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Semiconductors

Nvidia (NVDA) Update: Exceeding Expectations but Facing Margin Challenges

source:nvdia

Nvidia’s results exceeded expectations as usual, kind of becoming a habit! The previous quarter’s (Jan 2024) revenue beat by $1.6Bn and it guided Q1-FY25 (April 2024) revenue 10% or 2Bn higher to $22Bn.

Shares took off from $675 to $725. Everybody’s happy. 

Now comes the tough part.

Nvidia had a net profit margin of 55% = $12.2Bn in profits on $22Bn in sales. That is drug lord margin territory! Simply, they can charge whatever they want for the H100s, the new Grace Hopper, and the H200s that are coming down the pike. I’m confident that these margins will continue for at least a year untill competitors get their act together.

However, to assume that these margins will continue beyond that is difficult to swallow, and most of the street estimates for earnings are based on at least 52% in NPM, which if not achieved can be a huge disappointment.

So I modeled earnings at a 40% Net Profit Margin, which is similar to a big pharma company’s patented drug margin that also charges as much as the market can pay for it.

With that NPM, Earnings come down naturally; three years down the road in the 40% model, EPS is  $26 compared to the street estimate of $33. Assigning a P/E of 40, that gets us to $1,030 from today’s price of $725 or an annualized gain of 12%. And if the street is correct, we’re looking at 40*33 =$1,320 or an annualized gain of 22%.

The counter argument to the lower margin thesis is – Nvidia can lower prices and sell more, and at some point this is likely to happen – the overall growth doesn’t reduce – especially if you’re changing the whole paradigm of accelerated computing replacing the way data centers are built now.

At the moment, I’m not planning to add any more, my exposure to Nvidia is already very high, and the long-term thesis doesn’t change.

Palo Alto Networks (PANW) Update: $268 – HOLD Amid Revenue Guidance Cut

source:paloalto

Palo had a horrible drop of about 30%, or $100 from yesterday’s close of $365 to about $265 today, most of the damage happening after hours after weak revenue guidance. Markets punishing the stock for 15-16% growth forecasted instead of the earlier guidance of 19%.

Sales forecast for the year ending July 2024, is now expected to grow only 16%  between $7.95B and $8B, down from a prior view of $8.15B to $8.2B.  Also Street estimates FYJuly 2025 are about 9.22Bn, implying a revenue growth of just 15% – another slow year. 

How did this happen – Billings growth faltered dropping some $0.8Bn as Palo couldn’t a) close on Federal contracts b) extended discounts by allowing 3-6 months free usage before billing commenced. 

A drop of 3% annualized revenue growth with a sales multiple in excess of 18x is a tough pill to swallow for a company that is still not GAAP profitable – analysts downgrades followed this morning as expected.

What’s next after the finger-pointing – analysts not diligent enough with primary research, checking with customers management not nimble enough to manage expectations, or both?

CEO Nikesh Arora was right, in my opinion of discounted selling and free usage to sign new contracts, it’s a delay and a small price to pay upfront than to lose contracts – share price be damned, share prices usually come back.

On 2/13 I recommended selling Palo as profit-taking and subsequently sold 15% of my holding at $365. But after this, it becomes a “Show Me” story and I’ll wait.

Categories
Fintech

Pagaya Technologies (PGY) Update: $1.34 – Accumulating Between $1.25 and $1.35

source:pagaya

Pagaya’s earnings call was a much happier experience and it did match expectations, with revenue and adjusted EBITDA being in line. 

The 2024 revenue forecast was in line with the $ 988 Mn V 1.04Bn expected; more importantly, this is more than 20% growth in revenue and volume. I expect the same growth from 2024 to 2025 as well since their new 2023 customers take two years to fully ramp up.

The biggest surprise was the adjusted EBITDA mid-point number of $170Mn for 2024. Pagaya had a run rate of $28Mn going into this quarter and I had modeled $123Mn for next year, a 20% gain, but this was more than excellent and a good sign that they are executing well. They are looking at GAAP levels of profitability from 2025-2026, the reverse split will be 12:1, and Q1-2024 reporting will be with the SEC under US GAAP standards. 

This was first recommended on 02/05, and if you need the details, let me know I can post it again.

Categories
Semiconductors

Nvidia (NVDA) Update: $715-$720 – Taking Profits While Maintaining Long-Term Outlook

source:nvdia

Nvidia (NVDA) $715-$720. Planning to take profits, and reduce position by about 10% this week.

Nvidia reports Q4-FY24 earnings after market tomorrow, 02/21 and expectations are high for an impressive beat and raise for FY2025. Nvidia has a January year-end.

Nvidia is the largest holding in my portfolio and I need to reduce it a bit to keep my risk rules and parameters intact. I also believe that expectations are a little too rich for my liking and anything less may be hammered, instead of the usual earnings pop there could be a selloff. Nonetheless, it remains a great investment over the long term and I wouldn’t sell more than 10-15% of my position. Just pure profit-taking and risk control.

Categories
Market Outlook

S&P 500 Earnings Overview: Q4 2023 Insights and Valuation Metrics

source

FactSet reported the following for S&P 500 earnings through 2/9.

This is a very helpful 10,000 feet view and provides good benchmarking and comparisons.

Earnings Scorecard: For Q4 2023 (with 67% of S&P 500 companies reporting actual results), 75% of S&P 500 companies have reported a positive EPS surprise, which is below the 5-year average of 77% but above the 10-year average of 74%

Earnings Growth: For Q4 2023, the blended (year-over-year) earnings growth rate for the S&P 500 is 2.9%. If 2.9% is the actual growth rate for the quarter, it will mark the second-straight quarter that the index has reported earnings growth.

65% of S&P 500 companies have reported a positive revenue surprise, which is below the 5-year average of 68% but above the 10-year average of 64%.

In aggregate, companies are reporting revenues that are 1.2% above the estimates, which is below the 5-year average of 2.0% and below the 10-year average of 1.3%.  

If 3.9% is the actual revenue growth rate for the quarter, it will mark the 13th consecutive quarter of revenue growth for the index.

It is interesting to note that analysts were projecting record-high EPS for the S&P 500 of $243.41 in CY 2024 and $275.34 in CY 2025 on February 8. 

On February 8, the forward 12-month P/E ratio for the S&P 500 was 20.3, which marked the seventh time in the past nine trading days in which the P/E ratio for the index was above 20.0. How does this 20.3 P/E ratio compare to historical averages? 

Here is the chart for the historical PE, we have been above the 10 year average of around 18 for a while, and are now above the 5-year average of 19 as well.

Categories
Technology

Rivian (RIVN) Analysis: Navigating Challenges Ahead of Earnings Call

source:rivians

Rivian – (RIVN) $16.15 HOLD. Going to wait till 2/21 Earnings call to make a better judgment, too many conflicting signals to take a position.

Several weaknesses abound

Economies of scale – With about 57,,000 vehicles sold annually (double the previous year), it needs at least double that to break even or drastically increase prices, which is impossible, given that Tesla has decreased prices. 

Inventory appears to be piling up.

GM and Ford have called out weakening EV demand and slowed production.

Amazon didn’t pick up as much last year.

Highly capital intensive – the chances of dilution and/or debt piling up are high.

On the other hand…it’s not curtains yet..

Amazon has a goal of deploying 100,000 EV trucks by 2030, and this is a huge under penetrated market.

Seems as though their potential competition is also weak and fading away. Lordstown (another EV pickup) and Arrival (another ”last mile” EV delivery van) faltered. 

There is likely to be consolidation in this space amongst non Tesla start ups. Tesla itself faces difficulties and could buy up their competitors to fill out the gaps in their global lineup.

Reduction in Lithium input costs and other critical metals needed for the batteries, which made up a large share of the production costs and as these savings could start to show up in the manufacturing lines.

The valuation is not terrible, but I would like to see some progress against the current demand headwinds before taking a call.

Categories
Technology

Amazon (AMZN) Analysis: Valuation Insights and Growth Potential

Amazon (AMZN) $173, A little overpriced – Buy below $160 – 3 Year Price Target $210 -245, 12-14% annual return.

Yes, it has become a bit expensive like everything else, but a lot of positives and growth is trending higher for the next 3 years.

There is an important focus on profits, and renewed emphasis on costs. As a result, I can see them growing earnings in the mid thirties to about $7 a share by 2026, so assigning a multiple of 30 to 35 gets us to $210 to $245, with a midpoint of $230.

AWS growth resumed to 14%, and forecasted cloud end-user growth worldwide to around 20%. Plus AWS contracted obligations grew faster than sales – over 25% so that will show up in higher revenues down the road. AWS is currently at a run rate of over $100 Bn, and remains the market leader. If AI has to succeed, the cloud has to play an important role and vital role, you need that kind of processing power.

I also like Anthropic collaboration with Amazon for AI – that could be a big winner down the road.

Categories
Finance/banking

Why BlackRock is a Strong Investment Bet at $798: Diversified Exposure, Steady Growth, and Competitive Advantages

source:black rock

As an asset manager,  Blackrock would be a better bet at $798.

Their diversity is a lot better, exposure to real estate is lower to China and they have the same competitive advantages of scale, network, proprietary data, etc. They are the largest, overall with over $10 Tr AUM

Plus, the quality of earnings is better – steady 8% earnings growth in the last 10 years and a decent yield of 2%. Forward earnings forecasts are 11% and revenue growth of 9%, but these are recurring, fee-based.

It quotes 19X earnings, with 11% growth.

The charts below are also quite revealing.

Categories
Pharmaceuticals

Eli Lilly (LLY) Analysis: A Buy on Declines with Strong Growth Prospects

source:lilly

Eli Lilly – (LLY) $740 Buy on declines, Long term annual return 11-16%.

Eli Lilly’s forecasted earnings and revenue growth for the next three years are very impressive at a CAGR of 28% and 16%, respectively. To put that in context, it’s a lot higher than the 11% and 6%, 10-year average. 

Why?

Three blockbuster drugs mainly

Mounjaro, weight loss grew 8X 

Verenzio, Breast Cancer grew 56%

Jardiance, Blood Sugar grew 33%.

A big chunk of this is already priced into the stock, which has doubled from last year and quotes an expensive 58x earnings or a PEG of over 2. So we’re late to the party. However, given the higher multiples afforded to Big Pharma, specially the ones with massive pipelines that keep bringing new drugs to the market, Eli could still quote 35-40X 2027 earnings of $29, or between $1,015 to $1,160. That translates into an annual gain of 11% to 16%. That’s still quite good given the pedigree and size.

Eli is also very profitable with great operating margins of 30%.

This should also give us some diversification from the heavy reliance on tech and semis, two sectors that are getting overpriced.

Categories
Finance/banking

Blackstone at $125: Why I’m Holding Amid Real Estate and China Risks

Signage is seen outside the Blackstone Group headquarters in New York City, U.S., January 18, 2023. REUTERS/Jeenah Moon

Blackstone $125 Hold. 

The easy money has been made and the real estate and China exposure makes me a little cautious.

Blackstone (NYSE:BX) is the world’s largest alternative asset manager with over $1 trillion in assets under management, and that does give it competitive advantages of brand recognition, scale, network and large amounts of data.

That said, the fee business went nowhere in the last 10 years,  from 6.8Bn to 7.3Bn at a CAGR of less than 1%.

Capital Gains was the real story, in 2021, it made $14Bn! and in 5 other good years, it made between $2Bn and $3Bn each year. Not surprisingly, the 1-year, 5 year, and 10% performances were very impressive at  39%, 284% and 317%

When investors put their money into BX, they thus have to live with considerable ups and downs in the company’s profits — depending on the performance of the assets BX manages, there will be better and weaker years.

Forecasts: Consensus estimates are calling for 20% earnings growth and mid-teens revenue growth for the next 3 years, and the good revenue growth forecast suggests that these will be quality fee-based earnings.

I want to highlight two risks, 

  • Real Estate is 40% of Fee-based asset management and 45%+ of total managed assets.

This is from management’s last earning call.

“Real estate…will have a number of negative headlines coming out over the year. And so, what happens is, I think investors tend to take their time in terms of pivoting back to the space…so, there’s caution… it will take a bit of time on both the institutional and the individual investor side…it will take multiple quarters of strong performance where people say, hey, I’m comfortable doing this.”

  • The China exposure, from an analysts report.

“Furthermore, recent news reports indicate that BX’s CEO remains very close with the Chinese leadership and appears set to double down on his investments in the country, further increasing BX’s risk in the current environment and prompting us to grow even more bearish on the stock at its current price. While BX does not disclose its AUM exposure to China in its filings, it is evident that the company has a substantial – and growing – presence in the country.”

Valuation – Compared to its longer-term averages at 25X earnings it is about 20% overpriced, but then so is everything else…forward returns would likely be mediocre.