Fountainheadinvesting

Categories
Aerospace

Boeing at $208: A Duopoly with Persistent Quality Issues and Cyclical Upside Potential

Boeing (BA) $208

Boeing (BA) has been a chronic underperformer – its last 10-year total return is just 63% – that’s 5% a year, despite being a duopoly, quality issues have constantly dogged its performance.

That said – Boeing will likely recover about 15-20% from this price. It has done that several times in the past and is currently working with regulators fixing its quality problems with the Boeing 737 Max 9, which suffered the explosive decompression accident in January and has been grounded till quality issues are sorted out.

Besides, it’s a duopoly with $125Bn worth of order inflows – demand is solid, customers have nowhere else to go, and they have a lot of deliveries planned for 2024.

However, this is at best, a mediocre cyclical long-term investment, you have to constantly look over your shoulder for quality and delivery issues. Even in 2023, they fell 10% short of delivery performance, due to quality issues at Spirit AeroSystems, one of their key suppliers.

Boeing has not given guidance for 2024 – they should not, as an investor I would prefer that they focus on solving their safety problems first instead of rushing through. And as Dhierin Bechai one of the better Boeing and Aerospace analysts at Seeking Alpha, said

“It is widely considered that the problems at Boeing originate from a financially focused mindset where the focus is on financial numbers rather than engineering and manufacturing strength.”

Categories
Technology

Tesla: Why I’m Buying on Declines Between $160 and $190 Despite Margin Pressures and Competition

Tesla (TSLA) Buy on declines $160-190

I own Tesla and have been holding it patiently.

Tesla has operating margin compression from 16% to 9% and there is no way they can continue to grow without sacrificing margins, otherwise, they get saddled with excess production capacity and inventory – which are equally bad problems. There’s far more competition, Chinese demand is lower, and suddenly you’re looking at it as an auto company with all its associated auto industry problems and a lower multiple.

I guess the main question is how much of it is already in the price – Tesla has dropped 33% from its 52 week high of $300, and rebounding from $182.

Earnings – Priced at 59x with 24% growth, about 10% overpriced.

Sales – 5.5X sales with 18% growth – also overpriced, because it doesn’t have the tech operating margins anymore and even in the best case will go to 15-16% of sales.

That said – it is far ahead in innovation and scale and very likely remain so in spite of the Musk personality and the various chemicals that go with it.

Categories
Fintech

PayPal at $58: Is This Aging Incumbent a Value Trap or Opportunity?

Paypal (PYPL) $58 HOLD

Paypal took a beating of 8%, following lackluster results and guidance. Overall the stock has been a chronic underperformer with a negative 30% return in the last 5 years, and negative 24% in the past year. And this too in a booming market.

Most of the underperformance was because of overpricing, Paypal routinely fetched a P/E multiple of over 30, and a P/S ratio of over 6, in the Cathy Woods, buy everything tech, pandemic stimulus era. But with 5 year earnings and revenue growth slowing to the mid teens, the luster wore off, and in 2023, Paypal grew earnings by only 8% and recurring operating income by 11%.

What’s Ahead: In 2024, Adjusted EPS will be flat at $5.1 per share, while revenue is expected to grow 6.5%. Similarly 3 year forecasts are for only 7% revenue and earnings growth. Again, very mediocre growth.

Compared to its growth, Paypal is not unreasonably priced at 12X, Adjusted forward earnings ($60/5.1), and the PEG (Price Earnings / Growth) is 1.7 (12/7). Not that expensive. Block (earlier Square) (SQ) at $67, quotes 40x adjusted earnings, but grows faster at 30% – its PEG is actually lower at 1.33 (40/30)

In my opinion, Paypal’s stock could grow from here, the price is close to rock bottom, but the bigger problem is the whole payment processing sector is a commodity business, there is no product differentiation and Paypal has a lot of competition not just from Square, there’s Zelle, Stripe, Apple Pay and so on… the list gets bigger. It’s like the older, aging incumbent. Stock returns even from $58 could be just about the market average or we could get stuck in a value trap.

There is a new sheriff in town, let’s see how the new CEO Alex Chriss performs, and take another look next quarter.

Categories
Technology

Indie Semiconductor: Why I’m Continuing to Buy Despite Short-Term Volatility

Indie (INDI) I have been continuing to buy in the past two weeks as the stock kept getting lower. The long term story is intact and very strong, but because it’s a loss-making tiny growth stock ($345Mn revenue in 2024), the stock tends to be volatile. Besides, there is a large short interest of over 13%.

Management’s guidance of $1Bn in revenues by 2028, implies a 5 year growth of 35% – they have the $6.4Bn pipeline so I suspect that’s a conservative estimate.

Qualcomm’s auto tech revenues grew over 30% so that’s reassuring but Mobile Eye’s was a disaster, they had too much inventory, so mixed bag there.

I’m very confident of the long term potential, but it is going to be a bumpy ride, as it often is with early stage growth stocks.

Indie reports on 2/22 – will update.

Categories
Enterprise Software

Confluent Stock Pops 25%: Why I’m Buying on Declines Despite the Earnings Surge

Confluent (CFLT) the stock popped 25% to $30 on great results and guidance. 

My last few recommendations in the past two weeks, when the price was $24, was to buy up to $26, with a 1-year target of $28, with a return potential of over 25% in the next 3-5 years. 

Wouldn’t advise trying to jump in over $30, there was a short interest of 11% yesterday, so that contributed a ton to the post-earnings pop, but given the performance, I will buy on declines – I still see annual gains over 20% from here – some of the gains have been pulled forward with this jump.

Here are my forward estimates:

3 Year Revenue growth expected 27% – Current P/S 9, drops to 5.6 by 2026, 

3-Year Adjusted Earnings growth expected – Management has guided to adjusted operating break even in 2024, and post-2024, I expect at least 35% to 40% operating profit growth (analysts’ estimates are even higher).

Summary of 2023 earnings 

Q4 Non-GAAP EPS of $0.09 beats by $0.04.

Revenue of $213M (+26.0% Y/Y) beats by $7.72M.

  • Fourth quarter subscription revenue of $203 million, up 31% year over year; fiscal year 2023 subscription revenue of $729 million, up 36% year over year
  • Fourth quarter Confluent Cloud revenue of $100 million, up 46% year over year; fiscal year 2023 Confluent Cloud revenue of $349 million, up 65% year over year
  • Confluent Crowd is their big growth catalyst
  • 1,229 customers with $100,000 or greater in ARR, up 21% year over year
  • Q1- 2024, Confluent guidance:
  • Total revenue between $211 million and $212 million VS $210.54M consensus
  • Subscription revenue between $199 million to $200 million
  • Non-GAAP operating margin of approximately negative 4%
  • Non-GAAP net income per diluted share between $0.00 to $0.02 vs $0.02 consensus
  • Fiscal year 2024, Confluent guidance:
  • Total revenue of approximately $950 million $935.29M consensus;
  • Non-GAAP operating margin of approximately 0%
  • Non-GAAP net income per diluted share of approximately $0.17 vs $0.17 Consensus
Categories
Cybersecurity

Fortinet (FTNT) at $74: HOLD as Price Target Met, 10% Post-Earnings Pop Overdone

The long term story remains intact – it is currently fully priced to add more.

Fortinet released Q4-23, earnings after market yesterday.

While the results and guidance were good and met expectations, the 10% pop from $67 yesterday is overdone. In the previous quarter, Fortinet under performed and the stock was pummeled 25% – last evening’s reaction was more of a sigh of relief that results met expectations. As you can see below, there’s nothing extraordinary.

  • Q4-23
  • Revenue of $1.42B (+10.9% Y/Y) beats by $10M.
  • Billings1: Total billings were $1.86 billion for the fourth quarter of 2023, an increase of 8.5% compared to $1.72 billion for the same quarter of 2022.
  • For Q1-2024  Everything is in line with expectations and forecasted analysts estimates.
  • Revenue $1.300 billion to $1.360 billion vs $1.38B consensus – In line.
  • Billings in the range of $1.390 billion to $1.450 billion
  • Non-GAAP gross margin in the range of 76.5% to 77.5% – In line
  • Non-GAAP operating margin in the range of 25.5% to 26.5% – In line
  • For 2024, Fortinet : These are also in line with previous guidance and forecasts.
  • Revenue $5.715 billion to $5.815 billion vs $5.94B consensus – Just over 10% growth.
  • Service revenue in the range of $3.920 billion to $3.970 billion
  • Billings in the range of $6.400 billion to $6.600 billion
  • Non-GAAP gross margin in the range of 76.0% to 78.0%
  • Non-GAAP operating margin in the range of 25.5% to 27.5%
  • Service Revenue growth was impressive and the highlight of the quarter. Service revenue was $927.0 million for the fourth quarter of 2023, an increase of 24.8% compared to $742.9 million YoY.
Categories
Fintech

Block Inc (SQ) at $66: HOLD, Profitability Focus Could Unlock Value

Block Inc (SQ) $66 Previously known as Square. HOLD

Square has underperformed the market in the last 5 years in a big way, with a negative total return of 10%. When it started, it showed a lot of promise in a cyclical commodity industry of payment processing with the ease of installation, mobile applications and payments, good easy user interface, which differentiated it from the crowd. The Cash app also promised a good deal, with solid growth for years, and is now being well monetized. But the focus on crypto turned off investors from these strengths, especially when Block’s crypto trading account is heavily exposed to crypto performance and pricing. For example, out of $16Bn in 9 months of last year’s revenue, $7Bn was crypto trading VOLUME with a cost of $6.86 Bn with only $140Mn in gross commissions. Institutional investors and analysts like me object to such a loose interpretation of revenue accounting – Square is not a $16Bn company it is a 9Bn company. Secondly, out of the 25% revenue growth in the last 9 months, crypto volume grew 30% compared to the rest of the company’s 21% growth.

The rest of the payment processing business is good, but not GAAP profitable and for a company that has been around for 15 years, that is a sticking point – Stock Based Compensation for the last nine months was almost $1BN so that is going to take a while. However, adjusted operating profits are over $500Mn so that’s a plus and operating cash flow was $450Mn, decent but only 5-6% of revenues.

That said, this company has a lot of scope, especially in its cash application, which now has $22Mn MAU’s Monthly Active Users, and is growing well. Management has promised operating cost discipline in their last call, they have to – there are no significant, sustainable long term competitive advantages in payment processing – it’s a cookie cutter business, with some new wrinkles every few years.

Bottom Line – We saw how well Meta got rewarded last week with their focus on profitability, so if Block continues to execute and focus on it – this could be a surprise and a good gain. The stock has moved up more than 70% from its 52 week low of $39. The valuation is not bad with a P/E of 25x adjusted earnings with adjusted EPS growth of 25%

I would wait till I saw further signs of good execution.

Categories
Technology

Synopsys, Inc (SNPS) at $558: A Hold on High Valuation Despite Strong Fundamentals

Chip Design. (Electronic Design Automation) Pick and Shovels semi and AI play.

I had looked at this company a couple of weeks ago and just checked my notes – “Where’s the growth for a P/E of 42 and a P/S ratio of 13?”

Yeah, it’s a 15% earnings grower, so that’s a PEG (Price Earning to Growth) of 3 and a 12% revenue grower, that sales multiple is also too rich.

It’s a solid company – no doubt, but likely paying a steep price for the ANSYS (ANSS)  acquisition, hoping for ambitious synergy targets, which often don’t happen. That said, its chip design simulation business is strong and with the AI buzz can get a boost – that’s why I was surprised to see only 12% revenue growth estimates. Operating margins of both companies are very high at 32% and 28% – that’s a big plus.

There’s another competitor in this space Cadence (CDNS) which is also very profitable at 30% operating margins – same problem – 50X earnings with 17% growth..and 17.6X sales!

I do want to keep this company under the radar for sure and let’s see what the next call reveals.

Categories
AI

Palantir (PLTR) Surges 18% to $19.61 Post-Earnings: A Long-Term Buy Opportunity

*Palantir – $19.61 Post Earning pop of 18%!*

*One can start nibbling at around $19.60 BUT spread out purchases on declines, there should be declines after this post earnings bump and since this is a long term story I still anticipate 15-16% of annual gains over the next 5 years.*

The Reasons for the post earnings pop.

I think the trend of rewarding profitability as in the case of Meta last week seems to be working for Palantir as well. 

Investors are seeing that Palantir is serious about cost control and better margins. With revenue growth in the low 20’s overall, with the main catalyst being commercial customers, Palantir is doing the right thing by focusing on profitability.

Consider these metrics for Q4, which indicate a lot of progress since the days when Palantir didn’t care about profitability….I guess the drop to $6.35 at its low changed their perspective quite a bit

Fourth consecutive quarter of GAAP operating profitability. 11% Margin.

Adjusted free cash flow of $305 million; 50% margin; 731Mn for the year.

Adjusted operating margin of 34%; 28% for the year.

Fifth consecutive quarter of expanding adjusted operating margins 

Fifth consecutive quarter of GAAP profitability; 15% margin

Commercial customer count grew at a very impressive rate of 55% – higher than the revenue of 32%, this is mostly normal for Palantir, they usually land and expand.

While the revenue guidance is just 1-2% higher than the previous estimate, there is  guidance for GAAP profits in each quarter, 40% commercial business growth and adjusted profit margins of 32+% and cash flow of 33% – that is very good.

The AIP (Artificial Intelligence Platform) seems to be getting a lot of attention.

I also suspect multiples and targets will also move up considerably, growth can accelerate from here.