Author: Fountainhead

Super Micro Computer- SMCI $26 – Avoid Till We Get Restated Financials

Post author By Fountainhead
Post date November 5, 2024
2 Comments on Super Micro Computer- SMCI $26 – Avoid Till We Get Restated Financials

Super Micro Server Racks

I think Super Micro Computer, (SMCI) should be avoided for the following reasons:

Restatements could alter the financials significantly: The odds are high that the company will end up restating past financials. The Auditor’s resignation, its CEO’s pay package, and its past settlement with the SEC in 2018 all suggest that SMCI will have to restate its financial statements.

No 10K: SMCI has delayed its annual 10-K filing and without an audited 10K, we have precious little faith in the numbers.

SMCI has priors: This was not their first time. In 2018, the company settled charges with the SEC for improper accounting. As stated in the article from the SEC website….

“According to the SEC’s orders, Super Micro executives, including CFO, Hideshima, pushed employees to maximize end-of-quarter revenue, yet failed to devise and maintain sufficient internal accounting controls to accurately record revenue. As a result, the orders find Super Micro improperly and prematurely recognized revenue, including recognizing revenue on goods sent to warehouses but not yet delivered to customers, shipping goods to customers prior to customer authorization, and shipping misassembled goods to customers. The orders also find that Super Micro misused its cooperative marketing program, which entitles customers to reimbursement for a portion of cooperative marketing costs. According to the orders, Super Micro improperly reduced the liabilities accrued for the program in order to avoid recognizing a variety of expenses unrelated to marketing, including for Christmas gifts and to store goods.”

Tainted: To me the alleged malfeasance creates significant doubts for investors that will not go away for a while, and it’s very likely that Wall Street will not touch it, fearing liability for not doing enough due diligence. Also, I can’t imagine SMCI getting a decent multiple in the future for the same reasons until faith is restored in management and its books.

Possible Loan Default: There is a significant risk of Super Micro defaulting on the company’s Term Loan Agreement with Bank of America.

Compensation tied to aggressive revenue targets: The CEO’s unusual compensation package, with virtually no base salary and bonuses tied to very aggressive revenue and share price targets, is a dangerous and potentially abusive practice.

Possible delisting from the Nasdaq, and getting thrown out of the S&P 500: The chances of both are high as a new auditor needs to be found, and a substantial amount of restatement work needs to be done.

A great business: Sure, SMCI has a great server liquid cooling business, which has tremendous potential and demand for server racks for AI GPUs, right now and for the foreseeable future. However, as we saw Nvidia has already started shifting this business.

Ignore the low valuation: I’m going to ignore the current low valuation of 8x earnings and 0.5x sales, which are much lower than competitors such as Dell (DELL) and Oracle (ORCL), simply because I have no idea what the restated financials will look like, and the valuation could be a lot different

The only way I would invest is the possibility of a merger/acquisition/White Knight, that will keep the stock afloat. The CEO owns close to 10% of the company so I doubt if he would let this go without a fight.

The other problem I foresee is the difficulty of getting good and timely information. For the most part, we rely on analysts who expect a proper set of books. Instead of focusing on the fundamentals, we’ll be spending far too much time, and worse without success trying to figure out what is genuine or not, It would make better sense to invest in other GPU/semiconductor businesses.

Tags AI, AI GPUs, Artificial Intelligence, GPUs, SMCI, stock analysis, Super Micro Computer

AI Enterprise Software Stocks

Palantir Q3-24: Strikingly Good Results and Raised Guidance

Post author By Fountainhead
Post date November 4, 2024

Palantir Technologies (NYSE: PLTR): Q3 Non-GAAP EPS of $0.10 beats by $0.01.

Revenue of $725.52Mn (+30.0% Y/Y) beats by $21.83M. 30% growth is remarkable, the consensus was for 26-27%.

Big deals increased with Palantir closing 104 deals over $1 million as customer count grew 39% year-over-year and 6% quarter-over-quarter

Operating cash generation was also solid with $420Mn last quarter, at a 58% margin.

Palantir generated an adjusted free cash flow of $435 million, representing a 60% margin and over $1 billion on a trailing twelve-month basis.

Guidance

Q4 Outlook: Revenue of between $767 – $771 million vs. consensus of $744.04M.

At a midpoint of $769Mn, it is $25Mn over the consensus or 3.4% higher – another impressive feat.

Adjusted income from operations of between $298 – $302 million.

One of Palantir’s biggest strengths is its AIP (Artificial Intelligence Platform) Bootcamp sales strategy, which accelerates new customer acquisition, with conversions as fast as 16 days, boosting Palantir’s growth prospects. And from the last quarter’s excellent results, it has come through in spades.

I had recommended Palantir earlier in July 2023 at $17.

2024 Outlook: They raised their revenue guidance to $2.805 – $2.809 billion vs. the prior consensus of $2.76B. At the midpoint, that’s about 2% higher.

Palantir’s growth engine has been its commercial revenue segment, which was raised to more than $687 million, representing a growth rate of at least 50%.

They raised their adjusted income from operations guidance to between $1.054 and $1.058 billion and adjusted free cash flow guidance to more than $1 billion.

Cash Rich: Cash, cash equivalents, and short-term U.S. Treasury securities of $4.6 billion

They continue to expect GAAP operating income and net income in each quarter of this year. Clearly, the markets have been rewarding companies showing a healthy respect for profits over loss-making revenue growth at any cost, and Palantir has done an excellent job staying in the black for two years now.

Not surprisingly, shares are up 11% to $46

My biggest grouse has been Palantir’s valuation. I’ve already done well recommending and buying it for around $17. At a P/S multiple of 28X next year’s revenue of $3.4Bn, growing at 22% — this stock is way too rich for my liking and in the past quarter, I’ve sold twice. I will sell another 10% and hold on to the rest. It’s better to take profits.

Tags #GrowthStocks, AI, Artificial Intelligence, Palantir, PLTR, stock analysis, Tech Stocks

AI Cloud Service Providers Stocks

Alphabet Deserves A Better Valuation

Post author By Fountainhead
Post date October 31, 2024
2 Comments on Alphabet Deserves A Better Valuation

I had recommended Alphabet (GOOG) as a great long-term buy between $150 and $170 on several occasions.

Last evening, Google knocked it out of the park with really stellar results. I bought more shares this morning, and am reiterating a Buy.

I believe analysts’ consensus earnings are a bit conservative and Google will continue to beat estimates with better growth and operating margins.

Google’s earnings quality is better than several tech giants for the following reasons.

It has a near monopoly in Search
Market leadership in media with YouTube.
A strong first-mover advantage with Waymo.
A fast-growing Google Cloud business, third only to and catching up with Azure and AWS.

Its earnings and growth are sustainable, thus it deserves a better valuation and multiple.

Let’s take a closer look at Q3 earnings.

Q3 GAAP EPS came in at $2.12 per share, beating expectations of $1.85 per share $0.27, or 14% – This was a substantial beat.

Revenue of $88.3Bn (+14.9% Y/Y) beat by $2.05B or 3%.

Consolidated Alphabet revenues in Q3 2024 increased 15%, or 16% in constant currency, YoY to $88.3Bn reflecting strong momentum across the business.

Google Services revenues increased 13% to $76.5 billion, led by strength across Google Search & other, Google subscriptions, platforms, and YouTube ads.

Total operating income increased 34% and operating margin percent jumped a huge 4.5% to 32%.

Google Cloud revenues grew a whopping 35% to $11.4Bn led by accelerated growth in Google Cloud Platform (GCP) across AI Infrastructure, Generative AI Solutions, and core GCP products, with record operating margins of 17% as the cost per AI query decreased by 90% over the past 18 months.

Cloud titans Amazon (AWS) and Microsoft (Azure) have commanded huge valuations for their cloud computing businesses; with Google Cloud growing at 35%, it should continue to narrow the gap over the next 5 years. Also importantly, AWS and Azure have operating margins over 30%, and should Google continue to scale and leverage their existing fixed costs, they can reach the same margins. I also believe as they get better at AI, they should be able to charge more.

Based on consensus analysts’ estimates Alphabet’s EPS should grow to $11.60 in 2027 from $5.80 in 2023 – that’s an annual growth rate of 18%. Comparatively, Apple‘s estimated EPS growth through FY2027 is slower at 14%, and it sports a P/E of 33 compared to Google’s 22. Alphabet’s P/E is closer to the S&P 500’s P/E of 21!

I believe this is too low, and there is a lot of potential for its stock to appreciate just on the lower valuation.

Besides the strong EPS, a lot of Google’s expenses are noncash depreciation and amortization and their cash flow margins are strong. They generated operating cash of $31Bn on $88Bn last quarter, or a 35% cash flow margin.

The antitrust regulation will remain a possible negative on Alphabet, but the final decision is still years away as Alphabet vigorously appeals the decision.

I recommend Alphabet as a buy at $176

Tags #GrowthStocks, AI, Alphabet, Artificial Intelligence, Cloud, Cloud AI, Google, Growth Stocks, Investment Strategy, stock analysis

Market Outlook

S&P 500, Nasdaq Composite In Free Fall

Post author By Fountainhead
Post date October 31, 2024

The S&P 500 and the Nasdaq Composite are in a free fall today with drops of 1.5% and 2.4% respectively, and it’s just 11:30 am. This could develop into a rout as traders and investors turn their noses up at Meta and Microsoft’s earnings. Even Google has given up its 5%. Should Apple and Amazon disappoint post-market today, I think a correction could be on. The main bullish factor countering a volatile election week, a VIX over 21, and a rising 10-year yield at 4.32% were strong earnings, especially from the M-7. Clearly, that doesn’t seem to be happening.
Meta – Initially, it seemed like a perfunctory one percent drop on a small beat and in-line guidance, but it’s gone a lot further as Meta is down 4% to 570.
Why the rout? Analysts and investors panned high Capex plans of $40Bn and costly high-risk bets such as Meta’s Reality Labs unit, (the developer of augmented and virtual reality technologies), which logged a staggering operating loss of $4.4 billion
Microsoft – (down 6% to $408) is getting clobbered for a different reason. Even as Azure grew 34%, the pace wasn’t enough, and guidance of 31% to 32% in constant currency was lower than expected. However, this is due to supply chain constraints as President Amy Hood noted that the 1 or 2-point deceleration Microsoft has guided is mainly due to some supply pushouts, in terms of AI supply coming online that the company counted on. (Read, not as many Blackwells/Hoppers as they would have liked)
“We expect consumption growth to be stable compared to Q1, and we expect to add more sequential dollars to Azure than any other quarter in history,” Hood added.
The indomitable Dan Ives remains as bullish as ever…
“We actually disagree with this initial take as the new Azure reporting standards have moved Street numbers all around and a slight deceleration is totally expected by many investors with some supply constraints and reacceleration in 2H25, and we would be strong buyers of MSFT on any weakness this morning,” Wedbush analysts, led by Daniel Ives, said in a note.

Tags Investment Strategy, Meta Earnings, Microsoft, SPY, stock analysis, Stock Markets, Stocks

Market Outlook

The S&P 500 (SPX), (SPY) Could See Significant Gains In The Next Two Months

Post author By Fountainhead
Post date October 29, 2024

6,000 On The Horizon

The Heisenberg report includes an interesting article by Goldman Sachs’ Scott Rubner about trading from the end of October through the end of the year.

Rubner suggests if you’re looking to buy the election dip, you may not get it, for the following reasons:

For the past 100 years, the last week of October through year-end has been one of the best trading seasons, and even more so during election years. That is, the median return from 10/28 through year-end is 5.2%; in election years, it’s 6.3%.

The fiscal year-end for most mutual funds is October 31, and as October winds up, the supply overhang from mutual funds and pensions lifts.

The corporate Buyback blackout period, which is usually two weeks before the quarter ends through 48 hours after earnings are released publicly, also starts lifting,

Buybacks are one of the largest sources of demand for US equities. November stands out. Goldman’s corporate execution desk expects $960 billion worth of executed buybacks this year. So, simple math suggests next month could see ~$100 billion worth.

Then there’s the thinner markets around Thanksgiving and Christmas, which could lead to a more pronounced effect of large-scale buying on stock prices.

Scott was straightforward. “The global consensus on Wall Street is that we will dip after the election, and investors are waiting for the (-5%) dip to add,” he wrote, adding that he doesn’t see it. “I think the US election will be a clearing event for risk assets and re-risking may happen quickly,” he said.

In another article he goes on to add that FOMO or the (Fear Of Missing Out) would be another factor driving stocks higher, should the much-anticipated pullback during and after the elections not materialize.

Rubner has a 6,000 year-end target for the S&P 500, which may turn out to be conservative.

Tags Bull Market, Elections, S&P 500, SPX, SPY, Stock Index, StockMarketAnalysis, Stocks

AI Semiconductors Stocks

Nvidia – The Blackwell Ramp

Post author By Fountainhead
Post date September 25, 2024

Nvidia (NVDA) $121 (AI) (Semiconductors)

And here we are ramping Blackwell, and it’s in full production,” said Nvidia CEO Jensen Huang, during the Goldman Sachs Communacopia + Technology Conference. “We’ll ship in Q4 and scale it — start scaling in Q4 and into next year. And the demand on it is so great … and so the intensity is really, really quite extraordinary.”

https://seekingalpha.com/news/4152814-nvidia-trends-up-as-blackwell-release-date-nears

“Blackwell chips are expected to see 450,000 units produced in the fourth quarter of 2024, translating into a potential revenue opportunity exceeding $10B for Nvidia,” according to a post today on X.

The estimate during the August conference call was for $3Bn Blackwell revenue in Q4, so this is a big change. Fundamentally there wasn’t any real difference, just the quarterly cadence from Q4 to Q1, but this does help the stock in the short term and more importantly should put to rest any rumors or doubts about Blackwell design flaws.

Tags AI, Artificial Intelligence, NVDA, Nvidia, Semiconductors

Market Outlook

NFP Short Of Expectations

Post author By Fountainhead
Post date September 6, 2024

The unemployment rate ticked down to 4.2%, as expected, from 4.3% in July.

Nonfarm payrolls rose by 142K in August, accelerating from the 89K added in July (which was revised down from +114K), but still lagging the +160K consensus,

“August #jobsreport is a touch better than July but not by much: the job market is clearly cooling,” said Daniel Zhao lead economist at jobs site Glassdoor in a post on X.

Wages gained more ground than expected in the month, with average hourly earnings climbing 0.4% vs. 0.3% consensus and 0.2% prior On a Y/Y basis, average hourly earnings rose 3.8% vs. 3.7% consensus and 3.6% prior.

“Wage growth moved up a bit to 3.8% from 3.6%, but not enough to get in the way of the Fed’s pre-announced rate cut later this month,” said Brian Coulton, Fitch Rating’s chief economist,

The labor force participation rate was unchanged at 62.7%, matching consensus.

There was a combined 86K downward revision for June and July.

With the weaker-than-expected jobs growth, traders have increased expectations for a 50 basis-point Fed rate cut on Sept. 18, bringing the probability to 47.0% from 40.0% on Thursday. The 25-bp cut probability dipped to 53.0% from 60.0% a day earlier, according to the CME FedWatch tool.

Broader markets are drifting, there’s really nothing in this payroll report that suggests the September swoon is over, I would stay on the sidelines and let the markets correct a little more.

Tags Economy, Interest rates, Payroll Report, Wages