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Fountainhead Investing

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5 Star Tech Analyst Focused On Excellent Companies With Sustainable Moats

Author: Fountainhead

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Market Outlook

How To Thread The Needle In A Choppy Market In 2025

Expect the market to remain turbulent in 2025
  • Stubborn inflation and the fear of inflationary policies such as tariffs, budget deficits, and deportations had led to high 10-year treasury yields jumping to 4.8% before dropping to 4.66% today.
  • This, in turn, has spooked the S&P 500, which gave up its entire post-election bounce before bouncing back today.
  • The S&P 500’s current yield of 4.6% is less attractive compared to the 10-year treasury yield of 4.66%, questioning the risk-reward balance.
  • However, while the 4.66% yield will compete for investors’ funds, patient investors who can stomach a correction should do much better scooping up high-quality bargains.
  • There are enough positives to come from the new administration, such as lower taxes, less regulation, and business-friendly policies, which will trump the negative of high interest rates.

Will 10-year treasury yields of 4.66% drag down the market?

The equity risk premium

The current yield for the S&P 500 (NYSEARCA:SPY) is 4.6% or the 2025 Consensus Bottoms Up EPS of $274/S&P 500 of 5,953 = 4.6%. Comparatively, the 10-year treasury yield stands at 4.66% The commonsense argument is that if the US treasury gives me a risk-free return of 4.66% why should I make a risky equity index investment, yielding even less at 4.6%?

Risk-averse and conservative investors usually require a risk premium to invest in equities. During the great deflationary period from 2009, after the Great Financial Crisis, to Feb. 2020 (pre-pandemic), the equity premium was quite large as shown below. The average yield premium was 2.79%, and it rarely fell below 2%. The 10-year yield averaged 2.43%.

Source:Fountainhead, Yahoo Finance

In an inflationary environment, with the 10-year at 4.66%, we’re getting a discount of 6 basis points or 0.06%, which begs the question

a) Either I should get a premium return for that risk or

b) I should pay less to increase my yield.

Stubborn inflation

With stubborn inflation, a reduction in yields looks unlikely, and many would patiently wait for the reduction in the index to get in at a decent price. Not surprisingly, as of Jan. 14th, we’ve given back almost all the Trump bump, falling to 5,800, a mere 0.5% from the Nov 5th election date close of 5,782, which has now bounced back to 5,953 following the better-than-expected CPI report.

Last September, I was confident that the Fed’s reduction of 0.5% would lead to a 10-year closing between 3.25% and 3.5% in 2025. At an earnings yield of 4.6%, that would have been a fairly decent premium of around 1.25%. Initially, it did drop to 3.6%; however, given sticky inflation readings in the next 3 months and a stronger-than-expected job market and economy, 10-year yields have gone the opposite way climbing to 4.79%, before dropping to 4.66% — leading to the Feds anticipating just two cuts in 2025 in their dot plot from the December 18th FOMC meeting. Four weeks later, the markets have taken a step further, anticipating just a paltry 27 basis points reduction in 2025.

This morning, on Jan. 15th, the CPI report was much better than expected, with core CPI coming in only 0.2% higher from a month earlier, – a drop after increasing 0.3% in each of the previous four months. Its YoY increase was only 3.2%, lower than 3.3% in November and below the 3.3% consensus.

The 10-year yield dropped to 4.66% – a huge 13 basis point drop, leading to a 1.7% increase in the S&P 500 by mid-afternoon to 5,5953.

The Fed’s December meeting minutes also revealed a Fed that was worried about higher inflation from the incoming administration’s tax and tariff policies, which contributed to their forecast of only 2 cuts in 2025. From the FOMC minutes:

Almost all participants judged that upside risks to the inflation outlook had increased.

The S&P 500 (SP500) dropped 1% on January 7th, when PMI data revealed persistent price increases on the services front. It dropped another 1.5% with the massive 256,000 gain in net new jobs created, with the non-farm payrolls released on January 10th. Price action in the treasury clearly confirms this worry and, given how fast traders have sold bonds, suggests that this could well continue. Market headlines blaming the weakness in stocks on bond yields have only increased. Simply, the markets are sanguine until they’re not, and then the dam breaks.

The incoming administration’s volatility premium

I also believe that traders are assigning a “volatility” or even a “drama” premium if you will. Markets hate uncertainty. If you’re a bond manager already facing three years out of the last four of losses, witnessing the bizarre behavior of our elected officials towards the end of the year of getting a simple budget extension is going to weigh on your decisions. Why buy the treasury at 4.79% when the yield could shoot through 5.5% if there is more drama getting anything done in Washington with a razor-thin majority and an executive branch executing through Twitter?

An emboldened Trump, with a penchant for implausible actions such as annexing Greenland and the Panama Canal, will only increase bond market jitters.

High interest rates hurt Main Street, not just the market

The other factor that worries me about rising interest rates is the higher interest burden on other sectors such as commercial real estate lending, and residential mortgages. Residential mortgage rates are over 7% now, and while over 92% of residential mortgages are at much lower fixed rates, I would think that a significant amount of home purchases (some of which were chasing high-priced homes in short supply due to inventory shortages) have been made at higher mortgage rates in the last two-three years with the hope that they could refinance at cheaper rates – and clearly that hasn’t happened in 2023, and 2024 and from the looks of it, very unlikely to happen in 2025.

Similarly, the commercial real estate market is also likely to face problems.

According to Trepp estimates, roughly $1.7 trillion, or nearly 30% of outstanding debt, is expected to mature from 2024 to 2026. This is commonly referred to as the “maturity wall.” CRE debt relies heavily on refinancing; therefore, most of this debt is going to need to be repriced during this time.

The 4.5% yield threshold

Source: The 4.5% yield threshold (Bloomberg, FactSet, Morgan Stanley Research, The Heisenberg Report)

Last April the S&P 500 P/E fell in tandem with the 10-year rise, and it currently looks to be following the same path, not auguring well for the market in 2025.

Could we get “Trussed”?

UK 10-year bond yields surged by 30 basis points on January 8th, to 4.925%, bringing back bad memories of the harrowing 49 days of Elizabeth Truss’s short-lived premiership in 2022.

Back then, Truss had made the mistake of unveiling an unfunded budget of 45Bn GBP of tax cuts when inflation rates were about 11%! UK Equity, Bond, and Currency markets sank, with many even suggesting that the UK government’s treasury was no better than that of a Third World country. Almost destroying a weak Gilt market ultimately led to her resignation.

Fast-forward to 2025 – the 30 basis point drop to a level not seen since 2008 has 2 repercussions. 1) Bond markets are reacting very strongly to governments not having enough control over their country’s inflation. Punishment was swift and severe. It was the 4th day of drops in the UK bond market.

2) The second repercussion, and what worries me; is this going to happen in the US market as well as the incoming administration starts working on their planned tariff hikes, which will increase inflation; if so, where does the yield stop?

Tax cuts can be inflationary

Trump’s proposed tax cuts reduce tax revenues and increase deficits, which is inflationary.

The incoming administration plans to extend the 2017 tax reductions, reduce the corporate tax rate, and decrease or eliminate taxes on certain types of income. Here is the analysis from taxfoundation.org:

Using the Tax Foundation’s General Equilibrium Model, we estimate Trump’s tax proposals would increase long-run GDP by 0.8 percent, the capital stock by 1.7 percent, wages by 0.8 percent, and employment by 597,000 full-time equivalent jobs.”

“We estimate the proposals would increase the 10-year budget deficit by $3 trillion conventionally and $2.5 trillion dynamically. The debt-to-GDP ratio would increase from its long-run projected level of 201.2 percent to 223.1 percent on a conventional basis and 217 percent on a dynamic basis. Increased deficits and a higher debt load would require higher interest payments on the debt that would reduce American incomes as measured by GNP by almost 0.8 percent; the higher interest payments drive a wedge between the long-run effect on output of 0.8 percent and the long-run effect on GNP of -0.1 percent.

As you can see above, the repercussions can be good for the economy with higher GDP, but it will also be inflationary and expensive to service with higher interest rates. What’s also significant is that the administration believes that they can make up the shortfall by increasing tariffs, which in my opinion will worsen an already high inflation rate.

What the bulls say: There are a lot of positive factors as well

Juxtaposed with the negativity of high interest rates are the positive effects of excellent earnings growth from the S&P 500, lower taxes, and less regulation.

Source: S&P 500 Earnings (FactSet)

FactSet’s estimates call for a strong 14.64% growth in the S&P 500 for 2025 to 274.19, followed by 13.6% growth to 311.44 in 2025. In the years that I’ve been using FactSet, I’ve seen that the variation is not significant for the index. I strongly believe that the S&P 500 earnings would come in between 267 and 281, with an error margin of just 2.5%. But the problem is not in the performance – it’s the valuation, we’re priced to perfection as seen below, and disappointments could be the main catalyst for a drop.

Source: S&P 500 P/E Ratios (The Heisenberg Report, Datastream)

The last time the S&P 500 P/E was above 20, the 10-year was around 2%, currently, we’re at a P/E of over 21.73, but the 10-year is at 4.66%.

Corporate Debt is doing fine

Credit default risk is low among corporate borrowers as per a Goldman Sachs report.

Good earnings and cash flow over the last few years have led to low debts on several investment grade and lower balance sheets. The level of fallen angels – or companies below investment grade, is at its lowest level in 25 years.

Risk premiums are not mandatory for equity investments

The lack of an equity risk premium is not the end of the world and as we can see from the chart below, in higher interest rate environments from 1985 to 2000, there never was one. The biggest premiums have been in the deflationary era, post the GFC from 2009 before the Fed started raising interest rates to quell inflation.

Source: Equity Risk Premium (Fountainhead, Yahoo Finance)

A high interest rate doesn’t kill the equity market just because of a lack of a risk premium, but it provides competing offerings at much lower risk, and we saw that hurt the equity market in 2022 when the Fed started raising interest rates aggressively to contain inflation. I, myself, put money in high-yield CDs and corporate bonds through 2023.

A 5% Treasury yield should attract buyers

I believe there could be a lot of buying if the treasury breaches 5%. In October 2023, when the Middle East conflict was raging, bond yields briefly touched 5% from where they reversed very steeply, on buying and a subtle push from Treasury Secretary Janet Yellen, who reduced the size of government auctions by $76Bn. Will history be repeated? I think it’s likely that there will be substantial buying of 5% treasury bonds, as do several analysts, and money managers.

Inflation: The worst is likely behind us

The PPI came in a little lower than expected at 0.2% M/M in December 2024, versus a consensus of +0.4% and November’s reading of +0.4%. Even better, the core PPI was flat M/M, significantly lower than the expected rise of 0.3%. The benign numbers triggered a relief rally on Jan. 14th, and the CPI report which came in today (Jan 15th, 2025), did even better with the core CPI beating estimates, leading to a drop of 13 basis points in the 10-year and a huge 1.7% gain in the S&P 500. This could be the beginning of a trend reversal.

Positive effects of lower taxes

Even as we move towards a more inflationary environment with unfunded tax cuts, the Tax Foundation believes that lower taxes would increase long-run GDP by 0.8 percent, capital stock by 1.7 percent, wages by 0.8 percent, and employment by 597,000 full-time equivalent jobs.

Rekindled animal spirits are great for Main Street

Small businesses, which are major employers and contributors to US GDP, are very optimistic about the Trump administration’s policies, which should augur well for the economy. Small businesses are notably excited about higher sales, less regulation, increased chances of finding high-quality labor, stabilizing inflation or price increases, and importantly, better credit conditions due to less regulation. Not surprisingly, the groups’ uncertainty indicator has dropped as well.

What is the best way forward to invest in a difficult year?

Keep realistic expectations

There are enough bullish and bearish factors without either one having a clear edge. In 2023, the S&P had a reasonable P/E of around 18, allowing the big AI bang from Nvidia’s May earnings report, to propel the index to a 24% gain. In 2024, the S&P 500 gained 23% as the AI trend continued, but now inflation has persisted and the S&P trades at an expensive 21.7 times 2025 forward earnings. The chances of a third year of 20% gains are rare; it’s happened only 3 times in the past 100 years, but two of those were in 1935, and 1936 following the great depression, and then the third one in the nineties during the dot-com bubble. So, my expectations have to be very realistic.

Wait for bargains

The correction should continue, which allows us to scoop up bargains: In my opinion, we’re likely to see 5,500 before 6,500 in 2025. The S&P had wiped out the post-election bump, dropping to 5,800, past the 20 and 50 DMAs, before reversing this morning. Should it drop again, I expect strong support around its 200 DMA of 5,582.

Besides, I think this market will continue to correct until interest rates stabilize, which won’t happen until we see a drop in PCE readings (due at the end of January) wage growth, and a reduction in volatility, which is high with the VIX hovering between 17 and 19. There’s also precious little one can do about volatility; this is a Presidential stock-in-trade. The first few weeks of the Trump administration should be fairly volatile, as they roll out their tariff, deportation, and tax plans. The incoming President has stated that they intend to get off the ground very quickly with executive orders on day one, with immigration a big priority, which means we should get a fairly good view of deportations and their inflationary effects. The Trump administration also showed in their previous innings, firing unrealistic salvos as opening bids – and thus I assume a zero chance of 60% tariffs – the realistic number is likely to be much lower, but the drama will unsettle the market.

Focus on the big picture and stick to the fundamentals

To me, the biggest investment factor is always the fundamentals of great companies, which trumps macro, economic, or technical factors in the long run, unless they’ve historically deviated from the norm, and we’re not anywhere close to that. The stellar jobs report for December confirms how strong the economy is, in fact, higher wages are your biggest defense against inflation – good news is good news. It’s idiotic to hope that the labor market weakens, so the Fed can cut rates – very twisted logic, which hopes for weakness in the economy!

Earnings

Earnings will continue to do well, as we saw from FactSet’s estimates and especially across the M-7; No matter how much we complain about the lack of breadth, the M-7 will still carry the economy and the markets. The M-7 are not outliers, they are truly entrenched in the economy and are in the rare, sweet spot of being secular and sustainable growers and stalwarts with strong brands, pricing power, and huge moats.

Stocks to buy on declines

Taiwan Semiconductor Manufacturing Company Limited (TSM) – I first recommended TSMC in August 2023, and continue to add on declines. Its December monthly revenue grew 58% YoY and fourth quarter revenue grew 39% YoY, suggesting a strong beat of its mid-point guidance, and confirming its strength as one of the strongest pillars of the semiconductor industry.

NVIDIA Corporation (NVDA) – The CES showcased a strong Nvidia with its foray into the PC market, its new gaming chips, and the introduction of Cosmos, which takes its Ominverse segment to much higher levels with the addition of Blackwell architecture. Any short-term thinking about Blackwell delivery delays is just noise and a great opportunity. I’ve started buying around $132 and will continue to add on declines. I’ve owned Nvidia for a long time and have recommended it in March 2023, and July 2023.

Alphabet Inc. (GOOG) (GOOGL) does not get enough recognition for its market leadership and moats in Search, YouTube, Google Cloud, and Waymo, with far too much focus on the antitrust ruling. Given the new administration’s anti-regulatory stance, I don’t believe Alphabet will be hurt as badly, and even in the worst case, here’s a sum of the parts valuation, which at $2.6Tr is higher than its current market value of $2.35Tr.

I would also add the following on declines: Duolingo, Inc. (DUOL), the market leader in language learning and a huge beneficiary of AI, Marvell Technology, Inc. (MRVL), which has a strong position in ASICs and is very attractive at 12 times sales growing at 40%, and 41 times earnings growing at 33%,

Corrections are healthy for the market, and I look forward to buying on declines.

Categories
Market Outlook

Bond And Stock Markets Rally Strongly On Cooling Inflation

US 10-year treasury yields

Bonds Rally: The US 10-year treasury yield drops 14 basis points from 4.8% to 4.66%

The S&P 500 rallies 1.83% to 5,950, and the Nasdaq Composite zooms 2.45% to 19,511

CPI Data Signals Cooling Inflation in Good News for Fed

US Dec. consumer prices rise 0.4% M/M; Est. +0.4% The broader Consumer Price Index (CPI) matched expectations and rose 2.9% in December from a year earlier.

The benign numbers were in the Core CPI, led by shelter inflation, which was sorely needed.

Core prices rose 0.2% in December, less than the 0.4% estimated and 3.2% from a year earlier, down from 3.3% in November – an unexpected decline, which sparked the bond and stock rally.

Prices for shelter, airfares, used cars and trucks posted gains. Airfares were the outlier rising by 7% and gas prices also rose 4% MoM

Shelter inflation remained moderate, coming in at 0.3% on the month, a big sigh of relief for the Feds – shelter inflation is the stickiest and the hardest to reduce. The shelter index rose 4.6% YoY,  the smallest annual increase since January 2022.

US government bonds rallied strongly, reviving hopes of additional Federal Reserve interest-rate cuts, which were down to a total 29 basis points cut for the whole year. 

As the rally progressed Treasury yields across maturities fell by at least 10 basis points and closed with 10-year yields falling as much as 15 basis points to 4.65% for its biggest daily decline since August.

What a turbulent month so far – and all this before Trump is sworn in. The drop in yields reversed the sharp rise from a strong December employment data released Friday, which sparked a surge toward the highest levels in months to 4.81%, all but confirming that the Feds may not cut rates at all this year. At 4.81%, the 10-Year was a 100 basis points higher than when the Fed began easing in September.

Categories
AI Stocks

CES Note On Nvidia (NVDA)

Nvidia Digits Linux Blackwell Desktop

Nvidia Announcements: Jensen Huang CEO delivered the CES (Consumer Electronic Show) keynote on January 6th, 2025. An immensely popular event, with about 140,000 attendees, the charismatic Jensen drew a packed crowd. Jensen did not disappoint.

New Gaming Cards: Nvidia’s new line of RTX 50 Series gaming graphics cards is based on the company’s Blackwell chip architecture. Considering the massive leap Blackwell has made over Hopper, its previous iteration in data center applications, getting it to work in gaming is a huge deal – a massive improvement with superior rendering and higher frame rates for gamers.

Digits – The Linux-based desktop computer with the GB 10 Grace Blackwell Superchip with a CPU and GPU. A first in its history at $3,000 “Placing an AI supercomputer on the desks of every data scientist, AI researcher, and student empowers them to engage and shape the age of AI,” Huang said.

It may seem like a niche product for high-end engineers/professors/scientists and researchers, but I think it’s a deliberate and excellent strategy to evangelize the product, through the folks who can develop use cases and apps that can further the market for cheaper at scale mass Digits in the future. 

This is straight from the Nvidia playbook from the last two decades – they have always involved the scientific and research community from the start. I can bet a large number of these are going to be distributed free to campuses.

I think Digits will turn out to be a very consequential product for Nvidia – with several billion in revenue in a few years. But forecasts aside, what’s key is that Digits uses a scaled-down version of Nvidia’s Grace AI server CPU technology. It’s packaged in a Mac Mini-sized form factor with the help of Taiwan-based MediaTek, which Huang commended for its expertise in building low-power chips. 

Quoting Tae Kim from Barron’s who authored an excellent book on Nvidia.

“Over time, the logical move for Nvidia would be to scale down this CPU further for consumer Windows laptops. By integrating its graphics expertise, MediaTek’s power-saving capabilities, and the efficiency of Arm-based CPU technology, Nvidia could create a processor that offers leading graphics for gaming and high performance for productivity, along with long battery life. While prior Arm-based Windows PCs have struggled with software compatibility, Nvidia’s top-notch software engineering could make it work.”

Huang strongly hinted it was likely to happen. “We architected a high-performance CPU with [MediaTek],” he said on Tuesday at a question-and-answer session with financial analysts at CES. “It was a great win-win.”

When pressed by an analyst if Digits was an iterative step toward moving into the PC market, “I’m going to have to wait to tell you that,” Huang said. “Obviously, we have plans.”

There are questions about why Nvidia chose Linux over Windows – and we should hear more about that at their GTC conference in March.

It could shake up the moribund PC market, which has been suffering from a lack of growth rates after COVID-19. Desktop PCs and laptop computers still generate large revenues for Intel and Advanced Micro Devices, the primary makers of x86-based processors – a legacy that could give way to ARM-based processors, which Apple uses. Analysts expect Intel to generate $30 billion in revenue from its client computing business in 2024, according to FactSet, while AMD has $6.7 billion in revenue in its client segment.

Billions of potential new revenue are at stake for Nvidia, which is forecasted to make $180Bn in sales in the 12 months ending January 2026. While data center takes up the largest share of revenue at about $150Bn of that pie and gaming, auto, and professional visualization (Omniverse) take the rest, a new source would help a great deal when data center revenue growth slows down.

In the past two years, Nvidia has monopolizedized the AI data center market with the best-designed, highest-performing chips. Nvidia would likely make a significant dent in the PC market as well as the new paradigm in edge computing with all the computing power and constant innovation and upgrade at its disposal.

The third announcement was for COSMOS – a significant improvement over their Omniverse and the biggest catalyst/enabler of “Physical AI”,  I’ll write a separate note on that.

Nvidia wants it all. That’s likely to be good news for consumers and trouble for the PC status quo.

Categories
AI Hardware Semiconductors Stocks

AI Takes Center Stage At 2025 CES

AI at the edge

The mood at the CES (Consumer Electronics Show) is pretty upbeat. This is a hardware show and after years of taking a backseat to software, the massive computing power from GPUs for AI applications has propelled hardware to the forefront. And it’s not just servers, racks, data center peripherals, or networking, the range of hardware was impressive. From auto, robots, home appliances, entertainment, healthcare devices, industrial equipment, and smart glasses, to security.

Vendors, engineers, consulting firms, and VCs are noticeably excited for the future. 

Heavily focused on AI, the number of exhibitors with AI proof of concept and use cases was also quite large. Sure, there’s always hype, but a lot of them were genuine, with orders, use cases, and deployment.

Trends

Smarter hardware

Robotics – big push from computing power for robotic uses in supply chain, warehousing, and retail. Strong use of AI in industrial design, and industrial production.

Examples:  

  • Siemens’ collaboration with Nvidia and several others using Nvidia’s Cosmos (a big improvement on Omniverse) for pre-production simulation and assembly lines for quality control, and error reduction) 
  • Eaton with Intel for power systems. (Time reduction on compliance, process streamlining)
  • Accenture’s several clients, in fields like oil drilling, and IoT applications.

Vendors can do a lot more now and are seeing demand for better AI products.

Inference

Both edge AI in PCs and IoT endpoints are going to be huge. A SaaS cyber security firm (among others) complained about the crazy fees she pays AWS (somebody’s got to pay for that $100Bn of Capex for Nvidia’s GPUs!). The need to increase inference and solutions at the endpoint will be a major trend, and the increase in the number of AI PCs coming to market confirms the shift to the edge.

Agentic AI or Agents

I had lengthy discussions with  Nvidia and AMD engineers on Agentic AI, which has become a bit of a buzzword with some hype about it really being a chatbot with a fancier name, but in several cases that I saw, was a major improvement over a chatbot.

Agentic has to mean enhanced or better solutions than a chatbot –  a chatbot or a ChatGPT query gives you a simple answer to a query from a data set. An Agent must be able to give you significantly more feedback from analyzing a wider set of data, or more than one data set. It is more interactive and provides feedback and looks for feedback – a loop that ends up with a better solution.

A comment from the VP of Accenture was very interesting. She said, that if agents have to be better than chatbots or the latest version of Alexa/Siri – if I ask for the next charging station for my EV, it should be able to know my history, deduce, which direction I’m going in, and also tell if there is a vegetarian eatery on the way (in the same direction)  – not just throw up 5 charging stations 2 in the wrong direction, as it currently does.

In my opinion, this is just the beginning, there will be secular growth for a while. I would strongly focus on AI with the usual caveat of being careful of stock valuations running ahead of growth and getting overpriced – we’ll need to be patient with getting the right price.

For AI to continue growing the industry has to get more democratized – more developers, a wider ecosystem, more use cases and I saw that in spades, which gives me a lot of confidence in its future – Nvidia, AMD, Qualcomm, Amazon, Google, and Intel had multiple partners all over the conference. 

The Agent could be your interface on your iPhone – this is an interesting idea brought up by a VP from Qualcomm.

Categories
Ad Tech Stocks Technology

Roblox (RBLX) $58, A Solid But Overpriced Company

Roblox (RBLX) is a market leader for gaming apps and the short report from The Hindenburg. alleging irregularities in engagement metrics had a negligible impact on its share price.

In October 2024, Roblox shares dropped 9% after Hindenburg’s short thesis but quickly recovered, closing only 2% lower, highlighting investor resilience. The stock, which was coasting in the low forties then, has gained almost 50% since then to $58 today.

I believe it is a solid company. Although it is overpriced, it is worth considering as an investment if the price drops below $50.

Positives

Market Leader: Roblox is the number one grossing app for the iPad across the App Store, and regularly among the top 10 apps for the iPhone, across categories, according to data collected by Refinitiv. 

Not gaming the market: Roblox also showed strong App Store momentum across some of the biggest gaming markets in the world, including North America, Europe, and SEA. I believe these gross numbers are extremely difficult if not impossible to fudge, instead it supports Roblox’s strong commercial value and future prospects.

Good quarterly numbers and guidance: Roblox’s booking in Q2 grew around 22% YoY, to $955Mn, and it guided to $1-$1.025Bn for Q3.

Partnering with Shopify: The commercial integration partnership with Shopify also helps Roblox further build out its virtual market, with better monetization opportunities.

Wall Street likes it: Ken Gawrelski, an analyst from Wells Fargo, maintained a Buy rating on Roblox, raising the price target to $58.00. He observes that the company’s strong engagement trends continue to outperform expectations, with a significant increase in concurrent users and app downloads, indicating robust user growth. These factors contribute to a raised third-quarter total bookings growth forecast, which is now expected to surpass the company’s guidance and the consensus estimates. 

Great monetization tools: Roblox’s expansion of monetization tools, and strength in in-game spending is a significant competitive advantage for driving long-term developer and user engagement on the platform. Shopify and other initiatives are expected to enable developers to better monetize their offerings. 

The trend is their friend: The strategic shift towards direct response advertising, including new partnerships and live commerce testing, indicates that Roblox can make the most of the new opportunities in digital advertising. 

These initiatives give me confidence in the company’s sustainable long-term revenue growth.

Negatives

Hindenburg’s biggest grouse was the possibility of fudging and overstating user growth and engagement numbers, which though denied strongly by the company and discarded by analysts could create doubts about the valuation in the future.

Revenue growth forecasts for the next 3 years is around 16-18% and with the stock selling at 7.5x sales, it is expensive and a quarterly miss could lead to a large drop. Even the positive Wells Fargo analyst had a price target of $58, we’re already crossed that level.

It is loss-making on a GAAP basis with heavy stock-based compensation, which likely sets a cap on its valuation. That said cash flow is strong – around 19% of revenue.

Overall, Hindenburg didn’t make an impact, Roblox is performing well but I would be very careful about the price and get it lower to make a meaningful return.

Categories
Semiconductors Stocks

The Knee Jerk Reaction To Micron’s Q1-25 Is A Gift

Micron Technology’s fiscal Q1-2025 earnings report offered two stories: a dramatic surge in data center revenue and a troubling outlook for its consumer-facing NAND business. Despite the strong performance in high-growth areas like AI and data centers, the company’s stock took a sharp dip after hours due to concerns about consumer weakness, especially in the NAND segment.

I’ve owned and recommended Micron for a while now, and even took some profits in June 2024 at $157, when it rose far above what I felt was its intrinsic value. Since it’s a cyclical stock in a commodity cyclical memory semiconductor business, getting a good price is unusually important, and it is crucial to take profits when the stock gets ahead of itself.

Micron’s (MU) stock slumped from $108 on weak guidance for the next quarter, and now at $89, it looks very attractive at this price. I’ve started buying again.

Record-breaking data center performance

Micron reported impressive growth in its Compute and Networking Business Unit (CNBU), which saw a 46% quarter-over-quarter (QoQ) and 153% year-over-year (YoY) revenue jump, reaching a record $4.4Bn. This success was largely driven by cloud server DRAM demand and a surge in high-bandwidth memory (HBM) revenue. In fact, data center revenue accounted for over 50% of Micron’s Q1-FY2025 total revenue of $8.7Bn, a milestone for the company.

HBM Revenue was a standout, with analysts estimating that the company generated $800 to $900Mn in revenue from this segment during the quarter. Micron’s HBM3E memory, which is used in products like Nvidia’s B200 and GB200 GPUs, has been a significant contributor to the company’s data center growth. Micron’s management also raised their total addressable market (TAM) forecast for HBM in 2025, increasing it from $25 billion to $30 billion—a strong indicator of the company’s growing confidence in its AI and server business.

Looking ahead, Micron remains optimistic about the long-term prospects of HBM4, with the expectation of substantial growth in the coming years. The company anticipates that HBM4 will be ready for volume production by 2026, offering 50% more performance than its predecessor, HBM3E, and potentially reaching a $100 billion TAM by 2030.

Consumer weakness and NAND woes

While Micron’s data center performance was strong, the company’s consumer-facing NAND business painted a less rosy picture. Micron forecasted a near 10% sequential decline in Q2 revenue, to $7.9Bn far below the consensus estimate of $8.97 billion, setting a negative tone for the future. This decline was primarily attributed to inventory reductions in the consumer market, a seasonal slowdown, and a delay in the expected PC refresh cycle – a segment that has also derailed other semis such as Advanced Micro Devices (AMD), and Lam Research (LRCX) among others. While NAND bit shipments grew by 83% YoY, a weak demand environment for consumer electronics—especially in the PC and smartphone markets—weighed heavily on performance.

Micron’s CEO, Sanjay Mehrotra, emphasized that the consumer market weakness was temporary and that the company expected to see improvements by early 2025. The company also noted the challenges posed by excess NAND inventory at customers, especially in the smartphone and consumer electronics markets. In particular, Micron’s NAND SSD sales to the data center sector moderated, leading to further concerns about demand sustainability. The slowdown in the consumer space and the underloading of NAND production is expected to continue into Q3, with Micron’s management projecting lower margins for the foreseeable future due to these supply-demand imbalances.

Micron reported Q1 revenue of $8.71 billion, up 84.3% YoY, and in line with consensus estimates. However, the company’s Q2 guidance of $7.9Bn (a 9.3% sequential decline) was notably weaker than the $8.97Bn analysts had expected. The guidance miss sent Micron’s stock down significantly in after-hours trading.

Financial highlights: Strong margins and profitability, but challenges ahead

Improving Margins: Micron’s gross margin for Q1 came in at 38.4%, an improvement of 3.1 percentage points QoQ, largely driven by the strength of HBM and data center DRAM. However, the outlook for Q2 is less optimistic, with gross margins expected to decline by about 1 percentage point due to continued weakness in NAND, along with seasonal factors and underloading impacts.

Micron’s operating margin for the quarter was 25.0%, ahead of guidance, reflecting the company’s tight cost control and strong performance in high-margin segments like HBM. However, for Q2, Micron expects operating margins to contract, with GAAP operating margin expected to drop to 21.8%.

Profitability also improved significantly with GAAP net income rising 111% QoQ to $1.87Bn, resulting in a GAAP EPS of $1.67, compared to a loss of $1.10 in the year-ago quarter. However, Micron guided for a significant drop in EPS for Q2, forecasting GAAP EPS of $1.26, well below the $1.96 expected by analysts.

Cash flow and capital investments

Micron’s cash flow generation remained robust, with operating cash flow (OCF) increasing by 130% YoY to $3.24 billion, but free cash flow (FCF) was more limited due to significant capital expenditures (CapEx) of $3.1 billion. The company also outlined its intention to spend around $14 billion in CapEx in FY25, primarily to support the growth of HBM and other high-margin data center products. In my opinion, this is a necessity to stay close to SK Hynix and Samsung, its biggest rivals in HBM, who also have a large chunk of the market and can easily match Micron in product improvements necessary to supply to the likes of Nvidia (NVDA). High Capex also increases its ability to scale and improve margins down the road, leading to greater cash generation.

Going home: Micron also announced a $6.1 billion award from the U.S. Department of Commerce under the CHIPS and Science Act to support advanced DRAM manufacturing in Idaho and New York. This partnership aligns with Micron’s long-term growth strategy in the data center and AI segments.

Micron is a bargain

I’m buying the stock with the risk that it could stay range-bound for a few months.

The company’s earnings call reflected a clear divergence in the outlook for its two key segments: data center and consumer electronics. Management sounded confident about data center growth, driven by strong demand for AI-driven applications while providing a more cautious forecast for the consumer NAND business, where inventory corrections and weakened demand are expected to persist through Q2 2024.

I’m very confident about Micron’s continued strength in the data center market, driven by AI and cloud computing, and believe that the prolonged weakness in consumer-facing NAND and PC markets in the short term is an opportunity to buy the stock at a bargain price. The market’s reaction suggests that investors were caught off guard by the unexpected weakness in the consumer business, but this has been persisting as I mentioned earlier with AMD, and Lam Research, and even before

earnings at $109, Micron was a lot below its 52-week high of $158. The further knee-jerk reaction is a boon for the bargain hunter.

For now, I’m not worried if the stock remains range bound – at $89, the downside is seriously limited and its future success will remain squarely on HBM data center demand. Its largest customer Nvidia is forecast to generate $200Bn worth of data center revenue from its Blackwell line and Micron will reap a good chunk of that.

Micron is priced at 13x FY Aug – 2025, with consensus analyst earnings of $6.93, which is forecast to grow to $11.53 in FY2026, a whopping jump of 66%, bringing the P/E multiple down to just 8. Even for a cyclical that’s a low. Besides, Micron is also growing revenues at 28% next year on the back of a 40% increase in FY 2025, which took it soaring past its previous cyclical high of $31Bn in FY2022. With data center revenue contributing more than 50% of the total, Micron does deserve a better valuation.

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Market Outlook

The Inmates Are Running The Asylum?

12/20/2024

The Inmates Are Running The Asylum?

Sometimes, you get the feeling that the inmates are running the asylum after the two-day fiasco in Washington sent the government into a temporary shutdown without passage of any stop-gap funding. Not that it hasn’t happened before; we’re all too familiar with and cynical of the antics of our esteemed elected officials, but the drama is causing serious damage to an already rattled market.

The S&P dropped 2% overnight after a smaller stop-gap funding bill rushed through by the GOP in the house failed to secure enough votes with a large number of Republicans opposing the bill as well. Briefly, Musk had torpedoed an already agreed bipartisan stop-gap bill, which would have kept the government funded through March 2025, because it did not include a debt ceiling increase and far too much pork. Republicans scrambled to put together a much smaller bill including a debt ceiling increase, but couldn’t get enough representatives on board, and this time a betrayed democratic side didn’t lend a hand.

As we barrel through the uncertainty, already exacerbated by a rising 10-year yield and the likelihood of only two cuts next year, the huge drop in overnight futures suggested that the S&P could break 5,872 and completely erase the post-election rally. Everybody appreciates the animal spirits, lower taxes, lesser regulation, and so on, but it comes with the price of high drama! No free lunches…

Slightly better than expected inflationary numbers with the core PCE rising 2.8% YoY against the 2.9% has stemmed the fall a bit. I had planned to buy the dip – may get some of my limit buys today, or even lower them.

Though this is a far less onerous shutdown. In a shutdown, government offices continue essential work, but tasks deemed nonessential are put on ice, paychecks stop and many workers are furloughed until Congress passes new funding. The impact of a shutdown varies, critical services continue, as would military and border-control functions. But, most federal workers, whether essential or not, won’t receive a paycheck. Under a 2019 law, workers will automatically get back pay when the shutdown ends. Private contractors who work with federal agencies and are furloughed during a shutdown aren’t guaranteed back pay.

How would this shutdown compare to previous ones?

From the Wall Street Journal
“Congress has missed its deadline to pass 12 federal funding bills and failed to extend itself more time in about two dozen instances since 1976, but those lapses have often been short, with minimal impact.”

Quite the dysfunctional record but thankfully the impact has never been severe.

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Market Outlook

A Flicker Of Hope After The Fed Flameout

source:market outlook

12/20/2024

The Fed’s favored inflation gauge – core PCE – cools slightly in November

The core PCE Price Index, the Federal Reserve’s preferred inflation measure, edged up 0.1% M/M in November, less than the +0.2% consensus and cooling from the +0.3% pace in October. Personal income and spending also came in slightly lower than expected in the month.

On a year-over-year basis, core PCE increased 2.8%, just under the 2.9% consensus, and running at the same pace as in October.

PCE Price Index, which includes food and energy, also ticked up 0.1% M/M vs. +0.2% consensus and +0.2% prior.

That measure translated to a 2.4% Y/Y increase, less than the +2.5% consensus, but slightly hotter than the 2.3% rise in October.

Personal income: +0.3% M/M vs. +0.4% expected and +0.6% prior.

Personal outlays: +0.4% M/M vs. +0.5% consensus and +0.4% prior.

At the time of writing, premarket S&P 500 Futures are down 0.6% after being down 1.5% overnight after the second stop-gap funding bill failed miserably to get through the House of Representatives.

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Cloud Service Providers Enterprise Software Stocks

Oracle Deserves A Seat At The AI Table

Oracle

Oracle (ORCL) $166 is a solid investment opportunity for 3-5 years, with a decent shot at growing data center cloud revenues faster than its other businesses, with a push from AI requirements from clients like Meta. Hyperscalers and cloud service providers are expected to spend a capex of $300Bn in 2025, boosting cloud infrastructure providers such as Oracle.

Oracle’s earnings should grow between 16-18% in the next 3-5 years- and it’s very reasonably priced at 24x forward earnings of $7.05. 

Its 31% GAAP operating margins are another sign of strength, especially for a legacy/mature $52Bn+ tech company. 

Revenues should grow at 12-14% annually in the next 3-4 years, which is impressive for a company of that size. Oracle’s P/S multiple is not expensive at 7X sales.

Oracle Cloud Infrastructure’s robust growth is a big catalyst for the company and the stock, and while the near-term Oracle’s FQ2 double miss disappointed investors, the price drop from $191 has created an opportunity for investors. Besides Oracle could gain market share over time.

Oracle’s modular approach and scalable infrastructure offer cost competitiveness, attracting customers. The company’s ability to scale AI clusters, demonstrated by the deployment of a 65,000 NVIDIA H200 supercomputer and a 336% surge in GPU consumption last quarter, further highlights its appeal.

Furthermore, Oracle’s strengthened partnership with Meta for AI training underscores its attractiveness to both large enterprises and smaller businesses. This reinforces the effectiveness of Oracle’s modular strategy, which aims to provide customers with an improved total cost of ownership (TCO) compared to leading hyperscaler competitors.

Their overall cloud segment is about 55% of revenues and growing at 25%, but the licensing segment has been stagnant for the past two years. Over time this will tilt more decisively towards the cloud, allowing them to either increase or maintain their multiples/valuation.

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Market Outlook

Don’t Ignore The 10-Year Yield

It All Came Tumbling Down

The likelihood of only two Fed rate cuts in 2025 sent the markets tumbling yesterday, even as Chair Powell was still answering pointed questions about the resilience of the economy and where inflation was headed in 2025. The S&P 500 eventually closed 2.96% lower. shattering the post-election rally.

The markets had been ignoring the 10-year yield for far too long. The 10-year went from 3.6% in September when the Fed started cutting to 4.40% before the FOMC meeting, signaling that inflation wasn’t completely done and that stock valuations were getting frothy. It unraveled yesterday. Analysts are talking about the 10-year possibly reaching 5%, which will remain bad for stock multiples. The S&P 500 and the Nasdaq Comp are down 4.5% from their highs. Let’s see how the PCE report is on Friday.

The last time the S&P 500’s P/E ratio was 22, it was 2021, and the 10-year treasury yield was 1%! We are at 4.5% and climbing! The expectations of 4 cuts in 2025 had kept the markets hopeful that the 10-year would follow suit and head back below 4%. Clearly, that’s not happening. Either the index has to come down or the 10-year has to drop to justify these valuations….

Also don’t forget the Fed’s reluctance to cut big for forecast more cuts in 2025 was based on the Sep, Oct and Nov inflation readings, they’ve not even talked about the possible inflationary impact of tariffs and larger fiscal deficits – somebody has to fund the government when they’re not collecting enough taxes, and the weaknesses in the past two treasury auctions suggest that lenders are demanding better rates to lend to the government.