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Cloud Service Providers

Microsoft (MSFT) Hold at $407 – Impressive Earnings, Awaiting Guidance

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Microsoft (MSFT) Hold $407

Earnings: $2.93 per share, vs. $2.78 per share expected, 33% Higher YoY

Revenue: $62.02 billion, vs. $61.12 billion expected, 18% Higher YoY.

CLOUD DOES WELL – Intelligent Cloud revenue $25.88Bn V 25.29Bn expected, 20% Higher YoY contains Azure cloud infrastructure, SQL Server, Windows Server, Nuance, GitHub and enterprise services. Within that segment, revenue from Azure and other cloud services grew 30%. Analysts polled by CNBC had expected 27.7% growth, and the StreetAccount consensus was 27.5%. The metric for the previous quarter was 29%.

This is impressive growth – but most of it is already in the current price.

I own Microsoft but haven’t had a chance to add Microsoft during this rally, and it’s already up 9% this year.

The guidance will be out during the earnings call starting at 5:30 and will update after the call.

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Semiconductors

Super Micro Computer (SMCI) Earnings Report: Key Indicator for AMD and Nvidia’s Performance

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Super Micro Computer (SMCI) reports this evening, after market close. If you recall, Super Micro had shot up from $300 just two weeks back to the $490 it is now, because of its revised guidance  – it too had its Nvidia moment!

Second-quarter anticipated sales now expected to be between $3.60 billion and $3.65 billion, which was a significant increase from the previous forecast of $2.70 billion to $2.90 billion. The company anticipates an improvement in adjusted earnings to the range of $5.40 to $5.55, up from the initial estimate of $4.40 to $4.48. 

This new guidance handily surpasses analysts’ expectations for the second quarter, set at $2.84 billion in revenue and earnings per share of $4.55. At midpoints, these revised projections indicate a 29% rise in revenue and a 24% increase in non-GAAP net income compared to Super Micro Computer’s earlier guidance.

I’m more interested in SMCI’s results as a good indicator for AMD and Nvidia (Nvidia), since they are the largest supplier for scalable rack systems for the data center GPU’s. If they overshoot even this revised estimate, I would look at AMD more closely.

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Cybersecurity

Cybersecurity Sector Outlook for 2024: Strong Buy Recommendations for Key Players

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Morgan too recommends cybersecurity as an important sector for 2024. 

I had made buy recommendations for FTNT and PANW in the last few days and Morgan’s price targets of $77 and $375 are very similar to mine, indicating there is still considerable upside left. 

https://seekingalpha.com/news/4053959-palo-alto-on-top-at-morgan-stanley-world-preps-for-cyberattacks

Of the others in the article. I like these stories.

Crowdstrike – CRWD $280 – The best player in endpoint security, first recommended in Sep 2023 at a price of $165. Given the run up, I was hesitant to add more or recommend at this price. 

It’s growing at 33%, as fast as Sentinel One, (S) which is 1/4 its size, so clearly the growth momentum is still there. Wells Fargo has a $315 Price Target, and longer term the TAM (Total Addressable Market) is massive and growing over 25% per year.

It has gone up around $40 (16%)  from the beginning of the year, Buy on Declines.

Sentinel One (S) Cyber Security, $24, BUY Price Target – $30. 

Long term Over 20%. Small Company, Volatile

Sentinel is one the fastest growers in cyber security with 100% growth last year,  and expected growth of 35  to 40 % for the next three years. Sentinel’s valuation should grow on its transition to profitability and free cash flow generation – there have significant improvements in margins. For now, one needs to be prepared for the volatility that comes with just $800Mn revenue and a $7Bn market cap. Given the depth of its products and scope for improvements this is worth investing in.

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Networking

Arista Networks: A Strong Buy for Long-Term Growth in Network Infrastructure

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Arista Networks: (ANET) Buy, $$245  One year target $280. 

Invest 5 Years, 16-20% annual return. P/E 34, 3-5 year EPS growth 14-16%. 

Best large-scale network provider for hyperscalers like Meta and Microsoft. Unlike Cisco (CSCO), Arista didn’t focus on selling gear, instead, it partnered with hyperscalers to build their networks and platforms from scratch. This is a unique competitive advantage and very profitable too; Arista boasts the best margins (32% operating profit) and cash flow in the industry. It is a bit expensive with much of the Earnings growth of 44% in 2023 already priced in, with the stock doubling from $120 last year. Still, an excellent long-term play as the pick and shovels play for AI and high-speed data networks; it tends to surprise so the EPS growth could likely be higher.

I’ve owned it since May 2023 and I add on declines, my last purchase was around $231.

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Consumer Discretionary Industry Stocks

Make My Trip – Plenty to Like And Some Risks As Well. 

Make My Trip (MMYT) $88 

What’s to like:  

Secular growth in Indian tourism. That’s likely to last several years, less cyclical. 

Market leader with 54% share 

High awareness of brands. 

20% Three Year Forward Rev Growth consensus estimates 

Turned the corner – first year of Operating Profits of $56Mn on $782Mn in revenue or 7% operating profit margins and $125Mn operating cash or 16% cash flow margin. 

Management emphasized profitability from the entire industry, which should curtail some of the undercutting…Online travel booking can be a commodity, so this will help. 

Risks and challenges. 

Cyclicality – From 2015 to to 2018 (March Y/E) Make My Trip grew revenue from $295Mn to $658Mn, then drop 2 years in a row to $475Mn by March 2020 – Pre covid there was a slowdown in travel. Post Covid it has recovered strongly to $792Mn in revenue last year.  

Market returns were commensurate with this performance – the stocks best performance was in the past 12 months returning 183%, the vast majority of the 219% of the last 10 years. Simply, the market has discounted some the 20% growth of the next 3 years. 

Overall revenue growth from 2015-2024 was 10%, more like the industry average, and 20% forward growth will put it in a different league. 

Valuation: 10X sales with 20% growth, it’s not a profit story yet. That’s a P/S growth ratio of 0.5, ideally, I like to get in below 0.3 for a better margin of safety, unless the cash flow or operating profit is growing very strongly. 

It’s a good story, well managed, strong branding, market leadership and lots of growth ahead – valuation is a bit stretched because of secular growth Indian travel story 2X its normal multiple. Buying on declines and averaging it would be better. 

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Cybersecurity

Fortinet: A Strong Buy in the Cybersecurity Sector

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Fortinet: (FTNT) Cybersecurity $61-$61.50 BUY, One year target $75. Long Term 20% return 3-4 years. 

Market leader in the growing cybersecurity industry, increasing revenues at 19% and earnings at 22%, which makes it a good bargain at 34x forward earnings and 7x forward sales. Besides, it is GAAP profitable with terrific operating margins, which always carries a premium.

Cybersecurity is a growing industry due to increasing AI advancements and vulnerability to threats, with several tailwinds. Fortinet has already recovered its 25% second-quarter, post-earnings price drop due to lower revenue growth guidance, which was mostly due to indigestion from heady pandemic growth. It should resume high growth after a few quarters.

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Enterprise Software

UiPath: A Strong Buy in Robotic Process Automation

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UiPath (PATH) Buy $23  Industry: Robotic Automation Processes (RPA)

Secular Growth – 5 Years, Target $55 to $60. Annual Gain around 22%

Why UiPath?

Saving customers money: I believe that for AI to succeed, enterprise software businesses will have to come up with genuine economic and money-saving use cases and applications for their business customers by improving productivity.

Unlocking Data: Mark Moerdler, from Bernstein Research, commented on Barron’s AI Roundtable.

“But arguably, the bigger value creation is going to be unlocking the data within enterprises, to leverage that data to drive efficiencies within organizations, make leaps of intuition in coming up with answers, or make decisions faster, or in some cases reach conclusions you couldn’t previously reach because you didn’t have easy access to the data.” 

UiPath is a Robotic Process Automation (RPA) leader, that started improving productivity for its business customers since its inception and the availability of faster chips and new forms of faster, more efficient parallel computing should turbocharge its business.

Fast-growing industry: The RPA industry is in its early stages and has a long runway of fast growth, especially with AI hardware support. The RPA market is expected to grow at an astounding 33% to $27.5Bn, with cognitive or intelligent computing being one of its key drivers.

UiPath generates enough context to create AI solutions

UiPath’s co-founder had this to say on the earnings call

  • “To be effective, Generative AI needs context, which our software robots can deliver by gathering information from across the enterprise – in data, documents, CRM, ERP, and beyond. It also needs our platform to take action and operationalize the promise of AI today with an integrated set of capabilities that combines our Specialized AI with Generative AI. 
  • Yeah, I would like to add that more customers are realizing that automation is a great means to get more value from Generative AI.”

Strong margins and growth – GAAP margin of 83%,  revenue growth 21% for the next three years, Adjusted operating profit margin at 15%.

Categories
Enterprise Software

Confluent: A Strategic Buy in Data Streaming

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Confluent (CFLT) Buy $22.25 Industry: Data Streaming

Secular Growth – 3 years, Target $43-45. Annual Gain 24%

Open-source Apache Kafka is ubiquitously used for data streaming. Confluent’s founders originally built Kafka and its wheelhouse is scalable data streaming and infrastructure management. The demand for real-time, low-latency data streams from IoT, Ad-Tech, and Autos to name a few, is only going to get greater and Confluent has the best cloud platform to constantly stream it at scale, enhance, maintain, and provide analytics for it. 

What makes Confluent stand out?

Best in Class Product: Confluent does have large competitors; Amazon’s (AMZN) AWS, Microsoft’s (MSFT) Azure, and Alphabet’s (GOOG) Google Cloud have their own managed data streaming products. However, none have the focus, scale, rich features, implementation, integration, support, and cost savings that Confluent does.  A Comparison of the products revealed 26 integrations for Confluent Versus 9 and 10 for the rest, much wider deployment, and stronger support and training.

Symbiotic Relationship: Besides, Confluent, having an agnostic platform, has partnerships with the CSPs (Cloud Service Providers) to fill in their data streaming product needs or bring them customers for storage and processing.  So, it’s a symbiotic relationship and helps both the CSP and Confluent. 

  • Integration: Confluent’s  Data Streaming Platform has several integrated components that will lead to greater engagement and monetization. Given the massive $60Bn Total Addressable Market, and the speed at which data streaming is moving, a comprehensive best-in-class platform at scale is a necessity, and building it gives them a big competitive advantage.

Several Monetization Streams: With Kafka as the foundation, the DSP does a lot more than just stream data, it uses 5 integrated processes of streaming, connecting, governing, processing, and sharing. All these components, including the non-Kafka ones, can be monetized and Confluent has started Freemium licensing/subscriptions to increase engagement and revenue. Using Apache Flink, it’s also increasing engagement and monetization for stream processing, governance, and sharing from customers like Netflix (NFLX) and Instacart (CART). The stream-sharing offering would be very valuable to the finance, insurance, and travel insurance industries, which need to share data with providers and customers.

Confluent had a slower-than-expected 3rd q-2023 revenue growth and in a day sank from $28 to $17, so it is volatile. Now, at $22, it’s a lot cheaper at 8.5x sales, and with 26% revenue growth on the anvil is reasonable for a startup, growth stock that started only in 2014 and IPO’d in 2021. While still making heavy losses, there has been significant improvement in margins and management has committed to continue doing so.

Categories
Semiconductors

Qualcomm (QCOM): An Underappreciated GARP Opportunity in Wireless Technology

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Qualcomm (QCOM) $137.50

Qualcomm is an underappreciated GARP (Growth At A Reasonable Price). 

Apple stays on as a handset customer for an extra two years than originally planned, till FY 2027. Clearly, developing in-house modems is an enormously difficult undertaking and even the mighty Apple is still struggling to achieve the same levels of expertise and product quality that Qualcomm provides.

Qualcomm’s crown jewels of extensive, essential patents for wireless networks, such as a near-monopoly in 3G wireless networks, a large share of 4G patents, which contributed enough innovation to warrant earning royalties on virtually all 4G devices and a good portion of essential patents with 5G – ensure a lucrative stream of royalty revenue from most cell phones. 

The crown jewels continue to bolster and monetize the business. 

Qualcomm’s auto segment should power growth for the next decade.

Qualcomm has a large auto pipeline of $30Bn through 2030, larger than Nvidia’s $14Bn and Mobileye’s $22Bn. I expect the auto segment to grow from $1.9Bn to $4.3Bn by FY 2026, a CAGR of 33% in the next 3 years. 

Qualcomm’s main strengths are:

  • Its connectivity, from its decades of experience in the cell phone industry.
  • The one-stop shop integrating ADAS, Infotainment, Car to Cloud services, and connectivity.
  • Its massive capacity to scale and handle the complexity needed to manage different systems, stacks, and vendors.
  • Building a better platform at scale – Qualcomm would be the digital chassis for traditional ICE automakers 
  • Unlike Mobil Eye, Qualcomm could take market share by being more flexible and building heterogeneous SoCs the way they did in phones and IoT.

Given the emphasis on technology and the high growth, Mobileye, Qualcomm’s largest competitor is valued at a whopping 16x revenues. I don’t believe the markets are valuing the strength of Qualcomm’s $30Bn pipeline and 33% growth correctly and see this as an opportunity to buy.

The Company’s lucrative treasure trove of patents in connectivity should continue to ensure high-margin revenues for a long time.

Its Snapdragon technology in partnership with Microsoft can find opportunities in the PC space.

The auto industry, as it moves towards autonomous driving, is an extremely difficult one to work in with its maze of regulations, emphasis on safety, adherence to stringent quality standards, and the time from pipeline to production, which sometimes stretches up to 7 years. ICE (Internal Combustion Engine) automakers have to make a paradigm shift embracing technology as the main driver and not looking at digitization partners as parts suppliers.

Categories
Semiconductors

indie Semiconductor (INDI): A Compelling Buy in the Auto-Tech Growth Sector

indie Semiconductor (INDI) $7.35

BUY 

indie Semiconductor is a compelling growth story in the auto-tech industry, with a decade of secular growth ahead.

It has durable competitive advantages of providing agnostic and holistic solutions to the ADAS (Advanced Driver Assistance Systems) segment of the auto-tech industry. As cars progress towards becoming computers on wheels, there are myriad ADAS solutions for traditional internal combustion makers to pure tech companies making electronics and autonomous vehicles.  The industry is fragmented, finding its feet, thus having agnostic solutions is a big plus. 

Another plus is that it’s run by a solid team of industry veterans with decades of production experience and deep roots in the auto-tech industry. Auto production is deeply regulated for safety standards, the sales and production cycles take years from design to production, and having veterans instead of tech-whiz kids is a big competitive advantage. 

Also, indie’s small size (just $350Mn in sales in 2024) makes it nimble and well-positioned to take on difficult projects deemed unprofitable by large, rigid, complacent auto parts manufacturers.

indie’s pipeline has leapfrogged to $6.3Bn from $4.3Bn leading to forecasted revenue of $1Bn for 2028, about 5x 2023’s revenue. That was the clincher for me; its current market cap is only 1.4Bn, just 4x 2024 sales. 

A COMPELLING BARGAIN.