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Fountainhead Investing

  • Objective Analysis: Research On High Quality Companies With Sustainable Moats
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5 Star Tech Analyst Focused On Excellent Companies With Sustainable Moats

Tag: Artificial Intelligence

Categories
AI Semiconductors Stocks

Micron’s Low Price Is A Gift

Micron’s data center revenue should grow 91% and 38% in FY2025 and FY2026, driven by cloud server DRAM and HBM.

The market is not assigning a strong multiple to Micron’s largest, most profitable, and fastest-growing segment, with HBM3E contributing significantly, and future growth expected from HBM4.

Micron should gain from an extremely strong AI market as evidenced by huge CAPEX from hyperscalers, Nvidia’s Blackwell growth, and Taiwan Semiconductors’s forecasts.

Consumer NAND business faced challenges due to inventory reductions, seasonal slowdowns, and delayed PC refresh cycles, impacting Q2 revenue guidance and margins.

Despite short-term consumer weakness, Micron’s strong data center prospects and attractive valuation make it a compelling buy, especially at the current price of $90

You can read the entire article on Seeking Alpha; Micron (MU) dropped a massive 15% after DeepSeek deep-sixed the market. Nvidia (NVDA) too dropped 14%, but has begun to recover and I expect Micron to recover as well.

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
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.

Categories
AI Semiconductors Stocks

Broadcom Is A Strong AI Contender

ASICs

12/12/2024

Broadcom (AVGO) reported good results and exceeded guidance for Q1-FY2025

Revenue $14.05Bn for Q4-FY2024, up 51% YoY (It acquired VMWare) in line with expectations. Without the VMWare acquisition, organic revenue growth was 11%.

GAAP net income of $4.3Bn; Non-GAAP net income of $ 6.9Bn, slightly higher than estimated.

Adjusted EBITDA of $9.1Bn or 65 percent of revenue – Adjusted margins are high because of the non-cash adjustment of charges for the merger with VMWare.

GAAP diluted EPS of $0.90 for the fourth quarter; Non-GAAP diluted EPS of $1.42 for the fourth quarter – Slightly higher than estimates.

Solid Cash Generation: Cash from operations of $5.6Bn for the fourth quarter, less capital expenditures of $122Mn, resulted in $5.5Bn of free cash flow, or 39 percent of revenue.

First quarter fiscal year 2025 revenue guidance of approximately $14.6Bn, an increase of 22 percent from the prior year period – Slightly higher than estimates of $14.5Bn.

First quarter fiscal year 2025 Adjusted EBITDA guidance of approximately 66 percent of projected revenue.

Surging AI revenues: It exceeded its earlier projection of $11.5Bn AI revenues with $ 12.2Bn, mainly with sales of ASICs to Google, besides selling ethernet solutions to other AI data center clients.

“Broadcom’s fiscal year 2024 revenue grew 44% year-over-year to a record $51.6 billion, as infrastructure software revenue grew to $21.5 billion, on the successful integration of VMware,” said Hock Tan, President and CEO of Broadcom Inc. (AVGO) “Semiconductor revenue was a record $30.1 billion driven by AI revenue of $12.2 billion. AI revenue which grew 220 percent year-on-year was driven by our leading AI XPUs and Ethernet networking portfolio.“

Should the proposed development of semis for Apple go through as planned, they’d be an even stronger contender in AI data center infrastructure.

I own Broadcom and continue to accumulate and plan to hold for at least 3-5 years. The VMWare integration is also going according to plan and will be a source of sustainable and recurring revenue.

Categories
AI Cloud Service Providers Semiconductors Stocks

Nvidia Is An Excellent Long Term Investment

source:nvdia

Hyperscaler Capex Shows Strong Demand For Nvidia’s (NVDA) GPUs.

I know there is excitement in the markets as Nvidia reports Q3-FY2025 earnings after the market on Wednesday 11/20. Nvidia earnings watch parties have become part of the Zeitgeist, and its quarterly earnings are one of the most closely watched events each quarter.

I, however, don’t believe in quarterly gyrations and have been a long-term investor in Nvidia since 2017, having recommended it more than two years ago and then in March 2023 and again in May 2023 as part of an industry article on auto-tech.

I believe the Blackwell ramp is going strong, and reports regarding rack heating issues are just noise in a program of this size.

Capex from hyperscalers will continue to fuel demand for Nvidia’s GPUs in the next year and beyond and even though it’s expensive it remains a great long-term investment.

Capex from hyperscalers – Nvidia’s biggest customers.

AI spending from the hyperscalers is expected to increase to $225Bn in 2024. Cumulatively in the first 9 months of the year, the key hyperscalers who are Nvidia’s biggest clients, have already spent $170Bn, on Capex — 56% higher than the previous year. Here are the estimates for the full year 2024, 

  1. Amazon (AMZN) $75Bn 
  2. Alphabet (GOOG) $50Bn
  3. Meta (META) $38Bn to $40Bn
  4. Microsoft (MSFT) $60Bn

On their earnings call, hyperscalers’ management committed to continued Capex spending in 2025, but not at the same pace of over 50% seen in 2024.

When quizzed by analysts, hyperscalers also talked about AI revenues, which though are still relatively small compared to the amount of Capex spent, it is growing and growing within their products. Amazon mentioned that its AI business through AWS is at a multibillion-dollar revenue run rate growing in triple-digits year, while Microsoft’s CEO stated that its AI business is on track to surpass $10 billion in annual revenue run rate in Q2-FY2025. 

Meta and Alphabet had more indirect inferences about AI revenues. For example, Meta believes that its AI tools improve conversion rates for its advertisers, which creates more demand. On the consumer side, Meta believes that their AI has led to more time spent on Facebook and Instagram. Similarly, Alphabet also spoke about Gemini improving the user experience and its use of AI in search. Seven of the company’s major products—with more than two billion users—have incorporated Google’s AI Gemini model, While Capex from hyperscalers also goes towards infrastructure, and building, which take longer to show good returns, a fairly large chunk goes towards GPUs, which bodes well for Nvidia, which controls more than 80% of the AI-GPU market.

Besides Capex, I also believe in AI and there are several areas where AI has already shown promise.

Code Generation

The low-hanging fruit is being plucked: A quarter of new code at companies like Google is now initially generated by AI and then reviewed by staff. Similarly, GitLabs and GitHub, are providing Dev-Op teams similar offerings.

Parsing and synthesizing data for product usage:

Partha Ranganathan, a technical fellow at Google Cloud, says he’s seeing more customers using AI to synthesize and analyze a large amount of complex data using a conversational interface.

Other enterprise software companies see huge upsides in selecting a large-language model and fine-tuning the model with their own unique data applied to their own product needs.

I recommended Duolingo (DUOL) for the same reasons, their own AI strengths better their language app, creating a virtuous flywheel of data generation from their own users to create an even better product – data that exists within Duolingo, which is more powerful and useful than a generic ChatGPT product.

Using AI for medical breakthroughs

Pharmaceutical giants like Bristol Myers are using AI for drug discovery at a pace that was impossible before AI and LLMs became available. These are computational problems that need powerful GPUs to research, compute, and process for clinical trials.

Who is the indispensable, ubiquitous, and default option to turn their dreams into reality? – Nvidia and its revolutionary Blackwell GPUs – the GB200 NVL72 AI system, which incorporates 72 GPUs, linked together inside one server rack differentiating Nvidia from its lesser lights like AMD and Broadcom, which at a run rate of $5.5Bn and $11Bn, respectively are minnows compared to the $130Bn behemoth with 80% of that revenue from AI/Datacenter GPUs.

I believe we are in the first innings of AI and Nvidia will continue to lead the way. I continue to buy Nvidia on declines.

Categories
AI Semiconductors Stocks

Qualcomm, (QCOM) Solid Beat On Turbocharged Auto Sales

Post earnings the stock was up 9% to $188, yesterday, but has given up most of its gains, today. I’m continuing to accumulate.

I’ve owned Qualcomm for a while now, and recommended it in July 2024, and earlier in September 2023, when I wrote a lengthy article on the auto-tech industry. I believe in its long-term strengths and plan to keep the investment for the next three to five years.

Key Strengths include:

  • The Crown Jewel – Its licensing business with its treasure trove of patents generating 70% margins.
  • Strong growth from autos – one of the market leaders with Nvidia and Mobile Eye.
  • Its partnership with Microsoft (MSFT) for AI PCs

Sep Q-2024 Results

QCT sales rose 18% year-over-year to $8.678B.

Within QCT, Auto was the best performer – sales jumped 68% to $899M. This was the biggest surprise as Qualcomm’s auto sales growth cadence is in the mid-thirties. Auto sales tend to be lumpy so this was a really big positive.

Revenue from handsets rose 12% year-over-year to $6.096B. Handsets tend to struggle sometimes –  based on Apple’s fortunes and after drops in the previous year, this was a welcome return to growth.

Its IoT segment has been a slow grower – usually mid-single digits, but it grew 22% this quarter to $1.683Bn. 

Licensing revenue rose 21% year-over-year to $1.521B. Licensing is its most lucrative segment with gross margins over 70% – pretty much its crown jewel.

Q1FY2025 Guidance:

Revenue of $10.5B-$11.3B vs $10.61B consensus. At the midpoint, that’s an increase of 3% Non-GAAP diluted EPS of $2.85-$3.05 vs $2.87 consensus, which at the midpoint is also an increase of 3%. from handsets rose 12% year-over-year to $6.096B.

The CEO, Cristiano Anon, had this to say about the quarter

“We are pleased to conclude the fiscal year with strong results in the fourth quarter, delivering greater than 30% year-over-year growth in EPS,” “We are excited about our recent product announcements at Snapdragon Summit and Embedded World, as they continue to extend our technology leadership and position us well across Handsets, PC, Automotive and Industrial IoT. We look forward to providing an update on our growth and diversification initiatives at our Investor Day on November 19.”

Analysts from UBS and J.P. Morgan upped their price targets, while Barclays analyst Tom O’Malley (who kept his Overweight rating and $200 price target) pointed out that there is now a “bifurcation in Android between the high and low end” and Qualcomm is benefiting both in units and average selling price.

At $180, Qualcomm is very reasonably priced at 16x next year’s estimated earnings and 4x next year’s forecasted sales.

Given its market leadership in auto-tech, AI PCs, and sustainable, and recurring high-margin licensing business, Qualcomm should be priced between 20-22x earnings. It spends a good 25% of its revenues on R&D, which will enable it to continue innovating and growing. Even after that, it still returned $1.6Bn to shareholders with $0.7Bn in share buybacks and $0.9Bn in dividends.

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.

Categories
AI Enterprise Software Stocks

Palantir Q3-24: Strikingly Good Results and Raised Guidance

Source:Wikipedia

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.

Categories
AI Cloud Service Providers Stocks

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

Categories
AI Industry Semiconductors

ASML (ASML) AT $690 Is A Bargain

ASML - Semiconductor Giant
ASML

Sure it could stay sluggish, range-bound, or fall till there’s some improvement in bookings, export controls to China, etc. Perhaps, that may not even happen for a while.
I think that’s an acceptable risk, now I’m getting a monopoly at a 37% drop from its 52-week high of $1,110, still growing revenue at 12% and EPS at 22%, selling for 8x sales and 25x earnings.
With TSM’s results, we saw how strong AI semiconductor demand still is and there was absolutely no let-up in their guidance.

A monopoly for AI chip production – an essential cog, without which AI is not possible – is definitely worth the risk