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Stocks

Costco (COST) Analysis: A Strong Hold Amidst Valuation Concerns

Source: Costco

Costco (COST) $ 801 HOLD

Costco has a lot of positives:

  • Stable, steady, sustainable, and predictable revenue growth of about 5% a year. The business model has strong competitive advantages as the entrenched market leader – BJ’s is a distant competitor and I cannot imagine anyone coming in to even remotely rival Costco in the future.
  • The company has a growing membership base, which is its crown jewel and is expanding its physical locations at a slow but steady pace. They’re very careful and don’t increase more than 30 stores a year.
  • Costco’s operational metrics translate into higher profits – profits also grow predictably at 8-10% each year, faster than revenues.

The big negative is the valuation

  • Costco is an exceptional business and therefore always commands a premium. However, currently, it is priced at 49x 2024 EPS.  
  • Trading at a historically high premium over the market, 
  • Historically high PEG – With a growth of 10% the PEG ratio works out to 4.9 (49/10) 
  • Outside of its elevated trading range of 35x earnings.
  • The best and perhaps the only time to invest in COSTCO is on major declines otherwise the return on investment would be too low, or we could even lose money if the stock drops from here or stays sideways for a while.
  • Let’s see if there is a drop post-earnings – I’ll update again.
Categories
Market Outlook

S&P 500 Q1-2024 Earnings Season Recap: Strong Growth Signals Amidst High Expectations

Earnings Season Recap – Q1-2024, 93% of S&P 500 companies have reported.

Earnings and revenues haven’t disappointed for Q1-2024

On a year-over-year basis, the S&P 500 is reporting its highest earnings growth rate since Q2 2022. This is a welcome return to profit growth after the 4 quarters decline and slowdown. To recall, S&P 500 earnings have stagnated at about $220 per share in 2022 and 2023.

If 5.7% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q2 2022 (5.8%). 

Overall, 93% of the companies in the S&P 500 have reported actual results for Q1 2024 to date. Of these companies, 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and the 10-year average of 74%. However, the magnitude of the beats is not high – 7.5% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.7%.

Revenues:

60% beat estimates – Below the 5-year average of 69%- and the 10-year average of 64%. Remember, this is after an extraordinary bout of inflation in 2022 and 2023. This had to come down because you’re comparing it to a higher base. The magnitude of beats is also low compared to historical averages – only 0.8% above, compared to 2% for 5-year averages and 1.4% for the 10-year. I suspect it will be difficult to raise prices further without reducing demand.

Overall – if 4.2% is the actual revenue growth for the quarter, it will be the 14th consecutive quarter of revenue growth for the index. 

Where will 2024 end up?

Estimates are looking pretty good – 9.2%, 8.2%, and 17.4% for Q2, Q3 and Q4 respectively. Though I’m hard-pressed to see that kind of a jump in Q4. I suspect quarterly growth will be smoother and not the massive spike in Q4.

The overall calendar 2024 growth call is at 11.1% – consistent with earlier calls and my projections of earnings growth from $220 per share in 2023 to $245 per share for 2024. FactSet had an interesting observation – markets have punished negative EPS surprises, – confirming the one trend we’ve been witnessing ourselves, that markets are overbought, and expectations are too high, and unless you beat severely or raise guidance, your stock will get hammered – Facebook (META) was the biggest example.

Q1-24 net profit margins were solid – indicating that price increases and better expense management vaulted NPM to 11.7% – above the previous quarter’s margin of 11.2% and the 5- and 10-year averages of 11.5% and 11.6%.

Overall S&P 500 earnings and revenue increases look good for 2024-2025. Current estimates for calendar 2025 are an even higher earnings growth of 14.1% – this could come down, though – 2024 is not going to be an easy year to beat by 14.1%!

As you know the S&P 500 is a value-weighted index and large caps such as the M-7 tend to skew the numbers higher, even with Apple and Tesla being negative. Also, the “AI” effect has spread, and copper companies and utilities are getting a second look because of power demands, as are smaller players supplying components towards the gold rush among others – thankfully this is moving to other sectors of the economy.

Valuations remain high, of course, the forward P/E is 20.7 – above the 5-year average of 19.2- and the 10-year average of 17.8. Thankfully, at least interest rates are a little lower at 4.45% compared to 4.75% in April. My inclination is that this will trend lower to 4.1% to 4.25% by the end of the year. 

Bottom line – Harder to find bargains. No major surprises, we remain on track for earnings to get to $245 for 2024 and possibly to $270-$275 for 2024, my cash holdings are down to 6-7%. Wall Street is even more aggressive – closer to 4%.

Categories
Consumer Staples Stocks

Shopify (SHOP) Plummets 25% Post Earnings: Analyzing Valuation Concerns and Long-Term Growth Potential

Shopify (SHOP) $60 – Big 25% drop post earnings.

Shopify is still on the expensive side at 9x sales with 21% growth, and 63 x earnings with 35% growth. But it’s a lot cheaper after the drop.

What caused the drop, and does it change the long-term growth outlook?

  • Both revenue and earnings beat in small amounts.
  • Guidance was in line if you adjusted for the sale of the logistics business.

The drop was more valuation-related, which was high, and GAAP profitability has over the past year, become a sensitive issue with higher interest rates.

That said, the business is really, really solid – they’ve had two price increases (plus and premium tiers) with little churn from customers.

It does have Shopify has a significant competitive advantage in its dominant segment of SMBs –   in that it is the leader in small-to-medium-sized digital storefront provision of independent sites of access. The quality emphasis does resonate with customers who remain loyal.

I think it is worth accumulating on declines for the longer term- the only caveats being – that multiples are getting compressed and with Shopify’s relative maturity there will be scrutiny towards GAAP profitability, especially since their hyper-growth days are over. All that means that returns will be more sedate, but at this price, the downside is limited, with more upside potential.

Categories
Consumer Discretionary Stocks

Starbucks (SBUX) Faces Revenue Growth Challenges: Insights on Market Saturation and Future Prospects

Source: Starbucks

Starbucks (SBUX) $76

The main problem is the lack of revenue growth – Starbucks is struggling to grow revenues even 5-7%, same-store sales are declining, it is a saturated market, and with work from home, the big urban markets remain flat or in decline with little chances of recovery, the same for global growth.

Howard Schulz’s bashing of his hand-picked successor is not good for company morale, but he does have a point about improving the customer experience, especially when you keep increasing prices.

Earnings still grow 12-14%, with a multiple of just 18-19, so that’s fairly reasonable, and I don’t see earnings stalling much, they’re an extremely profitable company, with a history of passing price increases. The dividend yield is 3%, which helps.

I would wait for a better price, say mid to high sixties, because even though Starbucks is an absolutely strong and irreplaceable brand, (it would decades for someone to even come close), you’re not likely to see much appreciation – 7-8% per year at the most. In fact, in the last 5 years, the stock was flat, the only way to make a return was to buy it really cheap.

Categories
Enterprise Software Stocks

Confluent’s Strong Earnings Report: A Step Toward Profitability

Confluent (CFLT) Post Market $30.50 up 8%.

Confluent delivered better-than-expected results for the March quarter, with beats on revenue and adjusted earnings.

Adjusted Earnings came in at $0.05 per share against the $0.02 estimated and revenue at $217 v $211 expected.

Guidance was raised slightly in Q2 and FY 2024 as under:

Adjusted earnings – $0.04 to $0.05 V consensus of $0.04

Revenue $229-$230 v $229.3 expected. Growth 21.5%

EPS $0.19 to $0.20 v $0.18 consensus estimates

$957Mn revenue V $ 952.8 estimated – Growth of 23%

Confluent is swinging from adjusted losses into positive territory as promised to investors, though still far from GAAP profits, which would take at least two years.

Growth momentum remains, and I last accumulated at $28-29, which I plan to continue doing.

Will update further after the call.

Categories
Enterprise Software Stocks

Palantir (PLTR) Earnings Beat Expectations: A Strong Quarter Amidst Stock Decline

Source: Lord Of The Enterprise

Palantir (PLTR) Post Market down 6% but solid earnings and revenue beat and improved guidance.

Rev – $634Mn up 21% beats $615Mn consensus

Adjusted Operating income $226Mn beats forecast of $196-$200Mn

For the full year, Palantir lifted its revenue guidance to between $2.677 billion and $2.689 billion, above the previous range of $2.652 billion to $2.668 billion

Adjusted EPS – $0.08 per share in line with estimates

Palantir PLTR 8.06% followed up its “bombastic” December quarter with even better results for the March quarter as the data analytics software company continued to gain traction with its artificial intelligence tools in particular with U.S. commercial customers.

Nonetheless, the stock is losing ground following the announcement. Palantir shares, which rallied 8.1% in Monday’s regular session, was off more than 7% in late trading, leaving the stock up slightly from Friday’s close. The stock was up 47% this year as of Monday’s closing bell.

For the March quarter, Palantir posted revenue of $634 million, up 21% from a year ago, and ahead of both the company’s guidance range of $612 million to $616 million and Wall Street’s consensus of $615 million as tracked by FactSet.

Adjusted operating income was $226 million, well ahead of Palantir’s forecast of $196 million to $200 million. Adjusted profit was 8 cents a share, in line with Street estimates. Under generally accepted accounting principles, the company earned 4 cents a share.

Palantir gained impressive traction with U.S. commercial customers. That segment of the business grew 40% from a year ago and 14% sequentially to $150 million. Overall, commercial business was $299 million, up 27% and ahead of consensus at $292 million. Palantir said that the U.S. commercial business grew 69% year over year if you back out the contribution from customers where Palantir had made strategic investments a few years ago in a now-suspended program tied to SPAC-related IPOs.

Palantir said “remaining deal value” for U.S. commercial customers grew 74% from a year earlier and 14% sequentially. The total number of signed deals in the quarter increased 52% year over year for the quarter overall, including a 94% increase in U.S. commercial deals, Palantir reported.

Meanwhile, government segment revenue was $335 million, up 16% from a year ago, ahead of consensus at $322 million, and an acceleration from 11% growth in the December quarter.

“America is adopting technology and especially AI in a way no other part of the world is,” CEO Alex Karp said in an interview with Barron’s. “We are the only company providing the right infrastructure to make LLMs [large language models] actually valuable,” noting that the company is adopting a tagline of “beyond chat” for its AI business.

“We have a vibrancy of our tech and corporate scene that no one else has,” he said. “And as important as it is for Palantir, it’s going to change the GDP trajectory of America.” In the long run, he said the strongest players in AI will be in the U.S. and Middle East, with Europe “closing its eyes and hoping the nightmare will end.”

Palantir also provided strong guidance. For the June quarter, the company sees revenue of between $649 million and $653 million, ahead of consensus at $643 million, with adjusted operating income of between $209 million and $213 million, above the Street at $201 million.

For the full year, Palantir lifted its revenue guidance to between $2.677 billion and $2.689 billion, above the previous range of $2.652 billion to $2.668 billion. The company now sees U.S. commercial business for the year of above $661 million, up at least 45%; the previous guidance had called for 40% growth in that segment. Palantir also boosted its adjusted operating income guidance to between $868 million and $880 million from a previous forecast of $834 million to $850 million.

Categories
Networking Stocks

Arista Networks Posts Strong Earnings: A HOLD for Now

Arista Networks (ANET) $275 post earnings, HOLD

Beats all around and guidance is raised as well.

For the period ending March 31, Arista earned an adjusted $1.99 per share as revenue rose 16.3% year-over-year to $1.57B.

A consensus of analysts expected the company to earn $1.74 per share on $1.55B in revenue.

Looking ahead, Arista Networks expects to generate sales between $1.62B and $1.65B, compared to estimates of $1.62B.

Adjusted gross margin is forecast to be around 64% while adjusted operating margin is expected to be around 44%.

Arista also said that it has finished its previous $2B share buyback program and its board of directors has approved an additional program to repurchase up to $1.2B worth of shares.

Arista’s biggest clients Meta and Microsoft are ramping up Datacenter buildouts so Arista should remain strong. Excellent company, but has been expensive for the past 6 months, holding for now, and will re-assess if the price falls.

Categories
Semiconductors Stocks

Qualcomm (QCOM) Q2 Earnings: Strong Results and Guidance Boost Shares 4.5%

Qualcomm (QCOM) Maintaining Buy on Declines

Qualcomm (NASDAQ: QCOM) shares rose 4.5% in extended trading on Wednesday after the San Diego-based semiconductor firm offered up better-than-expected guidance on top of strong second-quarter results.

Auto is the big mover with a 35% increase in revenues. I’m also surprised that handsets held up considering Apple’s weakness.

Looking to the third quarter, Qualcomm said it expects to earn between $2.15 and $2.35 per share on an adjusted basis, with revenue forecast between $8.8B and $9.6B.

Analysts were expecting $2.16 per share in earnings and $9.05B in revenue.

For the period ending March 24, Qualcomm earned an adjusted $2.44 per share on $9.39B in revenue, as QCT sales rose 1% year-over-year to $8.02B. Revenue from handsets rose 1% year-over-year to $6.18B while automotive sales jumped 35% to $603M. Sales from (Internet of Things) IoT tumbled 11% to $1.243B.

Licensing revenue rose 2% year-over-year to $1.318B.

A consensus of analysts expected the company to earn $2.32 per share on $9.35B in revenue.

“We are pleased to report strong quarterly results, with EPS exceeding the high end of our guidance,” said Cristiano Amon, President and CEO of Qualcomm Incorporated. “We are excited about our continued growth and diversification, including achieving our third consecutive quarter of record QCT Automotive revenues, upcoming launches with our Snapdragon X platforms, and enabling leading on-device AI capabilities across multiple product categories.”

Categories
Stocks

PayPal Q1 Earnings: Revenue Beat and Optimistic Outlook Despite Market Challenges

Paypal (PYPL) $70 Pre-Market up 7%.

Maintaining Buy, at this price there’s little downside and Paypal seems to be walking the talk with steady increases in revenue in an overcrowded market. Paypal is a mature company and getting 12-15% a year is pretty good.

Q1 revenue of $7.70B, topping the $7.52B consensus, fell from $8.03B in Q4 2023 and grew from $7.04B in Q1 2023.

Q1 Non-GAAP EPS of $1.40 beats by $0.18.

Guidance

Non-GAAP earnings per diluted share are expected to increase by a mid-to-high single-digit percentage compared to $3.83 (based on the new non-GAAP methodology) in the prior year.2024 is a transition year, righting a ship that had screwed up quite badly for the past three years and I think they should be able to do a decent job. 

Categories
Fintech

Marqeta (MQ) at $5.35: Promising Growth Amid Challenges in a Competitive Market

Marqeta (MQ) $5.35

Marqeta is a credit card processor with clients like Block (Square), Affirm, and DoorDash.

Marqeta should grow in 2025, after two years of a slowdown in 2023 and 2024 (estimated). 

Total Bookings with new clients and expansions with existing clients are growing well at over 50% and 60%. They’ve also done a good job on cost reduction.

The stock, though, could likely stagnate since they’re far from profitability. The other negative is that this is a commodity business with a lot of strong older players and several new upstarts, without any real competitive advantages. But Marqeta has a strong business relationship with Block, (51% of business) so that’s a plus, and their contract is in place through 2028.

The valuation is around 5X sales, and once growth resumes should be seen as cheap.

I think it’s worth looking into around $5. I’ll keep an eye on updates.