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Fountainhead Investing

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Tag: Investment Strategy

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Market Outlook

S&P 500, Nasdaq Composite In Free Fall


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

Categories
Semiconductors Stocks

Nvidia (NVDA) Q1-2024 Earnings Preview: High Expectations and Market Optimism

Source: Nvidia

Nvidia Earnings Preview – Q1-2024 

The big event is finally here (Post-market Wednesday, May 22nd) and expectations are sky-high! 

Consensus estimates are for earnings of $5.58 (up 412% YoY) and revenues of $24.6Bn, (up 242% YoY). However, analysts seem to be pointing out that anything less than $5.75 and $26Bn would lead to disappointments. Similarly, expectations for higher guidance for Q2 are also, well, high. Just meeting consensus estimates of $6 per share and $27Bn won’t cut it.

Wall Street remains optimistic – the average price target is $1,040 a 9% upside, with a high of $1,400 from Rosenblatt Securities, who believe that there won’t be any air pockets transitioning from the H(Hopper) series to the B (Blackwell) series, even as AWS this morning confirmed that they would wait for the Blackwell to ship before buying more Hoppers.

Other Wall Street analysts also have higher-than-average targets from $1,100 (Barclays) to $1,200 (Baird).

Seeking Alpha analysts, not to be outdone also talk of the large and growing TAM, with one estimate of $600Bn by 2030, extrapolating growth from the Chips Act, the massive Capital expenditures from mega-caps like Microsoft, Google, Meta, and Oracle, plus the partnership with Dell, new AI use cases and even proxying TSM’s manufacturing capacity. So yes, there are plenty of defensible theories about why this AI gravy train won’t slow down.

For my part, I last bought Nvidia for around $780 on April 22nd, and with a high exposure in it, don’t plan to add more for now. It should remain a very strong, high-conviction, core holding for a long time. I will be looking out for other AI stories.

Categories
Semiconductors Stocks

Nvidia (NVDA) Achieves New Record: Q1 Earnings Beat and Forward Split Announcement

Nvidia (NVDA) Post Market $990 New Record.

  • Another beat, 10:1 forward split new record price, and higher guidance
  • Nvidia press release (NASDAQ: NVDA): Q1 Non-GAAP EPS of $6.12 beats by $0.54.
  • Revenue of $26.04B (+262.2% Y/Y) beats by $1.45B.
  • Record quarterly Data Center revenue of $22.6 billion, up 23% from Q4 and up 427% from a year ago
  • Ten-for-one forward stock split effective June 7, 2024
  • The quarterly cash dividend raised 150% to $0.01 per share on a post-split basis.
  • Q2 Outlook: Revenue is expected to be $28.0 billion vs. consensus of $26.84B, plus or minus 2%.
  • GAAP and non-GAAP gross margins are expected to be 74.8% and 75.5%, respectively, plus or minus 50 basis points. For the full year, gross margins are expected to be in the mid-70% range.
  • GAAP and non-GAAP operating expenses are expected to be approximately $4.0 billion and $2.8 billion, respectively. Full-year operating expenses are expected to grow in the low-40% range.
  • GAAP and non-GAAP other income and expenses are expected to be an income of approximately $300 million, excluding gains and losses from non-affiliated investments.
  • GAAP and non-GAAP tax rates are expected to be 17%, plus or minus 1%, excluding any discrete items.
  • Shares +4.3%.
Categories
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.