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Pharmaceuticals

Eli Lilly (LLY) Analysis: A Buy on Declines with Strong Growth Prospects

source:lilly

Eli Lilly – (LLY) $740 Buy on declines, Long term annual return 11-16%.

Eli Lilly’s forecasted earnings and revenue growth for the next three years are very impressive at a CAGR of 28% and 16%, respectively. To put that in context, it’s a lot higher than the 11% and 6%, 10-year average. 

Why?

Three blockbuster drugs mainly

Mounjaro, weight loss grew 8X 

Verenzio, Breast Cancer grew 56%

Jardiance, Blood Sugar grew 33%.

A big chunk of this is already priced into the stock, which has doubled from last year and quotes an expensive 58x earnings or a PEG of over 2. So we’re late to the party. However, given the higher multiples afforded to Big Pharma, specially the ones with massive pipelines that keep bringing new drugs to the market, Eli could still quote 35-40X 2027 earnings of $29, or between $1,015 to $1,160. That translates into an annual gain of 11% to 16%. That’s still quite good given the pedigree and size.

Eli is also very profitable with great operating margins of 30%.

This should also give us some diversification from the heavy reliance on tech and semis, two sectors that are getting overpriced.

Categories
Technology

Tesla: Why I’m Buying on Declines Between $160 and $190 Despite Margin Pressures and Competition

source:tesla

Tesla (TSLA) Buy on declines $160-190

I own Tesla and have been holding it patiently.

Tesla has operating margin compression from 16% to 9% and there is no way they can continue to grow without sacrificing margins, otherwise, they get saddled with excess production capacity and inventory – which are equally bad problems. There’s far more competition, Chinese demand is lower, and suddenly you’re looking at it as an auto company with all its associated auto industry problems and a lower multiple.

I guess the main question is how much of it is already in the price – Tesla has dropped 33% from its 52 week high of $300, and rebounding from $182.

Earnings – Priced at 59x with 24% growth, about 10% overpriced.

Sales – 5.5X sales with 18% growth – also overpriced, because it doesn’t have the tech operating margins anymore and even in the best case will go to 15-16% of sales.

That said – it is far ahead in innovation and scale and very likely remain so in spite of the Musk personality and the various chemicals that go with it.

Categories
Enterprise Software

Confluent Stock Pops 25%: Why I’m Buying on Declines Despite the Earnings Surge

source

Confluent (CFLT) the stock popped 25% to $30 on great results and guidance. 

My last few recommendations in the past two weeks, when the price was $24, was to buy up to $26, with a 1-year target of $28, with a return potential of over 25% in the next 3-5 years. 

Wouldn’t advise trying to jump in over $30, there was a short interest of 11% yesterday, so that contributed a ton to the post-earnings pop, but given the performance, I will buy on declines – I still see annual gains over 20% from here – some of the gains have been pulled forward with this jump.

Here are my forward estimates:

3 Year Revenue growth expected 27% – Current P/S 9, drops to 5.6 by 2026, 

3-Year Adjusted Earnings growth expected – Management has guided to adjusted operating break even in 2024, and post-2024, I expect at least 35% to 40% operating profit growth (analysts’ estimates are even higher).

Summary of 2023 earnings 

Q4 Non-GAAP EPS of $0.09 beats by $0.04.

Revenue of $213M (+26.0% Y/Y) beats by $7.72M.

  • Fourth quarter subscription revenue of $203 million, up 31% year over year; fiscal year 2023 subscription revenue of $729 million, up 36% year over year
  • Fourth quarter Confluent Cloud revenue of $100 million, up 46% year over year; fiscal year 2023 Confluent Cloud revenue of $349 million, up 65% year over year
  • Confluent Crowd is their big growth catalyst
  • 1,229 customers with $100,000 or greater in ARR, up 21% year over year
  • Q1- 2024, Confluent guidance:
  • Total revenue between $211 million and $212 million VS $210.54M consensus
  • Subscription revenue between $199 million to $200 million
  • Non-GAAP operating margin of approximately negative 4%
  • Non-GAAP net income per diluted share between $0.00 to $0.02 vs $0.02 consensus
  • Fiscal year 2024, Confluent guidance:
  • Total revenue of approximately $950 million $935.29M consensus;
  • Non-GAAP operating margin of approximately 0%
  • Non-GAAP net income per diluted share of approximately $0.17 vs $0.17 Consensus
Categories
Fintech

Block Inc (SQ) at $66: HOLD, Profitability Focus Could Unlock Value

source:

Block Inc (SQ) $66 Previously known as Square. HOLD

Square has underperformed the market in the last 5 years in a big way, with a negative total return of 10%. When it started, it showed a lot of promise in a cyclical commodity industry of payment processing with the ease of installation, mobile applications and payments, good easy user interface, which differentiated it from the crowd. The Cash app also promised a good deal, with solid growth for years, and is now being well monetized. But the focus on crypto turned off investors from these strengths, especially when Block’s crypto trading account is heavily exposed to crypto performance and pricing. For example, out of $16Bn in 9 months of last year’s revenue, $7Bn was crypto trading VOLUME with a cost of $6.86 Bn with only $140Mn in gross commissions. Institutional investors and analysts like me object to such a loose interpretation of revenue accounting – Square is not a $16Bn company it is a 9Bn company. Secondly, out of the 25% revenue growth in the last 9 months, crypto volume grew 30% compared to the rest of the company’s 21% growth.

The rest of the payment processing business is good, but not GAAP profitable and for a company that has been around for 15 years, that is a sticking point – Stock Based Compensation for the last nine months was almost $1BN so that is going to take a while. However, adjusted operating profits are over $500Mn so that’s a plus and operating cash flow was $450Mn, decent but only 5-6% of revenues.

That said, this company has a lot of scope, especially in its cash application, which now has $22Mn MAU’s Monthly Active Users, and is growing well. Management has promised operating cost discipline in their last call, they have to – there are no significant, sustainable long term competitive advantages in payment processing – it’s a cookie cutter business, with some new wrinkles every few years.

Bottom Line – We saw how well Meta got rewarded last week with their focus on profitability, so if Block continues to execute and focus on it – this could be a surprise and a good gain. The stock has moved up more than 70% from its 52 week low of $39. The valuation is not bad with a P/E of 25x adjusted earnings with adjusted EPS growth of 25%

I would wait till I saw further signs of good execution.

Categories
AI

Palantir (PLTR) Surges 18% to $19.61 Post-Earnings: A Long-Term Buy Opportunity

source:paltnir

*Palantir – $19.61 Post Earning pop of 18%!*

*One can start nibbling at around $19.60 BUT spread out purchases on declines, there should be declines after this post earnings bump and since this is a long term story I still anticipate 15-16% of annual gains over the next 5 years.*

The Reasons for the post earnings pop.

I think the trend of rewarding profitability as in the case of Meta last week seems to be working for Palantir as well. 

Investors are seeing that Palantir is serious about cost control and better margins. With revenue growth in the low 20’s overall, with the main catalyst being commercial customers, Palantir is doing the right thing by focusing on profitability.

Consider these metrics for Q4, which indicate a lot of progress since the days when Palantir didn’t care about profitability….I guess the drop to $6.35 at its low changed their perspective quite a bit

Fourth consecutive quarter of GAAP operating profitability. 11% Margin.

Adjusted free cash flow of $305 million; 50% margin; 731Mn for the year.

Adjusted operating margin of 34%; 28% for the year.

Fifth consecutive quarter of expanding adjusted operating margins 

Fifth consecutive quarter of GAAP profitability; 15% margin

Commercial customer count grew at a very impressive rate of 55% – higher than the revenue of 32%, this is mostly normal for Palantir, they usually land and expand.

While the revenue guidance is just 1-2% higher than the previous estimate, there is  guidance for GAAP profits in each quarter, 40% commercial business growth and adjusted profit margins of 32+% and cash flow of 33% – that is very good.

The AIP (Artificial Intelligence Platform) seems to be getting a lot of attention.

I also suspect multiples and targets will also move up considerably, growth can accelerate from here.

Categories
Retail

BJ’s Wholesale Club (BJ) at $65: HOLD for Stability, But Look for Better Opportunities

source:bjs

BJ’s had been a decent performer, starting from the $40’s range in 2020, to $65. (A lot of it Covid outperformance)

That’s about 16% per year. Though in the past year, BJ’s has had a negative return of 10%.

Currently it’s priced at 15x earnings with forward estimates of 5-6% in earnings and 4-6% in revenues, so that’s a Price to Earnings Ratio (P/E) of 15, with growth of 5, that’s a PEG ratio (P/E to Growth) of 3, which is high. I normally try not to pay more than 2, unless there is really superior growth. Not likely in this sector.

Contrast that with closest competitor Costco, which has earnings growth of 10 to 11% but at a P/E of 35 and – that’s even more expensive!

That said, Costco is a far superior business, with more stable margins, operating efficiencies and scale, which attracts both high volume sellers and customers. Costco is about 10X BJ’s and both started out around the same time. BJ’s unlikely to take market share from Costco, 

Bottom line – If the stock becomes a bargain around $55 I could see it returning around 7-8% a year. On the other hand a company like this doesn’t fall as much in bad times, it’s a low risk stock.

Categories
Fintech

Upstart (UPST) at $32.50: Why It’s Best to Avoid for Now

source:upstart

From 2017 to 2021, Upstart grew at a frenetic pace of 70%, before higher interest rates, funding constraints and higher defaults led to a massive decline in revenue.

Upstart was supposed to be an agnostic “Fintech” marketplace without credit exposure, but they made the mistake of taking auto loans on their books, which completely negated the buying/bullish case.

Upstart has boosted its capital but even at its latest earnings call, management stated Upstart’s ability to approve borrowers is constrained due to a macroeconomic environment of low consumer savings and high credit default rates.

Right now revenue growth forecasts are low and there are no clear indications of a turnaround – sure lower interest rates and better participation from banks and other financial institutions could be tailwinds in the second half.

Interestingly, while researching this one, I looked at Sofi Technologies (SOFI) and Pagaya (PGY), which are in much better shape, much more resilient and could be winners. Pagaya has executed well in the high interest rate downturn. Both are on the riskier side, and I will update later today.

Categories
Semiconductors

Teradyne (TER) Earnings Preview: BUY at $105-$107 Amid Strong Growth Prospects

source

Teradyne reports Q4-23 earnings after the market today.

TSM is Teradyne’s biggest customer for its semiconductor testing equipment, and its bullish guidance of 20-25% growth for 2024 is a big plus for Teradyne; especially after Teradyne’s two years of declining sales and earnings, a lot of which was pandemic indigestion and the slow rollout of the N3 process node from TSM in 2023. However,  N3 production and delivery is going to expand tremendously in 2024 and 2025 and will spur demand for  Teradyne’s testing equipment.

This probably will not be evident in 2023 Q4 results. Q4 expectations are low – only $0.67 in EPS and $675Mn in revenues, and for the full year 2023 are $2.70 in EPS and 2.67Bn in sales.  In my opinion, consensus earnings and revenues for 2024 are too low at $3.64 and $3Bn in sales – instead,  *I believe earnings will be between $4 to $4.25, and sales over $3.2Bn*. Teradyne has good operating leverage and earnings should grow to over $6 by 2025. *That’s over 40% earnings growth for the next two years.*

Categories
Finance/banking

HDFC Bank (HDB) $55 – Hold: Evaluating Post-Merger Impact and Future Prospects

source

HDFC Bank (HDB) $55 – Hold

Its merger with HDFC decreases overall operating margins and valuation multiples a little bit; earlier it was one of India’s fastest growing banks mostly on consumer and retail strengths, now we have a giant which is less nimble and owns a lot of wholesale slower earning assets.

However, there are a lot of benefits such as cross selling and the combined entity gains from HDFC’s strong exposure to mortgages, which will continue to grow fast in India.

It’s expensive at 19x earnings, which is pretty high for a bank and for one with mid single digit growth. Overall HDB has returned 7-9% in the last 5 years, which is not bad, but given India’s great growth story it is much lower than even the Indian market (Sensex and Nifty)

I would take a second look below $50; let’s see another quarter of how the merger pans out.

I compared it with ICICI Bank (IBN), which has actually done a lot better as a return on Investment, however that too is expensive right now around $24.36, and could be worth buying if it came down about 10-15%.

Banks are cyclicals, don’t tend to outperform and are not usually fast growers, so entry prices are important.