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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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Stocks

AMD’s Resurgence in the AI Market: Is It Time to Invest?

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AMD has been mostly relegated to second tier status because of Nvidia’s massive leap in AI related data center revenue, which catapulted it from $27Bn in sales the previous  year to $57Bn in 2023, this year and an estimated $90Bn in 2024.

However, AMD is a scrappy competitor and I have a lot of respect for Dr Lisa Su, who’s transformed this company from a commodity CPU/GPU semis supplier to game consoles and PC’s to a solid competitor in the data center segment. Most of Intel’s market share losses can be traced to AMD’s strengths!.

While Nvidia is likely to continue getting a lion’s share of AI GPU revenue for at least the next 2-3 years and in fact when AMD guided to about only $2Bn in AI/GPU revenue for 2024, during their last earnings call in Oct,  I felt it was too little to buy AMD at that time. Besides the hardware, Nvidia’s moat is CUDA, its operating system, which really makes its GPU’s so much more powerful. I didn’t see AMD getting much traction on that account.

However, that was a mistake as it turned out to be a conservative estimate.

This is from UBS analysts:

Recent channel and customer checks confirmed their view that AMD has a firm demand commitment for more than 400,000 MI300A/X units for 2024, the analysts said. This is a number that is fairly consistent with where the analysts have seen demand since last summer but they have been wary of double ordering and unsure of supply.

The analysts added that after having gone back to several customers and suppliers, they are more confident that these units are real and AMD now has sufficient Chip-on-Wafer-on-Substrate capacity to do over 10% the volumes of Nvidia (NVDA).

*Even assuming a very conservative average selling price (which could be as high as $20,000 or more for some customers), this suggests $5B for data center GPU revenue is a pedestrian target for this year. Even this implies AMD exits the year at a *run-rate which could be close to $10B per year* with AMD still likely to grow GPU units quarter-over-quarter through much of 2025, the analysts added.

AMD has already moved up from $135 this month to $177 and it lost a little bit after Intel’s poor guidance. I’m going to start buying this slowly – knowing fully well that I’m late but I do believe in its long term story and the $10Bn run rate is an excellent number – If we believe in the AI story and the resulting surge in its building blocks, there there is no way only one company, Nvidia can supply to the entire market – AMD will get a decent foothold. I’m anticipating +$8 in earnings two years out, that should be priced at 30x or $240, which is still 36% higher than today’s price, nothing to be sneezed at.

Citigroup (NYSE:C) stock rose 1.8% in Friday premarket trading after the bank said it expects 2024 revenue to increase to about $80B-$81B from $78.5B in 2023, driven by gains in treasury and trade solutions, securities services, a rebound in investment banking and wealth, and lower partner payments in retail services. The revenue outlook excludes markets and divestitures.

Net interest income, excluding markets, is expected to decline modestly as global interest rates fall. Citi (C) expects mid-single-digit loan growth, driven by its card business and modest operating deposit growth, it said in its earnings slides.

Citibank’s adjusted earnings also beat expectations, but they expect only 2% revenue growth for 2024 and a modest decline in NII. Their allowance for losses was $397 Mn so no dire warnings there either.

Wells Fargo also beat adjusted earnings and revenue expectations but is more pessimistic for 2024. It expects net interest income to be about 7%-9% lower than 2023’s $52.4B level on lower interest rates, an expected decline in average loans, and further attrition in Consumer Banking and Lending deposits. Their provision for credit losses was $1.28B, higher than the other two but below expectations. *Q4 net loan charge-off, as a percentage of average total loans, of 0.53% vs. 0.36% in the prior quarter and 0.23% a year ago.*

Percentage of loans charged-off is a key measure to monitor; in Wells Fargo’s case it was double of the previous year’s – will need to keep a strict watch on this.

Categories
Stocks

Palantir and TSMC: Strong Long-Term Investment Opportunities in Data Analytics and Semiconductor Industry

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*Palantir: (PLTR) Buy, $16.50  One year target $20.* 

*Invest 5 Years, 18-20% annual return.*

EPS Growth P/E PEG Sales Sales Growth P/S PS/G

0.30 29% 55 1.9 2.2 24% 16 67%

Palantir is a solid performer in the Data Analytics and AI space.

Their government business segment is a massive cash cow and a moat, because of long duration and sticky contracts and switching costs. 

The commercial segment is growing much faster at 50%, and will be its growth engine, with the help of its Artificial Intelligence Platform (AIP), which  tripled the number of users in the past quarter, with over 300 organizations using the new product in the last 5 months.

The stock is expensive especially after doubling last year but can be bought in installments and declines. I own some with an average cost of $15.

CPI Report: Inflation was slightly higher than expected.

Taiwan Semiconductor  Manufacturing(TSM) Buy, $100  One year target $120. 

Invest 5 Years, 15 % annual return. P/E 20, 3-5 year EPS growth 18-20%.

The Semiconductor foundry (manufacturing) leader by far with about 50% market share has large and deep moats in new processes, scale and costs. The semiconductor industry would collapse without it – it would take years for Global Foundries, Intel, Samsung, et al to even come close to catching up. Consider that TSM is spending up to $40Bn to set up a new foundry in Arizona,  and it’s having trouble finding enough qualified people for its plant. 

Revenue growth of 12-14% and earnings growth of 18-20% for the next three years augur well for the company. Normally TSM would be priced at over 40X earnings and closer to 10x sales, about twice the current price. Unfortunately, it being located in Taiwan and with China’s open design on it – multiples will always stay lower because of these geopolitical tensions. Still, the stock has rewarded investors well in the past with steady appreciation in the mid teens. It’s a must have for the portfolio specially for long term steady growth.

Palantir: (PLTR) Buy, $16.50  One year target $280. 

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

CPI Report: Inflation was slightly higher than expected.

December Consumer Price Index: +0.3% M/M vs. +0.2% expected and +0.1% prior.

+3.4% Year on Year  vs. 3.2% expected and +3.1% prior month

Core CPI, which excludes food and energy: +0.3% M/M vs. +0.2% expected and +0.3% prior. +3.9% Year on Year vs. 3.8% expected and +4.0% prior.

Stock Futures are flat as is the 10 year Treasury yield at 4.02% 

Categories
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.

Categories
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.

Categories
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.