Fountainheadinvesting

Fountainhead Investing

Menu
Menu

Tag: Long-Term Growth

Investing in Dell: A Strategic Buy for Long-Term Growth

source:

Dell (DELL) $110-$115 Buy 3 Years Annual Return 11-13%+dividends, spread the buying out the stock jumped after hours, but there is still upside left long term.

This is from my October 23 article recommending SMCI – “Super Micro competes with behemoths like Cisco (CSCO), Dell Technologies (DELL), and Lenovo”. However, I didn’t buy Dell subsequently, their infrastructure solutions group  is about 40% of their revenue and servers half of that – I wanted to see more evidence that they would be getting meaningful revenue from the datacenter boom. 

This quarter they did as Dell’s Infrastructure Solutions Group produced $9.3B in revenue up 10% from the prior quarter. Servers and networking revenue hit $4.9B, driven primarily by AI-optimized servers. Projected growth in unstructured data from AI should benefit Dell’s storage business as enterprise and large corporate customers are in the early stages of AI adoption. AI-optimized server orders increased by nearly 40% sequentially, $800 million of AI-optimized servers, and backlog nearly doubled sequentially, exiting the fiscal year at $2.9 billion. 

From their earnings call “Demand continued to outpace GPU supply, though we are seeing H100 lead times improving. We are also seeing strong interest in orders for AI-optimized servers equipped with the next generation of AI GPUs, including the H200 and the MI300X.” 

Even after this quarter AI related revenue is less than 10% but growth will come from 3 areas, servers, storage and services.

Company wide revenue growth is expected to be only mid single digits this year, with better growth of 7-8% in the years 2025 and 2026.

I estimate earnings to grow much faster at around 12% for the next three years. As a cyclical, Dell gets low multiples and I wouldn’t assign more than 16x, so at 2026 earnings of $10, we should target a price of $160. About 12% a year.

Categories
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
Cybersecurity

Fortinet (FTNT) at $74: HOLD as Price Target Met, 10% Post-Earnings Pop Overdone

source

The long term story remains intact – it is currently fully priced to add more.

Fortinet released Q4-23, earnings after market yesterday.

While the results and guidance were good and met expectations, the 10% pop from $67 yesterday is overdone. In the previous quarter, Fortinet under performed and the stock was pummeled 25% – last evening’s reaction was more of a sigh of relief that results met expectations. As you can see below, there’s nothing extraordinary.

  • Q4-23
  • Revenue of $1.42B (+10.9% Y/Y) beats by $10M.
  • Billings1: Total billings were $1.86 billion for the fourth quarter of 2023, an increase of 8.5% compared to $1.72 billion for the same quarter of 2022.
  • For Q1-2024  Everything is in line with expectations and forecasted analysts estimates.
  • Revenue $1.300 billion to $1.360 billion vs $1.38B consensus – In line.
  • Billings in the range of $1.390 billion to $1.450 billion
  • Non-GAAP gross margin in the range of 76.5% to 77.5% – In line
  • Non-GAAP operating margin in the range of 25.5% to 26.5% – In line
  • For 2024, Fortinet : These are also in line with previous guidance and forecasts.
  • Revenue $5.715 billion to $5.815 billion vs $5.94B consensus – Just over 10% growth.
  • Service revenue in the range of $3.920 billion to $3.970 billion
  • Billings in the range of $6.400 billion to $6.600 billion
  • Non-GAAP gross margin in the range of 76.0% to 78.0%
  • Non-GAAP operating margin in the range of 25.5% to 27.5%
  • Service Revenue growth was impressive and the highlight of the quarter. Service revenue was $927.0 million for the fourth quarter of 2023, an increase of 24.8% compared to $742.9 million YoY.
Categories
Networking

Arista Networks: A Strong Buy for Long-Term Growth in Network Infrastructure

source

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

source

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

source

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

source

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.