Market Sentiment – Fountainheadinvesting

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.

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.