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Market Outlook

S&P 500 Earnings Overview: Q4 2023 Insights and Valuation Metrics

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FactSet reported the following for S&P 500 earnings through 2/9.

This is a very helpful 10,000 feet view and provides good benchmarking and comparisons.

Earnings Scorecard: For Q4 2023 (with 67% of S&P 500 companies reporting actual results), 75% of S&P 500 companies have reported a positive EPS surprise, which is below the 5-year average of 77% but above the 10-year average of 74%

Earnings Growth: For Q4 2023, the blended (year-over-year) earnings growth rate for the S&P 500 is 2.9%. If 2.9% is the actual growth rate for the quarter, it will mark the second-straight quarter that the index has reported earnings growth.

65% of S&P 500 companies have reported a positive revenue surprise, which is below the 5-year average of 68% but above the 10-year average of 64%.

In aggregate, companies are reporting revenues that are 1.2% above the estimates, which is below the 5-year average of 2.0% and below the 10-year average of 1.3%.  

If 3.9% is the actual revenue growth rate for the quarter, it will mark the 13th consecutive quarter of revenue growth for the index.

It is interesting to note that analysts were projecting record-high EPS for the S&P 500 of $243.41 in CY 2024 and $275.34 in CY 2025 on February 8. 

On February 8, the forward 12-month P/E ratio for the S&P 500 was 20.3, which marked the seventh time in the past nine trading days in which the P/E ratio for the index was above 20.0. How does this 20.3 P/E ratio compare to historical averages? 

Here is the chart for the historical PE, we have been above the 10 year average of around 18 for a while, and are now above the 5-year average of 19 as well.

Categories
Pharmaceuticals

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

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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

Indie Semiconductor: Why I’m Continuing to Buy Despite Short-Term Volatility

Indie (INDI) I have been continuing to buy in the past two weeks as the stock kept getting lower. The long term story is intact and very strong, but because it’s a loss-making tiny growth stock ($345Mn revenue in 2024), the stock tends to be volatile. Besides, there is a large short interest of over 13%.

Management’s guidance of $1Bn in revenues by 2028, implies a 5 year growth of 35% – they have the $6.4Bn pipeline so I suspect that’s a conservative estimate.

Qualcomm’s auto tech revenues grew over 30% so that’s reassuring but Mobile Eye’s was a disaster, they had too much inventory, so mixed bag there.

I’m very confident of the long term potential, but it is going to be a bumpy ride, as it often is with early stage growth stocks.

Indie reports on 2/22 – will update.

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Enterprise Software

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

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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
Cybersecurity

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

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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
Fintech

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

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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

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*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
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.