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AI Cloud Service Providers Stocks

Alphabet Deserves A Better Valuation

I had recommended Alphabet (GOOG) as a great long-term buy between $150 and $170 on several occasions.

Last evening, Google knocked it out of the park with really stellar results. I bought more shares this morning, and am reiterating a Buy.

I believe analysts’ consensus earnings are a bit conservative and Google will continue to beat estimates with better growth and operating margins.

Google’s earnings quality is better than several tech giants for the following reasons.

  • It has a near monopoly in Search
  • Market leadership in media with YouTube.
  • A strong first-mover advantage with Waymo.
  • A fast-growing Google Cloud business, third only to and catching up with Azure and AWS.

Its earnings and growth are sustainable, thus it deserves a better valuation and multiple.

Let’s take a closer look at Q3 earnings.

Q3 GAAP EPS came in at $2.12 per share, beating expectations of $1.85 per share $0.27, or 14% – This was a substantial beat.

Revenue of $88.3Bn (+14.9% Y/Y) beat by $2.05B or 3%.

Consolidated Alphabet revenues in Q3 2024 increased 15%, or 16% in constant currency, YoY to $88.3Bn reflecting strong momentum across the business.

Google Services revenues increased 13% to $76.5 billion, led by strength across Google Search & other, Google subscriptions, platforms, and YouTube ads.

Total operating income increased 34% and operating margin percent jumped a huge 4.5% to 32%.

Google Cloud revenues grew a whopping 35% to $11.4Bn led by accelerated growth in Google Cloud Platform (GCP) across AI Infrastructure, Generative AI Solutions, and core GCP products, with record operating margins of 17% as the cost per AI query decreased by 90% over the past 18 months.

Cloud titans Amazon (AWS) and Microsoft (Azure) have commanded huge valuations for their cloud computing businesses; with Google Cloud growing at 35%, it should continue to narrow the gap over the next 5 years. Also importantly, AWS and Azure have operating margins over 30%, and should Google continue to scale and leverage their existing fixed costs, they can reach the same margins. I also believe as they get better at AI, they should be able to charge more.

Based on consensus analysts’ estimates Alphabet’s EPS should grow to $11.60 in 2027 from $5.80 in 2023 – that’s an annual growth rate of 18%. Comparatively, Apple‘s estimated EPS growth through FY2027 is slower at 14%, and it sports a P/E of 33 compared to Google’s 22. Alphabet’s P/E is closer to the S&P 500’s P/E of 21!

I believe this is too low, and there is a lot of potential for its stock to appreciate just on the lower valuation.

Besides the strong EPS, a lot of Google’s expenses are noncash depreciation and amortization and their cash flow margins are strong. They generated operating cash of $31Bn on $88Bn last quarter, or a 35% cash flow margin.

The antitrust regulation will remain a possible negative on Alphabet, but the final decision is still years away as Alphabet vigorously appeals the decision.

I recommend Alphabet as a buy at $176

Categories
Market Outlook

S&P 500, Nasdaq Composite In Free Fall


The S&P 500 and the Nasdaq Composite are in a free fall today with drops of 1.5% and 2.4% respectively, and it’s just 11:30 am. This could develop into a rout as traders and investors turn their noses up at Meta and Microsoft’s earnings. Even Google has given up its 5%. Should Apple and Amazon disappoint post-market today, I think a correction could be on. The main bullish factor countering a volatile election week, a VIX over 21, and a rising 10-year yield at 4.32% were strong earnings, especially from the M-7. Clearly, that doesn’t seem to be happening.
Meta – Initially, it seemed like a perfunctory one percent drop on a small beat and in-line guidance, but it’s gone a lot further as Meta is down 4% to 570.
Why the rout? Analysts and investors panned high Capex plans of $40Bn and costly high-risk bets such as Meta’s Reality Labs unit, (the developer of augmented and virtual reality technologies), which logged a staggering operating loss of $4.4 billion
Microsoft – (down 6% to $408) is getting clobbered for a different reason. Even as Azure grew 34%, the pace wasn’t enough, and guidance of 31% to 32% in constant currency was lower than expected. However, this is due to supply chain constraints as President Amy Hood noted that the 1 or 2-point deceleration Microsoft has guided is mainly due to some supply pushouts, in terms of AI supply coming online that the company counted on. (Read, not as many Blackwells/Hoppers as they would have liked)
“We expect consumption growth to be stable compared to Q1, and we expect to add more sequential dollars to Azure than any other quarter in history,” Hood added.
The indomitable Dan Ives remains as bullish as ever…
“We actually disagree with this initial take as the new Azure reporting standards have moved Street numbers all around and a slight deceleration is totally expected by many investors with some supply constraints and reacceleration in 2H25, and we would be strong buyers of MSFT on any weakness this morning,” Wedbush analysts, led by Daniel Ives, said in a note.

Categories
Pharmaceuticals Stocks

Galapagos Faces Uncertain Future Amidst CAR-T Therapy Pivot

Galapagos (GLPG) $27 pivots to CAR-T therapy, divesting Jyseleca; faces clinical, market risks amidst investor skepticism. Divestiture of its Jyseleca business reflects a significant shift in its business strategy. There are dissenting opinions on whether this was a good move.

Revenue up 9% YOY; operating losses reduced; strong cash reserve at $4.2B; 

  • Negative enterprise value and underperforming stock; high short interest and bearish investor sentiment.
  • A lot of uncertainties in CAR-T strategy, competitive landscape, and market skepticism. The CAR-T therapy landscape is intensely competitive, and the success of Galapagos’ key candidates, GLPG5101 and GLPG5201, is imperative.
    • Pipeline and R&D Success Rate: Concentrating on CAR-T therapies, particularly GLPG5101 and GLPG5201, presents significant risks. Nevertheless, the EUPLAGIA-1 study’s preliminary data reveals encouraging results. In the study, 75% of CLL patients (12 out of 16) who received GLPG5101 achieved Complete Response with no report of serious adverse effects. In contrast, the GLPG5201 treatment group faced more severe outcomes, with 2 out of 14 patients encountering fatal (Grade 5) events, and a few others experiencing life-threatening or disabling (Grade 4) complications.

This is from a biotech analyst, he’s bearish but a couple of other biotech specialists were bullish in 2023, but haven’t published any updates.

Wall Street has a hold rating.

Categories
Cloud Service Providers Stocks

 A Cloud Storage Titan Struggling to Stay Relevant

Dropbox (DBX) $21.25 – I’m Neutral On This Company

Dropbox has been quite the underperformer, in the last 5 years the stock has lost 7%, and 8% in the past year.

Sales growth has really slowed down from 8-10% to only 3-4% expected for the next 3 years and that’s why there’s no appreciation for the stock. Its a fairly profitable company 15-16% operating margins and cash flow of 30+% because of the high stock-based compensation. Earnings growth is also tepid with just 6-8% expected for the next three years. These are two big reasons why there isn’t much scope for Dropbox to grow.

Dropbox is proving to be less sticky than originally thought. As churn rates have increased over the past year, many investors are re-evaluating the stickiness and value of Dropbox’s subscription revenue base.

Deep competition- Dropbox has always been in an eternal tug-of-war with competitors Google Drive (which has an advantage in pricing and integration with consumer email accounts) and Box, Inc. (BOX), which is better known for its enterprise-grade features and security.

Confidence in Dropbox faltered even more after the company reported rather dismal Q1 results – Analysts have an average hold rating.

Box (BOX), which is about 40% the size of Dropbox, not surprisingly, has a better growth profile with 6-7% revenue growth and 11-12% earnings growth expected in the next 3-4 years. It has a similar valuation multiple, so it’s not like that the markets have given it too much of a premium. 

The main thing is that growth will likely be in the low to mid-single digits in this industry, so can’t expect too much in terms of return from either. 

The one thing Dropbox/Box could do is to put their cash to better use (both generate in excess of 30% cash margins) and buyback shares, the valuations are low enough, which would help them and also help investors. For now, its neutral – don’t see much scope for expansion.

Categories
Consumer Staples Stocks

Shopify (SHOP) Plummets 25% Post Earnings: Analyzing Valuation Concerns and Long-Term Growth Potential

Shopify (SHOP) $60 – Big 25% drop post earnings.

Shopify is still on the expensive side at 9x sales with 21% growth, and 63 x earnings with 35% growth. But it’s a lot cheaper after the drop.

What caused the drop, and does it change the long-term growth outlook?

  • Both revenue and earnings beat in small amounts.
  • Guidance was in line if you adjusted for the sale of the logistics business.

The drop was more valuation-related, which was high, and GAAP profitability has over the past year, become a sensitive issue with higher interest rates.

That said, the business is really, really solid – they’ve had two price increases (plus and premium tiers) with little churn from customers.

It does have Shopify has a significant competitive advantage in its dominant segment of SMBs –   in that it is the leader in small-to-medium-sized digital storefront provision of independent sites of access. The quality emphasis does resonate with customers who remain loyal.

I think it is worth accumulating on declines for the longer term- the only caveats being – that multiples are getting compressed and with Shopify’s relative maturity there will be scrutiny towards GAAP profitability, especially since their hyper-growth days are over. All that means that returns will be more sedate, but at this price, the downside is limited, with more upside potential.

Categories
Enterprise Software Stocks

Confluent’s Strong Earnings Report: A Step Toward Profitability

Confluent (CFLT) Post Market $30.50 up 8%.

Confluent delivered better-than-expected results for the March quarter, with beats on revenue and adjusted earnings.

Adjusted Earnings came in at $0.05 per share against the $0.02 estimated and revenue at $217 v $211 expected.

Guidance was raised slightly in Q2 and FY 2024 as under:

Adjusted earnings – $0.04 to $0.05 V consensus of $0.04

Revenue $229-$230 v $229.3 expected. Growth 21.5%

EPS $0.19 to $0.20 v $0.18 consensus estimates

$957Mn revenue V $ 952.8 estimated – Growth of 23%

Confluent is swinging from adjusted losses into positive territory as promised to investors, though still far from GAAP profits, which would take at least two years.

Growth momentum remains, and I last accumulated at $28-29, which I plan to continue doing.

Will update further after the call.

Categories
Networking Stocks

Arista Networks Posts Strong Earnings: A HOLD for Now

Arista Networks (ANET) $275 post earnings, HOLD

Beats all around and guidance is raised as well.

For the period ending March 31, Arista earned an adjusted $1.99 per share as revenue rose 16.3% year-over-year to $1.57B.

A consensus of analysts expected the company to earn $1.74 per share on $1.55B in revenue.

Looking ahead, Arista Networks expects to generate sales between $1.62B and $1.65B, compared to estimates of $1.62B.

Adjusted gross margin is forecast to be around 64% while adjusted operating margin is expected to be around 44%.

Arista also said that it has finished its previous $2B share buyback program and its board of directors has approved an additional program to repurchase up to $1.2B worth of shares.

Arista’s biggest clients Meta and Microsoft are ramping up Datacenter buildouts so Arista should remain strong. Excellent company, but has been expensive for the past 6 months, holding for now, and will re-assess if the price falls.

Categories
Stocks

Eli Lilly Q1 Earnings: Strong EPS Beat and Raised 2024 Guidance Amid Soaring Demand for Obesity Drugs

Eli Lilly (LLY) $790 Pre-Market – Up 6% – We’ve had a Buy on it and will continue to add on declines.

Lilly posted great results, but more importantly raised 2024 guidance by $2Bn (5-6%), leading to the pre-market jump! Obesity drugs have a huge demand, which they’re struggling to fill.

Eli Lilly press release (NYSE: LLY): Q1 Non-GAAP EPS of $2.58 beats by $0.09.

Revenue of $8.77B (+26.0% Y/Y) misses by $160M.

Revenue in Q1 2024 increased by 26%, driven by Mounjaro, Zepbound, Verzenio and Jardiance.

2024 full-year revenue guidance raised by $2.0 billion; reported EPS guidance raised $1.25 to be in the range of $13.05 to $13.55 and non-GAAP EPS guidance raised $1.30 to be in the range of $13.50 to $14.00 vs $12.46 Consensus.

Categories
Stocks

PayPal Q1 Earnings: Revenue Beat and Optimistic Outlook Despite Market Challenges

Paypal (PYPL) $70 Pre-Market up 7%.

Maintaining Buy, at this price there’s little downside and Paypal seems to be walking the talk with steady increases in revenue in an overcrowded market. Paypal is a mature company and getting 12-15% a year is pretty good.

Q1 revenue of $7.70B, topping the $7.52B consensus, fell from $8.03B in Q4 2023 and grew from $7.04B in Q1 2023.

Q1 Non-GAAP EPS of $1.40 beats by $0.18.

Guidance

Non-GAAP earnings per diluted share are expected to increase by a mid-to-high single-digit percentage compared to $3.83 (based on the new non-GAAP methodology) in the prior year.2024 is a transition year, righting a ship that had screwed up quite badly for the past three years and I think they should be able to do a decent job. 

Categories
Cloud Service Providers

Amazon Q1 Earnings: Solid Revenue and AWS Growth, But Lower Guidance for Q2

Source:Seeking Alpha

Source:Seeking Alpha

  • Amazon press release (NASDAQ: AMZN): Q1 EPS of $0.98 may not be comparable to consensus of $0.83.
  • Revenue of $143.3B (+12.5% Y/Y) beats by $750M – Positive.
  • AWS segment sales increased 17% year-over-year to $25.0 billion – That’s a good sized growth compared to Google Cloud and Azure since it’s so much bigger.
  • Second Quarter 2024 Guidance
  • Lower guidance – Net sales are expected to be between $144.0 billion and $149.0 billion vs. $150.09B consensus, or to grow between 7% and 11% compared with the second quarter of 2023. This guidance anticipates an unfavorable impact of approximately 60 basis points from foreign exchange rates. In the first quarter of 2024, the impact from Leap Year added approximately 120 basis points to the year-over-year net sales growth rate.
  • Operating income is expected to be between $10.0 billion and $14.0 billion, compared with $7.7 billion in the second quarter of 2023.

The stock is up about 3% to $180, but that’s not even recovered the 4% that it lost in the day.