Fountainheadinvesting

Fountainhead Investing

Menu
Menu

Tag: stock analysis

Categories
Stocks

 Solventum Has No Revenue Growth Prospects

Solventum (SOLV) $67

The valuation is reasonable, the price to sales ratio is just 1.5x with a $12Bn Market Cap and $8.2Bn in sales.

Solid profit-making company with 25% operating margins and an EPS of $6.25, which gives it a decent multiple of 67/6.25 or just 11 – this is a discount to comparable health companies for sure.

The big problem is the lack of revenue growth, Solventum has been struggling at $8.2MBn in sales for the last three years, and even post spin-off is guiding to zero growth. That is also a bit difficult to swallow with all their segments – MedSurg, dental, health information and drinking water filtration, having 4-6% annual growth opportunities. There seems to be an execution problem.

Pre-spin off this was a well-entrenched 70 year business within 100,000 global customers, with presence in 75% of US hospitals and 50% international sales

3M has saddled it with $7.7Bn of debt so there is an interest burden of $400Mn which will dent profitability, till they reduce it in the next two three years.

The low valuation is definitely interesting, but we don’t want to walk into a value trap, where the stock just stagnates because of zero growth. Right now, there needs to be better execution or at least a strategic plan to start growing again. 

It might make sense to buy a small quantity to take advantage of the low valuation and then add more with better growth visibility.

Categories
Enterprise Software

Adobe: A Strong Franchise Facing Valuation Challenges Amid Slowing Growth

Source: Adobe

Adobe (ADBE) – $506

It has strong defensible franchises, great branding and leadership. Very profitable in all its segments with operating margins in excess of 30%.

The threat of AI replacing some of the video editing and other products is still in its infancy and Adobe is also working on its own AI initiatives; they’ve just been slow to roll it out.

Revenue growth has slowed to 10-12% for the next three years, and management did disappoint for the next quarter’s guidance. However, Adobe is also a good earnings story with 13-14% earnings growth.

The only problem is the valuation, and the market perception that this is a mature company with $20Bn in revenue. At 28x earnings and 10.5x sales there’s not much left for appreciation with that slowing growth.

I would prefer to buy on declines at around $470. At $506 I would expect a return of about 12% or so a year.

Categories
Semiconductors

Marvell Technology: Positioned for AI Growth but Priced for Perfection

source

Marvell Technology (MRVL) $74

Networking infrastructure – It had a down year, with cyclicality in China and slower data center growth. China is about 50% of revenues.

That said, the forecast for the next three years is good, with 24% revenue growth and 35 to 40% adjusted earnings growth. 

A lot of this is riding on growth from Nvidia and other AI investments in data centers. 

Like most companies in the sector Marvell has also appreciated 73% in the past year so valuations are a bit expensive, 11x sales, with cyclicality and China exposure, it’s definitely on the higher side. It has also financed its acquisitions with debt, carrying a lot of interest burden.

I would prefer to buy 10% lower in the mid sixties for a better return – there is an AI event on April 11th, which may have more specifics/catalysts. Will keep a look out for that.

Categories
Leisure

Disney’s Rebound: A Hold for Steady Returns, but Limited Upside

Source

Disney (DIS) $122 Hold

Disney bounced back strongly in the last 12 months gaining 28% and 50% from its October now, a commendable rise reflecting the efforts of management to turn it around.

Going forward total revenues should be muted around 4 to 5% after the last three years gain of 8%. Entertainment and sports are slow growers, theme parks grew a lot after the pandemic ended, but won’t have that tailwind on a higher base.

Streaming while plateauing in the US will grow abroad, but the sluggish growth will not allow for major price increases. Besides Netflix and Prime, they should be the 3rd survivor, WSJ research indicated that there was resistance beyond 3 subscriptions per home.

Disney used to have over 20% operating margins, now they are like 10-11%, ESPN weakness, theme park shutdowns during the pandemic and all the expense of streaming really killed margins, but they are turning it around and the Dec quarter showed improvement.

Earnings will grow around 13% –  that’s the biggest positive, the brand value is tremendous and Disney will carry a premium multiple.

Valuation – Disney is already priced at 26x earnings, twice its growth rate, mainly because of the 28% gain in the past year. I would expect at least a 22-24 multiple of FY 2027 earnings of $7- that’s about $160-$170 per share, three years out, that’s a 10% return per year from the current price.

A good hold if 10% a year is good enough, I wouldn’t add more unless there is a major drop in price or a big improvement in strategy. 

Categories
Enterprise Software

nCino: A SaaS Player Focused on Profitability but Facing Valuation Hurdles

source: ncino

nCino Inc (NCNO) $35.75

The stock jumped 15-20% post earnings on an earnings beat and slight revenue miss, from $30 yesterday. Guidance is also decent with 15% revenue growth for 2024.

You could buy around $32 or in installments.

Positives

Focusing on profitability, makes decent cash flow of 15% and adjusted operating of 3-5%, showing an improving trend with good estimates of earnings improving 35% in years 2025-2026. 

They have the leverage to do that, it’s a SaaS business but I would have preferred gross margins in the high 80’s. That must happen over time.

They are selling to higher cohort customers, growth in customers over 100K and $1Mn is much higher than baseline growth.

There is a switching cost competitive advantage, especially when you’re dealing with larger customers, and have more than one offering.

Negatives

Sales cycles are longer given the higher value customer.

Banking and financial services software is very competitive, not much to differentiate from one another.

Price has gotten a little expensive at 6x sales with 15% revenue growth so returns going forward will be muted in comparison.

Given the weaknesses in banks and the financial services sector, I don’t expect multiples to be more rewarding than the market, even though this is a tech company, but focused on one vertical.

Categories
Fintech

Pagaya: Navigating Capital Raise Challenges While Aiming for Profitability

source:pagaya

Pagaya (PGY)

It was an interesting call and some questions were answered, which is kind of normal for these meetings. 

  • Guidance is reaffirmed for Q1-24 and full year 2024, which is about $170Mn in adjusted EBITDA.
  • Pagaya will be operating cash flow positive in early 2025 – reaffirmed. This was given with enough specifics, there will be enough margins from credit lending to tide over retention requirements.
  • There was a certain amount of naivete about getting a good deal from Wall Street for the recent capital raise, from both Pagaya and several of us bullish analysts. Wall Street never overpays and Blackrock, most definitely never does. And as the market was driven down, two other institutions besides Blackrock, who were part of the raise also bargained much lower than the original price. 
  • In terms of risk – there was a fair amount of detail provided on 2021-2022 vintages, which had weaker loans than 2023 and current cohort, but management again reiterated that this was significantly lower than the rest of the market. I suspect that this weakness was well taken advantage of by the investors in the current capital raise.
  • In securitization even though the issuer has to retain only 5% for compliance, the performance of the loans still matters because the underwriter will not come back to you as the issuer keep piling on bad loans, and because securitizations work in tranches – the top tranche has the best loans and so on, the weaker tranches cannot afford to have too many delinquent loans..in which case the issuer will have to take up that slack to just to stay in business. The general impression we got was that some of the 2021 vintage was slow to be taken off the books at a decent price.
  • Bottom line – I’m staying invested till the next quarters’ earnings call in May.
  • I have submitted these questions:

“1) Please address the surprise, blindsiding nature of the capital raise (3 days after the Reverse Split). Also, the midstream lowering of the price of the offering while increasing the number of shares you offered.

“I believe the original estimate was $14.70, then it was $12.70, and I watched the volume that day of the offering: the majority of it was under $12, and the share price closed a little above $11. Institutional participation seemed hesitant, even lacking. Today the share price is $9.12

“The timing and execution of this offering has been an unmitigated disaster for your shareholders, somewhere around a $600ML loss for a $90ML capital raise.

“How do you square that? Now that the damage has been done, it’s time to be honest with your investors about the capital raise. What happened?

“2) Since the bearish analyst at Wedbush Morgan downgraded your price target to $11.50, while remaining neutral, citing “losses in risk-retention assets” there has been a horde of relatively-inexperienced DYI accountants pouring through your past financial statements, looking for buried losses that you have not explicated for investors.

“You stated them, yes, in the March 8th 20-F, but now the investing world wants an explanation.

“What is the performance of your risk-retention assets? Are they insured? What is their current status? Do you now have sufficient capital to steer Pagaya to the end of the year? And cover the 5% needed for future ABS investments? Can you reaffirm your 1Q24 guidance and your full year estimates? Thank you.”

Categories
Semiconductors

Intel and AMD Face Revenue Impact from China Government Ban, but Scope May Be Limited

source:intel

Intel could lose as much as $1.5B in sales due to China ban; AMD less: Bernstein

The news that China is looking to ban purchases of Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD) chips for government use could be a sizable topline hit to the two semiconductor companies, but perhaps not as much as some believe, investment firm Bernstein said.

On a nominal basis, Intel had roughly 27% of its sales in China in 2023 (or $15B), while AMD had roughly 15% or ($3.4B). However, government purchases were much smaller than that — approximately 10% or so — Bernstein analyst Stacy Rasgon said. As such, Intel could see a revenue impact between $1B and $1.5B, while AMD could lose a “few hundred million,” Rasgon said.

Categories
Technology

Samsara (IOT) Stock Review: A Hold for Now at $35.86

source:samsara

Samsara $35.86 (IOT)

Hold for now, 15x sales 26% growth, no adjusted operating profits, but the promise of expansion of fleets and other business benefiting from AI/LLM’s more computing power should help the best IoT in the business. Pure play should be a moat.

Copy from the earnings report about the future growth prospects.

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
Media

Bumble (BMBL) Q4-2023 Earnings Call Analysis: Challenges and Opportunities Ahead

sourcebumble

Bumble (BMBL) earnings call, Q4-2023

The Bad  

The US online dating market is likely approaching maturity with a lot of headwinds. Also their younger cohort does not have much spending capability – there has to be a ceiling there.

Product execution was not smooth – too many tiers,  friction due to confusion, and not enough differentiation between tiers. The relaunch should take a couple of quarters.

The Good

Focus on profitability, expecting up to 300 basis point operating margin improvement in 2024.

Product relaunch is under way under a seasoned product leader, with a focus on simplification and value differentiation.

The stock should remain sideways for a while. 

I had recommended buying Bumble (BMBL) at $13 as a 3-5 year long-term investment, targeting 13-15% annual gains.

This was an investment where I lost quite a bit, I bought at $22, and sold 75% at $16.

What went wrong? I overestimated growth prospects of 23-24% revenue growth in 2023-2025, instead, growth slowed down to 17-19%,  and the final nail was in Q3, when Bumble forecasted low teens growth for 2024, amidst an overall slowdown in online dating – still a lot higher than Match’s forecast of 7-8% growth, but no longer the growth story. 

Why buy now? – The stock is not too far from it’s all-time low of $12.29, post disappointing Q3 results and guidance. With a market cap of just $2.4Bn or 1.5X 2024 sales of $1.2Bn its a decent GARP (Growth At a Reasonable Price). Revenue should grow at 12-14% in the next 3-5 years, mostly abroad. I think the worst is priced in the stock and we’re getting a subscription based, sticky business (the flagship Bumble app is a ladies first, unique model, with about 2.8Mn paying users paying over $25 per month). GAAP profitability is still a few years away, though but margins are improving 100-150 basis points each year.

Founder Whitney Herd, resigned in Nov as CEO and moved to Chair, appointing former Slack CEO – Lidaine Jones as CEO, who has already expanded the team with key appointees since she started a month ago. There was some consternation about the founder relinquishing charge, but Jones should fill in her shoes well, I suspect execution is likely to get better given her tech/product background.

Bumble reports after the market today, there might be some volatility, it’s a small cap after all.

Buying some during the day, and then will take another call after earnings.