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Market Outlook

Market Outlook – The Case For Market Breadth

The Russell 2000 (IWM) ETF and the S&P 500 Equal Weighted Index have been outperforming the S&P 500 and the NASDAQ Composite since the election. Last week was no exception.

The IWM comprises 2,000 of the smallest capitalized companies in the market.

The IWM has gained 8.5% compared to the S&P 500’s and the Nasdaq Composite’s 4.5% gain since Nov 4th, 2024, and 4.5% in the last week, significantly higher than the 1.7% each gained by its larger counterparts.

Last week, breadth was better across the board. The NYSE Advance/Decline Ratio or $ADRN, finished on Friday 11/22 at 3.6, (3.6 stocks advancing V 1 decline), it averaged 2.29 for the past week, and 1.81 since the Nov 5th election against an average of 1.61 for the Year To Date.

Clearly, everyone wants in and has been wanting in since the election – money has shifted from chasing the M-7 and other large caps to a larger pool of small-cap stocks. The markets have aggressively seized that opportunity and have bid them faster than the large caps. Is the breadth a bullish sign or is the euphoria unsettling?

Let’s look at some of the main reasons:

Business-Friendly Populist Government: To some extent, there is a perception that small caps are closer to the economy than the M-7, and other tech behemoths, which explains why the prospects of tax cuts, pro-business policies, and less regulation would improve their fortunes much more than the large caps.

Small Caps are cheaper: Large-cap tech is also perceived to be much more expensive – the average earnings multiples are lower for small caps.

Everybody and their uncle owns Nvidia: Investors and traders are likely overexposed to big-tech stocks and need to diversify, but were afraid to do so. A Bank of America study found “Long M-7” the most crowded trade in the markets just two weeks back.

Animal spirits are up: More risk-taking, Hell the markets are likely to go up with the pro-market Trump administration and I should add. Consumer sentiment seems to have boomed since the election.

FOMO – The small caps are up and I don’t have exposure, I need to jump on this train.

Should we remain invested or does breadth call for caution?

Business-Friendly Populist Government: I agree with the tax cuts and deregulation, but we need to see if the proposed tariff plans could derail this.

Small Caps are cheaper: Small caps may be cheaper, but if you take out the premium that should go to secular growers with sustainable competitive advantages, and look at the risks associated with smaller, struggling businesses, the difference is not that stark, and sometimes it’s the opposite. Some businesses are just terrible, with no competitive advantages, and low prospects of growth, and their stock prices are driven purely by momentum. These are risky businesses you don’t want to own, period. For now, I believe this rotation may continue for a few weeks more, but the bottom line — if I’m looking at a small cap or even a small cap index, I’m going to look at the underlying fundamentals before making a call. I’m not riding any gravy trains here.

Everybody and their uncle owns Nvidia: That is true – the overownership is well documented, and when there is overownership, the scope to continue rising is much, much lower. To some extent, the earnings have to catch up with the valuation or the stock will just drift, and you’ll find large-cap investors rotating into small-caps.

Animal spirits are up: Drill, Baby, Drill, DOGE, etc, all sound great during the honeymoon period, but the jury is still out, we’ll have to see how everything works in 2025. I’m on the fence on this, it’s still a show-me story, and the possibilities of this going south are not small.

FOMO: This I am seeing first hand – For example, Navitas (NVTS) one of my weak small-cap picks, which sank from $4 to $1.60, has suddenly bounced back from the dead to $2.40 in a week! I’m not going to look a gift horse in the mouth, I didn’t add but I’m hoping it bounces back to at least where I can exit. Navitas is actually in the right place at the right time – its focus is on power saving for data centers, which could be a huge business, but it’s currently, heavily exposed to China with 57% of sales there, (it is in 60% of all the cell phones in the world). Besides Navitas, several other stocks popped in the previous week, without any changes in fundamentals.

Conclusion

Breadth is good for the market, just not at the expense of the usual due diligence.

All five reasons helped a fundamentally sound, and highly high-quality small-cap stock like Confluent, (CFLT) a favorite, that I’ve owned and written about. It’s a $1Bn revenue company with an $8Bn market cap, which shot up from $27.50 to $31.50 in the past week for several reasons.

The business-friendly and animal spirits bounce – because now enterprises seem to be spending; The halo effect from Snowflake (SNOW) the 4x larger data warehousing, market leader had a great quarter and guidance last week; Confluent, which serves the same enterprise market with data streaming is also being seen as a beneficiary and now gets the higher multiple.

The over-ownership bounce: I would rather add more Confluent and Klaviyo (KVYO) shares because my portfolio already has high exposure to large caps.

Small Caps could continue to outperform in the near term, just to catch up. As we saw from the chart, on a YTD basis they’re still behind at 19% to 25%.

Categories
AI Cloud Service Providers Technology

Alphabet (GOOG) $165, Beset By Legal Issues Could Stay Range-Bound

An interesting article in the Wall Street Journal discusses Google’s anti-trust case in more detail. Quoting from the article:

“Some of the DOJ’s proposals were expected, such as the divestiture of the Chrome browser and a ban on payments to Apple AAPL in exchange for default or preferred placement of Google’s search engine on Apple’s devices”, which are minor and something Google could take in its stride.

But the government’s proposal of “Restoring Competition Through Syndication And Data Access”, could be more harmful in the long run.

Restoring competition through access, which involves Google providing its search index—essentially the massive database it has about all sites on the web—to rivals and potential rivals at a “marginal cost.”, in my opinion, is stripping Google of its IP, and competitive advantages, which it has built through decades of human and monetary capital. It is draconian and a massive overreach. It gets worse, if the government has its way, Google would also have to give those same parties full access to user and advertising data at no charge for 10 years.

For now, it’s a wish list, a starting point of a high ask, which I’m sure the government expects to be whittled down to something less harmful and gives it some bragging rights.

Points to consider

  1. This could harm/scare other tech giants.
  2. The Turney Act makes this government agnostic, it guarantees judicial oversights for antitrust actions.
  3. Alphabet has significant and solid resources and defensible arguments to fight this, mainly the 2 decades of resources put into building this moat.
  4. The stock is likely to stay range-bound or sideways because of the legal issues, where most investors would likely be cautious, even though this morning itself there have been strong buy calls from analysts.

I’m definitely going to hold on. While it is bad news that the DOJ is recommending that Google be forced to sell Chrome, it’s not written in stone, and there’s a small likelihood of it actually happening.

Here are several aspects to consider.

The Chrome divestiture is not devastating: Chrome, if divested could be valued at an estimated $20Bn, according to Bloomberg Intelligence, about 1% of Alphabet’s market cap of $2Tr, so it’s relatively less harmful.

All Roads Lead To Google Search: Even if the spinoff did happen, that doesn’t mean users would ditch Google’s search engine for rivals such as Bing and Safari, which account for less than 15% of the overall market.

The judge is unlikely to take up the recommendation: There is also the possibility the breakup doesn’t happen. Judge Amit Mehta, who will address Google’s illegal monopolization, could follow precedent.

“I think it’s unlikely because Judge Mehta is a very by-the-book kind of judge, and while breakups are a possible remedy under the antitrust laws, they have been generally disfavored over the last 40 years,” said Rebecca Haw Allensworth, a professor and associate dean for research at Vanderbilt Law School, in an email Monday. “He is very interested in following precedent, as was clear from his merits opinion in August, and the most relevant precedent here is Microsoft.”

The chances of an appeal are very strong: In June 2000, a judge ordered the breakup of Microsoft but that decision was later reversed on appeal. Google has stated that would appeal vigorously.

One of the analysts I follow had a fair point about some of Google’s “predatory or abusive” tactics on their ad-tech platforms, for which there are guidelines/rules that can be enforced for specific violations. But to get into a “European” mindset about regulating companies just because they have strong competitive advantages/moats is completely wrong, in my opinion. If Google didn’t pay Apple $20Bn to be its default search engine, Apple users would still prefer Google Search to Safari or Bing – this was in the court documents. Penalizing them (Google) is a massive overreach.

Google built this from scratch with tons of human and financial capital, at a time when there were several larger search engines in a fledgling, growing internet. The iPhone explosion came later. I would be very surprised if the government succeeds in destroying Alphabet.

Here is a sum of the parts valuation, which based on these estimates gives Google a higher valuation than its current market cap of $2.1Tr

Here are the WSJ and Barrons’ articles.

Categories
Stocks Technology

Shopify (SHOP) $113 Phenomenal Q3 -24 Results And Guidance

Source:The Realtime Report

11/12/2024

Shopify’s (SHOP) $113 phenomenal results and guidance propels the stock 25% higher to $113 by mid-morning.

I bought and recommended Shopify on 8/8 and 7/19 for around $66 and $63. I also recommended it on Seeking Alpha in July.

Even with the post-earnings bump, which has taken it to $113, I still think it would be worth buying once the euphoria settles. This company is firing on all cylinders and should continue growing for the next 3-5 years.

Shopify excelled on several metrics for the third quarter ended Sep 30th, 2024:

Gross merchandise volume rose 24% to $69.72 billion, beating the consensus estimate of $67.78 billion.

Its revenue rose 26% YoY to $2.16 billion, beating expectations by $50Mn, which was the sixth consecutive quarter of greater than 25% revenue growth for the e-commerce company, excluding logistics.

Monthly recurring revenue rose 28% to $175 million vs. the consensus estimate of $173.6 million. Monthly recurring revenue is a higher-margin subscription revenue business used by larger clients for more features and modules and multi-channel operations. This is Shopify’s growth catalyst for the future, and they’re focused on building and scaling this to differentiate from competitors.

Operating income was up 132% to $283 million, and free cash flow grew 53% to $421 million.

“We have grown free cash flow margin sequentially each quarter this year, consistent with what we delivered last year. These results demonstrate the durability of our business, our multiple avenues for growth, and continued discipline of balancing both future growth investment and operational leverage,” highlighted CFO Jeff Hoffmeister.

The biggest reason behind the 25% jump is the guidance and improving profitability, confirming my earlier thesis that Shopify’s strong focus on providing a rich, multi-channel platform is allowing it to gain market share from plain vanilla, single-feature vendors. Shopify’s management had cited client wins from SalesForce (CRM) earlier as testimonials of its progress.

Guidance

Looking ahead, Shopify sees Q4 revenue growing at a mid-to-high-twenties percentage rate on a year-over-year basis, which is a higher implied rate than the implied guidance. The earlier guidance was 23% so that is quite a large improvement.

Operating Profit Margin will continue to improve, as operating expense as a percentage of revenues decreases to 32% to 33% from an earlier average of 35%.

Free cash flow margin to be similar to Q4 2023 — Around 19.5%, another solid improvement from the previous year.

I plan to buy on declines and hold for the long term of 3-5 years.

Categories
Enterprise Software Stocks

Klaviyo (KVYO) $33, Adding More Shares On Declines

Source: Klaviyo

Klaviyo beat earnings and revenue estimates for Q3-24, handily, but it wasn’t enough for the market, which punished the stock 12-15% after hours. 

I would think that the short interest of 11% also had something to do with the fall, as I don’t believe that the stock is priced to perfection or that earnings “disappointed” investors. Klaviyo had been on a tear, rising from $22, at its low in August 2024, and the 80% rise to $40 needed a breather/correction to consolidate before it resumed rising again; The excellent progress in this quarter confirms the longer-term growth trajectory, and the high-quality business model of the company. I believe it is worth buying on declines, and I bought more at $33 this morning,

Sep 24 quarter results: Adjusted EPS beat by 4 cents or 40% coming in at 14 cents against the 10 cents forecast, and revenue of $235Mn beat by $8Mn or 4%. 

Guidance for the next quarter and full year was also raised from the earlier estimate provided. Klaviyo now expects total revenues of $925Mn V $914 at the midpoint and an adjusted operating income of $105, in line with the earlier forecast of $107. Perhaps the market was expecting more here, but this lower operating income is because of an adjustment for higher cash compensation instead of shares, which will be charged in Q4, and going forward accrued in each quarter. 

Management also mentioned that 2025 growth would decelerate slightly from Q3-24 growth of 28%, which is fine, consensus analysts’ estimates have pegged the next year’s growth at 24%, so it is likely that Klaviyo will outperform those estimates. Some of the lower growth projections can also be attributed to 2024 revenues coming higher at $924 than the earlier forecast of $895Mn — the growth projected is on a higher base.

I smoothened analysts’ estimates over 3 years from 2024 to 2026, I still get an annual estimated revenue growth of 27%. Klaviyo is valued at 9.5X 2025 sales. This is a P/S to Growth ratio of 0.35, (9.5/27%), which is relatively moderate. I get antsy when it goes above 0.4, and growth drops a lot. Clearly, that’s not anticipated in Klaviyo’s case. What’s remarkable is that an enterprise software company still grew over 30% in the SMB (Small and Medium Business) category.

Here are some Wall Street ratings.

“Klaviyo reported another solid sales quarter against a macro continuing to drive a soft sales environment that has been offset by strong up-market sales execution,” Needham analyst Scott Berg wrote in a note to clients. “Revenue outperformance of 3.9% was at the midpoint of its post-IPO results over the last five quarters. We expect modest share weakness after the company implements a new comp strategy, shifting some [stock-based compensation] to cash comp that will drive 4Q operating margins lower due to a catch-up accrual. We expect investors will ultimately like this change, as our math suggests it could drive somewhere around 8%-10% less annual share dilution.”

Berg kept his Buy rating on Klaviyo but upped his price target to $46 from $40.

Loop Capital analyst Yun Kim also upped his price target slightly, moving to $45 from $40, as he pointed out the results and its view of the business are “somewhat contrary to increasing signs of a weakening environment (especially for a marketing automation vendor).”

Morgan Stanley analyst Elizabeth Porter also upped her price target slightly, moving to $38 from $32, as she said the 34% revenue growth seen in the third quarter puts Klaviyo in “rare air amongst software vendors.”

Categories
AI Enterprise Software Stocks

Palantir Q3-24: Strikingly Good Results and Raised Guidance

Source:Wikipedia

Palantir Technologies (NYSE: PLTR): Q3 Non-GAAP EPS of $0.10 beats by $0.01.

Revenue of $725.52Mn (+30.0% Y/Y) beats by $21.83M. 30% growth is remarkable, the consensus was for 26-27%.

Big deals increased with Palantir closing 104 deals over $1 million as customer count grew 39% year-over-year and 6% quarter-over-quarter

Operating cash generation was also solid with $420Mn last quarter, at a 58% margin.

Palantir generated an adjusted free cash flow of $435 million, representing a 60% margin and over $1 billion on a trailing twelve-month basis.

Guidance

Q4 Outlook: Revenue of between $767 – $771 million vs. consensus of $744.04M.

At a midpoint of $769Mn, it is $25Mn over the consensus or 3.4% higher – another impressive feat.

Adjusted income from operations of between $298 – $302 million.

One of Palantir’s biggest strengths is its AIP (Artificial Intelligence Platform) Bootcamp sales strategy, which accelerates new customer acquisition, with conversions as fast as 16 days, boosting Palantir’s growth prospects. And from the last quarter’s excellent results, it has come through in spades.

I had recommended Palantir earlier in July 2023 at $17.

2024 Outlook: They raised their revenue guidance to $2.805 – $2.809 billion vs. the prior consensus of $2.76B. At the midpoint, that’s about 2% higher.

Palantir’s growth engine has been its commercial revenue segment, which was raised to more than $687 million, representing a growth rate of at least 50%.

They raised their adjusted income from operations guidance to between $1.054 and $1.058 billion and adjusted free cash flow guidance to more than $1 billion.

Cash Rich: Cash, cash equivalents, and short-term U.S. Treasury securities of $4.6 billion

They continue to expect GAAP operating income and net income in each quarter of this year. Clearly, the markets have been rewarding companies showing a healthy respect for profits over loss-making revenue growth at any cost, and Palantir has done an excellent job staying in the black for two years now.

Not surprisingly, shares are up 11% to $46

My biggest grouse has been Palantir’s valuation. I’ve already done well recommending and buying it for around $17. At a P/S multiple of 28X next year’s revenue of $3.4Bn, growing at 22% — this stock is way too rich for my liking and in the past quarter, I’ve sold twice. I will sell another 10% and hold on to the rest. It’s better to take profits.

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
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.

Categories
Semiconductors

Super Micro Q3 Earnings: Strong EPS Beat, But Revenue Misses; Upgraded Guidance Boosts Outlook

source:supermarco

Super Micro Earnings Release. Source: Seeking Alpha

  • Super Micro Computer press release (NASDAQ: SMCI): Q3 Non-GAAP EPS of $6.65 beats by $1.08.
  • Revenue of $3.85B (+200.8% Y/Y) misses by $50M.
  • Guidance is better: 
  • For the fourth quarter of the fiscal year 2024 ending June 30, 2024, the Company expects net sales of $5.1 billion to $5.5 billion vs $4.86B consensus, GAAP net income per diluted share of $7.20 to $8.05 and non-GAAP net income per diluted share of $7.62 to $8.42 vs $6.96 Consensus.
  • For the fiscal year 2024 ending June 30, 2024, the Company is raising its guidance for revenues from a range of $14.3 billion to $14.7 billion to a range of $14.7 billion to $15.1 billion vs $14.59B consensus and establishing guidance for GAAP net income per diluted share of $21.61 to $22.46 and non-GAAP net income per diluted share of $23.29 to $24.09.

The stock is down 1.5% to $846 after losing 3.5% during market hours.

Categories
Consumer Staples

Apple Stock Analysis: Bernstein Upgrade Signals Potential Turnaround

Apple (AAPL) $174 

Apple had an upgrade from Bernstein this morning after a spate of bad news, notably weaker China sales, and fewer iPhone sign-ups in the US. 

“AAPL has de-rated significantly amid a weak iPhone 15 cycle and fears that Apple’s China business is structurally impaired,” analyst Toni Sacconaghi wrote in a note. “We believe prevailing weakness in China is more cyclical than structural and note that historically Apple’s China business has exhibited much higher volatility than Apple overall, given its very feature-sensitive installed base.” Sacconaghi raised his rating on Apple to Outperform from Market Perform and kept his $195 price target.

While Sacconaghi acknowledges there may be short-term headwinds for Apple, the potential use of generative artificial intelligence features in the next iPhone and tailwinds from the replacement cycle could set up the company “well,” he said. It’s possible the company could top 2025 estimates of $416.9B in revenue and $7.40 in earnings per share, Sacconaghi said.

There are other positive developments.

A possibility of a tie-up with Open AI/Google Gemini for a co-pilot. Apple does have a treasure trove of data, there is no way they haven’t thought about monetizing it with AI. I suspect they are fairly advanced in the process but are as secretive as ever.

Nvidia’s omniverse is to be used with the Vision Pro – to be sure this is not revenue accretive, as the Vision Pro is still likely two years in beta before the product even becomes useful and less of a novelty. It is a step in the right direction for better use cases / commercial or other applications.

Apple steadying out around $167-$170 is a good sign for the rest of the market. They report on Thursday after the market, and while the quarter should be weak, the guidance should be key, along with product announcements or hints for announcements in their June developer conference. I don’t think they should be written off yet.

Categories
Stocks

Tesla Surges 14% on FSD Approval in China: Key Win for EV Giant Amidst Rising Competition

Tesla (TSLA) $193 up 14%

Good news for Tesla – Musk’s China visit seems to have paid off. The markets and the street love it and it’s great for those of you who had the patience to hold on to it. 

One of the key reasons for the approval seems to be the collaboration with Baidu, plus China was very keen for a win. Nonetheless, this is good for the market. Two heavyweights Apple and Tesla are seeing support.

Read on from Barron’s today.

https://www.barrons.com/articles/tesla-stock-price-news-china-elon-musk-8476fa2e?mod=BRNS_ENG_NAS_EML_BULLETIN_AUTO_NAH

Tesla Stock Soars on FSD Approval in China. 

3 Reasons the News Is a Big Deal.

According to Barrons “The win does a few things for Tesla. For starters, better driver-assistance products can mean more demand for Tesla vehicles in China. Second, it demonstrates the company can navigate complicated government regulations related to driver-assistance technology. And third, it shows that Tesla has increasing confidence in the quality of its self-driving car technology.”

“We expect this announcement to lead to a near-term uptick in FSD attach rates—which we currently model at about 10%—and improve the offering longer-term,” wrote Baird analyst Ben Kallo in a Monday report. Attach rates refer to how many people buying Tesla vehicles also buy FSD. “We also view this announcement as a potential pathway for Tesla to follow for entering new markets.”

“While the long-term valuation story at Tesla hinges on FSD and autonomous, a key missing piece in that puzzle is Tesla making FSD available in China which is now a done deal,” added Ives. “This is a key moment for Musk as well as Beijing at a time that Tesla has faced massive domestic EV competition in China along with softer demand.”

To help win Chinese approval for FSD, Musk needed to assuage regulators’ concerns about data security risks. To that end, he agreed to use navigation and mapping functions provided by Chinese firm Baidu BIDU 5.77%, the Journal said.

Baidu’s American depositary receipts, or ADRs, were up 4.1% in early trading at $104.65 apiece.