Tech and Finance Sector Update: Block, Globalstar, Galaxy Digital, AMD, and Marvell Technology

Block Is A Tale Of Two Growth Paths (NYSE:SQ)

Management's "Rule of" expectations for eFY24 result in lower than anticipated revenue growth. Block, Inc. (NYSE:SQ) may be reaching the tail end of growth during this economic cycle. Management is refocusing their go-to-market engagement with food & beverage services companies as the industry faces continued pressure on sales growth and higher input costs. I anticipate these headwinds will trickle into Block's Square segment, while the disparity of CPI may pressure consumers into more creative financing features, such as Afterpay. Given the macro environment and the limited growth potential for eFY24, I am downgrading my recommendation for SQ shares to a SELL rating with a price target of $55.31/share at 1.48x eFY24 price/sales. Be sure to read my previous coverage of Block here: Block Runs The Risk Of Being A Bank Block's Earnings Will Be Energized By AI (Rating Upgrade). Block Operations & Macroeconomics On the macro front, there are some concerning figures floating around as they pertain to the strength of the consumer. Total consumer debt continues to climb to new all-time-highs, as delinquencies have now surpassed pre-C19 levels. Though this news falls into the dismal side of economic studies, I believe that this will play into Block's consumer-facing business as consumers remain stretched on day-to-day costs of living. The recent June inflation print, or should I say deflation print, was promising; however, I do not anticipate it alleviates much of the pressure on the consumer. The deflationary reading was driven by a -10.1% decline in used cars and trucks and a -5.1% decline in airline fares. Gasoline also declined by -2.5%, which should relieve some pressure; however, gasoline prices remain at elevated levels for all intents and purposes. Daily expenses such as food at home and food away from home increased by 2.20% and 4.10% respectively. Electricity also increased 4.40%. In addition to this, PPI increased 20bps for June. Though my field research is relatively limited, it appears to be confirmed by Baird's data for fast-casual restaurants experiencing declining same-store sales in the range of -6%. In speaking with restaurant owners and management staff, it has become apparent to me that ticket volumes are considerably declining from the previous year. My presumption is that if larger chains are expected to suffer declining sales, small local eateries are likely experiencing similar declines. This may add certain headwinds to Block's go-to-market strategy, especially with food & beverage services that presently utilize a competing digital POS and restaurant management system. For the consumers, this will likely create tailwinds for Block as part of their Afterpay feature in their CashApp and headwinds for Block's Square business. Though I do not believe this spending habit is sustainable for the long term, it should help uplift margins to a certain extent in the near-term. This is as consumers continue to have access to credit and instant access to funds to cover these costs. What worries me about the uplift in Afterpay is the potential for it to work against Block. Though I cannot predict an upswing in delinquencies, I do believe that the increased use of buy now pay later, or BNPL, features is predicated on consumer credit being stretched thin. I believe this is what's driving management to further push into autopay with CashApp as this may act as a hedge for ensuring payments are made. Block Financials There is one sticking point that I cannot wrap my head around as part of management's guidance. Management guided their form of "Rule of 40" to achieve Rule of 32 for eFY24; however, management guided a relatively low estimate for adjusted operating income for eq2'24 in the range of $305-325mm and guided further spending in sales & marketing for e2h24. In addition to this, management estimates a gross margin of 17% for eFY24. Though management does not guide revenue, consensus estimates revenue to come within the range of $23.9-27.3b. My estimate for eFY24 revenue comes in just shy of the range at $23.8b. Where I'm getting at is that with management's expected adjusted operating income and gross margin growth, consensus is either overshooting on their revenue targets, or management is overshooting on their "Rule of" expectations. Management defines their "Rule of" as gross profit growth + adjusted operating margin. One area of business Block is struggling with is their food & beverage footprint. One factor that continues to come to mind is their dominance with Starbucks (SBUX) years ago while new platforms, such as Toast (TOST) and Shift4 Payments (FOUR), formed and took a dominating lead. Though I do believe Block has the capabilities of developing a front- & back-office platform to compete with each of these platforms, I do not believe it will be an easy battle to win over business. From a personal perspective, I see many more Toast consoles at restaurants, bars, and breweries than Square. I don't believe it will be a matter of ease of transition; but rather, reconfiguring IT systems to cater to the new infrastructure may crease an impediment. I anticipate that Block's strategy will need to be more hands-on with newer businesses as they undergo the selection process, rather than approaching existing business with competing digital platforms. With a bleak macroeconomic outlook, I believe Block may experience some tectonic shift in their business. I anticipate Square to experience significantly slower growth as small businesses struggle with higher costs and fewer sales, while CashApp may create some uplift as consumers resort to creative financing as the dollar stretches thinner and thinner. For modelling purposes, I'm forecasting low-to-mid-single digit growth for Square and high-single digit growth for CashApp. In aggregate, this should create mid-single digit growth for the firm as a whole. There is a bright spot for Block, as recently reported on Seeking Alpha. Block received their first order for its BTC (BTC:USD) mining chip from Core Scientific, as announced on July 10, 2024. This chip is a 3nm mining ASIC with a 15EH/s hashrate. I believe this chip came out a few years too late, as the halving event will likely create a more concentrated BTC mining environment. As discussed in my coverage of CleanSpark (CLSK), the firm is committed to reaching 50EH/s in eFY25 through organic growth and M&A. Unless the firm's supplier switches to Block's ASIC, I do not believe Block will realize as broad of growth as anticipated with this specialty chip. Industry consolidation will make competition for hardware that much more competitive. I believe IT integration may also pose a challenge for the new ASIC, making sales to existing technology firms a challenge. Valuation & Shareholder Value I anticipate the headwinds posed by the macroeconomic environment will pressure growth in the coming periods and may result in significant share price decline. Given management's "Rule of" forecast, I anticipate sales growth may come in short of consensus estimates to cater to their margin expectations. If this is the case, Block may be on the tail end of their growth story during this economic cycle. I rate SQ shares a SELL rating with a price target of $55.31/share, a -20% decline from the close on 7/13/24. Valuation & Risks Unpacking my scenario analysis and associated risks, each scenario is weighted based on the likelihood of the stock reaching its assigned multiple. The multiples provided are based on historical trading ranges. I believe a blue-sky event would involve various upside risks, such as continued growth in CashApp and stronger-than expected growth in Square. This may also include a low-to-normalized delinquency rate. The target scenario plays by my expectations in the body of this report. The gray-sky scenario would be lower-than-expected growth in Square and CashApp and involve a higher-than-expected delinquency rate. Michael Del Monte is a buy-side equity analyst with over 5 years of industry experience. Prior to working in the investment management industry, Michael spent over a decade in professional services working in industries that range from O&G, OFS, Midstream, Industrials, Information Technology, EPC Services, and consumer discretionary.Michael takes a macro-value-oriented approach to investment analysis and prides himself in being able to make investment recommendations based on cross-industry analysis. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Globalstar: Too Expensive And Too Early (NYSE:GSAT)

Large capex and lack of free cash flow positivity make it too early and expensive to invest in Globalstar. Investment Thesis Shares of Globalstar (NYSE:GSAT) haven't really gone anywhere, ranging from $1-2 per share over the past year. The market has priced this company at an expensive valuation of 10x sales and over 6x book value, leading me to believe the shares have already priced in a lot of the coming positive developments. With large capex coming up, I do not believe this company will be free cash flow positive anytime soon, leading me to rate shares as a sell because it is too expensive and too early to buy into Globalstar's story today. Company Overview Globalstar according to the annual report "provides Mobile Satellite Services including voice and data communications services as well as wholesale capacity services through its global satellite network". Their satellites are considered Low Earth Orbit, which means they are near enough to provide services to humans on Earth at any time. Their Globalstar satellite system offers many solutions to businesses and individuals, such as GPS asset tracking, emergency and remote communications, data management and mapping, and other services that rely on a satellite. Nowadays, because satellite phone and TV aren't really used or relevant in today's economy, Globalstar has shifted to provide B2B services which can be attractive to investors for their potentially sticky cash flows they provide. The bulk of the revenue comes from service revenue, or the money they make from their satellites and ground network. The company has service agreements with their customers where they "allocate network capacity to support the Services and Partner to enable Band 53/n53 for use in cellular-enabled devices designated by Partner for use with the Services". So, investors can see that they have long-term service agreements that set Globalstar up to receive recurring service fees. Ultimately, the company is still trying to find relevant ways to make use of its satellite assets but is still in its early stages. The company is currently free cash flow negative and faces a lot of competition in the satellite space. My take is that it is too early and also too expensive to take a flier on Globalstar because I think their Service Agreements revenue is still in its early stages and is already overpriced at 10x sales. Investors seem to be paying a lot for the uncertain future, so it's best to take a pass on this name for now, in my view. Working For The Government The company reported first quarter 2024 earnings with the following results: Service revenue increased $0.5 million during the first quarter of 2024 from the first quarter of 2023. Loss from operations was $4.7 million during the first quarter of 2024, compared to income from operations of $7.2 million during the first quarter of 2023. Adjusted EBITDA was $29.6 million during the first quarter of 2024 compared to $32.6 million during the prior year's first quarter, due primarily to lower subscriber equipment revenue. The company announced that they are leaning more towards projects from the government, "In February, we initiated the proof-of-concept phase for a government services company to utilize our satellite network for mission-critical applications with over-the-air testing expected this quarter". This government contract should increase revenue significantly, and is reported to "contains annual minimum revenue commitments escalating to $20 million in the fifth year". My take is that the company's revenue growth rate does not justify a P/S ratio of 10. Even with government contracts and new service agreements, it is very hard for investors to justify paying such a hefty price for a company whose satellites are seeing not that many use cases in today's economy, in my opinion. Sure, there are fringe cases for emergency messaging, GPS asset tracking and the like, but to me, it is unlikely to accelerate revenues anytime soon. One major positive that investors might like is that their Commercial IoT services are in high demand, as revenues here "increased 24% for the three months ended March 31, 2024, compared to the same period in 2023". Both ARPU and subscribers here are up YoY, which tells me that their asset-tracking solutions are potentially very viable as companies want to keep track of their productivity. Many of their solutions here on solar-powered, which is likely ideal and attractive to customers who want to reduce their carbon footprint. All in all, although there were positive developments in the first quarter earnings, I believe revenues aren't increasing fast enough to justify today's premium valuation. Furthermore, it does not look like the company will be free cash flow positive anytime soon as they still have to invest heavily into their satellites to maintain their competitive position. Thus, I feel it is too early to invest in Globalstar and suggest investors stay away from this name today. The Race To Outer Space Globalstar does not appear to be unique in its offerings, and other companies can offer better service at a lower price in my view. For instance, Viasat (VSAT) also offers satellite-based services that seem to be more successful than Globalstar. They both offer remote communications services and commercial IoT applications, so it looks to me that the market opportunity here is not exclusive to just Globalstar. Other competitors include SpaceX, which is reported in the company's own annual report "has launched its Starlink constellation and has plans to enter the direct-to-cellular market through a series of partnerships". I believe competitors such as SpaceX have more resources, talent, and exclusive partnerships that make it more likely to become the #1 or #2 direct-to-cellular service provider. If SpaceX takes the cake, it poses a major risk to Globalstar's shareholders as they cannot compete on service or price and many of their satellite investments may become impaired. I am skeptical if Globalstar can remain relevant in an increasingly competitive world that revolves around satellites. Their asset-intensive business requires a lot of money to sustain, and Globalstar's financial position seems weaker than their competitors. Viasat is spending $1.5 billion annually on investments in capex compared to Globalstar's $157 million, almost a 10x difference in spend. Therefore, I remain increasingly cautious on Globalstar's competitive position as I see other satellite companies potentially gaining speed in the race to outer space. Valuation - $0.33 Fair Value The stock trades extremely expensive to its peers, at 10x sales and over 6x book value, which is much higher than the sector median. Right away, I believe the stock looks overvalued and therefore think investors need to be careful about overpaying. Globalstar does not appear to be the market leader in the satellite space and it has a very hefty price tag, leading me to rate shares neutrally. Assuming revenues grow at 15%, which is around the FWD revenue growth rate of 20% according to Seeking Alpha, I think sales will reach $300 million by 2026. If we assume EBITDA margins to hold up around 35%, which is close to the TTM EBITDA margin of 36%, then our annual EBITDA should be around $105 million. Apply an EBITDA multiple of 10x, which is equal to the TTM sector median, gets me $1 billion in EV, rounded down. Subtract net debt of $368 million gets me a fair market cap of $632 million. Divide by shares outstanding of 1.883 billion gets me $0.33 fair value per share. Investors can see the stock is immensely overvalued and does not deserve such a massive premium to its peers. Many of Globalstar's competitors seem to be much more advanced, ahead, and have a bigger scale than Globalstar. I think investors are overpaying for this stock today and would not recommend buying it at today's price. A sell rating is appropriate due to the extreme valuation this company presents, at over 10x sales. In my opinion, the market is overvaluing Globalstar's growth prospects and does not account for the competitive risk that could slow the company down. With no positive free cash flow, this money-losing company does not appear to be worth over $2 billion. Potential Upsides I could be wrong on my bearish thesis if the company somehow grows revenues dramatically to justify a P/S ratio of 10. If the government ramps up its dependence on Globalstar's satellites and gives it a stronger reputation in the industry, it is possible that we see Globalstar fly up in terms of market share. New products that are unique could drive Globalstar's competitive position, as the company has announced that they have begun shipping their XCOM RAM product, which is seeing some initial success. The XCOM RAM product could be a major breakthrough that drives sales as it claims to "deliver >4x capacity gains and superior performance versus baseline 5G NR systems in both downlink and uplink transmissions" according to the website. Potentially, new industries could pop up and see new demand for satellite services that Globalstar could capitalize on. It's possible that we see the development of AI and machine learning create new use cases that require more satellites, thus increasing demand for the services Globalstar provides. Therefore, it's possible that the P/S ratio of 10 is justified and that investors are extremely optimistic about new use cases the market hasn't seen yet. Sell Globalstar It is rare to justify buying a company at 10x sales. In most cases, this is a clear and obvious sign of overvaluation, as it would take 10 years for investors to get their money back, assuming every dollar of sales translates to profit. This ridiculous assumption was penned by Scott McNealy back in the dot-com bubble, and I think aptly fits this stock as well. Investors should sell or avoid buying this name until the valuation becomes more affordable, as rising competition and negative free cash flows make this stock too expensive, in my view. Amateur value investor seeking bargains in any market, with a specific focus on emerging markets. Admires great investors such as Li Lu and Peter Lynch, and am not afraid to go against the grain. Willing to buy any company at the right price, and is looking for low-risk and high uncertainty bets. My purpose is to share investment ideas and to clarify my own thinking. It is good to keep an investment journal to monitor past successes and learn from failures. This is a good way to keep a scorecard and to make my ideas public for all to judge. Primarily adopts an owner-mindset, and largely ignores macro-environment noise. I'm an investor, not an economist. Investors make money, economists make forecasts.Graduated from NYU Stern, with a Bachelors in Business and a Concentration in Finance. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Galaxy Digital Holdings: Brace For Short-Term Volatility (BRPHF)

Its price action versus Bitcoin shows the degree to which expectations have risen due to favorable catalysts. Since I last covered Galaxy Digital Holdings (OTCPK:OTCPK:BRPHF) in November last year in my bullish piece entitled "Diversified Exposure To Bitcoin Mining (Rating Upgrade)", it is up by nearly 100% as shown in the orange chart below. The price action also shows that after having shadowed Bitcoin (BTC-USD), it has started outperforming since mid-May. This was mostly helped by revenues for the first quarter of 2024 (Q1) surging by 79% YoY to $259.7 million, its asset management segment switching back to growth for May, and the partnership with SSGA ( State Street Global Advisors) to create new ETFs. However, since digital asset prices have depreciated in Q2, this implies volatility risks for the derivatives business and the Bitcoin halving event may delay breaking even for mining operations. Thus, after high expectations have been baked into the share price, this thesis aims to show that the stock could suffer when results are announced in August. I start by analyzing Q1's financial results which were announced on May 14 and also included those for Galaxy Digital Holdings LP (limited partnership). Q1 Benefited From A Surge in The Price of Digital Assets First, for the sake of clarity, the relationship between these two Delaware-registered entities follows a typical corporate structure where Galaxy Digital Holdings is the publicly traded entity contributing to strategic direction whereas the LP operates the four reportable segments whose income statement is shown below. Starting with Mining which is at the very heart of the Bitcoin ecosystem, it forms part of the Digital Infrastructure Solutions segment where a total of $38.4 million were obtained as sales when including lending and staking revenues. Out of this $31.5 million was generated from proprietary mining and hosting which represents a 200% YoY increase, mostly as a result of rapidly scaling the Helios facility acquired from Argo Blockchain Plc (OTCPK:OTCPK:ARBKF) in December 2022. Now, since BTC appreciated by 54% in Q1 and declined by around 4% in Q2, there should be a reduction in QoQ income since the Bitcoin halving event on April 19 resulted in rewards (or subsidy) dropping to 3.125 BTC from 6.25 BTC for each block mined and added to the blockchain. Furthermore, with more miners competing on the network the average difficulty is about 60% more than one year earlier as shown in the chart below, increasing the cost to mine, thereby reducing profits. Now, as per the management update, mining gross profits for April which includes pre-halving and post-halving activities were mostly aligned with March figures (which exclude halving effects) due to more on-chain fee activity whereby the data is recorded directly into a blockchain. Another contributory factor was the optimized energy management plan using lower-cost power and software-driven mining operations. However, the mining business despite including revenue from lending and staking was not profitable in Q1, delivering an income loss of $559K. Therefore, the halving and difficulty combination exacerbated by BTC remaining $13K below its Q1 peak of $73K could delay break-even. Despite this loss, Galaxy remains profitable as a whole and generated a net income of $421.7 million, thanks to two other segments, Global Markets and Asset Management. Looking Closer at Asset Management and the Derivatives Business After peaking at $7.8 billion in March as shown in the chart below, AUM for April decreased by 27.3% with one of the reasons being "market depreciation", or the value of digital assets falling. The other reason for the decline was the continued liquidation of assets associated with the FTX bankruptcy. This includes FTX's shares of Grayscale and Bitwise investment funds consisting of Bitcoins and Ethereum (ETH-USD), which Galaxy secured last year contributing to increasing the value of its assets. Furthermore, May's AUM increased by 10% relative to April despite FTX assets continuing to be liquidated, but this is far below the 32% achieved in the June to December period as shown by the yellow dotted line above. This is because the price of Bitcoin has remained below $60K while the FTX-related portion of the AUM continues to decrease over time. This implies that unless Mike Novogratz's company manages to secure (buy) more assets from bankrupt crypto companies, June's AUM will likely continue decelerating, especially if Bitcoin does not rise. Now, lower digital asset prices may also lead to lower revenues for the Global Markets segment where counterparty trading revenue increased by 79% QoQ, but this was mainly driven by its derivatives book which grew more in Q1 than the whole of 2023. In this context, given the dynamic nature of the crypto market, counterparty trading could be subject to market volatility risks. Switching to a more positive note, it is unlikely to face liquidity risks given that digital asset prices have not plummeted. Also, its book loan size of $664 million remains far below its total assets of $5.4 billion, versus liabilities of only $3.2 billion. Also, Galaxy held $247.2 million of cash at the end of March, down from $316.6 million at the end of 2023, but its balance sheet should benefit from a $125 million equity capital raise. Additionally, the dollar value of its digital assets was $2 billion, or double the amount held 3 months earlier including $269.4 million of Stablecoins. Expect Near Term Volatility Still, looking across the industry, halving has created uncertainty for miners as it has reduced their rewards by half in a period where financing costs remain high due to elevated interest rates, and not all of them have access to cheap power and operate as diversified entities in a way that can mitigate the impacts. Thus, as their profit margins get squeezed, they have been compelled to sell more of the Bitcoin they HODLed earlier thereby increasing the supply and pressurizing asset prices. Therefore, unless there are clear signs that miners have adjusted to the post-halving scenario, the demand-supply equation is likely to be skewed to the latter, resulting in lower BTC prices. Shifting to Galaxy's role as an asset manager and coming back to the partnership with SSGA, this is one of the largest fund issuers with $4.14 trillion of assets under management. Moreover, its collaboration with Galaxy should see the launch of more sophisticated investment vehicles in the crypto space. Now, while this could represent product differentiation, one has to be realistic that there is already tough competition in the space with spot, futures, and equity ETFs. Consequently, it is preferable to wait for the ETF to be issued first and assess whether investors are attracted to them in the same way as the spot ETFs launched early this year. For this matter, after the initial frenzy, these have suffered from net outflows during the last three months, including the popular iShares Bitcoin Trust ETF (IBIT). In the same breath, after a lot of enthusiasm, after the SEC approved 19b-4 forms for the Invesco Galaxy Ether ETF, the reality is that there are seven other competing products, meaning that fees may have to be kept low to encourage inflows. Consequently, it was market optimism based mostly on positive news updates (as illustrated below) that propelled the stock higher and outperformed BTC by 15%. Henceforth, as reality bites, the stock could suffer from the same percentage of downside, especially in case of lower-than-expected ETF inflows and Galaxy's AUM showing slow progress in June. Thus, it could fall to $9.8 (11.5x0.85) based on its current share price of $11.5. To further justify my cautious instance, the assets management business could post lackluster growth until Bitcoin goes back to its all-time high of $73K in Q1. Additionally, Galaxy boasts $514.8 million in Bitcoin spot ETF investments which has largely benefited from an uplift thanks to digital asset prices surging in Q1, but could henceforth suffer from outflows in case investors switch part of their crypto allocation from BTC to Ether, all in the name of diversification. Long Term Potential Remains Intact Looking beyond volatility, its forward price-to-sales of 2x while being 30% above the ratio of 1.55x it was trading back in November last year, is still 25% below the median for the financials sector as shown below. This means that could represent an opportunity, but this is conditional to its mining business navigating the post-halving period while controlling operating expenses. For this purpose, it could be helped by its lower pre-halving cost-to-mine of about $19.5K per Bitcoin, compared to the industry's average break-even point of $23K. Additionally, network difficulty has seen a reduction from its peak of 88 as shown in the Bitcoin Average Difficulty chart above. Also, the Bitcoin network hash rate continues to decline as charted below due to fewer miners participating in production resulting in less competition for existing ones as it reduces transaction fees which augurs well for Galaxy. Furthermore, some miners could also go out of business representing an opportunity for the diversified crypto play to acquire distressed assets at advantageous prices. To this end, one of the objectives of raising equity capital was to expand its mining activities for a company that is diversified across the crypto ecosystem, especially, in a conducive environment where the approval of spot ETFs both for Bitcoin and Ether signals that regulators are recognizing crypto as legitimate investment assets. Finally, progress has been made as to its U.S. listing, through responding to the SEC's queries and by adopting fair value accounting standards for crypto assets as per the FASB or Financial Accounting Standards Board. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. As a tech-focused industry Research Analyst, my aim is to provide differentiated insights, whether it is for investing, trading, or informational reasons. For this purpose, I am not a classical equity researcher or fund manager, but, I come from the IT world as the founder of Keylogin Information and Technologies Co. Ltd. Thus, my research is often backed by analytics and I make frequent use of charts to support my position.I also invest, and thus, in this tumultuous market, I often look for strategies to preserve capital. As per my career history below, I have wide experience, initially as an implementer in virtualization and cloud, and I was subsequently a team leader and project lead, mostly working in telcos.I like to write around themes like automated supply chains, Generative AI, telcos Capex, the deflationary nature of software, semiconductors, etc and I am often contrarian. I have also covered biotechs.I have also been an entrepreneur in real estate ( a mediocre one), a business owner, and a farmer, and dedicate at least 5 hours per week to working on a non-profit basis. For this purpose, I help needy families by providing sponsored work and contributing peer reviews and opinions for enterprise tech.I have been investing for the last 25 years, initially in mutual or indexed funds before later opting for individual stocks. Got a lot of experience in the 2008/2009 downturn when I lost a lot due mostly to wrong advice. Since then I do my own research and have fallen in love with Seeking Alpha because of the unique perspectives it provides to someone investing hard-earned money as well as access to some of the best analysts. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

AMD: May Beat Q2 Earnings, Looks Fairly Valued Now

Looking for a helping hand in the market? Members of Beyond the Wall Investing get exclusive ideas and guidance to navigate any climate. Learn More " Introduction After first writing about Advanced Micro Devices, Inc. (NASDAQ:AMD) stock with a "Sell" rating in August 2023, I admitted my mistake later that year (December 2023) and upgraded AMD to "Neutral". In March 2024, I updated this rating, noting that the stock would need to fall further before becoming truly attractive to me. Since then, the stock has indeed fallen, first by 10%, then the dip accelerated to -15%, and the downtrend continued for a while. Since then, however, AMD stock has gradually recovered, and since my last article update, the stock has remained at roughly the same level. This is in contrast to a very fast-growing broader stock market that has delivered above-average returns over the last three months, judging by the S&P 500 (SPY) (SP500) index's performance. The reasoning in my last article was largely based on an analysis of the company's prospects against the backdrop of its seemingly high valuations. I did all the DCF valuation modeling in the classic way, using consensus forecasts and my own inputs. I concluded that the company was overvalued by about 11-12% in the base case scenario. Therefore, when the stock price fell by 15%, I should have upgraded my thesis, which unfortunately I didn't do because too little time had passed. Maybe now I have the opportunity to correct this? In about 2 weeks the company should report its 2nd quarter results, so let's take a look together at how attractive AMD looks from a valuation and growth perspective after its flat performance over the last quarter, and how likely they are to beat current analyst forecasts. AMD's Q1 FY2024 Overview In Q1 FY2024, AMD's revenues amounted to ~$5.47 billion, marking a 2% YoY increase, though it was down 11% on a QoQ basis (the Q4 FY2023 earnings report was quite strong). AMD continued to experience demand acceleration, but it wasn't universal across all its business segments. Notably, the data center segment saw significant growth, reaching a record $2.3 billion (>80% YoY), driven by the ramp-up of AMD Instinct MI300X GPU shipments and increased server CPU sales. Anyway, AMD's Q1 top-line figure exceeded the internal guidance midpoint of $5.4 billion and beat analysts' expectations of $5.46 billion, according to Seeking Alpha data. Looking at the non-GAAP figures, the company's gross margin improved by just 1% compared to the previous year. However, operating expenses increased by 10% YoY, so as a result, operating profit increased by 3% YoY, with the EBIT margin remaining unchanged. Due to lower non-OPEX, net income increased by 4% YoY; so AMD's non-GAAP EPS came in at $0.62, which is 4% higher than the previous year (and slightly above the analysts' forecast of $0.61) but $0.14 lower than the previous quarter. AMD has transformed itself from net debt to net cash and increased shareholder returns, helped by the acquisition of Xilinx, as it added approximately $2.2 billion in net cash, based on Xilinx's 2021 year-end balance sheet. So AMD's cash balance increased from $5.87 billion at the end of 2023 to $6.02 billion at the end of Q1 2024. Meanwhile, AMD's total debt was $2.53 billion in Q1 2024, which is consistent with $2.47 billion at the end of 2023. Also important to note that the company generated 7.2% more operating cash flow in the last quarter than in the previous year. This increase in Q1 FY2024 CFO occurred despite seemingly significant negative impact of account payables, so from a cash flow generation perspective, I'm satisfied with this development, particularly in view of the improved balance sheet, as all this reflects the improved creditworthiness and liquidity compared to the recent past. My conclusions are supported by Piotroski's F-score, which remains at 9 out of 9 points, indicating that the company continues to enhance its internal metrics, including profitability, margins, growth, and the quality of AMD's balance sheet. Comments during the latest earnings call revealed that AMD had ambitious plans for the second quarter and beyond: the company wanted to increase production of its AMD Instinct GPUs and was targeting data center GPU sales of more than $4 billion by FY2024. It also planned to launch the next generation of EPYC processors in the Turin family, which promises greater performance and efficiency. AMD also wanted to strengthen its connection to cloud and enterprise clients through focusing on AI hardware and software innovation. The Ryzen mobile processors, code-named Strix, have raised high expectations in the client segment and should show significant improvements in both performance and energy efficiency. Moreover, they are advancing AI PC adoption with enterprise refresh cycles anticipated from over 150 ISVs developing for AMD's AI PCs by the end of the year. To counteract declining gaming sales, AMD was going to expand the Radeon 7000 Series and also "introduce new technologies". The company wanted to manage inventory levels in the embedded segment and expected a gradual recovery, especially in the second half of 2024. As AMD sees AI as a key growth driver, the company will likely invest more in AI hardware, software, and market activities (I think you should read it as "less FCF going forward, but maybe more growth in the top-line"). As an example of higher CAPEX, AMD noted it'll develop cutting-edge AI solutions such as the adaptive Versal SoCs, which have already attracted major customers such as Subaru. These strategic moves should, in my opinion, position AMD for strong growth and an expanded market presence in 2024 and beyond. The Data Center segment now consists of EPYC server CPUs, GPUs, DPUs and some FPGA as well as SoC families from Xilinx following the company's acquisition. Sales of server CPU reached all-time high in recent quarter and year due to increased demand for 3rd and 4th gen EPYC processors. Overall, I like the strategic approach to business development that management has taken in recent quarters, particularly the focus on data centers. This is a good tactic, as I pointed out in my earlier article, where I cited several examples and concluded that data centers are likely to account for a much larger share of AMD's revenue over the next 2-3 years. Given the higher margins and growth rates in this segment, this shift will ultimately make the company less diversified - in a positive sense. The factors that have hampered the company's growth to date, such as its dependence on consumer cycles, will diminish. So this should be theoretically extremely beneficial for investors. The key question now is how much of this potential is already priced-in and whether the market's expectations are fair. Let's take a closer look and find out together. AMD's Valuation Update Seeking Alpha's Quant rating currently assigns AMD a "D-" Valuation score - this suggests that compared to the information technology sectors' norms (i.e. median values) AMD stock is significantly overvalued. However, it's important to note the sector's heterogeneity; different industries within IT can have very different valuation metrics. For instance, semiconductor companies can vary greatly in composition to, say, electronic manufacturing services stocks. Looking at specific multiples, AMD's trailing twelve months P/E ratio stands at 206.4x under GAAP calculations, significantly higher (by about 7 times) than the sector's norm. Looking at the forwarding GAAP P/E ratio, we see it drops to 125.4x, indicating expectations of strong EPS growth according to consensus forecasts. Additionally, the FWD PEG ratio currently stands at 1.19, which is 41% lower than the sector median, suggesting potential undervaluation relative to expected growth. In reality, these metrics offer limited insight, as deciding whether a P/E ratio of 125x or more is excessive, depends on the market's willingness to pay a premium for the stock. Instead, I think we should build a DCF model, focusing on the company's prospects for future business recovery, as economic cycles progress, and the potential monetization of technologies such as AI and chips that could drive future top-line and margin expansions. So while this approach differs from traditional methods of valuing growth stocks, I find it appropriate in this case. In the past, I've been able to use similar modeling to predict AMD's overvaluation, which then came true and the stock really fell near my estimate of overvaluation. Therefore, I think it makes sense to update my DCF model today (even if you don't believe in this valuation method regarding AMD in particular, it might interest you). As last time, I take the current consensus revenue forecasts and add a growth premium of about 1% annually. This is in line with the relatively consistent history of AMD surpassing the market expectations to the upside in recent years. As I suggested in my previous article, I expect AMD's EBIT margin to reach 33% in FY2025 and remain constant until the last forecast year (FY2028). I suggest assuming that D&A accounts for ~3% of the company's revenue in all forecast years. Also, I still think AMD's CapEx should increase, but this growth will also be fully offset by sales growth, so CAPEX/sales will have to remain at about the current level of 2%. So here are my key operating model assumptions: I suggest assuming a potential cost of debt of 5% for AMD, as the risk-free rate is ~4.2% as of today, so there should be a reasonable market spread. Assessing the market risk premium (MRP) at 5% and take into account AMD's tax rate of ~13%, we arrive at a WACC of ~12.6%. While this may seem a little high, it represents a conservative approach and ensures that our model reflects reality more closely. As I mentioned in a previous article, my DCF models utilize the EV/FCF ratio rather than the traditional EV/EBITDA for terminal value calculation. Currently, AMD's EV/FCF ratio is around 247x, which is well above the 10-year median of ~39.8x. This historical median of around 40x will be my main assumption today. Here I must emphasize a crucial point. In my April article, I used an EV/FCF exit multiple of 27.5x. This time I'm using a much higher multiple because I believe the market will demand a premium if the company maintains higher margins (as I expect) and meets its growth estimates. This premium will probably be at least in line with the ten-year median. As far as I can see, this should be the main difference from my previous forecasts, apart from the adjusted top-line growth rate based on the recent consensus changes. Nevertheless, with the higher multiple assumption, the overvaluation amounts to just 4.4%, which I perceive as a minor margin of error, reflecting the sensitivity to scenarios that could potentially adjust its current estimation. So after AMD's about-flat price performance over the last 3 months, it became about-fairly valued, in my view. AMD's Odds Of Beating Q2 FY2024 Earnings The company expects its revenues for Q2 FY2024 to be around $5.7 billion in Q2 2024, which corresponds to growth of 8% YoY and 6% QoQ. As Ardus Research analysts noted a few months back (proprietary source, May 2024), this guidance may intentionally underestimate the potential growth in the core PC and data center markets, as the continuous weakness in gaming and embedded processing segments should be still there in H1 FY2024 and will only gradually recover in H2 FY2024. The majority of AMD's revenue growth in 2024 is expected to come from its client business and especially its data center business (AMD's key AI opportunities). We can observe that the market's expectations align closely with management's forecasts, particularly regarding revenue: The market anticipates $5.72 billion in Q2, reflecting a year-on-year growth rate of about 6.73%. From this, I can conclude that if management correctly assessed AMD's opportunities at the end of the last quarter, they should at least meet current expectations for Q2. However, I still think it's plausible that they will beat the current consensus forecast as a base case scenario. This optimism stems from two factors: first, the company has beaten forecasts in 75% of the last 8 quarters, which is promising (although the past is the past, with no influence on the future). Second, the market's expectations seem reasonable and not too ambitious, which increases the AMD's chances of a successful positive surprise. The Verdict To be honest, when I started writing this article, I felt that AMD deserved a rating upgrade as its performance in recent months has been seemingly unfairly flat amid the broad market's strength. However, even given AMD's strong growth prospects, an upgrade doesn't seem fair today. According to my findings, the company has a good chance of beating current Q2 consensus estimates, as expectations haven't risen significantly in recent months and are closely in line with management's guidance. Given the increasing demand for AI and chips, AMD is likely to exceed expectations. However, with a slightly more optimistic assumption for my updated DCF model, AMD appears to be fairly valued rather than undervalued, which is disappointing. Despite my initial inclination to upgrade and despite the numerous growth prospects, I feel compelled to maintain a neutral rating for now. I look forward to AMD's second quarter results to confirm these views. Investors should closely monitor management's guidance for the quarter to see how actual results compare to previous guidance and to what extent AMD exceeds (or falls short of) the current expectations. Thank you for reading! Hold On! Can't find the equity research you've been looking for? Now you can get access to the latest and highest-quality analysis of recent Wall Street buying and selling ideas with just one subscription to Beyond the Wall Investing! There is a free trial and a special discount of 10% for you. Join us today! Daniel Sereda is chief investment analyst at a family office whose investments span continents and diverse asset classes. This requires him to navigate through a plethora of information on a daily basis. His expertise is in filtering this wealth of data to extract the most critical ideas. He runs the investing group Beyond the Wall Investing in which he provides access to the same information that institutional market participants prioritize in their analysis. Learn more. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Marvell Technology: Analyzing Potential Upside Of AI, Recovery Of Other Businesses

The company expects its Enterprise Networking and Carrier Infrastructure segments to rebound in 2025. When I last wrote about Marvell Technology (NASDAQ:MRVL) on January 22, 2024, I said, "The stock price will likely lag until its non-AI businesses stabilize and recover." I also believed that its non-artificial intelligence ("AI") businesses probably wouldn't recover enough to make a difference until the fiscal year ("FY") 2026 and that investors with a time horizon of a year or less were taking a high risk. I still gave this stock a buy recommendation. However, I should have emphasized much more that this stock is a dollar-cost average candidate for buy-and-hold investors. Since I made the Buy recommendation, the stock is up only 2.96% versus the S&P 500 (SPX). Marvell reported its first quarter FY 2025 results on May 30, 2024, confirming what I believed would happen. The Data Center segment, driven by AI growth, continued to perform excellently, while the non-AI business was lackluster. Marvell Chief Executive Officer ("CEO") Matt Murphy said on the company's first quarter FY 2025 earnings release, "Marvell delivered first quarter fiscal 2025 revenue of $1.161 billion, above the mid-point of guidance, driven by stronger than forecasted demand from AI. Our data center revenue grew 87% year over year, with the start of a ramp in our custom AI programs complementing our substantial base of electro-optics revenue." However, the Data Center segment's excellent results were insufficient to offset the other segment's terrible performance and lift total revenue into year-over-year growth. Total revenue declined 12.17% over the previous year's comparable quarter. The other segments may take another few quarters to recover. When the company reports the second quarter of FY 2025, expect the company's non-Data Center segments to continue being a drag on revenue. When does management expect the company's other segments to rebound? In the first quarter earnings release, CEO Murphy also said, "We see a favorable setup for the second half of this fiscal year, driven by continued growth in data center and the beginning of a recovery in enterprise networking and carrier infrastructure." In my opinion, investors may not see the growth they want in total revenue until maybe the fourth quarter or the beginning of FY 2026. This article will discuss the company's custom AI programs, briefly review the first quarter results, and discuss what to look for in the second quarter results. It will also review the risks and valuation and explain why I reiterate my Buy recommendation for the stock for buy-and-hold investors, especially on any dips. Before we discuss Marvell's custom AI chips, let's define what this company does in the data center. It's a data infrastructure provider and offers customers compute, connectivity, and storage products for general purposes and accelerated computing applications. The following image shows that Marvell has products addressing the three major areas of data infrastructure for accelerated computing. Although Marvell currently generates most of its revenue in connectivity solutions, custom computing is the fastest-growing area of the business. This article will focus primarily on custom compute, and I will discuss Marvell's connectivity and storage products in future articles. The following image shows the difference between general-purpose and accelerated computing. Traditional general-purpose computing uses a central processing unit (CPU) to process the instructions of one workload, which can take an enormous amount of time with complex problems or involving a massive amount of data. In contrast, accelerated computing uses multiple processors working in parallel to speed up the calculation time. One application of accelerated computing is organizations using it for HPC (high-performance computing) applications. HPC rapidly performs calculations to solve complex problems in science, engineering, and other fields. An additional application of accelerated computing is AI, especially generative AI. Once OpenAI introduced ChatGPT to the world in late November 2022, it started an arms race among hyperscalers (large cloud providers) for accelerated computing infrastructure. Among the reasons investors have become so excited about hardware companies like NVIDIA (NVDA), Broadcom (AVGO), and Marvell is that accelerated computing significantly widens the total addressable market in manufacturing processors, connectivity devices, and storage. At the Marvell Accelerated Infrastructure for The AI Era Event that the company held on April 11, 2024, CEO Matt Murphy said that $2 trillion is "the amount of data center CapEx [capital expenditures] that's going to be spent over the next five years to fuel the expansion of AI infrastructure in data centers." Marvell is investing heavily in the custom-accelerated compute opportunity because experts expect it will be the most rapidly growing area of data center infrastructure over the next four years. However, not all accelerated compute involves customized chips. NVIDIA's GPUs (graphics processing units) optimized for AI dominate the market for AI accelerated compute. Companies like Advanced Micro Devices (AMD) and Intel (INTC) battle with NVIDIA in the more general-purpose AI chip market. Marvell estimates the accelerated custom compute market will be 25% of accelerated custom compute by calendar year 2028. Be aware that these are just estimates, and some think the custom compute market will provide even more competition to NVIDIA chips than the estimates below. The image below shows that Marvell's total AI revenue in FY 2024 consisted of 100% connectivity revenue. The company's FY 2024 ended on February 3, 2024. Management forecasts FY 2025 AI revenue growth of 172% year-over-year, with one third of that growth coming from custom compute. If my math is correct, the accelerated custom market should be $37 billion at the end of calendar year 2025, only a few months offset from Marvell's FY 2025. By dividing Marvell's expected Accelerated AI revenue of $1.5 billion by $37 billion in FY 2025, Marvell will have captured approximately 4% of its estimated total addressable market by the end of calendar year 2025. Marvell is now in its second quarter of FY 2025. During the first quarter FY 2025 earnings call, CEO Matt Murphy said (emphasis added): So, we started production shipments [of custom compute], which was great in our first quarter and that's on its way up. If you look at our Q2, most of the growth in the data center segment is coming from custom [compute]. So that's a positive. And then, the whole thing in flex meaningfully in the second half and I'd say from a full year perspective, the way to think about it, maybe some additional color would be, we talked about a floor of $1.5 billion for AI revenue for Marvell for this fiscal year with about two-third in electro-optics [connectivity] and a third in custom [compute]. And we see now both of those exceeding that number. Marvell's revenue from AI custom compute this year will come from two unnamed hyperscalers. Business with Customer A is already ramping up for AI training accelerator chips and should soon ramp up for AI inference chips. Marvell is also ramping up business with Customer B for ARM CPU chips. Although AI accelerators (customized chips for a specific AI algorithm) get much fanfare, CPUs still have a use case in AI. An ARM CPU is a chip based on ISAs (instruction set architecture) licensed from Arm Holdings (ARM). During the Accelerated Infrastructure for The AI Era Event, the Marvell CEO also announced a new Customer C for an AI accelerator. Customer C should start generating revenue in CY 2026. Marvell laid the foundation for its current custom compute business in 2019 when it acquired Avera Semiconductor, an Application Specific Integrated Circuit (ASIC) business from GlobalFoundries (GFS). An ASIC is a custom-designed chip for one specific purpose, unlike a general-purpose chip like a CPU. The press release announcing the Avera acquisition stated, "By combining Marvell's advanced technology platform and scale with Avera's custom design capabilities, Marvell is now able to offer the complete spectrum of semiconductor solutions spanning 5G, data center, enterprise, and automotive applications." CEO Murphy said at the AI Era Event that the company's design wins have been up 8X since 2019. This achievement provides evidence that the company's custom compute solution may be gaining serious traction. Although Marvell is a relative newcomer to the custom chip business compared to companies like Broadcom, which helped Alphabet's (GOOGL)(GOOG) Google develop its customized Tensor Processor Unit ("TPU") chip in 2016, it has an opportunity to establish a solid moat in the business. Customers co-design and co-invest in chip design alongside Marvell. Since customers become deeply invested in the chips, this business has a potential high switching cost moat once Marvell establishes a solid working partnership with the customer. Another benefit of this co-investing relationship is that the company gains deep insights into what the customer wants in its next generation of AI data center architecture, which includes connectivity and storage solutions, information that competitors may not have. During the Marvell Accelerated Infrastructure for The AI Era event, management went into further detail about the expertise required for building an AI chip. I may do a part two on custom AI chips, briefly discussing in non-technical language what is involved in making customized AI accelerators. Only a select group of companies worldwide have enough technical expertise in chip design, AI algorithms, and manufacturing processes and the financial resources to reliably manufacture customized AI chips at a scale large enough to attract a hyperscaler into a partnership to make these chips. Marvell is one of those companies. Although Marvell has outpaced the S&P 500 so far this year, likely largely due to investor excitement over the company's AI opportunity, it significantly lags the results of the iShares Semiconductor ETF (SOXX). The following table of Marvell's segment revenue from the first quarter FY 2025 earnings release shows one of the reasons for its underperformance. Although the data center segment's growth is blazing hot at 87% year-over-year growth, its other reporting segments are significant laggards. Until enterprise networking and carrier infrastructure start contributing rather than detracting to revenue growth, it will likely continue to lag the SOXX. One of the best definitions of enterprise network comes from Cloudflare (NET), which defines the term in the following way: "A network is a group of connected computers, and an enterprise network is such a group constructed to serve the needs of a large business. Enterprise networks are composed of local area networks (LANs) that in turn connect to wide area networks (WANs) and the cloud." Marvell's carrier infrastructure segment is the equipment telecom carriers use to enable 5G. The enterprise networking and carrier infrastructure segments consist of the following products: The data center storage, enterprise networking, and enterprise market have endured a significant inventory correction over the past year. Industry experts expect those markets to come out of the doldrums and rebound in calendar year 2025. According to one of the largest enterprise network companies, Cisco Systems (CSCO), its May 16 results show that the enterprise network market has stabilized, and customers will have depleted their inventory by the end of July. Suppose that assessment is accurate; the enterprise networking market could begin rebounding by the end of calendar year 2024. As for the carrier infrastructure market, the following commentary describing Telecom provider Ericsson's (ERIC) recent results from the website telcoms.com provides hope that this market should also soon return to growth (emphasis added): The ongoing telecoms recession ensured Ericsson would register yet another year-on-year fall in sales in Q2 but it was a bit less than expected and a significant improvement on the previous quarter. The main reason was a return to growth in the critical North American networks segment, where it seems the big operators have started loosening their purse strings after a year or so of austerity. The other segment due for a rebound is automotive/industrial, which Marvell's CEO believes will increase in the second half of the company's FY 2025. The following table shows some of the products in this segment. The following chart shows the company's GAAP gross profit margin over the last three years. The gross margin decline in 2023 reflects the declines in the higher-margin automotive/industrial, enterprise networking, and carrier infrastructure markets. Another factor is that custom AI compute has lower margins than other parts of the business. As the custom AI business ramps, gross margins may remain pressured in the near term. The good news is that as Marvell's other reporting segments rebound, the company's overall gross margin should rise. The company's CEO Murphy said on the first quarter earnings call: We've successfully managed for some time now the ability to drive a healthy gross margin across the portfolio of products, but we still got to kind of get through this post-cyclical period we're in and get back to a period of normalcy in terms of demand. And I think when that happens and you see those other more margin-rich businesses return to their run rates that they were at and then grow from there, I think we'll have a much healthier margin profile. But that's really -- that's really sort of beyond, I would say, the next few quarters. Another thing investors should be aware of is that although custom compute may erode gross margins, it may help raise operating margins. CEO Murphy said (emphasis added), "We're in a period right now where the custom [AI accelerator] piece is well indicated, which does drive tremendous operating leverage, does carry a lower than corporate average gross margin." The other issue investors dislike about Marvell, outside of only one reporting segment performing, is that it doesn't produce a GAAP (Generally Accepted Accounting Principles) profit. It made a GAAP loss of $0.25 in the first quarter. It has acquired five companies over the last five years, including Avera Semiconductor, Aquantia Corp., Inphi, Innovium, and Tanzanite. One potential downside of inorganic growth through acquisitions is that it can sometimes produce restructuring and amortization costs that negatively impact operating and net income in the short term until a company effectively integrates the acquisitions and achieves synergies. Analysts expect the company to achieve GAAP net income and earnings-per-share ("EPS) profitability in FY 2026. Wall Street also expects the company to double its GAAP EPS profitability in FY 2027 to $1.46. The following chart compares Marvell and Broadcom's cash-flow-from operations ("CFO") to sales. The main difference between the two companies is that Broadcom has a larger software component than Marvell, which is primarily a hardware company. Therefore, Marvell may have challenges converting sales into cash flow as effectively as Broadcom. However, if the company can maintain its trajectory in improving cash flow, it may reach a CFO-to-sales of at least 35% over the next few years. The company ended the first quarter of FY 2025 with $848 million in cash and cash equivalents. It ended the quarter with $4.028 billion in long-term debt. According to Seeking Alpha, the company ended the quarter with gross debt (long-term debt + short-term debt + capital lease obligations) of $4.381 billion, net debt of $3.533 billion, and trailing 12-month ("TTM") EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of $924.5 million. Therefore, it has a gross debt-to-EBITDA ratio of 4.74 and a net debt-to-EBITDA ratio of 3.82. The International Monetary Fund considers a net-to-EBITDA of above 4.0 as high. However, there is a discrepancy between the amounts of debt-to-EBITDA calculated from numbers sourced from Seeking Alpha and the number management claims to have for the quarter. Chief Financial Officer Willem Meintjes said on the first quarter FY 2025 earnings call, "Marvell has a gross debt-to-EBITDA ratio of 2.27 times and net debt-to-EBITDA ratio was 1.8 times." I think the difference between numbers is that Seeking Alpha likely calculates EBITDA using a standard calculation, and the company uses adjusted EBITDA to remove one-time expenses or gains that are not part of normal business operations, such as restructuring costs and asset sales. Using an adjusted EBITDA, the company's net debt-to-EBITDA may look better to investors by eliminating one-time expenses. On the positive side, the company has a debt-to-equity ratio of 0.286, meaning it finances its operations more with shareholder equity than debt. Thus, it should have the financial strength to weather downturns in its sector or the economy. Marvell generated TTM free cash flow ("FCF") of $1.147 billion during the first quarter. The chart shows that FCF dipped in 2023 while several of the company's higher-margin segments declined. As the company's other segments outside the data center, such as enterprise networking and carrier infrastructure, rebound, FCF growth should pick up steam. Notice on the chart below that over the last year, FCF has grown almost 50%, a trend that strengthens the company's ability to repay debt, increase dividends, buy back shares, or reinvest in research and development. Investors also tend to award higher valuations to stocks with rapidly growing FCFs. Analysts expect FCF to grow at a compound annual growth rate ("CAGR") of 40.15% over the next three years to reach $2.847 billion in FY 2027. The following image shows management's guidance for the second quarter of FY 2025. If the company produces revenue for the second quarter of FY 2025 of $1.25 billion, revenue would decline by 6.8% over the previous year. If gross margin guidance hits the mark, it would represent a rise over the last year on a GAAP and non-GAAP basis. The company had a GAAP EPS loss of $0.24 and a non-GAAP EPS of $0.33 in FY 2024, so if it hits the mid-point of guidance, its EPS would improve on a GAAP basis but worsen on a non-GAAP basis. Let's look at a few risks to buying this stock today. Marvell remains vulnerable to the macroeconomy. If the economy enters a recession, the expected rebound in its other segments outside of the data center may stall and fail to come to fruition. According to the Estrella and Mishkin method, the US recession probability is 55.83%, compared to 51.82% last month. Competition remains a risk. In addition to the competitors in its networking business that I mentioned in my last article, Marvell will have enormous competition in the custom AI chip space. Broadcom might be the most significant player in customized chips, and NVIDIA recently entered the space. There are also many startups and private companies such as Groq, SambaNova Systems, Cerebras Systems, Graphcore, Rebellions, Mythic, etched, and more. Some of these companies may not have the financial resources to make it independently. Still, some may be buy-out candidates that could immediately strengthen some of Marvell's larger competitors. Another consideration is that existing or potential Marvell customers may buy one or several of these young, innovative companies and bring chip design in-house. Marvell has a price-to-sales ratio of 11.88, above its five- and ten-year median, indicating potential overvaluation. Currently, the company is unprofitable, so it doesn't have a GAAP price-to-earnings (P/E). Marvell has a non-GAAP P/E ratio of 51.10, well above the Information Technology sector median of 24.19, a sign of potential overvaluation. Seeking Alpha Quant rates the stock an F. Let's do a reverse discounted cash flow analysis. Reverse DCF According to the assumptions on the above DCF, Marvell will need to grow FCF 21% over the next ten years to justify the closing stock price on July 12, 2024. That's a tough ask since Wall Street analysts only expect revenue to grow at a compound annual growth rate of 14.28% over the next ten years. When I did a reverse DCF on Marvell on January 19, 2024, Marvell only had an FCF margin of 15.46%. As of the first quarter of FY 2025, its FCF margin is 21.45%. By FY 2027, analysts forecast Marvell to produce an FCF margin of 32.62%. Suppose Marvell can expand its FCF margin to 33%; the company would need to grow FCF by 15.1% over the next ten years. Assuming it can reach an FCF margin of 33% and revenue grows at 14.3% over the next ten years, the estimated intrinsic value would be $69.24. However, some may consider the stock undervalued according to its FY 2026 and FY 2027 forward P/E ratio. One way to determine whether the market may undervalue, overvalue, or fairly value a stock is by comparing its forward P/E in a given year to analysts' consensus growth rates. If the two numbers match, the market fairly values the stock. The market may overvalue the stock if the Forward P/E exceeds analysts' expected growth rate. If the opposite occurs, the market undervalues the stock. According to those rules, the market potentially undervalues Marvell's estimated EPS growth in its recovery years for its enterprise networking, Carrier infrastructure, and automotive/industrial segments and the ramping of its custom AI compute business. Suppose Marvell's FY 2026 forward P/E matched its estimated growth rate; the stock price would be $187.62, up 155% from the July 12, 2024, closing stock price. If the company's FY 2027 forward P/E matched its estimated growth rate for that year, the stock price would be $116.78, up 59%. Over the long term, the stock may sit at its fair value based on a DCF. However, suppose Marvell meets or exceeds its FY 2026 and FY 2027 EPS estimates. In that case, the market may undervalue it in the short term, and the stock has significant potential appreciation ahead of it in FY 2026. If you are an investor interested in a company that should benefit from the proliferation of AI but hesitate to invest in NVIDIA after its massive runup over the last year, Marvell is an excellent candidate. The company remains a buy for growth investors and an excellent candidate for dollar-cost averaging.

First Solar: Potential Reward Outweighs Risks (NASDAQ:FSLR)

Industry-leading margins, net cash balance sheet, and booked order log provide a firm foundation. First Solar (NASDAQ:FSLR) has been on a wild ride recently. I have followed the stock closely for years and never understood why it remained under the radar, that is, until UBS tied it directly to AI as a provider of clean energy for power-hungry data centers. Indeed, exactly this has been happening for years, with FSLR partnering with MSFT to provide clean energy for data centers, while also utilizing Azure cloud technology throughout their proprietary manufacturing processes. I was quite surprised to see the stock rocket up over 50% in the month following UBS's report, only to crash more than 25% since then. So where are we now? Since the market's valuation of FSLR has been all over the place (so much for efficiency), what should their stock be worth? A longer date range makes the expected growth look even more stunning: Just to be clear, FAST Graphs is forecasting a fair value over $400 by the end of this year, and over $900 by 2026 as more of their capacity growth comes online. That's about as bullish as a stock could be. And indeed, I see a fairly binary outcome. FSLR might languish if the outlook grows shaky, or it might indeed see the kind of growth forecasted here. Given how firm the current footing is, however, I see the latter as more likely. They have $12/share in net cash on their balance sheet and a robust backlog stretching into 2030 at margins far above peers. The bull and bear arguments are fairly well defined at this point, so our task is mainly to handicap them. What is the most likely path moving forward, and what should the fair value be today? First, to understand the bull case, we need to look at what makes FSLR so special in the first place. As a disclaimer, I am fascinated by solar, and consider myself a hobbyist. I have built several off-grid solar systems myself, and even have a solar panel on my minivan (me and Amazon) that powers exhaust fans and a functioning refrigerator. Over the years, I have kept up with various aspects of the industry and have always been impressed with FSLR, even though they almost exclusively work with large-scale utility developers. There is no other company like FSLR in the world. Most solar panels are virtually identical, almost commodity-like in how they are approached. 100 watts is 100 watts, right? Not quite. FSLR's product is completely different, something they have designed from the ground up in California and Ohio, and perfected a manufacturing process for. To date, they are "the only company to scale thin film solar manufacturing globally." They were involved in the very early days of cadmium telluride (CdTe) solar panel research in the 90s, and hold the current record for efficiency in a CdTe panel. When it comes to thin film CdTe, these guys are basically it. No one else in the world makes a product like they do. But is it any good? Historically, FSLR's thin film CdTe panels had major benefits in large-scale applications, but the main and obvious drawback was that they were not as efficient as competing silicon-based panels, requiring more space for the same amount of energy production. Today, the efficiency gap between CdTe and silicon is much smaller, and there is good reason to believe that in most cases, CdTe will actually be more efficient under real world conditions. One area of outperformance is in hot and humid conditions. A solar panel may be rated to produce 100w, but in the real world its production will almost never reach the full 100w. Heat is a major contributor to this performance gap, as solar panels become less efficient as they heat, particularly above around 120 degrees. And since solar panels are usually placed in hot areas that receive a lot of sun, heat becomes a real drag on performance. FSLR's panels do much better in the heat than silicon ones: 4% might not sound like much, but in the world of solar, this is huge. The much-hyped next big thing in solar is perovskite solar cells, which are only about 4% more efficient than traditional silicon panels (increasing in tandem junction cells with multiple layered materials). So while silicon panels may be more efficient under ideal test conditions, once heat and humidity are added to the equation, FSLR's panels may even begin to outperform. Further, FSLR's panels are more resilient to the elements in general. Not only are they potentially more efficient, but they last longer, degrading less overtime: That's a massive gap when compared with silicon panels. When installing a panel, it is important to consider not just how much energy will be produced on day 1, but how much will be produced throughout its lifetime. And in this capacity, FSLR far outperforms the competition, with degradation rates of only 0.2% per year. Recent research on degradation rates has found that it is even more of a problem that originally thought, approaching 2% a year for "high-efficiency" panels in desert and tropical locations, exactly where solar panels tend to be installed. That level of degradation would be devastating to a utility-scale project, making FSLR look like an attractive alternative. A third major benefit of FSLR's panels' durability is that they do not crack like silicon can (and often does). Hailstorms in Texas have been in the news recently for destroying massive solar farms entirely. FSLR panels do not have this issue, however, since the solar cells are so thin that they bend and do not break when impacted or stressed. Because of this property, FSLR panels have a hail impact certification up to 45mm, while most silicon panels have a certification up to 25mm. Hail is not the only thing that can crack a solar cell, and sometimes cracks are not visible to the naked eye. As more solar installations utilize tracking technology, adding moving parts to a solar installation, the risk of cracking is magnified even further. FSLR panels do not have this problem at all, and so cracking is covered under warranty. To date, FSLR is the only company that covers power loss from cracked modules under its warranty. FSLR panels are also immune to Light Induced Degradation (LID) and Light and Elevated Temperature Induced Degradation (LeTID) that can affect silicon panels. With all of these durability advantages over traditional silicon panels, I can also imagine that insurance companies would rather an installer work with FSLR over other suppliers, perhaps negotiating cheaper rates. Reduced risk from hail is itself a massive liability advantage. Putting this all together, it is evident that FSLR has developed a premium product that it should be able to sell for a premium price. There is no wonder customers have maxed out their order book for several years in advance. There are significant tangible benefits to FSLR's CdTe panels, but the intangible benefits that FSLR provides may be just as meaningful. There are two main intangible benefits: they are drastically more environmentally friendly, and they are made in America. It is hard to quantify these advantages, but they should not be undersold either. One of the main appeals of solar energy is that it is better for the environment. However, there are drawbacks, namely in the production process and end of life management. The environmental benefits of solar are reduced drastically if you have to use a large amount of fossil fuels to mine rare elements, then assemble the panels in polluting factories, and then throw the product in a landfill at the end of its life. Again, it is hard to exaggerate how far afield FSLR is when it comes to the environmental benefits of their panels and manufacturing process versus the competition's. They are the world leader. FSLR can make 2.5 panels for the same environmental footprint as one silicon panel. The faster energy payback means that FSLR essentially half as much energy to produce their panel compared with traditional panels, effectively doubling their EROI. A FSLR panel uses just 2% of the semiconductor material of a silicon panel, which is why it can manufacture panels so much more efficiently. More importantly, the semiconductor can be used over and over again, with a 90% recovery rate when recycled. When it comes to recycling, again, FSLR is leaps and bounds ahead of the rest of the industry. They designed their panels specifically with recyclability in mind, and are able to recover 90% of the material for the entire module. They offered the industry's first global module recycling program in 2005 and remain the only manufacturer with in-house recycling to this day. I found the EPA's official page on solar panel recycling to be instructive. They state: The industry is new and still growing, with researchers examining how to commercialize recycling to economically recover most of the components of a solar panel. Elements of this recycling process can be found in the United States, but it is not yet happening on a large scale. Solar panel recycling is a "new" industry not happening at scale, but FSLR has been doing it for decades. They are such a leader in the industry that the EPA mentions them (in)directly on the same page: Thin film cadmium-telluride panels, which represent a smaller part of the solar market, undergo a different recycling process. At least one U.S. manufacturer runs dedicated recycling facilities for thin film panels which recover the semiconductor material (cadmium and tellurium) in addition to glass and copper. It is unclear what the environmental impact will be when waves of panels begin to need to be decommissioned. The lifecycle of a FSLR panel is extremely clear, though, and has been since the beginning. For purchasers focused on sustainability and a lower carbon footprint, FSLR is unbeatable, and it is not particularly close. I like the following image, as it shows how every step in the module manufacturing process has been planned to be environmentally friendly, from the choice of semiconductor material to the longer usable service life (less degradation) to the recycling into new panels: The solar industry is dominated by Chinese companies, in large part due to government subsidies that have been absent in the US (until recently). I find it remarkable that FSLR, an American thoroughbred company, has been able to carve out such a valuable niche for itself and even lead the industry in several key aspects. The Arizona-headquartered company can be traced back to Harold McMaster's "Glasstech Solar," which began in 1984, the very early years of solar development. FSLR itself began in 1999 after McMaster's company was purchased by a venture capital firm. By 2009, FSLR was the largest manufacturer of PV solar cells in the world. As recently as 2009, the United States led the world in solar technology and manufacturing. That seems incomprehensible today; the situation changed quickly as China capitalized on the growing trend while the US lagged. This history is important for several reasons, and it is key to the thesis. FSLR may seem new on the scene to many investors, but in reality they have been a trailblazer at the forefront of the industry for longer than any other solar company. They have been perfecting CdTe panels, and their manufacturing process, since the early 90s. Second, FSLR is as American as it gets. They have expanded manufacturing capacity internationally to Malaysia, Vietnam, and India, but half of their current capacity remains in the US, and this will grow in the coming years as almost all of their growth capex will be spent in the US. For their US manufacturing, 100% of the glass and steel are American-produced, and they project to add close to $5 billion to the American economy in 2026. For every First Solar job added, they project to add 7.3 other high-skill jobs to the US economy. All of that economic activity results in more taxes for the US government (as opposed to the Chinese one). This is not a company that I believe the US would be keen to give up on, let alone to heavily-subsidized Chinese competition, no matter who is in office. Lastly, I want to reiterate the technological position that FSLR has achieved and maintained. When it comes to building and manufacturing, I have seen few companies execute on the level that FSLR does. In the words of CEO Mark Widmar: That we're the only company to scale thin film solar manufacturing globally speaks volumes about the capabilities of our manufacturing operations and manufacturing engineering teams; our record backlog speaks to the confidence our customers have in our technology, which has almost three decades of in-field experience; and we have the strongest balance sheet in the industry. On the recent earnings call, Widmar noted how some perceive execution risk in scaling up as quickly as they have, doubling their output in just a few years. His response? "That, in my mind, is the least of things that keep me up at night." He continues: Our current activities that we currently have ongoing right now are progressing extremely well and on schedule. And we know if we need to continue to grow off the base we have right now, we have -- truly have the capability of doing that. And we just want to see the demand and the right policy environment to make that decision. Time and time again, I have seen companies with ambitious growth plans fall prey to delays and cost overruns: not FSLR. Almost everything has progressed on time and within or around budget: they have even been ahead of schedule on rolling out CuRe panels. Widmar remarks, "Once we make decisions, we get projects built, constructed tools installed and up and running and ramped probably best than anyone else in this industry." I believe this claim. FSLR has shown themselves to be tremendously nimble, ready to pounce once the conditions are right. FSLR does not get enough credit as a trailblazer in the solar industry. Many discussions I have seen on the company mention the potential of perovskite solar cells to disrupt the industry as a significant risk. What if someone comes out with a significantly better solar panel, which makes all of FSLR's capacity obsolete? On the contrary, I believe FSLR will be a significant beneficiary of perovskite development. They acquired a leading perovskite research firm last year, and are ramping up a new perovskite development line in Ohio. Most importantly, perovskite is thin-film solar technology. Who has been developing and manufacturing thin-film solar cells longer than anyone else in the world? FSLR is without a doubt the thin-film technology leader. Their CdTe panels have a higher theoretical efficiency than their silicon counterparts, meaning that there is more room for improvement in current CdTe technology than in silicon. One recent improvement was the release of the first-ever bifacial thin-film solar panel in 2023. The next leap in solar technology will come in the form of tandem solar cells, however. Again, as is the case with perovskite, tandem in general requires thin-film technology. When it comes to the next generation of solar cell technology, I see FSLR as very well positioned to benefit from its research and manufacturing expertise. Like FSLR, Nvidia (NVDA) has been making its signature product, GPUs, since the 90s, long before they were thinking about AI. They found themselves far ahead of the competition in GPUs right when the world required a massive increase in high-performance GPUs. Being in the right place at the right time can be transformative for a company. I see a similar setup for FSLR, who has been mastering thin-film technology for decades and is now the world leader right at the moment when thin-film will be the next big technological leap. They are in the right place at the right time in solar technology, and I see future advancements as bullish for their business, not a threat. The risks to FSLR are clear and analyzable, a quality that I prefer when making stock selections. They are largely political, when it comes to China and the US IRA policy. But there is one more that I want to put forward as more company-specific. Certain industries are known for boom-bust investment cycles. For example, when shipping rates are high, operators build more ships. When rates come down due to all the new supply, profits disappear. With no profits, no one orders any new ships. Eventually, the demand catches up, and the cycle starts all over again. So, will FSLR find itself in this kind of cycle, where they ramp up capacity more and more until demand falls off? There are a lot of unknowns when it comes to the future of the solar industry, especially in the US. FSLR has ramped up manufacturing capacity due to a commensurate rise in demand in recent years. Their backlog remains full for several years, so there are no signs yet that they have over-allocated capital or not been prudent in their expansion. I am encouraged by their tone on the earnings call when asked about further capacity expansion: We've got to think about tellurium, right? We got to think about site selection process and access to power and ready to go to -- as quickly as possible as we see those inflection points that we start to see strength in demand. And then we see through the other side of the November election that we believe we have a highly predictable and stable policy environment that we can then make informed decisions from. That starts to come into the mix, then I think we're in a much more positive position to think about further capacity expansion. So that's what we're doing, and we're going to be as nimble as possible. And if all those -- we start filling out our scorecard a little bit there with the key dependencies that we need to further capacity expansion, we'll be ready to go as quickly as possible. As it stands, they are taking a cautious approach, especially in regards to the US election in November. Before they build, they want to have all the pieces in place to ensure that it is the right decision. And once those pieces are in place, they are ready to pounce immediately. The capacity expansion budget for 2024 and 2025 has already been set and is in motion for current projects. When it comes to 2026, the bulk of the capex is focused on technology initiatives, focused on winning the race to the next generation of solar technology. The bulk of spend is in the US as well. All of this looks like the right approach. I am comfortable with the current capex positioning, but this is an area that I will be watching closely. Especially as they begin to earn more and more money, what will they do with their earnings? To me, this is even more important than the prevailing geopolitical issues. If you listen to the conference call, you will hear a lot about China. Of course, FSLR has good reason to be nervous. China has created an absolute mess. The government has heavily subsidized the creation of a massive amount of solar manufacturing capacity, such that China alone now has the ability to meet global demand twice, and it is still building more factories! Thus, it is estimated that Chinese factories are only producing 23% of their nameplate capacity (as opposed to almost 100% at FSLR, with a yearslong backlog). Chinese panels are then dumped all over the world at prices even below their cost to build. The plan is simple, China wants to dominate the solar industry worldwide, making the supply chain dependent on them. The situation is highly unsustainable, and the US is highly motivated to avoid China's dominance of such a crucial industry. Recent developments have been unequivocal: One CNN article puts it succinctly: No matter who wins in November, tariffs are expected to remain in favor in Washington - especially on China. Both parties have embraced tariffs as a way to show they are tough on China, and there is little appetite to back down - even though economists say lower tariffs could help ease inflation. Policies that favor American factories are "arguably the most bipartisan issue in an increasingly partisan Washington," Chris Krueger, managing director of TD Cowen's Washington Research Group, wrote in a note to clients on Monday. I just do not see a world in which either party would institute policies that harm FSLR in favor of Chinese solar. That is not to say there is no risk. Particularly, FSLR operates outside of the US as well, where policy direction may not be as clear as it is here. But I see little risk to US operations, and even smaller existential risk to the company in the long term. FSLR has undoubtedly been one of the largest beneficiaries of President Biden's Inflation Reduction Act (IRA). Since it does not affect their operations, money received from the IRA goes straight to their bottom line, as is evidenced by their inflated margins: Looking at 2025, analysts expect revenue around $5.66 billion. At 18% operating margins and 107 million shares outstanding, that's about $9.5 per share in operating earnings. At a $225 stock price, that's a P/E of 23.7. That's comparable to the S&P 500, but with higher expected growth. So even without the tax credits, everything is fine. I point this out even though I expect the credits to remain, because my number one priority is capital preservation. Without the credits, the company does not fall apart. It will still be growing and soundly profitable, with a bulletproof net-cash balance sheet. The credit, then, is a bonus, and a big one at that! With the credit the 2025 P/E is around 10, which is absurd for a company growing as quickly as FSLR. FSLR makes a lot of money, and is projected to make much more money over the next few years as they ramp up production even further. With a low PE and high growth rate, investors seem to be pricing in very high risks. For the most part, these risks are external: competition from China and the removal of IRA credits. These risks are not existential, however, and they require US political leaders to make policy decisions that I believe are highly unlikely. Both parties have an incentive to protect valuable US manufacturing companies like FSLR. The further external tailwind of large tech companies looking for the cleanest energy possible for their data centers balances out the perceived external risks. In my opinion, the greater risk is internal: what will FSLR's future capital allocation look like? Signs point to prudence in further expansion and increased spending on technological research, which is what I want to see. This is what I will monitor closely moving forward. In the field, FSLR has extensive history and is the world leader in their niche. Their panels have significant advantages in utility settings, and they are very well positioned for the next generation of solar panels, which will require thin-film. For these reasons, I believe FSLR's high cash flow to be durable, and I assign a buy rating. It is a volatile space, and this stock is one to keep a close eye on. A win for Trump in November could also cause price weakness, which would present a buying opportunity. For more conservative investors, FSLR has very high option premiums, making covered calls or cash-secured puts extremely attractive. For the most part, though, I perceive the potential outcomes to be fairly binary. If all goes well, FSLR's stock price should soar as its earnings increase. If the thesis breaks, a re-rating to the downside could be fast and furious. So if I expose myself to the downside, I prefer to be exposed to the full upside by owning shares outright.

Unveiling Microsoft's Long-Term Growth Plans (NASDAQ:MSFT)

Initiating coverage with a buy based on Microsoft's healthy financials, strong management team, and leadership in AI and cloud. However, I find it fair valued but with high growth potential. Microsoft (NASDAQ:MSFT) boasts impressive financials, with high profitability and a strong balance sheet. Cloud computing, spearheaded by Azure, is a significant growth driver which has been growing at a rate of 31% YoY. I find that the company's dominance positions it well to capitalize on this growth market. Additionally, MSFT heavily invests in Generative AI (GenAI) through its partnership with OpenAI. This technology has the potential to revolutionize various industries and boost Microsoft's revenue. Integration of AI into existing products and services further enhances its competitive edge. As you will read later in this report, I find that MSFT currently trades at a fair valuation which reflects investors' expectations for sustained growth. MSFT, in my view, is one of the leading "Magnificent 7" for its diversified business model, large user base, and investments in future technologies. Looking forward, I find the following Key Growth Pillars: Microsoft reflected this growth with strong Q3 2024 Earnings which exceeded Wall Street expectations, with revenue growth of 17% YoY to $61.86 billion driven by strong performance in productivity, and cloud segment, both bolstered by AI integration. A further reflection of this growth trajectory is that MSFT surpassed AAPL to become the world's most valuable company in 2024, reflecting confidence in its growth plans. In this article, I aim to find if MSFT is a solid candidate for my value with potential portfolio. To accomplish this, I will explore various factors like Management effectiveness, corporate strategy, and valuation metrics to determine if it's aligned with this investment style. Satya Nadella, has a remarkably high approval rating on Glassdoor, so does MSFT as a company, he has been with Microsoft since 1992 and is currently the Chairman and CEO. This long tenure, along with his compensation of around 70% in stock awards, shows that he has a high alignment with the long-term success of Microsoft. After the last earnings call, I find that Microsoft's growth plan heavily involves Artificial Intelligence. Here are a few takeaways I found: Amy Hood, Microsoft's CFO since 2013, has overseen strong financial performance during her tenure. Under her leadership, MSFT has maintained a steady ROE and ROA, demonstrating efficient use of resources. However, I find that FCF growth hasn't kept pace with some of the other "Magnificent 7". I believe this is likely due to significant investments in AI, a strategic move for Microsoft's future. During the earnings call, she shed light on MSFT approach to AI spending. Amy emphasized the importance of investing in infrastructure to meet growing demand. She views AI as the "next wave of cloud infrastructure" and is confident that these investments will secure MSFT leadership position. On the challenges side, she acknowledged temporary capacity constraints on the Azure consumption side, Amy assures that Copilot capacity is not limited. There is a focus on optimizing resource allocation to ensure user growth for per-user businesses. Overall, I find that MSFT's leadership delivered a positive message on their growth plans, with a focus on AI and how it interjects with their Azure cloud offering. I find the company is financially sound and well positioned for the future. I have confidence in the management due to the combination of tenure with the company and experience in the industry and due to their success in the last years, I'm inclined to give management an "Exceeds Expectations". I find that Microsoft's current growth strategy hinges on two pillars: By focusing on both established cloud services and cutting-edge AI solutions, MSFT seeks to achieve sustainable growth across its business segments. Here is a table I created with key differentiators between MSFT and some companies in the industry offering similar services: Source: From companies' website, presentations, Seeking Alpha, Bloomberg, Statista MSFT currently trades at around $453.55 The stock is up around 13% since its last reported earnings at the end of April, and it's been hitting All-time highs. The stock is also up around 21.05% TR YTD, around 330 bps higher than the S&P 500 return. Now, to assess its value, I employed an 11% discount rate, this rate reflects the minimum return an investor expects to receive for their investments. Here, I am using a 5% risk free rate, combined with the additional market risk premium for holding stocks versus risk free investments, I'm using 6% for this risk premium. While this could be further refined, lower or higher, I'm using it as a starting point only to get a gauge using unbiased market expectations. Then, using a simple 15 year + 10 year two staged DCF model, I reversed the formula to solve for the high-growth rate, that is the growth in the first stage. To achieve this, I assumed a terminal growth rate of 4% in the second stage. Predicting growth beyond a 15-year horizon is challenging, but in my experience, a 4% rate reflects a more sustainable long-term trajectory for mature companies that should be close to historical GDP growth. Again, these assumptions can be higher or lower, but from my experience I will use a 4% rate as a base case scenario due to the nature of their business. The formula used is: This suggests that the market currently prices MSFT EPS to grow at 16.7%. According to Seeking Alpha analyst consensus EPS over the next 3-5 years CAGR at 13.72%. Therefore, for me, it seems that MSFT is fair valued on a fundamental basis. Further, I'll also look at their forward price earnings to growth (PEG) ratio which sits at 2.80x -versus a sector median of 2.05x- implying the stock price is slightly above the industry. However, when compared to a select group of companies, highlighted below, that are considered leaders in the industry, the company still looks fair valued. However, I believe MSFT still has a lot of potential and its already capitalizing on AI through all their offerings, cloud solutions, and investments (Open AI). Therefore, I believe its valuation deserves a premium and not merely a fair valuation. Therefore, I am inclined to start coverage of MSFT with a buy. MSFT has been on a positive momentum since they last reported earnings. The stock has been hitting all-time highs ever since. However, the stock looks fair valued, on a technical basis, with its 1-year average RSI in neutral territory at 54.84 and below its 14-day moving average of 67, indicating the stock price might be changing trends. I'm placing the resistance level for MSFT at its all-time high of $468.35 and support level 10% lower, which is close to the price where it was trading before its previous earning of around $400. Company earnings are July 25. Microsoft offers a compelling long-term investment opportunity for my value with potential portfolio. Their financial strength, with consistent profitability and a healthy balance sheet, inspires confidence. Azure positions them as a leader in the booming cloud computing market. Furthermore, Microsoft is at the forefront of AI through partnerships like Open AI, which has the potential to disrupt industries and create new revenue streams. Their diversified business model, encompassing software, cloud, gaming, and advertising, mitigate risk. While I consider MSFT fair valued, I believe the stock deserves a premium. Microsoft's focus on innovation, particularly in AI, positions them for long-term success. Therefore, I am starting my coverage with a Buy.

Amazon: Creating Recession Resistant Profits (NASDAQ:AMZN)

The company is building a profitable business model that is far more resistant to recessions than it was before. I believe that Amazon (NASDAQ:AMZN) remains a strong buy, driven by their aggressive push toward automation, which I believe we are now seeing causing exponential EPS increases. In my previous analysis, I mentioned that the company had recently invested $1 billion in a startup for automation to mitigate the escalating fulfillment costs that have plagued the company for years. This has started to yield financial benefits, with fulfillment costs growing at a slower rate than overall revenue, meaning an exponential increase in operating profits. The advanced systems are also poised to address persistent labor challenges, including wage pressures and unionization. The company's profit drive as well is able to help the firm offset any recession risk that may be on their horizon as the US consumer weakens. I believe there is a reason to anticipate that shares are about to accelerate out of a multi-year range, based on the stock's trend going back to 2021. During Andy Jassy's tenure as CEO, beginning in July 2021, the e-commerce giant's stock has trailed the market, seen in the stock increase of just 13% compared to roughly a 28% rise in the S&P 500. Despite this underperformance, recent developments suggest significant upside potential. I believe the company's financial health is further bolstered in part by strong free cash flow projections. For 2024, Amazon is expected to generate $62.4 billion in free cash flow, with projections of $79 billion in 2025 and $102.7 billion by 2026. This expected cash flow growth, together with potential shareholder returns through potential buybacks or dividends, will further support Amazon's stock appreciation, allowing them to break out of a 3-year range. Despite a challenging period post-COVID, where growth rates stalled and market share in cloud computing was lost to competitors like Microsoft and Google, Amazon's recent performance, I believe, indicates a strong rebound. The company has managed to re-accelerate AWS growth and regain market share in their e-commerce retail division, capturing 28% of all incremental retail sales in the U.S. The company is well positioned in the event of a recession, both on the e-commerce side and on the enterprise side. I think profits could grow further from here, and I do not believe that Wall Street is fully pricing these in for now. I believe with accelerating EPS growth, the company is a strong buy. Amazon's stock has gone up approximately 3.87% since my last writeup in April. While the stock has underperformed the market since my last post, the surge from the 2022 lows in Amazon's stock comes after the company's profit growth has accelerated. The company reported their most profitable first quarter ever this year, with a net income of $10.4 billion. This is a sharp contrast to the $3.8 billion loss in the same period in 2022 and a $3.2 billion profit in 2023. The rapid increase in profitability has outpaced the rise in share price, leading to a decrease in the price-to-earnings (P/E) multiple, a rarity for major tech firms such as Amazon. I believe the forward P/E ratio has now become far more attractive compared to historical levels, indicating that the stock may still be undervalued relative to their earnings growth. Despite the impressive financial results, the market appears to be cautious about the sustainability of Amazon's earnings growth, with the trailing 12 months PEG ratio sitting far below the sector median (0.07 vs. 0.58). However, with Amazon's investments into high-growth areas like AI to help optimize their e-commerce division, I believe the company's upward trajectory is just getting started. With this, I'm following up on my last coverage piece to show how this last quarter is helping them accelerate their EPS (and I believe share price as well). During the company's Q1 2024 earnings call, Amazon reported a strong revenue growth complemented by improvements in operating income, which soared to $15.3 billion. This marked a 221% increase year-over-year. CEO Andy Jassy mentioned the deployment of generative AI tools to streamline product listings for third-party sellers: We've recently launched a new generative AI tool that enables sellers to simply provide a URL to their own website, and we automatically create high-quality product detail pages on Amazon. Already, over 100,000 of our selling partners have used one or more of our GenAI tools -Q1 2024 earnings call. The key with this is that they're enabling sellers to optimize their product pages to increase sales. This is, again, helping them accelerate e-commerce efficiency in ways I did not cover in the last research piece. Adding to this, Jassy, also stated: We also see quite a few companies that are building their generative AI applications to do inference on top of AWS. And a lot of it has to do with the services. And the primary example we see there is how many companies, tens of thousands of companies, already are building on top of Amazon Bedrock, which has the largest selection of large language models around and a set of features that make it so much easier to build a high-quality, cost-effective low latency, production-grade generative AI applications -Q1 2024 earnings call. I also think this is big. While I think the biggest place Amazon will see their profits grow is, again, in the e-commerce division, getting AWS to remain as the bedrock of cloud infrastructure for future AI-driven cloud applications is huge. Some pundits have questioned Amazon's AI strategy. This is the foundation of it. To this point, CFO Brian Olsavsky also emphasized the impact of AI on the company's revenue performance, stating: We saw growth in both generative AI and non-generative AI workloads across a diverse group of customers and across industries as companies are shifting their focus towards driving innovation and bringing new workloads to the cloud -Q1 2024 earnings call. Strong performance here indicates the widespread adoption of AI technologies across Amazon's customer base. With the introduction of Amazon Q, a generative AI-powered assistant, Amazon is enhancing its AI AWS's offerings, attracting major clients like Pfizer, Toyota, and the New York Stock Exchange. The company is really firing on all cylinders here. I expect profits to come with this. The company's "super aggressive" push on AI has been highly transformative so far. Over the past year, the market has significantly underestimated Amazon's PEG TTM GAAP ratio. This value currently stands at 0.08, which is 86.47% below the sector median. Looking forward, the market sets the company's forward Non-GAAP PEG at 1.84 compared to the sector median of 1.50, just a 22% premium to sector median. Given the expected year-over-year EPS growth of 57% through the end of 2024 (far higher than the sector median 2.88% year over year EPS growth), the current valuation setup appears conservative in my opinion. Amazon shares have seen an increase of 3.87% since my last report in April. However, this barely scratches the surface of Amazon's potential. If we saw the company's PEG ratio converge on a 50% premium to sector median (to account for EPS growth that well outstrips the sector median), this would mean there is still another roughly 23% upside in shares as they move from a 22% PEG ratio premium to a 50% above sector median PEG ratio. In my last research piece, I argued that Amazon had roughly 23% upside at that point as well. Since, however, shares have moved by about 4% since then, this would imply only roughly 19% in remaining upside. I'm increasing my upside estimates given the street estimates for EPS are increasing exponentially as well. I am really optimistic. The U.S. economy is showing signs of slowing down. Recent data from June 2024 reveals a notable decline in personal spending. The government revised personal spending growth down to an annualized rate of 1.5% for Q1 2024, a drop from the previous estimate. Consumer behavior is also in a slowdown, with retail sales and housing activity slowing in the first half of the year. This shift in consumer behavior is likely a response to the Federal Reserve's sustained high-interest rates, which have made borrowing more expensive and dampened demand across the board. With this, core capital goods orders, a proxy for business investment, fell by 0.6% month over month in May. The job market is also showing signs of strain, with continuing jobless claims near their highest level since 2021. This indicates a slower reabsorption of unemployed workers into the labor force. For companies like Amazon, which rely heavily on consumer spending, these trends could cap potential upside if the economic conditions do not improve. The outlook for the U.S. economy remains cautious, and companies heavily dependent on consumer spending must navigate these uncertainties carefully to maintain growth and profitability. However, I am counting on Amazon's initiatives aimed at reducing operational costs and increasing efficiency across their extensive logistics and fulfillment networks. I believe they will live up to the challenge that management (and shareholders) put on them. Amazon has deployed over 750,000 robots, which have already replaced approximately 100,000 human jobs (large cost savings). These are used in various stages of the fulfillment process, including sorting, packing, and transporting goods within warehouses. In addition, according to CEO Jassy, the company restructured their U.S. fulfillment network into 8 self-sufficient regional networks, which reduced the distance products need to travel to reach consumers. The company is lean and increasing profits in the face of a consumer weakness. It's a really robust strategy. I'm excited to follow it. I believe that Amazon remains a strong buy, driven by their aggressive push toward automation which will help push profits higher, and help de-risk the company from a recession. The company has invested $1 billion in automation to mitigate the escalating fulfillment costs that have plagued them for years. By 1Q 2024, Amazon reported a 13% revenue growth to $143.3 billion, surpassing market expectations and operating profits up 221%. Amazon's stock has appreciated by approximately just 3.87% since April 2024, meaning the earnings are growing faster than the market's forward expectations about the company. This is a rare position for Amazon. While the U.S. economy is showing signs of slowing down, with a notable decline in personal spending and weakened consumer behavior, I believe Amazon's initiatives at reducing operational costs and increasing efficiency across their logistics and fulfillment networks can mitigate these risks. They are building an automation system that has already eliminated 100,000 jobs and likely tens of billions of dollars in wages. Imagine where they will be in just two years? Given this, I remain optimistic about Amazon shares, and believe the stock is still a strong buy.