Tech Giants Amazon, Nvidia, and AMD: AI Advancements and Market Implications

The More One Understands What Amazon Truly Is About, The Better It Looks (NASDAQ:AMZN)

Contrary to what many believe, AMZN is not simply an oddball combination of retail and cloud services. "When someone shows you who they are, believe them the first time," said poet, memoirist and activist Maya Angelou. It's just as well Ms. Angelou isn't an e-commerce/cloud investment analyst. When it comes to Amazon.com, Inc. (Nasdaq: AMZN), her words often fall on deaf ears. After AMZN went public in 1997, founder/ first C.E.O. Jeff Bezos' laid it all out in his first Shareholders' Letter. In the first sub-heading, Bezos asserted "It's All About the Long Term." Many companies also say that. But several Bezos bullet points really drove it home: We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.... When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows.... We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model. (Emphasis supplied by me.) But the Street, it seems, has often refused to believe it. For years many complained when AMZN about failure to satisfy short-term investment community priorities. In my prior AMZN articles, I did believe what AMZN was showing the world. Between November 28, 2006 and December 1, 2017, I published eight Seeking Alpha articles on AMZN. That, in and of itself is no sin. Being wrong is part of investing life. It happens to all of us. But my process was regrettable. My last paragraph led with "I love AMZN, the company." Valuation was high. But whether the stock deserved its high ratios was at least debatable. Ultimately, I used a quant model that suggested shares with exceptionally high growth and sentiment scores faltered in the future. You could call it reversion to the mean. The model back-tested very well. So, I used it to say "Sell." Check the bio in my current Seeking Alpha Profile. You'll see that now I'm retired from the corporate world. I'm no longer bound by employers' rules, policies, etc. And now, I don't serve the numbers. The numbers serve me. So, you can be darn sure I won't do something like that ever again. In this Seeking Alpha incarnation, I'm back to my earliest roots. It's about HI (Human Intelligence); supported, but not dominated by numbers. I tried to correct my late-2016 blunder with last last December 1, 2017 writeup. I said Buy. Since then, AMZN rose 234.65% (through 7/12/24). That beat the S&P 500's 112.52% gain. But I also floated the idea of pairing AMZN with an investment in the Pro Shares Decline of the Retail Store ETF (EMTY). That fund took short exposure to brick-and-mortar stores. From December 1, 2017 through its April 3, 2020 peak, EMTY rose 56%. But from the peak until now, it fell 74%. So, from the 2017 writeup till now, EMTY clocks in with a 57% loss. I never specified how big the EMTY stake should be relative to AMZN. If I now assume the stakes to have been equal, the combined position would have gained 88.83%. That would have trailed the S&P 500's 112.52% gain. So much for trying to outthink the room. Going forward, I'll keep it simple. As Ms. Angelou counsels, I'll believe what AMZN is showing me and the world. I'll explain below and recommend accordingly. But first, I want to address an issue that often troubles the bears... You can't get a Mercedes for the price of a Chevy. And you can't buy shares of a super company for the price of a dud. (I explain further in my May 28, 2024 Nvidia article. I even discussed it in 2016, but wasn't firm enough in my convictions.) Ever since it came public in 1997, AMZN has been a live case study showing how it's OK to accept high valuations for shares of great companies. (Note: The Benchmark I show in the Table is something I created specifically for AMZN. I'll explain it below when I present the rest of AMZN's numbers.) The ratios remain high. And Seeking Alpha gives AMZN a "D-" for Valuation. But look at the other Seeking Alpha factor grades, especially Growth and Quality. (Don't ignore these. Seeking Alpha is spot on to consider five sets of factors, rather than just one.) Notice, too, the relatively strong "Proj. 3-5Y EPS Gr" in my Valuation table. Based on my assessment of the company (see below), I find the 23.29% projection credible. That's enough to bring the "PEG FWD" down to earth. Meanwhile, AMZN's margins were low at times in the past. But they're pretty good now. That makes AMZN's sales-based valuation more acceptable than those of the Benchmark and SPY. So let's now get to the meat of this situation, whether AMZN as a company is really good enough to merit the stock's high price tag. The Vision Although it was founded in 1994 and has been public since 1997, AMZN still isn't mature. It's still investing to build its long-term future. C.F.O. Brian Olsavsky made that clear on the April 30, 2024 analyst earnings call: Right now, in Q1, we had $14 billion of CapEx. We expect that to be the low quarter for the year. As Andy said earlier, we are seeing strong demand signals from our customers and longer deals and larger commitments, many with generative AI components. So those signals are giving us confidence in our expansion of capital in this area. And as he also mentioned, we've done this for 18 years. We invest capital and resources upfront. We create capacity very carefully for our customers. And then we see the revenue, operating income and free cash flow benefit for years to come after that, with strong returns on invested capital. So a little bit of a long-winded answer to your question. But yes, we have -- the main issue that we'll see in the near term is additional CapEx and we've talked about that. And we continue to see strong CapEx performance in our stores business. Most of that will be related to modest capital or capacity increases in addition to our sameday fulfillment network and some Amazon Logistics upgrades to the fleet. But for the most part, what you'll see is really going to be on the AWS side. (Emphasis supplied by me.j Increased depreciation is likely to cut into reported EPS. And increased capital spending will cut into free cash flow. Investors should not find anything troubling about this. As Olsavsky said, AMAZ has been doing this successfully for a long time. So are all these periods of heavy capex really as worthwhile as AMZN hopes? To address this, we need perspective... Not every year will be equally great. 2022, for example, was a bad year. Rising interest rates did not actually trigger what many said would be a full-fledged recession. But they did cause consumers to tighten spending. Businesses, likewise, were less aggressive about spending for cloud upgrades on AWS. At the same time, labor and logistics costs rise. And AMZN had to readjust staffing and logistics as the world exited pandemic era lockdowns, which proved especially lucrative for e-commerce platforms like AMZN. Bad years happen. They always did. And they always will. Ultimately, though, investors should judge companies by overall results. This isn't just bullish hype. Chapter 37 of the Sixth Edition of the Graham and Dodd classic Security Analysis is all over this. Page 626, for example, says... The concept of earning power has a definite and important place in investment theory. It combines a statement of actual earnings, shown over a period of years, with a reasonable expectation that these will be approximated in the future, unless extraordinary conditions supervene. The record must cover a number of years, first because a continued or repeated performance is always more impressive than a single occurrence and secondly because the average of a fairly long period will tend to absorb and equalize the distorting influences of the business cycle. (Emphasis supplied by me.) I's like to think the Street will see things this way and look beyond any near-term weakness in AMZN's results. But I've been analyzing stocks since late 1979. And as described above, I've been watching AMZN for many years. So I recognize the risk the Street won't do that. But for those who can look beyond near-term potholes... AMZN's Vision Has Been Delivering Great Results Looking back from today, 2022 investors who obsessed over the near term and ignored the big picture got burned. The stock plummeted 56% from its 7/8/21 peak through its 12/28/22 trough. Now you probably know what they say about huge 50%-or-so drawdowns... The stock has to about double to regain that loss. Well, recoveries like that happens often in real life. That happened to AMZN. From 12/2822 through 7/9/24, the stock rose 144%. So, it regained lost ground, and then some. And it wasn't irrational exuberance. It was genuine company fundamentals. The GuruFocus.com 30-year AMZN data presentation shows that AMZN's Returns on Equity (ROE) were all over the place in its early years. ROE turned positive in the early 2000s. But it plummeted into the red due to heavy spending in the early 2010s. But soon thereafter, from 2016 through 2023, annual ROE averaged 18.69%. (And that includes a -1.91% tally for the bad year in 2022). Looking at "a number of years" and a "fairly long period," as Graham and Dodd suggest, paints AMZN in a very positive light. Neither I, nor any serious Graham and Dodd follower, would alter that view even if AMZN spends its way into another 2012-14-type rough patch. (During a bad 2012-14 interval, ROE averaged 0.07%.) The following tables provides a closeup on AMZN's current fundamental situation. They give us a sense of why Seeking Alpha's non-valuation Factor Grades are as high as they are. Comparing AMZN to companies in the SPDR S&P 500 ETF (SPY) is standard. But getting a peer benchmark has been challenging. Databases classify AMZN as Broadlines Retailing. That's not wrong per se. We all know AMZN does retailing. But its AWS (Amazon Web Services) cloud business is huge (see below). So, I created my own benchmark. I used median figures for companies in the Broadline Retail Industry, as defined in the Seeking Alpha Stock Screener. I also used the constituents of the Global X Cloud Computing ETF (CLOUD). The Benchmark figures I show are averages of the two groups, weighted by their relative contributions to 2023 operating profits. (I compare companies to benchmark medians since these aren't impacted by wild distortions often caused by unusual data items, even in big companies that can dominate weighted averages.) Clearly, AMZN is pretty good compared to SPY companies and those in my custom cloud/retailing benchmark. Here are AMZN's quarterly Revenue and EPS trends and estimates. So it's as clear as can be that ANZN has been executing its vision (spending for the long term rather than chasing short-term results). The company has been rewarded with powerful results. And shareholders have been rewarded with spectacular returns, even though AMZN has yet to pay a penny in dividends. Let's note total return for AMZN from 3/10/99 through 7/9/24. This starting date matches the debut of the iShares QQQ ETF Trust (QQQ). I'll ignore AMZN's rise from what, after several stock splits, now look like penny stock levels. And I'm including dividends from QQQ, and for SPY. Over this very long period, AMZN returned 5,715%. SPY returned 578%. And QQQ returned 1,045%. That's not necessarily wrong. Many of us buy a lot of things from AMZN. Also, most who pay attention to investing know Amazon Web Services (AWS) gives it a huge stake in the cloud business. This actually provides the lion's share of operating profits. And it has lately been growing faster. So, it looks like we have an oddball conglomerate-like company. It has one low margin cyclical consumer business. And there's another that's exploiting a hotter tech field. But first impressions can mislead. Maybe we can blame Jeff Bezos for some of that. His annual Chairman's letters presented impressive detail on "what" AMZN does. But current CEO Andy Jassy's 2023 letter took a bold leap in explaining "how" and "why." The latter paints a completely different different picture of AMZN. It's one that shows that the company's retailing and cloud operations are, to use a lawyers' phrase, inextricably intertwined... Traditional (brick-and-mortar) merchants grow by adding more stores. That obviously boosts sales. And hopefully, more scale and efficiencies can help profits outgrow the top line. They also want to increase same store sales. To do this, they need to market better. They keep trying to improve merchandise selection. They can gain share against rivals by cutting prices. And, perhaps, they could incentivize customer loyalty. Online retailers, such as the e-bookstore AMZN introduced itself as being, did a lot of the same. It marketed itself. It competed on price. Sales-tax saving was a big deal early on. And it added new kinds of merchandise. But right from day one, AMZN had a built-in advantage over brick-and-mortar. It immediately had a global presence. Barnes & Noble was all over too. But it had to keep building new stores. AMZN didn't. AMZN had an advantage in terms of inventory. It could centrally hold and manage inventories. So customers could buy anything immediately. Sure customers had to wait for delivery. But that was often better than driving to a local store, not finding the preferred book and being persuaded by a salesperson to let the store order it for the customer. And if the store wouldn't arrange for direct delivery to the customer, the latter had to again drive back to the store. Still, if that were all there was, AMZN critics and skeptics would be right. AMZN would just be another low-margin retailer, albeit one that could operate a bit more efficiently. But that's not all there is. Jeff Bezos consistently wrote and spoke of fanatical commitment to pleasing customers. Another bullet point in his 1997 Shareholder Letter said: We will continue to focus relentlessly on our customers. Many likely brushed this off as corporate puffery. But AMZN really put its money - lots and lots of it - behind its professed vision. That means it had to be more than a web site with logistics people who knew how to ship from warehouses. It had to find ways to keep doing better. That's hard. Every time you make customers happy, they decide they need more. And over the years, AMZN has often recognized customers will want more even before customers figured out they should ask for it. So behind the scenes, AMZN developed a practice of working with what it calls "primitives." Current CEO Jassy details these, and how AMZN uses them, in his 2023 letter. AMNZ defines a primitives as... the raw parts or the most foundational-level building blocks for software developers. They're indivisible (if they can be functionally split into two they must) and they do one thing really well. They're meant to be used together rather than as solutions in and of themselves. And, we'll build them for maximum developer flexibility. Initially, primitives were built to support the original business. They helped AMZN buy products, store them and then ship them to purchasers. But each step of the way, AMZN wondered if it could add to what it was doing. Eventually, according to Jassy "we realized we could add broader selection and lower prices by allowing third-party sellers to list their offerings next to our own on our highly trafficked search and product detail pages." The company tried using primitives relating to "payments, search, ordering, browse, item management (to let Target.com) use Amazon's ecommerce components as the backbone of its website, and then customize however they wished." But it turned out to have been too clunky. So AMZN backtracked and built "a new set of infrastructure technology services that would allow both Amazon to move more quickly and external developers to build anything they imagined." (Emphasis supplied by me). Hence the birth of AWS! AMZN didn't simply decide that the cloud was a hot area and that it would be good to get a piece of the action. AWS was born organically, as AMZN realized others would pay to use technology AMZN built for itself. Those interested in more detail will find plenty in Jassy's 2023 letter. For now, I'll summarize using Jassy's words: As AWS unveiled these building blocks over time (we now have over 240 at builders' disposal -- meaningfully more than any other provider), whole companies sprang up quickly on top of AWS (e.g. Airbnb, Dropbox, Instagram, Pinterest, Stripe, etc.), industries reinvented themselves on AWS (e.g. streaming with Netflix, Disney+, Hulu, Max, Fox, Paramount), and even critical government agencies switched to AWS (e.g. CIA, along with several other U.S. Intelligence agencies). But, one of the lesser-recognized beneficiaries was Amazon's own consumer businesses, which innovated at dramatic speed across retail, advertising, devices (e.g. Alexa and FireTV), Prime Video and Music, Amazon Go, Drones, and many other endeavors by leveraging the speed with which AWS let them build. So for today's investment case, we should recognize that this isn't merely an on-line retailer and a cloud services outfit under the same corporate umbrella. AMZN today is a retail-distribution technology company. And this retail-distribution tech company is benefitting from demand by outsiders to pay for the capabilities AMZN develops for itself. Right now, AMZN needs NVDA products. And NVDA needs AMZN as a major customer. At the same time, AMZN is developing its own chips to handle its own specific AI needs. AMZN needs a lot of AI. It'll join the race to supply generative AI tools to consumers. But it's world won't end if it doesn't wind up leading here. AMZN really needs a ton of AI for itself. It needs AI to support AWS' cybersecurity. It needs AI to optimize its use of regional distribution centers. It needs AI to optimize shipping. It needs AI to get the right ads in front of the right customers. It needs AI to show the right products to the right customers. Beyond AI grunt work, AMZN has been rolling out Rufus. According to the first-quarter earnings release, this is... a new generative AI powered shopping assistant that can help customers save time and make more informed purchase decisions by answering a variety of shopping-related questions, providing product comparisons, making recommendations, and more. Amazon improved Rufus' answer accuracy and response speed, and added new features, including "My Orders," which answers questions such as "when did I last order coffee?" and "what dog treats did I last order?" AMZN still has a very long runway for growth according to Jassy, because... about 80% of the worldwide retail market segment still resides in physical stores. Similarly, with a cloud computing business at nearly a $100B revenue run rate, more than 85% of the global IT spend is still on-premises. As happened with AWS, others could pay AMZN to use chips it develops for itself. So it's possible these AMZN and NVDA, close allies may eventually become competitors. This could turn into one heck of a show. A big risk here is that investors will go ballistic and beat up the stock if the next or any upcoming quarterly earnings release - and/or guidance - isn't all the Street wishes. This is so for all stocks too. But AMZN manages its business with a we-don't-worry-about-that perspective. So don't expect AMZN to manage earnings to please the Street. Also, there are also many politicians and regulators who don't realize or care how many of their constituents may be happy Amazon users, or even Prime subscribers. They often seek ways to cut the company down. The Federal Trade Commission is even trying to reinvent monopoly theory to do this. And as is so throughout the economy, many AMZN employees want more money and better terms of employment. I think that'll probably happen eventually - with or without unionization. That should cut a bit into margins and ROE... for AMZN and many other companies. What to do About AMZN Stock As discussed above, AMZN isn't a traditional value play. To own AMZN, one should assume this is, indeed, a growth company. And one should be willing to accept a growth-stock valuation. In technical-analysis lingo, the 50-day exponential moving average (EMA) has been a support level (floor) for the stock price. The strong 10-day EMA being above the 50 is a positive thing. But the latest price bar crossed below the 10-Day EMA. That's a modest red flag. But for now, at least, Chaikin Money Flow (CMF) and the Chaikin Oscillator (CO) both remain bullish. These indicators measure which party to trades is more motivated. CMF does it for institutional investors. CO does it for the market in general. Buyers being more motivated than sellers exerts upward pressure on stock prices. The CO, however, is slipping toward neutrality. AMZN has had a nice run since November 2023. So, it wouldn't be outrageous to see the stock take a breather. But on the whole, and from the perspective of a bona fide growth investor, I see nothing that scares me away from acting on the long-term investment case. As I've said before, my investment stance depends mainly on whether I think a stock will be better than, in line with, or worse than market. Here's how I apply that to the Seeking Alpha rating system: Based on this scale, I'm rating AMZN as a "Buy" for those who can tolerate the above-discussed risks.

Amazon Stock: Q2 Will Likely Surprise You (NASDAQ:AMZN)

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 I first wrote about Amazon Inc. (NASDAQ:AMZN) stock at the beginning of February 2021 and issued a buy recommendation. Since then, my ratings have fluctuated between "Buy" and "Hold", depending on market developments and my assessment of the company's nearest prospects. My last 2 articles were "Buy" and I'm delighted that Amazon has outperformed the index since the end of January by a really wide margin (taking into account the company's size). My most recent article analyzed the company's Q1 FY2024 financials immediately after their release. Today, I'd like to provide a preview of the upcoming Q2 2024 and assess Amazon's chances of exceeding market expectations. Quick Q1 FY2024 Overview The company's Q1 FY2024 results were released relatively long ago (at the end of April), so I assume everything we saw in Amazon's financials is likely already priced in, as the stock has increased significantly since then. Nevertheless, I decided to briefly highlight some points just to refresh readers' memory. In Q1 FY2024, Amazon's revenue reached $143.3 billion, a 13% YoY increase, which looks impressive. Although sales dropped 16% QoQ due to seasonality, the consolidated sales figure arrived at the high end of management's guidance and exceeded Wall Street consensus estimate by ~$764 million. Regarding the bottom line, there was also a beat as Amazon's GAAP EPS was $0.98 per diluted share, up from $0.31 a year earlier. Despite typically seeing a significant drop in profits from Q4 to Q1, Amazon maintained a steady EPS, mainly due to an expansion in gross margin to 49.3% (+255 basis points YoY) thanks to the robust performance of AWS. I should say that AWS has remained Amazon's key moneymaker with huge growth and profitability; the Q1 FY2024 figures for AWS revenue amounted to $25 billion, up 17% YoY as well as a 3% sequential hike. The segment's EBIT rose by 84% YoY to $9.4B with an EBIT margin of 37.6%, which looks exceptionally well, in my opinion. I think that by investing as much as $4 billion into Anthropic, AWS demonstrated its dedication towards promoting AI technology thus further solidifying its position in the AI-as-a-service market. I believe this strategic alliance should provide additional capabilities for AWS while also reinforcing its dominance in cloud services during the current AI gold rush. Excluding AWS, Amazon's total sales for products and services amounted to $118.3 billion, up 12% YoY but down 19% QoQ (again, that was consistent with typical seasonal swings). In this segment, the operating profit was $5.89 billion from a loss of $349 million reported in the previous year, thus seeing an increase in the operating margin to 5.0%. North American retail sales, which make up for ~60% of overall sales in the company, increased by 12% YoY yielding an operating income of $4.98 billion. Even though it was less than Q4's record of $6.5 billion, this represented a remarkable improvement over the $898 million it made in Q1 FY2023 (+6.6x YoY actually). Also, there was a 10% YoY increase in international retail revenue ($31.9 billion) - it was actually the 1st quarter of solid profitability since Q2 2021 (excluding an insignificant profit in Q3 2023). The EBIT for the international division amounted to $903 million with a margin of 2.8%. It looks like the operational efficiencies put in place during the pandemic era are yielding results. I expect Amazon's International segment to remain profitable going forward, with possibly even higher margins as the current base of 2.8% seems to be too low. Free cash flow, with various adjustments that the company includes in its investor presentation, has increased significantly over the last few quarters: Emerging from deep outflows in Q1 FY2023, Amazon generated over $50 billion on a TTM basis if we consider the FCF in its classical form, without adjusting for financial leases and other financial obligations. Additionally, I was pleased to see that the number of shares outstanding increased by only ~1.5 - this indicates that the company's resources are more than sufficient for innovative development, and there's no need to overcompensate staff excessively, which could potentially dilute investors in the future. In my opinion, all indicators from Q1 suggest that the company's business continues to develop actively and that Amazon seems to have no significant obstacles to overcome. The company holds substantial shares in each of its end markets, and its extensive ecosystem allows it to monetize all of the growth in these markets. This is very promising, especially as we watch the economy recover. Amazon is benefiting from this recovery through its operating leverage. Judging by the latest economic data, this growth likely continued in the second quarter. Let's take a closer look. The Odds Of Beating Again First off, let's define what the market expects from AMZN for the 2nd quarter. Since the last earnings report, Wall Street analysts have significantly raised their EPS estimates, not only for Q2 but also for most of the following quarters. According to Seeking Alpha Premium data, prior to the Q1 report, analysts were expecting $0.94 per share for Q2; now expectations have risen to $1.01 per share. That may seem like a minor change, but it actually represents a 7.46% increase for just 3 months. Thus, expectations have increased, making it more challenging for AMZN to surpass them now. However, based on Q1 results, we may recall that most analysts had anticipated a seasonal decline in EPS following a strong Q4. Contrary to those expectations, the company reported $0.98 per share in earnings, beating the forecast by ~18%. That was a substantial beat. I don't see any pronounced seasonal trend suggesting that the Q2 results should differ significantly from the Q1's. On the contrary, I think we're likely to see some acceleration in growth, so the $1.11 per share that Wall Street is currently forecasting seems to be a more than achievable goal for Amazon this time around. Moreover, the market reaction should depend not only on by what margin AMZN beats Q2 EPS estimates but also on the comments management provides regarding its future outlook. I believe that management will be, if not more positive than in the first quarter, at least as optimistic in this respect, as there are fewer negative factors at play. At the moment, I don't see many significant obstacles. According to the Q1 earnings call, the management set expectations of net sales to be in between $144 billion and $149 billion with a growth of 7% to 11% YoY, despite an anticipated adverse effect of FX. To minimize costs while improving user experiences, Amazon said it planned to keep developing its distribution systems "through investment, increased standardization of procedures and automation as well as other technological initiatives in robotics." The advertisement remains instrumental in achieving profitability gain; besides sponsored products, there are good chances for growth in streaming TV ads. Prime Video presents new content regularly while Manhattan is about to see a new Whole Foods Market concept being launched. Also, I think AWS's potential for growth is not exhausted, with AMZN's plans in place to heavily invest in CAPEX that will support the increasing demand for generative AI and other workloads. In 2H 2024, Amazon should introduce more NVIDIA compute instances as well as its latest custom silicon Trainium2.0. Amazon Bedrock should expand its LLMs selection and add capabilities such as Custom Model Import for better integration with SageMaker, according to the commentary. The company also intends to maintain its fast delivery speeds for Prime members while adding new events and collaborations to enhance the shopping experience. Therefore, if we're discussing optimization and the potential for higher margins in the future, I believe Amazon still has room for improvement. Perhaps this will be evident in the results of the second quarter, we'll see. In summary, I believe that Amazon has a strong chance of exceeding Q2 expectations. Amazon's Valuation Update Last time, I valued Amazon using DCF modeling, which showed an undervaluation of ~29.5%. Since then, the stock has grown by almost 7.5%, so I'd like to update my model today. In the same way as before, I expect AWS and other non-retail segments to continue to be a bigger share of Amazon's revenue given that they have higher growth rates. Given that AWS has a quite high EBIT margin with little signs of weakening, my forecast is that Amazon's consolidated EBIT margin will be significantly higher than the current 8%, possibly reaching 15-17% within the next 5 years. We can thus sketch a more sound financial outlook if we assume a conservative annual revenue growth slightly above 10%, just below the present consensus forecast, and target an EBIT margin of 16% by FY2028. Assuming historically average D&A-to-revenue ratios, rising CAPEX-to-revenue in the next 2 years (heavy investments into AI-related things), and average net working capital (also as of revenue), this is what my DCF model forecasts look like at this stage: I assume that the company's cost of debt capital won't have a significant spread relative to the risk-free rate (4.24%) - let it be 5%. So with a tax rate of 20% and a market risk premium (MRP) of 5%, we get a WACC of ~9.6%, which seems relatively conservative to me: Now, let's touch on one of the trickiest assumptions in my analysis - the terminal value. Currently, Amazon's EV/FCF multiple is 53.6x, which I expected to decrease as the company matures and loses growth potential over time. However, as I already noted above, I also expect AMZN's EBIT margin to keep expanding, so the implied multiple contraction should be less drastic. I suggest taking an EV/FCF of ~44x in 5 years (the 10-year median) - this assumption would result in an undervaluation of ~23.7% based on my DCF fair value calculation. So I can conclude that since the market is willing to pay a premium for Amazon's valuation, this provides a buffer if we see a strong earnings beat for Q2, so the price could really drive higher. Jeff Bezos Sells Massively This is a much-discussed topic, as everyone has seen how Amazon stock has struggled to break through the $200 mark in recent days, starting in early July. Based on insider findings, we see that Jeff Bezos has been actively selling his shares, some recent ones priced just slightly above $200. In 2024 alone, he sold more than $10 billion worth of AMZN shares, so many market participants and analysts I have read and heard believe this is a negative sign for future price action. So I can't ignore the discussion of this moment. I think it's important to remember the adage that insiders sell for different reasons. So Jeff Bezos' sales are not necessarily a negative sign for Amazon. It is important to remember that Mr. Bezos is heavily involved in other ventures besides Amazon, including the space industry, which is very capital-intensive and requires constant funding. It is therefore logical that he's selling some of his shares. Also, considering the fact that he has already sold about $10 billion worth of shares, we can probably assume that his "cash-out" will soon slow down and he won't be selling so actively. As analysts and investors, we should focus on the performance of the company and not on who is selling their shares and to what extent. From what I see, Amazon is doing very well fundamentally. According to the DCF model I updated today, the stock may be undervalued. In addition, the company is actively developing and holds a significant market share in its addressable markets. Innovations in cloud technologies, AI, and other areas that the company offers are likely to drive the business forward, regardless of whether Jeff Bezos sells or buys. The Verdict Of course, I may be wrong in today's bullish-looking findings. If Jeff Bezos continues to sell his shares, of which he still has many left, the pressure on Amazon's stock price may persist. In addition, the stock's large institutional and insider holdings, such as the 934.3 million shares held by insiders and the large investments by mutual funds (Argus Research proprietary source, May 2024 data), suggest a potential vulnerability in case there's a meltdown in the market. In addition to this risk, there's also the danger that cloud competitors such as Microsoft's (MSFT) Azure could force AWS to lower its prices, which could significantly impact its profitability and overall future sales growth. Furthermore, given the company's vast ecosystem, there are potential risks of malfunctions, outages, or cyber-attacks that shouldn't be overlooked as potential risk factors. Despite these risks, however, I believe that Amazon is one of the most innovative companies with a significant presence in various important end markets. Its growth potential looks very promising in almost any development scenario. Yes, its valuation may seem a bit overpriced today if we look at classic multiples such as the price-to-earnings or EV/EBITDA ratios. However, given the growth expectations, these multiples are likely to shrink significantly in the future, making them look cheap. Also, if the premium remains, the current stock price will look unrealistically low. In terms of potential Q2 results and Amazon's ability to beat expectations, I think AMZN has a very good chance of beating indeed, although the market has been more aggressive in its expectations, raising the consensus estimate by 7.5% in just the last 3 months. Specifically for the second quarter, I think the results will definitely surprise us and I'm looking forward to them in two weeks (expected July 26, 2024). I reiterate the "Buy" rating for AMZN today. 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 a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. 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.

Nvidia: I'm Late To The Party But I'm Buying (NASDAQ:NVDA)

Despite the stock's high valuation, Nvidia's strong financials and potential for future growth make it an attractive investment opportunity, with the possibility of further share buybacks driving earnings growth. Like many investors, I missed out on one of the most incredible runs I have seen from a stock over the past several years. Shares of Nvidia Corporation (NASDAQ:NVDA) on a split-adjusted basis increased from $4 on July 10th, 2019, to $32.67 on November 24th, 2021, before retracing back down to $11.23 on October 14th, 2022. What happened since the market bottomed is incredible, as shares of NVDA increased by more than 10x in less than 2 years, reaching $140.76. Today, shares are trading for $135.51, and NVDA has appreciated by 3,119.62% over the past 5 years. NVDA is the best-performing stock in the Magnificent Seven, and has outperformed the S&P 500 (SP500) by more than 35x over the past 5 years. Before the Magnificent Seven, there was FANG, and I was a shareholder in Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META). FANG has been upgraded to the Magnificent Seven, and the only company I am not currently invested in is Microsoft (MSFT). I missed the boat on NVDA, as I was looking at them as a GPU company. When the A.I. boom hit and NVDA rose, I just never got aboard, and shares just keep climbing higher. I have never a company accelerate their profitability or revenue growth the way NVDA has, and after creating my own profitability models, I decided to start buying even if I was starting the position at a temporary top. Currently, my cost basis is $123.87, and I am not done adding to the position. While I missed out on one of the best gainers in any 5-year period, I think NVDA can go much higher over the next 5-10 years, and I don't mind being late to the party. The risks to investing in Nvidia This may shock many investors, but valuation isn't a risk factor to me at the moment. NVDA looks to have grown into the multiple being assigned to it and trades at 48 times 2024 earnings and 30.45 times 2026 earnings. With the amount of growth that NVDA has generated and the amount of earnings growth being forecasted, I feel that NVDA could actually be cheap, and I'll get into that in the next section. My risk factors revolve around demand and innovation, and we won't know how these factors impact NVDA until the story unfolds. Years ago, Apple (AAPL) moved away from NVDA GPUs in its products as it moved to fully designing their silicon. First, AAPL moved away from Intel (INTC) for its CPU, then Advanced Micro Devices (AMD), and NVDA for its GPUs. Currently, anyone who wants to train their LLMs (large language models) on the largest scale is dependent on NVDA. The first risk factor revolves around innovation. AMZN, GOOGL, META, and Microsoft are all designing their own A.I. chips to reduce their dependence on NVDA. If they are successful is anyone's guess, but they have the capital and engineering to accomplish their goals. If this does occur, it will negatively impact NVDA because these are the companies allocating the most capital to CapEx in the market. If the day comes when NVDA's largest customers can augment their current data center infrastructure with homegrown chips, it could be catastrophic to their forward revenue and earnings projections. The next risk factor for me is demand. Currently, we are experiencing a super cycle as it's a race to build infrastructure. Not every company has a blank check like GOOGL, AMZN, MSFT, or META and won't be in a position to upgrade with each new GPU that NVDA produces. At some point, companies will need to depreciate and monetize their assets. We could be in a situation where NVDA is pulling so much growth forward that orders could flatten out or decline over the next several years. The first risk of innovation could also impact demand because INTC or AMD could come out of nowhere with chips that can compete with NVDA or be good enough to offer a lower-end option as an alternative. Also, if innovation from a use case level tapers off, there may not be a need to scale data centers at the rate we have seen over the past 2 years, and it could take time for the need for enhanced chips to create a new wave of demand. I decided to start buying NVDA at the upper range because shares may actually be trading at a good value despite the massive run There is an old saying: better late than never. I can't get everything correct, and while I have been a shareholder of many companies for a long time, I missed a massive run in NVDA. Rather than sitting on the sidelines waiting for shares to retrace, I tore through the financials and determined that this was a stock I wanted to invest in despite the easy money being made. What if I told you there was a company that was generating $79.77 billion in revenue annually, operating at a 75.29% gross profit margin and a 53.4% profit margin? Then I said their revenue grew by 125.85% YoY last fiscal year, and in the trailing twelve months (TTM) their revenue has increased by 30.95% YoY after just the first quarter, and based on the projections, the revenue is expected to grow by 97.34% throughout this fiscal year? I would be shocked, but those are the facts regarding NVDA. When I build a profitability model, the current valuation looks exciting to me. I want to preface this section by saying that NVDA has $31.44 billion in cash and short-term investments on the books, with an additional $1.75 billion in long-term investments. NVDA only has $8.46 billion in long-term debt and $11.24 billion in total debt on the balance sheet. NVDA is a cash-rich company that is producing more profitability than they know what to do with, and the best part is that it is only allocating $1.19 billion toward CapEx. All of their R&D is covered in their operating expenses, and they have been able to scale the business and produce this level of profitability with a minimal capital allocation toward CapEx. In the TTM, NVDA has generated $79.78 billion in revenue. After their cost of revenue is accounted for, NVDA's gross profit was $60.06 billion, which is a 75.86% margin. After total operating expenses, NVDA was left with $47.74 billion, which placed their operating margin at 59.85%. After taxes and interest expenses, NVDA produced $42.6 billion in net income, with a profit margin of 53.4%. I can't think of another company that I follow with operating and profit margins this high. The margins have also scaled rather than decreasing as revenue grew. In the 2022 fiscal year, NVDA had a gross profit margin of 56.93%, which grew to 72.72% in 2023 and is currently at 75.29%. From a profitability standpoint, NVDA had a profit margin of 16.19% in 2022, and it grew to 48.85% in 2023 before it scaled to 53.40% in the TTM. NVDA's financials look like an anomaly to me, and the analyst community doesn't see the trend reversing anytime soon. I normally look at the forward EPS estimates and price to FCF when I am evaluating a company, and I will do that in this article for NVDA. Prior to comparing NVDA to its peer group, I built a financial model based on my assumptions, and the results were shocking to me. NVDA recently conducted a 10-1 split, and its share count reached 25 billion at the end of the 2023 fiscal year. NVDA recently repurchased 400 million shares in Q1 of 2024, leaving them with 24.6 billion shares. If the analysts are correct in their forward revenue estimates, then NVDA will generate $120.23 billion of revenue this year and expand its revenue growth to $188.01 billion in 2026. If I assume that NVDA doesn't continue to scale its profit margin higher but maintains a 50% margin which is 3.4% less than what it is in the TTM, they would produce $60.12 billion in net income this year and $94.01 billion in 2026. This would work out to $2.44 of profit per share this year, and $3.82 in 2026. NVDA would be trading at a 55.45 forward P/E based on 2024's profitability, and a 35.46 forward P/E based on 2026's profitability. Now, what happens with all of the cash that NVDA is producing? In the annual report for 2023, NVDA disclosed that as of January 28th, 2024, the board authorized an additional $22.5 billion of share repurchases on top of the existing $25 billion that was authorized in August 2023. NVDA utilized $9.7 billion of their first $25 billion allotment and still has $37.8 billion authorized for repurchases. NVDA could generate $60.12 billion in net income this year and authorize additional buybacks. Hypothetically, if NVDA allocates 70% of its profitability this year toward buybacks, it would amount to $42.08 billion in capital. At an average price of $150, NVDA could repurchase 280.54 million shares. This would bring their share count down to 24.32 billion and adjust my forward P/E estimate for 2024 to 54.82 from 55.45. If NVDA allocated 70% of their 2025 profitability toward buybacks, they could repurchase $56.47 billion worth of shares. If they allocated this at an average price of $175 per share, they could repurchase 322.66 million shares and bring their shares outstanding down to 24 billion. This could bump their forward EPS in 2025 to $3.36 per share and place their forward P/E at 40.21 rather than 41.33. In 2026, NVDA could generate $94 billion in net income based on a 50% margin, and a 70% allocation rate would allow them to repurchase $65.80 billion worth of shares. If NVDA's average price per share was $200, it could repurchase 329.02 million shares and reduce the share count to 23.67 billion shares. This could increase their EPS to $3.97 per share and reduce their 2026 forward P/E from 35.46 to 34.12. I am shaving a few percent off NVDA's margin in the TTM and modeling out through 2026 based on what could happen. I am using the analyst projections for revenue and making assumptions on how much capital NVDA may allocate toward buybacks based on what they have done over the past year. I believe that I could be conservative in my model, and that NVDA could beat earnings estimates and repurchase more shares than I am modeling for. NVDA may also repurchase shares at a lower average price point than I am estimating. The forward potential is exciting, and I believe that based on what NVDA has achieved, its current margins, and what could occur, shares are inexpensive today. Normally, I wouldn't be purchasing at all-time highs, but I have put a lot of time into studying NVDA's numbers, and I am happy to be late to the party rather than not participating because the run could be far from over. How NVDA is comparing to the rest of the Magnificent Seven I always like to compare companies to see how the market is valuing them. NVDA is leading the Magnificent Seven, so rather than compare it to other semiconductors, I am comparing them to AAPL, GOOGL, META, TSLA, AMZN, and MSFT. Only TSLA and AMZN are expected to grow their EPS over the next 2 years by a larger percentage than NVDA. The Magnificent Seven as a peer group is expected to grow its EPS by 44.41% over the next 2 years, while NVDA has 57.88% of EPS growth on the horizon. NVDA trades at 31.3 times 2026 earnings based on the analyst consensus estimates, while AAPL trades at 29.27 times and MSFT trades at 29.77 times. When I look at the projections, I think NVDA is fairly valued and could grow into the valuation with some earnings beats and higher forward guidance. On a price-to-free cash flow (FCF) valuation, NVDA looks expensive, as they have generated $39.33 billion of FCF in the TTM. NVDA is currently trading at 84.37x their FCF, while most of the Magnificent Seven trade below 50x. Excluding TSLA, the peer group average trades at 45.95x their FCF, with META trading at the cheapest valuation at 27.39x its FCF. When I think about how NVDA is expected to scale their profitability, it could very well generate $90 billion in FCF during the 2026 fiscal year. If I plug in $90 billion, NVDA would have a price to FCF of 36.88 times, which is significantly less than AAPL And MSFT, which trade at 45.5x and 49.1x their FCF. I don't think it's unreasonable that if NVDA does accomplish what the forward projections indicate that the price to FCF will grow into the valuation and continuously trade at a premium compared to most of the Magnificent Seven. I could see NVDA scaling its FCF and growing into a multiple of 45-50x, which would place their market cap at $4.05 - $4.5 billion in 2026. I think there is still a significant upside in NVDA based on their ability to scale profitability. Conclusion NVDA has produced the largest amount of appreciation I have witnessed over a 5-year period. While replicating these results over the next 5-years isn't probable, I think there is still upside waiting to be unlocked. There are some projections that Nvidia will ship 1.5 million A.I. server units per year by 2027 as companies allocate more capital toward building out their A.I. infrastructure. Nvidia just announced the Blackwell product line, and there should be no shortage of customers as companies such as MSFT allocated $14 billion to their CapEx and leases to support scaling its cloud demand. I have never seen profitability margins this high from a company that is generating $80 billion in annualized revenue. Based on my assumptions and the ability to deploy tens of billions in buybacks on an annual basis, I think that the rally in NVDA can be extended for quite some time. I am late to the party because I was looking at NVDA incorrectly, but I have been buying and plan on continuing to build my position into earnings. I am focused on growth and dividend income. My personal strategy revolves around setting myself up for an easy retirement by creating a portfolio which focuses on compounding dividend income and growth. Dividends are an intricate part of my strategy as I have structured my portfolio to have monthly dividend income which grows through dividend reinvestment and yearly increases. Feel free to reach out to me on Seeking Alpha or https://dividendincomestreams.substack.com/ Analyst's Disclosure: I/we have a beneficial long position in the shares of NVDA, TSLA, AMZN, GOOGL, META, AAPL either through stock ownership, options, or other derivatives. 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. Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. The investments and strategies discussed within this article are solely my personal opinions and commentary on the subject. This article has been written for research and educational purposes only. Anything written in this article does not take into account the reader's particular investment objectives, financial situation, needs, or personal circumstances and is not intended to be specific to you. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters. Just because something may be an enticing investment for myself or someone else, it may not be the correct investment for you. 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: Long-Term Implications Of The Silo AI Acquisition

I'm recommending a Buy, but with the caution that the stock is likely to go through a quasi-cyclical growth pattern. When you're in second or third place in a race and the front-runners just seem so far away, there are only two ways to close the gap. The slow way is to gradually build up your speed until you can exceed that of the runners ahead. The fast way is to get a booster shot of something that will propel you forward, toward them and hopefully beyond. The first way is usually more sustainable, but the second way is far more efficient. Even though your "booster" may or may not work, when you're playing a high-stakes game against masters of their craft, it's the only long shot that could work in your favor. Besides, if it does work, it can become as sustainable as the organic way to the front of the race. I believe Advanced Micro Devices, Inc. (NASDAQ:AMD) has been taking this route for the past year or so with its multiple acquisitions. Arguably the most impactful one -- their "booster" shot -- will be the recently announced acquisition of Silo AI, a European powerhouse in the realm of AI software and model development and deployment. Today, I'm hoping to look at the potential impact of the Silo AI acquisition on AMD's attempt to close the gap with the AI GPU leader, Nvidia Corp. (NVDA). Does this strengthen my bull case for AMD that I initiated in March with my article on the YieldMax AMD Option Income Strategy ETF (AMDY)? It certainly does. Does it allow me to reiterate my positive sentiment on AMD despite the stock being down more than 5% since then? It certainly does. Does it hurt my thesis that NVDA gained more than 50% since that article, with AMD losing ground and not even being able to keep up with SP500? No, it certainly does not. Why? My biggest reason is that AMD already has a powerful product in the Instinct MI300X GPU. Along with driving $2.3 billion in first-quarter revenues for the data center segment, that's already a good use of the first method of catching up with the leader. It's a slow, organic process, but we're seeing tangible results. Coupled with the booster shot that Silo AI now represents, I think AMD has a real shot at significantly closing the gap with NVDA in terms of real-world AI deployments, if not in the data center GPU space. In other words, it's taking a different tack by focusing on fortifying its strengths in AI software and real-world deployments. To be clear, there's no doubt that real-world performance differences between the MI300X and NVDA's Blackwell are significantly tilted in the latter's favor. That allows NVDA to maintain its data center GPU dominance. I'm not arguing that point. My contention is that the combination of leveraging AI software (via Silo AI) alongside its proprietary hardware will help it accelerate quickly. It may not close the gap with NVDA for several years, or ever, but what it's likely to do is establish AMD as a clear #2. That, in itself, would be a major achievement. This is not to dismiss Intel's (INTC) Gaudi 3 release this quarter, but I don't see it as a serious threat to the MI300, let alone the B200 that ships later this year. AMD has attempted virtually everything under the sun to beat CUDA's dominance. Its open-source ROCm didn't have the kind of widespread adoption that AMD had hoped for. On the hardware side, its MI300 series will likely be overwhelmed when NVDA starts shipping its B100s and B200s at the end of this quarter or in Q4. Production is already underway, and assuming everything is on schedule, that spells trouble for AMD. Granted, AMD did have a good lead time with the MI300 series ahead of Blackwell-architecture-based shipments from the market leader, but that's very likely going to melt away in the next couple of quarters. Moreover, one of the key reasons AMD made significant gains in Q423 and Q124 was the fact that Hopper chip supply was constrained. Interestingly, in its Q424 earnings call back in February, NVDA also said the same of its Blackwell hardware: We are delighted that supply of Hopper architecture products is improving. Demand for Hopper remains very strong. We expect our next-generation products to be supply constrained as demand far exceeds supply. - NVDA EVP & CFO Colette Kress. More recently, at the Q125 earnings call, that point was reiterated: While supply for H100 grew, we are still constrained on H200. At the same time, Blackwell is in full production. We are working to bring up our system and cloud partners for global availability later this year. Demand for H200 and Blackwell is well ahead of supply, and we expect demand may exceed supply well into next year. - NVDA EVP & CFO Colette Kress. That brings us to why Silo AI is a key acquisition for AMD. I believe this represents an indirect attack on NVDA's end-user; not the data center operators, but their clients. That's where AI revenues are generated for cloud giants like Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOG, GOOGL), so it makes strategic sense to go directly to the source of revenues and acquire a key player in that space. And here's the kicker: "Silo AI has been a pioneer in scaling large language model training on LUMI, Europe's fastest supercomputer powered by over 12,000 AMD Instinct MI250X GPUs," said Dr. Pekka Manninen, Director of Science and Technology at CSC-IT Center for Science, Finland. "Together with university collaborators, they have trained state-of-the-art open-source models for EU languages, such as the Nordic Poro and Viking models. We have collaborated extensively with the team in optimizing the software layer, allowing for efficient training of AI models on LUMI." Silo's experience with training on AMD's GPUs and EPYC processors already gives it a head start, as CEO and co-founder Peter Sarlin stands on the verge of taking the reins at AMD's newly formed Artificial Intelligence Group. Together with their roster of elite clients, among whom are none other than Nvidia, Silo AI will give AMD the sorely needed booster shot it needs at this time. Combine that with ongoing supply constraints for NVDA, and what you have is a recipe for a short-term burst in speed that's crucial to AMD's position in the AI solutions race. The roughly $665 million (€613.7 million) valuation for Silo AI obviously includes a control premium, but it's not a stretch to say that it will be worth far more to AMD when synergies are fully realized. With the kind of expertise that Silo AI's team will bring to AMD's AI hardware and existing AI software efforts, this acquisition is indeed a very strategic one for the chipmaker. Will this acquisition help AMD overtake NVDA eventually? No, it won't, at least, not in the medium term and certainly not in the near-term. However, there's one thing it will most certainly do, and that's create a new revenue stream from deployed AI solutions outside its core hardware sales. All of AMD's reporting segments -- data center, client, gaming, and embedded -- essentially generate revenue from hardware sales, with a small portion coming from IP licensing and sales. For the first time, we could see a new line item being introduced into the mix, and the bulk of that is going to come from its AI Group. The acquisition is expected to close later this year, and we'll eventually see the coming to fruition of AMD's long-time goal of being an end-to-end AI solutions provider. AMD has ample cash on its books to fund the all-cash acquisition, and the company's levered free cash flow in the last reported quarter alone is sufficient to cover this cost. It's a small price to pay for the massive potential gains from the synergies that this business combination offers. Again, will it move the needle for this $300 billion enterprise against its gigantic $3.3 trillion competitor and AI hardware market leader? Not so much. However, the timing of NVDA's Blackwell shipments against strong Instinct and EPYC sales that are filling the demand-supply gap for enterprises around the world is a clear sign that AMD is slowly but surely reducing the distance between itself and the incumbent front-runner. To me, that's as bullish an argument as I need to recommend a Buy for AMD. Please recall that my investment horizon is typically in years and decades, not months. This story is going to play out very well for AMD eventually, and each time AMD makes a right move and NVDA makes a wrong move, that distance will close by that much more. NVDA's success is a paradox right now. On the one hand, demand for its products will remain very high for the foreseeable future, so most investors are naturally hesitant to get off the train while it's moving so fast. On the other, these same investors are well aware (but are they, really?) that such demand is unsustainable in the long term. The supply crunch that it keeps facing with its newer products only allows players like AMD to quickly fill that vacuum and generate billions in sales. However, that's cyclical right now because its data center and other hardware revenues are dependent on market conditions and, more pointedly, the demand gaps that NVDA leaves wide open. You can see this from AMD's revenue movements across Q423 and Q124, when total revenues were down by 11% on a sequential basis. I believe the reason for that is reflected in the supply constraints for H100 and H200 easing up over the first quarter, as NVDA noted in its earnings call. Those constraints were fully in place when AMD launched its MI300 series, so that was able to fill the demand gap initially, but by the time Q124 rolled around, the demand flowed back into NVDA's offerings. I think that's going to be a repeated story over the next few product releases, which also means NVDA is feeling the heat from AMD's products -- at least, from a lost opportunity perspective, if not an absolute one. In closing, while I'm recommending a Buy for AMD at this time, my thesis will play out over several years, possibly into the next decade. We will see this continued cyclical revenue performance over and over again, and every time AMD fills the demand gap that NVDA leaves behind, the stock is likely to go up. Conversely, whenever AMD has a soft quarter with minimal YoY growth or even a sequential drop, as it did in Q124, we're going to see a sideways movement with the risk of downward selling pressure. That's why it's crucial to watch any news coming from NVDA, especially updates on product shipments, and definitely their Q225 earnings call next month. AMD announces its own Q2 results at the end of this month, but in the absence of strong sequential revenue growth, investors shouldn't expect a sudden surge in price. We already saw such an AMD surge on the Silo AI deal announcement. It was short-lived, but the stock regained some of that lost momentum in Thursday's trading. I see that as a positive. Investors are slowly realizing that the Advanced Micro Devices, Inc. synergies from Silo AI represent long-term upside potential, and I agree with that view.

AMD: Building An AI Ecosystem (NASDAQ:AMD)

Since I last covered Advanced Micro Devices, Inc. (NASDAQ:AMD) in April, the stock has barely outstripped the market, increasing by 13.49%, while the S&P 500 (SP500) increased by 10.33%. Looking at their biggest competitor, NVIDIA Corporation (NVDA), this company increased by roughly 50% within the same timeframe. Despite (what I believe to be is) their 2nd place rating in the AI-chip market, AMD has obviously not been able to keep up with Nvidia's share price. Although they outperformed the market, I believe their stock should have increased at a rate more like their competitor. I suspect this is due to the belief held by some investors that Nvidia has a runaway lead in the AI GPU race. However, there is so much more that deserves to be factored in than just GPUs and CUDA. AMD understands that the AI chip race will be centered around the combination of CPUs on computers, and the use of multiple GPUs and servers, not just enterprise GPUs. Nvidia technology can really only operate well with other Nvidia technology (hence CUDA), and AMD does not think this centralization around one company is the future of AI. They believe that it is an ecosystem, with a collection of technology from multiple companies that creates the bedrock of future AI model developments. However, the market has not yet come to this same conclusion, and I believe this is a possible reason for their undervaluation. This undervaluation can be seen in their valuation metrics. The forward PEG ratio for AMD stands at 1.16, significantly lower than the sector median of 2.06, indicating that the market may not fully appreciate AMD's growth potential. To build an edge in the AI market and develop an AI ecosystem, AMD recently acquired Silo AI for $665 million. This acquisition integrates advanced AI technologies, such as large language model training and AI model development, into AMD's product lineup. This move strengthens AMD's AI production and positions them to better compete with Nvidia's dominance in the AI market. While AMD's stock has underperformed relative to Nvidia and barely beat the market, I believe the company's focus on building a comprehensive AI ecosystem is the key to success. Once the market realizes this, I believe we will see dramatic growth not only in operating results but also in shares. With this, I still believe AMD is a strong buy. As I mentioned above, since my coverage of AMD in April, the company has barely outstripped the market. Considering AMD is the second-best AI chip producer, this just doesn't seem right. It is clear the market is doubting their future earning potential as their PEG ratio is well below the sector median (they doubt once their true earnings results come out they will perform below forward expectations). I believe this is misguided and overly bearish. With this, I think follow-up coverage is necessary. The purpose of this article is to explain how AMD is constructing an AI ecosystem that the market doesn't yet see. AMD's approach to the AI revolution goes beyond simply developing powerful GPUs for enterprise servers. The company's strategy entails creating a diverse range of AI-enabled hardware, including GPUs, CPUs, and other processors, designed to cater to both personal work computers and servers. This holistic approach is indicative of AMD's understanding that the future of AI lies in an integrated ecosystem rather than concentrated components on cloud mainframes. With this, there is a growing trend that companies are seeking more control over their computation process (more on-premise compute), and this means that they are looking for technology that they can control locally from employee's computers and servers. AMD can help fit this increasing demand. With this, AMD has been working on a collection number of projects that knit into this ecosystem. For example, during the AMD Investor Conference, Jean Hu, AMD's CFO, mentioned one of their new products stating: ...the first is AIPC, because it is a consumer show we actually announced about our right in AIPC 300 series. It's for premium, like actual thing notebook. It actually has the GP and the latest of the GPU and the NPU, which are all on one single chip. The top Microsoft one is 40 pops -- we actually have 20% more tops, we are the only one who reached the 50 pops to really power the Copilot plus the AIPC. So it's one of the really amazing product. It's going to be available in July - Investor Conference. This is a great combination of compute. AMD is rising above the current industry standards with Microsoft Corporation (MSFT) AI PCs. This is powerful. She then went on to discuss various new products in the works: We also announced our Ryzen 9000 desktop processors. It also has leadership of performance in AI inferencing. So that's on the PC side. Then on the data center side, we actually previewed our next-generation Gen 5 EPYC CPU servers, codenamed Turin, to extend our leadership in both performance per watt and performance per dollar significantly - Investor Conference. I believe it is clear that AMD is developing new technology at a rapid pace, which is critical in the AI market. They are producing various technology innovations, not just one like some of their competitors, hitting both major markets, PC, and server. The company acknowledged this during the conference, with Jean Hu stating: AMD is the only company who have end-to-end solutions covering the CPU, GPU, and MPU from a data center and then to PC and eventually our embedded business, which is Xilinx FPGA business, we do think edge AI will happen in the future. So we have a broad portfolio to cover everything - Investor Conference. I believe if the trend continues of companies wanting more control and access to their AI systems (more on-premise servers), they will look towards AMD for help. Back in February, I mentioned AMD's 2.5D/3D technology. This technology will be key here, as it allows AMD to incorporate any chiplets into one package, increasing performance and space optimization while decreasing power consumption. This will help them build the best Ecosystem of AI chips. AMD's acquisition of Silo AI for $665 million adds to this. The startup helps them with their rapid development of new technology. For instance: [this acquisition will allow AMD access to Silo's renowned] team of AI scientists and engineers who specialize in creating customized AI models and solutions whose expertise spans various sectors, including cloud computing and embedded systems -Press Release. In addition to this, AMD "will now be able to offer not only hardware, but also software for enterprise customers." As I mentioned before, software is a considerable part of this AI ecosystem. This acquisition helps fill that. AMD acknowledged the benefits of this acquisition during a statement where senior vice president, Vamsi Boppana, stated: Across every industry, enterprises are looking for fast and effective ways to develop and deploy AI solutions for their unique business needs...silo AI's team of trusted AI experts and proven experience developing leadership AI models and solutions, including state-of-the-art LLMs built on AMD platforms, will further accelerate our AI strategy and advance the build-out and rapid implementation of AI solutions for our global customers. -Silo AI Acquisition Press Release. Having access to Silo's expertise and solution will be huge for AMD as it will open new markets for them to address, helping them attempt to gain a competitive edge over competitors like Nvidia. While this article is not meant to be an earnings preview, the market is downgrading their earnings expectations, despite what I believe to be a clear notion that the AI revolution is accelerating in many aspects. Over the past three months, there have been 30 downward revisions for AMD's forward EPS estimates, compared to only 9 upward revisions. The consensus EPS estimates for AMD show a mixed picture, with a slight decline (on a 1-month basis) in the near term (December 2024) to $3.50/share, but significant growth expected in the coming years, with the EPS reaching $7.30 by 2026. Revenue estimates also reflect this cautious outlook. There have been 28 downward revisions compared to 13 upward. The consensus revenue estimate for December 2024 is $25.54 billion, marking a 12.60% year-over-year growth. In this case, the estimate has decreased by 0.08% in the past month and 1.04% over the past six months. Despite these downward revisions, the longer-term revenue growth projections remain robust, with significant increases expected through 2026 to $38.70 billion. As I mentioned above, this cautious market sentiment comes at a time when the AI revolution is accelerating in many aspects. During the AMDs session at the BofA Securities Conference, CFO Jean Hu stated: the reason we are accelerating our roadmap is because we see the demand continue to exceed our expectations. We see customers need two suppliers for this very, very large market - BofA Conference. This literally runs contrary to the concept of downgrading forward EPS estimates. Demand is beating even the biggest optimists' expectations (the company insiders). Despite what, I believe, is obvious heightened demand for AMD's technology, the market isn't pricing this in. I think these earnings revisions are very misleading of the company's current performance. It represents a unique opportunity, however. I believe one of the key valuation metrics to consider for the chipmaker is their forward non-GAAP PEG ratio. Their metric currently stands at 1.16 which is 43.50% below the sector median of 2.06. I mentioned previously how this doesn't match up with the growth of the AI market. Based on the quotes from the BofA conference, the Investors conference, and the acquisition of Silo, I think this is a severe undervaluation. I strongly believe earnings expectations are moving in the wrong direction, which only means their forward PEG ratio may be even lower. To this point, their below-sector median PEG ratio just doesn't make sense to me given their EPS growth. AMD's forward EPS GAAP growth is 59.04%, 716.08% higher than the sector median of 7.23%. The projections for EPS growth support this narrative as well, considering that by 2028, the EPS is supposed to hit $10.78/share, growing from the predicted December 2024 value of $3.50. The difference between these two EPS values, in my opinion, is a massive disparity given the advancements in technology coming from AMD and high demand. If AMD's PEG were to converge on the sector median, this would represent roughly a 77.6% upside. Once the market realizes AI is an ecosystem, I think we will see massive growth in operating performance (and hopefully in share price) I believe AMD's growth prospects are promising, but it's not a clean-cut story. The biggest concern of mine is the potential slowing of AI demand in some pockets, which could affect AMD's growth. Some banks like Goldman Sachs have called attention to the AI trade, concerned that the price action has largely gotten ahead of itself. With this, the competitive landscape, of course, also poses a risk. Despite their ecosystem advancements, AMD is still underperforming industry giant Nvidia for market share. Nvidia holds a dominant position in the AI GPU market with their CUDA-based technology, which allows software to link a series of GPUs together so they can perform computations in sync and allows them to perform computations faster together. AMD's acquisition of Silo AI is a strategic move to challenge Nvidia's dominance, but integrating and leveraging this acquisition effectively will be crucial. Despite this, I'm not concerned. I think the market's outlook on AMD actually remains too bearish and a lot of the Goldman AI concerns are baked in. Not only because of the undervaluation when it comes to their EPS estimates, but also due to AMD barely outperforming the market and their below-sector median PEG ratio. I think there is a real potential that AMD will surprise to the upside. While the company has underperformed their biggest competitor Nvidia and barely beat the market since my last report, I continue to be firm that I just don't think the market has arrived at the same conclusion: AMD is making more than just chips, they are making an AI ecosystem. While there is a high P/E risk (of course), and risk of slowing growth, I am not concerned. Based on the qualitative projections AMD has announced, I am confident they will not only meet, but beat the market's expectations. I continue to believe AMD is a strong buy.

Downgrade Alert: AMD's Uphill Battle Against Nvidia Is Getting Much Steeper (NASDAQ:AMD)

Truth is, Nvidia's extensive AI platform is running circles around AMD's technology. Advanced Micro Devices, Inc. (NASDAQ:AMD) was widely expected to be the "Number 2" winner in this AI race among the semiconductor stocks, right behind market leader NVIDIA Corporation (NVDA). Although lately, Broadcom Inc. (AVGO) stock has gained prominence as the preferred alternative AI play to Nvidia, while AMD struggles to match up. In the previous article, we discussed how AMD could be a noteworthy winner in the AI race amid upbeat developments around its ROCm software stack, which is meant to challenge Nvidia's well-established CUDA software layer. The accompanying software ecosystems around each company's GPUs indeed play an essential role in augmenting the value proposition of their chips, influencing future sales growth potential. In this article, we will be assessing whether AMD is making any substantial progress in catching up to Nvidia. With Nvidia continuing to fire on all cylinders, AMD's "progress" is underwhelming, calling for a rating downgrade to a "hold." Analysts at Citi recently put out a note saying: we still expect AMD to get a 10% share of the data center GPU market or roughly $15.0 billion Although, this expectation is becoming increasingly difficult for AMD to live up to. The AI infrastructure build-out is booming, with customers buying GPUs hand-over-fist. While arch-rival Nvidia has been beating earnings expectations and raising guidance for several quarters in a row, the demand outlook for AMD's chips remains underwhelming. On the Q1 2024 AMD earnings call, CEO Lisa Su shared that: based on our expanding customer engagements, we now expect data center GPU revenue to exceed $4 billion in 2024, up from the $3.5 billion we guided in January. This guidance raise was not high enough to excite investors, as the street was looking for guidance north of at least $5 billion. And in case the bulls believed that the underwhelming guidance was due to supply chain constraints, and not a demand-side issue, the following response from CEO Lisa Su to an analyst question on the call quickly threw cold water on that hope (emphasis added): From a full-year standpoint, our $4 billion number is not supply capped -- I'm sorry, yes, it's not supply cap. It is -- we do have supply capability above that. So this confirmed that the underwhelming $4 billion guidance was definitely due to underwhelming demand. Contrarily, CEO Jensen Huang proclaimed on Nvidia FYQ1 2025 earnings call that: Demand for H200 and Blackwell is well ahead of supply and we expect demand may exceed supply well into next year. This is seriously concerning, as it signals that AMD is struggling to create hype around its GPUs in the midst of a major AI infrastructure boom. Now the guidance number is likely to be a conservative estimate so that AMD can beat earnings expectations. But Nvidia has been able to offer jaw-dropping guidance numbers, and still deliver blowout results that handily beat those expectations. Furthermore, despite AMD's disappointing guidance, analysts could still be overestimating GPU sales projections, as research from Morgan Stanley pointed out: The trouble we have is that investor expectations still anchor on supply chain-based forecasts that point to a number north of $6bn (400-500k units), despite continued messaging from the company that it takes time to build an ecosystem around a new solution, and that they would be aggressive with builds. Indeed, it takes time to build a software ecosystem around hardware products. It took Nvidia almost two decades to build the CUDA software stack into what it is today. On the last earnings call, Lisa Su briefly touched upon ROCm: We also released a major update to our ROCm software stack that expands support for open source libraries including VLLM and frameworks including Jax, adds new features like video decode, and significantly increases Generative AI performance by integrating advanced attention algorithm support for sparsity and FP8. While these growing capabilities are certainly steps in the right direction, what is really needed to support the bull case for AMD are statistical insights regarding the growth of ROCm adoption. These would include the number of developers who are developing applications for the software stack, or the number of applications that have been built so far that are specifically accelerated for AMD's GPUs. The lack of such statistical insights puts into question whether AMD is making any meaningful progress in catching up, especially given that Nvidia releases updated growth statistics for its CUDA platform every quarter. Even if AMD is unable to provide competitive statistics for ROCm at this stage, any commentary around the growth in developer activity around the software stack would have been encouraging. Now this does not necessarily mean that AMD's ROCm will never reach a competitive level of course, but the uphill battle is certainly getting steeper. A key bullish argument among Wall Street analysts for AMD stock is that the company's chips offer strong "inferencing" performance, and CEO Lisa Su repeatedly highlighted this competitive factor on the last earnings call: Our partners are seeing very strong performance in their AI workloads. As we jointly optimize for their models MI300x GPUs are delivering leadership inferencing performance and substantial TCO advantages, compared to H100. For instance, several of our partners are seeing significant increases in tokens per second when running their flagship LLMs on MI300x, compared to H100. ... Right now, I think MI300x is in a sweet spot for inference, very, very strong inference performance. I see as we bring in additional products later this year into 2025, that, that will continue to be a strong spot for us. Despite the chief executive's repeated claims that the MI300x GPUs can outperform Nvidia's H100 chips when it comes to inferencing, Nvidia is still selling more hardware for inferencing than AMD. In fact, on the Q4 2024 Nvidia earnings call, CEO Jensen Huang had revealed that: We estimate in the past year approximately 40% of data center revenue was for AI inference. Nvidia's data center segment generated $47.5 billion in FY2024, which would imply that $19 billion of those sales went towards "inferencing" computing workloads. If AMD's hardware truly has an edge over Nvidia's technology when it comes to inferencing, then its guidance numbers should be much higher for GPU sales and data center revenue overall, with customers buying MI300x chips hand-over-fist. Furthermore, while the CEO's claim that "partners are seeing significant increases in tokens per second when running their flagship LLMs on MI300x" is encouraging, Nvidia's CEO was able to back up similar claims with meaningful statistical insights into Return-on-Investment potential, during the previous earnings call: using Llama 3 with 700 billion parameters, a single NVIDIA HGX H200 server can deliver 24,000 tokens per second, supporting more than 2,400 users at the same time. That means for every $1 spent on NVIDIA HGX H200 servers at current prices per token, an API provider serving Llama 3 tokens can generate $7 in revenue over four years. So if AMD wants to convince investors that they can take share from Nvidia in the inferencing market, we will need to see more performance statistics to back up any bullish claims. Beyond selling chips to Cloud Service Providers (CSPs), the greater opportunity may lie in selling GPUs directly to enterprises. The increasing concern companies have surrounding data privacy/security risks is making many enterprises reluctant to migrate completely to public cloud platforms, and instead are seeking ways to leverage the power of generative AI through on-premises solutions. Indeed, enterprises' aversion to cloud migration is creating a great opportunity for the semiconductor companies to sell GPUs to them directly. These will be used in companies' own data centers on-premises, thereby subduing the risk to AMD's and Nvidia's future sales growth prospects from CSPs like Amazon AWS and Google Cloud offering their own in-house chips. CEO Lisa Su proclaimed on the last earnings call that: For the enterprise, we're working very closely with Dell, HPE, Lenovo, Supermicro, and others as multiple MI300x platforms enter volume production this quarter. In addition, we have more than 100 enterprise and AI customers actively developing or deploying MI300x. The fact that over 100 enterprise customers are buying AMD's GPUs is certainly a positive signal. However, the question is, to what extent are they deploying MI300X as part of their entire GPU portfolio? In other words, how many chips are they buying from AMD? While AMD is boasting about over 100 enterprise/ AI customers buying its GPUs (which is just one component of data center computing systems), Nvidia is proclaiming the fact that they are building over 100 full-stack AI factories (data centers). Nvidia also provided insights into the number of their chips used to build GPU clusters in AI factories, while AMD has offered no insights into the volume of orders from these 100 enterprise and AI customers. Here's CEO Jensen Huang's remarks from Nvidia's last earnings call (emphasis added): Large clusters like the ones built by Meta and Tesla are examples of the essential infrastructure for AI production, what we refer to as AI factories. These next-generation data centers host advanced full-stack accelerated computing platforms where the data comes in and intelligence comes out. In Q1, we worked with over 100 customers building AI factories ranging in size from hundreds to tens of thousands of GPUs, with some reaching 100,000 GPUs. Nvidia has extensively planned out how it will monetize this AI revolution at every technology layer and is building large-scale computing solutions in the form of entire data centers (or as they like to call them, "AI factories"). We covered this in-depth in a recent article covering Nvidia's proactive positioning to capitalize on the AI software opportunity ahead, beyond just selling hardware solutions. On the other hand, AMD is clearly behind the curve, still talking about selling AI chips as an individual layer rather than being able to offer an end-to-end platform solution for AI, the way Nvidia is. Nvidia saw the grander opportunity in data centers (rather than just individual AI chips) way before AMD did. In fact, here's an excerpt from Nvidia's 10k report for 2022, before the AI revolution really got underway (emphasis added): While historically the server was the unit of computing, as AI and HPC workloads have become extremely large spanning thousands of compute nodes, the data center has become the new unit of computing, with networking as an integral part. As a result of anticipating the AI revolution before AMD, Nvidia has built a portfolio of products, both hardware and software, encompassing all that is required for running complex AI workloads. Moreover, Nvidia cannily cross-sells all these solutions together as part of one big HGX supercomputer (consisting of 4 or 8 GPUs clustered together using networking products including InfiniBand and NVLink). The company's executives have repeatedly shared on various earnings calls that data center revenue growth was primarily driven by increasing sales of HGX supercomputers. They don't talk about demand for individual chips, but rather the sales of these all-in-one computing systems. And this is what we need to see from AMD for the company to truly capitalize on the AI revolution in data centers. In response to an analyst question on the last earnings call regarding the importance of selling fully integrated computing systems for AMD to stay competitive, Lisa Su shared that: Timothy Arcuri [UBS Analyst] ... can you just talk about how important systems are going to be in your road map? And do you have all the pieces you need as the market shifts to rack-scale systems? Lisa Su ...as it relates to the overall system integration, it is quite important. It is something that we're working very closely with our customers and partners on. That's a significant investment in networking, working with a number of networking partners as well to make sure that the scale-out capability is there. And to your question of do we have the pieces. We do absolutely have the pieces. I think the work that we've always done with our Infinity Fabric, as well as with our Pensando acquisition that's brought in a lot of networking expertise. And then we're working across the networking ecosystem with key partners like Broadcom and Cisco and Arista, who are with us at our AI data center event in December. So -- our work right now in future generations is not just specifying a GPU. It is specifying, let's call it, full system reference designs, and that's something that will be quite important going forward. So the good news is, that AMD is already working towards building fully integrated computing systems to augment their ability to gain more data center market share. Although the suggested reliance on third-party partners like Broadcom and Arista Networks for building such computing systems is discouraging. AMD will need to prove that they can be a one-stop-shop for AI beyond chips, the way Nvidia has proven to be. And this would just be a first step. Nvidia is not only selling AI supercomputer systems and helping enterprises build data centers/ AI factories, but also offers its own DGX Cloud services. With these, the tech giant assists companies in building customized AI models to be deployed into tailored software applications for end-users, as CEO Jensen Huang proclaimed on the FYQ3 2024 Nvidia earnings call: Our monetization model is that with each one of our partners they rent a sandbox on DGX Cloud, where we work together, they bring their data, they bring their domain expertise, we bring our researchers and engineers, and we help them build their custom AI. We help them make that custom AI incredible. Given the nascence of generative AI as a technology, enterprises need guidance and assistance to help them get their AI strategy right. Rival Nvidia is taking advantage of this by offering their software engineers' expertise alongside the full stack of hardware and software needed to build custom AI. This gives Nvidia an opportunity to lock enterprise customers into the Nvidia ecosystem for the long term, as the software applications would be specifically optimized for running on Nvidia's chips and the NVIDIA AI Enterprise operating system. Thereby making it harder for AMD to encourage enterprise customers to migrate to its own GPUs and software services in the future. Moreover, given the extent to which Nvidia offers end-to-end solutions for running generative AI applications, down from the GPU all the way up to the operating system software layer to run the underlying models, more enterprises could be inclined towards investing in Nvidia's platform over AMD's technology. The market leader offers more far-reaching solutions to enable the eventual deployment of generative AI-powered services, making the uphill battle much steeper for AMD. Now despite the steepening catch-up curve for AMD undermining stock price performance going forward, there are certain factors that could drive the stock price higher, creating upside risks to the bearish thesis. AMD's opportunity to exploit customers' diversification needs: While certain companies such as enterprise software giant ServiceNow, Inc. (NOW) are going all in on Nvidia's AI platform, there will certainly be several enterprises that want to avoid being too dependent on a single supplier, no matter how good its technology. This would prevent giving Nvidia too much pricing power. We discussed earlier how AMD is also striving to build its own fully integrated computing systems that encompass multiple chips and various networking solutions. In the citation earlier, CEO Lisa Su mentioned how AMD is also partnering with third parties like Broadcom, Arista, and Cisco to build wholesome computing systems that also incorporate their networking technology. Now, such computing systems could tap into customers' diversification needs to avoid giving a single semiconductor vendor too much pricing power. Hence, this strategy could potentially help AMD sell more of its GPUs. That being said, to truly win in this AI revolution, AMD should not become too reliant on third-party partnerships and will need to prove to investors that it can build all-encompassing computing systems on its own. As mentioned in a previous article covering Nvidia's HGX supercomputers strategy: Nvidia would want to avoid its GPUs being connected with competitors' hardware solutions on the occasions where customers strive to build their own computing systems..., as it could potentially compromise or obscure the performance attributes of Nvidia's chips. Therefore, increased sales of the HGX systems yield Nvidia more control over the performance of its chips, as they are integrated with Nvidia's own adjacent hardware solutions like NVLink and Infiniband, allowing for optimized performance. This enables Nvidia to better showcase the superiority of its data center solutions working aggregately together, as opposed to when its chips are integrated with competitors' hardware products Similarly, AMD should strive to be as self-reliant as possible, as combining its chips with third-party networking solutions could potentially obscure the performance of its GPUs. AMD fostering long-term sales cycles: Getting enterprise customers to diversify and purchase the company's GPUs is the first step. Keeping them engaged within AMD's growing ecosystem is the next important step to ensure a rolling hardware sales cycle, conducive to recurring revenue for shareholders. AMD has been highlighting how it is fostering tighter relationships with its customers, whereby companies are working with AMD to continuously advance the usability of both the MI series GPUs and the ROCm software stack. Lisa Su explained on the last earnings call: we have the follow-ons to MI300 as well as the next, next generations well in development. I think what is true is we're getting much closer to our top AI customers, they're actually giving us significant feedback on the road map and what we need to meet their needs. Our chiplet architecture is actually very flexible. And so that allows us to actually make changes to the road map as necessary. So we're very confident in our ability to continue to be very competitive. ... Because if you think about it, first of all, the ROCm stack, has done really well. And, you know, the work that we're doing is hand in hand with our customers to optimize their key models. And it was important to get sort of verification and validation that everything would run well and we've now passed some important milestones in that area. The fact that customers are helping AMD develop its chips and ROCm software is a sign of enterprises' need for an alternative to Nvidia's sticky ecosystem. Additionally, customers working in collaboration with AMD is also a sign of long-term commitments, enabling AMD to secure its slice of market share - however small that may be. AMD's data center revenue grew by 80% year-over-year, and company-wide revenue grew 2%, which is really underwhelming considering that rival Nvidia saw data center and overall revenue grow by 427% and 262%, respectively, from a much larger revenue base than AMD. Given the lackluster pace of revenue growth and the weak guidance for GPU sales forecasts, reaching the 10% market share projected by Wall Street analysts could be a big struggle. While AMD is still building its ROCm software ecosystem around its GPUs, Nvidia has already built out a far-reaching end-to-end platform, offering enterprises' CIOs a more visible pathway for executing their corporate AI strategies. Hence, the majority of AI investment dollars could continue to flow towards Nvidia. Until AMD can offer a competitive AI platform of its own, the company's technology will be merely considered a diversification option, with data center customers allocating a few racks to AMD's technology. But note that AMD is not the only diversification play available to enterprises, with competitors like Intel and chip start-ups like SambaNova also vying for market share in the AI chip market. In fact, a recent enterprise survey conducted by investment bank UBS found that: Nearly 70% of respondents indicated they were using some sort of Nvidia hardware as an LLM training platform. Another 21% said they were using AWS Trainium and 4% were using Intel Corporation's (INTC) Gaudi. Statistics like these raise serious questions around AMD's ability to achieve the 10% market share that bulls are projecting for the company. Now with the data center segment comprising the majority of AMD's top-line, making up 43% of total revenue last quarter, it also has the greatest weighting on the company's bottom-line profitability. AMD's net margin fell to 2% last quarter, dwarfing in comparison to Nvidia's mighty 57% margin. A lot of focus is on AMD's pricing power for its AI GPUs to drive profit margins higher. During the Q&A session on the last earnings call, CFO Jean Hu mentioned that: the GPU gross margin right now is below the data center gross margin level... Data center GPU gross margin over time will be accretive to the corporate average, but it will take a while to get to the server level for gross margin. For AMD to truly realize these anticipated profit margin expansions by strengthening pricing power for its AI GPUs, the company needs to step up its efforts in building a moat around its products via an extensive and sticky software layer. Keep in mind also that rival Nvidia has reportedly been lowering the prices of its own GPUs to fend off competition. This could also undermine the extent to which AMD can raise prices for its next-generation chips and deliver profit margin expansion for shareholders. Now in terms of AMD stock's valuation, it trades at almost 53x forward earnings, well above its 5-year average of around 43x, and pricier than arch-rival Nvidia, which trades at less than 50x. Now the market is also expecting higher EPS growth rates for AMD than Nvidia, with each company's EPS FWD Long-Term Growth (3-5Y CAGR) at 43.62% and 33.18%, respectively. So, adjusting the forward PE multiples by the anticipated growth rates would give us a forward PEG ratio of 1.21 for AMD, and 1.49 for Nvidia. Hence, AMD appears cheaper relative to NVDA from this perspective. That being said, Wall Street may be too optimistic regarding AMD's AI chips sales growth potential, given Nvidia's wide lead discussed earlier. Granted, that booming growth in the total addressable market for AI GPUs could support AMD's growth prospects as well to help it achieve the anticipated 43.62% EPS growth rate. However, AMD will need to show considerable progress in building out a full-scale AI platform to augment the value proposition of its chips and carve out a notable piece of market share for itself. Additionally, analysts' higher EPS growth rate projections may also reflect optimism around AMD's "client" segment amid the roll-out of AI PCs, encouraging people to buy new laptops and desktops. But for now, AMD's data center segment continues to have a higher weighting than the client segment on the company's revenue and profitability. With AMD shares trading at almost 53x forward earnings, it is difficult to make a case for buying the stock while market leader Nvidia trades at a cheaper multiple, therefore necessitating a downgrade for AMD to a "hold."

1 Stock-Split ETF That Could Turn $500 Per Month Into $1 Million, With Nvidia's Help

The artificial intelligence (AI) industry is still very young, but investors have already observed its incredible potential to create value. Nvidia, for example, added $2.8 trillion to its market capitalization since the start of 2023 alone. However, AI is evolving quickly, and picking the winners and losers over the long term won't be easy. Buying an exchange-traded fund (ETF) can be a great solution to that challenge for most investors. The iShares Expanded Tech Sector ETF (NYSEMKT: IGM) holds every leading AI stock investors could want, so it's a solid candidate to consider. Image source: Getty Images. The iShares Expanded Tech Sector ETF just completed a stock split The iShares ETF delivered a compound annual return of 21.7% over the last five years, far outpacing the average annual return of 15.7% in the S&P 500 index over the same period. As a result, the iShares ETF was trading above $510 in March, which made it relatively expensive for smaller investors to buy. To fix that problem, iShares executed a 6-for-1 stock split that increased the number of shares in circulation sixfold and organically reduced the price per share by a proportional amount. The stock split hasn't changed the underlying value of the ETF, but one share now trades for under $100, which makes it accessible to a broader investor base. AI could drive further momentum for the fund; here's how it could turn $500 per month into $1 million over the long term. The iShares ETF holds every popular AI stock investors could want Many AI-specific ETFs have hit the market over the last few years, but they typically hold a small number of stocks. The iShares ETF, however, has the benefit of a broad portfolio with 281 holdings representing not only AI, but also cloud computing, enterprise software, streaming, cybersecurity, and more. With that said, the top 10 holdings in the iShares ETF account for 53.7% of the entire value of its portfolio. Most of the leaders in AI are included in that top 10, so investors do get a relatively high exposure to this fast-growing industry: Data source: iShares. Portfolio weightings are accurate as of July 8, 2024, and are subject to change. Apple just crossed $3.5 trillion in market capitalization, making it the world's largest company once again after briefly slipping behind Microsoft. Its new Apple Intelligence software (developed in partnership with OpenAI) will transform the Siri voice assistant, and it will allow users to rapidly craft content in Notes, Mail, iMessage, and more. Apple has 2.2 billion active devices globally, so it could become the largest distributor of AI to consumers. Microsoft agreed to invest $10 billion in OpenAI in December 2023, and it used the start-up's technology to create its Copilot virtual assistant. Copilot is accessible in core products like Windows and 365 (Word, Excel, PowerPoint, and more) to help users boost their productivity. Plus, developers can use OpenAI's latest GPT-4 models to create their own AI applications through the Microsoft Azure cloud platform. None of the above would be possible without Nvidia. Its graphics processing units (GPUs) for the data center have trained the world's most advanced AI models to date -- including GPT-4 -- and red-hot demand for those chips has sent the company's revenue soaring. The iShares ETF generated a compound annual return of 10.9% since its inception in 2001. But the accelerated adoption of technologies like enterprise software, cloud computing, and AI have driven a much faster compound annual gain of 20.2% over the last 10 years. The below table shows the potential future returns from investing $500 per month in the iShares ETF over 10, 20, and 30 years: Calculations by author. It's incredibly unlikely the iShares ETF (or any fund) will sustain a 20.2% return over a 30-year period. The S&P 500, for example, has only delivered a compound annual return of 10.4% since it was established in 1957, and it has a strict criteria to ensure it only holds the 500 best U.S. stocks. With that said, the iShares ETF could turn $500 per month into $1 million over 30 years even if its average annual return falls back to its long-run average of 10.9%. There is the potential for higher returns if AI lives up to Wall Street's forecasts. Goldman Sachs thinks it will add $7 trillion to the global economy over the next decade, whereas PwC places that figure at $15.7 trillion by 2030. The ETF's top holdings like Apple, Microsoft, and Nvidia could capture a significant portion of that pie. On the flip side, those stocks are currently trading at a premium right now because of their AI initiatives. So, if the technology doesn't live up to the hype, they could lose some of their recent gains, which would trigger a period of underperformance for the iShares ETF. That's a risk investors must consider, and it's a good argument for owning the ETF as part of a balanced portfolio. Should you invest $1,000 in iShares Trust - iShares Expanded Tech Sector ETF right now? Before you buy stock in iShares Trust - iShares Expanded Tech Sector ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and iShares Trust - iShares Expanded Tech Sector ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $826,672!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Alphabet, Apple, Datadog, Goldman Sachs Group, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Palo Alto Networks, and Pinterest. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The Zacks Analyst Blog Highlights AMD, NVIDIA, Microsoft and Alphabet

Chicago, IL - July 12, 2024 - Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Advanced Micro Devices AMD, NVIDIA NVDA, Microsoft MSFT and Alphabet GOOGL. Here are highlights from Thursday's Analyst Blog: Can the Silo AI Acquisition Change AMD's Fate, or Is It a Risky Bet? Advanced Micro Devicesis expanding its AI ecosystem with the announced acquisition of Silo AI for roughly $665 million in cash. The deal, expected to close in the second half of this year, will strengthen AMD's AI skillset and software expertise. AMD has been on an acquisition spree to strengthen its AI ecosystem. In the past 12 months, it has spent $125 million on dozens of acquisitions. Nod.ai and Mipsology are some other notable acquisitions in the recent past. Helsinki, Finland-based Silo AI offers end-to-end AI solutions and boasts a diverse clientele that includes the likes of Allianz, Philips, Rolls-Royce and Unilever. Silo AI has developed open-source large language models, like Poro and Viking, on AMD platforms in addition to its SiloGen model platform. AMD's acquisitiveness is aimed at primarily reducing the technological gap with NVIDIA in the ongoing race for AI dominance. Silo AI's team comprises scientists and engineers with extensive experience in developing customized AI models, as well as platforms and solutions for leading enterprises encompassing cloud, embedded and endpoint computing markets. Nevertheless, Silo AI acquisition may not be enough to solve AMD's growing problems which include stiff competition from NVIDIA in the race for AI chip dominance and continued weakness in the Embedded and Gaming businesses. Strong Portfolio Fails to Boost AMD's Prospects Both AMD and NVDA have been the darlings of investors, driven by the massive proliferation of AI that has created a strong demand for GPU chips required to power AI models. The AI space is expected to remain robust with increased spending by cloud computing providers like Microsoft and Alphabet. Gartner estimates spending on AI software to witness a CAGR of 19.1% between 2022 and 2027 to hit $297 billion in 2027. Generative AI (GenAI) software spending is expected to surge from 8% in 2023 to 35% by 2027. Deloitte expects enterprise spending on GenAI to increase 30% in 2024 from $16 billion in 2023. AMD's initiatives to expand its portfolio are making it well-positioned to challenge NVDA not only in the data center market but also in the growing AI-enabled consumer PC market. New offerings like the Instinct MI325X accelerator are helping to expand AMD's footprint in the data center market. AMD has launched the Ryzen AI 300 Series, the third generation of AMD AI-enabled mobile processors, and Ryzen 9000 Series processors for laptop and desktop PCs. However, the challenging macroeconomic environment and rising uncertainty over the upcoming Presidential elections don't bode well for AMD, given its much smaller size and GPU market share compared to NVIDIA. NVIDIA's strategy to release new AI chip models annually instead of its previous two-year update timeline intensifies competition for AMD. Moreover, initiatives by tech giants like Microsoft, Alphabet and Meta Platforms to build their own platforms for AI don't bode well for AMD. Sluggish Embedded & Gaming Hurts AMD Prospects For second-quarter 2024, the Embedded and the Gaming segment revenues are expected to decline by a significant double-digit percentage year over year. Sequentially, Embedded segment revenues are expected to be flat, while the Gaming segment revenues are expected to decline by a significant double-digit percentage. The Zacks Consensus Estimate for second-quarter Embedded revenues is currently pegged at $847.4 million, indicating a 45.7% year-over-year decline. The consensus mark for Gaming is pegged at $661.94 million, suggesting a massive 165.4% decline. AMD expects second-quarter 2024 revenues to be $5.7 billion (+/-$300 million). At the mid-point of the revenue range, this represents year-over-year growth of approximately 6% and sequential growth of approximately 4%. The Zacks Consensus Estimate for second-quarter 2024 revenues is pegged at $5.71 billion, indicating 6.54% growth year over year. The consensus mark for earnings is pegged at 66 cents per share, unchanged over the past 30 days and suggesting 13.79% year-over-year growth. Conclusion AMD shares have jumped more than 14% in the past month, outperforming the Zacks Electronics-Semiconductors industry's gain of 12.4% and the broader Zacks Computer & Technology sector's return of 4.7%. NVIDIA has gained 7.7% over the same timeframe. However, we believe the recent share price momentum will be short-lived, given the rising fundamental challenges. AMD has a Growth Style Score of D, which makes the stock unattractive for growth-oriented investors. A Value Style Score of F indicates a stretched valuation at this moment. AMD currently has a Zacks Rank #5 (Strong Sell), which indicates that investors should stay away in the near term. Today you can access their live picks without cost or obligation. Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release. Free Report: 5 "Whisper" Stocks Poised to Stun Wall Street Analysts may be seriously underestimating these stocks. When they announce earnings, they could immediately jump +10-20%. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report Microsoft Corporation (MSFT) : Free Stock Analysis Report NVIDIA Corporation (NVDA) : Free Stock Analysis Report The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Broadcom's 10-for-1 Stock Split Is Imminent: 10 Things You Need to Know

Although all eyes seem to be focused on anything and everything having to do with artificial intelligence (AI), one of Wall Street's hottest trends right now is companies enacting stock splits. A stock split is an event that allows a publicly traded company to change its outstanding share count and share price by the same magnitude. Since 2024 began, nearly a dozen high-profile, time-tested businesses have announced and/or completed a stock split. Image source: Getty Images. Stock splits have two variations: forward and reverse. With a forward-stock split, a company desires to lower its nominal share price in order to make it more affordable for retail investors. Meanwhile, the goal of a reverse-stock split is to increase a company's share price, often with the purpose of ensuring it meets the continued listing standards required of a major stock exchange. Between these two "flavors," investors overwhelmingly gravitate to companies conducting forward splits. Following the recent completion of Nvidia's 10-for-1 forward split and Chipotle Mexican Grill's historic 50-for-1 stock split, the time has come for AI networking solutions provider Broadcom (NASDAQ: AVGO) to enter this exclusive club. Here are 10 things you need to know about Broadcom's imminent stock split. 1. Broadcom is (sort of) making history On June 12, when Broadcom released its fiscal second-quarter operating results (the company's second quarter ended May 5), it announced a 10-for-1 forward-stock split. This is, technically, Broadcom's first-ever split. However, prior to being acquired by Avago Technologies in early 2016 -- Avago chose to keep the Broadcom name following the purchase -- the old Broadcom had split its stock on three occasions, the last of which occurred in February 2006. 2. Its split becomes effective after the close of trading "Imminent" isn't an exaggeration of when Broadcom's stock split is taking place. According to company filings, this 10-for-1 forward split becomes effective after the close of trading on Friday, July 12. When trading begins on Monday, July 15, Broadcom's stock will be trading at 1/10th of its prior closing value, with an outstanding share count that's increased by a factor of 10. As I pointed out when Chipotle conducted its stock split a few weeks ago, it's not uncommon for brokers to fail to recognize that a stock split has taken place for up to a period of 24 hours. If you're a Broadcom shareholder and notice a large unrealized loss in the morning of July 15, there's no need to panic. 3. Stock splits are purely superficial Though companies enacting forward-stock splits have historically performed well in the 12 months that follow their stock-split announcement, stock splits themselves are purely cosmetic. Altering a company's share price and outstanding share count by the same factor has no impact on its market cap or operating performance. 4. The company's split is all about investor and employee accessibility Similar to Walmart and Chipotle, which have already become Wall Street's newest stock-split stocks of 2024, Broadcom's split is all about accessibility. "[W]e are announcing a 10-for-1 forward stock split of Broadcom's common stock, to make ownership of Broadcom stock more accessible to investors and employees," said the company's Chief Financial Officer Kirsten Spears. It's usually a lot easier for companies to encourage participation in employee stock purchase plans (ESPPs) when the price of said stock is not north of $1,700 per share. Image source: Getty Images. 5. Artificial intelligence has fueled its mega-rally over the last year and change The primary catalyst powering Broadcom's stock higher by 205% since the start of 2023 is its AI networking ties. The Jericho3-AI chip, which was unveiled in April 2023, is capable of connecting up to 32,000 graphics processing units (GPUs). The company's chips are designed to reduce tail latency and maximize the compute capacity of AI-GPUs in enterprise data centers. Just as Nvidia has become something of a mass-production GPU kingpin, Broadcom has quickly evolved into the go-to provider of specialized networking solutions in AI data centers. 6. There's more to Broadcom than just AI However, Broadcom is more than just AI networking solutions. It's also a leading provider of wireless chips and accessories used in next-generation smartphones. Wireless carriers upgrading their networks to support 5G speeds has led to a steady device replacement cycle that's fueled demand for Broadcom's products. Further, the company provides networking solutions for next-gen vehicles, cybersecurity solutions via subsidiary Symantec, and optical products used in industrial settings and automated equipment. 7. Consistency is key Another reason Broadcom finds itself in desperate need of a sizable forward-stock split is its leadership. Hock Tan has been CEO of Broadcom since March 2006. Having consistency in key leadership positions helps to ensure that growth initiatives and acquisitions are seen through from start to finish. With Broadcom now worth nearly $800 billion as a company, the value of strong leadership couldn't be more apparent. AVGO Dividend data by YCharts. 8. Broadcom's dividend growth is even more impressive than its stock split Not to slight the euphoria surrounding Broadcom's imminent stock split, but the growth in the company's quarterly dividend is considerably more impressive and worth lauding. In December 2010, the company doled out a $0.07-per-share quarterly payout to its investors. But on June 28, 2024, it dished out $5.25 for the quarter to its shareholders. That's a cool 7,400% increase in the company's quarterly payout in less than 14 years, which signals just how impressive its operating cash flow growth has been over that span. 9. Billionaire money managers have been active buyers of Broadcom stock Even before Broadcom announced its first-ever stock split, billionaire money managers were piling in. Based on data provided by Form 13F filings with the Securities and Exchange Commission, six prominent billionaire investors opened a new position in Broadcom or added to their existing stake in the first quarter (total shares purchased in parenthesis): A stock split is highly unlikely to alter the optimism these half-dozen billionaires have for Broadcom. 10. Broadcom remains an intriguing value for growth-seeking investors The final thing worth noting about Broadcom's imminent stock split is that it'll still be an intriguing value come Monday, July 15 -- and likely well beyond. While it's perfectly within reason to expect a modest pullback in the company's shares following a near-parabolic move higher in recent weeks, a forward price-to-earnings ratio of 30 for a company with sustained double-digit earnings growth and increasing importance in enterprise data centers suggests that long-term investors will be rewarded for their patience. The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Broadcom wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $826,672!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Walmart. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.