Time to Sell or Buy the Dip? Assessing Alibaba’s Price Action Amid Headwinds

Posted on by The INO.com Team

Commanding a market of roughly $174.86 billion, China’s leading technology giant Alibaba Group Holding Limited (BABA) has faced major headwinds over the past three years, with its shares taking a nosedive of more than 70%. Currently trading below $77, the stock has fallen from its 2020 high of more than $300.

But What Could Have Possibly Caused This Downfall?

Over the past few years, BABA has navigated through a series of obstacles that have significantly hampered its growth trajectory.

In 2021, amid China's sweeping efforts to rein in technology companies, BABA incurred a substantial fine of approximately $2.80 billion, equivalent to roughly 4% of the company's 2019 revenue. This penalty was imposed by Chinese regulators who accused BABA of exploiting its market dominance.

Apart from heightened scrutiny from Chinese regulators, 2023 proved to be a challenging year for BABA, raising uncertainties about the future of the tech giant, particularly as the era of Artificial Intelligence (AI) unfolded.

Last year, the company's strategic plan to list its cloud unit as a separate entity was compelled to undergo reconsideration due to the escalating chip conflict between the U.S. and China.

As the U.S. government intensified restrictions on exporting advanced chips crucial for powering AI models to China, BABA expressed concerns that this could have a substantial negative impact on the operational capabilities of its Cloud Intelligence Group and have a further negative on the company’s profitability.

Additionally, the company recognized that these restrictions could have wider ramifications, potentially hindering their capacity to advance technological capabilities across their various business sectors. These concerns did not sit well with investors, leading to a nearly $20 billion loss in the company's market cap last year.

Furthermore, BABA’s co-founder Joe Tsai recently, during an exchange with Nicolai Tangen, CEO of Norway’s Norges Bank Investment Management, indicated that China is at least two years behind American companies like Open AI, which have emerged as frontrunners in AI.

Tsai suggested that many Chinese tech companies were facing chip shortages, which he described as a significant challenge. However, he pointed out this issue was widely addressed within the industry.

Tsai further highlighted the challenges of conducting business in the U.S., emphasizing the need for caution as a Chinese company. He noted BABA’s limited consumer-facing presence in the U.S., citing concerns about data privacy and cybersecurity.

On top of it, as a retaliatory measure against U.S. restrictions, the Chinese government has directed the country's largest telecom carrier to replace foreign processors with domestic alternatives in its networks by 2027.

This measure is anticipated to hurt a few renowned U.S. chip giants who supplied core processors for network equipment in China. With China aiming to decrease its reliance on U.S. chips, tech companies like BABA are poised to face significant challenges.

Bottom Line

BABA’s fiscal 2024 third-quarter performance painted a mixed picture. Although the topline experienced a modest growth of just 5% year-over-year, reaching $36.67 billion, the company’s non-GAAP net income and non-GAAP EPS declined by 4% and 2% year-over-year to $6.75 billion and $0.33, respectively.

Furthermore, Alibaba’s Taobao and Tmall Group and Cloud Intelligence Group brought in revenue of $18.18 billion and $3.95 billion, witnessing only 3% and 2% year-over-year increases, respectively. The company’s newly appointed CEO, Eddie Wu, emphasized BABA’s focus on driving growth in e-commerce and cloud services.

Wu highlighted that the top priority is to reignite the growth of the core businesses, including Taobao and Tmall Group, through increased investment to enhance user experiences and strengthen market leadership over the next year.

Looking ahead, Wall Street analysts appear optimistic regarding the company's performance for fiscal year 2023, forecasting a 5.5% year-over-year growth in revenue and a 9.4% year-over-year growth in earnings per share.

However, despite the bullish estimates, it is crucial to acknowledge BABA and its peer companies are confronting a complex landscape of regulatory, geopolitical, and technological challenges, signaling a period of significant uncertainty and potential turbulence for the industry in the years ahead.

To make matters worse, weak consumer demand in China isn’t supporting its case either. According to the data released by the National Bureau of Statistics (NBS), China’s consumer inflation cooled more than anticipated in March, alongside persistent producer price deflation, which continues to pressure policymakers to consider further stimulus measures due to weak demand.

Considering BABA’s limited global consumer-facing presence and its Taobao and Tmall Group, which is highly dependent on Chinese consumer spending, the challenging economic environment could pose significant hurdles for the company in the near term.

Overall, despite BABA’s commitment and focus to fuel growth in e-commerce and cloud services, as highlighted by CEO Wu, the company’s growth might be hindered by ongoing macroeconomic headwinds such as weak consumer demand in China, geopolitical tensions, and technological constraints.

To that end, it seems prudent for investors to closely monitor the stock and wait for further developments.

AMD vs. Nvidia: The Battle for Trillion-Dollar Dominance in AI

Posted on by The INO.com Team

The trillion-dollar club, boasting only Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOG), and Meta Platforms, Inc. (META) as its only members, is incredibly exclusive. However, the landscape might soon shift, with another company on the brink of joining the ranks within the next decade.

Advanced Micro Devices, Inc. (AMD), being a stalwart force in driving innovation for over 50 years, particularly in high-performance computing, graphics, and visualization technologies, has now emerged as a formidable contender to NVIDIA Corporation (NVDA) in the AI chip market, signaling a potential shake-up in the industry's hierarchy.

AMD's Growth and Expansion Ventures

AMD stands to benefit significantly from its expansion initiatives, evidenced by the recent unveiling of its MI300 lineup. These data center chips, catering to AI workloads, offer two configurations: the pure GPU MI300X and the combined GPU-CPU MI300A, directly challenging NVDA's dominance.

With NVDA struggling to meet chip demand, AMD has a prime opportunity to capture market share. This sentiment was echoed at the "Advancing AI" event, where industry giants showcased their use of AMD's Instinct MI300X accelerators for cloud and enterprise AI infrastructure, reflecting growing adoption and trust in AMD's offerings.

Moreover, AMD's efforts to expand its AI software ecosystem, exemplified by the ROCm™ 6 software stack optimized for generative AI, have garnered support from key players like Databricks and OpenAI. The collaboration could position AMD as a preferred choice for AI solutions, further enhancing its competitive edge.

The company's commitment to innovation further extends to hardware, with the integration of neural processing units (NPUs) in its Ryzen 8040 Series mobile processors. The advancement, delivering up to 1.6x more AI processing performance, has garnered interest from leading PC OEMs, with new laptops featuring AMD Ryzen 8040 Series processors set to hit the market soon.

Additionally, strategic partnerships, including the one with Microsoft Corporation (MSFT), underscore AMD's role in enabling new services and computing capabilities across various domains, including cloud computing and AI-capable PCs. Such collaborations validate AMD's technology prowess and ability to drive transformative business outcomes.

Furthermore, its collaboration with JR Kyushu Railway Company highlights its foray into AI-driven automation, revolutionizing traditional track inspection methods with the AMD Kria™ K26 System-on-Module.

The deployment highlights AMD's commitment to innovation and its potential to address real-world challenges with AI-powered solutions, further solidifying its position as a critical player in the evolving tech landscape.

AMD’s Robust Financial Performance

AMD's fiscal 2023 fourth quarter showcased remarkable growth across its Data Center and Embedded segments, driven by significant developments. Notably, the company achieved record Data Center segment annual revenue and robust overall growth, buoyed by the rising adoption of Instinct AI accelerators and strong demand for EPYC server CPUs across cloud, enterprise, and AI sectors.

The company’s revenue for the fourth quarter surged by 10% year-over-year to $6.17 billion, fueled by substantial double-digit growth in both the Data Center and Client segments. The remarkable $1.2 billion increase in annual revenue for the Data Center and Embedded segments is of particular significance, which collectively contributed over 50% of the total revenue for 2023.

This surge underlines AMD's success in capturing server market share, driven by the launch of next-generation Instinct AI accelerators and its continued leadership in adaptive computing solutions.

In addition, the company's fourth-quarter non-GAAP gross profit grew 10% year-over-year to $3.13 billion, while operating income was up 12% from the year-ago value to $1.41 billion. Similarly, its non-GAAP net income and non-GAAP EPS grew 12% from the prior year's period to $1.25 billion and $0.77, respectively.

AMD and NVDA Growth Comparison

AMD's recent strides toward securing a spot in the trillion-dollar club spell trouble for its rival, NVDA. AMD's robust growth trajectory seems poised to challenge and potentially surpass NVDA in the market. This is primarily due to the recent events in the stock market, which have raised eyebrows.

NVDA's stock took a significant hit last week, tumbling into correction territory with a 10% decline from its recent peak. This downturn comes at a crucial juncture, highlighting potential vulnerabilities for the market darling.

Adding to NVDA's woes is the persistent supply constraint plaguing its H100 GPU chips. Despite soaring demand, the company has struggled to meet supply requirements for months, leading to significant challenges in fulfilling orders. The severity of this supply-demand mismatch was underscored by Tesla, Inc. (TSLA) CEO Elon Musk's admission that even TSLA couldn't acquire the chips quickly enough.

Furthermore, the lackluster performance of NVDA's stock from July 2023 to October 2023, as highlighted by Evercore ISI strategist Julian Emanuel, serves as a cautionary tale. This stagnant period failed to generate momentum for NVDA and catalyzed broader market downturns, impacting the S&P 500 index.

In light of AMD's upward trajectory and NVDA's recent setbacks, it's evident that the competitive landscape in the semiconductor industry is undergoing a significant shift, with AMD emerging as a formidable challenger to NVDA's dominance.

Furthermore, in a Texas federal court, NVIDIA was sued for trademark infringement by the financial technology company Modulus Financial Engineering over the chipmaker's Modulus artificial intelligence software.

Modulus Financial asked the U.S. District Court for the Western District of Texas to force NVDA to stop using the Modulus name, which it said would create consumer confusion with its AI-related software.

Bottom Line

Investor interest in AI has reached a fever pitch, driving substantial gains in the stock market throughout 2023 and 2024. With the global AI market valued at $515.31 billion in 2023 and projected to reach $2.74 trillion by 2032, the industry's growth trajectory is undeniable.

The surge in AI is fueled by several factors, including the proliferation of AI applications, increased partnerships, the emergence of small-scale AI platforms, and the evolving needs of businesses to navigate complexities. AMD, recognizing the immense potential, is heavily investing in the sector and forging lucrative partnerships to solidify its position in the AI landscape.

Moreover, with potent AI accelerator designs and leveraging third-party manufacturing solutions, AMD is poised to capture significant market share in the AI space, potentially elevating its status in investor discussions alongside NVDA.

Further, AMD's discounted valuation compared to NVDA presents an attractive investment opportunity, further bolstering its appeal as a solid buy in the market. Regarding forward EV/Sales, AMD is trading at 10.15x, 47.5% lower than NVDA's 19.34x. Also, the stock’s trailing-12-month Price/Sales and Price to Book are 11.62x and 4.72x compared to NVDA's 35.74x and 50.56x, respectively.

Against this backdrop, AMD stands well-positioned to make it into the trillion-dollar club and surpass NVDA with its innovative product launches, strategic investments and partnerships, and market dominance.

SoundHound AI’s Market Potential: Opportunities and Challenges Ahead

Posted on by The INO.com Team

SoundHound AI, Inc. (SOUN) is a leading global company specializing in conversational intelligence. The company provides advanced voice Artificial Intelligence (AI) solutions that enable businesses to offer exceptional conversational experiences to their customers.

SOUN’s technology, developed in-house, delivers unparalleled speed and accuracy across multiple languages. These solutions cater to various industries, including automotive, TV, IoT, and customer service.

With only a market cap of roughly $1.47 billion, the sound recognition and voice assistant technology company has garnered solid attention from investors lately. The company’s shares have climbed a whopping 169.5% over the past three months and 125% year-to-date.

But why?

In February, chip giant and a key beneficiary of the AI boom, NVIDIA Corporation (NVDA), made its inaugural 13-F filing with the Securities and Exchange Commission (SEC), unveiling new holdings in five small AI companies. Among these five companies, NVDA’s stake in SOUN, as of December 31, 2023, was valued at approximately $3.67 million.

Despite being ranked fourth among the five companies in terms of investment, SOUN experienced the most significant spike in its shares as a result of this news. However, this is not the first time SOUN has received investments from NVDA.

In 2017, NVDA participated in a $75 million venture round investment in SOUN. Moreover, SOUN entered the public market through a Special Purpose Acquisition Company (SPAC) in 2022, with NVDA acknowledged in its presentation as a strategic investor.

Beyond investments, the chip maker also engaged in strategic partnerships with SOUN. Last month, SOUN announced a groundbreaking in-vehicle voice assistant powered by a large language model (LLM) on the NVIDIA DRIVE platform.

This innovative technology operates entirely offline, expanding generative AI's reach beyond cloud connectivity. The collaboration between SOUN and NVDA aims to deploy generative AI in more places and situations. NVIDIA DRIVE enables SOUN’s Chat AI to offer responses without connectivity, enhancing in-car voice experiences.

Rishi Dhall, NVDA’s Vice President of Automotive, emphasized the collaboration with innovative partners like SOUN to integrate generative AI and accelerated computing into vehicles, enhancing the customer experience and bolstering safety on the road.

The in-vehicle voice interface developed by SOUN, powered by NVIDIA DRIVE, promises to deliver rapid and precise information to drivers, even in offline scenarios.

Meanwhile, despite garnering significant attention from investors, the company's financial performance is not meeting expectations. In its recent quarterly results, the company reported a significant 80% year-over-year jump in revenue, reaching $17.15 million.

However, despite this massive jump, the company's top-line figure fell short of analysts' estimates of $17.75 million for the same quarter. The company remained unprofitable in the fourth quarter, reporting a loss of $0.07 per share.

While its bottom line saw a slight improvement from the loss per share of $0.15 in the prior-year quarter, it remained higher than Wall Street’s estimate of $0.06 loss per share. Also, it reported an adjusted EBITDA loss of $3.68 million during the same quarter.

Looking ahead, management anticipates SOUN’s fiscal year 2024 to fall within the range of $63 million to $77 million, with a midpoint target set at $70 million, which is roughly 53% higher than the $45.87 million revenue generated in the fiscal year 2023. Moreover, for the fiscal year 2025, management projects revenue to surpass $100 million and finally achieve a positive adjusted EBITDA.

Bottom Line

Apart from the company’s less-than-stellar fourth-quarter performance, SOUN encountered a setback earlier this week after announcing a $150 million stock sale. The initial $55 million raised is intended for general corporate purposes and working capital, potentially including acquisitions. Any funds exceeding $55 million will be used to repay debt.

While investors may find this news alarming, given the company's substantial losses, it's crucial to recognize that SOUN is currently in a growth phase. It's actively pursuing significant acquisition initiatives and expanding its AI solutions across various industries.

For instance, in 2023, the company entered full production for its integrated generative AI voice assistant with automaker Stellantis' DS Automobiles, set to be deployed across all models in 13 languages across 18 countries. Additionally, SOUN introduced its Chat AI pilots in Europe with three automotive brands, Peugeot, Opel, and Vauxhall.

Furthermore, the company made waves in the restaurant industry in 2023, with over 100 customers adopting its AI solutions. Given the company’s strategic expansion efforts across several industries, SOUN’s financial standing could witness major improvements in the forthcoming years.

While the immediate impact of SOUN's financial performance and stock sale may raise concerns, the company's strategic initiatives and partnerships suggest that it is well-positioned for long-term growth and success in this rapidly evolving AI landscape.

Adding to the optimism is, of course, NVDA’s stakes in SOUN, signaling the chip giant’s confidence in the company's technology and potential for growth. To that end, it could be wise for investors to scoop up SOUN’s shares for potential gains.

TSLA vs. BYDDY: The Battle for Electric Pickup Truck Supremacy

Posted on by The INO.com Team

China, the world's largest and fiercely competitive EV market, saw a 38% surge in sales of "new energy vehicles" last year, totaling 9.49 million units. This accounted for nearly 70% of global EV sales, raising concerns among traditional automakers and Tesla, Inc.'s (TSLA) Elon Musk about China's potential dominance.

Concurrently, BYD Company Limited (BYDDY), a Chinese EV giant, is set to unveil its first electrified pickup truck globally. Though details on powertrain, performance, and pricing remain undisclosed, BYDDY released images featuring an orange and blue camouflaged truck, signaling its entry into the new energy pickup segment.

Competing with TSLA's Cybertruck, Ford Motor Company's (F) Ranger and F-150 Lightning, and Toyota Motor Corporation's (TM) Hilux, the upcoming BYDDY pickup marks a new frontier in the electric pickup market.

That said, TSLA's Cybertruck, launched in November 2023, faces criticism for battery range discrepancies, premature breakdowns, and durability issues like rust and corrosion. Initially promised at $39,900 with a 500-mile range, TSLA's Cybertruck now starts at $60,900, with deliveries pushed to 2025 due to production constraints.

Musk has admitted challenges in production, forecasting a financially challenging first year. Moreover, with the Cybertruck as its latest passenger vehicle since 2020, TSLA's global expansion might stall, leaving markets outside North America waiting for new releases for years to come.

Financial Performance Comparison Between BYDDY and TSLA

In the final quarter of 2023, the Shenzhen-based carmaker saw a surge in net profit, surpassing TSLA to become the top seller of electric vehicles globally. Revenue soared by 49.8% year-over-year to ¥180.04 billion ($24.89 billion), with gross profit reaching ¥38.21 billion ($5.28 billion), a 78% increase year-over-year.

Additionally, BYDDY’s net income attributable to common stockholders reached ¥8.67 billion ($1.20 billion), up from ¥4.13 billion ($571.02 million) in the previous year's quarter. Sales volume spiked by 38%, with over 526,000 EVs sold, nearly 80,000 more than TSLA's sales.

BYDDY, for the second consecutive year, outpaced TSLA, producing 3 million new energy vehicles (NEVs) compared to Tesla's 1.84 million. BYDDY's cars, mostly priced lower than TSLA's, offer hybrid and fully electric options, posing a significant threat to competitors, as acknowledged by Musk.

In the fiscal fourth quarter of 2023, TSLA's total revenue increased 3% year-over-year to $25.17 billion. However, its gross profit declined 23.2% year-over-year to $4.44 billion. Its adjusted EBITDA decreased 26.9% from the year-ago value to $3.95 billion.

Moreover, the company’s non-GAAP net income and non-GAAP EPS attributable to common stockholders reduced 39.5% and 40.3% from the prior year's period to $2.49 billion and $0.71, respectively.

Musk now recognizes BYDDY's potential dominance in the EV market despite initial ridicule, foreseeing a scenario where they could outperform most other car companies globally. He said, "Frankly, if there are not trade barriers established, they will pretty much demolish most other car companies in the world."

The Two Industry Giants’ Business Prospects and Challenges

BYDDY, while absent from the U.S. market, reaches more than 50 countries, concentrating efforts in Asia, South America, Australia, and selected European nations such as Hungary. Plans to unveil new models, including the $233,000 Yangwang U9 electric supercar, complement refreshed models like the e2 and Seagull electric hatchbacks.

Last year's global sales saw notable NEV success across multiple nations. With over 242,000 units exported, BYDDY anticipates China's NEV market surge in 2024, reinforcing its multi-brand strategy and global expansion objectives. Expansion ventures into Europe with a new Hungarian factory and successful deliveries also mark a pivotal moment in Central and Eastern European market development.

In South America, BYDDY aims to revitalize a former Ford manufacturing site in Brazil with a $620 million investment. Three Bahia factories will process locally sourced lithium and iron phosphate for vehicle production, enhancing regional presence. Future endeavors further include a prospective Mexican factory by next year's end.

Additionally, BYD's battery subsidiary, FinDreams, has partnered with Huaihai Holding Group to lead the sodium-ion battery supply for small electric cars. A Jiangsu production base near Xuzhou aims to revolutionize mass-market EV commercialization with cost-effective sodium-ion battery technology.

TSLA's recent quarterly sales shortfall has affected Elon Musk's reputation in China, the world's largest automotive market. Its market share has shrunk significantly due to unprecedented local competition and declining consumer confidence. Despite being known as a disruptor with advanced technology, TSLA struggles with its limited lineup of the Model 3 sedan and Model Y SUV.

In contrast, competitors like BYDDY offer a wider range of vehicles with advanced features. From the affordable Seagull hatchback to the high-performance Yangwang U8 plug-in hybrid SUV, BYDDY presents a compelling array of options.

Globally, TSLA's delivery of 386,810 vehicles in the first quarter falls significantly short of expectations. "It’s been an epic disaster, not just in terms of the delivery number, but the strategy,” Wedbush Securities Inc. analyst Dan Ives said. “This is probably one of the most challenging periods for Musk and Tesla in the last four or five years.”

Furthermore, the company’s reliance on BYDDY battery cells puts it at a disadvantage, as BYDDY’s in-house battery and semiconductor manufacturing capabilities give it an edge. BYDDY’s revolutionary Blade Battery, with an impressive 600 km range on a single charge, highlights TSLA’s struggles to remain competitive.

Bottom Line

In 2008, BYDDY introduced its inaugural plug-in hybrid electric vehicle, the F3DM, coinciding with Berkshire Hathaway's $230 million investment. Since then, BYDDY has solidified its position as a dominant force in China's EV market, consistently ranking among the top monthly EV sellers in the country.

Having conquered the Chinese market, BYDDY now sets its sights on global expansion, with a presence in at least 58 overseas markets, including Germany, Japan, Australia, and Thailand. Manufacturing facilities in Thailand and Brazil are underway, and commitments are being made to build in Hungary and Indonesia.

BYDDY’s latest ultra-cheap car enhances its competitiveness against TSLA, which still struggles with affordability. Yet, BYDDY’s product portfolio spans all market segments, evidenced by the unveiling of a supercar aimed at the premium end of the EV market spectrum.

Ending 2023 with record-breaking sales, surpassing 3 million annual sales and retaining its global NEV sales champion status for the second consecutive year, BYDDY has solidified its position as China's best-selling car brand and manufacturer.

Analysts project robust growth for BYDDY in the fiscal year 2024, with its revenue and EPS expected to increase by 28.6% and 3.2% year-over-year, respectively, reaching $107.29 billion and $3.00.

In contrast, TSLA's revenue for fiscal year 2024 is forecasted to grow 9.9% year-over-year to $106.30 billion, while its EPS is anticipated to decline by 8.4% to $2.86. Moreover, Tesla missed the consensus revenue and EPS estimates in three of the trailing four quarters, which is concerning.

Given this scenario, BYDDY could challenge TSLA’s dominance, making it an attractive investment opportunity in the current market landscape.

Warren Buffett's Oil Investments: Insights Into Berkshire Hathaway's Oil Holdings

Posted on by The INO.com Team

Warren Buffett, a prominent billionaire investor known for his investments through Berkshire Hathaway, holds significant investments in the oil sector, with holdings in Chevron Corporation (CVX) and Occidental Petroleum (OXY).

Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) owns 126.1 million shares of CVX, valued at $1.5 billion. This ownership stake represents about 6.7% of the company’s outstanding shares.

Berkshire’s purchase of shares in CVX during the fourth quarter of 2023 is seen as a significant endorsement of Chevron’s $53 billion merger with Hess Corporation (HES), announced on October 23. This move is interpreted as a strong vote of confidence for Chevron's investors and the oil and gas sector as a whole.

Additionally, per Berkshire Hathaway’s February shareholder letter, the multinational investment firm holds a 27.8% stake in OXY and has warrants that could increase its ownership further at a fixed price.

“We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives, though the economic feasibility of this technique has yet to be proven,” Buffett said, “Both of these activities are very much in our country’s interest.”

In November, Occidental Petroleum and BlackRock, the world’s largest asset manager, announced a joint investment of $550 million in Occidental’s direct air capture plant, Stratos, located in West Texas. The plant is anticipated to commence operations by the middle of the upcoming year.

Direct air capture (DAC) technology differs from traditional carbon capture methods because it extracts carbon dioxide directly from the atmosphere instead of capturing emissions at the source, such as at industrial facilities like steel plants.

According to the International Energy Agency (IEA), 27 DAC plants have been commissioned globally to date, with plans for at least 130 DAC facilities in several stages of development. Both Occidental Petroleum and Exxon Mobil Corp (XOM) estimate that DAC could evolve into a multi-trillion-dollar market for oil producers by 2050 as scale brings costs down.

Warren Buffett has expressed admiration for Vicki Hollub, the President and CEO of Occidental Petroleum, who is the first woman to lead a major American oil company. “Under Vicki Hollub’s leadership, Occidental is doing the right things for both its country and its owners,” Buffett stated. “No one knows what oil prices will do over the next month, year, or decade.”

“But Vicki does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and her country,” he added.

Understanding the Dynamics of the Energy Sector

Also, Berkshire's investments consider the dynamics of the energy sector, including factors such as supply and demand trends, geopolitical events, and technological advancements. Oil prices climbed above $90 per barrel last week. This surge was attributed to tensions in the Middle East, concerns regarding tightening supply, and optimistic expectations about demand growth amid improving economies.

Brent crude passed around $91 per barrel on Friday, taking its gains for the year to 18%. The U.S. West Texas Intermediate crude, closely linked to U.S. gasoline prices, has been even stronger, with 21% gains. Both benchmark crude oil prices settled at their highest levels since October 2023.

The oil market could see prices rise to $100 per barrel, especially if OPEC+ maintains its production cuts and extends them further into the second half of the year. This scenario is supported by expectations of robust demand, particularly in the second half, driven by economic growth and increased consumption.

Vitol’s Muller told on Gulf Intelligence’s Daily Energy Markets podcast that he anticipates a significant uptick in refined product demand globally, at around 2 million barrels per day (bpd) than in the same period last year.

This bullish outlook is echoed by experts like Bob McNally, founder of consultancy Rapidan Energy and a former White House adviser, who told Bloomberg Television in an interview that the market is currently “on firm fundamental footing.”

“I think $100 oil is entirely real — it just requires a little more risk pricing on the true geopolitical risk,” McNally added.

Now, let’s review the fundamentals of CVX and OXY in detail:

Chevron Corporation (CVX)

With a $299.80 billion market cap, CVX engages in integrated energy and chemicals operations internationally. It produces crude oil and natural gas; manufactures transportation fuels, lubricants, petrochemicals, and additives; and develops technologies that enhance its business and the industry.

The company also aims to grow its traditional oil and gas business, lower the carbon intensity of its operations, and expand its new lower carbon business in renewable fuels, hydrogen, carbon capture, and other emerging technologies.

On April 4, Chevron New Energies (CNE), a CVX division, announced a lead investment in ION Clean Energy (ION), a Boulder-based tech company that provides post-combustion point-source capture technology through its third-generation ICE-31 liquid amine system. ION raised $45 million in Series A financing led by CNE. 

“We continue to make progress on our goal to deliver the full value chain of carbon capture, utilization, and storage (CCUS) as a business, and we believe ION is a part of this solution,” said Chris Powers, vice president of CCUS & Emerging with CNE.

Also, on March 19, CNE and JX Nippon Oil & Gas Exploration Corporation signed a Memorandum of Understanding (MoU) that offers a framework to evaluate the export of Carbon Dioxide (CO₂) from Japan to Carbon Capture and Storage (CCS) projects located in Australia and other countries in the Asia Pacific region.

For the fourth quarter ended December 31, 2023, CVX’s total revenues and other income declined 16.5% year-over-year to $47.18 billion. Its total adjusted earnings and adjusted EPS decreased 17.8% and 15.6% over the prior-year quarter to $6.45 billion and $3.5, respectively.

However, the company’s worldwide and U.S. net oil-equivalent production set annual records. Worldwide production increased 4% from a year ago to more than 3.1 barrels of oil-equivalent per day, primarily due to the acquisition of PDC Energy, Inc. (PDC) and growth in the Permian Basin, up 10% from 2022. This was led by 14% growth in the U.S.

Last year, CVX returned more cash to shareholders and produced more oil and gas than any other year in the company’s history. Cash returned to shareholders was nearly $26 billion for the full year, 18% higher than the prior year’s total.

The company’s Board of Directors further declared an 8% increase in the quarterly dividend to $1.63 per share, paid on March 11, 2024, to all holders of common stock, as shown on the transfer records of the corporation at the close of business on February 16, 2024.

CVX’s annual dividend of $6.52 translates to a yield of 4.03% on the current share price. Its four-year average dividend yield is 4.43%. Moreover, the company’s dividend payouts have increased at CAGRs of 6.08% and 6.3% over the past three and five years, respectively.

For 2024, CVX announced an expected organic capital expenditure range of $15.5 to $16.5 billion for consolidated subsidiaries (capex) and an affiliate capital expenditure (affiliate capex) budget of around $3 billion. With the acquisition of PDC Energy, Chevron announced an annual capex guidance range of $14 to $16 billion through 2027.

Following the completion of the Hess acquisition, which is expected to be finalized in the first half of 2024, CVX’s annual capex budget is expected to increase significantly to a range of $19 billion to $22 billion.

Analysts expect CVX’s revenue for the fiscal year (ending December 2024) to increase by 1.8% year-over-year to $204.64 billion. However, the consensus EPS estimate of $12.82 for the current year indicates a decline of 2.4% year-over-year.

Occidental Petroleum Corporation (OXY)

With a market cap of $60.94 billion, OXY is a global energy company with assets primarily in the U.S., the Middle East, and North Africa. The company is one of the largest oil and gas producers in the U.S., including a leading producer in the Permian and DJ basins and offshore Gulf of Mexico. 

On February 8, OXY’s Board of Directors declared a regular quarterly dividend of $0.22 per share on common stock, payable on April 15, 2024, to stockholders of record at the close of business on March 8, 2024. The annual dividend per share has increased to $0.88 from its previous rate of $0.72.

OXY’s annual dividend translates to a yield of 1.27% on the current share price. Its four-year average yield is 3.44%. The company’s dividend payments have grown at a CAGR of 5.7% over the past three years.

On December 11, 2023, OXY entered a purchase agreement to acquire Midland-based oil and gas producer CrownRock L.P., a joint venture of CrownQuest Operating LLC and Lime Rock Partners. This acquisition is anticipated to deliver increased free cash flow on a share basis, including $1 billion in the first year based on $70 per barrel WTI.

The acquisition further complements and strengthens Occidental’s leading Permian portfolio by adding around 170 thousand barrels of oil equivalent per day (Mboed) of high-margin, lower-decline unconventional production in 2024 and approximately 1,700 undeveloped locations. It enhances the company’s resource base and growth potential in the region.

During the fourth quarter that ended December 31, 2023, OXY’s revenues and other income decreased 9.6% year-over-year to $7.53 billion. Its income before income taxes declined 35% from the prior year’s quarter to $1.56 billion. Its non-GAAP EPS came in at $0.74, down 54% year-over-year.

Furthermore, the company’s current liabilities increased to $9.15 billion as of December 31, 2023, compared to $7.76 billion as of December 31, 2022.

Street expects OXY’s revenue and EPS for the first quarter (ending March 2024) to decline 9.4% and 45.8% year-over-year to $6.58 billion and $0.59, respectively. For the fiscal year 2024, the consensus EPS estimate of $3.37 indicates a decrease of 8.9% year-over-year.

However, the company’s revenue for the ongoing year is expected to increase 2.5% year-over-year to $29.63 billion.

Bottom Line

Warren Buffett’s investments in the oil sector through Berkshire Hathaway have garnered attention, particularly with holdings in CVX and OXY. Hathaway’s oil investments are also aligned with the demand-supply dynamics in the energy sector. The recent surge in oil prices, driven by tensions in the Middle East, supply constraints, and an optimistic demand outlook, reflects the evolving landscape that Buffett’s investments navigate.

While rising oil prices, production growth, strategic acquisitions and investments, and continued commitment to rewarding shareholders via dividends make CVX an attractive option for long-term investors seeking growth, the company continues to face several challenges, including commodity price dependence, higher operational costs, and uncertainty in the energy transition.

Chevron's core business in oil and gas exploration (upstream) makes it susceptible to boom-and-bust cycles in commodity prices. The company’s earnings dropped in 2023 due to lower oil and gas prices and reduced refining profits, highlighting the ongoing challenge of staying profitable amid market changes. Also, analysts have presented a mixed outlook for 2024.

CVX also faces cost headwinds, with its operating expenses trending upward and inflationary pressures threatening to squeeze margins further. Moreover, the global shift toward renewable energy presents a long-term challenge for oil and gas companies. 

Regarding OXY, its investments in low-carbon ventures, strategic acquisitions, and technology advancements present numerous opportunities for growth and industry leadership. However, the company must also tackle challenges related to its reliance on commodity prices, managing operational costs and debt obligations, and navigating global economic uncertainties.

While Occidental’s last reported earnings topped analyst estimates, they dropped compared to year-ago values. Further, analysts appear bearish about the company’s financial performance this year.

Staying profitable in such a volatile environment requires strategic resilience, efficient cost management, and a focus on operational excellence to navigate through boom-and-bust cycles effectively. So, given the mixed performance and outlook for CVX and OXY, investors may consider waiting for a better entry point before investing in these stocks.

While Buffett’s endorsement and long-term investment strategy hold weight, it’s essential to assess the companies’ financial health, growth prospects, and industry trends comprehensively.