Author: The INO.com Team

Is ABBV a Long-Term Growth Stock Buy With a $27 Billion Sales Projection?

Posted on by The INO.com Team

Pharma company AbbVie Inc. (ABBV), with a market cap of over $300 billion, has recently unveiled its fourth-quarter earnings report. Its revenue for the quarter amounted to $14.30 billion, down 5.4% year-over-year, while its adjusted EPS declined 22.5% from the year-ago quarter to $2.79. But both figures surpassed analysts’ estimates.

Following its 2013 spinoff from Abbott Laboratories, ABBV, under the leadership of CEO Richard Gonzalez, was confronted with the challenge of preventing sales dips amid increasing competition to its top-performing drug, Humira – which at the time accounted for roughly $9 billion in annual sales, making up over half the company's total sales.

Humira achieved staggering success, hitting its peak with $21.23 billion in annual sales in 2022 and accumulating more than $200 billion in lifetime revenue – shattering even the most optimistic Wall Street projections. Market analysts praised Humira's impressive growth trajectory, but the looming patent expirations provoked investor anxiety. Humira's impressive results equipped ABBV with additional resources and time to adapt to a post-Humira future.

Sales of Humira dropped 40.8% year-over-year to $3.30 billion worldwide in the fiscal fourth quarter that ended December 31, 2023. This decline notably outpaced the full-year sales downturn of 32.2% year-over-year, a trend the drug maker attributes to the emergence of biosimilar drugs on the market.

ABBV believes that Humira's fiscal 2023 revenue remains strong at $14.40 billion despite the introduction of biosimilars. As competition from these copycat medications is projected to surge in the upcoming year, ABBV forecasts that sales for Humira will drop to $9.6 billion.

ABBV foresaw the impending loss of exclusivity and strategically diversified its product line. ABBV's strategic plan, upon the entry of Humira biosimilars, aims to weather the initial financial impact in 2024 before regaining momentum in 2025.

To cushion against this looming loss of exclusivity – the most significant event of its kind across the industry to date – ABBV planned to leverage sales of its rapidly growing products, including Humira’s immunology heirs, Rinvoq and Skyrizi. ABBV's two innovative anti-inflammatory medications, Skyrizi and Rinvoq, are used to manage conditions like Crohn’s disease and arthritis.

ABBV's acquisition of Allergan in 2020 and the creation of these new drugs, however, did not entirely abate investors' apprehensions about the long-term viability of ABBV’s products or its ability to maintain sales and earnings growth as consistently as it did during Humira's reign. This residual anxiety has seen the stock oscillating between $134 and $175 over the past two years. Nonetheless, concerns were substantially eased following the company's strong fourth-quarter financial report.

Revenue from Skyrizi and Rinvoq climbed 51.9% and 62.9% year-over-year, respectively. This propelled their combined revenue contribution to $3.65 billion. The company projects the two drugs to generate an impressive $16 billion in sales revenue. In 2027, these medicines could amass $27 billion, thereby outperforming peak earnings from Humira.

Upon detailed examination, Skyrizi could accumulate over $17 billion by 2027, underpinned by increased market share in psoriasis treatment and its growing use in inflammatory bowel disease (IBD).

Rinvoq is also slated for success, with projections suggesting it will reach over $10 billion in revenue in 2027 across rheumatology, IBD, and atopic dermatitis applications. Rinvoq's forecast includes moderate additions from several new treatment areas, onto which ABBV hopes to introduce the drug during the latter half of this decade. These new indications have a combined peak sales capability equivalent to several billion dollars.

ABBV maintains a robust competitive stance with high capture rates, as confirmed by Chief Commercial Officer Jeffrey Stewart. While currently on the lower end of the prescription share spectrum, Stewart remains optimistic about potential growth opportunities. He states there remains significant scope for boosting patient uptake of Rinvoq and Skyrizi, particularly within their existing treatment applications.

Moreover, the company has submitted its Skyrizi application for use in treating ulcerative colitis, with approval anticipated by 2024. Rinvoq is concurrently undergoing Phase 3 trials for additional treatment indications, indicating an avenue for growth in the future. Potential applications for Rinvoq include conditions such as vitiligo, hidradenitis suppurative (HS), and lupus.

Beyond Skyrizi and Rinvoq, there is also ongoing development of next-generation drug options. Lutikizumab, for example, recently displayed beneficial outcomes in a Phase 2 trial in adults experiencing moderate to severe HS and is set to advance to Phase 3.

ABBV's proficiency spans beyond immunology, despite its Oncology division recording a 7.4% year-on-year decrease to $1.51 billion, attributed to competitive pressures on Imbruvica. This trend is expected to prevail for a few more years. Imbruvica's U.S. market share has dwindled in favor of other BTK inhibitors and is among the initial 10 drugs that will be subject to price negotiation for Medicare coverage.

Nevertheless, ABBV's $10 billion ImmunoGen acquisition deal is projected to bolster the company's presence in the solid tumor space – beginning with the already-approved Elahere, a second-line therapy for specific ovarian cancer types. The deal is anticipated to result in R&D synergies across multiple treatments in this area.

ABBV's aesthetics segment has demonstrated resilience, marking a 6.4% year-on-year appreciation, primarily driven by an 11.8% annual increase from Botox cosmetics. Given Botox's impressive market penetration, the aesthetics segment is envisaged to continue trending upwards.

In addition, ABBV's neuroscience division reported a substantial 22.6% year-over-year growth, fueled by successful launches of migraine medications and an extended indication for Vraylar for major depression treatment. Migraine medications Ubrelvy and Qulipta are projected to attain combined peak revenues of $3 billion.

A paramount development in this segment was the $8.7 billion Cerevel Therapeutics acquisition. ABBV's prevailing neuroscience portfolio, in conjunction with its combined pipeline with Cerevel, epitomizes a substantial growth prospect stretching into the next decade.

For the fiscal year 2024, ABBV anticipates its revenue to be $54.2 billion and adjusted EPS between $11.05 and $11.25. This guidance includes a $0.32 per share dilutive impact tied to the proposed ImmunoGen and Cerevel acquisitions, slated for completion around mid-2024.

Analysts predict ABBV's revenue for the same period will reach $54.53 billion, while EPS is projected to hit $11.25 billion.

Following an optimistic quarterly earnings report, a surge was noted in ABBV shares. Eliciting this rise were the post-earnings price target escalations by analysts tracking the trajectory of the pharma company. Wall Street analysts expect the stock to reach $176.53 in the next 12 months, indicating a potential upside of 3.1%. The price target ranges from a low of $135 to a high of $200.

Wells Fargo maintains an overweight rating on ABBV shares, raising the firm's price target to $200. The financial institution highlighted an improving growth narrative for ABBV, as its products – Skyrizi and Rinvoq – are positioned to surpass Humira.

Bottom Line

Global medicine expenditure grew 35% over the past five years, and it is anticipated to surge around 38% by 2028, underlining the increasing demand for medicinal products. Moreover, the escalation in autoimmune diseases, now the third most frequent reason for chronic afflictions in the U.S., has instigated an ascending demand for next-generation immunology drugs. The next-generation immunology drugs market is poised to grow at a 6.1% CAGR by 2029.

Pharma firm ABBV is taking considerable strides to foster investor confidence, exhibiting its ability to succeed Humira, the primary growth engine since its inception as an independent entity. Furthermore, robust sales of Skyrizi and Rinvoq, along with significant oncology and neuroscience acquisitions, have fortified its operational pipeline and enhanced portfolio balance.

Considering market dynamics and drug trajectory, ABBV's projected growth appears feasible. While Humira sales are projected to temper due to escalating biosimilar competition from 2024, consistent gains are expected for the company's immunology franchise post-2024. The adept transition after Humira's exclusivity termination played a pivotal role in the recent upgrade.

In the pipeline, ABBV will require bolstering phase 3 assets, although an improved phase 2 pipeline and recent acquisitions of ImmunoGen and Cerevel enhance the company's long-term outlook. With the ImmunoGen acquisition, optimism surrounds the cancer drug Elahere. Late 2024 or early 2025 should see promising phase 2 data for several Alzheimer’s drugs, potentially paving the way for major new blockbusters.

Moreover, the need for debt to finance acquisitions could potentially impact the company’s predicted net margin. However, improving bottom lines could be seen as the debt diminishes.

Investors relish substantial portfolio returns, especially income investors who prioritize consistent cash flow from liquid investments. ABBV pays an annual dividend of $6.20 per share, yielding 3.68%, far exceeding the industry average of 1.59% and the S&P 500's yield of 1.34%. ABBV's dividend has seen an 8.68% CAGR over the past five years.

Future dividend growth will be contingent on earnings growth and the payout ratio. ABBV's present payout ratio stands at 53.92%, signifying that over 53% of its trailing 12-month EPS was disbursed as dividends.

Additionally, the company has maintained an impressive track record, with a decade-long streak of increasing dividends. Over the past 10 years, its dividend payments grew at a 14.1% CAGR. Its trailing-12-month levered FCF margin of 43.65% notably exceeds the industry average. Moreover, as of September 30, 2023, ABBV had cash and equivalents of $13.29 billion. The overall scenario supports the notion that dividend hikes over the past decade have not impeded cash accumulation.

Moreover, its notable reserve could act as a buffer against unforeseen circumstances. Therefore, this stock presents a solid prospect for passive income generation, reinforcing investors' rationale for the inclusion of ABBV in their portfolios.

Understanding Meta's 0.4% Yield and Its Growth Potential

Posted on by The INO.com Team

Dividend-loving investors worldwide woke up with exciting news on Friday, as Facebook parent Meta Platforms, Inc. (META) announced its first-ever quarterly dividend and authorized a $50 billion share buyback program.

The company will pay a cash dividend of 50 cents per share on March 26 to shareholders of record as of February 22, joining other peers, including Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Oracle Corporation (ORCL), which have regular payouts. META’s board intends to issue a cash dividend on a quarterly basis.

“Introducing a dividend just gives us a more balanced capital return program and some added flexibility in how we return capital in the future,” Meta’s Chief Financial Officer Susan Li told analysts on its earnings call.

META’s annual dividend of $2 translates to a yield of 0.4% at the prevailing share price. The stock finished nearly 20% higher to $474.99 on Friday after reporting better-than-expected fourth-quarter and full-year 2023 earnings.

The average yield for a dividend-paying stock in the S&P 500 is nearly 2%. Meta’s dividend payout is lower than that rate; however, companies generally start small. Now, investors can look forward to its dividend growth and stock gains.

Looking at Microsoft, the company initiated its cash dividend on January 16, 2003. Its annual dividend was $0.08 per share, which resulted in a yield of about 0.3%. A year following the dividend declaration, MSFT’s stock was up 10%, and the annual dividend for 2024 was raised to $0.16. Currently, the company pays a quarterly dividend of $0.75.

Talking about Apple, it stopped paying cash dividends in 1995 but then declared again in January 2013. Adjusting for all the splits, cash dividends in 2013 translated to an annualized yield of nearly 1.4%. A year after the dividend restart, AAPL’s stock was approximately 24% up as the company continued payouts. Since the restart, Apple has paid a total of around $34 per share.

Dividends are typically welcomed by shareholders and signal management’s confidence about the company’s future growth. Moreover, initial dividend payouts open up to investors who only hold stock in dividend payers.

Further, Meta’s recently released report marked the fourth quarter of the company’s self-described “year of efficiency,” which founder and CEO Mark Zuckerberg announced in February 2023. The company’s turnaround strategy involved layoffs and other cuts to spending, which in turn ended up being a successful effort to reverse the previous year’s revenue declines and share price weakness.

Outstanding Last Reported Financials

For the fourth quarter that ended December 31, 2023, META reported revenue of $39.17 billion, an increase of 24.7% year-over-year. The revenue surpassed analysts’ estimate of $40.11 billion. The company’s revenue from the Advertising segment grew 23.8% year-over-year, and its revenue from the Family of Apps segment rose 24.2%.

Meanwhile, META’s total costs and expenses reduced by 7.9% year-over-year to $23.73 billion. Its operating margin more than doubled to 41%, a clear sign that several cost-cutting measures are boosting profitability.

Facebook parent Meta’s income from operations rose 156% from the prior year’s period to $16.38 billion. Its net income increased 201.3% from the year-ago value to $14.02 billion. The company posted earnings per share attributable to Class A and Class B common stockholders of $5.33, compared to the consensus estimate of $1.76, and up 202.8% year-over-year.

As of December 31, 2023, META’s cash and cash equivalents stood at $41.86 billion, compared to $14.68 billion as of December 31, 2022. The company’s total assets were $229.62 billion versus $185.73 billion as of December 31, 2022.

Family daily active people (DAP) came in at 3.19 billion on average for December 2023, up 8% year-over-year. Family monthly activity people (MAP) was 3.98 billion as of December 31, 2023, an increase of 6% year-over-year.

Also, Facebook daily active users (DAUs) and Facebook monthly active users (MAUs) were 2.11 billion on average and 3.07 billion as of December 31, 2023, up 6% and 3% year-over-year, respectively.

As of December 31, 2023, the tech giant completed the data center initiatives and the employee layoffs, along with the facilities consolidation initiatives. META’s headcount was 67,317 at the end of the year 2023, a decline of 22% year-over-year.

“We had a good quarter as our community and business continue to grow,” said CEO Zuckerberg. “We’ve made a lot of progress on our vision for advancing AI and the metaverse.”

Fiscal 2024 Outlook

For the first quarter of 2024, META expects total revenue to be in the range of $34.50-37 billion. For the full year 2024, the management expects total expenses to be in the range of $94-99 billion, unchanged from the previous outlook.

The company anticipates full-year capital expenditures to be in the range of $30-37 billion, an increase of $2 billion in the high end of its prior range. Meta expects growth to be driven by investments in servers, including AI and non-AI hardware and data centers, and it plans to ramp up construction on sites with its previously announced new data center architecture.

META’s updated outlook reflects its evolving understanding of its AI capacity demands as the company anticipates what will be needed for the next generations of foundational research and product development.

Ramping up Efforts in AI and Metaverse

Meta is making consistent efforts to secure its place in the increasing AI arms race. Last month, CEO Mark Zuckerberg announced that META plans to build its own artificial general intelligence, known as AGI, which is artificial intelligence that meets or exceeds human intelligence in almost every area. He added that the company further plans to open it up to developers.

In a video posted to Meta’s social network Threads, Zuckerberg said building the best AI for chatbots, creators, and businesses requires enhanced advancement in AI across the board. “Our long term vision is to build general intelligence, open source it responsibly, and make it widely available so everyone can benefit,” he said in a post on Threads.

The tech giant announced building out its infrastructure to accommodate this push to get AI into products, and it planned to have about 350,000 H100 GPUs (graphics processing units) from chip designer NVIDIA Corporation (NVDA) by the end of this year. In combination with equivalent chips from other suppliers, Meta will have around 600,000 total GPUs by the end of the year, Zuckerberg said.

He added that the company plans to grow and bring its two major AI research groups – FAIR and GenAI – together to accelerate its work. He further said he believes that Meta’s vision for AI and the AR/VR-driven metaverse are connected.

“By the end of the decade, I think lots of people will talk to AIs frequently throughout the day using smart glasses like what we’re building with Ray Ban Meta.”

Mark Zuckerberg’s recent announcement is one of the company’s biggest pledges to double down on AI. Earlier last year, after the viral success of OpenAI’s ChatGPT, Zuckerberg announced that Meta is creating a new “top-level product group” to “turbocharge” the company’s work on AI tools.

Since then, Meta has introduced tools and information aimed at assisting users understand how AI influences what they see on its apps. The company has launched a commercial version of its Llama large language model (LLM), ad tools that can generate image backgrounds from text prompts, and a “Meta AI” chatbot that can be accessed directly via its Ray-Ban smart glasses.

In his posts last month, Meta CEO said the company is currently training a third version of the Liama model.

Impressive Historical Growth

Over the past three years, META’s revenue and EBITDA grew at CAGRs of 16.2% and 15%, respectively. The company’s net income and EPS rose at respective CAGRs of 10.3% and 13.8% over the same timeframe. Its levered free cash flow improved at 25.6% CAGR over the same period.

Moreover, the social networking company’s total assets increased at a CAGR of 13% over the same timeframe.

Favorable Analyst Estimates

Analysts expect META’s revenue for the first quarter (ending March 2024) to grow 25.3% year-over-year to $35.88 billion. The consensus EPS estimate of $4.25 for the ongoing quarter indicates a 93.3% year-over-year increase. Moreover, Meta has topped consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.

Furthermore, Street expects Meta’s revenue and EPS for the fiscal year (ending December 2024) to grow 17.3% and 32.4% year-over-year to $158.20 billion and $19.69, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 11.2% and 15.3% from the previous year to $175.98 billion and $22.70, respectively.

Solid Profitability

META’s trailing-12-month gross profit margin of 80.72% is 64.5% higher than the 49.07% industry average. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 36.33% and 28.98% are considerably higher than the industry averages of 8.47% and 3.50%, respectively.

In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 28.04%, 17.84% and 17.03% favorably compared to the respective industry averages of 4.09%, 3.52%, and 1.43%. Also, its trailing-12-month levered FCF margin of 23.52% is 202.7% higher than the industry average of 7.77%.

Bottom Line

Facebook parent META recently reported a big beat on earnings and revenue for the fourth quarter of fiscal 2023. The company, which owns Facebook, Instagram, and WhatsApp, also announced its first-ever dividend of $0.50 per share and authorized a $50 billion share buyback program. Dividends generally signal management’s confidence about the company’s future growth.

Moreover, Meta’s market capitalization last month surpassed $1 trillion. The company last exceeded this mark in the market cap in 2021, when it was still known as Facebook.

Meta’s “year of efficiency” and several cost-cutting measures paid off in a significant way and offered a sweetener for investors, sending its shares higher. The stock is up nearly 38% over the past month and has gained more than 150% over the past year.

2023 was a pivotal year for the social networking giant, where it raised its operating discipline, delivered solid execution across its product priorities, and significantly improved ad performance for the businesses that rely on its services. In 2024, the company further seems well-positioned to build on its progress in each of these areas while advancing its ambitious efforts in AI and Reality Labs.

Given META’s robust financials, accelerating profitability, dividend initiation, and solid growth outlook, primarily as it seeks to strengthen its position in AI, it could be wise to invest in this stock now.

Buy Alert: Merck's AI Revolution and the Role of Generative AI in Drug Research

Posted on by The INO.com Team

Advancements in Artificial Intelligence (AI) have yielded remarkable progress in technological and operational efficiencies across various sectors. Yet, AI's noteworthy penetration into the healthcare field is raising propositions of transformation.

Pharmaceutical companies have been capitalizing on AI long before the recent surge in interest – the utilization of intricate AI models to decipher disease mechanisms serving as a prime example. AI-facilitated applications like AlphaFold2, ESMFold, and MoLeR offer novel insights into protein structures that unravel numerous diseases.

While the most advanced AI-centric medicine entities have Phase 2 clinical trial drugs, the unlocking of AI-healthcare collaboration power, especially in fashioning potential cures for lethal diseases, will witness compelling progression in the upcoming years.

Researchers today regard AI as a pioneering tool offering an expedited analysis of vast data quantities, surpassing human capabilities. Presently, drug development demands a decade or more in research and development, compounded by the escalating production costs over the past decade – a conundrum existing despite technological advancement.

With AI's intervention, the feasibility of expediting this process, slashing developmental timeframes and drug production costs by up to 30%, emerges. There is also a reduction in failure risk, given the current approximately 90% attrition rate, depending on the therapeutic domain.

GenAI (a subset of deep learning) embarks on a fresh leap in AI evolution and imbues computers with transformative abilities. Its arrival challenges us to envision its implications within the healthcare sphere, particularly drug discovery.

While most ongoing projects are in their infancy stages, the merger of GenAI and drug discovery might instigate not only novel treatments but also breakthroughs potentially outpacing nature. GenAI is revolutionizing several facets of the pharmaceutical realm, from speeding up drug discovery, enhancing procedural efficiency in clinical trials, accelerating regulatory approvals, and ultra-targeting marketing to facilitating in-house medical materials production. GenAI's potential to unlock billions in industry value is imminent.

By expediting drug compound identification processes and their corresponding development, approval, and efficient marketing, this technology could generate an economic value between $60 to $110 billion annually for the pharma and medical-product industries.

The looming GenAI-steered transformation in life sciences lends immeasurable advancements to human health and quality of life. An accelerated drug discovery process, for instance, aids in combating diseases swiftly, freeing up resources for underserved areas such as orphan diseases.

GenAI’s capability to derive patterns and insights from extensive patient data will ignite more personalized treatments, hence improving patient outcomes and streamlining patient care by minimizing discrepancies in therapeutic manufacture and delivery.

Lastly, by automating mundane tasks like document creation and record-keeping, GenAI carries significant potential to augment productivity within the medical research field and enables researchers and medical liaisons to devote more time to patient-centered tasks. In turn, this holds promise for improved service to both clinicians and patients.

Pharmaceutical powerhouse Merck & Co., Inc. (MRK) has set sights on exploring GenAI platforms. The company's interest comes on the heels of the Merck Research Labs collaboration announcement with Variational AI, supported by the CQDM Quantum Leap program.

At the core of this innovation is Variational AI, a trailblazer in optimizing drug discovery and development through the efficient employment of GenAI. This potent technology called Enki offers a novel approach to drug discovery. Drawing parallels with AI software like DALL-E and Midjourney, which can translate text prompts into visual images, Enki generates small molecular structures in response to target product profiles (TPPs). The user picks the desirable attributes, selecting the targets they aim to affect alongside those they seek to avoid; then, Enki produces molecules tailored to meet the TPP specifications.

Constructed as a fundamental model for small molecule drug discovery, Enki serves to hasten and mitigate risks attached to the early stages of discovery. The startup believes that a series of prompts about the TPP is all that stands between users and innovative, selective, and lead-like structures ready for synthesis. Utilizing experimental data, Variational trained Enki to generate molecules based on TPPs, thereby handing researchers the tool to canvas a broader scope of chemical space.

Thanks to the Enki Platform, chemists can bypass the complex process of developing their own GenAI models. They can input their TPP and receive an array of innovative, diverse, selective, and synthesizable lead-like structures within days, facilitating a swift transition into lead optimization. With this dynamic start, it is evident that MRK, the leading purveyor of pharmaceuticals, aims to make a significant splash in the new year.

Several other factors present an optimistic outlook for MRK in 2024.

MRK's flagship oncology drug, Keytruda – the highest-grossing prescription medication worldwide – is slated to gain approval for additional uses. In 2023 alone, Keytruda grossed a remarkable $25.01 billion, equating to 45.2% of MRK's fourth-quarter sales. Forecasters project Keytruda to yield over $30 billion in sales by 2026.

MRK has already seen the tangible effects of its 2023 transactions, substantially boosting the company's future revenue projections. The pharma giant now anticipates garnering $20 billion from fresh oncology products in development by the mid-2030s, almost doubling its earlier pipeline forecast of just over $10 billion.

However, as Keytruda approaches its patent expiration in 2028, MRK is already searching for strategic acquisitions within $15 billion, preparing to weather the ensuing patent erosion. This effort is to ensure continuous growth through novel lucrative ventures, replacing the revenue stream provided by Keytruda upon losing its exclusiveness.

MRK's proactive approach comes on the heels of its recent $680 million acquisition of Harpoon Therapeutics, following the larger purchases of Prometheus Bio ($10.8 billion) and Acceleron Pharma ($11.5 billion).

MRK, buoyed by solid fourth-quarter performances backed by strong Keytruda sales, has secured several deals over the past year. Notably, this includes a notable $5.5 billion agreement with Japan's Daiichi Sankyo, granting co-development rights for three antibody-drug conjugate cancer treatments. This partnership has contributed to MRK's non-GAAP R&D expenses, increasing them to $9.63 billion in the fourth quarter of 2023 and $30.53 billion for fiscal 2023.

Aside from its dominant presence in the oncology sphere, MRK is also targeting the weight loss medication market. The company is developing Efinopegdutide, a GLP-1 class drug for weight management that has demonstrated promising trial results.

After securing only 1% year-over-year sales growth in fiscal year 2023, analysts project a 5.3% year-over-year increase in the fiscal year ending December 2024. This predicted growth is expected to propel the company’s EPS to $8.49, a 462.1% year-on-year increase.

MRK estimates its global sales between $62.70 billion and $64, while non-GAAP EPS is expected to be between $8.44 and $8.59.

Furthermore, MRK boasts an impeccable dividend history, with the annual dividend currently at $3.08 per share, yielding 2.55%. In an impressive display of consistency, MRK has increased its dividend for 13 consecutive years and holds a four-year average yield of 2.97%. Also, over the past three and five years, its dividend grew at a CAGR of 7.8% and 9.3%, respectively.

MRK’s shares have gained over 15% year-to-date to close the last trading session at $126.38. Moreover, it trades above the 50-, 100-, and 200-day moving averages of $110.53, $107.39, and $109.24, respectively. If this upward trajectory persists, the company is poised for a notable performance in 2024.

Bottom Line

With the employment of GenAI, the pharma industry has made a considerable stride forward, leading to significant operational enhancements and quicker benefit realization, especially in drug discovery. The GenAI in drug discovery market is projected to surpass around $1.13 billion by 2032, growing at a CAGR of 27.1%.

MRK has swiftly evaluated and addressed the potential impact of GenAI, demonstrating commendable adaptability in deploying the most appropriate tool for each specific use case. This technology holds great promise for MRK's research, trials, manufacturing, and commercialization endeavors.

Partnerships formed between MRK, AI technology firms, and research institutions could catalyze innovation in GenAI for drug discovery and bolster the company's product pipeline in the future. MRK, with an abundant oncology pipeline, is utilizing advanced technology for drug research. Furthermore, MRK shares are compelling due to robust shareholder returns, growth prospects, solid profitability, and an optimistic outlook.

However, the stock is priced at a premium compared to its competitors. In addition, despite displaying consistency in its dividend payment, its yield of 2.55% sits not only below the U.S. consumer inflation rate but also under that of its healthcare counterparts, potentially rendering MRK a less appealing proposition for conservative investors.

Further complicating matters, government regulations and the Inflation Reduction Act might unfavorably affect MRK's operations. Modifications such as negotiations with Medicare, implementation of medication discounts covered under Medicare Part B and D, and enforced penalties for escalating drug prices pose potential financial risks. MRK's Januvia ended up on this list, jeopardizing the financial stability of MRK's diabetes franchise.

Sales for the Januvia/Janumet (diabetes) franchise declined 13% year-on-year to $787 million in the fiscal fourth quarter of 2023. The drug's sales suffered due to dwindling demand in the U.S. and generic competition in certain international markets. Such regulatory restraints could decelerate MRK’s future revenue growth, pressuring management to reassess its R&D approach.

Therefore, investors are advised to weigh both the positive and negative factors prudently before investing in this stock.

Risk and Reward: Amplify High-Income ETF (YYY) and Its More Than 12% Dividend Yield

Posted on by The INO.com Team

After a sustained stretch of escalations, the U.S. Federal Reserve has placed a hold on its trajectory of interest rate hikes. It has maintained the status quo on the federal funds rate without changes since July 2023. Investors anticipate a rate reduction in May, which diverges from earlier projections of March made at the year's start. As a result, credit markets are recalibrating to this shift.

The 10-year U.S. Treasury yield surpassed 5% in October last year. The soaring yield on long-term bonds had negatively impacted stocks – most significantly those of dividend stocks. Nonetheless, the surge was decidedly unsustainable.

The 10-year Treasury yield dipped below 4% for the first time in approximately two weeks as investors anticipated the latest interest rate policy and monetary directives from the Fed. Treasuries are often the safe haven for investors in times of perceived impending concerns, and the recent withdrawal from bank stocks could be inducing flashbacks of the banking crisis experienced last spring.

Moreover, a gradual cooling within the labor market was recently revealed, which was evident from the employment cost index and the ADP payrolls report. These indicators further catalyze market optimism concerning a potential interest rate cut by the Fed, which could further lower yields.

Lastly, the Treasury Department’s quarterly refunding report indicates that the supply of longer-term bonds is unlikely to exceed expectations. A limited supply assuages concerns about the market’s capacity for debt absorption and pushes yields in a downward direction.

Simultaneously, investors eagerly watch for insights into the Fed's strategy for halting the drawdown of its balance sheet, a process dubbed quantitative tightening. Approximately $1.3 trillion in bonds has been eliminated from the Fed's balance sheet, which peaked near $9 trillion in mid-2022, leading to overall liquidity contraction in the market. Many in markets have been expecting the central bank to wind down quantitative tightening this year.

Given this backdrop, investors are increasingly turning their focus toward high-dividend ETFs in their quest for profitable, reliable income streams and diversification.

Amplify High Income ETF (YYY) is a specialty ETF that's known as a "fund of funds". Rather than purchasing individual stocks, bonds, or REITs or engaging in the selling of covered calls like many other ETFs, YYY operates by investing in and holding other income-generating funds. It aims to amass dividends from these funds and then distribute them to its shareholders. YYY has been operational since 2013, and since then, it has succeeded in drawing significant investment capital.

YYY operates by creating a portfolio of closed-end funds (CEFs) based on a rules-based index. The selection of holdings is driven by quantitative metrics, which allows for a certain degree of objectivity in investment decision-making as it eliminates some human element. YYY's sophisticated algorithmic system is programmed to pinpoint the most lucrative CEFs that meet three important criteria – yield, liquidity, and discount to net asset value (NAV).

This strategy has been beneficial so far, as demonstrated by the fund's impressive current yield of 12.4%. Acquiring ETFs below their NAV is considered a discount. There is scope for capital appreciation if the CEFs under YYY's portfolio manage to reduce their discounts to NAV. As of January 31, 2024, YYY had an average CEF discount of 8.20%, which suggests that YYY's market pricing was more economical compared to the NAV of its underlying CEFs, indicating a potential value proposition for investors.

As of January 31, YYY reported $428.22 million in Assets Under Management (AUM) and an NAV of $11.78. The ETF also seeks to deliver high monthly income to its investors. YYY boasted a distribution rate of 12.41% and a 30-day SEC yield of 10.58% as of January 31, 2024. This is notably higher than the yield on a 10-year treasury bond, underscoring YYY's efficacy as a high-yield investment mechanism.

Its net inflows were $92.28 million over the past year and $50.62 million over the past six months.

Moreover, YYY has gained 12.3% over the past three months and 1.2% over the past month to close the last trading session at $11.76.

YYY’s Holdings

YYY maintains a diversified stance, holding 45 different positions, with its top 10 holdings contributing to 32.1% of the entire assets.

No single holdings exceed the 3.62% that PIMCO Dynamic Income Fund (PDI) accounts for. The amassed holdings mostly emerge from esteemed investment firms' CEFs, including the Eagle Point Credit Company (ECC) with 3.46% of the weightage in the fund and Oxford Lane Cap Corp. (OXLC) at 3.45%. Though the top holdings like PDI and OXLC offer alluring dividend yields, their performance over the preceding decade was underwhelming.

Fees

While YYY's diversified nature and attractive yield, complemented by a portfolio trading at a discount to NAV, present an enticing proposition, it should be considered that the fund constitutes other funds imposing their fees. Hence, its expense ratio is relatively high, standing at 2.72% against the category average of 0.91%.

Given that it holds CEFs, which levy their management fees, YYY also incorporates "acquired fund fees" of 2.22%. With the addition of YYY's own 0.5% management fee, one is looking at a total of 2.72% management fee.

Bottom Line

Investor interest is frequently piqued by ETFs like YYY, boasting exceptional dividend yields. Currently offering an enticing 12.4% yield, YYY does possess a few redeeming features. However, investors need to look under the hood before endorsing any commitments to this sort of ETF.

CEFs often encounter a 10% or greater disparity to NAV, and while YYY’s bundle of CEFs trading at an 8.2% dip to NAV might appear attractive, there's no guarantee of shrinkage in this gap. Investment giant Fidelity stresses that “a CEF’s discount or premium tends to persist. If the CEF typically trades at a large discount, it will tend to stay at a large discount, barring any corporate actions from the board of directors.”

Hence, although NAV discounts potentially generate value, lacking a definitive catalyst, this discount may remain.

CEFs are actively managed and thus tend to incur higher fees and regularly employ leverage to augment returns, which simultaneously amplifies risk. Consequently, YYY's substantial fee poses a significant disadvantage, accumulating over time.

These elevated costs might be justifiable if YYY was significantly outstripping the broader market. Its impressive 12.4% yield may suggest thriving returns; sadly, long-term performance paints a different picture. YYY experienced a one-year total price return of negative 7.4%. Over the past two years, its total return plummeted by 25.8%. Although 2022 proved difficult across the market, pardoning YYY that particular year. However, over a five-year period, its returns still fell by 32.6%.

Despite providing investors with dividend gains in this timeframe, YYY substantially trails the broader market. For instance, the SPDR S&P 500 ETF Trust (SPY), an accurate S&P 500 representation, advanced by 78.9% in the same five-year duration while only levying a 0.09% fee. Similarly, the Invesco QQQ Trust ETF (QQQ), investing widely in the Nasdaq 100, yielded 148.1% over the identical timeframe with a nominal 0.2% fee.

Choosing investment strategies like SPY or QQQ could have significantly boosted potential earnings, thus creating a substantial opportunity cost.

Summing up, YYY holds appealing elements, such as its high yield and portfolio’s NAV discount, but it would be wise if investors proceed with caution and wait for a more favorable entry point in this ETF.

ASML vs. Nvidia: The Battle for AI Dominance Heats Up

Posted on by The INO.com Team

 

For the first half of the 20th century, artificial intelligence (AI) remained a subject of intrigue, primarily among science fiction enthusiasts. Characters like sentient machines and androids, frequently depicted in various literary and cinematic masterpieces, embodied the concept of AI at its most imaginative peak. In the second half of the century, scientists and technologists began their diligent pursuit to make AI a reality.

By 2023, the world managed to get an up-close and personal view of the stunning advancements in the field of AI technology. This rapidly evolving innovation is crucial in sculpting the future of humanity across diverse industries. At present, it plays a pivotal role as an impetus behind the emergence of new technologies such as big data, robotics, and the Internet of Things (IoT), to name a few.

Additionally, GenAI, with tools like ChatGPT and AI art generators, is gaining widespread attention. This momentum is anticipated to reaffirm AI's position as a technological trailblazer for the foreseeable future.

AI has its influence across machine learning, large language models, intelligent applications and appliances, digital assistants, synthetic media software, and autonomous vehicles. Corporations that neglect to invest in AI services and products may face the threat of obsolescence. Company executives project an increase in their expenditure for the year 2024 to modernize data infrastructure and adopt AI.

As AI continues its growth, semiconductors and their components have emerged as key topics of debate in the 2023 business landscape. This technological boom has often drawn parallels to the American Gold Rush of the nineteenth century, with the lucrative vantage point proving not to be the gold miners but the shovel manufacturers. Today, it’s NVIDIA Corporation (NVDA) that positions itself as a prominent "shovel seller" by producing chips; these are rare yet vital resources in the realm of AI development.

Based in Veldhoven, Netherlands, ASML Holding N.V. (ASML) is poised to reap substantial benefits from the swift incorporation of GenAI and machine learning technologies. It is projected that AI will initiate significant growth in leading-edge logic wafer capacity through increased volumes of GPU, CPU, and connectivity chips and escalating die sizes.

ASML holds the unique position of being the sole provider of extreme ultraviolet lithography machines, crucial for generating advanced process nodes, including TSMC's 5nm and 3nm parts.

This positions chipmakers – who create the bulk of the chips exploited for powering AI training, machine learning, and inference workloads – as dependent on this European equipment supplier.

Before we delve into a comparative analysis of NVDA and ASML to determine a better long-term buy, let's first individually look at the companies:

NVIDIA Corporation (NVDA)

NVDA, widely acknowledged as the leading U.S. manufacturer of chips and graphics processing units tailored for AI applications, celebrated a banner fiscal year in 2023. The company's stock skyrocketed over the year, tripling in value, propelled by the introduction of innovative products and a surge in reliance on AI technology. Its third-quarter revenue stood at $18.12 billion, with profits surging nearly fourteenfold from the year-ago quarter to $9.24 billion and pushing the company's market cap above $1.5 trillion.

NVDA's reputation for delivering high-quality, AI-ready hardware solutions has earned it a favored status among numerous companies. As a testament to NVDA’s relationship with various multinational corporations, META, a member of the "Magnificent Seven" tech giants, has plans to employ NVDA's GPUs. With the aim of constructing a "massive compute infrastructure" to meet its ambitious AI objectives, META will integrate 350,000 NVDA H100 GPUs and nearly 600,000 H100 compute-equivalent GPUs into its system by 2024.

Investors' exuberance for AI can be traced back to OpenAI's launch of ChatGPT on November 30, 2022. Following this event, NVDA's shares soared by more than 250%, solidifying the company's position as an industry frontrunner in semiconductor manufacturing. This upswing guided the S&P 500 Semiconductor stock price index toward a gain of 108%.

As for what's ahead, NVDA is expanding its production capability for the much-coveted H100 chip.

Further proof of NVDA's dynamism lies in its net income and EBIT margins of 42.10% and 45.94%, which vastly outperform industry averages of 2% and 4.79%, respectively. Likewise, its trailing-12-months ROCE, ROTC, and ROTA of 69.17%, 33.23%, and 34.88% are also significantly higher than the industry averages of 1.48%, 2.82%, and 0.41%, respectively.

As NVDA gears up for its next earnings announcement on February 21, 2024, anticipation is mounting among investors. Revenue and EPS are projected to be $20.21 billion and $4.52, denoting year-over-year increases of 234.1% and 413.2%, respectively.

That said, investors should stay mindful of potential geopolitical tensions. As history indicates, China is crucial to NVDA, contributing to over 90% of the country's $7 billion AI chip market. Should the U.S. impose restrictions on high-end chip exports to China, billions of orders could be placed under threat.

Furthermore, with NVDA trading at a forward non-GAAP price-to-earnings (P/E) ratio of 50.82x, it can be inferred that investors are paying a considerable premium, potentially influencing the valuation of the company’s stock. The forward price/earnings-to-growth (PEG) ratio of 0.37, which may seem attractively balanced at first glance, also suggests that any downward revisions to the EPS could trigger a significant decline in stock value. So far, analysts have revised EPS estimates upward. Nonetheless, it should be noted that this trend could reverse if these estimations fail to materialize.

ASML Holding N.V. (ASML)

ASML develops, produces, markets, sells, and services advanced semiconductor equipment systems. Its key product line is high-end, extremely expensive, and intricate systems for semiconductor manufacturing that employ extreme-ultraviolet (EUV) light to print features at a resolution of 13 nm – outpacing the reach of deep-ultraviolet (DUV) lithography, used in another product line that ASML also offers.

The EUV systems, exclusive to ASML, have been tremendously successful, enhancing the company's profit margins and its stock performance over the past five years. In fact, ASML had emerged as the third most valuable publicly listed firm in European stock markets as of late January.

AI system architecture necessitates the inclusion of chips specifically designed to process substantial quantities of data. High-performance memory chips are crucial to achieving the full potential of AI. The criticality of these chips has prompted chip manufacturers to invest in EUV lithography systems, essential elements of advanced chip manufacturing, made available by ASML. Under normal conditions, the delivery time for ASML's flagship EUV system ranges from 12 to 18 months.

ASML's critical tools are required by Taiwan Semiconductor Manufacturing (TSM), Intel (INTC), and Samsung to produce advanced AI chips for both their clients and their own needs. This dependence on ASML's equipment underscores the company’s pivotal role in the ongoing AI revolution.

In 2023, a lethargic order pace from customers and harsh market circumstances posed challenges for ASML. However, during the same year, the company made a resilient recovery. Its resurgence in orders coincides with the continued competition among top-tier chip manufacturers striving to develop 2-nanometer chips, thus enhancing the computing speed of AI algorithms. The imminent inauguration of several chipmaking facilities is also projected to amplify the demand for ASML machines further.

ASML disclosed solid earnings for the fiscal fourth quarter of 2023. Driven by the demand for the specific equipment necessary for AI chip production, net booking reached €9.19 billion ($9.95 billion), of which €5.6 billion ($5.85 billion) is EUV. Sales escalated to €7.24 billion ($7.84 billion), generating €2.05 billion ($2.22 billion) in profits representing an 8.2% year-over-year increase.

ASML's order lead time of 12 months to 18 months indicates that customers placing an order now can anticipate delivery during the initial half of 2025. It is projected that the order backlog will maintain its swift growth in subsequent quarters, reinforcing management’s narrative of future growth and market stability at the bottom of the cycle.

ASML was highly profitable last year, with shares peaking in the first half of 2023 before briefly declining and then rebounding to approach historic levels unseen since late 2021. This surge can be attributed to ASML's well-received earnings report for the fiscal fourth quarter of 2023. However, the company's current premium valuation and tempered outlook for its 2024 financial performance raise some concerns.

ASML’s non-GAAP P/E ratio of 43.16x suggests a high valuation, indicating the potential for ASML to face some financial pressures. The firm will also need to navigate potential challenges ahead, particularly regarding Chinese chipmakers impacted by export restrictions. Nevertheless, ASML foresees continued robust demand despite potential volatility in this market.

Despite these immediate challenges, ASML remains bullish for the long term about the industry it serves. The company views 2024 as a "transitional" year, predicting that its semiconductor clients are on their way through the bottom of their business cycles and will, therefore, increase demand for its systems significantly in the latter half of 2024 and even more so in 2025. In preparation for this predicted uptick in demand, ASML is actively investing in capacity ramping and technological advancement.

Financial analysis firm Jefferies further supports ASML's optimistic outlook, declaring that ASML is well-positioned to capitalize on an anticipated surge in AI demand. Based on this projection, it forecasts ASML’s revenue to grow at a 21% CAGR between 2022 and 2025.

The Winner

Peter Lynch once said, "Everybody is a long-term investor until the market goes down." During a market crash, plenty of investors retreat hastily, potentially missing out on substantial long-term gains. Therefore, a more prudent strategy would be to stay the course throughout downturns or even increase share purchases via dollar-cost averaging.

Nonetheless, this tactic is only applicable to robust, sustainable companies. Two firms fitting these parameters are NVDA and ASML – both undoubtedly presenting compelling long-term retirement investment opportunities.

However, there are certain factors one should consider. NVDA’s trailing-12-month gross profit margin of 69.85% is higher than ASML’s 51.29%. In addition, NVDA’s trailing-12-month cash from operations of $18.84 billion is higher than ASML’s $6.01 billion. Thus, NVDA seems more profitable.

Turning to growth, NVDA has exhibited an impressive revenue increase at a 44.8% CAGR over the past three years, while ASML trails with a still respectable growth at a 25.4% CAGR. During the same period, NVDA’s net income grew at a 70.3% CAGR compared to ASML’s 30.2% CAGR.

However, NVDA carries a heavy price tag reflected by its forward EV/EBITDA multiple of 47.34, higher than ASML’s 33.05. Similarly, NVDA’s high forward EV/Sales of 26.22x, compared to ASML’s 11.31x, further emphasizes the costliness of NVDA stocks.

NVDA possesses an astounding 90% stake in the AI chip market, which, when coupled with its astounding profitability and growth, underscores its industry dominance despite its lofty valuation.

The unprecedented demand surge for ASML machines, prompted by the burgeoning need for AI infrastructure, signifies the pivotal role the company plays in revolutionizing AI technologies. Notably, specialized AI chips, such as those fabricated by NVDA using ASML’s architecture, perpetually dominate the field, stressing the substantial weight ASML carries within the AI sphere.

However, growing production capacity due to ASML's record orders could produce potential price dips, impacting the industry negatively. The massive investment influx in semiconductor production may reduce pricing power and, contract margins and profits.

Turning a keen eye on dividends, NVDA pays an annual dividend of $0.16 per share, equating to a yield of 0.03%. Meanwhile, ASML offers a substantial dividend of $6.12 per share, yielding 0.70%. Also, ASML’s dividend grew at CAGRs of 34.9% and 30.7% over the past three and five years. Hence, investors aiming for dependable, long-term returns could consider allocating their resources toward incorporating ASML into their portfolios.

Undeniably, NVDA’s robust expansion is praiseworthy, with management consistently portraying an optimistic outlook for the company's future. However, the firm is not without risk. With NVDA's shares currently trading at 26.2x sales and 50.8x earnings, these valuations indicate that any slight mishap has the potential to jolt the company's market standing significantly. Given the prevailing market irregularities, potential hazards, and sluggish price momentum, exercising caution and waiting for a better entry point on the stock may be a sensible strategy.