Author: The INO.com Team

Salesforce (CRM) vs. Alphabet (GOOGL): AI's Role in Tech Layoffs Unveiled

Posted on by The INO.com Team

Since the launch of ChatGPT in November 2022, GenAI has been reshaping the future of work. From automating routine tasks to transforming entire job roles, generative AI is making a significant impact across multiple industries. A rapid acceleration of task automation could assist organizations in driving labor cost savings and boosting productivity.

If generative AI delivers on its promised capabilities, the labor market could face considerable disruption. Using data on occupational tasks in the U.S. and Europe, Godman Sachs Global Investment Research finds that about two-thirds of today’s jobs are exposed to some degree of AI automation. And this technology could substitute up to one-fourth of current work.

Goldman Sachs estimates that GenAI will eventually automate nearly 300 million of today’s full-time jobs globally.

AI’s Role in Latest Tech Layoffs

With just a month into the new year, tech layoffs are starting to pile up; however, analysts consider this a new normal for Silicon Valley in a considerable pivot to AI. The job cuts are not on the same scale as in late 2022 and early 2023 when tech companies got rid of thousands of employees, a blowback from the frenzied hiring that took place during the pandemic when everyday life turned digital.

According to layoffs.fyi, a California-based website that tracks the tech sector, the industry lost around 160,000 jobs last year. So far this year, tech layoffs are at nearly 24,584, the site showed, from 93 companies.

Layoffs.fyi estimates that approximately 20% of job cuts are brought on by AI and restructuring associated with it. Moreover, Silicon Valley jobs are on the front line, with some coding tasks primarily carried out by generative AI.

Cloud-based software provider Salesforce, Inc. (CRM) announced that it will be laying off about 700 employees, roughly 1% of its global workforce, adding to a brutal string of tech layoffs at the start of 2024. This move comes amid ongoing cost-cutting pressures from investors, including activist shareholders like Elliott Management, to boost its profit margins.

A year ago, CRM lowered its headcount by 10% as a part of its rebalancing efforts after a pandemic-era hiring boom.

Despite the recent cuts, Salesforce is still reportedly hiring for 1,000 open roles across the company, indicating that these layoffs could be a part of an adjustment in its workforce. The company’s focus is directing spending toward growth.

An unnamed source cited in the Wall Street Journal report that the latest round of layoffs could be more of a routine adjustment to the company’s headcount rather than a reactive measure to ongoing economic challenges.

Earlier this month, another tech company, Alphabet Inc. (GOOGL), laid off hundreds of employees across the company as it continues to push for efficiency and focus on its biggest product priorities and significant opportunities ahead.

According to the company, the job cuts will impact employees within Google’s hardware, voice assistance, and central engineering teams. Also, other parts of the tech company were affected.

This layoff announcement marks the latest cost-cutting effort at Google as it continues to work to rein in the drastic headcount growth that took place during the pandemic. In January last year, Google cut its workforce by 12,000 employees or nearly 6% of its employee count. Later in the year, the company made other cuts to its recruiting and news divisions.

Moreover, Google shifted its focus to prioritize developments in AI, launching products such as chatbot Bard and the large language model (LLM) Gemini as it aims to keep up with rivals, including Microsoft Corporation (MSFT) and Amazon.com, Inc. (AMZN).

This season’s tech layoffs are being framed more as restructuring rather than cutting down from prior over-hiring efforts; suggesting that even if employees lose their jobs, there could be some security within the industry more broadly. So, investors shouldn’t worry much about the recent job cuts.

Shares of CRM have gained nearly 27% over the past six months and more than 74% over the past year. Meanwhile, GOOGL’s stock has surged more than 14% over the past six months and approximately 55% over the past year.

Now, let’s review the fundamentals of CRM and GOOGL in detail:

Latest Developments

On January 14, 2024, CRM, at NRF 2024, announced new data and AI-powered tools for retail to help businesses drive efficiency and deliver connected shopping experiences. The Einstein 1 Platform will power these new retail innovations.

With generative AI built into Commerce Cloud and Marketing Cloud, retail merchandisers and marketers can tap into these generative tools with a real-time understanding of customer behavior and preferences to optimize every customer interaction — enhancing loyalty, boosting revenue, and driving employee productivity.

Also, on December 14, 2023, Salesforce unveiled major updates to its Einstein 1 Platform, adding the Data Cloud Vector Database and Einstein Copilot Search. Data Cloud Vector Database will unify all business data, including unstructured data like PDFs, emails, and transcripts, with CRM data to allow the grounding of AI prompts and Einstein Copilot.

Einstein Copilot Search will offer AI search capabilities to deliver accurate answers from Data Cloud instantly in a conversational AI experience, thereby driving productivity for all business users.

For GOOGL, 2023 was a remarkable year of significant advances in AI and computing. On December 6, Google launched its largest and ‘most capable’ AI model, Gemini, which will be in three different sizes: Ultra, Pro, and Nano.

Enterprises could use Gemini for advanced customer service engagement through chatbots and product recommendations and identifying trends for companies looking to advertise their products. Also, it could be used for content creation.

In November, Google further announced a new DeepMind model, Lyria, in partnership with YouTube. Lyria is an advanced AI music generative model that will create vocals, lyrics, and background tracks mimicking the style of famous artists. This model is available on YouTube through two distinct AI experiments – DreamTrack for Shorts and Music AI tools.

Last Reported Quarterly Results

CRM’s total revenues increased 11.3% year-over-year to $8.72 billion for the fiscal third quarter that ended on October 31, 2023. Its gross profit was $6.57 billion, up 14.2% from the year-ago value. Its income from operations rose 226.3% from the prior year’s quarter to $1.50 billion. The company’s free cash flow came in at $1.37 billion, an increase of 1,088% year-over-year.

In addition, Salesforce’s non-GAAP net income grew 47.9% from the previous year’s period to $2.09 billion. Its non-GAAP EPS came in at $2.11, surpassing the consensus estimate of $2.06 and up 50.7% year-over-year.

For the third quarter that ended September 30, 2023, GOOGL reported revenue of $76.69 billion, compared to analysts’ estimate of $75.73 billion and up 11% year-over-year. Its income from operations grew 24.6% from the prior year’s quarter to $21.34 billion. Its income before income taxes rose 30.6% year-over-year to $21.20 billion.

Google parent Alphabet’s net income increased 41.5% year-over-year to $19.69 billion. It posted net income per share of $1.55, compared to the consensus estimate of $1.45, and an increase of 46.2% year-over-year. Further, as of September 30, 2023, the company’s cash and cash equivalents stood at $30.70 billion, compared to $21.88 billion as of December 31, 2022.

Past And Expected Financial Performance

Over the past three years, CRM’s revenue has increased at a CAGR of 18.7%, and its EBITDA has grown at a 43.4% CAGR. The company’s normalized net income has increased at a CAGR of 188.3% over the same time frame, and its levered free cash flow and total assets have improved at CAGRs of 24.8% and 15.5%, respectively.

Analysts expect CRM’s revenue for the current year (ending January 2024) to increase 11% and 56.5% year-over-year to $34.79 billion and $8.20, respectively. For the fiscal year ending January 2025, the company’s revenue and EPS are expected to grow 10.9% and 16.5% year-over-year to $38.57 million and $9.55, respectively.

GOOGL’s revenue and EBITDA have grown at CAGRs of 20.1% and 26% over the past three years, respectively. Its net income and EPS have improved at respective CAGRs of 23.2% and 26.3% over the same timeframe. Also, the company’s levered free cash flow has increased at a CAGR of 36% over the same period.

For the fiscal year ending December 2024, GOOGL’s revenue and EPS are estimated to increase 10.8% and 15.4% year-over-year to $340.50 billion and $6.69, respectively. Likewise, Street expects the company’s revenue and EPS for the fiscal year 2025 to grow 10.5% and 15.6% from the prior year to $376.34 billion and $7.73, respectively. 

Profitability

In terms of the trailing-12-month EBIT margin, CRM’s 15.87% is 243.7% higher than the industry average of 4.62%. Its trailing-12-month gross profit margin of 74.99% is 54.8% higher than the 48.43% industry average. Moreover, the stock’s trailing-12-month net income margin of 7.63% is significantly higher than the 2.04% industry average.

GOOGL’s trailing-12-month gross profit margin of 56.12% is 15% higher than the 48.81% industry average. Its trailing-12-month EBIT margin of 27.42% is 226.8% higher than the 18.39% industry average. Likewise, the stock’s trailing-12-month net income margin of 22.46% is 541.4% higher than the industry average of 3.50%.

Bottom Line

The tech industry remains focused on trimming costs via job cuts. More than 20,000 tech employees have been laid off so far in 2024. CRM is the latest tech company to announce about 700 layoffs. However, the company still has plenty of job openings, roughly 1000, suggesting that these cuts might not be a drastic strategy shift but a routine labor force adjustment.

Similarly, tech giant Google signaled layoffs this month. Google CEO Sundar Pichai warned employees of more job cuts this year as the company continues to shift investments toward areas like AI. In a memo titled “2024 priorities and the year ahead,” Pichai stated that the company has ambitious goals and will be investing in its big priorities in 2024.

“The reality is that to create the capacity for this investment, we have to make tough choices,” Pichai said. For some teams, that means eliminating roles, which includes “removing layers to simplify execution and drive velocity,” he added.

Many fear that these job cuts could be related to Google’s rollout of AI across its advertisement department, effectively witnessing the technology replace humans. Also, given Salesforce’s heavy investments in AI, people can’t help but wonder if the technology could be threatening its workforce.

In today’s digital era, AI undoubtedly stands out as one of the most influential forces shaping the future of work. AI technology is making its dramatic impact felt, especially across the tech industry, from automating business operations to transforming entire job roles.

While some tasks/jobs are being automated, replacing humans, new roles are emerging with AI integration. Tech companies’ increased focus on AI is leading to a hiring surge in this area while other sectors face layoffs.

This season’s job cuts in the tech industry are viewed more as restructuring efforts rather than navigating economic challenges or cutting down from previous over-hiring during the pandemic. So, the latest tech layoffs should be the least of investors’ worries, and they can continue to hold CRM and GOOGL shares. 

NKE's China Comeback: Potential Upside Amid Stronger Consumer Demand

Posted on by The INO.com Team

Some of the U.S.-listed stocks, including NIKE, Inc. (NKE), stand to benefit from the sizable monetary stimulus that the People’s Bank of China has unleashed recently. The Chinese economy has witnessed slowing growth lately, prompting PBOC to implement new stimulus measures.

New Stimulus Measures to Boost Market Confidence

Beginning February 5, the People’s Bank of China will allow banks to hold smaller cash reserves, said central bank governor Pan Gongsheng at a press conference. Also, reserve ratio requirements (RRR) for banks will be slashed by 50 basis points. That will release 1 trillion yuan ($139.80 billion) in long-term capital.

In addition, the PBOC said that there is room for further easing of the monetary policy. Lowering the reserve requirements that banks must maintain will increase the capacity for lenders to extend loans and boost spending in the broader economy.

Pan told reporters the central bank and the National Financial Regulatory Administration would soon publish measures to support loans for high-quality real-estate developers. Real estate troubles are one of the various factors that have weighed heavily on Chinese investor sentiment.

“It is a significant step from the regulators to enhance credit support for developers,” said Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank. “For developer financing to fundamentally and sustainably improve, property sales need to stop falling and start to recover, which could require more policy efforts to stabilize the property market.”

To sum up, China’s economy could experience a boost from these latest PBOC announcements.

Evercore strategists screened for shares of U.S.-listed companies that have recently seen at least 10% of their revenues from China. Most are consumer companies that could witness a boost to sales in China since consumers will likely spend more than previously anticipated. Evercore’s list includes Nike, Las Vegas Sands, Aptiv, State Street, and more.

Talking about Nike, the sports apparel giant saw nearly 13% of its total revenue from China over the past year, as per FactSet. Now, a stronger-than-expected consumer in China because of massive monetary stimulus could unlock higher profit margins, more share buybacks, more earnings growth, and stock gains in the near future.

Shares of NKE have surged more than 2.4% over the past five days.

Let’s take a close look at the NKE’s fundamentals to analyze how the stock will perform in the near term:

Mixed Last Reported Financials

For the fiscal 2024 second quarter that ended November 30, 2023, NKE reported revenue of $13.39 billion, missing analysts’ estimates of $13.43 billion. This compared to the revenue of $13.32 billion in the same quarter of 2022.

Revenues for the NIKE Brand came in at $12.90 billion, up 1% year-over-year, but revenues for Converse were $519 million, a decline of 11% compared to the prior year’s period. NKE’s gross profit increased 4.6% year-over-year to $5.97 billion. Its income before income taxes rose 16.5% from the previous year’s quarter to $1.92 billion.

The sports apparel and sneaker giant’s net income grew 18.6% year-over-year to $1.58 billion. It posted earnings per common share of $1.03, compared to the consensus estimate of $0.85, and up 21.2% year-over-year.

In addition, NKE’s cash and cash equivalents stood at $7.92 billion as of November 30, 2023, compared to $6.49 billion as of November 30, 2022. The company’s current liabilities reduced to $9 billion versus $10.20 billion as of November 30, 2022.

However, Inventories for NKE were $8 billion as of November 30, 2023, down 14% compared to the previous year, reflecting a decrease in units.

Attractive Shareholder Returns

Nike continues to have a solid track record of investing to drive growth and consistently increasing returns to shareholders, including 22 consecutive years of raising dividend payouts.

On November 15, 2023, NKE’s Board of Directors approved a quarterly cash dividend of $0.370 per share on the company’s outstanding Class A and Class B common stock. This quarterly cash dividend represents an increase of 9% compared to the previous quarterly dividend rate of $0.340 per share. The dividend was paid on January 2, 2024, to shareholders of record on December 4, 2023.

“This dividend increase reflects our continued confidence in our strategies to generate sustainable, profitable growth, while investing for the future,” said John Donahoe, President & CEO of NKE.

The company pays an annual dividend of $1.48, translating to a yield of 1.44% at the current share price. Its four-year average dividend yield is 0.97%. Moreover, NKE’s dividend payouts have increased at a CAGR of 11.2% over the past three years. Nike has raised its dividends for 11 consecutive years.

During the second quarter of fiscal 2024, NKE returned nearly $1.70 billion to shareholders, including dividends of $523 million and share repurchases of about $1.20 billion, reflecting 11.9 million shares retired as part of the company’s four-year, $18 billion program approved by the Board of Directors in June 2022.

As of November 30, 2023, the company has repurchased a total of 65.9 million shares under the program for approximately $7.10 billion.

Lowered Revenue Outlook and Plans to Cut Costs

In December 2023, the management lowered its fiscal 2024 revenue guidance, partly due to weakening consumer demand in China. Nike now expects full-year revenue to grow nearly 1%, compared to the prior outlook of up mid-single digits.

For the current quarter, which includes the second half of the holiday shopping season, the apparel retailer’s revenue is expected to be slightly negative as it laps tough previous year comparisons, and revenue is estimated to be up low single digits in the fourth quarter of 2024.

“Last quarter as I provided guidance, I highlighted a number of risks in our operating environment, including the effects of a stronger U.S. dollar on foreign currency translation, consumer demand over the holiday season and our second half wholesale order books. Looking forward, the impact of these risks is becoming clearer,” said Chief Financial Officer Matthew Friend on a call with analysts.

“This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA. Adjusted digital growth plans are based on recent digital traffic softness and higher marketplace promotions, life cycle management of key product franchises and a stronger U.S. dollar that has negatively impacted second-half reported revenue versus 90 days ago,” he added.

Nike continues to expect gross margins to grow between 1.4 and 1.6 percentage points. Also, the company is identifying opportunities to deliver up to $2 billion in cumulative cost savings over the next three years. Areas of potential savings include simplifying its product assortment, streamlining its overall organization, automation and use of technology, and leveraging its scale to boost greater efficiency.

NKE plans to reinvest the savings it gets from these strategic initiatives into fueling future growth, accelerating innovation, and driving profitability in the long term.

“As we look ahead to a softer second-half revenue outlook, we remain focused on strong gross margin execution and disciplined cost management,” Friend said in a press release.

The plan will cost the sports apparel company between $400 million and $450 million in pre-tax restructuring charges that will essentially be reorganized in the current quarter. Nike stated these costs are primarily associated with employee severance costs.

However, more robust consumer demand in China because of new stimulus measures could unlock higher revenue than currently forecasted by Nike.

Mixed Analyst Estimates

Analysts expect NKE’s revenue for the third quarter (ending February 2024) to decrease 0.8% year-over-year to $12.30 billion. The consensus EPS estimate of $0.76 for the ongoing quarter indicates a 3.9% year-over-year decline.

For the fiscal year ending May 2024, Street expects Nike’s revenue and EPS to grow 1.2% and 11.6% year-over-year to $51.82 billion and $3.60, respectively. Furthermore, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 6.6% and 17.6% from the previous year to $55.22 billion and $4.24, respectively.

Solid Profitability

NKE’s trailing-12-month gross profit margin of 43.96% is 24.6% higher than the 35.28% industry average. Moreover, the stock’s trailing-12-month EBIT margin and net income margin of 11.76% and 10.28% are considerably higher than the industry averages of 7.63% and 4.56%, respectively.

Further, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 36.03%, 14% and 14.24% favorably compared to the respective industry averages of 11.61%, 6.09%, and 4.01%. Also, its trailing-12-month levered FCF margin of 10.91% is 100.2% higher than the industry average of 5.45%.

Elevated Valuation

In terms of forward non-GAAP P/E, NKE is currently trading at 28.52x, 79.9% higher than the industry average of 15.85x. The stock’s forward EV/Sales of 3.05x is 147.7% higher than the industry average of 1.23x. Likewise, its forward EV/EBITDA of 21.96x is 119.8% higher than the industry average of 9.99x.

Additionally, the stock’s forward Price/Sales and Price/Book multiples of 3 and 11.93 are significantly higher than the respective industry averages of 0.92 and 2.52. Also, its forward Price/Cash Flow of 23.65x is 133% higher than the industry average of 10.15x.

Bottom Line

In the last reported quarter, NKE’s EPS beat analysts’ expectations, indicating the company’s cost-saving initiatives were underway. However, the sports apparel and footwear retailer’s revenue fell short of consensus estimates for the second quarter in a row.

Due to several macro headwinds, particularly in China and EMEA, management lowered its revenue outlook for the fiscal year 2024. Also, the company unveiled plans to cut costs by about $2 billion over the next three years.

For Nike, as a consumer company with significant revenue from China, stronger-than-expected consumer demand because of the new stimulus package could result in higher sales than it currently forecasted. Further, better revenue growth, especially in Greater China, could unlock better profit margins, more share repurchases, higher earnings growth, and stock gains.

Amid a series of government announcements indicating forthcoming support for China’s economic growth and capital markets, such efforts could help stabilize the stock market and stop it from capitulating and falling further, said Winnie Wu, Bank of America’s chief China equity strategist.

However, she pointed out a fundamental turnaround in the economy is needed for investors to return to Chinese stocks, which might take time.

Although Nike holds tremendous growth potential with an anticipated rebound in consumer demand in China, the company’s near-term outlook appears uncertain. Given NKE’s stretched valuation and uncertain near-term prospects, it seems prudent to wait for a better entry point in this stock.

Examining AMD as a High-Growth, Long-Duration Asset Amid Chip Optimism

Posted on by The INO.com Team

Since the inception of civilization, humanity has perpetually sought the next groundbreaking advancement, extending across diverse fields, including entertainment, fashion, and technology. It is the forecasters, with one foot in the present and the other steering toward the future, whose evolutionary visions brought about automobiles, airplanes, and the internet.

While such visionaries may not always accurately predict the future, their ambitions fuel our relentless quest for innovation. In the spotlight recently has been Artificial Intelligence (AI), notably after OpenAI unveiled ChatGPT, a comprehensive language model that millions employ for diverse purposes such as searching, parsing, and content creation.

In the current digital era, the significance of semiconductors is evident. Powering an extensive array of devices from smartphones to aircraft, these components enhance the utility of modern electronics and act as technological accelerators, driving advancements in AI, machine learning, and quantum computing.

The semiconductor industry displays robust growth and is expected to expand at a CAGR of 9.18% by 2030, reaching $1.03 trillion.

The surge in demand for AI applications across different sectors for effective big data management serves as a key factor propelling the worldwide AI chip market's growth. Consequently, the market is anticipated to reach about $372.01 billion in 10 years.

Additionally, the rising requirement for quantum computing, especially for handling mammoth datasets linked to operational efficiency, is gaining increased prominence, which is forecasted to drive substantial market expansion.

Chip giant Advanced Micro Devices, Inc. (AMD) is set to officially join the AI chip competition in 2024. At the beginning of the second half of 2023, the tech titan announced the forthcoming MI300x GPU chipset.

According to AMD, the AI chip market, valued at $45 billion, is predicted to soar nearly tenfold to $400 billion by 2027. With an eye on this lucrative landscape, AMD's newly developed MI300X chipset is designed to vie with the AI-darling Nvidia Corporation’s (NVDA) flagship H100 for AI data center clientele.

According to AMD's forecasts, the new chips will generate an additional $2 billion in sales in 2024 – a figure some deem conservative considering the immense potential of the total addressable market. In contrast, analysts at Barclays project a figure closer to $4 billion – translating to roughly 18% growth rate based on AMD's trailing-12-month revenue, assuming all other business operations remain steady.

Over the past three and five years, AMD’s revenue grew at CAGRs of 36.8% and 28.2%, respectively, while its levered FCF grew at 68.2% and 84.4% CAGRs over the same periods.

For the fiscal third quarter that ended September 30, 2023, AMD delivered strong revenue and earnings growth fueled by rising demand for its Ryzen 7000 series PC chips and an all-time high in server processor sales. Its revenue for the quarter stood at $5.80 billion, up 4.2% year-over-year.

AMD's data center business is on a significant growth trajectory, rooted in the strength of its EPYC CPU portfolio and the accelerated shipments of Instinct MI300 accelerators. These factors have fortified multiple deployments across hyper-scale, enterprise, and AI customer frameworks.

Moreover, its non-GAAP net income and net income per share increased 3.7% and 4.5% from the year-ago quarter to $1.14 billion and $0.70, respectively.

AMD is scheduled to report fourth-quarter earnings on January 30, 2024. AMD EVP, CFO and Treasurer Jean Hu said, “In the fourth quarter, we expect to see strong growth in Data Center and continued momentum in Client, partially offset by lower sales in the Gaming segment and additional softening of demand in the embedded markets.”

Wall Street expects AMD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to be $6.14 billion and 77 cents, up 9.6% and 11.6% year-over-year, respectively. If it delivers on those estimates, it will mark the fastest sales growth in one year. The company has surpassed the consensus revenue and EPS estimates in all of the trailing four quarters, which is impressive.

Shares of AMD jumped 5.9% on January 24, soaring above 140% over the past year. Since October, AMD has seen an approximate increase of 65%, comfortably outperforming the AI darling NVDA and the Philadelphia Semiconductor Index during this period. The S&P 500 registered just a 15% uptick.

This week alone, AMD surged above 12%, trouncing NVDA's increase. The significant leap in AMD shares is attributed mainly to the burgeoning potential to secure a prominent slice of this year's AI chip market.

Additionally, this week saw a significant boost when several notable analytics firms – including Barclays Plc, Susquehanna Financial, and TD Cowen – elevated their price targets for AMD.

Barclays emerged with the loftiest target at $200 per share, surging from $120. This optimistic adjustment primarily stems from high expectations for artificial intelligence as a key growth stimulant. Notably, over 70% of analysts monitoring AMD are recommending a buy-equivalent rating.

However, Wall Street analysts expect the stock to reach about $156 in the next 12 months, indicating a potential downside of 12.6%. The price target ranges from a low of $105 to a high of $215.

Bottom Line

Growth projections from AMD’s MI300X chip family are a lot to receive from one type of product. Should AMD's ambitious forecasts regarding AI chip demand materialize, investors could anticipate a considerable escalation in sales in a couple of years.

Investors should remain aware that the AI sector does not exclusively entail a winner-take-all scenario. The market’s rapid expansion could allow multiple companies to carve out their successes. Although entering the market later than others, AMD may establish a competitive edge through cost-effectiveness, nurturing an esteemed standing within a balanced and diversified investment portfolio.

The early adopters of the MI300A/X are unlikely to obtain high profits initially – they will enjoy competitive pricing until demand gains traction. By nature, building momentum takes time, and if AMD stays true to its usual course of action, it will focus on long-term progress rather than immediate financial gain.

AMD's stock price could fluctuate significantly, and despite positive reports and guidance, it may take several estimated returns to invoke a maximum increase. This is because AMD must substantiate its guidance, requiring, at a minimum, another quarter to validate and replicate its success.

Moreover, there are significant issues like demonstrating market competitiveness, particularly concerning software adoption. Some investors view AMD's rival, NVDA, as a dominant player in the GPU space. For AMD to make its mark, it must prove its ability to lead on its terms, complementing its other endeavors. This validation process will require time and consistency.

While waiting, macroeconomic risks persist, ranging from ongoing wars to the potential of economic recession and fluctuating interest rates. Staying the course involves maintaining progress amid potentially adverse circumstances.

From an investment standpoint, it is critical to acknowledge AMD's forward non-GAAP P/E multiple of 67.17, signaling that AMD's stock is substantially more expensive than the industry average.

Furthermore, AMD's 12.71x forward P/S is 330% greater than the industry average of 2.95x. Its revenue has increased at a modest CAGR over the past three years, and analysts predict a 15% annual growth rate for the next three years. However, these projections are less robust than the industry average, suggesting a potential shortfall in expected revenue for AMD. It is thus concerning that AMD’s P/S supersedes most within the same industry.

The disquieting underperformance in its revenue projections spells potential risk for AMD’s elevated P/S. If the anticipated revenue trend doesn’t take an upward turn, it could negatively impact the already high P/S. Given the current market prices, it would be prudent for investors to exercise caution, particularly if the situation fails to enhance.

Therefore, investors could wait for a better entry point in the stock.

Tech Buy Alert: Is Motorola Solutions (MSI) Poised for Massive Growth Ahead?

Posted on by The INO.com Team

 

Motorola Solutions, Inc. (MSI) was once the market leader in cellular phones, from analog phones to digital phones such as the Motorola Razr. Motorola’s market share peaked in 2006 when market intelligence firm IDC placed it in a second position behind Nokia Oyj (NOK).

However, like many of its peers, the electronics manufacturer lost ground to smartphones from companies, including Apple Inc. (AAPL), Samsung, and several Chinese brands. Critics point to Motorola’s slow reaction to evolving consumer needs as the primary reason behind its downfall.

In 2010, Motorola was split into two companies: Motorola Mobility, which housed the company’s consumer electronics division, and Motorola Solutions, which manufactures telecommunications equipment. Google bought Motorola for around $12.50 billion in August 2011, and three years later, it offloaded to China-based tech company Lenovo for just $2.90 billion.

Now, Lenovo, the world’s largest personal computer maker, which acquired Motorola Mobility from Google in 2014, believes that the brand is all set for a major comeback. In recent years, Lenovo has sought to uplift the brand and position it as a higher-end smartphone player to compete with industry leaders like Apple and Samsung.

“I would bet a paycheck that in three years we will be number three around the world,” Matthew Zielinski, president of international markets at Lenovo, told CNBC at the World Economic Forum in Davos, Switzerland. Lenovo has turned around the Motorola business and “hyper-prioritized” it, a decision that is now paying off, he added.

This statement underscores Lenovo’s ambitious vision for Motorola’s position in the competitive landscape of the global smartphone market.

At present, Apple and Samsung are the top two brands in the smartphone market. According to the recent report from IDC, Apple grabbed first place in 2023 with a record-high market share of 20.1%, followed by Samsung at 19.4% market share. Two Chinese brands, Xiaomi Corp (XIACF) and Oppo, come in third and fourth place at 12.5% and 8.8%, respectively.

Counterpoint Research, another market intelligence firm, placed Samsung in first place with a 20% market share, as per data up to the third quarter of 2023. Apple comes in second with 16%, followed by Oppo and Xiaomi.

While the firm did not list Motorola in the top five, it did note that the brand reported double-digit growth last year. Motorola and Lenovo combined had about a 4% market share in the third quarter, making it the eighth-largest player worldwide. But Motorola might be doing well in individual markets. It came in second in Latin America, as per publicly available data from Canalys and Counterpoint.

Motorola is the third biggest smartphone maker by market share in the U.S., according to Counterpoint.

Currently, Motorola is banking on foldable smartphones, bringing back its Razr brand in the game. The latest version of the Motorola RAZR costs less than $1000, making it far more affordable than Samsung’s foldable offering.

Zielinski characterized the launch of the Razr foldable smartphone as a strategic move, describing it as “taking a stab at the premium market.”

MSI’s stock has shown rising strength, with more than 28% gains over the past year. Moreover, the stock has surged nearly 6% over the past month and more than 11% over the past six months.

Now, let’s discuss several other factors that could influence MSI’s performance in the near term:

Positive Recent Developments

On December 18, 2023, MSI acquired IPVideo, the creator of the HALO Smart Sensor, an all-in-one intelligent sensor that detects real-time health and safety threats. This acquisition reinforces Motorola Solutions’ commitment to enhancing safety and security by offering a cost-effective sensor that is easy and convenient to deploy and operate for enterprises of all sizes.

On November 28, MSI introduced the LTE-enabled V500 body camera, the newest addition to the company’s mobile video portfolio that brings critical real-time field intelligence to emergency response. Along with other of the Motorola Solutions mobile video portfolio, the V500 body camera uses the VideoManager evidence management software.

In addition, the V500 integrates with Motorola Solutions’ ecosystem of technologies, from radio and in-car video systems to control room solutions and Holster Aware Bluetooth sensors. These new product offerings are expected to extend MSI’s market reach and drive its profitability.

Robust Capital Deployment

On November 16, MSI’s Board of Directors raised its regular dividend by 11% to $0.98 per share. The quarterly dividend was paid in cash on January 12, 2024, to shareholders of record at the close of business on December 15, 2023.

The company pays a regular annual dividend of $3.92, translating to a yield of 1.19% at the current share price. Its four-year average dividend yield is 1.35%. Moreover, MSI’s dividend payouts have increased at a CAGR of 11.2% over the past three years. Motorola has raised its dividends for 11 consecutive years.

Additionally, MSI’s Board of Directors approved a $2 billion increase to the share repurchase program, raising the total authorization since July 2011 to $18 billion, with no expiration date for the program. Under its previously authorized $16 billion share repurchase program, nearly $599 million in repurchase authority remained at the end of the third quarter of 2023.

Robust Last Reported Financials

For the third quarter that ended on September 30, 2023, MSI reported net sales of $2.52 billion, surpassing analysts’ estimate of $2.52 billion. That compared to the revenue of $2.37 billion in the same quarter of 2022.

The Product and Systems Integration segment rose 5% year-over-year, driven by growth in land mobile radio communications (LMR) and video security and access control (Video). The Software and Services segment grew 12%, driven by growth in the command center, LMR, and Video.

Motorola ended the quarter with a record third-quarter backlog of $14.30 billion, an increase of 6% from the prior year’s quarter, inclusive of $321 million of favorable currency rates.

The company’s non-GAAP operating earnings rose 9.6% year-over-year to $741 million. Also, non-GAAP net earnings attributable to MSI grew 6.4% from the year-ago value to $547 million. The company posted earnings per share of $3.19, compared to the consensus estimate of $3.03, and up 6% year-over-year.

MSI’s cash inflows from operating activities were $714 million, an increase of 84% from the previous year’s period. The company’s free cash flow increased 104.1% year-over-year to $649 million.

Upbeat Business Outlook

“Q3 was another strong quarter, with record third-quarter revenue, earnings and cash flow,” said Greg Brown, chairman and CEO of Motorola Solutions. “Safety and security have never been more important and we continue to see robust demand which drove our record Q3 backlog. As a result, we’re again raising our revenue and earnings expectations for the full year.”

For the fourth quarter of 2023, the company expects revenue growth of nearly 4% year-over-year. MSI also anticipates non-GAAP EPS in the range of $3.65 per share.

For the full year 2023, Motorola expects revenue in the range of $9.93 billion to $9.95 billion, an increase from its previous guidance of $9.975 billion to $9.90 billion. The company’s non-GAAP EPS is expected to be between $11.65 and $11.70 per share, up from its prior guidance of $11.40-$11.48 per share.

Impressive Historical Growth

MSI’s revenue and EBITDA grew at respective CAGRs of 9.4% and 12.3% over the past three years. Its EBIT increased at a CAGR of 15.4% over the same period. Moreover, the company’s earnings from continued operations improved at a CAGR of 24.7% over the same time frame.

Furthermore, the company’s net income and EPS increased at CAGRs of 29.7% and 30.3% over the same period, respectively, while its levered free cash flow improved at a CAGR of 8.7%.

Favorable Analyst Estimates

Analysts expect MSI’s revenue for the fiscal year (ended December 2023) to grow 9.2% year-over-year to $9.95 billion. The consensus EPS estimate of $11.71 for the same period indicates a 13.1% year-over-year increase. Moreover, the company has surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.

For the fiscal year 2024, the company’s revenue and EPS are expected to increase 5.7% and 8.2% year-over-year to $10.51 billion and $12.67, respectively.

High Profitability

MSI’s trailing-12-month EBIT margin and net income margin of 24.74% and 17.30% are considerably higher than the respective industry averages of 4.88% and 2.04%. Likewise, the stock’s trailing-12-month EBITDA margin of 28.60% is 204% higher than the industry average of 9.41%.

Furthermore, the stock’s trailing-12-month ROTC and ROTA of 23.62% and 13.69% are significantly higher than the industry averages of 2.70% and 0.55%, respectively. Its trailing-12-month levered FCF margin of 16.65% is 89.3% higher than the industry average of 8.79%.

Bottom Line

MSI’s revenue and EPS topped analysts’ estimates in the third quarter of fiscal 2023. As a result of record third-quarter sales, earnings, cash flow, and backlog, the company raised its financial expectations for the full year. Also, analysts appear bullish about Motorola’s outlook, driven by strong demand for its innovative offerings, strategic acquisitions, and investments.

Furthermore, Motorola’s Board of Directors recently increased its quarterly dividend and approved a $2 billion increase in the stock repurchase program, reflecting the company’s robust shareholder return strategy.

Now, Lenovo believes the brand is poised for a big comeback. The Chinese tech company foresees Motorola emerging as the world’s third-largest mobile brand by 2027. Last year, the company unveiled its foldable, the Motorola RAZR, which has the potential to compete with industry leaders like Samsung with its innovative features and affordable pricing.

Moreover, smartphone recovery this year could be beneficial for Motorola. Canalys forecasts smartphone shipments to reach 1.17 billion units in 2024, up 4% from last year.

Given these factors, MSI could be a wise investment now.

Short Squeeze Alert: Analyzing the Impact of JetBlue's Blocked Acquisition on SAVE Stock

Posted on by The INO.com Team

The past few days have proven to be quite turbulent for Spirit Airlines, Inc. (SAVE), with notable fluctuations in its market value. From a federal judge opposing a proposed merger, sending SAVE stock into a nosedive, to David Portnoy investing in and promoting the company on January 18, resulting in SAVE's share price surge – the airline stock garnered significant attention.

The initial blow to the ultra-low-cost carrier's stock unfolded last week when JetBlue Airways Corporation’s (JBLU) $3.8 billion bid to takeover SAVE was thwarted by court intervention. This resulted in a sharp drop of as much as 74% over three days, throwing the fate of the previously secure deal into uncertainty. This drew attention to the mounting question about the survival prospects for SAVE.

Navigating the airline industry presents several complications. The inevitable costs associated with acquiring aircraft and employing relevant staff mount up, especially considering the volatile nature of jet fuel prices. This renders the sector vulnerable to bankruptcy, as demonstrated by prominent airlines, such as Pan Am, and countless smaller entities. Occasionally, airlines can re-emerge post-Chapter 11 restructuring, emulating the revival of American Airlines in 2013.

In other instances, they vanish indefinitely, leaving travelers in the lurch. According to TD Cowen analyst Helene Becker, SAVE may also be at risk.

Additionally, there is fervor among the investment community fueled by a return to bullish attitudes and a robust performance by S&P 500 and Nasdaq in the past year. Such success encourages “get rich quick” mentalities, evidenced by a flood of social media messages advocating for SAVE shares to skyrocket imminently without any factual basis.

Despite this, some analysts do not predict either a bankruptcy or a dramatic escalation for SAVE. Furthermore, the company reaching a book value of $12.06 per share is also not anticipated.

This article sheds light on the latest updates, evaluates SAVE's fundamentals, and provides prospective investors with guidance regarding SAVE's future value.

The Merger

The proposed merger would position JBLU as the fifth-largest airline in the U.S., vigorously contesting long-standing dominators Southwest, American, Delta and United Airlines. With an estimated domestic market share of 10%, it promised to diversify flight options and stimulate industry competition.

The acquisition was conjectured to enhance JBLU's cancellation policy through the planned substitution of SAVE’s non-refundable fares with JBLU’s Passenger Bill of Rights, which ensures an automatic reassessment upon inevitable delays and cancellations. The resultant entity could minimize flight delays and cancellations due to the availability of an expanded fleet and heightened pilot workforce following the merge.

Furthermore, JBLU's route network was expected to broaden, encompassing SAVE's reach in Central and South America and the Caribbean, supplementing its existing local and international destinations.

A federal judge, however, recently blocked the merger, arguing that SAVE's cost-sensitive customer base could be harmed. The court determined that the consolidation would infringe on antitrust law, which is designed to prevent anti-competitive harm to consumers. The decision highlighted a potential decrease in affordable ticket options for price-conscious travelers nationwide.

Concerns were voiced about escalating ticket prices, particularly for low-cost seekers, considering JBLU's previous estimation of a 30% price hike in the absence of SAVE as a competitor.

A surge in SAVE's market value triggered by the proposed merger piqued the interest of arbitrage investors looking to capitalize on price gaps between company equity and the offer price. However, the merger's block prompted investors to withdraw, subsequently depreciating SAVE's stock value.

A joint appeal by JBLU and SAVE against the ruling in hopes of reviving the merger is another interesting twist in the carriers' merger attempt. SAVE's stock price experienced a slight rebound in response to this move.

SAVE's stock witnessed an upward trend after Barstool Sports founder Dave Portnoy took to Twitter and openly commended SAVE’s value. His proclamation of SAVE as a "mega buy" sparked a late-week rally.

Despite these developments, it seems improbable that the judicial verdict will be overturned. The merger blockage is anticipated to persist. Potential investors should assess SAVE on individual merit and without expectations for the completion of such a corporative action.

Let’s delve deeper into the fundamentals of SAVE.

The airline, with a market cap of approximately $898 million, boasts an extensive workforce numbering over 11,000 employees. The ownership structure of the company shows a mix of roughly 0.5% insiders and about 67.7% institutional holders.

Since the onset of the COVID-19 pandemic, SAVE has grappled with financial sustainability. Their ticket sales have not seen recovery at the pace anticipated, and several of its planes are being temporarily grounded due to engine problems necessitating inspection and possible replacements. SAVE anticipates an average of 26 grounded aircraft, over 10% of its fleet, during 2024. As a result, Pratt & Whitney engines on numerous Airbus jets could drastically hamper immediate growth predictions for the company.

SAVE raised $419 million through the mortgage of many of its airplanes. However, the future options for raising liquidity seem limited. As per results for the fiscal third quarter that ended September 30, 2023, SAVE's overall operating revenue stood at $1.26 billion, a 6.3% year-over-year decline. The net loss for the quarter was reported at $157.55 million, a 333% rise year-over-year, while net loss per share surged by 336.4% from the year-ago quarter to $1.44.

The precarious liquidity situation at SAVE is hinted at by its quick ratio of 0.69. Its Total Debt/Equity ratio exceeding 500% indicates that for every dollar of equity, the company holds five dollars in debt. This high leverage exposes the company to greater risk while settling its debt.

On December 31, 2023, SAVE's liquidity stood at $1.3 billion, including unrestricted cash and equivalents, short-term investment securities, and $300 million under a revolving credit facility. The company is currently in talks with Pratt & Whitney to negotiate compensation for the geared turbofan engine faults that may provide significant liquidity in the next few years.

While SAVE is not bankrupt and still commands liquidity, they are not without challenges. Their $1.3 billion is barely above their debt due in 2025 – amounting to $1.1 billion, which is slated for restructuring next year.

Given that higher risk-free rates have led to a cooling of corporate debt markets, creating an unfavorable environment for debt refinancing, SAVE's management team must explore severe measures to ensure the corporation’s ongoing viability, especially when the likelihood of the merger being off the table is high.

Credit rating company Fitch has issued a warning regarding the "significant refinancing risk" SAVE is expected to encounter in the coming year due to the $1.1 billion debt owed by its loyalty program, which is due for repayment in September 2025. Although Fitch has maintained a B/Negative credit rating for SAVE's debt, it has encouraged the airline to formulate a near-term strategy to increase liquidity, reduce refinancing risk, and boost profitability to prevent further negative ratings.

Details concerning this scenario are expected to emerge on February 8, 2024, when the company will disclose its 2023 fourth-quarter results.

Despite the challenges, SAVE is optimistic about its future earnings – projecting that total revenue will surpass prior estimations. The airline anticipates its fourth-quarter revenue to come at $1.32 billion, which exceeds the higher benchmarks established in its prior projection. This optimistic outlook is primarily attributed to the robust bookings received during the 2023 year-end travel peak.

The airline also forecasts a fuel cost reduction that would help relieve some revenue pressure and enable increased earnings. Operational costs for the quarter are expected to be lower than predicted, primarily due to decreased fuel expenses driven by improved fuel efficiency, reduced airport costs, and other factors. Additionally, SAVE predicts a significant contraction in its negative margin, foreseeing it to shrink down to between 12% and 13% from the previously anticipated negative margin of up to 19%.

Is SAVE a Worthy Investment?

When a stock encounters difficulties as notable as those faced by SAVE, the conversation invariably turns toward short-squeeze speculation. Despite recent losses, SAVE's share trajectory appears to have rebounded. However, it's plausible that this upward momentum results in more from short-squeeze speculation among retail investors than it does from positive news about the airline itself.

The current high level of short interest in SAVE stock further buttresses this theory. Data pulled from the short analysis platform Fintel corroborates this, showing that the short interest is 19.75%. Short sellers presently only have a minuscule 0.27-day window to cover their positions.

Considering SAVE's shaky foothold, Citi's analyst, Stephen Trent, has downgraded the company from a Hold to a Sell, simultaneously lowering the price target from $13 to $4.

While there remains the possibility of an appeal, Trent questions its logic, stating, “…it is unclear why JetBlue wouldn’t cut its losses here and recognize that it avoided a risky bid on a highly levered carrier with steep losses.”

He further predicts that SAVE's EBITDA isn't likely to turn positive until 2025. A bond yield surpassing 40% augments the hurdles SAVE faces in securing another merger proposal.

Bottom Line

Undoubtedly, the previous week proved to be a stormy period for SAVE. However, some observers are optimistic that the company may recover and could potentially regain its value.

The future now hinges on the appeal filed jointly by SAVE and JBLU; its potential impact on the stock price in the coming weeks remains unknown.

Given the various challenges currently plaguing SAVE, the trend of short selling seems almost unavoidable. Indeed, SAVE presents a distinct possibility for a short squeeze, given its bleak future, which might include bankruptcy or liquidation. It's feasible that investors could identify it as their subsequent target. Nevertheless, this offers no guarantee of sustained squeeze or any significant profits.

It becomes crucial for investors to closely monitor SAVE’s overall performance moving forward. Unlike its competitors, the company hasn’t been able to recover due to a host of difficulties. This includes the availability of pilots, engine malfunctioning, saturation in certain domestic markets, and pronounced exposure to regions impacted by air traffic control adversities.

Considering the broader context, investors are advised to exercise caution and look for more favorable entry points in the stock.