Is Intel (INTC) a Buy, Sell, or Hold Amidst Tough Competition?

Posted on by The INO.com Team

Intel Corporation (INTC), a prominent semiconductor company, is currently navigating a challenging phase characterized by a dwindling financial outlook and difficulties sustaining competitiveness within the semiconductor industry. Intel stands behind many tech stocks in the S&P 500 this year, while rival chipmaker NVIDIA Corporation (NVDA) emerges as the third-best performer in the index.

Now, we will evaluate the risks and opportunities associated with investing in Intel amidst competitive pressures.

Strategic Initiatives to Keep up With the Fierce Competition

Amid escalating competition in the tech arena, INTC, the foremost producer of processors driving PCs and laptops, has aggressively expanded its presence in the AI domain to remain abreast of its peers.

Last month, the company announced the creation of the world's largest neuromorphic system, dubbed Hala Point, which is powered by Intel's Loihi 2 processor. Initially deployed at Sandia National Laboratories, this system supports research for future brain-inspired AI and addresses challenges concerning AI efficiency and sustainability.

On April 9, Intel also unveiled a new AI chip called Gaudi 3, which was intended to compete against NVDA’s dominance in popular graphics processing units. The new chip boasts over twice the power efficiency and can run AI models one-and-a-half times faster than NVDA’s H100 GPU. The company expects more than $500 million in sales from its Gaudi 3 chips in the year's second half.

In March, Reuters reported that INTC plans to spend $100 billion across four U.S. states to build and expand factories, bolstered by $19.5 billion in federal grants and loans (with an additional $25 billion in tax incentives in sight). CEO Pat Gelsinger envisions transforming vacant land near Columbus, Ohio, into "the largest AI chip manufacturing site globally" by 2027, forming the cornerstone of Intel's ambitious five-year spending plan.

Such advancements enable the company to stay competitive and meet the growing demand for AI-driven solutions across various industries.

Solid First-Quarter Performance but Shaky Outlook

For the first quarter that ended March 30, 2024, INTC’s net revenue surged 8.6% year-over-year to $12.72 billion, primarily driven by growth in its personal computing, data center, and AI business. However, its revenue from the Foundry unit amounted to $4.40 billion, down about 10% year-over-year.

Intel’s gross margin grew 30.2% from the prior year’s quarter to $5.22 billion. Also, it reported a non-GAAP operating income of $723 million, compared to an operating loss of $294 million in 2023. Further, its non-GAAP net income and non-GAAP earnings per share came in at $759 million and $0.18 versus a net loss and loss per share of $169 million and $0.04, respectively, in the same quarter last year.

The solid financial performance underscores the vital innovation across its client, edge, and data center portfolios, driving double-digit product revenue growth. Total Intel Products chalked up $11.90 billion in revenue for the first quarter of 2024, resulting in a 17% year-over-year increase over the prior year’s period. Its Client Computing Group (CCG) contributed to about 31% of the gains of this unit.

However, the company lowered its outlook for the second quarter of 2024. The company expects its revenue to come between $12.5 billion and $13.5 billion, while its non-GAAP earnings per share is expected to be $0.10.

Following the company's weak guidance for the ongoing quarter, Intel shares nosedived as much as 13% on Friday morning, overshadowing its first-quarter earnings beat. Also, the stock has plunged nearly 15% over the past six months and more than 39% year-to-date.

Bottom Line

INTC surpassed analyst estimates on the top and bottom lines in the first quarter of 2024, but achieving full recovery appears challenging. The chipmaker provided a weak outlook for the second quarter, validating concerns about its ongoing struggle to capitalize on the AI boom amid competition pressures.

Looking ahead, analysts expect INTC’s revenue to increase marginally year-over-year to $13.09 billion for the quarter ending June 2024. However, the company’s EPS for the current quarter is expected to fall 16.2% from the prior year’s period to $0.11.

For the fiscal year 2024, the consensus revenue and EPS estimates of $56.06 billion and $1.10 indicate increases of 3.4% and 5.2% year-over-year, respectively.

Recently, Goldman Sachs analysts slashed their price target for Intel stock by $5 to $34 per share and reaffirmed a ‘Sell’ rating in light of heightened competition in the artificial intelligence landscape.

Toshiya Hari noted that the company’s weak guidance was due to delayed recovery in traditional server demand, driven by cloud and enterprise customers' focus on AI infrastructure spending. As a result, it could lead INTC to lose market share to competitors like NVDA and Arm Holdings plc (ARM) in the data center computing market.

Moreover, analysts at Bank of America decreased their price target on the stock from $44 to $40, citing rising costs, slower growth prospects, and intensified competition.

Additionally, INTC’s elevated valuation exacerbates market sensitivity. In terms of forward non-GAAP P/E, the stock trades at 27.58x, 18.9% above the industry average of 23.19x. Furthermore, its forward EV/Sales of 2.93x is 5.7% higher than the industry average of 2.77x. And the stock’s forward EV/EBIT of 31.80x compares to the industry average of 19.07x.

Also, the stock’s trailing-12-month gross profit and EBIT margins of 41.49% and 1.29% are 14.7% and 73.1% lower than the industry averages of 48.64% and 4.80%, respectively. Likewise, its asset turnover ratio of negative 0.29x compares to the industry average of 0.61x.

Given this backdrop, while we wouldn’t recommend investing in INTC now, keeping a close eye on the stock seems prudent.

Alibaba's (BABA) Valuation: Uncovering Opportunities in a Discounted Market

Posted on by The INO.com Team

With a $187.28 billion market cap, Alibaba Group Holding Limited (BABA) is a China-based technology company that provides infrastructure and marketing reach to help merchants, brands, and other businesses engage with their users internationally. Last Friday, BABA’s stock notched the seventh consecutive session of gains, marking the longest winning streak in a year.

The e-commerce giant's shares surged more than 3% over the past month, compared to the S&P 500’s nearly 3.3% loss. Also, the stock has soared approximately 1% over the past five days, beating the S&P’s marginal loss.

From a valuation perspective, BABA is trading at a forward non-GAAP P/E multiple of 9.03, 41% lower than the industry average of 15.32. Likewise, the stock’s forward EV/EBITDA and EV/EBIT of 5.46x and 8.79x are favorably compared to the industry averages of 9.42x and 13.57x, respectively.

In addition, in terms of forward Price/Book, the stock is trading at 1.33x, 43.2% lower than the industry average of 2.34x.

Alibaba’s stock trading at a discount compared to its peers can be an intriguing opportunity for value-oriented investors. However, analyzing several quantitative and qualitative factors is crucial before making investment decisions.

Now, let’s discuss BABA’s fundamentals and growth prospects in detail:

Financial Performance Overview

For the fiscal 2024 fourth quarter that ended December 31, 2023, BABA’s revenue increased 5.1% year-over-year to $36.67 billion. Revenue from the Alibaba International Digital Commerce Group grew 43.8% year-over-year, while Cainiao Smart Logistics Network Limited and Digital Media and Entertainment Group rose 23.7% and 18.3%, respectively.

The tech giant’s adjusted EBITA came in at $7.44 billion, up 1.5% from the prior year’s quarter. However, its non-GAAP net income for the quarter declined 4.1% year-over-year to $6.75 billion. It posted non-GAAP earnings per share of $0.33, down 2% year-over-year.

Alibaba’s total assets stand at $256.80 billion, with significant holdings in cash, investments, and operational assets. The company reported cash and cash equivalents of $35.89 billion and short-term investments of $42.31 billion.

“We delivered a solid quarter as we are executing our focused strategies across the organization. Our top priority is to reignite the growth of our core businesses, e-commerce and cloud computing. We will step up investment to improve users’ core experiences to drive growth in Taobao and Tmall Group and strengthen market leadership in the coming year,” said Eddie Wu, Chief Executive Officer of Alibaba Group.

“We will also focus our resources on developing public cloud products and sustaining the strong growth momentum in international commerce business,” Wu added.

Upsize of Share Buyback Program

BABA announced that its board of directors approved an increase of $25 billion to its share repurchase program through the end of March 2027. During the quarter that ended March 31, 2024, the company repurchased a total of 524 million ordinary shares for a total of $4.80 billion.

For the fiscal year that ended March 2024, Alibaba repurchased around 1,249 million ordinary shares for a total of $12.50 billion. As of March 31, 2024, the Chinese e-commerce firm had 19,469 million ordinary shares outstanding, a net decrease of 520 million ordinary shares versus December 31, 2023, or a net reduction of 2.6% in its outstanding shares after accounting for shares issued under its ESOP.

As of March 31, 2024, the company has $31.90 billion available under its share repurchase program, effective through March 2027.

The increase in BABA’s share repurchase program demonstrates its confidence in the outlook for its business and cash flow.

“Our consistent share repurchase has also reduced outstanding share count while achieving EPS and cash flow per share accretion,” said Toby Xu, Chief Financial Officer of Alibaba Group.

Reorganization

Over the past year, Alibaba underwent significant changes, including restructuring efforts.

Daniel Zhang, the previous CEO of Alibaba Group, who became acting head of the cloud business in December 2022, unexpectedly resigned in September last year.

In March 2023, BABA announced plans to split its business into six separate units in a move to unlock shareholder value and advance competitiveness. The company’s restructuring resulted in the creation of six distinct business units, some of which will be able to go public and raise external funding.

Among those being touted for initial public offerings (IPOs) were Alibaba’s cloud unit, Cainiao logistics arm, and Freshippo grocery arm. However, Alibaba decided to cancel the highly anticipated spinoff of its cloud computing business last year.

Joe Tsai, chairman of BABA, mentioned during the last earnings call that while the company will explore separate financing options, generating synergies within the Alibaba ecosystem remains a priority to reflect the group's overall value. Tsai also emphasized that Alibaba is not rushing into these transactions and will consider market conditions before proceeding.

Strategic Initiatives

On April 17, 2024, Alibaba.com, a leading platform for global business-to-business (B2B) e-commerce, introduced its affordable, customizable Logistics Marketplace, offering U.S. small and medium-sized enterprises (SMEs) access to affordable and customizable logistics services to streamline their supply chains and gain global reach with more ease.

On January 9, Alibaba.com introduced its latest Smart Assistant features powered by AI at CES in Las Vegas, NV. The Smart Assistant is an AI-powered sourcing tool that caters to newcomers and seasoned entrepreneurs in the dynamic world of global commerce, helping them discover new opportunities, stay up-to-date on trends, seamlessly track orders, and more.

Also, in the same month, Alibaba Cloud unveiled its new generation of elastic computing instance specification family ECS g8i. ECS g8i instances will offer high-quality and efficient computing services for customers in industries like games, e-commerce, finance, medical care, and enterprise services to meet their performance needs in application scenarios, including in-depth learning, AI reasoning training, and big data.

On October 31 last year, Alibaba Cloud announced its latest large language model (LLM), Tongyi Qianwen 2.0. This is a substantial upgrade from its predecessor, launched in April. Tongyi Qianwen 2.0 demonstrates outstanding capabilities in understanding complex instructions, copywriting, memorizing, reasoning, and preventing hallucinations.

With this upgraded version of its AI model, the company looks to compete with U.S. rivals such as Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT).

Alibaba also unveiled the GenAI Service Platform, which allows companies to build their own generative AI applications using their data.

Bottom Line

While BABA reported mixed financials in the last quarter, it announced an increase in the size of its share buyback program by $25 billion, creating a greater value for its shareholders. The boost to the buyback program demonstrates the company’s confidence in its business outlook and cash flow.

Moreover, AliExpress order volume rose by 60% year-over-year for the third quarter. This solid performance contributed to a staggering 44% year-over-year growth in Alibaba International Digital Commerce Group’s revenue, surpassing market expectations for the sixth straight quarter. AliExpress’ Choice, a premium service launched in March 2023, is the catalyst behind this strong growth.

Alibaba’s Cainiao Smart Logistics Network Limited and Digital Media and Entertainment Group further grew by around 23% and 18%, respectively.

Over the past five years, BABA’s revenue and EBITDA grew at CAGRs of 21.9% and 16%, respectively. The company’s net income and EPS rose at respective CAGRs of 7.6% and 7.8% over the same timeframe. Its total assets increased at 14.7% CAGR over the same period.

Besides, BABA’s trailing-12-month EBIT margin of 13.74% is 79.8% higher than the 7.64% industry average. Moreover, the stock’s trailing-12-month net income margin and levered FCF margin of 10.81% and 15.77% are significantly higher than the industry averages of 4.57% and 5.53%, respectively.

The Chinese internet giant is set to report its financial results for the quarter and fiscal year ended March 31, 2024, before the market opens on May 14, 2024. Analysts expect BABA’s revenue for the fourth quarter to increase 2.6% year-over-year to $30.37 billion. However, the company’s EPS for the same period is expected to decline by 6.3% year-over-year to $1.43.

For the fiscal year 2024, Street expects BABA’s revenue and EPS to grow 5.4% and 9.1% from the prior year to $130.09 billion and $8.46, respectively.

Moving forward, the China-based tech company’s primary focus is on revitalizing the growth of its core businesses, mainly e-commerce and cloud computing. The company will increase its investments to enhance users’ core experiences, boost growth in Taobao and Tmall Group, and solidify its market leadership in the upcoming year.

Alibaba has a substantial amount of net cash and investments on its balance sheet, providing investors with a safety cushion. This solid cash position can be used for strategic investments, acquisitions, and business expansion, enhancing the company's growth prospects in the long term.

In conclusion, BABA’s current discounted market position presents an attractive opportunity for value-oriented investors. Conducting a thorough analysis of the company's financial health, growth prospects, and competitive landscape can help investors make informed investment decisions and benefit from the long-term upside potential of the stock.

Top Tech Stocks for Buying Amid S&P 500's Surge

Posted on by The INO.com Team

Recently released data from the personal consumption expenditures (PCE) price index revealed that inflation increased in March. The core PCE price index, which excludes energy and food prices, went up by 0.3% last month, reaching an annual rate of 2.8% (unchanged from February). That was above the 2.7% estimate from the Dow Jones consensus.

George Mateyo, chief investment officer at Key Wealth, cautioned against assuming that inflation concerns have completely dissipated and that the Federal Reserve will imminently cut interest rates. He said, “The prospects of rate cuts remain, but they are not assured, and the Fed will likely need weakness in the labor market before they have the confidence to cut.”

Meanwhile, consumers continued to spend despite the elevated price levels. Personal spending increased by 0.8% for the month, slightly surpassing the 0.7% estimate. Personal income increased by 0.5%, aligning with expectations and exceeding the 0.3% rise in February.

The S&P 500 index capped off its best week since November as it rose around 2.7% to snap its streak of three straight weekly losses, while the tech-heavy Nasdaq Composite gained 4.2%, marking its first positive week in five. The broad market index is currently up more than 7% year-to-date. Stocks have surged lately as Big Tech names rallied on solid earnings and traders closely analyzing the latest inflation data.

Mona Mahajan, senior investment strategist at Edward Jones, noted, “We are finishing a volatile week on a strong note. It’s nice to see some green on the screen. Clearly one of the drivers has been the stellar reports coming out of megacap technology.”

Tech giants, including Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA), and Alphabet Inc. (GOOGL), reported impressive earnings lately, and the message conveyed to Wall Street is simple and straightforward: enterprise spending on A will likely remain steady in the foreseeable future.

GOOGL soared over 10% on better-than-expected first-quarter earnings, marking its best day since July 2015. Additionally, the company announced its first-ever dividend payable to its shareholders on June 17, 2024, and a $70 billion buyback. Meanwhile, Microsoft gained nearly 2% after reporting robust fiscal third-quarter results, with a notable growth in its cloud business.

Let’s delve deeper into the fundamentals and growth prospects of MSFT, NVDA, and GOOGL:

Microsoft Corporation (MSFT)

One of the most popular and sought-after software companies, Microsoft Corporation (MSFT), barely requires any introduction. It has a market capitalization of whooping $2.99 trillion.

With a strong foothold in the cloud, the tech giant continues to pursue innovations in the artificial technology (AI) front, with AI-powered Bing and Microsoft 365 Copilot. Moreover, the partnership with ChatGPT creator OpenAI has given MSFT another edge over its competitors.

On April 23, the company introduced Phi-3-mini, a lightweight AI model aimed at broadening its client base with cost-effective options. Phi-3-mini is immediately available on Microsoft’s Azure cloud platform, Hugging Face’s machine learning model platform, and Ollama for local machine deployment.

On the same day, MSFT announced a five-year strategic partnership with The Coca-Cola Company (KO) to accelerate AI transformation enterprise-wide and across its global network of independent bottlers. In addition, on April 22, Cognizant Technology Solutions Corporation (CTSH) announced a partnership with MSFT to expand the adoption of generative AI in the enterprise and realize strategic business transformation.

In the same month, the company also expanded its work with G42 to accelerate responsible AI innovation in the United Arab Emirates and beyond while accelerating digital transformation securely across the Middle East, Central Asia, and Africa with expanded access to services and technologies.

Given the AI boom, such strategic partnerships make it a contender in the high-growth segments of the tech market that matter.

Driven by its Intelligent Cloud revenue with a 21% increase, the company posted impressive earnings for the third quarter that ended March 31, 2024. MSFT’s total revenue increased 17% year-over-year to $61.86 billion. Thanks to the booming demand for its cloud solutions, the company’s Cloud revenue surged 23% year-over-year to $35.10 billion.

"Microsoft Copilot and Copilot stack spanning everyday productivity, business process and developer services to models, data and infrastructure are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry," chief executive officer Satya Nadella said in a statement, referring to Microsoft’s AI services.

Further, Microsoft’s operating income rose 23.4% from the year-ago value to $27.58 billion. Its net income and earnings per share came in at $21.94 billion and $2.94, up 19.9% and 20% year-over-year, respectively. In addition, the company’s cash inflow from operating activities grew 30.6% from the prior year’s period to $31.92 billion.

Looking ahead, Street expects MSFT’s revenue and EPS to rise 14.6% and 8.5% year-over-year to $64.42 billion and $2.92 in the fourth quarter ending June 2024, respectively. It’s no surprise that the company has topped the consensus revenue and EPS estimates in each of the four trailing quarters.

Moreover, Microsoft boasts an impressive trailing-12-month ROCE and net income margin of 38.49% and 36.43%, significantly higher than the industry averages of 3.36%and 2.64%, respectively. Also, the stock’s trailing-12-month gross profit margin of 69.89% is 43.6% higher than the 48.66% industry average.

Shares of MSFT continue to shine this year, following robust third-quarter 2024 earnings. The stock has gained nearly 7% year-to-date and more than 36% over the past year.

NVIDIA Corporation (NVDA)

Having originated in designing GPUs for consumer gaming, NVIDIA Corporation (NVDA) has shifted its focus to making hardware for data centers, and it is at the forefront of enabling AI capabilities for a broad range of applications. Its market capitalization stands at $2.19 trillion.

While gaming remains a core market for NVDA, its reach extends far beyond. Given the rapidly evolving technological landscape, the company has leveraged its expertise in chip design and computing power to stay at the forefront of emerging trends and capitalize on new market opportunities.

Recently, the company announced that SEA.AI Linz, an Austria-based start-up and its Metropolis partner, would use AI and machine vision technology powered by NVIDIA's Jetson edge AI platform to enhance safety in sea travel by quickly detecting and alerting operators to potential hazards.

On April 25, the company posted that a line-up of NVIDIA automotive partners unveiled their latest offerings (at Auto China), powered by NVIDIA DRIVE, the leading platform for AI-driven vehicles. It also stated that several automakers are developing next-generation vehicles using NVIDIA DRIVE Orin.

Also, on April 24, NVDA announced its acquisition of Run:ai, a provider of GPU orchestration software, in a move to enhance the efficiency of AI computing resources. Run:ai, an Israeli start-up, specializes in Kubernetes-based workload management, enabling efficient cluster resource utilization for AI workloads across shared accelerated computing infrastructure.

Through this platform, enterprise customers can effectively manage and optimize their compute infrastructure, spanning on-premises, cloud, and hybrid environments.

NVDA's fourth quarter saw over 3x year-over-year increase to $22.10 billion, resulting in a 22% gain versus the previous quarter. Its Data Center group chalked up $18.40 billion in revenue for the quarter, resulting in a 27% sequential gain and a massive 409% lift over the same period last year. NVIDIA’s Data Center business (primarily connected to its AI operations) is among its highest-margin businesses.

NVIDIA’s founder and CEO, Jensen Huang, believes that accelerated computing and generative AI have hit a “tipping point,” with broad-based demand observed in the market. He added that the demand for data processing, training, and inference from large cloud-service providers and GPU-specialized ones, as well as from enterprise software and consumer internet companies, have been the driving force for the Data Center unit.

Moreover, the company’s non-GAAP operating income and non-GAAP net income grew significantly from the prior year period (and each 28% up quarter-over-quarter) to $14.75 billion and $12.84 billion, respectively. Its non-GAAP EPS came in at $5.16, compared to $0.88 in the prior year’s quarter.

Per its financial guidance, NVIDIA expects net revenue to be $24 billion for the first quarter of fiscal 2025, representing a projected 9% sequential gain. Its non-GAAP gross margin is expected to be at 77%.

Analysts expect NVDA’s revenue and EPS for the first quarter (ending April 2024) to increase substantially by 238.4% and 407.9% year-over-year to $24.34 billion and $5.54, respectively. Additionally, the company surpassed consensus revenue estimates in each of the trailing four quarters, which is impressive.

The stock’s trailing-12-month ROCE, ROTC, and ROTA of 91.46%, 46.75%, and 45.28% are significantly higher than the industry averages of 3.36%, 2.32%, and 1.29%, respectively. Also, its trailing-12-month net income margin of 48.85% compares to the industry average of 2.64%.

Moreover, the shares of the GPU giant have returned more than 117% over the past six months and nearly 77% year-to-date.

Alphabet Inc. (GOOGL)

With a market cap of $2.15 trillion, Alphabet Inc. (GOOGL) is known for its pioneering internet-related services and products. Amidst the rise of generative artificial intelligence, Google's parent company is making notable advancements, as indicated by its escalating capital expenditures and aggressive moves in artificial intelligence.

Alphabet CEO Sundar Pichai attributed the company’s significant success to its investments in AI, including the large language model and suite of AI products, including Gemini.

“We are well under way with our Gemini era and there’s great momentum across the company. Our leadership in AI research and infrastructure, and our global product footprint, position us well for the next wave of AI innovation,” Pichai said.

On April 23, GOOGL announced a €600 million ($642.98 million) investment plan for a new data center in Groningen, Netherlands, to create 125 job opportunities. This investment contributes to the company’s cumulative investment in Dutch data infrastructure, which has exceeded €3.80 billion ($4.07 billion) since 2014.

In the fiscal 2024 first quarter ended March 31, 2024, GOOGL reported revenues of $80.54 billion, up 15.4% year-over-year. Its income from operations grew 46.3% from the prior year’s quarter to $25.47 billion. Net income and earnings per share came in at $23.33 billion and $1.89, representing increases of 57.2% and 61.5% year-over-year, respectively.

In addition, the tech company’s cash and cash equivalents amounted to $24.49 billion as of March 31, 2024, compared to $24.05 billion as of December 31, 2023.

Street expects GOOGL’s revenue and EPS for the fiscal second quarter (ending June 2024) to increase 12.5% and 27.5% year-over-year to $83.90 billion and $1.84, respectively. Also, the company has topped the consensus EPS and revenue estimates in all four trailing quarters.

Besides, GOOGL’s trailing-12-month gross profit margin of 57.47% is 16.9% higher than the 49.13% industry average. Likewise, the stock’s trailing-12-month net income margin, ROCE, and ROTC of 25.90%, 29.76%, and 19.82% compare to the industry averages of 2.53%, 2.86%, and 3.28%, respectively.

GOOGL’s stock has climbed over 35% over the past six months and is up nearly 18% year-to-date.

Bottom Line

Judging from the recent strategic initiatives, it’s clear that the tech giants have been investing heavily in artificial intelligence (AI). These investments reflect their recognition of the importance of AI in driving innovation, improving products and services, and staying competitive in the rapidly evolving tech landscape.

With Microsoft’s Copilot and Google’s Gemini, big companies such as Meta Platforms, Inc. (META) and c are joining the race to make sure they keep up with AI and don’t miss out on the vast market that could be worth more than $1 trillion in the next ten years.

Moreover, the tech landscape remains a bright spot, with more and more people engaging in online activities, ranging from remote working and online learning to entertainment and shopping. Plus, the rapid adoption of cloud computing, big data, the Internet of Things (IoT), virtual reality, machine learning, digital communication, blockchain, and 5G technology will continue to push the industry forward.

Lately, Big Tech stocks have played a crucial role in driving the S&P 500 to notch its best week since November, contributing to market optimism despite lingering inflation concerns. Amid the S&P’s surge, top-performing tech stocks MSFT, NVDA, and GOOGL could be wise additions to your portfolios for potential gains.

Is Energy Transfer (ET) the Next Big Dividend Winner?

Posted on by The INO.com Team

Leading midstream oil & gas company Energy Transfer LP (ET) has again gained traction among income-seeking investors for its high-yield dividend. The company's distribution yield currently tops 8%, which is well above the market’s 1.4% yield.

Moreover, the energy company has been a staple in a Congress member's portfolio for several years. In 2023, Representative Mark Green of Tennessee emerged as the second-best stock trader in Congress, boasting an impressive 122.2% return on investment.

Now, let's take a closer look at the company’s business operations, fundamentals, and how it supports its attractive distribution.

Recent Strategic Expansion Initiatives

Operating a vast network of approximately 125,000 miles of pipelines for the transportation of crude oil, natural gas, and natural gas liquids (NGLs), Energy Transfer demonstrates its robust and resilient business operations.

On March 27, 2024, Texas Rangers announced an extended partnership with ET, marking a multi-year agreement where the energy company will serve as the Rangers' official jersey patch partner. This move signifies a significant expansion of the company's brand visibility and community involvement.

ET co-CEO Mackie McCrea remarked, “Expanding our partnership to include the jersey patch creates an opportunity for us to show our support for the team while aligning our brand with Rangers fans throughout the Metroplex and across the country.”

On February 23, ET and Sunoco LP (SUN) joined forces to sponsor Sauber Motorsport’s Stake F1 Team KICK Sauber, marking their inaugural marketing partnership. The two-year agreement, starting from the 2024 season, grants sponsorship rights for three Formula 1 Grand Prix races in the U.S.

Also, in November 2023, Energy Transfer completed its previously announced merger with Crestwood Equity Partners LP, and integration of the combined operations is ongoing. The merger is expected to generate $80 million of annual cost synergies by 2026, with $65 million in 2024, before additional anticipated benefits from financial and commercial synergies.

What’s in Store for Income-oriented Investors?

ET is highly committed to returning value to shareholders via attractive dividends. On April 24, the company announced a quarterly cash distribution of $0.3175 per common unit ($1.27 on an annualized basis) for the first quarter, to be paid on May 20, 2024. The distribution per unit represents a 3.3% increase over the year-ago quarter.

Further, the company expects to grow its distribution by 3% to 5% annually. Energy Transfer’s current dividend translates to an 8% yield, while its four-year average dividend yield is 9.8%. Meanwhile, ET has raised its dividend payouts at a CAGR of 10.8% over the past three years.

Solid Fourth-Quarter 2023 Results and Upbeat 2024 Outlook

For the fourth quarter that ended December 31, 2023, ET’s revenues rose marginally year-over-year to $20.53 billion. Its operating income grew 19.9% year-over-year to $2.17 billion. Net income attributable to partners and net income per common unit came in at $1.33 billion and $0.37, up 14.9% and 8.8% from the prior-year quarter, respectively.

Furthermore, the energy company’s adjusted EBITDA increased 4.8% year-over-year to $3.60 billion. Also, its distributable cash flow attributable to partners amounted to $2.03 billion compared to $1.91 billion for the same period last year.

During the fourth quarter, Energy Transfer achieved significant milestones with the addition of new growth projects and acquisitions. The company's assets hit new records, with NGL fractionation volumes increasing by 16%. NGL transportation volumes also saw a notable surge of 10%. Additionally, NGL exports were up more than 13%, showcasing the company's expanding market reach.

Further, interstate natural gas transportation volumes witnessed a 5% growth, while midstream gathered volumes rose by the same margin. Crude oil transportation and terminal volumes were up 39% and 16%, respectively.

For the fiscal year 2024, ET anticipates its adjusted EBITDA to fall between $14.5 billion and $14.8 billion. The midpoint of this range indicates a 7% increase from last year’s adjusted EBITDA. Growth capital expenditures are estimated to range from $2.4 billion to $2.6 billion, including nearly $300 million of deferred spending from the previous 2023 capital guidance.

Energy Transfer will unveil its first-quarter results on May 8. For the quarter that ended March 2024, analysts expect the company’s EPS and revenue to increase 19% and 10.4% year-over-year to $0.38 and $20.97 billion, respectively. In addition, ET’s EPS and revenue for the fiscal year 2024 are expected to grow 44.1% and 9.1% from the prior year to $1.57 and $85.70 billion, respectively.

Bottom Line

ET’s business continues to thrive, propelled by consistent demand across its network and strategic acquisitions and partnerships. It benefits from a portfolio of assets with exceptional product and geographic diversity. Moreover, the energy company reported impressive fourth-quarter results, primarily driven by increased volumes across all core segments and the positive impact of its recent acquisition of Enable Midstream.

Moreover, ET announced an increase in quarterly cash dividend to $0.3175 per common unit for the first quarter of 2024. The company’s annual dividend reflects a lucrative yield of 8%. Energy Transfer targets a 3% to 5% annual distribution growth rate. The dividend increase reflects ET’s confidence in its financial health and growth prospects.

Further, the stock is modestly undervalued. ET’s forward non-GAAP price-to-earnings ratio of 10.17 is 7.5% lower than the industry average of 11. Also, its forward Price/Sales multiple of 0.62 compares to the industry average of 1.49.

Regarding price performance, the midstream giant’s shares have gained nearly 15% year-to-date and more than 25.1% over the past year. On top of it, RBC Capital analyst Elvira Scotto recently maintained a Buy rating on ET and set a price target of $19. Also, Mizuho Securities reiterated a Buy rating on the stock with a $19 price target.

Given ET’s promising expansion efforts, solid financial performance, and attractive dividend yield, we believe that this stock holds the potential to become the next big dividend winner. Hence, it could be an ideal buy for those principally focused on income.

Bank of America (BAC) Payout Potential for Income Investors

Posted on by The INO.com Team

Headquartered in Charlotte, North Carolina, Bank of America Corporation (BAC), the financial juggernaut boasting $3.20 trillion in assets, has been a boon for investors lately. Over the past six months, shares of the mega-bank have delivered returns of 50.2%. Impressive, isn’t it?

Moreover, BAC now ranks as the second-largest holding in Berkshire Hathaway's (BRK.A) (BRK.B) portfolio, with well-known investor CEO Warren Buffett showing confidence in the bank’s long-term success. Berkshire owns around 1.03 billion shares in Bank of America, representing a 13.1% stake as of December 31, 2023.

Warren Buffett's knack for investing in profitable ventures has made Berkshire a top conglomerate. Berkshire's investment in BAC is driven by factors including the bank's robust financial position, diversification of financial services, and growth potential. Buffett, known for seeking companies with solid fundamentals and competitive advantages, sees Bank of America meeting his standards. So, does this signal a bullish outlook on the bank’s prospects?

Here's a closer look at whether BAC holds promise for investors seeking to emulate Buffett's investment philosophy.

How Did the Bank Perform in Q1?

Bank of America’s top line in the fiscal 2024 first-quarter results revealed a marginal year-over-year decline, reaching $25.82 billion due to the lower net interest income (NII) generated across its business segments. NII decreased by 3% year-over-year to $14.03 billion, with higher deposit costs outweighing increased asset yields and modest loan growth.

Despite the drop, the company delivered better-than-expected NII performance, which is $100 million higher than the last quarter. BofA had predicted a decrease of $100 million to $200 million from the fourth quarter of 2023 to the first quarter of 2024. Moreover, BAC’s Global Wealth and Investment Management segment reported a record revenue of $5.60 billion, up 5% year-over-year.

In addition, BAC’s net income applicable to common shareholders fell by 19.8% from the prior year’s quarter to $6.14 billion. Its EPS came in at $0.76, representing a decline of 19.2% year-over-year.

Compared to the previous year’s period, the company’s provision for credit losses rose by 41.7% to $1.32 billion. Also, its total net charge-offs increased 85.6% year-over-year. The net charge-offs as a percentage of average loans and leases outstanding stood at 0.58%, compared to 0.32% in the prior-year quarter.

On the other hand, the company’s CET1 ratio came in at 11.8%, compared to 11.4% in the prior-year quarter. Also, its total loans and leases rose 0.2% year-over-year to $1.05 trillion. As of March 31, 2024, Bank of America’s liquidity remained strong, with cash and cash equivalents at $313.40 million, albeit a decline of 5.9% from $333.07 billion as of December 31, 2023.

Brian Moynihan, BAC’s Chair and CEO, said, “We reported a strong quarter as our businesses performed well, adding clients and deepening relationships. We reached 36.9 million consumer checking accounts, with 21 consecutive quarters of net checking account growth. Our Wealth Management team generated record revenue, with record client balances, and investment banking rebounded.”

“Continued strong earnings and strong expense management both position our company to continue to drive our market leading positions across our businesses,” Moynihan added.

What’s Ahead?

Street expects BAC to generate a revenue of $25.31 billion for the second quarter (ending June 2024), indicating a slight increase compared to the same period last year. The company’s earnings per share is expected to stand at $0.81 for the ongoing quarter.

For the fiscal year ending December 2024, analysts anticipate a revenue surge of 3.4% year-over-year, reaching $101.91 billion. They forecast that earnings per share will reach $3.23, up 4.7% year-over-year. Further, the company’s revenue and EPS for the fiscal year 2025 are expected to grow 2.5% and 8.7% year-over-year to $104.49 billion and $3.51, respectively.

Additionally, the company has comfortably surpassed consensus revenue estimates in three of the trailing four quarters, so there is a low likelihood of another miss in the upcoming period.

Dividend Sustainability Makes It Attractive for Income Investors

Thanks to its robust capital strength, with a common equity Tier 1 capital of $197 billion (exceeding regulatory requirements by $31 billion), the bank was able to support clients and return $4.4 billion to shareholders in the first quarter through dividends and share repurchases.

BAC rewards shareholders a dividend of 2.5% (or $0.96 annually), significantly higher than the S&P 500's average of 1.4%. That means BAC shareholders get over 78% of the income generated by America’s leading stock index.

Moreover, BofA has a commendable track record of dividend increases, with compound annualized growth rates (CAGRs) of 9.3% over the past three years and 10.5% over the past five years. With a record of 10 years of consecutive dividend growth, the bank has shown a steady and reliable history of doing so.

The company has a payout ratio of 32.5%, demonstrating a prudent balance between rewarding shareholders and retaining earnings for future growth. While past performance does not indicate future results, the company's steadfast commitment to dividend growth suggests that the management is unlikely to break its streak in the near term.

Bottom Line

Despite the mixed financials, BAC's recent first-quarter report showcased the strength of its diversified business model. Notably, the bank saw a significant 35% increase in investment banking fee revenue, driven by a timely rebound in deal activity. Also, its sales and trading revenue experienced a notable resurgence, marking its most robust first-quarter performance in over a decade.

Moreover, the company’s dividend sustainability and growth prospects highlight its attractiveness for income-focused investors seeking reliable cash flow and capital appreciation.

According to Statista, the U.S. wealth management market is expected to expand at a CAGR of 7.9%, resulting in a market volume of $87.35 trillion by 2028. Meanwhile, the U.S. retail banking market is projected to hit $91.47 billion, growing at a CAGR of 4.3% during the forecast period (2024-2028).

Given the inflationary pressures, the Federal Reserve is unlikely to cut rates in June, meaning interest rates will remain higher for longer. While this may enable banks to charge higher loan rates, they may face increased deposit costs, potentially impacting their margins. Bolstered by an adjusted ROTCE of 13.88% and a CET1 ratio of 11.8%, we believe the company is well-equipped to thrive in a higher interest rate environment.

Looking at valuation, BAC’s forward non-GAAP P/E of 11.89x is 14.1% higher than the industry average of 10.42x. Likewise, in terms of forward Price/Sales, the stock is trading at 2.96x, 18.4% higher than the industry average of 2.50x.

So, while existing shareholders have reason to cheer, potential investors might wait for a better entry point in this stock.