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

Posted on by The INO.com Team

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

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

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

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

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

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

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

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

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

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

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

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

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

YYY’s Holdings

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

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

Fees

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

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

Bottom Line

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

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

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

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

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

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

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

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

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

Posted on by The INO.com Team

 

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

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

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

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

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

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

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

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

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

NVIDIA Corporation (NVDA)

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

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

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

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

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

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

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

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

ASML Holding N.V. (ASML)

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

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

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

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

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

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

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

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

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

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

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

The Winner

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

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

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

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

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

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

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

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

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

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

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.