Beyond Gaming: Assessing the Ripple Effect of China's Regulatory Actions on BABA and JD

Posted on by The INO.com Team

The Chinese authorities have recently issued a comprehensive draft of rules and regulations to reduce online expenditure and in-game rewards in video games. These impending regulations would prohibit online games from offering incentives to players based on their consecutive logins, first-time purchases, or recurring payments – standard practices typically deployed in online gaming scenarios.

The removal of the incentives could reduce daily active users and in-app revenue. Such a change could ultimately compel publishers to restructure their game design and monetization strategies.

The draft represents the most stringent enforcement to date. It bars games from presenting probability-based draws to underage users and disallows the trading of virtual gaming items. Amid ongoing concerns over user data security, it mandates that game publishers host their servers domestically in China.

The aggressive regulations have slammed the world's largest gaming market. The immediate fallout saw investors retreating in haste, resulting in an approximate loss of $80 billion in market value for China’s two dominant gaming companies, Tencent Holdings and Netease.

Several U.S. and European video game developers saw shares take a hit after Friday’s announcement, but the losses were small when compared with Tencent’s 16% tumble and NetEase’s 25% decline. The regulation news wiped about $54 billion off Tencent’s share value.

The country initiated its major clampdown on the gaming sector in 2021, implementing stringent playtime restrictions for minors and freezing new game approvals for almost eight months, citing increasing concerns over gaming addiction. These regulatory measures led to unprecedented challenges for China's gaming industry in 2021 and 2022, marking the first time the industry witnessed a contraction in total revenues.

While the Chinese authorities resumed approval of new games in the following year, regulators have maintained their focus on managing the duration of gameplay for minors and their overall expenditure within the game.

The recent draft comes as China's domestic game market revenue reached ¥303 billion ($42.6 billion), growing 14% in 2023, reversing a 10% decline from the year before, as per figures from industry association CGIGC. Due to the sheer size and impact of Chinese gaming giants, the global video games market could also be affected in the long run.

The profound impact of China's recent regulations has reverberated beyond the gaming industry and has significantly impacted Chinese tech corporations.

A regulatory storm against big tech firms emerged in late 2020 when Chinese authorities began to express concerns about the extensive influence and growth of the nation's major internet platforms.

This regulatory onslaught against China’s tech giants resulted in the wiping of trillions of dollars in market value, leaving a significant dent in one of the most burgeoning sectors of the world's second-largest economy. This intensified the U.S.-China decoupling, with its effects visibly shrinking those Chinese tech companies that once competed neck-to-neck with their U.S. counterparts.

Alibaba Group Holding Limited (BABA) found itself in the eye of the storm following critical comments made by co-founder Jack Ma against Chinese regulators ahead of the impending IPO of its subsidiary Ant Financial. This fintech affiliate, whose IPO plans in Shanghai and Hong Kong were halted abruptly, created a global tremor among the investment community.

BABA faced a record-breaking fine of $2.8 billion, and Chinese antitrust regulators imposed rigorous restrictions on the company's e-commerce operations. The newly enacted measures – barring BABA from implementing exclusive agreements with merchants, employing loss-leader promotions to attract fresh clientele, and boosting its ecosystem through unauthorized investments – have subsequently weakened BABA's safeguards against market competitors.

Following the censure of BABA, China's regulatory hawks turned their attention toward the online financial service units of 13 other tech titans, including JD.com, Inc. (JD).

It was initially predicted that Chinese policymakers would change their trajectory and prioritize growth stimulation in 2023, with tech firms being key players in this strategy. But with recent gaming regulations eroding consumer faith in tech stocks, it is expected to trigger a domino effect, potentially impacting shares of high-flyers like BABA and JD.

Here, we delve deeper into the ramifications and implications faced by these tech companies.

Alibaba Group Holding Limited (BABA)

BABA, previously regarded as China's best contender for becoming a trillion-dollar entity, currently stands near its lowest trading value of the year, a significant reduction from its 2020 peak. The company is navigating through turbulence on multiple fronts. Weakened economic recovery and burgeoning rivals threaten BABA's once primarily dominant position in the online retail sector.

BABA recently aborted plans to float its cloud division due to uncertainties stirred by the United States' export restrictions on advanced computing chips. The tech giant now looks forward to formulating a robust growth model centered around the increasing demand for networked and highly scalable cloud computing services underpinned by AI. However, it's worth noting that U.S. bans on high-end chip exports to China may hinder China's technological ambitions.

In an endeavor to revive profits, BABA is refocusing on e-commerce, leveraging content creators and competitive pricing to remain relevant amid stiff competition. The e-commerce behemoth is looking at slashing prices and is projected to continue heavy investment in curating content encompassing shopping, consumption, and everyday life.

Stricter regulations enforced in recent years have purportedly placed pressure on Chinese tech firms like BABA. This year, BABA has also witnessed a contraction in its workforce. BABA's stock prices dropped following China's announcement to regulate the online gaming industry with tough measures aimed at reducing excessive spending and controlling online game content.

Alibaba Cloud offers custom solutions for the gaming industry, providing dependable support for game development and distribution, ensuring an excellent experience for players and users. Globally, it remains a top choice for gaming businesses intending to streamline their digital transition journey with flexible game development, secure and swift global distribution, and economical operations.

BABA owns several renowned gaming platforms in China, including Youku Games, Epic Games China, and Perfect World. These platforms boast millions of gamers and generate billions of dollars in revenue each year.

Nonetheless, these platforms will also have to conform to new rules that curtail online gaming time for minors and limit game content featuring violence, gambling, or inappropriate language. These newly imposed rules mandate BABA to modify its game development strategy and content to meet the novel standards and evade potential penalties.

Additionally, it might require extensive resources and effort to supervise and moderate its gaming platforms to maintain regulatory compliance, potentially risking the loss of consumers. Such changes could then detrimentally affect BABA's revenue and profitability derived from the online games that the tech behemoth develops and distributes.

However, analysts expect BABA’s revenue for the fiscal third quarter ending December 2023 to increase 4.9% year-over-year to $37.65 billion. Its EPS is expected to come at $2.79 for the same quarter.

JD.com, Inc. (JD)

JD, China’s leading e-commerce platform, has extended its realm of operations to include online gaming under the name of JD Gaming.

What JD is doing in gaming?

The retail giant's gaming venture has several elements to its approach. Firstly, it harnesses the insights of its extensive consumer base, who contribute an abundance of product feedback collected through the platform's transactions. This data is shared with industry partners to inform and enhance their product development.

One key instance is JD's engagement with influential partners like Lenovo, a noted Chinese PC manufacturer, and the gaming behemoth Tencent. The collaboration resulted in the creation of mobile gaming optimized smartphones. Through this strategy, JD not only participates in product development but also acts as a distributor for these devices, directly catering to its gaming clientele via its shopping app.

Secondly, a significant component of JD's gaming strategy involves its stake in e-sports or competitive video gaming. In 2017, JD unveiled its professional e-sports team, JD Gaming, expanding it later by launching JD Esports, a dedicated mobile gaming team, in 2020.

Considering that global esports revenue is projected to surge to $3.8 billion by 2023, the potential for profit is vast. JD intends to ensure that a part of this profitable domain is its.

However, recent changes in gaming regulation affecting youth in China might cause a shift in consumer preferences and gaming habits. Consequently, online games, accompanying accessories, game consoles, and in-game purchases may see a decrease in demand. These developments have the potential to impact JD's e-commerce operation in ways worth close observation.

Analysts expect JD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to decline 1.1% and 3.8% year-over-year to $41.97 billion and $0.66, respectively.

Bottom Line

The sweeping restrictions unveiled before Christmas elicited reminders of the unceremoniously harsh crackdown on the tech sector in 2021. During that year, Chinese regulatory bodies spontaneously initiated limitations spanning various areas from e-commerce to entertainment, effectively destroying the online education industry through the outlawing of profits.

Some believe that there are traces of a governmental aspiration for an enhanced and diverse gaming environment marked by creativity and exceptional quality. The authorities lean toward a marketplace where publishers gain profits via ethical practices and innovative offerings instead of aggressive monetization tactics or endorsing "pay-to-win" games.

In a surprising turn of events, Chinese officialdom has moderated newly formulated online gaming regulations soon after the proposed constraints resulted in major technology firms losing billions of dollars. They sanctioned 105 domestic games, indicating the Chinese authorities' approval for the evolution of online gaming. This could potentially bolster investor sentiment.

However, analysts remain cautious when considering China's e-commerce titans, like BABA and JD. As it stands, the Chinese consumer is progressively tightening discretionary spending amid a frail economic climate. Additionally, the looming threat of intensified sector rivalry might influence company profitability.

Last week saw Chinese stocks taking a downturn, induced by apprehension over a potential surge in COVID-19 contagions, endangering progress in the world's second-most prosperous economy. This puts the decision to open the country post-lockdown under scrutiny, especially considering the resultant economic deceleration witnessed last year.

Given this backdrop, it could be wise to wait for better entry points in the featured stocks

AI 2024 Outlook: Which Stock Holds the Edge – INTC or NVDA?

Posted on by The INO.com Team

The AI landscape evolved significantly, thrusting it into the limelight for leading technology firms with the introduction of OpenAI’s ChatGPT. Before this advanced language model-based chatbot was unveiled, AI was certainly explored and considered by tech enterprises, but seldom was it prioritized. However, now, unwavering optimism about the burgeoning potential of AI continues to pervade organizations.

As we bid adieu to 2023 – notably marked by the ascendancy of AI – queries linger regarding the monetization strategies businesses will employ around this transformative technology. However, amid the clouds of uncertainty, one fact stands crystal clear – AI is here for the long haul, advancing at a stupendously swift pace.

NVIDIA Corporation (NVDA), a leading force in the semiconductor realm, has secured an iron-clad position in the AI arena thanks to its timely engagement with AI technologies. This strategic move has propelled NVDA years ahead of its competitors, enabling it to provide a comprehensive platform catering to all AI requisites – from advanced chips and processors to complex software systems.

Intel Corporation (INTC), distinguished for trailblazing semiconductor innovation and globally esteemed for its Central Processing Units (CPUs), fuels a myriad of devices spanning personal computers to expansive data centers. INTC's Core processors are applauded for their exceptional performance and unwavering reliability. In a recent turn of events, INTC has plunged into the AI sphere with products like the AI-specialized Core Ultra and server CPUs like Emerald Rapids.

The global AI market is expected to reach $1.35 trillion, growing at a 36.8% CAGR. It would be strategically amiss for INTC not to stake its claim. However, the extent of INTC's share within this booming market hinges upon factors like the raw processing capacity, the versatility of the tech, and the number and diversity of potential applications for its semiconductor chips.

Relations between INTC and NVDA have soured following the "AI Everywhere" event, as a harsh critique from INTC's CEO Pat Gelsinger has elicited retaliatory remarks. The dispute originated when Pat Gelsinger criticized NVDA's AI strategy as being "shallow and small." This sparked a skirmish of words between the two tech titans, relentlessly escalating since then. The wrangle fueled up when INTC suggested that NVDA's status in the sector was simply due to “luck,” provoking a robust response from the graphics giant.

NVDA reacted defensively to INTC's comments, vehemently denying the ‘luck’ factor in their success. Bryan Catanzaro, NVDA's Vice President and previously involved with INTC's discontinued Larrabee project, took to the internet to express his views. He pointed to INTC's failure to capitalize on the rising AI trend as evidence of their lack of "vision and execution."

During the "AI Everywhere" event, INTC unveiled numerous innovative products and provided updates on their product pipeline. The highlight of the event was the introduction of the Gaudi 3 accelerator. However, Meteor Lake, an AI-optimized Core Ultra, and Emerald Rapids for cloud applications were also unveiled along with new chipsets, underscoring INTC’s commitment to fostering an extensive AI ecosystem.

It is reported that Gaudi 3 could outperform NVDA’s H100 accelerator, the current top choice for companies developing sizeable chip farms to power AI applications, despite NVDA is yet to launch its latest high-end AI chip.

Stepping into the booming AI market with gusto, INTC’s latest offerings include an upgraded version of Xeon server chips – marking the chips’ second major update in less than a year. These chips are designed to propel INTC to the pinnacle of AI innovation by offering improved performance and memory capabilities with lower electricity consumption.

INTC posits that the Xeon is the only mainstream data center processor with built-in AI acceleration. The company's 5th Gen Xeon delivers up to 42% higher inference and fine-tuning on models boasting up to 20 billion parameters.

Let’s look at the different approaches to AI processing…

At present, divergent strategies toward AI processing are being implemented by INTC and NVDA. NVDA's CUDA puts more emphasis on educating AI from the ground up. It involves supplying the AI model with data to let it learn – akin to educating an individual to achieve the necessary qualifications required for a job.

On the other hand, INTC leans more toward "inference." In this approach, a pre-existing AI model adapts and acquires knowledge from an unfamiliar situation. This could be likened to assigning a task relevant to their field to someone armed with the necessary degrees but lacking experience, then observing how they apply their theoretical knowledge in a practical situation.

Probable Impacts of Approaches on the Broader AI Industry in 2024…

NVDA’s CUDA is a software platform API facilitating parallel computing with GPU hardware. This breakthrough solution simplifies the process for developers, allowing them to create software that accelerates tasks by distributing workloads across parallelized GPUs.

CUDA has proven instrumental in driving pioneering advancements within various AI sectors. Thanks to the computational firepower harnessed from CUDA, researchers can train increasingly complex models, manage larger datasets, and achieve best-in-class results in record-breaking time.

The AI industry widely embraces CUDA for various applications, including deep learning, robotics, computer vision, and natural language processing. The platform will continue to evolve, underpinning new architectures such as NVDA's Hooper and Ada Lovelace. These innovations promise cutting-edge Tensor Cores and Transform Engines, advanced memory management capabilities, and more.

CUDA’s potential lies in boosting the performance and effectiveness of AI applications through the exploitation of GPU’s powerful parallelism and high bandwidth. For instance, it allows deep learning models to run faster on GPUs rather than CPUs or cloud servers.

Using CUDA, AI researchers and developers gain access to the enormous computational capacities of GPUs. This enables the training and deployment of AI models at revolutionary speeds, improving the efficiency of AI algorithms and decreasing the time necessary for model development and deployment. This acceleration empowers greater innovation in the field.

INTC’s Inference is the process used for making predictions through a trained model to make a prediction. The company's primary focus is vested in the inference market. Gelsinger commented in the event, “As inferencing occurs, hey, once you’ve trained the model … There is no CUDA dependency. It’s all about, can you run that model well?”

This evolving realm presents considerable competition for INTC. Nevertheless, the firm’s leadership considers the inference market to be a thriving ground for the future. The inference model aims to provide momentum to the expansive AI market by promoting cost efficiency and deployment of AI models across diverse platforms and devices. This would result in stimulating innovation and fostering collaboration among numerous stakeholders within the AI ecosystem.

With the adoption of AI reaching unparalleled heights, the demand for ground-breaking methods to train these AIs will be vital to conserve time and resources. While it is premature to conclude whether INTC's strategy will outmaneuver CUDA, the recent launch of INTC's Meteor Lake CPUs featuring an integrated Neural Processing Unit (NPU) reflects the firm's determination to incorporate AI profoundly into its products.

We shall now delve into some other factors to ascertain which stock holds an advantage:

Past and Expected Performance

NVDA’s revenue has grown at 44.8% and 29.3% CAGRs over the past three and five years, respectively. Its tangible book value has increased at CAGRs of 49.4% and 25.7% over the same periods.

On the other hand, INTC has yet to translate to top-line improvement, as its revenue has shown negative CAGR growths of 12.2% and 5.3% over the past three and five years, respectively. However, its tangible book value has increased at CAGRs of 22.5% and 14.6% over the same periods.

Analysts expect NVDA’s EPS for the fiscal year ending January 2025 to reach as high as $19.94 from the $12.30 expected in Fiscal 2024 (ending January 2024). For the fiscal year ending January 2024, NVDA’s revenue is expected to reach $58.77 billion, up 117.9% year-over-year, while for the fiscal year 2025, analysts expect its revenue to reach $90.66 billion. For the fourth quarter, the company expects its revenue to be $20 billion, plus or minus 2%.

Analysts expect INTC’s revenue for the fiscal year (ending December 2023) to come in at $54.07 billion, indicating a decline of 14.2% year-over-year. The consensus EPS estimate of $0.95 for the ongoing year indicates a 48.2% year-over-year decrease. For the fiscal year ending December 2024, its revenue and EPS are expected to increase 13% and 100% year-over-year to $61.10 billion and $1.91, respectively.

Financials

NVDA’s net revenue for the fiscal third quarter ended October 29, 2023, increased 205.5% year-over-year to $18.12 billion. Also, its non-GAAP net income and non-GAAP EPS came in at $10.02 million and $4.02, up 588.2% and 593.1% year-over-year, respectively.

During the fiscal third quarter that ended September 30, 2023, INTC’s revenue amounted to $14.16 billion, down 7.7% year-over-year. Its net income came at $297 million, while non-GAAP EPS increased 10.8% year-over-year to $0.41.

Bottom Line

NVDA showcases remarkable potential in the AI field, reaping significant profits from the sector. However, despite impressive revenue growth in the last quarter, boosted by a surge in AI GPU sales, NVDA continues to grapple with intricate macroeconomic difficulties. Sustained export limitations have negatively impacted sales to organizations in countries like China. Given the present regulatory environment, NVDA foresees a significant downturn in sales.

As the U.S. intensifies its export control measures, NVDA is proactively working to develop chips tailored for the Chinese market. However, the U.S. is expected to tighten these controls even more tightly to curb strides in new technologies that could favor Beijing.

A delay in the deployment of chips specifically optimized for China's market has resulted in an NVDA stock dip over the last month. While the recent slide may seem like an attractive investment opportunity, investors must be mindful of the possibility of further short-term volatility.

It is crucial to note that NVDA shares are currently trading at 20.59x sales and 39.83x earnings; valuations that imply any missteps have the potential to affect the company's market position significantly. Given the ongoing market instability and associated risks, it may be judicious for prospective investors to wait for a better entry point into the stock.

A notable concern for INTC stems from its primary focus as a PC hardware entity. Evidenced by the 2021 historic surge in PC sales, mainly attributed to COVID-19 and a rising interest in PC gaming, INTC relayed a substantial dependency on this market.

However, as we navigate into 2023, the PC market has dramatically retrenched compared to the extraordinary circumstances of 2021. Adding insult to injury, it appears NVDA has been outpacing INTC within the data center arena since the launch of ChatGPT.

An emergent trend of building accelerated computing server instances and a marked preference for H100 GPUs has seen a decline in the demand for CPU-heavy, compute-optimized instances. This act has placed INTC in a challenging position since the Xeon processors, once a market favorite, are now struggling to find takers.

While INTC's Gaudi has indeed enhanced AI/ML performance to a certain degree, there's no denying its noticeable lag behind NVDA. The comparative analysis drawn from third-party benchmarks and NVDA's unprecedented winning streak at the last MLPerf inference and training benchmarks only reinforces this fact.

INTC certainly boasts commendable computing expertise and continues its endeavors to gain mastery in process technology. Alas, Critics argue it has been sluggish in its execution compared to its counterparts. Rising costs associated with fabrication work and a tarnished reputation – being labeled as expensive, slow, and difficult to collaborate with – have acted as further impediments to its growth. Nevertheless, currently, INTC appears confined to providing chip fabrication services for ARM chips to fabless chip designers.

In the escalating war of AI technology where INTC and NVDA stand head-to-head, the future remains uncertain. With NVDA leading in graphic card technology and INTC's innovative Meteor Lake processors becoming game-changers in laptop technology, it's safe to say the ultimate victors of this clash will unquestionably be the hardware enthusiasts.

Decoding the Impact of the $15 Special Dividend on COST Stock

Posted on by The INO.com Team

Costco Wholesale Corporation (COST), a leading membership-based warehouse retailer, last week announced that its Board of Directors declared a special cash dividend on common stock of $15 per share, payable January 12, 2024, to shareholders of record as of the close of business on December 28, 2023. The aggregate amount of the payment will be nearly $6.70 billion.

This marks the fifth special dividend to be paid by Costco in the last 11 years and its largest so far. The special dividends paid previously were in 2012, 2015, 2017, and 2020 in the amounts of $7, $5, $7, and $10, respectively.

COST has shown significant resilience even as other big-box retailers raised caution on the consumer outlook. The recent news of Costco’s special dividend builds on its stellar financial performance in the first quarter of fiscal year 2024.

In addition to the special dividend, the warehouse club chain pays a regular annual dividend of $4.08, translating to a yield of 0.62% at the current share price. Its four-year average dividend yield is 1.36%. Moreover, COST’s dividend payouts have increased at a CAGR of 12.9% over the past three years. Costco has raised its dividends for 19 consecutive years.

After the retailer topped analysts’ estimates in the last reported quarter and announced a $15/share special dividend, shares of COST have been moving up the charts lately. The stock has surged nearly 14% over the past month and more than 28% over the past six months.

Robust Last Reported Financials

For the fiscal 2024 first quarter ended on November 26, 2023, COST reported revenue of $57.80 billion, slightly surpassing analysts’ estimate of $57.79 billion. This compared to the revenue of $53.44 billion in the same quarter of 2022. Its same-store sales grew 3.8% from a year ago. Also, e-commerce sales rose 6.3%, driven by solid demand during the Black Friday weekend.

The company said its sales got a significant boost during the recent Thanksgiving weekend when it sold more than four million pies. Also, COST made $100 million from the sale of gold bars during the quarter.

Costco added nearly 72 million paid household members in the first quarter, an increase of 7.6% compared to the same period last year. Shopping frequency at its stores grew 4.7% worldwide and 3.6% in the U.S.

The retailer’s operating income rose 13.3% year-over-year to $1.98 billion. Its income before income taxes was $2.11 billion, an increase of 19% from the prior year’s quarter. Also, its net income grew 16.5% year-over-year to $1.59 billion. The company posted a net income per share of $3.58, compared to the consensus estimate of $3.42, and up 16.6% year-over-year.

COST’s cash inflows from operating activities were $4.65 billion, up 78.2% from the previous year’s period. As of November 26, 2023, Costco’s cash and cash equivalents totaled $17.01 billion, compared to $13.70 billion as of September 3, 2022.

Improved Discretionary Spending During the Holiday Season

Costco got a solid start to its new fiscal year 2024, as consumer demand for discretionary items surged at the beginning of the holiday season. 

According to the National Retail Federation (NRF) forecast, holiday spending is anticipated to reach record levels during November and December this year and will grow between 3% and 4% from 2022 to between $957.30 billion and $966.60 billion.

“It is not surprising to see holiday sales growth returning to pre-pandemic levels,” said Matthew Shay, NRF President and CEO. “Overall household finances remain in good shape and will continue to support the consumer’s ability to spend.

Expanding Store Footprint

During the first quarter of 2024, the company opened ten new locations and plans to open approximately 33 locations over the coming year, up from 23 a year ago.

Costco currently operates 871 warehouses, including 600 in the U.S. and Puerto Rico, 108 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom, 18 in Korea, 15 in Australia, 14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, Sweden, and New Zealand.

In addition, the big-box retailer operates e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.

Impressive Historical Growth

COST’s revenue and EBITDA grew at respective CAGRs of 12.4% and 13.2% over the past five years. Its EBIT increased at a CAGR of 13.9% over the same period. Moreover, the company’s earnings from continued operations improved at a CAGR of 14.1% over the same time frame.

Furthermore, the company’s net income and EPS increased at CAGRs of 14.7% and 14.6% over the same period, respectively, while its total assets improved at a CAGR of 7%.

Upbeat Analyst Estimates

Analysts expect COST’s revenue for the second quarter (ending February 2024) to grow 6.1% year-over-year to $58.64 billion. The consensus EPS estimate of $3.56 for the ongoing quarter indicates an 8% year-over-year increase. Moreover, the company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is remarkable.

For the fiscal year ending August 2024, the retailer’s revenue and EPS are expected to increase 4.8% and 10.3% year-over-year to $253.91 billion and $15.61, respectively. Further, Street expects COST’s revenue and EPS to grow 6.7% and 9.2% from the previous year to $270.89 billion and $17.05, respectively.

Mixed Profitability

COST’s trailing-12-month ROCE, ROTC, and ROTA of 27.37%, 16.55%, and 8.84% are considerably higher than the respective industry averages of 11.68%, 6.92%, and 4.83%. However, the stock’s trailing-12-month gross profit margin of 12.53% is 63% lower than the industry average of 33.89%.

Additionally, the stock’s trailing-12-month EBITDA margin and net income margin of 4.42% and 2.65% are lower than the industry averages of 11.26% and 4.90%, respectively. Its trailing-12-month levered FCF margin of 2.83% is 41.7% lower than the industry average of 4.86%.

Elevated Valuation

In terms of forward non-GAAP P/E, COST is currently trading at 42.60x, 136.8% higher than the industry average of 17.99x. Also, the stock’s forward EV/EBITDA and EV/EBIT of 25.28x and 31.75x are significantly higher than the industry averages of 11.25x and 15.30x, respectively.

Further, the stock’s forward Price/Book multiple of 11.77 is 313.6% higher than the respective industry average of 2.85. Its forward Price/Cash Flow of 29.01x is 114.4% higher than the industry average of 13.53x.

Price Target Upgrades

On December 21, equities researchers at Truist Financial raised their price objective on COST stock from $693 to $741. The firm currently has a Buy rating on the retailer’s stock. On December 15, Stifel Nicolaus raised his target price on the stock from $615 to $675 and gave the stock a Buy rating.

Analysts at TD Cowen boosted their price target on COST from $680 to $700, maintaining their Overweight rating. The analysts believe that the company can continue to grow via new stores and increased traffic.

Also, Jefferies analyst Corey Tarlowe increased his target price on Costco’s stock to $725 from $680 and maintained a Buy rating.

“Looking ahead, Costco’s strong value offering, high renewal rates, and club expansion plans make Costco well-positioned, in our view,” Tarlowe wrote in a research note.

Bottom Line

COST’s revenue and earnings surpassed analysts’ expectations in the first quarter of fiscal 2024. With Costco outshining its retail rivals as indicated by its upbeat last reported financials, the company announced a special dividend of $15 per share, its biggest one yet.

In addition to this special dividend, the membership-based warehouse retailer pays a regular quarterly dividend of $1.03 per share. The impressive dividend payout reflects the company’s commitment to returning value to its shareholders and its ability to provide stable growth in the long run.

While analysts seem bullish about Costco’s growth prospects driven by new stores and increased membership and traffic, the stock’s valuation is excessive right now, which is a legitimate concern. An excellent business could be a lousy investment if you overpay for the stock.

Given its stretched valuation and mixed profitability, it could be wise to wait for a better entry point in this stock.

What Does a $115M Contract Mean for Palantir Technologies (PLTR) Stock?

Posted on by The INO.com Team

Palantir Technologies Inc. (PLTR), a leading data analytics company, last week announced a one-year extension of its partnership with the U.S. Army’s Program Executive Office for Enterprise Information Systems (PEO EIS) to continue powering the Army Vantage data-driven operations and decision-making platform.

The value of the contract, inclusive of options, is $155.04 million, with $97.35 million awarded and $35.60 million in initial funding. Following this news, PLTR stock briefly traded higher on Friday.

The Vantage program is a keystone in the U.S. Army’s transformative efforts to leverage data as a strategic asset, integrating data sources from within the Army and across the Department of Defense (DoD) to offer a real-time operational enterprise data ecosystem.

Under the extended agreement, PLTR will continue to provide its open data and analytics platform through the delivery of new AI-enabled capabilities and open platform infrastructures that advance the program’s evolution to the Army Data Platform vision.

Akash Jain, President of Palantir USG, said, “Building on our shared history of operational excellence and innovation, our partnership has consistently provided the Army with a decisive edge in data-driven decision-making. This extension is evidence of the value we bring to the nation’s defense, including our joint efforts to provide more commercial technology providers the opportunity to equip soldiers with the innovation they need to meet their most pressing challenges.”

Palantir, which obtains a significant portion of its revenue through government contracts, will benefit considerably from this extension of its pivotal partnership with the U.S. Army’s Vantage Program.

Following this news, BofA analyst Mariana Perez Mora maintained a Buy rating and price target of $21 on PLTR’s stock, stating that this one-year extension was unexpected.

Mora said, “The up to $115mn contract extension is in line with the annualized rate of the original contract award ($458mn), slightly below the annualized actual action obligation ($480mn) and 15% higher than Option year 2/3 average obligations. $35.6mn were obligated at the time of the award.”

“We think that PLTR has a strong position to remain a key provider of data engineering & orchestration capabilities in a growing data-centric operational strategy. The recent contract extension and the fact that PLTR can add AIP capabilities to existing offerings support our thesis,” she added.

On the contrary, William Blair analyst Louie DiPalma maintained a bearish stance on the stock, keeping an Underperform rating.

DiPalma said in a note last Friday that shares of PLTR “may start to reflect reality over the next three months once it is fully digested that the U.S. Army last night only awarded Palantir a short-term, one-year $115 million ceiling extension for Palantir’s second-largest contract on its books, the U.S. Army Vantage program.”

“When the Army originally gave Palantir the Vantage contract in December 2019, it awarded Palantir a $458 million four-year deal,” he stated. “That deal ended yesterday.”

“Not only was the duration for the new contract reduced, but the max annual run-rate was even slightly downsized from the prior $116 million revenue run-rate,” the analyst added. “Palantir will likely not even receive the $115 million as the Army announcement indicated that is just a ceiling value. The Army has a track record of only awarding Palantir less than 60% of the potential value of ceiling contracts, with Project Maven, CD1, and CD2 as prominent examples.”

PLTR’s stock has surged more than 165% year-to-date. However, the stock has plunged nearly 18% over the past month.

Let’s discuss the key factors that could impact PLTR’s performance in the near term:

Solid Last Reported Financials

For the third quarter that ended September 30, 2023, PLTR reported revenue of $558.16 million, beating analysts’ estimate of $555.92 million. This compared to the revenue of $477.88 million in the same quarter of 2022. The company’s commercial revenue rose 23% year-over-year, while its government revenue rose 12%. Its gross profit grew 21.6% year-over-year to $450.24 million.

PLTR’s customer count was 34% up year-over-year. Its U.S. commercial customer count rose 37% from the year-ago value, from 132 customers in the third quarter of 2022 to 181 customers in the third quarter of this year.

The reacceleration in the growth of the company’s U.S. commercial business is aided by the surging demand that it is witnessing from its new Artificial Intelligence Platform (AIP), which was released only months ago.  

The data analytics firm’s adjusted income from operations came in at $163.27 million, an increase of 101% from the prior year’s quarter, and represented a margin of 29%. This is the fourth consecutive quarter of expanding adjusted operation margins. PLTR’s adjusted EBITDA was $171.94 million, up 97.2% year-over-year.

Palantir’s adjusted net income attributable to common stockholders increased 864.3% from the prior year’s period to $155.02 million. The company posted an adjusted EPS of $0.07, compared to the consensus estimate of $0.07, and up 95.7% year-over-year.

Furthermore, PLTR’s free cash flow stood at $140.85 million, an increase of 285.2% from the same period last year. As of September 30, 2023, the company’s total assets were $4.19 billion, compared to $3.46 billion as of December 31, 2022.

The software maker’s third-quarter results mark its fourth consecutive quarter of profitability, meaning it is eligible for inclusion in the S&P 500. PLTR reported its first profitable quarter in February this year.

Upbeat Full-Year 2023 Guidance

After outstanding third-quarter results, Palantir raised its revenue guidance to between $2.216 billion and $2.220 billion. Also, the company increased its adjusted income from operations guidance to between $607 million and $611 million.

For the fourth quarter of 2023, PLTR’s revenue is expected to be between $599 million and $603 million. The software company anticipates its quarterly adjusted income from operations of $184-$188 million.

Revenue Growth Slowed Over Years

PLTR’s revenue grew by 47% in 2020 and 41% in 2021, with an initial forecast of at least 30% annual growth through 2025. However, in 2022, the company’s revenue growth slowed to 24%. This year, management expects a further dip with nearly 16% growth. Uneven government contract timing and other macroeconomic challenges impacted the software marker’s growth.

Benefitting From the AI Boom

In June this year, Palantir launched its Artificial Intelligence Platform (AIP), which has proven to be highly successful among corporations. This AI platform significantly enhances its existing data analytics platform along with its machine learning technologies.

Users of PLTR’s AI platform almost tripled in the July-September period, Chief Revenue Officer Ryan Taylor said.

In the five months since its launch, more than 300 organizations have signed up to use the company’s AIP. Also, Palantir is experiencing strong interest in the “bootcamps” it launched in October to provide clients access to its AI platform for one to five days, which is a positive sign for future solid demand.

According to Bloomberg Intelligence, Generative AI is expected to become a $1.30 trillion market by 2032, growing at a CAGR of 42% over the next ten years. Increasing demand for generative AI products could add around $280 billion of new software revenue.

Thus, PLTR is aggressively investing in AI to capitalize on this robust demand.

Favorable Analyst Estimates  

Analysts expect PLTR’s revenue to grow 18.5% year-over-year to $602.79 million for the fourth quarter ending December 2023. The company’s EPS for the ongoing quarter is expected to grow 89.8% year-over-year to $0.08. Additionally, the company topped the consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects Palantir’s revenue and EPS to increase 16.5% and 312.4% year-over-year to $2.22 billion and $0.25, respectively. Also, the company’s revenue and EPS for fiscal year 2024 are expected to grow 19.7% and 18.7% year-over-year to $2.66 billion and $0.29, respectively.

Mixed Profitability

PLTR’s trailing-12-month gross profit margin of 79.92% is 63.5% higher than the industry average of 48.88%. Its trailing-13-month net income margin of 3.25% is 195.5% higher than the industry average of 2.35%. Moreover, the stock’s ROCE and ROTA of 5.28% and 3.51% are considerably higher than the respective industry averages of 1.11% and 0.15%.

However, the stock’s trailing-12-month EBITDA margin of 1.71% is 64.3% lower than the 4.78% industry average. PLTR’s trailing-12-month ROTC of 0.74% is 71.5% lower than the industry average of 2.60%.

Elevated Valuation

In terms of forward non-GAAP P/E, PLTR is currently trading at 69.72x, 187% higher than the industry average of 24.30x. Also, the stock’s forward EV/Sales and EV/EBITDA of 15.57x and 54.13x are significantly higher than the industry averages of 2,89x and 15.69x, respectively.

In addition, the stock’s forward Price/Sales multiple of 16.91 is 475.8% higher than the respective industry average of 2.94. Its forward Price/Cash Flow of 66.97x is 199.7% higher than the industry average of 22.35x.

Bottom Line

PLTR beat analysts’ estimates on top and bottom lines in the third quarter of 2023. The company delivered a fourth straight quarterly profit on rising demand for its data analytics services from corporates. Moreover, the software marker’s AI offerings would aid its growth in the future.

After impressive third-quarter results, Palantir raised its revenue guidance for the full year 2023. Despite this, the company’s revenue growth slowed down over the years, from 47% in 2020 to nearly 16%, as management anticipated for this year. Also, government revenue rose 12% year-over-year in the third quarter, below the 13% recorded in the prior year.

The company blamed budgeting constraints at the government level but stated it remains optimistic about demand considering geopolitical tensions.

Recently, the data analysis firm announced that another year was added to its Vantage contract with the U.S. Army, and this extension would provide PLTR with as much as $115 million.

Following this news, analysts are divided on the impact, with William Blair analyst maintaining his long-held bearish view on the stock. On the other hand, BofA analysts maintained a Buy rating on the PLTR stock, citing that this unexpected contract extension should bode well for the company.

Given its stretched valuation, mixed profitability, and uncertain near-term prospects, it could be wise to wait for a better entry point in this stock.