NOK's Struggles Unveiled: Analyzing the Impact of AT&T's $14 Billion Snub

Posted on by The INO.com Team

In December, Swedish telecommunications giant Ericsson (ERIC) won a $14 billion contract to revamp AT&T Inc.’s (T) wireless network, outpacing long-time competitor Nokia Oyj (NOK).

Within the agreement, Ericsson is expected to construct an open network capable of obtaining supply from multiple vendors, signifying a pivotal industrial transition. The conditions of the contract permit T to freely select its antenna and infrastructure suppliers going forward, mitigating the inflexibility of a single-vendor lock-in. The allocated budget will span over five years, with the primary aim of enhancing T's 5G technology infrastructure.

Ericsson currently supplies two-thirds of T's network, while NOK caters to the remaining portion. T's choice dealt a significant blow to NOK, whose shares took a harrowing 10% dip on the Helsinki stock exchange following the announcement.

NOK maintains a comprehensive partnership with T, supplying products and services across wireless, wireline, and other network technologies. This mirrors NOK's similar collaborations with other major network operators in North America.

Analysts caution that setbacks faced by NOK could compel the firm to divest sections of its business. These segments might operate more efficiently under local entities that possess superior proficiency in maneuvering through the vast U.S. market. This prediction arises from worries that interpersonal issues undermined NOK's previous bid.

Danske Bank analyst Sami Sarkamies said, "We don't think the decision came down to nitty-gritty product features such as fan-based cooling, rather it has been more about top-level relationships, credibility, and corporate image in the eyes of the customer."

The transition to open-source technology is set to expose NOK to intensified competition from its competitors in the lucrative U.S. marketplace, an area currently recognized as the globe's most valued telecom market. The largest expenditure in this territory is by T.

The contract with T now grants Ericsson a critical early-adopter lead over its adversaries. The Swedish corporation pioneers as the inaugural globally recognized vendor to integrate open RAN with a major operator into an existing network.

Citi analyst Andrew Gardiner said, "Nokia had been the primary share gainer within the RAN market for the past two years, following the decline after it lost significant share at Verizon in 2019. The loss of share at a second North American customer, particularly given Nokia's legacy in that market, is a considerable blow."

In light of T’s plans to undertake an O-RAN deployment, co-working with other vendors for the coming five years, NOK anticipates a decline in revenue generated from T in the Mobile Networks section for the next two to three years. As of 2023, T accounted for approximately 5% to 8% of the net sales within Mobile Networks.

In response to the anticipated change in revenue, NOK aims to reduce its gross cost basis by between €800 million and €1.20 billion by the end of 2026 compared to 2023, assuming consistent variable pay during both periods. This ambitious target equates to a 10% to 15% reduction in personnel expenses.

NOK has put forth an aggressive strategy to implement this program swiftly, with plans in place to save at least €400 million within 2024 and a further €300 million in 2025. The effects of this cost-cutting endeavor could result in a leaner organization consisting of around 72,000 to 77,000 employees, compared to the current strength of 86,000 employees.

The action to reduce the cost base is expected to mitigate the impact of T’s decision partially. NOK expects Mobile Networks to remain profitable over the coming years, but this decision would delay the timeline of achieving a double-digit operating margin by up to two years.

Consequently, by 2026, the Finnish telecom equipment provider NOK anticipates a 13% dip in its overall comparable operating margin target from the prior estimation of at least 14%.

NOK's Mobile Network division is witnessing a declining trend in 2023, expecting the market environment for this segment to remain bearish in the near future. This anticipated weakness in Mobile Networks is predicted to impact NOK’s operating profits negatively.

Challenges also extend to 5G deployment slowdowns in India. While 5G technology boasts transformative potentials like rapid video downloads and high-speed autonomous vehicles, NOK has encountered investment deceleration from mobile network operators this year due to global economic downturns.

NOK had initially envisioned its 5G rollout in India as compensation for North American telecom operators' mitigated spending this year. However, reality fell short of these expectations.

Moreover, in the fiscal third-quarter report, NOK reported a 20.2% year-over-year decline in sales, reaching €4.98 billion ($5.49 billion) and a sharp 69% drop in profits, totaling €133 million ($146.65 million). These weaker-than-expected figures may potentially incite the telecom titan to decrease its workforce by approximately 14,000 personnel.

However, NOK is implementing various strategies to enhance the resilience of its operations and augment profitability. It also aims to capitalize on rapidly growing markets like Cloud RAN, O-RAN, Enterprise, and Defense.

By 2024, NOK projects a modest increase in revenue generated from its Cloud and Network services, which is anticipated to be driven by the stable rollout of 5G core technology and solid performance in the enterprise sector. The company is prioritizing the integration of SaaS and Network as Code solutions to fortify its business model. Its commitment to digital operations, AI, analytics, security, private wireless, and 5G core technologies will likely escalate its prospects.

In addition, NOK also foresees mid-single-digit growth in net sales accompanied by a consistent operating profit in their Infrastructure division for 2024. This positive trajectory is upheld by impressive performance in optical networks and secure enterprise agreements relating to IP networks.

The injection of government funding expected in the latter half of 2024 will likely stimulate a revival in fixed networks. With these favorable conditions, the Network Infrastructure division is projected to achieve an operating margin ranging between 12% and 15% by fiscal 2026.

In Mobile Networks, NOK is confident about outpacing market growth in 2026, with a comparable operating margin expected between 6% and 9%. The company has reaffirmed its revenue guidance, with a forecast indicating growth exceeding the average market rate in 2026. Moreover, the projected free cash flow remains unchanged and is anticipated to convert 55% to 85% from the comparable operating profit.

Analysts expect NOK’s revenue and EPS for the current fiscal year ending December 2023 to decline 6.4% and 21.9% year-over-year to $25.39 billion and $0.37, respectively.

Bottom Line

NOK’s diverse business segments cater to separate customer demographics with specialized research and development needs, susceptibility to market shifts, and variable target profit margins. To foster growth and strategic agility, NOK plans to accord greater autonomy to its business units in terms of investment choices, growth schemas, portfolio supervision, and strategic affiliations.

In addition to refining its operating model, NOK intends to share cash flow and area-specific sales data for every business group. This increased transparency will offer investors a more detailed understanding of the financial performance of each segment.

Despite the recent developments being less than positive, NOK's Mobile Networks sector has achieved notable progression in the past years, expanding its RAN market share and reinforcing technological advantages.

Management remains confident that the company possesses an apt strategy to generate shareholder value in the future through opportunities to increase market share, diversify operations, and enhance profitability.

Mobile Networks play an indispensable role in envisioning a universally connected future. Significant investments are necessary for networks with exponentially improved capacities to realize potential revolutions in cloud computing and artificial intelligence. Undeterred, NOK continues to finance its research and development initiatives and fabricate superior products for its clientele.

Moreover, NOK has garnered a significant advantage by inking several noteworthy contracts. The most significant among these is a contract with Deutsche Telekom, Europe's leading telecommunications operator and the primary stakeholder of T-Mobile USA. This strategic move marks a turning point for NOK, re-establishing its partnership with Deutsche Telekom after a lapse since 2017. As part of this renegotiation, notably, Ericsson failed to secure its participation, positioning NOK as the exclusive contractor.

NOK’s valuation appears reasonable, with the stock trading at 9x consensus 2023 earnings and 8.8x 2024 earnings, which could entice investors to allocate their funds to the stock.

However, investors should take note that NOK shares demonstrated an underwhelming performance throughout 2023, exhibiting a roughly 27% decline year-to-date, in glaring contrast with the broader S&P 500's gain of about 24% within the same period.

The shares, currently trading below their 50-,100-, and 200-day moving averages, have mostly been traded below the $5 mark.

The difficulty beleaguering NOK shares, however, lies in the lack of potential growth, especially as estimates continue to dwindle. This will perpetuate the scenario where shares remain in a value trap, mirroring the trend experienced in 2023.

Considering the overall scenario, it would be wise for investors to wait for a better entry point in the stock.

Navigating the 2023 Santa Claus Rally: 3 Top Stock Picks for Year-End Gains

Posted on by The INO.com Team

Understanding the Santa Claus Rally

The Santa Claus rally refers to the sustained increase in the stock market indices that occurs during the last trading week of December and the first two trading days of the new year. It was first defined in The 1971 Stock Trader’s Almanac by Yale Hirsch.

Historically, major market indices, including the S&P 500, the Dow Jones, and the Nasdaq Composite, witnessed higher gains during these seven days compared to any other seven trading days of the year. Going back to 1950, the S&P 500 has gained nearly 80% times during this period.

In addition to marking a solid trading period, the Santa Claus rally is used as an early indicator by traders for what may happen in the new year. One of Yale Hirsch’s famous lines states: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

Wall Street Awaits Santa Claus Rally This Year with Stocks Nearing Records

As we head into the last few days of 2023, Wall Street investors are counting on the Santa Claus rally to generate solid returns.

The S&P 500 climbed more than 4% in December alone and is up nearly 24% this year, bringing the index within 1% of a new all-time high. Also, the benchmark index is on track for its eighth consecutive positive week. The high optimism in the stock market is buoyed by solid earnings reports, several signs of strength in the economy, and a growing probability that interest rates will come down soon.

Earlier this month, the Federal Reserve left interest rates unchanged, and the central bank chief Jerome Powell said the historic monetary policy tightening is likely over as inflation falls faster than expected and signaled interest rate cuts into 2024.

Data released last Friday supported the trend of easing inflation, showing annual U.S. inflation, measured by the Personal Consumption Expenditures (PCE) price index, further dropped below 3% in November. The PCE index fell by 0.1% between October and November, the first monthly decline in over three and a half years.

Combined with other latest data indicating disposable personal income and consumer sentiment rising, the U.S. economy seems to be heading into the new year on a solid footing.

“The narrative will continue to be about the Fed making a dovish pivot,” stated Angelo Kourkafas, senior investment strategist at Edward Jones. “That provides support on markets and sentiment and that is unlikely to change next week,”

Investors have demonstrated a substantial appetite for stocks lately. BofA clients bought about $6.4 billion of U.S. equities on a net basis in the last week, the largest weekly net inflow since October last year, BofA Global Research said in a December 19 report.

At the same time, there has been a “sharp increase” in buying among retail investors over the past four to six weeks, Vanda Research said in a note last Wednesday.

“After having chased higher yields aggressively in the past months, the FOMC pivot and strengthening soft-landing narrative have had individuals redirecting their purchases toward riskier securities,” Vanda said in a note. “We expect this trend to continue into the new year as yields remain under pressure.”

3 Stocks to Bet on for Year-End Gains

With a market cap of $1.58 trillion, Amazon.com, Inc. (AMZN) is an e-commerce giant that has a history of performing well during the holiday season. It engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally. The company operates in North America; International; and Amazon Web Services (AWS) segments.

According to the National Retail Federal (NRF), the holiday spending during November and December is expected to rise to “record levels” of between 3% and 4% year-over-year to between $957.30 billion and $966.60 billion, respectively. The NRF projects that online and non-stores sales will grow between 7% and 9% to between $273.70 billion and $278.80 billion.

With NRF projected holiday spending to surge to record levels, Amazon is anticipated to witness significant growth in its total sales volume and profit levels. The e-commerce giant held its latest Prime Day sales event on October 10 and 11, featuring two days of epic deals ahead of the holiday season. Also, AMZN announced plans to hire about 250,000 additional workers across its operations globally for the busy year-end sales period.

The company’s biannual Prime Day events help to drive its revenue. Despite persistent inflation rate, Amazon boasted the biggest-ever Prime Day sale in July this year. U.S. online sales during Amazon’s Prime Day event grew 6.1% year-over-year to $12.70 billion, according to data by Adobe Analytics. The first 24 hours of the shopping event were touted as the “single-largest sales day in company history.”

In addition, AMZN gets a considerable lift from the Black Friday and Cyber Monday sales events held at the end of November and tied to Thanksgiving and Christmas.

After all, AMZN’s trailing-12-month gross profit margin of 46.24% is 30.4% higher than the 35.47% industry average. Its trailing-12-month EBITDA margin of 13.35% is 22.4% higher than the 10.91% industry average. Moreover, the stock’s trailing-12-month levered FCF margin of 5.57% is 25.9% higher than the 5.22% industry average.

For the third quarter that ended September 30, 2023, AMZN’s net sales increased 12.6% year-over-year to $143.08 billion. Its operating income rose 348% year-over-year to $11.19 billion. In addition, the company’s net income and EPS came in at $9.88 billion and $0.94, compared to $2.90 billion and $0.28 in the same quarter of 2022, respectively.

Analysts expect Amazon’s revenue and EPS for the fourth quarter (ending December 2023) to increase 11.2% and 2,510% year-over-year to $165.93 billion and $0.78, respectively. Moreover, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

AMZN’s stock is already up nearly 78% year-to-date. Further gains could come with a Santa Claus rally.

Another stock that is primed for a holiday season rally is American Eagle Outfitters, Inc. (AEO). It operates as a specialty retailer that offers clothing, accessories, and personal care products under the American Eagle and Aerie brands worldwide. AEO sells its products through retail stores; digital channels, like www.ae.com, www.toddsnyder.com, and www.unsubscribed.com; and applications.

The solid performance of its key brands, such as American Eagle and Aerie, combined with strategic expansions into premium and activewear segments, indicates considerable potential for AEO’s growth. The company’s store designs, and online enhancements demonstrate its commitment to improving the customer experience.

During the third quarter that ended October 28, 2023, AEO’s net sales increased 4.9% year-over-year to $1.30 billion. Its gross profit was $543.80 million, up 13.3% from the prior year’s quarter. The company’s net income came in at $96.70 million, or $0.49 per share, compared to $81.27 million, or $0.42 per share, in the prior year’s period, respectively.

“I am pleased with our third quarter results which demonstrated the strength of our brands and reflected continued progress on our growth and profit improvement initiatives. Our strategic priorities, underpinned by our customer-first focus and commitment to operational excellence, are propelling us forward,” said Jay Schottenstein, AEO’s Executive Chairman of the Board of Directors and CEO.

“Momentum has continued across the business into the fourth quarter, driven by strong holiday assortments, engaging marketing campaigns and solid execution, supporting our improved outlook for the rest of the year,” Schottenstein added. “Looking ahead, we remain focused on advancing our long-term strategic priorities, as we seek to create consistent growth across our portfolio of brands and generate efficiencies for improved profit flow-through.”

For the full year, AEO’s management forecasts revenue to be up mid-single digits to last year, compared to the previous guidance for revenue up low single digits. Operating income is projected to be in the range of $340 to $350 million, at the high end of prior guidance of $325 to $350 million. This reflects strengthened demand and continued profit improvement. 

For the fourth quarter, the company’s outlook reflects revenue up high-single digits and operating income in the range of $105 to $115 million. The revenue outlook includes a four-point positive contribution from the 53rd week. 

Street expects AEO’s revenue and EPS for the fourth quarter (ending January 2024) to increase 8.5% and 17.8% year-over-year to $1.62 billion and $0.44, respectively. Also, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters.

Shares of AEO have surged more than 25% over the past month and approximately 45% over the past year.

The third stock, JAKKS Pacific, Inc. (JAKK), also tends to shine during the holiday season. With a market cap of $347.33 million, JAKK produces, markets, sells, and distributes toys and related products worldwide. The company operates through the Toys/Consumer Products and Costumes segments.

The company is primarily benefiting from the expansion of product offerings by strategizing business operations, coupled with the growing focus on partnerships. On November 1, JAKK announced entering a long-term agreement with Authentic Brands Group to design and distribute products inspired by iconic brands like Forever 21 and Sports Illustrated, aiming for a global retail debut in 2024.

The partnership aligns with JAKK’s strategy to expand into new product categories, targeting Millennials and Gen Z while leveraging Authentic’s platform to diversify its seasonal offerings and explore additional collaborations.

JAKK’s trailing-12-month net income margin of 12.18% is 169.5% higher than the 4.52% industry average. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 56.52%, 17.03%, and 16.96% are significantly higher than the industry averages of 11.40%, 6.01%, and 3.99%, respectively.

For the third quarter that ended September 30, 2023, JAKK’s reported net sales from the Costumes segment increased 19% year-over-year to $63.70 million. Its gross profit grew 16.4% year-over-year to $106.99 million. The company’s income from operations rose 16.1% from the year-ago value to $62.40 million. Its adjusted EBITDA grew 12.9% year-over-year to $67.07 million.

In addition, the company’s adjusted net income attributable to common stockholders increased 28.4% year-over-year to $50.09 million, and its EPS came in at $4.75, up 25% year-over-year. 

After reporting outstanding fiscal 2023 third-quarter results, Stephen Berman, CEO of JAKKS Pacific, said, “We are looking forward to the holiday season and have recently finished great customer meetings previewing our Fall 2024 product line. We are exceeding our own internal expectations for the full-year and are carefully navigating towards the end of the year given the persistent uncertainty about consumer behavior.”

JAKK’s stock has climbed more than 14% over the past month and is up nearly 100% year-to-date.

Bottom Line

We are heading into the last few days of the year, which typically represents a favorable time for the stock market and investors. Known as the Santa Claus rally, the stock market tends to rise substantially in the last trading week of December and the first two trading days of the new year.

This year, the optimism is high, with the Federal Reserve surprising investors earlier this month by signaling that its historic monetary policy tightening is likely over and projecting interest rate cuts in 2024. Moreover, the latest robust data indicates strength in the U.S. economy.

Of course, year-end holiday shopping offers a considerable sales boost to retailers and other companies, which can help lift stock prices. AMZN, AEO, and JAKK are set to shine in the year-end Santa Claus rally.

While the Santa Claus Rally offers profitable investment opportunities, day traders should approach it with immense caution and implement an effective risk management strategy. Pre-setting position sizes, setting stop-loss orders, diversifying portfolios, and adhering to a well-defined trading plan are essential steps for managing risk during the rally.

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.