Analyzing Microsoft’s (MSFT) Soaring Success – What’s Next?

Posted on by The INO.com Team

Shares of Microsoft Corporation (MSFT) have been performing exceptionally well lately, with the stock surging more than 12% over the past month. Moreover, it hit a new 52-week high of $376.35 in the previous session. The stock has gained more than 20% over the past six months and nearly 55% over the past year.

The rally in the stock kicked off a couple of days after Microsoft reported upbeat fiscal 2024 first-quarter results. Since then, the stock has added more than $350 billion to its market capitalization. MSFT is the second-largest component in the S&P 500 with a market cap of $2.796 trillion, behind only Apple Inc. (AAPL) at $2.951 trillion.

Market research firm Bespoke Investment said that MSFT has joined AAPL as the second individual company with a larger market cap than the companies that comprise the Russel 2000 index.

Now, let’s discuss the factors that could impact MSFT’s performance in the upcoming months:

Solid Financial Performance in the Last Reported Quarter

For the fiscal 2024 first quarter that ended September 30, 2023, MSFT reported revenue of $56.52 billion, beating analysts’ estimate of $54.55 billion. This compared to the revenue of $50.12 billion in the same quarter of 2022.

Microsoft’s Intelligent Cloud segment, which comprises Azure, public cloud, SQL Server, Visual Studio, Nuance, Windows Server, GitHub, and enterprise services, was up 19.4% year-over-year.

MSFT’s Productivity and Business Processes segment posted $18.59 billion, up 13% from the previous year’s period. This business unit comprises Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software. The software company’s gross margin grew 16% year-over-year to $40.22 billion.

In addition, the software maker’s operating income came in at $26.90 billion, an increase of 25% year-over-year. Its net income rose 27% year-over-year to $22.29 billion. MSFT posted an EPS of $2.99 versus the consensus estimate of $2.65. This was up 27.2% from the same period last year.

As of September 30, 2023, the company’s cash and cash equivalents stood at $80.45 billion, compared to $34.70 billion as of June 30, 2023. Its total current assets totaled $207.59 billion, compared to $184.26 billion as of June 30, 2023.

For the fiscal 2024 second quarter, Amy Hood, MSFT’s finance chief, expects the company’s revenue to come in the range of $60.40 billion to $61.40 billion, which implies approximately 15% year-over-year growth.

Robust Historical Growth

Over the past three years, MSFT’s revenue grew at a CAGR of 14.1%. Its EBITDA and net income improved at CAGRs of 16.7% and 17.5%, respectively, over the past three years. Also, the company’s EPS increased at a CAGR of 18.5%. Its levered free cash flow improved at 15.9% CAGR over the same timeframe.

Further, the company’s tangible book value and total assets increased at CAGRs of 25.7% and 14% over the same period, respectively.

Rebound In Cloud Spending

Revenue from Microsoft’s Azure cloud business surged 29% year-over-year during the September quarter, compared with 26% growth in the fourth quarter. Moreover, Microsoft is pulling ahead of its major competitors, Amazon.com, Inc. (AMZN) and Google parent Alphabet Inc. (GOOGL), in the race to recover from a two-year slowdown in cloud spending.

When multi-decade inflation hit last year, the Fed hiked interest rates, and companies responded by lowering their tech spending as a part of their cost-reduction measures. The inflation has fallen sharply from its peak of 9.1% hit in June last year. The Consumer Price Index (CPI), the most widely used measure of inflation, further showed signs of easing in October.

The core CPI, excluding volatile food and energy prices, increased 0.2% for the month and 4% year-over-year, lower than the estimates of 0.3% and 4.1%, respectively. Also, the annual level was the lowest in nearly two years and down from 4.1% in September. With declining inflationary pressures, organizations’ cost-cutting efforts have begun to wane, which should bode well for MSFT.

According to the latest forecast from Gartner, worldwide end-user spending on public cloud is projected to grow by 20.4% to a total of $678.80 billion in 2024, up from $563.60 billion in 2023. Growing business needs and emerging technologies like GenAI drive cloud model innovation.

MSFT is “still helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage,” CEO Satya Nadella said in the latest earnings release.

Significant Advancements in AI

MSFT has been making several initiatives to infuse generative AI into its software and services.

In January this year, Microsoft announced a multiyear, multibillion-dollar investment in ChatGPT-maker OpenAI. The agreement marked the third phase of the partnership between the two companies after MSFT’s prior investments in 2019 and 2021. The company is providing its Azure cloud computing infrastructure for OpenAI.

Also, Microsoft is adding OpenAI models to its consumer and enterprise software products.

In February, the company launched a new, AI-powered Bing search engine and Edge browser with built-in support for OpenAI’s ChatGPT. The new Bing search version could deliver better search, more accurate answers, a new chat experience, and the ability to generate content.

Further, on March 16, the software maker announced the addition of AI tools to its Office productivity applications and introduced a feature called Microsoft 365 Copilot. The Copilot feature uses next-gen AI to automate and simplify tasks and offer suggestions. MSFT announced that Microsoft 365 Copilot in Windows will be available on September 26.

Starting November 1, Microsoft 365 Copilot will be generally available for enterprise customers. In addition, this AI-powered Copilot is added to the company’s cybersecurity offerings and GitHub service for software developers.

On November 8, MSFT-owned GitHub introduced a Copilot assistant that can assist developers in working with their employers’ internal code, priced at $39 per person a month. The new launch might help the company boost revenue in its cloud business unit by taking enhanced advantage of partner OpenAI’s technology.

Recovery in the PC Market

MSFT reported a 4% growth in sales of Windows operating system licenses to device makers in the last reported quarter, putting an end to a streak of five quarters of year-over-year declines. Amy Hood stated that the PC market has started to stabilize.

As per the estimates from Gartner, worldwide PC shipments totaled 64.3 million units during the third quarter of 2023, a decline of 9% from the third quarter of 2022. A 9% decrease in the third quarter compared to a 30% decline in the first quarter.

After eight straight quarters of decline, the PC market is expected to begin recovery in the fourth quarter of this year. For 2024, Gartner projects the global PC market to witness 4.9% growth, driven by both the business and consumer segments.

“The good news for PC vendors is that the worst could be over by the end of 2023,” said Mikako Kitagawa, Director Analyst at Gartner. “The business PC market is ready for the next replacement cycle, driven by the Windows 11 upgrades. Consumer PC demand should also begin to recover as PCs purchased during the pandemic are entering the early stages of a refresh cycle.”

In September, MSFT introduced new Surface computers and revealed details about the release of this year’s version of Windows 11. The company unveiled the Surface Laptop Studio 2 and the Surface Laptop Go 3; both computers will have Microsoft’s revamped Windows 11 OS, which includes its Copilot software. The company could capitalize on the PC market’s expected recovery with these new launches.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue for the second quarter (ending December 2023) to grow 15.6% year-over-year to $60.96 billion. The consensus EPS estimate of $2.75 for the ongoing quarter indicates an 18.7% year-over-year rise. Moreover, the company has topped the consensus revenue in three of the trailing four quarters and EPS estimates in all the trailing four quarters.

Additionally, for the fiscal year (ending June 2024), Street expects MSFT’s revenue and EPS to increase 14.5% and 14.1% year-over-year to $242.69 billion and $11.19, respectively. Also, the software company’s revenue and EPS for the fiscal year 2025 are expected to increase 13.8% and 15.1% from the previous year to $276.22 billion and $12.88, respectively.

Bottom Line

Microsoft’s revenue and earnings beat analysts’ expectations in the last reported quarter, fueled by its cloud business strength, with Microsoft Cloud revenue up a staggering 24% year-over-year. Further, the software giant continues to make numerous advancements in AI, helping it regain tech leadership.

"With copilots, we are making the age of AI real for people and businesses everywhere," said Satya Nadella. “We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers,” he added.

According to Brent Thill, Jefferies analyst, the tailwinds of AI have begun to kick in for MSFT.

MSFT’s stock notched a new 52-week high in the previous trading session. The software maker’s early dominance in the realm of AI has been the primary driver of the stock’s impressive gains so far this year, and the stock is expected to surge higher in the upcoming months.

According to Bloomberg Intelligence (BI) research, the generative AI market could grow at a CAGR of 42% to reach $1.3 trillion by 2032.

Given MSFT’s solid financials, high profitability, and optimistic growth outlook, it could be wise to invest in this software stock now.

Is Altria Group (MO) a High-Yield Investor's Dream?

Posted on by The INO.com Team

Altria Group, Inc. (MO), one of the world's largest producers and marketers of tobacco, cigarettes, and related products, possesses virtues appealing to income-focused investors. The company's commitment to shareholder value is evidenced by 54 consecutive years of dividend payments, the latest of which marked its 58th increase, resulting in an impressive dividend yield of 9.72%. This, along with its low non-GAAP forward P/E of 8.14x, elevates MO into a secure and appealing investment proposition.

However, income investors are advised to be diligent, given the shift in the business landscape. Despite the company's significant presence, there has been a noticeable lag in capturing the interest of certain fractions of the financial community.

The health perils associated with smoking, ranging from Cancer to chronic obstructive pulmonary disease (COPD) such as emphysema, are no secret. Nicotine's addictive nature results in many to continue smoking despite understanding these risks.

Acknowledging this reality, MO is reinventing its offerings, transitioning toward smokeless tobacco products and electronic alternatives like vapes. This shift stems from changing perceptions and attitudes toward smoking, buoyed further by the mushrooming popularity of smoking alternatives.

While venturing into vaping, MO must redouble its efforts to win significant market share. It could secure its future by matching its dominance in the traditional cigarette market within the e-cigarette industry.

Despite commanding a substantial 42.3% market share and 58.9% share in the premium segment, there are mounting concerns about the long-term ability of MO to sustain its dividend payments. This is due to the rising unpopularity of cigarettes amid health concerns.

The Richmond-Virginia-based tobacco company’s robust economic foothold is widely acknowledged. However, a slump in performance since its peak in mid-2017 has led to speculation that its glory days might be behind it. The company's recent third-quarter results substantiate these market apprehensions.

In the fiscal third quarter (ended September 30, 2023), total smokeable products volume declined 11.4% year-over-year as demand for its core cigarette business dwindled, exacerbated by the influx of illicit e-vapor products. This downturn began amid the COVID-19 pandemic and has been eating into product volumes ever since.

Its revenue for the quarter declined 2.5% year-over-year. However, MO has so far managed by consistently raising cigarette prices for a shrinking customer base, which allowed it to maintain revenue acceptable for its dividend payout, thus attracting income-oriented investors.

This year, MO has so far accrued pre-tax charges amounting to $424 million for tobacco litigation, including the settlement of JUUL-related litigation. In May, MO settled an estimated 6,000 lawsuits accusing it of exacerbating the teen vaping epidemic through its prior investment in JUUL.

In addition to falling short of Wall Street’s expectations for the third quarter of 2023, the company narrowed the current fiscal year’s adjusted EPS outlook. The company expects the adjusted EPS between $4.91 and $4.98, or a growth rate of 1.5% to 3%, down from the prior forecast of between $4.89 and $5.03, or a growth rate of 1% to 4%.

MO’s shares have dipped slightly after an underwhelming third-quarter performance and a narrowed 2023 earnings outlook. It has lost over 10% year-to-date.

Bottom Line

MO faces significant macroeconomic challenges, competition from illegal merchants and manufacturers contesting NJOY, and a substantial decline in legacy tobacco product sales.

Cigarettes constitute approximately 90% of MO's gross revenue. The firm is grappling with the consequences of its exclusive reliance on a single-market strategy. July’s Gallup poll indicates declining smoking rates in the U.S. as cigarette use drops. There is a growing concern that demographic trends might inevitably usher the company's revenue into decline.

Moreover, considering its poor fundamentals in the last reported quarter, a segment of the investment community may be suitable to assume higher execution risks, which perhaps the company's modest valuation may not have fully considered.

Its solid dividend yield compares with the S&P Index's 1.5% yield and other reliable income alternatives. Apprehensions persist, however, regarding the company's capacity to offset volume dips with long-term price hikes. Investor unease persists about the feasibility of the projected mid-single adjusted EPS growth outlook through 2028.

Along with MO's appealing valuation and high dividend yield, investors must consider the factors discussed in this article before investing in the stock.  

4 Stocks to Buy Before Black Friday 2023

Posted on by The INO.com Team

Black Friday, a renowned shopping holiday, is rapidly gaining popularity worldwide. The fervor surfaces like clockwork every year. The event signals the onset of the festive retail period, where vendors entice consumers with considerable discounts and appealing deals on merchandise.

Consumers’ scramble for long-desired products is typically the culmination of months of intense preparation undertaken by retailers, warehouse supervisors, and distribution center managers.

Financial analysts conventionally consider the sales returns on Black Friday to outline prevailing consumer confidence. For retail entities, Black Friday has consistently offered an immense financial uplift. Many consumers leverage the occasion to fulfill their Christmas shopping needs at competitive prices.

With persistent escalations in living costs pressurizing household budgets, 74% of consumers intend to exploit the November sales extravaganza in 2023. The National Retail Federation forecasts that holiday spending will increase annually by 3% to 4%. This year's total festive spending is anticipated to range between $957.3 billion and $966.6 billion.

Black Friday is transitioning from physical store-bound activity to being predominantly digital. In 2022, 69% of Black Friday shopping occurred online, as consumers splurged a record-breaking $9.2 billion, according to data from Adobe Analytics. Furthermore, logistical operations for this retail marathon require meticulous strategizing by retail managers, leading to millions in annual outlay.

As digital transactions encroach on the week-long event, it carries notable implications for delivery logistics. Notably, while retailers profit from the holiday season, package delivery services also stand to reap considerable benefits.

Considering this backdrop, it is pertinent to examine why United Parcel Service, Inc. (UPS), FedEx Corporation (FDX), eBay Inc. (EBAY), and Best Buy Co., Inc. (BBY) could be solid investments this festive season.

United Parcel Service, Inc. (UPS)

With a market cap of over $121 billion, UPS is a logistics behemoth that offers various integrated solutions for customers scattered across more than 200 locations worldwide.

Despite its significant standing, the company has been grappling with an assortment of challenges throughout this year. These range from a weakening demand due to economic slowdown to expensive, drawn-out labor contract negotiations, all translating into a forecasted decline in the company’s revenue and earnings for the current fiscal year.

The protracted labor talks significantly distorted UPS' earnings during the year. The resulting five-year contract led to a whopping $500 million upfront expenses in the third quarter alone. At the same time, the extended negotiations caused many customers to switch their deliveries to other networks.

However, opportunities abound as the Black Friday holiday season approaches for UPS to turn the tide. This retail extravaganza provides ample scope for UPS to augment its revenue, attract fresh clientele, and retain its existing customer base, courtesy of its high-quality service offerings.

UPS is improving the underlying quality of its business. This is most easily seen in two areas relating to its revenue. The first is the conscious decision to be more selective over deliveries rather than chasing volume growth. Second is that UPS has made great strides in expanding its connections with small and medium-sized businesses (SMB) and healthcare customers, and it's been able to significantly grow its revenue per piece in recent years.

Moreover, the company's noteworthy 4.7% dividend yield appeals to a broad swathe of income-oriented investors, and value investors also find favor given its appealing valuation metrics. The firm's below-industry non-GAAP P/E ratio presents a lucrative buying opportunity for investors.

Over the past year, the stock has lost roughly 20% and trails behind the 50, 100, and 200-day moving averages. However, Wall Street analysts forecast the stock to reach $168.30 in the next 12 months, indicating a potential upside of 17.6%. The price target ranges from a low of $100 to a high of $202.

FedEx Corporation (FDX)

The shipping and logistics company FDX, with a market cap of over $63 billion, is poised to reap significant benefits from the upcoming Black Friday sales. In anticipation of heightened online shopping activity during this period, increased demand for shipping services allows the company to expand its customer reach and deepen its market penetration.

Its potential to attract consumers by offering holiday promotional discounts on its services could significantly drive its revenue growth and expand its market share. The company's decision to partner with retailers for shipping services further bolsters the potential for enhanced revenues during this season of heightened consumer spending.

Additional services provided by FDX, including gift wrapping, package tracking and insurance, could further distinguish it in a competitive marketplace, attracting additional consumers during the holiday season.

Furthermore, FDX's effective cost-reduction strategies have successfully strengthened its financial standing. Outperforming Wall Street predictions, the international courier company reported impressive fiscal first-quarter adjusted earnings of $4.55 per share.

This robust financial performance led the company's management to elevate its future financial outlook. FDX shares gained momentum after the Memphis-based firm announced adjusted earnings expectations for fiscal 2024, projecting $17 to $18.50 per share.

The company also expects capital expenditure to reach $5.7 billion, with investment priorities geared towards improving efficiency through fleet and facility modernization, network optimization, and automation strategies.

Driven to implement transformative initiatives enhancing efficiency and reducing expenses, FDX anticipates building upon current momentum to improve profit margins and returns throughout the fiscal year. The stage is set for another year of exceptional profitability for FDX, with shares currently trading at a reasonable valuation.

Over the past year, the stock has gained roughly 45% and trades above the 200-day moving average of $237.12. However, Wall Street analysts forecast the stock to reach $297.85 in the next 12 months, indicating a potential upside of 17.2%. The price target ranges from a low of $265 to a high of $330.

eBay Inc. (EBAY)

With over $20 billion in market cap, EBAY, an established e-commerce heavyweight, is tirelessly striving to attract its consumers' interest and spending power. The company initiated the publication of its discount coupons on November 6.

Customers seeking automotive necessities, smartwatches, and Apple products can reap the benefits of up to 75% discount by commencing their shopping endeavors with EBAY this holiday season.

The company recently expanded access to its Generative AI technology, an innovative system designed to upgrade the listing experience for sellers, which is now available to mobile users in the United States, the United Kingdom, and Germany, and 50% of desktop users in these regions.

However, EBAY's recent sales forecast for the upcoming holiday period has somewhat dispirited investors. Expected revenues for the current quarter are anticipated to total between $2.47 billion and $2.53 billion, which, while robust, fall below the industry analysts' average projections of $2.60 billion.

Its bleak revenue predictions for the historically lucrative holiday quarter indicate continued difficulties in retaining customers amid fierce competition from larger competitors. Despite U.S. online sales being projected to increase by 4.8% during the holiday season spanning November 1 to December 31, EBAY faces an uphill battle to attract traffic. To weather these challenges, the company plans to enhance its cost efficiencies to safeguard profit margins and earnings.

The unexpected forecast emanated shockwaves throughout the financial sector, particularly unsettling EBAY investors. Post-announcement, the company's shares suffered a significant plunge, underscoring the heavy expectations investors attach to EBAY due to its commanding position in the e-commerce market.

Over the past year, the stock has lost over 12% and trades below its 50-, 100-, and 200-day moving averages. However, Wall Street analysts forecast the stock to reach $44.75 in the next 12 months, indicating a potential upside of 11.6%. The price target ranges from a low of $32 to a high of $56.

EBAY constantly refines its strategies to uphold its preeminence in an industry characterized by relentless evolution and revolution. As the holiday season looms, its performance is under intense scrutiny as never before, making its sales forecast a widely watched indicator in the e-commerce landscape.

Best Buy Co., Inc. (BBY)

BBY, with over $14 billion market cap, is a specialty consumer electronics retailer that introduces various promotional events via its recently inaugurated Holiday Gift Center – offering unique exploration and immersive discovery experiences of cutting-edge technologies for its clientele. BBY members can anticipate exclusive savings throughout the holiday period. The company will depend on its My Best Buy membership benefits to boost this year's holiday sales.

Interestingly, BBY finds itself in a unique situation this festive season as it battles to maintain market share during a time frame it typically dominates. The retailer has tempered expectations for a highly successful holiday season, which usually accounts for a significant proportion of its profit margins.

While BBY has a low non-GAAP P/E of 10.30x, its dividend yield of 5.74% remains low for various reasons. As of July 29, 2023, BBY has $8.43 billion in current liabilities and $8.30 billion in current assets. Of its current assets, $5.65 billion in merchandise inventories highly depends on consumer spending patterns.

The company’s vulnerability can be illustrated further by its lower than 1x current ratio. Given the upcoming debt maturity, the company’s fortunes largely hang on the successful sale of inventory to maintain its dividend.

This year’s holiday season provides a moment for BBY's modern retail business model – which largely thrived during the pandemic – to prove its resilience. The Richfield, Minnesota-based firm continues to concentrate on enhancing its digital capabilities, such as augmenting its omnichannel services. Its consultation service, supporting customers' personalized tech requirements, has grown in popularity.

In the second quarter that ended July 29, 2023, digital sales comprised 31% of our domestic revenue, consistent with the year-ago quarter and nearly twice as high as the domestic revenue percentage in the pre-pandemic second quarter of fiscal 2020.

Although the BBY stock has declined over 10% over the past year and is trading beneath the 100-day and 200-day moving averages, Wall Street analysts remain optimistic. They forecast the stock to reach $78.60 in the next 12 months, indicating a potential upside of 18.2%. The price target ranges from a low of $60 to a high of $110.

Even though it is perceived as a risky stock with slim margins and limited appeal to investors, BBY is determined to convince potential investors that its forward-looking strategies, industry reshaping efforts, and focus on advancing in-store experiences and robust pickup/delivery operations mark it as a worthwhile investment prospect. Hence, it could be best added to the watchlist.

Datadog (DDOG): A Software Industry Savior?

Posted on by The INO.com Team

  Shares of Snowflake Inc. (SNOW), MongoDB Inc. (MDB), and Elastic N.V. (ESTC) rallied sharply in last Tuesday’s premarket trading after Datadog, Inc.’s (DDOG) stronger-than-expected third-quarter earnings report eased fears about consumption-based software companies for the most recent quarter.

SNOW’s shares surged more than 8%, shares of MDB were up nearly 6%, while ESTC shares climbed about 4%. DDOG’s stock surged more than 24% last Tuesday, marking its best day ever. Moreover, the stock has gained more than 22% over the past month and nearly 51% year-to-date.

Mizuho desk-based analyst Jordan Klein called DDOG “clearly one of the most shorted and over-sold names” in all software and among consumption-based players. After Datadog topped expectations with its latest results and outlook, “Other peers like SNOW, MDB and ESTC yet to report should bounce, but also a good sign for AWS and Azure demand trends in my view and broader software,” wrote Klien.

Let’s determine if DDOG is a solid buy now and what the stock’s upbeat earnings report means for other computer-based software companies.

Here are some of the factors that could impact DDOG’s performance in the near term:

Robust Financial Performance in The Last Reported Quarter

For the third quarter that ended September 30, 2023, DDOG, the monitoring and security platform for cloud applications, reported revenue of $547.54 million, beating analysts’ estimate of $524.20 million. This compared to the revenue of $436.53 million in the same quarter of 2022. Its non-GAAP gross profit grew 29.5% year-over-year to $450.87 million.

Datadog continued to grow its customer base and ended the quarter with 3,130 customers worth $100,000 in annual recurring revenue (ARR). This is an increase of 140 customers from the previous quarter and 530 more than the company had a year ago, at the end of September 2022.

The cloud company’s non-GAAP operating income came in at $130.76 million, an increase of 74.7% from the prior year’s quarter. Its non-GAAP net income rose 95.5% year-over-year to $158.46 million. It posted non-GAAP net income per share of $0.45, compared to the consensus estimate of $0.34, and up 95.7% year-over-year.

Furthermore, net cash provided by operating activities increased 82.7% year-over-year to $152.78 million. DDOG’s free cash flow stood at $138.19 million, up 105.9% from the same period last year.

Upbeat Full-Year Guidance

“We were pleased with our execution in the third quarter, with 25% year-over-year revenue growth, robust new logo bookings, and a continued focus on solving our customers' DevSecOps pain points,” said Olivier Pomel, co-founder and CEO of DDOG.

“Companies across all industries and sizes are building cloud applications and services to deliver positive business outcomes, including more users, higher revenue growth, improved productivity, and cost savings. With our unified, cloud-native, end-to-end observability and security platform, Datadog is uniquely positioned to help our customers reach their goals,” added Pomel.

After upbeat third-quarter earnings and confidence in continued business momentum, DDOG raised its revenue and profit view for the full fiscal year 2023. For the full year, the company expects its revenue to be between $2.103 billion and $2.107 billion. Its non-GAAP operating income and non-GAAP net income per share are expected to be in the range of $453-$457 million and $1.52-$1.54, respectively.

DDOG now expects fourth-quarter revenue between $564 million and $568 million. The company’s non-GAAP operating income is anticipated to be between $129 million and $133 million, while its non-GAAP net income per share to be between $0.42 and $0.44.

Impressive Historical Growth

Over the past three years, DDOG’s revenue grew at a CAGR of 55%. Its tangible book value and total assets increased at CAGRs of 16.5% and 25% over the same period, respectively. Also, the company’s levered free cash flow improved at 88% CAGR over the same timeframe.

Positive Recent Developments

On November 8, Datadog expanded a strategic partnership with Google Cloud, which allows Google Cloud customers to proactively observe and secure their cloud-native and hybrid applications within Datadog’s unified platform.

As a part of the extended partnership and integrations, DDOG is one of the first AI/ML observability solution partners for Vertex AI, enabling AI ops teams and developers to monitor, analyze, and optimize the performance of their ML models in production.

Also, on August 3, DDOG announced new AI observability capabilities that assist customers in deploying LLM-based applications to production with confidence and help them troubleshoot health, cost, and accuracy in real-time.

These capabilities include integrations for the end-to-end AI stack: AI Infrastructure and compute, embeddings and data management, model serving and deployment, model layer, and orchestration framework. Datadog’s LLM observability includes model catalog, model performance, and model drift.

Datadog’s CEO Olivier Pomel told analysts on a conference call that “AI-native customers” contributed 2.5% of the company’s annualized revenue during the last reported quarter.

Favorable Analyst Estimates

Analysts expect DDOG’s revenue for the fourth quarter (ending December 2023) to grow 21.1% year-over-year to $568.56 million. The consensus EPS estimate of $0.44 for the ongoing year indicates a 68.6% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects DDOG’s revenue and EPS to grow 25.4% and 56.4% year-over-year to $2.10 billion and $1.53, respectively. In addition, the company’s revenue and EPS for the fiscal year 2024 are expected to increase 22.7% and 14.8% from the previous year to $2.58 billion and $1.76, respectively.

Rating Upgrade

Mark Murphy, an analyst at JPMorgan Chase & Co., upgraded his rating of DDOG to “Overweight” from “Neutral”, stating that the “worst period” of declining revenue growth at the solution solutions group has most likely ended. Also, the analyst bumped up the share price target of the stock to $115 from $90.

What Do DDOG’s Upbeat Earnings Mean for Other Computer-Based Software Firms?

Datadog and other consumption-based software companies, including Amazon.com, Inc.’s (AMZN) AWS, Microsoft Corporation’s (MSFT) Azure, and SNOW, among others, have been grappling with a slowdown in cloud spending by inflation-hit customers.

After COVID-19 prompted companies, governments, and schools to switch to cloud services driven by the surge in work-from-home, several cloud-computing firms enjoyed robust demand. However, when inflation hit last year, the central bank hiked interest rates, and cloud stocks began tumbling as companies responded by scrutinizing their IT spending as they engaged in cost-reduction measures.

Inflation has declined sharply from its 2022 peak, with the Consumer Price Index (CPI) showing further signs of easing in October. The core CPI, excluding volatile food and energy prices, increased 0.2% for the month and 4% year-over-year, against the forecast of 0.3% and 4.1%, respectively. The annual level was the lowest in nearly two years and down from 4.1% in September.

With these positive developments, cloud infrastructure providers indicated last month that some organizations’ cost-cutting efforts have begun to wane. Datadog’s Pomel also validated this observation, saying optimization activity among the company’s clients could be easing.

“Overall, we continue to see impact from optimization in our business, but we believe that the intensity and breadth of optimization we’ve experienced in recent quarters is moderating,” he said.

DDOG’s significant surge last week, following its upbeat earnings and optimistic guidance, also buoyed other cloud-computing names, including SNOW, MDB, and ESTC.

As per the latest forecast from Gartner, global end-user spending on public cloud is expected to rise by 20.4% to a total of $678.80 billion in 2024, an increase from $563.60 billion in 2023. Growing business needs and emerging technologies like GenAI drive cloud model innovation.

Bottom Line

DDOG, the data analytics platform provider, beat third-quarter Wall Street’s expectations for earnings and revenue. Further, the cloud company raised its full fiscal year 2023 guidance on third-quarter upside and expected continued business momentum.

Due to reduced IT spending by inflation-hit clients, Datadog’s revenue growth slowed from 83% in early 2022 to 25% now. However, this slowdown will likely “moderate and level out,” driven by the recovery in companies’ cloud spending, benefitting DDOG significantly. The company is well-positioned to serve its customers effectively with its unified, cloud-native, end-to-end observability and security platform.

According to Alex Zukin of Wolfe Research, DDOG has the potential to become the “fastest-growing software company” amid the AI boom. Datadog’s platform can offer advanced predictive analytics and intelligent alerting by leveraging new AI and ML capabilities.

Given DDOG’s solid financials, accelerating profitability, and bright growth outlook, it could be wise to consider investing in this software stock.

Red Flags: What's Driving Investor Caution With AMC, GRPN, and LCID This Week?

Posted on by The INO.com Team

The stock market appears to be regaining ground from the October slump, with noted gains in the S&P 500 and Nasdaq since the onset of November. However, while some stocks have displayed a rally, their stability remains questionable amid the Federal Reserve’s mixed signals.

Signs of a soft landing are emerging in the U.S. economy. A slowing job growth rate and reduced inflationary pressure inspired investor confidence that the Fed may refrain from further interest rate hikes and potentially consider cutting rates sooner.

Nevertheless, the market continues to grapple with volatility due to high interest rates and the daunting $33 trillion national debt posing a potential threat to the U.S. economy. Consequently, specific stocks could face increasingly volatile conditions moving forward.

This year's broad rally has not been all-inclusive, as certain equities have struggled. Despite performing well amid individual company challenges and lofty valuations, several stocks may lose their steady performance status should macro conditions deteriorate instead of improving.

In particular, Lucid Group, Inc. (LCID), AMC Entertainment Holdings, Inc. (AMC), and Groupon, Inc. (GRPN) are raising concerns among investors. Let’s delve into an in-depth analysis of this caution and what has tagged these stocks as potential red flags.

Lucid Group, Inc. (LCID)

Luxury EV maker LCID has gained considerable attention following Riyadh Air's announcement of a signed MOU with the former. This pivotal partnership is designed to encompass a range of operational, commercial, and marketing collaborations projected to heighten LCID's industry prominence significantly.

Further emphasizing its market strategy, LCID announced its adoption of Tesla’s North American Charging Standard (NACS), bolstering its customer service efforts by offering increased access to reliable and convenient vehicle charging solutions.

Despite LCID's promising potential in the burgeoning EV industry, its disappointing third-quarter financial results have exercised investor caution due to substantial shortfalls in revenue and production forecasts.

With $137.81 million in revenue in the third quarter, denoting a 29.5% year-over-year decrease, it marks four consecutive quarters when the company failed to meet market estimates. Its losses have also steadily accrued over the year. It burned through $630.89 million in the third quarter alone, amassing an annual total exceeding $2.17 billion.

The additional concern stems from significant production figures falling behind. It produced 1,550 vehicles during the quarter, representing a 32.1% year-on-year drop, signifying their lowest output figures since the company's inception. Furthermore, its Q3 deliveries of 1,457 Lucid Airs reflect a meager 4.2% increase from the prior year. This figure parallels its Q1 and Q2 metrics, generating concern amid typical expectations for escalating EV sales, particularly for startups commencing from a lower base.

Gradual delivery growth and loss escalation have raised significant questions surrounding LCID's profitability. The company has grappled with production increment challenges and slower-than-projected delivery growth, resulting in a revision of the previous sales outlook.

Initially, LCID projected a production forecast of 10,000 to 14,000 cars this year. Recent developments have led executive expectations to a more modest 8,000 to 8,500 units.

LCID shares experienced an approximate 10% decline after releasing less-than-ideal third-quarter results and decreased annual production guidance. Over the past year, it has lost 65.9%.

The company is projected to confront a slew of challenges in its trajectory. As a capital-intensive venture, it works assiduously to escalate its production efforts. As of September 30, 2023, its liquidity, including cash and short-term investments, was valued at $4.42 billion, marking a decline from the $5.25 billion as of June 30, 2023. Saudi Arabia contributed a significant proportion of this capital.

Despite the substantial backlog of orders from Saudi Arabia, a positive factor for LCID, the hefty price tags attached to its cars restrict widespread affordability. As per the company's website, the least expensive vehicle retails at $75,000, escalating to $250,000 for the most expensive model.

Adding to its woes, the preference for trucks over sedans among many Americans further impairs LCID’s efforts to expand operations and capture greater market share over time. Subsequently, excluding orders from Saudi Arabia, LCID also grapples with potential demand issues. Given the fiercely competitive nature of the American market, carving out a substantial niche would pose formidable challenges.

AMC Entertainment Holdings, Inc. (AMC)

AMC, engaged in the theatrical exhibition business, is grappling with ongoing financial pressure amid an upsurge in its debt load and ponderous liquidity management. In September, the company closed an at-the-market equity offering, amassing approximately $325.5 million following the sale of 40 million shares at an average price of $8.14 per share.

Less than a month preceding this, AMC underwent a 1-for-10 reverse stock split to bolster its capital. Following two consecutive quarters of profitability, as of September 30, 2023, the company's cash holdings totaled $729.70 million.

AMC has embarked on another stock sale as a lifeline to sourcing necessary funds. It plans to funnel $350 million of its Class A shares in an “at the market offering.” The achieved funds would be used to enhance liquidity and manage existing debt, along with funding general corporate operations.

However, AMC’s stock plunged over 88% over the past year. A significant drop of roughly 20% was observed upon publicizing its third-quarter earnings. The earnings report was not necessarily bad, as revenues increased 45.2% year-over-year to $1.41 billion, reaping net earnings of $12.3 million – a feat driven by robust theatrical attendance for Barbie and Oppenheimer. The $350 million stock sale announcement shook investors and incited a sell-off, driving share prices below the $9 mark.

Although the company seeks to fortify its balance sheet through additional funding, forecasts do not anticipate a return to a surplus working capital soon. As of September 30, 2023, AMC's working capital deficit was $549 million, compared to the deficit of nearly $847 million as of June 30, 2023.

The third-quarter raise of over $325 million resulted in a modest improvement in the working capital balance of $298 million for the quarter. Consequently, AMC's fresh plans for equity sales may be inadequate in bridging the company’s capital gap, suggesting a need for further funds in the near term.

Moreover, AMC's working capital will likely remain negative as the cash influx will be directed towards debt repayment, potentially sparking further equity sales.

Despite making a recovery from the pandemic lows, AMC's current performance still falls short of ensuring long-term viability. Future equity sales could be on the horizon, and each presumably more dilutive than the last, particularly as the stock teeters near its all-time low levels.

Groupon, Inc. (GRPN)

GRPN has yet to achieve profitability. For the fiscal third quarter that ended September 30, 2023, its revenue declined 12.4% year-over-year to $126.47 million, while net loss attributable to GRPN came at $41.36 million or $1.31 per share.

Despite experiencing a surge over the past year, GRPN’s shares took a hit in October due to an unfavorable response to an announcement regarding an asset sale. Consequently, it is anticipated that the share price might continue to plummet.

As of September 30, 2023, the company’s working capital deficit stood at $158.06 million, slightly improving from $171.82 million as of June 30, 2023. Given its negative working capital, the company needs to secure funding to ensure survival and additional capital to facilitate a turnaround. This could potentially imply future dilution of shareholder value.

GRPN shares tumbled over 35% after announcing a new rights offering and the firm’s recognition of "challenged" business conditions. The board has approved an $80 million fully underwritten rights issue extended to all holders of its common stock. This will be done via non-transferable subscription rights to purchase common stock at $11.30 a share.

Currently, as GRPN’s share has dwindled to trade at $9.61 per share, it seems improbable that investors would be willing to purchase shares at the company’s set price of $11.30 – leaving the CEO and board members to foot the bill for this $80 million investment.

Looking ahead, for the fourth quarter of 2023, the company anticipates revenues to fall within the range of $127.5 million to $137.5 million, signifying a decline of 14% to 7% year-over-year. Furthermore, adjusted EBITDA is expected to be between $18 million and $25 million. The company’s pessimistic sentiment about revenue has spooked investors, leading to stock sell-offs.