NVIDIA (NVDA) Mirrors Apple's Success, Unleashing Another Stock Surge – Is There Still a Chance to Buy?

Posted on by The INO.com Team

Artificial Intelligence (AI) has been the flavor of the season so far, driving up share prices of tech giants as they focus more on AI. This has resulted in the resurgence of the Nasdaq Composite, which gained more than 30% year-to-date. NVIDIA Corporation (NVDA) is at the forefront of this AI revolution, and investors’ interest in the stock led to its shares gaining more than 200% year-to-date.

NVDA founder and CEO Jensen Huang earlier this year said, “AI is at an inflection point, setting up for broad adoption reaching into every industry. From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI.”

Last month, NVDA became the sixth company to surpass the $1 trillion market capitalization. Its revenue and earnings in the first quarter beat Street estimates. Its revenue topped analyst estimates by 10.3%, while its earnings came 18.8% above the consensus estimate. The company reported record data center revenue of $4.28 billion during the first quarter.

NVDA is garnering investors’ interest due to its leadership and expertise in AI. Given the growing popularity of ChatGPT, the generative AI industry is expected to witness robust growth. NVDA is a leader in advanced AI chips required for generative AI. Apart from generative AI, there is a growing demand for accelerated computing.

The company’s graphic processing units (GPUs) are used in supercomputers, data centers, and drug development. Its GPUs are used as accelerators for central processing units (CPUs). Founder and CEO Jensen Huang said, “The computer industry is going through two simultaneous transitions – accelerated computing and generative AI.”

“A trillion dollars of installed global data center infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process,” he added.

NVDA is boosting the production of its entire data center range of products like H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand, and BlueField-3 DPU to meet the rising demand for AI technology.

Melius Research analyst Ben Reitzes said that NVDA reminds him of Apple Inc. (AAPL). He said, “NVDA is the obvious flagship AI company, whose decisions over the last two decades have positioned it for long-term benefits.”

“With a full-stack approach that, in our experience, tends to deliver an outsized profit share in the industry for longer than expected once the ball starts rolling downhill due to developer support and becoming an industry standard,” he added. The analyst has a Buy rating on the stock with a price target of $625.

For the second quarter of fiscal 2024, NVDA’s revenue is expected to be $11 billion, plus or minus 2%. Its non-GAAP gross margins are expected to be 70%, plus or minus 50 basis points.

Here’s what could influence NVDA’s performance in the upcoming months:

Disappointing Financials

NVDA’s revenue for the first quarter ended April 30, 2023, declined 13% year-over-year to $7.19 billion. Its non-GAAP operating income fell 23% year-over-year to $3.05 billion. The company’s non-GAAP net income declined 21% over the prior-year quarter to $2.71 billion. In addition, its non-GAAP EPS came in at $1.09, representing a decline of 20% year-over-year.

Favorable Analyst Estimates

Analysts expect NVDA’s EPS for fiscal 2024 and 2025 to increase 136.9% and 35.6% year-over-year to $7.91 and $10.71. Its fiscal 2024 and 2025 revenue is expected to increase 60.9% and 27.8% year-over-year to $43.39 billion and $55.46 billion.

For the quarter ending July 31, 2023, NVDA’s EPS and revenue are expected to increase 305.8% and 65.1% year-over-year to $2.07 and $11.07 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, NVDA’s 58.50x is 298.3% higher than the 14.69x industry average. Likewise, its 25.35x forward EV/S is 752.6% higher than the 2.97x industry average. Its 56.39x forward non-GAAP P/E is 139.3% higher than the 23.56x industry average.

High Profitability

In terms of the trailing-12-month net income margin, NVDA’s 18.52% is 821% higher than the 2.01% industry average. Likewise, its 23.53% trailing-12-month EBITDA margin is 174.8% higher than the industry average of 8.57%. Furthermore, the stock’s 6.65% trailing-12-month Capex/Sales is 181.8% higher than the industry average of 2.36%.

Bottom Line

Given the vast generative AI and accelerated computing market, NVDA is in a sweet spot. Its earnings are expected to more than double this year, driven by rising chip sales for data centers and artificial intelligence. Demand for GPUs from gaming is also likely to recover this year.
Moreover, the company is well-positioned to benefit from the chip demand from autonomous cars, cryptocurrency mining, and adopting the metaverse.
However, given its stretched valuation, it could be wise to wait for a better entry point in the stock.

Wall Street Giants Alphabet (GOOGL), Meta Platforms (META), and Microsoft (MSFT) Report Earnings this Week – Here’s the Game Plan

Posted on by The INO.com Team

U.S. tech giants could indicate an end to the approximately year-long slowdown in their cloud businesses as recent signs of economic resilience encourage consumers to boost their tech spending. Also, a surge in digital ads would drive profits.

Wall Street’s leading tech companies, Google-parent Alphabet Inc. (GOOGL), Meta Platforms (META), and Microsoft Corporation (MSFT), are scheduled to report earnings this week, which will be a test to their elevated valuations and the broader market rally these tech giants have driven, thanks to optimism over artificial intelligence’s (AI) growth potential.

The Overall Consensus Estimates of Each Stock.

Analysts expect GOOGL’s revenue for the second quarter (ended June 2023) to come in at $72.80 billion, indicating an increase of 4.5% year-over-year. The consensus EPS estimate of $1.34 for the to-be-reported quarter reflects a 10.7% year-over-year improvement.

Furthermore, analysts expect GOOGL’s revenue and EPS for the fiscal year (ending December 2023) to increase 6.2% and 16.9% from the previous year to $300.31 billion and $5.33, respectively.

In the case of META, analysts expect revenue to increase 8% year-over-year to $31.12 billion for the second quarter that ended June 2023. The tech company’s EPS for the to-be-reported quarter is expected to rise 18.3% year-over-year to $2.91.

Additionally, META’s revenue and EPS for the fiscal year (ending December 2023) are expected to grow 8.9% and 37.5% year-over-year to $126.96 billion and $11.81, respectively.
For the fourth quarter that ended June 2023, analysts expect MSFT’s revenue to increase 7% year-over-year to $55.47 billion. The company’s EPS for the same quarter is expected to rise 14.4% year-over-year to $2.55. Moreover, it has topped the consensus EPS estimates in three of the trailing four quarters, which is impressive.

For the fiscal year 2023, the consensus revenue and EPS estimates of $211.34 billion and $9.67 indicate increases of 6.6% and 5% year-over-year, respectively. In addition, the company’s revenue and EPS for the next fiscal year 2024 are expected to grow 11.7% and 14.1% from the prior year to $236.10 billion and $11.03, respectively.

How Should Investors Approach These Stocks?

While the search engine is GOOGL’s flagship product, the company operates in key areas such as hardware, cloud computing, advertising, and software.

The tech giant, scheduled to report second-quarter 2023 results on July 25, surpassed analysts’ earnings estimates in the first quarter. GOOGL’s revenue of $69.78 billion beat analyst expectations of $68.90 billion, according to Refinitiv. Also, the company reported earnings of $1.17 per share versus $1.07 per share expected, according to Refinitiv.

In addition, GOOGL’s YouTube advertising revenue was $6.69 billion, compared to $6.60 billion expected, according to StreetAccount. The beat on the top and bottom lines breaks a string of four consecutive quarters in which the company missed the consensus estimates.

The company finally generated profit in its cloud-computing business during the first quarter. Its Google Cloud revenue grew 28.1% from the year-ago value to $7.45 billion. The unit reported an operating income of $191 million, following a $706 million loss in the same quarter of 2022.

“We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation,” commented Sundar Pichai, GOOGL’s CEO.

Due to intense pressure from the popularity of the AI-based chatbot ChatGPT, launched in November last year by Microsoft-backed Open AI, GOOGL launched its own AI chatbot called Bard during the first quarter of 2023.

GOOGL is making numerous efforts to incorporate “generative AI” into its products. On June 8, the company introduced the Secure AI Framework (SAIF), a conceptual framework for secure AI systems. SAIF is designed to help mitigate risks specific to AI systems, such as stealing the model, data positioning of training data, extracting confidential information in the training data, and injecting malicious inputs.

On May 25, GOOGL announced Search Labs, a new generative AI-powered program that enables users to access early experiments like SGE, Code Tips, and Add to Sheets. In the same month, the company unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator to provide help to developers.

Furthermore, on May 18, GOOGL unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator powered by generative AI. It offers real-time code suggestions, chat assistance, and customizable features designed for enterprise requirements.

Alphabet’s second-quarter results are expected to reflect profits from its strengthening cloud service offerings. The company’s growing investments in infrastructure, data management, analytics, security, and AI are the primary catalysts. While the Google Cloud segment would turn into a profit in the second quarter, the growth could slow down.

According to analysts polled by Refinitiv, GOOGL will likely report its lowest-ever growth for the cloud computing business at 24.4%. On the other hand, the recovery in the digital ad market would aid GOOGL significantly.

META is another tech giant set to report second-quarter earnings on July 26 after market close. With a $754.11 billion market cap, Meta, formerly known as Facebook, Inc., develops innovative products that allow people to connect and share with friends and family through mobile phones, PCs, virtual reality (VR) headsets, and wearables globally.

Meta’s products and services include Facebook, Instagram, WhatsApp, Messenger, and Quest 2.

Tech conglomerate reported better-than-expected revenue and earnings for the first quarter of 2023. META’s sales increased by 3% year-over-year during the first quarter, reversing a trend of three consecutive quarters of revenue declines and topping analysts’ estimates of $27.65 billion, according to Refinitiv.

Also, the tech company reported earnings of $2.20 per share, compared to the $2.03 per share expected by analysts, according to Refinitiv.

In addition, META’s user growth was relatively strong compared to previous quarters. META’s family daily active people (DAP) were 3.02 billion on average, up 5% year-over-year. Similarly, its family monthly active people (MAP) rose 5% from the prior-year quarter to 3.81 billion. Also, Facebook's daily active users (DAUs) were 2.04 billion as of March 31, 2023, up 4% year-over-year.

In the last quarterly release, Meta’s founder and CEO, Mark Zuckerberg, commented, “Our AI work is driving good results across our apps and business. We’re also becoming more efficient so we can build better products faster and put ourselves in a stronger position to deliver our long-term vision.”
Further, the company stands to benefit from its upcoming product launches, including Meta Quest 3, a cutting-edge virtual and mixed reality headset featuring higher resolution, improved performance, breakthrough Meta Reality technology, and enhanced comfort.

Also, on July 18, META introduced the availability of Llama 2, an open-source large language model, with Microsoft as its preferred partner. The companies believe that an open approach is the right one for developing today’s AI models, especially those in the generative space where the technology is advancing rapidly.

This month, Facebook owner Meta announced Threads, an app built by the Instagram team for sharing via text. Threads provide a new, separate space for real-time updates and public conversations. Creators and influencers are increasingly exploring this new app to bolster their online presence and help them reach bigger audiences.

Threads became the fastest-growing social media platform to hit 100 million users, a serious threat to the dominant microblogging Twitter app. This resulted in several analysts upgrading the META stock. If the application manages to retain users, Threads could achieve $5 billion in annual ad revenue, Bernstein said in a note on July 18.

On July 11, Morningstar analysts stated that Threads could add between $2 billion and $3 billion to META’s revenue annually between 2024 and 2024.

As a result of continued technological breakthroughs and innovative product launches, META issued a relatively bullish forecast for the second quarter of fiscal 2023, projecting total revenue of between $29.50 billion and $32 billion, exceeding analysts’ sales estimate of $29.50 billion, according to Refinitiv.

For META, revenue in the fiscal 2023 second quarter is projected to grow at its fastest pace in six quarters, driven by a significant pickup in the digital ad market as consumer spending remains robust.
Along with GOOGL, leading tech company MSFT is set to release its fourth-quarter and fiscal year 2023 earnings report on July 25. The company reported better-than-expected results for the first quarter of fiscal 2023.

During the third quarter, MSFT beat Wall Street’s revenue and earnings estimates, driven by growth in its cloud computing and Office productivity software businesses, and the software giant added that AI products were stimulating its sales.

MSFT’s revenue in the third quarter increased 7% year-over-year to $52.90 billion, surpassing analyst expectations of $51.02 billion, according to data from Refinitiv. The company reported earnings of $2.45 per share, beating analyst estimates of $2.23, according to Refinitiv.

During the quarter, the company’s growth at its cloud business Azure was 27%, exceeding analyst expectations for 26.6% growth, according to the consensus of 23 analysts polled by Visible Alpha.

Microsoft’s CEO, Satya Nadella, told investors on a conference call that the company will continue to focus on three priorities. First is assisting customers in using the depth of the Microsoft Cloud to get the most value out of their digital spend; second, investing to take the lead in the new AI wave across its solution areas. And third is driving operating leverage, aligning its cost structure with its revenue growth.

Satya Nadella added that the company has the most powerful AI infrastructure, which is being used by its partner Open AI and NVIDIA Corporation (NVDA), and other leading AI startups, including Adept and Inflection, to train large models. MSFT’s Azure OpenAI bright together advanced models like ChatGPT and GPT-4 with the enterprise capabilities of Azure.

The company has more than 2,500 Azure-Open AI service customers, and AI is integrated into a wide range of products, MSFT’s CEO said.

On July 18, MSFT announced that the company’s new corporate AI tools that work with Office software, Microsoft 365 Copilot, would cost $30 per user per month in addition to what most business customers already pay.

The pricing, announced at MSFT’s partners' conference, reflects solid demand for corporate AI products and the cost of running them. According to Chief Financial Officer Amy Hood, its new AI products might become the tech company’s fastest business to hit $10 billion.

While the company will likely surpass analysts’ earnings estimates in the to-be-reported fourth quarter, as it did in the first three quarters of 2023, however, Microsoft Intelligent Cloud, home to Azure, is estimated to grow at 13.7%, the slowest rate since 2017. Enterprises are optimizing their IT spending due to lingering macro challenges, thus impacting Azure and other cloud providers.

Meanwhile, last Friday, Goldman Sachs analyst Kash Rangan reiterated a Buy rating on MSFT and increased the price target to $400 from $350 after the company announced pricing and other details related to its Microsoft 265 Copilot offering.

Bottom Line

These tech giants have been at the forefront of cutting-edge research and developments in AI, Cloud, among others, integrating these powerful technologies into their products and services. With these companies flexing their muscles in Cloud and AI, they are well-posied for significant long-term growth.

3 AI Stocks Dominating the Market: How to Trade Them

Posted on by The INO.com Team

Artificial Intelligence (AI) is an umbrella term that denotes a series of programs and algorithms designed to mimic human intelligence and perform cognitive tasks efficiently with little to no human intervention.

AI, in its various forms and applications, can analyze large volumes of data generated during the entire course of our increasingly digital existence and identify trends and exceptions to help us develop better insights and make more effective decisions.

Unlike other next-big things, such as nuclear fusion, quantum computing, and flying cars, which are practically (and literally) pies in the sky, AI has been around for quite some time, influencing how we shop, drive, date, entertain ourselves, manage our finances, take care of our health, and much more.
However, the technology came into the limelight late last year with the release of ChatGPT, which in its own description, is “an AI-powered chatbot developed by OpenAI, based on the GPT (Generative Pretrained Transformer) language model. It uses deep learning techniques to generate human-like responses to text inputs in a conversational manner.”

ChatGPT, which took the world by storm by signing up 1 million users in five days and amassing 100 million monthly active users only two months into its launch, is one of the several use cases of generative AI. It is the subset of algorithms that creates and returns content, such as human-like text, images, and videos, based on the user's written instructions (prompts).

Given its massive importance, it’s hardly surprising that Zion Market Research forecasts the global AI industry to grow to $422.37 billion by 2028. Hence, this field has understandably garnered massive attention from investors who are reluctant to miss the bus on such a watershed development in the history of humankind.

Although OpenAI, the creator of ChatGPT, is not a publicly listed company, Microsoft Corporation (MSFT) has bet big on the company with the announcement of a multiyear, multibillion-dollar investment deal. Here’s CEO Satya Nadella discussing, at the World Economic Forum held in Davos this year, how the underlying technology would eventually be ubiquitous across MSFT’s products. The process has already begun with updates to its Bing search engine.

However, more recently, the company which made headlines when its stock got its moonshot due to the widespread public interest in AI is NVIDIA Corporation (NVDA). Post its earnings release on May 24, the Santa Clara-based graphics chip maker has stolen the thunder over the past week by becoming the first semiconductor company to hit a valuation of $1 trillion.

NVDA’s A100 chips, powering LLMs like ChatGPT, have become indispensable for Silicon Valley tech giants. To put things into context, the supercomputer behind OpenAI’s ChatGPT needed 10,000 of Nvidia’s famous chips. With each chip costing $10,000, a single algorithm that’s fast becoming ubiquitous is powered by semiconductors worth $100 million.

Earlier this year, Advanced Micro Devices, Inc. (AMD) made history by surpassing Intel Corporation (INTC)in terms of market cap for the first time ever. Chair and CEO Dr. Lisa Su is widely credited with the turnaround and transition from being widely dismissed due to performance issues and delayed releases to being the only company in the world to design both CPUs and GPUs at scale.

According to Dr. Su, Data Center is the most strategic piece of business as far as high-performance computing is concerned. AMD underscored this commitment with the recent acquisition of data center optimization startup Pensando for $1.9 billion.

AMD has made its ambitions to capitalize on the AI boom loud and clear with the launch of MI300X (a GPU-only chip) as a direct competitor to NVDA’s H100. The chip includes 8 GPUs (5nm GPUs with 6nm I/O) with 192GB of HBM3 and 5.2TB/s of memory bandwidth.

AMD believes this will allow LLMs’ inference workloads that require substantial memory to be run using fewer GPUs, which could improve the TCO compared to the H100.

Lastly, the company aims to address the growing AI accelerator market, projected to be over $30 billion in 2023 and potentially exceed $150 billion in 2027.

The Catch

While the chip and software companies at the cutting edge of the AI arms race have contributed to a melt-up in the markets that have seen the Nasdaq Composite gain more than 36% year-to-date, investors would be wise to be aware of the limitations and loopholes of investing in technology before FOMO drives them to inflate a "baby bubble" growing in plain sight.

LLM-based generative AI chatbots are auto-complete on steroids trained on vast data. While they are really good (and continually getting better) at predicting what the next word is going to be and extrapolating it to generate extensive literature, it lacks contextual understanding.
Consequently, the algorithms struggle with nuances such as sarcasm, irony, satire, analogies, etc. This also leads to the propensity to “hallucinate” and generate responses even if those are factually and logically incorrect.

Moreover, since, in the words of Morgan Housel, “things that have never happened before happen all the time,” it could be challenging for any AI tool to deal with tails, exceptions, and outliers in the shifting sands of business, economy, and society.
Even AAPL co-founder Steve Wozniak, who knows more than a thing or two about technology, agrees with the ‘A’ and not the ‘I’ of Artificial Intelligence.

Stick to Basics

Just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, markets can stay irrational longer than investors can stay solvent.

Big tech mega caps (mentioned earlier in the article) are involved in providing the infrastructure and computing horsepower required to make the data and power-hungry AI algorithms work. Moreover, since AI is well-embedded into their business operations and market offerings and AI as a service is (still) a small portion of their revenue, concentration risks can be more easily managed.

Therefore, rather than getting too carried away and stretching a worthwhile and useful innovation to frothy excesses with unrealistic expectations, it could be wise and safe for investors to add to their positions in the aforementioned stocks on dips.

Has UnitedHealth Group Inc. (UNH) Become the Backbone of Wall Street?

Posted on by The INO.com Team

On July 14,UnitedHealth Group Incorporated (UNH) released its earnings for the fiscal second quarter ended June 30, 2023. Despite concerns regarding rising medical costs and a surge in demand for non-urgent surgeries overdue because of the pandemic, the Minnesota-based diversified healthcare company topped Street estimates on both top and bottom lines.

In addition to revenue and adjusted EPS of $92.9 billion and $6.14 surpassing analyst estimates of $91.01 billion and $5.99, respectively, UNH raised its full-year adjusted earnings guidance to $24.70 to $25.00 per share, from the previous forecast of $24.50 to $25.00 per share.

The impressive results were reflected in UNH’s price action. The stock popped as high as 7.2% intraday to close the session at around $480 and a market capitalization of around $447 billion, making UNH the largest healthcare company in the United States and a bellwether for the broader insurance sector.
After adjusting for inflation, UNH has increased its annual revenue by more than $100 billion since 2012 to become even bigger than JP Morgan Chase & Co. (JPM) , the nation’s largest bank.

Ana Gupte, principal at AG Health Advisors, gave UNH her vote of confidence by saying, “If I had to pick one stock, only one stock to buy, I’d buy United[Health].” In addition to being in the healthcare sector, which is largely immune to economic downturns, according to Gupte, UNH’s size “makes it very attractive from an economic cycle and a macro environment perspective.”

With its size, performance, and stability (reflected in its 2-year and 5-year betas of 0.50 and 0.66, respectively), UNH has unsurprisingly become Wall Street’s darling with the highest weight in the Dow Jones Industrial Average and the tenth heaviest weightage in the S&P 500.

According to Lance Wilkes, managing director and senior research analyst at Bernstein Research, UNH “has had superior stock performance over everybody else for two reasons. One would be strategic vision, and the other is strategic capital management.”

While its peers, such as Aetna and Humana or Anthem and Cigna, have had their attempted consolidation through horizontal integration blocked by regulators due to antitrust concerns, UNH’s unique vertical-integration strategy, the kind being employed by Microsoft Corporation (MSFT) andActivision Blizzard , Inc. (ATVI), has meant that it could go about making smaller deals which have organically grown over time.

The company’s capital discipline has been reflected in its trailing-12-month ROCE, ROTC, and ROTA of 26.35%, 13.13%, and 7.53%, compared to the respective industry averages of -42.29%, -22.86%, and -33.16%.

As a result, through its various business segments, UNH has created an ecosystem that serves the entire healthcare value chain end-to-end while making the whole more than just a sum of its parts.

UnitedHealthcare provides insurance coverage and benefits services to more than 50 million people, while the company’s other platform, Optum, offers health services. The latter runs one of the largest pharmacy benefit managers or intermediaries who negotiate drug discounts with drug manufacturers on behalf of health insurers and large employers, which helps the former by reducing the cost of coverage.

As a result, UNH has achieved EBITDA and net-income margins of 9.55% and 6.06%, respectively, which are significantly higher than the respective industry averages.

Temporary Tailwinds

Insurance companies have benefited from delays in non-urgent procedures due to hospital staffing shortages and the pandemic, which deemed healthcare centers too risky for elective procedures.
However, as alluded to at the beginning of the article, UNH’s medical cost ratio, the percentage of payout on claims compared with premiums, despite being lower than Street estimates, came in at 83.2%, up over the prior-year quarter.

UNH has attributed this uptick to elective surgeries and outpatient care activity, primarily among seniors getting overdue heart procedures and hip and knee replacements at outpatient clinics.
According to CFO John Rex, the medical cost ratio is expected to “be a little bit lower” in the third quarter compared with the second quarter while being “higher marginally” than it will be in the fourth quarter, being “just a seasonality factor.”

Bottom line

Regardless of marginal increases in the medical cost ratio, UNH’s revenue and EPS for the fiscal third quarter ending September 30, 2023, are expected to increase by 12.9% and 9.8% year-over-year to $91.30 billion and $6.36, respectively.

For the entire fiscal year, revenue and EPS are expected to increase by 13.2% and 11.9% year-over-year to $366.85 billion and $24.83, respectively.

Given such solid prospects, healthcare companies, such as UNH, as Lance Wilkes put it, “are becoming more and more [like] utilities.”

How Will Bank of America (BAC) Stock Fare Against Scandal?

Posted on by The INO.com Team

America’s second-largest bank by assets, Bank of America Corporation (BAC), is mired in a scandal involving double-dipping on fees imposed on customers with insufficient funds in their accounts, withholding reward bonuses that were promised to credit card customers, and misappropriating sensitive personal information to open accounts without customers’ knowledge or permission.

The Consumer Financial Protection Bureau (CFPB) director Rohit Chopra said, “Bank of America wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent. These practices are illegal and undermine customer trust. The CFPB will be putting an end to these practices across the banking system.”

The bank has been ordered to pay $250 million in fines and refunds, with the CFPB and the Office of the Comptroller of the Currency (OCC) saying that BAC has violated several laws since 2012. While the CFPB ordered BAC to pay $100 million to the affected customers and $90 million in penalties, the OCC ordered BAC to pay a penalty of $60 million. The $250 million in fines and refunds will pressure the company’s near-term financials.

This is not the first time that U.S. regulators have fined BAC. In 2014, the bank was fined $727 million for “illegal credit card practices.” In May 2022, the CFPB ordered the bank to pay a $10 million civil penalty over unlawful garnishments, and additionally, it was fined $225 million by the CFPB and OCC last year automatically and unlawfully freezing customer accounts with a fraud detection program during the pandemic.

Since the bank was ordered to pay the penalties and refund, the stock has gained marginally. However, the stock has lost year-to-date and over the past year.

Looking at BAC’s recently reported financials, the Global Wealth and Investment Management segment’s revenue declined 3.5% year-over-year to $5.24 billion for the second quarter. The segment’s net income declined 15% year-over-year to $978 million due to the global slowdown in the deal-making business.
For the quarter that ended June 30, 2023, BAC’s EPS and revenue beat the consensus estimates. The bank has set aside $602 million as a provision for credit losses.

Here’s what could influence BAC’s performance in the upcoming months:

Robust Financials

BAC’s net interest income for the second quarter ended June 30, 2023, increased 13.8% year-over-year to $14.16 billion. Its return on average assets came in at 0.94%, compared to 0.79% in the year-ago period. The company’s net income applicable to common shareholders rose 19.7% year-over-year to $7.10 billion. Its EPS came in at $0.88, representing an increase of 20.5% year-over-year.

Mixed Analyst Estimates

Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 5.3% and 5.5% year-over-year to $3.36 and $100.14 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 2.4% and 0.7% year-over-year to $3.28 and $99.47 billion, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s 11.02% trailing-12-month Return on Common Equity is 1.1% lower than the 11.15% industry average. Likewise, its 0.90% trailing-12-month Return on Total Assets is 20.2% lower than the 1.12% industry average.

On the other hand, the stock’s 30.28% trailing-12-month net income margin is 17% higher than the industry average of 25.87%.

Bottom Line

BAC has been previously fined for other illegal practices, but the bank managed to navigate the rough waters, growing from strength to strength. Although its revenues and net income from the Global Wealth and Investment Management segment took a hit in the second quarter, the bank managed to beat Wall Street EPS and revenue estimates.

Although the penalty and refund of $250 million might dent its financial performance over the next quarter, it is unlikely to affect its financials significantly. Moreover, BAC was left with $106 billion in paper losses at the end of the second quarter due to its decision to invest heavily in the U.S. government bonds market. The amount is significantly higher than its peers’ unrealized bond market losses.

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