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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.

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

Posted on by The INO.com Team

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Solid Last Reported Financials

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

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

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

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

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

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

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

Upbeat Full-Year 2023 Guidance

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

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

Revenue Growth Slowed Over Years

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

Benefitting From the AI Boom

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

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

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

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

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

Favorable Analyst Estimates  

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

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

Mixed Profitability

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

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

Elevated Valuation

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

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

Bottom Line

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

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

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

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

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

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

 

4 Streaming Stocks to Buy Instead as Netflix Faces Lawsuit

Posted on by The INO.com Team

Streaming giant Netflix, Inc. (NFLX) finds itself in the center of a lawsuit over the upcoming Zack Snyder sci-fi epic Rebel Moon. NFLX has been sued for axing a gaming development contract based on filmmaker Snyder’s much-anticipated franchise, originally created as a “Star Wars” movie.

On September 28, 2023, Evil Genius Games filed a lawsuit against NFLX at the U.S. District Court in the Central District of California. Evil Genius Games is a popular developer and publisher of tabletop role-playing games based on major motion picture franchises.

The plaintiff has claimed that it had begun working with NFLX earlier this year to develop a tabletop role-playing game (TTRPG) based on Snyder’s “Rebel Moon,” and the game’s release was supposed to have coincided with the release of the first film’s streaming release on December 22, 2023.

According to the plaintiff, when the two parties started working on the project earlier this year, NFLX had a Rebel Moon movie script, a rough idea about the Rebel Moon universe, and a few cursory graphical assets. However, the script was missing background information vital to the story.

In the court documents, Evil Genius claimed that they not only did the work they were required to do but also supplied all the missing pieces and created a well-integrated backstory for the whole franchise. The plaintiff came up with a 228-page World Bible, a 430-page Player’s Guide, and a 337-page Game Master’s Guide.

Evil Genius had paid NFLX for a license and agreed to share profits from the licensed articles with NFLX. Despite having collaborated for months, NFLX decided to pull the plug on the project on May 25, weeks after the work was finalized and turned over to the streamer.

NFLX alleged that Evil Genius had violated the confidentiality agreement for “Rebel Moon” and violated its trust by sharing artwork at an industry trade show in March 2023. However, the plaintiff maintains that they had acquired NFLX’s permission to show artwork from the game at the 2023 Game Manufacturers Associate Exposition to “create some industry buzz” for the project.

According to the court documents, Evil Genius alleged that two NFLX employees were present at the event and helped hand out materials to retailers at the show. The legal filing states that “It became clear that Netflix was simply using the alleged breach and termination to hijack (Evil Genius’) intellectual property and prevent (Evil Genius’) from releasing the game.”

Evil Genius CEO David Scott said, “Our aim is to ensure our team is recognized for their fantastic work, and that we can release this game for millions of enthusiasts to enjoy. It’s disheartening to see Netflix backpedal on content that was jointly showcased and had received their prior consent. We urge our supporters to contact Netflix and Zack Snyder to push for the release of this game.”

While the allegations on NFLX are severe, the streamer has yet to comment on the lawsuit. In this scenario, investors could look to buy streaming stocks Comcast Corporation (CMCSA), The Walt Disney Company (DIS), Roku, Inc. (ROKU), and Paramount Global (PARA) as they are likely to benefit from NFLX’s bad press.

Let’s delve into the fundamentals of these stocks.

Comcast Corporation (CMCSA)

CMCSA is a media and technology company. Its segments include the Cable Communications segment, Media, and the Studios segment, which includes film and television studio production and distribution operations. The company has three primary businesses: Comcast Cable, NBCUniversal, and Sky.

CMCSA’s revenue grew at a CAGR of 4.6% over the past three years. Its EBITDA grew at a CAGR of 4.1% over the past three years. In addition, its EBIT grew at a CAGR of 4.7% in the same time frame.

CMCSA’s revenue for the second quarter ended June 30, 2023, increased 1.7% year-over-year to $30.51 billion. Its adjusted EBITDA rose 4.2% over the prior-year quarter to $10.24 billion. The company’s adjusted net income increased 4.8% year-over-year to $4.72 billion. Also, its adjusted EPS came in at $1.13, representing an increase of 11.9% year-over-year.

For the quarter ended September 30, 2023, CMCSA’s EPS and revenue are expected to decline 1.4% and 0.4% year-over-year to $0.95 and $29.73 billion, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters.

The Walt Disney Company (DIS)

DIS operates as an entertainment company worldwide. The company engages in film and episodic television content production and distribution activities. It operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences, and Products.

On September 11, 2023, DIS and Charter Communications (CHTR) announced a transformative, multiyear distribution agreement to maximize value for consumers and support the linear TV experience. Due to the deal, most DIS networks and stations will be restored to Spectrum’s video customers.

DIS’ revenue grew at a CAGR of 8% over the past three years. Its EBIT grew at a CAGR of 4.6% over the past three years. In addition, its EBITDA grew at a CAGR of 2.5% in the same time frame.

For the third quarter ended on July 1, 2023, DIS’ revenues increased 3.8% year-over-year to $22.33 billion. Its net loss attributable to DIS came in at $460 million, compared to a net income attributable of $1.41 billion in the prior-year quarter.

The company’s loss per share came in at $0.25, compared to an EPS of $0.77 in the prior-year quarter. Also, its cash provided by continuing operations increased 45.8% year-over-year to $2.80 billion. In addition, its free cash flow increased 775.4% year-over-year to $1.64 billion.

Analysts expect DIS’ EPS and revenue for the quarter ended September 30, 2023, to increase 153.2% and 6.4% year-over-year to $0.76 and $21.44 billion, respectively.

Roku, Inc. (ROKU)

ROKU operates a TV streaming platform. The company operates in two segments: Platform and Devices. Its streaming platform allows users to find and access TV shows, movies, news, sports, and others. The company also provides digital advertising and related services. In addition, it offers billing services; and brand sponsorship and promotions, as well as manufactures, sells, and licenses smart TVs under the Roku TV name.

On August 31, 2023, ROKU and TV Azteca announced a strategic partnership that will enable brands and agencies to purchase TV streaming advertising on the Roku platform in Mexico through TV Azteca.

ROKU’s International Advertising Vice President Mirjam Laux said, “The collaboration with TV Azteca increases our reach in the market and is a significant step to expand our growing ad sales business in Mexico. Working with TV Azteca, a trusted media group with deep connections to brands and advertisers, helps us to accelerate our advertising business and create more impactful marketing.”

ROKU’s revenue grew at a CAGR of 33.6% over the past three years. Its Tang Book Value grew at a CAGR of 32.3% over the past three years. In addition, its Total Assets grew at a CAGR of 31.1% in the same time frame.

ROKU’s total net revenue for the second quarter ended June 30, 2023, increased 10.8% year-over-year to $847.19 million. Its total gross profit rose 6.5% year-over-year to $378.27 million. The company’s net loss narrowed 4.2% year-over-year to $107.60 million. Also, its loss per share narrowed 7.3% year-over-year to $0.76.

Street expects ROKU’s revenue for the quarter ended September 30, 2023, is expected to increase 11.6% year-over-year to $849.38 million. Its EPS for the same quarter is expected to decline 124.5% year-over-year to $1.98. It surpassed the Street EPS estimates in each of the trailing four quarters.

Paramount Global (PARA)

PARA operates as a media and entertainment company worldwide. The company operates through TV Media, Direct-to-Consumer, and Filmed Entertainment segments.

On August 7, 2023, PARA and KKR announced signing an agreement pursuant to which KKR will acquire Simon & Schuster. PARA’s President and CEO Bob Bakish said, “We are pleased to have reached an agreement on a transaction that delivers excellent value to Paramount shareholders while also positioning Simon & Schuster for its next phase of growth with KKR.”

“The proceeds will give Paramount additional financial flexibility and greater ability to create long-term value for shareholders while also delivering our balance sheet,” he added.

PARA’s revenue grew at a CAGR of 5.7% over the past three years. Its levered FCF grew at a CAGR of 2.3% over the past three years. In addition, its Total Assets grew at a CAGR of 2.7% in the same time frame.

For the fiscal second quarter ended June 30, 2023, PARA’s revenue declined 2.1% year-over-year to $7.62 billion. Its adjusted OIBDA declined 37% over the prior-year quarter to $606 million.

The company’s adjusted net earnings from continuing operations attributable to PARA declined 81.4% year-over-year to $80 million. Its adjusted EPS from continuing operations attributable to PARA came in at $0.10, representing a decline of 84.4% year-over-year.

For the quarter ended September 30, 2023, PARA’s revenue is expected to increase 4.2% year-over-year to $7.21 billion. Its EPS for the same quarter is expected to decline 70.9% year-over-year to $0.11.

TSM’s Demand Woes May Benefit 3 Chip Stocks

Posted on by The INO.com Team

Semiconductor sales reached their highest level last year despite witnessing a slowdown during the year's second half. The slowdown was primarily due to the decline in demand from the end-user markets because of macroeconomic headwinds.

According to Gartner, global semiconductor revenues will decline 11.2% in 2023. Popular chipmaker Taiwan Semiconductor Manufacturing Company Limited (TSM) is also witnessing a slowdown in demand. According to sources, the company, to control costs, has asked its major suppliers to delay the delivery of chipmaking equipment.

Although the long-term growth prospects of the semiconductor industry look bright, the near-term headwinds will continue to put pressure on the chip industry in the short term. Gartner’s Practice VP Richard Gordon said, “As economic headwinds persist, weak end-market electronics demand is spreading from consumers to businesses, creating an uncertain investment environment.”

“In addition, an oversupply of chips, which is elevating inventories and reducing chip prices, is accelerating the decline of the semiconductor market this year,” he added. In July, TSM, a major supplier to smartphone giant Apple Inc. (AAPL), forecasted that it would witness a 10% drop in sales in 2023, and its investment spending would be at the lower end of its estimate of $32 billion and $36 billion.

TSM CEO C.C. Wei highlighted that the decline in demand would be mostly due to a tepid recovery in China, soft demand in the end market, and a weak global economic scenario. Although the demand for artificial intelligence (AI) chips is likely to remain strong, it is unlikely to offset the softer demand in the end markets due to declining sales of smartphones, personal computers, laptops, etc.

Degroof Petercam’s analyst Michael Roeg said, “There has been a lot of excitement about artificial intelligence and the implications for the semiconductor industry. However, the strength in demand for AI chips is not strong enough to compensate (for) what is happening in other segments.”

After global demand for consumer electronics spiked during the pandemic, companies had stockpiled chips to meet the high demand. However, as the demand slowed down in the end markets due to high inflation, companies were stuck with excess inventories, and this led to a fall in the demand for chips, followed by a decline in their prices.

TSM’s CFO Wendell Huang said, “Moving into the third quarter 2023, we expect our business to be supported by the strong ramp of our 3-nanomenter technologies, partially offset by customers’ continued inventory adjustment.”

AAPL, a major TSM customer, announced its latest iPhone series with the cutting-edge 3-nanometer chip but did not raise prices, indicating softness in the smartphone market. AAPL is currently facing trouble in a key market like China as the Chinese government banned some government employees from using iPhones at work.

Furthermore, smartphone maker Huawei came up with the Mate 60 series, which utilizes an advanced chip made by Chinese chipmaker SMIC. All these factors might put pressure on iPhone sales this year, piling further pressure on TSM.

Moreover, TSM is facing delays at its Arizona plant. The company was forced to push back production at the plant by a year to 2025 as it faced difficulty recruiting workers and pushback from unions due to its efforts to bring workers from Taiwan. After investing heavily in expanding its capacity, the company is looking at a slower increase in capital expenditure in the coming years.

As TSM’s headwinds are expected to continue, fundamentally stable chip stocks Infineon Technologies AG (IFNNY), STMicroelectronics N.V. (STM), and ChipMOS TECHNOLOGIES INC. (IMOS) might benefit.

Let’s discuss these stocks in detail.

Infineon Technologies AG (IFNNY)

Headquartered in Neubiberg, Germany, IFNNY designs, develops, manufactures, and markets semiconductors and related system solutions worldwide.

On August 3, 2023, IFNNY announced its decision to expand its Kulim fab over and above the original investment announced in February 2022. The company will build the world’s largest 200-millimeter SiC (silicon carbide) Power Fab. The expansion is backed by new design wins in automotive and industrial applications for about five billion euros and about one billion euros in pre-payments.

The company will additionally invest up to €5 billion in Kulim during the second construction phase for Module Three. The investment will lead to an annual SiC revenue potential of about €7 billion by the end of the decade, together with the planned 200-millimeter SiC conversion of Villach and Kulim.

IFNNY’s CEO Jochen Hanebeck said, “The market for silicon carbide shows accelerating growth, not only in automotive but also in a broad range of industrial applications such as solar, energy storage, and high-power EV charging. With the Kulim expansion, we will secure our leadership position in this market.”

IFNNY’s revenue grew at a CAGR of 26.1% over the past three years. Its EBITDA grew at a CAGR of 45.7% over the past three years. In addition, its EPS grew at a CAGR of 96% in the same time frame.

In terms of trailing-12-month net income margin, IFNNY’s 19.13% is 840.7% higher than the 2.03% industry average. Likewise, its 35.32% trailing-12-month EBITDA margin is 285.9% higher than the industry average of 9.15%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 15.52%, compared to the industry average of 2.42%.

For the third quarter ended June 30, 2023, IFNNY’s revenue increased 13% year-over-year to €4.09 billion ($4.37 billion). Its adjusted gross margin came in at 46.2%, compared to 45.4% in the prior-year quarter. The company’s profit for the period rose 60.7% year-over-year to €831 million ($887.97 million). Also, its adjusted EPS came in at €0.68, representing an increase of 38.8% year-over-year.

Analysts expect IFNNY’s revenue for the quarter ending September 30, 2023, to increase 2% year-over-year to $4.37 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters.

STMicroelectronics N.V. (STM)

Based in Geneva, Switzerland, STM designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through the Automotive and Discrete Group, Analog, MEMS, and Sensors Group; and Microcontrollers and Digital ICs Group segments.

STM’s revenue grew at a CAGR of 21.6% over the past three years. Its EBIT grew at a CAGR of 65.7% over the past three years. In addition, its net income grew at a CAGR of 69.5% in the same time frame.

In terms of trailing-12-month net income margin, STM’s 27.45% is significantly higher than the 2.03% industry average. Likewise, its 29.78% trailing-12-month EBIT margin is 559.7% higher than the industry average of 4.51%. Furthermore, the stock’s trailing-12-month asset turnover ratio came in at 0.88x, compared to the industry average of 0.62x.

STM’s net revenues for the second quarter ended July 1, 2023, increased 12.7% year-over-year to $4.33 billion. Its net cash from operating activities rose 24.1% year-over-year to $1.31 billion. The company’s net income rose 15.5% year-over-year to $1 billion. Also, its EPS came in at $1.06, representing an increase of 15.2% year-over-year.

Street expects STM’s revenue for the quarter ending September 30, 2023, to increase 1.7% year-over-year to $4.38 billion. Its EPS for fiscal 2023 is expected to increase 3.3% year-over-year to $4.33. It surpassed the Street EPS estimates in three of the trailing four quarters.

ChipMOS TECHNOLOGIES INC. (IMOS)

Headquartered in Hsinchu, Taiwan, IMOS researches, develops, manufactures, and sells high-integration and high-precision integrated circuits and related assembly and testing services. It operates through Testing, Assembly, Testing, and Assembly for LCD, OLED, and Other Display Panel Driver Semiconductors, Bumping; and Others segments.

IMOS’s total assets grew at a CAGR of 8.7% over the past three years. Its Tang Book Value grew at a CAGR of 6.8% over the past three years. In addition, its revenue grew at a CAGR of 2.9% over the past five years.

In terms of trailing-12-month net income margin, IMOS’ 8.63% is 324.4% higher than the 2.03% industry average. Likewise, its 29.37% trailing-12-month EBITDA margin is 220.9% higher than the industry average of 9.15%. Furthermore, the stock’s trailing-12-month Capex/Sales is 15.32%, higher than the industry average of 2.42%.

For the fiscal second quarter ended June 30, 2023, IMOS’ revenue came in at NT$5.44 billion ($169.84 million). Its net non-operating income came in at NT$222.40 million ($6.94 million. The company’s net profit attributable to equity holders of the company came in at NT$628.50 million ($19.62 million). Also, its EPS came in at NT$0.86.

For the quarter ending September 30, 2023, IMOS’ revenue is expected to increase 6.9% year-over-year to $176.86 million.

An Analysis of NVIDIA (NVDA) Stock Before Q2 Earnings Release

Posted on by The INO.com Team

Technology stocks have staged a massive recovery this year, with the Nasdaq rising nearly 27% year-to-date. Breakthroughs in AI, such as the advent of the large language model-based (LLM) chatbots, significantly drove the tech sector’s performance. The buzz around AI helped the Nasdaq jump 32% during the year's first half, registering its best first half since 1983.

NVIDIA Corporation (NVDA), playing a crucial role in the AI revolution, rallied more than 196% this year. The Santa Clara, California-based chipmaker has seen considerable investor interest in its shares, as its graphic processing units (GPUs) provide the necessary processing power to Generative AI applications. This AI boom has catapulted NVDA’s market capitalization to over $1 trillion, making it the sixth company to achieve that landmark.

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.”

In addition to being a leader in providing advanced AI chips required for generative AI, NVDA is witnessing rising demand for its chips in accelerated computing.

The company’s GPUs are used in supercomputers and data centers. Its GPUs are used as accelerators for central processing units (CPUs). 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 technologies. According to Wedbush, artificial intelligence will be worth $800 billion to businesses over the next ten years.

During the first quarter, the company reported record data center revenue of $4.28 billion. For the second quarter of fiscal 2024, NVDA expects its revenue to be $11 billion, plus or minus 2%. The revenue forecast was more than 50% higher than Wall Street estimates of $7.15 billion. The company expects non-GAAP gross margins to be 70%, plus or minus 50 basis points.

Deutsche Bank analyst Ross Seymore said, “We expect another stunning print & guide from NVDA, with demand for AI, compute still at ‘frenzied’ levels and expected to remain limited by supply for several quarters.” The analyst expects revenues of $11.05 billion and EPS of $2.05. He has a Hold rating on the stock with a $440 price target.

Forrester analyst Glenn O’Donnell said, “What Nvidia reports in its upcoming earnings release is going to be a barometer for the whole AI hype. I anticipate that the results are going to look really outstanding because demand is so high, and that means Nvidia is able to command even higher margins than it would otherwise.”

Street expects NVDA’s EPS and revenue for the second quarter ending July 31, 2023, to increase 309.1% and 65.8% year-over-year to $2.09 and $11.12 billion, respectively.

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

Disappointing First-Quarter Results

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 144.7% and 44.2% year-over-year to $8.17 and $11.78, respectively. Its fiscal 2024 and 2025 revenues are expected to increase 64.4% and 33.4% year-over-year to $44.33 billion and $59.16 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, NVDA’s 54.10x is 268.2% higher than the 14.70x industry average. Likewise, its 24.08x forward EV/S is 777.4% higher than the 2.74x industry average. Its 52.99x forward non-GAAP P/E is 131.4% higher than the 22.90x 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 162.8% higher than the industry average of 8.96%. Furthermore, the stock’s 6.65% trailing-12-month Capex/Sales is 174.3% higher than the industry average of 2.42%.

Bottom Line

NVDA remains well-positioned to capitalize on the multi-billion-dollar opportunity in artificial intelligence. Its graphic processing units (GPUs) are essential in powering generative AI tools. The company’s optimism over AI led to an impressive outlook for the second quarter.

Investors will be looking forward to the company’s second-quarter results on August 23, 2023. Despite the vast scope for NVDA, the stock has already rallied nearly 200% this year and is trading at an expensive valuation. Considering these factors, it could be wise to wait for a better entry point in the stock.