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U.S. Tech Sector Analysis

UpdatedOct 01, 2022
DataAggregated Company Financials
  • 7D-3.7%
  • 3M-6.0%
  • 1Y-27.8%
  • YTD-35.2%

Over the last 7 days, the Tech industry has dropped 3.7%, driven by a pullback from Apple of 8.1%. However, the industry is down 28% over the past year. As for the next few years, earnings are expected to grow by 14% per annum.

Sector Valuation and Performance

Has the U.S. Tech Sector valuation changed over the past few years?

DateMarket CapRevenueEarningsPEAbsolute PEPS
Sat, 01 Oct 2022US$9.5tUS$2.2tUS$346.0b19.1x27.4x4.3x
Mon, 29 Aug 2022US$11.2tUS$2.2tUS$346.2b22.5x32.2x5.1x
Wed, 27 Jul 2022US$10.8tUS$2.2tUS$360.2b23.2x29.9x5x
Fri, 24 Jun 2022US$10.3tUS$2.1tUS$358.5b22.7x28.9x4.8x
Sun, 22 May 2022US$10.5tUS$2.1tUS$357.7b24.5x29.4x4.9x
Tue, 19 Apr 2022US$12.1tUS$2.1tUS$345.6b24.2x34.9x5.9x
Thu, 17 Mar 2022US$12.4tUS$2.0tUS$345.2b25.8x35.8x6.1x
Sat, 12 Feb 2022US$13.0tUS$2.1tUS$354.1b26.3x36.8x6.1x
Mon, 10 Jan 2022US$13.9tUS$2.1tUS$346.7b28.4x40.2x6.5x
Wed, 08 Dec 2021US$14.2tUS$2.1tUS$345.9b28.4x40.9x6.6x
Fri, 05 Nov 2021US$14.6tUS$2.1tUS$339.6b32.1x43.1x7x
Sun, 03 Oct 2021US$13.5tUS$2.0tUS$315.3b32.9x42.7x6.6x
Tue, 31 Aug 2021US$13.9tUS$2.0tUS$313.9b31.6x44.3x6.9x
Wed, 07 Jul 2021US$12.9tUS$2.0tUS$309.3b30.9x41.7x6.5x
Sat, 10 Apr 2021US$11.7tUS$1.9tUS$289.5b31.8x40.3x6.1x
Fri, 01 Jan 2021US$11.4tUS$1.8tUS$256.8b32.2x44.5x6.2x
Mon, 05 Oct 2020US$10.0tUS$1.7tUS$233.1b28.4x42.8x5.9x
Thu, 09 Jul 2020US$8.7tUS$1.6tUS$233.1b29.5x37.4x5.3x
Wed, 01 Apr 2020US$6.6tUS$1.6tUS$240.0b22.4x27.4x4x
Sat, 04 Jan 2020US$7.7tUS$1.6tUS$241.2b30x31.9x4.7x
Tue, 08 Oct 2019US$6.8tUS$1.6tUS$236.6b25.8x28.8x4.3x
Price to Earnings Ratio


Total Market Cap: US$6.8tTotal Earnings: US$236.6bTotal Revenue: US$1.6tTotal Market Cap vs Earnings and Revenue0%0%0%
U.S. Tech Sector Price to Earnings3Y Average 37.6x202020212022
Current Industry PE
  • Investors are pessimistic on the American Information Technology industry, indicating that they anticipate long term growth rates will be lower than they have historically.
  • The industry is trading at a PE ratio of 27.4x which is lower than its 3-year average PE of 37.6x.
  • The 3-year average PS ratio of 5.7x is higher than the industry's current PS ratio of 4.3x.
Past Earnings Growth
  • The earnings for companies in the Information Technology industry have grown 14% per year over the last three years.
  • Revenues for these companies have grown 11% per year.
  • This means that more sales are being generated by these companies overall, and subsequently their profits are increasing too.

Industry Trends

Which industries have driven the changes within the U.S. Tech sector?

US Market-2.48%
Electronic Equipment and Components-2.21%
Tech Hardware-7.95%
Industry PE
  • Investors are most optimistic about the Software industry, which is trading close to its 3-year average PE ratio of 54.8x.
    • Analysts are expecting annual earnings growth of 19.5%, which is higher than its past year's earnings growth of 13.4% per year.
  • Investors are most pessimistic about the Semiconductors industry, which is trading below its 3-year average of 27.1x.
Forecasted Growth
  • Analysts are most optimistic on the Software industry, expecting annual earnings growth of 20% over the next 5 years.
  • This is better than its past earnings growth rate of 13% per year.
  • In contrast, the Tech Hardware industry is expected to see its earnings grow by 4.3% per year over the next few years.

Top Stock Gainers and Losers

Which companies have driven the market over the last 7 days?

CompanyLast Price7D1YValuation
BR Broadridge Financial SolutionsUS$144.32-6.6%
PLTR Palantir TechnologiesUS$8.139.9%
AZPN Aspen TechnologyUS$238.207.2%
CRWD CrowdStrike HoldingsUS$164.812.8%
TTD Trade DeskUS$59.753.6%
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Sep 29

Microsoft: Improving Profitability Despite Stiff Competition

Summary Microsoft is in a downward momentum. Its 6-month price performance is -22.15%. This decline is worse than IBM’s -7.48%. EMA and Stochastic technical indicators are indicating MSFT is going to decline further. The falling knife syndrome of MSFT makes it an upcoming value buy. The 20-year-old .NET ecosystem is evolving. It is the tailwind that helps Microsoft lead in the $389 billion custom software market. Microsoft’s enthusiasm for WebAssembly is why investors should give a damn about its .NET MAUI, Blazor, and WASI products. Microsoft (MSFT) is a high-flying stock that is now under the falling knife category. Technical analysis of the Dow Jones Index indicates its MACD is still below zero. The persisting bearish emotion of the stock market convinced me that MSFT's price will continue to dip. The high-valuation factor grade of MSFT is D-. MSFT will likely perform worse than IBM (IBM). IBM's 6-month decline is only -7.48%, much better than MSFT's -22.15%. Seeking Alpha Premium The YTD performance of MSFT is -29.71%. This is another gross underperformance against IBM's -8.92%. Based on its EMA, MACD, and Stochastic indicators, MSFT will continue to decline. The fast stochastic of MSFT is 8.23. The trade signal is it is Oversold Buried - near term bearish alert. Best to wait for a cheaper buy-in window. StockTA.com Still High Valuation In spite of the almost 30% YTD dip, MSFT remains a pricey investment. Compared to its mega-cap software peers, Microsoft's stock is more expensive to own. This relative overvaluation is best exemplified by MSFT's TTM Price/Sales valuation of 8.94x. This is significantly greater than IBM's P/S ratio of 1.83x. and Oracle's (ORCL) 3.79x Seeking Alpha Premium More Competition Is A Headwind The relatively high P/S valuation of MSFT makes it a tempting target to short sellers. It is a blessing that Microsoft touts more than $104 billion in cash to intimidate shorts. The decline of MSFT is due to profit-takers, bearish investors, and skeptics. Investors are perhaps realizing that MSFT's 5-year revenue CAGR is less than 16%. MSFT therefore is clearly not a high-growth stock. Azure remains a far second to AWS in cloud infrastructure market share. Microsoft 365 has fierce competition from cheaper or even free alternatives. The massive success (48.08% market share) of Microsoft 365 has inspired Canva to launch its own online office suite. Microsoft's revenue CAGR could fall below 12% if more companies imitate Canva's move to challenge Microsoft 365. Canva became a $40 billion unicorn because of its affordable templates-based graphic design business. Adobe's (ADBE) Creative Cloud suite of software has less customers because budget-conscious businesses/individual can subscribe to Canva Pro for their graphic content projects. The Canva Office Suite will take customers away from the $9.99/month Microsoft 365. The freemium made-in-China $29.99/year WPS Office is another headwind for Microsoft 365. So is the $24/year German-made SoftMaker Office Universal NX. As per Microsoft's FY 2022 report, the productivity and business processes earned $63.4 billion. It is alarming that Google (GOOGL) Workplace now enjoys 59.41% market share in U.S. organization adoption. Microsoft 365's market share is 40.35%. On the global stage, Google Workplace has 48% and Microsoft 365 has 46%. Losing to Google Workplace contributes to the big decline in MSFT's stock price. Important Tailwind From .NET Microsoft's growth potential is not limited to Microsoft 365. Investors should evaluate the rarely discussed contribution of the 20-year-old.NET ecosystem. The .NET business is more important than Microsoft Ads. Microsoft is never going to make it big in digital display ads because its Bing Search still has less than 9% market share in usage. Microsoft Edge's browser market share is 10.84%. Microsoft Microsoft is also marketing cost-savings if developers host their .NET apps on Azure. Anything that helps sustain Microsoft's $30.4 billion/year Azure business is worth discussing here at Seeking Alpha. Microsoft also offers its Visual Studio Enterprise IDE for $250/month so people can develop .NET and ASP.net apps. The .NET ecosystem is Microsoft's growth driver inside the $389 billion (2020 estimate) custom software development industry. This niche market is set to become a $650.13 billion business by 2025. Building .NET apps for any device is possible through Microsoft-made programming languages C#, F#, and VB (Visual Basic). The screenshot above is emphasizing .NET MAUI and Blazor. Both software development frameworks are C#-centric. Microsoft has officially stopped development of VB.net. Microsoft Microsoft bought Xamarin in 2016 and it came up with Xamarin.Forms to extend the .NET platform for cross-platform app development. The new version of Xamarin.Forms is .NET MAUI (Multi-platform App UI). It seeks to unify the different technologies of Xamarin, Mono, and .NET CORE. MSFT is a buy because it is helping .NET and C# developers create apps more coherently. The average U.S. annual salary for .NET or C# developers in the U.S. is $100k. These high-income developers can easily afford to pay the $250/month Visual Studio Enterprise just so they can build .NET MAUI apps. Blazor is Microsoft's popular ASP.NET framework to build client web apps using HTML, CSS, and C#. Blazor is Microsoft's effort to diminish the popularity of JavaScript frameworks for websites and mobile apps. Many developers hate JavaScript for several reasons. Microsoft made C#-centric Blazor as an alternative to create web, PWA (Progressive Web Apps), and WebAssembly applications. Of course, developers will have to pay $250/month for Visual Studio Enterprise to develop Blazor apps. Blazor might inspire profitable websites like Seekingalpha.com to stop using JavaScript for frontend/backend purposes. Motek Moyen C# is faster and therefore better than JavaScript. Microsoft was not so happy with the very old JavaScript. It created TypeScript in 2012. TypeScript developers in the U.S. now tout average salary of $130k/year. JavaScript developers' average is $126,75k. The $45/month Visual Studio Standard IDE can be used to build TypeScript and JavaScript apps. MSFT is a buy because Microsoft is monetizing .NET MAUI and Blazor even though there's the free Uno Platform. Uno is the development framework that can do the jobs of .NET MAUI and Blazor. The Uno Platform is so good that Microsoft used it to revamp its Windows Community Toolkit Labs. Microsoft is a good investment because people/companies still pay $99.99/year for Microsoft 365. They ignore the free LibreOffice and the cheaper $29.99/year WPS Office. WebAssembly Gambit Microsoft makes money by helping developers build .NET and C# apps through premium Visual Studio IDE and Azure subscription fees. It might be safer for Microsoft to stop its efforts on WASI (WebAssembly System Interface). WASI is an attempt to bring WebAssembly apps beyond the browser. Azure's topline is not going to benefit from Microsoft's experimental but not yet committed effort to bring .NET app to WASI compliance. Microsoft's WASI SDK iwill fix Blazor's unsuitability for WASI apps. Blazor uses JavaScript interop to handle DOM and browser API calls. WASI does not use JavaScript. Microsoft.com WASI means it will be possible to create truly autonomous C# and .NET apps on any device without Azure hosting and JavaScript dependencies. WASI will sacrifice future Azure revenue just to attract more paying developers to use Visual Studio Standard or Enterprise. It is tempting to pay $45/month or $250/month for an IDE that helps developers build cross-platform, web/WebAssembly, and no-JavaScript WASI apps. It is now possible to use the experimental WASI SDK to build .NET 7 and ASP.NET Core apps. Microsoft should let it remain experimental. Focus More On No-Code WASI is not the optimal long-term strategy. Attracting more C# developers is the better option. Microsoft must attract more kids and adults to the well-paying C# developer population. Giving away free educational Visual Studio Standard to K-12 institutions is highly recommended. Adding C# to the coding option of Microsoft's MakeCode visual programming learning platform should inspire more kids to study C#. To date, MakeCode only let block-based programmers use JavaScript or Python to learn hands-on coding. Microsoft Microsoft can afford to pay $68.7 billion to acquire Activision Blizzard (ATVI). It should be willing to spend a few millions to build a no-code C# version of the WebAssembly game engine GDevelop. GDevelop uses JavaScript for its game logic. I still use my $99.99/year Microsoft 365 account. Microsoft is kind enough to bundle free no-code PowerApps and Power Automate with it. This is the brilliant tactic that keeps Microsoft 365 attractive. Microsoft wants Word, Excel, and PowerPoint loyalists to start becoming no-code app developers. Microsoft can then entice them with affordable Azure hosting for their no-code apps. The new integration of Figma with PowerApps means the UI/UX layout tasks are now a cakewalk. Corporations will save money by letting its lowly paid clerks and receptionists do no-code app development. Why hire a $100k/year C# developer when you can have the $36,000/year clerk learn PowerApps and PowerAutomate. Motek Moyen

Sep 29

CrowdStrike: Good Company, Bad Stock

Summary CrowdStrike has been delivering exceptional growth in a very difficult environment where most enterprise SaaS peers are struggling. The product portfolio continues to evolve with new offerings in cloud and identify, where emerging solutions generated record ARR with 129% growth in the last quarter. Management highlighted a larger long-term TAM in the recent Investor Briefing, while notes from the partner panel indicate big deals are still happening. There are no cracks in the business, but valuation remains a major source of risks, as bigger catalysts will be needed to trigger further re-rating to the upside. Sit back, relax, and wait for a better buying opportunity. Growing and gaining share CrowdStrike (CRWD) has been an exceptional growth story, while most companies within the software sector have been struggling with slowing growth under the current macro backdrop. The company is a leading cloud-native provider of corporate endpoint security and has been gaining a meaningful market share in the industry. According to IDC, CrowdStrike's share increased from 10% to 13% in 2021, while revenue growth outpaced most industry peers at 68%. IDC, 2022 The corporate endpoint market had a total value of just over $10 billion 2021 and is likely to grow at a double-digit CAGR over the next several years thanks to a highly concerning threat environment amplified by the Russia-Ukraine crisis and China's potential invasion of Taiwan in 2022. From a macro perspective, there has never been a better time to be in the cybersecurity business as companies and governments look to upgrade their mousetraps. A better mousetrap Without a question, CrowdStrike is the company that's built a better mousetrap. The signature Falcon platform offers a complete set of solutions including EDR (endpoint detection and response), XDR (extended detection and response), identity protection, threat intelligence, file monitoring, vulnerability management, and many more. Before we move on, let's first understand some of the industry lingos. An "endpoint" is essentially any digital device that connects to the Internet and is thus vulnerable to a cyber attack. For example, your work laptop is considered an "endpoint". EDR protects the endpoint, or the device that you're using at work. XDR is a more comprehensive solution that integrates protection across endpoints (devices), cloud workload, server, email, etc. Both solutions are similar in detecting and reacting to threats and are set to displace a plethora of legacy solutions that no longer meet corporate needs in today's cybersecurity landscape. Recent performance and outlook CrowdStrike reported a strong 2Q22 that almost puts the company in its own league. Revenue of $535 million and adj. EPS of $0.36 both came in above Street estimates of $516 million and $0.28, while total ARR grew 59% YoY to break above the $2 billion mark. Emerging products (Discover, Spotlight, Identify Protection, Humio) delivered a record ARR of $219 million, up 129% YoY. CRWD 2Q22 Investor Presentation The majority of top-line growth was driven by a strong 60% subscription revenue growth as customers embraced more solutions. Customers with +5/+6/+7 modules represented 59%/36%/20% of total customers, indicating a YoY growth of 70%/84%/105%. Subscription gross margin of 79% in 1H22 also held up well vs. 79% in 2021 and 2020. CRWD 2Q22 Investor Presentation Customers are not only staying with CrowdStrike but spending more. The net retention rates ((NRR)) for 1Q22 and 2Q22 were above 120%, which continued to remain very strong as the company has long maintained a >120% NRR. Given only 20% of total customers are subscribed to 7+ modules, this should help maintain a strong NRR going forward. CRWD 2Q22 Investor Presentation All told, it was another solid quarter characterized by record ARR, strong subscription margin and free cash flows. For 3Q22, management guided revenue of $572 million at the mid point which was above $569 million consensus. Fal.Con CrowdStrike just recently had an Investor Briefing at the annual Fal.Con conference with the following key takeaways: XDR will be integrated into CrowdStrike's EDR module (Falcon Insight). Previously, customers had to separately purchase the XDR module. Will acquire Reposify, an EASM (external attack surface management) provider that helps companies identify corporate assets that may be exposed to risks of being attacked. Humio will become Falcon LogScale with a new fully-managed service. Announced Cloud Infrastructure Entitlements Manager (CIEM), an identity product for cloud customers. Management sees a $97 billion TAM for current product portfolio by 2025 and a $158 billion long-term TAM (vs. $126 billion previous estimate). More importantly, big deals are still happening despite a light early summer, per Barclays' notes from the partner panel (see below). CRWD Investor Briefing Barclays Valuation CrowdStrike is no doubt a secular growth story supported by strong industry tailwinds. The company is projected to grow its revenue by 54% to $2.23 billion in 2022 and 37% to $3 billion in 2023. That said, with a market cap of $39 billion, valuation is very demanding at almost 13x C2023 revenue.

Sep 29

Aspen Technology: A Surging Software Stock Bucks Its Industry's Bearish Trend

Summary It's hard to spot long-lasting winning niches of the equity markets in 2022. Long-duration stocks have been slammed with rising rates and investors demanding to own cash-flow-generation companies. Aspen Technology, though, notched fresh all-time highs this week following a key merger a year ago. Are you having a tough time finding a winning stock in 2022? It seems all areas of the market have come under attack by the bears. High-duration software stocks, in particular, are under pressure. One name, though, went through a very positive corporate combination almost a year ago that is still paying figurative dividends for its investors today. But is the stock now too richly valued? S&P 500, Tech, Software Down, Aspen Technology Up StockCharts.com According to Bank of America Global Research, Aspen Technology (AZPN) came into existence in 1981 after an R&D initiative in MIT labs was commercialized. The company was incorporated in 1981 and reincorporated in 1998. AZPN has 3,700 employees and operates in 41 countries. Fidelity notes that the firm provides enterprise asset performance management, asset performance monitoring, and asset optimization solutions worldwide. The company's solutions address complex environments where it is critical to optimize the asset design, operation, and maintenance lifecycle. In October 2021, industry stalwart Emerson (EMR) partnered with Aspen Technology for its industrial software offering. The deal helped bring about value for both firms, but Aspen Technology shares have surged in a year fraught with volatility and downward price action. BofA sees the corporate transaction as a major catalyst for revenue growth, margin expansion, and diversification. The Massachusetts-based $12.5 billion market cap Software industry company within the Information Technology sector does not have positive GAAP earnings over the past 12 months and does not pay a dividend, according to The Wall Street Journal. On earnings and valuation, BofA sees operating per-share profits rising sharply this year and through 2024. GAAP earnings are currently negative over the past 12 months, but the more conservative profit accounting figure also turns sharply higher in the proceeding years. Still, AZPN's operating P/E is quite high and there's no yield. All the while, its EV/EBITDA multiple is very stretched with low free cash flow. AZPN Earnings, Valuation, And Free Cash Flow Forecasts BofA Global Research Aspen Technology's corporate event calendar is light until its Q1 2023 unconfirmed earnings date of October 26 after market close, according to Wall Street Horizon. The company recently appeared at the Piper Sandler growth Frontiers Conference earlier in September. Corporate Event Calendar Wall Street Horizon The Technical Take Price action has been tremendous this year. It has been a long time since I have seen such a strong uptrend considering the ongoing global bear market. Nonprofitable tech/software has been particularly hit hard, but that has not negatively affected shares of AZPN it appears.














Sep 28

Visa: High Price Multiples Are Likely Not A Problem

Summary If over the past 10 years we had relied on multiples analysis, we probably would never have bought Visa. The current multiples while not that low by the standards of fundamental analysis, signal an undervaluation compared to those of the past. There is arguably no company in the world that has better FCF margin than Visa among those that produce an annual free cash flow of at least $3 billion. The global payments system has huge barriers to entry, which is why Visa's competitive advantage is very pronounced. Multiples with too high nominal values compared to the canons of fundamental analysis are often an indication of overvaluation for a company, but not for Visa (V). When analyzing this company some of the metrics of fundamental analysis are misleading, and in this article I will explain why Visa cannot be evaluated as if it were any other company. Back testing If over the past 10 years we had relied on multiples analysis, we probably would never have bought Visa. In 2012 Visa was trading at a P/E of 47.31x, a P/S of 9.59x and an EV/EBITDA of 15.08x. Revenue growth over the next 10 years was about 10.80% CAGR. These do not sound like exciting multiples when compared to the growth, yet Visa has since then achieved a return of 618.90% versus 189.03% for the S&P500. TradingView In 2015, Visa had a P/E of 30.06x, a P/S of 13.46x, and an EV/EDITDA of 18.88x. The revenue CAGR was about 11.1% from 2015 to the present. Under these assumptions Visa would once again be considered overvalued relative to the market, yet the performance achieved says otherwise. TradingView 176.53% for Visa versus 78% for the S&P500. Finally, in 2018 Visa had a P/E of 29.85x, a P/S of 14.07x, and an EV/EBITDA of 21.20x. From 2018 to the present, revenues have grown by about 9% CAGR. Again, based on the nominal value of price multiples, Visa was overvalued. After all, we are talking about a company trading at a P/E of almost 30x and with a growth rate of less than 10%. Yet, once again Visa outperformed the market. TradingView Visa's return since 2018 has been 52% while that of the S&P500 has been 34%. Why Visa continues to outperform the market even at such high multiples One of the generally accepted market rules is that you have to pay more for something that in the collective imagination is worth more. In the stock market, the same principle applies, and it all translates into higher price multiples. Typically there are three characteristics that lead a company to have higher multiples than the market: Its profitability. Leadership within the underlying market. Expectations of growth potential. If a company has excellent margins, it is likely fair that we should expect to pay more, as should we expect this for an industry leader or one with a high growth rate. With reference to these parameters, Visa's position will now be analyzed to demonstrate why it deserves to trade at higher market multiples. Profitability Visa's profitability is certainly its greatest strength. There is no company in the world that I've found that has better FCF margins than Visa among those that produce an annual free cash flow of at least $3 billion. The only company that comes close in terms of net income margin and free cash flow margin is its rival Mastercard (MA), but even here the comparison is unequal. TIKR terminal As can be seen from this chart, Visa has higher profitability in terms of net income and free cash flow margin over multiple time frames. This comparison is not meant to put Mastercard in a bad light (which by the way also has outlier margins), but to put Visa's profitability in context to its main competitor. Beyond Mastercard there is no company that can sustain this comparison, not least because the payment services industry in which they both operate already has much higher-than-average margins. Comparing Visa's profitability with top companies in other industries such as Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG) (GOOGL) would be no match anyway. Except for Visa, no company in the world consistently manages to generate at least $50 in free cash flow for every $100 in revenue. In light of these considerations, this is the first reason why I think this company deserves to trade at higher multiples. If you want to become a shareholder in a company with impressive profitability margins, you have to pay more. Leadership In the global payment services market, Visa presents undisputed leadership. nilsonreport.com Considering the 2021 purchase volume in the U.S., Visa has a 62% market share with about $5.21 trillion. Mastercard is in second place with 26% and a purchase volume of $2.18 trillion. Visa and Mastercard combined have an 88% market share in U.S. purchase volumes, effectively demonstrating that their position can be associated with that of a duopoly. The global payments system has huge barriers to entry, which is why Visa's competitive advantage is very pronounced. To best explain this concept I think it is useful to give an example. Assume that company X wants to compete against Visa and places its own payment system within the market. What merchant would use a payment system without a track record of reliability and speed? What user would use this service if there were no merchants willing to accept it as a payment system? Creating a global network that can channel within it agreements with banks, merchants, companies, and a large customer base is extremely complex, especially when there are already companies offering a more than satisfactory service. In this market, trust is one of the most important aspects and cannot be obtained overnight. If you were the owner of a store, which payment system would you accept between Visa, a certainty in terms of quality and spread, and the one just created by company X? The answer is why I believe a company with such a competitive advantage should be traded at higher price multiples than the market. Growth potential Visa's future growth potential is quite high given that it is a leading company in its industry and with a market cap of $380 billion. In Q3 2022, there were signs of a slowdown from the growth achieved in Q3 2021, but it was overall a good quarter. One must take into consideration that the current macroeconomic scenario and last year's scenario are completely different. Visa Q3 2022 The payment volume of Q3 2022 increased by 8% compared to Q3 2021 in nominal terms and by 12% not considering the strengthening of the dollar. Visa Q3 2022 In addition, Q3 2022 net revenues achieved 19% growth over Q3 2021, a positive result considering the current recessionary context. The most promising segment is international transactions, which recorded a strong growth of 51%. From a long-term perspective, Visa is increasing its influence in key countries such as Brazil and especially India. Underlying Visa's steady growth is primarily the increasingly less frequent adoption of cash as a payment method. Developed countries are trying year after year to reduce the use of cash in favor of digital payments, both to encourage better payment efficiency and to combat tax evasion. There are still many countries that still favor cash, such as Italy, but the long-term trend is still toward a cashless society. On that note, we can look at this interesting graph below where we see the expected growth in cashless transactions through 2025. paymentscardsandmobile.com The total volume of cashless transactions is expected to reach $1.84 trillion, registering a CAGR of 18.60% in the 2020-2025 time frame. Companies like Visa can only benefit from this inevitable transition. As for Visa's FCF growth estimates, let's look at what analysts predict. stockforecast.com Analysts at Stock Forecast estimated Visa's free cash flow to be $33.35 billion by 2030, registering a 10.27% CAGR. Considering a shorter time frame instead, free cash flow of $24.23 billion is expected by 2026, registering a 12.46% CAGR. TIKR Terminal In contrast, analysts at TIKR Terminal estimated free cash flow of $24.63 billion by 2026, a 12.15% CAGR. In both cases the analysts still estimate double-digit annual growth for Visa, so there is still significant room for improvement.

Sep 27

The Trade Desk: Not Immune

Summary The Trade Desk hasn't seen its EPS estimates get downwards adjusted. This strikes me as odd. I believe that investors are being lulled into a false sense of safety. The whole ad tech has taken its medicine. I believe that The Trade Desk's Q4 guidance could deliver negative surprises to investors. In a time of 0% interest rates, this stock made a lot more sense. Bear market rallies are investors' number one enemy right now. Investment Thesis The Trade Desk (TTD) has not seen analysts downward revising their EPS estimates for Q4 and early 2023. Even though EPS estimates for its peers have already moved lower. TTD has been relatively immune to the bear market that has seen countless names fall substantially more than 50% from their highs. With this in mind, I don't believe that paying more than 40x EBITDA for TTD makes sense. Bear Market Rallies We are likely in the middle of a bear market. Along the way, there are going to be periods where stocks get oversold only to pull back and trap bulls. Stocks rarely move in a straight line, either up or down. There are vicissitudes along the way that trick investors that don't fully buy into the overarching narrative. The bear market rallies happen when stocks have moved too quickly into negative territory. For example, back in the 2000s, the Nasdaq (QQQ) had 7 bear market rallies that saw stocks jump 50%, even though the long-term trend was lower over a period of years. Those rallies are meant to erode investors' capital. Only when investors are sufficiently burnt to stop throwing good capital after bad, can the market stabilize. Looking Ahead, It's Going To Get Tough Moving on, I argue that Q4 is going to be tough for TTD, despite political spending percolating into its business. More importantly, as we look out to early 2023, there are a lot more questions than answers. Investors are going to navigate a period of substantial uncertainty. And even though TTD could well come out the other side with significant market share gains, I don't believe that today's investors will benefit. And I'll get to why momentarily, before that, let's address near-term earnings expectations. TTD Earnings Expectations Need To Come Down In the graphic below we can see several straight lines for TTD earnings expectations. TTD analysts' consensus earnings What this tells you is that earnings have not come down. In fact, what you can clearly see is that Q4 and Q1 2023 EPS estimates, light blue and lilac respectively, have actually come up slightly in the past several months. Consequently, I argue that the Street is widely off the mark here. Look no further than every other ad tech and advertising company in the public market. The market is the best leading indicator that you need to know that everything is not fine in the advertising sector. Concurrently, I think analysts are stuck with their unreasonable expectations! Consider a more widely followed name, such as Alphabet (GOOGL)(GOOG). GOOG analysts' consensus earnings And one may make the case that Alphabet is a more widely followed name, so there's a bigger cohort of analysts, which ultimately leads to better insights into EPS forecasts. And I would retort, precisely! Analysts are being too flat-footed to figure out that TTD isn't going to thrive in the coming quarters in my opinion, as much as analysts expect. Essentially, I believe that TTD is likely to deliver to investors a large negative surprise in its upcoming Q3 quarterly earnings season. Here's another point of reference, consider Digital Turbine (APPS). APPS analysts' consensus earnings And we can make the argument that Digital Turbine is no match for TTD. Perhaps it could be true that Digital Turbine's analysts are too bearish on its prospects. But the fact that there's been no adjustment at all on TTD's EPS quarterly estimates, doesn't this strike one as odd? As I look around I see countless advertising businesses referencing a lengthened sales cycle, as well as a slowing economy, and the impact of higher interest rates. But no adjustment for TTD? Seriously? Bull Case Too Far Stretched The reason why TTD has remained so resilient is that its EBITDA is so strong. Indeed, in a time where countless other businesses are only marginally EBITDA profitable, TTD stands tall.







Sep 27

Nvidia: Interesting Setup

Summary Semiconductor stocks at their lowest level in two years. Slowing demand in gaming to be offset by data center and automotive demand. Huge buybacks and a small dividend boosting shareholder value. EPS growth to resume in 2023, though we would love to see operating expenses be better controlled. There is no perfect time to buy but we are nearing the levels that are appropriate to scale in again. NVIDIA Corporation (NVDA) is a semiconductor stock and one that we have started buying in the recent onslaught of weakness. We really like how the situation is starting to set up for an investment. Sure, there is always going to be spiking and waning demand, and there will always be shortages and gluts of certain chips. Perhaps we are coming into a glut, as many question whether the Federal Reserve's actions to rein in inflation will have catastrophic impacts on the consumer and businesses alike, and subsequently the demand for chips in computers, vehicles, and as well as data center demand. It all remains to be seen. The market is pricing in disaster and has sent semiconductor stocks to their lowest level in two years. We argue that demand is far less cyclical than in years past, because chips are in everything. NVIDIA stock had truly been a winner up until 2022. It became a stock that just continued to get beaten on. Now, after hundreds of points of declines, the stock is actually rather reasonably value for the growth of the company. While macro demand may ebb and flow, and NVIDIA might be coming into a slower few quarters, we think you need to buy into the weakness to position yourself to take advantage of the turnaround in markets. We expect a few more weeks of pain, and suspect that CPI inflation data will be a main catalyst higher or lower for markets. Once the Fed is done hiking, markets will rally, even if the economy is feeling the worst of it. The market is a forward indicator, and we like the setup for this stock to rally hard. Semiconductor stocks have been crushed. We think they emerge as leaders in a rebound. As the stock gets closer and closer to $100, the more bullish we become for value, and eventual returns to growth in a few quarters. Position ahead of this, and start scaling in. Even with all of the talk of how demand is gone, the most recent earnings were indeed quite strong. However, it is our recommendation that after this most recent earnings report (which was still decent all things considered) and the huge declines in the last few months, that you take start scaling back in. If you have lost your shirt, we recommend you consider averaging down here at the present valuations, even if we expect the extreme growth to stall somewhat. Look. You can sit there and wait for a true reversal and try to ride some momentum higher. That works for trading certainly, especially. But we think that the stock is at levels worth investing in. Yes, business likely slows some in coming months. Everyone agrees the landscape is poor. But remember, the market will start moving this names up well before the actual improvements are felt. The same can be said about how the stock has fallen all year. The market brought the stock down well before performance slowed. That is how it works. Once you understand this, you will improve your investing game dramatically. While the stock was expensive before, it has seen its valuation drop tremendously. It is not quite a value stock, but given the growth that will still be offered the next few years, it is trading at bargain levels. We like buying sub $125, but especially as we get closer to $100. The company may not be firing on all cylinders, but is firing on most. The stock has garnered a lot of attention from bears as a short target and they have been correct. But investors will be rewarded here. You cannot buy all at once, that is a mistake. Scale in. Why? Long-term, fundamentally, NVIDIA's chips are being used in technologies that are in our everyday lives, and the demand historically has really never been higher. While the company is demonstrating growth, a significant pullback has occurred knocking down the valuation as the market now expects intermediate-term low to moderate growth. NVIDIA has been around a long time. We have been trading this one for a long time, long and short. We have a core position that we trade around as well. and one that we just started buying aggressively in and will do so even if the market does fall another 10% which is not impossible. Scale in. Cheap relative to five-year averages NVIDIA has fallen hard many times from strong peaks. In fact in 2002, 2007-08, and 2018, we saw massive corrections of more than 50% in some cases. Well, here we are again, and we like the setup. The stock will come back. The company is a winner. Performance is still strong. Just because the stock has fallen so hard does not mean the company is a failure. While the stock is not "cheap" on a relative basis, considering the growth, the valuation is now in our opinion attractive: NVDA selected valuation metrics (Seeking Alpha) While Seeking Alpha Premium's ranking system gives the overall valuation poor letter grades, this is compared to all stocks in the information technology sector. What we want you to hone in on here is the current valuation metrics relative to the 5-year averages for this power house chipmaker. The far right column of the image above tells the story. NVDA stock is now trading largely well below 5-year averages. This means to us that a mean reversion is in the cards when the market starts to bid this up in anticipation of better days ahead. We like scaling in now. Growth metrics remain strong in many respects Sure, compared to sector averages, or even to other lower growth semiconductors, every valuation metric is stretched. But with the growth the company is seeing, it may justify where we are now. While there is growth on display, the valuation declines suggest growth will stall. Growth is slowing some, but is not going to stall in our opinion. The growth is solid. NVDA growth metrics (Seeking Alpha) The growth is impressive. With 22% EPS growth forecasted, we think it justifies trading at 30x FWD EPS, especially in the short term. Sales growth will continue, the levered free cash flow growth is incredible, as we believe as you build a position on the way down, valuation will improve, and be more reflective of the near-term growth. Like every chip cycle, eventually, supply and demand will normalize, pricing will stabilize, and the stock will retrace much higher. It is all but guaranteed as NVIDIA's tech being used in many areas of our lives. Performance remains strong, even if there are some declines in the pace of growth. The company brought in revenue of $6.7 billion, up 3% from a year earlier but down 19% from the sequential quarter. There is some slowing for sure. The results were pretty much in line with consensus expectations, but for a stock with rich valuations, this is considered disappointing. Disappointment with some silver linings But was it all disappointing? Look the company is navigating supply chain changes and operating in a challenging macro environment, but still delivered some strong subsets of results. There is some slowing but still good performance in Gaming, Data Center and Professional Visualization market platforms. But a lot of this slowing is for preparation for new NVIDIA products, as well as some expected cycle demand declines. One of the biggest drivers of the stock and the company's growth has been the AI tech. Demand for NVIDIA AI remains strong and is being scaled to the cloud. NVIDIA now has over 25,000 companies on board. Data center revenue was also up 61% from last year. Margins dipped and operating expenses are high: Earnings metrics (NVIDIA Press Release) As you can see, the slowdown in performance in some of these categories is certainly disappointing. However, this is why the stock has been falling. The market predicted a downturn, and that is coming to fruition. We think the stock becomes a buy on valuation as we approach $100. We also think the company will take action to address margins and operation expenses. Professional Visualization revenue was down 4% from a year ago and down 20% sequentially. Automotive revenue was up 45% from a year ago and up 59% sequentially.

Sep 26

Broadcom: Impressive

Summary Broadcom is posting strong sequential growth and is able to maintain margins, while its peers are facing real turmoil. This strength is welcomed with the upcoming VMware deal set to close next year. Valuations look reasonable, although the same strong operational performance has turned shares into a relative strong share outperformer. In May of this year, I concluded that VMware (VMW) was the next target in the ambitions of Broadcom (AVGO) as the company announced a huge $69 billion deal for its latest target. That deal raised some questions given the suboptimal earnings of VMWare, although I am the first to acknowledge the strong dealmaking track record of Broadcom. Historical Perspective Ahead of the VMware deal, it has been all the way back to 2018 since I last covered Broadcom which at the time acquired CA in a near $20 billion deal. That deal which was set to diversify the business with an unrelated business, was ill-received by investors in 2018, with shares falling to $230 in a rather aggressive move. That large deal was set to create a very profitable and large business, reporting pro forma sales around $24 billion and EBITDA margins near 50% as leverage was coming in at 2.5 times EBITDA. With adjusted earnings trending round $20 per share, and these earnings coming in at $17 per share, if we exclude stock-based compensation expenses, valuations were non-demanding. After all, a 13-14 times realistic adjusted earnings number looked very reasonable, with leverage supported by strong earnings power. The company delivered and ahead of the pandemic shares had already rallied to the $300 mark, to trade around the $400 mark by the end of that year, as shares rallied to a high of $677 per share by the end of 2021. Ever since, shares have lost ground and are down $200 to $470 at the moment in time. While this is a significant pullback, it actually marks a dramatic outperformance versus many technology and semiconductor names. Some Recent Numbers In December of last year, the company posted its fiscal 2021 results. Revenues at $27.5 billion came in mostly above the $24 billion pro forma revenue number since the CA deal was announced in 2018. The real performance has been seen in the margins as EBITDA was posted at $16.6 billion, translating into adjusted earnings of $12.6 billion, or $10.9 billion if we back out stock-based compensation expenses. This worked down to a realistic adjusted earnings number around $24 per share. This translates into higher valuation at a multiple in the high twenties as momentum continued with first quarter sales coming in at $7.7 billion on which $4.8 billion in EBITDA was posted, as the company guided for second quarter revenues to rise further to $7.9 billion. Of course, we have seen at the announcement of the VMware deal in the meantime, as the $69 billion deal would be half paid for in cash (thus debt) and half in equity, adding nearly $13 billion in sales. Pro forma sales would jump from $27 billion to $40 billion, as a $4.7 billion EBITDA contribution would boost pro forma EBITDA to $25 billion. This kind of profitability was badly needed as net debt of $30 billion would jump to roughly $70 billion, pushing up leverage to nearly 3 times. Fortunately, the core business was on fire with second quarter sales posted at $8.1 billion on which $5.1 billion in EBITDA was posted, with further gains seen in the third quarter in which sales are seen at $8.4 billion. This strong relative performance comes as the company has a relative small exposure to IT hardware, a segment hurt in this environment, as the company has a lot more traditional customers in this space, apparently not so much affected as other semiconductor names here. With earnings power coming in above $30 per share ahead of the VMware deal, there were many moving targets. The profitability of the own business was sound and leverage was low, as the VMware deal would add a lot of leverage with little immediate earnings power to show for, albeit that the company expected large synergies down the road. At $550 in May, I found that $32 in earnings power would translate into a 17 times earnings multiple, which looked very reasonable, albeit that synergies would need to be delivered upon, as debt was substantial. What Now? Since May, shares have lost some ground, having fallen from $550 to $468 here, pushing down valuations a bit more. Little news was seen on the corporate front other than the release of the third quarter results in September. Sales were up a healthy 25% to $8.46 billion at a time when many technology and semiconductor peers were posting sales declines. Adjusted EBITDA rose in a spectacular fashion to $5.38 billion as well, as both sales and earnings came in ahead of the guidance issued at the second quarter earnings release. Net debt was posted at $29.4 billion, pretty stable from the second quarter as the deal with VMware is of course still not closed, an event set to happen in 2023 if all goes well on the regulatory front. Comforting and actually intriguing is that there are no signs of momentum cooling down as the company guided for fourth quarter revenues around $8.9 billion on which EBITDA margins of 63% are seen, with margins in line with the third quarter report.







Sep 26

Qualcomm: My Top Metaverse Pick

Summary I am very bullish on QUALCOMM, as I believe the company is poised to benefit from metaverse-related structural trends. QUALCOMM's Snapdragon technology powers most, and the best, AR/VR devices including Meta's Oculus Quest. QUALCOMM enjoys similar growth rates and profit margins as NVIDIA while trading at multiples of Intel. Personally, I see more than a 30% upside for QUALCOMM stock. My target price is $157.34/share. Thesis I am very bullish on QUALCOMM (QCOM), as I believe the company is poised to benefit from metaverse-related structural trends. Notably, it is estimated that VR/AR technology could grow at a 40% CAGR through 2030. And QUALCOMM's Snapdragon is the leading chipset in this industry. QUALCOMM stock is down about 35% year to date, versus a loss of approximately 23% for the S&P 500 (SPX). This, in my opinion, is a secular dip-buying opportunity for long-term focused investors. Seeking Alpha Personally, I see more than 30% upside for QUALCOMM stock. I anchor my thesis on a residual earnings model, which calculates a fair implied share price of $157.34/share. About QUALCOMM QUALCOMM is a US-based leading semiconductor company. The company researches, designs and commercializes chip technologies with a focus on the wireless industry. QUALCOMM operates three key segments: Qualcomm CDMA Technologies; Qualcomm Technology Licensing; and Qualcomm Strategic Initiatives. The Qualcomm CDMA Technologies segment provides technology for the wireless communication, networking, application processing and multimedia industry (reference 5G) and accounts for about 85% of the company's revenues. The Qualcomm Technology Licensing segment sells licenses and other usage rights for QUALCOMM's intellectual property portfolio and accounts for about 15% of sales. Finally, Qualcomm Strategic Initiatives segment is the company's investment arm and provides funding to new technologies, including 5G, artificial intelligence, automotive, consumer, enterprise, cloud, and IoT. QCOM June Quarter presentation Leading Into The Metaverse While QUALCOMM for a long time has been known primarily as a chip designer for the smartphone industry, the company is now rapidly diversifying into new high-potential verticals - most notably the metaverse. To put thing into perspective, McKinsey has estimated the annual market size of metaverse economy at $5 trillion by 2030. Citigroup (C) even said that $13 trillion by 2030 could be reasonable. Without a doubt, low latency data communication will be a key cornerstone for the metaverse. And as of 2022, QUALCOMM's CDMA Technologies segment is leading the wireless communication and networking chipset technology, which could be leveraged for broader metaverse experiences. Moreover, QUALCOMM's Snapdragon technology powers most, if not all, AR/VR devices, including Meta's (META) Oculus Quest. A few weeks ago, QUALCOMM and Meta Platforms have announced a strategic partnership that will likely further strengthen QUALCOMM's leading metaverse chip technology. QUALCOMM expects that the Snapdragon technology will grow at a 15% CAGR through 2024. But instead of slowing down afterwards, revenues could accelerate, as XR device adoption finds broader acceptance in the global economy and society. QCOM Investor Presentation Exceptional Financials With regards to financials, QUALCOMM can play in the same league as the US's leading tech businesses, including the FAANGs, both with regard to revenue expansion and business profitability. Notably, QUALCOMM's revenues jumped from about $22.6 billion in 2018 to $42.1 billion in 2022 (TTM reference), which implies a topline CAGR of about 18%. Over the same period, operating income jumped from $3.8 to $15.1 billion, a compounded annual growth rate of 44% respectively. For the trailing twelve months, QUALCOMM has claimed a gross profit margin of 58%, which is about 16% above the sector median of 50%. QUALCOMM's operating income margin (EBIT, TTM reference) is 45.8%, versus 7.4% for the sector median (382% premium). Seeking Alpha Finally, I would like to highlight that QUALCOMM's balance sheet is very strong. As of June 30, the company had $6.8 billion of cash and cash equivalents versus total debt of $15.5 billion. Target Price Estimation To estimate a stock's fair implied share price, I am a great fan of applying the residual earnings model, which anchors on the idea that a valuation should equal a business' discounted future earnings after capital charge. As per the CFA Institute: Conceptually, residual income is net income less a charge (deduction) for common shareholders' opportunity cost in generating net income. It is the residual or remaining income after considering the costs of all of a company's capital.

Sep 25

Arista: Valuation Is The Main Issue

Summary Shares of Arista have remained buoyant relative to other tech stocks this year, thanks to its strong results. In its most recent quarter, Arista saw 49% y/y revenue growth, driven by strong performance in its cloud titans vertical. Irregular spending patterns, however, could mean that Q2 saw a pull-in of revenue from future quarters. Arista trades at a ~24x forward P/E multiple, which stands out as quite rich in the current market. The market has hit year-to-date lows. Interest rate spikes and fears of a global recession have put investors on edge and into "risk-off" mode; but now is a great time for intrepid investors to be bargain-hunting. Conversely, there are many stocks in the growth/tech sector that have performed relatively well this year that should be considered for a rotation out of the portfolio on account of rising relative valuations. Arista Networks (ANET) sits in this bucket. This networking hardware company, one of the main rivals to legacy incumbent Cisco (CSCO), has held up much better relative to tech peers this year. Down only roughly 20% year to date, Arista has enjoyed relatively strong fundamental performance during a time that many companies have reported slowing enterprise spend trends. Data by YCharts I'd advise caution on Arista, however. While I agree that the company retains a best-in-class product portfolio that continues to grow rapidly and take share from Cisco every quarter, and that Arista's 60%+ pro forma gross margins mark the company as a rarity among hardware vendors, there are a number of downside factors that investors should consider. The first is valuation. At current share prices near $110, Arista already trades at a 24.0x forward P/E ratio relative to Wall Street's FY23 EPS consensus of $4.59 (which, by the way, represents 14% y/y earnings growth. That's not bad, but that strength is already factored into a mid-20s P/E multiple). Right now, many stocks are trading incredibly cheaply - I'd advise investors to look carefully at the small/mid-cap software sector for many high-quality names that are trading at multi-year lows and historic low valuations. Some names I particularly like right now include Okta (OKTA), Palantir (PLTR), and Coupa (COUP). The second is - how much of Arista's current growth momentum is sustainable? Yes, Arista saw impressive 49% y/y revenue growth in Q2 (which we'll discuss in more detail in the next section), both beating Wall Street's expectations by a wide mile and accelerating sharply over Q1. But with hardware, business is lumpy. Especially because Arista relies on a core set of high-spending "cloud titan" customers, one quarter of strong revenue may mean the order book may be thinner in future quarters. We note as well that Arista completed a number of tuck-in acquisitions in Q2 without disclosing organic growth, so there's some amount of inorganic lift being factored in. All in all, I don't doubt that Arista remains a solid company with a share-gaining product, rich margins, and expanding earnings - but with the stock market at YTD lows, there are just far better bargains to be had than Arista. Keep adopting a "watch and wait" stance here. I'd buy Arista in a heartbeat if its P/E multiple sank to 18x FY23 EPS, implying a price target of $83 (25% downside from current levels). Until Arista starts sinking downward again, stay on the sidelines. Q2 download Let's now go through Arista's latest Q2 results in greater detail. The Q2 earnings summary is shown below: Arista Q2 results (Arista Q2 earnings release) Arista's revenue in the second quarter grew 49% y/y to $1.05 billion. This was the first time that the company crossed the $1 billion revenue mark in a single quarter, and it beat Wall Street's expectations of $980.0 million (+39% y/y) by a significant ten-point margin. Revenue growth also accelerated from 39% y/y growth in Q1. The company noted that strong purchases from cloud titans remained the key driver in Q2 results. Anshul Sadana, the company's COO, gave the following commentary during the Q2 earnings call on the company's deepening relationships with its two main customers, Microsoft (MSFT) and Meta (META), who are each expected to contribute more than 10% to this year's revenue: As we disclosed in previous calls, Microsoft and Meta are very special customers and expected to each be over 10% of our revenue for the full year. At Microsoft, we are deployed in all layers of their network, from the leaf switches at the top of rack to data center spine and regional spine to WAN and cloud edge layers across the globe. We have partnered together to create the DCI layer with encryption and long-reach pluggable optics, which has now become a gold standard in the industry. Microsoft deploys our products, both with SONiC and EOS, and the engineering partnership to codevelop the next-gen network is stronger than ever. Our newer 400-gig products are deployed in production, and we continue to receive very positive feedback about our quality and execution and continue to be the preferred supplier for Azure. We have also had a strong partnership with Meta and have been involved with their network design since the early days. We have codeveloped multiple generations of products with them, including the latest 25.6-terabit 7388 platform with unmatched power efficiency and time-to-market advantages. We have deployed in their colorful cluster fabrics with parallel planes. We’ve also deployed in several use cases, including Meta’s backbone layers, where there is a constant need for higher-speed networks."