How Much Upside Is Left in NVIDIA (NVDA)?

Posted on by The INO.com Team

Semiconductor powerhouse NVIDIA Corporation (NVDA) delivered extraordinary quarterly figures last month, surpassing its revenue guidance and analysts’ projections. The firm’s revenues tripled to $18.12 billion, and net income soared 13.6 times to $9.24 billion. Its non-GAAP EPS of $4.02 comfortably exceeded estimates, registering a 6.9x year-over-year surge.

Due to an early commitment to AI, NVDA has positioned itself as an undisputed market leader in the AI semiconductor industry. It has effectively positioned the company years ahead of its competitors, offering an all-encompassing platform that represents a holistic solution for all AI demands, from chips and processors to intricate software systems.

In its latest earnings cycle, NVDA’s persistent dominance in the AI chips marketplace was notable, demonstrated by Data Center revenues increasing 278.7% year-on-year to $14.51 billion. The company maintained robust non-GAAP gross margins at 75%, resulting in a 380 basis points rise quarter-over-quarter.

Amid mounting competition from rivals boosting their AI capabilities, NVDA owns a remarkable 80% share of the AI chip market. The company's foresight to invest heavily in AI innovation years ahead of others now positions the company to capitalize on the industry’s exponential growth.

Furthermore, NVIDIA continues to spark innovations in the competitive AI scene, as evidenced by the development of GH200, the next iteration of Grace Hopper Superchip. Notably, the Santa Clara-based chipmaker also reported significant growth in the networking business, bolstered by advancements in InfiniBand technology.

Given the exceptional third-quarter performance, there is little surprise over Wall Street's widespread upward revision in the revenue and EPS estimates. Analysts expect NVDA’s EPS for the fiscal year ending January 2025 to reach as high as $19.72 from the $12.30 expected in fiscal 2024 (ending January 2024).

For the fiscal year ending January 2024, NVDA’s revenue is expected to reach $58.86 billion, up 118.2% year-over-year, while for the fiscal year 2025, analysts expect its revenue to reach $89.70 billion. For the fourth quarter, the company expects its revenue to be $20 billion, plus or minus 2%.

NVDA responded to all the widespread speculation regarding its potential to deliver impressive results, prompting analysts to revise their already lofty price targets upward. Goldman Sachs’ analyst Toshiya Hari increased the price target to $625 due to robust demand and an improving chip supply chain.

JPMorgan’s analyst Harlan Sur hiked the target to $650, citing the “massive demand pull” for NVDA’s data center products, while Morgan Stanley’s Joseph Moore forecasts a price target of $603 due to anticipated reduced supply chain lead times next year.

Bank of America and Bernstein analysts upgraded their price expectation to $700 because of the expected rise in AI adoption, which they believe will counterbalance regulatory challenges associated with China. Wall Street analysts expect the stock to reach $661 in the next 12 months, indicating a potential upside of 42%. The price target ranges from a low of $560 to a high of $1,100.

Nevertheless, after earnings and optimistic projections were released, NVDA stock experienced a dip, correlating with a moderate rise in market skepticism. This downward movement can be attributed to concerns about the company’s sustained dominance amid challenges like the potential impact of President Joe Biden’s administration's advancement of a chip export ban to China. Management indicated that this policy decision could have detrimental effects on NVDA.

The U.S. chipmaker faces a risk of a setback worth $5 billion due to the export ban. These orders were placed for 2024 by leading Chinese tech giants, including Alibaba, ByteDance, and Baidu. If the U.S. government fails to issue the necessary delivery licenses, NVDA may have to forgo these lucrative contracts.

Moreover, there are broader concerns about the extent to which speculative investment can continue to propel NVDA stock. With a year-to-date gain of more than 218%, NVDA easily takes the lead as the most aggressive-performing stock in the S&P 500.

Bottom Line

NVDA secured a distinguished position in the $1 trillion club this year following an impressive surge in its revenue guidance, mainly due to the substantial order volume from the burgeoning generative AI industry. This achievement is particularly noteworthy given the company's size.

The substantial rise in the company's valuation is primarily attributed to significant interest in NVIDIA's advanced chip technology, which is currently experiencing increased demand because of a mounting focus on AI and ML capabilities across various sectors.

Despite a slump in its price, the trading volume of NVIDIA's shares skyrocketed to 86 million on November 21, compared to a daily average of 26 million, indicating a heightened interest in the stock.

Investors are unlikely to buy the stock solely for its $0.04 per share quarterly dividend, particularly given that the stock recently surpassed the $500 benchmark and currently trades at over $450 per share. Thus, it can be reasoned that investors acquiring the stock at these elevated levels assume the stock has further upsides left.

Undeniably, NVDA's robust growth is commendable, and management continues to uphold a confident picture of the company's future. However, the firm is not without risk. For instance, questions arise over the impact the AI bubble pop could have on chip prices and, consequently, profit margins.

Moreover, with NVDA's shares trading at 19.5x sales and 38x earnings, any stumble can impact the stock significantly. Considering the current market volatility, associated headwinds, and lackluster price momentum, it may be prudent to wait for a better entry point in the stock.

AVGO Stock: Crisis or Major Chip Investment?

Posted on by The INO.com Team

Broadcom Inc. (AVGO), a leading semiconductor and infrastructure software company, recently completed its acquisition of VMware, Inc., a provider of multi-cloud services, for $69 billion. This acquisition, first announced in May last year, formally closed on November 22, 2023. The deal received regulatory clearance from various countries, including the U.S., United Kingdom, and China.

Hock Tan, President and CEO of Broadcom, said, “We are excited to welcome VMware to Broadcom and bring together our engineering-first, innovation-centric teams as we take another important step forward in building the world's leading infrastructure technology company.”

“With a shared focus on customer success, together we are well positioned to enable global enterprises to embrace private and hybrid cloud environments, making them more secure and resilient. Broadcom has a long track record of investing in the businesses we acquire to drive sustainable growth, and that will continue with VMware for the benefit of the stakeholders we serve,” he added.

AVGO’s main focus is to allow enterprise customers to create and modernize their private and hybrid cloud environments. As a result, the company will invest in VMware Cloud Foundation, the software stack that serves as the foundation of private and hybrid clouds.

In addition to Broadcom’s investment in VMware Cloud Foundation, VMware will provide a list of services to modernize and optimize cloud and edge environments like VMware Tanzu to help accelerate the deployment of applications, Application Networking (Load Balancing) and Advanced Security services, and VMware Software-Defined Edge for Telco and enterprise edges.

Wall Street analysts believe AVGO’s stock will increase following the VMware acquisition.

On December 4, Oppenheimer analyst Rick Schafer presented a positive outlook for Broadcom by maintaining an Outperform rating and revising his price target to $1,100.

Also, on November 24, KeyBanc Capital Markets analyst John Vinh raised his price target on AVGO by 20% from $1,000 to $1,200. Also, the analyst maintained his “Strong Buy” rating on the stock. In a note to clients, Vinh expects the acquisition to be immediately accretive to the company’s earnings and gross margin.

John Vinh commented that KeyBanc is “constructive on the acquisition because it is highly complementary to Broadcom’s infrastructure and semiconductor franchises.”

Further, according to Evercore ASI analyst Matthew Prisco, Broadcom’s software sales will increase to nearly 40% of its total revenue in the first year after the acquisition closes. Prisco rated AVGO’s stock as Outperform with a price target of $1,050.

Shares of AVGO have gained more than 15% over the past six months and nearly 66% year-to-date. Also, the stock has surged approximately 74% over the past year.

Now, let’s discuss some of the factors that could impact AVGO’s performance in the near term:

Solid Financial Performance in the Last Reported Quarter

For the third quarter that ended July 30, 2023, AVGO reported net revenue of $8.88 billion, beating analysts’ estimate of $8.86 billion. This compared to net revenue of $8.46 billion in the same quarter of 2022. Its non-GAAP gross margin grew 3.7% year-over-year to $6.67 billion.

Broadcom’s non-GAAP operating income came in at $5.54 billion, an increase of 6.5% from the prior year’s quarter. Its adjusted EBITDA rose 7.9% from the year-ago value to $5.80 billion. The company’s non-GAAP net income rose 8.4% year-over-year to $4.60 billion. It posted non-GAAP net income per share of $10.54, compared to the consensus estimate of $10.43.

Furthermore, net cash provided by operating activities increased 6.7% year-over-year to $4.72 billion. AVGO’s free cash flow stood at $4.60 billion, up 6.7% from the same period last year.

Upbeat Fiscal 2023 Fourth-Quarter Guidance

“Broadcom’s third quarter results were driven by demand for next generation networking technologies as hyperscale customers scale out and network their AI clusters within data centers,” said CEO Hock Tan. “Our fourth quarter outlook projects year-over-year growth, reflecting continued leadership in networking for generative AI.”

After solid third-quarter earnings and confidence in continued business progress, AVGO expressed an optimistic view on the fiscal 2023 fourth quarter ended October 29, 2023. The company expects its fourth-quarter revenue to be nearly $9.27 billion, an increase of around 4% from the previous year’s period. AVGO’s adjusted EBITDA is expected to be approximately 65% of projected revenue.

“We generated $4.6 billion in free cash flow in the third quarter, and expect cash flows to remain solid for Q4,” said Kirsten Spears, CFO of Broadcom.

Impressive Historical Growth

Over the past three years, AVGO’s revenue and EBITDA grew at CAGRs of 15.2% and 24.7%, respectively. The company’s EBIT improved at a CAGR of 61.4% over the same period. Moreover, its net income and EPS increased at CAGRs of 77.6% and 83.2% over the same timeframe, respectively.

Also, the company’s levered free cash flow grew at a 6.9% CAGR over the same period.

Positive Recent Developments

On November 30, AVGO introduced the industry’s first switch with an on-chip neutral network, NetGNT (Networking General-purpose Neutral-network Traffic-analyzer), in its new, software-programmable Trident 5-X12 chip. The new Trident 5-X12 will double bandwidth, reduce power by 25%, and add a neutral network to enable next-generation telemetry, security, and traffic engineering.

 On October 17, Broadcom announced the availability of Qumran3D, the next-gen of the StrataDNX family of single-chip routers. Qumran3D will accelerate the transition to merchant silicon routers by considerably reducing carrier and cloud operator TCO with unprecedented scale.

This new single-chip router will raise the bar for carrier and cloud operator solutions by delivering high-performance, low-power, and security-rich networking. It will meet growing bandwidth and security demands faced by service providers amid increased AI, mobile edge, and other high data deployments.

Also, on September 26, AVGO’s division, Symantec, partnered with Google Cloud to embed generative AI into the Symantec Security platform in a phased rollout that will provide customers a technical edge for detecting, understanding, and remediating sophisticated cyberattacks.

“Our partnership with Google Cloud is part of that continuing journey to put the most innovative security solutions possible into user hands. Our engineers have simplified the process in ways that will enable customers to be much more productive and effective. This is just the beginning of a great collaboration that will help to kickstart the benefits of AI throughout the broader security ecosystem,” said Adam Bromwich, CTO and Head of Engineering, Symantec Enterprise Division, Broadcom.

Broadcom’s Commitment To AI

On October 10, AVGO showcased its vision for AI acceleration and democratization at the 2023 Open Compute Project Global Summit. The company’s commitment to unleashing the AI potential at scale is achieved through a combination of ubiquitous AI connectivity, innovative silicon, and open standards.

This also reflects Broadcom’s commitment to its standardization work toward an open hardware ecosystem for AI workloads.

“Today, AI is pushing technology to its boundaries. Broadcom is focused on innovating to interconnect the key components of an open AI platform within the data center. Our goal is to partner with hyperscalers and enterprise OEMs to build leading-edge AI products and solutions,” said Charlie Kawwas, Ph. D., President, Semiconductor Solutions Group, Broadcom.

AGVO will witness growing demand for its products from companies developing AI capabilities. As per a report by Bloomberg Intelligence (BI), the generative AI market is expected to reach $1.30 trillion over the next ten years from a market size of just $40 billion in 2022, expanding at a CAGR of 42%.

Favorable Analyst Estimates

Analysts expect AVGO’s revenue for the fourth quarter (ended October 2023) to grow 3.9% year-over-year to $9.28 billion. The consensus EPS estimate of $10.96 for the same period indicates a 4.9% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects AVGO’s revenue and EPS to grow 7.8% and 11.7% year-over-year to $35.80 billion and $42.03, respectively. In addition, the company’s revenue and EPS for the fiscal year 2024 are expected to increase 22.7% and 46.2% from the previous year to $52.33 billion and $45.49, respectively.

Attractive Dividend

AVGO pays an annual dividend of $18.40, which translates to a yield of 1.98% at the current share price. Its four-year average dividend yield is 3.04%. Also, the company’s dividend payouts have increased at a CAGR of 21.3% over the past five years. Broadcom has raised its dividends for 12 consecutive years.

Robust Profitability

AVGO’s trailing-12-month gross profit margin of 74.27% is 52.6% higher than the 48.67% industry average. The stock’s trailing-12-month EBIT margin of 45.7% is 874.3% higher than the 4.69% industry average. Likewise, its trailing-12-month net income margin of 39.25% is significantly higher than the 2.20% industry average.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 64.57%, 16.63%, and 19.44% are considerably higher than the industry averages of 1.01%, 2.60%, and 0.26%, respectively. Its trailing-12-month levered FCF margin of 38.97% is 375.16% higher than the industry average of 8.20%.

Bottom Line

Broadcom surpassed analyst estimates on the top and bottom lines in the last reported quarter. The company’s outstanding third-quarter performance was driven by robust demand for next generation networking technologies.

In addition, AVGO’s long-term outlook appears promising, propelled by continued leadership in networking for generative AI, strategic investments, and partnerships. Recently, the chipmaker completed its acquisition of VMware, enabling it to accelerate its adoption of cloud technologies. AVGO’s stock has surged more than 65% year-to-date on the back of the VMware deal closing and AI wave.

Given its solid financials, high profitability, and rosy growth prospects, it could be wise to invest in AVGO now.

Is Vail Resorts (MTN) a Massive Earnings Buy During the Holiday Season?

Posted on by The INO.com Team

The popularity of snow sports like skiing and snowboarding has significantly increased in recent years. This trend is poised to continue following last year's record-breaking snowfall and several expansions at multiple resorts this holiday season. With the advent of the winter, ski resorts across the state are churning out snow and preparing for the forthcoming 2023-24 holiday season.

Vail Resorts, Inc. (MTN), owning and operating 41 high-end resorts worldwide, has forged a robust foothold in the ski industry bolstered by its strategic locations and superior guest offerings. MTN demonstrates its substantial corporate strength with a market cap of $8.44 billion, thereby solidifying its stature within the buoyant business landscape.

The company is set to unveil the financial results for its fiscal first quarter 2024, which ended on October 31, 2023, after market close on Thursday, December 7, 2023. Analysts expect MTN’s revenue to decline 2.4% year-over-year to $272.89 million, while its EPS is projected to remain in the red at $4.63, plunging 36.2% year-over-year.

However, the fiscal 2024 forecast presented by MTN has seemingly piqued investor curiosity. The firm anticipates “meaningful growth” for the period, with a robust Resort EBITDA margin. Net income attributable to MTN is estimated to be between $316 million and $394 million, with Resort Reported EBITDA for fiscal 2024 between $912 million and $968 million.

Moving forward, several dynamic factors are poised to impact MTN's operational performance in the foreseeable future, requiring closer attention and analysis.

MTN agreed to acquire Switzerland's Crans-Montana Mountain Resort, marking its 42nd ski location and extending its global operations. This move is seen as the company's latest effort to increase its international appeal by boasting various outdoor activities complemented by breathtaking alpine views. The Crans-Montana deal signifies MTN's second Swiss ski acquisition within two years, having procured the Andermatt-Sedrun resort in 2022.

The new business deal demonstrates an 84% stake in the resort's lift operations and 80% ownership in a key ski school associated with the site, thus portraying the company's influential global reach and enhancing the allure of Crans-Montana Mountain Resort.

Cementing its dominance, MTN places the transaction value at CHF 118.5 million, signifying substantial potential for growth. Although immediate revenue generation from the acquisition is not expected, projections suggest that Crans-Montana will contribute approximately CHF 5 million EBITDA in its fiscal year ending July 31, 2025, marking its debut full year following the scheduled completion later in fiscal 2024.

MTN projects long-term EBITDA growth from the Alpine resort's incorporation into MTN’s Epic Pass offerings, synergies within the company's broader network, and investments geared toward enhancing guest experiences.

In line with its unwavering commitment to delivering superior guest experiences, the company has announced plans to roll out cutting-edge technology at its U.S.-based resorts for the 2023-24 ski season. The company places significant emphasis on bolstering offerings at its resorts, including the ongoing efforts to expand capacity through initiatives focused on lift facilities, ski terrain, technological advancements, and food and beverage options.

MTN closed its fiscal year on a subdued note. In the fiscal fourth quarter that ended July 31, 2023, its total net revenue stood at $269.77 million, up about 1% year-over-year, with the resort's net revenue reaching $269.67 million. Its loss from operations widened 63.2% year-over-year to $160.10 million.

Net loss attributable to MTN surged to 128.57 million, or $3.35 per share. These statistics are not unexpected, considering the large concentration of MTN's assets in the Northern Hemisphere, which experiences the summer season during the company's fiscal fourth quarter.

Diminished demand for mountain travel destinations and weather-related operational disruptions significantly affected the company's performance. Moreover, the ancillary business's underperformance and inflating costs further contributed to the decline.

Even though its revenue surged by an impressive 14.4% annually for the full year, expanding expenses have negatively impacted bottom-line figures.

As of July 31, 2023, its net debt increased to $2.26 billion, which was 2.7 times trailing-12-months total reported EBITDA. Considering the high-interest rate environment, the obligation of interest payments may significantly strain the company's financial health. With the company's EBITDA persistently trailing downward, managing such immense debt could be as challenging as delivering a hot soup on a unicycle.

MTN’s annualized dividend rate of $8.24 per share translates to a dividend yield of 3.72% on the current share price. Its four-year average yield is 2.07%. Its dividend payments have grown at CAGRs of 32% and 8.2% over the past three and five years, respectively.

Moreover, the stock has lost about 18% over the past three years and is trading below the 100- and 200-day moving averages. The stock could potentially rally amid favorable weather for the ski resort. Nevertheless, looming uncertainties are yet to be mitigated.

Investors may have to weigh their options carefully. Would it be prudent to embrace the risk for a dividend yield of 3.72% when the seemingly "risk-free" one-year US Treasury bonds offer a yield of over 5%?

Bottom Line

The post-pandemic travel surge is expected to maintain momentum through the upcoming holiday season. Driven by an amplified desire for relaxation and leisure activities, more and more American holidaymakers are drawing up travel plans.

Despite this positive trend, consumers and the tourism industry face price pressures as hotel rates climb an additional 0.8% higher in October than in 2022.

Today’s skiing culture exudes luxury, apparent through upscale shopping and gourmet dining experiences at the base of pristine, well-maintained slopes. Resort launches understandably hinge on financial backing and weather conditions beyond our control.

However, not even inflation and shifting climate can hinder the expansion of ski resorts or deter the passionate influx of visitors. Economic stability remains a concern amid rising inflation rates and continued geopolitical unrest. Despite these external factors, the ski property market persists in its resilience.

A look at MTN's financial metrics reveals that the company may struggle to leverage the positive industry trends. Considering these factors, it would be wise to wait for a better entry point in the stock.

End of Year Outlook: Is It Time for Investors to Re-evaluate TSLA Stock?

Posted on by The INO.com Team

 

Tesla, Inc. (TSLA) employees initiated a strike in late October when approximately 120 mechanics at 12 TSLA repair shops in seven cities across Sweden protested against TSLA's refusal to endorse a collective bargaining agreement.

Continuing ripple effects were seen across various segments – from custodial and dock workers to postal employees and metalworkers. Sympathy strikes ensued, disrupting the company's operations from unloading vehicles off boats and obtaining vehicle registration plates.

Sweden, boasting one of Europe's most powerful labor movements, stands as the stinging backdrop. The strike is seen as a clash between the Swedish and American ways of doing business and a fight to protect the Swedish union model, covering about 90% of its workforce.

Employees and employers unanimously support this system. This universal approbation is warranted given that the Swedish labor relations model has maintained relative industrial tranquility between corporations and wage earners for decades.

TSLA, on the contrary, is known for opposing unionization in its workplaces and has a different corporate culture and vision. Elon Musk-led TSLA may have inadvertently chosen a contest difficult to win by retorting against this norm. What began as a localized dispute has now escalated to potentially considerable global implications.

Casting wider ripples, there are projections for the labor movements and automotive workers within Europe and extending to the U.S. Arturo Vasquez, an ombudsman in the IF Metall union – the largest in Sweden, has reportedly reached out to counterparts across Europe and the U.S. With this, he aims to gather support, possibly leading to similar moves in their respective domains.

According to car.info data, TSLA reportedly registered 1,516 new cars in November, representing a sales increase of 175.2% year-over-year. This performance is particularly noteworthy given the mounting efforts of IF Metall against the EV manufacturer.

Furthermore, TSLA aims to maintain a growth rate of 50%, with aspirations to sell 2.7 million vehicles by 2024. The automaker plans to augment its production capacity across Fremont, Shanghai, Berlin, and Texas facilities. Additionally, the company aims to enhance its product range and features, including introducing new models – like Model 3 Highland and Model S Plaid, with Cybertruck recently added to the lineup.

However, with no signs of an impending agreement between TSLA and IF Metall, the ongoing strike could disrupt TSLA's ambitious objectives. In September, EVs constituted a 63.4% market share in Sweden, an increase from last year's 55.2%. TSLA’s Model Y was the top-selling vehicle in Sweden year-to-date, underscoring its dominant stance.

The strike could compromise TSLA's market share and customer loyalty in Sweden and other Nordic countries, where the brand has a substantial presence and exciting demand prospects. It could impact the delivery and service of TSLA vehicles, thus potentially undermining the brand's reputation in the region.

TSLA recently filed a lawsuit against the Swedish state via Sweden's Transport Agency due to a strike by postal workers that halted delivery of license plates for the automaker's new vehicles, creating additional regulatory hurdles. The company could face fines, sanctions, or injunctions, which could dent the company’s profitability.

Moreover, TSLA's global supply chain and production network could experience disruptions and delays, affecting the availability and quality of components. Expansion of operations and facilities might also face challenges.

Furthermore, TSLA's capability to attract and retain talent, particularly in Europe, where the company is aggressively investing and recruiting, could be impacted. It could further hamper the morale and motivation of TSLA’s existing employees. Consequently, this could blemish TSLA’s image as a leading pioneer in the EV and clean energy industry, thereby lessening its allure to investors and partners.

Since the issue is unlikely to dissipate soon, the company may experience a downturn in revenue and profit, along with muted growth prospects, thus potentially leading to a fall in its share price. The projected declining cash flow and profitability could impede the company's ability to invest in new ventures and innovations.

Over the past five years, TSLA's impressive rally has resulted in a robust return of over 900% for its shareholders, equivalent to some investors' lifetime returns. Nevertheless, its lofty valuations have set the bar high for expectations.

TSLA has historically foregone dividend payments, choosing instead to reinvest profits into the organization to fuel future growth. While some analysts and investors anticipate it could begin issuing dividends as the company matures and turns profitable, the ongoing strike and its impacts could delay or even nullify these possibilities due to declining cash flow and earnings.

Let’s look at some that may prompt investors to proceed with caution:

Deteriorating Financials

Although TSLA’s revenue grew 9% year-over-year to $23.35 billion in the third quarter of 2023, the company’s total gross profits fell 22% year-over-year. Its non-GAAP net income declined 37% from the year-ago quarter to $2.32 billion despite robust Model 3 and Model Y sales.

Despite a 9% year-over-year revenue increase to $23.35 billion in the third quarter of 2023, TSLA’s total gross profits declined 22%. This decline was accompanied by a 37% decrease in non-GAAP net income to $2.32 billion despite robust sales from Model 3 and Model Y vehicles.

According to Cox Automotive, TSLA’s market share fell to the lowest ever at 50%, a stark contrast from the previous year's near 65%. Furthermore, the firm does not project any imminent revenue surge following the Cybertruck launch.

Price Slashing

TSLA initiated a competitive pricing battle earlier this year, sparking enthusiasm among industry observers who perceived it as a manifestation of its production efficiencies. However, the company later confirmed that this strategy was primarily demand-driven.

Implementing over six decisive price reductions across its four vehicle models unequivocally demonstrates that the market competition is intensifying, and customer demand is not keeping pace with the company's inventories.

This dynamic is unfavorable and offers a cogent explanation as to why TSLA's operating margin substantially shrunk to 7.6% in the third quarter, down from its prior-year quarter level of 17.2%.

Unfavorable Analyst Estimates

Analysts expect TSLA’s revenue for the fourth quarter (ending December 2023) to come in at $25.62 billion, suggesting an increase of 5.1% year-over-year. However, the consensus EPS estimate of $0.74 for the quarter reflects an alarming 38.1% year-over-year decline.

Moreover, for the fiscal year 2023, the company’s EPS is expected to decrease 21.4% year-over-year to $3.20, while revenue is expected to come at $97.31 billion.

Bottom Line

Over the previous decade, TSLA has emerged as one of the top performers on the expansive S&P 500, delivering massive returns.

The company's robust progress has positioned it among the most significant publicly traded bodies, boasting an immense market cap of approximately $763 billion. As such, TSLA secured a crucial position in the so-called 'Magnificent Seven,' significantly driving the broader market to greater heights in 2023.

Furthermore, the automaker is looking to broaden its revenue streams beyond the traditional sales and leases of EVs. There lies a sizeable opportunity for TSLA to amplify its profit margins by selling full self-driving subscriptions.

Moreover, TSLA's presence within the energy storage sphere continues to expand, with the company poised to become the principal supercharger network provider for EVs across the U.S.

Despite the laudable accomplishments of Elon Musk as a leader and innovator, there are concerns regarding the potential pitfalls of his management style. Notably, there has been criticism surrounding persistent issues with adhering to initially set timelines, which cast shadows of doubt moving forward. The ongoing strike adds to the woes.

Concurrently, the company faces financial headwinds with high-interest rates, a facet exacerbating financing costs and suppressing consumer discretionary purchasing behavior. TSLA’s assertive actions toward price reduction in response to weakened demand and intensifying competition have failed to resonate as intended.

Moreover, TSLA's non-GAAP forward P/E multiple sits at a lofty 75.04, significantly surpassing the industry average of 14.87. Should TSLA's market cap decline to meet this industry average, shareholders may find their confidence dented considerably.

Additional trepidation stems from analyst skepticism surrounding the company's prospects. This is a concern for current or potential investors considering TSLA stock. Therefore, investors may wish to reassess their stance before investing in the stock.

AutoZone (AZO) Faces Cybersecurity Breach: Is it Time to Sell?

Posted on by The INO.com Team

AutoZone, Inc. (AZO), a leading retailer and distributor of automotive replacement parts and accessories in the United States, announced that it was hacked by a ransomware gang in May this year. Bleeping Computer reported that AZO’s data stores were breached, with the personal information of approximately 185,000 customers leaked.

The Clop ransomware gang took responsibility for this cyberattack, with hackers uncovering susceptibilities in the file transfer application MOVEit.

Several other affected organizations include the Louisiana Department of Motor Vehicles, the State of Maine, British Airways, and the New York City public school system. As per the report, the total financial damage totaled around $12 billion, with estimates indicating that at least 62 million people were affected by this data leak.

The data leaked by cybercriminals is around 1.1GB in size, containing employee names, email addresses, tax information, parts supply details, payroll documents, Oracle database files, production and sales information, data about stores, and more. No customer data appears in the leaked files, Bleeping Computer noted.

AutoZone informed the U.S. authorities last week about this data breach. It took the auto company nearly three months to determine what data was stolen from its systems and who had been impacted and required to be notified.

“AutoZone became aware that an unauthorized third party exploited a vulnerability associated with MOVEit and exfiltrated certain data from an AutoZone system that supports the MOVEit application,” read the letter from AZO. The company further added that it is “not aware” of any instances where a customer's personal information was used to conduct fraud.

However, AutoZone will provide its affected clients with a year of free credit monitoring software. This will allow them to track potential fraud and suspicious activities related to their identity and credit.

Despite this news, AZO’s shares have gained more than 6% over the past month and nearly 5% over the past six months.

Now, let’s discuss several factors that could influence AZO’s performance in the near term:

Growing Need for Auto Parts

The global auto parts market is expected to reach $1.10 trillion by 2030, growing at a CAGR of 6.8%. One of the primary factors driving the auto parts market is the increasing demand for auto vehicles worldwide. Global motor vehicle production has been rising steadily, with around 85 million vehicles produced in 2022, up nearly 6% from 2021.

The demand for auto parts has increased in tandem with this production boom. Further, the growing shift toward electric and hybrid vehicles and the manufacturing of environmentally friendly vehicle parts because of an enhanced focus on sustainability and environmental issues are propelling the market’s expansion.

Additionally, the significant surge in e-commerce platforms has a major impact on auto parts distribution and sales, providing more access for customers. Also, the rising popularity of automotive customization and the introduction of advanced technologies, such as navigation systems, infotainment systems, and advanced driver assistance systems, will boost the market’s growth.

Therefore, the growing demand for auto parts and accessories is a primary tailwind for AZO stock.

Robust Financials

For the fourth quarter that ended August 26, 2023, AZO reported net sales of $5.69 billion, beating analysts’ estimate of $5.61 billion. This compared to net sales of $5.25 billion in the same quarter of 2022. Its gross profit grew 8.8% from the year-ago value to $3 billion.

The auto parts operating profit (EBIT) came in at $1.22 billion, an increase of 10.8% from the prior year’s quarter. Its net income rose 6.8% year-over-year to $864.84 million. The company posted net income per share of $46.46, compared to the consensus estimate of $45.23, and up 14.7% year-over-year.

For the fiscal year 2023, the company’s net sales increased 7.4% year-over-year to $17.46 billion, while its gross profit rose 7.1% from the previous year to $9.07 billion. Its operating profit grew 6.2% year-over-year to $3.47 billion. The company’s EBITDAR increased 7.6% from the prior year to $4.47 billion.

In addition, AZO’s net income rose 4.1% year-over-year to $2.53 billion, and its net income per share came in at $132.36, an increase of 12.9% year-over-year. Its adjusted after-tax ROIC was 55.4%, up from 52.9% a year ago. As of August 26, 2023, the company’s cash and cash equivalents were $277.05 million, compared to $264.38 million as of August 27, 2022.

Regarding its strong performance delivered in the fourth quarter and fiscal year 2023, AZO’s Chairman, President, and CEO, Bill Rhodes, commented, “Our customer service and trustworthy advice are what continue to differentiate us across the industry, and our AutoZoners’ commitment to delivering exceptional service has allowed us to continue to deliver strong financial results.” 

“While we turn our focus to performance in the new fiscal year, we will remain committed to prudently investing capital in our business, and we will be steadfast in our long-term, disciplined approach to increasing operating earnings and cash flows while utilizing our balance sheet effectively,” Rhodes added.

Share Repurchase

Under its share repurchase program, AZO repurchased 403 thousand shares of its common stock during the fourth quarter at an average price per share of $2.502, for a total investment of $1 billion. For the fiscal year 2023, the auto company repurchased 1.5 million shares of its common stock for a total investment of $3.7 billion.

Since the inception of this share repurchase program, the auto parts retailer has repurchased a total of about 154 million shares of its common stock at an average price of $219, for a total investment of $33.8 billion. At the year's end, the company had $1.8 billion remaining under its current share repurchase authorization.

Share buybacks might enable the company to generate additional shareholder value.

Expanding Store Footprint

During the quarter ended August 26, 2023, the auto parts giant opened 53 new stores in the U.S., 27 new stores in Mexico, and 17 in Brazil, for a total of 96 net new stores. For the year 2023, the company opened 197 net new stores. The company’s inventory also increased due to new store growth.

As of August 26, 2023, AutoZone had 6,300 stores in the U.S., 740 in Mexico, and 100 in Brazil, for a total of 7,140 stores.

Impressive Historical Growth

AZO’s revenue and EBITDA grew at respective CAGRs of 11.4% and 11.1% over the past three years. Its EBIT increased at a CAGR of 11.6% over the same period. Moreover, the company’s net income and EPS rose at CAGRs of 13.4% and 22.5% over the same timeframe, respectively.

In addition, the company’s total assets improved at a 3.5% CAGR over the same period.

Favorable Analyst Estimates

Street expects AutoZone’s revenue for the fiscal 2024 first quarter (ending November 2023) to increase 5.1% year-over-year to $4.19 billion. The consensus EPS estimate of $31.16 for the ongoing quarter reflects a 14.6% year-over-year rise. Moreover, the company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in all four trailing quarters.

AZO’s revenue and EPS for the fiscal year (ending August 2024) are expected to grow 7.5% and 12.58% year-over-year to $18.76 billion and $149.01, respectively. For the next fiscal year, Street expects the company’s revenue and EPS to increase 3.7% and 9.3% from the previous year to $19.45 billion and $162.93, respectively.

Solid Profitability

AZO’s trailing-12-month gross profit margin of 51.96% is 46.5% higher than the 35.71% industry average. Likewise, the stock’s trailing-12-month EBITDA margin and net income margin of 22.75% and 14.48% are significantly higher than the industry averages of 11.04% and 4.44%, respectively.

Furthermore, the stock’s trailing-12-month ROTC and ROTA of 34.04% and 15.82% favorably compare to the respective industry averages of 6.01% and 3.97%. Also, its trailing-12-month levered FCF margin of 8.83% is 71.4% higher than the industry average of 5.15%.

Bottom Line

AutoZone reported positive earnings and revenue surprises for the last reported quarter. Further, the company’s prospects look highly promising, driven by a diversified product portfolio to meet robust demand for auto replacement parts and accessories.

The auto giant also continues to expand the physical footprint of its stores to serve its ever-growing customers worldwide.

Despite the news of its data stores getting breached in a cyberattack earlier this year, AZO could be an ideal investment now, given its robust financials, higher-than-industry profitability, and bright growth outlook.