Tag: Amazon.com

Salesforce (CRM) vs. Alphabet (GOOGL): AI's Role in Tech Layoffs Unveiled

Posted on by The INO.com Team

Since the launch of ChatGPT in November 2022, GenAI has been reshaping the future of work. From automating routine tasks to transforming entire job roles, generative AI is making a significant impact across multiple industries. A rapid acceleration of task automation could assist organizations in driving labor cost savings and boosting productivity.

If generative AI delivers on its promised capabilities, the labor market could face considerable disruption. Using data on occupational tasks in the U.S. and Europe, Godman Sachs Global Investment Research finds that about two-thirds of today’s jobs are exposed to some degree of AI automation. And this technology could substitute up to one-fourth of current work.

Goldman Sachs estimates that GenAI will eventually automate nearly 300 million of today’s full-time jobs globally.

AI’s Role in Latest Tech Layoffs

With just a month into the new year, tech layoffs are starting to pile up; however, analysts consider this a new normal for Silicon Valley in a considerable pivot to AI. The job cuts are not on the same scale as in late 2022 and early 2023 when tech companies got rid of thousands of employees, a blowback from the frenzied hiring that took place during the pandemic when everyday life turned digital.

According to layoffs.fyi, a California-based website that tracks the tech sector, the industry lost around 160,000 jobs last year. So far this year, tech layoffs are at nearly 24,584, the site showed, from 93 companies.

Layoffs.fyi estimates that approximately 20% of job cuts are brought on by AI and restructuring associated with it. Moreover, Silicon Valley jobs are on the front line, with some coding tasks primarily carried out by generative AI.

Cloud-based software provider Salesforce, Inc. (CRM) announced that it will be laying off about 700 employees, roughly 1% of its global workforce, adding to a brutal string of tech layoffs at the start of 2024. This move comes amid ongoing cost-cutting pressures from investors, including activist shareholders like Elliott Management, to boost its profit margins.

A year ago, CRM lowered its headcount by 10% as a part of its rebalancing efforts after a pandemic-era hiring boom.

Despite the recent cuts, Salesforce is still reportedly hiring for 1,000 open roles across the company, indicating that these layoffs could be a part of an adjustment in its workforce. The company’s focus is directing spending toward growth.

An unnamed source cited in the Wall Street Journal report that the latest round of layoffs could be more of a routine adjustment to the company’s headcount rather than a reactive measure to ongoing economic challenges.

Earlier this month, another tech company, Alphabet Inc. (GOOGL), laid off hundreds of employees across the company as it continues to push for efficiency and focus on its biggest product priorities and significant opportunities ahead.

According to the company, the job cuts will impact employees within Google’s hardware, voice assistance, and central engineering teams. Also, other parts of the tech company were affected.

This layoff announcement marks the latest cost-cutting effort at Google as it continues to work to rein in the drastic headcount growth that took place during the pandemic. In January last year, Google cut its workforce by 12,000 employees or nearly 6% of its employee count. Later in the year, the company made other cuts to its recruiting and news divisions.

Moreover, Google shifted its focus to prioritize developments in AI, launching products such as chatbot Bard and the large language model (LLM) Gemini as it aims to keep up with rivals, including Microsoft Corporation (MSFT) and Amazon.com, Inc. (AMZN).

This season’s tech layoffs are being framed more as restructuring rather than cutting down from prior over-hiring efforts; suggesting that even if employees lose their jobs, there could be some security within the industry more broadly. So, investors shouldn’t worry much about the recent job cuts.

Shares of CRM have gained nearly 27% over the past six months and more than 74% over the past year. Meanwhile, GOOGL’s stock has surged more than 14% over the past six months and approximately 55% over the past year.

Now, let’s review the fundamentals of CRM and GOOGL in detail:

Latest Developments

On January 14, 2024, CRM, at NRF 2024, announced new data and AI-powered tools for retail to help businesses drive efficiency and deliver connected shopping experiences. The Einstein 1 Platform will power these new retail innovations.

With generative AI built into Commerce Cloud and Marketing Cloud, retail merchandisers and marketers can tap into these generative tools with a real-time understanding of customer behavior and preferences to optimize every customer interaction — enhancing loyalty, boosting revenue, and driving employee productivity.

Also, on December 14, 2023, Salesforce unveiled major updates to its Einstein 1 Platform, adding the Data Cloud Vector Database and Einstein Copilot Search. Data Cloud Vector Database will unify all business data, including unstructured data like PDFs, emails, and transcripts, with CRM data to allow the grounding of AI prompts and Einstein Copilot.

Einstein Copilot Search will offer AI search capabilities to deliver accurate answers from Data Cloud instantly in a conversational AI experience, thereby driving productivity for all business users.

For GOOGL, 2023 was a remarkable year of significant advances in AI and computing. On December 6, Google launched its largest and ‘most capable’ AI model, Gemini, which will be in three different sizes: Ultra, Pro, and Nano.

Enterprises could use Gemini for advanced customer service engagement through chatbots and product recommendations and identifying trends for companies looking to advertise their products. Also, it could be used for content creation.

In November, Google further announced a new DeepMind model, Lyria, in partnership with YouTube. Lyria is an advanced AI music generative model that will create vocals, lyrics, and background tracks mimicking the style of famous artists. This model is available on YouTube through two distinct AI experiments – DreamTrack for Shorts and Music AI tools.

Last Reported Quarterly Results

CRM’s total revenues increased 11.3% year-over-year to $8.72 billion for the fiscal third quarter that ended on October 31, 2023. Its gross profit was $6.57 billion, up 14.2% from the year-ago value. Its income from operations rose 226.3% from the prior year’s quarter to $1.50 billion. The company’s free cash flow came in at $1.37 billion, an increase of 1,088% year-over-year.

In addition, Salesforce’s non-GAAP net income grew 47.9% from the previous year’s period to $2.09 billion. Its non-GAAP EPS came in at $2.11, surpassing the consensus estimate of $2.06 and up 50.7% year-over-year.

For the third quarter that ended September 30, 2023, GOOGL reported revenue of $76.69 billion, compared to analysts’ estimate of $75.73 billion and up 11% year-over-year. Its income from operations grew 24.6% from the prior year’s quarter to $21.34 billion. Its income before income taxes rose 30.6% year-over-year to $21.20 billion.

Google parent Alphabet’s net income increased 41.5% year-over-year to $19.69 billion. It posted net income per share of $1.55, compared to the consensus estimate of $1.45, and an increase of 46.2% year-over-year. Further, as of September 30, 2023, the company’s cash and cash equivalents stood at $30.70 billion, compared to $21.88 billion as of December 31, 2022.

Past And Expected Financial Performance

Over the past three years, CRM’s revenue has increased at a CAGR of 18.7%, and its EBITDA has grown at a 43.4% CAGR. The company’s normalized net income has increased at a CAGR of 188.3% over the same time frame, and its levered free cash flow and total assets have improved at CAGRs of 24.8% and 15.5%, respectively.

Analysts expect CRM’s revenue for the current year (ending January 2024) to increase 11% and 56.5% year-over-year to $34.79 billion and $8.20, respectively. For the fiscal year ending January 2025, the company’s revenue and EPS are expected to grow 10.9% and 16.5% year-over-year to $38.57 million and $9.55, respectively.

GOOGL’s revenue and EBITDA have grown at CAGRs of 20.1% and 26% over the past three years, respectively. Its net income and EPS have improved at respective CAGRs of 23.2% and 26.3% over the same timeframe. Also, the company’s levered free cash flow has increased at a CAGR of 36% over the same period.

For the fiscal year ending December 2024, GOOGL’s revenue and EPS are estimated to increase 10.8% and 15.4% year-over-year to $340.50 billion and $6.69, respectively. Likewise, Street expects the company’s revenue and EPS for the fiscal year 2025 to grow 10.5% and 15.6% from the prior year to $376.34 billion and $7.73, respectively. 

Profitability

In terms of the trailing-12-month EBIT margin, CRM’s 15.87% is 243.7% higher than the industry average of 4.62%. Its trailing-12-month gross profit margin of 74.99% is 54.8% higher than the 48.43% industry average. Moreover, the stock’s trailing-12-month net income margin of 7.63% is significantly higher than the 2.04% industry average.

GOOGL’s trailing-12-month gross profit margin of 56.12% is 15% higher than the 48.81% industry average. Its trailing-12-month EBIT margin of 27.42% is 226.8% higher than the 18.39% industry average. Likewise, the stock’s trailing-12-month net income margin of 22.46% is 541.4% higher than the industry average of 3.50%.

Bottom Line

The tech industry remains focused on trimming costs via job cuts. More than 20,000 tech employees have been laid off so far in 2024. CRM is the latest tech company to announce about 700 layoffs. However, the company still has plenty of job openings, roughly 1000, suggesting that these cuts might not be a drastic strategy shift but a routine labor force adjustment.

Similarly, tech giant Google signaled layoffs this month. Google CEO Sundar Pichai warned employees of more job cuts this year as the company continues to shift investments toward areas like AI. In a memo titled “2024 priorities and the year ahead,” Pichai stated that the company has ambitious goals and will be investing in its big priorities in 2024.

“The reality is that to create the capacity for this investment, we have to make tough choices,” Pichai said. For some teams, that means eliminating roles, which includes “removing layers to simplify execution and drive velocity,” he added.

Many fear that these job cuts could be related to Google’s rollout of AI across its advertisement department, effectively witnessing the technology replace humans. Also, given Salesforce’s heavy investments in AI, people can’t help but wonder if the technology could be threatening its workforce.

In today’s digital era, AI undoubtedly stands out as one of the most influential forces shaping the future of work. AI technology is making its dramatic impact felt, especially across the tech industry, from automating business operations to transforming entire job roles.

While some tasks/jobs are being automated, replacing humans, new roles are emerging with AI integration. Tech companies’ increased focus on AI is leading to a hiring surge in this area while other sectors face layoffs.

This season’s job cuts in the tech industry are viewed more as restructuring efforts rather than navigating economic challenges or cutting down from previous over-hiring during the pandemic. So, the latest tech layoffs should be the least of investors’ worries, and they can continue to hold CRM and GOOGL shares. 

Joann Stores on the Brink: Is it Time to Unload JOAN Stock?

Posted on by The INO.com Team

Over the past years, the retail sector has been shaken by renowned names going under and a couple of others just barely surviving. In most cases, the financial damage was caused by the COVID-19 pandemic, which forced many retail businesses to shut down for months due to mandated stay-at-home orders.

Due to these closures, online retailers received a boost in sales as customers looked for alternative ways to shop.

JOANN, Inc. (JOAN), a specialty retailer of crafts and fabrics, should have been a pandemic winner, but it stands on the verge of collapse, and the company prospects appear weak, as per Creditsafe Head of Brand Ragini Bhalla.

In theory, JOAN should have benefitted from people staying at home during the pandemic, as sewing enthusiasts and other hobbyists make up the retailer’s customer base. Even when Joann stores were opened, customers could’ve opted to purchase their supplies online.

The ease of shopping online has changed customer behavior drastically, and that could have shifted some of Joann’s regular customers to e-commerce giant Amazon.com, Inc. (AMZN). Another possibility could be that some of the company’s fanbase died or changed their hobbies during the pandemic.

No matter what the reason is, Ragini Bhalla thinks that JOAN’s situation is critical.

“Given the struggles JoAnn has had with cash flow, its inability to stay current with many of its bills, its declining sales in FY 2023, and its $1 billion debt load, our Creditsafe algorithm has classified the company as a high risk of becoming seriously delinquent on payments and could be headed for bankruptcy very soon. Without strong leadership (still no permanent CEO), it could be hard to right the ship,” he told TheStreet via email.

Bhalla further stated that JOAN has been lagging in paying its bills, something which often foreshadows a bankruptcy filing.

“Creditsafe data shows that Joann struggled to make on-time payments in the second half of 2023. For most of that time, about 20% to 31% of its bills were paid late (1-30 days), while about 1% to 8% of its bills were paid late (31-60 days),” he added.

Despite management’s positive comments during the third-quarter 2024 earnings call, Bhalla sees the company’s risk of bankruptcy rising.

“Joann is rated as a high risk: Based on Creditsafe’s risk algorithm which takes into account both trade payment data and financial results, JoAnn is deemed to be a high risk (D), meaning it could be at risk of bankruptcy. Its risk score dropped from C to D in July 2023 and has stayed there since,” he added. 

Now, let’s discuss some of the factors that contribute to Joann’s precarious financial situation and could impact the stock’s performance in the near term:

Broader Challenges Faced by the Retail Industry

Over the past few years, several retailers have been grappling with struggling physical storefronts, massive debt, and inefficient operations, among other challenges. The COVID-19 pandemic initially compounded these issues and advanced the downfall of various retailers, which had faced declining sales and increasing debt in the years prior as consumer preferences changed.

Shopping centers witnessed decreasing foot traffic even before the pandemic, but stay-at-home orders further shifted consumers to online shopping and spending cash on essential goods instead.

After 2020, the retail industry experienced a major rebound as consumers returned to physical stores. While there were 52 retail bankruptcies in 2020, 2021 witnessed just 21, a decline of 60% year-over-year, according to the report by Axios, citing research by S&P Global Market Intelligence. In 2022, only a few retail companies went under.

However, last year, retail bankruptcies flared up again due to persistently high inflation and a significant pullback in consumer spending. According to Axios, there were about 82 bankruptcies filed by consumer discretionary companies amid a tighter financing market and higher borrowing costs.

Home goods and furniture retailer Bed Bath & Beyond filed for bankruptcy in April 2023. During the pandemic, the retailer’s merchandise was non-essential. A failure to take online shopping seriously harmed the company, and then product missteps and misguided financial maneuvers fastened its decline.

A popular Ohio-based fabric and craft retailer, JOAN, has been recently identified as having an elevated risk of filing for bankruptcy. It faces enhanced financial uncertainty after dwindling sales and massive debt. Also, the company seems to miss out on the e-commerce boom.

During the third quarter of 2023, the share of e-commerce in total U.S. sales amounted to 15.6%, an increase from the prior quarter. From July to September last year, retail e-commerce sales in the U.S. reached nearly $284 billion, the highest quarterly revenue in history.

Deteriorating Last Reported Financials

For the fiscal 2024 third quarter that ended October 28, 2023, JOAN reported net sales of $539.80 million, beating analysts’ estimate of $547.20 million. That compared to the revenue of $562.80 million in the same quarter of 2022. Its net interest expense increased 56.9% from the year-ago value to $28.40 million. Its adjusted gross profit was $282.10 million, down 5.8% year-over-year.

The company’s operating loss widened by 24.4% from the prior year’s quarter to $15.40 million. Its adjusted EBITDA declined 6.7% year-over-year to $37.50 million. Its adjusted net loss came in at $8.80 million, compared to an adjusted net income of $2.30 million in the previous year’s period.

Joann posted third-quarter adjusted loss per share of $0.21, compared to adjusted income per share of $0.06 in the same quarter of 2022.

Furthermore, for the nine months ended October 28, 2023, the company’s free cash flow decreased 26.4% year-over-year to $187 million. JOAN’s current assets were $790.30 million as of October 28, 2023, compared to $854.10 million as of October 29, 2022. Its net long-term debt stood at $1.15 billion versus $1.06 billion as of October 29, 2022.

Full Year 2024 Outlook

Despite deteriorating financial health, Joann’s interim leaders tried to paint a positive picture.

Commenting on the third-quarter performance, Scott Sekella, JOANN’s Chief Financial Officer and co-lead of the Interim Office of the CEO, said, “During the quarter, we continued to execute against our Focus, Simplify and Grow cost reduction initiative in which we had previously identified $200 million of targeted annual cost savings across supply chain, product, and SG&A expenses. As we implement these cost savings initiatives, we are driving meaningful cash flow improvements that we expect will continue for the remainder of this fiscal year and beyond.”

“With the strategic shifts we have implemented this year, combined with our ongoing cost reduction strategies, we are pleased to increase the top-line and reaffirm the bottom line full-year outlook,” Sekella added.

These management’s comments sound nice, but with only $28.30 million in cash and cash equivalents as of October 28, 2023, and its net long-term debt standing at $1.15 billion, the company has to make choices more carefully moving forward.

Unfavorable Consensus Earnings Expectations

Street expects JOAN’s revenue for the fiscal year (ending January 2024) to decrease 1.7% year-over-year to $2.18 billion. The company’s loss per share for the ongoing year is expected to widen by 149.4% year-over-year to $2.12. In addition, the company has missed the consensus EPS estimates in three of the trailing four quarters.

For the fiscal year 2025, the retailer’s revenue is estimated to decline 1.4% year-over-year to $2.15 billion. Analysts expect Joann to report a loss per share of $1.39 for the following year.

Declining Profitability

JOAN’s trailing-12-month EBITDA margin and net income margin of negative 1.51% and negative 11.10% compared to the respective industry averages of 11.04% and 4.56%. The stock’s trailing-12-month levered FCF margin of negative 1.68% compared to the 5.40% industry average.

In addition, the stock’s trailing-12-month ROTC and ROTA of negative 3.52% and negative 10.64% compared unfavorably to industry averages of 6.17% and 4.01%, respectively. Its trailing-12-month CAPEX/Sales of 2.43% is 19.6% lower than the 3.02% industry average.

JOAN’s FRISK Rating Lowered

Joann has been identified as at an increased risk of bankruptcy within the next 12 months by a retail industry analysis reported by RetailDive. In October 2023, JOAN got its CreditRiskMonitor FRISK Score updated, which generally has a 96% accuracy in predicting bankruptcies for public U.S. companies.

 In the report, Joann has been given a score of 1, which is the worst possible score. This indicates a probability between 9.99% and 50% of bankruptcy within the next 12 months.

Experts Hinting at Significant Bankruptcy Risk

“Joann is in a financial mess. Not only does it have a huge debt pile and associated interest, it is not profitable at operating level,” GlobalData Managing Director Neil Saunders posted on Retailwire.

According to Aptos’ Vice President, JOAN needs to make changes quickly to save itself and can look at a key competitor for ideas.

“Michael’s recently invested in revamping stores, streamlining checkout, upping their loyalty game,” she stated. “Joann would definitely benefit, and potentially quickly, by taking a look at their promotional strategy. It’s very confusing and there is a lot of over-promoting and overlapping promotions. Barring anything else, getting smart and streamlined and simple about the offer to customers could help both top and bottom line – at the same time.”

Further, CEO of Vector Textiles, Mark Self, said, “A specialty store specializing in crafts and sewing whose customer base is dwindling, no CEO and $1B in debt...sounds like liquidation time to me.”

Bottom Line

JOAN’s financial struggles continue as the retailer reported a sales decline and mounting losses in the third quarter of the fiscal year 2024. Stubborn inflation, continued supply chain disruption, a pullback in consumer spending, and macroeconomic uncertainty have impacted the company’s financial performance over the past year. Also, Joann has been slow to adopt e-commerce.

The craft and fabric company, which is still operating without a permanent CEO, tried to paint a positive picture about its growth prospects; however, Joann’s growing losses, massive debt and limited available cash tell a different story.

Companies rarely come out and tell investors that they are teetering on the edge of disaster until they are left with no choice. For instance, J.C. Penney, which spiraled toward bankruptcy, a fall that took years, the company’s earnings call mainly focused on positive aspects.

Given its deteriorating financials and other challenges, JOAN has its CreditRiskMonitor FRISK Score lowered to 1. Based on the history, companies that receive a 1 have between a 9.99% and 50% chance of filing for bankruptcy. Several experts further hinted that the company was facing significant bankruptcy risk.

With these factors in mind, it could be wise for investors to avoid JOAN’s shares now. 

How Alibaba's 3% Reduction in Outstanding Shares Affects the Stock's Future

Posted on by The INO.com Team

During the 12 months ended December 31, 2023, Alibaba Group Holding Limited (BABA) repurchased a total of 897.9 million ordinary shares for $9.5 billion. This includes the purchase of 292.7 million ordinary shares for a total of $2.9 billion during the fourth quarter.

The shares were purchased in both the U.S. and Hong Kong markets under its share repurchase program, the company said in a filing.

The Chinese e-commerce giant said that it had 20 billion ordinary shares outstanding as of December 31, 2023, compared to 20.7 billion ordinary shares from December 31, 2022. This indicates a net reduction of 3.3% in its outstanding shares.

The remaining amount that the company’s Board had authorized for its share repurchase program, which is effective through March 2025, was $11.7 billion as of December 31, 2023.

When a company buys back its own shares from the marketplace, it reduces the total number of shares outstanding. As a result, the value of the remaining shares increases. The company’s Board may feel that its shares are undervalued, making it a favorable time to purchase them. Meanwhile, investors often perceive a buyback as an expression of confidence by the management.

Therefore, in the case of Alibaba, a more than 3% reduction in outstanding shares will positively impact its shareholder value and give a significant boost to the stock’s performance this year.

Now, let’s review several other factors that could influence BABA’s performance in the near term:

Strategic Reorganization

Last year in March, BABA announced plans to split its business into six independent units in a strategic move to unlock shareholder value and advance competitiveness.

“This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” said Daniel Zhang, former CEO and chairman of Alibaba Group.

Under the restructuring, Alibaba will be split up into six newly formed business units: Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, International Digital Commerce Group, and Digital Media and Entertainment Group.

Each business unit will be overseen by its own chief executive and board of directors. Five of the new business clusters “will also have the flexibility to raise outside capital and potentially to seek its own IPO,” the company said.

As per the latest update on business group spin-offs and capital raisings, the recent expansion of U.S. restrictions on the export of advanced computing chips has created uncertainties for the Cloud Intelligence Group’s prospects.

The company believes that a complete spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement. Correspondingly, it decided not to proceed with a full spin-off and instead will focus on developing a sustainable growth model for Cloud Intelligence Group under fluid circumstances.

In terms of Alibaba International Digital Commerce Group, it is in preparation for external fundraising. Further, Cainiao Smart Logistics Network Limited applied for an initial public offering in Hong Kong and submitted its AI filing to the Hong Kong Stock Exchange.

Capitalizing on the AI Boom

BABA’s newly appointed CEO, Eddie Wu, stressed putting AI and user experience at the top of the company’s priorities to reclaim customers and market share in an immensely competitive arena.

“Over the next decade, the most significant change agent will be the disruptions brought about by AI across all sectors,” Wu said in his note, reviewed by Bloomberg News. “If we don’t keep up with the changes of the AI era, we will be displaced.”

Wu added that Alibaba will reinforce strategic investments in the areas of AI-driven tech businesses, internet platforms, and its global commerce network.

On January 9, 2024, Alibaba.com, a leading platform for global B2B e-commerce and part of Alibaba International Digital Commerce Group, introduced its latest Smart Assistant features powered by AI at CES in Las Vegas, NV.

The Smart Assistant is an AI-powered sourcing tool that caters to newcomers and seasoned entrepreneurs in the dynamic world of global commerce, helping them discover new opportunities, stay up-to-date on trends, seamlessly track orders and more in a single, efficient touchpoint.

Also, in October 2023, Alibaba launched an upgraded version of its AI model as the Chinese tech giant looks to challenge its U.S. rivals, including Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT).

BABA launched Tongyi Qianwen 2.0, its latest large language model (LLM). Tongyi Qianwen 2.0 “demonstrates remarkable capabilities in understanding complex instructions, copywriting, reasoning, memorizing, and preventing hallucinations,” the company said. 

Alibaba stated that Tongyi Qianwen 2.0 is a “substantial upgrade from its predecessor,” which was introduced in April. Also, the Hangzhou-based company announced the GenAI Service Platform, which allows companies to build their own generative AI applications using their own data.  

Solid Last Reported Financials

For the fiscal 2024 second quarter that ended September 30, 2023, BABA reported revenue of $31.04 billion, an increase of 8.5% year-over-year. The revenue slightly surpassed analysts’ estimate of $30.84 billion. Alibaba International Digital Commerce Group rose 53% year-over-year, while Cainiao Smart Logistics Network Limited and Local Services Group grew 25% and 16%, respectively.

Alibaba’s income from operations increased 33.6% from the year-ago value to $4.60 billion. The company’s adjusted EBITDA came in at $6.75 billion, up 13.7% from the prior year’s quarter. Also, its adjusted EBITA rose 18% year-over-year to $5.87 billion, primarily contributed by revenue growth and improved operating efficiency.

Furthermore, the Chinese tech giant’s non-GAAP net income for the quarter came in at $5.51 billion, an increase of 18.8% from the prior year’s period. It posted non-GAAP net income per share of $2.16, compared to the consensus estimate of $2.09, and up 21% year-over-year.

As of September 30, 2023, Alibaba’s cash and cash equivalents, short-term investments and other treasury investments, included in equity securities and other investments on the consolidated balance sheets, were $85.60 billion. During the quarter ended September 30, 2023, cash inflows from operating activities were $6.75 billion, up 4% from the same quarter of 2022.

Also, the company’s free cash flow was $6.20 billion, an increase of 27% year-over-year.

Impressive Historical Growth

Over the past five years, BABA’s revenue and EBITDA grew at CAGRs of 24.1% and 15.5%, respectively. The company’s net income and EPS rose at respective CAGRs of 17% and 17.3% over the same timeframe. Its levered free cash flow improved at 8.2% CAGR over the same period.

Moreover, the company’s tangible book value and total assets increased at CAGRs of 34.2% and 17% over the same timeframe, respectively.

Favorable Analyst Estimates

Analysts expect BABA’s revenue for the fiscal year (ending March 2024) to grow 8% year-over-year to $133.38 billion. The consensus EPS estimate of $9.20 for the ongoing year indicates an 18.6% year-over-year increase. Moreover, Alibaba has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2025, the company’s revenue and EPS are expected to increase 8.9% and 7.8% from the previous year to $145.27 billion and $9.92, respectively.

Low Valuation

In terms of forward non-GAAP P/E, BABA is currently trading at 7.83x, 50.1% lower than the industry average of 15.68x. The stock’s forward EV/Sales of 1.11x is 10.7% lower than the industry average of 1.24x. Likewise, its forward EV/EBITDA of 5.17x is 48.2% lower than the industry average of 9.99x.

In addition, the stock’s forward Price/Book multiple of 1.18 is 53.8% lower than the industry average of 2.55. Also, its forward Price/Cash Flow of 7.20x is 27.2% lower than the industry average of 9.88x.

Robust Profitability

BABA’s trailing-12-month EBIT margin of 14.66% is 92.9% higher than the 7.60% industry average. Moreover, the stock’s trailing-12-month levered FCF margin and net income margin of 14.17% and 56.87% are considerably higher than the industry averages of 5.37% and 4.52%, respectively.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 13.35%, 6.34% and 7.32% favorably compared to the respective industry averages of 11.40%, 6.05%, and 4%. Also, its trailing-12-month gross profit margin of 37.73% is 6.6% higher than the industry average of 35.38%.

Stock Upgrades

On November 24, 2023, Goldman Sachs analyst Ronald Keung maintained a Buy rating on BABA shares, with a price target of $134, suggesting that shares are anticipated to surge by nearly 73% over the coming year. The analyst stated that its FCF generation will fund ongoing buybacks and dividends. Also, he continues to view the stock’s valuation as attractive.

Bottom Line

BABA beat second-quarter analyst expectations for earnings and revenue. Revenue grew approximately 9% year-over-year in the last reported quarter, and the company posted expanded margins as its income from operations rose an impressive 24%. Also, the stock’s valuation is extremely attractive.

Alibaba further pleased its investors with last year’s announcement of plans to split its business into six separate units in a move to unlock more shareholder value and foster competitiveness. Also, the company continues to leverage AI across its operations. Its AI-powered systems optimize its pricing, marketing, and logistics, ultimately resulting in enhanced user experience.

As per Statista, the AI market in China is projected to reach a staggering $38.89 billion in 2024. In global comparison, the largest market will be in the U.S. ($106.50 billion this year). China’s AI market is further expected to show a CAGR of 18%, resulting in a market volume of $104.70 billion by 2030.

Alibaba’s AI leadership positions it to capitalize on the significant growth potential of the Chinese AI market. Also, the company has introduced its upgraded AI model to compete with its U.S. rivals, such as AMZN and MSFT.

“Through a more flexible organizational governance mechanism, we aim to capture brand new opportunities from the ongoing AI technological transformation and create more value for our customers,” said CEO Eddie Wu in BABA’s latest earnings release.

Notably, Alibaba’s 3.3% reduction in its outstanding shares because of a share buyback program will further create a greater value for its shareholders. Given BABA’s solid financials, accelerating profitability, attractive valuation, and bright growth prospects, this tech stock appears an ideal buy now.

Can Wayfair (W) Outpace Amazon.com (AMZN) With a Strategic Merger in 2024?

Posted on by The INO.com Team

Reports suggest that Chinese e-commerce companies Shein and Temu may be plausible merger candidates for American home goods retailer Wayfair Inc. (W). This conjecture emerges amid a challenging period for W, which has experienced a decline in active customers and a significant 76% plunge in share price over the last three years.

A strategic merger with W could present an opportunity for both Shein and Temu to elevate their brand image beyond the "bargain basement" stereotype. More importantly, it could empower them to compete more prominently against industry leader Amazon.com, Inc. (AMZN), especially as they navigate regulatory scrutiny.

Given the recent stringent regulatory oversight aimed at businesses founded in China, a merger with W might further solidify their standing in American marketplaces.

Shein, known for its high-velocity fashion production, privately filed an Initial Public Offering in the U.S. in 2023, projecting to become a publicly traded entity by 2024. This milestone stands to make Shein one of the most valuable Chinese start-ups listed on U.S. exchanges.

Conversely, Temu serves as a broad-spectrum online marketplace offering various products, from clothing and cosmetics to electronics and homewares. A possible merger prospect could exacerbate the already intense rivalry between Shein and Temu.

Among the two, PDD Holdings – the parent company of Temu – appears better positioned for acquisition due to its substantial $197 billion market cap as compared to Shein's $66 billion.

A potential amalgamation with W could permit Temu to diversify its product portfolio and leverage W's specialist home goods proficiency. Nonetheless, Shein is believed to be a more synergistic match for W, given that W's extensive domestic logistical capabilities are likely to enhance Shein's commitment toward optimizing distribution within the U.S.

Regulatory concerns in the U.S. pose potential challenges to the possible merger between Shein or Temu and W. This complexity is further intensified as the political landscape between China and the U.S. is becoming increasingly strained, fueled by escalating concerns over Chinese influence in American investment decisions. Such issues may impact the feasibility of the proposed union on a large scale.

Now let’s delve into a comparative analysis to assess whether Wayfair could outpace Amazon after the strategic merger in 2024…

Wayfair Inc. (W)

Reflecting on the aftermath of the pandemic, 2021 marked a successful year for retailers specializing in once-popular pandemic items like stationary bikes, used cars, furniture, and pet food sold online. This was largely attributed to consumers with surplus savings ready to spend while stuck at home and supported by advantageous financing conditions.

However, online furniture retailer W has witnessed a downturn from its height of sales, now selling less than it once did at its peak. This struggle has been somewhat mitigated through strategic cost-cutting measures and financial engineering practices in certain situations.

These cost-reduction efforts have been instrumental in limiting the company's cash burn rate. W plans to minimize costs by over $1 billion. In a bid to streamline operations and boost agility, the company trimmed its global workforce by 10% - roughly 1,750 employees – in January last year.

In November 2022, W set out another deficit reduction target of a half-billion dollars. At the same time, the company endeavored to bounce back from a quarter that saw declines in revenue, active customers, and overall orders.

This recovery plan included enhancements to wholesale economics, merchandising gains, and elevating mixed-supplier services. To encourage more suppliers to use its platform, W improved its logistics network by offering better delivery speeds and competitive pricing. Coupled with vendor-funded promotions, these steps buoyed W's overall gross margins. Wall Street predicts the company to generate positive free cash flow on an annual basis in 2024.

It seems unlikely that hefty discounts will entice consumers to purchase new furniture in the immediate future. W's revenue growth has been inconsistent in recent years, and this is projected to be their third consecutive year of declining top-line results.

On the brighter side, there are signs that W is making a recovery. After nine consecutive quarters of year-on-year top-line decreases, the company recently reported total net revenue of $2.94 billion – a 3.7% year-over-year increase. Its U.S. net income increased by $132 million, marking a 5.4% year-on-year increase. However, W's adjusted loss per share lingered at $0.13.

W's active customers totaled 22.3 million as of September 30, 2023, a decrease of 1.3% year-over-year. Its long-term debt, as of September 30, 2023, stood at $3.21 billion, with a net loss of $163 million in the last quarter. With continuous refinancing of convertible debt at lower conversion prices and a higher interest rate, coupled with equity-based compensation, there comes a significant question: What will the share count amount to if W starts reporting positive net income?

Foundational to W's business model was the thrilling potential of directly selling oversized, hefty household items. However, it soon became apparent that the more traditional approach, as modernized by W’s competitors, yielded more substantial profits. This revelation paints W’s innovative idea as not altogether successful, suggesting it may yield no better results for entities such as Temu or Shein.

W looks set to bolster its international footprint and customer base through a promising merger. Given Shein and Temu's considerable generated traction within China and further markets, this merger presents a viable opportunity. Moreover, W could potentially tap into advanced technology and innovation employed by Shein and Temu, significantly in the spheres of AI, data analytics, and social media, which could enrich its customer's shopping experiences.

Analysts project W's return to profitability by 2024, markedly sooner than previous expectations. The upgraded forecast comes following the favorable response to the company's third-quarter reports. In the face of likely declining interest rates and a generally more promising economic forecast in 2024, circumstances are slowly turning favorable for W's digital business platform.

For the fiscal fourth quarter of 2023 (ended December 2023), its revenue is expected to grow 1.7% year-over-year to $3.15 billion. EPS is expected to increase 92% year-over-year but remain negative at $0.14.

Amazon.com, Inc. (AMZN)

The forthcoming merger might intensify competition for AMZN within the online furniture and home decor sector. W boasts a notable brand image and customer allegiance in this industry, while Shein and Temu possess the potential to drive increased traffic and sales to the merged platform.

AMZN could be closely tracking this competitive scenario as it faces eroding market share. To counteract this trend, AMZN has been taking strategic measures like reducing certain vendor fees with the intention of attracting more businesses from China. However, this strategy might have been implemented too late to recover the lost market share effectively.

Furthermore, the merger could undermine AMZN's competitive pricing advantage. Firms like Shein and Temu are well-regarded for their competitive pricing and discount offerings, giving W a chance to capitalize on these economies of scale and strong supplier relationships.

The synergy also represents a challenge to AMZN’s customer experience. With Shein and Temu's curated and personalized shopping features, such as 3D visualization, augmented reality, and social sharing, W has the opportunity to boost its design inspiration and customer service capabilities.

On the bright side, over the past three and five years, its revenue grew at CAGRs of 16.8% and 20.2%, respectively. Its tangible book value grew at CAGRs of 33.2% and 45.5% over the respective timeframe.

AMZN's investment in faster delivery bore fruit just before the Christmas season. In the two weeks preceding the holiday, the tech giant reportedly claimed 29% of the worldwide volume of online orders, based on data from Route, a package-tracking application that recorded some 55 million orders. This percentage marked an increase from the 21% achieved during the week of Thanksgiving.

Furthermore, current easing inflationary pressures have resulted in positive shifts in consumer sentiments, setting the stage for a potential upswing in spending. Collectively considering these elements, the ensuing months could be exceptionally profitable for AMZN.

For the fiscal fourth quarter of 2023 (ended December 2023), its revenue is expected to grow 11.3% year-over-year to $166.07 billion, while EPS is expected to increase significantly year-over-year to $0.78.

Its revenue and EPS for the fiscal first quarter (ended March 2024) are expected to increase 11.6% and 116.5% year-over-year to $142.10 billion and $0.67, respectively.

Wall Street analysts expect the stock to reach $183.28 in the next 12 months, indicating a potential upside of about 26.8%. The price target ranges from a low of $145 to a high of $220.

In comparison to the last decade, AMZN today is neither the cheapest nor the only online shopping option, especially when accounting for burgeoning international competition. To meet projected growth, AMZN must exponentially expand its international reach. As a result, past performance cannot be the sole determinant of future success.

Despite being a remarkable enterprise, aligning investment with opportune timing is crucial to generating sizable returns.

Bottom Line

It might indeed be an opportune moment to invest in e-commerce stocks broadly, but the market hasn't presented the same favor for larger-scale furniture goods and additional home décor. Elevated mortgage rates are tempering real estate transactions, thereby making it more difficult for consumers to substantiate the acquisition of new domestic adornments. This could impact W.

Should W choose to engage in a merger with either Shein or Temu, it could potentially surpass AMZN in home furnishings and décor. A merger would pave the way for new customer bases, market opportunities, and access to innovative technologies. However, significant risks such as regulatory challenges, the likelihood of cultural discord, and potential brand dilution may also arise.

Consequently, it is imperative for W to carefully balance the pros and cons related to each merger possibility while formulating a strategic, clear, and potent approach to compete with established giants like AMZN.

Navigating the 2023 Santa Claus Rally: 3 Top Stock Picks for Year-End Gains

Posted on by The INO.com Team

Understanding the Santa Claus Rally

The Santa Claus rally refers to the sustained increase in the stock market indices that occurs during the last trading week of December and the first two trading days of the new year. It was first defined in The 1971 Stock Trader’s Almanac by Yale Hirsch.

Historically, major market indices, including the S&P 500, the Dow Jones, and the Nasdaq Composite, witnessed higher gains during these seven days compared to any other seven trading days of the year. Going back to 1950, the S&P 500 has gained nearly 80% times during this period.

In addition to marking a solid trading period, the Santa Claus rally is used as an early indicator by traders for what may happen in the new year. One of Yale Hirsch’s famous lines states: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

Wall Street Awaits Santa Claus Rally This Year with Stocks Nearing Records

As we head into the last few days of 2023, Wall Street investors are counting on the Santa Claus rally to generate solid returns.

The S&P 500 climbed more than 4% in December alone and is up nearly 24% this year, bringing the index within 1% of a new all-time high. Also, the benchmark index is on track for its eighth consecutive positive week. The high optimism in the stock market is buoyed by solid earnings reports, several signs of strength in the economy, and a growing probability that interest rates will come down soon.

Earlier this month, the Federal Reserve left interest rates unchanged, and the central bank chief Jerome Powell said the historic monetary policy tightening is likely over as inflation falls faster than expected and signaled interest rate cuts into 2024.

Data released last Friday supported the trend of easing inflation, showing annual U.S. inflation, measured by the Personal Consumption Expenditures (PCE) price index, further dropped below 3% in November. The PCE index fell by 0.1% between October and November, the first monthly decline in over three and a half years.

Combined with other latest data indicating disposable personal income and consumer sentiment rising, the U.S. economy seems to be heading into the new year on a solid footing.

“The narrative will continue to be about the Fed making a dovish pivot,” stated Angelo Kourkafas, senior investment strategist at Edward Jones. “That provides support on markets and sentiment and that is unlikely to change next week,”

Investors have demonstrated a substantial appetite for stocks lately. BofA clients bought about $6.4 billion of U.S. equities on a net basis in the last week, the largest weekly net inflow since October last year, BofA Global Research said in a December 19 report.

At the same time, there has been a “sharp increase” in buying among retail investors over the past four to six weeks, Vanda Research said in a note last Wednesday.

“After having chased higher yields aggressively in the past months, the FOMC pivot and strengthening soft-landing narrative have had individuals redirecting their purchases toward riskier securities,” Vanda said in a note. “We expect this trend to continue into the new year as yields remain under pressure.”

3 Stocks to Bet on for Year-End Gains

With a market cap of $1.58 trillion, Amazon.com, Inc. (AMZN) is an e-commerce giant that has a history of performing well during the holiday season. It engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally. The company operates in North America; International; and Amazon Web Services (AWS) segments.

According to the National Retail Federal (NRF), the holiday spending during November and December is expected to rise to “record levels” of between 3% and 4% year-over-year to between $957.30 billion and $966.60 billion, respectively. The NRF projects that online and non-stores sales will grow between 7% and 9% to between $273.70 billion and $278.80 billion.

With NRF projected holiday spending to surge to record levels, Amazon is anticipated to witness significant growth in its total sales volume and profit levels. The e-commerce giant held its latest Prime Day sales event on October 10 and 11, featuring two days of epic deals ahead of the holiday season. Also, AMZN announced plans to hire about 250,000 additional workers across its operations globally for the busy year-end sales period.

The company’s biannual Prime Day events help to drive its revenue. Despite persistent inflation rate, Amazon boasted the biggest-ever Prime Day sale in July this year. U.S. online sales during Amazon’s Prime Day event grew 6.1% year-over-year to $12.70 billion, according to data by Adobe Analytics. The first 24 hours of the shopping event were touted as the “single-largest sales day in company history.”

In addition, AMZN gets a considerable lift from the Black Friday and Cyber Monday sales events held at the end of November and tied to Thanksgiving and Christmas.

After all, AMZN’s trailing-12-month gross profit margin of 46.24% is 30.4% higher than the 35.47% industry average. Its trailing-12-month EBITDA margin of 13.35% is 22.4% higher than the 10.91% industry average. Moreover, the stock’s trailing-12-month levered FCF margin of 5.57% is 25.9% higher than the 5.22% industry average.

For the third quarter that ended September 30, 2023, AMZN’s net sales increased 12.6% year-over-year to $143.08 billion. Its operating income rose 348% year-over-year to $11.19 billion. In addition, the company’s net income and EPS came in at $9.88 billion and $0.94, compared to $2.90 billion and $0.28 in the same quarter of 2022, respectively.

Analysts expect Amazon’s revenue and EPS for the fourth quarter (ending December 2023) to increase 11.2% and 2,510% year-over-year to $165.93 billion and $0.78, respectively. Moreover, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

AMZN’s stock is already up nearly 78% year-to-date. Further gains could come with a Santa Claus rally.

Another stock that is primed for a holiday season rally is American Eagle Outfitters, Inc. (AEO). It operates as a specialty retailer that offers clothing, accessories, and personal care products under the American Eagle and Aerie brands worldwide. AEO sells its products through retail stores; digital channels, like www.ae.com, www.toddsnyder.com, and www.unsubscribed.com; and applications.

The solid performance of its key brands, such as American Eagle and Aerie, combined with strategic expansions into premium and activewear segments, indicates considerable potential for AEO’s growth. The company’s store designs, and online enhancements demonstrate its commitment to improving the customer experience.

During the third quarter that ended October 28, 2023, AEO’s net sales increased 4.9% year-over-year to $1.30 billion. Its gross profit was $543.80 million, up 13.3% from the prior year’s quarter. The company’s net income came in at $96.70 million, or $0.49 per share, compared to $81.27 million, or $0.42 per share, in the prior year’s period, respectively.

“I am pleased with our third quarter results which demonstrated the strength of our brands and reflected continued progress on our growth and profit improvement initiatives. Our strategic priorities, underpinned by our customer-first focus and commitment to operational excellence, are propelling us forward,” said Jay Schottenstein, AEO’s Executive Chairman of the Board of Directors and CEO.

“Momentum has continued across the business into the fourth quarter, driven by strong holiday assortments, engaging marketing campaigns and solid execution, supporting our improved outlook for the rest of the year,” Schottenstein added. “Looking ahead, we remain focused on advancing our long-term strategic priorities, as we seek to create consistent growth across our portfolio of brands and generate efficiencies for improved profit flow-through.”

For the full year, AEO’s management forecasts revenue to be up mid-single digits to last year, compared to the previous guidance for revenue up low single digits. Operating income is projected to be in the range of $340 to $350 million, at the high end of prior guidance of $325 to $350 million. This reflects strengthened demand and continued profit improvement. 

For the fourth quarter, the company’s outlook reflects revenue up high-single digits and operating income in the range of $105 to $115 million. The revenue outlook includes a four-point positive contribution from the 53rd week. 

Street expects AEO’s revenue and EPS for the fourth quarter (ending January 2024) to increase 8.5% and 17.8% year-over-year to $1.62 billion and $0.44, respectively. Also, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters.

Shares of AEO have surged more than 25% over the past month and approximately 45% over the past year.

The third stock, JAKKS Pacific, Inc. (JAKK), also tends to shine during the holiday season. With a market cap of $347.33 million, JAKK produces, markets, sells, and distributes toys and related products worldwide. The company operates through the Toys/Consumer Products and Costumes segments.

The company is primarily benefiting from the expansion of product offerings by strategizing business operations, coupled with the growing focus on partnerships. On November 1, JAKK announced entering a long-term agreement with Authentic Brands Group to design and distribute products inspired by iconic brands like Forever 21 and Sports Illustrated, aiming for a global retail debut in 2024.

The partnership aligns with JAKK’s strategy to expand into new product categories, targeting Millennials and Gen Z while leveraging Authentic’s platform to diversify its seasonal offerings and explore additional collaborations.

JAKK’s trailing-12-month net income margin of 12.18% is 169.5% higher than the 4.52% industry average. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 56.52%, 17.03%, and 16.96% are significantly higher than the industry averages of 11.40%, 6.01%, and 3.99%, respectively.

For the third quarter that ended September 30, 2023, JAKK’s reported net sales from the Costumes segment increased 19% year-over-year to $63.70 million. Its gross profit grew 16.4% year-over-year to $106.99 million. The company’s income from operations rose 16.1% from the year-ago value to $62.40 million. Its adjusted EBITDA grew 12.9% year-over-year to $67.07 million.

In addition, the company’s adjusted net income attributable to common stockholders increased 28.4% year-over-year to $50.09 million, and its EPS came in at $4.75, up 25% year-over-year. 

After reporting outstanding fiscal 2023 third-quarter results, Stephen Berman, CEO of JAKKS Pacific, said, “We are looking forward to the holiday season and have recently finished great customer meetings previewing our Fall 2024 product line. We are exceeding our own internal expectations for the full-year and are carefully navigating towards the end of the year given the persistent uncertainty about consumer behavior.”

JAKK’s stock has climbed more than 14% over the past month and is up nearly 100% year-to-date.

Bottom Line

We are heading into the last few days of the year, which typically represents a favorable time for the stock market and investors. Known as the Santa Claus rally, the stock market tends to rise substantially in the last trading week of December and the first two trading days of the new year.

This year, the optimism is high, with the Federal Reserve surprising investors earlier this month by signaling that its historic monetary policy tightening is likely over and projecting interest rate cuts in 2024. Moreover, the latest robust data indicates strength in the U.S. economy.

Of course, year-end holiday shopping offers a considerable sales boost to retailers and other companies, which can help lift stock prices. AMZN, AEO, and JAKK are set to shine in the year-end Santa Claus rally.

While the Santa Claus Rally offers profitable investment opportunities, day traders should approach it with immense caution and implement an effective risk management strategy. Pre-setting position sizes, setting stop-loss orders, diversifying portfolios, and adhering to a well-defined trading plan are essential steps for managing risk during the rally.