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The market is getting excited about electric vehicles, but interested investors need to read this before diving in.

Investors have recently become very enthusiastic about electric vehicle companies. Thanks to vast improvements in battery technology over the past decade, EVs are now getting closer to cost parity with gas-powered internal combustion engines. When you combine that with concerns over global warming and the trend toward ESG investing, the growth prospects for EVs, which only have a 2.8% share of new vehicle sales today, seem bright indeed.

But before you invest in any of the EV companies out there — many of which are now going public to raise money at favorable valuations — heed Warren Buffett’s 1999 warning about investing in growth industries. He gave the warning during the 1999 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting on the eve of the dot-com bust, but the concept still applies today.

BUFFETT IS GENERALLY NOT A FAN OF THE AUTO INDUSTRY. IMAGE SOURCE: THE MOTLEY FOOL.

Remember autos and airlines

All-electric vehicles are the revolutionary transportation innovation of the early 21st century, just like the internal combustion engine tantalized investors at the beginning of the 20th century. Imagine being an informed investor in the late 1800s and getting an early look at the first automobiles. No doubt, many would have invested in an invention that was sure to make early investors’ fortunes.

The same could also be said of airlines. Obviously, the airplane was going to revolutionize travel and change society forever going forward. So it must have been a promising investment too, right?

A “difference between making money and spotting a wonderful industry”

In 1999, Warren Buffett and partner Charlie Munger were asked about potentially investing in internet communications stocks, which skyrocketed after the spread of the internet in the early 1990s. Berkshire hadn’t touched them, meaning Buffett was missing out on a market that was booming at the time.

In response, Buffet said:

You know, the two most important industries in the first half of this century in the United States—in the world, probably—were the auto industry and the airplane industry. Here you had these two discoveries, both in the first decade—essentially in the first decade—of the century. And if you’d foreseen, in 1905 or thereabouts, what the auto would do to the world, let alone this country, or what the airplane would do, you might have thought that it was a great way to get rich. But very, very few people got rich by being—by riding the back of that auto industry. And probably even fewer got rich by participating in the airline industry over that time. I mean, millions of people are flying around every day. But the number of people who’ve made money carrying them around is very limited. And the capital has been lost in that business, the bankruptcies. It’s been a terrible business. It’s been a marvelous industry. So you do not want to necessarily equate the prospects of growth for an industry with the prospects for growth in your own net worth by participating in it.

Why didn’t many early automobile or airline investments work out? There are a number of reasons, including the capital intensiveness of these businesses and fierce competition.

The auto industry needs to build expensive factories in order to grow, and airlines need to buy or lease planes in order to serve customers. Both industries have a history of unionized labor forces as well. These characteristics give each high fixed costs.

If demand goes down for any reason — whether from an economic slowdown or a competitor stealing customers — those costs remain, leaving airlines with half-full planes or auto companies running factories at less than full capacity. That’s why so many airlines and car companies have gone bankrupt over the years.

The EV industry is similar

While electric vehicles are innovative and beneficial for society, some of these unfavorable business characteristics remain.

That’s not to say you should avoid the sector entirely. But if you’re invested in any of these companies, you need to genuinely believe that the company has an edge over competitors through technology, brand power, financial power, or management. That edge, or competitive moat, will be needed to navigate the ups and downs of this high fixed-cost industry and to protect your investment capital.

That’s especially true since a number of electric vehicle makers are just now going public to battle with current leaders like Tesla (NASDAQ:TSLA) — not to mention nearly every legacy automobile company now pivoting to EVs. Whether electric or gas-powered, the auto industry will likely remain intensely competitive for years.

If I had to bet which public EV company might have any sort of moat, it would be Tesla, thanks to its brand equity and leading battery technology, which it will update for investors on Sept. 22. That said, with its meteoric rise this year, I think Tesla’s valuation has gotten ahead of itself.

If you believe you’ve genuinely found a competitively advantaged EV company at a reasonable price, then by all means invest. But if you do, heed Buffett’s warning, and go into the investment with your eyes open.

As Buffett himself says: Investing is simple, but not easy.

Author: Billy Duberstein

Source: Fool: The 1999 Warren Buffett Quote That Should Terrify EV Investors

With its impressive growth track record and interest from Warren Buffett himself, this upcoming IPO should be at the top of every tech investor’s watch list.

Investors in general — and technology investors in particular — are always looking for their next multibagger opportunity. In the past five years or so, a number of cloud-based software companies have gone public, with several going on to produce truly jaw-dropping returns. Here are just a few examples:

DATA SOURCES: CNBC, FORTUNE, YAHOO! FINANCE. TABLE BY AUTHOR.

Among the numerous technology companies that have filed S-1 documents recently in preparation for their initial public offerings, Snowflake (NYSE: SNOW) appears to be the one that technology investors are truly excited about. Just last night, Snowflake announced its pricing range, and also revealed a pair of companies that will be taking stakes in its IPO. One is Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) — a somewhat shocking move, given Warren Buffett’s well-documented reluctance to buy expensive growth stocks right when they go public. The other is salesforce.com (NYSE:CRM) — and given that company’s propensity toward pricey acquisitions, its interest here shouldn’t be too shocking at all.

Judging by its current mouthwatering growth rates, there’s good reason for all the enthusiasm. But could this “unicorn” become a millionaire-maker stock for retail investors after it hits the New York Stock Exchange?

IMAGE SOURCE: GETTY IMAGES.

What Snowflake does

Snowflake capitalizes on two of the biggest trends in enterprise technology today: big data processing and the public cloud. Its core product is a cloud-based data warehouse that works seamlessly across the three major public clouds, in contrast to legacy data warehouses that were initially designed for use with on-premises data centers. The company has expanded from its initial offering, and now provides a unified big data querying, governance, and services suite.

Basically, organizations can take all of their data, whatever the source, and easily make sense out of it by dumping it all into Snowflake’s system. Those services are apparently adding lots of value to organizations in an era when such data is being gleaned for insights that underlay nearly every type of business decision.

Big-league growth

The first things that jump out about Snowflake are its ridiculous growth rates. Check out these stats:

IMAGE SOURCE: GETTY IMAGES.

Those are some crazy good numbers, even more so considering that Snowflake is no small business anymore: Its revenue run-rate is on course to exceed $500 million this year. The company did lose $174 million in the first six months of its fiscal year, which began on Feb. 1, but that was an improvement over the prior-year period, both in absolute terms and in terms of margins.

And Snowflake’s revenues pale in comparison with what it outlines as its total addressable market opportunity. Management asserts that the company is disrupting three different but related end markets: analytics data management, integration platforms, and business intelligence and analytics tools. The company cites IDC statistics that show a total market of $56 billion for those segments in 2020, and a forecast for those markets to hit $84 billion by the end of 2023.

Management teams do tend to exaggerate their total market opportunities — especially when they’re advertising their stock — but even a smaller addressable market could still provide Snowflake with plenty of room to grow.

What’s Snowflake’s secret sauce?

Snowflake seems to have capitalized on the demand for cloud-based analytics by optimizing its technology for the public cloud, making it extremely easy to use, and requiring zero maintenance. It allows organizations to manage massive quantities and diverse types of data across all three major public clouds in one easy-to-use, secure platform. The company was founded in 2012: It appears that its founders foresaw the coming shift to the cloud, which explains why they were the first to build a data warehouse platform optimized for cloud computing.

Due to the network effects that apply in the enterprise software space, in which leading solutions often become even more widely adopted because people have trained on them and are used to them, Snowflake appears to have a fair amount of stickiness as the leading purely cloud-based data warehouse. And even though its three key cloud partners all offer similar types of services, Snowflake’s “cloud-neutral” posture seems to be resonating. It’s similar to the way that MongoDB’s cloud database has taken off, even though all the major cloud providers provide their own static databases.

Another advantage for Snowflake may be its management. The company was founded by Benoit Dageville and Thierry Cruanes, both of whom came from on-premises database and data warehouse leader Oracle (NYSE:ORCL), and Marcin Zukowski, a co-founder of Dutch data start-up Vectorwise. I always like it when employees from an industry leader think there’s a better way to do things, and then go off to accomplish it. They usually have the expertise and technology chops to make it happen, and that appears to be the case here.

Interestingly, Snowflake’s co-founders have always hired outside CEOs with significant administrative experience, which could be another reason why the company has accomplished just as much on the sales and marketing execution front as it has with its technology. Current CEO Frank Slootman was just hired out of retirement in April 2019. He has extensive executive experience and was formerly CEO of ServiceNow (NYSE:NOW), one of the leading cloud-based, back-end software vendors for large enterprises. Slootman is highly regarded, and during just six years at ServiceNow, he grew the company’s revenues from $75 million to $1.5 billion. The fact that Snowflake was able to lure him out of retirement also says something about the company’s prospects.

Is this a millionaire-maker opportunity?

Based on the current numbers, it appears that Snowflake has all the attributes of a potential millionaire-maker stock, but there are a few factors that give me pause when it comes to recommending investors buy into its IPO outright on day one.

First, it appears as though Snowflake will hit the market with a sky-high valuation. Tuesday night, the company announced it would be pricing its stock between $75 and $85 per share, or a valuation of $21 billion at the midpoint. Assuming the company takes in $500 million or so in revenue this year, that would put its price-to-sales ratio over 40.

Such a valuation would come close to those of the most expensively priced technology stocks in the market, such as Shopify (P/S of 56) or Zoom Video (P/S/ of 86). In addition, the companies I mentioned at the top of the article all came public at a time when cloud software stocks weren’t given the premiums they are today, and Snowflake has been a private company for a longer period. As such, it’s possible much of the good news about the business — and there appears to be a lot of it — is already baked in.

Second, I’m still a bit unsure about the risks presented by potential competitive threats from Snowflake’s big cloud partners, each of which has their own data warehousing tools, or even the founders’ former employer, Oracle. Those cloud vendors could eventually allow interoperability across their rivals’ systems as Snowflake does, which could allow them to cut into Snowflake’s market share. So far, they haven’t posed a big threat to Snowflake, but given Snowflake’s sky-high high valuation, everything will need to go nearly perfectly in order for the investment to become a multibagger.

Still, it’s very reassuring that both Salesforce and Berkshire Hathaway will be taking stakes in the IPO, which certainly seems to tilt things in favor of Snowflake’s moat being stronger than it may even appear, and its market opportunity being as large as it says. Each of them will be buying $250 million worth of stock at the IPO price, and Berkshire will be buying out an existing stakeholder for an additional $320 million or so. The move is somewhat shocking for Berkshire, as this is the first real U.S. technology company Berkshire will have invested in that is also a high-growth, expensive-looking, money-losing venture. Salesforce, meanwhile, has a history of successful but expensive-looking tech acquisitions, such as Mulesoft in 2018 and Tableau last year.

Thus, it appears that Snowflake looks like the real deal, as evidenced by its enormous growth rates, customer adoption, and expansion metrics, and high-profile investors. I wouldn’t bet against Snowflake doing quite well for public shareholders, even if they buy at an expensive-looking sales multiple.

However, public shareholders should be aware that when Snowflake opens for trading to the public, its price may instantly spike higher. I’d be much more enthusiastic about opening a position if that jump doesn’t push it too much higher than the listed IPO price… but that may be wishful thinking.

Author: Billy Duberstein

Source: Fool: Could Snowflake Be a Millionaire-Maker Stock?

These three stocks are all using artificial intelligence to get a leg up on competitors and win over customers.

Many people have probably heard of artificial intelligence but may be unsure exactly what AI entails.

AI occurs in two phases; the learning or training phase, in which case an algorithm is “taught” how to react to incoming information from troves of past data. The second phase is the “inference” phase, in which case a machine reacts to a prompt based on its learning without human interaction. Along the way, there’s quite a lot of software, processors, and memory that make all of this work, and there are a lot of companies directly or tangentially involved.

One thing’s for sure: The AI revolution is taking off and is bound to make many companies rich in the 2020s. Today, three of the best-positioned AI stocks are CrowdStrike (NASDAQ:CRWD), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), and Lam Research (NASDAQ:LRCX). Here’s why each is a solid buy in September.

IMAGE SOURCE: GETTY IMAGES.

Using AI to disrupt the cybersecurity market

CrowdStrike (NASDAQ:CRWD) has more than tripled since its IPO just over one year ago, but that shouldn’t deter you from still taking a look at this endpoint cybersecurity company today. Although the company looks quite expensive at a $25 billion market cap and a price-to-sales ratio of 45, CrowdStrike’s 85% growth rate and significant gross margin expansion backs up the optimism.

Why is this upstart cybersecurity company on such a tear? Chalk it up to its disruptive business model that was born in the cloud and uses AI to create a “network effect” that continually improves the product based on threat data from all of its customers. CrowdStrike’s Falcon platform consists of its easily deployable lightweight agent that can attach to any enterprise endpoint, from servers, to laptops, to mobile devices, to Internet-of-Things devices. Every endpoint sends data back to CrowdStrike’s centralized Threat Graph, which amalgamates all of that data to continually improve the company’s defense algorithms.

CrowdStrike’s impressive management is nothing if not confident. In the company’s annual report, it writes, “by analyzing and correlating information across our massive, crowdsourced dataset, we are able to deploy our AI algorithms at cloud-scale and build a more intelligent, effective solution to detect threats and stop breaches that on-premise or single instance cloud products cannot match.”

There appears to be something there; in 2019, CrowdStrike catapulted from ninth place in the endpoint security market to fourth place, while the three companies above CrowdStrike all lost market share. What’s more, even after last year’s big share gains, CrowdStrike had only 5.8% of the overall endpoint security market.

I’d look for CrowdStrike to continue gobbling up more endpoint market share over the years while also entering new segments of cybersecurity in the years ahead. The company reports earnings on Wednesday, Sept. 2, so interested investors may wish to buy a portion of stock now, then see what management has to say after the release and conference call.

IMAGE SOURCE: GETTY IMAGES.

Alphabet is an AI conglomerate

Guess which large company was an early investor in CrowdStrike. That would be Alphabet, which invested in the cybersecurity firm in 2015 through its Google Capital, or “CapitalG” later-stage growth investing entity.

But it’s not just through its two investing businesses, CapitalG and Google Ventures, in which Google is exposed to AI. No, AI is at the heart of most core Alphabet products, even its main search engine, where AI-driven algorithms improved the core search function over human-developed algorithms in recent years. YouTube video recommendations also depend on AI, and the rising star in the portfolio, Google Cloud Platform, offers a full suite of AI tools, from image recognition, to voice and language AI, to machine learning and other out-of-the-box algorithms that clients can use. The same goes for Google’s hardware products, including its Google Home pod and Pixel smartphones.

Alphabet has continued to heavily invest in AI, establishing Google.ai in 2017 to work on cutting-edge AI research. Alphabet has even begun making its own customized AI processors called Tensor processing units, which were first developed in 2016. And Alphabet is also making great strikes in futuristic AI-related fields such as quantum computing and self-driving cars with its Waymo subsidiary.

Despite its formidable search business and new high-growth segments like YouTube and Google Cloud, Alphabet has lagged the other FAANG stocks this year, even though it’s up 23% for 2020.

GOOG YEAR TO DATE TOTAL RETURNS (DAILY) DATA BY YCHARTS

I think investors are focusing too much on the quarter-to-quarter growth numbers in the core search business, which has been temporarily affected by the COVID-19 pandemic and lack of travel-related advertising. Yet given Alphabet’s vast cash resources and hefty investments into leading AI research, investors should appreciate the long-term forest, not the short-term trees, making Alphabet a great buy at today’s prices.

IMAGES SOURCE: GETTY IMAGES.

This semi equipment maker just upped its dividend

One thing is for sure: AI will continue to require advanced processors, graphics chips, memory, and storage. And while many chip companies are chasing that gold rush, the manufacturing of advanced processors and memory only comes by way of a few “picks and shovels” semiconductor equipment companies. Of them, Lam Research is currently reporting some of the strongest profitability metrics. In fact, following its stellar June quarter, Lam Research just announced it was increasing its quarterly dividend by 13%, from $1.15 to $1.30, or $5.20 on an annual basis, good for a yield of 1.5%.

Helping matters is that Lam Research garners an outsize portion of revenues from value-add services relative to peers, at around one-third of its revenue base. Not only do Lam Research’s machines make chips for AI applications, the company also uses AI to collect and process vast amounts of data from its large and growing installed base of machines. From that data, Lam has introduced value-add productivity services over the years that help customers reduce defects increase yields, creating a win-win for both Lam and its customers.

Not only should Lam’s installed base increase every year as more and more advanced chips are produced, but Lam has been able to increase its “revenue per chamber” by continuing to develop these extra value-add services.

With high profit margins, returns on capital, a steadily growing services segment and a still-reasonable P/E ratio of 23, Lam still looks like one of the best risk-rewards in the tech sector today.

Author: Billy Duberstein

Source: Fool: 3 Top Artificial Intelligence Stocks to Buy in September

While Starbucks offers a bigger dividend, Microsoft is a better overall investment in this Fool’s opinion.

After this month’s incredible rally, investors on the sidelines may feel as if they’ve missed the boat. With the U.S. economy reopening and adding jobs again, the “out-of-home” plays have skyrocketed recently, as they were among the hardest hit in March’s sell-off.

Meanwhile, technology stocks, after a nice run earlier in the year, have stagnated as investors rotate into more beaten-down sectors of the economy. However, technology is pushing many of the big societal trends today, from 5G communications, to cloud computing, to artificial intelligence, to e-commerce, telemedicine, remote work, and remote education. Thus, tech may also be worthy of a look after its “pause.”

So, what kind of stocks should you buy today, if putting new money to work? First, whether it’s an out-of-home or work-from-home stock, make sure to invest in a quality business. The times are still uncertain, and with many lower quality stocks having rebounded sharply off the lows, it’s probably a good time to look at some of the larger, high-quality dividend stocks in the market.

After all, companies with sustainable competitive advantages and solid growth prospects are almost never a bad buy. Meanwhile, it’s also a great time to buy dividend growth stocks. With interest rates at rock-bottom levels for the foreseeable future, even low dividends look attractive today. And if those dividends can grow? Even better.

One large, high-quality out-of-home dividend stock is coffee giant Starbucsk (NASDAQ:SBUX), while a favorite high-quality work-from-home stock is Microsoft (NASDAQ:MSFT). Let’s see which of the two looks better today.

COVID-19 hit Starbucks hard

Investors may be tempted to buy Starbucks as it recovers from the COVID-19 pandemic. While Microsoft’s first calendar year quarter’s earnings were relatively unaffected by the coronavirus, Starbucks was, predictably, heavily affected.

Though lockdowns occurred only in the last two weeks of the March quarter in the U.S., Starbucks’ Americas segment saw a 3% decline in same-store sales. More indicative of the quarantine-affected results was the company’s international segment, which includes China, which saw a 31% same-store-sales decline. Offsetting these declines was an increase in Starbucks’ channel development, where Starbucks sells beans and pods through third-party retailers like grocery stores, which saw 16% sales growth, though off a much, much smaller base. Yet the channel improvement wasn’t enough to offset declines in stores, as the company saw negative deleveraging as it continued to pay employees through the period. As a result, Starbucks saw its earnings per share fall by 47% in the March quarter, down from $0.53 a year ago to just $0.28 last quarter.

Moreover, that quarter was only partially affected by the coronavirus. Even as more and more Starbucks stores reopen, results are likely to be worse in the current quarter. And though Starbucks has already reopened basically all its stores in China, they are operating under modified hours. While 85% of Starbucks’ total stores have reopened, the company hasn’t been able to give employees as many hours as expected and recently encouraged workers to take unpaid leave — not a great sign.

Clearly, Starbucks is a great company and is doing the right thing by continuing to offer its benefits to workers, even if they’re on leave. However, that will affect near-term results. Analysts now expect Starbucks to post a net loss of $0.16 for the June quarter, and just $1.37 for the fiscal year ending in September. That $1.37 is actually lower than the company’s current $1.64 dividend, so Starbucks will likely have to fund its dividend with more debt as well as it navigates through this period.

Microsoft is well insulated

While Microsoft will also be affected by any economic slowdown, it has a far more resilient business model. That’s because Microsoft mainly operates in enterprise software, which businesses need to use in good times and bad. While it’s true that a recession could lead to a decrease in business IT investment, the COVID-19 pandemic has also spurred many business to digitize their IT infrastructure much faster than they otherwise would have. That cross-current of headwinds and tailwinds left Microsoft’s recent results on-trend during the March quarter.

In fact, Microsoft’s year-over-year growth actually accelerated during coronavirus compared to the December quarter, led by its Azure infrastructure-as-a-service platform, which grew a stunning 59%. Microsoft’s Teams software, which competes with coronavirus darlings Slack Technologies (NYSE:WORK) and Zoom Video (NASDAQ:ZM) got a big boost in interest as workers began to work from home across a wide swathe of businesses. “We’ve seen two years’ worth of digital transformation in two months” said CEO Satya Nadella on the recent conference call with analysts.

With Microsoft’s high-growth cloud-based products making up a larger part of the business, and with Microsoft’s new Xbox console set to launch later this year, it’s possible that Microsoft can maintain or even accelerate its revenue and earnings through 2020.

Yet valuations are similar

Despite Microsoft clearly having the better-insulated business, growth prospects, and a better balance sheet, both companies actually trade at similar valuations at this point. While it’s not always appropriate to compare companies in different sectors, when looking at each company’s financial characteristics, it’s hard to believe both are valued so closely, at least on a forward price-to-earnings basis.

Microsoft is actually slightly cheaper based on 2021 EPS estimates, and Starbucks’ 2021 estimates imply a significant recovery from current levels. No doubt, a Starbucks recovery will likely happen, but the scope of the recovery is still a big question mark. And while Starbucks’ dividend is currently covered by trailing earnings, remember, its 2.08% dividend will likely not be covered by 2021 full-year earnings. Even using the $2.75 EPS estimate for next year, and the dividend payout ratio would rise to 60%, up from 55% today. That doesn’t leave much room for more growth or debt paydown, which will likely be necessary considering the company has taken on additional debt to get through this period.

Meanwhile, not only is Microsoft cheaper on forward earnings basis, but when taking into account its massive $71 billion in net cash versus Starbucks’ $11.4 billion in net debt, Microsoft is significantly cheaper. In addition, I think analysts may be too conservative with Microsoft’s earnings growth estimates, which only imply 9.1% growth next year. Given that Microsoft grew earnings per share 23% last quarter and 28% over the past nine months, I think that’s much too modest, given the company’s strength in cloud computing.

Putting new money to work? Microsoft looks better

While many investors may see Starbucks’ higher dividend yield and think its top brand will make for a good reopening play, the company’s strong recovery from the March lows seems to have priced in a lot of the good news already. Meanwhile, I think Microsoft still has more gas left in the tank, based on its stronger financials. Analysts at Wells Fargo (NYSE:WFC) recently raised their price target on Microsoft to $250, up from $188 today, and I think that’s a solid call.

Of course, I own both companies. Starbucks isn’t a bad investment by any means. However, when looking at each company’s growth and profit potential amid the coronavirus, along with their strikingly similar valuations, it’s no contest: Microsoft seems like the better of the two investments today.

Author: Billy Duberstein

Source: Fool: Forget Starbucks: Microsoft Is the Better Dividend Growth Stock

Coronavirus or not, these three companies will help shape the future of tech.

The upcoming economic downturn caused by the COVID-19 outbreak may actually speed up some long-term technological trends. These include teleworking, e-commerce, and automation. At the center of all these is artificial intelligence, in which machines process vast data sets, learning to “react” to incoming information without human intervention.

Thus, the terrible downturn may have opened up long-term opportunities in stocks at the center of future AI applications. Nevertheless, in uncertain times like these, it’s best to look at companies with best-in-class profitability, safe business models, and solid balance sheets. The following three AI-oriented companies all fit that bill.

Lam Research

The advent of AI will require vast amounts of storage and processing capability. That means faster and faster, smaller, and smaller chips that occupy less space in servers while also doing more work. Lam Research (NASDAQ:LRCX) makes the machines that allow chipmakers to produce smaller, more powerful chips.

Today’s chips are so advanced that they’re becoming harder and harder to manufacture without defects, which is why Lam’s machines and services are so important. Specifically, Lam produces etch and deposition machines used across foundries as well as memory-makers. Last year, its revenues were almost evenly divided between logic and foundry and memory deployments, even in a recessionary year for memory spending.

Lam was one of the best-performing stocks in 2019, but its stock has been punished this year, down over 37% from its recent all-time highs, and the company’s PE ratio has fallen to just under 16. Lam’s results do fluctuate with semiconductor spending, but investors should know that Lam was already coming off of a down year in 2019. Prior to the coronavirus breakout last month, Lam had projected wafer equipment industry revenue in the mid-to-high $50 billion range in 2020, up from around $47 billion in 2019. So even if the industry has a severe downturn, the total wafer fabrication equipment industry is likely to be closer to what it was last year, not significantly down. Moreover, Lam has a great service and spare parts business, which accounts for about 30% of revenue and can grow even without growing new machine sales.

Meanwhile, Lam has outperformed its industry peers. Over the last two semi cycles, Lam grew revenue at 1.6 times the industry, with operating income growing faster than revenue, and earnings per share growing faster than operating income. Over the past four years, Lam’s return on invested capital has been extremely high, averaging over 50%, which has enabled it to buy back lots of stock and increase its dividend every year. Importantly, the company has a strong balance even after these generous capital returns, with $4.6 billion in cash and investments versus just $4.4 billion in debt as of last quarter.

Basically, while Lam’s near-term results are a bit uncertain, it’s still a profitable business with great long-term growth prospects. Down this much, investors may want to pick up some shares at these discounted levels.

Alteryx

On the software side of artificial intelligence, Alteryx (NYSE:AYX) may be worth a look as well, as its stock is down about 50% from its 52-week highs. While Alteryx’s valuation had likely gotten ahead of itself earlier this year, at the current discounted price, it deserves a long look.

Alteryx is becoming an important core software platform for corporations, as its main product is an end-to-end, comprehensive software suite, which allows both data scientists and non-data scientists to work together building and deploying machine learning algorithms. Alteryx was an early mover in the space and focused exclusively on the core customer usability, making it a hit with clients. Alteryx was also not afraid to integrate seamlessly with other big data offerings, even those with which it might compete in some areas. That has led to impressive customer adoption. Last year, Alteryx grew customers by 30% while also achieving a net expansion rate of 30%, good for 65% overall growth.

No doubt, the company’s growth will slow this year. Management had already anticipated a deceleration to just 34% growth in the coming year even before coronavirus. Yet while the near-term environment is no doubt challenging, a 50% haircut on the stock price is also significant.

But the real reason Alteryx could be a safe pick is because it’s one of the rare software-as-a-service platforms that actually makes profits. That’s true of both GAAP as well as adjusted non-GAAP earnings. Last year, Alteryx made $27 million in net profits on a GAAP basis, as well as non-GAAP net income of $64.6 million. The company also has cash, cash equivalents, and long-term investments of $975 million versus just $700 million in convertible debt.

While growth may slow in the near term, Alteryx’s solid profitability, balance sheet, and “sticky” product make the stock look much more attractive at its current discount.

Micron

One of Lam Research’s memory clients is Micron Technology (NASDAQ:MU), which also deserves a look after the recent sell-off. Micron’s product portfolio will be essential to future artificial intelligence applications, which will require lots and lots of DRAM memory and NAND flash storage. In addition to these products, Micron is also one of only two companies to have 3D Xpoint, a new kind of non-volatile memory that is faster than NAND, though also more expensive. Micron is the only company to have all three technologies.

While memory companies have traditionally been dangerous to buy in a recession, that’s been because these companies can’t just “turn off” supply very easily. So if demand plummets, memory prices tend to crash.

However, the memory industry was already at the trough of the last cycle when COVID-19 hit. That means memory companies had already greatly pulled back on supply growth, and was already projecting this year’s supply output to be below demand. That’s why even with the current downturn, research website DRAMeXchange is still projecting DRAM prices to increase this year, though NAND prices could either increase or decrease a little.

Memory is also a bit different because memory content per unit is increasing. So, even if smartphone shipments fall by 10% this year, new 5G phones will have increased amounts of memory. If a phone goes from, say, four gigabytes to six gigabytes of DRAM, that’s a 50% increase, so overall demand may increase even though units go down. In addition, some segments like servers and gaming are seeing increasing demand from teleworking and other in-home activities. That’s why despite the downturn, Micron’s management is seeing pockets of supply shortages. On the recent earnings release in late March, management actually forecast increasing revenue and earnings for the current quarter, even with knowledge of the widespread quarantines by that time.

Micron is a bit of a wildcard in the near term, but it’s still generating profits in a downturn, and has a solid net cash position, with $10.6 billion in cash versus $7.9 billion in debt. That means Micron should be able to weather the current storm rather well. And with the stock down by about a third since the market collapse, Micron seems poised for upside once the crisis subsides.

Author: Billy Duberstein

Source: Fool: 3 Top Artificial Intelligence Stocks to Buy in April

Individuals are set to receive $1,200 in federal money under certain income thresholds.

On Wednesday night, the U.S. Senate passed a giant $2.2 trillion stimulus bill that included $1,200 payments to all U.S. citizens with incomes under $75,000, along with an extra $500 per child. For every $100 in income above $75,000, the stimulus check will drop by $5. The Senate bill still has to be passed by the House of Representatives, but it should either pass the bill as is or even add more benefits for average Americans, given that the House is controlled by the Democrats.

With the recent severe market decline, some people may be tempted to invest those dollars in the market as soon as they receive them. However, while now is a great entry point for long-term investors, make sure you’ve checked the following boxes first.

Priority No. 1: Bolster your emergency fund

While the stimulus bill is good news and the past few days have seen roaring gains in the market, there’s still a high degree of uncertainty as to how COVID-19, as well as the economy, will perform. You may feel secure in your job and health now, but coronavirus cases are still spiking in the U.S. Until we get the disease under control, we just don’t know how long the fallout will be. While we do have a model for time-until-peak cases from China, it’s still unclear if the U.S. can contain the virus as well or as quickly.

That still leaves many Americans open to both employment risk and health risk. It also means that if you don’t yet have an emergency fund of three to six months of living expenses set aside in a savings account, that’s where these dollars should go.

Having a solid emergency fund may not be the most efficient use of dollars when the market is depressed, but having the peace of mind that those funds are available can reap a lot of psychological dividends. If, for instance, you decide to invest your check instead and the stock market has another leg down, you may panic-sell at another low. But If you save the money, you could start to nibble at lower prices, as long as your don’t deplete your emergency stash below three months.

Priority No. 2: Pay your bills and debt on time

Hopefully, the current downturn is temporary. However, if it’s not, we could be looking at an environment in which financial institutions tighten credit in the medium term. That means large banks and lenders might make it more difficult to get a needed loan such as a mortgage, personal loan, or credit card if there’s a prolonged recession.

That would be bad news if you have less-than-pristine credit due to not paying your bills. If that happens, you may not be able to get a much-needed loan in the future or have to pay a much higher interest rate than you otherwise would. That’s why it’s still a good idea to pay your bills and loans on time.

That being said, many lenders are now allowing deferred payments on all types of loans in light of the crisis. For instance, many of the large U.S. banks, including JPMorgan & Chase, Wells Fargo, Citigroup, and U.S. Bancorp, have committed to 90 days forbearance on mortgage payments for those affected by the coronavirus, provided they provide documentation related to hardship. Bank of America has agreed to 30 days, along with commitments to work with customers on a monthly basis until the crisis is over.

Meanwhile, other lenders are offering one-off deferments regardless of the impact of the coronavirus. For instance, holders of the Apple credit card, which is backed by Goldman Sachs, are allowed to defer their March payments by one month with no interest charges or penalties. Meanwhile, most other credit card companies have offered more general assistance based on individual circumstances.

While these programs are nice, you should double-check to make sure enrolling in any forbearance or deferment programs won’t affect your credit score. And if you don’t have a hardship, it’s probably a good idea to pay all your bills on time.

Of course, if you have a revolving credit card balance, pay that down first before investing. Even with this depressed market, the return you get by eliminating a high-teens interest rate on your credit card is still highly likely to do better than the long-term returns of the market, even from these depressed equity levels.

No. 3: Buy from local businesses

My third priority is somewhat unconventional, and one you might not hear from others. If you already have a solid emergency fund, have paid all your bills and credit card balances, and still have money left over, I suggest making an effort to buy food and other goods from local businesses.

Just like social distancing, buying from local businesses is doing your part to not only help stop the spread of the disease, but also the financial contagion. While small businesses will get help from the new stimulus package, every bit of incremental revenue helps. That means instead of stocking up on groceries from a financially strong company such as Costsco, make an effort to order delivery or takeout from your favorite local restaurant. Very likely, these businesses are open for pickup or delivery through one of many third-party delivery apps.

Small businesses have been losing out to large corporations for the better part of two decades, and the current crisis has the potential to accelerate that troubling trend. Still, small businesses currently account for 43.5% of U.S. gross domestic product (GDP), and last year, small businesses employed about 47.3% of the private workforce.

By buying dinner from your favorite local restaurant, you’re not only helping keep that restaurant open and its employees on the payroll, you’re helping to contribute to the economic recovery from this terrible crisis. While it may be a bit more expensive than stocking up on groceries and making food at home, you’d be doing your part to help the ailing economy at this critical time.

Then, by all means, invest!

If you have a solid emergency fund, paid all of your credit cards and bills, and are buying from local businesses — and you still have money left over — then by all means, invest! After all, the recent crisis has provided a very nice entry point for investors with a long-term time horizon. There are many solid bargains out there.

Author: Billy Duberstein

Source: Fool: Thinking of Investing Your Stimulus Check? Do These 3 Things First

Here’s why it’s a big deal for the company and future of banking.

In its fourth-quarter and full-year 2019 earnings release, financial-technology loan platform LendingClub (NYSE:LC) also announced that it would be acquiring another company. Wedbush analyst Henry Coffey deemed the move “amazing news” on LendingClub’s conference call with analysts.

What has analysts like Coffey so excited? This is the first time a new fintech company has acquired a bank — specifically, digitally native Radius Bank, a branchless bank based in Boston, with about $1.4 billion in assets.

While that may not seem like such a huge deal, it could be. Fintechs came on to the scene a few years ago as potential disruptors to the banking industry. However, many have fallen flat, as regulatory hurdles popped up, credit tightened, charge-offs rose, and legacy big banks upped their game.

However, should fintechs be able to combine what’s best about their modern, nimble platforms with the regulatory compliance and access to deposits that banks have, it could make for a formidable combination. Though LendingClub is the first to make the combination by acquisition, private start-up Varo Money just received a bank charter earlier this month after a three-year application process. Fellow fintech Square (NYSE:SQ) is also currently pursuing its own license with the FDIC.

Here’s why the transaction could especially be a game-changer for LendingClub’s lagging stock price and the industry at large.

Enormous synergies

In total, LendingClub will pay $185 million for Radius, with 75% coming in cash and 25% coming in stock. However, to clear the way for regulators, LendingClub also has to pay $50.2 million to current shareholder Shanda, a Chinese investment company that owns 22% of LendingClub shares, in exchange for converting its shares into non-voting stock.

LendingClub should get enormous benefits from the deal should it go through. First, LendingClub will save roughly $25 million per year on fees it currently pays to WebBank, the current Utah bank that LendingClub “rents” essentially as a pass-through entity to make its loans across the country.

Second, LendingClub estimates it will lower its own costs of funding by about $15 million per year to start, as Radius’ lower-cost deposits will replace LendingClub’s current warehouse lines, which LendingClub estimates will bring its costs of debt down from roughly 4% to 1.8%.

LendingClub currently only uses its warehouse lines to acquire loans on its platform temporarily, before selling them in securitizations or directly to institutions, banks, and individuals. However, having Radius’ deposits will allow LendingClub to hold more of its own loans on its balance sheet. Previously, LendingClub only held a token amount of loans on its balance sheet and mostly resold loans on its platform. Though the majority of LendingCLub’s loans will still be sold, the company now intends to hold about 10% of its originations on its balance sheet. That could result in an incremental $40 million in economic profit per year for every $1 billion held on the balance sheet. Last year, LendingClub originated about $12.3 billion of consumer loans.

In all, this adds up to about $80 million in annual economic benefit for Lending Club alone, which is fairly remarkable since LendingClub is paying only $185 million, or $235 million when including Shanda’s payoff. LendingClub also has a market capitalization of just $1.15 billion, with $714 million in net cash and short-term loans held for sale on its balance sheet, for an enterprise value only around $435 million.

In addition, LendingClub will acquire Radius at 1.72 times book value and 28.6 times earnings and will bring in Radius’ roughly $1 billion in diverse consumer and commercial loans. While the P/E ratio suggests only about $6.5 million in earnings for Radius, that’s really the cherry on top for the deal. Combined, Radius will enable LendingClub to reap all of the benefits, and both companies should be able to meaningfully grow together with the added scale each side brings. In addition, Radius also appears to be a technically savvy operator, and Bankrate recently named it “Best Online Bank for 2020.”

Adding to Wedbush’s enthusiasm on the call, Oppenheimer analyst Jed Kelly wrote in a report, “We view LendingClub’s intention to become a fully digitized bank by acquiring Radius Bank as a meaningful catalyst in unlocking greater shareholder value for its leading personal lending platform.” At first glance, I tend to agree.

A formidable combo

LendingClub estimates that the deal will take 12 to 15 months to close, and regulators are notoriously difficult with bank mergers. Nevertheless, should it come to fruition, the combination would create a new type of financial institution that combines the fintech’s leading customer acquisition and data-driven underwriting platform with Radius’ deposit-gathering skills. LendingClub will still be selling 90% or so of its consumer loans through its platform to third parties, so it will still retain that “platform” status and won’t totally resemble a bank.

In this way, LendingClub is hoping to become a new kind of hybrid that retains the advantages of being a loan platform while also bringing in the advantages that come with traditional banking, most notably low-cost deposits and lower compliance costs.

Is it the right mix? That remains to be seen, but one thing is for sure — at least on traditional metrics, the combined company will be extremely cheap, should the deal go through and promised synergies come to fruition.

Author: Billy Duberstein

Source: Fool: A Fintech Is Buying a Bank for the First Time Ever, and It Could Change Everything

If you’re thinking of investing in AI, these three leaders face crucial tests this month.

Though artificial intelligence (AI) has been a hot topic among technologists for quite some time, it’s only in recent years that semiconductor, software, and cloud capabilities have gotten to the point where companies are now deploying AI on a wider basis.

AI is so powerful because it can help companies on every part of the income statement. It can identify the best leads and better satisfy customers through recommendation engines, helping to boost revenue. AI can also help automate many back office tasks, saving companies on their selling, general, and administrative costs. And perhaps most exciting, AI can also help research and development departments find new solutions or correct flaws in highly technological manufacturing processes, benefiting both research and development as well as costs of goods sold.

February is shaping up to be a crucial month for these three AI leaders across cloud, memory hardware, and software-based analytics. Here’s what investors should watch.

Alphabet

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) reports its fourth-quarter earnings today, the last of the large-cap “FAANG” stocks to do so this earnings season.

Alphabet has two main issues that will heavily affect its earnings and outlook. Its main business of digital advertising saw a nice pickup last year; however, investors might be cautious on digital ads today after rival Facebook (NASDAQ:FB) disappointed in its revenue outlook last week. Facebook management said revenue would decelerate in the “low to mid-single digits” for the first quarter, because of “the maturity of our business, as well as the increasing impact from global privacy regulation and other ad targeting related headwinds.”

Keep in mind Facebook still grew revenue a solid 25% last quarter, so it’s not a huge deal to see some deceleration. I also don’t think Alphabet’s Google search engine would be quite as affected by privacy regulation, since customers voluntarily enter information they’re searching for. However, investors should keep a watch on Alphabet’s forward guidance and any commentary around privacy regulations affecting their core digital advertising business.

In addition, the next big growth driver for Alphabet could be its cloud computing division. Alphabet doesn’t disclose cloud revenue separately, as leader Amazon.com (NASDAQ:AMZN) does, but rather groups it in with its hardware and app store revenue in a category called “Google other.” Alphabet has also not disclosed specific cloud growth rates either, as does its other cloud rival, Microsoft (NASDAQ:MSFT). Nevertheless, management usually gives lots of qualitative commentary on the cloud, and it’s been investing heavily in that unit over the past 18 months under new cloud head Thomas Kurian.

Both Microsoft and Amazon reported strong cloud results in their recent earnings reports, so investors should monitor management’s cloud commentary to see if Alphabet is falling behind these two leaders, or if a rising tide is lifting all boats.

Micron

Another leader in AI, though this time on the hardware side, is Micron Technology (NASDAQ:MU). Micron is a leader in both DRAM memory, NAND flash, and a new kind of memory component called 3D Xpoint, which is just being commercialized now.

Micron doesn’t report earnings this month; it has an off-quarter schedule and doesn’t report until late March. However, there are a number of interesting developments going on in the memory market in February. Most exciting, the memory market seems poised to begin a strong up-cycle, and Micron’s management called the bottom of the current cycle in late December.
The NAND flash market, where Micron earns about 30% of its revenue, is already in the early stages price increases after a huge crash in average selling prices over the past 18 months. Some analysts have even forecast a 40% rise in NAND flash pricing this year, which would significantly boost revenue and profit for all industry players if true.

Meanwhile, while Micron’s core DRAM market is lagging behind the NAND market in its upswing, the DRAM market is also showing signs of improvement. Memory market research firm DrameXchange, a division of Trendforce, recently revised upward its first-quarter forecast for DRAM pricing, from an initial projection of flattish average selling prices to a low-single-digit price increase. That could mean that the oversupply in the DRAM market is adjusting faster than some expected, which could lead to better projected results for 2020.

However, Micron is also very sensitive to macroeconomic conditions, and the recent coronavirus outbreak in China seems to have caused blind selling in all such component stocks — Micron included. While Micron would definitely be affected by a near-term drop-off in demand, it’s not showing up in results just yet. Storage and memory are crucial to AI applications, so long-term investors may wish to give all related stocks a look based on the current fear-induced sell-off.

Alteryx

Finally, big data analytics software company Alteryx (NYSE:AYX) reports earnings on Feb. 13. Alteryx makes an end-to-end software suite that allows both data scientists and average knowledge workers alike to create, organize, and share predictive analytics models across an enterprise.

Alteryx has been on my radar for a little while, and I’m sorry to say I’ve missed the stock’s ridiculous 35% surge in just the past month. What has investors so bullish? While there wasn’t any big news in January, investors may be refocusing on Alteryx’s long-term prospects after a bout of profit-taking in late 2019. Management believes Alteryx’s total addressable market for data analytics and spreadsheet users combined is around $73 billion, versus Alteryx’s trailing-12-month revenue of just $351 million. That leaves a huge amount of white space there for the taking, even if Alteryx shares that pie with competitors such as Tableau, which salesforce.com (NYSE:CRM) acquired in August.

However, Alteryx hasn’t shown much competitive pressure yet. Last quarter’s revenue accelerated 65%, beating the prior-year quarter’s revenue growth rate of 59%. That accelerating growth put the stock back up near its all-time highs, and it now trades at a quite lofty valuation multiple of 26 times sales. Admittedly, that’s pricey, even for the high-growth software-as-service sector.

For the upcoming earnings report, I’ll be watching closely to see if the company can beat its forecast for 44%-47% revenue growth. While that would mark a deceleration from last quarter, growth rates are bound to come down as the company’s revenue base gets bigger, and high-40s growth is hard to find in many large companies. Alteryx also has positive operating income, somewhat rare for a high-flying software company still investing heavily in growth.

With coronavirus fears hitting all tech stocks, investors should look for any type of pullback, perhaps after earnings, as a potential entry point in this winning AI-related software stock.

Author: Billy Duberstein

Source: Fool: 3 Top Artificial Intelligence Stocks to Watch in February

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