Nicholas Rossolillo


AI has been a huge talking point for C-suites, but NVIDIA’s third-quarter earnings call takes the cake.

Artificial intelligence — or at least the idea — is nothing new. In the last few years, though, the decades-old phrase has gone from sci-fi fantasy (or sci-fi doomsday, depending on the writer) to an actual mainstream reality. And for good reason. AI is powering incredible operational changes, providing better insight on decision making, automating monotonous and soul-crushing tasks to free people’s time for higher-level activity, and saving businesses money.

One of the pioneers of the movement is NVIDIA (NASDAQ:NVDA), and the company’s third-quarter 2019 earnings call featured AI unlike any I can recall in recent memory. Though most investors think of NVIDIA as the graphics processor unit (GPU) designer for high-end video gaming (which it most certainly is), it’s often forgotten that much of NVIDIA’s current cutting-edge work is because of video games. That includes AI, which is quickly taking over as the leading driver of growth for the chip giant.

What the numbers said

With the third quarter now in the books, NVIDIA is now nearly back to its cryptocurrency-fueled high-water mark from a year ago. Third-quarter revenue was down 5% year over year to $3.01 billion but surged 17% sequentially over the previous quarter. Adjusted earnings were likewise down 3% from the year prior but up 44% sequentially.

Of course, it was gaming — which still makes up more than half of the revenue total — that drove results. With the busy holiday shopping season here and nearly all video game developers having adopted ray-tracing technology, gaming laptops and PCs (as well as workstations for graphic artists and other creative professionals) are hot items. CEO Jensen Huang said he looks forward to helping the hundreds of millions of computer gamers around the globe upgrade their rigs in the years ahead.

In other segment news, the promising auto business was weak during the quarter, but management said that half of that revenue is still legacy auto infotainment, which has been declining as the space has gotten crowded and commoditized. Crowded and commoditized is not NVIDIA’s specialty. Autonomous-vehicle revenue continues to increase in the meantime, but this is a much longer game than what can be measured in just a couple quarters. Data centers also notched another year-over-year decline but grew 11% from the second quarter.

Why you should forget the numbers

With video games taking the spotlight as far as numbers go, what’s all the hubbub about AI — especially given that the data center and auto segments are responsible for most of the AI business? It all has to do with some recent developments driving future expectations, especially when it comes to conversational AI and the problems it helps solve (like call center and other customer service automation).

As Huang expounded on the third-quarter earnings call, Alphabet’s Google has made some breakthroughs in natural-language understanding and real-time conversation. The AI models running the programming are incredibly complex — Huang said they usually have 10 to 20 times, sometimes 100 times, more parameters than running an image and video. NVIDIA’s GPUs are ideal at accelerating the compute time for artificial conversation in real time.

NVIDIA also made a slew of announcements in the last quarter. It launched its Intelligent Edge platform, which is already getting put to use in retail, manufacturing, and logistics by the likes of Walmart, Procter & Gamble, BMW, Samsung, and the U.S. Postal Service. It’s also getting into mobile telecom, using its GPUs and AI to power new 5G networks.

Huang covered a lot of ground on the call, but it’s a must read. NVIDIA’s technology is helping fuel change across industries worth tens of trillions of dollars a year, so the expectation that AI will eventually itself become a multitrillion-dollar-a-year industry isn’t so far-fetched. It’s taking time for business results to materialize, but the revolution is happening, and NVIDIA’s suite of GPUs and software solutions built on top of them is front and center. The continued revenue recovery in the third quarter was nice, but this is a stock worth keeping as a core portfolio holding for the long haul.

Author: Nicholas Rossolillo

Source: Fool: Artificial Intelligence Is Driving Renewed Growth at NVIDIA

They are also buying one that is getting sold off by Carl Icahn.

When it comes to investing in stocks, there’s no shortage of hot tips and advice on what to buy. One popular tactic is to copy what the biggest names in the investing business are doing.

Blindly replicating recent moves from big investors isn’t exactly advisable, though. For instance, their strategies and goals will likely be different from yours, so due diligence is strongly advised.

Nevertheless, it’s sometimes worth taking note when the big boys make some changes. Two stocks that recently got some positive attention are Facebook (NASDAQ:FB) and Roku (NASDAQ:ROKU), while Occidental Petroleum (NYSE:OXY) got put on notice that a war is coming.

Facebook named a JPMorgan top pick

The social media giant has gotten plenty of harsh criticism the last couple of years. From accusations of everything from election tampering on its platform to personal data mishandling, the knives have been out against Facebook. Nevertheless, buying a well-run company during peak pessimism can be a rewarding endeavor. That’s the take that analysts at JPMorgan Chase took in December 2018 (when, incidentally, the stock market was also in the grips of what is now in the record books as a 20% tumble from highs).

It proved to be good timing, as Facebook is up roughly 45% so far in 2019. However, even with the big run-up, JPMorgan again listed the company as one of its “top picks” after the third-quarter 2019 results. I agree (full disclosure, it’s my third-largest holding).

Sure, the angst over Facebook’s activities hasn’t subsided. In fact, politicians continue to stir the pot, this time over the company’s unwillingness to outright halt political advertising. The company has shown a lack of desire to search for and take down political ads with false statements — although CEO Mark Zuckerberg explained why during the last quarterly conference call. Despite a large impediment to growth being laid in its path for some time, it’s still growing. Revenue is up 27.5% through the first three quarters of 2019, with north-of-20% growth initially called for from management in 2020 as well. Like it or not, Facebook’s social platform is a buy-and-hold for the long haul stock.

Citadel takes on 5% of Roku

Back in October, Ken Griffin’s hedge fund, Citadel Advisors, revealed via an SEC filing that it had scooped up 5% of Roku. The TV streaming device maker and connected TV platform is up over 400% since its IPO in September 2017 and up 300% in 2019 alone, so it may appear that the big institutional investor is getting to the party late. But Roku stock was in the midst of a price pullback from all-time highs in early October (and still is after its third-quarter report, as it was up as much as 360% on the year at one point). Are Griffin and his team of multibillion-dollar money managers right to buy the dip?

The cat is absolutely out of the bag on this one, and Roku continued to put up sizzling numbers in Q3. Revenue grew 50% year over year on the back of a 36% increase in active accounts, a 68% increase in streaming hours, and a 30% increase in average revenue per user. Huzzah! But beware: Share price has handily exceeded revenue growth this year, and free cash flow (basic profits after cash operating expenses and capital expenditures are paid) is barely positive at $6.9 million over the last 12-month stretch.

Granted, Roku is operating close to unprofitability by design, attempting to maximize growth now for a bigger payoff later. But this is still no cheap stock, even when using the woefully imperfect price-to-sales ratio. Roku currently trades for 15.4 times trailing 12-month sales. There’s no company on the market to use for a good apples-to-apples comparison, but humor me and use Netflix (NASDAQ:NFLX). Though the TV streaming leader has a lower gross profit margin, its top-line sales growth isn’t too far removed from Roku’s, yet it trades for only 7.0 times trailing 12-month sales.

Digitally connected TV is the way of the future, and though the recent dip in Roku is currently a shallow one when you consider the landfall return this year, I’m personally not a buyer at the moment. For those willing to stick it out for the long term though, now might be time to at least put this one on your watch list.

Icahn fires up the gears of war against Occidental

Our last consideration isn’t an investor purchase, although it is an interesting sell worth dissecting. Famed investor and corporate raider Carl Icahn revealed that he sold off about a third of his stake in Occidental Petroleum and, via an open letter to shareholders, vowed a proxy war is coming in 2020 in which Icahn will attempt to win seats on the board of directors and oust CEO Vicki Hollub.

Icahn asserts that Hollub and the board were in fear of becoming an acquisition target, and so they engaged in a bidding war with Chevron (NYSE:CVX) for the purchase of Anadarko Petroleum in the spring of 2019. The $55 billion winning bid (considering the assumption of Anadarko’s debt by Occidental) hasn’t been looked on kindly by the market or Icahn. Occidental stock is down over 40% since the announced intention to buy, and while oil prices falling over 10% since then haven’t helped, it’s the large amount of debt and the plan to sell off oil-producing assets to pay for it that has Icahn and the market disturbed.

The company’s first full-quarter report since winning its prize wasn’t great either. Not only did oil prices weigh, but production volume excluding Anadarko also fell during the third quarter. Expected growth in production in 2020 was also cut to 2% (from a 5% target before), as capital spending is being reduced to help pay off debt in tandem with asset sales. A lot is riding on the management team’s ability to wheel and deal.

That’s an ability Icahn doubts the team has. While his strategy to make inroads into the company and shake things up remains to be seen, it’s undeniable Occidental has some quality assets on the books — an admission that Icahn himself also makes. At some point, this beat-up energy producer will be too cheap to ignore. That time may be getting near.

Author: Nicholas Rossolillo

Source: Fool: The Smartest People on Wall Street Are Buying These 2 Stocks — Should You Follow?

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