Earning Tidbits #7: Nvidia, Palo Alto Networks, Zoom Video, Rivian + A Bonus Report For Paid Subscribers
Hello Qvestor,
Hope you are well. As the Q4 earnings season winds down, the focus of my analysis will move away from earnings in the next week or so. However, we still have a few big reports to discuss.
In today’s note, I will share a summary of my post-ER updates on - Nvidia (NVDA), Palo Alto Networks (PANW), Zoom Video (ZM), and Rivian (RIVN). Plus, there’s a detailed bonus report for paid members on TQI’s Asymmetric Idea For August 2023, where we are already up +95% in 7 months!!!
In the back half of February, I issued the following ratings on SeekingAlpha:
21st February: NVDA → “Hold” rating issued at $750.25 per share
21st February: PANW → “Hold” rating issued at $261.97 per share
26th February: RIVN → “Hold” rating issued at $10.70 per share
27th February: ZM → “Buy” rating issued at $67.15 per share
Let’s go over the gist of these reports one by one!
Nvidia Corporation (NVDA)
After reporting a blowout quarter, Nvidia Corporation stock is popping higher to new all-time highs. Powered by insatiable demand for its AI GPU chips, Nvidia's Data Center business quintupled y/y to $18.4B! With Nvidia's non-GAAP gross margin expanding by 200 bps y/y and operating expenses growing much slower than the top line, NVDA’s quarterly free cash flow jumped to $11.2B in Q4 2023.
From a fundamental standpoint, Nvidia's business is firing on all cylinders, with astronomical growth stemming from GenAI-induced demand for its AI GPUs. Further, management issued strong guidance for Q1 FY2025.
In my view, Nvidia Corporation remains the most obvious "picks and shovels" play in the AI gold rush. That said, a lot of future success is already baked into Nvidia's current stock price, and the long-term risk/reward doesn't justify the allocation of fresh capital in NVDA stock right now.
While Nvidia Corporation shares are racing above $900+ (as of writing), I am sticking to the sidelines. Here’s why: Nvidia's Q4 Report Is A Blowout: Buy, Sell, Or Hold?
Palo Alto Networks (PANW)
Despite beating revenue and EPS estimates, Palo Alto Networks, Inc. stock tanked by nearly 30% after a shocking guidance cut following its Q2 FY2024 results.
During the Q2 earnings call, Palo Alto Networks' management called out a big federal contract not coming through, rogue behavior (uneconomic pricing) from legacy competitors & startups, and [ROI] optimization in cybersecurity whilst explaining their reduced guidance. However, the primary driver of the guidance cut was a strategic shift for accelerating "Platformization”. By offering its "platforms for free" for a limited time period in exchange for long-term platform commitments, Palo Alto Networks is looking to accelerate its platformization and consolidation program. The company's strategic shift towards "Accelerated Platformization" is set to impact near-term billings and revenue growth but promises bigger long-term gains with no impact on profitability.
While I see no reason to worry about Palo Alto Networks as a business, the stock is still trading above its fair value ($237 per share), and its expected 5-year CAGR of ~13% doesn't exceed our investment hurdle rate of 15%.
If Palo Alto Networks were to keep sliding lower, I would restart the accumulation of PANW stock as soon as its projected CAGR return exceeds our hurdle rate. FYI, this buying level is ~$250 per share. Read my detailed update on PANW here: Palo Alto Networks Q2 FY2024 Review: Arora Fumbles, Stock Tumbles
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Rivian (RIVN)
Following its Q4 2023 report, Rivian’s stock plunged to all-time lows due to bleak production guidance for 2024 and a bankruptcy warning from Tesla’s CEO Elon Musk.
Rivian's numbers paint a grim picture, with negative gross margins, a high cash burn rate, and the need for additional funding to avoid bankruptcy. Despite slashing its workforce by 10% and slowing vehicle production in a worsening demand environment for EVs, Rivian's management sees the current cash balance of $9.4B only lasting the business through the end of 2025!
At 10:00 AM PST today, Rivian will be releasing details about its R2 platform and product lineup, and I am sure all eyes will be looking at what a $45-55K vehicle from Rivian has to offer. While Tesla hit the bullseye with the Model 3 (after skirting with bankruptcy fears for a good while), Rivian's prospects of replicating Tesla's success seem bleak right now. Why? Because for the R2 platform to be wildly successful, Rivian will have to survive until at least 2026 [when the first R2 platform vehicles are expected to be delivered]. Trading only slightly above its cash balance, I think it is fair to say that Rivian is once again priced for bankruptcy. Unfortunately, that's exactly where Rivian may be headed in the next year or two if management fails to raise additional capital for the EV maker. Amid tough macro [demand] conditions, Rivian is cutting costs and slowing production growth to elongate its runway; however, if the economy were to suffer a hard landing, Rivian may very well run out of money within 6-8 quarters in the absence of fresh capital infusion.
Since we are no longer operating in a zero-interest rate world, I am not at all confident about a money-burning furnace such as Rivian being able to get additional funding in its current form. Therefore, I still think Rivian's bankruptcy odds are pretty elevated. If you're thinking - "Well, Rivian is already down so much; how much lower can it go from here?" - the simple answer is 100%. If bankruptcy can be avoided, RIVN stock could be a ~10x or ~20x investment from here; however, Rivian going bankrupt is a far likelier outcome. Read my detailed update to understand my rationale: Rivian: You Have Been Warned By Elon Musk
Zoom Video Communications (ZM)
In Q4 FY-2024, Zoom Video Communications, Inc. generated revenues and normalized EPS of $1.146B and $1.42, beating consensus street estimates on both top and bottom lines.
While the Q4 results and management mood on the call were upbeat, FY2025 guidance for revenue growth of ~1.6% y/y is uninspiring. Amid a post-COVID normalization, Zoom has found growth hard to come by, but as a long-term investor, I remain excited about Zoom's ongoing platform expansion. In my view, Zoom is a best-in-class UCaaS platform for hybrid work as evidenced by Gartner's 2023 Magic Quadrant for UCaaS and Zoom's ability to grow revenues on top of the astronomical demand pull forward experienced in 2020-21, albeit at a tepid pace. Yes, the video meeting solutions market (Zoom's bread and butter) is commoditized [highly competitive] and more or less saturated; however, with Zoom Phone [95 customers with 10K+ seats] and Zoom Contact Center [700+ customers] gaining traction among enterprise customers, I still think top line re-acceleration at Zoom is a matter of when not if.
With a net cash position of ~$22.4 per share or ~$7B (~30% of its market capitalization) and an annual FCF generation capacity of ~$1.5-$2B per year, Zoom has very little downside risk from current levels. Trading at ~10x 2024 EV/FCF, Zoom is a dirt-cheap cash cow right now (for a good reason - lack of growth). Here's what I said in my Q3 review:
With the right capital allocation, Zoom's management should be able to deliver a solid mix of growth, profitability, and shareholder returns over the coming years. That said, Zoom shareholders may need to exercise patience for a few more quarters and allow Eric Yuan and Co. to find the next leg of growth for the hybrid-work software company.
Overall, I am satisfied with Zoom's Q4 2023 report. The guidance for FY2025 is weak, but management seems to be sandbagging here. Given Zoom's robust FCF generation and strong financial position, I continue to feel comfortable holding Zoom here, giving management more time to find the company's next leg of growth. Read the detailed earnings review: Zoom Q4 Earnings Review: Decent Quarter, Weird Guidance
All four reports are paywalled by SA Premium, and can be unlocked by subscribing to our investing group - The Quantamental Investor starting at just $99 per year!
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Now, we will dive into our exclusive update on TQI’s Asymmetric Idea for August 2023. As I shared earlier, we’re already up by ~95% on this stock pick in just 7 months, and I see another 3x from here just to get to our fair value estimate…
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