Friday File, part two: One Post-Earnings Buy and Other Updates
by Travis Johnson, Stock Gumshoe | August 17, 2018 4:05 pm
Real Money Portfolio updates on NVIDIA, Premier, Tencent/Naspers, Sandstorm, and others...
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Source URL: https://www.stockgumshoe.com/2018/08/friday-file-part-two-one-post-earnings-buy-and-other-updates/
@Travis, thanks for the detailed analysis on both TCEHY and JD. I have been following the two stocks, especially relative to BABA and beginning to think that they are chasing the latter. BABA’s result this coming week should shed more light on that but it may be taking market share from them in e-commerce, payments, grocery, and advertisement. Should that be the case, we will continue to see margin erosion in all the stocks but BABA may eventually emerge as the undisputed overall leader based on its massive patronage.
Could be, though the overhang of Chinese regulatory changes and Chinese growth/slowdown in general may mean more than anything else, given that all the companies trade at rich valuations.
NVIDIA did indeed announce their latest GPUs — the ray tracing enabled RTX series, which seem like they’re a massive leap forward in graphics rendering for those game producers who use the technology, including some AI rendering technology in addition to their ray tracing breakthroughs, and a big jump ahead of AMD in general. AMD doesn’t seem to have a plan for new consumer GPUs this year, so NVIDIA is likely to have a pretty big lead in the important high-end market, as well.
To me, that means NVIDIA is a buy even at this high price. PC Gaming is bigger than ever and continues to grow, and NVIDIA is going to own the high end for a while — which, if they get enough game publishers on board, could create a sustainable network effect that keeps them in the lead over their only real rival. The stuff that is more interesting to me, datacenter AI and machine learning, is also NVIDIA’s market to lead, but those are much smaller (and faster growing) markets than the gaming/GPU market — if gaming gets a real growth surge from this new GPU technology, ten years after NVDA revolutionized GPUs with the previous iteration of these chipsets, NVDA could accelerate a lot faster than anyone anticipates.
Certainly not low risk, but I think the company is lowballing their forecasts because they’re worried about whether gamers will buy up the highest-end GPUs this fall — and I think they’re probably being overly cautious. The forward PE on analyst forecasts is about 28, which is very high for a large cap chip stock, but I think there’s a pretty good chance that they’re going to beat those analyst forecasts with this new wave of gaming cards. We’ll see, but I think NVDA is worth buying in small bites here while we wait to see what the consumer reaction to the RTX GPUs looks like. Deliveries of the new GPUs look like they’ll start in late September.
I agree with your fundamental analysis on NVDA but won’t be surprised if it drops to about 215-222 before picking up again given that it traditionally weakens immediately after earning release.
Certainly could work that way, it’s dipped 5-10% a few times in those lull times… we’ll see what kind of analyst response their new product cycle gets in the next few weeks.
Haha you sure called this one right. Wish I would have traded into it. Thanks as always for the insight Travis. Friday Files might be my favorite
Well, so much for “wait for earnings” … Premier had a strong “beat” on both revenue and profit and the shares popped up by another 10% or so. Would still like to add, I’ll see if the shares come back down a bit after this report — PINC is not about to become a momentum growth stock, and they did not offer particularly exciting forecasts for the remainder of the year, so I think there’s still room for patience. Will check in on this one later in the week.
Thanks Travis,
since i liked your analysis of PINC i decided to buy some 2 days ago. Perfect timing so far.
In response to the reader question about Namaste Technologies:
Are they going to sell the best vaporizers and accessories and get a premium price? Current gross margins are 20%, which is pretty decent for a maker and distributor of “stuff”, but their expenses are growing a lot faster than their gross profit so they need a huge bump in revenue and they need that bump to persist, without cutting into margins.
That’s true for a lot of the marijuana equipment/accessory suppliers (and, indeed, for the marijuana growers themselves), since pot enthusiasm has divorced valuations from reality. Doesn’t mean the stock will go down, or that there’s something uniquely more challenging about Namaste’s valuation than the other stocks I’ve seen in the space, but it means buying it at these prices assumes very robust growth and that a lot of things will go their way… which means there’s one critical piece that every investor should understand: You should have a good understanding of why you think this company is better than competitors or has some sort of edge in their market. Otherwise, you’re just betting on future investor enthusiasm and speculative mania to drive up the share price, and that can work but it’s essentially a game of chance — which means you have to, as Kenny Rogers says, “know when to fold ’em” and walk away.
Right now, about 80% of each dollar goes to cost of goods and 25% to sales & marketing, and neither of those line items have shown any economy of scale yet (and may not exhibit dramatically improved efficiencies, as they’ll have to spend more on marketing to try to take share in newly legal markets). To cover that much cost, even assuming their other overhead doesn’t increase as the sales grow (which it probably will), even if we assume that they will eke out improvements in efficiency and spend, say, 20% less on both marketing and widget-making as a percent of sales, that would mean those two lines are taking up 84% of sales and they would therefore need annual sales of about $120 million. That’s about a 500% revenue jump from here, so it’s perhaps feasible in some time frame if the market is really going to expand that fast… but that’s my most optimistic scenario and I have no idea what the competition is like. Unless really strong brands emerge, it wouldn’t be at all surprising if their products are essentially commodities that get dragged down in price in what will probably be a very competitive market. We’ll see.