A Growing Empire
In this edition of the Smart Investor newsletter, we examine one of the most valuable companies in the world. But first, let’s delve into the latest Portfolio news and updates.
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Portfolio Updates
❖ Dell (DELL) shares fell last week along with other semiconductor and hardware stocks in one of the most brutal periods for tech stocks since the pandemic. However, DELL strongly rebounded after the S&P Dow Jones Indices Friday’s announcement that the stock would be added to the S&P 500 index on September 23rd. Analysts believe the company’s shares can continue their gains as Dell has multiple potential catalysts, including the PC refresh cycle, recovery in non-AI infrastructure demand, AI hardware momentum, and more. According to Wall Street analysts, the average potential upside for the stock in the next year is 39%.
❖ Broadcom (AVGO) shares declined in the past week despite the chip and software behemoth posting better-than-expected quarterly results. However, but the beat was smaller than in previous quarters, while the chipmaker’s total current-quarter revenue guidance disappointed (despite an increased outlook for AI-related revenue). Still, Wall Street analysts remain very bullish on Broadcom. The consensus recommendation is “Strong Buy” with an average price target implying an upside of 44% in the next 12 months.
❖ Alphabet (GOOGL) saw its stock wobble on the news about the “grand opening” of its antitrust trial. The claim alleging monopolistic practices to stifle digital advertising competition was filed by the U.S. Department of Justice in 2023. This is Alphabet’s second antitrust battle with the DoJ in the past few months: in August, the tech giant lost a case over search-engine dominance. U.S. regulators are increasingly targeting the nation’s leading tech companies, alarmed by their rising dominance in multiple spheres. Thus, the DoJ is now suing Apple (AAPL) and investigating Nvidia (NVDA), while the U.S. Federal Trade Commission is pursuing cases against Amazon (AMZN) and Meta Platforms (META).
❖ Verizon Communications (VZ) has announced a 2% hike to its dividend, beginning with November’s payout. The communications stalwart’s current dividend yield is a staggering 6.4% even before the latest increase. In other company news, the communications giant announced a definitive agreement to acquire Frontier Communications in an all-cash transaction valued at $20 billion. The deal is expected to expand Verizon’s fiber network significantly. Analysts believe that combining wireless and wired networks will enhance VZ’s proposition for consumers, while potentially expanding revenue growth opportunities for the company through unified network infrastructure and bundling options.
❖ Salesforce (CRM) is ramping up its AI investments with its latest acquisition of California-based startup Tenyx, which develops AI-enabled voice interactions. In addition, CRM announced that it has signed an agreement to acquire Israel-based data protection and management start-up Own Company, in which Salesforce previously invested, to enhance its artificial intelligence data security capabilities.
❖ Taiwan Semiconductor Manufacturing (TSM) reported a 33% year-on-year revenue growth in August, reflecting a continued strength in AI chip demand. The world’s largest semiconductor foundry derives over half of its revenues from high-performance computing. Analysts expect TSM to report revenue growth of 37% in the current quarter on the back of a continued surge in AI infrastructure spending.
❖ Oracle (ORCL) released its FQ1 2025 results on September 9th after close. The global corporate IT solutions leader surpassed analyst revenue and EPS projections, with 8% year-over-year top-line and 17% bottom-line growth. Revenues in Oracle’s largest business segment, Cloud Services, increased 21%, driven by rising demand for training AI models. In addition, ORCL’s remaining performance obligations (future contract commitments) surged 53% year-over-year, rising to a record, which underpins the outlook for revenue growth acceleration. Importantly, Oracle Cloud Infrastructure revenue surged in FQ1 by 45% year-over-year, accelerating from the previous quarter. Analysts expect it to soar even higher in the coming quarters after ORCL’s new multi-cloud partnership with Amazon Web Services. Oracle now collaborates with all three major cloud service providers: Azure, Google Cloud, and AWS.
❖ PayPal (PYPL) added another partnership to its recent list of collaborations that includes Adyen and Fiserv. The online payments pioneer has collaborated with Shopify to “become an additional provider for processing online credit and debit card transactions for Shopify Payments in the U.S.” As part of the agreement, PayPal wallet transactions will be integrated into Shopify Payments in the U.S.
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Portfolio Stocks Under Review
❖ We are placing Super Micro Computer (SMCI) under review following a turbulent period for the stock, which included strong hits to investor sentiment stemming from a short-seller’s report and a filing delay. As a reminder, the notorious short-seller Hindenburg revealed a large short position in SMCI and alleged “accounting manipulation.”
The allegations by themselves might not have been enough to cause more than a momentary dip for a couple of weeks, as short-seller attacks on high-profile stocks abound, and analysts mostly brushed off the allegations. However, SMCI saw its shares plunge after the company unexpectedly postponed the release of its annual filing with the SEC, saying that it needed to assess “the effectiveness of its internal controls over financial reporting.”
After the delay announcement, Supermicro confirmed that there would be no changes to its previously announced financial results or its forward guidance. Despite these reassurances, many analysts have cut their price targets and ratings, citing heightened uncertainty. A downgrade by JPMorgan analysts in particular shook the stock. Although the investment house said that the downgrade “is not led by lower confidence in the company’s ability to regain compliance in relation to regulatory filings or related to any of the tenets of the Hindenburg report,” they lowered their recommendation from “Buy” to “Hold,” citing high uncertainty regarding the stock’s further direction and concerns that the company may have to lower prices to fend off competition.
However, Supermicro’s shares regained some ground this week, notching Monday’s top performance in the S&P 500 following a report by GlassHouse Research. The forensic accounting firm specializing in exposing fraudulent activities by public companies announced a long position in SMCI “for the foreseeable future,” stating highly favorable risk-reward ratio and valuation. GlassHouse added that, according to their analysis, “Hindenburg missed the mark as the quantitative accounting metrics do not line up with their published short thesis,” while they see the firm’s recent filing delay with the SEC as “a precautionary measure” and expect a strong rebound after the company clarifies the issue.
The Smart Investor’s long-term thesis regarding SMCI’s immense long-term potential remains intact; we believe the current difficulties to be temporary. However, we are focusing on the company’s provision of clear communication with regard to compliance questions, which we see as key to its ability to overcome negative sentiment weighing down the stock.
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❖ Vertex (VRTX) remains under review following its underwhelming Q2 results, which included an EPS miss. The company reported a wider earnings-per-share loss than was expected. Notably, the negative EPS is a one-time event brought on by expenses associated with an acquisition of Alpine Immune Sciences, as well as increased investments to support launches of new therapies. The biopharma giant raised its full-year product revenue guidance, citing growth in sales of its cystic fibrosis (CF) treatment and the soon-to-launch gene therapy Casgevy. The stock fell from its all-time high following Q2 underperformance, though not by a large percentage. Vertex’s stellar finances and cash-producing capabilities, along with its strong portfolio of existing and prospective treatments, provide a strong argument in favor of the company. Meanwhile, the main factor against holding the stock, according to analysts, is VRTX’s high valuation, which could limit its near-term upside.
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Portfolio Earnings and Dividend Calendar
❖ The Q2 2024 earnings season is officially over, but companies whose fiscal year is shaped differently continue to report their results. Thus, Adobe (ADBE) is scheduled to release its FQ3 2024 results on September 12th.
❖ The ex-dividend date for Taiwan Semiconductor Manufacturing (TSM) is September 12th, while for Amphenol (APH) and Lam Research (LRCX) it is September 17th.
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New Buy: Amazon.com, Inc. (AMZN)
Amazon.com, Inc., aka Amazon, is an American multinational technology company, engaged in e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence.
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From a Book Shop to “Everything Empire”
The company, founded in 1994 as an online book marketplace, gradually expanded over the years into a wide range of businesses. Amazon’s success has been and continues to be driven by constant innovation and adaptation. The expansion was driven by internal R&D efforts as well as acquisitions. Following its intrinsic development and numerous buyouts, Amazon has many subsidiaries and business units, including Amazon Web Services (AWS), a self-driving car division, a satellite Internet provider, a supermarket chain, a movie database provider, a manufacturer of home security and smart home devices, a video life-streaming service, a book publishing arm, a consumer electronics division, a logistics arm, an online payment service, AI certification courses, and even a pharmacy business.
Although Amazon derives almost 70% of its revenues from the U.S., it spans over 200 countries, with India, Germany, and Japan significantly contributing to revenue. Its e-commerce platform has ~350 million active users worldwide, while its AWS platform counts ~2.5 million businesses among its customers.
Amazon is the world’s prime “creative disruptor,” changing every industry it has entered through technological innovation and aggressive reinvestment of profits. Amazon is the global leader in R&D spending, having invested $86 billion in research in development in 2023. These humongous investments are driven by Amazon’s ambition to lead not just in e-commerce, but in a growing number of advanced tech fields, including cloud, robotics, and AI. The company believes that generative AI “will ultimately drive tens of billions of dollars of revenue across multiple business segments in the years ahead.”
With a market capitalization of $1.9 trillion and annual revenues of $575 billion, AMZN is a member of the “Magnificent Seven” leading U.S. stocks, as well as one of the five largest tech companies in the world, along with Microsoft, Alphabet, Apple, and Meta Platforms. It holds a #2 spot on the Fortune 500 list.
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Retail, Cloud, AI, and Advertising
Today, Amazon is the world’s largest online retailer, with its e-commerce marketplace providing over 40% of total revenues. Amazon.com’s online sales alone (excluding subscription services and third-party seller fees) make it by far the largest e-commerce player on the planet; however, this is now the slowest-growing segment of the company with a three-year CAGR of just 5.5%. Amazon Prime (the company’s subscription service), on the other hand, has grown at a CAGR of 17% over the same period, turning in larger annual revenues than that of Home Depot or Costco. Another source of growth within Amazon’s retail business is third-party seller fees in its marketplace, which have grown at a CAGR of over 20% over the past three years.
However, revenue and earnings growth are driven by AWS, the world’s largest cloud computing platform. Launched in 2006, AWS has become the bedrock of Amazon’s corporate strategy and its tech ambitions. Last year, AWS provided 16.5% of Amazon’s revenues, while accounting for 62% of operating income. AWS holds over 32% of the global cloud computing market, while Microsoft Azure holds 23% and Google Cloud has 11% share.
The rapid expansion of AWS is fueled by accelerating digitalization and driven by customers’ infrastructure modernization efforts, as well as rising demand for the platform’s integrated AI services like Amazon Bedrock, which gives customers access to AI models built by Anthropic, Mistral, and other AI frontrunners. Given that most AI models are run on the cloud, coupled with the fact that over 90% of global companies use the cloud for at least one part of their business, AWS is expected to see accelerating demand as the revolutionary technology continues to advance.
Another important line of Amazon’s business is online advertising. While it currently provides about 8% of the giant’s revenues, it is a fast-growing business, continuously stealing market share from the current leaders, Google and Meta. While their market shares have been slowly declining in the past three years, Amazon’s has risen to 21.3% and is forecasted to continue growing, thanks to the vast user base of its e-commerce platform. As millions of internet users visit its platform, Amazon attracts over 75% of digital retail ad spending in the U.S.
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Stellar Financials and Enviable Earnings
Amazon’s financial health is more than stellar, despite all the acquisitions and heavy investments in expansion and innovation. It has a flawless balance sheet with a solid track record, carrying zero net debt (it holds more cash than its total liabilities) and earning more interest than it pays.
In the past decade, the “everything empire” has grown its revenues at a CAGR of 22.2%, while its earnings-per-share surged at a rate of 71%. EPS growth has been uneven during and after the pandemic but is now back at its breakneck speed. In the last six quarters, quarterly year-over-year EPS growth has averaged 730%! While this rate of growth is hardly sustainable in the long term, analysts expect AMZN’s earnings growth rate to come in at around 50% annual rate in the next couple of years and to average at ~24% beyond that period (barring the very real possibility of the company gaining additional growth sources, as it has done many times).
Amazon reported its Q2 2024 results on August 1st. The company’s net sales rose 10% year-on-year, operating income nearly doubled, and net income surged by 101%. Operating cash flow increased by 75%, and TTM free cash flows surged almost 7x. Moreover, the company’s retail segment far surpasses all other large retailers in terms of operating margins, while this metric for AWS – coming in at 40% – is more akin to the averages seen at the higher-margin software large-caps.
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Attractive Entry Point
Despite these sparkling positives, AMZN’s stock has tumbled after earnings, as investors were unhappy about its conservative current-quarter forecast. The company said that consumers, hit by economic uncertainty and inflation, are increasingly cautious. In Q2, the company saw a slight slowdown in retail revenue growth across platforms, as well as in subscription services. Ad business growth also slowed to 20% versus its previous rates of ~24-26% YoY growth.
On the other hand, revenue growth at AWS accelerated to 19%. AMZN said it has spent over $30 billion on Capex in the first half of the year, with the expenditures mostly related to AWS services’ expansion and advancement, which includes AI deployment. The company said it expects Capex investments to increase in H2. These expectations spooked investors, who lately became impatient with massive AI spending that isn’t expected to create adequate ROI immediately. However, Amazon sees the investments in advanced tech as fuel for growth – and, given its track record, the chances are high that this view is on target.
However, the stock’s ~10% decline from July’s high has created an attractive entry point for long-term investors. Its valuation now sits at the mid-point for AMZN’s fellow “Magnificent Seven” stocks, having declined by over 50% versus its five-year historical average. In addition, it appears about 40% undervalued based on future cash flow projections. Leading Wall Street analysts rate Amazon a “Strong Buy,” with an average price target implying an upside of over 25% in the next 12 months.
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Investing Takeaway
Amazon is a “one of a kind” company, a modern conglomerate spanning multiple industries and geographies. The company’s stock represents a growing retail empire with increasing profitability metrics, a robust digital ad business, and the world’s leading cloud platform. Despite its massive size, it has a proven track record of surging growth, which is expected to continue for the foreseeable future, even if at a more solid pace. While the retail and advertising businesses may see some headwinds in the current and next quarters, AWS is set to continue beating estimates. Overall, Amazon is projected to keep rewarding shareholders for years to come, and as such, we view it as an attractive long-term investment.
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New Sell: Dover Corp. (DOV)
Dover Corp. is an industrial company that provides equipment and components, consumable supplies, aftermarket parts, software and digital solutions, and support services. Its products include printing, identification, marking, and coding systems, waste handling, industrial equipment, refrigeration systems, display cases, industrial pumps, fuel dispensers, nozzles, piping, and electronic tank gauge equipment.
The Illinois-based company is highly diversified across products and end markets, serving all industries, ranging from industrial automation and aerospace & defense to digital textile printing. Its broad global portfolio translates into highly diversified revenue sources, supporting Dover’s ability to maintain profitability and robust cash flow generation through various stages of the business cycle. Notably, about a third of the firm’s revenues are recurring, which reduces capital intensity and increases revenue stability.
Dover has consistently surpassed its peers in the industry in terms of ROE, ROA, and ROIC. In addition, the company has registered above-average earnings growth in the past five years as compared to its peers. In Q2 2024, it surpassed analysts’ EPS estimates, as it did in all quarters since 2020, with a single exception. Wall Street analysts rate it a “Buy” with a ~12% average price upside for the next 12 months. All in all, Dover is a great performer with a solid potential for further earnings growth. Our decision to sell the stock stems from our downbeat outlook for the Industrial stocks over the next several quarters.
The manufacturing activity in the U.S. and worldwide has been under pressure and is not expected to rebound quickly. As firms have largely worked through the pent-up demand from the pandemic era, new orders continue to be weak. According to the latest report from Interact Analysis, the global manufacturing output outside of China is expected to contract in 2024, with the rebound seen sometime in 2025. The U.S. is not projected to experience as severe a downturn as other regions, thanks to infrastructure investments. Still, tight lending conditions, as well as economic and political uncertainty, continue to weigh on the capital-intensive sector.
While our long-term outlook for Industrials is extremely positive, short-term challenges demand Portfolio optimization. We see it as prudent to decrease the Portfolio’s exposure to industrials, selling stocks that have shown relatively weaker stock performance in the past year, have less-than-stellar fundamentals, or have smaller potential upside according to top Wall Street analysts. Thus, in addition to our last week’s deletion of Applied Industrial Technologies, this week we are selling Dover. We retain four best-in-class Industrials in the Smart Investor Portfolio (not accounting for the Aerospace and Defense firms).
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Last week was the worst for the S&P 500 since the pandemic, with the technology and the industrial sectors suffering outsized losses. Despite that, our list of Winners still holds 16 stocks: GE, AVGO, ANET, ORCL, EME, TSM, SMCI, CHKP, GD, PH, HWM, APH, TPL, VRTX, ITT, and AMAT.
The next in line to enter the lucrative club is still REGN with a 21.2% gain since its purchase date. Will it close this gap, or will someone else outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
