Master your fundamental research. Join 78,618 investors who trust our platform and content.
Save 54+ hours of fundamental research with free access to Stock Card.
We only ask your name and email address.
|
I've read a fascinating study about cloning super investors like Warren Buffett this week. If you copied Warren Buffett's top 10 holdings and rebalanced them every quarter, you could have outperformed the S&P 500 by three percentage points yearly between 2000 and 2019. That's strong evidence that sometimes copying the right investor can be a good strategy. But not every investor is worth that much respect. A better strategy is to find the top investors, aka super investors, and use their top holdings as a source of new stock ideas. That's precisely what we are going to discuss in today's post. There are three stocks that 20 super investors hold the most in their top 10 portfolio holdings. I'll research them fundamentally first and then share whether adding them to our portfolios makes sense too  I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett? or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. There is no actual definition of super investors. They are the most prominent hedge fund managers or investors we hear from in the financial media. People follow their advice, share their quotes, or read their books and writings. You must already know many of them. Warren Buffett sits on the top of the list as the undisputed super investor with $350B in assets, excluding the value of all the companies Berkshire Hathaway wholly owns. Howard Marks, Bill Ackman, Chuck Akre, Monish Pabrai, and Michael Burry, with a few hundred million dollars in assets under management, are some of the others on the list. Even Bill Gates is considered a super investor because of his $40B+ Bill and Melinda Gates Foundation Trust. In summary, the super investors list is the who's who of investors because they manage a lot of money, influence the funds' decisions, or are known in the media as great investors. I went through the top 10 holdings of each super investor's portfolio reported on their quarterly 13F document as of the 30th of June 2023. The list of top 10 holdings across the 20 super investors includes more than 150 individual U.S. equities. These super investors have a limited number of stocks in common, which shows how hard it is to find the best stocks to invest in now. The most common stocks among the top-10 holdings of the 20 super investors got picked by 7 of them. The second most common stock was picked by six super investors, and the third one by four super investors. It shows that even the top 20 super investors have differing views on which stocks to buy and hold for long. And if it's so hard to agree on the best stocks to hold, the fact that some stocks got the vote of confidence of even a few still confirms those companies' strengths and quality. Now let's talk about the top three stocks most held by super investors and research them one by one. Number 3 - Moody's (MCO)If you are a Buffett fan, you already know this company. He has owned and held it for a long time because of its almost monopolistic power over the credit rating market. A few posts ago, when we discussed Fitch Ratings downgrading the creditworthiness of the United States, we talked about three rating agencies owning almost the entire market, with Moody's and S&P controlling 90% of the market. These credit agencies run a very stable business. Their market isn't growing rapidly. However, their products and services are essential to a healthy capital market. Many banks, governments, hedge funds, insurance companies, and investors use the ratings to assess all kinds of risks and make decisions to invest billions of dollars, lend money to or insure businesses, etc. If you research Moody's fundamentals, you see relatively stable and slow revenue growth in the best of times. However, the company has a solid gross margin above 70%, indicating a real pricing power in the market. It also boasts a 25%+ net profit and solid, free-cash-flow-generating operations. In its latest quarterly earnings call, I listened to the management's plan for the future and was very impressed with how Moody's focuses on future opportunities. It is experimenting with generative AI with Microsoft's help, leveraging its extensive database about companies, countries, properties, and global markets. It is expanding its footprint across the global market, such as Latin America. It is expanding its ratings into tokenized and digitalized bonds and assets. For example, it issued a rating for the European Investment Bank's first-ever blockchain-based bond this past quarter. These are evidence of how Moody's leadership team stays ahead of the curve and focuses on the market's needs. Moody's is a financially solid and well-managed company—no wonder several super investors own the stock in their top holdings. I added the stock to my 2023 Watchlist because the company is overvalued compared to its historical valuation. With more than 11 times the price-to-sales ratio and more than 43 times the price-to-earnings ratio, this is not a cheap stock by any means. The valuation has jumped above its average of 20-25 times the historical price-to-earnings ratio since the middle of 2022 without any significant jump in the earnings per share. This won't be a 10X investment, but buying it at a reasonable price can be an excellent investment for many years. Number 2 - Microsoft (MSFT)The next most held stock by 20 super investors in their top 10 holdings is Microsoft, ticker MSFT. Not only is Microsoft a favorite among super investors, but it is also among the top 25 holdings of nearly 400 ETFs. Let's dig into its fundamentals and see if we should own it as those super investors do.
What a great business! Where do the growth and cash come from? Microsoft Cloud is now a bigger and faster-growing business than the old Microsoft Office and other productivity divisions. The Azure cloud storage was up 18%, and the Cloud services business was up 27%. This is no joke. Microsoft is a $2.5 trillion company, generating double-digit revenue growth in the cloud and AI market that will get even bigger in the coming years. It's a major investor in OpenAI, the developer of the all-famous ChatGPT application, and it has already started offering generative AI cloud services to its customers, such as Moody's. The company's double-down on AI and generative AI will make the cloud business even more prominent. On the valuation front, the stock is priced right where financial analysts expect it to be, with 35 times price-to-earnings and 12X price-to-sales ratios. Once again, just like Moody's, we have a beloved company by super investors and many other investors, which is richly priced. This again goes to my 2023 Watchlist for a chance to buy it at a better price.
|
 | Upgrade To Stock Card VIPIf you research more than a few stocks and ETFs each month, our Full VIP Plan is for you. Use promo code "welcome" to get 20% off with a 14-day free trial when you upgrade today. |
Advanced Micro Devices (AMD) is a lonely AI stock, down double digits last month. How can a company that makes chips and semiconductors that power artificial intelligence and other digital applications be down double-digits while competitors like NVDA are up more than 50% in the last three months?
Investors price NVDA at more than 40 times its current sales, while AMD has a price-to-sales ratio of 8 times. Is AMD falling behind in the AI race, or is this a temporary bleep in an otherwise rally to the so-called moon?
Let's talk about that!
Investors price NVDA at more than 40 times its current sales, while AMD has a price-to-sales ratio of 8 times. Is AMD falling behind in the AI race, or is this a temporary bleep in an otherwise rally to the so-called moon?
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I'll continue with this series for a few more weeks.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week.
We only ask your name and email address when you sign up.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I'll continue with this series for a few more weeks.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week.
We only ask your name and email address when you sign up.
The story of AMD and NVDA makes you feel we live in two parallel universes. AMD says it is waiting for the demand environment to improve. NVIDIA says we live in an accelerated demand cycle.
AMD's latest earnings report in May 2023 shows that the company offers a complete line of chips and solutions for AI applications. But revenue was down about 9%. The company lost money compared to several quarters of positive GAAP-based earnings, and worst yet, AMD forecasted a 19% decline in its Q2 revenue.
This earnings release came about at the same time as NVIDIA's roaring earnings report, in which the company announced a revenue forecast of $11B for the second quarter, up from roughly $7B in Q1.
As a side note, I published a fundamental analysis for NVDA a few weeks ago that you can go back to and decide whether NVDA is a buy now. I'll leave a link to the NVDA episode in the show notes.
Today, I dig into AMD's fundamentals and discuss whether the revenue decline and downward forecast are temporary and whether the price drop is an opportunity for us to invest in AMD at a much better price than NVIDIA. This is going to be super interesting!
I'll use our usual 6-part fundamental analysis framework to research AMD:
AMD's latest earnings report in May 2023 shows that the company offers a complete line of chips and solutions for AI applications. But revenue was down about 9%. The company lost money compared to several quarters of positive GAAP-based earnings, and worst yet, AMD forecasted a 19% decline in its Q2 revenue.
This earnings release came about at the same time as NVIDIA's roaring earnings report, in which the company announced a revenue forecast of $11B for the second quarter, up from roughly $7B in Q1.
As a side note, I published a fundamental analysis for NVDA a few weeks ago that you can go back to and decide whether NVDA is a buy now. I'll leave a link to the NVDA episode in the show notes.
Today, I dig into AMD's fundamentals and discuss whether the revenue decline and downward forecast are temporary and whether the price drop is an opportunity for us to invest in AMD at a much better price than NVIDIA. This is going to be super interesting!
I'll use our usual 6-part fundamental analysis framework to research AMD:
- How the company makes money,
- Its top and bottom line trends,
- Noteworthy changes in the top and bottom lines,
- Balance sheet strength,
- Ability to generate cash to reinvest in its future,
- Current valuation and the feasibility of growing into it.
Can AMD's Revenue Go Back Up?
AMD makes money by designing and selling semiconductor chips that run data centers, PCs, laptops, and gaming consoles or embed them into automobiles and other data processing applications.
Not only AMD designs the chips and sells them, but it also makes software that enables developers to use its products in their devices and applications.
Like NVIDIA, AMD doesn't manufacture its own chips. Taiwan Semiconductor (TSM) is the primary manufacturer of AMD's wafers and works with United Microelectronics Corporation (UMC) and Samsung Electronics Co.
AMD's revenue is relatively equally distributed across gaming, data centers, and embedded systems, and the PCs and laptops segment trail the other three. That's already good news because if we see soft demand in one segment, there are still different segments to compensate for the revenue loss.
So far, so good! But why did the revenue go down? Where is the slowdown coming from, and how is NVIDIA growing exponentially while AMD slows down?
Data Center revenue remained flat, gaming slowed, and PC, laptop, and computer client sales dropped more than 60%. Embedded chips in automobiles, VRs, and other devices soared. Why isn't the data center segment roaring like NVIDIA, and is the drop in PC and Laptop temporary?
The PC & Laptop segment is somewhat understandable. Coming off the surge in demand during the COVID era, the company is now dealing with lower demand and had to cut costs to move its inventory. However, looking at all the new product launches, the company has several high-performing product launches in the segment that should ramp up in the coming quarters.
On the data center side, NVIDIA seems to be the immediate beneficiary of the generative AI infrastructure rush because OpenAI's chatGPT runs on its products and already offers a whole stack of hardware and software for data centers to train and run AI applications. AMD suffered from the global slowdown of investments in data centers by large enterprises and didn't see any benefit from the generative AI heightened demand. Does this mean AMD has lost the market?
As I'm researching AMD today, the company is supposed to have an AI Day presentation in two days on July 13th. While I don't know what AMD will share specifically during the AI day and how the market perceives it, I was able to catch up on Bank of America and JPMorgan Chase analysts' conversations with AMD's leadership team in the last few days and weeks. I got a preview of the company's AI strategy.
As a non-technical investor, it is difficult for many of us to gauge the technical superiority of AMD over its competitors. However, we can deduct its technical capabilities and moat from the information available to us. Here are some of such evidence:
AMD is behind NVIDIA in the AI segment. However, the company isn't a competitor to brush off easily. It has a solid track record of executing its plans and delivering new products based on customers' needs. AMD still has a shot. AI revenue can likely ramp up and accelerate if the management team executes the roadmap it has already planned.
So on the topline side, AMD is expected to ramp up revenue through new product launches. And as the global macro environment recovers and enterprises resume investing in data centers and computation beyond AI, we should see revenue growth to come back to AMD.
Not only AMD designs the chips and sells them, but it also makes software that enables developers to use its products in their devices and applications.
Like NVIDIA, AMD doesn't manufacture its own chips. Taiwan Semiconductor (TSM) is the primary manufacturer of AMD's wafers and works with United Microelectronics Corporation (UMC) and Samsung Electronics Co.
AMD's revenue is relatively equally distributed across gaming, data centers, and embedded systems, and the PCs and laptops segment trail the other three. That's already good news because if we see soft demand in one segment, there are still different segments to compensate for the revenue loss.
So far, so good! But why did the revenue go down? Where is the slowdown coming from, and how is NVIDIA growing exponentially while AMD slows down?
Data Center revenue remained flat, gaming slowed, and PC, laptop, and computer client sales dropped more than 60%. Embedded chips in automobiles, VRs, and other devices soared. Why isn't the data center segment roaring like NVIDIA, and is the drop in PC and Laptop temporary?
The PC & Laptop segment is somewhat understandable. Coming off the surge in demand during the COVID era, the company is now dealing with lower demand and had to cut costs to move its inventory. However, looking at all the new product launches, the company has several high-performing product launches in the segment that should ramp up in the coming quarters.
On the data center side, NVIDIA seems to be the immediate beneficiary of the generative AI infrastructure rush because OpenAI's chatGPT runs on its products and already offers a whole stack of hardware and software for data centers to train and run AI applications. AMD suffered from the global slowdown of investments in data centers by large enterprises and didn't see any benefit from the generative AI heightened demand. Does this mean AMD has lost the market?
As I'm researching AMD today, the company is supposed to have an AI Day presentation in two days on July 13th. While I don't know what AMD will share specifically during the AI day and how the market perceives it, I was able to catch up on Bank of America and JPMorgan Chase analysts' conversations with AMD's leadership team in the last few days and weeks. I got a preview of the company's AI strategy.
As a non-technical investor, it is difficult for many of us to gauge the technical superiority of AMD over its competitors. However, we can deduct its technical capabilities and moat from the information available to us. Here are some of such evidence:
- AMD has been focused on AI for a while and already has live AI products in the market. But, the company is putting a lot of emphasis on releasing new chips for supercomputing and AI applications in Q4 2023 in response to its customer's demands and requests, signaling the current products need to be better.
- It's also made some internal organizational changes to align its hardware and software team around the needs of supercomputing and AI training models and its big customers. This means the company still needs to successfully build a whole stack of AI-focused products.
- When you compare that with how Nvidia is already in the market powering chatGPT and is signing customers with its highly power-efficient and full-stack data center and software library, AMD is playing catch-up.
- AMD already had a response to NVIDIA's recent AI announcement, and it didn't impress the market and investors. Hence a new data center and AI day presentation is coming up in two days from when I'm researching this episode.
AMD is behind NVIDIA in the AI segment. However, the company isn't a competitor to brush off easily. It has a solid track record of executing its plans and delivering new products based on customers' needs. AMD still has a shot. AI revenue can likely ramp up and accelerate if the management team executes the roadmap it has already planned.
So on the topline side, AMD is expected to ramp up revenue through new product launches. And as the global macro environment recovers and enterprises resume investing in data centers and computation beyond AI, we should see revenue growth to come back to AMD.
AMD's Earnings Loss Isn't A Big Deal
In the last quarter, we saw negative earnings for the first time. Some of the losses are due to lower revenue, but the most significant chunk comes from increasing R&D expenses and the amortization of acquisition-related intangibles. R&D expense increase is an important driver of the future of product releases and not much concern. The amortization of acquisition-related intangibles is also less of a problem. It is a unique way accountants engineer profits and losses. For AMD, it is expensing the costs associated with acquiring Xilinx. This is good news because it means no major cost jump in AMD's operations.
AMD's Cash & Free Cash Flow Power
There are lots of good news here. The company has more than $9B in cash and cash equivalents, against $6B in current liabilities, leaving it with enough cash to continue investing in its products, and better yet, we see AMD generates positive free cash flow indicating its cash position should be growing steadily in the absence of any major new acquisition or expense.
Assuming the management can continue to execute as it has been doing so far, and the market in data center and server sides recover globally and steadily, there aren't major fundamental concerns about AMD.
This brings us to its valuation. The company is priced eight times its sales, which isn't cheap.
Assuming the management can continue to execute as it has been doing so far, and the market in data center and server sides recover globally and steadily, there aren't major fundamental concerns about AMD.
This brings us to its valuation. The company is priced eight times its sales, which isn't cheap.
AMD's Valuation
Looking at the company's price-to-sales ratio history, eight times isn't the most expensive rate, but it is certainly not historically cheap either. You could have invested in AMD at roughly five times sales only a few months ago and five years ago.
Looking forward, all else equal, to grow revenue by eight times in 10 years, AMD has to increase revenue by 23% per year. The AI chips market is expected to grow more than 40%, while the broader semiconductors market has a much slower growth rate of under 10% per year. Therefore, the 23% per year revenue growth isn't far-fetched and sits between the two markets' growth rates. Moreover, if we look at AMD's revenue growth in the last three years, it has grown above 40% compounded annually, despite the recent slump.
All in all, AMD isn't a cheap stock by any stretch of the imagination, but compared to Nvidia's 40+ Price-to-Sales, and AMD's possibility of growing revenue rapidly, it isn't exuberantly expensive either.
Looking forward, all else equal, to grow revenue by eight times in 10 years, AMD has to increase revenue by 23% per year. The AI chips market is expected to grow more than 40%, while the broader semiconductors market has a much slower growth rate of under 10% per year. Therefore, the 23% per year revenue growth isn't far-fetched and sits between the two markets' growth rates. Moreover, if we look at AMD's revenue growth in the last three years, it has grown above 40% compounded annually, despite the recent slump.
All in all, AMD isn't a cheap stock by any stretch of the imagination, but compared to Nvidia's 40+ Price-to-Sales, and AMD's possibility of growing revenue rapidly, it isn't exuberantly expensive either.
AMD's Fundamental Recap
Let's recap AMD's fundamentals.
Knowing all that, what should we do with AMD? Is it time to buy now?
- Revenue has been declining due to macroeconomic factors but is expected to ramp up with new product launches in the AI space and broader market recovery.
- The company has turned losses for the first time in several quarters. But the losses are due to accounting adjustments related to acquisition-related amortization and R&D.
- The company has a good balance sheet with more cash than current liabilities.
- It generates free cash flow.
- And valuation is less exuberant than the likes of Nvidia or considering the possible revenue growth in the next semiconductor upcycles driven by AI.
Knowing all that, what should we do with AMD? Is it time to buy now?
Is AMD A Buy Now?
Agreeing on the fact that investing is a game of possibilities and betting on probabilities of success, let's discuss two possibilities for where AMD goes from here:
We need more information to decide which scenario is more likely.
To me, this is one of those cases where if you like a company fundamentally and trust the management track record in implementing their plans, you can pick up some shares and add more as you collect evidence on its ability to scale, ramp up and compete in the AI space while not losing market in PC, laptops, enterprise, and gaming segments.
One thing for sure is that the AI revolution is just beginning, and there is a lot of time for chip makers to innovate and grow. 2023 is one of many chances to buy AI chip stocks and win big. This is a multi-year if not decade-long, major technological cycle and most likely full of volatile up and down trends.
See you next time!
- AMD releases its AI products to compete with NVIDIA's full-stack hardware and software AI solutions and libraries, and it doesn't ramp up as fast as we'd like to. The stock will most likely tumble from here. It doesn't mean AMD is dead. With $9B in cash on the balance sheet, the company will push forward and eventually catch up or take market share away from NVIDIA. But that means if we invest now, we must watch NVIDIA soaring while waiting for AMD to catch up.
- The second possibility is that AMD releases its products, the market loves them, and customers order up. The company revises its future revenue forecast and joins Nvidia and other large players such as Apple and Alphabet, who are also making their own AI semiconductors in sharing the AI market. In that case, buying the stock now means buying at a great price and enjoying a massive upside.
We need more information to decide which scenario is more likely.
To me, this is one of those cases where if you like a company fundamentally and trust the management track record in implementing their plans, you can pick up some shares and add more as you collect evidence on its ability to scale, ramp up and compete in the AI space while not losing market in PC, laptops, enterprise, and gaming segments.
One thing for sure is that the AI revolution is just beginning, and there is a lot of time for chip makers to innovate and grow. 2023 is one of many chances to buy AI chip stocks and win big. This is a multi-year if not decade-long, major technological cycle and most likely full of volatile up and down trends.
See you next time!
|
|
Upgrade To Stock Card VIP
If you research more than a few stocks and ETFs each month, our Full VIP Plan is for you. Use promo code "welcome" to get 20% off with a 14-day free trial when you upgrade today.
|
Nio (NIO) is an Electric Vehicle manufacturer with a unique twist. Instead of plugging your car to charge, you can pull up to a Power Swap station and change your battery for a fully-charged one in less than 5 minutes.
Cool, unique technologies combined with high-end, beautifully designed cars make for good growth stories, resulting in NIO's stock being one of the most researched stocks on the market. Do the swappable battery technology and its premium brand give the company an edge over other EV makers? Some investors certainly believe so and go to the extent of calling Nio the next Tesla. Is Nio truly the next Tesla?
Let's talk about that!
Cool, unique technologies combined with high-end, beautifully designed cars make for good growth stories, resulting in NIO's stock being one of the most researched stocks on the market. Do the swappable battery technology and its premium brand give the company an edge over other EV makers? Some investors certainly believe so and go to the extent of calling Nio the next Tesla. Is Nio truly the next Tesla?
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I'll continue with this series for a few more weeks.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week.
We only ask you name and email address when you sign up.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I'll continue with this series for a few more weeks.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week.
We only ask you name and email address when you sign up.
The last time I looked at Nio was four years ago when the company was about to run out of cash. I'm surprised to see it is still around. Manufacturing cars are hard and capital-intensive. And Nio isn't the only EV maker in its core market in China. The fact that the company is still around makes me wonder whether there is more to Nio's story than meets the eye.
The market seems quite excited about NIO since the price is up by more than 30% in the last month after hitting a 52-week low of $7 per share due to a gloomy quarterly earnings report released in June. Perhaps, just like Tesla, which was once running out of cash, Nio has found its way through challenges and is becoming the next Tesla.
Nio is a $15B EV manufacturer in China that made about $7B in revenue in the last fiscal year. It makes most of its revenue from selling new cars, and additional revenue comes from services, financing, and second-hand car sales. While the company is focused on the Chinese market, it also has a presence in a few European countries, such as Norway and Germany. It is currently priced at 2.5 times its sales. Compared to other EV stocks, such as Tesla, at more than 11 times price-to-sale, the stock seems quite undervalued. We need to know what?
Typically, I follow a 6-part fundamental analysis to decide whether I'd be investing in a company or not. Today, I'll change the flow and give you a quick recap of Nio's fundamentals at the beginning, and then spend more time on a qualitative assessment of Nio. That's because, as you will see in a second, if I just use a fundamental analysis of the company's financial information, Nio won't make the cut.
Sometimes, when you invest in a growth company and want to find the next Tesla, it is worth taking risks for a shot at gaining a significant return. In those cases, in addition to analyzing a company's fundamentals, you look for early signs of growth despite struggling financials. Before investing in early-stage companies, I typically look at five important growth criteria:
So today's question isn't whether Nio is financially solid. It's whether Nio is investable despite apparent financial risks in its fundamentals.
The market seems quite excited about NIO since the price is up by more than 30% in the last month after hitting a 52-week low of $7 per share due to a gloomy quarterly earnings report released in June. Perhaps, just like Tesla, which was once running out of cash, Nio has found its way through challenges and is becoming the next Tesla.
Nio is a $15B EV manufacturer in China that made about $7B in revenue in the last fiscal year. It makes most of its revenue from selling new cars, and additional revenue comes from services, financing, and second-hand car sales. While the company is focused on the Chinese market, it also has a presence in a few European countries, such as Norway and Germany. It is currently priced at 2.5 times its sales. Compared to other EV stocks, such as Tesla, at more than 11 times price-to-sale, the stock seems quite undervalued. We need to know what?
Typically, I follow a 6-part fundamental analysis to decide whether I'd be investing in a company or not. Today, I'll change the flow and give you a quick recap of Nio's fundamentals at the beginning, and then spend more time on a qualitative assessment of Nio. That's because, as you will see in a second, if I just use a fundamental analysis of the company's financial information, Nio won't make the cut.
Sometimes, when you invest in a growth company and want to find the next Tesla, it is worth taking risks for a shot at gaining a significant return. In those cases, in addition to analyzing a company's fundamentals, you look for early signs of growth despite struggling financials. Before investing in early-stage companies, I typically look at five important growth criteria:
- Does the company operate in a growing market?
- Are there signs of customer traction that can lead to rapid revenue growth down the road?
- Does it have access to lots of cash, or can it raise additional capital?
- Does the company have a competitive moat such as a unique technology, brand, market access, or some sort of monopoly over the customers and market, among other factors that enable it to grow despite struggling fundamentals?
- And, is it run by a unique and capable management team?
So today's question isn't whether Nio is financially solid. It's whether Nio is investable despite apparent financial risks in its fundamentals.
Nio's Fundamental Analysis Recap
When I pull up the company's Stock Card, I see a company struggling financially.
Let's recap Nio's fundamental analysis:
In summary, the company has struggling fundamentals with good targets in the second half of 2023 and beyond. If it manages to reach some of its targets regarding deliveries, revenue from new vehicles line-up, and profitability, it will be in a much better fundamental position. However, looking at the current fundamentals we just discussed, it becomes easy to understand why the stock is priced only at 2.5 times sales. The market sees the same red alerts as we do.
If we are interested in investing in Nio purely based on fundamentals, we have to wait and see how it implements its plans in the next few quarters or take a bet on the possibility of it reaching its targets. There are still a lot of unknowns in the company's operations.
Let's recap Nio's fundamental analysis:
- Its revenue has been growing slowly year-over-year, although quarterly revenue is declining due to recent vehicle price cuts,
- It makes no profit, and more importantly, its gross margin has drastically declined to only 1.5% from 15% a year ago due to lower average sales price and higher battery costs,
- The company has its eyes on 20K car deliveries per month, but in June 2023, it has delivered about 10K units, roughly the same as the average monthly deliveries in the last 12 months. The deliveries have recently taken a hit as the company launched a new lineup of vehicles and needed time to ramp up production facilities..
- The management believes the gross margin will return to the 15% range in Q4 2023, which is something to watch for.
- Its balance sheet is, at best, in an okay situation with the same amount of cash and current debt, forcing the company to reduce its R&D projects and CapEx investments to maintain cash.
- It makes no free cash flow to replenish its cash position and, most likely, would need to raise more capital in the coming years.
In summary, the company has struggling fundamentals with good targets in the second half of 2023 and beyond. If it manages to reach some of its targets regarding deliveries, revenue from new vehicles line-up, and profitability, it will be in a much better fundamental position. However, looking at the current fundamentals we just discussed, it becomes easy to understand why the stock is priced only at 2.5 times sales. The market sees the same red alerts as we do.
If we are interested in investing in Nio purely based on fundamentals, we have to wait and see how it implements its plans in the next few quarters or take a bet on the possibility of it reaching its targets. There are still a lot of unknowns in the company's operations.
Nio's Qualitative Assessment
Like all EV companies, Nio benefits from a rapidly growing market and a shift in consumer preferences toward EVs over combustion engine vehicles. For example, in Nio's core market in China, the EV sector is expected to grow by 25% per year, which results in organic growth. This is most likely the primary reason Nio hasn't run out of business despite its cash availability challenges in the past. There is a lot of excitement around EVs globally, and many large investors are willing to fund EV manufacturers, not too dissimilar to Tesla's early days.
As we discussed, the company makes EVs with swappable battery packs instead of waiting to charge your battery. You can enter a Power Swap station and swap your car's battery with a fully charged battery very quickly and be on your way. There are currently about fifteen hundred Power Swap stations worldwide. Considering reasons to invest in Nio despite its alarming financial struggles, the swappable battery pack and stations is a unique technology that can give the company an edge over other EVs.
Mind you, Tesla has also had a swappable battery plan with one station in California. But the company focused on expanding its charging stations. It makes you wonder if the technology is available to other EV makers, then it isn't as unique or economically viable as we hoped. Nio cars can still be charged in a charging station. Because the battery pack itself is the single most expensive part of an EV, it isn't feasible for individual users to buy spare batteries at home. Nio still needs to make chargers available and invest in its swap stations. Double the CapEx investment, double the hassle.
We know Nio isn't profitable, and with all the capital expenditures required to build its Power Swap stations and charging network, ramping up sales and marketing for its new car models, there is certainly a limited expectation of profitability or free cash flow in the near future. The management has promised profitability at the end of 2023 due to a significant increase in the number of deliveries. But that's yet to be seen and proven by its sales and delivery performance in Q2 and Q3. This makes me wonder if the sales and deliveries do not ramp up as fast as we hope, does the company have enough cash to continue investing in its growth?
Based on that last quarterly earnings report, while Nio had about 40B in Chinese Yuan in cash, it also carried the same amount in current liabilities. At 0.14 Chinese Yuan to USD conversion rate, that's about 5.5 billion US dollars in cash and current debt. Moreover, the company carries a total of 65 billion Chinese Yuan in current and long-term liabilities combined, reducing its financial resilience and strength to keep building.
There is some good news related to its balance sheet, though. Only a few days ago, the company announced a $738.5 million dollars investment by an investment company majority owned by the Abu Dhabi Government. The Abu Dhabi Government investment also comes with a board seat, giving the investment company a 7% ownership in Nio. Not all of the investment is in cash. Rather, a portion of it is paid to Tencent to purchase Nio shares. So the investment can add some cash to Nio's balance sheet, but it is more of a strategic investment that potentially opens the Middle East's EV market door to Nio.
As we discussed, the company makes EVs with swappable battery packs instead of waiting to charge your battery. You can enter a Power Swap station and swap your car's battery with a fully charged battery very quickly and be on your way. There are currently about fifteen hundred Power Swap stations worldwide. Considering reasons to invest in Nio despite its alarming financial struggles, the swappable battery pack and stations is a unique technology that can give the company an edge over other EVs.
Mind you, Tesla has also had a swappable battery plan with one station in California. But the company focused on expanding its charging stations. It makes you wonder if the technology is available to other EV makers, then it isn't as unique or economically viable as we hoped. Nio cars can still be charged in a charging station. Because the battery pack itself is the single most expensive part of an EV, it isn't feasible for individual users to buy spare batteries at home. Nio still needs to make chargers available and invest in its swap stations. Double the CapEx investment, double the hassle.
We know Nio isn't profitable, and with all the capital expenditures required to build its Power Swap stations and charging network, ramping up sales and marketing for its new car models, there is certainly a limited expectation of profitability or free cash flow in the near future. The management has promised profitability at the end of 2023 due to a significant increase in the number of deliveries. But that's yet to be seen and proven by its sales and delivery performance in Q2 and Q3. This makes me wonder if the sales and deliveries do not ramp up as fast as we hope, does the company have enough cash to continue investing in its growth?
Based on that last quarterly earnings report, while Nio had about 40B in Chinese Yuan in cash, it also carried the same amount in current liabilities. At 0.14 Chinese Yuan to USD conversion rate, that's about 5.5 billion US dollars in cash and current debt. Moreover, the company carries a total of 65 billion Chinese Yuan in current and long-term liabilities combined, reducing its financial resilience and strength to keep building.
There is some good news related to its balance sheet, though. Only a few days ago, the company announced a $738.5 million dollars investment by an investment company majority owned by the Abu Dhabi Government. The Abu Dhabi Government investment also comes with a board seat, giving the investment company a 7% ownership in Nio. Not all of the investment is in cash. Rather, a portion of it is paid to Tencent to purchase Nio shares. So the investment can add some cash to Nio's balance sheet, but it is more of a strategic investment that potentially opens the Middle East's EV market door to Nio.
Is Nio The Same As Tesla
Overall, Nio is a risky bet, just like how Tesla once was, with limited fundamental strengths to support it now. Just like old Tesla, there are good plans and targets that, if they pan out, the company will be in a much better position. Like Tesla, it has a strong brand and cool swappable battery technology too. But, it doesn't have the same first-mover advantage that Tesla had and has to compete with 16 other EV makers such as Tesla and BYD in its core China market and European EV makers in its new markets.
It's an investment bet that can win you a significant return, especially at only 2.5 times price to sales valuation ratio. But you accept the significant financial risk if the new vehicle lineup doesn't sell as fast or the company doesn't reach its profit margins.
It's an investment bet that can win you a significant return, especially at only 2.5 times price to sales valuation ratio. But you accept the significant financial risk if the new vehicle lineup doesn't sell as fast or the company doesn't reach its profit margins.
What To Expect In Nio's Next Earnings Report
If you have your eyes on it, remember that the next quarterly earnings report is expected to come out in August. You can get the date by clicking on the Key Dates section of the company's Stock Card. When the earnings come out, watch for a few things:
Despite everything I discussed today, Nio's stock may still go up. There are forces in place that can push Nio's stock price up just the same as the 30% growth in the last month. For example, any positive news around deliveries and the U.S.-China relationship can be catalysts for Nio. Also, if the Abu Dhabi government continues its investments or subsidizes the development of manufacturing facilities in the Middle East, we will most likely see a price spike.
For me, I don't think Nio's risk is still justified. I could be wrong. You have to do your own research.
See you next time!
- Early in the year, the company's leadership announced it could reach profitability by the end of 2023, thanks to the launch of several new models in the first half of the year. So you want to review the company's second quarterly performance and see what the management thinks about the feasibility of reaching profitability in 2023.
- Monitor the number of deliveries per month and see if it has managed to scale it up to the target of 20K per month.
- Look at gross margin trends and see if the company has managed to reach back to 15% gross margin with the launch of its new product line.
Despite everything I discussed today, Nio's stock may still go up. There are forces in place that can push Nio's stock price up just the same as the 30% growth in the last month. For example, any positive news around deliveries and the U.S.-China relationship can be catalysts for Nio. Also, if the Abu Dhabi government continues its investments or subsidizes the development of manufacturing facilities in the Middle East, we will most likely see a price spike.
For me, I don't think Nio's risk is still justified. I could be wrong. You have to do your own research.
See you next time!
|
|
Upgrade To Stock Card VIP
? If you research more than a few stocks and ETFs each month, our Full VIP Plan is for you. Use promo code "welcome" to get 20% off with a 14-day free trial when you upgrade today.
|
RSS Feed
Categories
All
Battle
Education
ETF Investing
Fundamental Analysis
How To Invest
New Podcast Episode
New Portfolio
Portfolio Update
Starter 2020
Stock Card VIP Pick
Stock Lists
The Daily Hype
Update
Watchlist Worthy
Winners And Losers
Archives
September 2023
August 2023
July 2023
June 2023
May 2023
April 2023
March 2023
December 2022
September 2022
July 2022
February 2022
November 2021
October 2021
September 2021
August 2021
July 2021
June 2021
May 2021
April 2021
February 2021
October 2020
September 2020
August 2020
July 2020
June 2020
May 2020
April 2020
March 2020
January 2020
October 2019
July 2019
June 2019
May 2019
April 2019
March 2019
February 2019
January 2019
December 2018
November 2018
October 2018
September 2018
August 2018
July 2018
June 2018
May 2018
April 2018
March 2018
February 2018
January 2018
December 2017
November 2017