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The earnings season is in full swing, and the usual revenue and profit misses and beats come with it. But companies make all sorts of announcements during the earnings reports, and not all are revenue and profit related. Three companies made surprise announcements that are worth paying attention to, especially if you plan to invest in them or are an investor already: Palantir, PayPal, and PubMatic. Let's talk about their surprises. 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 also started sharing interesting investing-related stories. The first one was on what happens when the U.S. hit its 2% inflation target. More interesting stories are in the works. 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. Palantir's Earnings SurprisePalantir stock price is down by ~ 22% in the first 10 days of August, despite reporting a solid quarterly earnings report. Revenue was up, profits remained in the green, and the company announced the launch of its generative AI product, among other positive news. The surprise came when the company announced a $1B share buyback program. Typically, a share buyback program is quite investor friendly. It reduces the share count and creates more value for current shareholders. Companies buy their own shares for two primary reasons:
Even after the recent price drop, the stock is priced 18 times its sales, so Palantir has to grow its revenue by ~30% per year in the next 10 years to grow into such a valuation. That seems unrealistic when the company just grew 13% year-over-year in the latest quarter. Investors must be worried that the company is "wasting" its cash resource on buying shares at an overpriced level. So why is Palantir's leadership spending $1B in buying its shares? There can be two reasons:
Based on my observations of Palantir's focus on storytelling and riding the wave of the market's momentum and sentiment, I believe the decision is a part of the company's story. PayPal's Earnings SurpriseThe company released its earnings, and the stock price dropped ~6% after. There were lots of good news in the earnings, including 11% Y/Y payment volume growth and 12% transaction per active account growth. Also, the company is quite solid, fundamentally looking at the balance sheet and free cash flow. So what drove the price down? Investors are concerned about the drop in the company's transaction margin. PayPal's business isn't just the branded payment we are all familiar with. It operates Venmo and Braintree. Venmo is so popular that it has become a verb. I just parked my car in a parking lot, and the attendant told me to "Venmo" him the parking fee. It's so popular it's a verb. Braintree is a technology company that enables companies to process credit cards and other forms of payment on their website. And that business is the reason behind the lower transaction margin. For a mature company such as PayPal, profitability and maintaining or expanding is the most important metric investors look for. However, according to the management, several projects and initiatives in the works can improve transaction margin, including the growth of PayPal's unbranded check-out functionality and other value-add payment services that companies such as META and TikTok are adopting. Despite the transaction margin worries, the surprise is in the company's valuation. PayPal generates $5B in free cash flow and shared a positive earnings report and forecast for the year, but the stock is priced 17 times its earnings and 13 times in forward earnings. In contrast, S&P 500's average P/E ratio is above 20 times. Even more surprising is the company's PEG ratio. The PEG ratio takes the P/E ratio and divides it by the earnings growth rate. If the PEG ratio is above one, it means the stock valuation is higher than the speed of its earnings growth, and if lower, it shows a lower valuation than what the company deserves based on its earnings growth rate. PayPal's PEG ratio is 0.7, indicating an undervalued stock despite a fundamentally solid business. This surprising undervaluation made me add PayPal to our Beaten Down portfolio, which is a portfolio of stocks getting punished by the market due to short-term miscalculations. The portfolio's picks, on average, have overperformed the market by more than 80%. Here's the link to this portfolio in the show notes if you'd like to follow the portfolio and get notified of the new additions when we find new beaten-down stocks to add. PubMatic's Earnings' Reaction SurpriseAnd finally, the last earnings surprise comes from PubMatic (PUBM). The surprise isn't in what the company announced but in how the market reacted to the earnings report, dragging the stock price by more than 30% on the earnings day. The report wasn't stellar and came with flat revenue growth and negative GAAP net income due to a few one-time hits to the bottom line, followed by a few analysts cutting their price target for the stock. However, the report also had several early indicators of future growth. PubMatic invested and launched new products, especially in the video ad and ad supply optimization capabilities. It's already seen great traction with those new launches. It has also invested in its infrastructure to create incremental capacity without an impact on the margin. The flat revenue wasn't due to low engagement and activity but rather due to lower CPM. That means that due to overall economic concerns, advertisers spend less on ads or bid less fiercely than they used to, bringing the ad prices down and PubMatic's revenue down with it. Using common valuations metrics such as the Price to Sales or Price to Earnings ratio, the stock isn't cheap. For example, PubMatic is priced 7 times its sales. To reach 7 times sales growth, it requires 20% revenue growth per year in the next ten years. This revenue growth was once quite normal for PubMatic, but it feels quite out of reach compared to the last few quarters. Ultimately, it is still feasible if the advertising spending goes back to growth, and the company's new product launches should help. Also, high profit and the company's focus on strong free cash flow would help it grow into its current valuation. All in all, the 33% drop in the price seems to be an overreaction. Even the analysts cutting down their price target still price it 30% higher than the stock's current price. I still own PubMatic and plan to hold it, although I would want to closely watch and see the revenue and profitability grow as the digital ad market recovers in the next few quarters. See you next time!
I have excellent news: Fundamental investing is arguably one of the easiest ways to invest. Investing is stressful and hard when you worry about the stock price. Because the price keeps moving up and down, you can literally see the value of your investment every minute, and that's extremely taxing. If the stock price goes up, you want to save yourself from future regrets and lock in that gain as fast as possible. If the stock price goes down, you want to save yourself again from the pain of losing more money by selling the stock now. But, there is also the possibility that you make a mistake and sell something just before it goes up another 10% or sell a falling stock just before it recovers and goes back up. If your investment decision is based on price and price predictions, you always have something to worry about. Moreover, every time there is a piece of news about the companies you invested in, you worry about the impact on their prices. In contrast, in fundamental investing, you don't stress about price fluctuations or what the news says about the company today, this week, or this month. Because in fundamental investing, you are not picking stocks, you are investing in the company behind the stock, which differs from its stock price. Buffett says it the best: "Charlie and I are not stock-pickers, we are business-pickers." When you pick a business, the company's situation rarely changes daily or based on news articles. The price can fly to the moon or crash to the ground, but the business behind it is still the same. You can research the company once without worrying about it for at least a few quarters, if not longer. That's the good news. If you invest fundamentally, you can invest slowly and steadily without the stress of the market and build wealth. Now that we know fundamental investing is about the business behind the stock, we should ask ourselves what makes a company strong. In this video, I give you a 6-part research process anyone can use to assess the strength of a business and use it to pick stocks for the long term. 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. Now, what makes a company a good one? Think about it intuitively:
You may come up with some other points. Coming up with the characteristics of a strong company isn't too difficult. What's important is to learn how to use the company's financial statements and publicly available information to assess the company. Criteria One: How Does It Make MoneyWhy? A business is a for-profit entity. At its core, it has to be able to make money. So the first thing we must do is to understand how the company on our radar actually makes money. I can't tell you how many people I have spoken with that invested in a stock and had no idea how it actually makes money. Does it sell something, get paid for its services, charge a fee or a subscription, or something else? It is the foundation question you must answer. How to find them? The best way to start your research is to read the business description. All companies share a brief business description on their annual and quarterly reports. Review a company's annual report and look for the business description section. On Stock Card, you can read the description in the introduction section. This may seem to be an extra step. However, if you want to understand a company, you have to know how it makes money. Some business models are better than others. For example, digital subscriptions or SaaS business models are recurring and are more profitable than a physical retailer. You can see that in Amazon's business. It makes money in two primary ways: 1) Selling products on Amazon and 2) Delivering its cloud services through AWS. Selling products is very expensive and low margin. Delivering cloud services is highly profitable because you build the infrastructure once and sell it several times. You may feel I'm simplifying things, but that's the point. You want to find companies with simple, recurring, easy ways of making money. Some companies don't make money yet. Think of research-phase pharmaceutical companies or SPACs (special purpose acquisition companies) that became quite popular in 2021. They were fundamentally difficult businesses to research or pick because they weren't making money yet. So investing in them was stressful because there was no money-making foundation behind the stock. I don't say you shouldn't invest in companies that don't make money. Some are worth it, but understand that you are taking the risk of "no business model," which is a very big risk in most cases. Criteria Two: Topline and Bottom Lines The top line is the figure that tells you how much money a company makes, and the bottom line is the figure showing how much money is left at the end of the month, considering every single expense the company has to incur to make money and keeps the lights on. Knowing those figures are important. However, the more important thing is the direction of the top and bottom lines. You'd want to know whether the company is growing or shrinking its revenue and profits if it has any. How to find them? Those figures come directly from companies' income statements. You can visit any publicly traded company's website and look for the investor section. In the investor section, there is a portion for SEC filings. There are typically the annual and quarterly earnings reports the companies file with the SEC. Those reports show how the top and bottom lines have moved in the last few quarters or years. You can also get that information on Stock Card. Look up any company's Stock Card, and you can see the Revenue and Profit sections as the top 2 pieces of information contributing to a company's financial strength. Make sure you know how much money a company makes and then how it has increased or decreased in the last quarter over quarter, year over year, and three years. The important factor is understanding why the company's top and bottom lines have increased or declined. If the revenue is up, ask yourself why? For example, in Q1 2023, Unity's revenue was up by more than 50%. At first glance, it's good. But, if you read through the company's quarterly earnings, you realize it is due to a recent acquisition and not organic growth. The difference between a robot and you looking at such information is that you can see the growth or decline rate and ask yourself why? If this were an algorithmic trading bot, it would have considered the revenue growth a good thing and moved on. You, with your organic intelligence, can look at the information and ask yourself why this happened and whether it shows the company is better and stronger than a year ago. The last thing about assessing a company's top and bottom line is identifying how it can grow over the years. There are many factors contributing to the answer. Some common factors are:
For example, a company like Nvidia is developing computer chips, and the market for those chips is rapidly growing. In contrast, a company like Coca-Cola is in the soft drinks market that is much slower in growth. A company like Unity is one of the two companies that enable others to make high-quality digital experiences and games and has a higher potential to grow than a company such as Target, which is one of the many retail stores in the U.S. And lastly, a company that is run by its original founder may be able to grow faster because the founder's personal and financial success is tied to the future of the company. You may come up with, hear, or read about many other factors on the web. At their core, they are all different ways to assess whether the company can grow its revenue and profit faster and far longer than others. Criteria Three: Cash GenerationThe next important factor in researching a company is understanding whether it has money to allocate to its future growth and invest in itself. Where does this money come from? Either the company's operations generate cash, or it has saved up or raised capital in the past and has kept it accessible to invest in its future. Naturally, everyone jumps on profitability. However, you need to understand profit is an engineered number. Profit at the end of a company's profit and loss statement is not equal to the cash it made in that period. Accounting departments engineer profit. You can remove non-cash expenses such as stock-based compensation or depreciation of your assets from your income and report a very different number than what amount of cash your business actually generated. A better way to understand a company's cash generation strength is to look at free cash flow. Free cash flow takes the cash from the operations, adds back non-cash expenses, and removes capital expenditures that are not shown in the profit and loss statement. A company with strong finances can generate free cash flow. That's why Stock Card has a full section allocated to free cash flow, just like revenue and profit. You can also get the free cash flow figure from financial statements. Just open any financial statement a company has filed with the SEC, and search for the term free cash flow, and you'll get the figure. Sometimes, companies do not yet generate free cash flow. This is quite common in early-stage growth companies. In those cases, you'd want to see how much cash or cash equivalents the company has available on its balance sheet, compare it with short-term liabilities the company holds, and make sure it has the resources to invest in its future, even though the operations don't generate free cash flow. As a matter of fact, it's always a good idea to look at the cash vs. liabilities of a company to make sure a significantly large amount of liabilities does not burden it. Just be mindful that some companies, such as banks, hold a lot of liabilities, but that's not bad. They are in the business of lending and borrowing money. That's why we discussed the importance of knowing how a company makes money because you can make these subjective judgments about high liabilities in the context of its business model. How to find them? Like the other few data points, there is a section on every company's Stock Card about its cash vs debt that you can use to assess its balance sheet strengths and weaknesses. Or, simply go to the latest SEC filings by the company and look for its balance sheet. One More Criteria: Stock ValuationMany fundamental investors don't agree with me that valuation matters. However, my experience tells me, and most likely, your experience in life would agree that it's better to buy things we like at a lower price whenever it's possible, or at least avoid paying significantly higher prices than what's reasonable. Before digging into how to use valuation information in our investment research, let's discuss why many long-term investors do not pay attention to stocks' valuations. There are two ways you value a company:
The problem with the first methodology is that it is backward-looking. But, you invest in companies that you expect to have tremendous success in the future. Their past performance should be only a fraction of their future success. Therefore using valuation ratios is irrelevant. The problem with the second methodology is that it is forecasting the future. No one really knows what will happen in the future. As they say, there are two kinds of forecasters: those who don't know and those who don't know they don't know. That's an exaggerated way of saying that forecasting the future is impossible, therefore, trying to value a company based on it is irrelevant. While I agree with the shortcomings of both methodologies, looking at the valuation ratios can be a very useful exercise. You can use the valuation ratios to decide how feasible it is for the company to grow into its valuation. Let's take an example: Take Zoom (ZM) as an example. In May 2023, Zoom's price-to-sales ratio is about five times. In simple terms, this means investors expect the company to at least grow its sales five times its current revenue, all other factors such as profit and free cash flow being equal. To grow sales by five times in ten years, the company has to be able to grow its revenue by almost 18% per year. Is that possible? Zoom has grown its sales by roughly the same amount compounded annually between 2021 and 2023. It also operates in the web conference software market, which is expected to grow globally by 14.30% annually between 2020 and 2027. Therefore, the five times price-to-sales ratio for an investor willing to hold Zoom for ten years is reasonable. This math doesn't guarantee the valuation, but it gives us some sense that the market is not overexcited about Zoom, and we won't be paying too high of a price if we invest today. How to Find them: The good news is that you can find the most common valuation ratios on each companies' Stock Card. Click on the valuation, get the list, and even compare the valuation ratios with each company's peers. For the second methodology. there are tools out there that help you calculate the valuation of a company using the discounted cash flow method. I don't use them myself because I agree with the critics that no one can predict the future, especially when investing in companies that are expected to bring significant growth to our portfolios. Typically, such companies get better and are flexible with the direction they take, and it is very difficult to say what new products or services they will launch in the future that impacts their future cash generation power. But mind you, if you are investing in more stable companies, let's say Coca-Cola, then a DCF methodology can be used because it is pretty clear what that company will be doing 5 to 10 years from now. Step-By-Step Fundamental Analysis RecapLet's recap a 6-part process to research stocks fundamentally to find such companies:
I hope you find this helpful. The only way you can master fundamental analysis is to practice it. So go ahead, pick one company now, and research it fundamentally. There are several examples of such detailed analysis on our YouTube channel. There is a link to it in the notes section. Make sure to continue your education. See you next time!
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!
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.
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:
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. 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. 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. 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? 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!
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!
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.
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. 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. 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. 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. 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!
There are two types of SoFi (SOFI) investors:
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.
I had always ignored SoFi. At some point, I assumed the business focused too much on student loans and didn't think it could scale to very large business. At another point, when the government put a hold on student load payments due to COVID, I disregarded SoFi as a dead business. But in all honesty, I never fundamentally researched the company.
Today, let's change that. So many of you on YouTube, Twitter, and the Stock Card platform have asked about SoFi. It is one of the top 10 most viewed stocks on our platform. The most important question that grabbed my attention is whether SoFi is a possible 100-bagger stock, because it is a legacy bank disruptor and is shaping the future of fintech. If that's true, then I cannot ignore SoFi anymore. Today, I stop speculating and fundamentally research the company using our usual 6-part framework:
SoFi's Revenue & Growth Potential
Visiting SoFi's website, the company comes across as a full-fledged financial service provider, offering loans, bank accounts, credit cards, insurance, and other financial products.
However, looking at its financial statements, SoFi is still a lending company and makes most of its revenue from offering various loans and collecting interest on those loans from its members. The company also sells those loans to other financial institutions and collects revenue from the sale, or at least, that's what it used to do before it stopped selling loans in Q1 2023. Based on my math, nearly 70% of SoFi's revenue is related to lending activities. The rest of its revenue comes from financial services like credit cards and insurance products and a technology platform that sells banking products to other companies. When talking about SoFi's revenue, we must discuss the big elephant in the room – the student loan business. SoFi started as a student loan platform and is still a leading student loan provider in the U.S. market. It focuses on high-interested mid-term student loans. Because student loan payments and interest accumulation on the loans have been on hold since 2020 due to Covid-19 financial hardship, and the government has offered a student loan forgiveness program, there have been limited opportunities for SoFi to originate new loans or collect interest rates on the balances. Therefore the company's stock price was negatively impacted for quite a while. Now, and partially thanks to SoFi's legal actions, the student loan repayment is expected to resume in 2023, and the interest accumulates on the outstanding balances. Therefore, the negative sentiment about SoFi is gradually evaporating. There is still a lot of argument about the timing of the student loan repayments and the loan forgiveness program, but investing in SoFi just because of its student loan program isn't a good case for long-term investment in SoFi, and long-term investors shouldn't worry about it too much. Let me tell you why? According to the company's CFO at the latest Morgan Stanley conference, the total addressable market for student loans that SoFi can access is about $200B in the loan amount, and SoFi already has a 60% market share in that category. The student loan market has no significant growth opportunity for SoFi long-term investors looking for companies with rapid revenue growth and profitable operation. If all SoFi does is return to its old student loan program, we should stop researching now. But the company has been clever and used the student loan hold period to transition its business to a one-stop-shop platform for all-money-related needs of its members. So the negative or positive sentiment around the student loan programs is irrelevant to long-term investments, especially if we are looking for a company that shapes the future of fintech and can generate a significant return. The rest of SoFi's business, specifically its short-term, high-interest-rate personal loans to members with high credit scores, other financial products such as bank accounts, and its technology platform that serves other businesses with their banking infrastructure needs, are more important to our long-term investment strategy. Before we dig further in, there is an immediate red flag here. For a small $8B company, SoFi is doing too many things. It issues loans, securitizes and sells loans, offers various financial products and services, and sells banking infrastructure. Each of those segments can be a full-fledged business by itself. I fear that the lack of focus and doing too many things at the same time can be a double-edged sword. On the positive side, it diversifies SoFi's revenue away from the complex lending and loan reselling business. On the negative side, it makes the business quite complex to run. Having that red flag in mind, let's explore potential growth opportunities SoFi had created for itself by diversifying away student loans. It has expanded into broader banking services by getting a national banking charter certification through a bank acquisition in the U.S. in 2022, and it offers banking infrastructure tech to other financial institutions through acquiring the Galileo and Technisys platforms in 2022. These moves create at least three growth opportunities:
So what does all this mean for SoFi's topline? There are positive trends and forces in the market to believe the company's revenue can grow in the years to come even if the student loan segment doesn't return to the pre-COVID and low-interest rate era. SoFi's Bottom Line
Let's pull up SoFi's Stock Card to continue our research. I leave a link to SoFi's Stock Card in the show notes. If you've been with me for a while, you already know I built Stock Card to help me and fundamental investors like me easily research and pick companies for the long term. If you are new around here, check out StockCard.io, look up your favorite stock or ETF ticker, and see how intuitive and easy it is to research them on Stock Card.
Back to SoFi, on the bottom line, the company doesn't generate positive income and is still losing money. But the losses have shrunk to $34M quarterly in Q1 2023, compared to a negative $110M in Q1 2022. Also, the company generates positive adjusted EBITDA. The adjustment comes from adding back stock-based compensation and amortization to the loss from operations. Those are positive improvements. Assuming SoFi can continue to sell high-yield personal loans and expand its embedded finance tech platform business, we should see more profitable operations in the near future. However, one red flag to be mindful of is that even though the company is steadily growing its banking products, evidenced by rapidly growing deposits by customers into SoFi's banking accounts, that business segment is making heavy losses. It's because SoFi offers high-interest-rate bank accounts and charges no fees to attract new members. Assuming high-interest rates stay around for a while, eventually, bigger banks will catch up, and SoFi may lose its deposit and member growth. We must monitor how well SoFi converts its banking customers to lending customers, turning them into profitable members before others catch up. Otherwise, the banking product divisions will become a profitability drag. SoFi's Balance Sheet
Losing money makes us wonder about SoFi's balance sheet. Does it have enough cash to keep funding its loss-making operations, and more importantly, does its balance sheet allow issuing more personal loans where the company still makes most of its revenue?
As we dig into its financial statements, it's good to see SoFi has a solid balance sheet. It raised money through convertible notes in 2021 and now has more than $2B in cash and cash equivalents. Moreover, because the company has started accepting deposits into its bank accounts, it now has access to those deposits to improve its ability to issue new loans. The company has a fair balance sheet. And the management doesn't believe it needs additional fundraising to continue funding its growth. SoFi's Accounting Methodology Issue: Despite management's take on its balance sheet strength, because the business doesn't generate free cash flow, it isn't too far-fetched to believe SoFi may need to raise additional capital or borrow money if things don't pan out as planned. For example, if deposit growth slows down or if SoFi needs capital to allocate to R&D expenses and acquire new companies to shore up its tech platform side. Moreover, there is an unlikely case that the regulators ask SoFi to use a different accounting methodology for its lending business. This has been the topic of heated conversation between SoFi bulls and bears, and regardless of your position in that fight, it makes sense to understand the risk. So far, because SoFi has been issuing and reselling its loans to other financial institutions, it didn't need to calculate any loss provisions in the loan values on its balance sheet. Typically, lenders who carry the loan and don't sell them have to put 7% of the loan's values as loss provisions on their balance sheet. If SoFi is forced to follow a similar accounting methodology, the loss provisions will deplete its assets significantly, which may force the company to raise capital or borrow money to continue to fund its loans and unprofitable operations. This is the primary reason a Wedbush analyst had recently downgraded SoFi and has caused the stock price to come down from its recent highs. I'd leave a link to an excellent article on this accounting issue on Seeking Alpha in the show notes. As a side note, Seeking Alpha is one of our preferred news partners, and you can access recent articles and news related to any stock on its Stock Card by clicking on the News button on top of all Stock Cards. Back to SoFi's loan value accounting red flag, SoFi didn't need to follow that methodology because it had always originated and then immediately sold those loans to other institutions. In Q1 2023, the company changed its approach and is holding on to its loans. Management argues it is because it generates a higher yield by holding on to the loans. The bears argue that it is holding on to the loans because other financial institutions aren't interested in buying high-yield, unsecured personal loan portfolios in the current economic conditions. According to the Wedbush analyst, we can expect regulators to catch up and force that accounting methodology change on SoFi which will result in reducing the value of SoFi's assets on the balance sheet, forcing it to raise capital and dilute investors. No one really knows whether this will happen or not, but we cannot ignore its possibility as a red flag. We now know enough about SoFi's financials to discuss its valuations. SoFi's Fundamental Recap
Let's recap SoFi's fundamentals.
SoFi's Valuation
There are many positives about SoFi and some red flags we just discussed. But can the company realistically become ten times bigger by disrupting the legacy banks and leading the embedded finance market? It's time for valuation analysis. At 5 times the price-to-sales ratio, investors believe SoFi can grow its revenue by five times, which means an 18% compounded annual growth rate in the next ten years, all else equal. Is it possible?
If SoFi was only in the lending business, 18% consistent annual revenue growth wouldn't be easy. If we believe the company can keep growing its financial product business, 18% annual growth may not be too difficult to believe. With $2B annual revenue and 5.6M in members now, SoFi makes about $350 per member. If the company grows its member base to the same 50 million members as CashApp by Block, the estimated revenue will be $17B, eight times bigger than its current estimated annual revenue. I know there are a lot of assumptions involved, and growing the membership base to 50 Million is a giant undertaking, but at least it gives us a sense of the feasibility of its current valuation. There is a path, even if it has a low probability, the SoFi grows into its current valuation and even higher. Let's assume SoFi generates $17B in revenue, which is not too far from Block's current revenue. And it gets a 2X price-to-sales valuation at that level. It can be a company with $34 B in market cap. That means SoFi can be a 4-bagger, giving us a 400% return. But, that story I gave you is with the assumption that SoFi stays a tech company, builds its embedded finance business, and moves away from lending as its core business. If SoFi focuses on lending and banking, then price-to-sales and high-growth valuation ratios won't be applicable to it. Many argue because SoFi is a bank, the better valuation ratio is the company's price-to-book value which is about 1.6 times on the day I'm researching the stock. This is almost the same price-to-book valuation as JPMorgan Chase. So Investors are already pricing SoFi the same as the biggest bank in the U.S. As a matter of fact, the stock has recently received a few valuation downgrades from financial analysts from Piper Sanders and Bank of America due to high valuation concerns. So whether SoFi is overvalued or undervalued depends on which direction you believe in a lending and banking business or a banking infrastructure provider. Is SoFi A Buy Now?
I see many risks, especially short-term, that can hinder SoFi from ever implementing its broader aspirations in embedded finance. I can also see the growth potential in that story if all goes well. But in business, as in life, you rarely get lucky for everything to go well. So this is one of those cases in which you can buy a small amount and monitor the company's track record in implementing its strategy. We are likely dealing with a volatile stock in the short term, especially if any news comes out about student loans, interest rates, regulatory interventions to force SoFi to change its accounting methodology, and SoFi's ability to grow its b2b business.
If the stock price goes down in response to short-term news, we should return and redo our analysis to see whether the company is moving in the right direction. Those can be good buying opportunities assuming SoFi is on track to implement its banking infrastructure plans. After all, investing in big winners requires a lot of patience and monitoring. SoFi has a good direction, and it's all about whether it can implement and execute its plan and do some of the short-term risks related to its lending business. You also have the less risky option of investing in an ETF that is holding SoFi in its top holdings, which you can get from the company's Stock Card by clicking on the top ETFs holding SoFi. See you next time!
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