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Novavax, Pfizer, and Moderna were at the top of the world during the Covid-19 pandemic.
The global demand for a new vaccine to save humanity and the economy from a disaster and collapse was the most important topic, and the companies that researched and developed the vaccines were the kings of wall street. Where are those stocks now, and should we invest in them now that the hype has subsided and whether there are reasons to believe the companies can still benefits from their COVID vaccine and investments that other investors don't see yet? 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 rise and fall of vaccine stocks are one of the latest and most fascinating wall street stories.
All three stocks are now drastically lower than their all-time highs of the pandemic era, which means there may be an opportunity to buy them at a great price benefiting from the fact that the market is now up to the next big hype and has forgotten all about vaccine stocks. Demand For Recurring Annual Covid Vaccine Shots
On the demand side, vaccine companies expect a new FDA recommendation will require the medical system to upgrade COVID vaccines with a new strain of the virus, and as a consequence, vaccine companies expect billions of dollars of vaccine revenue in the U.S.
Additionally, there is a high expectation to combine COVID and flu vaccines so the population can get immunized in one shot and the entire health ecosystem can be more efficient. According to the President of Moderna at the Jeffries investment conference, there is demand for 50 to 100 billion vaccine shots. Compare that to 150M flu vaccine shots in the United States, and the 50 to 100 million doses are reasonably in demand. This means there is an opportunity for additional revenue and potentially recurring revenue from future COVID vaccinations in the future. Let's jump into the fundamentals and see which company is better positioned to benefit from the ongoing COVID vaccine demand. Novavax (NVAX) Fundamental Analysis
The company's market cap is about $600M, on a minimum of $1.4B forecasted revenue and $700M in cash. Investors must expect the revenue to decline drastically to price the company at $600M in market cap, less than the cash it has on hand.
Looking at its latest quarterly earnings, Novavax made no money, or worst, it has reported a negative revenue. It makes no free cash flow and carries more than $2B in total liabilities. At first glance and looking at immediate data, the company is doomed. However, if you review the company's latest earnings reports, it is forecasting an annual revenue of between $1.4 to $1.6B coming from 2023 COVID vaccinations and the possibility of producing a combined influenza and Covid vaccine. It has already secured $800M in vaccine orders for 2023. The company is also reducing R&D and cutting costs to improve its financial stability. So the company isn't fully doomed. However, I'm quite concerned about the large liabilities. Let's say Novavax uses $700M to pay ⅓ of its liabilities and uses all its revenue to pay for its operating expenses. It is still left with about $1.2B in liabilities. It needs to keep reducing its operating expenses so its revenue from future vaccines surpasses its costs and pays off the rest of its debt for several more years before it has any money left to return to investors. To add insult to injury, Novavax is dealing with a $700M dispute with GAVI, the Vaccine Alliance. The dispute is related to advanced payments by GAVI, and Novavax claims that the payment isn't refundable. The legal dispute is still ongoing. With all those challenges, it feels like the stock is overvalued even at a 0.4-time price-to-sales ratio. Of course, we shouldn't forget about it its patent and technology value. So at best and in the absence of a major new outbreak, Novavax is a cigar-butt stock that may still have another last puff left in it. Pfizer (PFE) Fundamental Analysis
Pfizer is a $220B company that makes $93B in revenue, is profitable, and holds more than $30B in cash and cash equivalent assets. It also pays more than a 4% stable dividend. This is a drastically different company compared to Novavax. It generates more than $26B in free cash flow too. It is a vaccine stock, but its survival isn't by any means dependent on Covid vaccine. So why is the company priced only eight times its earnings?
Going through its earnings report, the company wants to show its growth potential, excluding Covid-related products and expects between $20 to $25B in revenue by 2030 from its pipeline. A company such as Pfizer has a rather stable and reliable trajectory based on its multi-decade operating history, and if you look at its historical Price-to-Earnings ratio trend, it is hovering at a historically low level, indicating possible upsides. Moderna (MRNA) Fundamental Analysis
Moderna is a $47B company with $5B in expected revenue from the COVID vaccine program in 2023. It was profitable last quarter and has nearly $17B in cash and cash equivalent. Like Novavax, it is also working on the combined flu and Covid-19 vaccine, but unlike Novavax, it has several other products in the pipeline. Moderna is focused on bringing its mRNA technology to other vaccines, such as HIV, Lyme, or Norovirus, and therapeutics, such as different kinds of immuno-oncology and rare diseases among others.
On further review of the company's financials, you'll see that most of its net income last quarter came from income tax benefits driven by R&D credits. The company has drastically increased its R&D expenses. Although you do not like to see a drastic cost increase, an R&D expenditure increase for a biotech company that isn't plagued by significant liabilities, like Novavax, is good news. It is an indicator of potential future revenue. At a 2.5 times price-to-sales ratio, with significant cash on the balance sheet and a solid pipeline to develop new mRNA-based vaccines and treatments, Novavax seems to be a typical high-risk - high-reward biotech bet. However, be mindful that the 2.5-time price to sales is based on last fiscal year's revenue of $15M thanks to the COVID-19 vaccine revenue. This year, so far, the company has only confirmed a $5B in revenue which brings the price-to-sales ratio up to more than nine times. Moderna can be a good bet if you can tolerate the risks. Investing in biotech always comes with the risk of delayed drug developments, significant market sensitivity to even the smallest news about the drug development programs, and the possibility of never getting an actual product out into the market. Which Vaccine Stock Is A Good Buy Now?
Let's recap what we discusses so far and decide what to do with these old Vaccine Race winners:
In my point of view, Moderna has a chance for a significant return but comes with the typical risk that comes with biotech companies. Pfizer is most likely the most reliable investment of the three, but it won't be a big 10-bagger. And, lastly. Novavax be a big blind bet for a chance on a significant gain but also a very high likelihood of losing all your money. I'll see you next time!
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Apple (AAPL):
And a brand that inspires! A tech company that doesn't stop innovating. And a stock that pays consistent dividends. Apple is the perfect company. But a perfect company doesn't mean a perfect stock. Apple is priced at more than 30X its earnings and more than seven times its sales. Can it grow into its current seemingly ambitious valuation? Today, I review Apple's latest product and feature announcements at its worldwide developers' conference, WWDC, and discuss its fundamental analysis and valuation to decide whether it can get even bigger than its current roughly $3T market cap and whether it is still a good stock to buy now. 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. Apple becoming the largest publicly traded company in the world is one of the most fascinating stock market stories. The stock has generated a 120,000% price return since its IPO and has consistently paid dividends since 1989, eight years after it went public in 1980. How has the company achieved such an extraordinary return? There is never only one reason for a company's success. But, for Apple, if we can narrow down our answer to the most important reason for its success, it has to be about building a strong competitive advantage and moat by keeping its customers loyal and engaged for decades. And if there is any way Apple can continue growing, it has to be its ability to keep strengthening its moat. As you watch the company's announcements at the latest WWDC conference, you'll see evidence of it fortifying its competitive moat. Before discussing how Apple can continue building it's moat, Let's talk about the elephant in the room. What Does Vision Pro Launch Mean For Apple's Investors?The most talked-about portion of WWDC was the release of Apple's new Augmented Reality glasses. People are so excited about this product release. The Virtual and Augmented Reality market is expected to grow 46.00% annually between 2021 and 2025 globally. AR and VR glasses will become a $7B market by 2027. If Apple manages even to own the entire market, the new Vision Pro glasses aren't going to make a dent in the company's nearly $400B revenue per year. There are some caveats to my argument:
How Does Apple Build and Protect Its Moat?Apple's WWDC wasn't all about the new Vision Pro AR Glasses. The company talked about a slew of new features and technologies that are much more important to its future and its ability to grow revenue and expand its moat. Specifically, two things captured my attention:
Let's talk about the M2 Chips first. In 2021, Apple moved away from using Intel's chips in its devices and switched to designing chips, naming them Apple silicon. These semiconductors are powerful and designed to handle Apple's specific needs. The company is now releasing the second generation of its chips, called the M2 series, which are much more powerful and can handle extremely challenging workloads such as enabling professional video and audio editors to stream and render high-quality content. Interestingly, during the presentation, the presenters kept comparing Apple silicon-powered devices with Intel-powered ones and emphasized the superior speed and performance of Apple Silicon. It kept reminding me how much Intel has fallen to the point that its stock may not be saved anymore. I have done a detailed analysis of Intel's stock which I leave a link to it here. Back to Apple, the chips are so powerful that the new Mac computers can now run high-fidelity games such as Death Stranding. These powerful semiconductors open Apple's doors to the world of computer gaming in addition to its growing mobile gaming. The chips are strong enough that famous game maker, Kojima San, accepted to appear at WWDC and endorse Apple's technology calling it s a new era for Apple's gaming. Of course, it's not all about gaming. These powerful chips make all Apple devices more powerful and keep Apple at the forefront of the personal devices market. The second note-worthy portion of the WWDC was about a slew of small but interesting software improvements and new feature releases. Apple is notorious for observing its users and figuring out ways to make them a little bit more comfortable and a little bit more dependent on its ecosystem. If you listen to any of the features Apple released during WWDC in isolation, they mean nothing. But they delight users at tiny moments and solve their day-to-day problems one small feature at a time. Features like better profiles, stickers, Journaling on your phone, and many more. As they say, "Trenches are dug one shovel at a time." And these days, Apple's competitive moat is built one small feature and software improvement at a time. Do all that moat-building and competitive advantage translate into Apple being a great investment now? Apple's Fundamental RecapLet's look at Apple's fundamental analysis:
Apple's ValuationUsing common valuation ratios such as the Price-to-Earnings ratio of more than 30 times, and the Price-to-Sales ratio of more than seven times, Apple is overvalued. A high valuation ratio, such as more than 30 times Price-to-Earnings, shows investors' expectation of higher earnings and profitability in the future. In this case, using a PEG ratio can be a more reliable indicator. The PEG ratio considers the historical growth rate in a company's earnings and paints a better picture of its valuation. Apple's PEG ratio is 2.5 times. This means Apple investors expect the future earnings will grow faster than its historical growth rate. Is it reasonable to assume that Apple will be much more profitable in the future than today? How Can Apple Become More Profitable?There are a few things that can improve Apple's profitability in the future. The most important factor is the growing share of the Services in the company's revenues. Service or software are much more profitable than hardware and devices. We have seen the share of services grow in total Apple's revenue, which may translate to higher earnings. However, Apple is still a hardware company looking to lead the hardware market, evident by its new VR glasses launch in the latest Word Wide Developer Conference. Overall, it seems Apple is a strong, well-managed, cash-generating company that investors are too excited about now. So what should we do with Apple stock? Is Apple Stock A Buy Now?If you own Apple's stocks, holding on to them isn't a bad idea. It is an overvalued stock, but that doesn't mean the share price will drop anytime soon. Because of its reliable dividend and market leadership, the stock is one of those shares many indexes and large funds tend to own and hold for the long term. Therefore there is limited price drop risk, especially if no major economic crisis or unexpected factors impact Apple. If you don't have Apple's shares, buying them at the current valuation most likely wouldn't give you a significant return, and it only preserves your capital. If you are looking for reliable and steady investment, picking up shares of broad market index ETFs such as SPY or similar mutual funds would give you the same result with less risk because you will diversify by owning a broad market ETF while still owning Apple indirectly. The company is among the largest holdings of almost all broad market indexes. To find such ETFs, you can go to Apple's Stock Card and look for the ETFs that hold Apple in its top 25 holdings. For example, Vanguard Information Technology (VGT) or iShares's Global Tech ETF (Ticker: IXN) are ETFs with big exposure to Apple and reasonable costs and risks. By investing in them, you will benefit from possible Apple price increases while protecting yourself against possible price drops that come with owning an ETF that diversifies your holding into other large and successful companies worldwide. It is also worth monitoring Apple's price for possible buy-the-dip opportunities. For example, if some external factors drag the stock price down while the company maintains its moat, you may have a chance to get a better return. Before I wrap up, I have to say that if you look for investment opportunities to double or triple your money, Apple most likely won't be the best choice, even if the stock price drops a few percent in the future. You can only generate outsized returns by investing in Apple's of the future that are much smaller and unknown at this point. See you next time!
The year is 2033. Rows and rows of people are ushered through narrow captivity corridors by the robot overlords. The sharp smell of fire and ash is making people gasp for air. The humanoid robots are scaring, capturing, and hunting people. AI finally took over. What's that? It's 2023, not 2033? AI hasn't dominated the world yet! Okay, phew! So if AI hasn't yet dominated the world, what can it do? Well, according to UiPath's business description, AI can help organizations scale digital business operations rapidly. Oh, that sounds like a good idea! It can save businesses a lot of money. But is the stock fundamentally strong and worth investing in so we can make much money too before AI takes over the world? It may very well be. More importantly, is it priced cheaper than AI stocks such as Nvidia, giving us room to grow without taking the high valuation risk? Today, we will discuss all that and research UiPath (PATH) fundamentally to decide whether it is worth investing in and holding for the long term before AI takes over the world. 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), and JD.com (JD), 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. Artificial Intelligence is the talk of the town. Just recently, we saw Nvidia's stock jumped more than 25% in one day after announcing a surprising revenue forecast thanks to heightened demand for data centers that can handle generative ai applications. I posted a detailed review of Nvidia a few days back, and I'll share a link to it in the show notes. The gist of it was that Nvidia is great but too expensive. Which means if we are not investing in NVDA, then what do we invest in that benefits from the same trends and has solid operations while it is not priced as the next best thing after the sliced bread? UiPath could fit that description, at least, that's what Cathie Wood and the ARK Invest team of innovation-obsessed investors believe in. Let's dig into UiPath's top and bottom lines, revenue and profit trends and direction, balance sheet strength, and free cash flow status, and decide whether it is worth paying the 8-time price-to-sales ratio for the stock. UiPath's Fundamental AnalysisUiPath makes money by selling other companies the licenses to use its automation software or paying a subscription fee to access UiPath's platform on the cloud. It grew its revenue by 42% annually, compounded to $1.3B in annual recurring revenue in the first quarter of this year. Growth in recent years has slowed down slightly to 28% year over year and 17% for a quarter-over-quarter. But still, the company is growing. While UiPath's operations weren't profitable in the latest quarter, the company has been profitable in the past, and by adjusting the numbers for non-cash expenses such as stock-based compensation, the operations are still profitable in the latest quarter. Similarly, it used to generate free cash flow in the past, and in the latest quarter, it is free cash flow positive on a non-GAAP basis. Most of the adjustment is attributed to the cash used in the purchases of marketable securities. Ideally, you'd want a company that generates free cash flow consistently and doesn't need adjustments to show positive figures, but still, it's good to see non-GAAP free cash flow. The good news is that UiPath holds nearly $2B in cash and cash equivalents with no significant debt, giving it a resilient balance sheet. We can be comfortable knowing that it has enough cash to reinvest in its future even if it doesn't generate free cash flow for a quarter or so. UiPath's Fundamental RecapLet's recap UiPath's fundamental analysis:
UiPath's ValuationTo grow sales eight times in 10 years, which is the stock's current price-to-sales ratio, UiPath needs to grow its revenue by 23% annually. The good news is that the required growth rate is lower than UiPath's compounded annual growth in the last few years, even though its latest quarterly growth rate isn't as high. It is certainly cheaper and more reasonably priced than Nvidia while still benefiting from the AI boom. It isn't exactly the generative AI infrastructure developer that Nvidia is, but certainly, it has a rapidly growing market. Most importantly, it allows companies to adopt the generative AI application within their organizations which can boost its revenue in the coming quarters. However, there are still valuation risks associated with the stock. If by any chance the revenue growth slows down and the company doesn't make up for it with higher profitability, then we will be in serious problem. It isn't a slam dunk stock, but nothing is. Remember, the company is a recent IPO but was founded in 2005, almost 18 years ago, so by now, it should have found it's selling rhythm. Is UiPath A Buy Now?At nearly $10B in market cap, it is just at the threshold of small companies I like to invest. I already indirectly invested in this stock because of ARKK's 6% allocation to this company. If you don't have an ETF like ARKK that bets big on UiPath, this can be a stock to buy now and monitor and add more as it continues to prove it can grow its revenue rapidly and expand its profits. If UiPath isn't up to your liking, but you still want to research AI stocks, type artificial intelligence in the search bar and get the list of AI stocks and ETFs on Stock Card. I'll see you next time!
On May 24th, 2023, $750M Nvidia jumped 26% after its earnings release while reporting a 13% year-over-year revenue growth decline. How can a mega-cap stock jump nearly 30% in one day, and how is that possible when revenue growth decelerates? The answer is the AI boom. The company designs and builds semiconductors and chips that power data centers with the computation capacity to run generative artificial intelligence applications and large language models. The data centers are foundational to other large tech businesses, such as Microsoft and Google, who want to meet the rush of demand by companies of all sizes for generative AI applications. Aside from the recent price rally, Nvidia's stock price is no stranger to big jumps in price thanks to similar technological boom cycles such as cryptocurrencies. As a matter of fact, in five years, the stock went from a low of $35 per share in 2018 to a high of $400, generating more than a 1000% return on the day of recording this episode. The question is, after a 5-year 1000% gain, is it too late to buy Nvidia? 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), and JD.com (JD). 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. Before discussing Nvidia's fundamentals and assessing whether it's time to buy, let's point something out. If you are already investing in the broad market index ETFs such as SPY or QQQ, you already have a big exposure to Nvidia. The stock is the 4th largest holding in SPY ETF and the one I the largest stocks in the QQQ ETF. So no! it's not too late to buy Nvidia, you are already an investor if you are an index investor through your 401K or other similar accounts. You now need to ask whether you'd want direct exposure to Nvidia too. The stock has a few interesting fundamental characteristics that can help you decide whether the company has more room to grow. Let's go through the stock's fundamental analysis using our usual fundamental framework:
NVIDIA's Fundamental AnalysisNvidia makes money by selling computer chips that it designs and builds for other technology companies to run data centers, make video games and computers, and build autonomous vehicles. Interestingly, Nvidia doesn't manufacture its own chips. It works with Taiwan Semiconductor (TSM) to make the actual chips. But the company develops the technological architecture and the software that makes those chips unique and powerful. There are two important fundamental characteristics in what we just discussed:
NVIDIA's Topline & Bottom Line: Fundamentally speaking, Nvidia has solid top and bottom lines, two important factors we consider when researching a stock. It's also important to notice that the roughly 30% jump after the recent earnings report comes from the company's forecasted $11B revenue for the next quarter, up from the $7.2B in the year's first quarter thanks to the AI boom which strengthen its topline growth and health. NVIDIA's Free Cash Flow: Having a growing topline is good, but better is the company's ability to turn that revenue into cash. Typically, free cash flow is a good indicator that a company's business is working. And Nvidia doesn't disappoint. It generated $2.6B in free cash flow. NVIDIA's Balance Sheet: On top of its cash-generating business, it has more than $19B in cash and cash equivalents on its balance sheet against roughly $7B in current liabilities. Nvidia generates cash and has access to enough cash to invest in its future growth without any concerns. Why Does NVIDIA Want To Issue New Shares? Talking about cash and balance sheet, there is a rather surprising announcement but the company's SEC filings. It has announced that it may sell up to $10B in new shares at some point, raising additional capital. It's surprising because of all the cash it already generates and holds on its balance sheet. Raising capital doesn't sit well with current shareholders because it increases the number of shares and dilutes the existing shareholders' ownership of the company. Most likely, the company is trying to take advantage of the AI boost to its market cap to authorize share issuance without worrying about the market's negative reaction if it was announced at any other time. My guess is that the new shares can be used to fund the repayment of its current debt, or Nvidia expects it needs much more capital and R&D to stay competitive in the market and that investment is much higher than the cash it has on hand and can generate in the future. Nevertheless, both reasons don't sit well with me and are a red flag in my books. NVIDIA's Valuation: Aside from those fundamental metrics, the important question we should discuss now is whether the company deserved the 25% jump on the earnings release day and the follow-on price increases since then. Today, when I'm researching, Nvidia boasts a 200+ price-to-earnings and 37+ price-to-sales ratio. The Forward price-to-earnings ratio of 53 times indicates the company is expected to be more profitable in the future, but still, these valuations seem quite extraordinary. To grow into 37 times the P/S ratio in 10 years, Nvidia must grow its revenue by roughly 43% annually all else equal. Nvidia has grown by almost 30% per year compounded in the last few years. But still, 43% compounded annual growth is quite aggressive. Moreover, the generative AI market is expected to grow by 27% annually in the next ten years. Even if Nvidia grows as fast as the market, it still has a 16% difference between the market growth and the required growth rate to grow into its current valuations. That's HARD to do. Before summarizing Nvidia's fundamental analysis, and discussing what we should do with the shares, let me invite you to look up Nvidia's Stock Card to research the company on your own. I leave a link to its Stock Card in the show notes. Better yet, if you don't feel comfortable paying such a high price for Nvidia, we recently launched the generative AI stock list on Stock Card so you can find stocks like Nvidia working in this rapidly growing industry. Type "generative AI" in the search bar and get the list. I leave a link to that list in the show notes too. NVDIDA's Fundamental RecapNow, let's recap Nvidia's fundamental analysis:
Is NVIDIA A Buy Now?Knowing all that, what should we do with Nvidia shares? I have no doubt NVDA's stock price can and may go up in the coming months. That's how hype-driven stock prices tend to move. They go up until something disrupts their momentum. In the case of Nvidia, any new stock issuance, any disruption to the huge revenue forecast, competitors' announcements, or any supply challenges can qualify as a disruption, and then, it can easily give back its 25% jump in a day. If you own NVDA as I do, taking some profit off is not a bad idea, especially if you have other or better investment options. And, then, buy the stock back when it comes off the AI hype. Be careful that you may sell, and the stock may still go up. You need to be satisfied that you took some profit, reduced your risk, and can sleep better. Remember, investing is a game of probabilities. The investment return is not an absolute figure. You need to consider how much risk you take to generate a return and whether that risk is justified. After Nvidia's big recent jump, the probability of a decline goes up, and staying away is a prudent strategy. Also, remember, as we discussed at the beginning, if you are investing in SPY or QQQ index ETFs through your 401K or automated passive investing, you already have massive exposure to Nvidia. Ultimately, you need to decide whether you are okay to chase the momentum and risk higher drop probabilities or prefer to take some profit off now and wait for the next cycle by adding the stock to your buy-the-deep watchlist. I decided to sell my Nvidia shares, and if you were a Roll with Our CEO portfolio follower, you must have received an update notification. See you next time!
Michael Burry is as close as it gets to a stock market celebrity. Investors like to follow his every move. The always-pessimistic investor has earned the right to his celebrity status by enduring the emotional toll it takes on one's mind to go against the mainstream. His famed bet against mortgage-backed securities in 2008 made him and his clients millions. His bet on GameStop and the consecutive short-squeeze solidified his status as the dark prince of the stock market. In later 2022, he forecasted an extended multi-year recession for the U.S. economy, and now he is making big bets on China's consumer spending recovery by picking up shares of Alibaba (BABA) and JD.com (JD). Is he right about those Chinese stocks? 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 research companies that are down significantly from their all-time highs to decide whether to buy more or sell and allocate money to other companies. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), and Unity (U). 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. Chinese stocks and whether to invest in them is a fascinating story in the market. Some hate investing in the country due to political and philosophical differences between the U.S. democratic system and China's government-controlled economy. Some prominent investors, such as Charlie Munger, who have been quite bullish about investing in companies such as Alibaba, have recently changed their minds about the company. I have discussed how I disagree with Munger in a recent episode that I recommend you watch if you are interested in Alibaba. I'll leave a link to it in the show notes. Today's episode is about JD.com (Ticker JD), one of the two Chinese stocks Burry has invested in based on the last 13F report for this investment management company, Scion Asset Management. Interestingly, one of our YouTube channel viewers has also recently requested detailed research on JD, so I'm doubly glad to spend today's episode on this company's fundamental analysis. If you have any stock ideas you'd like me to cover in the future, don't forget to share them in the comments. You never know, it can find its way to future episodes. On to JD's fundamental analysis. As always, we look at the company across six criteria:
JD.com's Fundamental AnalysisJD.com is a Chinese e-commerce company headquartered in Beijing. According to the company's website, it is the largest online retailer in China and the biggest internet company by Revenue. This is interesting because I thought Alibaba owned that title. JD's Topline: The company just recently announced its earnings release report, with 243M in Chinese Yuan quarterly revenue, down 18% quarter over quarter. Not a so good start for a company to bet big on. That's certainly a red flag. But, let's not rush and understand the reasons for the decline. The decline isn't as bad when you compare the revenue with Q12021, which is up nearly 1.5%. When you look at the revenue across all business units, JD Logistics drives growth while new businesses and retail suffer. We discussed this in the past when we analyzed Snap together, revenue is a lagging indicator. To see where a company is going, we must look at its leading indicators, such as daily active users. Engagement inevitably results in higher revenue if more users are active on the platform daily. JD's application saw double-digit year-on-year growth in March. Additionally, there is a revenue mix shift. JD is focusing on moving toward more high-margin categories, such as Services, which is a segment that grew 34% in Q1. The Services refer to marketplace and advertising revenue it charges merchants and advertisers to leverage the company's platform. My point is that the business isn't in downward disarray. It has growing segments that will result in future revenue growth. Complex Organization: While researching the company's different divisions, I came across another red flag which is the complex organizational structure of JD. As you read through the company's annual reports, it's cumbersome to understand the relationship between different divisions. Every segment of the company acts like a stand-alone company in which the broader JD has ownership interests and agreements. The CEO talked about reorganization efforts to simplify the structure, and we have seen similar efforts at Alibaba. A complex organization isn't bad by its nature. For example, Berkshire Hathaway is a complex organization with multiple equity ownership, full ownership, and part investments in various businesses. It just makes understanding the business harder, and that's a red flag in my books. JD.com's Bottom Line: This seems to be an area the management focuses on. Even the core retail business, which has been shrinking in terms of top-line revenue, has managed to grow its profitability by almost 5% year on year. The improvement comes from cutting marketing expenses by 8% and R&D by 4.5%, with most other costs staying relatively steady. It's good to see high profitability, but not good to see R&D cuts. JD.com's Free Cash Flow: Profits are good, but better yet is free cash flow which is a true indicator of a business's ability to make money. Although the company didn't make free cash flow in its latest quarter, the trailing 12-month free cash flow is 19B Chinese Yuan. On a roughly 1 trillion Chines Yuan annualized revenue, 19 B free cash flow represents about 2% of free cash flow to revenue ratio, It's good to see the company makes free cash flow, but the FCF to revenue ratio isn't as impressive as I had hoped. JD.com's Balance Sheet: The next point is JD's balance sheet strength. The company has some cash and some liabilities with its primary metrics, such as debt to equity, debt affordability, and current ratios, all hovering in an acceptable range. Summary of JD.com's Fundamental Analysis: So let's recap JD's fundamental analysis before turning to its valuation because the company's fundamentals aren't a slam dunk as some of the other companies we have discussed in the past, which you can watch and view if you go to the "Beaten Down Stocks" playlist on our YouTube channel. However, they could all be overshadowed if we can buy JD at a good valuation. In summary:
Why Did Michael Burry Invest In JD?Knowing all that, why did Michael Burry allocate over 19% of Scion Asset Management's fund to this company? The answer lies in the valuation:
Michael Burry is making a value bet on JD's stock, most likely expecting a recovery in consumer spending in China in the years to come and understanding that the company is indeed able to grow its revenue in the future. Also, the upside expectation isn't limited to Burry. 9 analysts who updated their JD's price target in the last six months expect an average 100% upside for the stock with 7 Buy recommendations and 2 Hold. Knowing all that, what should we do with the shares? Should we follow the dark prince of the stock market to buy more JD's shares? Is JD.com A Buy Now?Buying this stock goes back to how comfortable you are with owning and holding a Chinese stock. I believe the stock is truly undervalued and has an upside. But, there is no guarantee the recovery to happen anytime soon. If we compare JD's market cap with Alibaba, we see a 4X difference between the two. Although Alibaba gets a big valuation boost because of its cloud and mobile payment businesses, they are relatively comparable. I expect that JD can double my money if I'm patient enough. But I don't see the evidence that the stock can be a significant multi-bagger. You should decide if you have the patience and the interest to hold JD.com in your portfolio for a chase to double your money. Now it's your turn to lock up JD's Stock Card. See you next time!
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