KeyStone’s Stock Talk Show, Episode 176
The band is back together, the calendar has turned to September, and we are taking you back to school this week. In keeping with the back-to-school theme, Brennan will start by defining “The Rule of 40”, which has nothing to do with the idea that it all goes to crap after you hit 40, or his favourite movie, The 40 Year Old Virgin. The Rule of 40 is a commonly used metric when comparing SaaS companies and is a simple framework that balances revenue growth versus profit margins. Brett takes reviews one of our more popular Stock vs. Stock Battle of the past couple years which pitted two hot (at the time) renewable energy companies Greenlane Renewables Inc. (GRN:TSX) and Xebec Adsorption Inc. (XBC:TSX) against one another. Greenlane won the battle at the time, but neither met our criteria. Brett will look at where both stocks are today. Ryan will hit the mailbag and take a quick look at one of the hotter TSX Venture stocks this year, Patriot Battery Metals Inc. (PMET:TSX-V), which has seen its share price jump from the $0.55 range to just under $7.00. What is driving the gains and is it sustainable? Finally, in our Your Stock, Our Take segment Aaron reviews NVIDIA Corporation (NVDA: NASDAQ), the worlds top designer and manufacturer of GPUs or graphic processing units. The tech giant has seen its share price slashed 60% from 2021 highs and its recently released ugly Q2 numbers helped pour gasoline on the recent tire fire. Aaron let’s you know his thoughts on the current valuations.
Welcome, my cohosts, Aaron and the killer B’s, Brennan and Brett!
I saw a massive run on Patriot Battery Metals Inc. (PMET) – – what is going on here? Can it continue?
Patriot Battery Metals Inc. (PMET:TSX-V)
What do they do?
Mineral exploration company focused on the acquisition and development of mineral properties containing battery, base, and precious metals. The company’s flagship asset is the 100% owned Corvette Property, located proximal to the Trans-Taiga Road and powerline infrastructural corridor in the James Bay Region of Québec. Also, two gold prospect properties in Idaho.
No revenues here, so nothing to analyse from a cash flow perspective. Net loss of $4.4 million in the last quarter.
We can look at the balance sheet.
As at June 30, 2022: Cash: $8.82 million.
Accumulated Deficit: $(16,633,735)
What is driving the share price?
1) Good lithium drilling results at its drill program at the Corvette property.
2) Hot lithium and/or battery metals stock market.
Our Take: Very cautious – shares have run up from $0.54 to start 2022 to $6.70 today, primarily on positive drill results.
While the drill results are promising – positive drill results are a long way from delineating an actual resource that is worth building a long-term sustainable and profitable mine and there are countless things that can derail a junior miner on that path. While the rise looks dizzying, in this segment the drops are often just as dizzying if not worse. We prefer to stick to cash producing businesses with growth, strong upside, but something to fall back on in terms of fundamentals when the tide eventually goes out.
Your Stock Our Take
NVIDIA Corporation (NVDA: NASDAQ)
Market Cap: $340 billion
Nvidia is the worlds top designer and manufacturer of GPUs or graphic processing units. The company’s GPUs are used in high-end PCs for gaming, data centers, and automotive systems. In recent years, the company’s GPU technology has been applied to the development of complex, artificial intelligence systems including autonomous driving.
Nvidia was a top performing tech stock in the period leading up to November 2021. Since then, the stock price has come down hard as has been the case with most of its high growth, technology peers. Nvidia’s stock price is down 60% from 52-week highs. The stock is also down 24% since the release of its Q2 financial results about 2 weeks ago.
The quarter overall looked pretty ugly.
- Revenue of $6.7 billion was down 19% compared to the most recent quarter and up only 3% year-over-year.
- Operating income was down 67% and 51%, respectively, compared to Q1 and Q2 of last year.
- Non-GAAP EPS was $0.51 down 63% from Q1 and 51% from the same quarter last year.
These are some of the weakest numbers that I’ve seen from Nvidia for many years. But the decline in growth was not necessarily a big surprise to the market. Analysts were expecting $0.52 in earnings per share so the company’s reported figure only missed expectations by 1 cent. Revenue for Q2 was in line with analyst expectations.
Nvidia did provide guidance for Q3, expecting revenue in the range of $5.9 billion which would equate to a decline of 12% sequentially and 17% year-over-year.
Breaking down the numbers by segment, Nvidia’s two most important end markets are data centers, which made up 57% of revenue and Gaming which is 30% of revenue. Its really Gaming where the company is experiencing weakness. Gaming revenue was down 33% in the second quarter to $2 billion. Data centers on the other hand continue to performance very well with growth of 61% to $3.8 billion. The weakness that the company is expecting to experience in Q3 is largely from the Gaming segment.
Another thing to consider with Nvidia is the situation in China. There are two issues with China. One is the Chinese government’s zero covid policy which has caused wide spread disruptions in the economy this year. Another is China’s relationship with Russia in reference to the current Western sanctions on Russia.
On August 31st, Nvidia filed an 8K form with the SEC disclosing that it had received notice from the U.S. government to curb sales of some products which were suspected of reaching Russia through China. Other chip companies also received the same notice. Its unlikely that this specific notice will have an significant impact on Nvidia but the straining relationship between China and the United States does create uncertainties. It is estimated that about $7 billion, or 26%, of Nvidia’s revenue last year was connected to China.