KeyStone’s Stock Talk Show, Episode 213.
Great to be back with you this week. We have a busy show this week with. I kick the show off with a look at this past week’s earnings release from data warehousing management company Snowflake Inc. (SNOW:NYSE) which dropped nearly 20% on Thursday as the company lowered its growth outlook for the remainder of the fiscal year. I will tie the company into the idea of buying “growth-at-any-price” and how this has worked out over the past 5-years for market darling Cathie Wood’s Ark Innovation Fund. Aaron will highlight the recent results from AI market darling NVIDIA Corporation (NVDA:NASDAQ) and whether or not last week’s surge is justified. Brett will touch on the promotion of options trading as a “get-rich-quick” scheme for retail investors. Last, and certainly least, Brennan answers a viewer question on Marvell Technology Inc. (MRVL:NASDAQ) which provides data infrastructure semiconductor solutions, spanning the data center core to network edge. The stock has surged year-to-date, despite posting a drop in revenues in its latest period. Is the increase justified or based on AI hype?
Snowflake Inc. (SNOW:NYSE)
Market Cap: $48.89 B.
Stock dropped nearly 20% after the company lowered it Fiscal 2024 guidance.
What does the company do?
A provider of cloud-based data warehousing solutions. Its services comprise of data warehouse modernization, analytics, data exchange and engineering, data science, and others.
Strong track record of growth.
Revenues surged from just 96.7 million in 2019 to 2.25 billion over the last 12-months – a remarkable growth rate.
Gross profit also had a massive surge ovee that period from $44.9 million to $1.48 billion.
Cash from operation is also increasing.
All of these are good things.
But the price is what you pay for the stock, value is what you get.
What is the value of the stock – let’s look at a couple of ratios.
Price to sales: 22.82.
Price to operating cash flow: ~72.
Price-to-GAAP Earnings: Negative – No trailing GAAP earnings.
EV/EBITDA: Negative – no trailing EBITDA.
Now let’s compare it to some quasi-peers. We will use Price-to-sales, as there is no GAAP earnings and cash flow is just emerging to better levels.
Snowflake trades at a price-to-sales (P/S) ratio of 25. While closing all-time lows, it is significantly higher than its largest competitors, Amazon’s AWS and Microsoft’s Azure. A multiple of 25 times sales, despite the drop gives Snowflake little room for error. And we saw this play out in real time from the stock when it reported strong growth, but not to the incredible level in prior periods and a slowing level of growth going forward. The stock drops almost 20%.
This is despite a very strong Q1 Fiscal 2024 report.
Revenue of roughly $624 million increased 48% compared with the first quarter of fiscal 2023. That represents a slowdown from fiscal 2023, when revenue grew at 69%.
Additionally, Snowflake reported a non-GAAP (generally accepted accounting principles) income of $54 million, up from a $2 million loss in the year-ago quarter. stock-based compensation costs still led to a loss on a GAAP basis, it still represents a considerable improvement.
Despite the 48% increase in Q1 earnings, the growth rate declined from 69% and the company guided to $2.6 billion in product revenue, a yearly increase of 34%. In most cases, 34% is a great number, but when you are trading (at the time of the release) at nearly 30 times sales and over 80 times operating cash flow, there is not room for error.
Now perhaps Snowflake is the next unicorn – meaning 10-20 years form now we will look at Snowflake and it will have the sustainable growth of the Microsofts, Amazon’s or Alphabets of the World. But the trouble with predicting it will be a Unicorn is that by definition, the are basically almost impossible to find.
And my main point is, constructing a portfolio based on finding the next true disruptor or unicorn and paying “any” price for it, is not good process.
Snowflake is a remarkable growth story, will I pay any price for it or any stock – no.
Let me give you an example of a very well publicized fund that has uses this strategy and its returns over the past 5-years.
Of course, this is Cathie Wood’s Ark Innovation fund.
Ark is up almost 23% year to date – in the tech bounce, good on Cathy – or is it…the Nasdaq 100 is up nearly 28% as we will see in a second.
In fact, using this disruptor or growth at any price strategy, the fund has underperformed – and in most cases very significantly the return of the NASDAQ 100 over the past 5 years.
It does not even compare well with the broader S&P 500.
One could just argue the fund is just not good stock pickers and I might agree, but it also points to the folly of paying anything or any multiple for a stock – no matter how great you think the business is.
Question from a client in one of our U.S. Chat sessions.
Your Stock Our Take
Marvell Technology Inc. (MRVL:NASDAQ)
Current Price: $65.51
Market Cap: $5.6 Billion
Dividend Yield: 0.4%
Marvell Technology provides data infrastructure semiconductor solutions, spanning the data center core to network edge. The company develops, scales complex System-on-a-Chip architectures, integrating analog, mixed-signal, and digital signal processing functionality.
It offers a portfolio of:
Ethernet solutions, including controllers, network adapters, physical transceivers, and switches;
Single or multiple core processors
Custom application specific integrated circuits; and System-on-a-Chip solutions.
Electro-optical products, including pulse amplitude modulations, coherent digital signal processors, laser drivers, trans-impedance amplifiers, silicon photonics, and data center interconnect solutions;
Fibre channel products comprising host bus adapters and controllers;
Single or multiple core processors; storage controllers for hard disk drives and solid-state-drives; and host system interfaces, including serial attached SCSI, serial advanced technology attachment, peripheral component interconnect express, non-volatile memory express (NVMe), and NVMe over fabrics.
YTD the stock is up 73%, and just in the last week, the steock is up 46%… but let’s take a look at whats driving the share price…
Number #1 – It is because of the CEO, Matt Murphy commenting that AI is acting as a great growth driver for the company… stating that:
“AI has emerged as a key growth driver for Marvell, which we are enabling with our leading network connectivity products and emerging cloud optimized silicon platform. While we are still in the early stages of our AI ramp, we are forecasting our AI revenue in fiscal 2024 to at least double from the prior year and continue to grow rapidly in the coming years.”
And to put this into perspective, in their conference call they noted that “In fiscal 2023, they estimate that their AI revenue was approximately $200 million, up dramatically from the prior year.”
So if they expect it to double in the year to $400M… that would be adding an additional $200M in revenue for the year, or on a quarterly basis would equate to about $50M.. so that would mean that overall this growth in AI should contribute to under 4% growth per quarter (based off of Q1 2024 revenue).
He also commented that “revenue growth is expected to accelerate in the second half of this fiscal year, accompanied by gross and operating margin expansion”
Number #2 – The company’s Q1 2024 results came in better than managements Q1 revenue guidance of $1.322 billion and beat analyst estimates… even though Q1 net revenue declined by 9% Y-o-Y, and GAAP diluted loss per share came in at a loss of ($0.20) and non-GAAP diluted income per share came in at $0.31 per share.
Recent Financial Results: (Q1, 2024)
Net Revenue came in at $1.322B, a declined of 9%.
CFO was $208.4M, an increase of 7%.
GAAP EPS was a loss of ($0.20) which was flat year over year. And adjusted EPS was down 40% to $0.31 per share.
The company now has net debt of $3.6B million and a trailing net debt to EBITDA multiple of 2.4x
As you can see on the table, I have included the company’s Q2 2024 financial guidance which at the midpoint has revenue at $1.33B (decline of 12% Y-o-Y), GAAP EPS is expected to be ($0.16) and Adj. EPS is expected to be $0.32 (decline of 44% Y-o-Y).
Using the company’s Q2 2024 guidance, on a forward basis the business trades at 40x Adj. earnings… and taking into consideration the company’s debt, on a trailing EV/CFO basis, the stock trades at just over 7x.
Lets just quickly look at how the company is adjusting its “Net Income”
You can see that every quarter the company is adding back significant “stock-based compensation.
The stock is trading at 40 times Adj. Earnings, while revenue and EPS are actually down YOY.
The company has a net debt position of $3.6B and a net debt-to-EBITDA multiple of 2.4x.
The company believes that AI will fuel growth going forward, which may be true but IMO the anticipated growth for FY2024 isnt justifying the 40x adj. earnings multiple.
And I really think that the recent move in the share price is a bit unjustified and is being led by the hype round AI.
Options are alluring to many, many investors and recently we have been inundated with ads for Wealthsimple options trading. The company is known for low commissions and a simple trading interface.
Wealthsimple is advertising $2 per contract option trading for US securities, saying they have made options trading simple with a quick sign-up.
Since Wealthsimple targets a retail investor I thought I would go through the basics of options, why they can increase the risk substantially and a quick critique of Wealthsimple.
First off the basics of options.
The basic equity option comes in two types calls and puts. If you buy a call you have the right but not the obligation to purchase a stock at a certain price known as a strike price but not the obligation. And puts are the right to sell but not the obligation.
When you purchase an option you pay what is known as an option premium, which is just the price of the option contract.
The price of the option is determined by the following factors:
The price of the underlying ie a stock, the strike price, the time till maturity, the implied volatility of the underlying stock, interest rates, as well as dividend expectations.
For a call option, the lower the strike price the higher the premium, and for a put the higher the strike price the higher the premium. And for both, the longer the maturity and higher implied volatility increase the premium for both puts and calls. A call options price is positively correlated to interest rates and negatively correlated with dividends, and the opposite is true for puts.
Option contracts underlying are 100 shares so if you see a quote for a $10 option, and purchase 1 contract you would pay $1000 to actually purchase the option plus fees.
The exact pricing of options can be broken down into Greeks, which are just the notation for the equations of how the options premium changes due to certain factors. I’m not going to get into the Greeks because that would turn into a whole lecture. But as a starting point if you are interested in options look into the main Greeks, Delta, Theta, Vega, Gamma, and Rho.
But In simple terms, why are options just so risky? The answer is leverage.
A real-world example, using a short-dated option which have higher leverage. Nvidia is trading at $389 and a $387.5 June 23 call currently trades at $10.45 this results in leverage of just over 20 times. Just to give an idea of how much options fluctuate in price, this option price ranged from $6.25 to $12.20 during Friday’s session, while the stock ranged from $375 to $392.
Now circling back to Wealthsimple and a couple of issues I have with their advertising.
First off $2 a contract isn’t exactly cheap there are cheaper options pun intended like interactive brokers who are cheaper in every case US options are $0.65 each. As well most banks which these ads are comparing against are cheaper on a per-contract basis but also have a flat fee, so if you were to buy multiple contracts it could end up being cheaper elsewhere.
Second, which is the bigger issue, the risks are not emphasized enough within both the ads and app if you sign up. Wealthsimple only provides a brief description of the mechanics similar to what I said previously to start trading, but I believe that is not enough info to trade options and is a starting point, not an endpoint. On the landing, they advertise start options trading in 5 minutes, which for the average person who stumbled onto their ads on social media where they are advertising is reckless. Like all ads they focus on the great benefits of options, but in reality, options are just financial tools and can be used improperly if not understood.
I will say to the benefit of Wealthsimple, they do provide more information on options on their website, but Wealthsimple is run almost exclusively through their mobile app so I would bet most people would not see the additional information.
In one of their posts, they even reference that retail traders lost $2.1 billion from options between November 2019, and June 2021. But displaying that fact wouldn’t make a good advertisement, would it.
So, if you are remotely interested in options don’t rush in take your time understand the risks and don’t focus purely on the benefits like much of these ads do.