Valuentum Exclusive Analysis for the Discerning Investor

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Nvidia Bets Big on Data Centers
Image Source: Nvidia Corporation – 2020 Annual Meeting of Stockholders Presentation. On August 19, Nvidia Corp reported second quarter fiscal 2021 earnings (period ended July 26, 2020) that beat consensus top-line estimates (on a GAAP basis) and consensus bottom-line estimates (on a non-GAAP basis, as its GAAP earnings were slightly lower than consensus estimates). Nvidia has several things going for it including a pristine balance sheet (meaning a net cash position), a data center business that is growing at a brisk pace (which we will cover in this note), a high quality cash flow profile (relatively low capital expenditure requirements to generate meaningful revenues), and its outlook is supported by secular growth tailwinds, particularly as it relates to demand from cloud computing providers. Shares of NVDA yield a negligible ~0.1% as of this writing.

Intel’s 7-nm Chips Behind Schedule, Free Cash Flows Remain Strong
Image Shown: Intel Corporation made waves on July 23 when it announced its 7-nm chips were well behind schedule. Image Source: Intel Corporation – Second Quarter Fiscal 2020 IR Earnings Presentation. On July 23, Intel Corp reported second quarter fiscal 2020 earnings (period ended June 27, 2020) that beat both consensus top- and bottom-line estimates. However, shares of INTC dropped during after hours trading that day due to Intel delaying the rollout of its 7-nanometer chips. The company offered full-year guidance for fiscal 2020 that indicated its growth trajectory was continuing in the face of the ongoing coronavirus (‘COVID-19’) pandemic, though investors were largely fixated on the delay of its 7-nm chip offerings.

Microsoft Closes Out Fiscal 2020
Image Shown: An overview of Microsoft Corporation’s financial performance during the fourth quarter of fiscal 2020. The company reported strong year-over-year revenue growth across its three main business segments. Image Source: Microsoft Corporation – Fourth Quarter Fiscal 2020 Earnings PowerPoint Presentation. On June 12, 2020, we added Microsoft Corp back to the Best Ideas Newsletter and the Dividend Growth Newsletter portfolios. We strongly appreciate Microsoft’s net cash position, high quality cash flow profile, and its long-term outlook, which is underpinned by secular growth tailwinds. On July 22, Microsoft posted fourth quarter fiscal 2020 (period ended June 30, 2020) that beat both consensus top- and bottom-line estimates, though its guidance for the current fiscal quarter was lighter than what analysts had expected. The top end of our fair value estimate range for Microsoft sits at $234 per share, indicating shares of MSFT have room to run further still after climbing ~34% year-to-date as of the end of normal trading hours on July 22 (before taking dividend considerations into account). Additionally, we give Microsoft “EXCELLENT” Dividend Growth and Dividend Safety ratings due to its promising payout growth outlook and stellar Dividend Cushion ratio of 3.9 (which factors in annual double-digit per share dividend increases over the coming fiscal years). Shares of MSFT yield ~1.0% as of this writing.

IBM’s Cloud Transition Continues
Image Source: International Business Machines Corporation – 2019 Annual Report. On July 20, IBM reported second quarter 2020 earnings that beat both consensus top- and bottom-line estimates. Most of the market’s excitement centered on IBM’s ‘Cloud & Cognitive Software’ segment posting year-over-year revenue growth of ~3% in the second quarter while its company-wide GAAP revenue declined by ~5% year-over-year, though initial gains in IBM’s share price faded away during regular trading hours on July 21. In the earnings press release, IBM noted its “total cloud revenue” grew by 30% year-over-year last quarter. Shares of IBM are trading near their fair value estimate of $129 as of this writing, indicating that shares of IBM appear fairly valued.

Update on Dell Technologies and VMware
Image Source: VMware Inc – First Quarter Fiscal 2021 IR Earnings Presentation. Dell Technologies and VMware Inc are back in the news as the WSJ recently reported the former is considering spinning off its enormous equity stake in the latter. Back in September 2016, Dell completed its ~$67 billion cash-and-stock acquisition of EMC which gave Dell a controlling equity stake in VMware (and a mountain of net debt in the process). As of January 31, 2020, Dell owned approximately 80.9% of VMware’s outstanding equity. Dell can spin off its equity stake in VMware tax-free after a five-year waiting period, though Dell would need to wait until September 2021 before that could occur (given when the EMC deal closed).

Broadcom’s Financials Are Stabilizing
Image Source: Broadcom Inc – June 2020 IR Presentation. On June 4, Broadcom posted second-quarter earnings for fiscal 2020 (period ended May 3, 2020). Shares of AVGO are trading in the upper bound of our fair value estimate range and appear reasonably priced as of this writing considering the relatively favorable forward-guidance management offered for the fiscal third quarter. Though the ongoing coronavirus (‘COVID-19’) pandemic is negatively impacting Broadcom’s operations with an eye towards “challenges” at the firm’s supply chain, the company’s growing ‘Infrastructure software’ segment appears to be helping stabilize its financial performance. We give Broadcom a Dividend Cushion ratio of 1.0, earning the firm a “GOOD” Dividend Safety rating (these metrics factor in expectations that the firm will push through meaningful per share dividend growth over the coming fiscal years). While Broadcom carries a hefty net debt load, its business model is light on capital expenditures which allows for the firm to generate meaningful free cash flows. Shares of AVGO yield ~4.2% as of this writing.

Good News for Intel
Image Source: Intel Corporation – January 2020 Presentation. In this article, we cover recent events in the semiconductor industry and how a bill that was just introduced in the US Congress could positively impact Intel Corp. We include shares of INTC as a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios and continue to like the company for numerous reasons that we will cover in this piece. Shares of INTC yield ~2.2% as of this writing.

Earnings Roundup: Week Ended May 24, 2020
Image Shown: In this article we cover a variety of companies that reported earnings in May 2020. As we get deeper into 2020, more companies have reported earnings that covered how they performed during the early days of the ongoing coronavirus (‘COVID-19’) pandemic on both a financial and operational basis. In alphabetical order by ticker: DE, LOW, NVDA, TGT.

Covering the US-China “Technological Arms Race”
Image Shown: The future of geopolitical tensions will likely boil down to what some see as a “technological arms race” between the US and China. Image Source: Nvidia Corp – May 2020 Presentation. Given the rise of US-China geopolitical tensions, we wanted to cover the changing state of the semiconductor industry and the rare earth minerals landscape. Recent announcements from Taiwan Semiconductor Manufacturing Company or ‘TSMC’ caught our eye. For some background, in the world of semiconductors, there are what is referred to as fabrication facilities and foundries. The former is used to make chips for internal purposes while the latter contracts out its production capacity to third parties to make chips for external purposes. TSMC is considered a foundry operator, with the second-largest wafer production capacity (silicon wafers are slices of semiconductors) and the largest chip contract producing capacity in the world at the end of 2019 according to some reports.

Staying Focused on the Long Term
Image Source: The final lesson to learn from financial crises. Value Trap: Theory of Universal Valuation. Excerpt: "...it's difficult to be optimistic during these challenging times, but sometimes it's okay to take a step back and relax. Things are going to be alright. Many of you have read my book Value Trap: Theory of Universal Valuation. In it, I talk a lot about the lessons from the Great Financial Crisis. Above any other, however, what I've found is that the most difficult lesson to accept is that moral hazard will (once again) be rewarded. The Fed and Treasury may really have no choice but to continue to bail out "everyone," flood the markets with never-ending liquidity injections (if needed), and otherwise continue to prop up these markets at any and all costs. Granted, it was much easier to call the top in February and to identify dollar-cost-averaging opportunities near the bottom of this swoon than it is to call a near-term direction today, but over the longer run, I don't think I've ever had more conviction that the markets will, once again, make new highs thanks to Fed and Treasury actions and the resulting equity-focused inflationary repercussions." -- Brian Nelson, CFA