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Netflix Blows Away the Quarter

Streaming giant Netflix (NFLX: $403, up $57, up 16%) posted a remarkable third quarter performance last night, reporting $8.5 billion in revenues, up 7% YoY, compared to $7.9 billion a year ago. The company posted a profit of $1.7 billion, or $3.73 per share, against $1.4 billion, or $3.10, in addition to a beat on estimates at the top and bottom lines, resulting in a strong 14% post-market rally in the stock following the results.

During the quarter, the company posted strong metrics across the board, starting with its new paid subscribers at 9 million, bringing its total to 250 million. This is largely the result of its crackdown on account sharing, which is now in full swing. Netflix has further rolled out its $6.99 ad-supported pricing tier in select regions worldwide, where these plans now account for over 30% of new subscriber additions.

In addition to this, the platform’s engagement metrics so far this year are off the charts. According to Nielsen, Netflix hosted the most-watched original series for 37 of the 38 weeks this year, and the most-watched movie for 31 out of the 38. Its share of total TV screen time within the US now stands at 8%, far ahead of other competitors, and only lagging behind YouTube, which has taken a slight lead at 9%.

With the success of content such as One Piece, The Witcher, and Top Boy, Netflix has officially cracked the originals game and continues to give traditional Hollywood studios a run for their money. While licensed content will continue to play an outsized role, originals help unlock additional monetization opportunities such as theatrical releases, product placements, and merchandising.

Netflix expects a significant jump in its free cash flow at $6.5 billion, resulting in lower content expenses. In fact, they expect to spend $14 billion on content next year, down from $17 billion which will surely increase cash flow. This has prompted the company to increase its buyback authorizations by $10 billion, creating plenty of support for the stock. The company ended the quarter with $8.6 billion in cash, $17 billion in debt, and $4.6 billion in cash flow. The stock has been hit hard these past five weeks, for conceivably no good reason, as this quarter shattered expectations. This company remains one of our favorites. Our Target is $590 and our Sell Price is: We would never sell Netflix. Yes, the Target is high. But yes, the stock will get there. 2024? 2025? It WILL get there. The competition is shattered and will have to consolidate, with Netflix the clear winner.

 

Tesla – Way More than Just an Automobile Company

Tesla – Way More than Just an Automobile Company

The valuation of automaker Tesla (TSLA: $252) has long been an enigma for Wall Street and the company continues to astound and astonish analysts to this day. The stock was considered overvalued when it first went public in 2010, with a valuation of $2.2 billion, just as it is today with a market cap of $760 billion. And in the preceding years, many short-sellers have lost fortunes trying to bet against the company. We have a personal friend, a former Merrill Lynch VP who ran an office in Florida, who has been short for the last four years. He has lost over seven figures. We have implored him to buy back the stock, especially when it went to $102 in January of this year, down from the all-time high of close to $400 set in late 2021.

To be fair, it's hard not to question the exuberant valuations that the automaker has consistently held, which is 16 times the market cap of Ford Motors, a 120-year-old behemoth that sells twice as many cars as Tesla, and three times that of Toyota, which currently sells 10 times as many cars. Even considering Elon Musk’s ambitious goal of making 20 million cars a year by 2030, the valuations are a tough sell, particularly in the face of rising competition. The company is on track to deliver 2 million this year, up from 935,000 two years ago.

Number of Tesla vehicles delivered worldwide

Tesla has remained the most popular stock among retail investors for years. While it is also the most shorted stock as of now, with over $21 billion in short interest, the fate of these shorts looks increasingly shaky, similar to the many institutional, retail, and hedge fund bets made against the stock over the past decade. And as you know quite well by now since we have mentioned this numerous times, having a large short position is very bullish. Why? Because the only thing shorts can do is to BUY BACK their stock, which pushed the stock higher.

As discussed in our research report when we first began covering the stock two months ago, Tesla is not an automotive company, and it would be a mistake to value it as such. With its ambitious plans to flood the streets with robotaxis, its Dojo supercomputer that the Street estimates to be worth over $500 billion, the massive battery factory in Nevada, and innumerable other innovations, rather than an “automotive” company, this is a high-growth tech company through and through.

Reuters said this eight days ago: Tesla has drawn up plans to make and sell battery storage systems in India and submitted a proposal to officials seeking incentives to build a factory, as Elon Musk continues a push to enter the country. Tesla has been in talks about setting up a new electric vehicle factory in India to build a [world] car priced around $24,000 for weeks, with discussions overseen directly by Prime Minister Narendra Modi.” We have heard that Tesla has plans for another large battery plant as well.

Another overlooked asset is the company’s extensive network of 45,000 superchargers, which it has yet to monetize. Most competitors have adopted Tesla’s North American Charging Standard. Rising competition and growing penetration of EVs on American roads only stand to benefit Tesla going forward.

Tesla is not just an automobile manufacturer; it is the future of mobility, computer vision, and sustainable technology, all rolled into one. Its vision-based AI system has applications beyond mobility, similar to its growing prowess in battery technology. With robust tailwinds across the board, and a well-capitalized balance sheet with $23 billion in cash, just $6 billion in debt, and $14 billion in cash flow, we believe that this company, with a market cap of $800 billion, run by an acknowledged genius, is poised to continue to change the world as we know it. Our Target is $325.

If you are still not convinced, get the new book called Elon Musk, by Walter Isaacson. We read all 615 pages in three days this week. He is changing the world that we live in.

The Leading Communications and Networking Company Beats Again

Cisco (CSCO: $55), released its fourth quarter results last week, reporting $15.2 billion in revenues, up 16% YoY, compared to $13.1 billion a year earlier. The company posted a profit of $4.7 billion, or $1.14 per share, against $3.4 billion, or $0.83, beating consensus figures at the top and bottom lines for the umpteenth time, sending the stock higher following the results.

The company’s full-year figures were just as phenomenal with revenues at $57 billion, up 11% YoY, compared to $52 billion a year ago, with profits at $16 billion, or $3.89 per share, against $14 billion, or $3.36. The results were driven by strong momentum and substantial tailwinds arising from trends such as AI, cloud computing, and cybersecurity, all of which represent a dominant position for Cisco. Plus, the fact that Cisco is in a great business with no particular end in sight to its growth potential.

Cisco designs, manufactures and sells Internet Protocol (IP)-based networking and other products related to the communications and information technology (IT) industry. They are a leading provider of networking solutions for businesses of all sizes. Their products are used to connect people, devices, and applications together. Cisco has operations in over 160 countries with over 75,000 employees. Cisco is successful because they offer a wide range of high-quality products that meet the needs of businesses of all sizes. They also have a strong global presence and a commitment to innovation. Here are some of the businesses that Cisco dominates:

  1. Routers and Switches: Cisco is renowned for its routers and switches, which form the backbone of networking infrastructure. These devices enable data traffic management and efficient communication between devices within networks.
  2. Security Solutions: They offer a comprehensive suite of cybersecurity solutions, including firewalls, intrusion prevention systems, and secure access solutions, safeguarding networks from cyber threats and unauthorized access.
  3. Collaboration Tools: This includes video conferencing systems, collaboration software, and communication platforms like Webex, enabling remote teamwork, virtual meetings, and content sharing.
  4. Wireless and Mobility: The company provides wireless networking solutions, ensuring seamless connectivity for devices in both business and public environments.
  5. Data Center Infrastructure: Their data center offerings encompass servers, storage solutions, and networking equipment tailored for large-scale data processing, storage, and management.
  6. Cloud Services: Their cloud offerings include networking solutions for cloud data centers, ensuring efficient connectivity and management of cloud resources of this monstrous fast-growing business.

Cisco is in the process of transforming its business model, with a focus on growing the share of recurring revenues in its overall sales mix. The company expects modest year-over-year (YoY) growth rates in 2024, yet they remain proactive in developing cutting-edge innovations. In recent months they have unveiled a slew of new products, initiatives, and offerings. This includes the launch of its new scalable infrastructure to help customers process AI workloads more seamlessly, followed by XDR*, multi-cloud defense, and cloud-secure access which are seeing strong traction across the board, even onboarding marquee customers such as Goldman Sachs and Apple. Cisco has since received orders worth over $500 million for its new ethernet fabric for AI at scale. (From the recent Tech press: The Cisco CEO surprised analysts by mentioning it had already sold $500 million of AI gear. Cisco is wooing cloud companies away from offerings by Nvidia. One analyst says it's a promising start on a potentially huge new market.)
*XDR - Extended detection and response or XDR is a new approach to threat detection and response that protects against cyberattacks, unauthorized access, and misuse.

We believe Cisco to be a strong value at this level, trading at a little under 4 times sales, and 13 times earnings, which is enticing, and this is after a 20% rally starting in May. Cisco continues to reward shareholders generously, with $2.8 billion paid out in the form of dividends and buybacks during the fourth quarter, made possible by its $26 billion in cash, just $8.4 billion in debt, and $20 billion in cash flow. Our Target is $60 and our Sell Price of $41 is too low, so we are raising it today to $48.

As we said when we issued our Research Report on June 1st, “We can see the day when Cisco hits triple digits.”

 

Amazon Blows Out the Quarter

This Is Where The Growth Is

Amazon had a blowout second quarter, with a beat on both ends, and an upbeat guidance for the third quarter sending the stock soaring by over 10% following the results, adding $14 billion in equity to stockholders. The company posted $134 billion in revenues, up 11% YoY, compared to $120 billion a year ago, with a profit of $6.7 billion, or $0.65 per share, a phenomenal improvement over a loss of $2 billion. Is this company big, or what! $134 billion in revenue for the quarter is quite amazing. The last four years of revenue look like this: $280 billion, $385 billion, $470 billion, and $515 billion last year. We can see them doing $600 billion in revenue for this year.

The company’s AWS cloud computing business posted $22 billion in revenues, up 12% YoY, which marks a slight deceleration but is remarkable nonetheless, considering the broad-based slowdown in enterprise IT spending. This segment has helped Amazon stay profitable and hold its head above water for years and still continues to do so, contributing over 70% to the company’s overall operating profits.

Despite substantial headwinds, the AWS segment leads in terms of sales growth and profitability, owing to steady demand for cloud computing infrastructure for generative AI and Machine Learning applications. In addition to this, the company’s advertising business continues to grow by leaps and bounds, hitting $11 billion in revenues, up 22% YoY, ahead of Alphabet and Meta at 3% and 12% growth, respectively.

Its core e-commerce business produced sales of $60 billion, up from $57 billion a year ago. Aided by its Prime Day event during the quarter, which saw a record 375 million items being delivered to customers at its quickest-ever delivery speeds, the segment posted an operating profit of $3.2 billion, emerging from a loss of $630 million during the year-ago period.

Following a 64% YTD rally, the stock still trades at a reasonable 2.5 times sales, offering plenty of value for investors. As it remains focused on unlocking value across its massive landed base, we expect its margins and profitability to consistently improve going forward, opening up avenues for dividends and buybacks. The company ended the quarter with $64 billion in cash, $180 billion in debt, and $54 billion in cash flow. Our Target is $205, the highest on the Street. We’re over 10% closer to that today. Our Sell Price is: We Would Not Sell Amazon.

We Add Cisco Systems Back Again, After 20 Years. It's Time

We Add Cisco Systems Back Again, After 20 Years. It's Time

Cisco (CSCO: $50)

Coverage initiated June 1, 2023 at $50 in the Long-Term Growth portfolio
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.

Silicon Valley-based Cisco Systems (CSCO) stands as a shining example of a promising wunderkind that continuously pushes the boundaries of its potential. The four-decades-old company, which was once pegged to be the first trillion-dollar company, still trades below its all-time high of $77 during the dotcom bubble 24 years ago, despite a multifold rise in revenues, profits, and free cash flows during the same period. For years, the company has consistently pioneered groundbreaking new innovations, either via in-house developments, acquisitions, or partnerships, only to lose ground to fresh upstarts in those very segments. A prime example of this is WebEx, its video conferencing solution that was thoroughly outstripped by Zoom, despite having a head start and an established base of enterprise customers.

That being said, however, Cisco is far from the boring tech conglomerate that its valuations currently reflect. While the company is no longer plastered in headlines, or a mainstay in tech conversations as it once was, its products still play a crucial role in the broader ecosystem, particularly in its core networking business. This is precisely what makes the company such a compelling buy, especially at current valuations.

Enviable Product Mix

Cisco makes a broad range of networking and communication equipment that has long been dubbed the ‘backbone of the internet.’ From routers and switches to industrial networking and data center infrastructure, the company is an indisputable giant in this segment, with a market share of over 45% in ethernet switches. Gartner consistently crowns it as the lead in wired and wireless infrastructure.

During its third quarter results two weeks ago, the company posted a robust performance across the board, in the face of headwinds such as inflationary pressures, supply chain issues, unpredictable market dynamics, and economic uncertainties, among other things. We see this as a testament to Cisco’s products and services, which are still the backbone of networking infrastructure across enterprise organizations.

In addition to this, the company is now a sizable player in the hyperscale and AI markets, with its Silicon One Architecture, which is known for its efficient power consumption, which is crucial for hyperscale. Its recent acquisitions of ThousandEyes and AppDynamics have helped further bolster its profile in the observability space, which has since grown to become a vital element of the hybrid work environment. What is hyperscale?  Hyperscale describes a system or technology architecture's ability to scale as demand for resources gets added to it. Examples of hyperscalers are Amazon AWS, Microsoft Azure, Google GCP, Alibaba AliCloud, IBM, and Oracle. As you can see, Cisco is right smack in the middle of this huge growth market.

Recurring Revenue

One reason Cisco has continued to underperform its big-tech rivals is its overreliance on hardware. In general, hardware companies come with a lot of baggage and are more prone to macro headwinds such as the present supply-chain constraints and inflationary pressures. Excepting Apple, hardware is a tough spot to be in this day and age.

Over a decade ago, Cisco recognized the importance of this and has since consistently strived for and witnessed a transition towards services and recurring revenues throughout its product range. While hardware still remains at the core of its offerings, starting in 2012, the company has quietly transitioned into a machine for services and recurring subscriptions, and this is precisely what our investment thesis is currently based on.

This was the logical next step for the company in order to build steady revenues. After all, even at large enterprises, it is rather rare to upgrade switches, access points, and firewalls on a regular basis. This transition has since paid off handsomely, with Cisco reporting monumental growth in subscription revenues, and in increasing remaining performance obligations, at $6 billion and $17 billion, respectively.

This shift has fundamentally altered the outlook of this stock, from being a low-margin peddler of utilities to a scalable, predictable, and largely low-overhead operating model. This shift further makes the company more resilient in challenging times, making it less prone to macro shocks, as no matter how dire the situation gets, large enterprises are unlikely to scale back on their wireless infrastructure.

Risk Factors

While this decade-long transformation has been off to a great start, it is not without its risks, or at least certain presumed risks. In recent months, investors have grown increasingly concerned about the company losing market share in its core networking business. Its well-known customers have been leaving in droves in favor of competitors such as Juniper Networks and Arista Networks.

This, however, is largely overblown in our opinion, as the company, being the dominant player in the market, is more prone to macro shocks, and will further bear the brunt of most competitive pressures as opposed to players with a smaller share of the pie. As a result, the stock has remained under pressure over the past few months, but things will subside as better sense starts to prevail.

Financial Analysis

The last four years of revenues have been solid, but flat. The company hit $52 billion in 2019 and then was hurt by the pandemic in 2020 and 2021 reporting $49 billion and $50 billion respectively. Fiscal 2022 ending in July last year saw $51.5 billion, and the company did $14.7 billion in the quarter ending April 30th, 2023, giving it a run-rate of $59 billion. The company is quite profitable, producing $4.1 billion in profits last quarter, a profitability rate of a huge 28% after tax. Very strong. Guidance: The company has predicted future growth rates of revenues at 15%, earnings per share of $1.05 for the quarter, and $3.80 cents for the full year ending July 31, 2023.

From the company in its recent quarterly report: Capital Allocation -- In the third quarter of fiscal 2023, we returned $2.9 billion to stockholders through share buybacks and dividends. We declared and paid a cash dividend of $0.39 per common share, or $1.6 billion, and repurchased approximately 25 million shares of common stock under our stock repurchase program at an average price of $49.45 per share for an aggregate purchase price of $1.3 billion. The remaining authorized amount for stock repurchases under the program is $12.2 billion with no termination date.

Icing On The Cake

Cisco’s core business, products, and fundamentals are beyond reproach, and now comes the icing on the cake, which is the company’s generous capital returns program. Since instituting its dividend program in 2011, it has been increased consecutively for 11 years, marking a 550% increase as of today. This represents an annualized yield of 3.1%, with a payout ratio of 43%, the best among the tech giants.

In addition to this, the company is all the more generous when it comes to its stock buybacks, having repurchased nearly 25% of its total shares outstanding since the end of 2013. During its recent third quarter results, the company similarly announced $1.6 billion in dividends and $1.3 billion in buybacks, with a further $12.2 billion in repurchase authorizations pending, with no expiration date mentioned.

All of this shows management’s confidence in the company’s steady cash flows, especially as it transitions to the subscription-based model. On top of this, the company has made remarkable strides when it comes to profit margins and free cash flow yields, in the face of substantial macro headwinds, ranging from inflation, supply issues, and waning demand.

BMR Take

Cisco is an outlier among the big-tech giants, trading at under 4 times sales, and a mere 12 times its free cash flow.  During its third quarter results two weeks ago, the company posted a handy beat on estimates, with $14.6 billion in revenues, up 14% YoY, and a profit of $4.1 billion, or $1.00 per share. This was in addition to the boost in guidance figures, and yet the stock received a somber reception when the markets opened the following day. The company has $23 billion in cash, up from $19 billion last year, and less than $10 billion in debt. Cash Flow from Operating Activities -- $5.2 billion for the third quarter of fiscal 2023, an increase of 43% compared with $3.7 billion for the third quarter of fiscal 2022.

All of this points towards substantial coiled potential that is just waiting to be released, apart from the robust technical factors, with the RSI already above 75 and continuing to gain strength week after week, following the results. The old is forever new again. We believe we have found a diamond in the rough and we will be rewarded in the company years with the continued growth of big tech, electronics, wireless, computing power, networking, mobile and the like. Or, we could have just said we believe in Moore’s Law. Long live Gordon Moore’s legacy.

Added to our Long Term Growth Portfolio today, our initial Target is $60 with a Sell Price of $41. But we can see the day when Cisco hits triple digits.