Nvidia, Alibaba and Palo Alto

(“What’s a lukewarm take?” you ask – well, it’s definitely not a hot take – we would like to think it’s a more considered, insightful, and useful take on the news.)

This article first appeared on Simply Wall St News

How much growth lies ahead for Nvidia’s key markets?

On the face of it, Nvidia’s (Nasdaq: NVDA) third-quarter results were mixed with revenue down 17% year-on-year but ahead of consensus estimates. EPS were lower than expected, while guidance was encouraging.

Beyond the headline numbers, there were a number of encouraging points to note. Gaming revenue has fallen sharply over the last year, particularly over the last quarter. However, there are signs that customers are working through their inventories, and sales for this segment may start to improve soon.

In the face of new restrictions imposed by the US on semiconductor companies exporting to China, the small increase in data center revenue was also good to see.

Our take: By most accounts, Nvidia is still executing very well. But there’s a lot that is beyond the company’s control. In the medium term, market sentiment is likely to outweigh Nvidia’s own performance in determining where the stock price ends up.

Over the long term, revenue growth will be key. If there is one company that stands to benefit from the industries shaping the future – AI, the metaverse, virtual reality, and automation – to name a few its Nvidia. This is no secret and many investors are already betting on the company for that reason.

Analysts are looking for revenue to be flat over the next year, and then to double by January 2028. That requires annual growth of 15 to 20%. Whether industry growth can accommodate that is the 390 billion dollar question.

According to all the valuation metrics that Simply Wall Street tracks, Nvidia appears moderately overvalued at the current price. However, that may not be the case if the company can deliver revenue growth above 20% for the next few years.

Alibaba – Analysts have been behind the curve on this one

Shares of Alibaba (NYSE: BABA) traded higher after the company reported mixed second-quarter results. EPS was better than expected while revenue was slightly lower than consensus estimates. This seemed to be another case of a company beating very low expectations, and the fact remains that revenue is down 6% from a year ago and margins continue to contract.

Our take: Alibaba is widely considered as ‘cheap’, and investors point to Charlie Munger’s purchase at twice the current price as proof of this. Over time his investment may indeed pay off, but it’s worth noting that analyst estimates have continued to decline and have continuously been behind the curve since January last year.

The shaded area in the chart below is the range of estimates for EPS and shows that the gap between forecasts and actual EPS has continued to widen. So while analysts are forecasting an imminent recovery in earnings, their track record is not great.

You can keep track of this on our Alibaba analysis page. Another factor to keep an eye on is institutional ownership. Foreign institutions have reduced their ownership of Alibaba substantially over the last 12 months – but it would be a positive development if this trend reversed.

Palo Alto’s Cash Flows Are Looking Great

Palo Alto Networks ( Nasdaq: PANW ) released another set of strong results last week which resulted in the stock price bouncing 7%. This is actually the third time the stock has gapped higher on earnings, but the sector has remained out of favor for most of this year.

In September Palo Alto split its stock 3 for 1 and we wondered if it would lead to more ownership among retail investors. Since then the sector has been out of favor, but the percentage of shares held by retail investors did rise modestly from 10% to 12.8%.

Our take: While the cybersecurity sector is still out of favor, Palo Alto has continued to outperform its peers. One of the reasons for this appears to be the fact that it is more profitable, despite slightly slower growth. We covered this in more depth earlier in the year.

This quarter represented the company’s second quarter of positive net income, but it’s even more profitable when we look at the free cash flow

Palo Alto Networks is more profitable than it appears. The chart illustrates the point: while the net income margin for the last 12 months was -2.45%, the cash flow margin was 41%. This is well ahead of most of Palo Alto’s peers.

Do you have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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