Nvidia
NVDA posted poor Q3 numbers and guided down for Q4 and 2019. A stock that had been red-hot for several years is now ice cold, down 50% from its peak just a couple of months ago. NVDA makes the most powerful GPU's on the market. They lowered next year's guidance due to an inventory build as a result from lower crypto mining demand. However, management expects the excess inventory to be cleared out in the next one to two quarters. In the meantime, analysts forecast GPU revenues to grow from roughly $10.5bb in 2018 to 12.7bb in 2020. As of the end of Q2, their GeForce chips have approximately 70% market share in gaming, which experienced 36% yoy growth. Their datacenter business also increased 70% yoy. Projections are for that market to hit $50bb by the early 2020s. They are also a leader in providing chips for A.I. and connected cars. Daimler, Volvo, and Bosch among other's have entered into partnerships using Nvidia's Drive PX and Drive Pegasus programs. Datacenters, AI and gaming, are three of the fastest growing secular trends in the economy and NVDA is among the top players in each category. The company is sitting on $7bb in cash with $2bb in debt generating roughly $3bb in free cash flow and has a $7.5bb stock buyback in place. They also announced a small dividend increase.
Netflix
RBC recently released data that showed NFLX is experiencing record low churn, record high satisfaction across all geographies, and increased viewing. In fact, for the first time, viewership of shows on NFLX surpassed Youtube in the UK. In India alone, NFLX believes it can add millions more subscribers with original content, lower tiered pricing and increased capex. In fact, in international markets, I think NFLX will continue to grow in popularity, will have pricing power and an increase in profitability. So far in 2018 NFLX has experienced 25% yoy growth in paid subscribers with 140 million worldwide. NFLX has 60% penetration of the US market, and 15% penetration internationally. Netflix’s spend on content creation is estimated to be around $12bb this year! This commitment to producing original content will allow them to create/license 82 films in 2018 vs.10 for Disney and 23 for Warner Brothers. They are also producing/licensing 700 new programs! They beat their Q3 report with better earnings, more subscribers and increased guidance. Their artificial intelligence algorithms have more data statistics about subscriber's habits than any other streaming platform on the market, and their capex dwarfs the competition. They have created television on a global scale unshackled by boundaries or cultural viewing tastes. They make something for everybody. I believe the game is over concerning streaming, and new entrants such as Disney and Apple will be fighting for second or third place. The market seems to be zero-sum for everyone instead of Netflix at this point because of their massive lead in subscribers and content spend. NFLX is the replacement of linear TV on a global scale.
Amazon
Amazon web services saw growth of 46%. Online advertising saw an increase of 120%. Growth in their subscription business was 32%. Their cloud and advertising businesses are growing 2-4x faster than the core business with margins that are 10x better. There's a shift up in the margin profile of the company. Amazon experienced 100% growth in core operating cash flow. With 29% top-line growth, increasing cash flow, expense cutting and a total addressable market of $70+ billion in data centers, groceries, Alexa and Prime, AMZN is still one of the best all-around corporations to invest in. Investors were disappointed in their guidance as they see higher shipping costs, more rebates and higher minimum wages. However, another investment cycle could be looming, and with management's positive track record of investing for the future, new market's for growth could emerge at any time. At the upper end of the EPS estimate range for 2019 ($36.80) AMZN is trading around 40x forward earnings. I believe that's a premium worth paying for with all the growth levers at AMZN's disposal. And given Jeff Bezos’s history of innovation and disruption, AMZN is a must own.
Square
SQ beat their quarterly earnings report on the top and bottom line. They also increased their top line guidance going forward. The company reduced bottom line guidance. The reduction in the EPS outlook is a reflection of Square continuing to reinvest into growth initiatives. Interestingly, the company continues to forecast margin expansion even as capex increases, a reflection of its growing subscription revenue. SQ also reported 68% yoy growth with 51% qoq growth in their latest report. SQ saw 155% growth in their subscription and services business. This includes SQ for retail, CASH App, Instant Deposit for employers/employees, financing and new payroll solutions for businesses. Their suite of software offerings is perhaps the stickiest flywheel in all fintech. The company sees higher growth going forward while experiencing a declining share price. On the hardware side, 52% of gross merchandise volume came from large sellers, which is a big positive for SQ. New initiatives such as Square terminal could add billions in new revenues. I believe the electronic payments sector has a long tail and SQ has the most attractive ecosystem to offer small and medium-sized companies. While the hardware provides a near frictionless transaction, it's the software suite that will provide a reliable flow of revenue. Investors tend to put on premium on companies with predictable, stable revenue streams.
Mastercard
Staying with the fintech sector, I believe MA along with Visa will benefit the most as consumers continue transitioning away from paper currency transactions to digital-based transactions. The processing business is a duopoly with a vast moat. According to 'The World Payments Report' global non-cash transactions grew at 10.1% in 2016. Non-cash transactions are estimated to accelerate at a compound annual growth rate of 12.7% globally with emerging markets growing at 21.6% from 2016-2021. Emerging Asia is looking at 28.8% growth from 2016-2021. MA is aggressively pushing into Asian markets to tap the huge tailwinds in that part of the world. Because they have a nearly impenetrable moat around their business and such a long tail opportunity, I believe that this should be a core holding for many years. They currently have $8.3 billion in cash, $5 billion in debt with roughly $6bb in free cash flow. They've also had $4bb in buybacks. MA is estimated to have 15% EPS growth and 20% revenue growth in 2019. The return on shareholder equity has increased from 63.2% in 2015 to 89.5% in 2017. Initiatives into areas such as bill pay, analytics, fraud protection, a global trade platform, and logistics are all potential growth drivers going forward.
