NVIDIA and Illumina have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – October 9, 2023 – Zacks Equity Research shares NVIDIA NVDA as the Bull of the Day and Illumina ILMN as the Bear of the Day. In addition, Zacks Equity Research provides analysis on General Motors GM, Ford F and Stellantis STLA.
Here is a synopsis of all five stocks:
Bull of the Day:
I last wrote about NVIDIA as the Bull of the Day in early September when it seemed like estimates had surged so much that they couldn't go any higher.
This was two weeks after the company's August 23 quarterly report and most analysts had made their upward revisions based on strong guidance from Jensen Huang & Co.
But the full wrath (and math) of the AI tsunami that NVIDIA has given life to is still being underestimated by Wall Street analysts and investors.
And that means the sales and profit estimates for NVDA keep getting revised upwards.
For perspective, here was the update I gave on September 6...
Because look what happened with the Starship Jensen's results and guidance: They blew the roof off with a roughly $2 billion beat on the Q2 top line and then forecasted almost a $4 billion beat for the current Q3.
This means that the crowd of spreadsheet jockeys (Wall Street analysts), who have been underestimating NVIDIA's growth in hyper-scale accelerated computing, have spent the last two weeks punching new, much more bullish assumptions into their models that keep NVDA a Zacks #1 Rank.
Here are where their consensus revenue projections stand now (9/6) on the Zacks Detailed Estimates page...
FY'24 (ends January): $53 billion for 97% growth
FY'25 (begins in Feb): $76 billion for 43% growth
And there's profit optimism too...
FY'24 EPS consensus just moved from $7.79 to $10.46
FY'25 EPS consensus just moved from $10.77 to $15.48 (48% annual growth after the current year's 210%+ advance!)
Based on these revenue and profit estimates for next year, NVDA trades at 30X EPS and only 16X sales. As I described in my June video and article, NVDA should continue to trade at a premium of 20X sales as it progresses to $100 billion in annual revenue...
Nvidia DGX: Workhorse of AI Will Drive NVDA to $2 Trillion
(end of excerpt from September 6 report)
The Moonshot to $100 Billion in Sales
In that June video and article, I suggested that NVIDIA sales could climb to $100 billion annually by 2026. At the time, sales estimates for next year (FY'25 which ends in January of 2025) were just beginning to breach $50 billion after their May earnings and product announcements.
Fast forward just over 3 months and here's where the consensus views have ascended to...
FY'24 (ends January): $54.4 billion for 101.7% growth
FY'25 (begins in Feb): $80 billion for 47% growth
At a $1.1 trillion market cap, NVDA now trades under 14X next year's sales.
And the profit optimism persists too as the premier maker of GPUs commands top margins. Here's a look at the move higher in EPS estimates just in the past four weeks since my last public report (I update for members every week)...
FY'24 EPS consensus just moved from $10.46 to $10.74
FY'25 EPS consensus just moved from $15.48 to $16.32 (52% annual growth after the current year's 221.5%+ advance!)
$100 Billion -- Sooner Than Even I Imagined
Keep in mind that these are consensus views. The high end estimate on next year's topline is $116 billion.
Given the surge in demand for NVIDIA systems architecture like DGX Grace Hopper 200 supercomputers, even my optimistic expectations are getting run over quickly.
To wit, last week KeyBanc analyst John Vinh put out a note where he explained why he was raising his price target from $670 to $750.
After the firm's quarterly supply-chain channel checks, his top takeaway is that AI data center demand remained extremely strong, outstripping supply by about 20%.
In his model, that computes to datacenter revenue of $45 billion for fiscal year 2024, up over 100%.
Vinh reported that while China's demand remained weak, it didn't deteriorate significantly. More importantly, Vinh sees a new opportunity for Nvidia in the second half, driven by "very strong" demand for L40S, a GPU designed for datacenter workloads like generative AI and large language model inference and training.
He estimates a revenue contribution of $2.25 billion to $3 billion from this next-gen GPU.
I haven't talked much about the new L40S platform yet because we're still in a revenue phase driven by a mix shift from Ampere 100 chipsets to the higher ASP (average selling price) Grace Hopper 100 "admirals."
A DGX system which holds eight GPUs, can command a price tag between $200,000 and $300,000 depending on configuration and availability (i.e., demand outstripping supply).
But the L40S will be another game-changer for NVIDIA in datacenters because the workload capacities are hyper-industrial strength.
Breaking down why Vinh sees NVIDIA DC doing $45 billion this year, he predicts that the Microsoft/Open AI alliance will procure 450,000 Nvidia GPUs this year, translating to $11 billion in revenue, and 1.6 million GPUs next year, contributing $40 billion in revenue.
These estimates are based on ASPs for GPUs of about $25,000, which is really the low end in this demand-driven environment. The real market is closer to $40K each.
And Apple is expected to purchase 200,000 H100 GPUs next year, representing $5 billion in revenue.
"We believe NVDA has order and backlog visibility through 1H24 at this point and have not heard of any order cuts from its major CSP customers," Vinh said.
To wit, KeyBanc expects Nvidia's data center revenue of $101 billion for fiscal year 2025, up 124%.
CUDA the Kraken
In my September report, I reviewed the "killer app" that makes NVIDIA GPUs so special...
For the past seven years since I first learned about what Jensen was creating from GPU gaming cards, I've said that the key to NVIDIA innovation dominating the world of hyperscale accelerated computing revolved around three factors...
1) The capabilities of GPU stacks creating "massively parallel architectures" for harnessing big-data with modeling, automation, and simulation
2) The CUDA (Compute Unified Device Architecture) hardware + software stack that enables fast training and deployment of machine learning and deep learning models
3) The evangelism of thousand of developers who get ingrained in the platform tools and never want to leave that ecosystem
Long-time Apple evangelist Gene Munster recently said the same thing...
"CUDA has created a moat around Nvidia's chip business. It would be difficult to get developers to switch to a different platform."
And that's why observers like me and Dan Ives of Wedbush think that this is the "iPhone moment" for NVIDIA and its AI tools.
In conclusion, let's hear from the AI wizard himself, Jensen Huang...
"The world has something along the lines of about a trillion dollars' worth of data centers installed in the cloud and enterprise. And that trillion dollars of data centers is in the process of transitioning into accelerated computing and generative AI."
I think this translates into NVIDIA hitting $100 billion per year in revenue much sooner than my 2026 projection in June. So don't miss your chance to buy NVDA under $450 again. I'm pretty sure you won't see it below $400 ever again.
(end of excerpt from Sep 6)
As I write this on Friday afternoon, NVDA shares are popping back above $450 after a trip down to $410 on September 21. And I also see a new article by the Wall Street Journal's Dan Gallagher in his Heard on the Street column titled "How Nvidia Got Huge — and Almost Invincible."
Here's a quote that sums up the built-in invincibility of the developer moat...
Over time, CUDA has grown to encompass 250 software libraries used by AI developers. That breadth effectively makes Nvidia the go-to platform for AI developers; Credit Suisse analysts said those libraries "provide a starting point for AI projects that aren't available on non-NVDA systems, " in a report earlier this year. During a speech at the Computex conference in May, Nvidia's Huang said CUDA was downloaded 25 million times over the last year, which was more than double the software's life-to-date downloads prior to that.
Looks like I wasn't crazy optimistic enough calling for $100 billion in sales in 2025. Let's make that call $125 billion now.
Bear of the Day:
Illumina, the maker of million-dollar genome sequencing machines that revolutionized the fields of genetics and biotechnology, has fallen hard in the past year.
And some analysts believe the pain is not over. Barclays just lowered their price target from $150 to $100 as top and bottom line estimates continue to drop.
Illumina is on track for barely positive revenue growth this year and EPS projections in the past few months have dropped from $1.40 to $0.83, representing a 60% annual crash.
While next year's profits are expected to surge back to EPS of $2.42, there is enough uncertainty still in those numbers -- as margins continue to contract -- to keep institutional investors fleeing the stock since its zenith above $500 two years ago.
What's Been Driving the Plummet?
As a former Illumina investor in the past year, I watched two elements unfold that created chaos for the company.
The first was the bid to re-acquire GRAIL in 2020 after Illumina had spun-off the cancer test developer in 2016, but retained a 12% stake.
Regulators in Europe and the U.S. stood in opposition to this move, but Illumina management charged ahead.
The second chaos element was that grizzlie corporate raider Carl Icahn getting involved and trashing Illumina management at every turn.
Icahn even accused them of spinning out and then reacquiring GRAIL in order to enrich Illumina's directors and executives.
For a good timeline of all the drama, see this Reuters article from July which culminates in the EU imposing a $476 million antitrust penalty on the company...
Rocky history of Illumina's Grail deal
Icahn has certainly succeeded in several ways, including shaking up Illumina management and the board of directors. But he also helped clobber the stock price for himself and other investors. I hope he finds some value now.
"Illumina has changed a lot in the last 10 years and is no longer a 20%+ revenue growth stretching-the-bounds-of-science company."
That quote is from Piper Sandler analyst David Westenberg and it captures what I missed when I thought buying Illumina last year near $200 was a good idea.
Despite this dour realization, the analyst has maintained his optimism, and as recently as September 5 had an Overweight rating and $275 price target on the shares.
In conclusion, here's what I told my Healthcare Innovators member in April when shares had climbed back to $230 and the "biotech battle royale" between Icahn and Illumina was getting hot...
You might imagine where I stand. While I respect Icahn's prowess to dissect balance sheets, income statements, and management teams to extract more value, how much does his team really know about genomic sequencing and the opportunities ahead that are built on key relationships with research institutions and biotech-focused universities?
I tend to favor the scientists here, but that's my bias.
Either way, it will be a great battle at the epicenter of Biotech progress to watch.
Additional content:
Is GM a Steal at 3-Year Lows?
Shares of General Motors hit a three-year low yesterday, dropping below $30 per share during intraday trading, before closing the session at $30.31. The decline can be attributed to the historic United Auto Workers (UAW) strike coupled with a looming airbag recall threatening to strain the automaker's finances further. With the stock at a three-year low, is it a tempting deal for value investors now? Or should you stay away from it considering the near-term hurdles?
Ongoing Strike & Recall Risk Dragging Down the Stock
The UAW had initiated an unprecedented simultaneous strike against the Detroit 3 automakers — General Motors, Ford and Stellantis — on Sep 15. Since then, the shares of GM have contracted around 10%. While some Wall Street analysts argue that the UAW strike was already factored into GM's stock price, the reality on the trading floor tells a different tale. GM's stock has seen only five positive trading days in the last 14 sessions. Moreover, GM disclosed that the strike had already cost it $200 million in lost production during the third quarter, a figure that might escalate if a resolution isn't reached soon.
In a bid to mitigate the strike's impact, GM presented its sixth counteroffer to the union yesterday. The automaker believes its offer would not only reward its team members but also ensure the company's success and sustainability in the long run. As negotiations continue round the clock, the stakes are high for both GM and its workforce.
Additionally, Wall Street Journal's report stating that at least 20 million GM vehicles are fitted with potentially hazardous airbag inflators added to the woes of the U.S. auto giant. The government is recommending recall of the same to avoid fatalities and injuries, possibly leading General Motors to incur significant costs for replacements and repairs.
The recall concerns about 52 million airbag inflators supplied by Tennessee-based auto supplier ARC Automotive. So far, GM has recalled approximately 1 million vehicles due to this issue. However, the company contested the NHTSA's findings, stating that the current evidence and data do not necessitate any further recalls beyond what has already been done. Despite this defense, the shadow of a larger recall looms, threatening to impose significant financial and reputational costs on GM.
3-Year Low Price Point is a Golden Buying Opportunity
While these near-term concerns are triggering a sell-off, GM is still one of the top auto stocks to buy now for the long haul on the back of promising fundamentals. Especially, the company's electrification push is likely to be a key growth driver in the coming years.
General Motors plans to roll out 30 fresh EV models by 2025-end. This year, it will have nine EV models in the North America market. Solid demand for GMC Hummer EV, Chevrolet Bolt EV and EUV, Cadillac crossover EV, Equinox EV, Silverdo EV, Sierra EV, Blazer EV and BrightDrop Zevo 600 is expected to buoy top-line growth. The firm's modular battery platform, the Ultium Drive system, is aiding the transition to an all-electric portfolio. GM's battery plants in Ohio, Tennessee and Lansing are likely to scale up its e-mobility prowess.
Additionally, General Motors has enough cash on the balance sheet to weather short-term headwinds and navigate economic cycles. The firm had total automotive liquidity of $38.9 billion as of Jun 30, 2023, including $16 billion of cash/cash equivalents. Recently, GM has secured a new $6 billion line of credit extending through October 2024. This move is seen as a strategic step to ensure financial stability amid the uncertainty surrounding the strike's resolution.
General Motors stock does make a strong case for being undervalued at just 0.24X forward sales currently. This not only looks attractive when compared with the industry's 1.85X, but it also compares favorably with its closest peers — Ford's 0.30X and STLA's 0.31X. At 4.17X forward earnings currently, GM is trading below its five-year high of 12.68X as well as the median of 6.19X. For those seeking discounted GM shares, now is the time to buy.
The Zacks Consensus Estimate for GM's sales implies a year-over-year increase of 9.2% to around $171.2 billion in 2023 and edge up another 2.3% next year to $175.19 billion.
General Motors currently carries a Zacks Rank #2 (Buy) and has a Value Score of A. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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