1. Fundamental Analysis

As a global leader in the retail industry, Walmart (WMT) possesses several key investment advantages:

• Strong Financial Performance:Walmart has consistently achieved revenue and profit growth, demonstrating exceptional profitability and financial stability.
• Increased Market Share:In the highly competitive retail market, Walmart continues to expand its market share through its pricing advantages and extensive product lines.
• Optimized Inventory Management:By improving inventory management, Walmart has effectively reduced markdown pressures and improved profit margins.
• Diversified Growth Model:Walmart actively expands into e-commerce and international markets, driving long-term growth.

1.1 Financial Stability:

• WMT reported positive earnings last year.
• Over the past year, WMT has maintained positive operating cash flow.
• For the past five consecutive years, WMT has achieved positive net income annually.
• Over the past five years, WMT has consistently reported positive cash flow from operating activities.

1.2  Profitability

WMT’s Return on Assets (ROA)is 11%, outperforming 73.17% of its industry peers.WMT’s Return on Equity (ROE)stands at 42%, a strong performance that surpasses 78.05% of companies in the same industry.WMT’s Return on Invested Capital (ROIC)is 25%, higher than 80.49% of its industry counterparts.Over the past three years, WMT’s average ROIChas exceeded the industry average by 9.09%.

WMT’s profit margin stands at 2.34%, performing well and surpassing 70.73% of its industry peers.Over the past few years, WMT has achieved steady growth in its profit margin.WMT’s operating profit margin is 4.25%, outperforming 73.17% of its competitors in the industry.Similarly, WMT has shown consistent growth in its operating profit margin over the past several years.WMT’s gross profit margin is 24.63%, which is reasonably strong compared to other companies in the industry, surpassing 60.98% of its peers.Over the past few years, WMT’s gross profit margin has remained relatively stable.

1.3  Growth Momentum:

• Over the past year, WMT’s earnings per share (EPS)increased by 51%.
• Over the past five years, WMT’s EPS has shown modest growth, with an average annual increase of 18%.
• WMT’s revenue has also seen slight growth, rising by 43% last year.

1.4  Analyst Ratings:

At SSW management institute, over 30 analysts have rated Walmart’s stock, with a consensus rating of “Strong Buy.” This indicates that analysts are highly optimistic about Walmart’s performance and believe it holds tremendous future potential. Our analysts have provided a price forecast for the next 12 months:

• Average target price:$126.63
• Lowest estimate:$101.72
• Highest estimate:$153.88

As of the time of writing, Walmart’s (WMT) stock price is $84.25.

Fiscal 2025 Forecast (Ending January 31, 2025):

• Full Year:
  • Consolidated net sales:Expected to grow 3% to 4% year-over-year.
  • Consolidated revenue:Expected to grow 4% to 6% year-over-year.

1.5  Outlook:

• Market Share:Walmart’s U.S. sales continue to rise steadily. In the fourth fiscal quarter, U.S. sales reached $117.6 billion, representing a 4% year-over-year increase.
• International Business:Walmart’s international net sales totaled $31.2 billion, up 13% year-over-year, with particularly strong growth in the Chinese market.
• E-Commerce:Walmart’s global e-commerce business exhibited robust growth, with annual e-commerce net sales reaching $30 billion, a 23% year-over-year increase.
• Summary:

       In fiscal 2024, Walmart achieved stable profit growth, driven by its continued investment in e-commerce and international market expansion. Looking ahead to fiscal 2025, Walmart is expected to maintain its growth momentum and further solidify its leadership position in the global retail market.

2. Technical Analysis:

From the daily candlestick chart for Walmart (WMT), the technical analysis reveals the following:

Support Levels:

1）First Support Level ($83.50): This level serves as strong short-term support, as the stock price has repeatedly rebounded quickly after testing it, indicating robust buying pressure.

2）Second Support Level ($81.40): If the stock retraces but remains above $81.40, it is likely to attract further buying interest.

3）The trendline has a moderate upward slope, supported by the gradual rise of the lower Bollinger Band, suggesting steady upward momentum. If the stock price continues to hold above the $83.50 support level, the short-term uptrend is expected to persist.

4）Currently, Walmart’s stock price is trading securely above the middle band of the Bollinger Bands, establishing a strong support zone. While there has been a minor short- to medium-term pullback, the overall structure remains bullish, setting a solid foundation for further gains.

Technical Indicators:

1）The lower Bollinger Band is trending upward, signaling additional bullish momentum.

2）The MACD indicator shows both the MACD line and signal line positioned above the zero axis, confirming the current bullish market trend.

Price Forecast:

1）According to the chart’s projected path, if the stock breaks above the current high of $85.79, it is likely to target a price range of $95–$100 in the short term.

2）Overall, the trend remains steadily bullish. Investors should closely monitor the stability of the $83.50 support level to determine the stock’s ongoing trajectory, which appears to be in the middle stages of an upward trend.

Trading Plan:

• Buy Range:$83–$84
• Position Size:10%
• Short-Term Target Price:$100
• Mid-Term Target Price:$125
• Protective Stop-Loss:$79

In conclusion, Walmart’s technical outlook is optimistic, with strong support levels and bullish momentum providing an attractive opportunity for short- and mid-term gains. Investors should consider entering positions within the specified buy range while monitoring key support levels to optimize their trading strategy.

Summary

MSTR’s Bitcoin strategy under Michael Saylor’s leadership has driven significant outperformance, creating momentum for institutional BTC adoption, supported by recent Q3 earnings and a robust ’42 Strategy.”. Game theory illustrates how institutional and national adoption of BTC could unfold, with MSTR’s success pressuring other companies to consider BTC investments. Trump’s pro-BTC stance and Republican majority are expected to drive favorable BTC policies, potentially including a national BTC reserve, influencing global BTC adoption. We reiterate our BUY ratings on BTC and MSTR, anticipating accelerated institutional adoption and higher BTC prices driven by FOMO dynamics and supportive U.S. policies.

Introduction

On October 21st, we initiated coverage on MicroStrategy (NASDAQ:MSTR) with a BUY rating.

On September 11th we also initiated on BTC with a BUY rating, highlighting that brighter days could be on the horizon. For our readers who haven’t checked our initiations yet, we encourage you to check them out. Since our initiations, MSTR has outperformed S&P 500 (SP500) by 21.6%.

On its side, BTC has outperformed the index by 23.06%.

In this article, we’ll discuss MSTR and BTC potential with a focus on the accelerating momentum behind these two assets, especially following Trump’s victory in the U.S. election. First, we’ll dive into MSTR’s recent earnings. Then, we’ll explore the concept of “game theory” to illustrate how mass adoption could unfold,initially among institutions and potentially among nations. We’ll begin by examining how MSTR, under Michael Saylor’s leadership, is challenging many investors and corporations, creating momentum that could spark a wave of institutional BTC adoption. Finally, we’ll discuss Trump and the Republican stance on BTC and explore how this could impact BTC adoption at an international level.

MSTR Q3 Earnings – Michael Saylor’s 42 Strategy 

During Q3, MSTR acquired an additional 25,889 BTC for $1.6 billion at an average price of $60 839. As we write, this represents already a 25% unrealized profit on that portion. Consistent with its strategy, the firm raised $1.1 billion in equity and $1 billion through convertible notes due in 2028. It also repaid $500 million in senior notes maturing in 2028. The group now holds $18 billion in BTC and shows no signs of slowing down as it announced its “42 Strategy”, a plan to acquire $42 billion of BTC by 2025 through $21 billion in equity and $21 billion in debt. Here’s the breakdown and timeline of this strategy:

Company Presentation

In our initiation, we highlighted two key metrics that deserved close attention:

BTC count relative to the increase in share count. This ratio is essential, as it shows whether shareholders are gaining more BTC per share, despite share dilution. Since the beginning of the year, even with a +13.2% increase in share count, shareholders have seen their BTC holdings per share rise by 33.3%. Adjusted for dilution, this results in what is called a “BTC Yield” of 17.8%, which we find particularly impressive.

Company Presentation

During the earnings call, management also set BTC yield targets for 2025-2027, aiming for a range of 6-10%, which is lower than the historical BTC yield. This indicates in our view a rather cautious approach. A lower BTC yield could reflect a shift from aggressive BTC acquisition to a more stable pace. It could also suggest more dilution than previously seen. We consider that even a lower BTC yield benefits to shareholders as long as it remains above the share dilution rate. Management also highlighted the strong performance of the firm since adopting the BTC strategy in which very few believed. MSTR success has proven critics wrong.

Company Presentation

Since implementing this strategy, MSTR has been outperforming every company in the S&P 500.

In that sense, there’s good reason for Michael Saylor to be proud. This success is creating a seism in the financial world and beyond. More and more important players are starting to consider the possibility of integrating BTC into their own strategies. Why this sudden shift in behavior? Why are executives and even politicians who were once hostile to BTC now beginning to shift their positions and question their previous views? To understand this major change, we wanted to dive with you into the concept of “game theory”.

Understanding Game Theory

Game Theory is a framework for understanding the relationships between players, aiming to explain their decisions and choices based on their interactions and circumstances. Developed by mathematician John von Neumann and economist Oskar Morgenstern in the 1940s, this concept studies optimal decision-making, trying to anticipate the possible choices an actor might make and ultimately identifying the best decision they can take. Let’s illustrate this with a simple example.

The Prisoner’ s Dilemma

Mario and Toad have been captured by Bowser, accused of trying to rescue Princess Peach from Bowser’s Castle! They’re now being interrogated separately.

Here are the 4 possible outcomes:

Both plead not guilty-They each receive a 3-year sentence. Mario pleads guilty while Toad pleads not guilty – Mario receives the minimum sentence, while Toad receives the maximum. Both plead guilty-They both get a 5-year sentence. Toad pleads guilty while Mario pleads not guilty -Toad receives the minimum sentence, while Mario receives the maximum. Нere pleading guilty is the best option if the other pleads not guilty. However, if both plead guilty, they’ll still face a significant sentence, though it will be less severe than if one pleads guilty while the other doesn’t. This simple example highlights the importance of understanding the other’s actions to make the best possible decision in any given situation.

Bitcoin and Corporations Adoption

We believe that the game theory applies particularly well to what is currently happening to the institutional sphere while BTC perspectives are shifting. Since the beginning of MSTR’S BTC strategy, an increasing number of companies have started to consider BTC as a potential way to diversify their treasury. As of today, 29 listed companies hold BTC, representing 1.73% of the total BTC supply.

Since MSTR’s initial adoption in 2020, several other companies have taken this step toward BTC. Here, we only mention those that currently hold crypto. Some, like Reddit (RDDT) included BTC in their treasury but decided recently to sell them. There is no doubt that MSTR holds the majority of BTC held by institutions. We also acknowledge that many companies holding BTC are operating in the BTC mining industry, but adoption is growing. In the past, BTC wasn’t even considered, it was either ignored or mocked. Today, we are convinced that this perception is changing.

MicroStrategy vs Microsoft -Bitcoin Dilemma

In December 2024, Microsoft shareholders will vote on whether the company should explore investing a portion of its cash reserves in BTC, a proposal made by the National Center for Public Policy Research (NCPPR). You can find below NCCPPR’s statement:

It’s worth noting that MSFT’s board is advising shareholders to vote against this proposal. We believe it is unlikely that this proposal will be adopted, at least, not yet. Here again, we consider this case as a perfect example of game theory. Now that many investors have observed companies like MSTR diversifying their holdings with successful results, more and more investors especially the one holding MSFT shares are questioning why companies with massive cash reserves, don’t invest in scarce assets like BTC to counter cash depreciation. In our view, the simple fact that this question is being asked now, when just a few years ago, anyone asking it might have been considered as foolish, signals a massive change in perspective. For context, the Magnificent Seven alone hold more than $300 billion in cash. According to Investors, as of the end of 2023, 13 S&P companies collectively held over $1 trillion in cash. In total, S&P companies are holding approximately $2.5 trillion in cash, almost double BTC’s total market capitalization.

Even a small allocation of this cash could be a game changer for BTC, and we expect such moves to happen in the near term. We believe that even a slight allocation from S&P companies could have a significant impact on BTC’s trajectory and trigger a domino effect. Returning to our game theory scenario, here’s how it could play out:

Same way of interpretation than we did before with our friends Mario and Toad 4 possible outcomes:

• Both buy BTC -Both companies see high gains and are viewed as innovators.
• MSTR Buys, MSFT Ignores -MSTR benefits from BTC’s success, while MSFT maintains stability but misses potential BTC gains, potentially appearing behind the curve.
• MSFT Buys, MSTR Ignores-MSFT could gain as a “catch-up” adopter if BTC appreciates, whereas MSTR might stabilize or lose value due to investors losing faith in the firm’s strategy.
• Both Ignore BTC-Both companies keep cash or invest in traditional assets that are sensitive to inflation, leading to value erosion over time.

In MSFT’s case, the company may face additional pressure, as highlighted in a Cointelegraph article where Ethan Peck, deputy director of NCPPR’s stated:

Should Microsoft publicly and explicitly determine in this assessment (undoubtedly based on shaky and biased reasoning) that it’s not in the best interest of Microsoft shareholders to purchase any BTC, and then BTC proceeds to increase in value (as it likely wil), there may be grounds for shareholders to sue the Company.

As more companies embrace BTC, we believe investors holding shares in companies that resist may become frustrated, watching BTC-friendly companies outperform. We believe this will increase pressure on corporate to potentially consider BTC thus supporting adoption.

U.S.A. – Driving Bitcoin’ s New World Order

Let’s shift our focus from corporations to nations, specifically the U.S. and China. Crypto played a significant role in this recent election, frequently mentioned by both candidates, Trump and Harris.

However, Trump emerged as the most crypto-friendly, as reflected by BTC’s price action on the day of the results. That day, BTC surged by 9% and reached a new all-time high of $76 000. We believe Trump’s victory will be a game-changer for BTC adoption in the U.S., paving the way for mass adoption worldwide. During his campaign, he promised to support the U.S. BTC mining industry and Defi, to replace Gary Gensler with a more open-minded SEC chairman,and most notably, to create a strategic BTC reserve for the U.S. We are confident these promises will be respected as Republicans not only secured the presidency but also gained a majority in the Senate and led the House of Representatives. This should grant them the power to propose and pass the laws they consider as appropriated. Although the election is recent, momentum is already building and strengthening. In July 2024, Senator Cynthia Lummis, known for her pro-crypto positions, proposed a bill for the U.S. to acquire 200,000 BTC annually for the 5 upcoming years. If applied,this would result in a strategic reserve of 1 million BTC or 4.7% of the supply.

We don’t know if this whole plan will be implemented or if it will be modified but we believe that initiatives of this kind are likely to be adopted under the Trump administration. If so, we are convinced this initiative would provide strong support for BTC’s price.

If adopted at the state level, we also believe that game theory could enter in action at a totally different scale. In that specific scenario, we anticipate that many countries will reconsider their stance on BTC, starting with China, considering the competition between these two super-powers.

However, remember that in September 2021, China banned cryptocurrency transactions, including BTC. Recently, unofficial sources have suggested that China might reconsider this decision. We currently find it unlikely, given China’s consistent opposition to this asset class.

If this position were to shift, we believe that game theory would once again play a crucial role in influencing such a decision driving way higher BTC price and of course MSTR.

Conclusion

We remain bullish about BTC and MSTR. We have the conviction that Michael Saylor’s vision and bold BTC strategy has set off a domino effect, making MSTR a frontrunner and pressuring other companies to consider BTC as a key diversification asset. As more companies and frustrated investors observe MSTR’s success, they’re increasingly facing the decisions of whether to follow or risk being left behind. We believe this FOMO dynamic could accelerate BTC’s institutional adoption and drive prices way higher. Strengthening our optimism,we think the recent President Trump election and the Republican majority will support BTC. This administration should push forward pro-BTC policies, potentially including a national BTC reserve and a favorable regulatory framework. If adopted, we are convinced the U.S.’s stance will influence other countries. A shift in U.S. policy could trigger reassessment elsewhere in the world, supporting further BTC price. Considering all these elements, we reiterate our BUY ratings on BTC and MSTR.

Summary:

Tesla,Inc.’s automotive sales are resilient vs. amidst a challenging backdrop in the industry. The rollout of affordable models in H1 FY25 are a key volumes catalyst. Margin performance is at local highs but is likely to revert a bit, driven by fluctuations in the nature of energy business projects and lower average selling price pressures. Valuations are at a premium, driven by full self-drive and Optimus expectations. I believe this is acceptable, contingent on the timelines of robotaxis and FSD rollout being intact in FY25. The relative technicals vs. the S&P 500 point bullish after a false breakout down. The ratio prices are basing and forming a support, indicating readiness to move up over the coming months ahead. Prepaid expenses have been creeping up over the past few quarters, eroding cash flow conversion. This is something Iam monitoring; a common oversight is for investors to focus on margin movements but ignore erosion in working capital intensity.

Performance Assessment

l’ve had a strong bullish view on Tesla, Inc. (NASDAQ:TSLA) since my last update in late September 2024. This investment is yet to yield major returns as it has lagged the S&P 500 (SPY SPX,IW vOO) slightly so far:

I still hold Tesla in my portfolio since I remain bullish on the stock:

Thesis

Since my last update on the stock, Tesla has had a full self-drive (“FSD’) and Optimus update on October 10, which broadly disappointed the market due to a perceived lack of specific data on monetization of the robotaxi vision. The stock fell 11% after this event. However, the Q3 FY24 earnings release was received more positively as the stock rallied up to 28% in 3 days after that.

Automotive deliveries and sales are resilient amid a challenging backdrop

Margin performance is likely to revert a bit

Valuations are at a premium driven by FSD and Optimus expectations

Technicals point bullish after a false breakout down

Prepaid expenses creep up are a working capital monitorable.

Automotive deliveries and sales are resilient amid a challenging backdrop

I had previously anticipated rate cuts to boost demand. This seems to still be in-play:

a helpful macro trend is, if there’s a decline in the interest rates, this has a massive effect on the automotive demand. For the vast majority of people, the demand is driven by the monthly payment. Can they afford monthly payment? So I think most likely, we’ll see a continued decline in interest rates, which helps with the affordability of vehicles. CEO Elon Musk in the Q3 FY24 earnings call.

Tesla’s total deliveries grew 6.4% YoY, outperforming the broader industry, which has seen YoY declines:

Over the next 6 months, the introduction of affordable Tesla models ($30,000 and below price points) in H1 FY25 is expected to boost automotive sales growth again by 20-30%:

Hence, my assessment is that Tesla is holding well in sales performance so far, with further upside catalysts ahead in the next half-year. Margin performance is likely to revert a bit Tesla saw a meaningful +180bps jump in gross margins in the latest quarter:

This is driven by gross profit margin uptick in both automotive (80.6% of gross profit mix) and energy business lines:

However, management commentary suggests that the current gross profit margin levels may revert down a bit:

Energy margins in Q3 were a record at more than 30%. This is a function of mix of projects being deployed inthe quarter. Note that there will be fluctuation in margins as we manage through deployments and ourinventory.

CFO Vaibhav Taneja in the Q3 FY24 earnings call, Author’s bolded highlight.

On the automotive side, Tesla’s average vehicle sales price has been ticking down, driven primarily by financing incentives:

This is one of the factors expected to weigh down on margins in Q4 FY24. Thus, Ianticipate the gross profit margin profile in Q4 and beyond to revert toward the 19.0% levels. I am still baking in some improvement as the company has been making structural progress on lowering the cost per vehicle. Valuations are at a premium driven by FSD and Optimus expectations Tesla stock currently trades at a 1-yr fwd P/E of 80.6x, which corresponds to a 32% premium to the recent median 1-yr fwd P/E of 61.1x:

I posit that bullish expectations on FSD and Optimus growth vectors are the key determinants of the premium valuation. On FSD, the bullishness seems to be driven by expectations of full autonomy for the existing vehicle fleet in 2025:

There’s no need to wait for a robotaxi or a Cybercab to experience full autonomy. We expect to achieve thatnext year with our existing vehicle line. CEO Elon Musk in the Q3 FY24 earnings call.

On the Optimus humanoid, Musk noted a massive improvement in movement dexterity and expressed confidence in scalability to high-volume production. Now, I think it is prudent for any investor to downgrade the timelines of the Tesla CEO’s comments, as Musk has a notorious reputation of pushing timelines. Still,I believe a modest relative valuation premium is acceptable at this stage. A key monitorable for it remaining so it would be approvals for the roll-out of ride-hailing services in Texas and California next year. Technicals point bullish after a false breakout down If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the wayIdo. All my charts reflect total shareholder return as they are adjusted for dividends/distributions. Relative Read of TSLA vs. SPX500

TSLA stock relative to the S&P500 has posted a false breakout below a strong up-thrust. The ratio prices have stabilized, basing and forming a new support level.I anticipate further expansion toward the upside over the coming months. Prepaid expenses creep up isa working capital monitorable

One thing that has caught my eye is a steady creep up in prepaid expenses and other current assets as a % of revenue:

From prior levels, this is leading to a 200bps detraction in the cash flow conversion profile of the company. I could not find a specific explanation for these movements. However, it is something I am monitoring for further erosion. I believe a common investing oversight is to focus on margin erosion but miss cash flow conversion erosion effects. Takeaway & Positioning Tesla’s automotive sales performance seems to be holding up well relative to the broader industry. My earlier thesis about demand drivers from increased affordability remains intact. Furthermore, the introduction of affordable models in H1 FY25 is a key volume catalyst. Margins performance has hit a local high in Q3 FY24. However, this is likely to revert down a bit, driven by fluctuations in the energy business and low average selling price headwinds in the automotive business. Valuations are at a 32% premium to 1-yr fwd PE levels. I believe this is acceptable so long as the FY25 timelines of robotaxis and ride-hailing services roll-out in Texas and California remain intact. Technically, vs. the S&P 500, TSLA is basing after a false breakout to the downside. I anticipate it to outperform the broader market over the coming months.

How to interpret Hunting Alpha’s ratings:

Strong Buy: Expect the company to outperform the S&P 500 on a total shareholder return basis, with higher than usual confidence. I also have a net long position in the security in my personal portfolio. Buy: Expect the company to outperform the S&P 500 on a total shareholder return basis

Neutral/hold: Expect the company to perform in-line with the S&P 500 on a total shareholder return basis Sell: Expect the company to underperform the S&P 500 on a total shareholder return basis Strong Sell: Expect the company to underperform the S&P 500 on a total shareholder return basis, with higher than usual confidence The typical time-horizon for my views is multiple quarters to more than a year. It is not set in stone. However, I will share updates on my changes in stance in a pinned comment to this article and may also publish a new article discussing the reasons for the change in view.

Wolfspeed’s FY2024 revenue growth slowed significantly, driven by competitive pressures and delayed revenue realization from key deals, impacting its market share in SiC power devices and materials.

The company’s competitive positioning weakened against rivals like Infineon and ON Semiconductor, with Infineon leading in product breadth and performance, and onsemi showing robust growth. Despite increased competition, WOLF maintains the largest market share in SiC materials, supported by long-term contracts, including an expanded deal with Infineon worth $275 million. Although industrial market weakness impacted revenue, it represents only 20% of Wolfspeed’s total revenue. A recovery in telecom capes is expected to mitigate this slowdown.

In our previous coverage, we highlighted Wolfspeed, Inc. (NYSE:WOLF) strategic decision to divest its RF business due to its lagging growth rate and negative profitability, which we expected to strengthen its position in the SiC power devices and wafers markets instead. We further noted the company’s competitive pressures from ON Semiconductor (ON), Infineon (OTCQX:IFNNE), and STMicroelectronics (STM), which have led to market share losses of around 5%. We also highlighted the company’s potential in the SiC materials segment, supported by new deals like the 10-year deal with Renesas and its unique position as a supplier within the SiC market.

In this current analysis, we cover the company again due to its slowdown in full-year revenue growth in FY2024 where we observed a flattish growth in the company’s power products segment of 2% as well as a slowdown in the growth of its materials products segment from 18% to 12%. Excluding the divestiture of its RF business, the company’s total revenue growth in FY2024 is 6.5%, a slowdown from its previous year’s growth of 23.5%. The revenue growth also differs from our previous forecast at a growth rate of 25.6% and 84% for its power products and materials segment respectively. One of the reasons for our missed forecast is that we previously factored in $223 mln into the company’s revenue in the materials products segment due to its $2 bln deal with Renesas announced in 2024. However, according to management, this will only start ‘shipping 200-millimeter in 2027,’ indicating that revenue from this deal should be realized starting from 2027. However, even after adjusting for the delayed realization of the new deal with Renesas, the growth in this segment still falls short of our expectations. Hence, in this analysis, we examine the reasons behind the company’s revenue growth slowdown in FY2024 and analyze whether its growth could recover in FY2025. We then determine whether it was attributable to its loss of competitive positioning in the SiC power device market as well as in the SiC materials/wafer market. Finally, we examine whether the company’s slowdown was a result of the market.

Source: Company Data, Khaveen Investments

Growth of SiC Power Segment

Given the company’s growth in the power products segment is slowing down to a flattish 2% compared to 48% in 2023, we first examine whether the company’s revenue slowdown is a result of its losing competitiveness in the SiC power device market. We update our previous data for global SiC market share, as well as the comparison table where we compare the product breadth and performance of the leading companies (STMicro, Wolfspeed, Infineon, onsemi, ROHM) within the SiC power device market.

Sourse：Company Data, Yole, Khaveen Investments

Source: Company Data, Yole, Khaveen Investments

Based on the above, we compiled the top SiC power companies’ revenue in 2023 based on their full-year SiC segment revenue. For ROHM, we estimated the company’s 2023 revenue based on Yole, and for the rest of the top companies we updated the 2023 revenue based on the respective managements’ reported revenue size for their silicon carbide business. We observed that onsemi’s market share had the highest increase across the 3 years, from 7.3% to 21.5%, with also the largest SiC revenue growth at 300%, outpacing the market growth at 98%. Whereas for STMicro, the company’s market share had a significant decline across the 3 years to 30.6% despite its stronger growth in 2023 at 62.9% in contrast with 2022 (40%), however, it is still in a leading position given its largest market share by revenue. Most significantly, Wolfspeed’s market share in 2023 within the Global SiC power device market had seen a decline of 7.1% as its segment revenue slowed down to 21.7% in comparison to robust growth in 2022 (108.1%).

Source: Company Data, Khaveen Investments

Furthermore, we updated the SiC comparison table in our previous coverage based on product breadth and performance. Compared to the data from our previous analysis, in terms of product breadth, Infineon is now leading the market with a total of 194 SiC products whereas previously onsemi was leading at 106. On the other hand, Wolfspeed was ranked the last with a total SiC product of 69, and it now has grown to 96, ranked as the fourth as it surpasses ROHM. We also observed that Infineon has the largest improvement, raising its total SiC product number from 102 to 194, Additionally, we further ranked the top companies in terms of their product performance (volts and RDS). According to Texas Instruments, a higher voltage achievable indicates a better option, as high voltage capabilities “makes them a good fit for applications such as automotive and locomotive traction inverters”. Hence, we observed that Infineon continues to lead the market at 2000V, followed by all other 4 companies in a tie at 1700V. In terms of the company’s RDS (On) range, the definition refers to how much resistance a device would generate in its “on” state, where a Iower RDS means higher efficiency and less heat at a given current”. Thus, we ranked Infineon as the first given that it had advanced its technology from 7 to 6.7 m2 whereas onsemi is now ranked as the third as we observed the company to have downgraded its technology in RDS from 6to 12 m2. In terms of Wolfspeed, despite its improvement from 15 to 13 m2, it is still ranked as the last tied with ROHM across the top competitors. Furthermore, we ranked Infineon as the first for product breadth given its largest product portfolio across all 3 categories of product range. For Wolfspeed, despite that the company increased its total portfolio from 69 to 96, its number of products across the 3 categories is still considered relatively less competitive; hence, we ranked the company as the third for both the 650-1199V and >=1700V range, and a fifth for the 1200-1699V range. Overall, our competitive factor score has shown Infineon as the top at 1.5, whereas we have derived a score below 1 for companies including Wolfspeed and ROHM.

Source: Company Data, Khaveen Investments

Overall, we project Wolfspeed’s power products segment to grow at a rate of 22.5%, which is slower than the SiC power device market. This slower growth is due to the company’s diminishing competitiveness within the overall market, as we derived a competitive factor score of 0.9x against a market CAGR of 25% across 2023 to 2029 for SiC power devices reported by Yole Intelligence. This highlights Wolfspeed’s revenue slowdown and its struggle to maintain market share against more competitive companies such as Infineon and onsemi. Additionally, we believe that the increasing competitiveness within the market is due to Infineon’s recent announcement in its Q2 FY2024 earnings briefing of its Gen 2 CoolSiC MOSFET that “charges by up to 20% compared with the prior generation”. The company also recently announced its official opening of the first phase of its *Kulim 3 facility for silicon carbide power devices* in Aug 2024 located in Malaysia. Besides, in terms of onsemi, TrendForce reported onsemi’s robust growth in its SiC business being primarily attributable to “its automotive EliteSiC series of power devices” as well as “its expansion in 2023 and plans to transition to 8-inch production…in 2025*, this aligns with our previous coverage of onsemi where we identified SiC, IGBT, and MOSFET being the “cornerstone* for EVs, with EV sales expected to increase with strong demand. Whereas for Wolfspeed, the company initially had planned on constructing a silicon carbide R&D center in collaboration with ZF, to “develop breakthrough innovations for Silicon Carbide systems, products, and applications”. However, according to Reuters, the plan has been delayed and will only start construction “until mid-2025 at the earliest, two years later than its original target”, which, we believe, could hinder the company’s future development of more advanced technologies.

SiC Materials Growth Outlook Still Robust

In the second section, we determine whether the company’s revenue slowdown is also attributable to its loss of competitiveness in the SiC materials/wafer market. We compile the global SiC material market breakdown by wafer and epiwafer and analyze the reasons behind the change in market share, such as the rise of market players. Additionally, we further update the company’s announcements of new deals and analyze the corresponding benefits to forecast Wolfspeed’s segment growth outlook.

Yole Intelligence

The chart above from Yole Intelligence further segments the SiC materials market into wafer and epiwafer submarkets, with Wolfspeed leading in both. We calculated Wolfspeed’s total combined market share in 2023 to be 33.9% using the total 2022 SiC wafer market size of $554 mln, as previously reported by Yole Group, and by comparing this to the combined market size of SiC wafer and epiwafer in 2023 reported by Valuates. In comparison, their 2022 share was 53% according to Yole Group indicating a significant decrease of 19.1%. Additionally, the graph also indicates increased competition in the SiC epiwafer market, particularly from Chinese companies as the Others segment share had a robust surge since 2021 with the increasing presence of Chinese companies such as TYSiC, CECS, Poshing, and TankeBlue shown in the graph. In terms of the SiC Boule/wafer market, the Chinese company SICC also gained a significant portion of shares in comparison to its minimal presence in prior years. We believe this is attributable to the support from the Chinese government as according to Asia Times, the Chinese government had planned to start from 2023 to followed by the ban “from purchasing US high-end chips and chipmaking tools”. Furthermore, this surge in the presence of Chinese companies is further evidenced by a series of partnerships of Chinese companies with Infineon. For instance, according to Semiconductor Today, SICC and TankeBlue in 2023 have collaborated with Infineon in 2023 “to supply silicon carbide wafers and boules”, where Infineon is also one of the partners of Wolfspeed as mentioned in our previous coverage We further analyzed the SiC materials market to identify whether the increasing emergence of Chinese companies is a result of a lower production cost in China by comparing the historical five-year net margins of Wolfspeed with those of SICC, a Chinese company that has experienced significant growth in market share since 2021. Despite both companies having negative net margins historically, SICC shows relatively better financial performance in terms of net profitability compared to Wolfspeed.

Source: Company Data, Khaveen Investments

KPMG

Based on KPMG, countries such as Malaysia, China, Mexico, and Vietnam are tied for the first rank in terms of lower production costs, while the US is ranked 14th. This indicates that China holds a leading position in the production cost index, which could provide Chinese companies with a competitive advantage in cost efficiency. Additionally, we believe that the surge in Chinese market involvement can also be attributed to the nature of SiC as a raw material, which we analyzed in our previous coverage of Entegris identifying a Iow production differentiation requirement and R&D intensity within the semicon materials market. We believe that this could also be explained by the US imposing sanctions to prevent advanced manufacturing equipment from falling under the control of China, and not extending it to basic materials such as SiC as this is an area that, according to The Diplomat, ‘remains untouched by U.S. sanctions”.

Source: Company Data, Khaveen Investments

Overall, we believe that the minor slowdown of the company’s materials segment is indeed attributed to increasing competition from Chinese companies within the Sic materials market. However, Wolfspeed is still observed to have the largest market share, and we continue to believe that the company is well-supported by the strength of competitors in the power product segment such as Infineon, which we analyzed in the first section with the highest ranking in terms of product breadth and performance. This is evidenced by the long-term contracts together with another newly announced deal expansion in Jan 2024, where its expanded agreement with Infineon “is now worth approximately $275 million in total”, showing an increase of $175 mln. Hence, given that we have discussed in the beginning that management claimed the realization of revenue from Renesas to only start from 2027, we adjusted the realization of revenue from Renesas until 2027. Based on the above, we projected a five-year forward growth rate of 23.4%. This projection includes revenue contributions from the newly secured Infineon deal and the unnamed deal discussed in our previous coverage. This forecast is lower than our previous estimate of 28.3% as we adjusted the realization of the Renesas deal and also is attributed to the company’s loss of market share to Chinese competitors, which, we believe, are benefiting from Iower product costs.

Industrial End Market Weakness

Lastly, we compile the reasons behind the company’s slowdown as a result of the market, given that management claims “weaker industrial and energy markets” across all four quarters of the earnings transcript in FY2024. Hence, we compile what the top company’s management states to identify whether Wolfspeed’s competitors are also observing a weakness in the industrial end market.

Source: Company Data, Khaveen Investments

Based on the above, we compiled the full-year revenue guidance for 2024 in the silicon carbide business from leading companies such as STMicro, Infineon, and onsemi. Specifically, for Wolfspeed, we prorated its CY2024 revenue for the power product segment based on management’s guidance for the upcoming quarter. Our analysis shows a noticeable slowdown in the SiC market growth among these top companies with the projected full-year market growth standing at 14% in contrast with the 88.5% growth observed in 2023. We also identified a common reason among the top companies regarding the weakness in the industrial end market, which is in line with our previous analysis of GlobalFoundries where we examined a slowdown in industrial production growth following a surge in 2022. For instance, during its Q1 FY2024 earnings, Infineon claimed to observe “inventory digestion in industrial as well as extended sluggishness in consumer computing, communication, and loT”. Similarly, STMicro’s management claimed during its latest earnings briefing with a “longer and more pronounced correction in Industrial.* Additionally, onsemi noted a ‘decline of silicon power products* in its Q1 FY2024 earnings.

Wolfspeed

According to the above company breakdown by application in Design-wins, we observed that the company’s revenue from industrial only represents less than ~20%, which includes examples such as DC/DC converter as well as server & datacenter, with examples of the products being 650V Discrete SiC MOSFETs. Whereas the other ~80% are specifically catered towards the end market of Automotive, which, according to Wolfspeed, includes areas such as powertrain inverters and OBC systems with related products such as its E-Series Automotive Discrete SiC MOSFETs.

According to Wolfspeed’s explanation of its industrial end market, the application involves Server & Telecom Power Supplies. In our previous analysis of Intel and GlobalFoundries, we discussed the decline in the capex of telecom operators where in 2023 it declined by 3.5% which followed a 7.8% surge in the previous year. Furthermore, Matismart reported that *telecom towers require a constant and steady supply of power to maintain uninterrupted service*, hence given Wolfspeed’s Sic products under the application of telecom power supplies such as the high-frequency DC-DC converter, the low capex intensity could be one of the factors contributing to the weakness in the company’s segment growth. Additionally, we further compiled the historical market trend for the energy storage system and global solar energy system market as the company also has products that cater to the energy end market which includes “WolfPACK” power modules, to identify whether the company also experienced an end market weakness in its energy segment. Based on the trends, we examined that in 2023, all markets are experiencing positive growth, with the Energy Storage System Market growing positively at 7.3% and the Global Solar Energy System Market maintaining a steady growth of 13.5%. Despite a slight slowdown in the expansion rate of the public fast charging points, the installation of these units has continued to exhibit robust growth at more than 50%. We believe that this growth slowdown by a single digit is primarily attributed to a slowdown in total EV sales, as the growth of sales slowed after a 109% surge in 2021, according to EV Volumes. Overall, the company’s revenue growth slowdown is partially attributable to the weakness in the industrial end market, particularly within the telecom market. However, considering that the company’s involvement in the industrial end market only contributes about 20% of its total revenue, as we estimated from its design-wins breakdown in the latest investor presentation, we believe that the impact on its overall performance appears minimal.

Federal Reserve Bank of Dallas, Khaveen investments

Looking forward, as we observe a recovering growth trajectory through 2023 and early 2024 for world and emerging markets, we expect the US market to also follow the diverging trends to become in line with the world’s trends. According to our previous coverage of Analog Devices, this is in line as we believed the global production growth to pick up in the second half of 2024 following the slowdown, we believe this sign of gradual recovery could help mitigate the current downturn and contribute positively to the company’s future performance in the industrial end market.

Risk: Negative Margins and High Debt

Company Data, Khaveen Investments

Since our previous analysis, the company’s financial position has worsened, with the company’s net margin declining from -43.5% in FY2023 to -107% in FY2024, and its free cash flow margin declining to -319.7%. We believe that the situation with the steep fall in net margins overall may require the company to increase its reliance on debt financing. Furthermore, Wolfspeed’s cash-to-debt ratio also declined from 0.6x in FY2023 to 0.3x in FY2024 with a net debt of $4.9 bln.

Verdict

All in all, despite a slowdown in FY2024, we believe the company’s long-term growth outlook remains positive and could recover due to the strong SiC market outlook. We forecasted the company’s Power Products segment to grow at 22.5%, slightly slower than the forecasted market CAGR as we believe the company to face stiff competition from top competitors like Infineon and onsemi, who are enhancing their offerings and capturing market share aggressively. Additionally, with the long-term contracts and extended deals such as the deal with Infineon now worth approximately $275 mln, overall support a positive outlook despite the increasing presence of Chinese competitors in the SiC market given that Wolfspeed still has the largest portion of the share in the SiC materials market. Besides, despite the slowdown in the industrial end market, particularly within telecom, has impacted the company’s revenue, this only represents about 20% of Wolfspeed’s total revenue, and thus we believe its overal impact is minimal. Looking ahead, a recovery in telecom capital expenditures is also expected throughout 2024, which, we believe, should also help mitigate the current slowdown.

Hence, we updated our PS valuation of the company based on the semicon industry average PS of 6.9x and our revised revenue projections. Based on our prorated price target for 2025, we derived a 66.4% upside following the company’s significant drop in the stock price of around 73% since our previous coverage of Wolfspeed. Notably, the company’s current PS ratio is at 1.52x, which is also about 85% below its 5-year historical average, which we believe indicates an attractive valuation as we anticipate a growth recovery, overall, we rate the company as a Strong Buy.

Summary

We’ve maintained a ‘Buy’ rating on Coinbase stock since early 2023 due to its successful transition to a services-based model, yielding stable revenues and growth.

Recent financials show strong top-line results driven by increased interest in crypto and organic IRR, with services revenue growing 80% YoY.

COIN’s valuation has become attractive again, trading at 6.4x sales, making it a compelling buy after a recent dip.

We’re re-iterating our ‘Buy’ rating on COIN.

Over the last 18 months or so, we’ve put out a number of bullish articles about Coinbase (NASDAQ:COIN), the leading regulated crypto exchange in the United States.

Here are some links to this research, if you’d like to have a gander:

Coinbase: Diversifying Revenue, Cutting Costs, And Well Positioned For The Next Bull Market

Coinbase: Very, Very, Very Promising

Coinbase: All Signs Point To Further Gains (Technical Analysis)

Since the very start of our coverage, we’ve maintained a ‘Buy’ rating on COIN, and from our first rating through today, investors have been treated to more than +190% in total returns, vs. a~38.5% return for the S&P 500 in that same span:

Seeking Alpha

Talk about alpha!

The core of our thesis has historically centered around our belief that the crypto exchange was successfully transitioning away from transaction-based model and towards a services-based model which would come with more stable revenues, solid new avenues for growth, and a higher multiple. As the company’s revenue has diversified, swings in the underlying crypto market have proven easier to navigate, and the multiple has grown, mostly according to our expectations.

Looking forward, our bullish thesis remains centered on two things-COIN’s continued success with a services-based model, and the valuation, which has once again become attractive. We avoided talking about the stock for the last 8 months or so as a result of the company’s extended valuation, but today, given the dip, COIN looks well priced vs. future expectations, and we’re once again re-iterating our ‘Buy’ rating.

In this article, we’ll explore fundamental updates with COIN (since we last covered those), and explain why we’re still bullish on the stock.

Sound good? Let’s dive in.

COIN’ s Financials

Since we last covered COIN on a fundamental basis, the company has reported earnings 3 times, in February, May, and August. Each of these reports saw strong generally results, although the Q2 report did miss on EPS by a little bit:

Seeking Alpha

These results – particularly the top line growth -were largely driven by a boost in underlying crypto sentiment, which caused a massive spike in transaction-based revenue.

You can see this increase below, particularly in Q1 of this year, with transaction revenue surging more than 100% QoQ from Q4:

IR

This increase in revenue is linear to the degree that it can be plotted on a graph.

Below, you can see how higher prices, and higher volumes at higher prices, especially at the start of 2024, drove big revenues for COIN:

TradingView

This chart is only of BTC, but similar charts exist for ETH, SOL, etc.

Clearly, some of COIN’s revenue is still directly correlated with crypto prices and market interest.

However, these charts have come off a bit in terms of both price and volume, which is primarily why the stock has fallen 100 points from the $270 region to the $170 region over the last few months:

TradingView

This leads us to the growth in services. Dig into the table above, and you’ll notice how much COIN’s additional lines of business have increased and stabilized since we first highlighted them early last year.

In Q2, from a YoY standpoint, stablecoin revenue has grown from $150 million to $240 million in pretty much a straight line.

Similarly, blockchain rewards, subscription fees, interest, and custodian fees have also increased without much volatility, due to increasing platform utilization, as well as a mix of higher takes, models, and crypto prices.

Together, COIN’s services revenues have grown from $335 million per quarter (in Q2 2023) to ~$600 million per quarter (at present). This represents YoY growth of roughly 80%.

Again, some of this is due to higher crypto prices, but much of this increase is also driven by a stronger business focus and organic IRR within segments.

To some extent, a bet on COIN will always be a bet on the future of crypto, but these quarterly service revenue figures from COIN are starting to pile up.

Finally, if we’re looking at COIN from a profitability standpoint, the company has done a decent job of controlling spend in the face of 80% YoY services and 100%+ transaction revenue growth:

TradingView

This leads us to the growth in services.

Dig into the table above, and you’ll notice how much COIN’s additional lines of business have increased and stabilized since we first highlighted them early last year.

In Q2, from a YoY standpoint, stablecoin revenue has grown from $150 million to $240 million in pretty much a straight line.

Similarly, blockchain rewards, subscription fees, interest, and custodian fees have also increased without much volatility, due to increasing platform utilization, as well as a mix of higher takes, models, and crypto prices.

Together, COIN’s services revenues have grown from $335 million per quarter (in Q2 2023) to ~$600 million per quarter (at present). This represents YoY growth of roughly 80%.

Again, some of this is due to higher crypto prices, but much of this increase is also driven by a stronger business focus and organic IRR within segments.

To some extent, a bet on COIN will always be a bet on the future of crypto, but these quarterly service revenue figures from COIN are starting to pile up.

Finally, if we’re looking at COIN from a profitability standpoint, the company has done a decent job of controlling spend in the face of 80% YoY services and 100%+ transaction revenue growth:

IR

Sure, spend has increased roughly 41% after a brutal round of cuts in 2022, but we see this as reasonable re-investment into the company in order to grow the business further.

Plus, on a cash basis, the company just reported two strong quarters of $400 million+ CFO, so it’s not like COIN is hurting for bottom line profitability:

Sicking Alpha

Net income numbers are hampered somewhat by the more than $200 million per quarter in SBC, but given growth of COIN’s services businesses, we’re willing to overlook this as a negative for the time being.

COIN’ s Valuation

Our view on the fundamentals is well established at this point, and we’re happy to see the company continue growing recurring revenues alongside the recent burst in transaction business.

The barbell approach is working, and we think COIN is well positioned to grow into the definitive ‘all in one’ bridge to the crypto economy.

However, the reason we’re excited about the stock as of late is actually due to the valuation.

The price you pay for good assets matters, and for the longest time this year, COIN’s price was simply too expensive from a long-term allocation standpoint:

TradingView

The chart above is of COIN’s Price / Sales ratio, which has been quite volatile since IPO in 2021.

As you can see, COIN’s sales multiple increased early in the year to around 16x sales (very high) as transaction revenue was exploding.

However, as COIN has reported results, the stock has coincidentally come in somewhat. This has created a reasonable looking multiple for a long-term entry.

In November 2023, we argued that COIN was a long based on the potential of the high-margin services businesses, alongside a 6x sales multiple.

Since then, the stock is up 93%, but the stock is still trading at 6.4x sales.

To us, given that COIN management have demonstrated -concretely, through results-that the combined transaction/services approach can produce more stable financials and better margin, we think that re-entering the stock at a similar multiple to a year ago appears to be a solid move.

The capital appreciation COIN has experienced, in combination with the similar multiple, also does a good job of showing just how much the organic business has grown in a short span.

Between the financials and the valuation, we think buying the recent dip in COIN’s stock appears to be an appealing way to allocate capital in today’s market.

Risks

There are, of course, risks to this thesis.

First off, regulatory hurdles remain. The SEC has been famously uncooperative to the crypto space as a whole, but the recent Chevron supreme court ruling should help out the industry, as it allows government agencies less room for interpretation of the law. In theory, this should produce a more consistent regulatory regime for Crypto.

Thus, while COIN is still on the backfoot vs. the U.S. government in terms of ‘power’, we’re hopeful that things will improve in the coming years.

Secondly, the crypto space remains volatile, and to some degree, all of COIN’s revenues are tied to the success of the space. Management has done a good job of reducing the reliance on transactions to keep the business viable, which reduces the amplitude of earnings volatility somewhat, but if interest in crypto dies down, secularly, over the long term, then it’s tough to see how COIN could appreciate from here. In fact, in that scenario, the company is likely in a LOT of trouble.

Thankfully, we don’t see that happening.

Finally, there’s always a risk that getting in at 6.4x sales is a bit expensive.

The multiple has decreased to 1-2x in the worst bear markets in the past, and the same could happen in the future, even given COIN’s improved profitability & stability profile.

Summary

That said, we’re long-term bulls in COIN.

Interest in crypto remains high, regulatory risks seem to be subsiding, and recent results show concrete proof that COIN’s focus on services is powering results. 6.4x sales might be a bit expensive in the event that a crypto bear market is around the corner, but taken together, especially as the Fed begins cutting rates, we think that buying the recent dip in the stock is the best course of action.

Thus, we’re re-iterating our ‘Buy’ rating on COIN.

Cheers!

Warren Buffett finally did it. After making a monster investment in Apple (NASDAG: AAPL) many years ago and watching it appreciate by multiples of his cost basis, the legendary investor is trimming Berkshire Hathaway’: (NYSE: PRK. Đ) stake. According to filings with the SEC, Buffett has sold approximately half of Berkshire’s stake in Apple, raising around $80 billion in cash. Yes, that’s how big a winner Apple was for the company.

What is he doing with all this cash? The largest stock purchase for Berkshire Hathaway in the second quarter vas Occidental Petroleum (NYSE: OXY). Here’s why he is selling Apple and buying this oil stock instead.

A cheap oil stock?

Buffett’s biggest purchase last quarter vas in Occidental Petroleum. Berkshire Hathaway owns a whopping 27.25% of occidental’: outstanding shares, making it the largest shareholder by far in the company.

Why is Buffett attracted to the stock? First and foremost is the valuation. Oil and gas companies have been neglected by investors for years as they focus on exciting technology companies. Occidental Petroleum trades at a P/E of 12.6, which is around one-third that of Apple. The company is one of the largest oil producers in the United States, with over 82% of its production coning from domestic sources. This makes it less risky than other oil сompanies that have to deal with adversarial foreign goverments.

Occidental can also play as a hedge for oil prices. Rising oil prices can be inflationary and affect other parts of the economy and the Berkshire Hathaway portfolio. If oil prices rise, Occidental Petroleum will benefit, but likely hurt the earnings power of Berkshire’s railroad subsidiary by increasing input costs. This way, Berkshire Hathaway is playing both sides of the situation. No matter that happens, it cones out on top.

Even better for Buffett, Occidental trades at a cheap P/E when oil prices are falling. The current level for crude oil is $68 a barrel, which is well off the highs of around $100 a barrel or higher in 2022. If the price of oil starts to rise again, Occidental’: earning power will rise too.

From a geopolitical perspective:

The Middle East war is intensifying, with Iran launching a series of military actions against Israel. This is also expected to be a significant factor driving the rise in oil prices. This is great news: for oil investors, as oil prices are expected to increase in the short term.

Summary

Occidental Petroleum’s South Texas Direct Air Capture Hub aims to capture carbon dioxide.

Secondary recovery could enhance oil and gas production for decades to come while storing carbon dioxide permanently in the process.

Current CO2 supplies come from wells, but DACs may replace these. Now CO2 will go from the air into the ground by using the DAC process.

The industry’s challenge is achieving cost competitiveness without perpetual tax credits. This is crucial for its long-term viability and for reducing taxpayer burden.

The tax credits and government aid for DACs is aimed at getting a low carbon idea “off the ground”.

Occidental Petroleum (NYSE:OXY) announced that the project involving the South Texas Direct Air Capture Hub -DAC -received $500 million in funding to support the development of this hub. A previous article noted that secondary recovery of unconventional wells will likely use carbon dioxide. Under recent legislation, this secondary recovery can qualify for tax credits, as the carbon dioxide is intended to stay in the ground to maintain reservoir pressure that will increase the recovery of petroleum products. The current drive to capture carbon dioxide and store it in the ground is getting a supply ready for the day when much of the unconventional industry will need carbon dioxide to produce oil and gas.

That was probably not the intention, but the sheer number of secondary producers that are looking at currently available tax credits has convinced me that there’s a future investment opportunity in secondary recovery that’s a side effect of current intentions. In the beginning, the carbon dioxide that’s captured will likely be just stored. However, the unconventional industry is so young that many of the recovery rates are comparably low compared with conventional.

That leaves a whole lot of opportunity to produce still more oil and other petroleum products from what still remains in the reservoir. The current carbon capture technology supplies a necessary ingredient for that step. There will probably be a lot more ideas when the time comes for this to be a necessary production method.

Occidental Petroleum Low Carbon Venture Emerging Business (Occidental Petroleum Second Quarter 2024, Corporate Earnings Presentation)

This project already was ongoing with the company seeking partners. Funding from the government that was announced just makes the whole process easier.

Originally, the company and its partners were looking for places to permanently store the carbon dioxide. That’s how the plant will likely begin to operate. But as the need arises for secondary recovery, there’s likely to be a whole lot of places to permanently store carbon dioxide in the future while producing oil and gas.

Currently, the secondary recovery industry gets its supplies from companies like Kinder Morgan (KMI) and Denbury (now a subsidiary of Exxon Mobil (XOM) that actually have wells drilled to large carbon dioxide supplies. But that means that the industry gets carbon dioxide from the ground to use. That’s the exact opposite of what those worried about greenhouse gasses want to see happen.

What’s going to happen nowis that these “DAC’s” will likely (over time) replace those carbon dioxide wells to supply the industry with needed carbon dioxide. What we’re doing nowis getting the supply of carbon dioxide high enough so that when the need arises there’s an adequate supply to make secondary recovery a viable way to produce oil and gas.

Occidental Petroleum Gosls For Low Carbon Ventures (Occidental Petroleum Second Quarter 2024, Corporate Earnings Presentation)

The more daunting challenge for both taxpayers and the industry is for this venture to obtain “lift-off* to the point where it no longer needs tax credits to exist as an industry. Sometimes, when the government does this, the credits take on “a life of their own” and the taxpayers forever subsidize the industry (at least that is the fear).

The company expresses this fear by stating a goal of obtaining competitive returns. Otherwise, when secondary recovery demands for carbon dioxide climb, the industry will just drill a carbon dioxide well and then transport the carbon dioxide to the site needed. It will, therefore, be interesting to see exactly how this new industry develops and whether it will ever be cost competitive in its own right without tax credits or other government aid.

Enhanced 0il Recovery (EOR)

Occidental already has the largest EOR operation, probably in North America. This operation is responsible for a significant part of the total Permian production. In fact, this operation existed before the Permian unconventional business was even a thought for most investors.

From the website:

 [Oxy is the Permian’s leader in Enhanced Oil Recovery (EOR). In these operations, CO2 is injected and permanently stored in oil and gas reservoirs during production to improve efficiency, economics and environmental sustainability. With more than 40 years of carbon management experience, we are the Permian’s largest CO2 EOR operator. Oxy stores up to 20 million tons of CO2 annually underground.]

As unconventional wells age and production declines, demand for this considerable expertise will be growing in the future. Because Occidental already stores carbon dioxide as a means of producing oil and gas, it’s far ahead of much of the industry when it comes to the carbon capture business.

EOR is essentially a secondary recovery that this company has managed to make into a low-cost business. That’s not always the case, as secondary recovery is generally a higher cost business for many companies. Now tax credits will help keep this part of the industry at a lower cost for the time being.

But it’s obvious that continued technology advances and economies of scale are needed for the industry to not need government assistance.

What’s obvious is that we’re going to need oil and gas for a long time to come. As a country, we clearly have the reserves that will last, probably centuries. But the continuing challenge is to keep coming up with cost-effective technologies (like the unconventional business) that allow us to produce the remaining reserves in a cost-effective way. It would appear that DAC is the next step. Over time, more steps will be needed.

Summary

Occidental has a huge advantage in actual experience when it comes to carbon storage compared to much of the unconventional industry. This gets added to the continuing portfolio upgrades of the current unconventional business through acquisitions.

There has long been worries about a lack of Tier 1 acreage. But so far, technology advances have made sure that each year most companies report more Tier 1 acreage locations than the year before.

I suspect that what’s likely to happen is that eventually EOR will be the technology that is used when the time comes to get more Tier 1 acreage after the “traditional” unconventional business has exhausted all possibilities. It will either be that or we will continue to drill deeper and longer wells for a while.

But it does seem like eventually some form of enhanced recovery will be the order of the day. If that’s the case, then a whole lot of carbon dioxide will be needed for when that day comes.

So, the connection between the last article and the events in this article may be distant. But right now, they appear certain.

This is another growth area for Occidental Petroleum that does not get the coverage that the main business does. It’s also an area that a strong buy company like this one has a big lead over much of the unconventional industry.

Summary

Data center revenue grew 154% from the prior year to $26 billion, largely driven by strong demand for Hopper, GPU computing and networking solutions.

Blackwell is expected to now start production ramp in the fourth quarter, and this will continue into FY2026. With the next generation models requiring 10 to 20 times more compute to train given significantly more data put into the model, the trend of continued purchases of the best-in-class compute for Al will likely continue.

Currently, cloud service providers make up 45% of Nvidia’s data center revenue, with consumer, Internet and enterprise companies making up more than 50% of Nvidia’s data center revenues.

Management highlights two major computing transitions: accelerated computing and generative Al, justifying ongoing capital expenditures and long-term sustainability of GPU demand.

Unenterprising

Nvidia (NASDAQ:NVDA) published results that beat expectations, but still a touch below the sky-high expectations of investors. Realistically, there were no significant holes to poke, with Hopper continuing to see strong demand, and customers getting ready to deploy Blackwell. The issues with Blackwell have been resolved, and management expects several billions of revenue from Blackwell still in FY2025, with Blackwell starting production ramp in the fourth quarter, and continuing into FY2026. Investors have been questioning the return on investment of capital expenditures spent on Al and the sustainability of this trend, with multiple questions being asked on this topic during the earnings call. Management assured investors that we are seeing two big transitions happening in the world of computing: the transition towards accelerated computing and the transition towards generative Al applications.

I have written about Nvidia on Seeking Alpha, which can be found here. In the previous article, I stated that demand continues to outstrip supply well into 2025, with the customer base broadening out and that l expect Nvidia to remain ahead of competition in the near to medium term given the pace of innovation the company is bringing. I continue to reiterate this view in this article, as Nvidia continues to be ahead of competitors still trying to match Nvidia’s offering and ecosystem. The only difference is that with 2025 coming into view, Blackwell becomes even more important, as its ramp will determine the trajectory of Nvidia stock in the next year.

Business review and outlook

l’II just very briefly review the recent results and outlook, given that I must cover this before l cover the opportunity for Nvidia moving forward. Nvidia saw revenue grow 122% from the prior year to $30 billion, 5% ahead of consensus expectations. Gross margin came in at 75.7%, down 300 basis points, in-line with consensus expectations. The lower gross margin reflects the increased mix of new data center products, with higher HBM memory costs and greater complexity.

In my opinion, this is somewhat expected given the ramp of Blackwell family of chips, and I expect this trend to continue into FY2026. EPS grew 153% from the prior year to $0.68,6% ahead of consensus expectations. FY3Q25 revenue is expected to be at $32.5 billion at the midpoint, up 79% from the prior year, 3% ahead of consensus. Data center growth is once again expected to be the primary driver of the growth, backed notably by the growing generative Al demand of GPUs and networking products. Gross margin for FY3Q25 was guided to a 75%,30 basis points above consensus. FY2025 gross margin is expected to be in the mid-70% range, while operating expenses are guided to grow in the mid-to- upper 40% as the company works on developing its next-gen products. This was revised up from low 40% earlier.

Data center strength

Data center revenue grew 154% from the prior year to $26 billion, largely driven by strong demand for Hopper, GPU computing and networking solutions. Hopper has seen strong demand in the quarter, as customers continue to accelerate their purchases of Hopper, and customers are also preparing to purchase and adopt Blackwell next. The H200 platform started ramping in FY2Q25, with shipments to cloud service providers, consumer Internet and enterprise companies. China data center revenue grew sequentially in FY2Q25, and a significant contributor to data center revenue, but it still remains below the levels seen before the export controls were imposed. Networking is one area that Nvidia has been investing in, and network revenues increased 16% sequentially. The Ethernet Networking Platform for Al revenue, which includes Spectrum X end-to-end platform, doubled sequentially, with hundreds of customer adopting Nvidia’s networking offerings. Nvidia noted that XAl was one of those customers buying Nvidia’s networking offerings to connect the largest GPU compute cluster in the world. Nvidia expects to continue to launch new Spectrum-X products on a yearly cadence, and it expects Spectrum-X to be able to become a multi-billion dollar product line within a year. Inference continued to drive more than 40% of Nvidia’s data center revenues. With strong demand for Nvidia’s Hopper GPUs from frontier model makers, generative Al startups, consumer Internet companies, among many others, cloud service providers are seeing very broad adoption of Nvidia GPUs and likewise, they too are growing their Nvidia capacity to meet this high demand. With the next generation models requiring 10 to 20 times more compute to train given significantly more data put into the model, the trend of continued purchases of the best-in-class compute for Al will likely continue.

Hopper and Blackwell

Nvidia continued to see strong demand for Hopper, but Blackwell is on most investor’s mind. Blackwell is currently widely sampling. Nvidia has made a change to the Blackwell GPU mass to improve the production yields on Blackwell.

In terms of timeline, Blackwell is expected to now start production ramp in the fourth quarter, and this will continue into FY2026. At the Goldman Sachs Communalism + Technology conference, Nvidia CEO Jensen Huang provided more updates on Blackwell:

 [And here we are ramping Blackwell and it’s in full production. We’ll ship in Q4 and start scaling in Q4 and into next year. And the demand on it is so great. And everybody wants to be first, and so the intensity is really, really quite extraordinary.]

The expectation in the fourth quarter is to ship about several billion dollars worth of Blackwell revenue, and for Hopper shipments to continue to increase in the second half of FY2025. In terms of the supply and demand dynamic, Hopper and Blackwell are in different places. Given Hopper has been shipped for some time now, the supply and availability for Hopper has improved. For Blackwell, given that it has yet to ramp production, demand for Blackwell is well above supply, and I expect this dynamic to continue into FY2026. Both Hopper and Blackwell platforms did well in the latest round of MLPerf inference benchmarks, highlighting Nvidia’s inference leadership.

Opportunity Set

Currently, cloud service providers make up 45% of Nvidia’s data center revenue, with consumer, Internet and enterprise companies making up more than 50% of Nvidia’s data center revenues. Sovereign Al opportunities continue to grow for Nvidia as countries see the importance of building Al infrastructure. Nvidia expects sovereign Al revenues to be in the low-double-digit billions in 2024. For example, Japan’s National Institute of Advanced Industrial Science and Technology is working with Nvidia to build its Al bridging cloud infrastructure 3.0 supercomputer.

Another area of opportunity for Nvidia is the enterprise Al wave. Nvidia is currently working with most Fortune 100 companies on their Al initiatives, which includes use cases like generative Al chatbots, copilots and agents to improve productivity and develop new business applications that can be monetized. Examples of some of these companies include ServiceNow (NOW) and Snowflake (SNOW). Automotive is one of the key growth drivers in the quarter as Nvidia sees strong demand from many automakers wanting to develop autonomous vehicle technology, which will require more compute. Nvidia expects automotive to become a multi-billion dollar revenue business over time as on-premises and cloud consumption continues to grow as autonomous vehicle technology improves. Another area or vertical that Nvidia finds promising is healthcare, which is on track to become a multi-billion dollar business. Within the healthcare space, Al is used to improve medical imaging, drug discovery and surgical robots, amongst others.

The ROI question

CEO Jensen Huang was asked repeatedly about the return on investments customers are seeing with the significant increase in purchases of Nvidia GPUs and the sustainability of the capital expenditures of these large customers going forward.

You can see his typical reply below.

ROI of capex (Nvidia)

The idea here is that computing is going through two huge platform transitions, and these two transitions will drive long-term sustainability in capital expenditure spend.

The first computing platform transition is the shift from general-purpose computing to accelerating computing. With CPU scaling known to be slowing for some time, and computing demand continuing to grow, the transition from general-purpose computing to accelerating computing is necessary. By moving from CPUs to GPUS, companies save costs and reduce energy consumption, which is helping drive down costs dramatically. With trillion dollars of general-purpose computing infrastructure out there today, Jensen Huang argues that general CPU- based infrastructure is commoditized and that for every $1 billion invested, companies can probably rent it for less than $1 billion. As a result, the ROI on accelerated computing makes sense because of the higher performance, better efficiency of Hopper-based infrastructure and soon Blackwell-based infrastructure, that helps customers start saving money.

The second computing platform transition is the shift from human engineered software to generative Al leaned software. With accelerating computing, generative Al applications are now possible given the lower costs of training large language models. As such, the world is transitioning to large scale models with billions and trillions of parameters, trained on very large data sets. The thing about this transition to generative Al applications and software is that the best, frontier models continue to push the envelope and go to new boundaries, doubling and tripling the models. With larger models, this means it requires a larger dataset and more compute resources are needed. As such, with each new generation of models developed, the compute needed will grow 10 or 20 times more, if not more, than earlier generations of models. Thus, with the transition to both accelerating computing and generative Al software being two huge waves that are coinciding today, the amount of capital expenditures being spent today on Nvidia’s GPUS will continue to grow.

I think there is another very important point Jensen Huang said in the earnings call about the return on investment and demand for Nvidia’s GPUS. Firstly, while the cloud service providers are buying large amounts of GPUs today, the GPU capacity they have today available for external use is very small. The reason for this is that these cloud service providers are using these GPUS internally or to accelerate their own internal workloads. I think this speaks volumes about the opportunity set available because with GPUs being so scarce today, these cloud service providers know the huge benefit these top-end Nvidia GPUS bring, and that’s why they use it internally first. Secondly, after meeting the demands of their own internal workloads, these cloud service providers can then have renting capacity for their GPUs. These GPUS can be rented to model makers or generative Al companies, and the demand for these is so high now that any GPU capacity that is put out there will be taken up very quickly. Lastly, this mainly applies to the top end of the Al and big tech space, but these companies that are at the top are willing to spend large amounts of financial resources for the best Nvidia GPU So that they can be the first to roll out new products, the first to roll out new applications and the first to roll out the best models. By being the first company to scale up on the best Nvidia GPUS gives the company a huge first mover advantage.

Gaming, Professional Visualization and Automotive

Together, the three segments below make up 22% of revenues, so I will be elaborating more on them in this section.

Gaming revenue grew 16% from the prior year due to strong growth in console, notebook, and desktop revenue, while channel inventory remains healthy. Professional Visualization revenue was up 20% from the prior year. The growth was driven by strong demand for Al and graphic use cases, which includes model fine-tuning and Omniverse-related workloads. The key verticals driving growth were the automotive and manufacturing verticals. Companies are digitalizing workflows to drive efficiency in their operations. Several large global enterprises signed multi- year contracts for Nvidia Omniverse Cloud to build industrial digital twins for factories, one of which is Mercedes-Benz. Automotive revenue was up 37% from the prior year, driven by new customer ramps in self-driving platforms and growing demand for Al cockpit solutions.

Valuation

For FY2025, I revised revenue growth up marginally by the 5% beat from this quarter, while I maintain the gross margin given that I already forecasted 75% gross margins, which is in-line with guidance. Operating profit margin was reduced from the earlier 66% to 61% to incorporate the higher costs required to develop its next-gen products. While Nvidia may be growing very strongly in the past few years, to forecast such growth will continue in the long term is not wise in my view. I assume this growth tapers in 2026, and we may even see cutting of capital expenditure spend by its largest customers, which will lead to a change in valuation for the company. As such, from 2026, I am assuming a conservative 11% revenue CAGR on a very large $190 billion revenue base. On the profitability front, l assume continued margin expansion for both gross and operating profits, as Nvidia continues to improve production efficiency and organizational efficiency.

Summary of my 5-year financial forecasts for Nvidia (Author generated). My intrinsic value for Nvidia is $115. This assumes a terminal 2028 multiple of 35x and cost of equity or discount rate of 12%. Again,I am unwilling to go above 35x P/E for the terminal multiple, given 35x P/E is in-line with Nvidia’s 5-year average P/E, and it is in a highly cyclical industry. My 1-year and 3-year price targets are $142 and $167, and they imply a 40x and 35x 2025 and 2027 P/E respectively.

Conclusion

With Nvidia showing very significant beats in the prior quarters, this FY2Q25’s smaller beat was not enough for investors. That said, the business continues to be doing well, with Hopper continuing to see strong demand and Blackwell ramping production in the fourth quarter.

The fact that Nvidia has Blackwell under control is also a positive, given that this has been a concern for investors in recent weeks. Nvidia’s customers continue to want to buy Nvidia’s GPUs in large numbers, with the largest customers like cloud service providers currently mostly using GPUs bought for their own internal workloads and the remaining GPU capacity rented out sees very strong demand.