Nvidia, Alibaba and Palo Alto - Our lukewarm results on last week's results

Nvidia, Alibaba and Palo Alto – Our lukewarm results on last week’s results

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

This article first appeared on Simply Wall St News

What growth awaits Nvidia’s key markets?

On the face of it, Nvidia’s (Nasdaq: NVDA) third-quarter results were mixed, with revenue down 17% year-over-year, but above consensus estimates. EPS were below expectations, while forecasts were encouraging.

Beyond the headlines, there were a number of encouraging points to note. Gaming revenue has fallen sharply over the past year, especially in the last quarter. However, there are signs that customers are running out of inventory and sales in this segment may soon start to improve.

In the face of new restrictions imposed by the United States on semiconductor companies exporting to China, the slight increase in data center revenues was also good to see.

Our opinion : By most accounts, Nvidia still performs just fine. But there are a lot of things that are beyond the company’s control. In the medium term, market sentiment should trump Nvidia’s own performance in determining where the stock price stands.

In the long term, revenue growth will be key. If there’s one company that stands to benefit from the industries shaping the future – AI, Metaverse, Virtual Reality, and Automation – to name a few, it’s Nvidia. It’s no secret and many investors are already betting on the company for this reason.

Analysts expect revenue to remain flat over the next yeast, then double by January 2028. This requires 15-20% annual growth. Whether the growth of the industry can accommodate this is the $390 billion question.

By all valuation metrics tracked by Simply Wall Street, Nvidia looks moderately overvalued at the current price. However, that might not be the case if the business can generate revenue growth of more than 20% over the next few years.

Alibaba – Analysts have been behind the curve on this one

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

Our take: Alibaba is widely seen as “cheap,” and investors cite buying Charlie Munger at twice the current price as proof of that. Over time, his investment could indeed pay off, but it should be noted that analyst estimates have continued to fall and have continuously lagged the curve since January of last year.

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

You can track this on our Alibaba analytics page. Another factor to watch out for is institutional ownership. Foreign institutions have drastically reduced their stake in Alibaba over the past 12 months – but it would be a positive development if that trend reversed.

Palo Alto cash flow is doing well

Palo Alto Networks (Nasdaq: PANW) released another set of strong results last week, sending the stock price up 7%. This is actually the third time the stock has had a higher earnings spread, but the sector has remained out of favor for most of this year.

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

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

This quarter represented the company’s second positive net profit quarter, but it is even more profitable when looking at free cash flow.

Palo Alto Networks is more profitable than it looks. The graph illustrates this point: while the net income margin for the last 12 months was -2.45%, the cash margin was 41%. That’s way ahead of most Palo Alto peers.

Feedback on this article? Concerned about content? Contact us directly. You can also email the editorial team@simplywallst.com

Simply Wall St analyst Richard Bowman and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

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