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3 Earnings Reports Send a Warning About the Market
UiPath, Salesforce, and Dell are telling us something.
Travis Hoium
June 02, 2024
In partnership with
There weren’t many big news items this week as Wall Street begins its summer swoon. But the few earnings reports we got sent a bit of a shockwave through the market. I’ll get to that in a moment.
The Asymmetric Portfolio bumped along without many catalysts moving stocks. A reminder that I’ll be making the June allocations on Monday, including a new stock in the portfolio and the first sale of a stock.
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In Case You Missed It
Here’s some of the content I put out this week. Enjoy!
Who Is Making Money on AI?: Outside of NVIDIA, it’s tough to find companies making money on AI today.
A second look at Sony and Dropbox: Two early Asymmetric Investing stocks haven’t lived up to expectations.
What I’m Buying in June 2024: Details of this month’s allocations.
NVIDIA’s 10-for-1 Stock Split: Everything you need to know about the split, including why companies split their stock.
Earnings Surprises and Questions About AI
Despite typically being a growth investor who looks at the bright side of the market. I’ve spent a lot of time questioning the massive investment currently taking place in AI and the valuation of stocks in a shaky economy.
Last week, UiPath, Salesforce, and Dell all reported earnings and despite reporting reasonable results, all three stocks dropped like a rock because they didn’t meet rising investor expectations for AI growth. This could be a theme in 2024.
UiPath describes itself as a “leading enterprise automation and AI software company.“ If any company is going to benefit from AI, it’s a company that has AI at its core.
First quarter results showed the AI company is slowing down, not accelerating. Revenue was up 16% to $335 million, but guidance for Q2 was for a drop in revenue to $300 million to $305 million in revenue and the full year is only up 7% from a year ago. Growth is slowing despite AI supposedly being a tailwind.
Salesforce reported a similar trend. You can see that growth has been slowing since mid-2022 and management expects revenue to be up just 7% to 8% this fiscal year.
Dell has been touted as a great AI player because of AI servers and other AI-related products, but revenue is stagnant. You can see below that results are lumpy and management said they expect $93.5 billion to $97.5 billion in revenue for this fiscal year. Not exactly an AI growth stock!
Where is the AI growth?
The market reacted so violently because valuations were high given AI growth expectations. UiPath isn’t profitable, but trades for 3.8x sales, while Salesforce trades for 42x earnings and Dell has a 32x P/E ratio. Why are investors paying a premium for single-digit growth stocks?
The bigger worry is that heavy investment in artificial intelligence results in little payoff. Capex is up and operating margins are down.
And it seems everyone but NVIDIA is lighting money on fire chasing AI.
In a presentation earlier this month, the venture-capital firm Sequoia estimated that the AI industry spent $50 billion on the Nvidia chips used to train advanced AI models last year, but brought in only $3 billion in revenue.
From a valuation standpoint, AI is holding up big parts of the market. If AI results are disappointing the massive level of investment taking place today may drop. Last week may have been a sign of what’s to come.
I’m adding to the Asymmetric Portfolio again on Monday.
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Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.
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