Stocks in the news
Seagate Tech (STX) provides a good opportunity to benefit from AI trends while offering a reliable dividend yield. The recent buzz around AI has led companies to associate the term with their earnings reports in order to boost their stock prices. However, AI also has the potential to disrupt various industries. Given this uncertainty, we want to highlight a company that is not overly committed to AI but still has exposure to the technology.
Seagate Tech, a consistent presence in our Yield Leaders Rankings, operates in a challenging environment due to weak consumer electronics demand. Nevertheless, its strong position in the hard disk drive (HDD) market provides a solid foundation to capitalize on current AI trends.
Storage is crucial for building AI applications as they require large amounts of data. Pure Storage, a provider of solid-state drives (SSDs), aims to lead in this area by developing flash storage tailored for AI workloads. However, Seagate's competitor, Western Digital, stated that since HDDs dominate cloud storage, the significant boost from AI is expected to occur in HDDs rather than SSDs, which benefits Seagate.
The rise of AI is driving an increased need for connected devices, which in turn accelerates the demand for more storage. Despite the faster data processing capabilities of SSDs, many companies still prefer HDDs due to their lower cost per byte. This is especially important for cloud companies that prioritize batch workloads and data archiving over latency-sensitive applications. Seagate referred to a study indicating that the amount of data generated globally subject to data analysis will grow significantly by 2025, emphasizing the importance of affordable and reliable storage.
However, the near-term outlook remains uncertain for Seagate. The company's near-term business is adversely affected by inventory digestion among its major cloud customers. Additionally, lower economic activity in China has contributed to Seagate's challenges in recent months. Nonetheless, Seagate is taking appropriate steps to navigate this difficult economy, extending the first phase of its restructuring efforts and scaling back new investments. As a result, in Q1, the company reduced its cost structure by over $150 million, decreased debt by 5% compared to the previous year, and significantly reduced its manufacturing capacity. Seagate is also targeting at least an additional $200 million in annualized savings during the next phase of its restructuring. In summary, considering that the popularity of AI is still growing, it remains unclear how companies will monetize the technology and what its primary applications will be. Therefore, Seagate is seen as a solid choice to gain exposure to the AI trend without overextending. Furthermore, despite pausing its buybacks, the company aims to preserve its solid dividend yield, currently sitting at 4.9%.
Monday.com (MNDY), a provider of work management platforms that went public in June 2021, continues to surpass quarterly estimates and provide positive revenue guidance. Despite many enterprises cutting back on IT spending, MNDY's product suite, particularly its Work OS platform, maintains strong demand, as demonstrated by record-breaking revenue and free cash flow in Q1.
Despite the company's strong performance, the stock has struggled to sustain upward momentum since reaching post-IPO highs in November 2021. Factors such as a broader rotation away from growth stocks in a rising interest rate environment, anticipation of softened demand, and MNDY's high valuation have worked against the stock. In terms of valuation, MNDY currently trades at a high price-to-sales ratio of approximately 12x. MNDY is making efforts to justify its valuation, as its key metrics for Q1 were solid across the board. For instance, the number of customers with over $50,000 in annual recurring revenue (ARR) increased by 75% year-over-year, following 86% growth in the previous quarter.
C3.ai experiences a significant increase in stock price despite providing conservative revenue guidance, but remains optimistic about FY24. The company has raised its Q4 revenue guidance slightly and remains on track to achieve non-GAAP profitability by the end of FY24. C3.ai is encouraged by the active business environment for enterprise AI and the growing interest in predictive analytics. The company closed numerous deals and saw a surge in business activity, with a substantial increase in qualified enterprise opportunities in its sales pipeline. Its partnership with major tech companies such as Google Cloud, AWS, Microsoft, Baker Hughes, and Booz Allen contributes to its success. Serving multiple industries allows C3.ai to withstand weaknesses in specific sectors. The company is well-positioned for the new fiscal year, as the market for Enterprise AI is deemed to be exceptionally large. Investors focus on C3.ai's path to profitability and recognize the company's platform as a gold standard in enterprise AI. While cautioning about the stock's volatility, the positive Q4 guidance and commentary indicate a potentially brighter outlook for FY24.
Tapestry continues to rally after an upgrade by Bernstein. The luxury apparel and accessories firm, which owns Coach and Kate Spade, reported strong Q3 earnings, setting a positive tone for the industry. Tapestry's focus on selling luxury goods to higher-income consumers provides some defense against a slowdown in discretionary spending. The company's gross margins improved, reaching 72.8% in the latest quarter. The international market plays a crucial role in Tapestry's success, particularly in China, where a faster-than-expected rebound has contributed to a significant revenue increase. While facing challenges in North America, Tapestry expects growth in China and other regions in Asia. The company's strategy to attract younger generations has been successful, with a substantial number of new customers coming from the Millennial and Gen Z demographics. Tapestry's Coach brand remains dominant in the luxury handbag and leather goods category. However, the company faces difficulties in Europe and the impact of lower international tourist numbers. Nonetheless, Tapestry's brand loyalty and potential opportunities in overseas markets position it well for the future.
Gen Digital (GEN) experiences a sell-off as its direct customer count continues to decline for the fourth consecutive quarter, despite exceeding Q4 revenue forecasts and delivering earnings at the higher end of projections. The cybersecurity software provider, which owns Norton, Avast, LifeLock, and other brands, provided Q1 guidance in line with estimates, projecting similar earnings per share (EPS) and sales as the previous quarter.
The decline in shares can be attributed to the contraction of GEN's direct customer count, which accounts for approximately 90% of its total revenue, with a sequential decrease of 183,000 customers. GEN acknowledged this trend and stated it was taking measures to drive traffic to its site and reverse the decline in direct customers. The company plans to invest in a diverse marketing strategy to reach new audiences and return to direct customer growth. While GEN highlighted that the decline in the previous quarter was the lowest of the fiscal year, investors express concerns about the company's ability to reverse the falling direct customer count, especially given the unfavorable macroeconomic conditions.
Despite the challenges, there were positive aspects in the Q4 results. GEN's adjusted EPS of $0.46 exceeded the guidance range of $0.44-0.46. Additionally, revenues of $948 million, a 32.4% increase year-over-year, surpassed the company's prediction and marked the 15th consecutive quarter of growth. Bookings also surpassed $1.0 billion for the first time, growing 29% year-over-year in Q4.
Although direct customers continued to decline, the average revenue per user increased by $0.15 quarter-over-quarter to $7.24, driven by cross-selling and upselling efforts. The aggregate direct retention rate improved by 1 percentage point sequentially to 76%, indicating positive effects from the company's actions to increase customer engagement. Indirect customers, although representing a smaller portion of GEN's customer count, grew by 400,000 sequentially, resulting in a 35% year-over-year increase in partner revenues to $100 million.
The integration of Avast, a recent $8.0 billion acquisition by GEN, has been progressing smoothly, with sales and infrastructure processes fully integrated. The company remains on track to achieve annual cost savings of over $300 million by the end of FY24. The merger's product integration is the final step, expected to enable $850 million in revenue synergies.
Overall, GEN's Q4 performance was decent, with positive developments such as surpassing $1.0 billion in bookings and progress with the Avast merger. However, investors remain discouraged by the ongoing decline in direct customers. While management suggests the trend may be stabilizing, the timing of the stabilization remains uncertain, particularly considering the current economic environment and budget constraints.