NVIDIA’s (NASDAQ:NVDA) rise in the stock market has been quite the thing to behold over the last two years. After hitting a low of $12 ($240 on a pre-split basis) in September of 2022, it started rising rapidly. What happened to trigger this was ChatGPT launched, went viral on Twitter, and showed the world how much demand there was for AI software. NVIDIA, as the supplier of chips to the AI industry, naturally reaped a huge share of the profits, and rose close to 877% in the stock market in a little under two years.
That was then, this is now. Although AI is still very much in vogue, NVIDIA’s explosive growth has been going on for months. It’s only natural to fear a pullback. Fortunately, there is another AI company that profits from the same forces NVIDIA does which is far cheaper. In this article, I will explore the “cheaper NVIDIA” that I find worth buying and holding.
Kinaxis
Kinaxis Inc (TSX:KXS) is a Canadian supply chain software company. It develops software that helps people and companies keep track of key supply chain variables.
Kinaxis’ main offering is the Rapid Response software suite. It empowers businesses to gain supply chain insights. Some of its main features include:
- Compiling all supply chain data in one place.
- Delivering real-time insights using AI, with no or little need for human input.
- An intuitive and easy-to-use UI.
- Scenario analysis.
- Automated data wrangling.
- Generative AI/LLMs.
Here’s an example illustrating how Rapid Response works:
Sonya is a manager at XYZ retail. She wants to know how much inventory she needs for the busy Christmas Holidays. She knows that this depends on customer buying patterns. So she asks Rapid Response, “How much inventory will I need to meet demand during the Christmas Holidays?” In response, the software writes an answer that incorporates the data XYZ retail has on hand regarding customer buying patterns over the Christmas season.
How is Kinaxis doing as a company?
As we’ve seen, Kinaxis has a pretty good product on its hands. How is it doing as a business by selling this product?
Pretty well, it seems. In its most recent quarter, KXS delivered:
- $119 million in revenue, up 18%.
- $73 million in gross profit, up 20%.
- $6.1 million in earnings, up 420%.
- $22.8 million in adjusted earnings before interest, taxes and depreciation (EBITDA), up 32%.
Pretty good growth. Likewise, Kinaxis scores well on the ‘profitability’ factor, with a 60% gross profit margin and a 15% return on equity in the trailing 12-month period.
Valuation
How much are investors paying for Kinaxis’ growth and profitability? It’s certainly no bargain, trading at 60 times earnings, 7 times sales, 6.3 times book value, and 43 times operating cash flow. It’s more expensive than the markets as a whole. Nevertheless, it is cheaper than NVIDIA. Both NVDA and KXS are too expensive for my tastes, but KXS is less so. The 6.3 times book value multiple is actually somewhat low by the standards of tech stocks these days. For that reason, if I had to choose between an investment in Kinaxis and an investment in NVIDIA, I’d go with the former.
