This article originally appeared on The Motley Fool’s U.S. website.

The artificial intelligence revolution has caused a growth surge for the technology’s enablers, most of which reside in the semiconductor sector.

The stock movements for these companies have been so strong that many now trade at very, very high stock prices, setting these AI beneficiaries up for a potential stock split. In fact, AI darling Nvidia (NASDAQ:NVDA) just announced a 10-for-1 split during its first-quarter earnings call.

Stock splits don’t create or destroy any value on their own. After all, if a company has twice as many shares but half the stock price, the company’s total market cap remains the same. However, stock splits can help certain people afford shares if they don’t have a broker that allows fractional share buying. Moreover, splits can increase a stock’s liquidity, which can help lower-bid-ask spreads for trading purposes, and therefore attract larger funds to a stock.

Therefore, even though the following four stocks have already had very strong runs, a split could potentially drive these AI winners to even further upside.

1. Super Micro Computer

One AI stock that has had even better returns than Nvidia over the past three years is Super Micro Computer (NASDAQ:SMCI). Sure, a lot of Super Micro’s recent success is owed to Nvidia’s AI chips, but SMCI’s returns in the stock market have actually been far superior. Since July 2021, the last time Nvidia split its stock, Nvidia is up by five times. But Super Micro’s stock has increased a whopping 25 times over in less than three years. As a result, Super Micro’s stock price has appreciated to about $900 per share as of this writing, setting it up for a potential split.

A good part of that outperformance was a result of Super Micro’s starting from a significantly lower valuation. In the past, its server products were thought of as “commoditized” with a lot of other competitors in the space.

But the AI revolution has exposed the business model strengths CEO Charles Liang had been cultivating for 30 years. Architecting its servers out of, “building blocks,” or creating the smallest possible modules or server components independently, then being able to build servers out of any combination of these components, Super Micro has mass-customization capabilities that enable it to satisfy virtually any customer modification request. Not only that, but the architecture also saves on costs, as parts of a server can be refreshed instead of having to replace an entire system.

Moreover, Liang has stressed energy-efficiency in its server design for some 20 years, far before it was fashionable. But with the enormous electricity needs and costs of AI servers, Super Micro’s efficient designs are finding even more favor today. And with offices right in the heart of Silicon Valley close to Nvidia and other chipmakers, Super Micro is often able to stay ahead of competitors with the latest in-demand features such as liquid cooling, and is often first-to-market with servers containing the latest and greatest chips.

While Super Micro’s P/E ratio has ballooned from the single digits to 50 over just the past few years, it’s also displaying the growth to back it up, with a stunning 200% growth last quarter. As such, I’d expect Super Micro’s share price to at least maintain these valuation levels, with a stock split potentially in the cards.

2. Broadcom

Another AI beneficiary is Broadcom (NASDAQ:AVGO), thanks to two main factors. First, Broadcom makes the world’s leading networking and routing chips with its Tomahawk and Jericho brands, and data center networking needs are exploding thanks to the data-intensive nature of AI.

Second, Broadcom has application-specific integrated chip (ASIC) design IP that third parties can use to make AI accelerators. In this area, Broadcom has landed some big fish, with both Alphabet (NASDAQ:GOOG) and Meta Platforms (NASDAQ:META) using the company’s ASICs to design their own in-house AI accelerators.

As a result of its highly cash-generative business and AI-fueled growth, Broadcom has seen its share price rally to over $1,400 per share. That definitely puts it in the running for a stock-split.

Of course, the AI boost has only been the most recent catalyst pushing Broadcom’s stock. Even before the AI revolution, Broadcom was an impressive winner thanks to CEO Hock Tan’s visionary acquisition strategy. Over the past 18 years under his tenure, Tan has sought to acquire strong semiconductor franchises, then cutting costs as these defensible niche technologies are folded into the Broadcom corporate umbrella.

Then in 2018, Tan expanded Broadcom’s reach when it bought its first software company, California Technologies, diversifying the chipmaker into software, albeit still within its main enterprise infrastructure market. After buying cybersecurity firm Symantec in 2019, Broadcom made its biggest purchase yet in VMware, a software leader that enables hybrid cloud capabilities and data center virtualization. VMware should also benefit from the growth of AI as customers use many clouds with unique capabilities while striving to keep their data safe in their own data centers. As a result of the VMware acquisition, which closed late last year, Broadcom’s software mix has grown to roughly 40% of revenues.

Now, Broadcom isn’t just a chipmaker, but a diversified technology platform company with many ways to win. Look for its profitable growth to remain strong in the years ahead.

3. ASML Holdings

The path to making every leading-edge semiconductor, Nvidia GPUs included, runs through ASML Holdings (NASDAQ:ASML). This is because the Netherlands-based lithography company has a monopoly on key extreme ultraviolet lithography (EUV) technology needed to make today’s most advanced chips.

EUV technology took some 20 years to develop with significant buy-in from ASML’s customers to fund leading research, so don’t think that EUV capabilities can be copied anytime soon. The resulting technology allows for chipmakers to draw extremely fine transistor designs with light wavelengths that do not occur naturally on earth. And ASML’s latest version of EUV, called “high-NA” EUV, can print designs down to widths of just 8nm. ASML is set to rake in the dough from high-NA, just introduced late last year, as these machines currently go for between $300 million and $400 million a pop!

EUV only began to be used commercially in 2018, with the first EUV-enabled products coming out in 2019. So, we are still only at the beginning of the EUV era. As such, ASML has seen its stock rocket 367% over the past five years, reaching $940 per share, thus making it a candidate for a stock split.

4. Lam Research

Like ASML, Lam Research (NASDAQ:LRCX) is a semiconductor equipment leader that has also seen shares rally over the semiconductor bull market. But whereas ASML is the de facto leader in lithography, which draws designs on a silicon wafer using extremely fine light, Lam’s technology does the exacting and painstaking work of etching the printed design and then depositing semiconductor material in extremely intricate patterns to construct the chip.

While Lam doesn’t have a clear monopoly over etch and deposition technology like ASML does with EUV, Lam actually does have a monopoly over certain process steps in the chipmaking process. More specifically, Lam dominates the deposition technology crucial to “stacking” chip components in a vertical fashion. Over the past decade or so, that has led to Lam benefiting from the production of 3D NAND flash chips, in which memory-makers stack storage modules in a “3D” fashion in greater and greater numbers of layers with every generation.

Now, logic and DRAM chips crucial for AI are also “going vertical,” including high-bandwidth memory DRAM that is currently seeing such strong demand from AI applications. In fact, on its January conference call with analysts, Lam management noted it had a 100% market share in certain technologies needed for stacking DRAM modules. And with new gate-all-around transistors and 3D designs making their way into logic chips, look for Lam to get a further AI boost in the years ahead.

That’s why shares have rocketed 385% over the past five years to $941 per share as of this writing, setting this strong compounder up for a possible stock split as well.

The post After Nvidia: 4 Artificial Intelligence (AI) Stocks That Look Ready to Split appeared first on The Motley Fool Canada.

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Billy Duberstein has positions in ASML, Alphabet, Broadcom, Lam Research, Meta Platforms, and Super Micro Computer and has the following options: short January 2025 $1,840 calls on Super Micro Computer, short January 2025 $110 puts on Super Micro Computer, short January 2025 $125 puts on Super Micro Computer, short January 2025 $130 puts on Super Micro Computer, short January 2025 $280 calls on Super Micro Computer, and short January 2025 $85 puts on Super Micro Computer. His clients may own shares of the companies mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool recommends ASML, Alphabet, Lam Research, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.

The age of artificial intelligence is upon us. AI and machine learning have the potential to create $3.9 trillion in business value by 2022, according to research firm Gartner (NYSE: IT). Consulting firm McKinsey says that 82% of the businesses it surveyed are generating positive returns from their AI investments, including better customer satisfaction and productivity, better fraud detection at financial firms, and a host of other benefits. In dollar terms, spending on AI and cognitive systems will more than triple between 2018 and 2022, from $24 billion to $77.6 billion, for a compound annual growth rate of 37.3%, according to estimates from research firm IDC.

There are a lot of tech companies aiming to win pieces of this pie. These include cloud computing companies that own the vast data centers where information is stored and processed, the chipmakers producing the CPUs, GPUs, and FPGAs that can process the vast amounts of data involved, software companies that organize this data and produce AI programs, and IT consultancies that aid big businesses in implementing these systems.

The “picks and shovels” of AI

The heart of AI, though, rests in the basic components of memory and storage. According to hard disk maker Seagate Technology (NASDAQ: STX), 23 exabytes of data were produced in 2002 (To put that in a more familiar scale, that’s 23 billion gigabytes.) In 2020, 23 exabytes of data will be produced every five hours. That’s an immense amount of data that will need to be stored, either on hard disk drives or solid-state drives using NAND flash, and then fed to processors via dynamic random access memory (DRAM).

However, the memory and storage industry is notoriously cyclical, and it’s currently at the bottom of that cycle, due in part to a spending pullback caused by the U.S.-China trade war. That may have opened up an opportunity for investors to buy memory and storage stocks, including my favorite in the space, Micron Technology (NASDAQ: MU).

Why Micron?

Micron tops my AI stock list because its product portfolio spans both NAND flash — the most modern storage technology — and DRAM, where it is one of only three global players left standing. That DRAM oligopoly can flexibly increase or slow production as market demand fluctuates, ensuring profitability throughout the product cycle.

And as Micron CEO Sanjay Mehrotra noted during an analyst day presentation last year, artificial intelligence servers require twice as much solid state memory and six times as much DRAM as standard servers. Since we are still in the early days of AI implementation, demand for NAND and DRAM should soar over the long term, even if the current period is challenging.

In addition, Micron and Intel (NASDAQ: INTC) are the only companies able to produce a new type of memory called 3D Xpoint, which is non-volatile storage, akin to NAND flash, but much faster. The drawback is that it’s more expensive, but there are many AI applications that could benefit from its unique features.

Last year, Micron exercised its option to purchase the 3D Xpoint fabrication plant from IM Flash Technologies (IMFT), a joint venture Micron and Intel have co-developed since 2006. The two recently decided to go their own ways with 3D Xpoint technology; Micron exercised its option to take over the plant, so Intel will have to develop another facility. However, IMFT will supply Intel with 3D Xpoint wafers for up to a year.

And while Intel released its first 3D Xpoint Optane products back in April, Micron just took full control of IMFT and announced its first 3D Xpoint products last week.

Recent exciting announcements

On Oct. 24, Micron dropped a slew of press releases, including one addressing the introduction of its first 3D Xpoint SSD, the X100. It will feature speeds three times faster than the latest NAND Flash-based SSDs with 11 times the endurance, which should result in an end-user experience that’s two to four times better than flash solutions.

In addition, Micron announced more product innovations and investments related to AI. These include Authenta, a security key for IoT-enabled devices at the hardware level, as well as Micron’s first portable consumer SSD, called Crucial. And the company is acquiring FWDNXT, a start-up that makes an integrated hardware and software solution for edge AI applications. Finally, it made a venture investment in German start-up Volocopter, an autonomous air taxi company, which claims its vehicles are safer than helicopters.

All aboard the AI train

Despite all the things Micron has going for it, the stock still trades at just 7.6 times adjusted (non-GAAP) 2019 earnings. Now, that’s not totally unreasonable, as its earnings are declining due to this year’s crash in memory prices. While Micron earned $6.35 per share in diluted EPS for the fiscal year that ended in August, analysts on average only expect it to earn $2.54 per share in the current fiscal year.

However, that should be the trough of this cycle, which means that Micron is trading for less than 19 times trough EPS, compared to the S&P 500, which trades at 22.5 times trailing earnings. Meanwhile the company earned $11.95 per share as recently as fiscal 2018, meaning it’s only trading at 4 times the peak earnings of the most recent “up” cycle.

While Micron has historically lost money during down-cycles, it doesn’t seem like that will happen this time around. The memory industry is far more consolidated, and Micron has greatly reduced its cost structure and improved its balance sheet, with $3.4 billion in net cash as of the end of the last quarter.

Despite the recent collapse in memory prices, Micron’s stock is up by more than 50% so far in 2019. Nevertheless, that comes after a 2018 in which the stock declined mightily, and the stock is still well below previous all-time highs in the mid-$60s.

With a fortress balance sheet, an unmatched product portfolio, and a valuation far below other leading tech companies, this company at the heart of the AI revolution presents a great opportunity for long-term investors.

The post The World’s Best Artificial Intelligence Stock Is Still Dirt Cheap appeared first on The Motley Fool Canada.

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Of all the big technology stocks, Apple (NASDAQ: AAPL) has been viewed as the value stock of the bunch. While most of the high-flying big tech companies have seen their stocks awarded with high price-to-earnings multiples in recent years, Apple has not. In fact, over the past three years, Apple has only earned itself a P/E ratio, on average, in the mid-teens, lower than the broader market’s current P/E ratio of 22.

Not only has Apple traded at a cheaper multiple relative to the market, but its valuation has also included over $100 billion in net cash. If you strip out Apple’s excess cash, Apple’s underlying business has actually traded at an even cheaper multiple relative to its earnings stream.

This is because, unlike the other large-cap internet giants, Apple is seen by investors mostly as a hardware maker. Hardware sales tend to be more inconsistent than service or subscription revenue, and thus earn lower P/E multiples. At the same time, many had feared that Apple’s flagship iPhone product, from which Apple has earned a majority of its revenue (on an annual basis) in the recent past, may have saturated the market.

However, its seems that Apple’s stock may very well be at an inflection point that could earn the company a growth multiple once again. Here are three reasons — one for the short, medium, and long term — to be excited about Apple’s prospects once again.

1. Short term: Increasing orders for the iPhone 11

In the near term, many analysts focus on iPhone sales, especially during the fall, when Apple releases its new phones. According to Nikkei Asian Review, Apple recently put in an order with Japanese component manufacturers to increase their output by about 10%, based on the strength of initial sales for the iPhone 11, which just came out in September.

The demand for the new iPhone may be somewhat of a surprise, given that many had expected consumers to wait for next year’s introduction of a 5G model before refreshing their phones. Apple had initially put in a conservative order for slightly fewer iPhone orders this year. However, it appears that the iPhone 11 is actually tracking ahead of last year’s iPhone XR and XS series.

Of course, last year’s launch of the iPhone XS and XR were disappointing, as Apple’s price hikes for 2017’s iPhone X, starting at $999, ran out of demand when Apple tried to keep similar pricing the following year. Even the “cheaper” iPhone XR starting at $749 wasn’t quite cheap enough to lure customers to refresh in 2018. At that time, the U.S.-China trade war had just erupted, and the Federal Reserve was raising interest rates, perhaps adding to consumer reluctance.

But this year, it seems Apple has learned its lessons, making the basic iPhone 11 much more affordable. Though the iPhone 11 Pro and 11 Pro Max start at $999 and $1,099, respectively, the basic iPhone 11 goes for just $699, about $50 lower than the XR.

But the discounting doesn’t stop there: Apple is also currently giving consumers three more ways to lower the price of their iPhone 11 even further. First, Apple is more assertively marketing its trade-in program, whereby consumers can trade in old iPhones for discounts — some of which could be substantial — toward a new phone. Second, Apple conveniently released the Apple credit card late this summer, ahead of the launch of the new phone. Since the Apple Card gives you a hefty 3% cash back on all direct purchases with Apple, that’s another $20 toward your new iPhone 11. Finally, Apple also threw in a free year of its new video streaming service, Apple TV+, which hits the market on Nov. 1 — a $60 value. All told, customers could essentially receive an $80 discount on the iPhone 11 before the trade-in discount, which could also yield hundreds of dollars in additional savings.

Yet rather than being pure “discounts,” all three of these customer incentives further tie customers to the Apple ecosystem. The ability to trade in a phone for a discount — which Apple can then resell — makes customers much more likely to stick with Apple over switching to an Android product. Apple also makes money for users of the Apple card from interest charges, and the free trial for Apple TV+ is a unique way to interest consumers who now have a plethora of streaming TV options.

2. Medium term: Becoming a services ecosystem

These discounting moves add to an already robust slate of services coming from Apple this year. Not only is Apple releasing its credit card and Apple TV+, but also Apple News+, a news aggregation app, along with Apple Arcade, a subscription-based gaming service with over 100 mobile games. But Apple isn’t stopping there. Recent reports have shown that Apple may bundle all of these new services, along with Apple Music and its 60 million-plus subscribers, into an entertainment “super-bundle” for Apple users, with an additional discount.

Yet beyond these entertainment, news, and financial services all delivered through the Apple ecosystem, an even bigger deal may be Apple’s health initiatives. Apple’s health apps already deliver heart, exercise, sleep, and menstrual cycle monitoring, as well as a number of other tools for doctors and researchers. In addition, Apple is collaborating on three new health studies this year in hearing, heart health, and women’s health, which will use data from the Apple Watch and Health app for these studies. There’s even more going on with healthcare at Apple; CEO Tim Cook boldly declared earlier this year, “[I]f you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind,’ it will be about health.”

These new services, all tied to the Apple ecosystem, should go a long way toward lifting Apple’s status beyond a mere hardware maker to an all-encompassing ecosystem with lots of recurring revenue.

3. Long term: 5G

Finally, both of these trends — device sales, and more essential services — should get a turbocharge from 5G, once the new communications standard becomes ubiquitous over the next decade. Beginning next year, not only will consumers start to upgrade to 5G-enabled devices, but 5G will also open up new opportunities for services that haven’t been possible on the 4G standard.

That should help Apple on both the hardware and the software and services side, and this multiyear catalyst will begin next year, when Apple will supposedly be releasing its first 5G phones.

The next phase of Apple

Apple was once known purely as a producer of computers — in fact, Apple’s original corporate name was “Apple Computer” when it was founded back in 1976. The company became the center of consumers’ musical worlds with the iPod in 2001, and later the center of consumers’ entire social worlds with the iPhone in 2007. Now, Apple is transitioning to its next phase, tying the iPhone, Watch, and other devices to an essential services ecosystem across entertainment, finance, and health. Each prior product evolution has led to Apple’s stock surging to greater and greater heights, and I think investors should expect more of the same this time around as well.

With Apple’s stock still below all-time highs set over a year ago, it’s time to get excited about Apple’s stock once again.

The post 3 Reasons It’s Time to Get Excited About Apple’s Stock Once Again appeared first on The Motley Fool Canada.

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This has been true of both the storage business, which is the primary business of Western Digital (NASDAQ: WDC), and the processor business, which is the main profit center for Intel (NASDAQ: INTC). While Intel does have a NAND flash storage business line that competes with Western Digital, it’s a relatively minor part of Intel’s business when compared with its dominance in processors for PCs and data centers. Western Digital’s entire business spans storage solutions, both in hard disk drives, as well as the newer NAND flash technology.

Given the bottoming of the chip cycle we are experiencing today, which company makes the better buy at this moment?

Volatility is high in the storage business, less so in processors

As you can see, both companies have an element of cyclicality in their businesses. However, the cyclicality of Western Digital is much more pronounced than that of Intel.

This is because the price per bit of storage can fluctuate by a huge amount. In the run-up in storage demand in 2017 and 2018, you can see that Western Digital’s trailing 12-month operating income basically quadrupled, whereas Intel’s operating income only nearly doubled. Meanwhile, in the recent downturn, Western Digital’s operating profits have pretty much vanished. Last quarter Western Digital had an adjusted (non-GAAP) operating income of just $138 million, and non-GAAP net income of just $50 million.

Meanwhile, Intel’s income is only slightly declining during this downturn. Last quarter the company’s revenue and non-GAAP net income declined only 3%, while non-GAAP earnings-per-share (EPS) actually increased by 2% thanks to Intel’s robust share repurchases.

Valuation differences

As you can see, the supposed risk profile is reflected in each company’s valuation. While Western Digital’s earnings are set to remain depressed for its current fiscal year (which ends June 30, 2020), its valuation is far cheaper on the basis of 2021 estimates once we theoretically get through the bottom in storage bit pricing. Meanwhile, Intel is forecast to produce flat, steady earnings over the next two years.

Data source: Yahoo! Finance. Table by the author.

In addition to Western Digital’s sunnier forecast over the next few years, the company’s dividend yield currently stands at 3.41%, versus Intel’s mere 2.55%. Since Western Digital is coming out of a more severe slump, it seems like it’s both cheaper than Intel, and has better medium-term growth prospects as well.

Recent events bolster Western Digital’s outlook, dim Intel’s

Thus, while Western Digital may seem like a higher risk (and also have higher upside opportunity), Intel is not without its own risks. In the past year, rival Advanced Micro Devices (NASDAQ: AMD) has beaten Intel in the race to produce a 7nm chip, the first time in a long time that Intel has not had the advantage in cutting-edge processors. AMD’s chips are just hitting the market this year, and we can already see some of the potential competitive hurdles for Intel. Intel just announced the release of its new i9 Cascade Lake desktop processors at a 40%-50% discount versus its prior generation, a massive discounting that seems to acknowledge the competitive onslaught coming from AMD.

That seems to indicate Intel may be losing some of the competitive advantage it has enjoyed in prior years. This is a big deal: While Intel has diversified its business into programmable chips, Internet of Things chips, storage, and self-driving car software, the company’s processors across both consumer and data centers still comprised almost 84% of Intel’s revenue last quarter.

Meanwhile, while Western Digital’s current financials may look ugly, things appear set to turn around. After two years of horrific price declines — NAND flash prices have dropped a whopping 80% in the past two years — it appears as though NAND flash prices are leveling off, and some even think flash prices could rise in the fourth quarter and through 2020, marking the beginning of the next up-cycle in memory. New applications such as artificial intelligence, self-driving cars, and cloud computing will all require massive amounts of storage, and demand now seems to be catching up with the industry’s supply growth.

Intel would, of course, benefit from the turn in NAND flash prices as well, but its flash business only made up 5.7% of revenue last quarter.

While Western Digital has not had the competitive differentiation that Intel has enjoyed in the past, it does execute about as well as the rest of the storage industry, and it can also pivot between NAND flash and HDDs. Meanwhile, Intel’s traditional competitive advantage in processors may be eroding. That’s why Intel’s choice as a “risk-off” choice might not be so cut-and-dried.

I’d actually pick Western Digital over Intel today, both because of the prospects of a memory cycle recovery and AMD’s pursuit of Intel’s business. You should do the same, but only if you are comfortable owning a cyclical stock.

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Shares of enterprise-software company Box (NYSE: BOX) rose 13.2% in September, according to data from S&P Global Market Intelligence. Box managed to buck the trend in other enterprise software stocks during the month, most of which sold off hard in a big rotation out of the sector. One of the reasons could be that Box shares had already been under pressure in August, as its growth had showed some signs of slowing all year.

However, sentiment turned in early September, when Box attracted a big investment from a prominent activist investor.

So what

On September 3, activist investor Starboard Value disclosed a 7.5% stake in the company, sending shares up about 15% in the span of about two days. Though the disclosure only indicated that Starboard believed Box shares to be undervalued, the activist investor is known for shaking up boardrooms, agitating for board seats, and at times replacing leadership. That hasn’t yet happened in Box’s case and it would be strange if Starboard decided to become hostile.

Box founder and CEO Aaron Levie is known to be fairly shareholder-friendly, even doing away with the dual-class share structure back in June of 2018 that many tech companies employ to maintain an iron grip on their companies.

Nevertheless, Starboard appears to see things that could be improved, and Levie has said he will work collaboratively with Starboard going forward.

Now what

It’s possible that Starboard may also agitate for a sale of the company. Shares have been under pressure for over a year as the company’s new products just haven’t seemed to catch on with its existing customer base. Still, Box’s current offerings do seem to have value, as the company has relatively low churn of just 4.2%. That could make it an attractive piece for a larger tech company to purchase and plug into its existing offerings.

Nevertheless, investors probably shouldn’t bank on a sale, but rather be on the lookout for more product innovation at the company, which can hopefully rejuvenate sales growth organically.

The post Why Box Rose 13.2% in September appeared first on The Motley Fool Canada.

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What happened

Shares of small and medium business marketing software company HubSpot (NYSE: HUBS) plunged 24.1% in September, according to data from S&P Global Market Intelligence. The plunge marked a big reversal from the stock’s impressive 11.7% gain in August after its positive second-quarter earnings report. What caused such a sell-off?

So what

There was actually no material bad news to come out of the company in September. The sell-off can most likely be attributed to a big rotation out of expensive growth stocks and more into lower-priced value stocks on the part of large institutions. The rotation affected not only HubSpot, but also a variety of software stocks that are posting high revenue growth but little in the way of profits.

Interestingly, the sectorwide sell-off occurred just after the company’s Inbound event, in which HubSpot announced a slew of innovations that actually prompted a big analyst upgrade thereafter. But these positive news items couldn’t stop the larger technical forces of big institutions selling growth software stocks en masse.

Now what

HubSpot stock has fallen all the way to around $158 per share today, down from its high of $207.98 in August. While the company isn’t cheap by any means, with little in the way of earnings and a price-to-sales ratio still over 11, it’s far cheaper than it was just a couple of months ago. Analysts are also fairly bullish on the company, with all of them giving higher price targets than the current share price, in a range of $165 to $231. Since the stock is 50 points cheaper on no material company news, investors may wish to give this software leader a look.

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Samsung (OTC: SSNLF) and Apple (NASDAQ: AAPL) are the No. 1 and No. 3 smartphone brands by global units sold, respectively — though Apple’s premium brand allows it to take home the lion’s share of the industry’s profits. As the smartphone is perhaps the most important technological device so far this century, most investors know these two large-cap companies as it relates to this intense rivalry.

Yet while most consumers view Apple and Samsung as smartphone companies, it may actually be the other parts of each company’s business that most defines and distinguishes them. Therefore, if you’re thinking of buying stock in one of these two market leaders, you need to understand their nonsmartphone businesses. That will help determine which stock is the better buy for your portfolio today.

Apple’s business model: From hardware to services

Perhaps the most important distinction between these two companies is that Apple is much more of a consumer brand and ecosystem, whereas Samsung is more of an industrial conglomerate with large economies of scale.

Here is Apple’s revenue breakdown by product last quarter:

Data source: Apple fiscal year Q3 2019 financials release.

What most distinguishes Apple is its growing services division. As you can see, its services, which include Apple Care, Apple Music, iCloud, and commissions from the App store, garnered just over 20% of revenue last quarter and grew almost 13% year over year. Within that revenue base are also about 420 million recurring paid subscriptions, which the market tends to value higher than hardware. As services and subscriptions grow as a percentage of Apple’s overall revenue base, the company could begin to garner a higher multiple in the market.

However, Apple is set to unveil even more services this year, with four major new services just hitting, or about to hit, the market: Apple News+, Apple Arcade, the Apple credit card, and Apple TV+. These four new services have the potential to greatly augment Apple’s services contribution going forward.

In addition, CEO Tim Cook is also quite bullish on Apple’s healthcare initiatives. While health monitoring isn’t a big moneymaker as of yet, Cook has said that years from now, Apple may be best known for its contribution to health services, even more so than its phones.

Samsung’s business model: Chips and semiconductors dominate

Samsung is Korea’s largest company, a sprawling conglomerate spanning phones, consumer appliances, and, most importantly, memory and semiconductor chips. As you can see, smartphones aren’t even Samsung’s main profit center.

Q2 2019. Data source: Samsung quarterly filings. Revenue equals more than 100% due to inter-segment revenue.

While nearly half of Samsung’s revenue comes from the mobile segment, it accounts for just under a quarter of Samsung’s operating profits. The numbers are effectively reversed for Samsung’s semiconductor business. Not only that, but the semiconductor industry is currently in the midst of a nasty downturn. Thus, the above results could be greatly underrating the importance of memory chips to Samsung’s overall fortunes.

For instance, in the second quarter of 2018, just over a year ago, semiconductor prices were booming, and the semiconductor segment actually made up 78% of Samsung’s operating profit. Not only that, but its operating profit was more than double that of the recent quarter, at 14.9 trillion won, versus last quarter’s 6.6 trillion won.

Therefore, Samsung’s profits are much more tied to the wildly cyclical DRAM and NAND flash markets, which are subject to booms and busts than they are to smartphones. This usually causes Samsung to earn a lower valuation multiple than Apple. While Apple’s hardware, especially the iPhone, is subject to its own cycles, they are not nearly as severe as Samsung’s semiconductor business.

Valuation comparisons

Though both stocks trade below overall average market multiples due to their reliance on hardware, which Wall Street values lower than software, Samsung is clearly cheaper Apple. However, both companies have excellent balance sheets and also pay out healthy dividends to investors.

Data source: Yahoo! finance, Apple and Samsung quarterly filings. * TTM = trailing 12 months.

Apple’s valuation may also benefit from the fact that it is a bit more shareholder-friendly than Samsung. For instance, Apple has been very aggressive in repurchasing its own shares, while Samsung only bought back a tiny portion of stock in 2018, a “boom” year for semiconductors, and hasn’t bought back any stock in 2019. This may be due to the controlling ownership by the Lee family. In addition to hoarding cash at the corporate level, the Lees have also added a huge amount of complexity to Samsung’s ownership structure, through complicated circular ownership of Samsung’s many separate (but controlled) subsidiaries.

Meanwhile, Apple has been the epitome of shareholder-friendliness, returning a whopping $50 billion to shareholders via buybacks, or about 5% of the current market cap, over the past nine months alone. Apple is also planning to return even more, with the clear, stated goal of becoming cash neutral (cash equal to debt) over time. The capital allocation policies have earned plaudits from none other than Warren Buffett, who has made Apple his largest public equity position.

Samsung is for high reward, Apple for lower risk

I think both companies are currently excellent values, but investors with a lower risk tolerance should probably opt for Apple. The company’s results are less volatile, and its corporate governance is much, much better.

In addition, it is also somewhat difficult to trade Samsung’s stock. There are no approved global depositary receipts (GDR) on U.S. exchanges — Samsung GDRs are only listed on the London Stock Exchange (LSE), though many U.S. brokers have access to the LSE. You may also trade Samsung directly on the Korea Stock Exchange, the KRX, but to do so, you may have to open an account with a Korean broker or a specific affiliated bank.

However, assuming you are willing to endure the trading headaches and cyclicality in Samsung’s business, its shares do appear to be a compelling value right now. But so are Apple’s, and owning Apple is a much more stress-free experience.

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Microsoft’s fiscal year ends in June, and shortly afterward, it usually raises its dividend while also announcing its new capital allocation plans and other changes for the upcoming fiscal year. The company just unveiled these plans this week. As expected, they should be music to investors’ ears.

Dividends, buybacks, and new cloud metrics

First, Microsoft raised its dividend by 11% to $0.51 per share, payable on Dec. 21 to shareholders of record on Nov. 21, meaning that the ex-dividend date will be on Nov. 20. That’s a pretty nice hike, actually just above Microsoft’s five-year average dividend growth rate of 10.96%, though slightly below the 10-year average growth rate of 13.7%. It’s not wholly unexpected, however, as Microsoft’s latest fiscal year included a whopping 23% growth in operating earnings, and an even higher 62% growth in free cash flow — though due to variances in cash flow accounting, investors shouldn’t expect growth quite that high in the future.

In that light, a mere 11% hike in the dividend seems downright paltry. However, dividends aren’t the only way to reward investors.

Buybacks to the tune of $40 billion

Microsoft also announced a new authorization for $40 billion in stock buybacks. The new program has no expiration date, so it will have the freedom to deploy this capital at will.

The company had actually authorized a similar $40 billion in both 2013 and 2016, deploying such programs over the course of years. However, there’s reason to think Microsoft could exhaust this program even sooner. Last year, it generated over $52 billion in operating cash flow, more than $38 billion in free cash flow, and $36 billion in cash flow net of acquisitions.

If you subtract $15 billion or so for the new dividend payment, that leaves about $20 billion available for share repurchases, and that’s before accounting for any growth in the upcoming year, so the total available for repurchases this year could be more along the lines of $25 billion. That means Microsoft could exhaust the program in less than two years. This is, of course, unless it makes a large acquisition that would eat up a significant amount of this cash.

Other changes afoot

Microsoft also unveiled two new metrics that it would be reporting, which will help investors better understand the business in the context of cloud computing. One metric will be “remaining performance obligations.” This figure will encompass contracted revenue that has not yet been recognized as revenue, and will replace the term “contracted not recognized revenue.”

Essentially, this figure includes long-term contracts that Microsoft has booked but not yet billed and that may be longer in duration than the typical deferred revenue, which usually encompasses only the year ahead. This change will likely help investors understand how much long-term cloud contracts the company is booking, which can span many years for certain large clients.

The company will also reveal a new metric called “Xbox content and services revenue growth” in its personal computing segment. This will include not only games and systems sold, but also “transactions, subscriptions, cloud services, and advertising.” This move likely reflects the overall shift in gaming away from just one-off purchases of games and more toward streaming subscriptions. Microsoft is about to roll out its streaming mode for Xbox this fall, and this metric will likely be the most appropriate way to account for overall segment growth going forward.

Good times keep coming

Basically, these new announcements are more of the same from Microsoft — and more of the same is good. With a rising dividend, more share repurchases, and more cloud-fueled growth on the way, it’s why Microsoft is still a great pick for retirees — and for all of us, for that matter.

The post Microsoft Is Returning Even More Cash to Shareholders appeared first on The Motley Fool Canada.

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At the current share price, the new $3.60 annual dividend per share comes to a dividend yield of about 2.8%, which is certainly not bad in a world where the 10-year Treasury note yields just 1.77%.

Boosting to the high end of TI’s payout range

More than perhaps any other tech company, Texas Instruments puts its capital allocation philosophy and execution front and center. In early 2018, Texas Instruments set a new target for its dividend payout ratio at 40%-60% of trailing 12-month free cash flow. Over the last 12 months, that ratio was 47%. Assuming no increase in cash flow next year, the raised dividend would be about 55% of cash flow, still within the range, though getting toward the high end.

Texas Instruments will also likely continue share repurchases with the remainder of its free cash flow. In the press release announcing the dividend increase, management made the point that in addition to 16 straight years of dividend increases, the company has also decreased shares outstanding by a whopping 46% over the past 15 years. That comes to about 4% of the company’s shares retired every year, on average.

If you add those returns to the current dividend yield, shareholders are currently due a 6.8% total shareholder return. This would be quite generous for a growth company, but can Texas Instruments continue to grow in this environment?

Not all sunshine and rainbows

Though the dividend hike is welcome news to shareholders, while last year’s dividend raise was supported by a huge 55% rise in earnings per share, this year’s raise has actually come at a time when TI’s earnings are in decline. Wall Street forecasts just $5.32 in earnings per share (EPS) in 2019, compared with $5.59 per share earned in 2018.

The company remains somewhat in limbo, as the U.S.-China trade war has dented demand for its chips this year. And while Wall Street forecasts moderate growth next year to $5.79 per share, that figure could easily be higher or lower, depending on the outcome of U.S.-China trade talks.

That makes Texas Instruments’ forward price-to-earnings (P/E) ratio of 22.2 times 2020 earnings seem a tad rich today. If there’s a cloudy lining to the dividend raise, the hike could be seen as coming at the expense of more share repurchases. Texas Instruments’ stock has actually risen during the 18 month-long trade war, so its valuation doesn’t exactly seem like a screaming bargain today. That may explain management’s decision to aggressively hike the dividend in lieu of more repurchases.

A great sign long term

While there’s considerable uncertainty around Texas Instruments’ current valuation given trade uncertainties, today’s dividend increase is a great example of Texas Instruments’ ample cash generation and shareholder-friendly capital allocation. So while the near-term picture is a bit unclear, the dividend raise is another reminder why this blue chip remains a great long-term hold for dividend growth investors.

The post This Tech Blue Chip Just Raised Its Dividend 17% appeared first on The Motley Fool Canada.

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When you’re looking at the two names, it might seem as though Expedia is clearly the better stock. After all, it not only trades at a lower forward P/E ratio of 16.2 to Booking Holdings’ 17.8, but Expedia also seems to be growing faster than Booking at the moment:

Data source: Booking Holdings’ and Expedia’s second-quarter filings.

However, there is more to Booking and Expedia than meets the eye.

International businesses and investments

One reason investors might want to give Booking Holdings the benefit of the doubt is that it has more European and Asian exposure, and is thus more affected by currency swings. On a constant currency basis, Booking Holdings grew Q2 2019 bookings 10% and revenue 14%, which means it actually slightly surpassed Expedia. Negative currency movements last quarter makes Booking Holdings’ growth slower than Expedia’s. If the recently strengthening U.S. dollar reverses course, Booking Holdings’ growth metrics would proportionally improve.

Additionally, Booking Holdings has more room to grow domestically. On the recent conference call with analysts, CEO Glenn Fogel said, “The U.S. is a great opportunity for us because we’re under indexed. And that’s something that we recognize, a need to do better and to try and get more than our fair share is what we always want.”

Yet besides this currency issue, there’s an even bigger reason Booking may have an advantage over Expedia.

China investments move the needle

The real reason that Booking Holdings might be valued higher than Expedia is its superior investment track record, specifically with its minority investments in China. While the Chinese market has been difficult for both Booking Holdings and Expedia to penetrate, Booking has invested aggressively in leading Chinese companies in the travel and mobility spaces. These include the following:

Data source: Booking Holdings quarterly report, Crunchbase.

Ctrip is the leading online travel agent site in China. Meituan-Dianping is the leading food delivery app and local deals platform in China (which just posted a great earnings report). Didi Chuxing is the leading ride-hailing platform in China. In addition, Booking recently invested in Grab, a leading ride-hailing platform and food delivery service in Southeast Asia, and even more recently invested in Yanolja, a Korean hotel booking platform.

For those unaware, investors in private companies often take preferred stock, which gives the company priority over equity investors. These preferred shares often convert to equity for a company’s IPO. Therefore, the preferred stock investment in Didi, for instance, could eventually be valued higher should the company go public.

Booking Holdings is more aggressive and international

All of these investments add up to a formidable Chinese and Asian portfolio for Booking of over $3 billion. While Expedia has also made international investments, it hasn’t been in China, and they consist of a smaller $120 million stake in Despegar (NYSE: DESP), a Latin American travel platform, and a $350 million investment in southeast Asian travel platform Traveloka.

Expedia hasn’t had as much investment success as Booking. The company’s investment in Despegar has lost about half its value since Despegar went public, and Traveloka’s CTO resigned late last year, issuing a scathing letter about the company’s culture upon departure. Expedia also owns a majority stake in Trivago (NASDAQ: TRVG). Trivago is a public company in its own right, but its results are consolidated with Expedia’s. Trivago has also lost over half its value since going public.

While Expedia’s current headline numbers appear superior to Booking Holdings’ numbers, it’s not so cut-and-dried. Expedia could make for the better choice for some investors, given its U.S.-centric model, small dividend, and lower valuation. However, those willing to bet on the growth of China and international markets should probably look at Booking Holdings, despite its seemingly inferior growth. At the very least, Booking has proven to be the better investor in other companies, and this likely accounts for its premium over Expedia.

The post The Hidden Reason Booking Holdings May Be a Better Stock Than Expedia appeared first on The Motley Fool Canada.

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