Ticker Reports for July 20th
Oracle Pulls Back After Musk Deal Falls Through, Time to Buy?
Oracle stock (NYSE: ORCL) has pulled back nearly 6% from its recent 52-week highs following reports that the company is no longer in talks with Elon Musk's xAI startup for an expanded cloud-computing deal to train large language models. Despite this setback, Oracle has still outperformed the overall market and its sector, with the stock up over 30% year-to-date compared to the benchmark's 16.27% YTD performance.
The leading technology company known for developing software solutions for businesses worldwide, has greatly benefited from the AI boom. In its most recent earnings report on June 11, Oracle Chief Executive Safra Catz said the company is seeing "enormous demand for training AI large language models."
What Happened with the xAI Deal?
In May, several sources and media outlets reported that xAI and Oracle were discussing a multiyear deal worth up to $10 billion to provide xAI with cloud servers. Oracle's cloud infrastructure business had already supplied xAI with specialized chips from NVIDIA (NASDAQ: NVDA). However, the two sides ended talks to expand their arrangement, and xAI will now buy chips from NVIDIA to build its own data center, according to several reports.
Following the report, Musk wrote on X.com that xAI decided to build an internal system because "our fundamental competitiveness depends on being faster than any other AI company. This is the only way to catch up."
Analyst Insights on the xAI Deal Fallout
Some analysts are downplaying the impact of the canceled deal with xAI. Jefferies analyst Brent Thill reassured clients that Musk's change of plans will not affect Oracle's extensive cloud work backlog, which stood at $98 billion in remaining performance obligations as of the end of its fiscal fourth quarter in May. Thill highlighted that Oracle continues to experience robust demand despite the xAI shift, with its pipeline expanding faster than bookings and revenue.
Evercore ISI analyst Kirk Materne shared a similar view, asserting that Oracle's cloud business has ample growth potential even without Musk's additional spending. Materne pointed out that since the xAI deal was not factored into last quarter's RPO figures, there is no significant risk to the company's estimates from the agreement not proceeding. While supporting Gen AI workloads is a key part of Oracle's strategy, the immediate priority lies in securing more traditional workload contracts from larger enterprises and government entities.
Analysts' Views and Ratings
Despite the recent developments, analysts remain bullish on Oracle stock. ORCL is among the most upgraded names, with a consensus rating of moderate buy based on thirty analyst ratings. The consensus price target of $145.83 forecasts an almost 6% upside.
On July 12, Piper Sandler reiterated its overweight rating with a $150 price target. On June 25, analysts at Morgan Stanley and Guggenheim also took action. Guggenheim reiterated its buy rating with a street-high forecast of $175, projecting almost 27% upside. Morgan Stanley analysts reiterated their equal weight rating with a $125 price target. Overall, ORCL's moderate buy rating is in line with other Computer and Technology companies and the S&P 500 consensus rating.
Insider Selling Concerns
One worrying sign, however, is the consistent insider selling that has occurred. Over the past twelve months, insiders have sold $377.45 million of ORCL stock, although current insider ownership remains substantial at 42.8%. Most recently, on July 15, founder and chairman Lawrence Ellison sold just over 1.1 million shares at an average price of $143.69 for a total of $161.6 million. On July 10, insider Edward Screven sold over $60 million in stock.
The Bottom Line
Oracle has shown strong performance and significant demand in the AI sector, but the fallout from the xAI deal and insider selling might cause some investors to caution. Analysts, however, remain optimistic about the company's future, viewing the pullback as a potential opportunity rather than a setback. One thing for sure is that as Oracle grows its cloud infrastructure business, it remains a crucial player in the technology sector with substantial potential for further gains.
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Semiconductor Giant Posts Big Earnings Beat, but Shares Stay Flat
Taiwan Semiconductor Manufacturing (NYSE: TSM), known by the acronym TSMC, is the world’s second-largest company in the semiconductor industry. Let’s examine TSMC's operations and review the company’s earnings release. We will conclude by examining the market reaction and what to watch for going forward.
TSMC: Dominating the Advanced Logic Chip Market
TSMC is the world’s largest semiconductor fabrication company. It sells around 92% of the world’s advanced logic chips, defined as those with transistor node sizes of 10 nanometers or less. Samsung (OTCMKTS: SSNLF) and Intel (NASDAQ: INTC) are two other firms making chips this size. However, Intel does not sell chips to other companies. It only uses them in its own products.
It also makes the world's most advanced logic chips based on transistor node size, with smaller ones being more advanced. It currently makes 3-nanometer chips and is developing 2-nanometer chips. North America accounts for 68% of the firm’s revenue. China, the Asia Pacific, EMEA (Europe, Middle East, Africa), and Japan each comprise 12% to 8% of revenue.
The company also categorizes its revenue by chip platform. These include high-performance computing (HPC), smartphones, the Internet of Things, automotive, digital consumer electronics (DCE), and others. HPC and smartphone platforms together make up the majority of revenue, accounting for 43% and 38%, respectively, in 2023.
In relation to the growth of artificial intelligence, the HPC platform is most significant. Graphics processor units (GPUs), application-specific integrated circuits (ASICs), and personal computer central processing units (CPUs) are products within this platform specifically made for AI applications.
TSMC Stock Plummets Following Comments by Former President Trump
The day before the release, various semiconductor stocks, including TSMC, saw their share prices plummet. TSMC's stock price was negatively affected by former President Donald Trump's comments in an interview with Bloomberg.
He said, “I think Taiwan should pay us for defense," referring to the U.S. providing the island nation with security against China. The former president implied that he feels Taiwan owes the United States, saying, “They did take about 100% of our chip business.”
He added that he disapproved of the U.S. giving TSMC, a foreign company, subsidies to build factories in America. Charging Taiwan for defense or imposing protectionist policies against the country would hurt TSMC. This led to the stock price falling 7%.
TSMC Surpasses Q2 Earnings and Revenue Expectations
TSMC beat on earnings per share (EPS), coming in at 9.56 New Taiwan dollars (NTD), approximately 30 cents in US dollars. This was 5.6% higher than expectations of 9.05 NTD and up 36% from the previous year. It also beat on revenue, coming in at 673.51 billion NTD, compared with expectations of 656 billion NTD. This was a 40% increase from last year.
The most growth came from the HPC platform, which increased by 28%. DCE revenue also grew solidly by 20%. The company also saw its most advanced chips, 3 nanometers, increase its share of total revenue. The chips accounted for 9% of total revenue in the previous quarter; that number increased to 15%.
Gross and operating margins were higher than predicted by the firms' guidance: gross margin was 53.2%, and operating margin was 42.5%. The high end of the guidance ranges were 53% and 42%. The company increased its revenue guidance for Q3 2024 to between $22.4 billion and $23.2 billion USD.
Other positive results included a solid reduction in inventory and accounts receivable (A/R) turnover days. Inventory turnover measures how long it takes the firm to sell its inventory. A/R turnover measures how long it takes to convert sales bought on credit to cash. Inventory turnover days decreased by 8% and A/R turnover days decreased by 10%, from the previous quarter.
All Eyes on Trump's Expected RNC Speech
After the release, shares jumped as much as 4% intraday. However, gains pared back to less than 1% by the close. During the earnings call, analysts asked CEO C.C. Wei if the company would consider a joint venture for its foundries in the United States. The remarks made by Trump prompted this question. He said they have no plans to do so.
The lack of price increase after a positive earnings report may be due to uncertainty about how Trump might respond to that statement and what else he might say about Taiwan. He is expected to speak Thursday night at the Republican National Convention.
Semiconductor investors should keep their ears perked up on the Republican nominee’s words.
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How to Execute the Wheel Strategy to Generate Options Income
What Is The Wheel Strategy?
The wheel is a popular options trading approach that aims to generate income and potentially acquire stocks at a discount. It consists of two options strategies: a cash-secured put and a covered call. The wheel lets you collect premiums on both parts of the strategy, with a payoff at the end if your stock gets called out.
The strategy is called "the wheel" because it can be repeated in a cyclical manner: selling puts to acquire stock and then selling calls to generate additional income, continuously rolling through these steps.
How to Execute the Wheel Strategy
The wheel strategy involves two main steps: selling cash-secured puts and then selling covered calls if the stock is assigned (meaning they are sold at the strike price and you are back to flat).
Selling Cash-Secured Puts:
- You sell put options on a stock you are willing to own.
- You collect a premium from the sale of these options.
- If the stock price remains above the strike price at expiration, the put options expire worthless, and you keep the premium.
- If the stock price falls below the strike price, you are obligated to buy the stock at the strike price, effectively acquiring the stock at a discount (considering the premium received).
Selling Covered Calls:
- Once you own the stock (either through assignment from the put options or from previous holdings), you sell call options on the stock.
- You collect a premium from the sale of these options.
- If the stock price remains below the strike price at expiration, the call options expire worthless, and you keep the premium.
- If the stock price rises above the strike price, you are obligated to sell the stock at the strike price, potentially capping your profit but you're still benefiting from the premium received.
Example of The Wheel Strategy
Let's go through each part of this process using a very liquid stock in the computer and technology sector, AI chip leader NVIDIA (NASDAQ: NVDA), as an example.
Step 1: Sell an OTM Cash-Secured Put
The first step is to sell an out-of-the money (OTM) cash secured put at a strike price below the current price that you’re comfortable holding the stock if you get assigned. This will provide the first piece of income by collecting a credit. While seasoned traders might use naked put options, most brokers will likely require you to have cash in your account in case you get assigned the stock.
For NVDA, the $120 price level has been a consistent support. You can start the strategy using the $121 put strike price expiring August 2, 2024, which is 17 days away.
The trade would be: Sell 1 NVDA $121 Cash-Secured Put for $3.10
This enables you to collect a $3.10 credit in the account for an income of $310. Keep in mind that you will need to make sure you have $12,100 in your trading account in case you get assigned the stock. On a margin account, you will need at least $6,050, assuming the maintenance margin is 50% for 2:1 overnight leverage. You will also need to confirm you have the options approval level to execute cash-secured puts.
Upon expiration on August 2, 2024, if NVDA stock closes above $121, then you'll keep the full premium, and you can repeat the trade by selling one cash-secured put again to keep racking up premium income. You continue to do this until you actually get assigned the stock.
Let’s assume NVDA closes at $120.50 on expiration. The following Monday, you will have 100 shares of NVDA stock in your account that you paid $121 per share for.
Step 2: Write an OTM Covered Call
NVDA has been holding resistance at $130, so you can opt to write a covered call expiring August 23, 2024, 37 days away.
The trade would be: Sell 1 NVDA $130 Covered Call for $6.45
For the sake of this example, let’s assume you own 100 shares of NVDA from a cash-secured put option that’s already been assigned. This gives you another credit of $6.45 per share or $645. It also gives you the potential for a $4.05 per share gain upside if the stock gets called out.
Upon expiration on August 23, 2024, if NVDA stock closes below $130, then you can repeat the covered call and sell another covered call, rolling the trade forward. However, if NVDA closes above $130, then you keep the additional profit from the gain in the stock, and you have completed a revolution. You can then repeat the cycle, starting with Step 1, by selling another case-secured put to keep the wheel strategy rolling forward.
Can You Lose Money with the Wheel Strategy?
Any investment strategy comes with the risk of financial losses, and the wheel strategy is no exception.
However, the wheel strategy allows you to buffer the initial losses by rolling forward the covered call to continue collecting premium. When you do finally get called out, you can start the process again with Step 1 and keep the wheel moving forward.
In the above NVIDIA example, you'd collect $3.10 from the cash-secured put and then another $6.30 on the covered call premium. That $9.40 of premium is income but also acts as a buffer in case NVIDIA stock collapses. Since your covered call wouldn't be called out, you can then collect more premiums by writing another covered call. This way, you continue to collect premium, which helps you buffer downside moves on the underlying stock.
The wheel strategy works best for stocks with good liquidity that you're comfortable holding longer-term, preferably in a rising market.
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