🤖📈 A Media Company Set to Benefit from Generative AI

Nintendo possesses a strong portfolio of game franchises, including two of the top three best-selling franchises of all time, granting them a competitive advantage. However, the company is undervalued, trading close to its 5-year low at a multiple of 8.79x, which is considered cheap for most value investors. Nintendo's successful console business, including the Switch as the third best-selling console of all time, has significantly improved its gross and net profit margins over a five-year period. The company has also reduced its outstanding shares by nearly 100 million in the past 10 years.

Future growth opportunities, such as the new Mario movie, could lead to new movies, theme parks, and games based on old franchises. Nintendo boasts a strong management team, a robust balance sheet with zero debt, and a cash position of 13 billion. The primary risk is that Japanese companies often prioritize employee welfare over profitability. Despite this, the author believes that Nintendo's strong balance sheet and undervaluation make it a promising investment for long-term investors with small downside potential and large upside potential.

The article discusses the challenges of copyright law in the context of generative AI models that can create high-quality images and music. The uncertainty of copyright law creates fear and doubt around using generative AI in business or commercial contexts. The article also mentions a recent copyright case heard before the Supreme Court that illustrates the nuances of U.S. copyright law. The use of generative AI models, which are often trained on copyrighted data, will also require consideration of whether the output meets the transformative use bar for fair use. The article discusses the potential copyright liability issues surrounding generative AI, specifically in the context of style transfer and model deployment. The article also discusses the issue of copyright infringement in machine learning models and how it can be avoided by only training on licensed or publicly licensed content.

Adobe and Shutterstock are both examples of companies that provide licensed content for machine learning models. Shutterstock is shifting its focus from content to data, specifically selling metadata to model developers. The article discusses the potential for Shutterstock to scale their data business and transition into a professional services business.

ServiceNow exceeded Q1 revenue and profitability expectations, driven by robust demand and focused operations, leading to solid guidance and a raised full-year outlook. The company's total revenue grew 22% YoY, with subscription revenue growing 24% YoY, as it successfully executed a land-and-expand strategy beyond ITSM and ITOM to HR, customer service, finance, and operations. With a wide economic moat rating due to high customer switching costs, ServiceNow is disrupting legacy vendors in the ITOM market and offers superior products that automate processes across various functions. The author maintains a fair value estimate of $600 per share for ServiceNow and anticipates a five-year CAGR for revenue of 20%. Non-GAAP operating margin is expected to expand to the high 20% area over the next five years, and the addressable market is projected to grow to $200 billion in 2024. ServiceNow, with an Exemplary capital allocation rating and a sound balance sheet, is considered a top pick for its resilient near-term performance and long-term organic-driven growth.

Despite not being directly impacted by the recent bank crisis in the US, Charles Schwab Corporation's market value has dropped by approximately 30%, making the stock very attractively valued. The author argues that the fear surrounding Charles Schwab is largely unfounded, and the stock's current valuation presents a great opportunity for investors. Key executives at the company have shown trust and confidence by purchasing shares, and Charles Schwab's strong profitability and low earnings multiple make it a safe haven investment during times of crisis. The acquisition of TD Ameritrade further boosts the broker's organic account growth and reduces market competition. Charles Schwab's profits are expected to grow YoY, with a projected earnings multiple of 12.8x in 2024. The author believes that the market's concerns are misplaced, and with access to liquidity and substantial asset inflows in March, Charles Schwab provides a high margin of safety for investors.

The article discusses the pros and cons of working in an office versus working from home. The author believes that high-quality office spaces may come out relatively unscathed in the future of office space as an investment. The article also briefly mentions Allied Properties REIT as a potential investment opportunity. Allied Properties is a publicly-traded REIT with a portfolio of $11.9B as of the end of 2022, growing at a 25% annual growth rate. The company has been leasing space actively and has 2.5M square feet of property in development and 10M square feet in long-term development potential. The author discusses their decision to invest in Allied Property REIT due to the upcoming data centre sale and potential for increased earnings from the development portfolio. The author discloses that they own shares in Allied but advises readers to consult a financial advisor before making any investment decisions.

The article discusses the advantages of owning high-yielding stocks in a market where treasury bonds are yielding close to 5%. The North American energy sector is identified as a place where mispricings exist, and a group of companies with high dividend yields and low or no debt are referred to as the \"Grizzle Dividend Elite.\" Purchasing these stocks would create a diversified portfolio with a dividend yield 2x the energy average and less risk. The article emphasizes the importance of combining quant and fundamental analysis.

Raytheon Technologies (RTX) is a major player in the aerospace and defense industry, with strong businesses in both segments. The company faced headwinds in 2020 due to the COVID-19 pandemic, but the aerospace segments have rebounded since 2021 while the defense segments have faced supply chain disruptions and cost inflation. Q1 2023 results showed a rebound in aerospace offsetting headwinds in defense, and management reaffirmed the 2023 outlook. The company is expected to have much stronger earnings growth from 2024 after macro conditions normalize. RTX shares have a 21x P/E, a 3.3% FCF Yield, and a 2.3% Dividend Yield, with a projected total return of 41% by 2025, leading to a Buy rating.

Advantest and Teradyne dominate the ATE (automatic test equipment) market, enjoying significant barriers to entry due to their long-standing experience and customer relationships. With an estimated annual revenue of $5.5 billion and a projected growth rate of 6-8% in the semiconductor market, the ATE industry has immense growth potential. The specialized nature of the business, high switching costs, and pricing power of Advantest and Teradyne make it difficult for new entrants to compete, ensuring a duopoly that is likely to continue for the foreseeable future. Advantest has experienced massive growth in recent years, with a diverse client base and stellar operating margins of 28 to 31%. Despite a projected revenue drop of 10% in FY March 2024 due to a cyclical semiconductor slowdown, Advantest remains a strong investment opportunity in the AI boom at a reasonable price, as it is involved in the vital testing process of semiconductors and enjoys the benefits of being in a duopoly. Advantest compares favorably to Teradyne, with a cheaper price and strong growth expectations, making it a valuable stock to own even in a recession.

DigitalOcean (DOCN) is a hidden gem in the tech sector, consistently demonstrating excellent operating results and revenue growth of 36% YoY in the most recent quarter. Despite the tech sector facing challenges in 2022, DOCN has continued to grow and execute its business plan, targeting small and medium businesses with IaaS products. The company boasts robust cash flow generation and strong liquidity, with only a long-term debt burden of about $1.5 billion to consider. Currently, the stock is significantly oversold, presenting an opportunity for investors to capitalize on a potential bounce back. The valuation has come down to a more reasonable 45x FCF, and recent higher highs and higher lows indicate an uptrend. The article suggests selling put options on the underlying stock to capitalize on this opportunity while generating income and mitigating risk. However, risks include execution, competitors, and earnings, with DOCN reporting earnings on May 9th.

eBay reported solid quarterly earnings, with $2.5 billion in sales and $1.11 in non-GAAP EPS, driven by the success of its focused category investments. The large parts and accessories business achieved e-commerce market growth rates more quickly than expected. However, higher interest rates and softening retail sales may lead to a mid-single-digit percentage decrease in the company's fair value estimate.

Despite this, shares look attractive and are trading at a 17%-18% discount to the revised intrinsic valuation. The ongoing rollout of its first-party advertising business and deployment of tuck-in financial services offerings are expected to drive mid-single-digit average annual sales growth and operating profit expansion over the next five years. eBay's strategic pivot back to its core competency of price discovery for non-new, in-season wares is seen as a competitive necessity, and its estimated $500 billion total addressable market for non-new, seasoned goods provides ample room for growth.

The author believes that eBay's network, unique product focus, and prudent investments in user experience will allow the firm to generate excess returns for the next 10 years, despite competitive pressures. eBay is expected to experience expansion in the next 10 years but warrants a High Morningstar Uncertainty rating due to its sensitivity to consumer demand, proliferation of competitors, and exposure to international regulations and potential liabilities.