by Chantal Marx, Pritu Makan, Sithembile Bopela, Hashmeel Suka, Jalpa Bhoolia & Zimele Mbanjwa
Amazon (AMZN US; AMETNC; AMETNQ)
Amazon is one of the largest e-commerce companies in the world, facilitating the sale of millions of products both by itself and by third parties, across various product categories with direct shipping to customers. The company is also a major player in cloud computing through Amazon Web Services (AWS) which provides digital streaming and entertainment services, manufactures consumer electronics, manages a robust logistics and delivery network, and offers subscription-based services like Amazon Prime.
Second-quarter results were decent. Earnings comfortably beat consensus, while revenue, though lower than expected, was still healthy amid robust demand across the various channels. Guidance for the next quarter was a bit soft relative to consensus, with management perhaps wary of lingering macroeconomic headwinds as well as certain seasonal impacts. This led to a sell-off in the share after results. Pressure on the price has remained but has had the impact of bringing the valuation to more reasonable levels.
Although the company still looks highly valued on a PE basis (27 times), it has unwound significantly from its highs. The company is a dominant force in a major growth market and we continue to like it from a long-term investment perspective. Amazon has plenty of growth potential and is highly cash generative, and we think the recent share price decline makes for an attractive entry point.
Alphabet (GOOGL US; ALETNC; ALETNQ)
Alphabet is the holding company of Google, which owns some of the world's most well-known technology and hardware solutions including the Google search engine, the Android smartphone operating system, and a multitude of other internet-based services, including YouTube. Google is also a key player in the cloud computing space offering a full suite of services including data storage, analytics, and machine learning.
The company's second-quarter results were decent, following on from a strong start to the new financial year, with most metrics being well forecast by the market. Despite ongoing investments into cloud and AI infrastructure, cash resources remain quite healthy, affording sufficient room for both dividend payments and share buy-backs. No particular guidance was provided, though management remains focused on growing the company's AI offering, as prospects within the space remain encouraging.
Alphabet is trading on a forward PE of 19 times, below its average long-term rating of 21 times. The share price has come down recently, and we think that the price is attractive at current levels, particularly in the context of upwards growth potential. The diversion between the consensus 12-month target price ($206.65) for the stock and its current share price ($161.78) reiterates attractiveness of the stock.
ASML (ASML NA)
ASML provides chipmakers with the hardware, software, and services required to mass produce patterns on silicon (make microchips) through lithography. The hardware portion is effectively the machine used by well-known fabs (chip manufacturers) like TSMC, Intel and Samsung to produce chips. These fabs produce chips on behalf of chip designers/IP owners like Nvidia, Apple, Qualcomm, and AMD. The chips are utilised by many end-customers including mega-tech companies like Microsoft, Amazon, Meta, and Alphabet. The software segment supports the inner workings of ASML's lithography hardware, and the services segment provides support to make sure the entire lithography system (hardware and software) is operating smoothly.
ASML's valuation has come down lately as the share price has come under pressure while earning estimates have continued to see upside revisions from analysts. The stock is trading on a forward PE of 31.8 times versus its five-year average rating of 34.5 times. The gap between analysts' 12-month target price (consensus: €1 067) for the stock and its share price (current: €822) has also widened recently.
Eli Lilly (LLY US; LLETNC; LLETNQ)
Eli Lilly, often simply known as Lilly, is a leading drug-maker primarily focused on discovering, developing, manufacturing, and selling pharmaceutical products. The company's portfolio includes a wide range of drugs, with a particular emphasis on diabetes care, cancer treatments, immunology, cardiovascular agents, and neuroscience, including psychiatric medications and treatments for neurodegenerative disorders. Lilly's operations span the entire pharmaceutical value chain, from research and development (R&D) to manufacturing and sales.
Lilly's stock has generally outperformed industry players, as investor confidence grows in the company's growth trajectory and its pipeline of new drugs.
The stock is trading on a PE multiple of 46.5 times, which is elevated against its own history and peers. The rating is expected to unwind rapidly, however, to 42 times in FY25 and 33 times in FY26. This reflects expected earnings growth of >100% this financial year, 37% in FY25, and 30% in FY26. Consensus remains bullish on the stock, with 78% of analysts covering the stock maintaining a "buy" rating, despite a strong share price performance recently.
Qualcomm (QCOM US)
Qualcomm is a leading developer of wireless technology solutions as well as mobile and computing processors and platforms. The company is renowned for its network hardware products enabling 3G, 4G and 5G connectivity (revolutionising global communication) and has gained significant attention more recently for its Snapdragon processors, serving as the heartbeat of various smartphones, tablets, and connected devices.
Qualcomm is trading on a forward PE of 15.6 times, which looks fair relative to its long-term history but very attractive compared to its peers on an absolute (group average of ~27.6 times) and relative (larger than average discount) basis. The stock is rated quite favourably, with earnings expected to grow strongly over the next two-to-three years. Currently, around 66% of sell-side analysts maintain a "buy" recommendation on the stock, with a 12-month target price of ~$219. This represents ~28% upside from current levels (~$172).
