CISCO

CISCO (CSCO) is undergoing a transformation from a networking giant to a software company.  CSCO’s strategy is to build a multi-cloud portfolio that brings cloud, edge and enterprise together to open up new service revenue streams.

1. Cloud: Our previous report (Cloud Computing – Only a near-term digestion) highlighted that near-term digestion of cloud purchases would last until 1H2019. However, cloud infrastructure spending will is expected to grow at 26% for 2019, while overall cloud infrastructure spending will grow at an 11.7% CAGR through As enterprises are shifting from traditional on-premise infrastructure to hybrid cloud, cloud connectivity is a pertinent issue for customers. CSCO aims to capitalise on its dominant networking position to provide solutions on cloud connectivity. Some of the services include multi-cloud migration and secure management of multi-cloud platforms.
2. Edge: Customers are leveraging on future network capabilities (such as 5G) to roll-out Internet-of-Things (IoT) devices that provide real-time data analysis. CSCO extends key service and forwarding functions from the core to the edge through its service offerings such as its Cloud Hyperflex 4.0.
3. Enterprise: Enterprises are increasingly demanding cost-effective migration from traditional internet circuits. They also require trusted mobile services that provide inter-network roaming and secure user experience. CSCO’s services are positioned to help enterprises move to such digital, cloud-based platforms while ensuring its security in the process. Enterprise strength is likely to remain the main sales driver, and the momentum from the 15% enterprise growth reported in 1Q 2019 should continue. Although the Catalyst 9000 adoption is still in the early stages, it will help to sustain revenue growth for the rest of 2019. IT spending remains vibrant, and it is likely that CSCO will meet the 5-7% YoY revenue growth guidance for 2Q 2019.

NVIDIA

Nvidia (NVDA) recently cut its revenue forecast twice in three months, citing weaker demand in China, higher price points and lack of games that utilise its new RTX technology. As for its data centre division, NVDA pointed to the lumpiness of datacenter bookings and customer caution of the economy. However, we believe that NVDA will benefit from its RTX 20-series graphic cards as more games take advantage of its ray-tracing technology. We expect robust demand for PC gaming to be one of the key revenue drivers for the company.

As described earlier, data centres are currently facing a digestion period that may last until 1H 2019. We iterate our expectations that data centre spending will grow at double-digit %CAGR over the next few years. The data centre segment is likely to grow as hyperscale customers continue to invest in GPU-accelerated deep learning to process huge data sets. Furthermore, NVDA’s leadership in AI training will allow it to grow its presence in the inference market across verticals such as autonomous driving, retail and healthcare. NVDA is currently leveraging on its hardware platforms (Quadro, Tesla, DGX, Jetson) to enable precision medicine using accelerated computing.  Therefore, there is still significant upside in shares for NVDA.

SQUARE

Square (SQ) may face stiff competition from Fiserv (FISVV)’s acquisition of First Data Corporation (FDC). FISVV processes credit card transactions for banks, while FDC focuses on merchants. The combined entity would mean that the firm would have access to customers from both sides of the traction and could cross-sell technology and services by launching solutions that connect both banks and merchants.  FDC’s Clover Go suite is a point-of-sale payment platform that directly competes with SQ.  FDC’s target group is on middle-sized merchants, the businesses that SQ is also eyeing as its growth is increasingly tied to larger sellers. Larger seller gross payment value (GPV) (>$125k in annualised GPV), increased 41% YoY in 3Q 2018. Larger seller mix is now 52% of GPV up from 48% in prior year. However, Square growth is unlikely to be stubbed as it adds new services such as debit cards for small businesses and enters new markets such as e-commerce. SQ’s 2019 forecast indicates strong revenue growth of 40% and EBITDA margin expansion similar to that of 2018. Consensus calls for 40% revenue growth and EBITDA margins gains of 350bps (2018: 250bps) in 2019.

WALMART

Online grocery will remain a strong driver of Walmart (WMT)’s e-commerce growth. E-commerce growth was 43% YoY in 3Q 2018, with grocery pickup available at 2,100 locations (1,100 at December 2018 and about 3,100 expected by end 2019). The retail giant is expected to reach 60% of the U.S. population by delivery at end 2019 (40% in 2018). 

China will be a revenue growth driver for WMT in the international markets. In Q3 2019, comp sales growth was up 2.2% for mainland China, benefiting from strong sales at Sam’s Club and flagship stores on JD.com. Walmart’s number of online transactions in China increased by more than 150% in 2018, making it the third year that the firm’s volume of online transactions achieved three-digit growth. WMT plans to expand its foothold in China by building its first fresh food distribution centre in the mainland, with plans to establish more than 10 food distribution centres for the next several years. It is likely that WMT’s partnership with JD.com to provide home delivery services will further improve WMT’s penetration rate.

Figure 1: Earnings Estimates for these 4 companies