One method I like to use to find potential value opportunities is to watch which stocks the famous value investing gurus have been buying. GAMCO Investors is an investment firm with $8.48 billion in equities in its portfolio as per its latest 13F filing with the SEC for the third quarter of 2022. The company was founded by the legendary Mario Gabelli (Trades, Portfolio), whose strategy focuses on “bottom-up” value investing. In this article, we will go over two tech stocks that Gabelli loaded up on in the third quarter; let's dive in.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Advanced Micro Devices
Advanced Micro Devices (AMD, Financial), better known by its acronym AMD, is a leading chip designer which specializes in high-performance and high-efficiency semiconductor products.
GAMCO purchased 6,215 shares in the third quarter of 2022 while shares were trading for an average price of $85 per share. The stock is trading slightly cheaper than its third-quarter average at ~$75 as of this writing.
AMD has solid secular growth prospects across its four main market segments; Data Centers, PCs, Embedded Tech and Gaming. Combined, these have a total addressable market of a staggering $1.35 trillion, according to AMD’s latest investor presentation.
Data Centers is an especially interesting segment with a $50 billion total addressable market. The data center industry is forecasted to grow at a 22% compounded annual growth rate through 2026 according to estimates from Technavio thanks to growth in the cloud and digital transformation.
AMD provides server processors for data centers run by the three main cloud providers, Amazon's (AMZN, Financial) Amazon Web Services, Microsoft's (MSFT, Financial) Azure and Alphabet's (GOOG, Financial)(GOOGL, Financial) Google Cloud. Its processors are best in class for high-performance computing and artificial intelligence.
AMD recently launched is fourth generation Genoa data center chip, which has been called a “gamechanger” by technology analysts. This is not just an incremental improvement over previous generations but a 50-60% per socket improvement, which is incredible in technology terms. From an investor's perspective, all we need to know is that these new chips are expected to steal market share from Intel (INTC, Financial) and its Skylake processors for servers. The chip also offers great efficiency and cost savings over competitor Nvidia’s (NVDA, Financial) RTX40 series, which could help to entice more customers to AMD.
Mixed financials
AMD recently announced its financial results for the third quarter of 2022. Its revenue was $5.57 billion, which increased by a rapid 32% year over year. However, it did miss analyst expectations by $84 million.
Its Cloud revenue has doubled year over year, as the three big “hyperscalers” continued to increase deployment of AMD’s EPYC processors.
Gaming revenue increased at a slower rate of just 14% year over year to $1.6 billion, mainly due to a decline in gaming graphics demand.
The semiconductor industry is currently going through a cyclical decline, with gaming and PC markets being the hardest hit.
For example, AMD’s client segment revenue declined by an eye-watering 40% year over year to $1 billion. The good news is the majority of these declines have been seen across the industry, therefore it is expected to be cyclical and not a permanent market issue.
The company generated $1.3 billion in operating income in the third quarter, which increased by 20% year over year and was driven by a higher gross margin. Operating expenses did increase from $1 billion to $1.5 billion over the year, but this was offset by strong revenue growth.
Earnings per share was $0.67 for the quarter, down slightly from $0.73 per share a year ago, which was mainly driven by lower Client segment revenue.
AMD has a solid balance sheet with $5.6 billion in cash and short term investments compared to total debt of $2.9 billion with short-term debt of $312 million, which is manageable.
Valuation
AMD trades at a forward price-earnings ratio of 21 based on analysts' estimates, which is 52% cheaper than its five-year average. Wedbush Securities has an outperform rating on AMD with a $100 price target, which represents a 42% upside at the time of writing.
The GF Value chart indicates at a fair value of $138 per share for the stock, which makes it look undervalued, but it also flags a possible “value trap” due to declines in financial results combined with the share price decline. However, as mentioned prior, I believe this to be most cyclical by nature.
2. Tesla
Tesla (TSLA, Financial) is the largest electric vehicle maker in the U.S. and is also a technology powerhouse with operations such as solar energy and even moonshots such as the Optimus humanoid robot project that is in development.
GAMCO investors increased its position in Tesla by 458% in the third quarter of 2022, purchasing 19,248 shares. The average share price during the quarter was $279, which is ~30% more expensive than where the stock trades at the time of writing.
Growing financials
Tesla continued to generate strong financials for the third quarter of 2022. Revenue was $21.45 billion, which increased by a rapid 54% year over year. This growth was driven by a 42% increase in vehicle deliveries to 343,830 vehicles. The Model Y made up the majority of these sales, followed by the Model S. Tesla has managed to shake off production headwinds at factories to record a 54% year over year increase in production to 365,923 vehicles.
Tesla's operating margin increased to 17.2%, up 262 basis points, in the third quarter, which was driven by a higher average selling price for its vehicles. The chart below shows Tesla (pink line) has a higher operating margin than Ford (F, Financial), Toyota (TM, Financial) and General Motors (GM, Financial). Once the company has mastered full self-driving, which is currently still in the Beta mode of testing, I expect to see margins further improve.
In the third quarter, earnings per share was $0.95, which beat analyst expectations by $0.06. The company increased its free cash flow by a blistering 148% year over year to $3.3 billion.
Its cash position has increased to $21.1 billion, up 31% year over year. The company has fairly low debt of just $2 billion, with $1 billion in short-term debt.
Valuation
Tesla trades at a forward price-earnings ratio of 45 based on analysts' estimates, which isn’t exactly cheap relative to the automotive sector or even the technology sector. However, this is cheaper than historic levels as the company has been growing into its valuation.
The GF Value chart indicates a fair value of $377 per share for Tesla, which makes the stock significantly undervalued at the time of writing.
Final thoughts
Both AMD and Tesla are fantastic technology companies that are leaders in their respective industries. The fact that value investing firm GAMCO has bought these stocks recently is another positive signal for long-term investors in my opinion. Both companies are performing well and are continuing to grow both revenue and profits, while innovating on a technology front.
