As an investor, following the hype has its risks. However, noise can provide momentum to a stock if corroborated with sound fundamental analysis.
Two stocks that have received a high volume of coverage this week are KLA Corp. (KLAC, Financial) and Visa Inc. (V, Financial). Both companies recently beat their quarterly earnings forecasts, causing their stocks to surge.
I believe both assets will exhibit momentum throughout this year's first quarter for several reasons.
KLA
As an ancillary service provider to the semiconductor industry, KLA (KLAC, Financial) is well-positioned to benefit from affiliated momentum while running a low-cost business model. The company's offerings span the semiconductor value chain, ranging from process management to yield control. Although KLA does service industries other than the semiconductor space, its primary focus on semiconductor-related activities provides it with significant support amid rising demand for electronic circuits.
KLA reported its fiscal second-quartert 2023 financials last week, displaying a triumphant three months by delivering a revenue beat of $150 million and a positive earnings per share surprise worth 29 cents. The company's success was primarily driven by a 36% year-over-year increase in process control turnover.
According to CEO Keith Wallace, KLA's strong performance in the wafer fabrication equipment market has been instrumental to its recent success. Although the WFE industry's demand is receding, Wallace claims KLA's wafer and recircle inspection performance could continue to grow throughout 2023.
Furthermore, KLA's patterning systems segment and services business grew by 69% and 15% during the past year, primarily driven by successful market expansion.
Collectively, the company's income statement is in great form. As mentioned previously, KLA is capable of benefiting from systemic support in the semiconductor space while maintaining a low-cost business model, which is conveyed by its headline income statement line items.
Lastly, observing the company's cash flow-based valuation indicates its stock is significantly undervalued. A discounted cash flow model with a terminal growth rate of 4% places a fair value of $459.52 on KLA's stock, illustrating a significant value gap.
Even though the discounted cash flow model is merely an indicator, financial analysts highly regard the metric as it often provides meaningful results.
Visa
A firm favorite of Warren Buffet's Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Visa (V, Financial) is yet again aligned to surge after delivering stellar results for its most recent quarter. However, before delving into the company's earnings results, let us discuss a few fundamental aspects.
Visa suffered from an arduous 2022 as its interlinkage to the global economy acted unfavorably. Last year's economic uncertainty stunned consumers and Visa alike. However, better-than-anticipated gross domestic groduct growth, reopenings in China and an abated recession in the eurozone have resulted in an improved outlook for the company's stock.
Yet the question remains: Will an improved outlook on Visa be realized?
According to the company's first-quarter 2023 earnings report, the market's outlook on the stock and its tangible results may coalesce. For the three months ended Dec.31, Visa achieved a revenue beat of $236.13 million, including 12.3% year-over-year growth. Moreover, the company's earnings topped analysts' estimates as it delivered an earnings per share value of $2.18.
Pivotal to Visa's earnings success was a 7% year-over-year rise in payments volume, amounting to a 135% increase since December 2019. Accompanying the company's continued payment volume growth was a 31% year-over-year surge in cross-border transactions, with travel-related spending being the catalyst amid a busy holiday season and further reopenings in China.
A prospective vantage point suggests that cross-border transactions and emerging markets are of crucial importance to Visa. The company continues expanding its offerings in regions such as China, South Africa, Argentina, Brazil and Bangladesh. Consequently, emerging market integration could assist the company's revenue mix, allowing it to sustain its long-term growth trajectory.
Although Visa's forward dividend yield of 0.8% is slightly underwhelming, a discounted cash flow model suggests the stock is undervalued with a margin of safety, providing shareholders with a deep-value opportunity.
Noteworthy risks
Both KLA and Visa are resilient companies, yet they possess notable risks.
For instance, KLA's beta coefficient of 1.38 means it hosts excess risk to the broader stock market. Many analysts on Wall Street believe an economic backdrop could occur toward the back end of this year, which could leave the company in trouble.
As for Visa, its risks are primarily bound to consumer sentiment. Similar to KLA, Visa might suffer if a recession were to occur. However, unlike KLA, in the event of an economic downturn, Visa's operational metrics will likely fade on the premise of subdued discretionary transactions.
Final word
KLA and Visa are two of the most talked about stocks on the street after recently beating earnings estimates. Both stocks are secured by companies with robust operational activities, accompanied by clear pathways to enterprise expansion.
According to the renowned discounted cash flow model, both assets are undervalued and offer investors appealing value gaps.
