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MARKET DIGEST
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THURSDAY, MAY 1, 2025
APRIL 30, DJIA: 40,669.36
UP 141.74
Independent Equity Research Since 1934
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Good Morning. This is the Market Digest for Thursday, May 1, 2025, with analysis of the financial markets and comments on
AbbVie Inc., American Tower Corp., Booking Holdings Inc., Digital Realty Trust Inc., MSCI Inc., Qorvo Inc., Snap Inc.
and Starbucks Corp.
IN THIS ISSUE:
* Focus List: AbbVie Inc.: BUY as company poised for above-average EPS growth (Jasper Hellweg)
* Growth Stock: American Tower Corp.: Dividend hiked by 5% to $1.70 per share (Marie Ferguson)
*Growth Stock: Booking Holdings Inc.: Strong international division provides consistency in an uncertain economy
(John Staszak)
*Growth Stock: Digital Realty Trust Inc.: With no hike in three years, dividend growth is slower than peers (Marie
Ferguson)
* Growth Stock: MSCI Inc.: Pullback presents opportunity (Kevin Heal)
* Value Stock: Qorvo Inc.: Activist interest, but challenges persist (Jim Kelleher)
* Value Stock: Snap Inc.: Withholds guidance and plans to lower costs; reiterating HOLD (Jim Kelleher)
*Value Stock: Starbucks Corp.: Rewards program and workforce training likely to accelerate growth (John Staszak)
WEBINAR ANNOUNCEMENT
Argus Research will host its monthly Outlook & Ideas Webinar for clients at 11 a.m. ET on Wednesday, May 7, 2025. This webinar
is titled Communication Services Disruptors, and will be hosted by Argus Director of Research Jim Kelleher, CFA. Jim will be
joined by Senior Technology, Media, and Telecommunications Analyst Joe Bonner, CFA, as well as several other analysts. During
the webinar, we’ll share our outlooks and top stock picks for the Communications Services sector as well as offshoot areas such
as mobility, travel, gaming, retail, and food delivery.
Please note that the CFP Board has Argus’ Outlook & Ideas Webinar for one (1) hour of continuing education (CE) credit.
The webinar, as always, will be interactive with a question-and-answer period. We will be recording the webinar, and
a rebroadcast will be available on the password-protected portion of our website. Slides related to the presentation will be posted
on our website the day of the webinar and will be available via the webcast itself.
Please visit https://attendee.gotowebinar.com/register/9039848598161659993 to register. If you have any problems
registering, please contact us at clientservices@argusresearch.com or by calling (212) 425-7500.
MARKET REVIEW:
Tamer Tariffs Drive Stock Recovery
The stock market has been uncommonly volatile in April. Amid a range of economic and geopolitical cross-currents, the driving
force has been tariffs and, even more so, tariff talk. The early days of the month were characterized by sharp selloffs reminiscent
of the market crashing toward recession in 2008 or plunging on COVID-19 shutdown fears in 2020. But as the Trump
administration has softened its tone on tariffs, the stock market has rallied. Stocks remain far from recapturing year-opening levels
and are even further away from establishing new all-time highs. But the recovery has taken some panic out the market. We are
now seeing selling days that do not turn into routs, as was the case earlier in April.
As of market close on 4/25/25, the S&P 500, at 5,525, was down 6.1% year to date; it was also down 1.5% for April to
date. The Nasdaq was down 10.0% and the Dow Jones Industrial Average was down 5.7%. At a closing lows of 4,983 on 4/8/25,
and at the height of tariff panic, the S&P 500 was down 15.3% year to date and 18.9% below its all-time closing high of 6,147
from February 2025. At its low near 15,267, the Nasdaq was down 20.9% year to date and 24.4% below its all-time closing high.
'34 '39 '44 '49 '54 '59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14 '19 '24
2024 - DJIA: 42,544.22
1934 - DJIA: 104.04
MARKET DIGEST
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In addition to a more-moderate pace of tariff implementation and ongoing negotiations with a host of countries, the stock
market has also rallied on a reversal from the president regarding the Fed chairman. A week after calling Jerome Powell a “major
loser” and saying the central bank was making a mistake by not immediately cutting interest rates, President Trump said he had
“no intention” of seeking to fire the Fed chair. Investors believe Treasury secretary Scott Bessent and other administration officials
persuaded the president to back down by citing rapid deterioration in the Treasury market and in the U.S. dollar.
Yet investors are not celebrating the comeback in stocks. The market bravado of 2024 appears to be completely gone.
Institutional investors who were inclined to buy every dip in the 2023-24 timeframe now seem trigger-ready to sell every rally.
Currently, key tariff negotiations are underway with Japan, India, and other nations. By many accounts, any negotiations
with China are at the lowest level or are nonexistent. The outcome of the elections in Canada suggest an anti-American tone from
our northern neighbor. Events of that type, or a stray posting from the president on Truth Social, could knock the market back down
toward its lows.
Sectors in 2Q25: Growth Returns
Assuming the rally since mid-April does hold up, the market is showing very different sector leadership in 2Q25 compared with
1Q25. During the first quarter, the best-performing sectors were defensive, rate sensitive, and/or provided inflation protection.
Winning sectors in 1Q25 included Energy, Utilities, Consumer Staples, Healthcare, and Materials.
The worst first-quarter sectors were Information Technology, Consumer Discretionary and Communication Services.
These three sectors led the market in 2023 and 2024. They also tend to offer the best growth prospects and apparently have become
attractive to investors on weakness.
The best-performing sectors in 2Q25 to date are Utilities and Information Technology. Consumer Discretionary and
Consumer Staples are also fractionally positive. No other sectors are positive as of late April. Energy, the first-quarter winner,
has unwound its 8% gain for 1Q and is down almost 11% for 2Q25 as energy prices continue to sink. Healthcare has also given
back its first-quarter gain and is down about 4% for 2Q25 as of late April, with leading health insurers getting crushed.
Weakness in growth sectors in 1Q25 and weakness in defensive, rate-sensitive, cyclical, and inflation-protection sectors
in 2Q25 results in just four sectors being positive for the 2025 trading year to date: Utilities (up almost 4%), Consumer Staples
(up 2.5%), Healthcare (up 0.75%), and Real Estate (up 0.35). The remaining sectors are all negative year to date. Thanks to its
April bounce-back, Information Technology is no longer 2025’s worst sector. That distinction belongs to Consumer Discretionary.
Discretionary also had a poor start to 2024, deeply lagging the broad market in 1Q24 and 2Q24. It bounced higher in the
third and fourth quarters last year on hopes that the Fed’s newly launched rate-cutting campaign would reduce financing costs and
stimulate big-ticket purchases. The sector has weakened this year on fears that tariffs would cause costs and prices on big-ticket
items to balloon. Expensive items such as vehicles, homes, and appliances tend to be built with parts and components sourced from
all over the world via highly complex supply chains. Forecasting the final costs and prices for such items is impossible when the
tariff landscape is changing every day.
If half or more of the 11 sectors were to push into positive territory, it would be hugely positive for a broad market reversal.
Earnings Update
The 1Q25 earnings scorecard has improved meaningfully over the past week. The blended EPS growth estimates from FactSet,
Refinitiv, and Bloomberg have all ticked 300 to 400 basis points higher than they were at the end of the first week of 1Q25 earnings,
as upside surprises displace conservative estimates in the blended tally.
With a little over one-third (36%) of component companies having reported, FactSet is now estimating a 10.1% blended
growth rate for S&P 500 earnings from continuing operations for 1Q25. That is up from 7% a week earlier, when just 12% of
companies had reported 1Q results. Refinitiv is estimating 10.9% EPS growth on a blended basis, while Bloomberg is right around
10%; both were in the 7%-8% range a week earlier.
About 73% of companies to date have surpassed Street expectations; a week ago, that percentage was closer to 70%. On
a long-term basis (past 10 years), about three-quarters of companies reporting EPS growth have surprised to the upside.
Additionally, the magnitude of the EPS beat jumped meaningfully higher, to 10% (with 36% of companies having
reported) from 6% (with 12% of companies having reported). That is better than the 7% long-term average and now also better
than the 9% intermediate-term average. Several large and notable Communication Services component companies – Alphabet,
Netflix, and Comcast – have delivered strong upside EPS surprises and are responsible for much of the cumulative increase.
MARKET DIGEST
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Six or seven sectors are reporting positive 1Q25 EPS growth, and four or five sectors are posting year-over-year declines.
[The different agencies using slightly different metrics, explaining the discrepancy in earnings measurement.] All the earnings
compiling agencies agree that Energy has had the worst EPS performance for 1Q25 season to date, with a high-teens decline. Hopes
that Energy would swing to positive annual comps by 2Q25 are now fading, given the downtrend in petroleum prices spanning
late 2024 into the first half of 2025.
Healthcare is showing the best 1Q25 earnings momentum, with growth in the mid- to upper-30% range. The sector is
being led by pharmaceuticals and biotech, with growth in the high-double-digit to low-triple-digit range. Healthcare providers and
healthcare equipment are more modest contributors. First-quarter EPS growth is in the low-20% range for Communication
Services and in the mid-teens range for Information Technology. Utilities is not only one of the best-performing sectors in 2025;
it is also in fourth place in terms of 1Q25 earnings growth with a low-double-digit rate.
Revenue growth for S&P 500 component companies in 1Q25 is running just under 5% year over year. That is below the
intermediate-term average of 7%. Inflation contributed to that 7% growth rate over the 2020-24 period, however. If inflation heats
up again in coming quarters due to tariffs, revenue growth could rise again as well.
Conclusion
The S&P 500, as noted, is down about 6% year to date. While that is meaningfully off the lows, markets tend to move in waves;
and the latest recovery wave may have spent itself on the beach.
About a year ago late in April 2024, the S&P 500 was in the 5,100 range. The index moved briskly to the 5,600 range
by July 2024, only to tumble to 5,200 in August. Investors interpreted the weak July jobs report as evidence that the Fed had waited
too long to cut rates. That perception quickly faded. Stocks resumed a jagged climb, with downdrafts in September 2024 and
November 2024 followed by new all-time highs. Stocks made an early January 2025 low before reaching an all-time high in the
6,150s in February.
The year-long pattern of higher highs has been replaced so far in 2025 by a pattern of lower lows. This includes key lows
in mid-March and in early April in the wake of President Trump’s tariff announcements. If the market is able resume its climb,
key markers for the S&P 500 would be the close at 5,671 just before “Liberation Day” and the close at 5,777 on 3/25/25. If the
market does pitch lower from here, red flag zone would be the 4/21/25 close at 5,158 and the year-to-date low at 4,982 from 4/
8/25. (Jim Kelleher, CFA, Director of Research)
MARKET DIGEST
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ABBVIE INC. (NYSE: ABBV, $195.10)................................................................................... BUY
ABBV: BUY as company poised for above-average EPS growth
*Immunology products Skyrizi and Rinvoq have succeeded Humira as key growth engines. During the first quarter,
global Skyrizi sales rose 72% on an operational basis to $3.43 billion, and Rinvoq sales rose 60%, to $1.72 billion.
*While Humira sales still represent 8% of the company’s total revenues, 1Q25 was just the second time that Rinvoq
sales were higher, coming in at 13% of total revenues, and only the third time that Skyrizi sales were higher, now
representing 26% of the company’s total sales.
*Looking ahead, AbbVie expects to generate adjusted EPS of $12.09-$12.29 in 2025, representing growth of 19%-
21% versus 2024.
* Our target price of $220 implies a total return, including the dividend, of roughly 16%.
ANALYSIS
INVESTMENT THESIS
Our rating on Focus List selection AbbVie Inc. (NYSE: ABBV) is BUY. Two of the company’s key immunology
products, Skyrizi and Rinvoq, have succeeded Humira as growth drivers. During 1Q25, global sales of Skyrizi rose 72% on an
operational basis, to $3.43 billion, while Rinvoq sales rose 60% to $1.72 billion. While Humira sales still represent 8% of the
company’s total revenues, 1Q25 was just the second time that Rinvoq sales were higher, coming in at 13% of total revenues, and
only the third time that Skyrizi sales were higher, now representing 26% of the company’s total sales. Other products within the
company’s portfolio also continue to produce solid returns, leading to growth across the Neuroscience and Oncology portfolios.
Management expects ABBV to generate 19%-21% adjusted EPS growth in 2025. On a longer-term view, management has
previously stated that it expects combined Skyrizi and Rinvoq revenues in 2027 to reach more than $31 billion. This guidance
assumes Skyrizi revenues for 2027 of more than $20 billion and Rinvoq revenues of more than $11 billion. Our target price of
$220 implies a total return, including the dividend, of roughly 16%.
RECENT DEVELOPMENTS
Over the last three months, ABBV shares have outperformed the S&P 500, rising 11% compared to an 8% decline for
the market. Over the past year, the stock has also outperformed the market, rising 21% versus a gain of 1% for the S&P 500. Over
the past five years, the stock has gained 132% versus an advance of 97% for the S&P 500. The beta on ABBV is below the peer
average. AbbVie released its 1Q25 results on April 25, beating the consensus estimates for both earnings and revenue. Adjusted
EPS rose to $2.46 from $2.31, beating the consensus estimate by $0.06. Management noted that these results included an
unfavorable impact of $0.13 per share related to 1Q25 acquired IPR&D and milestone expenses. Revenue rose 8.4% on a reported
basis (9.8% on an operational basis) to $13.3 billion, beating the consensus by $422 million. The adjusted gross margin was 84.1%,
up 120 basis points from 1Q24. The adjusted operating margin was 42.3%, up 10 basis points year over year.
Within the company’s Immunology portfolio, Skyrizi and Rinvoq are succeeding Humira as growth engines. During the
first quarter, global Skyrizi sales rose 72% on an operational basis to $3.43 billion, driven by 76% growth in the U.S. market and
52% in the International market. Meanwhile, Rinvoq sales rose 60% to $1.72 billion, driven by 68% growth in the U.S. and 43%
growth in the International market. Conversely, global Humira sales fell 50% on an operational basis to $1.12 billion, driven by
a 58% decline in the U.S. and a 20% decline in the International market. The decline in Humira sales was due to the arrival of
biosimilar competition. While Humira sales still represent 8% of the company’s total revenues, the first quarter of 2025 was only
the second time that Rinvoq sales were higher, coming in at 13% of total revenues, and only the third time that Skyrizi sales were
higher, now representing 26% of total revenues. Given the significant growth potential of Skyrizi and Rinvoq, as well as the
continued impact of Humira’s patent expiration, we expect that the company’s reliance on its formerly highest revenue-generating
product will continue to decline.
Among the company’s Oncology portfolio, which saw operational sales growth of 8% to $1.63 billion, growth was
propelled largely by Venclexta (up 12% globally to $665 million), as well as the recently approved Elahere and Epkinly. Growth
in this portfolio was partially offset by a 12% operational decline in the performance of Imbruvica, which saw sales fall to $738
million.
MARKET DIGEST
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The Aesthetics portfolio, which came with the Allergan acquisition, includes Botox and Juvederm. Botox is also used
therapeutically to treat migraine. Botox Therapeutic revenue grew 17% in 1Q25 on an operational basis, while Botox Cosmetic
revenue fell 11%. Other key products that came with the Allergan transaction include neuroscience products Vraylar (up 10% to
$765 million), Ubrelvy (up 18% to $240 million), and Qulipta (up 48% to $193 million).
AbbVie’s share price is supported in part by pipeline developments. On April 29, the FDA approved Rinvoq for the
treatment of adults with giant cell arteritis (GCA). This follows the April 8 approval by the European Commission for the same
indication. GCA is an autoimmune disease that causes inflammation of the temporal and other cranial arteries, the aorta, and other
large and medium arteries. If left untreated, the disease can lead to debilitating symptoms and potentially severe outcomes, such
as blindness, aortic aneurysm, or stroke. The approvals were supported by Phase 3 results demonstrating sustained remission, with
46.4% of patients receiving Rinvoq in combination with a 26-week steroid taper regimen achieving sustained remission from week
12 to week 52, compared to 29.0% of patients receiving placebo in combination with a 52-week steroid taper regimen. This marks
the ninth approved indication for Rinvoq in the U.S., across rheumatology, gastroenterology, and dermatology, and the eighth
approved indication for Rinvoq in the EU.
On April 24, AbbVie announced the submission of a Biologics License Application (BLA) to the FDA for
trenibotulinumtoxinE (TrenibotE) for the treatment of moderate to severe glabellar lines. TrenibotE is a first-in-class botulinum
neurotoxin serotype E characterized by a rapid onset of action as early as 8 hours after administration (earliest assessment time)
and shorter duration of effect of 2-3 weeks. If approved, TrenibotE will be the first serotype E neurotoxin offering patients the
opportunity to experience a neurotoxin with rapid clinical effect for a shorter duration of time as a trial before getting treatment
with Botox Cosmetic.
Earlier, on February 7, the FDA approved Emblaveo as the first and only fixed-dose, intravenous, monobactam/?-
lactamase inhibitor combination antibiotic. It is approved in combination with metronidazole, for patients 18 years and older who
have limited or no alternative options for the treatment of complicated intra-abdominal infections, including those caused by the
following susceptible Gram-negative microorganisms: Escherichia coli, Klebsiella pneumoniae, Klebsiella oxytoca, Enterobacter
cloacae complex, Citrobacter freundii complex, and Serratia marcescens. Gram-negative bacterial infections are among the most
challenging for healthcare professionals to control due to high antimicrobial resistance (AMR). When AMR develops, medicines
intended to treat these infections become ineffective, increasing the risk of morbidity and mortality. AMR is considered an urgent
global public health threat and, according to reporting in The Lancet, could lead to over 39 million deaths worldwide by 2050.
Meanwhile, the company has also established partnerships as a means to grow its business. On March 3, AbbVie and
Gubra A/S, a company specializing in preclinical contract research services and peptide-based drug discovery within metabolic
and fibrotic diseases, announced a license agreement to develop GUB014295, a potential best-in-class, long-acting amylin analog
for the treatment of obesity. Currently in a Phase 1 clinical trial, GUB014295 is an agonist that specifically activates amylin and
calcitonin receptors. Amylin, a satiety hormone, has been identified as a potential therapeutic target for the treatment of obesity
given its role in activating signals to the brain that result in appetite suppression and the reduction of food intake, while also acting
as an inhibitory signal to delay gastric emptying. Under the terms of the agreement, AbbVie will lead development and
commercialization activities of GUB014295 globally. Gubra will receive $350 million in total upfront payment and will be eligible
to receive up to $1.875 billion in development, commercial and sales milestone payments with tiered royalties on global net sales.
This partnership marks AbbVie’s entrance into the obesity field.
Among its other partnership developments, on February 12, AbbVie and Xilio Therapeutics, Inc., a clinical-stage
biotechnology company discovering and developing tumor-activated immuno-oncology therapies for people living with cancer,
announced a collaboration and option-to-license agreement to develop novel tumor-activated, antibody-based immunotherapies,
including masked T-cell engagers, leveraging Xilio’s proprietary technology. Xilio has developed a proprietary, clinically-
validated platform technology for tumor-activated biologics. The company is advancing a pipeline of novel, clinical and pre-
clinical immunotherapies, including masked multispecific molecules designed to achieve tumor-selective activation by leveraging
masking and other unique components that are optimized for the specific target. This allows focused activity within the tumor
microenvironment with the goal of minimizing systemic adverse events. Under the terms of the agreement, Xilio will receive $52.0
million in total upfront payments, including a $10 million equity investment, and will be eligible to receive up to approximately
$2.1 billion in total contingent payments for option-related fees and milestones plus tiered royalties.
MARKET DIGEST
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EARNINGS & GROWTH ANALYSIS
Along with the 1Q25 results, AbbVie raised its earnings guidance for 2025. The company now expects to generate
adjusted EPS of $12.09-$12.29, representing growth of 19%-21% from 2024, raised from its earlier guidance of $11.99-$12.19
that it communicated in early-April. Management noted that its guidance includes a $0.13 per share impact related to acquired
IPR&D and milestone expenses incurred through the first quarter of 2025, but does not include any impact from IPR&D and
milestone expenses that have been or may yet be incurred following the close of the first quarter. Management also noted that its
guidance is based on the existing trade environment and does not reflect any trade policy shifts, including pharmaceutical sector
tariffs that could impact its business. From a longer-term standpoint, management has previously shared its expectations for a high
single-digit compound annual revenue growth rate through 2029, using 2024 as the base year in the compound annual growth rate
calculation. It has shared an outlook for combined Skyrizi and Rinvoq 2027 revenues of more than $31 billion, which assumes
Skyrizi revenues of more than $20 billion and Rinvoq revenues of more than $11 billion in 2027. Additionally, AbbVie has shared
that it expects a high single-digit compound annual revenue growth rate for aesthetics through 2029, which assumes 2025 as the
base year in the compound annual growth rate calculation.
Based on the company’s first quarter results and management’s revised guidance, we are reiterating our 2025 adjusted
EPS estimate $12.15, implying growth of about 20% for the year. Meanwhile, given advances in the company’s pipeline and recent
regulatory developments, we are raising our 2026 adjusted EPS estimate to $13.70 from $13.45, implying growth of 13% from
our 2025 estimate.
FINANCIAL STRENGTH & DIVIDEND
We rate AbbVie’s financial strength as Medium, the midpoint on our five-point scale.
AbbVie pays a dividend. In October 2024, the company raised its dividend by 5.8% to a quarterly payment of $1.64 per
share, for an annualized payout of $6.56. Based on the stock’s current price, the dividend holds a yield of approximately 3.4%.
Our dividend estimates are $6.56 for 2025 and $6.92 for 2026.
MANAGEMENT & RISKS
Robert A. Michael serves as AbbVie’s Chairman and CEO. He succeeded Richard A Gonzalez in the role of CEO in July
2024 and in the role of Chairman in February 2025. Mr. Michael previously served as the company’s president and chief operating
officer. Scott T. Reents serves as Executive Vice President and CFO.
AbbVie faces a range of risks. The development of new drugs from initial discovery to approval for commercial
distribution may take several years and cost hundreds of millions of dollars. Only a small percentage of drugs make it all the way
from discovery to commercialization.
As noted above, Humira now faces the risk of competition from biosimilars, which will impact the product’s profitability.
The company faces integration risks as it folds in acquired companies and assets. These include larger acquisitions, such
as Allergan, and smaller tuck-in acquisitions. There is also the risk that tariffs or trade wars will impact the company’s operations,
as highlighted in the company’s earnings guidance.
COMPANY DESCRIPTION
AbbVie, a research-based biopharmaceutical company, was spun off from Abbott Laboratories in January 2013. The
company is based in suburban Chicago. The shares are a component of the S&P 500.
INDUSTRY
Our rating on the Healthcare sector is Over-Weight. It includes companies in the pharmaceuticals, medical devices,
healthcare services, and insurance industries.
As of the end of March, the sector accounted for 11.2% of the S&P 500. Over the past five years, the weighting has ranged
from 10% to 15%. The sector was outperforming the market with a gain of 6.1%. It underperformed the market in 2024, with a
gain of 0.9% compared to a gain of 23.3% for the S&P 500.
The sector’s P/E ratio on projected 2025 EPS was 16, below the market multiple. Yields of 1.2% were equal to the market
average. The sector’s smoothed earnings growth rate of 10% was equal to the market average.
Within the biopharma sector of Healthcare, the growth is driven by FDA approvals of novel drugs. This trend and M&A
activity in the sector could lead to increased investment in biotech companies.
Recent approvals include high-profile therapies in GLP-1 weight-loss drugs and Alzheimer’s disease. The FDA also
approved several gene therapies. On the MedTech side, we are looking forward to AI-enhancements to medical devices to deliver
better outcomes, such shorter post-surgical recoveries. The healthcare environment is undergoing rapid transitions, and we now
see as an unfolding period of significant promise and opportunity in the sector.
MARKET DIGEST
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While the Inflation Reduction Act (IRA) gives Medicare the authority to negotiate drug pricing, the long period of patent
protection for innovative medicines will still give manufacturers the opportunity for large returns for their new drugs.
While both the broad Healthcare sector ETF XLV and the biotech ETF XBI underperformed the broader market in 2024,
we see the potential for lower interest rates to improve funding for the biotech industry.
On the managed-care side, both the Affordable Care Act and the national demographics of an aging population are
expanding the addressable market of new members for the commercial and Medicare Advantage segments. We observe that some
26 million U.S. Baby Boomers will age into Medicare-eligibility from now through 2030.
VALUATION
ABBV shares trade at 16-times our 2025 EPS estimate, below the average multiple for our coverage universe of large-
cap biotech/pharmaceutical stocks. Given the rapid growth of immunology products Skyrizi and Rinvoq, their status as new
growth drivers that more than offset the declining sales of Humira, and growth across the rest of the portfolio, we believe that the
stock is attractively valued at current levels. Consequently, we are reiterating our BUY rating on the stock. Our target price of $220
implies a total return, including the dividend, of roughly 16%.
On April 30, BUY-rated ABBV closed at $195.10, up $1.59. (Jasper Hellweg, 4/30/25)
MARKET DIGEST
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AMERICAN TOWER CORP. (NYSE: AMT, $225.41) ............................................................... BUY
AMT: Dividend hiked by 5% to $1.70 per share
*AMT reported 1Q25 AFFO of $2.75 per share versus $2.58 per share in 1Q24. Results are adjusted to reflect the
sale of operations in India in 3Q24.
*AMT reported 5% growth in total tenant billings and is seeing increasing domestic deployment and potential new
site demand at CoreSite.
*Along with 1Q25 earnings, the REIT revised its guidance range to $10.35-$10.54 to reflect 4.8% growth at the
midpoint over 2024 adjusted earnings.
*After making the unusual decision to cut its dividend to an annual payout of $6.48 and maintain its $1.62 quarterly
payout, AMT hiked its dividend in March to $1.70 per share. The dividend provides a yield of 3.1%.
ANALYSIS
INVESTMENT THESIS
We are reiterating our BUY rating on American Tower Corp. (NYSE: AMT). The shares responded more than many
peers to REIT and Tech sector trading trends in 2024 and potential momentum in 2025 is behind our revised target price of $245,
up from $235. The company is a leader in tower services, and while domestic mobile spending has flattened, the company is
focusing on international expansion of 5G networks and growth in mobile data consumption. It is also expanding into the data
center market through its joint venture ownership of CoreSite, which we see as a positive. AMT’s strength is in its tower business
model. The company owns and leases land and tower access to wireless, radio, and television companies, with multiple tenants
per tower. Customers sign long-term leases (with the average lease term extension around 20 years) and bear the costs of the
transmission equipment housed on the company’s towers.
The REIT has maintained top-line growth and earnings momentum in spite of lower wireless spending, overall. The
company generates solid margins from each additional tenant and, after facing losses from nonpayment with its largest client in
India, the REIT sold those operations in 3Q24. We think the exit from the region will be a long-term positive and with expansion
focused on other geographic areas in 2025, AMT is building long-term growth prospects and has returned to dividend growth with
a hike payable in 2Q25.
RECENT DEVELOPMENTS
AMT shares have outperformed over the past three months with a gain of almost 22%, compared with a loss of under
1% for the Real Estate ETF (IYR), a loss of 11.7% for the Tech ETF (IYW), and a decline of 8.5% for the S&P 500. For the past
52 weeks, the shares have gained almost 28% while the IYR has gained 10.5% and the S&P 500 has gained 8%.
AMT sold its joint venture interest of its operations in India in 3Q24. As a result, earnings will be restated on a quarterly
basis. For 1Q25, AFFO was $1.29 billion or $2.75 per share, up from $1.20 billion or $2.58 per share in 1Q24. For the first three
months of 2024, income from discontinued operations was $91.7 million, net of taxes. Adjusted EBITDA in 1Q25 was $1.74
billion, up from $1.71 billion in 1Q24.
First-quarter revenues increased 2% to $2.6 billion, up from a restated $2.5 billion in 1Q24. Property revenues increased
less than 1% to $2.5 billion compared with a year ago. The asset sale also improved margins. In 1Q25, operating expenses were
$1.31 billion, down from $1.37 billion in 1Q24. Interest expense in 1Q25 was just under $27 million, down from $31 million in
1Q24. For 2025, the REIT’s capital plans include estimated costs of up to $210 million for ground lease purchases and as much
as $70 million for start-up projects. American Tower’s redevelopment budget is between $360 and $390 million. The REIT has
a discretionary project budget of about $1.5 billion for 2025, which it estimates to use 40% for U.S. data center growth and 35%
for Europe and emerging markets.
In September 2024, AMT announced that it had completed the sale of VIL, its largest tenant in India. The sale represented
100% of AMT’s equity interest in its tower operations in India was to Data Infrastructure Trust, a sponsored affiliate of Brookfield
Asset Management (NYSE: BAM). AMT had ongoing issues with lack of payment from the tenant. In March, AMT converted
VIL debt into shares. During 2Q24, the shares were sold in several transactions for net proceeds of $257 million. As a result of
the sale, AMT recognized a gain of $46.4 million and no VIL shares remain outstanding. During 3Q24, AMT announced that it
had completed the sale to Brookfield. In addition to selling its operations in India, the company entered into an agreement during
3Q24 to sell 100% of its interest in ATC Australia and New Zealand for about $78 million.
MARKET DIGEST
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Management revised its AFFO guidance. The new outlook reflects positive impact of foreign currency, which could
increase earnings by an estimated $0.04 per share. For 1Q25, the new AFFO guidance range is $10.35-$10.54, up from $10.31-
$10.50 per share. Management projects total property revenue to increase about 1% and adjusted EBITDA to increase 1.6% at
the midpoints of projected ranges.
EARNINGS & GROWTH ANALYSIS
American Tower has six segments. In 2024, the segments comprised total revenue as follows: U.S. & Canada, 52%;
APAC/Africa, 12%; Europe, 8%; Latin America property, 17%; Data Centers, 9%; and Services, 2%. Property revenues tend to
account for about 98% of total operating revenues.
Compared with a year ago, total tenant billing growth increased 5.2% and organic tenant billings growth increased 4.7%.
Total property revenues increased 2% to $2.6 billion. Compared with 1Q24, first-quarter revenues based on region were as
follows: U.S. and Canada decreased less than 1% to $1.3 billion; Latin America decreased 10% to $399 million; Africa/Asia
Pacific increased 12% to $334 million; Europe increased 4% to $213 million. Data center revenue increased almost 9% to $244
million, compared with a year ago.
AMT and the tower industry as a whole have faced lower demand from smaller carrier budgets and tenant churn. The
REIT, as a global tower provider has also faced FX headwinds and poor performance in some international locations. Despite
lower demand, the company was able to increase AFFO by 7% in 2024 as compared with 2023. While the company had largely
favorable quarterly year-over-year top-line growth, revenues had negative comparisons in 4Q24. The lower revenues were in part
driven by payment issues with AMT’s largest client in India, which was sold in a transaction finalized in 3Q24. Upcoming year-
over-year comparisons will reflect the sale, as estimated 2024 revenue from India was approximately $500 million. However, the
sale of operations in India will help the balance sheet and enable quicker expansion once demand increases. Cost savings have
also resulted. For 2024, operating costs decreased 18% compared with 2023. Our 2026 estimates imply about 5% growth for both
AFFO and revenues over 2025 projections.
Along with 1Q25 results, management reported that domestic demand was improving with tenant churn continuing to
diminish. Management also raised its guidance to reflect an optimistic foreign exchange impact as the year progresses. Once
interest rates ease, we expect margins to also strengthen as FX headwinds ease. Furthermore, Argus is estimating that carrier
spending could strengthen overall in 2H25. Mobile phone service providers began to reduce their spending in 2023, due to slowing
demand for new smartphones with lower spending continuing into 2024. As a result, tower providers felt the strain on earnings.
Looking ahead, Argus believes that PC and smartphone demand has bottomed out, but still remains well below peak levels. We
do not see meaningful demand for these devices returning until 2H25 with robust potential growth by early 2026. However, higher
device ownership, especially internationally, should boost data traffic and demand for 5G communications, potentially leading
to growth in new tower space as the year progresses and continuing through the end of the decade. Also providing tailwinds to
FFO is the REIT’s data center operations. Management is projecting increased capacity in the mid-term and increased demand
for new centers.
Last year, AMT’s tightened revenue outlook and slower earnings growth from discontinued operations, and lower
demand resulted in lower projected FAD in 2024. In response, AMT lowered its payout and froze its dividend in 2Q24, which
implied slower earnings growth as 2024 progressed. The company projected that it would increase its dividend by early 2025 and
followed through with a 5% hike, payable in 2Q25.
For the remainder of the year, despite asset sales, management remains optimistic that it can maintain pricing power with
forecasts of organic tenant billings growth in 2025 between 4%-6%, with new site tenant billing growth as much as 1%. Despite
concerns about reduced spending by telecom companies, we expect revenues to continue to grow modestly year over year in 2025
and 2026, and look for international expansion to boost AFFO as the 2025 progresses.
Thus, despite slower earnings growth expected through mid-2025, the REIT has long-term growth potential. AMT has
an advantage over peers with its presence in the data center market and established global focus. And it appears the REIT plans
to continue the expansion into the data center segment. Management reported that as much as $60 million of its discretionary
capital budget of $1.5 billion could be spent on U.S. data center growth. Data center revenues increased to $925 million in 2024,
up from $835 in 2023.
Freezing dividend increases in 2024 was unusual. However, the REIT had provided a stronger schedule of dividend
increases than most REIT peers.
Based on the positive impact of foreign currency exchange on property revenues, we are increasing our AFFO estimates.
Our revised 2025 AFFO estimate is $10.50, up from $10.45 per share. Our new 2026 estimate is $10.80, up from $10.75 per share.
MARKET DIGEST
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FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on AMT is Medium, the midpoint on our five-point scale. Moody’s long-term rating is Baa3/
stable and S&P’s rating is BBB-.
The company’s balance sheet has been strengthened by the recent sale of operations. At the end of 1Q25, cash was $2.1
billion, compared with $2.0 billion at the end of 2024. Long-term debt was $34 billion versus $33 billion at year-end 2024. AMT
has one of the higher debt/capital ratios among Argus-covered REITs. At the end of 1Q25, its long-term debt/capital ratio was
77%, unchanged from the end of 2024 and the end of 2023.
As of year-end 2024, the weighted-average debt maturity is about 5.7 years, and about 97% of the company’s debt is
fixed-rate. The REIT has credit facilities and senior notes in U.S. dollars and in euros.
AMT has had a strong record of dividend growth. The REIT had historically raised its dividend each quarter, although it did not
do so in 1Q23 due to lower AFFO. The REIT reinstated dividend increases by June 2023 and ended the year with an increase to
$1.70 per quarter, up from $1.62 per quarter. The REIT then took an unusual step in 2Q24 by reducing its quarterly dividend back
to $1.62 per share. The quarterly dividend of $1.62 remained unchanged for four quarters. The cut reflected AMT’s tightened
outlook as REITS are expected to calculate annual dividends based on its estimate of future FFO and must distribute 90% of
earnings as dividends.
In March 2025, AMT announced it would increase its dividend to $1.70 per share, payable in 2Q25. The current yield of 3.1%
compares to the average of 3.6% for data REIT peers under coverage by Argus. We are raising our dividend estimate to reflect
the sooner-than-expected increase. Our 2025 estimate is $6.72, up from $6.55. Our 2026 estimate is $6.94, up from $6.70 per share.
MANAGEMENT & RISKS
On February 1, 2024, Tom Bartlett retired as president, CEO, and director of the board. He was replaced by Steve Vondran
as president and CEO. Mr. Vondran joined AMT in 2000. Pamela Reeve is the company’s chair. She also serves on the board of
Frontier Communications. Rod Smith is CFO.
With international communication sites contributing just under half of property revenues, AMT is subject to FX
headwinds. In addition, it faces customer concentration risk from wireless network operators. This risk has been exacerbated by
industry mergers, such as T-Mobile/Sprint, which, as a combined entity, has greater pricing power and has been able to eliminate
duplicative AMT leases. That said, AMT is the largest tower company in the U.S., and is thus unlikely to see significant defections
by carriers to smaller, less geographically diversified competitors.
Additional risks include government regulation, exposure related to overseas expansion, and the threat of rising bond
yields that could squeeze the dividend or increase borrowing costs. The shares can trade on news in the tech sector and the income
sector, wherein interest rates rise, REITs, in general, can decline along with bonds.
COMPANY DESCRIPTION
American Tower operates wireless and broadcast communications real estate, including wireless towers, distributed
antenna systems, and managed rooftop systems. The company leases multitenant space to wireless service providers and radio
and television broadcasters. AMT entered the data center sector with the acquisition of an interest in CoreSite in 2021 and currently
owns a 72% share of CoreSite. As of the beginning of 2025, the REIT had about 148,000 international tower sites and 42,000
towers in the U.S. and Canada. For 2024, North American assets accounted for just over half of total revenues with data centers
accounting for about 9%.
Top U.S. tenants include T-Mobile, AT&T, and Verizon. The current market cap is $105 billion and the shares are a
component of the S&P 500.
VALUATION
AMT shares have had strong gains over the past quarter. AMT delivered solid FFO growth in 2024 and moderation has
been expected in 2025. We expect the REIT to continue to have pricing power and growth potential as the economy improves.
The shares have also fully participated in positive historical sector rotation in periods of declining interest rates and Argus
estimates that rates could decline as 2025 progresses. The solid recent dividend hike also adds to total return. As such, we are
maintaining our BUY rating as the company is trading favorably to peers on several key valuation metrics.
The shares remain undervalued and are trading favorably to peers on several metrics. AMT shares are trading above the
midpoint of their 52-week range of $171-$243. The shares are also trading at a 2025 price/FFO multiple of 21.5, versus the peer
average of 23.3 for data REITs. The 2026 estimated price/FFO multiple of 20.9 is also below the peer average of 21.6 for data
REITs and below the share’s five-year average of 23.9. The shares have a PEG ratio of 6.9, which is in-line with the peer average
for Argus-covered data REITs. The price/sales ratio is 7.1, which compares with the average of 7.23 for all REITs covered by
Argus. We believe that AMT merits higher multiples, given the company’s leadership in the 5G tower space, opportunities for
international expansion, and scale. Our revised target price is $245, up from $235.
On April 30, BUY-rated AMT closed at $225.41, up $4.08. (Marie Ferguson, 4/30/25)
MARKET DIGEST
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BOOKING HOLDINGS INC. (NGS: BKNG, $5099.28) ............................................................ BUY
BKNG: Strong international division provides consistency in an uncertain economy
*We have a favorable view of online travel companies and of BKNG in particular, given its focus on Europe, where
it generates most of its gross profit.
*We expect results to benefit as growing numbers of travelers book their flights, hotel reservations, and vacation
rentals online.
*Reflecting solid bookings and higher room prices, we are leaving our 2025 EPS estimate at $225 and keeping our
2026 estimate at $260 per share.
*We are leaving our target price at $6,000. This implies a potential return of 23% from current levels, including the
recently initiated dividend.
ANALYSIS
INVESTMENT THESIS
We are maintaining our BUY rating on Booking Holdings Inc. (NGS: BKNG) as demand for travel remains solid. We
have a favorable view of online travel companies, and particularly of BKNG, given its focus on Europe, where most of its gross
profit is generated. We expect the company to benefit from the strength of its Booking.com brand in Europe and from recovery
in the U.S. BKNG is trading at 18.9-times our 2026 EPS estimate, below the average for other online booking companies; however,
we believe the company’s strong earnings outlook merits a higher multiple. Our target price of $6,000 implies a projected 2026
P/E of 23.1 and a potential return of 23% from current levels, including the recently initiated dividend.
Given Booking’s emphasis on international travel, it should endure U.S. tariffs relatively well.
Our long-term rating is also BUY.
RECENT DEVELOPMENTS
On April 29, Booking Holdings reported 1Q25 revenue of $4.8 billion, above the consensus estimate of $4.6 billion, and
adjusted EPS of $24.81, up from $20.29 a year earlier. EPS topped the consensus estimate of $17.29 as the company continued
to see robust demand for travel worldwide. Bookings rose 7% to $46.2 billion, below the consensus of $46.53 billion. Room nights
increased 7% to $319 million, below the consensus estimate of 8.3% growth and at the top of management’s guidance calling for
5%-7% growth. Interest expense rose to $649 million from $219 million a year earlier. Adjusted EBITDA rose to $1.09 billion
from nearly $898 million in 1Q24 and topped the consensus forecast of $850 million as well as management’s guidance of $800-
$850 million. On a GAAP basis, EPS fell to $10.07 from $22.37 a year earlier.
The number of diluted shares fell year over year to 33.1 million from 34.7 million, helped by share buybacks.
Moreover, the company has a share buyback program of $20 billion.
As discussed in a previous note, in 2024, revenue increased 11% to $23.7 billion, while adjusted EPS totaled $187.10,
up from $152.22 in 2023.
EARNINGS & GROWTH ANALYSIS
Reflecting solid bookings, fewer shares, and higher room prices, we are leaving our 2025 EPS estimate at $225 and
keeping our estimate at $260 per share for 2026. Longer-term, we expect Booking Holdings to continue to benefit from growth
in the online travel agent industry.
FINANCIAL STRENGTH
We rate the financial strength of Booking Holdings as Medium, the midpoint on our five-point scale. The company scores
above average on key tests such as debt levels, cash balances, and profitability.
At the end of 1Q25, cash and cash equivalents were $15.6 billion, down from $16.2 billion at the end of 2024. Long-term
debt totaled $15.4 billion, up from $14.9 billion. The first-quarter EBITDA margin was 22.9%, increasing from 20.3% a year
earlier. Booking Holdings initiated a quarterly dividend of $8.75 per share in 1Q24. In 2024, the company paid an annual
dividend of $35.00 per share. In the fourth quarter press release, the company said it would begin paying a quarterly dividend of
$9.60 per share. For 2025, our dividend estimate is $38.40 per share, up from $35.00 previously. For 2026, our annual dividend
estimate is $40.80 per share, up from $37.55.
MARKET DIGEST
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MANAGEMENT & RISKS
Glenn D. Fogel has been the CEO of Booking Holdings Group since 2017. Ewout Steenbergen is executive vice president
and CFO.
Booking Holdings earns most of its revenue in international markets and is thus vulnerable to foreign exchange
headwinds.
The online travel bookings market is growing rapidly, attracting such competitors as Google, Amazon, and Facebook.
These large firms could take some of Booking Holdings’ market share and squeeze industry pricing. The travel industry is cyclical
and vulnerable to weak economic conditions. It also faces significant risks from outbreaks of disease, such as Covid-19.
COMPANY DESCRIPTION
Booking Holdings offers a variety of online booking services, including airline tickets, car rentals, cruises, hotel rooms,
and vacations. Booking Holdings operates in Europe, North America, South America, the Asia-Pacific region, the Middle East,
and Africa.
The company’s brands, Booking.com, Agoda, KAYAK, OpenTable, and Priceline, enable customers to reserve hotel
rooms anywhere in the world. More than 80% of bookings are international (primarily in Europe).
In July 2014, Booking Holdings acquired OpenTable, which provides restaurant reservations online in the U.S. and
internationally. In May 2013, it acquired KAYAK Software Corp. KAYAK searches travel sites to obtain the lowest hotel room
and airline ticket prices. In 2012, the company bought TravelJigsaw, now called Rentalcars.com, a provider of rental car services
in Europe. In 2007, it acquired Agoda, an online travel company offering hotel bookings in Asia.
We think management’s efforts to expand its services and diversify geographically have enabled the company to gain
market share over the past five years. Although some of its competitors entered Europe before Booking Holdings, savvy
acquisitions have, in our opinion, enabled the company to become a leader in the European market.
VALUATION
Reflecting a strong lodging industry, we believe that BKNG shares are undervalued at current prices. The shares are
trading at 18.9-times our 2026 EPS estimate, below the average for other online booking companies. We believe the current
valuation inadequately reflects prospects for stronger revenue and earnings in 2025. Consequently, we are maintaining our BUY
rating. Our target price of $6,000 implies a potential return of nearly 23% from current levels, including the recently initiated
dividend.On April 30, BUY-rated BKNG closed at $5099.28, up $190.05. (John Staszak, CFA, 4/30/25)
MARKET DIGEST
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DIGITAL REALTY TRUST INC. (NYSE: DLR, $160.54)........................................................ HOLD
DLR: With no hike in three years, dividend growth is slower than peers
*While 1Q25 revenues decreased from the previous quarter, core FFO for 1Q25 was $1.77 per share, up 6% from
$1.67 in 1Q24.
*While DLR has had solid growth in new bookings, the average lag time before commencement is about 10 months.
*DLR raised its 2025 core FFO guidance by less than 1% at the midpoint. The new guidance of $7.05-$7.15, up
from $7.00-$7.10, matches the previous currency-adjusted estimate.
*While most peer REITs under coverage have continued to increase their dividends, DLR has not had an increase
since 2022. The current yield near 3% is also lower than our REIT peer average of 3.8%.
ANALYSIS
INVESTMENT THESIS
We are maintaining our HOLD rating on Digital Realty Trust Inc. (NYSE: DLR). DLR is a REIT that owns and operates
global data centers with a full spectrum of data services, including storage, colocation, and interconnection. As of the end of 2024,
the portfolio is less weighted with hyperscale centers than its main competitor. While DLR’s recent leasing and pricing trends had
favored their smaller centers, insiders expect that new AI demand will trend towards megacenters. While the company has had
a recent uptick in over 1MW bookings at year-end, overall, recent new leases have had a significant lag time before
commencement.
The company also continues to face weaker macroeconomic conditions as lower provider budgets have limited demand
for computing and telecommunications equipment, which has weighed on earnings. DLR is projecting a stronger asset pipeline
going forward and management has forecasted solid long-term stabilized yields. However, earnings could be more reflective of
high operating expenses in the near term.
We still expect data center demand to rise over the next several years, driven by the large amount of storage required by
AI, and to support multi-cloud environments, but not as quickly as previously anticipated. DLR also has international growth
potential, but has faced foreign-currency headwinds. Given the recent increase in share price and the company’s slow growth
potential, we consider the shares to be fairly valued at current levels. We also regard the absence of dividend increases compared
to peers as supportive of our HOLD rating.
RECENT DEVELOPMENTS
Over the past three months, shares have declined just under 3%, compared to a decline of 1.4% for the Real Estate ETF
IYR, and a loss of 9% for the S&P 500. Over the past 52 weeks, the shares have risen about 10%, in line with IYR gains and
compared to an increase of 7% for the S&P 500.
DLR reported 1Q25 core FFO of $608 million or $1.77 per share, up from $532 million or $1.67 per share in 1Q24. We
note that the 1Q24 results included a significantly higher negative impact on FFO from real estate transactions. Adjusted EBITDA
in 1Q25 was $791 million, up 11% from 1Q24.
Total first-quarter operating revenues increased to $1.4 billion, up from $1.3 billion in 1Q24, but down slightly from
4Q24. Operating expenses in 1Q25 rose 2.5% to $1.21 billion, up from $1.18 billion in 1Q24 with utility costs up only 3% to $314
million. Most line items increased year over year with property taxes up 19% to $49 million, property operating costs up almost
7%, and G&A expenses up over 6% compared with a year ago.
As for first-quarter leasing activity, new bookings are expected to generate $242 million and renewal leases equal $147
million of annualized cash rent.
DLR’s first-quarter acquisition activity focused on North Carolina. Management is projecting development capital
expenses at DLR’s share of $3.0-$3.5 billion and dispositions of as much as $1 billion in 2025.
DLR acquired five land parcels in North Carolina during 1Q25. Three parcels purchased for $20 million are adjacent to
an existing site and part of a planned 400 MW campus. Digital Realty also purchased two other parcels near Charlotte for $16
million. At year-end, DLR sold an additional 15% interest in a German data center for $74 million with Digital maintaining a 65%
ownership interest. DLR and Blackstone also closed on the second phase of their hyperscale center development venture, which
includes complexes in Frankfurt and Virginia.
Along with 1Q25 earnings, management raised its 2025 core FFO guidance by less than 1% from the midpoints. The new
range of $7.05-$7.15 is up from $7.00-$7.10 per share. The high-end of revenue guidance is $5.9 billion for 2025.
MARKET DIGEST
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EARNINGS & GROWTH ANALYSIS
Rental revenues in 1Q25 increased 7.5% to $961 million, compared with $894 million in 1Q24, and $959 million in 4Q24.
While DLR had solid new bookings, much is placed in backlog. For the first quarter, over 1 MW centers outpaced demand
in the Americas, while new leases for over 1 MW space was outpaced by under 1 MW. New bookings in 1Q25 were $242 million,
which adds to a backlog of about $919 million. Based on segment, $54 million of new bookings were for 0-1 MW centers and
$172 million were for over 1 MW centers. Total rental rate change for new bookings was 5.6% on a cash basis. The time-lag to
commencement is about 10 months.
Of new 1Q25 leases, including interconnection, almost 78% were located in the Americas where over 1 MW space had
higher demand. EMEA accounted for about 12% of new leases with 0-1 MW contracts representing 87% of new business.
DLR’s operations enjoyed rapid growth in 2021, followed by higher costs and slower asset development in 2022 and
2023. While the company’s revenues increased 17% in 2023 over 2022, core FFO decreased 2%. The top line struggled last year
with 2024 earnings, up 2%, compared with the negative growth posted in 2023. We expect the company’s leasing momentum to
help improve earnings in the next 12 months, but we project that significant AI tailwinds will lag the economy longer than
previously anticipated. Our 2025 estimate implies about 5% growth over 2024 results, which is currently in the middle of the
average range for peer REITs under coverage. While the REIT has improving leasing statistics, improving foreign exchange
impact can be a stronger tailwind as new leases remain in backlog. The company had record backlog in 1Q25 with just under three-
fourths for non-joint venture assets.
While the company has been investing in megacenters, DLR had been more focused on non-hyperscale centers and
developing its global assets. This was advantageous, as smaller centers have recently had stronger leasing statistics. This focus
can be beneficial when expanding operations in developing countries, where smaller centers have higher demand. The Americas,
however, continue to see stronger demand for centers over 1 MW. Afterall, training in large language models, machine learning,
and high-level AI tasks, such as inference, requires significant physical infrastructure. This includes massively parallel computing
implementations with banks of CPUs and GPUs for application acceleration. While we see interconnection services aiding the
top line, we estimate that the data-center sector will require increased demand for new large-scale centers to drive significant
growth while maintaining economies of scale. We look for AI-driven demand to accelerate on a global basis, and expect Digital
Realty to participate in this strong growth. However, as we expect the AI boom to accelerate more slowly than originally
anticipated, with DLR’s earnings and revenue growth to gain strength by late 2025 and into 2026.
The company has been increasing its development pipeline, especially in Europe and in secondary markets. While the
return to asset development is a positive, the benefit will be outweighed in the near term by rising costs and slower stabilization.
Also of primary concern for our immediate outlook for DLR is its significant lag time with new contracts and new rates before
commencement. Lease timing has improved, but there remains a lag in lease commencement. In 3Q24, the average lag time for
contracts was 15 months, or until early 2026, between lease agreement and lease starts. As time has progressed, at the end of 4Q24,
the average lag time was six months. Along with 1Q25 results, management projected current average lag time around ten months.
The company’s current backlog for DLR is about $919 million.
The company has also increased sales of joint venture interest in several assets. The increased use of JVs will save some
costs but also slow revenue growth. Of new bookings at year-end 2024, about 85% were DLR’s share. We also note that FX has
been a primary headwind to DLR’s top line and FFO.
Many REITs will participate in sector trends that have historically followed interest rates. DLR and other data REITs
have tended to also trade in line with the tech sector and can also trade on news of changes in tech and wireless infrastructure
spending. In early 2023, data center stocks fell amid reports of weaker spending. This contrasts with many REITs that generally
trade as income-oriented stocks, which historically have responded favorably to lower interest rate environments.
For the near-term, once the economy improves and spending increases, DLR’s fundamentals should gain momentum.
As the decade progresses, we expect DLR to benefit from growing demand for secure space. It has a diversified global portfolio
and benefits from pass-through cost contracts with its tenants, which helps offset surging power and water costs. The company
has a balanced customer base, and as of the end of 2024, its top 20 customers have a weighted average remaining lease term of
about six years. The company also has a strong presence in a key data-center region in northern Virginia, although that market
appears to be reaching capacity. DLR continues to expand internationally, with a focus on high-growth, high-demand markets,
such as Africa and EMEA, which we see as a long-term positive.
MARKET DIGEST
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Core FFO growth continues outpace revenue growth. Reflecting, in part, the impact of FX and real estate transactions.
We are raising our 2025 core FFO estimate to reflect the better-than-expected 1Q results. Our revised 2025 core FFO estimate
is $7.10 per share, up from $7.05. Our 2026 estimate remains $7.40 per share.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on DLR is Medium on our five-point scale. Moody’s rates DLR’s debt at Baa2.
At the end of 1Q25, cash and equivalents were $2.3 billion, down from $3.9 billion at the end of 2024. The net investment
in real estate was $26.84 billion versus $26.76 billion at the end of 2024. Long-term debt totaled $14.7 billion, compared with
$13.96 billion at the end of 2024. The long-term debt/cap ratio at the end of 1Q25 was 41%, compared to 39% at year-end 2024.
The current ratio is below the average of 50% for Argus-covered REITs.
At the end of 1Q25, 83% of debt was in non-USD denomination. The weighted average maturity is 4.5 years with about
$2.4 billion of debt maturing by the end of 2026. Management has structured the company’s debt to support global expansion and
act as a foreign exchange hedge. The company has about $1.3 billion in debt maturing in 2025.
The REIT steadily increased its share count in 2024 while selling shares in each quarter, with about $5 million shares
sold in 4Q24. At the end of 1Q25, the diluted share count was about 343 million, versus just under 319 million shares at the end
of 1Q24.DLR last raised its quarterly dividend by 5% to $1.22 or $4.88 annually in March 2022. The current yield of about 3%
is below the average of 3.6% for Argus-covered data peers and the average of 4.0% for REITs in general. We are lowering our
2025 dividend estimate to $4.90, down from $4.92, and our 2026 estimate to $4.96, down from $5.00 per share.
MANAGEMENT & RISKS
Andrew Power, who formerly served as CFO, is the company’s president and CEO. He succeeded William Stein, who
was dismissed in December 2022. Matthew Mercer replaced Mr. Power as CFO in 2023.
Performance in the sector has struggled following slower spending by wireless providers. DLR faces risks associated
with acquisitions, expansion projects, and currency translation due to an expanding international footprint. However, the company
has hedged some of this risk by issuing non-U.S. debt. REITs generally face interest-rate risk, which may be exacerbated if
acquisitions are funded with floating-rate debt, or if existing debt matures and credit conditions are tight. High dividend yields
may cause REIT stocks to act more like bonds if interest rates move higher. DLR is also sensitive to trends in Technology stocks
in addition to fixed-income yields.
COMPANY DESCRIPTION
Digital Realty Trust is a real estate investment trust focusing on global cloud and carrier-neutral interconnected data
centers. DLR also develops data center platforms for businesses involved in cloud software, financial services, social media, and
mobile services. Digital Realty helps customers develop secure networks and cloud-neutral data center platforms, and was at the
forefront of the secular transition from on-premises data centers to cloud colocation centers. The REIT has fewer hyperscale
centers than its competitor, but is focusing on growing its larger-scale AI capabilities. It continues to expand through M&A, joint
ventures, and new development projects, while also recycling capital through asset sales.
DLR is based in Austin, Texas. At the end of 2024, it had about 2,700 MW of IT capacity and operates over 300 data
centers in 25 countries and over 50 global metropolitan markets. About 115 centers are in the U.S. About half of revenues at year-
end came from U.S. centers. The REIT faces high utility costs. Last year, utility expenses were almost one-quarter of revenues.
Another headwind is foreign exchange issues, as only about half of revenues were in U.S. dollars in 2024. Recent acquisitions
have included data center companies in Europe, Israel, and Africa. The shares are a component of the S&P 500 and DLR’s market
cap is $55 billion.
VALUATION
The shares are trading below the midpoint of their 52-week range of $130-$198 and could respond to ongoing news of
tech tariffs. Several key valuation metrics remain unfavorable to peers at current share levels. Based on our 2025 core FFO
estimate, the P/FFO multiple of 22.1-times is above the average of 19.3-times for data REIT peers and DLR’s own five-year P/
FFO of 19.4-times. The P/FFO multiple based on our 2026 estimate is 21.2-times which compares to 18.3-times for all REIT peers
under coverage. The DLR shares’ EV/EBIDTA multiple of 21-times also compares unfavorably with the average of 17-times for
REIT peers. The PEG multiple of 5.3-times is above the average for REIT peers of 4.9-times and below the average of 6.8-times
for data REIT peers. The dividend yield of about 3.05% is below the REIT peer average of 4%.
Given the uncertainty of growth projections, lack of dividend growth, and unfavorable valuation metrics our HOLD
rating seems appropriate.
On April 30, HOLD-rated DLR closed at $160.54, up $0.67. (Marie Ferguson, 4/30/25)
MARKET DIGEST
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MSCI INC. (NYSE: MSCI, $545.11)........................................................................................ BUY
MSCI: Pullback presents opportunity
*The company recently reported 1Q adjusted EPS of $4.00, up from $3.52 in the prior year and topping Street
expectations. Revenue rose 10% year over year to $746 million.
* Management has signaled confidence in its outlook with a recent double-digit dividend hike.
*Looking ahead, we expect low double-digit EPS growth, multiple expansion, and share-price appreciation as the
company continues to grow in its target markets.
* Our target price remains $660.
ANALYSIS
INVESTMENT THESIS
Our rating on MSCI Inc. (NYSE: MSCI) is BUY. MSCI is a large-cap financial services company focusing on passive
investing, analytics, and ESG and climate-related investing. It has an impressive track record, with double-digit annual growth
in both sales and EPS. We expect MSCI to benefit over time from global GDP growth, the increased popularity of passive
investment strategies, and the development of ESG and climate-based investing in developed and emerging economies. The
company also has opportunities to develop new products and raise margins, and to expand through targeted acquisitions. The
balance sheet is clean, and management has a history of focusing on shareholder returns through dividend growth and share
buybacks; the most recent dividend hike was 12.5% in early 2025. On valuation, the shares trade at a premium to the peer group
– and while they have rewarded investors over time with above-market and above-peer-average returns, they are susceptible to
sharp pullbacks on any earnings disappointment. Looking ahead, we expect low double-digit EPS growth, multiples expansion,
and share-price appreciation as the company continues to expand in its target markets. Our target price remains $660.
RECENT DEVELOPMENTS
Over the past year, MSCI shares have risen 14%, compared to a 9% advance for the S&P 500. Approximately 17.6%
of the shares are held in various ETFs, and the shares make up 4.3% of the iShares U.S. Broker-Dealers ETF IAI. The beta on MSCI
is 0.92. The company recently reported 1Q adjusted EPS of $4.00, up from $3.52 in the prior year and topping Street expectations.
Revenue rose 10% year-over-year to $746 million. The adjusted EBITDA margin was 57.1%, up from 56.4% in the prior-year
quarter. Along with the 1Q report, management reiterated its guidance for 2025. The company projects full-year free cash flow
of $1.400-$1.460 billion, capital expenditures of $115-$125 million and operating expenses of $1.405-1.445 billion.
EARNINGS & GROWTH ANALYSIS
MSCI has a record of solid long-term growth. It has increased adjusted EPS at a 14% CAGR over the past five years.
We note that approximately 97% of total revenue is recurring.
MSCI has four main operating segments: Index (57% of 1Q revenue), Analytics (23%), ESG and Climate (11%), and
Private Assets (9%). Recent trends and outlooks for these segments are discussed below.
The Index business includes the company’s Market-Cap Weighted, Custom Indices and Non-Market Cap Weighter.
Clients license these indices to create a wide range of financial products, including ETFs, mutual funds, insurance products, over-
the-counter derivatives, and listed futures and options. Index is the company’s most profitable business, with an adjusted EBITDA
margin in the mid-70% range. Management is targeting low double-digit revenue and adjusted EBITDA growth in this segment
over the long term.
In the Analytics segment, the company’s products offer institutional investors an integrated view of risk and return, and
help investors make better decisions. MSCI’s analytics portfolio includes Barra multifactor models; pricing models; methodologies
for performance attribution; RiskMetrics models for statistical analysis, such as VaR; and tools for security analysis, portfolio
optimization, back testing, and stress testing. Analytics is the second most-profitable business, with an adjusted EBITDA margin
in the high-40s percent range. Management is targeting high single-digit revenue and low double-digit adjusted EBITDA growth
over the long term.
The ESG and Climate group offers ratings, ESG data & solutions, ESG indices, climate indices, and analytics and
valuation tools. MSCI has been running ESG analytics and models for more than 30 years. This is currently the company’s fastest-
growing business. Management is targeting growth in the mid-to-high teens percent range for revenue and adjusted EBITDA in
this segment over the long term.
In the latest quarter, Index revenue rose 13% year over year. Growth in recurring subscription revenue was driven by
strong expansion from market-cap weighted Index products offset by a decline in non-recurring revenues. The Index run rate as
of March 31, 2025, was $984 million, up 9% year over year. The $78 million increase reflected a $57 million increase in the
recurring subscription run rate and a $13 million increase in the asset-based fees run rate.
MARKET DIGEST
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Analytics revenue rose 5% from the prior year in 1Q; this growth was from recurring subscriptions related to both Equity
Analytics and Multi-Asset Class products. The Analytics run rate as of March 31, 2025, was $708 million, up 7%.
Sustainability and Climate revenue rose 9% from the prior year. The $7 million increase was driven by strength in
recurring subscriptions related to ratings, climate and screening products. The Sustainability and Climate run rate as of March 31
was $352 million, up 10% year over year.
Private Assets revenue rose 5% to $67 million, driven by growth in Private Capital Solutions. The All Other- Private
Assets run rate as of March 31 was $273 million, up 7% year over year.
Moving to margins, the 1Q25 adjusted operating margin was up year over year, at 50.6%. Margins increased in the
Analytics and Index segments. EBITDA margins for Index, Analytics and ESG and Climate were 73.9%, 44.2% and 28.2%,
respectively.
Turning to our estimates, based on trends and forecasts for the financial markets, as well as management’s focus on
growth and margins, we are inching up our 2025 EPS estimate to $17.20 from $17.17 and our 2026 EPS estimate to $19.43 from
$19.40. Our long-term earnings growth rate forecast is 12%.
FINANCIAL STRENGTH & DIVIDEND
We rate the financial strength of MSCI as Medium, the midpoint on our five-point scale. The company scores above
average on key tests such as fixed-cost coverage and profitability, but debt levels are on the high side.
Cash and cash equivalents and short-term investments totaled $361 million at March 31. Debt totaled $4.6 billion, and
the total debt/adjusted EBITDA ratio (based on trailing 12-month adjusted EBITDA) was 2.6, below management’s target range
of 3.0-3.5.
MSCI pays a dividend. In January 2025, the company raised the payout by 12.5%. The current quarterly dividend is $1.80
per share, or $7.20 annually, for a yield of about 1.3%. We think the dividend is secure, and likely to grow. Our dividend estimates
are $7.20 for 2025 and $8.00 for 2026.
The company also has a share repurchase program. In 1Q, share repurchases totaled $275 million. Approximately $1.3
billion remains under the current authorization.
MANAGEMENT & RISKS
The chairman and CEO of MSCI is Henry Fernandez. He has been CEO for almost three decades. Prior to becoming CEO,
Mr. Fernandez was a managing director at Morgan Stanley. The CFO is Andrew C. Wiechmann, who previously served as chief
strategy officer.
MSCI is well positioned to benefit from long-term secular trends, including global GDP growth and the increased interest
in ESG and climate-based investing. The company has products to meet the needs of all participants in the investment process:
providers of capital (asset owners), users of capital (corporations), and financial intermediaries (banks, broker-dealers and
exchanges).
MSCI also has a growth-by-acquisition strategy. It continues to pursue targeted acquisitions and sees the opportunity for
operating-margin expansion. In January 2024, MSCI acquired Fabric, a wealth-technology platform specializing in portfolio
design, customization, and analytics for wealth managers and advisors. Share buybacks are also expected to boost EPS.
The company has also set long-term growth targets, including low double-digit revenue growth, low to mid-teens
EBITDA growth and an adjusted EBITDA margin in the high-50% range.
Investors in MSCI face numerous risks. The financial services industry is highly competitive, and may be affected by
a slowing economy or by rising interest rates, which could reduce demand for index investing or investment services and tools.
As a global company, MSCI faces currency risk. A stable or lower dollar would be a positive development for companies such
as MSCI. The company also faces regulatory risks. Its margins and multiples are high, so any EPS disappointment can lead to a
sharp sell-off in the shares.
COMPANY DESCRIPTION
MSCI is a leading provider of investment-decision support tools worldwide. Its line of products and services includes
indices, analytical tools, and ESG and climate research products. The stock is a component of the S&P 500. The company has
approximately 6,100 employees.
VALUATION
We think that MSCI shares remain attractively valued at current prices near $545. The shares have traded between $465
and $635 over the past 52 weeks, and are currently near the mid-point of the range.
On the fundamentals, the current forward P/E is 32, below the midpoint of the historical range of 20-50. The price/sales
ratio is 14.5, with a range of 10-26. We have examined a group of MSCI’s publicly traded peers, including, among others,
Morningstar, FactSet Research Systems, and S&P Global. MSCI trades at above-peer-average P/E and price/sales multiples, but
the dividend yield is also higher. Over the long term, we expect low double-digit EPS growth, multiple expansion, and a higher
share price as the company continues to expand in its target markets. Our 12-month target price remains $660, or 38-times forward
EPS. On April 30, BUY-rated MSCI closed at $545.11, up $4.65. (Kevin Heal, 4/30/25)
MARKET DIGEST
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QORVO INC. (NGS: QRVO, $71.67) ..................................................................................... HOLD
QRVO: Activist interest, but challenges persist
*Qorvo topped revenue and non-GAAP EPS expectations for fiscal 4Q25. Fiscal 4Q25 sales were down 8% year
over year. Non-GAAP profits were substantially above expectations and grew 2% year over year.
*QRVO shares surged late in 2024 and early in 2025 on reports that activist investor Starboard had taken a 7.7%
position in the company.
*Qorvo is positioned for long-term growth in its mobility, infrastructure, automotive, and aerospace markets, but
faces significant near-term challenges.
*Following stock strength on the activist news, QRVO shares continue to trade within 10% of our blended fair value
estimate – consistent with a near-term HOLD rating.
ANALYSIS
INVESTMENT THESIS
HOLD-rated Qorvo Inc. (NGS: QRVO) jumped 12% in a down market on 4/30/25 after modestly exceeding revenue
expectations and sharply beating the consensus non-GAAP EPS forecast for fiscal 4Q25. The company provided fiscal 1Q26
(calendar 2Q25) guidance perceived as positive, leading to the stock surge.
Revenue for fiscal 4Q25 declined 8% annually while non-GAAP EPS surprised with a 2% year over year gain. Adjusted
profits of $1.42 were well above the consensus forecast of $1.00, which was based on the company’s conservative non-GAAP
EPS guidance of $0.90-$1.10.
In January 2025, Qorvo filed a 13D form with the SEC indicating that Starboard Value LP has acquired a 7.7% position
in the company’s stock. The company’s competitive challenges persist and will not be easily remedied, given increased
competition from Qualcomm, Skyworks, and Broadcom in RF markets.
Qorvo’s mobility business benefits from rising content in Apple devices, the source of roughly 40% of revenue; the
company expects 10% growth in iPhone content in FY26. Other highlights in 4Q25 include record Aerospace-defense revenue
and significant growth in Ultrawideband for Automotive. On the downside, Qorvo is impacted by declines in the Android market
and plans to exit $150-$200 million of lower-margin Android business. Demand weakness and inventory digestion are unevenly
impacting Qorvo’s diversified end markets.
For fiscal 1Q26, revenue at the guidance midpoint would be down 13% on an annual basis and 11% on a sequential basis.
Based on profit guidance of $0.65 at midpoint, Qorvo’s non-GAAP EPS for fiscal 1Q26 is modeled to decline 25% year over year.
In our view, Qorvo is positioned for long-term growth in its mobility, infrastructure, and aerospace markets. Starboard
is likely to press for tighter cost containment that would benefit margins and may seek to exit one or more markets outside of mobile
devices. Existing challenges in front of Qorvo could now be compounded by the uncertain tariff environment.
We are reiterating our near-term HOLD rating on QRVO, which appears fairly valued at current levels, as well as our
long-term BUY rating. In the mobile-device semiconductor space, we recommend the shares of Broadcom, Qualcomm, and
Skyworks.
RECENT DEVELOPMENTS
QRVO is up 1% year-to-date in 2025, compared to a 16% decline for peers. QRVO fell 23% in 2024, compared to a 22%
gain for the peer group of Argus-covered semiconductor stocks and a 29% gain for the Philadelphia Semiconductor Index (SOX).
QRVO rose 24% in 2023, compared to a gain of 62% for the peer group; declined 42% in 2022, compared to a 33% drop for peers;
and fell 6% in 2021, compared to a 35% gain for peers.
For fiscal 4Q25 (calendar 1Q25), Qorvo reported revenue of $869 million, which was down 8% year over year and 5%
sequentially. Revenue came in toward the high end of management’s $825 million-$875 million guidance range and exceeded
the $850 million consensus estimate. Non-GAAP earnings for 4Q25 came to $1.42 per diluted share, up from $1.39 in the year-
earlier quarter. Adjusted EPS came in above the high end of management’s guidance of $0.90-$1.10 and well ahead of the
consensus non-GAAP EPS estimate of $1.00.
In mid-January 2025, Qorvo filed a 13D form with the SEC. This form signals that an investor who seeks to actively
participate in the company’s management or control has taken a meaningful position in the company’s stock. The 13D form
indicated that Starboard Value LP had acquired more than 7.28 million QRVO shares, representing a 7.7% position in the company
valued at around $500 million. A 13D form filed on 4/14/25 signaled that Starboard’s position had increased to 8.9%.
MARKET DIGEST
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Starboard has not revealed the nature of its plans for Qorvo, and the company has not issued a statement regarding the
ownership stake. Starboard Value, run by Jeffrey Smith, is a prominent activist firm that has taken positions and sought changes
at firms including Pfizer, News Corp., Smithfield Foods, Macy’s, and Commvault Systems.
Four months later, there has been no significant change in the board or in leadership at the management level. CEO Robert
Bruggeworth noted that during the March quarter, Qorvo achieved sequential revenue growth that was stronger than seasonal. The
company exceeded its margin guidance leading to a significant beat against both guidance and consensus on the bottom line.
Across Qorvo’s six served markets of automotive, consumer, aerospace-defense, industrial, enterprise, and mobility,
growth and margin targets are “anchored in a multi-year strategy.” In mobility, that strategy is focused on winning content with
its largest customer, Apple. In all product markets, Qorvo seeks to build on its core RF and power expertise to drive diversification
through CSG (Connectivity & Sensors Group) and HPA (High-Performance Analog).
Qorvo’s markets, management believes, are underpinned by global megatrends, which include vehicle electrification,
connectivity, mobility, sustainability, datafication, and AI. These trends are driving new functionality and new user experiences,
creating opportunities for Qorvo’s products and technologies.
Beginning in fiscal 2023, Qorvo introduced a new reporting structure consisting of three segments. The High
Performance Analog (HPA) group supplies radio frequency (RF) and power management solutions for infrastructure, aerospace
& defense, automotive, and other markets. Connectivity & Sensors Group (CSG) supplies systems and components supporting
WiFi, Bluetooth, Zigbee, cellular IoT, and multiple other standards. Advanced Cellular Group (ACG) provides radio frequency
(RF) solutions for smartphones, wearables, laptops & tablets, and other devices.
For fiscal 4Q25, High Performance Analog (HPA) revenue of $188 million (22% of total) rose 14% annually and 9%
sequentially. HPA generated a 31.3% operating margin in fiscal 4Q25, up from 19.1% in 4Q24.
After a down first half of FY25, strength in the second half enabled the HPA business to grow 11% for the full year –
a significant rebound from a 21% decline in FY24. Second-half FY25 growth was led by the timing of major aerospace-defense
contracts and by power management demand.
In HPA, design wins have been diversified across customers and markets and include large defense programs with multi-
year terms. Qorvo continues to experience relative strength in markets such as defense and power, offset by softness in consumer-
facing markets such as SSDs and battery-powered tools.
According to SVP and HPA President Philip Chesley, Qorvo’s D&A business has a $5 billion design win funnel with
a current run rate of about $400 million. The funnel is diversified across radar, communications, electronic warfare, and missile
applications. Foreign military sales represents a significant opportunity.
A major development for Qorvo in the High Performance Analog segment is expansion into and development of Active
Electronically Scanned Array (AESA) Radar, which replaces mechanically scanned radars. These new radars within defense and
aerospace applications demand more RF content and operate multiple beams and frequencies. In each AESA, Qorvo adds
beamforming ICs and power management ICs along with RF technology. Strong HPA growth is forecast to continue in FY26,
driven by aerospace-defense. For the long term, management believes HPA is positioned for double-digit revenue growth.
Connectivity and Sensors Group (CSG) revenue of $101 million (12% of total) declined 18% annually and 7%
sequentially. CSG posted an operating margin of negative 15.4%, compared with negative 12.4% in fiscal 4Q24. For all of FY25,
CSG grew 9% compared with a decline of 8% in fiscal 2024.
CSG continues to benefit from better supply availability in automotive and the transition to EVs and hybrids. Fiscal 4Q25
strength was likely driven by pull-forwards ahead of tariffs. Given high financing costs and unit prices, compounded by tariff fears,
the Automotive outlook is mixed. CSG end-market demand for WiFi and cellular IoT components has been soft due to ongoing
channel inventory normalization, but that process may be winding down. CSG is generating ongoing design activity across a
variety of applications, including smart home, precise location, indoor navigation, automotive connectivity and smart interiors,
and enhanced human-machine interfaces.
In connectivity and sensors (C&S), recent design wins span highly integrated IoT connectivity solutions and WiFi 7
front-end force-sensing touch sensors, along with new growth areas including ultra-wideband. Over time, Qorvo expects HPA
and C&S to contribute increasingly to growth, diversification, and margin expansion.
In the Connectivity and Sensors Group, Qorvo has identified key opportunities for growth within the automotive industry
and indoor navigation. Expansion opportunities in the automotive market include passenger safety and security. Qorvo technology
allows for passenger monitoring and “in-cabin micro-location,” meaning that it detects exactly where someone is in the car. This
is essential for child presence detection.
MARKET DIGEST
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In terms of security developments, next generation key fobs have adopted ultra-wideband technology, which Qorvo
provides to enhance car security. Also, once cars have a digital interface, drivers will be able to access their cars via a digital key
on their smartphone, without a key fob. On the indoor navigation front, Qorvo’s technology now has centimeter-scale accuracy.
This allows the technology to detect what side of a wall the user is on, and ultimately leads to navigational platforms working
efficiently indoors. Qorvo aims to have strong double-digit growth in the CSG segment.
Fiscal 4Q25 Advanced Cellular Group revenue of $580 million (67% of total) decreased 11% annually and 9%
sequentially from the holiday quarter, which is the second-strongest quarter seasonally for this business. The annual sales decrease
reflected sluggish global smartphone unit volumes, which offset improved channel inventory digestion within the Android
ecosystem. ACG posted an 18.9% operating margin in 4Q25, tightening from 20.5% a year earlier in 4Q24.
According to IDC, global smartphone shipments grew 1.5% year over year in calendar 1Q25, following similar single-
digit growth in 1Q24 through 4Q24. Mobile device shipments totaled 304.9 million units for 1Q25, up from 300.3 million units
in 1Q24.Global smartphone unit shipment trends for the Android ecosystem were mixed, as Chinese vendors Xiaomi grew 2.5%
and Vivo grew 6% — both faster than the market overall. Android leader Samsung, however, posted just 0.6% growth, while
Oppo’s unit sales were down 6.8%. Apple iPhone units increased 10% and its market share slipped to 19.0% in 1Q25 from 17.5%
a year earlier.
SVP and GM Frank Stewart of the Advanced Cellular Group stated Qorvo captured new content across multiple vendors
for the fall 2025 new product launch. Pricing pressures are “prevalent” in the mass market, one reason Qorvo is exiting lower-
tier Android. The company is competitive in the premium flagship tier for Android, with “significant” content wins in Galaxy S25
and other Samsung models.
CEO Bruggeworth reaffirmed that HPA and CSG are expected to grow in double-digit percentages in fiscal 2026. The
outlook for ACG is less certain, given plan to exit lower-tier Android along with relative weakness and political hurdles in key
Android markets such as China.
Activist Starboard has yet to fully reveal its intentions. We believe the activist will demand that Qorvo focus on the mobile
device market and focus its involvement in industrial, automotive, defense and other markets to those with the most near-term
promise. While that would likely lead to margin improvements in the intermediate term, major divestitures would be disruptive
to ongoing operating strategy as it would represent a fundamental break from current management’s “Land and expand” strategy.
Additionally, a major overhaul and downsizing of markets served will not immediately solve the core issue of increased
competition in the RF space for mobile devices, particularly from deep-pocketed companies such as Broadcom and Qualcomm,
and loss of market share in Android as that market shifts toward entry-tier. We are reiterating our near-term HOLD rating on
QRVO, which appears fairly valued at current levels, as well as our long-term BUY rating.
EARNINGS & GROWTH ANALYSIS
For fiscal 4Q25 (calendar 1Q25), Qorvo reported revenue of $869 million, which was down 8% year over year and 5%
sequentially. Revenue came in toward the high end of management’s $825 million-$875 million guidance range and exceeded
the $850 million consensus estimate.
The non-GAAP gross margin was 45.9% in fiscal 4Q25, vs. 43.7% in fiscal 3Q25 and 42.6% a year earlier. The non-
GAAP operating margin was 17.5% in fiscal 4Q25, vs. 14.0% in fiscal 3Q25 and 15.6% a year earlier.
Non-GAAP earnings for 4Q25 came to $1.42 per diluted share, up 2% from $1.39 in the year-earlier quarter. Adjusted
EPS came in above the high end of management’s guidance of $0.90-$1.10 and well ahead of the consensus non-GAAP EPS
estimate of $1.00.
For FY25, revenue of $3.72 billion decreased 2% from $3.77 billion in FY24. Non-GAAP diluted EPS of $5.77 fell 7%
from $6.22 for FY24.
For fiscal 1Q26, a seasonally weak quarter, management projects revenue of $750 million-$800 million. At the $775
million guidance midpoint, revenue would be down 13% annually and 11% sequentially. Management expects a non-GAAP gross
margin of 43% and non-GAAP EPS of $0.50-$0.75 for 1Q26, which at the midpoint of $0.625 would be down 28% from fiscal
1Q25. Given the lower-tier Android exit and anticipated pressures in ACG, we are lowering our FY26 non-GAAP EPS
projection to $5.11 per diluted share from $6.12. We are implementing a preliminary non-GAAP EPS forecast for FY27 of $6.45.
Our five-year annualized EPS growth rate forecast for QRVO is 9%.
MARKET DIGEST
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FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on Qorvo is Medium-High. In August 2021, Fitch initiated a BBB+ rating on Qorvo debt.
Standard & Poor’s credit services upgraded Qorvo to investment grade in April 2021. Proceeds from sale of the SiC JFET business
were realized in January 2025 and are not reflected in the balance sheet as of 12/31/24.
Cash, equivalents, and marketable securities were $1.02 billion at the end of fiscal 2025. Cash was $1.03 billion at the
end of FY24, $809 million at the end of FY23, $973 million at the end of FY22, $1.4 billion at the end of FY21, and $715 million
at the end of FY20.
Qorvo had debt of $1.55 billion at the end of fiscal 2025. Debt was $1.55 billion at the end of fiscal 2024, $2.05 billion
at the end of FY23, $2.15 billion at the end of FY22, $1.75 billion at the end of FY21, and $1.57 billion at the end of FY20.
The debt/total capitalization ratio was 30.8% at the end of fiscal 2025. Debt/cap was 34.4% at the end of FY23, 32.1%
at the end of FY22, 27.3% at the end of FY21, and 26.7% at the close of FY20.
In November 2022, Qorvo’s board announced a $2 billion share repurchase authorization. The program includes the
remainder of the prior $2 billion authorization implemented in May 2021. The company spent $125 million to repurchase shares
in fiscal 1Q25.
Qorvo does not pay a dividend. Given the company’s focus on growing its markets and reinvesting cash flow in the
business, we do not expect Qorvo to implement a dividend in the medium term.
MANAGEMENT & RISKS
CEO Robert Bruggeworth has been in that role since January 2015. Grant Brown has been CFO since August 2022 after
serving on an interim basis. Ralph G. Quinsey is the chairman of the board.
The activist stake by Starboard adds multiple risks. If Starboard exits its position on the perception that it cannot effect
change, that could cause a plunge in the stock price. If Starboard succeeds in shaking up Qorvo, the company likely faces
significant shifts in operating strategy and direction and may see new management. Executing on planned changes will take time
and could cause customer turbulence and defections. Finally, as long as Qorvo is an activist target, the stock will trade more on
perceptions than on fundamentals.
Operating results fluctuate and depend on developing new products and achieving design wins amid short product life
cycles and rapidly changing customer requirements. The company depends on several large customers, most notably Apple, for
a substantial portion of revenue. It risks a loss of revenue if contracts with large technology customers are canceled or amended.
Outside of the mobile device business, Qorvo does business with the U.S. Government and defense and aerospace
contractors. That company would be at risk if those contracts were to be canceled or delayed, or if defense spending is reduced.
The company’s growth-by-acquisition strategy also places pressure on management to successfully integrate acquired companies.
COMPANY DESCRIPTION
Qorvo Inc. is a semiconductor company that develops and commercializes technologies and products for wireless and
wired connectivity worldwide. Qorvo is a leading provider of RF solutions and is leveraging its strong position in mobility into
diversified end markets. The company sells its products directly to original equipment manufacturers and original design
manufacturers, as well as through a network of sales representative firms and distributors. The company operates through three
segments: High-Performance Analog, Connectivity & Sensors Group, and Advanced Cellular Group.
VALUATION
QRVO trades at 12.3-times our FY26 non-GAAP EPS estimate and at 9.7-times our FY27 forecast. The two-year average
forward P/E of 11.0 is below the average multiple of 14.3 over the past five years (FY21-FY25). The two-year forward relative
P/E of 0.59 is below QRVO’s trailing five-year relative P/E of 0.70. Historical multiples were assigned in a period of clear growth,
whereas Qorvo posted well-below-peak earnings in FY24 and did not return to growth in FY25. Our comparable valuation range
for QRVO is around $90 a share, above current prices.
Compared with its peer group, QRVO trades at discounts on absolute P/E, relative P/E, EV/EBITDA, and at premiums
on price/sales and PEG. Given the tech sector selloff, QRVO’s peer value of around $78 has declined. Our forward-looking
discounted free cash flow model points to a value in the low $100 range. Calculated fair value in our blended model is around $96,
above current levels.
Despite the activist presence, investors remain skeptical of Qorvo’s intermediate-term prospects based on prospects for
weakening in ACG and potential trade restrictions on Asian customers. On balance, we believe that a near-term HOLD rating is
prudent. Our long-term rating is BUY.
On April 30, HOLD-rated QRVO closed at $71.67, up $9.02. (Jim Kelleher, CFA, 4/30/25)
MARKET DIGEST
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SNAP INC. (NYSE: SNAP, $7.96) ........................................................................................ HOLD
SNAP: Withholds guidance and plans to lower costs; reiterating HOLD
*Snap posted 1Q25 sales and non-GAAP EPS ahead of consensus expectations. Given economic uncertainty, the
company withheld guidance for 2Q25, sending the stock sharply lower.
*Sales rose 14% annually, as direct response (DR) advertising revenues improved in the quarter. Non-GAAP EPS
of $0.08 more than doubled from $0.03 a year earlier.
*Snap in 1Q25 grew its user count by 9% annually and by 2% sequentially from 2Q24, although most growth
continues to come from Rest of World. Monetization per user grew in mid-single-digit percentages, sustaining
growth from the second half of 2024.
*Given intensifying competition from a refocused Meta and from TikTok, the absence of company guidance, and
the perception that Snap is a niche target for digital ad spending, we believe that a HOLD rating remains
appropriate.
ANALYSIS
INVESTMENT THESIS
HOLD-rated Snap Inc. (NGS: SNAP) plunged 17% in a down market on 4/30/25, after the selfie and social media
platform delivered revenue ahead of expectations for 4Q24 and non-GAAP EPS that more meaningfully beat Street expectations.
Revenue of $1.36 billion was up 14% year over year and just ahead of the $1.35 billion consensus forecast. Non-GAAP EPS of
$0.08 more than doubled from $0.03 a year earlier and beat consensus by four cents.
The company broke with past practice of providing top-line and adjusted EBITDA guidance for the current quarter due
to uncertainty about the intermediate-term microenvironment. Management instead provided limited directional guidance for all
of 2025. The company intends to reduce operating expenses and anticipates lower stock-based compensation, which signals
internal expectations for slowing business activity. Willingness of other companies to describe their trade war strategies makes
Snap’s omission all the more glaring.
Snap in 1Q25 grew its daily active user (DAU) count by 9% annually from 1Q24 and by 2% sequentially from 4Q24.
Nearly all growth continues to come from Rest of World, which has low monetization per user compared with the Americas and
Europe. Monetization per user grew in mid-single-digit percentages, sustaining growth from the second half of 2024.
Snap was unable to fully participate in broad digital-advertising recovery in 2024 perhaps due to its relatively small social
media footprint and perception that the company serves a niche market whose participants are several years away from their prime
spending years. The bulk of digital advertising dollars appears to be directed at much bigger platforms with vastly more users.
The new administration in Washington appears prepared to postpone any ban on TikTok until the asset can be sold to a U.S. buyer.
Snap is seeking to lure creators and influencers with revenue-sharing strategies; the payoff in actual advertising revenue
growth is slowly materializing. Snap has pledged to boost DAUs in its most lucrative markets of North America and Europe, but
those markets are growing slowly and in any quarter at risk of declining.
We would like to see Snap deliver consistent ad-spending strength before becoming more positive on the stock. Although
SNAP, trading below $8, is well below pandemic peak prices, we would not upgrade the shares on price alone. As we monitor
the digital advertising market and the allocation of spending among the various platforms, we believe that a neutral stance on SNAP
remains appropriate.
RECENT DEVELOPMENTS
SNAP is down 28% year-to-date in 2025, while close peers are down 6%. SNAP dropped 36% in 2024, while the peer
group of Argus-covered social media, cloud, and internet companies advanced 26%. SNAP was up 8% in 2023, while close peers
soared 70%; declined 81% in 2022, while peers fell 43%; fell 6% in 2021 versus a gain of 17% for close peers; and rose 207%
in 2020, while immediate peers rose 89%.
For 1Q25, Snap reported revenue of $1.36 billion, which was up 14% year over year and down a seasonally normal 14%
sequentially from the peak quarter of 4Q24. Sales were above the $1.345 billion midpoint of management’s $1.33 billion-$1.36
billion guidance range and topped the $1.35 billion consensus estimate. Snap posted non-GAAP EPS of $0.08 per share in 1Q25,
more than doubling from $0.03 per share a year earlier; EPS was down $0.08 sequentially from $0.16 for seasonally strong 4Q24.
Non-GAAP earnings doubled 1Q25 consensus expectations of $0.04. Snap guides on adjusted EBITDA and does not provide
explicit non-GAAP EPS guidance on a quarterly or annual basis.
MARKET DIGEST
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SNAP shares plunged 15% following the company’s results release due to the company’s caution on the intermediate-
term macroeconomic environment. In its usual quarterly letter to investors, management stated that it would not be providing its
usual revenue and adjusted EBITDA guidance for 2Q25 because of a lack of near-term visibility. Specifically, the company stated
that it is not clear how macroeconomic conditions may evolve in the months ahead. The uncertain macroenvironment has the
potential to impact advertising demand more broadly.
The company also pointed to “headwinds” at the beginning of the current June 2025 quarter. Management believes it
is prudent to balance its level of investment with realized revenue growth. Snap has reduced its expectations for full-year 2025
operating expenses to $2.65-$2.70 billion from a previous estimate of $2.70-$2.75 billion. The company also anticipates that 2025
stock-based compensation (SBC) will total in the $1.13-$1.16 billion range, down from a prior forecast of $1.15-$1.20 billion.
The company stated that it lacks clarity in the current environment. But these spending reductions indicate that, internally
at least, management anticipates a slowing pace of business activity. R&D accounted for about 63% of 1Q25 SBC expense, by
far the highest of any operating cost category. The reduction in planned SBC likely means less investment in software resources
to advance the company’s growth platforms.
CEO Evan Spiegel stated that in 1Q25, Snap surpassed 900 million monthly users (MAU) for the first time in company
history. He attributed mid-teens annual revenue growth to progress with direct-response advertising solutions, continued success
driving performance for small- and medium-sized businesses, and growth of Snapchat+ subscriptions.
Snap has prioritized growing its Direct Response (DR) advertising revenue, which grew 14% year over year in 1Q25 after
growing 16% annually in 2024, according to the company. Total advertising revenue of $1.21 billion in 1Q25 grew 9% year over-
year. Other or non-advertising revenue, which is primarily driven by Snapchat+, increased 75% year over year to reach $152
million. Snapchat + grew from seven million users at the end of 2023 to 14 million at year-end 2024; the company did not update
subscriptions as of 1Q25.
For 1Q25, Snap’s DAUs rose 9% annually, or by 38 million users, to 460 million. DAUs were up 2%, or by 7 million
users, on a sequential basis. Sequential DAU growth averaged between 2% and 3% in all quarters in 2023 and 2024, after averaging
4%-plus in 2022.
North America DAUs (22% of total) were down 1% year over year and sequentially; this region posted sequential DAU
growth (2% in 2Q23) in just one of the past eight quarters. At 99 million users as of March 2025, Snap’s North America DAUs
have been little changed in the 100 million range since mid-2022.
European users (22% of total) were up 3% year over year and unchanged sequentially, at 99 million. The best growth,
as usual, was in RoW (57% of users), where DAUs of 262 million rose 16% year over year and 3% on a sequential basis. RoW
DAUs rose by 36 million from the prior year and by eight million from the prior quarter.
On a regional basis, North America remains the primary revenue contributor. For 1Q25, North American revenue of $832
million (61% of total) was up 12% year over year. European revenue (16% of total) was up 14% year over year to $224 million.
RoW revenue of $308 million (23% of total) was up 20% annually. RoW was the only region to post sequential revenue growth
from seasonally strong 4Q24, rising 2% quarter over quarter in 1Q25.
With total revenue rising more rapidly than DAUs, average revenue per DAU (ARPU) reached $2.96, up 5% year over
year and down 14% sequentially in a seasonally normal pattern from 4Q24. This marked a fourth straight quarter of annual ARPU
growth following a seven-quarter string, from 2Q22 through 4Q23, of consecutive annual declines in ARPU.
Regional ARPU is still dominated by North America. North American ARPU of $8.41 increased 13% annually and
declined 14% sequentially from 4Q24. Also on a regional basis, European ARPU of $2.26 was up 11% annually. RoW ARPU
of $1.17 was up 3% year over year. RoW has long been experiencing strong growth in users; Snap has been doing a better job
monetizing that growth, but that momentum slowed in 1Q25.
The cost of revenue per user (CoRPU) rose 3% annually to $1.38 per user. The per-user profit margin (ARPU minus
CoRPU) was $1.58 per DAU in 1Q25, up 7% from $1.48 in 1Q24.
Even while navigating new headwinds, Snap is focused on key initiatives. Two new ad placements, Sponsored Snaps
and Promoted Places, enable advertisers to connect with the Snap community in unique and personalized ways. Snap is looking
to improve its go-to-market by providing advertisers with actionable insights and introducing automated campaign-optimization
tools. Other efforts include offering a simplified Snapchat experience to enhance usability and grow audience, advancing machine
learning infrastructure, and promoting the latest iterations of Spectacles and Lenses.
MARKET DIGEST
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Snap has identified three initiatives that it sees as essential to long-term success. The company is continuing to evolve
its machine learning models to drive more ad interactions across its platform. The team is working to “unify the content experience”
across Spotlight and Stories to improve the user experience and deepen engagement.
The third initiative is shifting more focus toward user growth in its “most highly monetizable geographies,” including
North America and Europe. This third strategy is essential, given tepid user growth in Europe and North America. Despite that
third strategic pillar, most growth in users and ad dollars in recent quarters has come in the Rest of World (RoW) market.
There is uncertainty in the outlook, and for that reason Snap decided to withhold quarterly guidance. We note, however,
that other Information Technology and Communication Services companies in Argus coverage have detailed their global
footprints and proactive strategies to navigate the evolving tariff and trade war environment. Sanmina and Corning are two recent
examples of companies that detailed their global footprints and provided strategies to mitigate geopolitical and macroeconomic
risk. Both companies also provided their standard quarterly guidance. Willingness of other companies to describe their trade war
strategies makes Snap’s omission all the more glaring.
Investors have long regarded Meta’s Instagram as Snap’s chief rival, but TikTok has grown users in the U.S. faster than
any competing social media platform. TikTok’s Chinese owners have long been suspected of harvesting global user data and
providing it to China’s military and intelligence agencies. Following passage of the Foreign Adversary Controlled Applications
Act, owner ByteDancer was told to make a “qualified divestiture” of TikTok or face a total ban in the U.S. as of January 19, 2025.
The Trump Administration has granted TikTok an extension to the ban and will likely continue to do so until a U.S. buyer steps
forward. Hopes that Snap would benefit from a TikTok ban have now faded.
Snap may struggle to fully participate in the digital advertising recovery seen on the Meta sites and elsewhere. SNAP
trades at about 10% of its peak pandemic level in the mid-$80s. We are not inclined to upgrade SNAP on price alone, however,
given ongoing competition for digital ad dollars and challenges in Snap’s advertiser markets, compounded by the absence of the
usual topline guidance. We would like to see sustained ad-spending strength from Snap and DAU growth in developed markets
before becoming more positive on the stock.
EARNINGS & GROWTH ANALYSIS
For 1Q25, Snap reported revenue of $1.36 billion, which was up 14% year over year and down a seasonally normal 14%
sequentially from the peak quarter of 4Q24. Sales were above the $1.345 billion midpoint of management’s $1.33 billion-$1.36
billion guidance range and topped the $1.35 billion consensus estimate.
The non-GAAP gross margin was 53.3% in 1Q25 vs. 57.0% in 4Q24 and 52.2% a year earlier. The non-GAAP operating
margin was 6.7% in 1Q25 vs. 17.4% in 4Q24 and 1.9% a year earlier.
Snap posted non-GAAP EPS of $0.08 per share in 1Q25, more than doubling from $0.03 per share a year earlier; EPS
was down $0.08 sequentially from $0.16 for seasonally strong 4Q24. Non-GAAP earnings doubled 1Q25 consensus expectations
of $0.04. Snap guides on adjusted EBITDA and does not provide explicit non-GAAP EPS guidance on a quarterly or annual basis.
Full-year 2024 revenue was $5.36 billion, up 16% from $4.61 billion in 2023. Non-GAAP earnings for 2024 were $0.29,
up in triple digit percentages from $0.09 per diluted share in 2023.
Snap has discontinued its usual top-line and adjusted EBITDA guidance indefinitely given the uncertain environment.
Snap has reduced its expectations for full-year 2025 operating expenses to $2.65-$2.70 billion from a previous estimate of $2.70-
$2.75 billion. The company also anticipates that 2025 stock-based compensation (SBC) will total in the $1.13-$1.16 billion range,
down from a prior forecast of $1.15-$1.20 billion.
We are lowering our 2025 non-GAAP earnings estimate to $0.33 per diluted share from $0.37. We are lowering our
preliminary non-GAAP EPS projection for 2026 to $0.45 per diluted share from an initial $0.49. We regard our estimates as
dynamic and expect them to remain fluid. Our long-term annualized EPS growth rate forecast is 10%.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength ranking on Snap Inc. is Medium. Snap, which had been a user rather than a generator of cash flow,
swung to positive free cash flow in 2021. As it has expanded, the company has levered up.
Snap had cash of $3.21 billion at the end of 1Q25. Cash was $3.38 billion at the end of 2024, $3.54 billion at the end of
2023, $3.74 billion at the end of 2022, and $3.77 billion at the end of 2021.
Debt was $3.58 billion at the end of 1Q25. Debt was $3.61 billion at the end of 2024, $3.82 billion at the end of 2023,
$3.74 billion at the end of 2022, $2.25 billion at the end of 2021, and $1.71 billion at the end of 2020. Most debt is in the form
of convertible senior notes.
Net debt was $231 million at year-end 2024 and $205 million at year-end 2023. Net cash was $197 million at year-end
2022, and $1.44 billion at year-end 2021.
MARKET DIGEST
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Cash flow from operations was $413 million in 2024. Cash flow from operations was $247 million in 2023, $185 million
in 2022, and $293 million in 2021. Cash use from operations was $167 million in 2020.
In October 2024, Snap announced a stock repurchase authorization of up to $500 million of its Class A shares. Previously,
in October 2022, Snap announced a stock repurchase authorization of up to $500 million of its Class A shares. In February 2021,
it filed a mixed shelf registration, giving it the ability to issue an unspecified amount of various equity and debt classes and
providing additional financial flexibility.
Snap Inc. does not pay a dividend, and we do not expect a dividend in 2025 or 2026.
MANAGEMENT & RISKS
Co-founder Evan Spiegel is the company’s CEO, while co-founder Robert Murphy is chief technology officer; both are
directors. Derek Andersen is CFO; Rebecca Morrow is chief accounting officer. Other officers include Chief Communications
Officer Julie Henderson and SVP of Engineering Eric Young.
A main risk for Snap, as for other social media companies, is the possibility of a general economic downturn and a
corresponding dip in advertising spending. We believe that Snap has the financial strength, market leadership, and growth
characteristics to weather such a storm and emerge stronger.
Risks facing Snap also include new competitive offerings, such as the Stories clone offered by Meta’s Instagram and the
TikTok platform. Other risks include the dependence of users, advertisers, and partners on engagement by DAUs; reliance on
advertising for substantially all revenue; and a history of losses.
Snapchat relies on Google Cloud for computing, storage, bandwidth, and other services. Potential disruption of Google
Cloud could materially impact the usability of the company’s core product.
In addition, it should be noted that Snapchat does not have a presence in China. There is a risk that it may never be able
to enter the Chinese market.
The capital structure may also present a risk to common shareholders. Class A common shareholders — holders of the
only publicly available class of shares — have no voting power. Evan Spiegel and Robert Murphy hold 44.4% of voting control.
COMPANY DESCRIPTION
Snap operates the social networking site Snapchat, which allows users to post, view, and interact with videos and still
images. Snap has added text-, video- and voice-based calling between users. The company sells advertising in the form of
sponsored geofilters, publisher stories, snap ads shown between user stories, and sponsored Lenses. Given the richer context and
information furnished by images, Snap’s goal is to reinvent the camera to improve how people live and communicate.
VALUATION
Snap has been mostly unprofitable in recent years, and the company’s ability to sustain non-GAAP profitability has been
uneven. SNAP trades at a two-year forward P/E of 23.7-times, compared with a historical (2021-2024) P/E of 117.3. On a price/
sales basis, SNAP, at a two-year forward multiple of 2.3, is trading at less than one-third of its five-year average P/S multiple of
12.1. On historical comparable metrics such as P/E, price/book, and price/cash flow, we calculate a value for Snap in the $30s,
once again in a falling trend.
Peer growth valuation points to a value of about $11, in a long-term declining trend based on Snap’s high and rising
valuations. Our discounted free cash flow model renders a terminal value for SNAP in the mid-teens, in a declining trend. Our
blended valuation model points to a value in the mid-teens, above current prices but in a clearly declining trend.
Although SNAP is trading well below pandemic peak prices in the $80s, we will not upgrade the shares on price alone.
We would like to see Snap deliver consistent ad-spending strength and grow its DAUs in mature, high-ARPU markets before
becoming more positive on the stock. As we monitor the digital advertising market and the allocation of spending among the
various platforms, we believe that a neutral posture remains appropriate.
On April 30, HOLD-rated SNAP closed at $7.96, down $1.13. (Jim Kelleher, CFA, 4/30/25)
MARKET DIGEST
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STARBUCKS CORP. (NGS: SBUX, $80.05) ........................................................................... BUY
SBUX: Rewards program and workforce training likely to accelerate growth
*The company’s emphasis on digital improvements, brand marketing, and fewer sales promotions offer promise,
in our view.
*Looking ahead, menu simplification and store remodeling are likely to increase customer traffic and raise same-
store sales.
* We are leaving our FY25 EPS estimate at $3.18 and keeping our FY26 estimate at $3.80 per share.
*Based on an above-average dividend yield, the company’s solid prospects and the elimination of its share buyback
program in favor of unit expansion, our long-term rating is BUY.
ANALYSIS
INVESTMENT THESIS
We are reiterating our BUY rating on Starbucks Corp. (NGS: SBUX) and lowering our target price to $95 from $115.
The company’s emphasis on digital improvements, its Rewards program, brand marketing, and fewer sales promotions offers
promise, in our view. Looking ahead, menu simplification and store remodeling are likely to increase customer traffic and raise
same-store sales.
Based on an above-average dividend yield, the company’s solid prospects, and the elimination of its share buyback
program in favor of unit expansion, our long-term rating is BUY.
RECENT DEVELOPMENTS
On April 29, Starbucks posted fiscal 2Q25 operating earnings of $0.41 per share, down from $0.68 in the prior-year period
and below the consensus estimate of $0.49. The earnings decline reflected the company’s efforts to simplify its menus, investments
in workforce training and store design. However, we expect these efforts to drive future growth. Reflecting the addition of 213
net new stores during the quarter, revenue rose 2.3% to $8.8 billion, driven by higher average tickets in both domestic and
international markets. Revenue missed the consensus estimate of $8.84 billion.
Global comps fell 100 basis points, driven by 2% lower customer traffic, offset in part by 1% higher prices.
Geographically, comps fell 1% in the Americas, driven by a 3% increase in the average ticket and 4% lower customer traffic. The
International division, which combines EMEA and China/Asia Pacific, saw comps rise 2%. International results were hurt by
conflict in the Middle East and customers spending less on expensive coffee. The comp increase reflected a 3% increase in
customer traffic and a 1% decline in the average ticket. In China, same-store sales were unchanged, reflecting a 4% increase in
customer traffic and 4% lower average ticket.
The adjusted operating margin contracted 460 basis points to 8.2% from 12.8% a year earlier. The decline reflected higher
product and distribution expenses, and store operating expenses, as well as increased depreciation and amortization, offset in part
by lower licensed store costs. The consensus estimate had called for an operating margin of 9.4%.
The diluted share count rose by 5 million from the prior-year period to 1.14 billion.
As discussed in a previous note, in FY24, revenue rose 50 basis points to a record $36.2 billion, with same-store sales
down 2%. Full-year EPS fell to $3.31 from $3.55 in FY23.
EARNINGS & GROWTH ANALYSIS
Starbucks’ three divisions consist of Channel Development, International, and North America. The North America unit
contributes nearly three-fourths of sales and comprises company-operated and licensed stores sales in North America and Canada.
The International division makes up more than a fifth of total sales, and includes the Asia-Pacific, China, Europe, the Middle East,
and Latin America regions. The company’s Channel Development segment contributes 5% of total sales, through sales of coffees,
single-serve products, and ready-to-drink beverages.
In FY25, driven by improved operational efficiency (4 minutes or less per order) and increased spending on store
renovations, we are leaving our EPS estimate at $3.18. We are keeping our FY26 estimate at $3.80 per share, implying growth
of more than 19% from our FY25 estimate.
MARKET DIGEST
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FINANCIAL STRENGTH & DIVIDEND
We rate Starbucks’ financial strength as High, our top ranking. The adjusted operating margin was 8.2% in fiscal 2Q25,
down from 12.8% a year earlier due to higher G&A, and significantly higher store operating expenses and depreciation and
amortization expenses. Interest expense fell to $127 million in fiscal 2Q25 from $141 million in fiscal 2Q24.
The company’s long-term debt was approximately $13.3 billion at the end of fiscal 2Q25, down from $14.3 billion at
the end of 4Q24.
In April 2020, management secured an additional $5.25 billion in short- and long-term funding. At the end of fiscal 1Q25,
Starbucks had just over $3.01 billion in cash, cash equivalents, and short-term investments, down from $3.54 billion at the end
of fiscal 4Q24.
In September 2023, SBUX raised its quarterly dividend by 7.5% to $0.57 per share, or $2.28 annually. On September
10, 2024, SBUX raised its dividend 7.0%, to $0.61 per share, or $2.44 annually. Our dividend estimates are $2.48 per share for
FY25 and $2.65 for FY26. The current yield is about 3.1%.
MANAGEMENT & RISKS
In August 2024, Starbucks appointed Brian Niccol as CEO and chairman. Rachel Ruggeri remains CFO.
Efforts by McDonald’s to sell gourmet coffee and aggressive expansion by Dunkin’ and even Tim Hortons could hinder
Starbucks’ growth. The price of SBUX shares usually reflects the market’s expectations for high growth and could drop sharply
if the company reports disappointing earnings or same-store sales. In the U.S., unit growth could also reach the point where new
locations cannibalize sales at existing stores. In addition, the company’s international expansion plans could prove overly
ambitious. Finally, increases in food and beverage costs could reduce margins and earnings.
COMPANY DESCRIPTION
Starbucks is a leading retailer of fresh-brewed coffee and branded merchandise. Its brands include Starbucks, Tazo Tea,
and Frappuccino. With a market cap of about $96.4 billion, SBUX shares are generally considered large-cap growth.
VALUATION
SBUX shares were down 6% on April 30, 2025, as investors appeared to worry that recovery would take longer than
anticipated. We think that the sell-off has created a buying opportunity. Given efforts to increase customer traffic and open new
stores, we believe the shares are undervalued. At current prices, our target price, if achieved, offers investors the prospect of a more
than 17% total return including the dividend.
On April 30, BUY-rated SBUX closed at $80.05, down $4.80. (John Staszak, CFA, 4/30/25)
MARKET DIGEST
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