In this article, we present three stocks from companies that are investing in Web3 technology. For each option, we discuss the latest financial results and a valuation perspective. Once upon a time, our fathers worked in factories. Now, we work on our computers. The companies had a solid physical infrastructure, but now they also have a digital one. Many of our friends are online. Payment can be done almost anywhere to anyone. A smartphone isn’t only equipment, but an extension of yourself. It looks like the Metaverse is already here and there is no turning back. And so does Web3. Companies are investing in Web3, but are the stock prices following? Let’s find out.
What is Web3?
The concept of Web3 represents the evolution of the internet by adding key features like decentralization to the existing Web 2.0. Web 1.0 (1990 – 2004) was based on read-only which means that the early web only allowed the simple search-read of information.
Different from Web 1.0, Web 2.0 consists of Read-Write and it has been around for 18 years (2004 – present). Not only content but also platforms have been provided to users (e.g: Orkut, Facebook, Instagram, Twitter). This advancement set the search for information to a higher level than never seen before.
Web 3 was born in Ethereum strengthened by the core ideas to be decentralized, permissionless, trustless, and native payment ready. The “internet of the future”, as some may say, will have the ability to be read-write-own instead of read-write as it is now.
If you want to know more about Web3, make sure to check “The Power of Web3”, “Why is Web3 important?”, and “Introduction to Web3“.
The USA stock market is a big place with over 3,000 stocks. Many companies from different Sectors and Industries can be investing in Web3. This kind of information can be found in their business plan which is periodically published. Commonly, these kind of companies are from the Information Technology (IT) sector which is what we will be looking for.
Since there are a high number of companies, we will choose based on the following criterias:
- Revenue (TTM): higher than 1B;
- Net Income (TTM): higher than 1B;
- Cash From Operations (TTM): higher than 1B;
- Debt to FCF: Between < -10 and 0.00;
- Investing in Web3: Yes.
Now it’s time to analyze 3 selected stocks based on our criteria.
Web3 Stock #1 – Intel Corporation (INTC)
The chip giant Intel led the market for computer processors for many years until AMD came to the battlefield. They have a broad set of products and technologies that includes 5G, semiconductors, artificial intelligence, computing, and communications. Some news like this and this show that the company is investing in Web3 which makes INTC eligible for our criteria.
Now it’s time to take a look at INTC financial results for the last 7 years. Let’s focus on total revenue, margins (gross, operational and net), net revenue, cash flow from operations, and debt to cash ratio.
Apart from understanding the real reasons that led to these results (which it’d take us to dive deep into Intel’s history), let’s keep it simple and focus on what they are telling us.
The total annual revenue kept growing from 2016 ($59B) to 2021 ($79B). About 6% growth a year. The gross margin is going down. INTC had 60% in 2016 and now 55% in 2021. This means that the raw materials costs are pressuring the results.
If the gross margin is going down, the EBITDA (Earning Before Interest, Tax, Depreciation, and Amortization) will be pressured as well. The Operating margin is related to how well Intel can handle general and administration costs to produce its products. Probably, the competition increase is also pressuring this metric that has gone down from its peak (33% in 2018) to 27% in 2021.
Even though the gross and operational margins are being pressured over time, Intel is handling to maintain a competitive net margin of around 25%. This means that for every $100 of revenue, about $25 will be turned into net profits.
By analyzing these results, we come to the conclusion that the company has been delivering consistent profits. But this is not enough to buy the stocks. Let’s take a look at its cash flow and debt.
The cash from operating activities has risen from 2016 ($22B) to 2021 ($29B). An increase of 5,5% per year. This means that the profit is being turned into cash. The cash-to-debt ratio represents the division between the total cash and total debt. If it’s higher than 1, then the company has more cash than debt. The high the better. Intel has 0.74, which means that the cash position represents 74% of the debt position.
The INTC stock is being traded at 8.94x its cash flow per stock and 1.74x its sales (the lowest level since 2016). This is simple to understand: If the cash flow is going up, but the price isn’t following, then this metric is going down and this can (not necessarily will) result in an undervalued stock.
Despite the competition, Intel has managed to deliver consistent net margins. Its revenue and cash flows are growing about 5% a year. The company has a good debt structure and its being traded way below the Information Technology (IT) Sector Median that it’s about 17x to 19x cash flow. In terms of comparison, AMD is being traded at 32x.
Considering the company’s guidance of solid returns for the upcoming years along with a strong fundamental Outlook, INTC seems a good buy. Keep in mind that the upside potential for INTC stocks can be considerably limited by the competition and the demand slow down for processors.
Web3 Stock #2 – Dell Technologies Inc. (DELL)
According to their website, the company figures among the “world’s leading technology companies”. According to this article, Dell has about 10% market share relative to its competitors in terms of revenue. The number is even higher when we analyze the commercial PC segment. For this one, Dell has about 30% and currently aims to get to 32%. The company is also investing in Web3 according to this news.
Let’s follow the same analysis for Dell. Figure 3 shows some income statement’s metrics.
Dell has delivered an increasing total revenue, but the gross margin has gone down from 32% (2020) to 21% (2022). The operating margin looks stable between 4,5% – 5% and also the net margin is about 5%. Note that Dell’s margins are way below Intel’s margins, probably due to the differences in each market that the companies sell to.
Dell stocks surged from $34 to $44 in a short period a little bit before the company reported its last Quarter results. (see the Orange rectangles in Figure 4 above). This boosted its P/CF ratio from 4x to 8.41x still way below the sector’s median. It looks like also the company is reducing leverage (Cash/Debt ratio it’s increasing).
Even though the company is being traded much below the Sector’s median and focuses on a very stable PC segment, its limited growth capability and declining demand can affect its growth.
Web3 Stock #3 – NVIDIA Corporation (NVDA)
Nvidia is diving deep into disruptive technology like Web3, Artificial Intelligence, Machine Learning, Robotics, and Metaverse. The company it’s well-known due to its popular GeForce video cards for PC gamers. Recently, the company’s revenue was boosted by cryptocurrency miners that were using their video cards to mine several cryptocurrencies, especially Ethereum. You can find more about it here.
Figure 5 shows the NVDA Stock Weekly price and its total revenue.
The cryptocurrency mining fever doubled Nvidia’s total revenue from $11B in 2022 to $27B in 2022. NVDA stock price increased about 700% in that period. The prices of the GeForce lines climbed to levels never seen before. But it looks like the party it’s over. Since Ethereum’s merge, the miners are dumping their video cards and this has undoubtedly impacted Nvidia’s revenue and its stock price has gone down about 70% since ATH.
Is NVDA a good Web3 stock to get? Let’s take a look at other financial results.
Nvidia has managed to increase all of its margins which shows a good managerial effort to keep its competitiveness. Isn’t clear if the company will be able to keep these levels now that the mining fever is gone. According to this article, the company misled investors about the impact of crypto mining on their business.
The cash flow increased along with profits and the company has much more cash than the debt which leaves it in a comfortable position to invest in Research & Development. NVDA Stock is being traded at an astounding 54x its Cash Flow. Even though the company is a pioneer in the field, this number it’s almost 4x higher than the sector median which leads me to believe that the market overhyped the stock due to a false premise that cryptocurrency mining would keep growing forever.
Given the current macroeconomic conditions, crypto mining slowdown, and the possible upcoming recession, NVDA is in the best-case scenario a stock to keep on your watchlist.
Information Technology (IT) companies are facing a hostile environment right now. The market excitement with these stocks in the past has led the prices to irrational levels that were linked to faith instead of financial results. Many companies are investing in Web3 to evolve and survive in an extremely highly competitive market.
In my humble opinion, they aren’t doing this because it’s cool, but because there is no choice. The future of the internet will come and the industry’s infrastructure won’t be physical, but digital. The companies are trying to build the needed infrastructure for tomorrow’s needs.
For now, this hasn’t been reflected in stock prices. Investing in Web3 hasn’t produced any considerably important outcome by now. The tech companies look overvalued or with limited upside potential. Web3 may be the future of the internet, but only time will tell if it’s going to be the future of the companies building it.