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IPO Watch

Marqeta’s $1.2 Billion IPO: What to Know

Financial technology companies in particular have garnered significant investor interest this year, perhaps pushing more startups to gopublic. Two other payments-related companies, Flywire FLYW and Paymentus PAY recently went to market. Flywire’s stock jumped about 46% and Paymentus’ went up about 36% on their first day of trading.

Marqeta has scaled quickly, fueled by the growth of financial technology, e-commerce, and the gig economy. But its future is anything but certain.

Marqeta’s clients include familiar tech names like Square SQ, AffirmAFRM, Uber UBER, DoorDash DASH, and Instacart. These companies use Marqeta’s platform to build payment experiences for their own customers or streamline business payments.

What’s Behind Marqeta’s Strong Revenue Growth

Most of Marqeta’s revenue comes from transaction fees, so processing volume is the name of the game. Marqeta has benefited from the accelerated shift to e-commerce and digital payments brought on by COVID-19. The company’s total processing volume reached roughly $60 billion in 2020, up from $21.7 billion the year before, according to the Marqeta’s SEC filing. The momentum has continued into 2021; Marqeta says its platform processed $24 billion in the first quarter.

With the boost in processing volume, Marqeta brought in $290.3 million in revenue in 2020, more than double its 2019 revenue.

While the past year has been sweet for Marqeta in terms of revenue growth, we have to look at the numbers with a grain of salt because they may not be indicative of the future. COVID-19 has impacted consumer spending patterns, boosting online purchases and demand for delivery services and contactless payments. While the need for virtual payment processing and card issuing may continue to trend upward, the dramatic shift seen during the pandemic will likely subside.

Despite the boost in revenue over the past year, Marqeta isn’t yet profitable. The company has shown a decline in net losses in recent years but still lost $47.7 million in 2020.

Marqeta expects to incur losses for the foreseeable future as the company continues to invest in its growth. Ultimately, the future is uncertain. And Marqeta acknowledges in its SEC filing that it may never achieve or sustain profitability.

Marqeta Has a Dependency Problem

Marqeta’s growth over the past year has mirrored the performance of its customers, particularly payments processing company Square, which generates most of Marqeta’s revenue. Square was responsible for 70% of Marqeta’s net revenue in 2020. That percentage rose to 73% for first-quarter 2021.

Square’s rapid growth during the pandemic has been a boon for Marqeta, but Morningstar senior equity analyst Brett Horn sees risk in customer concentration: “This tends to be mainly a growth issue, as customers have leverage to demand better pricing.”

The current term of Marqeta’s agreement with Square for Square Card expires in December 2024, and the current term of their agreement with Square for Cash App expires in March 2024. There is no guarantee that the relationship will continue on the same terms.

Losing revenue from Square, whether from Square’s poor performance or a severance of the relationship, would also have an adverse effect on Marqeta’s business.

Market Tailwinds Can Benefit Marqeta and Competitors

Horn and equity analyst Michael Miller believe there are significant opportunities for companies like Marqeta to draft off the secular trend toward electronic payments, which would act as a tailwind to card payment volumes. Euromonitor International, a market research firm, projects electronic payments will represent 46% of the total global transaction volume by 2025, up from 31% in 2017.

Horn sees competition between traditional players relying on scale and better pricing while newer upstarts like Marqeta try to win with services that better fit higher-growth areas. Industry growth creates room for new players, but Horn ultimately believes scale is the best form of long-term advantage in the space. This benefits existing players, like FIS and Fiserv, and gives them a window to replicate new offerings.

Miller said the rise of buy-now-pay-later offerings is another major trend in the card payments space. Such offerings allow consumers to pay for retail goods under an installment plan. “These firms are more prominent in Europe and Australia, but they’ve been investing heavily in the U.S. to gain market share,” Miller said. “That said, in my view, they have a difficult path to significant adoption in the U.S. since they don’t have a clear benefit over existing credit card products already available in the country.”

Marqeta already supports providers in this space, like Affirm and Klarna, and Marqeta’s global presence (the company is certified to operate in 36 countries) would allow it to take advantage of this growth outside of the United States.

Marqeta’s potential markets are growing and evolving, and it will have to grow and evolve with them. Profitability will take a back seat as the company pursues further growth and innovation.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Palo Alto Networks : Platform Approach Resonating With Clients Across Network, Cloud, and Automation

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The complexity of an entity’s threat management increases as the quantity of data and traffic being generated off-premises grows. Network security can be attacked from various angles, and we posit that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers. Security point solutions were traditionally purchased to combat the latest threats, and IT teams had to manage various vendors’ products simultaneously, which leads us to believe that IT teams are clamoring for security consolidation to manage disparate solutions. Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. We believe the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand.

We expect that Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although we expect Palo Alto to remain acquisitive and dedicated to organic innovation, we believe significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers.

Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors.

The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

The large public cloud vendors are developing security suites that may be preferred over those of a pure-play security supplier. If these companies offer products outside their data centers, Palo Alto may be stuck with niche applications and on-premises products.

Palo Alto competitors are also offering consolidated platforms, which could make displacing competitors more challenging.

Cloud and software-based startups could disrupt Palo Alto’s high-growth plans. The market for acquiring bolt-on firms could be hotly contested, and Palo Alto could miss out on the next big technology.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares

Ralph Lauren Closes Fiscal 2021 on Positive Note

In the quarter, Ralph Lauren saw a constant-currency sales decline of just 4% in Europe (our forecast was negative 19%) as strong e-commerce growth (owned up 79%) overcame store closures. Its sales in Asia and North America were close to our estimates. While sales have continued to decline in North America because of reduced distribution and less off-price selling, we view this strategy as favourable for Ralph Lauren’s brand strength, the basis of our narrow moat rating. We project long-term growth of less than 1% for the company in the region but anticipate mid- to highsingle- digit percentage growth in Europe and Asia on store openings, e-commerce, and wholesale expansion. For fiscal 2022, Ralph Lauren projected overall sales growth of 20%-25%, in line with our previous forecast (adjusted for the impending sale of Club Monaco, which generated $210 million in sales in prepandemic fiscal 2020).

Ralph Lauren reported an adjusted gross margin of 62.9% in the quarter, 140 basis points above our forecast, due to strong pricing and mix. Our long-term forecast calls for sustainable 63% gross margins.

As has typically been the case, Ralph Lauren closed the fourth quarter in a net cash position, with long-term debt of $1.6 billion more than offset by $2.6 billion in cash (net cash of about $13 per share). The firm will also receive cash soon (undisclosed terms) from the sale of Club Monaco, which it bought for about $52 million in 1999. Given its strong balance sheet, Ralph Lauren has reinstated its quarterly dividend of $0.6875 per share, as we had anticipated. We forecast its long-term dividend payout ratio at about 50%. We forecast limited buybacks in fiscal 2022 (just over $100 million) but increasing share repurchases in subsequent years. Our capital allocation rating is Standard.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

S&P Global and IHS Markit Are a Collection of Moaty Franchises

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 Key Takeaways

  • S&P Global and IHS Markit are high-margin, largely recurring-revenue businesses that serve a diverse set of customers. IHS Markit has modestly more recurring revenue, which should lead to smoother earnings for the combined business.
  • S&P Global and IHS Markit have seen meaningful operating margin expansion over the past five years. S&P Ratings, the firm’s largest segment, has seen strong revenue growth and has expanded adjusted operating margins to 62% in 2020 from 50% in 2016 driven by robust issuance and pricing.
  • Following the merger, S&P Global and IHS Markit’s transportation and consolidated markets and solutions segments will continue to be stand-alone segments. Financial information and services will be created from S&P Market Intelligence and IHS Markit Financial Services (excluding indices), commodities and energy will be created from S&P Platts and IHS Markit Resources, and Indices will be created from S&P Dow Jones Indices and Markit Indices.
  • We expect S&P Global to achieve its $480 million expense synergy target. While we acknowledge some potential upside to this target, at a certain point the margin expansion implied by additional cost synergies would become unrealistic. Furthermore, S&P Global’s expense synergy targets are on top of existing expense efficiency programs.
  • S&P Global expects $350 million in revenue synergies within five years, though thus far it has given only limited detail on this. In Exhibit 1, we provide a list of where we think those revenue synergies may lie.
  • Rather than use the cross-sell versus new product framework, we instead categorize potential revenue synergies based on the segment and then identify vectors of where revenue synergies may be achieved. We expect the majority of revenue synergies to be in the financial information and services segment; to achieve its targeted synergies, we estimate the segment would need to grow 1.3% faster than it would have on its own. We view this as reasonable and could envision upside to this scenario.
  • While synergies are important, we believe investors should not overly concentrate on them. Other factors may have a greater impact in determining earnings, such as bond issuance volume. In addition, it can be difficult to precisely measure revenue synergies, given product bundling and other factors.

(Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares

Teladoc Health Inc – Growth Opportunities Remain Strong

However, we see intensifying competition (record venture capital funding, peer consolidation, and even Amazon), as barriers to entry are relatively low. While achieving a moat through scale on its own is difficult in an industry that could be described as commoditized, Teladoc can distinguish its offerings through its breadth of services. Following its Livongo and InTouch acquisitions in 2020, Teladoc has expanded its offering beyond virtual ambulatory and expert visits to include chronic care management and telehealth solutions for hospital systems.

We are lowering our fair value estimate to $210 per share from $225 due to adjustments in our assumptions for longterm operating margins following the company’s first full quarterly results integrating Livongo’s operations. However, Teladoc shares trade at over a 30% discount to our fair value estimate, as they have declined from their price ceiling of $292 in February. We attribute the decline to an unwinding of pandemic bets as vaccines have rolled out and a full reopening appears increasingly likely. However, we see market pessimism around Teladoc as overexaggerated and believe the bigger picture is being lost. Teladoc’s primary sales channel is business to business, as a vendor to selffunded employers and other payers. Even if overall telehealth utilization declines as the country opens up, we believe it’s highly unlikely that membership will fall, as telehealth services are becoming more of a staple in benefits, like vision or dental coverage. In a postpandemic world, telehealth still provides value to payers by potentially reducing the need for costly hospital visits and providing convenience to members.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Expert Insights Shares Small Cap

Canopy Offers Attractive Investment Exposure to the U.S

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Although we expect the medical market to shrink as consumers turn to the recreational market, we forecast more than 10% average annual growth for the entire Canadian market through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers.

Canopy also exports medical cannabis globally. The global market looks lucrative, given higher prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor— the single largest cost. However, many Canadian companies have pulled back expansion plans given ongoing cash burn. We forecast around 15% average annual growth through 2030.

Besides hemp, Canadian companies typically have no U.S. operations, given legal limitations. However, Canopy has a standing deal to acquire Acreage Holdings, a U.S. multistate operator, immediately upon federal legalization. We thought Canopy paid a good price and acquired an attractive option for an accelerated entry into the U.S. Canopy also owns 27% of U.S. multistate operator Terrascend on a fully diluted basis. The U.S. market is murky, with some states legalizing recreational or medical cannabis while it remains illegal federally. We expect that federal law will be changed to recognize states’ choices on legality within their borders. Based on our state-by-state analysis, we forecast nearly 20% average annual growth for the U.S. recreational market and nearly 10% for the medical market through 2030.

Constellation Brands owns 38.6% of Canopy with additional securities that could push ownership to 55.8%. We see the investment as supportive of developing branded cannabis consumer products while also providing a funding backstop and foothold into the U.S. non-THC market.

Company Profile

Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Global stocks

CCRE Expansion Key for Future Growth

While the spin-off reshapes CCRE into more defined focus in property development, the asset-light business—which enjoys higher price-to-earnings multiples–is carved out of CCRE, which may dampen investor optimism on the post spin- off CCRE. We resume coverage of CCRE post spin-off and revise our fair value estimate to HKD 2.92 per share from HKD 4.40 per share. The shares are undervalued, trading at a depressed price/earnings ratio of about 2.2 times 2021 earnings. In our view, this is attributed to the spin-off mode not improving the balance sheet and the slower-than-peers contracted sales recovery. Moving forward much will depend on how the company’s recently articulated Greater Central China Strategy will pan out to improve growth prospects.

Contracted sales shrank 4.8% year on year to CNY 68.3 billion in 2020, which fell short of the company’s CNY 80 billion target and performance is largely below that of peers. We note that the company attributed the underperformance to a slower pace of saleable resources launched and reiterated its confidence in the Henan market. Nonetheless, CCRE recently articulated its Greater Central China Strategy to cover a large market radius around its Zhengzhou home base to bolster growth. However, we think the geographical expansion strategy may take time to bear fruit as the company enters new markets. For the first four months of 2021, the run rate looks off the pace with contracted sales at 17% of full year target. Hence, we think for this year the CNY 80 billion contracted sales target the company retained from last year looks aggressive, which may dampen share price performance.

Company Profile

Central China Real Estate is a China property developer founded by Chairman Wu Po Sum in 1992 and listed on the Hong Kong Stock Exchange in 2008. Differentiated from most other listed Chinese developers with a nationwide presence, CCRE is focused primarily in Henan province. The company’s coverage is spread across Henan’s prefecture and county-level cities, as well as a small presence in Hainan. Zhengzhou is a key market for the company, contributing the highest contracted sales and salable inventory among cities in Henan. The company has spun off its asset-light project management business and seeks geographical expansion via its Greater Central China Strategy for growth. Wu owns the controlling stake of about 74.9% in CCRE.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Commodities Trading Ideas & Charts

Con Ed four natural gas storage facilities with a combined Capacity

The principal asset of the joint venture is three natural gas pipelines with a total capacity of 3 billion cubic feet per day and four natural gas storage facilities with a combined capacity of 41 Bcf. The pipelines and storage facilities are all located in New York and Pennsylvania. The sale of the joint venture for $1.225 billion was in line with our estimate and has no impact on our fair value estimate or EPS estimates. We had already assumed Con Ed would divest its gas transmission investments, following comments in the 2020 10-K that it was considering strategic alternatives for its interest in Stagecoach. Stagecoach is the primary operating asset for the Con Edison Transmission segment, or CET, contributing $0.17 per share in 2020, or about 4% of consolidated EPS.

In March, we reduced our EPS estimates from 2021-2024 by $0.04 to $0.06 per share due in large part to the dilutive impact of our assumption that Con Ed would exit the gas transmission business. At that time, we also established a 2025 EPS estimate of $5.00, resulting in a 4.1% average annual EPS growth rate near the bottom of ConEd’s EPS growth target of 4%-6%. CET also has a projected 8.5% ownership interest in the proposed 300-mile Mountain Valley Pipeline. In 2019, exercised its option under the MVP joint venture agreement to cap its cash contributions at $530 million. In May, MVP announced a six-month delay in the projected startup and an increase in the estimated cost to $6.2 billion from the previous estimate of $5.8 billion to $6.0 billion.

We remain concerned the MVP will never be completed due in large part to the ongoing delays and increasing uncertainty with respect to obtaining necessary permits for waterbody and wetland crossings because of ongoing court challenges. Dominion Energy and Duke Energy elected to abandon The Atlantic Coast Pipeline, a project also moving Appalachian shale gas to Virginia and North Carolina, last year after running into similar challenges.

Company Profile

Con Ed is a holding company for Consolidated Edison Company of New York, or CECONY, and Orange & Rockland, or O&R. These utilities provide steam, natural gas, and electricity to customers in south eastern New York–including New York City–and small parts of New Jersey. The two utilities generate roughly 90% of Con Ed’s earnings. The other 10% of earnings comes from investments in renewable energy projects and gas and electric transmission. These investments have resulted in Con Ed becoming the second-largest owner of utility-scale PV solar capacity in the U.S.       

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Funds Funds

Devon Alpha Fund

This is the fourth portfolio manager change on this strategy in four years. In early

2019, Devon announced it was changing the portfolio manager to Mark Brown from Nick Dravitzki. Prior to taking the portfolio manager role, Brown had been the chief investment officer at Devon. Dravitzki had been the portfolio manager on this strategy since 2017 following previous portfolio manager Robertson’s ascension to the key business management role. This level of portfolio manager change on a strategy that allows significant flexibility for the key decision-maker rarely leads to good outcomes in the short to medium term, even with an experienced team.

The investment process seeks to identify companies in the NZX 50 and S&P/ASX 200 indexes that have the ability to generate strong returns on invested capital and achieve good cash flow expansion or have unappreciated catalysts for revaluation. The strategy allows for a portfolio of just 10-15 stocks, so the fund carries significant stock- and sector-specific risk, which may result in greater volatility than more-traditional strategies. In addition, the portfolio manager has a high level of discretion and can allocate 0-100% to New Zealand stocks, 0-100% to Australian stocks, or 0-100% to cash. Historically, cash levels have often been in the 20%-30% range but have been lower since mid-2020. The portfolio manager also has the flexibility to short-sell stocks (though we’ve rarely seen it used) and invests outside Australasia.

Since inception, the strategy’s returns have been largely lacklustre, which is not entirely unexpected given the difficulty in getting cash levels right and the portfolio manager changes.

Devon Alpha has some interesting characteristics, but the numerous portfolio manager changes constrain our enthusiasm.

Devon seeks to identify Australasian companies with the ability to produce strong returns on invested capital. Devon generates investment ideas through its fundamental research process and draws on its members’ extensive experience. On-the-ground research is an important part of the process; the team will not only visit management of companies in the portfolio and potential holdings, but also competitors, suppliers, and customers. Discounted cash flow is the most important factor in the valuation decision, ensuring the team avoids overpaying for companies. The investment decision also considers the strength of the business model, the relative attractiveness of the industry, quality of management, and the company’s financial health. These factors are assigned weightings that the portfolio manager uses in his portfolio construction process.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

Devon Dividend Yield Fund

However, Nick Dravitzki, who had been portfolio manager on this strategy since it was launched in 2012, resigned in early June 2020. Devon’s experienced chief investment officer, Mark Brown is now portfolio manager here. He is assisted by the investment team, which includes managing director Slade Robertson, three portfolio managers, and two senior equities analysts.

The investment team is tight-knit and possesses valuable experience, but in recent years the good quality research and portfolio construction we had come to expect from Devon has marginally declined relative to peers. In addition, a change of portfolio manager, in the short term, can be unsettling for an investment team and strategy. However, Robertson has restructured and reinvigorated the team by hiring two additional analysts and increasing his mentoring of the investment committee. The investment process is straightforward, with an emphasis on fundamental bottom up research. The team invests in companies based on their gross yield to a New Zealand investor and the sustainability of that yield. The 20-25 stock portfolios is high-conviction and therefore carries significant stock- and sector-specific risk, which may result in greater volatility than peers.

Utilities, listed property, and financial services companies typically take up 45%-50% of FUM.

However, there are no restrictions on the amount invested in Australian and New Zealand companies, providing the portfolio manager with significant flexibility to allocate capital where he sees opportunities. Since inception, the strategy has experienced mixed performance. The process worked well up until late 2016, but since early 2017 the strategy has struggled against the index and equity region Australasia Morningstar Category peers. The process behind Devon Equity Income is reasonable, but our conviction is stronger with peers at this time.

Devon Dividend Yield aims to provide investors with a stream of income by constructing a concentrated portfolio of New Zealand and Australian companies, with a 2% blended yield improvement compared with the market. Devon screens the S&P/NZX 50 and S&P/ASX 200 indexes and ranks stocks by their gross dividend yields to a New Zealand investor. Valuation of top-ranked stocks is determined using a discounted cash flow methodology. Devon will go the extra mile to obtain an understanding of the intrinsic value of a business. Fortunately, a healthy travel budget accommodates this, whether for company visitation or investment conferences.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.