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Technology Stocks

AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles

Business Strategy & Outlook

Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating.AMD outsources its chip designs to third-party foundries such as Taiwan Semiconductor Manufacturing and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles, which allowed AMD’s chief foundry partner TSMC to leapfrog Intel in process technology.

The firm is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though x86-based chips is to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semi custom processor applications, such as game consoles. AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though AMD isn’t as competitive in GPUs as it is in CPUs. In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. FPGAs can be reconfigured to address the unique needs of users. AMD is to leverage FPGAs in the data center alongside its CPUs.

Financial Strengths

At the end of June 2022, the firm reported $5 billion in cash and cash equivalents against total debt of $2.8 billion. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While it has generated solid cash flow in recent years, its longer-term competitiveness remains heavily dependent on its ability to retain healthy market share across the PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies.
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Description

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook

Coupa software is a moaty cloud-only platform in the business spending management, or BMS, space with significant market share gains to come. Coupa benefits from a narrow moat based on strong switching costs and a network effect. Coupa’s core platform allows users to procure indirect or direct spending for a company—including everything from bottled water to laptops. While these use cases vary in mission criticality, switching costs persist throughout the business from the significant implementation time and costs as well as risks involved in changing vendors. Coupa’s network effect is driven by the increased benefits each supplier and procurer gain when additional users are added to the platform. Since its founding, Coupa has enabled $3.3 trillion in spending through its platform—and such stickiness will allow cumulative spending to snowball, benefiting long-term investors. Once items are procured, Coupa’s platform enables invoicing, expense, and payment. By having all these functionalities within one system, users benefit from better visibility of their spending. Nonetheless, existing attach rates leave ample room to grow—which informs that a positive moat trend is at play—as Coupa customers continue to use more value-adding modules, which increases overall stickiness.

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering, as customers are willing to forgo the synergies of having their ERP and procurement vendor all in one in order to gain benefits of Coupa’s user experience. In addition, while it can be considered Workday to be the greatest long-term threat to Coupa given its cloud-only architecture and reputation for highly intuitive human capital management and financial service software, Workday has admitted that it cannot compete effectively with Coupa. This is comforting that at least Coupa has a considerable head start, which will be protected in the long run by its hard-to-dismantle network effect.

Financial Strengths

Coupa is in good financial health. As of January 2022, Coupa had $730 million in cash and marketable securities with $1.6 billion in convertible debt. The firm is rightly focusing on growth of the business over allocating capital toward dividends or share repurchases. A large proportion of debt does not mature until 2025 and 2026, and the firm does not face material risk in terms of funding it, as it is capable of issuing $1.5 billion in additional debt if investors do not take the option to convert the debt to stock. Coupa has an ability to raise additional debt if needed, as the company boasts healthy adjusted free cash flow. Altogether, the 2025 notes have a conversion price of $159.60 while the 2026 notes have a conversion price of $296.45. While Coupa acquired Llamasoft for $1.5 billion in 2020, the large acquisition was well justified—as significant synergies can be seen between Coupa’s bread and butter, indirect spending, and direct spending-related offerings, like Llamasoft’s supply chain design functionality. Coupa will not make such hefty acquisitions over the next 10 years. While Coupa currently is not achieving excess returns on invested capital, or ROICs, the firm will be able to do so by fiscal 2026. While Coupa could be excess ROIC positive today, Coupa is making the right approach in funneling significant sales and marketing spending on new customer acquisition today to reap the long-term benefits later—as Coupa software is sticky, which informs a narrow moat rating.

Bulls Say

  • Coupa could take share within the direct spending and supply chain design market much faster than expected as frustration with other solutions nears a tipping point.
  • Coupa could be able to push boundaries further on price increases for existing offerings.
  • Regulation on reporting third-party liabilities in a timely manner could expand to other industries, further necessitating the Coupa platform.

Company Description

Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce

Young female explaining new idea to her colleague in creative office.

Business Strategy & Outlook

Fiscal 2023 should be another banner year for BRP’s sales given still robust consumer demand and high level of backfill units needed at its dealers. However, this will distract the team from its long-term product and operational priorities, which should improve the firm’s competitive positioning. BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centres of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product line-up (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, acquisitions aren’t required for expansion. However, entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

BRP has fiscal 2025 goals of CAD 12 billion-CAD 12.5 billion in sales and CAD 13.50-CAD 14.50 in EPS. Sales of CAD 12.4 billion and EPS of $14.68 in fiscal 2025. Demand has persisted despite economic uncertainty, and innovation should continue to drive sales, particularly in the marine segment where BRP has launched Project Ghost (altering placement of outboard engines) and the Sea Doo Switch (marine is expected to grow to CAD 1 billion by 2025, from CAD 513 billion in 2022, according to BRP, although less than CAD 800 million with current products). In the base case, BRP’s brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With further improvements to the manufacturing process and scale, BRP could also develop a cost advantage over time.

Financial Strengths

BRP has been reducing its leverage ratio in recent years, taking debt/adjusted EBITDA down to 1.4 times at the end of fiscal 2022 from more than 4 times in 2011, as profitability has improved. It’s not surprising that significant leverage was taken on under the management of private equity partners, and leverage will continue to be contained now that the company is publicly held. The firm is comfortable operating below its targeted leverage ratio of 2 times EBITDA, and it could be around 1-1.5 times at the end of fiscal 2023.BRP has a $1.5 billion term loan set to mature in May 2027, a $100 million term loan due 2024, as well as a small euro-denominated term loan to support research and development projects in Austria (where Rotax engines are developed). The company has a CAD 1.5 billion revolving credit facility through May 2027 to access incremental liquidity. In normal operating periods, the company expects cash on hand, cash from operations, and utilization of the credit facility should allow it to meet capital expenditure, working capital, and debt service needs. The firm has agreements in place with companies like Wells Fargo and TCF to provide floor-plan financing for dealers. The company maintains flexibility in its capital structure through stock repurchases. BRP continued on its normal course issuer bid in fiscal 2023, repurchasing around 464,000 subordinate voting shares, and also executed a substantial issuer bid for 2.4 million shares in fiscal 2022 (for CAD 250 million). Additionally, the firm returns excess cash to shareholders via a quarterly dividend of CAD 0.16 per share, which could rise at a 20% clip over the long term.

Bulls Say

  • BRP has white-space opportunities to expand the business faster than expectations, particularly in the marine business and some niches (like electric) of the year-round lines.
  • Demand from underpenetrated international markets and expansion into new markets like China could lead to demand that is higher than the forecast, which could raise utilization and productivity, leading to higher profitability.
  • Marine is becoming a segment with higher priority to the company, which could generate a better-than-expected operating margin as the category scales, providing cash flow upside.

Company Description

BRP designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. It also builds engines under the Rotax brand (after discontinuing the Evinrude outboard engine business in 2020) and offers clothing, parts, and accessories that cater to its core consumers. In 2018, BRP created a marine group, acquiring boat manufacturers Alumacraft, Triton (which makes Manitou pontoon boats), and Telwater (in Australia). At the end of fiscal 2022, the company marketed its products through a network of more than 2,800 independent dealers and 170 distributors in about 120 countries.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

NetEase maintains a high level of profitability above 30% operating margin for its gaming business, thanks to stable revenue from core titles

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook

NetEase started as a Chinese internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchises in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach. Over the past years, the firm has established iconic titles such as Onmyoji, Knives Out, and Identity V. Every year, the company publishes dozens of games across almost every genre and game play. In addition, NetEase is also collaborating with firms such as Blizzard, Marvel, and Microsoft to release games based on famous global intellectual property like Diablo, Harry Potter, and Lord of the Rings. Over the foreseeable future, NetEase is to continue to leverage its in-house research and development team and user data to develop next-generation games. Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. The firm is positioned to not only continue capitalizing on the success of Westward Journey titles, but to also keep diversifying its revenue into new franchises.

While games will remain NetEase’s core cash flow driver, the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential. Cloud Village, the group’s music streaming arm, had over 180 million monthly active users in 2021 and remained the second-largest music streaming platform in China. Youdao is the group’s attempt at cracking the online education market, but recent regulatory changes in China add uncertainty to this business model.

Financial Strengths

NetEase has a rock-solid balance sheet. At the end of December 2021, the company had CNY 98 billion in cash, cash equivalents, short-term investments, and time deposits under current assets. There was also a restricted cash balance of CNY 2.9 billion under current assets. This compares with only CNY 19.4 billion of short-term debt. Thanks to its strong net cash position and strong operating cash flow that amounted to 147% of net income in 2021, the firm should have no problem funding its gaming business and innovative businesses. NetEase’s capital structure is conservative but not uncommon among Chinese internet firms, given that the company needs to have abundant cash on hand to quickly seize opportunities in the fast-changing internet industry and give it a leg up on competition. Given the growth potential in the Chinese internet space, many of these companies under the coverage do not pay dividends. However, NetEase has returned capital to shareholders via dividends and has set quarterly dividends at 20%-30% of its anticipated net income after tax in each quarter starting in the second quarter of 2019. In addition, the company announced the expansion of its share-repurchase program in May 2020, from up to $1 billion worth of outstanding ADSs to $2 billion, this amount was maintained in 2021. At the end of December 2021, approximately $1.8 billion ADSs had been repurchased under such program.

Bulls Say

  • NetEase’s expertise in asymmetric multiplayer (Identity V and Dead by Daylight) would allow it to capitalize on future opportunities in this genre.
  • The firm has done an admirable job at organically expanding into Japan, and it is likely that it will be able to replicate same success in Europe and the U.S.
  • NetEase Music could see stronger user growth now that Tencent Music was told to end its exclusive licensing agreements with music labels on anti-trust grounds.

Company Description

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Poshmark now has access to the resources of a profitable multinational sponsor, affording investments in marketing and international expansion

Business Strategy & Outlook

Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, evidenced by the firm’s pending acquisition by narrow-moat South Korean Conglomerate Naver (expected to close in the first quarter of 2023), particularly as the scope of resale firms’ offerings see increasing category, price point, and geographic overlap. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services. Working in its favour, the firm now has access to the resources of a profitable multinational sponsor, affording investments in marketing and international expansion that were previously off the table as investors demanded a quicker route to profitability.

Each international market must be approached as a greenfield development, with local competitors boasting a home field advantage at the outset. Winning any of a handful of culturally similar markets (Canada, Australia, the U.K., Germany, France) would meaningfully expand the long-term addressable market, but the firm’s entry into India will remain dubious, which has proven notoriously difficult to monetize. Finally, the management is to target efforts at ameliorating the shipping pain point, with more diversified last-mile providers and a thrust toward higher-priced products likely helping to defray costs that currently constitute about a quarter of average order values, weighing on GMV growth.

Financial Strengths

Poshmark’s financial strength is sound. The firm carries no long-term debt, has $581 million in cash and cash equivalents on its balance sheet as of the second quarter of 2022, and the firm is to be free cash flow positive (operating cash flow plus capital expenditures) by 2024. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring operating profitability by 2026. Provided that the firm realizes the planned $30 million run-rate synergies from its acquisition by narrow-moat South Korean conglomerate Naver, Poshmark could achieve operating profitability as early as 2024.Poshmark’s waterfall of investment priorities as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions. There’s no pressure building for shareholder returns through repurchases or cash dividends until the firm achieves operating profitability, with the model suggesting the inception of a modest repurchase program in 2027, though this timeline could be delayed by a strategic acquisition or more circuitous route to positive earnings. As Poshmark emerges from its high-growth phase, it will encourage management to consider optimizing the firm’s capital structure (adding debt) and initiating a cash dividend, but this remains a long-dated concern as forecasts don’t contemplate a dividend until 2030.

Bulls Say

  • Five straight quarters of operating profitability during 2020 and 2021 (ending in the third quarter of 2021) suggest a strong underlying business model once customer acquisition costs normalize.
  • Early traction in Australia and Canada could augur well for long-term success in those and other culturally similar markets.
  • The firm’s planned acquisition by Naver could accelerate marketing spending, customer acquisition, and position Poshmark more effectively to win the peer-to-peer resale space.

Company Description

Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million active users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.8 billion in 2021 gross merchandise volume, or GMV, hence the firm captured about 13%-14% of the domestic online resale market, with rolling lockdowns and tangled supply chains providing a meaningful impetus for channel trial during 2020 and 2021.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Alibaba’s internet services had annual active consumers of over 1 billion as of March 2022, versus the 1.2 billion online population in June 2022

Digital tablet display the stock market data

Business Strategy & Outlook

Alibaba is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. There’s a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba. Alibaba’s internet services had annual active consumers of over 1 billion as of March 2022, versus the 1.2 billion online population in June 2022 per Quest mobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD.

The Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it is also believed AL iCloud and globalization offer long-term potential. While AL iCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. 

Financial Strengths

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. The company is to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

Bulls Say

  • Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD.
  • Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
  • Alibaba’s China commerce adjusted EBITA margin was 32.5%, higher than JD Retail’s 3.1% non-GAAP EBIT margin and PDD’s 12.4% non-GAAP EBIT margin for the 12 months ended December 2021.

Company Description

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations

Business Strategy & Outlook

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships as of October 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in years prior to the pandemic, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international travel has waned as a result of COVID-19, which could spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have resumed cruising since the summer of 2021 (after a year-plus no-sail halt), cruise operators have been able to reassure passengers of both the safety and value propositions of cruising (offering a holiday product at 25%-50% less than land alternatives).

On the yield side, Carnival is to see some pricing pressure as future cruise credits continue to be redeemed through 2023, a headwind partially mitigated by the return of capacity via rising occupancy. And on the cost side, higher spend to maintain tighter health protocols should begin to alleviate in 2023, helping manage expenses. Higher than normal dry dock days could temper profits as the fleet is redeployed, crimping near-term profitability. As of Sept. 30, 2022, 95% of capacity was already deployed and eight of the company’s nine brands will have their entire fleets sailing by year-end. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below the 10.4% weighted average cost of capital estimate until 2028, which supports no-moat rating.

Financial Strengths

Carnival has secured adequate liquidity to survive its slow resumption of cruising, with around $7 billion in cash and investments at the end of September 2022. This should help finance the little cash burn remaining through the end of the redeployment ramp-up, which earlier in the pandemic had run around $500 million or more per month. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term. By math, Carnival has more than one year’s worth of liquidity to operate successfully in a no-revenue environment. There’s no imminent credit crunch in the near term, as long as capital markets continue to function properly. Liquidity remains accessible, as Carnival was able to issue $1 billion in senior unsecured notes during its second quarter (due 2030), which was set to help refinance certain 2023 debt maturities while supporting capital spend. In August, Carnival was also able to extend the maturity (to 2024) of its convertible notes while maintaining the original rate (5.75%). Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $4.8 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And equity markets have also been accommodating, with the company facilitating a $500 million at-the-market equity raise in early 2022, indicating access to cash remains.

Bulls Say

  • As Carnival continues to deploy its fleet, passenger counts and yields could rise at a faster pace than the current capacity limitations are repealed.
  • A more efficient fleet composition (after pruning 23 ships since the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed in 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry

Business Strategy & Outlook

A confluence of several issues–poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. It is still believable there will always be a room for active management, the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With $667 billion in managed assets at the end of August 2022, AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions, being diversified across its three main asset class segments: equities (43% of managed assets), fixed income (40%), and other investments (made up of the firm’s asset allocation services and certain other alternative investments) accounting for the remainder. However, this has not always translated into solid organic growth or above-average profitability, with AllianceBernstein’s adjusted GAAP operating margins of 23.4% on average during 2017-21 being well below the group average of 30%.

Financial Strengths

AllianceBernstein is structured as a limited partnership, required to pay out essentially all of its available cash flows as dividends to unitholders (but allowing it to be taxed at a significantly lower rate than most corporations). The firm has traditionally managed a fairly conservative capital structure. This does not place the company at a competitive disadvantage relative to its peers, though, because most asset managers tend to carry little to no debt on their balance sheets. At the end of June 2022, AB had $800 million in debt (tied primarily to its commercial paper program) and $1.2 billion in unrestricted cash and cash equivalents on its books. The company maintains an $800 million revolving credit facility expiring September 2023, used primarily as backup liquidity for AB’s commercial paper program, and a $900 million committed unsecured senior credit facility with Equitable Holdings, which can be used for AB’s general business purposes (and where AB had $800 million outstanding at the end of June 2022 with an interest rate of approximately 0.5%). While the company’s structure as a limited partnership does limit the amount of capital that AB can allocate to other purposes, the firm does generally hold more cash than debt on its books, which along with substantial liquid investments and solid operational cash flows should enable AB to make investments in other assets/businesses from time to time.

Bulls Say

  • With nearly half of its AUM invested internationally, and 44% of managed assets sourced from non-U.S. domiciled clients, AB is one of the more global asset managers.
  • AB had $10 billion in its institutional pipeline at the end of June 2022, as well as a commitment from Equitable to invest $10 billion in the firm’s buildout of its private alternatives and private placements offerings.
  • The combination of CarVal Investors operations with AB’s private market capabilities has created a platform with $54 ($40) billion in total (fee-earning) AUM at the start of the third quarter.

Company Description

AllianceBernstein provides investment management services to institutional (46% of assets under management), retail (38%), and private (16%) clients through products that includes mutual funds, hedge funds, and separately managed accounts. At the end of July 2022, AB had $689.0 billion in managed assets, composed primarily of fixed-income (40% of AUM) and equity (43%) strategies, with other investments (made up of asset allocation services and certain other alternative investments) accounting for the remainder. The company also provides sell-side research and brokerage services through its Sanford Bernstein subsidiary.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act

Business Strategy & Outlook

EDP is the European utility with the second-largest weight of renewables (behind Orsted), accounting for two thirds of the group’s EBITDA. They consist of EDP Renovaveis’ wind and solar assets chiefly located in the United States and Iberia and EDP’s hydro assets in Iberia and Brazil. Renewables are the main growth driver as per estimates due to the commissioning of new capacity and capital gains from asset rotations. EDP plans to install 12.5 GW of net capacity by 2025 or 2.5 GW per year, still less than 4 GW-6 GW planned by Enel, Iberdrola, or Engie but almost 3 times as much as 0.9 GW of the previous 2019-22 business plan. As the third-largest renewables player in the U.S. through EDP Renovaveis, EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act. The second-largest division is formed by EDP’s electricity networks in Iberia and Brazil, contributing around one third of EBITDA. Networks’ profitability will grow thanks to investments in Brazilian networks and indexation to high inflation. The third division is client solutions and energy management, which weighs around 5% of group EBITDA. It is composed of Iberian thermal power plants and supply activities.

The almost zero implicit valuation of EDP’s Iberian operations when stripping out the market value of EDP’s stakes in its subsidiaries EDP Brazil and EDP Renovaveis reflect an excessive holding discount. To eliminate it, EDP’s management is contemplating changing the group’s capital structure. This could lead to a “reverse acquisition” of EDP by EDP Renovaveis. Such a situation where a subsidiary acquires its parent is called a downstream merger. The subsidiary buys back its shares from the parent and then redeems them or issues them to a shareholder in the acquiree. Consequently, the merger may be completed without increasing EDP Renovaveis’ share capital. EPS will grow annually by 9.9% on average through 2026 and a return to dividend growth as of 2023.

Financial Strengths

Net debt to increase from EUR 11.57 billion in 2021 to EUR 16.7 billion in 2026 as organic operating cash flow will be too low to cover hefty investment plan and dividend payments. The net debt/EBITDA to decrease from 3.1 in 2021 to 2.9 in 2026, averaging 2.8 during the period. Net debt/equity will average 0.9 through 2026. EBIT/net interest coverage will strengthen from 4.5 in 2021 to 5.5 in 2026. EDP’s dividend policy is based on a floor of EUR 0.19 per share, equal to the dividend paid since 2012, and a 75%-85% payout ratio. Taking the maximum between EUR 0.19 and an 80%-based dividend, the earnings estimates point to a EUR 0.19 dividend in 2022 and an average annual growth of 11.3% between 2022 and 2026.

Bulls Say

  • Being an early mover, EDP has an attractive portfolio of renewables assets, especially in the U.S.
  • EDP should beat its 2023-25 financial targets due to soaring power prices in Europe.
  • EDP might push EDP Renovaveis to do a downstream merger to eliminate the holding discount.

Company Description

EDP is a vertically integrated utility company and is the largest generator, supplier, and distributor of electricity in Portugal. In addition to Portugal, EDP has sizable operations in Spain, Brazil, and the U.S. EDP owns 82.6% of EDP Renovaveis, the third-largest wind power owner/operator in the world. EDP also owns 51% of Energias do Brasil, an electric utility that serves a population of almost 8 million.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Netflix Looks to Advertising to Spark Top-Line Growth

Business Strategy & Outlook

Netflix is a pioneer in subscription video on demand and is now the largest online video provider in the U.S. and the world. The economic moat rating of narrow is based on intangibles resulting from the use of data stemming from the firm’s massive worldwide subscriber base. From its origin in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside. The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.” However, the firm has recently ramped up its production using more traditional methods. Many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease (due to the shift to over-the-top, or OTT, delivery). With a number of new services from media firms launched over the last five years, many consumers now pay for or have access to multiple services. 

One potential issue for these platforms is the potential for consumers to move between the services with minimal friction. This usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn. Netflix will trial an ad-supported tier in fourth-quarter 2022 into 2023 as the firm looks to capture potential subscribers that were unwilling to pay the ad-free price. While the potential audience could be large, particularly in emerging markets, management will need to ensure that the lower-priced tier doesn’t cannibalize the full-price subscriber base in more saturated markets like the U.S. Netflix will expand further into local-language programming to augment its offering in many countries. This will generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, Netflix’s international expansion will continue to hamper margin expansion.   

Financial Strengths

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as one doesn’t see the need to spend decreasing in the near future. The net cash burn was over $2 billion in 2017, over $3 billion in 2018, and $3.5 billion in 2019. While the firm generated positive free cash in 2020 due to pandemic-related production shutdown, Netflix returned to a slight cash burn in 2021. As of June 2022, Netflix has $14.2 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($3.0 billion recognized on the balance sheet and $15.6 billion not yet reflected on the balance sheet).

Bulls Say

  • Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  •  International expansion offers attractive markets for adding subscribers.

Company Description

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, internet connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

(Source: Morningstar)

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