Category: Sectors

Categories
Technology Stocks

Uber’s Q4 results beat expectations; Margin expansion to continue on all fronts; Shares attractive

Business Strategy and Outlook:

Mobility demand continued to approach pre-pandemic levels, which further attracted drivers and stabilized prices for riders, expanding the adjusted EBITDA margin, displaying the platform’s strong network effect moat source. The firm’s ability to further monetize the platform via advertising and other verticals is also appealing. 

It appears that normalcy after the pandemic includes not only spending more time out of home and traveling, but also still ordering food and other products online for delivery or pickup as delivery continued to grow. While the mobility take rate dipped, the delivery take rate increased 60 basis points from last quarter and around 5 percentage points year over year.

A slowdown in the decline in air travel is witnessed, which we believe indicates that Omicron has already peaked and demand for travel and therefore airport rides and overall mobility demand may accelerate again. As Uber’s strong network effect continues to attract consumers, advertisers have begun to spend more on the firm’s marketplace platform.

Financial Strength:

Management guided to first-quarter year-over-year gross bookings growth deceleration due to a slight impact from omicron, which appears to have already peaked. Uber generated $25.9 billion in total gross bookings during the quarter, up 51% year over year, with contributions from mobility (up 67%), delivery (34%), and freight, which spiked 245% from last year due to the acquisition of Transplace. Mobility gross bookings hit 84% of pre-pandemic levels during the quarter, up from 79% in the third quarter. While the mobility take rate dipped, the delivery take rate increased 60 basis points from last quarter and around 5 percentage points year over year. Net revenue of $5.8 billion during the quarter was up 105% from 2021. Mobility net revenue grew 55%, while delivery net revenue went up 78%. Monthly active platform users increased 27% from last year to 118 million. Trip requests came in at 1.77 billion (up 23% year over year); however, due to omicron, frequency, or trips per user, declined nearly 10% from last year but stayed within the 14-15 trips range. 

Company Profile:

Uber Technologies is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm refers to it, provides “aerial ride-sharing.” Uber Technologies is headquartered in San Francisco and operates in over 63 countries with over 110 million users that order rides or foods at least once a month. Approximately 76% of its gross revenue comes from ride-sharing and 22% from food delivery.

(Source: Morningstar)

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
Shares Technology Stocks

Twitter’s strong user growth and monetization keeps firm on track

Business Strategy and Outlook:

Despite the top-line miss, both user growth and revenue per user was impressive, as the firm continues to capitalize on the growing demand for brand and direct response advertising. Twitter’s effort to focus more on advertising opportunities is believed to mix well with its balanced brand and direct response revenue base in the long run, allowing the firm to capture more small- and medium-size business ad revenue and tap further into ecommerce growth. the firm has taken the right steps to focus on generating growth in advertising revenue. Following the sale of MoPub, the firm properly reallocated investment into direct response and commerce offerings, which should allow it to attract more small- and medium-size businesses and balance brand advertising. In addition, Twitter’s efforts to provide easier contextual advertising options combined with further user personalization and improvements to user experience in the app could attract even more brand advertising dollars. With the continuing user growth, it is expected that Twitter’s subscription products to slightly reduce its dependency on advertising.

On the commerce front, Twitter for Professionals profile options will attract more businesses as usage of the platform’s Shop module, which allows businesses to highlight their products to be purchased on Twitter, will drive transaction volume higher. However, the firm does face significant competition on this front, including from the likes of Facebook, Pinterest, and, of course, Amazon.

Financial Strength:

Total revenue came in at $1.6 billion, up 22% from last year, with growth in both advertising revenue (22%) and data licensing and other revenue (15%), bringing total revenue for the year to $5.1 billion in 2021. The firm’s user count increased 13% year over year to 217 million, with U.S. and international users up 3% and 16%, respectively. Management claims user numbers improved because of Twitter’s new single sign on feature and improved notifications that attracted former users to return to the platform. n the fourth quarter, costs and expenses totaled $1.4 billion, an increase of 35%, mainly due to increased investment in research and development as well as sales and marketing. The firm generated operating income of $167 million (11% margin) compared with operating income of $252 million (20% margin) last year

Company Profile:

Twitter is an open distribution platform for and a conversational platform around short-form text (a maximum of 280 characters), image, and video content. Its users can create different social networks based on their interests, thereby creating an interest graph. Many prominent celebrities and public figures have Twitter accounts. Twitter generates revenue from advertising (90%) and licensing the user data that it compiles (10%)

(Source: Morningstar)

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 Shares

DaVita Stays Steady on Cautious Guidance for 2022; Shares Fairly Valued

Two businesswomen working late in office look at documents

Business Strategy and Outlook

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, Morningstar analysts view DaVita’s long-term prospects as solid. 

Once COVID-19 concerns dissipate, Morningstar analysts expect DaVita to get back to more normalized growth trends driven primarily by ESRD trends. Analysts think low- to mid-single-digit revenue growth is likely for DaVita in the long run based on the continued expansion of the U.S. dialysis patient population, mild revenue per treatment growth, and ongoing international expansion. These expectations include ongoing expansion of at-home treatments, and we think DaVita can even benefit from extending the at-home treatment stage for patients, despite its clinic infrastructure. At-home patients still have relationships with clinics and are more likely to continue working and, in turn, remain on more profitable commercial insurance plans for a more substantial part of the 33 months where that is possible before Medicare automatically takes the lead on reimbursement for ESRD treatments. Eventually, most ESRD patients will need in-clinic therapy, too, unless they receive a kidney transplant. Of note, supply and demand for transplants remain greatly mismatched with the average wait list time around four years. But if those dynamics change, DaVita may even be able to benefit, as it has invested in early-stage initiatives to improve transplants. And in general, we think DaVita stands to benefit from the continued growth in the ESRD population however they are treated, and it is even pursuing integrated care models to gain a bigger piece of the treatment pie in the long run. 

With these factors in mind, management has highlighted mid-single-digit operating income and high-single-digit to low-double-digit earnings per share growth targets from 2021 to 2025, which is roughly in line with our assumptions during that period, as well.

DaVita Stays Steady on Cautious Guidance for 2022; Shares Fairly Valued

After trimming guidance for 2021 and expressing caution on 2022 during its third-quarter call, DaVita turned in solid operating results and guided in line with our 2022 expectations on its fourth-quarter call. Morningstar analyst   boosts its fair value estimate to $116 per share from $110 primarily to reflect a change in our long-term U.S. corporate tax rate estimate after previously assuming the tax rate would rise on Democratic policy initiatives, which appear unlikely now. Also, our fair value depends on business conditions normalizing in 2023 and beyond, and despite the near-term constraints, Morningstar analysts continue to see significant intangible assets and cost advantages around DaVita’s top-tier position in dialysis services, which informs our narrow moat rating on the firm. 

Financial Strength 

Like many healthcare services providers, DaVita operates with significant leverage, especially when considering lease obligations. DaVita owed $8.9 billion of debt and held $1.2 billion of cash and short-term investments as of September 2021, or in the middle of its net leverage target range of 3.0 to 3.5 times. Its operating lease obligations of $3.1 billion add another turn, roughly, to leverage. After refinancing many of its obligations, DaVita’s maturity schedule appears easily manageable, though, with big maturities in 2024 ($1.4 billion) and 2026 ($2.6 billion) but limited maturities otherwise. During that time frame, Morningstar analysts expect DaVita to generate at least $1 billion annually of free cash flow, so the company could handle those maturities as they come due through internal means. However, given the firm’s large share repurchase plans, Morningstar analysts think DaVita will seek to refinance its obligations coming due. After $2.4 billion of share repurchases in 2019, the company made another $1.4 billion of share repurchases in 2020 and $0.9 billion of repurchases through September 2021. The company anticipates making significant share repurchases going forward to boost its adjusted EPS growth (8% to 14% goal from 2021 to 2025) above its operating income prospects (3% to 7% goal from 2021 to 2025). It had $1.0 billion remaining on its share repurchase authorization as of September 2021.

Bulls Say

  • Excluding recent COVID-19-mortality challenges, we expect the ESRD patient population to grow at a healthy rate in the U.S. and around the globe for the long run, which should benefit DaVita. 
  • DaVita enjoys top-tier status in the essential dialysis business, and we do not expect competitive dynamics to negatively affect that attractive position anytime soon. 
  • While growing at-home care could change its business model a bit, DaVita could also benefit from ESRD patients being able to continue working and staying on commercial insurance plans.

Company Profile

DaVita is the largest provider of dialysis services in the United States, boasting market share that eclipses 35% when measured by both patients and clinics. The firm operates over 3,100 facilities worldwide, mostly in the U.S., and treats over 240,000 patients globally each year. Government payers dominate U.S. dialysis reimbursement. DaVita receives approximately 69% of U.S. sales at government (primarily Medicare) reimbursement rates, with the remaining 31% coming from commercial insurers. However, while commercial insurers represented only about 10% of the U.S. patients treated, they represented nearly all of the profits generated by DaVita in the U.S. dialysis business.

(Source: Morningstar)

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

Vanguard Real Estate Index Fund Investor Shares: Low cost, no-frills U.S real estate exposure

Approach

Tracking the MSCI U.S. Investable Market Real Estate 25/50 Index yields a broadly diversified portfolio that captures the full scope of opportunities available to U.S. real estate investors. Market-cap weighting channels the market’s collective wisdom and promotes low turnover, underpinning an Above Average Process Pillar rating. This index selects stocks from the MSCI U.S. Investable Market Index, a broad benchmark the spans the complete U.S. stock market. It adds firms that are classified under the real estate sector. This includes equity REITs as well as real estate management and development firms. The fund excludes mortgage and hybrid REITs, which partially derive their revenue through real estate lending.

Portfolio

REITs represent 96% of this portfolio, with real estate management and development firms rounding out the remainder. REITs are required to distribute at least 90% of their taxable income to shareholders, so this fund consistently generates higher yield than the category average. REITs tend to be more sensitive to interest rates than other equity sectors, partially because interest rates directly affect property values. Additionally, their cash flows from rent collection are relatively fixed, making them somewhat bondlike. REITs’ interest-rate sensitivity depends on their lease durations. For example, office REITs (11% of portfolio) tend to be quite sensitive because of their longer lease cycles, but the shorter leases of residential REITs (14%) make them less responsive. Industrial (11%) and retail REITs (9%) tend to fall in the middle. This fund sprinkles investment across an array of property types, ensuring that its fate isn’t tied to a bet on interest rates or one industry’s performance. 

Performance

Specialty REITs have fared very well over the past few years. REITs that own and operate cell towers, like Crown Castle International CC and American Tower ATC, have turned in especially strong performance. This fund invests in specialty REITs more heavily than the category average, so it has reaped strong growth from these sound performers. Specialty REITs tend to be more volatile than other property types, but they have also demonstrated the potential for stronger returns. 

About the Fund

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. The advisor attempts to track the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly owned subsidiary, which is itself a registered investment company-in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

(Source: Morningstar)

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
Dividend Stocks

Calendar 2021 Guidance Met and Cash Can Now Begin to Flow Again for Cimic

Business Strategy and Outlook

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom.

Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes. Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals.

Financial Strength

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. 

In addition to the cash proceeds, the Thiess sell-down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. 

Bulls Say’s

  • Cimic could remain under pressure due to slower demand for mining services. Mining construction often involves higher levels of risk, as a result of fixed-price, fixed-time, and long-duration contracts. 
  • Cimic’s CEO was confidently forecasting strong earnings before COVID-19 led to an about-face and withdrawal of guidance. But Cimic says it is now building positive cash flow momentum again with awarding of new work. 
  • Increased focus on infrastructure construction projects and maintenance has helped stabilise earnings during weak market conditions for the domestic mining and energy sectors.

Company Profile 

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.

(Source: Morningstar)

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
Dividend Stocks

Glaxo’s Diverse Portfolio Looks Poised to Support Steady Earnings Growth Over the Long Term

Business Strategy and Outlook:

As one of the largest pharmaceutical companies, GlaxoSmithKline has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product line up and expansive list of patent-protected drugs create a wide economic moat, in our opinion. The magnitude of Glaxo’s reach is evidenced by a product portfolio that spans several therapeutic classes as well as vaccines and consumer goods. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. Glaxo is expected to be a major competitor in respiratory, HIV, and vaccines over the next decade.

On the pipeline front, Glaxo has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and immune system, with genetic data to help develop the next generation of drugs. The benefits of this strategies are showing up in Glaxo’s early-stage drugs. This focus is expected to improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers.

Financial Strength:

Glaxo remains on fairly stable financial footing, with debt/EBITDA at 2.8 as of the end of 2021. While the company carries more debt than several of its peers, it generates relatively strong cash flows that should be largely stable. Glaxo has relatively higher debt levels than its peer group, and analysts don’t expect a major acquisition, but several smaller tuck-in acquisitions are likely as the firm augments its internal research and development efforts. Additionally, with the expected divestment of the consumer division in 2021, the combined dividend of the newly separated consumer group and the remaining pharma group are expected to be lower than the current dividend of the combined company as Glaxo has signalled a desire to invest more into the business at the expense of the dividend.

Bulls Say:

  • Glaxo’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • Glaxo faces relatively minor near-term patent losses, setting up steady long-term growth. 
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Profile:

In the pharmaceutical industry, GlaxoSmithKline ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines and consumer healthcare products. Glaxo uses joint ventures to gain additional scale in certain markets like HIV and consumer products.

(Source: Morningstar)

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
Technology Stocks

Twilio’s software building blocks are constructing a cloud communications empire

Business Strategy and Outlook:

Twilio is a cloud-based communication-platform-as-a-service, or CPaaS, company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows developers to integrate messaging, voice, and video functionality into business applications. We believe narrow-moat Twilio has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform. 

In a go-to-market model that focuses on empowering developers to utilize the APIs to build products in a highly customized fashion, Twilio has been able to expand into use-cases that would be difficult to penetrate otherwise. For widely sought-after use-cases, Twilio has developed solution applications, like Flex Contact Center, which combine various channel APIs into a unified interface to create use-case-specific solutions.

Financial Strength:

Twilio is in a healthy financial position. Revenue is growing rapidly, and the company is beginning to scale, while the balance sheet is in good shape. As of December 2021, the company had cash and short-term investments of $5.4 billion and a debt balance of $985.9 million. In March 2021, Twilio issued $1.0 billion of senior notes, consisting of $500 million of 3.625% notes due 2029, and $500 million of 3.875% notes due 2031. In June 2021, the company redeemed its prior convertible notes, due March 2023, in their entirety. Since raising approximately $150 million in its IPO in 2016, Twilio has completed several secondary offerings, recently announcing a $1.8 billion offering of its Class. A common stock in 2021.Twilio has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Twilio does not pay a dividend, nor repurchase stock, and for a young company in a relatively nascent industry, we find it appropriate that the company focuses capital allocation on reinvestments for growth.

Bulls Say:

  • The addition of SI partnerships and solution APIs should lead to increasing success in winning enterprise customers, which not only offer a greater lifetime value for a proportionally smaller acquisition cost, but also tend to be stickier customers. 
  • Twilio has stellar user retention metrics, with churn consistently below 5% and net dollar retention north of 130% in recent years. 
  • As Twilio focuses on developing more solution APIs and growth shifts from usage-based messaging to SaaS-like priced solutions, there should be a natural uptick in both gross margins and recurring revenue.

Company Profile:

Twilio is a cloud-based communication platform-as-a-service company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows software developers to integrate messaging, voice, and video functionality into new or existing business applications. The company leverages its Super Network, Twilio’s global network of carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.

(Source: Morningstar)

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
Dividend Stocks

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth

Business Strategy and Outlook

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. 

The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers.The macro economic impact of the coronavirus has put the near-term outlook for credit growth and profitability under a cloud. The main current influences on earnings growth are modest credit growth, a product of household risk aversion and deleveraging, and delays to business plans for capital expenditure. Intense competition is constraining interest margins. Operating expenses are expected to moderate from 2021 though after years of rising risk and compliance spend.

After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. As a result of which, Morningstar analysts expect a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth 

National Australia Bank’s first-quarter cash profit of AUD 1.8 billion is a strong start to the year. Operationally performance in the quarter was solid. The bank continues to sustain home loan growth ahead of the market, growing by 2.6% in the quarter. But with net interest margins, or NIM, trending lower, for the earnings run rate to hold, the release of loan loss provisions will need to step up. NIM fell 5 basis points to 1.64%, Morningstar analysts maintained a fair value estimate to AUD 28 per share. Morningstar analysts continue to assume NIM improvements in fiscal 2023 on a higher cash rate with a recovery to a NIM of 1.85% by fiscal 2025. Despite cost inflation, analysts think the bank can keep operating costs flat in dollar terms in fiscal 2023 and expect the benefits of fewer systems, more streamlined loan processing to allow the bank to reduce branch costs and staff numbers over time

Financial Strength 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.4% above the regulator’s 10.5% benchmark as at Dec. 31, 2021. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings and a reduced dividend payout ratio. Morningstar analysts expect the payout to average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank has AUD 3.5 billion in excess capital, assuming a target common equity Tier 1 ratio of 11% (management target of 10.75% to 11.25%). This assumes completion of the AUD 2.5 billion share buyback announced in July 2021 and the acquisition of Citigroup’s Australian consumer business.

Bulls Say

  • Management focus is on successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth. 
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit. 
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements

Company Profile

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalization, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

 (Source: Morningstar)

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
Technology Stocks

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Business Strategy and Outlook

Zebra Technologies is a key partner for supply chain, logistics, and operational efficiency for customers across industry verticals. Zebra has acquired and maintained a dominant share position in the automatic identification and data capture, or AIDC, marketby pivoting into higher-growth technologies over its life.

Morningstar analysts agree with the firm’s ongoing pivot into software, developing platforms internally and through acquisitions to augment and complement its existing portfolio.  Layering prescriptive software with machine learning and artificial intelligence on top of these solutions allows customers to focus on activities with higher return on investment and creates a stickier solution by further embedding Zebra’s technology in customer processes. Morningstar analysts think Zebra’s custom solutions give rise to steep customer switching costs, which underpin our narrow economic moat rating.

 Morningstar analysts expect Zebra to benefit from ongoing secular trends toward digitization and automation, notably in omnichannel retail, which has been accelerated by the COVID-19 pandemic and is a tailwind for the firm. Analysts consider the firm’s highest-growth opportunities will come from further building out its software portfolio and growing its base of recurring revenue, as well as from expanding its footprint in the healthcare market as health records and hospital workflows become digitized. The firm is done paying down its debt from its transformative 2014 Motorola deal, and management is now committing capital to bolt-on M&A and its heady research and development budget.

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Morningstar analysts raise its fair value estimate for Zebra Technologies to $449 per share, from $430, after the firm reported solid fourth-quarter results and raised its long-term guidance. Morningstar analysts believe COVID-19 impacts have benefited Zebra’s growth through accelerating demand for digitized solutions and automated workflows, however, it has simultaneously resulted in cost headwinds for supply chain and logistics, pressuring margins. Morningstar analysts believe that the long-term outlook for Zebra to lead the market in end-to-end digital transformation solutions and durably grow margins will come to fruition, despite ongoing constraints and considered it as short term. Morningstar analysts have greater confidence in Zebra’s growing portfolio of high growth adjacent markets to bolster the top line and modestly raise its long-term growth expectations. Shares pulled back on weak short-term margin guidance, and Morningstar analysts now view them as fairly valued.

Financial Strength

The firm was highly leveraged following its 2014 acquisition of Motorola Solutions’ enterprise division, but in the years following it has steadily paid down its debt. As of Dec. 31, 2021, the firm carried $991 million in debt, making its ratio of net debt/trailing 12-month adjusted EBITDA 0.51 times, well below the top of its target range of 2.5 times. Morningstar analysts  forecast Zebra to generate an average of $1.4 billion in free cash flow each year through 2026 and  allow it to easily service its obligations. With the remainder, analysts  expect the firm to pursue additional bolt-on acquisitions and conduct opportunistic share repurchases. However, Morningstar analysts don’t anticipate a transformative deal (like Motorola) in the short term and anticipate Zebra to remain in its target debt/EBITDA range. Zebra engages in receivables factoring, mostly in its operations in Europe, to help fund working capital. If the firm were to encounter a cash crunch, it has over $800 million of its revolving credit facility, which doesn’t expire until 2024, currently untapped.

Bulls Say 

  • Zebra derives 80% of its sales from a robust ecosystem of channel partners, which can customize its technology to specific sub verticals. 
  • Zebra has the largest share of the AIDC market with over 40%, per VDC Research. 
  • Zebra’s pivot into software should enable it to pursue higher-growth opportunities, expand margins, and heighten switching costs at end customers.

Company Profile

Zebra Technologies is a leading provider of automatic identification and data capture technology to enterprises. Its solutions include barcode printers and scanners, mobile computers, and workflow optimization software. The firm primarily serves the retail, transportation logistics, manufacturing, and healthcare markets, designing custom solutions to improve efficiency at its customers

(Source: Morningstar)

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
Technology Stocks

The Market For Uber Remains Fragmented, And Uber Competing Many Local Ride-Sharing Platforms And Taxis

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy and Outlook

Founded in 2009 and headquartered in San Francisco, Uber Technologies has become the largest on-demand ride-sharing provider in the world (outside of China). It has matched riders with drivers completing trips over billions of miles and, at the end of 2020, Uber had 93 million users who used the firm’s ride-sharing or food delivery services at least once a month. In light of Uber’s network effect between riders and drivers, as well as its accumulation of valuable user data, it is alleged the firm warrants a narrow moat rating. 

Uber helps people get from point A to point B by taking ride requests and matching them with drivers available in the area. Uber generates gross booking revenue from this service (the firm’s mobility segment), which is equivalent to the total amount that riders pay. From that, Uber takes the remaining after the driver takes his or her share. Mobility gross booking declined 46% in 2020 due to the pandemic, while net revenue declined 43% with a slightly higher average take rate, although it is anticipated the take rate will decline in the long-run. The pandemic spurred 109% growth in delivery gross bookings and 182% increase in net revenue. 

It is likely, Uber has 30% global market share and will be the leader in Analysts’ estimated $452 billion total addressable ride-sharing market (excluding China) by 2024. The firm faces stiff competition from players such as Lyft (mainly in the U.S.) and Didi, a business in which Uber has an 11% holding after the sale of its operations in China to Didi in 2016. While Uber no longer operates in China, it does compete with Didi in other regions around the world. Globally, the market remains fragmented, and Uber competes with many local ride-sharing platforms and taxis. Delivery, the firm’s food delivery service, will continue to be one of the main revenue growth drivers. Both the mobility and delivery segments will benefit from cross-selling opportunities on the demand and supply sides of the platforms. Further utilization of Uber’s overall on-demand platform for delivery services in other verticals can also help the firm progress toward profitability, in Analysts’ view.

Financial Strength

At the end of 2021, Uber had $4.9 billion of cash and $9.3 billion of debt on its balance sheet. Uber burned $4.3 billion, $2.7 billion, and $445 million in cash from operations in 2019, 2020, and 2021, respectively, while capital expenditures averaged a bit less than $500 million during this period. It is likely, the firm to generate positive cash from operations beginning in 2022. By 2031, it is anticipated Uber’s cash from operations could exceed $23 billion, outpacing top-line growth due to operating leverage. It is projected Uber to become free cash flow positive in 2022, after which Analysts’ model it will average free cash flow to equity/revenue (FCFE/Sales) of over 10% through 2031. While it is held, Uber FCFE/Sales to reach 19% by 2031, it isn’t foreseen the firm issuing dividends. Uber will likely use any excess cash for further acquisitions.

Bulls Say’s

  • Uber’s position in the autonomous vehicle race could equalize gross and net revenue, after no longer needing to pay drivers. 
  • Pressure to pay a minimum amount per trip to its contracted drivers could create a barrier to entry for smaller players, helping Uber in the long-run. 
  • Uber’s aggregation of multimodal offerings will drive in-app stickiness, making Uber a one-stop shop for all transport needs.

Company Profile 

Uber Technologies is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm refers to it, provides “aerial ride-sharing.” Uber Technologies is headquartered in San Francisco and operates in over 63 countries with over 110 million users that order rides or foods at least once a month. Approximately 76% of its gross revenue comes from ride-sharing and 22% from food delivery. 

(Source: MorningStar)

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.