Category: Technology Stocks

Tech stocks refer to any stock involved in the technology sector, from semiconductor producers to software providers. Tech stocks are often a leading indicator for the economy and the stock market. Technology stocks generally follow the pattern of more innovation in the market & new development of product.

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Technology Stocks

Despite Challenges, a Narrow Moat Still Surrounds Illumina in Sequencing and Grail Remains Promising

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Business Strategy & Outlook:   

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions. Over the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HiSeq X in early 2014. 

Further innovation, like the NovaSeq, continue to push down these costs, and Illumina expects its new Chemistry X, to eventually enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genome sequencing could have wide appeal in clinical applications beyond current strongholds in oncology and reproductive health. Threats from disruptive technologies may never fully disappear, though. For example, new or cheaper sequencing tools may eventually displace Illumina’s stronghold in genomic sequencing. Overall, emerging systems shall dethrone Illumina’s sequencing technologies, especially given the switching costs associated with its large installed system base and its own development initiatives. Additionally, the company’s recent bet on Grail’s liquid biopsy technology exposes the company to a new risk of disruptive technologies in the very large but nascent preventative care testing market for cancer. So while Grail’s technology looks like it will have a first-mover advantage and should have a decent runway to expand before competitive forces materially alter that target market, future entrants may eat into its liquid biopsy potential, eventually.

Financial Strengths:  

Illumina’s financial flexibility has declined a bit to purchase Grail. Of the $10 billion cumulative purchase price, the company issued about $5 billion of equity, and cash for the remainder, including $1 billion in recently issued debt ($500 million due in 2023 and $500 million due in 2031). Illumina should be able to handle this mild increase in financial leverage. At the end of March 2022, the company held about $1.4 billion of cash and investments and owed $1.7 billion in debt, which the company should be able to easily manage. Additionally, a Delaware jury recently awarded BGI’s Complete Genomics $334 million in past damages related to a patent dispute. While Illumina plans to appeal that decision, the company should be able to easily manage that potential outflow and potential royalty streams, along with a potential fine from the EU antitrust regulator for jumping the gun on the Grail transaction. 

Bulls Say: 

  • Genome sequencing remains a relatively early-stage market, and expanding sequencing indications, including the nascent liquid biopsy applications, create large growth opportunities for Illumina’s legacy and recently acquired operations.
  • Illumina’s very large and growing installed base of sequencing instruments should translate into significant ongoing sales of high-margin consumables and maintenance services.
  • The Grail assets hold substantial promise, so even if antitrust regulators force Illumina to unwind the transaction, it should get a decent return on its investment.

Company Description: 

Illumina provides tools and services to analyze genetic material with life science and clinical lab applications. The company generates over 90% of its revenue from sequencing instruments, consumables, and services. Illumina’s high-throughput technology enables whole genome sequencing in humans and other large organisms. Its lower throughput tools enable applications that require smaller data outputs, such as viral and cancer tumor screening. Illumina also sells microarrays (less than 10% of sales) that enable lower-cost, focused genetic screening with primarily consumer and agricultural applications.

(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.

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Technology Stocks

BlackBerry Is Seeking Growth From Cybersecurity and Connected Vehicles but Hasn’t Earned a Moat

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Business Strategy & Outlook

BlackBerry has positioned itself in rapidly growing markets that benefit from secular trends toward security and connectivity, but it has a long way to go to earn a durable competitive advantage. BlackBerry sells software into enterprise cybersecurity applications and embedded applications like cars. Its flagship enterprise product is the Spark suite, which combines unified endpoint management with endpoint protection. In the automotive market, BlackBerry’s QNX software powers infotainment systems, where it leads the market, as well as electronic control units and advanced driver-assistance systems. BlackBerry performs best in regulated industries such as government, financial services, and healthcare, where security and privacy are more mission-critical. CEO John Chen has helped turn the business around after its handset decline, primarily via software acquisitions like Good Technology and Cylance. The metrics of BlackBerry’s success going forward will be an ability to gain market share against larger incumbents and improve profitability. The core of its technology–both in cybersecurity and automotive software–is strong, but the company’s lackluster ability to use this technology has been disappointing in relation to maintaining solid growth or gaining market share. BlackBerry does not merit an economic moat. 

BlackBerry is expected to focus on its go-to-market approach for its enterprise offerings in order to gain market share. While BlackBerry is well recognized in regulated industries, it will have to improve its ability to sell into a broader base of enterprises to grow. After a slew of acquisitions during Chen’s pivot, BlackBerry is now anticipated to focus on organic investment in operating expenses to spur growth. The firm’s greatest growth opportunities will come from connected and autonomous vehicles. BlackBerry’s QNX software is anticipated to benefit in the short and medium term from increasing levels of autonomy worldwide, and think its partnership with Amazon for its IVY platform gives it a longer-term growth opportunity in connected and autonomous cars.

Financial Strengths

BlackBerry is expected to focus on improving its profitability and free cash flow over the medium term. As of Feb. 28, 2022, the firm carried $507 million in debt compared with $712 million in cash and equivalents. While the firm is not projected to be GAAP profitable for a few years, management’s goal is to be non-GAAP profitable while generating positive free cash flow, which it failed to do in fiscal 2022. The company is forecasted to steadily improve while it works to regain positive free cash flow and GAAP profitability. The current forecast shows that there is enough cash flow generation to enable the firm to fulfill its obligations over the next few years. BlackBerry does not pay a dividend, nor does it regularly conduct share repurchases as a way of providing capital back to shareholders. Management has been focused on the business turnaround from handsets and has prioritized using excess cash for inorganic growth opportunities and divesting from its hardware business. While the firm has paused M&A for now to focus on its go-to-market strategy, a cash buildup is anticipated over the explicit forecast that could allow for future acquisitions. 

Bulls Say

  • The Spark suite provides the widest breadth of endpoint capabilities BlackBerry has offered to date, and should appeal to enterprises looking to consolidate their software vendor lists. 
  • BlackBerry’s focus on security gives it an advantage in regulated industries, like government, healthcare, and financial services. 
  • BlackBerry IVY—the result of a partnership with Amazon Web Services—could create a revolutionary software ecosystem for connected vehicles, allowing OEMs to process, analyze, and monetize massive amounts of vehicle data.

Company Description

BlackBerry, once known for being the world’s largest smartphone manufacturer, is now exclusively a software provider with a stated goal of end-to-end secure communication for enterprises. The firm provides endpoint management and protection to enterprises, specializing in regulated industries like government, as well as embedded software to the automotive, medical, and industrial markets.

(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.

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Technology Stocks

Ring the Alarm, RingCentral Poised for Success as UCaaS Becomes the Business Communication Standard

Business Strategy & Outlook:   

RingCentral is a leading unified communication as a service, or UCaaS, provider that enables omnichannel business communication and collaboration on a single cloud-native platform, creating a holistic user experience. As an increasingly mobile workforce requires greater flexibility in business communications, the company believes the firm’s offerings become more critical, and narrow-moat RingCentral should exhibit healthy long-term growth. The company believes the market opportunity for UCaaS providers is significant as 450 million-plus on-premises private branch exchange, or PBX, seats migrate to the cloud. At this point, although cloud penetration of hosted PBX seats is accelerating, less than 5% of seats have moved to the cloud. In a go-to-market model that focuses on leveraging channel partners such as Avaya and Mitel, RingCentral has gained first access to an on-premises PBX install base of over 210 million of these seats. These partnerships provide RingCentral a powerful advantage over competitors in winning a significant portion of the legacy install base. Company foresees healthy long-term growth as the firm increases seat penetration, expands enterprise adoption, and develops its international presence. 

RingCentral’s core product, RingCentral Office, deploys a global unified communications platform that integrates messaging, video, phone, and other cloud-based communication solutions. Users are assigned a single business phone number and profile that allows for connection to the business network from any device and location. Company viewed the platform’s 5,000-plus integration offerings as being particularly important in defining the value and competitiveness of the Office product. RingCentral’s moat is supported by strong user metrics, with a subscription model and net dollar retention rates in excess of 100%. They expect enterprise penetration, which has been the fastest growing business segment, to expand further in coming years, and benefit both deal size and retention. This should lead to lower churn and higher seat penetration, further cementing RingCentral’s position as a leader in the UCaaS space.

Financial Strengths:  

RingCentral’s financial position is reasonably sound but skews toward risky. As of December 2021, RingCentral has $267 million in cash and cash equivalents versus $1.4 billion in debt. In March 2020 and September 2020, RingCentral issued $1.0 billion of convertible senior notes, due 2025 and convertible at $360 per share, and $650 million of convertible senior notes, due 2026 and convertible at $424 per share, respectively. RingCentral has yet to achieve GAAP profitability, as it remains focused on reinvesting excess returns back into the company. RingCentral does not pay a dividend and has only repurchased stock sporadically. In December 2021, the company announced a $100 million share repurchase authorization, which is expected to occur opportunistically. The firm has historically demonstrated descent cash flows, with free cash flow margins averaging 5% over the last five years, including a downward skew from 2020 where free cash flow was pressured as a result of the COVID-19 pandemic. 2021 has shown a rebound to strong free cash flows, and the company expects healthy free cash flow expansion in the coming years. RingCentral has delivered positive non-GAAP operating margins in each year since 2016, which is expected to continue over the next five years, as well. The firm’s non-GAAP operating margin has averaged 10% over the last three years. Over the next 10 years,  margins expand significantly as the company scales, which should translate to GAAP profitability as well.

Bulls Say: 

  • Partnerships with legacy PBX vendors give RingCentral access to a significant portion of the 450 million on-premises users, providing a powerful advantage over competitors in winning a large portion of the legacy installed base. 
  • RingCentral is the first in its space to offer a CCaaS solution in addition to UCaaS, an offering to prove influential in winning enterprise deals again. 
  • As an increasingly mobile workforce requires greater flexibility in business communications, RingCentral should face robust demand and have success in expanding enterprise adoption.

Company Description:  

RingCentral is a unified communication as a service, or UCaaS, provider. RingCentral’s unified communications platform replaces on-premises private branch exchange (PBX) phone systems, which support voice-only desktop phones, with its cloud phone system. Beyond its flagship voice product, the company’s platform enables cloud-based integrated omnichannel communications, including voice, messaging, SMS, video meetings, conferencing, and contact center software solutions, among others. The software allows businesses to communicate and collaborate all on one platform across various device-types.

 (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.

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Technology Stocks

Synopsys Boasts Compelling Growth Outlook With its EDA Portfolio

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Business Strategy & Outlook:   

Synopsys provides electronic design automation, or EDA, software, intellectual property, and software integrity products that are critical to the semiconductor chip design process. It is  expected that as secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitization of various end markets. The company believes narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, Synopsys privy to higher growth vectors and as a result expected growth greater than that of top competitor Cadence. 

Outside of core EDA, the company views Synopsys’ IP and SI businesses as benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, Synopsys will benefit as its customer base expands beyond traditional semiconductor designers. The company expects this trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths:  

Synopsys is in a healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. Company do not have any material concerns about Synopsys’ ability to finance this debt. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continued access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. The company expects margins to continue to expand and believes management will deliver on its target of 100 basis points of annual non-GAAP operating margin expansion. The company expects healthy growth in free cash flow as industry tailwinds lead to long-term growth for Synopsys.

Bulls Say: 

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys. 
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle. 
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%

Company Description:  

Synopsys is a provider of electronic design automation software, intellectual property, and software integrity products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(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.

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Technology Stocks

ORCL’s cloud ERP has the potential to become the market leader

Investment Thesis

  • Industry leader with a solid portfolio and proven track record in achieving solid profitability and leading high and improving margins. ORCL has a large global footprint (of customers and developers).
  • Leader in relational database market with market shares of top 4 vendors (ORCL, Microsoft, IBM and SAP) largely unchanged since 2000. ORCL leads the other 3 players. These top 4 vendors hold ~80-85% market share whilst there is significant churn across the smaller vendors. According to ORCL, the Company’s database offerings lead competitors based on performance, reliability and security. For instance, ORCL’s Cloud Database has 35x faster online transaction processing (OLTP) than Aurora on AWS. Note: OLTPs are typically used to support order entry and transactions on the internet.
  • ORCL’s Autonomous Database (available since August 2018) has been well-received by customers and presents cost savings for customers by reducing costs of ongoing maintenance.
  • ORCL’s cloud ERP has the potential to become the market leader. ORCL arguably has a wider breadth of products within its ERP offering compared to its close rival SAP.  
  • Strong and substantial cash generation which enables the Board to consider capital management initiatives such as large stock repurchases and or undertake further acquisitions which fill gaps in the Company’s product portfolio.  

Key Risks

  • Aggressive competition by other established players like Microsoft, Salesforce and SAP. Further, ORCL competes in a rapidly changing competitive environment whereby other vendors seek to gain share by disrupting large legacy vendors in offering similar products at lower price points (if not free such as PostgreSQL, Apache and Cassandra).
  • Any deterioration in the global economy and weakening of IT spending. 
  • Market share loss in database business.
  • Lack of customer demand for Autonomous Database.
  • Market share loss as a result of corporations migrating to cloud computing.
  • Potential strengthening of USD providing currency headwinds.
  • ORCL has a history of making acquisitions to fill its product portfolio gaps. As such, execution risks arise with any failure to integrate the acquisition. 

Key Highlights 

  • For FY23 Cloud business (excluding Cerner) to organically grow more than +30% in CC (vs +22% in pcp), Cloud service & License support to deliver double-digit organic growth, gross margin to be significantly higher y/y, capex to be higher y/y to meet the demand by adding another 6 cloud regions to take total region count to 44, Cerner acquisition to be accretive to earnings, including in 1Q23. 
  • For 1Q23 total revenues (including Cerner) to grow +20-22% in CC with total Cloud growing +47-50% in CC (+25-28% in CC excluding Cerner) with FX being 3-4% headwind on total revenue, non-GAAP EPS to grow +6-10% and be $1.09-1.13 in CC with FX being $0.05-0.06 headwind.

Company Description

Oracle Corporation (NYSE: ORCL), was founded in 1977 and is a global leader in providing enterprise software. The Company’s businesses include cloud and on-premise software, hardware and services. Its cloud and on-premise software business consist of three segments; Cloud software and on-premise software, Cloud infrastructure as a service (IaaS) and Software license updates and product support. The Company’s Hardware business consists of two segments, including hardware products and hardware support and the Services business includes activities, such as consulting services, enhanced support services and education services.

(Source: Banyantree)

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 is 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

SKF’s core market is treading water from a growth perspective

Business Strategy and Outlook

SKF’s core market is treading water from a growth perspective, and management’s plan for faster top-line growth to double revenue by “2030” is fairly high level in its outline and therefore difficult for investors to assess. SKF has deep engineering expertise and a leading position in ball bearings; however, growth from new market opportunities will still take time and investment. Of the high-level opportunities presented by the company, ceramic ball bearings for the electric vehicle market is one of the most promising. The market for EVs will expand over time, as the adoption is supported by regulators and consumers alike. Therefore, SKF’s ceramic bearing solution should yield positive results once EV take-up accelerates. Pricing power along with cost flexibility thanks to the adoption of robotics and other automation has enabled to SKF to weather its mostly procyclical end markets. However, the estimate is around 10% of its revenue is favoured by structural tailwinds. First, it has exposure to renewables through wind turbines and other “clean tech” end markets, which currently contribute around 9% of revenue. Second, it has an emerging connected services business, with contracts at less than 1% of revenue. However, the services offer a promising growth outlook and also welcome recurring revenue for SKF. Across capital goods companies, connected services have seen good customer take-up rates due to the productivity gains from preventative maintenance, and the same is expected for SKF’s connected services.

SKF provides its customers with measurable operational cost savings versus competitor bearings, which it can accomplish by designing its ball bearings on an application-specific basis. As one of the two largest industrial bearings suppliers, along with Schaeffler, it draws on its more than 100 years of experience in industrial application design to lower energy costs and extend the length of time between maintenance breaks. Customers are willing to pay a premium for this engineering and often sign supply contracts, as work stoppages are very costly for customers running processes for hours at a time or even on a continuous basis

Financial Strength

SKF ended the first quarter of 2022 with a moderate level of debt on its balance sheet and net debt/EBITDA of 1.2 times. This is an appropriate level for a company with mostly cyclical demand. Based on the free cash flow forecasts, if necessary, the company could pay down its gross debt balance within four years.

Bulls Say’s

SKF’s restructuring program and working-capital management program should boost medium-term cash flows and provide mid-single-digit earnings growth.

As a major supplier of ball bearings for wind turbines, the company is a beneficiary of renewables growth.

The lagging automotive division should see a marked improvement in the short term from restructuring efforts and EV growth

Company Profile

SKF’s history goes back to the first major patents in ball bearings: In 1907, SKF was the first to patent the self-aligning ball bearing, which is easily recognisable today. Along with Schaeffler, it is one of the top two global ball bearing suppliers, followed by Timken, NSK, NTN, and JTEK. Combined, these six companies supply about 60% of the world’s ball bearings. The company is based in Sweden and has a global manufacturing footprint of 108 sites and 17,000 global distributor locations. SKF operates under two segments: industrial, which has a fairly fragmented customer base, and automotive, which is the opposite, with a concentrated customer base that includes the likes of Tesla.

(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 is 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

DaVita stands to benefit from the continued growth in the ESRD population and it is even pursuing integrated care models to gain a bigger piece of the treatment pie

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, DaVita’s long-term prospects as solid. Once COVID-19 concerns dissipate, it is expected DaVita to get back to more normalized growth trends driven primarily by ESRD trends. The 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  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, 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 during that period, as well.

Financial Strength

Like many healthcare services providers, DaVita operates with significant leverage, especially when considering lease obligations. After recapitalizing its balance sheet and repurchasing shares following the 2019 sale of DaVita Medical Group, 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, DaVita is 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, 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’s

  • Excluding recent COVID-19-mortality challenges, 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 there are no 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 represent nearly all of the profits generated by DaVita in the U.S. dialysis business.

 (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 is 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

Dexcom’s strength in innovation puts the company on firm footing.

The Japan Finance and market, Data Chart.

Business Strategy & Outlook

Dexcom enjoys a well-established track record for introducing the most precise sensors for use in its continuous glucose monitors. On the strength of its technology, Dexcom has captured an impressive slice of this CGM market, but a recent wave of innovation in the diabetes device market has intensified competitive pressure. Nonetheless, Dexcom has done a credible job of adapting and fending off competition from Abbott and Medtronic. Dexcom has finally begun to make progress in penetrating the Type 2 market, in addition to long dominating the Type 1 market, where CGM penetration has been estimated around 35%. The establishing reimbursement for Type 2 patients can be challenging, but payers have been steadily joining the bandwagon. Dexcom should benefit as these the reimbursement pieces fall into place.

Both Abbott and Medtronic have introduced meaningful innovation in this realm that the offers patients’ new alternatives. Abbott’s FreeStyle Libre Flash is significantly more user-friendly and is aggressively priced. The product has made substantial inroads with the Type 2 population. Medtronic’s next-gen 780g insulin pump automates much of the insulin delivery and comes with its own integrated CGM. These competitive features could peel some Dexcom users away on the margins. However, one has been impressed with how Dexcom was able to incorporate some of the most attractive Libre features–no-stick calibration, longer sensor life–in its G6 product. The new G7 CGM builds on those strengths. The Dexcom’s strength in innovation puts the company on firm footing. First, the precision of its CGM remains materially better than competitive products. Second, Dexcom’s next-gen, one-piece G7 should be significantly lower-cost, which offers flexibility for improving cost structure. The firm has also moved more aggressively into the pharmacy channel to enhance patient access and take advantage of greater volume upside. Finally, Dexcom’s alliances with Tandem, Insulate, Livongo (now part of Teledoc), and Eli Lilly provide opportunities for the firm to remain tightly woven into most new diabetes technologies.

Financial Strengths

Dexcom has been cash flow positive for since 2014 and more recently moved into positive earnings territory. While revenue has grown very quickly, research and development expenses and selling, general, and administrative costs have grown significantly as well, sometimes outpacing revenue growth, during the early phases of commercialization. However, the firm turned the corner in 2019, and it will post meaningful profits through the explicit forecast period. Historically, Dexcom has funded its operating losses through additional capital raises over the years or through convertible debt. As of December 2020, Dexcom had two lots of convertible senior notes, which mature in 2023 and 2025. The debt is partially intended to support Dexcom’s efforts to expand, including building out the company’s manufacturing footprint. The $850 million in convertible debt due in 2023 are already in the money at the initial conversion price of $41.07 per share. Most recently, the firm issued $1.21 billion more in convertible debt due in 2025, partially to redeem convertible debt due in 2022, and these notes have an initial conversion rate that is equivalent to $150.11 per share. Dexcom also issued 1.8 million shares in 2018 to raise funds to pay for a hefty collaborate R&D fee.

Bulls Say

  • Dexcom’s next-gen G7 product should be significantly less expensive, offer a thinner profile, and faster warm-up time than G6. 
  • Medicare’s decision to reimburse for the G6 is a favorable development for Dexcom, as private payers often use Medicare as the benchmark for reimbursement policies. 
  • Dexcom’s initiative with Verily offers the potential to apply tech expertise in data analytics with data intensive health management for type 2 diabetic patients. This partnership could put Dexcom a step ahead of rivals.

Company Description

Dexcom designs and commercializes continuous glucose monitoring systems for diabetics. CGM systems serve as an alternative to the traditional blood glucose meter process, and the company is evolving its CGM systems to include the disposable sensor and the durable receiver.

(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

Five9 Is a Growing Force in the Cloud Contact Center Space

Business Strategy & Outlook

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. A long growth runway and significant market opportunity is anticipated but no-moat Five9 is expected to require a high degree of investment activity moving forward as it squares off against larger competitors. Five9’s Virtual Contact Center, or VCC, platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist capabilities, and workflow automation. VCC is expected to become increasingly critical for enabling omnichannel interactions amid a secular acceleration of digital-first customer engagement. 

With only 15% to 20% of contact center agents in the cloud, the residual opportunity around uncaptured communication data is significant. The increasing automation of contact center labor also presents an additional opportunity for Five9 and expect the firm’s rapidly growing AI and automation portfolio to enable both scale and efficiency gains for customers’ call center operations. Attach rates for these solutions are rising within each tier of customers, and higher attach rates are observed in incrementally larger enterprises, a positive as the company advances its penetration within larger companies. Reflecting the high utility businesses derive from the firm’s offerings, Five9 reports a net retention rate in excess of 120%, reflecting strong growth within existing customers. Five9’s success in gathering new customers is also noted, principally driven by the migration of contact centers to the cloud. Nonetheless, the current positive outlook is tempered as heightening competition in the cloud contact center space is observed with the emergence of natively built CCaaS offerings from key competitors such as Zoom, Twilio, and Amazon.

Financial Strengths

Five9’s financial position is sound. As of March 2022, Five9 held $478 million in cash and short-term investments versus $738 million in debt. In May 2018, Five9 issued $259 million in 0.125% convertible senior notes, due 2023 and convertible at $40.82 per share. As of March 2022, approximately $2.3 million of the 2023 notes remained outstanding. In June 2020, Five9 issued an additional $748 million in 0.5% convertible senior notes, due 2025, convertible at $134.34 per share, and entirely outstanding as of March 2022. There are no any material concerns about Five9’s ability to repay this debt with existing cash and expected cash generation over the next several years. That said, it is possible the firm may need to access the capital markets, which will not present any significant challenges. Five9 has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company to build out the platform and enhance future growth prospects. Five9 has invested heavily in recent years, building a sophisticated AI and automation portfolio and building direct sales teams to help drive enterprise sales. Five9 does not pay a dividend, nor repurchase stock, and for a growing company within an increasingly competitive market, it is appropriate that the company focuses capital allocation on reinvestments for growth. Healthy growth in free cash flow is anticipated as industry tailwinds around digital transformations lead to long-term growth for Five9. Five9 has generated positive non-GAAP operating margins since 2017. As the company scales, non-GAAP operating margins are expected to reach into the low-20% range within five years, up from 14% in 2021. These positive results should translate to profitability on a GAAP basis by 2025.

Bulls Say

  • Five9 has strong user retention metrics, with net dollar retention above 120%. 
  • As the firm continues to expand its growing AI and automation portfolio, Five9 should benefit as automation of contact center labor will enable a larger incremental market opportunity, and AI-based technology commands a higher ASP per seat. 
  • Five9 has a large residual market opportunity, with only about 15% to 20% of contact center agents having moved to the cloud so far.

Company Description

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. The company’s Virtual Contact Center platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist technology, and workflow automation. Five9 also offers workforce optimization products that optimize call center efficiency through workforce management solutions, manage interaction quality, and track agent performance.

(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

Lennar controls an ample land supply, which affords the company the ability to meet future demand while focusing on improving cash flows.

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy & Outlook

From 2020-2021 proved to be strong years for the U.S. housing market despite the COVID-19 pandemic, and housing starts should remain elevated in 2022 as homebuilders work through extensive backlogs. However, deteriorating affordability has slowed housing demand, and starts to decrease 10% in 2023 to 1.435 million units and decline roughly 10% in 2024 to 1.3 million units, which is about in line with new home production in 2018-19. However, the affordability will improve over the next two years as mortgage rates subside and home prices become more tenable. The project starts will rebound to 1.55 million units by 2026 and average around 1.45 million units from 2027-31.

The first-time buyers will be a key driver of future housing demand, and Lennar is well positioned to capture these potential buyers with its increased mix of entry-level homes. Lennar controls an ample land supply, which affords the company the ability to meet future demand while focusing on improving cash flows and maintaining a strong balance sheet. The company has shifted to a lighter land acquisition strategy, which seeks to reduce the amount of capital tied up in land by purchasing smaller land parcels and relying more on land options to acquire land on a just-in-time basis. This strategy should help the company realize better returns on invested capital and cash flows over the housing cycle. Lennar’s investments in ancillary businesses, such as its multifamily business and technology startups, distinguishes the company from many other homebuilders. Management announced plans to spin off its multifamily, single-family for rent, and land businesses by the end of fiscal 2022. Whether the market will place a higher multiple on SpinCo as a standalone entity has yet to be seen, but one cannot think this transaction will result in meaningful value creation for Lennar’s remaining businesses. However, the separation of these ancillary businesses, which tend to generate lumpier earnings, should dampen Lennar’s earnings volatility.

Financial Strengths

At the end of fiscal second-quarter 2022, Lennar had approximately $4.6 billion of outstanding homebuilding debt, which net of its $1.3 billion homebuilding cash balance, equates to a 13.4% homebuilding net debt/capital ratio. The Lennar has a strong balance sheet and plenty of liquidity. Aside from the firm’s $1.3 billion homebuilding cash balance, it also has $2.5 billion available on its revolving credit facility. Given the long-term outlook for U.S. residential construction and the firm’s commitment to become a more asset-light business, the Lennar will continue to generate strong cash flow over the longer term.

Bulls Say

  • The U.S. housing market is undersupplied. This supply/demand imbalance will take years to address and should support pricing power for homebuilders. 
  • Demand for entry-level housing should increase as the large millennial generation forms households. Lennar is well positioned to capitalize on this growing market. 
  • Lennar’s multifamily segment is an underappreciated asset, which could get more market recognition after it is spun off.

Company Description

Lennar is the second-largest public homebuilder in the United States. The company’s homebuilding operations target first-time, move-up, and active adult homebuyers mainly under the Lennar brand name. Lennar’s financial-services segment provides mortgage financing and related services to its homebuyers. Miami-based Lennar is also involved in multifamily construction and has invested in numerous housing-related technology startups.

(Source: Morningstar)

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