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

Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past

Business Strategy & Outlook

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage are not independent, as they are controlled by mobile network operators). Cellnex’s strategy is to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leasebacks and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

When Cellnex acquires a tower portfolio, the MNO signs a long-term contract with Cellnex and becomes an “anchor tenant” on the towers. Contracts, known as master service agreements, allow Cellnex to move anchor tenants between towers, which lets it realize efficiencies (decommission redundant towers, build new towers with two tenants instead of one, or avoid unnecessary land lease costs) and improve returns on invested capital. Cellnex’s strategic priority is to own at least two tower portfolios in each of the markets where it operates, as having several portfolios allows for more efficiencies. The company owns at least two portfolios in each of France, Spain, Italy, Portugal, Switzerland, Poland, and the United Kingdom. The Cellnex will keep acquiring towers in Europe, with a focus in Germany, Scandinavia, or Austria, regions where it currently owns none or only one tower portfolio. Cellnex has reached a scale of almost 100,000 towers since its inception in 2015 by acquiring towers from operators like Telefonica, Iliad, Bouygues, Altice, and CK Hutchison, among others. Deals are usually structured as asset deals, so they typically come with fewer integration burdens, which is positive for an acquisitive company like Cellnex. The Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past.

Financial Strengths

As of December 2021, Cellnex had EUR 11.7 billion in net debt excluding leases, which implies a net debt/EBITDA (after leases) ratio of around 5.5 times at the end of 2022. Although this ratio may seem elevated, it is reasonable, as tower companies can manage high leverage due to long-term contractual revenue and high cash flow visibility linked to inflation. Cellnex’s leverage is also in line with other peers in the sector, such as American Tower and Inwit. As the European tower industry consolidates and fewer M&A opportunities are available, we expect the firm to steadily reduce leverage. Of Cellnex’s debt, 80% is fixed-rate, providing protection against interest-rate increases. Cellnex’s debt is nonrecourse, which means the debt is associated with the assets but not to the company (the issuer can seize the collateral—towers—but cannot go after the firm for additional compensation).

Bulls Say

  • Cellnex provides high cash flow visibility to investors, with inflation protection and growth optionality coming from new tenants. It is also protected against COVID-19 headwinds as critical infrastructure is still needed in lockdown times. 
  • Cellnex has the opportunity for more M&A deals. Tower portfolios in Germany, Scandinavia, or Austria could be acquired, which could enhance operating leverage and drive better returns on capital. 
  • Cellnex is well hedged against inflation risk and interest-rate increases through its inflation-linked contracts and fixed-rate debt.

Company Description

Cellnex owns and operates almost 100,000 wireless towers in Europe, resulting from continued M&A activity since its IPO in 2015. It has acquired towers from several European mobile network operator, including Telefonica, Iliad, CK Hutchison, Bouygues, and Altice. Cellnex is present in more than 10 European countries as of December 2021, including France, Italy, Spain, Poland, the U.K., Switzerland, and Portugal. Cellnex’s strategy is to acquire portfolios from MNOs and lease the towers back to them through long-term contracts, which provide high cash flow visibility and inflation protection.

(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

SAP has further entrenched itself in X data with its acquisition of Qualtrics

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 

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP Central Component software such that by 2030 all of its ERP customers will need to shift to a cloud solution. This vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP’s transition of on-premises users to the cloud, which leads to believe its negative trend could be prolonged. ERP is not SAP’s only offering. The company offers software in its so-called intelligent spending category, which includes Ariba and Concur, which cater to procurement and travel and expense reporting. While ERP and intelligent spending software caters to operational data–otherwise known as O data–SAP also provides solutions around X data, or experience data. SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software. But, regardless of which type of data is flowing through SAP software, this data can be stored in SAP’s database offering, HANA, which is the only database compatible with SAP’s cloud ERP, S/4HANA (unlike on-premises ERP’s former database interoperability).

Despite SAP’s efforts to nurture high attach rates among offerings amid the vulnerable transition to the cloud, such as via database lock-in, this is only ruffling more feathers among its customers that have adapted to the new norm of mix-and-match technology, which the cloud has enabled. Such lock-in attempts are influential in SAP’s consistently declining net promoter score. Moreover, SAP’s efforts to add to its ecosystem in the hopes of more effortless user experience have proved to be anything but accretive, as its acquisition of Qualtrics has shown. SAP announced plans to spin off the company only two years after it was acquired.

Financial Strength

AP has been acquisitive over the last decade as it has built out its ERP offerings. Despite this, SAP has maintained healthy leverage ratios and continues to do so with 2019 net debt/EBITDA close to 2. This figure includes the EUR 7 billion of debt SAP issued in December 2018 to finance the Qualtrics acquisition, leaving it with outstanding long-term debt of roughly EUR 14 billion and EUR 7 billion in cash and marketable securities at the end of the fiscal 2020 third quarter. The Qualtrics acquisition has stretched SAP’s leverage ratio slightly beyond its normal levels over the last decade and may limit the company’s ability to make transformative acquisitions in the near future. It can be foreseen SAP is still having the ability to make tuck-in acquisitions, and with free cash flow of at least EUR 3 billion expected in 2020 and 2021, but SAP is not having any troubles covering its financial obligations.

Bulls Say’s

  • SAP should be able to migrate the majority of its on-premises ERP customers to S/4HANA while continuing to add hefty net new customers to the platform. 
  • As more customers transition to the cloud, SAP should be able to extract significant more lifetime value per customer, adding to its top line. 
  • SAP should see significant margin expansion as a result of improving scale in its cloud offerings.

Company Profile 

Founded in 1972 by former IBM employees, SAP provides database technology and enterprise resource planning software to enterprises around the world. Across more than 180 countries, the company serves 440,000 customers, approximately 80% of which are small to medium-size enterprises.

(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.

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Technology Stocks

Arista Gaining From High End Switching Demand Turned On As Cloud Data Centers Expand, $105 FVE

Business Strategy & Outlook

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and customers are anticipated to remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises. EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which allows the company to focus on its core competencies. 

Arista works closely with its core customers to optimize their networking ecosystems, which can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, Arista is growing alongside key customers and it is noted that new ventures have expanded from core competencies. Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.

Financial Strengths

Arista is considered to be in a financially healthy position; its zero debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. The company’s financial health is expected to remain stable and that cash could be deployed for growth via bolt-on products or technologies.

Bulls Say

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.

Company Description

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.

(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

Dell Is an IT and PC Behemoth, But That Doesn’t Lead to a Moat

Business Strategy & Outlook

Born out of Dell’s 2016 acquisition of EMC, Dell Technologies is a pre-eminent vendor of IT infrastructure and PCs. Although Dell has substantial exposure to commoditized markets, its ability to bring the cloud to organizations is a growth opportunity and the company is expected to benefit from PC and workplace productivity product demand brought on by remote work needs. Dell has taken massive strides to trim its debt load via cash injections coming from divestitures, as well as spinning off VMware in November 2021. Dell’s business centers on PCs and peripherals, servers, storage, and networking equipment, as well as software, services, and financial services. Its brands include Dell, Dell EMC, Secureworks, and Virtustream.

The company’s largest revenue streams of commercial PCs and servers are in tough pricing environments that can rely on services and support to generate profit. The overall PC market is projected to continue consolidating toward an oligopoly, with profits coming from high-end notebooks, gaming PCs, and peripherals. While storage is a challenging marketplace, flash-based arrays and hyperconverged infrastructure provide avenues for growth. A commercial agreement with VMware should continue providing Dell’s hardware with a unique selling proposition. Dell Technologies as an end-to-end IT infrastructure provider that is supplementing hardware prowess with emerging software and cloud-based solutions. Its ability to bring the cloud to customers via its hybrid cloud offerings as organizations face challenges adopting public cloud is met with optimism, but competitive markets are anticipated to challenge the company’s overall profitability. With Dell Technologies achieving an investment-grade capital rating after the VMware spinoff, it is expected to have flexibility in investing for growth and rewarding shareholders via a new quarterly dividend and through share buybacks. Public shareholders have very little influence on the company’s strategy and rely heavily on CEO Michael Dell and Silver Lake Partners making value-accretive decisions.

Financial Strengths

Dell Technologies’ core debt load (outside of Dell Financial Services) as the main hindrance to its financial strength, but the firm’s financial health is projected to greatly improve through cash flow generation and paying down debt. Using its portion of VMware’s special dividend, as part of the spinoff, to repay obligations helped increase Dell’s credit rating into investment-grade territory. After returning to the public market in December 2018, the total debt load was approximately $55 billion versus an estimated $6 billion cash and cash equivalents. The company has placed a priority on paying down its debt balance over shareholder returns. As of the end of fiscal 2022, Dell Technologies had about $27 billion in total debt and $9 billion in cash and equivalents.. The company has taken strides to restructure debt, sell off assets, and improve its cash flows, which is expected to give better flexibility in investing for growth and potential shareholder returns. Outside of operating costs, debt repayments will take priority in the near term. As of fiscal 2023, Dell pays a quarterly dividend as well. As an investment-grade organization, Dell will look for targeted acquisitions to help expand into higher-growth areas for cloud workload management, edge, and open telecom solutions.

Bulls Say

As a supplier with an end-to-end IT infrastructure portfolio, Dell Technologies has significant upselling and cross-selling opportunities.

Through its cloud-based products, higher-margin nascent technologies, traditional hardware prowess, and tight VMware product integrations, the company is well positioned to be a leader in hybrid cloud environments.

Dell Technologies’ healthy cash flow is focused on paying down debt and creating a more balanced longterm capital structure that can support future investments.

Company Description

Dell Technologies, born from Dell’s 2016 acquisition of EMC, is a major provider of servers, storage, and networking products through its ISG segment and PCs, monitors, and peripherals via its CSG division. Its brands include Dell, Dell EMC, Secureworks, and Virtustream. The company focuses on supplementing its traditional mainstream servers and PCs with hardware and software products for hybrid-cloud environments. The Texas-based company employs around 133,000 people and sells globally.

(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

ABB has an enviable base of robotics and automation customers that puts it in a solid position for Industry 4.0 or the Industrial Internet of Things

Business Strategy and Outlook 

ABB generates around 40% of its revenue from electrical equipment and around 40% from industrial automation products. While it has low exposure to faster-growing software, it has a fast-growing robotics business, where it is the number-two global supplier; this contributes around 9% of revenue. It is projected 4% medium-term revenue growth for ABB. Automation is the fastest-growing category in the industrial space, and ABB has an enviable base of robotics and automation customers that puts it in a solid position for Industry 4.0, or the Industrial Internet of Things. Its robotics and industrial controller (used to program equipment) products have leading market share and enjoy loyal customer bases that would be difficult for competitors to capture. Furthermore, ABB’s electrification products division offers some overlap with other customer segments, such as process industries, that could prove useful in cross-selling the automation portfolio.

However, growing demand from Industry 4.0 has meant that ABB and its close competitors have had to refresh their product offerings, acquiring or developing in-house industrial automation components and software. ABB has been slow to refresh its product offering and, in some cases, has had to turn to second-best choices. ABB’s software strategy lags that of competitors like Siemens and Schneider. ABB has a hybrid strategy for its Industry 4.0 software, offering most of its equipment productivity and maintenance optimization software from its own developed software portfolio, while for design and simulation software, it has a partnership with Dassault Systemes. The partnership structure deprives ABB of the advantage of in-house development that Siemens and Schneider enjoy, as they offer similar software developed by in-house engineering teams.

Financial Strength

At the end of December 2021, ABB’s net debt/adjusted EBITDA was less than 1. The company does not have near-term liquidity nor long-term solvency issues. The company generates about $3.6 billion annually in free cash flow, so in theory it could pay off its roughly $7 billion in gross debt in less than three years

Bulls Say’s

  • ABB is one of the best-positioned companies to benefit from industrial automation and robotics. 
  • The company’s restructuring program, which focuses on reducing corporate costs through decentralization of management, should benefit long-term margins and capital allocation by putting more profit and loss accountability into the hands of business unit leaders. 
  • ABB’s exposure to smart-grid products and electrical distribution components should benefit from a demand tailwind for grid-management and energysaving products.

Company Profile 

ABB is a global supplier of electrical equipment and automation products. Founded in the late 19th century, the company was created out of the merger of two old industrial companies: ASEA and BBC. The company is the number-one or number-two supplier in all of its core markets and the number-two robotic arm supplier globally. In automation, it offers a full suite of products for discrete and process automation (continuous processes like chemical production) as well as industrial robotics.

(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

Fortinet at the Forefront of Networking and Security Converging

Business Strategy & Outlook

Fortinet is a leading cybersecurity company that has amassed an extensive customer base because of its solutions’ high performance relative to price as well as its broad product offerings covering various security concerns. The company developed a centralized cybersecurity management plane and is at the forefront of networking and security converging with its secure software-defined wide-area networking offerings. Fortinet sells security appliances and subscriptions as well as technical and professional services. It has established customer switching costs alongside its network effect and has a nice runway for growth through its holistic approach to network and cloud cybersecurity. As organizations expand their networking footprint beyond on-premises data centers, Fortinet keeps customers locked into its ecosystem via holistic security management across any location. 

The vast creation of data and the dispersed nature of network traffic due to hybrid environments, software-as-a-service applications, and remote access needs create a larger threat surface. Attacks are becoming more masqueraded and serpentine, which drives up the complications associated with cybersecurity management and threat prevention. Fortinet gleans threat insights from its massive customer base, which keeps it at the forefront of security requirements. Compounded by a dearth of cybersecurity talent, consolidated security platforms like Fortinet’s Security Fabric will remain in high demand, as customers prefer to add capabilities via subscriptions over managing disparate software and hardware vendors. The company has a build-versus-buy mentality, with a penchant for making custom processors. While this strategy has helped establish its name within the perimeters of localized networks, Fortinet is expected to supplement its engineering prowess with inorganic growth in areas like cloud-based security, machine learning, and automated threat responses. These high-growth areas can help drive new product growth on top of a considerable base of durable services and support income.

Financial Strengths

Fortinet is considered a financially sound company that will continue to generate strong cash flow. At the end of 2021, Fortinet’s deferred revenue of $3.5 billion is a strong indication of predictable revenue streams and should help insulate the company from any IT spending downturns. Fortinet had $3.0 billion in cash and equivalents and $1 billion of debt at the end of 2021. The company has never paid a dividend, but used over $2 billion to repurchase shares between 2017 and 2021, and Fortinet is anticipated to continue repurchasing shares. Beyond returning capital, cash outflows are expected to be focused on research and development alongside sales and marketing efforts and with some smaller tuck-in acquisitions to be completed for areas such as cloud-based security and analytics.

Bulls Say

  • A growing enterprise customer base and nascent technologies like software-defined networking and 5G create sizable revenue growth potential for Fortinet. 
  • The firm’s consolidated cybersecurity platform could be enticing for customers attempting to decrease the quantity of vendors, which would drive more revenue per customer for Fortinet. 
  • With no end to cybersecurity threats, Fortinet’s products should remain in high demand from SMBs, government entities, service providers, and enterprises.

Company Description

Fortinet is a cybersecurity vendor that sells products, support, and services to small and midsize businesses, enterprises, and government entities. Its products include unified threat management appliances, firewalls, network security, and its security platform, Security Fabric. Services revenue is primarily from FortiGuard security subscriptions and FortiCare technical support. At the end of 2021, products were 38% of revenue and services were 62% of sales. The California-based company sells products worldwide.

(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

Mandiant Services and Solutions Expected To Be Demanded Amid Heightened Threat Environment

Business Strategy & Outlook

Cybersecurity pure play Mandiant (formerly FireEye) sells subscriptions and services to protect customers from threats and to resolve security breaches. Mandiant is considered a pre-eminent provider of professional consulting services for incident response, security assessments and updates, managed security, and training. Its software-as-a-service solutions include continuous security validation, managed defense, threat intelligence and automated defense. Robust demand for Mandiant’s services and subscriptions is expected due to a persistent cybersecurity talent shortage and cybercriminals continually evolving their threats, causing organizations to look for assistance from experts. 

By selling off its products division in October 2021, Mandiant is making the prudent decision to focus on its world-class incident response, threat intelligence, and security validation offerings, as strong competition from other leading cybersecurity players’ holistic security platforms and spry best-of-breed upstarts hindered its legacy products’ success. Being independent of its former product division could enhance its technology partner relationships and improve threat intelligence and enhanced customer engagements. The vast creation of data plus the increased use of software-as-a-service applications and cloud-based ecosystems will continuously drive up the quantity and complexity of cyberthreats. Mandiant’s security experts stay ahead of threat trends via in-depth research, and those insights cause organizations to demand support or potentially outsource their security to Mandiant to manage. With a lack of security talent in the marketplace, firms are anticipated to increase their usage of external threat assessments, security validation, and automated response solutions while looking toward experts, such as Mandiant, when internal teams are overwhelmed.

Financial Strengths

Mandiant is in mediocre financial shape, with an improving free cash flow profile and its cash balance outweighing its convertible note obligations. At the end of 2020, FireEye, Inc. (which included both Mandiant plus FireEye products) had $1.3 billion in cash and equivalents and $960 million in total debt made up of convertible notes. Mandiant sold its FireEye products division for $1.2 billion in October 2021, which is expected to help fuel internal investments and potential shareholder returns. The company has never paid, nor has any intention to pay, a dividend. Its share count rose from 142 million shares in 2014 to 229 million in 2020, but share dilution is anticipated to temper in the next few years. As part of selling its products division, Mandiant announced a $500 million share repurchase program. Besides the acquisitions of Verodin for $250 million in 2019, iSight Partners for $275 million in 2016, and Mandiant (when the company was FireEye) for over $1 billion in 2013, which were partly funded with cash, most of FireEye’s funds have been used for operating expenses. FireEye has made some small acquisitions, which are presumed to continue. Cash deployment is expected to remain focused on operating costs, but for the firm to drive operating leverage as it matures.

Bulls Say

  • With a skills gap in cybersecurity, customers may prefer to outsource security to Mandiant’s managed services.  
  • Mandiant’s security experts provide customers with a unique selling proposition for breach response and security posture assessments, and the expertise could become relied upon by customers. 
  • Heightened threat environments and digital transformations may make organizations uneasy regarding security, driving up demand for Mandiant’s security posture validation.

Company Description

Mandiant (formally FireEye,) is a pure-play cybersecurity firm that focuses on incident response, threat intelligence, automated response, and managed security. Mandiant’s security experts can be used on demand or customers can outsource their security to Mandiant. The California-based company sells security solutions worldwide, and sold its FireEye products division in October 2021.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

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 & Outlook

The Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, the Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

To develop sufficient scale, Square needed to move past its micro merchant base, and recent results suggest it is doing just that. At this point, only about two thirds of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past couple of years, while absolute growth in merchants below this threshold has largely held steady. The move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model. But Square as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its relative lack of scale. The Clover has proven itself a strong competitor and appears to be outperforming Square. The company’s effort to build out a consumer business surrounding its Cash App creates option value, and the more uncertainty on this side of the business. Block is competing in a space with winner-take-all dynamics, and its competitors have large consumer customer bases, which can justify some initial skepticism. However, Cash App’s performance compared with peers has been relatively strong, suggesting it is positioning itself to be a longtime leader in the space.

Financial Strengths

The Block is in a solid financial position. Historically, it has avoided carrying a meaningful amount of debt, which seems appropriate given that the company remains unprofitable. However, the company had about $5 billion in debt on the balance sheet at the end of 2021. Absent one-time gains, Block remains unprofitable on a GAAP basis. But stock compensation makes up a significant portion of its expenses. As such, the company did turn free-cash flow-positive in 2017, and the improving profitability will increase free cash flow meaningfully in the coming years. The capital-light nature of the business creates significant financial flexibility, and the company should have room to consider cash-based acquisitions to fill in any product holes.

Bulls Say

  • The ongoing shift toward electronic payments has created, and will continue to create, room for payments companies to see strong growth without stealing share from each other. 
  • Ancillary services are becoming a more critical engine for growth and will help Square fully monetize its merchant client base and improve margins. 
  • Electronic payment growth is shifting overseas, and Square’s business model looks portable into international markets, as the company does not rely on a large local salesforce to attract merchants.

Company Description

Founded in 2009, Block provides payment acquiring services to merchants, along with related services. The company also launched Cash App, a person-to-person payment network. Block has operations in Canada, Japan, Australia, and the United Kingdom; about 5% of revenue is generated outside the U.S.

(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

Operating cash flow was up +42.0% to $502.4m reflecting strong business performance and underlying cash flow generation capability

Investment Thesis:

  • Trades on attractive multiples and valuation.
  • On market buy back should be supportive of its share price.
  • Fasting growing Digital business, with strong execution by management.
  • Expectations of new product releases will gain significant traction with customers. 
  • Increasing skew towards recurring revenue.
  • Global gaming exposure. 
  • Growing market share in underpenetrated markets. 
  • Leveraged to a falling AUD.
  • Strong balance sheet with ample liquidity provides management with significant flexibility to take advantage of value accretive acquisitions or pursue organic growth opportunities. 

Key Risks:

  • Any further downside to the Japanese market.
  • Low replacement/uptake in the US market.
  • Competition risk.
  • Loss in market share.
  • Lack of product development.
  • Adverse currency movements.
  • Adverse outcome from any potential court case. 

Key Highlights:

  • Group revenue increased to $2.7bn, up +23.1% in reported terms, or up +19.7% in constant currency compared to the pcp, driven by strong performance in Gaming Operations and Outright Sales, supported by robust portfolio performance from Pixel United.
  • EBITDA of $970m, up +30% on a reported basis and +27% higher on a constant currency basis compared to the pcp.
  • Normalized profit after tax and before amortization of acquired intangibles (NPATA) of $580m, up +41% (up +37% in constant currency). According to management, this was +37% ahead of (pre-COVID) 1H19 profit performance, despite mixed operating conditions and supply chain disruptions.
  • Operating cash flow was up +42.0% to $502.4m reflecting strong business performance and underlying cash flow generation capability.
  • ALL’s balance sheet remained robust, with gearing (net (cash)/debt to EBITDA) further reduced to (0.3x), and more than $3.3bn of liquidity available as of 31 March 2022.
  • The Board declared an interim fully franked dividend of 26.0cps (A$173.7m).

Company Description

Aristocrat Leisure Ltd (ASX: ALL) manufactures and sells gaming machines in Australia and globally, to casinos, clubs and hotels. In addition, ALL provides complementary products and services such as gaming systems and software, table gaming equipment and other related products.

(Source: Banyantree)

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.

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.

Categories
Technology Stocks

Bilibili’s video sharing site has a superior business model compared with most other streaming companies

Business Strategy and Outlook 

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. The advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success. Bilibili’s video sharing site has a superior business model compared with most other streaming companies. The company has appropriately decided to focus most of its resources on building a platform for UGC (user-generated content) instead of investing heavily into original content or paying huge up-front content licenses. By doing so, it avoids going head-to-head against Tencent Video and iQiyi, both of whom are spending hundreds of billions on content development and licensing, and have yet to generate operating profit.

More importantly, Bilibili has created a self-maintainable UGC ecosystem that allows the firm to acquire video content at significantly lower costs than traditional streaming players such as iQiyi and Tencent Video. In 2021, Bilibili recorded just CNY 11 in content cost per MAU, less than one-fourth of iQiyi’s, while delivering a comparable level of revenue per user. The fact that it has a lower cost structure demonstrates the superiority of Bilibili’s platform business model. Although Bilibili is ahead of the pack in the growing video sharing and streaming markets, it faces potential competition from behemoths such as Tencent and ByteDance. Unlike Bilibili, these firms don’t rely solely on a single app to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. In addition to its core video platform, Bilibili also offers other services such as live streaming, mobile games, and e-commerce. While they offer some growth, which looks less confident of their outlook than the core video product due to weak competitive positioning, low barrier to entry, and numerous existing competitors.

Financial Strength

Bilibili might need to raise additional capital before it achieves breakeven cash flows in 2026. The firm was sitting on a net cash of CNY 11.2 billion at the end of 2021, but it is expected that another 17 billion of cash burn before Bilibili becomes net cash generative. In the past, Bilibili has used convertible debt and stock issuance to finance its operations. Its 2021 listing in Hong Kong alone provided CNY 19 billion of funds for the company. It is expected that Bilibili is to continue running its asset-light business model. The company will continue to focus its resources on building a platform for user-generated content, or UGC, instead of investing heavily into original content or paying huge up-front content licenses. Besides revenue-sharing, the bulk of cost is in people (R&D, sales and marketing). Over the next few years, the firm is to spend upward of 10 billion annually in these two categories in total. Bilibili is not expected to take part in major M&A deals as management remains focused on organic growth opportunities.

Bulls Say’s

  • Bilibili’s video sharing platform is in early stage of monetization with significant runway for growth.
  • Bilibili’s strong hold on younger users provide tremendous value to advertisers seeking to target such demographic group.
  • The firm still has room to attract a wider base of users, potentially increasing the platform’s appeal to advertiser

Company Profile 

Bilibili is a Chinese online entertainment platform that is best known for its video-sharing site that resembles YouTube. The site was founded in 2009 and started as a long-form video platform for anime, comics, and gaming, or ACG, content that appealed to Gen Z users. Since then, it has expanded its content on the platform to include a broader range of interests that have attracted Chinese users outside of the Gen Z cohort. The firm generates revenue through five main areas: advertising, mobile games, live streaming, value-added services, and e-commerce.

 (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.