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

DocuSign has a long runway for growth through viral adoption in greenfield opportunities

Business Strategy and Outlook 

As the leader in electronic signatures and contract life cycle management software, DocuSign has a long runway for growth through viral adoption in greenfield opportunities. Also, the existing customers are adopting more use cases and expanding seats over time, and also moving to the Agreement Cloud platform. DocuSign’s vision is to modernize the contracting process by taking it from a disjointed and paper-based manual sequence of steps to an automated digital and collaborative system. The company has mastered the “sign” step of the process and has used it to build the Agreement Cloud around, but there’s more to DocuSign than just e-signatures. The Agreement Cloud is a platform that includes tools to help users prepare contracts using intuitive drag and drop forms, negotiate, e-sign using a variety of enhanced security and identification means, automate agreement workflows for satisfying contract elements post-execution, allow for payment collections, and centralize account management.

As use cases expand, it is still expected the current primary driver of growth, the e-signature solution, to continue to grow rapidly thanks to the company’s entrenched leadership position and the more unpenetrated market. Underlying the larger picture is that the company still offers free trials and self-service for pain-free test drives.  There is a strong adoption, in the more than one million paid customers, with 88% involving a sales rep, and hundreds of customers already driving annual contract value in excess of $300,000 annually. In the meantime, net dollar retention rates have been strong, about 120%, which is very good and is in line with other self-service, viral models in coverage. Based on a bottom-up analysis, management estimates that DocuSign has a total addressable market of $50 billion, half of which is e-signatures alone, while Agreement Cloud is the next largest piece, with other services making up a smaller opportunity. However, while the immediate market is smaller, the relative under penetration, as evidenced by rapid growth from both DocuSign and its largest competitor, Adobe, makes this less relevant.

Financial Strength

DocuSign is a financially sound company with a solid balance sheet, improving margins, and rapidly growing revenue. Capital is generally allocated to growth efforts and acquisitions, with no dividends or buybacks on the horizon. As of fiscal 2022, DocuSign had $803 million in cash and marketable securities, compared with $718 million in long-term debt. The company generated non-GAAP EBITDA of $593 million in fiscal 2022, representing gross leverage of 1.2 times. DocuSign generated free cash margins of 15% in fiscal 2021 and 21% in fiscal 2022. The free cash flow margins to continue to expand during the next five years. The debt relates to convertible notes due in 2024. DocuSign can satisfy its obligations while continuing to fund normal operations. DocuSign does not pay a dividend and has not repurchased shares, nor is it expected that the company will do so within the next several years. The company has made a variety of relatively small acquisitions, including Seal, totalling in excess of $400 million over the last several years. All these are feature additions or product extensions that are additive to the company’s product development efforts. As per the timing and size of potential future acquisitions may vary, it models a modest level of acquisitions annually.

Bulls Say’s

  • DocuSign is the market leader in e-signatures and is expanding to a broader contract life cycle management solution. 
  • The free trial, easier implementation, and rapid return on investment for DocuSign customers make for a compelling sales pitch. The company is also enjoying success moving upstream to larger customers. 
  • DocuSign’s market consists of considerably more greenfield space than is typical within software.

Company Profile 

DocuSign offers the Agreement Cloud, a broad cloud-based software suite that enables users to automate the agreement process and provide legally binding e-signatures from nearly any device. The company was founded in 2003 and completed its IPO in May 2018.

(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

Zscaler’s go-to-market approach focuses on Large Enterprises

Business Strategy and Outlook 

Zscaler wagered heavily on the secular trend of cloud computing and how users would directly connect to cloud-based resources. Its bet has paid dividends, as it has leveraged a distributed cloud to deliver a multitenant security platform that offers security capabilities traditionally sold as purpose-built appliances. Although Zscaler has been at it since 2007, its business model and security approach are in their early innings, and there’s a long runway for growth as enterprises adopt cloud-centric security and zero-trust architectures. Zscaler’s software-as-a-service business model and the benefits that accompany this mode of software consumption, combined with an innovative product suite and a differentiated channel sales model, are all factors that will facilitate continued success winning enterprises that are consuming more cloud-based resources. Zscaler’s go-to-market approach focuses on large enterprises; the firm charges customers on a per-user subscription basis for access to its security cloud offerings. 

Capabilities such as cloud firewall, data loss prevention, and application segmentation are encompassed within its two more mature solutions: Zscaler Internet Access and Zscaler Private Access. The malware detection and application control functionalities of ZIA primarily fall under the ambit of secure web gateways, and while ZPA is used for internal resource protection.

Zscaler faces entrenched competitors as well as a legacy appliance-based approach to security that is prevalent in the IT ecosystems of current and potential customers. Still, the firm will be able to maintain and augment its competitive positioning in a fragmented security vendor landscape. The secular trends of cloud and mobility have given rise to structural shifts in data traffic paths and volume. It is believed that enterprises will continue to leverage the internet, an open network rife with security vulnerabilities, for critical workloads. In turn, they will find value in the Zscaler’s offerings.

Financial Strength

Zscaler boasts a healthy balance sheet, with over $1.5 billion in cash and liquid investments versus $914 million of convertible senior notes as of the end of fiscal 2021. The company has been free cash flow (operating cash flow minus capital expenditures) positive since fiscal 2018, and this trend is expected to continue even as it expands its data centre footprint and invests in customer acquisition, as the benefits of a recurring revenue business model should offset the cash drag of investing activities. Zscaler has no dividend or share-repurchase program to support, and the cash that the company generates will either be placed into liquid investments or redeployed into the business to stimulate organic or inorganic growth.

Bulls Say’s

  • Zscaler is a disproportionate beneficiary of the security implications that arise from the secular trends of cloud and mobility. 
  • Zscaler’s multitenant platform is best equipped to handle increasing web traffic. 
  • By building out a platform of cybersecurity offerings around its flagship ZIA, Zscaler can lock customers into its ecosystem.

Company Profile 

Zscaler is a security-as-a-service firm that offers its customers cloud-delivered solutions for protecting user devices and data. The firm leverages its position in 150 colocation data centres to deliver traditionally appliance-based security functionality, such as firewalls and sandboxes, as a completely cloud-native platform. The firm focuses on large enterprise customers and offers two primary product suites: Zscaler Internet Access, which securely connects users to externally managed application and websites (such as Salesforce and Google), and Zscaler Private Access, which securely connects users to internally managed applications. Both product suites encompass a broad g

(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

Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks

Business Strategy and Outlook 

Nokia is a primary provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind. 5G’s promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, Nokia’s core market is not a moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors. Nokia has a fundamentally strong strategy to remain a leader in its competitive environment after bloated initial 5G costs caused the firm to overhaul its products. Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrums bands and transmit at the highest speeds. Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks and enterprises build private wireless networks. It is expected, a healthy demand for Nokia’s software and service offerings as software-defined networking becomes commonplace and customers desire solutions to optimize increasingly complex networks.

Nokia’s technology segment creates revenue through licensing critical communication patents and receiving royalty payments through HMD’s Nokia-branded smartphone sales. Nokia has license agreements with leading 5G handset manufacturers, and the company has stated its intention to pursue licensing in industries such as automotive and consumer electronics. Alongside selling more enterprise private wireless networks, 5G networks and Internet of Things device propagation offer Nokia a chance to be less reliant on CSPs’ generational network upgrade spending.

Financial Strength

After taking corrective actions to remove excess costs in its 5G products, Nokia is a financially stable company which can be expected to generate positive free cash flow as 5G networks are built out. While Nokia primarily funnels cash toward organic development, sales, and marketing efforts, the company has made minor acquisitions since its large Alcatel-Lucent purchase in 2015, and Nokia is well positioned to bolt-on smaller software, Internet of Things, or related technology firms as needed. Nokia finished 2021 with EUR 9 billion in cash and equivalents and EUR 5 billion in total debt, with a debt to capital ratio of 21%, and can expect the company to repay its debts on schedule. As 5G networks are rolled out alongside cost-extraction efforts, the revenue growth to outpace operating expenditures as Nokia capitalizes on up-front 5G innovation expenditures while strengthening operational efficiencies. After pausing its dividend to fix bloated product costs in 2019, Nokia announced a plan to restart payments in 2022, alongside a buyback program.

Bulls Say’s

  • 5G should have more uses and a longer build-out cycle than previous wireless generations. Internet of Things device proliferation, from autonomous vehicles to smart factories, should broaden the demand for Nokia solutions. 
  • Nokia’s moving away from an end-to-end networking portfolio could be aligned with purchasing preferences. Its focus on software for 5G networks is wise, as enterprises may require custom data analytics and optimized networks. 
  • 5G may create licensing opportunities outside of handsets, and Nokia royalties could grow via a resurging smartphone brand.

Company Profile 

Nokia is a primary vendor in the telecommunications equipment industry. The company’s network business derives revenue from selling wireless and fixed-line hardware, software, and services. Nokia’s main operating segments are mobile networks, network infrastructure, cloud and network services, and Nokia technologies. The company, headquartered in Espoo, Finland, operates on a global scale, with most of its revenue from communication service providers.

(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

HP’s Markets Are Declining Despite Growth Initiatives and It Doesn’t Have a Moat

Business Strategy & Outlook

The HP to remain a leader in the personal computer and printing markets but these markets are facing challenging long-term growth prospects. Industry shifts toward using mobile devices as computer supplements or replacements and fewer printing tasks being performed for economic and environmental reasons may create headwinds for HP. The HP’s growth initiatives will expand its market share within the PC and printing industries as consolidation occurs, but the cost competitiveness among the remaining vendors to limit potential upside. The personal computer purchases will contract as more households primarily use smartphones for computing tasks and as cloud-based software upgrades can delay the impetus to upgrade computer hardware. HP’s personal systems business, containing notebooks, desktops, and workstations, yields a narrow operating margin that one cannot foresee expanding. The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. Contractual service offerings like HP’s DaaS are alluring to businesses since IT teams can offload hardware management, receive analytics to proactively mitigate computer issues, and pay monthly instead of facing unpredictable large capital expenditures.

HP’s push toward contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing. HP is combating the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but the competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is a late entrant, its movement into printing metals could cause customer adoption. The printing market is the overall trend of screen reading replacing printed pages, and one cannot believe HP’s initiatives can offset the macro trend.

Financial Strengths

The HP’s solid balance of cash and equivalents and its ability to generate free cash flow as indicators of a financially secure firm. As of the end of the fiscal 2021, the company had $4.3 billion in cash and equivalents and $7.5 billion in total debt. The HP’s leverage to decrease as retained earnings increase and the company pays off debt on schedule. HP spends about 8%-9% of its revenue on SG&A and about 2%-3% of its revenue on R&D, and the expenditure trends to remain consistent. The company’s yearly dividend has increased year-over-year since fiscal 2016, and a modest dividend increase annually. HP has a solid track record of repurchasing shares, and the company will continue to invest in buybacks. Additionally, as part of thwarting Xerox’s 2020 takeover attempt, HP targeted $16 billion in shareholder returns, with the majority being share repurchases. The company’s strategy regarding its pension plan funding is to commit at least the minimum contribution required by the respective local authorities. At the end of fiscal 2020, the defined benefit plans and post-retirement plan were underfunded by $1.6 billion. One cannot see HP’s benefit payment schedule as a hinderance to operations and posit that HP should be able to properly invest in growth opportunities while supporting its benefit plan obligations.

Bulls Say

  • Expected challenges within the printing and PCs markets may be overstated. Enterprises adopting managed print services and Device-as-a-Service over hardware purchases could expand HP’s margins. 
  • HP’s innovation in notebooks and tablets could moderate concerns about a lengthening computer upgrade cycle. With an invigorated brand, HP is making inroads with premium and gaming PC buyers. 
  • Existing 3D and A3 vendors could be disrupted via HP’s scale. HP’s 3D materials open platform could make HP the preferred choice while offering A3 products opens up a $55 billion market.

Company Description

HP Incorporated is a leading provider of computers, printers, and printer supplies. The company’s mains segments are personal systems and printing. Its personal systems segment contains notebooks, desktops, and workstations. Its printing segment contains supplies, consumer hardware, and commercial hardware. In 2015, Hewlett-Packard was separated into HP Incorporated and Hewlett Packard Enterprise and the Palo Alto, California-based HP Incorporated sells on a global scale.

(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

Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021

Business Strategy and Outlook

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy’s service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Chewy was founded with the intention of outcompeting wide-moat Amazon for online pre-eminence in a category that was rife with inefficiencies and saw only low-single-digit online penetration at the time. By emphasizing the labour-intensive aspects of the business model that its largest competitor intentionally eschewed (building out an army of dedicated customer service representatives whose principal qualification was their love of pets), the firm amassed a loyal customer base, with robust auto ship penetration and strengthening monetization over time, generating net revenue retention of over 100% for each annual cohort. The firm’s 72% auto ship penetration, a subscription-based model that pet consumables lend themselves to particularly nicely, defrays fulfilment cost pressures relative to large peers, given that a high degree of order predictability renders inventory management markedly easier, reducing split shipments.

With a digital native platform, expansion into adjacent sales layers in pet healthcare (filling prescriptions, offering telehealth services, partnering with veterinarians through “Practice Hub,” and offering pet wellness and insurance plans in conjunction with TransUnion), Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021, by analyst’s estimates. With the expansion of higher-margin private label product, pet healthcare, and increasingly valuable maturing cohorts, Chewy looks poised to continue its leadership well into the future, in a category with 30% online penetration and no apparent glass ceiling for e-commerce saturation.

Financial Strength

With no long-term debt and $605 million in cash and cash equivalents on the balance sheet at the end of the first quarter of 2022, it is assessed Chewy’s financial position to be strong. The firm also maintains access to a $500 million credit facility with a $300 million extender. Consistent with many high-growth e-commerce names, Chewy has elected to fund its growth entirely with internally generated funds and proceeds from equity issuances, freeing the company from the constraints of debt covenants and the restrictions on corporate actions that those often carry. While it is encouraged for the firm to optimize its capital structure with the addition of leverage longer term (lowering its WACC and expanding its frontier of net present value (NPV) positive projects), it is understandable, management’s reluctant approach given the company’s stage in its life cycle. The firm’s investment priorities strike us as reasonable–investing in expanded fulfilment centre (FC) capabilities, with $20 million in buildout costs adding an incremental $750 million to $1 billion in sales capacity (for automated centres), retrofitting existing traditional FCs, and continuing to invest in platform development and ease of use. Though Chewy’s free cash flow, or FCF, generation (with FCF clocking averaging less than 1% of sales through 2024) doesn’t afford a ton of flexibility, it offers the leeway to make fulfilment centre investments without necessitating a costly capital raise, and should see the firm through the leaner years of profitability during its high-growth phase. As margins (and free cash flow generation) expand over time, it is alleged shareholder returns to find their way onto management’s agenda, with CEO Sumit Singh and company likely to favour share repurchases, in analyst’s view, for the flexibility they offer (given the signalling properties of dividends). Analyst’s forecast anticipates share repurchases as soon as 2024, accelerating through 2031 as Chewy approaches mid-to-high-single-digit operating margins.

Bulls Say’s

  • E-commerce penetration should continue to increase in the category, favouring digital native players like Chewy.
  • Chewy’s subscription-based model (72% auto ship penetration) should help it retain the bulk of the customers it has added since the onset of COVID-19.
  • With two thirds of Chewy’s customer base also boasting Amazon Prime memberships, it is probed that pressure from the e-commerce behemoth could prove less onerous than many expect.

Company Profile

Chewy is the largest e-commerce pet care retailer in the U.S., generating $8.9 billion in 2021 sales across pet food, treats, hard goods, and pharmacy categories. The firm was founded in 2011, acquired by PetSmart in 2017, and tapped public markets as a standalone company in 2019, after spending a couple of years developing under the aegis of the pet superstore chain. The firm generates sales from pet food, treats, over-the-counter medications, medical prescription fulfilment, and hard goods, like crates, leashes, and bowls.

(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

CrowdStrike Remains Attractive Even as We Lower Our Long Term Profitability Assumptions; FVE to $196

Business Strategy & Outlook

CrowdStrike is a leader in endpoint security, a necessity that aids in protecting devices and networks, and its threat hunting and breach remediation services are topnotch. While nefarious threat actors are continually upping their attack methodology to create zero-day attacks and are using the rise in entities using cloud-based resources to their advantage, CrowdStrike developed a methodology to turn any entities’ weak-point into better protection for all of its clients. CrowdStrike’s cloud-delivered endpoint protection platform continuously ingests data from all of its installed agents to enhance its protection solutions while keeping all users up to date against the latest threats. CrowdStrike’s customer base, revenue, and margins will experience profound growth throughout the 2020s as customers update their endpoint and workload security requirements in a hybrid-cloud world. 

CrowdStrike’s endpoint protection platform melded the needs of next-generation antivirus, threat intelligence, endpoint detection and response, and other features like managed threat hunting into a consolidated management plane. The lightweight agents, installed on physical devices like servers and laptops, or in virtual machines and cloud environments, are continually improving through its cloud database algorithms, becoming more capable as more data is received. CrowdStrike’s solutions establish customer switching costs and its network effect makes changing vendors a challenge as clients rely on having the latest threat protection. Alongside a persistent talent shortage in cybersecurity and firms attempting to manage disparate toolsets for various parts of endpoint security, entities are challenged to stay secure in networking environments without distinct security perimeters. CrowdStrike’s experts supplement these overwhelmed or short-staffed teams, and the firm also offers breach remediation and proactive testing services. CrowdStrike is in the early stages of becoming a market mainstay as businesses and governments rapidly adopt cloud-based endpoint protection platforms.

Financial Strengths

CrowdStrike is a financially sound company that will be able to generate solid free cash flow and expand its margin profile throughout the 2020s. CrowdStrike had its initial public offering in June 2019 and has historically operated at a loss on a GAAP basis. CrowdStrike’s capital deployment efforts are true to a land-and-expand strategy, whereby CrowdStrike initially has elevated sales and marketing expenses to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). CrowdStrike can benefit from cross-selling and up-selling tangential products to its existing base and new clients, while also converting breach remediation service clients to be product customers. As of the end of fiscal 2022, CrowdStrike had $2.0 billion of cash, cash equivalents, and marketable securities and $740 million of debt. With a strong balance sheet and free cash flow generation, CrowdStrike is anticipated to pay its obligations on time.

Bulls Say

  • CrowdStrike’s innovative endpoint security solutions, delivered as a platform, are quickly attracting customers as clients want to consolidate their myriad legacy security tools. Its threat remediation services are a powerful tool in landing new subscription clients. 
  • After landing a client, CrowdStrike can gain significant margin leverage via the cross-selling and up-selling of additional security modules. 
  • CrowdStrike’s products become more capable as new clients are added, and its threat intelligence and hunting can become a core part of customer’s cybercrime defense.

Company Description

CrowdStrike Holdings provides cybersecurity products and services aimed at protecting organizations from cyberthreats. It offers cloud-delivered protection across endpoints, cloud workloads, identity and data, and threat intelligence, managed security services, IT operations management, threat hunting, identity protection, and log management. CrowdStrike went public in 2019 and serves customers 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

We Are Lowering Long-Term Growth Estimates for Palantir; FVE Down to $16

Business Strategy & Outlook

The Palantir is well suited to help organizations consolidate and harness the power of data. With its leading position in the government sector with the U.S. and its allies and a growing presence with commercial data applications, this narrow-moat company is poised for robust growth and margin expansion as deployment costs are optimized and product acceptance hastens with task-specific modules. Uncovering insights and easy integration of data is a largely untapped market, due to legacy data sets saved in different locations, various data formats, the uptick in cloud-based resources, and the proliferation of the need for real-time access via distributed devices. Palantir established itself by working with the U.S. government intelligence and defense sectors to integrate data into a consolidated dashboard and then drove outcomes by uncovering patterns with artificial intelligence support. Its Gotham software platform is used across various government sectors of the U.S. and its allies.

Palantir sells its Foundry software platform to commercial organizations, targeting large-scale data operations. Holistically combining data has typically involved consulting alongside in-house customized development efforts for enterprises, but Palantir’s commercial offering is attempting to change the industry’s procurement motion. Its software is used in a variety of industries; Palantir’s aim is to be the data operating system for companies and industries. By stitching together various seemingly disparate components of the airline industry, as one example, Palantir has made inroads into becoming a data platform standard for the industry and looks to other industries to achieve similar results. The company rotates its engineers into the field to understand customer and industry issues firsthand to make its platforms more valuable while gaining deployment cost efficiencies. A robust growth trajectory comes from new commercial ventures on top of a strongly expanding government base, and that installation efficiencies and the strategic shift toward a software-as-a-service model will be conducive to margin expansion throughout the 2020s.

Financial Strengths

The Palantir is in a solid financial position that is on a positive trajectory. The company has historically operated at a loss while producing negative operating cash flow; however, these results improve throughout the 2020s. The rapid revenue growth alongside an improving margin profile will help generate bottom-line improvement alongside positive free cash flow. The company’s existing customer base generates the bulk of revenue, which gives high visibility and an opportunity to expand customer margins. Although the model Palantir generates positive free cash flow and being profitable on an adjusted basis, after adding back copious amounts of stock-based compensation, the GAAP profitability may not come until the middle to latter half of the 2020s. The expansion into the commercial market, proliferation across government sectors, and further decreasing the expenses required to initially deploy its software platforms will drive Palantir’s operating profile and cash flow improvements.  As of the end of June 2021, Palantir had no outstanding debt and $2.3 billion of cash and cash equivalents, excluding restricted cash. The company chose to use a direct listing to join the public markets in 2020, so no cash was raised during the IPO process. Although the company had various funding rounds before going public, the direct listing can be viewed as a testament to Palantir’s solid financial footing and being confident of funding new ventures internally. The strategic initiatives to expand its enterprise software subscription business, alongside sticky government deals, could reward investors over the long run.

Bulls Say

  • Palantir could be the answer to the problems that governments and commercial customers face in successfully integrating large-scale, disparate data in a cohesive and coherent manner to gain insight and drive actions. 
  • Palantir has a strong government business and is diversifying into potentially higher-margin commercial markets; it could become the data operating system for companies and industries. 
  • The company has substantial margin expansion opportunities via improvements in deployment costs and by offering commercially available solutions to prospects.

Company Description

Palantir Technologies provides organizations with solutions to manage large disparate data sets in an attempt to gain insight and drive operational outcomes. Founded in 2003, Palantir released its Gotham software platform in 2008, which focuses on the government intelligence and defense sectors. Palantir expanded into various commercial markets with its Foundry software platform in 2016 with the intent of becoming the data operating system for companies and industries. The Denver company had 125 customers as of its initial public offering and roughly splits its revenue between commercial and government customers.

(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 in Demand Amid Heightened Threat Environment

Business Strategy and Outlook 

Cybersecurity pure-play Mandiant (formerly FireEye) sells subscriptions and services to protect customers from threats and 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. It is expected, robust demand for Mandiant’s services and subscriptions due to a persistent cybersecurity talent dearth and cybercriminals continually evolving their threats, causing organizations to seek the assistance of experts. By selling off its products division in October 2021, it is believed that Mandiant is making the prudent decision to focus on its world-class incident response, threat intelligence, and security validation offerings. Tough 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 customer engagements.

It is believed 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. 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, It is expected, firms 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 Strength

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 the sale 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 a share dilution is expected 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 is presumed will continue. The cash deployment is to remain focused on operating costs, but for the firm to drive operating leverage as it matures

Bulls Say’s

  • 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 Profile 

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 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

Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks

Young woman trading stock market by touching.

Business Strategy and Outlook 

Palo Alto Networks established its cybersecurity leadership by its next-generation firewall appliance altering the requirements of this essential piece of networking security. Its portfolio has expanded outside of network security into areas such as cloud security and solutions to help automate security operations. Palo Alto’s nascent threat-prevention solutions will provide robust growth along with a significantly improved margin profile as customers remain locked into its ecosystem. The complexity of an entity’s threat management increases as the quantity of data and traffic being generated off-premises grows. Network security can be attacked from various angles, and that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers. Security point solutions were traditionally purchased to combat the latest threats, and IT teams had to manage various vendors’ products simultaneously, which leads us to believe that IT teams are clamouring for security consolidation to manage disparate solutions. Palo Alto has established security platforms, made up of various products needed, for network security, cloud security, and operations. These platforms alleviate toolset management burden and alert fatigue, and Palo Alto gains threat insights from its vast customer base, which in turn improves its threat protection efficacy. It is believed the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand.

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

Financial Strength

Palo Alto is financially stable and should generate strong cash flow as it expands its operating margin profile. The company has historically operated at a loss (excluding fiscal 2012), and it is expected to turn profitable by fiscal 2023 on a GAAP basis. Large operating expenditures, including an outsize sales and marketing budget, fuelled Palo Alto’s land-and-expand strategy, and the company is to gain operating leverage throughout the 2020s. Palo Alto ended fiscal 2021 with $2.9 billion in cash and cash equivalents and total debt of $3.2 billion in 2023 and 2025 convertible senior notes. The $1.7 billion 2023 notes mature in June 2023 and have a 0.75% fixed interest rate per year paid semi-annually, while the $2.0 billion of notes that mature June 2025 have a 0.375% interest rate paid semi-annually. Palo Alto issued note hedges for both maturity dates to alleviate potential earnings per share dilution. The company announced a $1.0 billion share-repurchase authorization in February 2019, which was increased to $1.7 billion the following year with an expiration at the end of 2021, and has subsequently extended the program. Palo Alto completed its previous $1.0 billion share-repurchase program in the second quarter of fiscal 2019. The company also completed an accelerated share-repurchase program of $1 billion in fiscal 2020 (announced February 2020), in addition to its normal repurchase program. It is expected that Palo Alto will continue to use share buybacks to return capital to shareholders, and will not pursue any dividend payouts. Palo Alto will continue to focus its cash expenditures on operating costs and potential acquisitions that bolster its security platform within the cloud-based security solutions arena.

Bulls Say’s

  • Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers. 
  • Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and Palo Alto is typically on the short list of potential vendors. 
  • The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

Company Profile 

Palo Alto Networks is a pure-play cybersecurity vendor that sells security appliances, subscriptions, and support into enterprises, government entities, and service providers. The company’s product portfolio includes firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics. The Santa Clara, California, firm was established in 2005 and sells its 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 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

Guidewire Extends Its Streak of Solid Results; FVE Decreased to $120

LONDON, UNITED KINGDOM: Analysts work on the trading floor at Goldman Sachs in London, 22 March 2004. AFP PHOTO / ODD ANDERSEN (Photo credit should read ODD ANDERSEN/AFP via Getty Images)

Business Strategy & Outlook

Guidewire is reaping the benefits of years of groundwork in the form of convincing property and casualty, or P&C, insurers to upgrade their aging core legacy systems to Guidewire’s solutions. The company has used a modern software platform to disrupt a sleepy industry that has been underserved by legacy software vendors, and there is still a long runway for additional growth for Guidewire. Guidewire as executing a classic land-and-expand strategy. The company started with the most critical piece, ClaimCenter, which is customer facing and handles claims processing, and then organically layered in BillingCenter and PolicyCenter within the next several years. Today, Guidewire has a broad software suite that covers all areas of an insurer’s needs and offers a wide variety of add-on solutions. Importantly, the company acquired ISCS to land a lower- and middle-tier SaaS offering.

By any objective measure, Guidewire has become the leading provider of core software to the P&C insurance industry. The company already covers 25% of direct written premiums, or DWPs, and it wins more deals per year than its largest competitors combined. Just as the company nudged the industry to modernize, it will be at the forefront as it now leads a wide array of the largest insurers into the SaaS age with InsuranceSuite Cloud and other cloud-based solutions. Indeed, results were uneven throughout 2019 because of accelerating SaaS adoption, but Guidewire has turned the corner and results are expected to be more predictable in future. Guidewire is anticipated to win more than its share of new clients, especially at the larger end of the market. From there the company is projected to upsell additional lines of insurance business and add on features. Momentum is on the company’s side after capturing many critical Tier 1 insurer mandates, as the industry can no longer wait or afford to maintain legacy systems built in the 1950s in some instances.

Financial Strengths

Guidewire has a standard level of financial strength. Revenue is growing rapidly on an organic basis, and non-GAAP margins are positive and expanding. Continued penetration into Tier 1 and 2 core solutions, with conversions and new bookings of InsuranceSuite Cloud, and the cross-selling of data-driven and digital add-ons will drive consistent midteens annual revenue growth over the next five years. As of July 31, Guidewire had $1.1 billion in cash offset by $344 million in debt, resulting in a net cash position of $776 million. The $344 million in debt represents convertible notes due in 2025, which is not considered as problematic, given the company’s cash balance and expected free cash flow generation leading up to the debt maturity date, and the likelihood it converts into equity rather than is repaid. GAAP Operating margin was negative in fiscal 2021, but is expected to gradually improve over time as a result of easing pressure from accounting treatment for two larger transactions in fiscal 2017 and 2018, and the maturation of the business model transition to subscriptions.

On a non-GAAP basis, margin contraction is modelled in fiscal 2022, followed by several hundred basis points of margin improvement each year over the next five years, driven by scale. Guidewire does not pay a dividend, does not regularly repurchase shares although it did recently begin doing so, and generally makes small acquisitions. The company completed two larger acquisitions in the context of its deal history, with deals of $154 million in fiscal 2017 and $130 million in fiscal 2018. Since its 2012 IPO, Guidewire has completed a handful of acquisitions for approximately $500 million in aggregate. The company is expected to occasionally make small, feature-driven acquisitions.  Management is expected to initiate a dividend in the foreseeable future.

Bulls Say

  • Guidewire is the clear leader seeking to modernize a large and underserved P&C insurance market that is ripe for modernization. 
  • Guidewire is investing in R&D and acquiring companies to add new solutions and features to its existing platform, as there is room to at least quadruple revenue within its existing clients. 
  • Some friction is being removed from the sales process, as insurers are recognizing the need to modernize and the sales conversation is easier with as many live Tier 1 and 2 customers as Guidewire has.

Company Description

Guidewire Software provides software solutions for property and casualty insurers. Flagship product InsuranceSuite is an on-premises system of record and comprises ClaimCenter, a claims management system; PolicyCenter, a policy management system including policy definitions, quotas, issuance, maintenance, and renewal; and BillingCenter, for billing management, payment plans, and agent commissions. The company also offers InsuranceNow, a cloud-based offering, as well as a variety of other add-on applications. 

(Source: Morningstar)

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