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

Broadcom’s Acquisition of VMware Underscores the Latter’s Importance in Hybrid-Cloud Environment

Business Strategy & Outlook:   

VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, company believes VMware’s robust cloud provider partnerships, including the major hyperscale’s, should help the firm handle the changing market landscape. Company expects VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. Our view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In our view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. Company thinks that the November 2021 spinoff from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, Company assumes that its $11.5 billion special dividend, to all shareholders, as part of the spinoff was worth the price of becoming a stand-alone entity. 

VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. The company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is expected that       software cohesion across on-premises and clouds along with nascent networking products should give VMware maintainable growth. In May 2022, the firm agreed to be acquired by Broadcom.

Financial Strengths:  

Company considers VMware a financially stable company that should continue generating strong free cash flow. The company’s main expenditures are in the forms of developing product innovations and marketing efforts. VMware’s R&D expenditures are in the low 20s as a percentage of revenue while sales and marketing expenditures are in the low 30s. In the past, VMware has bolted on firms to bolster its presence in focus growth areas, and organic developments to be supplemented with future acquisitions. As of the end of fiscal 2022, VMware had $3.6 billion in cash and equivalents, and the company will pay its debts on time. VMware completed its first special dividend of $11 billion in December 2018, which helped Dell Technologies facilitate an exchange of Dell Class V tracking stock (DVMT) for a new class of Dell Technologies Class C common stock or a cash buyout option for shareholders. As part of becoming an independent company and spinning off from Dell, VMware paid special dividends worth $11.5 billion and retained an investment-grade credit rating. Although VMware raised capital to help pay the special dividend, company expects to quickly lower its obligations through cash on hand and its robust free cash flow generation.

Bulls Say: 

  • VMware’s hybrid cloud program could yield tremendous growth if VMware is cemented as the dominant software supplier between private and public clouds. Its presence in hyperscale public cloud networks could make it the de facto virtualization choice. 
  • Product leadership in application management, endures computing, cybersecurity, and software-defined networking provides robust growth opportunities beyond core virtualization. 
  • VMware can more tightly integrate itself with Dell peers as a stand-alone company, while also benefiting from its Dell commercial contract and their salesforce.

Company Description:  

VMware is an industry titan in virtualizing IT infrastructure and became a stand-alone entity after spinning off from Dell Technologies in November 2021. The software provider operates in the three segments: licenses; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships.

(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

Coupa’s Opening Quarter Dives Deeper Into Subscription Growth; FVE Down to $108

Business Strategy & Outlook

Coupa Software is a cloud-based business spend management, or BMS, platform that allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Coupa’s solutions are designed to manage all spend, and inform each step of a transaction’s process, from idea inception, supplier evaluation, and procurement, to invoicing, and finally to payment collection. With a platform of over 2,500 businesses and over 7 million suppliers, Coupa has built a robust self-reinforcing ecosystem of AI-informed spend management. Narrow-moat Coupa is perceived to have a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases. In a go-to-market model that focuses on co-selling deals with system integrators, Coupa has been able to expand its market reach significantly. As back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor, Coupa’s partners are expected to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives. 

As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic spend management tool. As the firm introduces new modules, Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions. Coupa’s moat is supported by strong user metrics, with gross retention above 95% and net retention exceeding 110%. While adoption of Coupa’s BSM platform has grown rapidly, cumulative spend under management has far outpaced sequential customer and recently surpassed $3 trillion. Coupa’s market opportunity is considered to be significant as it is pioneering a largely untapped market opportunity in cloud-based unified spend management.

Financial Strengths 

Coupa is in a decent financial position. As of January 2022, Coupa had $729.5 million in cash and marketable securities versus $1.6 billion in convertible debt. In June 2019 and June 2020, Coupa issued $805 million of convertible senior notes, due 2025 and convertible at $159.60 per share, and $1.38 billion of convertible senior notes, due 2026 and convertible at $296.45 per share, respectively. Coupa has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. While Coupa has invested heavily in acquisitions over the past five fiscal years, allocating well over $1.0 billion to inorganic investments, acquisition activity is expected to slow as the platform is virtually complete. Coupa does not pay a dividend, nor repurchase stock, and for a young company pioneering a novel offspring under the ERP umbrella, it is only appropriate that the company focuses capital allocation on reinvestments for growth. Even so, the firm has historically demonstrated strong cash flows, with free cash flow margins averaging 16% over the last three fiscal years. While cash flows were pressured in fiscal 2021 and 2022 as a result of the COVID-19 pandemic, healthy free cash flows are expected in later years. 

Coupa reached non-GAAP profitability in 2019, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. The company has averaged a non-GAAP operating margin of 9.9% since 2019, and as the company scales, non-GAAP operating margins are projected to reach into the high-20% range at the end of the 10-year forecast period. These positive results should translate to profitability on a GAAP basis in the future as well.

Bulls Say

  • Coupa has strong user retention metrics, with gross retention above 95% and net dollar retention north of 110%. 
  • As Coupa expands its platform both organically and inorganically, increasing suite synergies are anticipated to accelerate cross-selling activity, further entrenching customers within Coupa and creating greater monetization opportunities. 
  • Continual annual subscription price point increases reflect the stickiness of Coupa’s modules and suggest significant competitive differentiation in winning new deals over less expensive alternatives.

Company Description

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

(Source: Morningstar)

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

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

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

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

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

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

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

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Technology Stocks

Coupa’s Opening Quarter Dives Deeper Into Subscription Growth; FVE Down to $108

Business Strategy & Outlook

Coupa Software is a cloud-based business spend management, or BMS, platform that allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Coupa’s solutions are designed to manage all spend, and inform each step of a transaction’s process, from idea inception, supplier evaluation, and procurement, to invoicing, and finally to payment collection. With a platform of over 2,500 businesses and over 7 million suppliers, Coupa has built a robust self-reinforcing ecosystem of AI-informed spend management. Narrow-moat Coupa is perceived to have a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases. In a go-to-market model that focuses on co-selling deals with system integrators, Coupa has been able to expand its market reach significantly. As back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor, Coupa’s partners are expected to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives. 

As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic spend management tool. As the firm introduces new modules, Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions. Coupa’s moat is supported by strong user metrics, with gross retention above 95% and net retention exceeding 110%. While adoption of Coupa’s BSM platform has grown rapidly, cumulative spend under management has far outpaced sequential customer and recently surpassed $3 trillion. Coupa’s market opportunity is considered to be significant as it is pioneering a largely untapped market opportunity in cloud-based unified spend management.

Financial Strengths 

Coupa is in a decent financial position. As of January 2022, Coupa had $729.5 million in cash and marketable securities versus $1.6 billion in convertible debt. In June 2019 and June 2020, Coupa issued $805 million of convertible senior notes, due 2025 and convertible at $159.60 per share, and $1.38 billion of convertible senior notes, due 2026 and convertible at $296.45 per share, respectively. Coupa has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. While Coupa has invested heavily in acquisitions over the past five fiscal years, allocating well over $1.0 billion to inorganic investments, acquisition activity is expected to slow as the platform is virtually complete. Coupa does not pay a dividend, nor repurchase stock, and for a young company pioneering a novel offspring under the ERP umbrella, it is only appropriate that the company focuses capital allocation on reinvestments for growth. Even so, the firm has historically demonstrated strong cash flows, with free cash flow margins averaging 16% over the last three fiscal years. While cash flows were pressured in fiscal 2021 and 2022 as a result of the COVID-19 pandemic, healthy free cash flows are expected in later years. 

Coupa reached non-GAAP profitability in 2019, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. The company has averaged a non-GAAP operating margin of 9.9% since 2019, and as the company scales, non-GAAP operating margins are projected to reach into the high-20% range at the end of the 10-year forecast period. These positive results should translate to profitability on a GAAP basis in the future as well.

Bulls Say

  • Coupa has strong user retention metrics, with gross retention above 95% and net dollar retention north of 110%. 
  • As Coupa expands its platform both organically and inorganically, increasing suite synergies are anticipated to accelerate cross-selling activity, further entrenching customers within Coupa and creating greater monetization opportunities. 
  • Continual annual subscription price point increases reflect the stickiness of Coupa’s modules and suggest significant competitive differentiation in winning new deals over less expensive alternatives.

Company Description

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

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Look Inside oOh media for Value as Investors Head Outside on Macro Risks

Business Strategy & Outlook

OOh media is strongly-positioned to benefit from the positive dynamics driving the Australian (and New Zealand) outdoor advertising industry. This has seen outdoors’s share of the total advertising pie lift from 3.5% in 2009 to 5.7% prior to COVID-19. The trend continuing, especially as the Australian outdoor medium’s share still lags Canada (8%), the United Kingdom (6%), and the global average of 6%-plus. Our view is based on three structurally related tailwinds. First, unlike other traditional media, outdoor audience is increasing. This is due to population growth, greater living density, and increasing commuter traffic on major roads, public transport and in retail precincts–fertile areas for marketers struggling to reach mass audiences in a fragmenting world. Second, a key Achilles heel for the outdoor advertising industry was the lack of reliable audience measurement. However, with the 2010 launch of measurement of Outdoor Visibility and Exposure, or MOVE, the medium now has greater legitimacy and offers a more robust way for marketers to assess the return on money allocated to outdoor advertising. Third, in contrast to its debilitating impact on other traditional media, digital technology is a growth facilitator for the outdoor industry. Converting a traditional outdoor advertising site to a digital one is attractive to marketers as it allows creative flexibility, immediacy and premium presentation. Digital conversion also benefits the outdoor advertising operator as it attracts new clients, allows greater inventory utilization and offers yield management flexibility. 

However, like all players in the outdoor advertising space, oOh media’s business model hinges on its portfolio of leasehold concessions. The contract duration for the roads segment is generally five to 10 years, typically with an extension option for another five years. The retail and place divisions are more varied, with renewal agreements generally directly negotiated. The risk is not the group failing to renew these concessions, but the terms on which they will be renewed.

Financial Strengths 

At the end of December 2021, net debt/EBITDA was 0.8 times, pre AASB 16. This to remain below 1.0 for the foreseeable future and within the renegotiated 3.25 covenant limit. The current dividend payout policy is reasonably conservative at between 40% and 60% of net profits after tax but before amortization acquired intangibles, allowing further investment in digitization and technology. However, due to the uncertain impact of the coronavirus outbreak, there were no dividends in 2020. But dividends were reinstated in early 2022 and to grow solidly over the next three years.

Bulls Say

  • Outdoor advertising is a growth medium benefiting from structural tailwinds such as increasing audience, more reliable measurement, and conversion of inventory to digital. 
  • Australian outdoors’s 5% share of the total advertising pie still lags Canada (8%), the U.K. (7%), and the global average of 6%-plus. 
  • OOh media may have failed in its attempt to merge with APN Outdoor in 2017, but it completed the acquisition of Adshel in September 2018 and there is an opportunity to extract sizable synergies from the combination.

Company Description

OOh media operates a network of outdoor advertising sites with a commanding share of the Australian market, and has also presence in New Zealand. It boasts a diverse portfolio of locations to service the needs of outdoor advertisers, and is particularly strong in the roadside billboard and retail (such as shopping malls) segments. OOh media offers these services by entering into lease arrangements with owners of outdoor sites–effectively an intermediary allowing site owners to monetize their visible space in high-traffic areas. In late September 2018, the group completed the acquisition of Adshel from HT&E for AUD 570 million, a deal that cements its competitive position in the face of industry consolidation

(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

Millicom Shares Now Trading Without Subscription Rights; Fair Value Estimate to $34

Business Strategy & Outlook

After several years of restructuring, Millicom is now best thought of as a collection of investments in Latin American telecom businesses. The firm will spend the next couple years primarily operating its businesses rather than reshaping its portfolio, allowing the firm to more clearly demonstrate its ability to generate cash flow. Millicom’s subsidiaries have provided wireless service in Guatemala, El Salvador, Honduras, Bolivia, and Paraguay since the early 1990s, giving it the largest market share in most of these countries. In addition to the wireless business, Millicom has invested heavily, both organically and through M&A, to build cable infrastructure, carving out solid market share in the fixed-line market as well—it is the internet access leader in Guatemala, Panama, Bolivia, Honduras, and Paraguay and the second largest in Colombia and El Salvador. Millicom can offer converged fixed-line and wireless services to nearly 13 million homes and businesses across a footprint that encompasses a population of about 120 million people.

Favorable market structures following recent consolidation should also benefit Millicom. In Guatemala, which is now the firm’s most important market following the buyout of minority investors, it is the clear market leader and competes almost exclusively against America Movil. Other markets with only one substantial competitor include Panama, Honduras, Nicaragua, and Bolivia. Only Colombia, where Millicom is a distant third in the wireless market, presents an especially difficult competitive situation, but the firm has made progress gaining scale recently. Wireless penetration in these markets is already high, but data services still provide significant growth opportunities. Less than 55% of Millicom customers have a 4G LTE smartphone today, but this figure is up from 30% three years ago. Broadband penetration is also low in the countries Millicom serves at around 30%. As demand for high-quality connectivity grows, the Millicom’s financial performance will improve nicely in the coming years.

Financial Strengths

Millicom historically carried below-average leverage, with a net debt around 1.0-2.0 times EBITDA. However, acquisitions and the buyout of minority investors in Guatemala has caused the debt load to swell. Net debt, including lease obligations, stood at $7.8 billion-, or 3.4-times EBITDA, at the end of 2021. The firm expects to complete a $750 million equity rights offering during 2022 to fund a portion of the Guatemala transaction that will bring net leverage down to 3.0 times. Management has had a net leverage target of 2.0 times EBITDA since its portfolio reshuffling began in 2018 but hasn’t come close to that mark yet. Millicom cut its dividend to $1 per share from $2.64 in early 2020 and then eliminated the payout entirely later in the year, saving about $265 million annually. While the 2.0 target remains a long-term goal, management expects leverage to decline to only about 2.5 times EBITDA by the end of 2025, with share repurchases resuming in 2023. By the calculation, this target implies the firm could repurchase $1.5 billion of its shares over the next four years, or about 60% of its current market capitalization. The firm take a more aggressive approach to reducing leverage given the volatility of the markets in which it operates. About 55% of the consolidated debt load and lease obligations sits at the individual operating subsidiaries, with Millicom guaranteeing less than 5% of these obligations. Most subsidiaries carry modest debt loads, most below 2 times net leverage. The businesses in Paraguay and Costa Rico are exceptions, with more than 3 times net leverage. Leverage in Panama is also elevated at 2.7 times EBITDA. At the parent level, Millicom had $3.8 billion in net debt outstanding at the end of 2021. The Guatemalan business subsequently issued $900 million of debt to fund part of the minority investor buyout, freeing up cash to repay parent-company obligations. The Guatemalan operation now carries net leverage of about 1.8 times.

Bulls Say

Millicom holds strong wireless market share across nine Latin American countries with a combined population of nearly 120 million people and owns high quality cable networks that can provide broadband to 13 million homes and businesses in the region.

Broadband penetration remains low across the region and only about half the population owns a 4G smartphone, providing a long runway for growth.

Millicom should be able to improve its margins and cash flow as it grows its converged customer base.

Company Description

Millicom offers wireless and fixed-line telecom services primarily in smaller, less congested markets or in less developed countries in Latin America. Countries served include Bolivia (100% owned), Honduras (67%), Nicaragua (100%), Panama (80%), El Salvador (100%), Guatemala (100% following the buyout of minority partners in 2021), Paraguay (100%), Colombia (50%), and Costa Rica (100%). The firm’s fixed-line networks reach nearly 13 million homes and businesses while its wireless networks cover about 120 million people. Increasingly, Millicom offers a converged package that may include fixed-line phone, broadband, and pay television in conjunction with wireless services. The firm hopes to spin off portions of its tower business and mobile payments operation over the next couple years.

(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

Xero Ltd: Continued uplift in Lifetime Value (LTV) of Subscribers

Investment Thesis:

  • Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY17-22, ANZ LTV grew at CAGR 34% and International LTV grew at CAGR 49%).
  • Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. We note that XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers.
  • Potential for meaningful acquisitions to fill gaps in product capability. In our view, the Company is well positioned to make acquisitions going forward (given its balance sheet and funding status).
  • The Company continues to focus on cloud accounting, and we see significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates.

Key Risks:

  • Decrease of migration to cloud software.
  • Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound.
  • Deteriorating sentiment if the economy and IT spending weakens.
  • Excessive competition from other established players like Intuit leading to loss of market share.
  • Inability to extract higher operational efficiencies as the Company scales up.
  • Issues in gaining market share especially in markets with established incumbents.
     

Key Highlights:

  • Total LTV increased +43% YoY to $10.9bn in FY22 (equating to 5-year CAGR of +34% for ANZ and +49% for International), equating to LTV/CAC (LTV/customer acquisition cost) of 6.9x (up +0.5x YoY), driven by good progress on subscriber growth, a marked improvement in average revenue per user (ARPU) of +7% YoY (+9% in CC), along with a -11bps YoY decline in monthly churn to 0.90%, which remained consistently below pre-Covid pandemic level. 
  • Operating revenue grew +29% YoY (+30% in CC) to $1.1bn, with Core accounting revenue up +23% driven by subscriber growth (up +19% YoY to 3.3 million) and ARPU increases (driven by price increases) and Platform revenue up +113% (to account for 11% of total operating revenue) driven by growth in payments, payroll and revenues from recently acquired businesses including Planday.
  • Gross profit increased +31% YoY to $957.4m with margin improving +130bps to 87.3% (includes the operations of Planday), largely due to efficiency gains in customer support teams and hosting costs for cloud-based products.
  • Total operating expenses, inclusive of acquisition integration costs, increased +39% YoY, reflecting greater investment in product design and development and sales and marketing expenses as travel cost resumed, resulting in -32% YoY decline in operating profit to $42m.
  • Net loss was $9.1m vs net profit of $19.8m in FY21, impacted by a fair value revaluation gain on contingent consideration of $38.9m, a new revenue incentive with Planday management resulting in a $10.5m expense and goodwill impairment relating to the acquisition of Waddle of $20.4m.
  • Free cash flows declined -96% YoY to $2.1m as +8% YoY increase in operating cashflow was more than offset by +117% YoY increase in investments. XRO has $150m of undrawn committed debt facilities.
  • Australia Market revenue increased +26% YoY (+27% in CC) to $483.3m with 229k net subscriber additions to reach a total of 1.34 million subscribers.
  • New Zealand Market revenue increased by +15% YoY to $149.4m with 66k net subscriber additions to reach a total of 512k.
  • UK Market revenue increased +30% YoY (+30% in CC) to $291.6m with 130k net subscriber additions taking total subscribers to 850k.
  • North America Market revenue increased +28% YoY (+31% in CC) to $72.6m, with 54k net subscriber additions to reach a total of 339k subscribers.
  • Rest of World (ROW) Market revenue increased +85% YoY (+90% CC) to $100m with subscribers increasing 51k to 226k. 

Company Description:

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World). 

(Source: Banyantree)

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

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

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

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

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

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

Deere Delves Into its Precision Agriculture and Sustainability Strategy at its 2022 Analyst Day

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy & Outlook

Deere offers customers an extensive portfolio of agriculture and construction products. It will continue to be the leader in the agriculture industry and one of the top players in construction. For over a century, the company has been the pre-eminent manufacturer of mission-critical agricultural equipment, which has led to its place as one of the world’s most valuable brands. Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the farming process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and spacing and customized spraying applications. Deere is committed to expanding customer offerings and providing value-added services. Additionally, the management team will look to reduce the company’s cost structure as some markets have matured, providing an opportunity to rethink its footprint and create a leaner organization. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Deere provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Deere has exposure to end markets with attractive tailwinds. In agriculture, the demand for corn and soybeans will be strong in the near term, largely due to robust demand from China and tight global supplies. On the construction side,  the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s roads are in poor condition, which has led to pent-up road construction demand.

Financial Strengths

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2021, coming in at 0.4. Total outstanding debt, including both short- and long-term debt, was $10.4 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of fiscal year-end 2021 stood at $7.2 billion on its industrial balance sheet. The comfort in Deere’s ability to tap into available lines of credit to meet any short-term needs. Deere has access to $5.7 billion in credit facilities. The Deere can generate solid free cash flow throughout the economic cycle. The company can generate over $6 billion in free cash flow in midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, the management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $38 billion in fiscal 2021, along with $38 billion in finance receivables and $829 million in cash. In the Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth. 
  • Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet. 
  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Description

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through a robust dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(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

With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it

Business Strategy and Outlook

MarketAxess operates the leading platform for the electronic trading of corporate bonds. While the company is primarily focused on U.S. securities, 30%-40% of its corporate bond trading volume comes from emerging market debt and Eurobonds giving the company a strong international presence. MarketAxess also offers trading in U.S. Treasuries and municipal bonds, bolstering its efforts in these sectors through the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. That said, corporate bonds are the core of MarketAxess’ business which is likely to remain true, a consequence of the more competitive nature of the treasury trading market and the smaller amount of municipal debt outstanding. 

Fixed-income markets globally are increasingly moving away from voice negotiated trading toward electronic trading platforms as the liquidity and workflow enhancement of these electronic networks promises to lower implicit and explicit trading costs for increasingly expense conscious firms. As MarketAxess rolls out such new features as automated trade execution and expands its Open Trading all-to-all network, the cost and liquidity advantages of electronic trading networks over traditional methods continues to increase. With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it. 

While revenue only grew in the low single digits during 2021, results were affected by a normalization from a cyclical high in corporate bond trading volume market wide in 2020. That said, it must be noted that MarketAxess’ competitor, Tradeweb, found a great deal of success in U.S. corporate bond trading in 2021 as its net hedging and portfolio trading protocols resonated with traders. The rival firm gained market share from voice trading while MarketAxess’ position was largely stagnant. MarketAxess has worked to replicate these features but the company’s competitive positioning in the U.S will bear monitoring in 2022, particularly as the smaller Trumid has gained momentum and support recently.

Financial Strength

MarketAxess is in a strong financial position, even after the series of acquisitions it has made in recent years. At the end of December 2021, the company had over $500 million in cash and investment securities, more than double its total cash outlay on acquisitions over the last two and a half years, and no long-term debt outstanding. MarketAxess enjoys wide margins and strong cash flow, given the countercyclical behaviour of its revenue is in an excellent financial position from a cash flow perspective. MarketAxess’ operating model has high upfront costs but lower incremental capital requirements to support growth once the trading platform and its network have been established. The company’s decision to switch to a self-clearing model for its U.S. operations has materially increased the amount of capital required to maintain its business, but with a strong balance sheet and good operating cash flow the company still has plenty of room to finance investment spending and shareholder returns as it sees fit.

Bulls Say’s

  • MarketAxess enjoys a commanding position in the market for electronic trading of credit bonds, particularly in U.S. high yield securities. 
  • MarketAxess is benefiting from a secular transition away from voice negotiated trading toward electronic platforms, creating strong tailwinds for continued revenue growth. 
  • U.S. corporate bond markets are seeing higher turnover rates as automated trading algorithms, like MarketAxess’ AiEX, see more adoption and trading costs decrease. This increases transaction volume industrywide, creating another tailwind for MarketAxess.

Company Profile 

Founded in 2000, MarketAxess is a leading electronic fixed-income trading platform that connects broker/dealers and institutional investors. The company is primarily focused on credit based fixed income securities with its main trading products being U.S. investment-grade and high-yield bonds, Eurobonds, and Emerging Market corporate debt. Recently the company has expanded more aggressively into Treasuries and municipal bonds with the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. The company also provides pre- and post-trade services with its acquisition of Regulatory Reporting Hub from Deutsche Börse Group in 2020 adding to its product offerings. 

(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

Cloud becoming a Material Long- term Driver for Baidu As Q1 2022 Revenue Beat

Statistics chart on laptop display and trader analyzing the data

Business Strategy & Outlook:   

Baidu’s online advertising business accounted for 79% of Core revenue in 2020 and will be the main source of revenue in the medium term given its dominant market share for search engines, but unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and Bytedance. In recent years, the firm developed its own ecosystem by creating its own Baidu app that incorporates smart mini-programs like Tencent’s WeChat to attract organic user growth but the flagship app has reached 580 million monthly active users in second-quarter 2021, increasing 9% year on year and 4% sequentially, signaling deceleration. Therefore, the signs of a plateau emphasize the importance of being able to commercialize other businesses, but success is far from certain. 

Baidu is transforming its identity by investing in AI firms, mainly AI cloud and autonomous driving, but whether these are commercialized successfully remains to be seen. There are encouraging signs of its AI cloud monetization having seen a 75% CAGR from 2018-20, now accounting for 14% of Core revenue in second-quarter 2021. However, despite sharp growth, Baidu has to face competition in the cloud from industry leaders Alibaba, Huawei and Tencent, which all have greater market share than Baidu. Baidu has invested in other emerging technologies, including speech recognition, AI chips, and autonomous driving. Despite a potential total addressable market for autonomous driving that is 9 times its online advertising per management, commercial success is highly uncertain as revenue remains immaterial, and mass scale adoption or time-to-market are unclear. Its streaming video service, iQiyi, continues to be a margin drag on Baidu’s business due to a high content cost. The business constantly needs to develop or acquire new content to prevent customer churn. We’re less confident of its outlook than the Core product due to a low barrier to entry and numerous competitors. Membership has remained stagnant at 105 million to 106 million subscribers for the last five quarters and therefore, long-term growth is limited.

Financial Strengths:  

Baidu’s balance sheet remains very well capitalized, with around CNY 163 billion in cash and short-term investments to support CNY 76 billion in total debt as of December 2020. Its free cash flow was CNY 3.9 billion in 2020, which is sufficient to fund operations and maintain its moat through investments in new products. As of fiscal 2020, Baidu had an EBITDA/interest coverage ratio of over 50 times. Given the cash-rich nature of the search business, Baidu might initiate repaying interest expense and debts when they are due. As of January 2021, Moody’s maintained Baidu’s A3 rating and changed the outlook from positive to stable.

Bulls Say:  

  • Baidu is strengthening its mobile ecosystem with search, livestreaming, and mini programs, helping to create a closed-loop experience for users to acquire information and make transaction.
  • Baidu is a leader in AI with autonomous driving in terms of number of miles tested and the number of driving licenses in China. Baidu’s AI cloud has also grown significantly in 2020 at 44% year over year, with signs of momentum.
  • Sitting on a cash pile of over CNY 100 billion, Baidu has ample dry powder to invest in technology, particularly in AI, as well as merger and acquisition opportunities.

Company Description: 

Baidu is the largest internet search engine in China with 84% share of the search engine market in September 2021 per web analytics firm, Statcounter. The firm generated 62% of revenue from online marketing services from its search engine in 2020. Outside its search engine, Baidu is a technology-driven company and its other major growth initiatives are artificial intelligence cloud, video streaming services, voice recognition technology, and autonomous driving.

(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

Marqeta offers impressive growth, but Its reliance on block Is a Concern

Business Strategy & Outlook:   

Marqeta has recently enjoyed rapid revenue and volume growth that has led to improving margins, though the company is still unprofitable. Marqeta’s operating cost structure is mostly fixed, so higher processing volume on debit and credit cards issued on its platform naturally leads to better margins for the firm, creating a road map for profitability as volume grows. The Marqeta card-issuing platform provides its customers with the infrastructure and application programming interfaces, or APIs, needed to build and rapidly deploy innovative card payment systems without preexisting payment expertise. The unique capabilities and flexibility of Marqeta’s platform has allowed it to find success with fintech and technology companies, with buy now pay later firms and Block being the most notable. Marqeta continues to benefit from the high organic growth its customer base provides, and the transition to digital payments as digital card issuance and tokenization are among its strengths, with major firms like Citi and JPMorgan using its digital issuance technology. 

That said, Marqeta has a genuine problem with customer concentration. More than 80% of Marqeta’s revenue comes from its two largest customers, with Block alone accounting for around 65% of net revenue. This creates serious risk for Marqeta as either a loss of this relationship or a material deterioration in contract terms could have serious repercussions on Marqeta’s business model. Marqeta’s current agreement with Block lasts until 2024, giving Marqeta some breathing room, but the firm’s reliance on Block will be an ongoing concern as it is the company’s largest source of risk. In a more positive light, Marqeta has announced deals to create debit cards for Bill.com and Goldman Sachs’ Marcus—major wins for the company. It is also moving forward with plans to expand its international business and move into credit card issuance. While these efforts are still in their early stages, these plans along with its recent contract wins provides Marqeta with a potential road map to continue its rapid growth and address its concentration issues.

Financial Strengths:  

Marqeta is in a very strong financial position, particularly after raising $1.2 billion in its IPO. Marqeta ended March 2022 with over $1.6 billion in cash and investment securities on its balance sheet. With no long-term debt outstanding, this provides the company with ample financial resources to invest back into its business, without the need to raise more capital. Additionally, Marqeta’s business requires little investment capital, even as it grows rapidly. The company is first and foremost a financial technology firm, and requires very little physical assets. Marqeta also collects interchange revenue from merchants before paying its customers their share, meaning the company has low net working capital requirements due to its high accounts payable. In fact, the company generated positive cashflow from operations in 2021 and used less than $50 million in 2022. This places Marqeta in the position of having substantial financial assets but little to no cash burn. While the company expects Marqeta to remain unprofitable for the immediate future, it also sees little risk of financial strain given the strength of its balance sheet.

Bulls Say: 

  • Marqeta’s platform and open APIs for card issuance continue to attract large and sophisticated firms like Goldman Sachs’ Marcus and Google to its platform, highlighting the strength of its offerings.
  • Marqeta’s existing customer base includes disruptive firms like Square and Klarna, which provides Marqeta with strong organic growth from its existing user base.
  • Marqeta’s cost structure is mostly fixed, allowing the company to naturally expand its margins as volume grows.

Company Description:  

Headquartered in Oakland, California, and founded in 2010, Marqeta provides its clients with a card-issuing platform that offers the infrastructure and tools necessary to offer digital, physical, and tokenized payment options without the need for a traditional bank. The company’s open APIs are designed to allow third parties like DoorDash, Klarna, and Block to rapidly develop and deploy innovative card-based products and payment services without the need to develop the underlying technology. The company generates revenue primarily through processing and ATM fees for cards issued on its platform.

(Source: Morningstar)

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