Category: Technology Stocks

Business Strategy & Outlook

Honeywell is one of the strongest multi-industry firms in operation today. The firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others. The predicate of the thesis is mostly on a) increased demand for warehouse automation solutions; b) new digital offerings that promote data analytics in power plants, as well as remote security management, and energy savings in building solutions; c) an increasingly automated world in mission critical end-markets like life sciences. Over the next five years, Honeywell is capable of mid-single-digit-plus top-line growth, incremental operating margins in the low-30s, low-double-digit adjusted earnings per share growth, and free cash flow margins in the midteens.

The Honeywell is capable of meeting that assumed targets through a combination of portfolio refreshes, powerful new product introductions, breakthrough initiatives, and strategic partnerships in areas where the firm has domain expertise, a focus on high growth regions that’ll help the firm grow faster than its core markets, continuous improvement initiatives cantered on fixed cost reduction, on-time delivery and simplified design, supply chain automation, and an increasing shift toward software with a recurring revenue stream. The Honeywell was wise to continue investing aggressively during the height of the pandemic, which will reward the firm with share gains.

Despite appreciable headwinds in about 40% of Honeywell’s portfolio from the pandemic, in some ways, the COVID-19 has only accelerated the need for automation, particularly in warehousing given the strong secular trend toward e-commerce. Many of Honeywell’s automation solutions offer customers meaningful ROI payback in a truncated period of time. Furthermore, the Honeywell is strongly positioned to lead in carbon capture given its large installed base and investments in solvents.

Finally, Honeywell’s early-stage investments like quantum computing represent a leapfrog in technology, and they have multiple use cases in fast growing industries like cybersecurity.

Financial Strengths

Honeywell operates from a very strong financial position and believes its credit risk is very low. Honeywell boasts one of the lowest net debt/EBITDA ratios of any of the U.S. multi-industry firms that cover at 1.1 times at the end of 2021, though with the exception of 2020, that figure has been at or below 1 time since 2012. In fact, credit its balance sheet strength as one of its greatest assets during the pandemic as it was allowed to maintain its growth capital expenditures plans while other competitors froze growth capital expenditures spending in 2020. Furthermore, Honeywell’s interest coverage ratio (EBIT/interest expense) stands at over 18 times as of the end of 2021, meaning Honeywell has ample firepower to service its interest payments. Finally, Honeywell’s pension and other postretirement benefits have a minimal effect on fair value, as its pension is overfunded, and its other retiree benefits deduct a mere 21 cents per share on the fair value (which likely overstates the impact given the rising interest rate environment in 2021).

Bulls Say

• Honeywell is making several organic bets in mission critical end markets that should yield triple-digit IRRs over the long term, including in quantum computing and building automation.

• Honeywell boasts one of the strongest balance sheets in the multi-industry universe, and the company has a history of under promising and over delivering on its targets.

• With approximately 60% of its portfolio in short-cycle businesses and with the remaining portfolio in end markets like aerospace and oil and gas, Honeywell is poised to outperform in 2021 with a value-cyclical reopening trade.

Company Description

Honeywell traces its roots to 1885 with Albert Butz’s firm, Butz-Thermo Electric Regulator, which produced a predecessor to the modern thermostat. Today, Honeywell is a global multi-industry behemoth with one of the largest installed bases of equipment. The firm operates through four business segments, including aerospace, building technologies, performance materials and technologies, and safety and productivity solutions. In recent years, the firm has made several portfolio changes, including the addition of Intelligrated in 2016, as well as the spins of Garrett Technologies and Resideo in 2018. In 2019, the firm launched Honeywell Forge, its enterprise performance management software solution that leverages the firm’s domain expertise in buildings, airlines, and critical infrastructure.

(Source: Morningstar)

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Investment Thesis:

• Strong market position in online advertising.  
• Value accretive acquisitions in existing and new growth areas.
• Focus on innovation across advertising businesses, which should help to sustain growth. 
• Strong and competent management team.   
• Strong balance sheet (net cash position) giving flexibility to invest in growth options or undertake capital management initiatives. 
• Social media dominance with brands like WhatsApp, Instagram and Facebook.
• Potential earnings upside from rolling out payment solutions and cryptocurrency.

Key Risks:

• De-rating should growth rates miss expectations.
• Growing competition from other platforms (e.g., TikTok).
• Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data (e.g., AAPL’s new iOS allows users to stop companies from tracking their movements).
• Deterioration in economic conditions, which would put pressure on the advertising revenue.
• Competition from companies like Alphabet Inc. and Amazon.com Inc. could put pressure on margins. 
• Potential return from investment on new, innovative technology fails to yield adequate results.
• Key man risk if the founder and CEO Mark Zuckerberg decides to depart.

Key Highlights:

• Total revenue grew +20% (+21% in CC) to $33.7bn, with Family of Apps (Facebook + Instagram + Messenger + WhatsApp + other services) revenue up +20% to $32.8bn (ad revenue growth of +20%/21% in CC to $32.6bn with total number of ad impressions served across services increasing +13% and the average price per ad increasing +6% was partially offset by -8% decline in other revenue to $155m due to a decline in payment revenue earned from games) and Reality Labs (AR & VR related consumer hardware, software and content) revenue up +22% to $877m, driven by strong Quest 2 sales during the holiday season.
• Cost of revenue increased +22%, driven primarily by Reality Labs hardware costs, core infrastructure investments, and payments to partners. Total expenses were up +38% to $21.1bn with Family of Apps expenses up +35% to $16.9bn and Reality Labs expenses up +48% to $4.2bn.
• Operating income declined -1% to $12.6bn with margin declining -900bps to 37% as +6.8% increase in Family of Apps operating income to $15.9bn (margin down -589bps to 48.48%) was more than offset by Reality Labs operating loss widening by +57% to $3.3bn.
• NPAT declined -8% to $10.3bn with EPS down -5% to $3.67, driven by decline in operating income and +32% higher tax.
• Capex increased +15% to $5.5bn, driven by investments in data centers, servers, network infrastructure and office facilities.
• FCF increased +36% to $12.6bn driven by +28.9% increase in operating cashflow to $18.1bn.
• The Company repurchased $19.18bn of our Class A common stock and ended the year with Cash and cash equivalents of $48bn.
• 1Q22 total revenue of $27-29bn, up +3-11% over pcp, negatively impacted by headwinds to both impression (increased competition + shift of engagement to Reels) and price growth (ad targeting and measurement given Apple’s iOS changes + macroeconomic challenges impacting ad budgets + FX headwind).
• FY22 total expenses of $90-95bn (vs prior outlook of $91-97bn).
• FY22 capex (including principal payments on finance leases) of $29-34bn driven by investments in data centres to support AI and Machine Learning.
• FY22 tax rate to be similar to FY21. 
• Holding a view that short-form video will be an increasing part of how people consume content moving forward, management continues to replace some time in News Feed and other higher monetizing surfaces to transition services towards short-form video like Reels. (Reels is now FB’s fastest growing content format by far and the biggest contributor to engagement growth on Instagram) and expects pressure on ad impression growth in the near term given Reels monetizes at a lower rate than Feed and Stories, and competition from dominant players like TikTok and YouTube.

Company Description:

Meta Platforms Inc. (NASDAQ: FB) is the biggest social network worldwide focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The Company’s products include Facebook, Instagram, Messenger, WhatsApp and Oculus. The Company also engages in selling advertising placements to marketers, to help them reach people based on a range of factors, including age, gender, location, interests and behaviours. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Cadence provides electronic design automation software, intellectual property, and system design and analysis products that are critical to the semiconductor chip design process. It is held Cadence offers a compelling value proposition for investors looking to capitalize on secular trends in technology that are increasing the complexity of chip designs and advancing the digitalization of various end markets. Analysts fair value estimate for Cadence is $138 per share, up from $127 as experts’ model stronger near-term growth and profitability. With shares trading at around $155, It is foreseen the narrow-moat stable-moat-trend company as slightly overvalued. 

It is likely Cadence’s products are transformational in enabling increasingly complex integrated circuit and system-on-chip design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Cadence is the second-largest EDA vendor, behind Synopsys, having multidecade-spanning market dominance in analog design and emerging as a force in digital design. While it is seen Cadence to grow at a slightly more muted pace than Synopsys, it is likely the firm’s analog stability, focus on profitability, and building of a holistic offering that includes unique system-level solutions as creating a compelling, risk mitigated narrative.

Cadence’s origins rest with analog chip design, which is an inherently stickier market than digital design, where Synopsys had its beginnings. Cadence is the market leader in analog EDA tools, holding over 80% of the market share for more than two decades. Analog chips boast more complex and archaic designs than digital chips, with longer design cycles and more loyal, risk-averse customers. While Synopsys holds a larger piece of the overall EDA market, it is anticipated Cadence’s core EDA segment benefits from a wider moat than Synopsys’ does because of the company’s exposure to analog chip design.

Financial Strength

It is likely Cadence’s narrow moat is derived from high customer switching costs associated with its EDA and system design and analysis businesses, and intangible assets associated with its IP portfolio. In experts’ opinion, this customer stickiness and broad, proprietary IP portfolio will drive excess returns on capital for Cadence over the next 10 years. It is alleged that Cadence’s unified portfolio of EDA tools lends itself to specialized, high-touchpoint, deeply integrated software that is believed to give rise to significant time costs, operational risks, and implementation expenses if it were to be replaced. It anticipated Cadence to grow at an 11% CAGR through 2026, as it is likely an uptick in EDA tool adoption from growing demand for new technologies and rising chip design costs. It is projected the systems business to support growth as well as designs trend from chip-level to board-level and multitier integrated systems become the standard for supporting advanced technologies. It is anticipated the IP business’ profitability focus, expansion of the margin-accretive systems business, and operating leverage to support margin expansion. It is held Cadence to increase non-GAAP operating margin from 35% in fiscal 2021 to 43% in fiscal 2026. In addition to deep integration into design flows, it is likely product familiarity is a defining factor among users of EDA tools that also drives higher switching costs. First, productivity gains from product familiarity drive a faster time-to-market, which is mission-critical in this industry when winning new nodes and designs is largely determined by staying ahead of the semiconductor industry’s pace of innovation. Second, as chip design is an incredibly expensive process, the margin for error is virtually non-existent and engineers are more likely to prefer tools with which they are familiar.

Company Profile 

Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other non-traditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

JD’s growth in the number of third-party merchants was at the highest level in the last three years, as JD added more new merchants in the quarter than the previous three quarters combined. This will benefit the high-margin marketplace and advertising revenue, though t is held it will be partially offset by reduced fees for merchants amid more intense competition and reduced advertising budgets of merchants amid weaker consumer sentiment. The 98 million increases in annual active customers in the year, who are more likely to come from lower-tier cities, did not reduce average spending per user. Average spending per user was up 4.5% year over year in 2021, reverting from the 3.5% decline in 2020. This is in contrast with Alibaba, whose average spending per user declined by a low-single digit percentage year over year in 2021 due to a higher mix of customers from lower-tier cities. This means that either new users, as a whole, have average spending as high as the old users, or the old users have increased their spending levels to offset dilution from these new users.

JD’s share price has declined due to fears of delisting in the U.S., renewed concerns of a regulatory crackdown and increased common prosperity measures; it is likely such news will continue to weigh on investor sentiment in the near term. Other risks include uncertainty over the losses at the new businesses and whether the lagging impact of real estate weakness on home appliances and electronics will be worse than expected. Improved profitability, improving consumer sentiment in China, the U.S. and Chinese governments resolving the accounting problem, and signs of regulatory relief, will lead to a rerating in expert’s view.

Users’ shopping frequency and the range of categories purchased improved in this quarter. Average spending per user improved by 11% in the quarter for new users. Frequency of shopping by existing customers was up by 3% and average spending per user has increased by 4.5%. Daily active users’ year-over-year growth of 25% in this quarter surpassed annual active customers’ growth of 21%. These demonstrated JD’s stronger user engagement.

Financial Strength

The net product revenue or first-party gross merchandise volume growth estimate for 2022 is 16% now versus 25% previously. It is anticipated gross merchandise volume, or GMV, to grow 18% year over year in 2022, with third-party GMV growth of 19%. The total revenue is now 17% compared with 25% year over year previously in 2022. In 2022, the non-GAAP net margin is 1.9%, versus 1.8% in 2021 as new businesses and logistics improve profitability while JD Retail’s margin remains stable. Marketplace and advertising revenue in 2022 will grow at 20% year over year versus 35% in 2021. It is seen the growth of the home appliance and electronics segment accelerate in the fourth quarter to 21.7% from 18.8% in the third quarter despite macroeconomic uncertainty. This is helped by sales in offline stores in lower-tier cities. JD’s strong relationship with brands in the segment also helped it to secure inventory amid shortages.

Company Profile 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of transaction volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses. JD.com launched its online marketplace business in 2010.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

CrowdStrike is solidly growing its partner revenue stream, which can be critical to keeping the customer addition momentum. ARR from public cloud deployments was $106 million at the end of the fourth quarter, up 20% sequentially. AWS marketplace ARR grew over 100% year over year and CrowdStrike’s MSSP ARR grew by over 200% year over year. While it is withholding these large growth numbers to moderate with scale, it is seen ample growth opportunities as organizations migrate away from legacy endpoint providers and look to managed service partner offerings for protection. Additionally, it is alleged that CrowdStrike’s leading professional services organization is a powerful lead generator. For every $1 spent on professional services, such as resolving organization’s breaches, the company subsequently generates $5.71 in security subscription ARR, up from $5.51 the year prior.

Guidance for the first quarter includes 53% year-over-year sales growth and adjusted earnings of $0.22-$0.24. For fiscal 2023, CrowdStrike is targeting 48% annual revenue growth and adjusted earnings of $1.03-$1.13. It is anticipated that CrowdStrike can overachieve these guideposts behind the strong momentum in core endpoint and adjacent areas, an increased reach due to partner success, and a heightened threat environment creating a powerful demand for upgraded cybersecurity posture.

Analysts have been raising their fair value estimate for narrow-moat CrowdStrike Holdings to $225 per share from $200 after its fourth-quarter results topped analysts lofty revenue growth and earnings expectations, and the company provided robust fiscal 2023 guidance. Even with CrowdStrike shares soaring by 14% in after-hours trading to $193, which is still seen as marginal upside for investors. The increase is spurred from expecting higher growth alongside margin expansion as it is likely for CrowdStrike to gain in an outsize manner from various trends. It is held, CrowdStrike will continue landing customers at a rapid rate as organizations move away from legacy endpoint protection solutions, and then further entrench itself by selling multiple modules over time with its platform-based approach. The company also benefits from a heightened threat environment with a larger attack surface brought up by remote work and organizations using more cloud-based resources, a skills gap within cybersecurity driving demand for CrowdStrike’s managed security, and its professional services being called upon for breach remediation assistance.

Financial Strength

Fourth-quarter sales growth of 63% year over year came from subscriptions increasing by 66% and professional services expanding by 26%. Annualized recurring revenue expanded 65% to $1.73 billion and remaining performance obligations grew 67% to $2.27 billion, both year over year. It is anticipated these robust results show CrowdStrike’s leadership in its core endpoint protection, growth in adjacent areas like IT hygiene and log ingestion, and momentum with partners. CrowdStrike ended the quarter with 16,325 customers, up 65% year over year. Alongside rapid client additions, experts positively view the company being able to keep world-class retention metrics, with dollar based net retention of 124% and gross retention of 98%. Customers buying at least 4 and 6 subscriptions were 69% and 34%, respectively, which is meant to show organizations consolidating spending toward CrowdStrike’s platform

Company Profile

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)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.