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

GM Will Likely Look Very Different and More High Tech in 2030 Than It Is Now

Business Strategy and Outlook:

GM is having a competitive lineup in all segments, combined with a reduced cost base, finally enabling the firm to have the scale to match its size. The head of Consumer Reports automotive testing even said Toyota and Honda could learn from the Chevrolet Malibu. The GM’s earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers’ retiree healthcare to a separate fund and closing plants have drastically lowered GM North America’s break-even point to U.S. industry sales of about 10 million-11 million vehicles. It has more scale to come from GM moving its production to more global platforms and eventually onto vehicle sets over the next few years for even more flexibility and scale. Exiting most U.S. sedan segments also helps.

GM makes products that consumers are willing to pay more for than in the past. It no longer has to overproduce trying to cover high labor costs and then dump cars into rental fleets (which hurts residual values). GM now operates in a demand-pull model where it can produce only to meet demand and is structured to do no worse than break even at the bottom of an economic cycle when plants can be open. The result is higher profits than under old GM despite lower U.S. share. It now seeks roughly $300 billion in revenue by 2030 from many new high-margin businesses such as insurance, subscriptions, and selling data, while targeting 2030 total company adjusted EBIT margin of 12%-14%, up from 11.3% in 2021 and 7.9% in 2020. GM takes actions such as buying Cruise, along with GM’s connectivity and data-gathering via OnStar, position GM well for this new era. Cruise is offering autonomous ride-hailing with its Origin vehicle and GM targets $50 billion of Cruise revenue in 2030. GM is investing over $35 billion in battery electric and autonomous vehicles for 2020-25 and is launching 30 BEVs through 2025 with two thirds of them available in North America. Management also targets over 2 million annual BEV sales by mid-decade and in early 2021 announced the ambition to only sell zero-emission vehicles globally by 2035.

Financial Strengths:

GM’s balance sheet and liquidity were strong at the end of 2021, apart from $11.2 billion in underfunded pension and other postemployment benefit obligations, an improvement from $30.8 billion at year-end 2014. Management targets automotive cash and securities of $18 billion and liquidity of $30 billion-$35 billion. GM had calculated that at year-end 2021, the automotive net cash and securities, excluding legacy obligations but including Cruise, of $7.7 billion, about $5.26 per diluted share. Global pension contributions in 2022 are expected at about $570 million, with about $500 million of that amount for non-U.S. plans. 

Auto and Cruise debt at Dec. 31 is $17.0 billion, mostly from senior unsecured notes and capital leases. Credit line availability after an April 2021 renewal is about $17.2 billion across three lines with one of those lines being a 364-day $2 billion line allocated exclusively to GM Financial. The other two automotive lines are a $4.3 billion line expiring in April 2024 and an $11.2 billion line. The $11.2 billion line has $9.9 billion available until April 2026 while the remaining portion is available until April 2023. GM fulfilled its UAW VEBA funding obligations in 2010. GM had calculated in 2021 that the automotive and Cruise debt/adjusted EBITDA at 1.3, excluding legacy obligations and equity income. Automotive debt maturities including capital leases are about $463 million in 2022.

Bulls Say:

  • GMNA’s break-even point of about 10 million-11 million units is drastically lower than it was under the old GM. The company’s earnings should grow rapidly as GM becomes more cost-efficient.
  • GM’s U.S. hourly labor cost is about $5 billion compared with about $16 billion in 2005 under the old GM.
  • GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light- vehicle sales and falling market share.

Company Profile:

General Motors Co. emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009. GM has eight brands and operates under four segments: GM North America, GM International, Cruise, and GM Financial. The United States now has four brands instead of eight under old GM. The company lost its U.S. market share leader crown in 2021 with share down 280 basis points to 14.6%, but it is expected that GM to reclaim the top spot in 2022 due to 2021 suffering from the chip shortage. GM Financial became the company’s captive finance arm in October 2010 via the purchase of AmeriCredit.

(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.

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Technology Stocks

LNK results reflects Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA

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Investment Thesis:

  • LNK is currently under a takeover offer by D&D, which the LNK Board has unanimously recommended. 
  • Leveraged to ongoing outsourcing of administration by retail super funds.
  • LNK still has exposure to any further upside in PEXA’s valuation. 
  • New contract wins in Fund Administration and increased market activity.
  • Successfully delivering on its offshore expansion story. 
  • Efficiency benefits from the cost out program. 
  • Clarity around Brexit will remove uncertainty / potential discount assumed in current valuation / share price.  
  • Value accretive bolt-on acquisitions. 
  • Favourable currency movements. 

Key Risks:

  • LNK does not receive all the regulatory approvals for the current takeover offer from D&D. 
  • Lower market activity and business / investor confidence. 
  • Loss of major client contract(s) in Fund Administration.
  • Adverse changes in super regulatory environment – e.g. super account consolidation.
  • Lack of product development.
  • Adverse currency movements.

Key Highlights:

  • Link Administration Holdings Ltd (LNK) reported strong 1H22 results ahead of expectations, with the Company upgrading its FY22 guidance.
  • LNK’s results reflect – Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA.
  • Statutory Loss of $81.7m was due to a non-cash impairment charge of $81.6m related to the BCM business and rationalisation of LNK’s premises footprint.
  • According to management, the GTP remains on track to deliver the committed gross annualised savings of $75m by the end of FY22.
  • For 1H22, the GTP delivered gross savings of $14.9m (including D&A).
  • D&D takeover offer unanimously recommended by LNK Board – total consideration of $5.68 per share.
  • As per LNK’s announcement on 22 December 2021, the Company has entered a scheme of implementation deed with Dye & Durham (D&D) to have 100% of its shares acquired at $5.50 per share plus a fully franked 3cps interim dividend (which declared at the 1H22 results)
  • Investors may also receive a further 15cps if LNK reaches an agreement to sell its Banking and Credit management (BCM) business prior to or up to 12 months after the implementation of the scheme. LNK shareholders are expected to vote on the scheme in May 2022.
  • BCM sales does not proceed and investors miss out on the additional 15cps value.
  • There are contingencies in the offer, which also relates to the Woodford Matters (if there are fines before the completion of the scheme this may delay or put the takeover into jeopardy).

Company Description:

Link Administration Holding Ltd (LNK) is the largest provider of superannuation fund administration services to super fund in Australia. Further, the Company is also a leading provider of shareholder management and analytics, share registry and other services to corporates in Australia and globally. The Company has 5 main divisions: (1) Retirement & Super Solutions (RSS), (2) Corporate Markets (CM), (3) Technology & Operations (T&O), (4) Fund Solutions (FS) and (5) Banking & Credit Management (BCM). LNK was listed on the ASX in October 2015. 

(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.

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Technology Stocks

Jack Henry Remains Committed to the Idea That Slow and Steady Wins the Race

price of btc is going to breakout

Business Strategy and Outlook

 Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers.

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is to be believed was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur

 Jack Henry has generally outperformed its larger peers in terms of growth, and expect this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  •  The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions.

(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.

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Technology Stocks

Jack Henry & Associates: margins under pressure as company developed and migrated clients to a new card processing platform

Business Strategy and Outlook

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, it is seen this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers. 

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is likely was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur. 

Jack Henry has generally outperformed its larger peers in terms of growth, and is believed for this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. It is held Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions. 

(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.

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Technology Stocks

Strong 2022 Outlook Motivates Us to Lift Eaton’s Fair Value Estimate

Business Strategy and Outlook

 Eaton is a specialized producer of highly engineered products and services. These offerings are designed to solve customer pain points in vital portions of the world’s infrastructure. We believe Eaton has mostly positioned its portfolio in profitable niches that should benefit from secular trends like energy transition and electrification, to propel long-term growth. Eaton’s portfolio can be divided into two portions: it’s more legacy industrial sector and its electrical sector. 

Industrial serves a variety of end markets and houses the aerospace and vehicle segments, while electrical consists of the Americas and global segments. Eaton’s products mostly compete in differentiated niches of its end markets, which we think reduces the risk of commoditization. Moreover, many of its end-market solutions are mission-critical, like fuel pumps in aerospace applications or uninterruptible power supply in hospitals. Others lower customers’ total cost of ownership or compete in industries with a high cost of failure.

 In 2018, the company created a new segment, eMobility, which aims to take advantage of the secular trend toward electric vehicles. It is believed that the company can leverage its technology core competency from its electrical sector while taking advantage of its OEM relationships in its vehicle segment. Of all of Eaton’s businesses, the most bullish trend is in its electrical sector and its aerospace business, given data center growth, necessary upgrades to aging infrastructure, and the eventual commercial aerospace recovery.

After revisiting the Eaton thesis and came away far more bullish on the company after management made two prudent capital allocation decisions to sell the commoditized and secularly challenged businesses in lighting and hydraulics. The recent bolt-ons, particularly Tripp Lite, given growth potential in the data center market are particularly liked. It is now believed that Eaton will likely hit all its upward revised targets by 2025, save for its eMobility margin aspirations, given continued investment needs there. Nonetheless, the market is too generous in its assessment of Eaton based on fundamental, intrinsic valuation.

Financial Strength

Eaton is on a decent financial footing. Eaton’s credit rating had steadily improved under Craig Arnold’s stewardship to single A, but the firm is slightly more leveraged now from a net debt/EBITDA standpoint at 2.4 times as a result of the coronavirus pandemic. Nonetheless, it is not a concern as these results are in line with peers, and expect this ratio will come down to under 2 times by 2023 as the firm’s growth returns. It is estimated that 25% of cash on the balance sheet is needed to support Eaton’s global operations, though it is also noted that Eaton is a very strong generator of free cash flow. Further, the firm’s interest coverage ratio (EBIT/interest) is nearly 14 times, which when considered is a strong indicator that the company can safely meet its obligations. Given acquisitions announced at the end of 2020, Eaton will be out of the merger and acquisition market in 2021, given its dividend and share repurchase commitment, but consider the company financially healthy enough to pursue acquisitions once more in 2022 if it should prefer this route over repurchases. At year-end 2020, the company’s pension and other postretirement liabilities’ shortfall totalled just over $1.6 billion, which detracts about $4 from our fair value estimate. Nonetheless, this effect may be overstated in a rising interest-rate environment.

Bulls Say’s

  •  Eaton’s portfolio moves will create lots of value for shareholders and transform Eaton from a 10% ROIC generator to one in the mid-teens. 
  • Investors should welcome many of the secular trends Eaton is positioned to capture, including energy transition, digitization, and electrification as well as the commercial aerospace recovery. 
  • The market could rerate Eaton with an even higher multiple if Congress passes an infrastructure bill. 

Company Profile 

Eaton is a diversified power management company operating for over 100 years. The company operates through various segments, including electrical products, electrical systems and services, aerospace, vehicle, and most recently eMobility. Eaton’s portfolio can broadly be divided into two halves. One part of its portfolio is housed under its industrial sector umbrella, which serves a large variety of end markets like commercial vehicles, general aviation, and trucks. The other portion is Eaton’s electrical sector portfolio, which serves data centers, utilities, and the residential end market, among others. While the company receives favorable tax treatment as a domiciliary of Ireland, most of its operations take place in the U.S.

(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.

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Technology Stocks

Carsales.com Ltd (CAR) reported strong 1H22 results & Balance sheet position; Declared fully franked dividend of 25.5cps

Investment Thesis

  • Leading market position in online car classifieds. 
  • Overseas expansion provides new growth opportunities from the challenging core Australian market. 
  • Heavily reliant on two growth stories (South Korea and Brazil).
  • Diversified geographic coverage.
  • Bolt-on acquisitions provide opportunities to supplement organic growth.
  • The Company can sustain high single-digit and low double-digit revenue growth. 
  • CAR’s move into adjacent products and industries. 
  • Increasing pricing in South Korea to boost margins.
  • Looking to take more of the car buying experience online with dealers (i.e. increasing its total addressable market). 

Key Risk

  • Rich and demanding valuation.
  • Competitive pressures, that is car dealer driven substitute platform or the No. 2 & 3 player gain ground on CAR.
  • Motor vehicle sales remain subdued.  
  • Value destructive acquisition / execution risk with international strategy.
  • Not immune from broader downturn in economy (consumer likely to delay a significant purchase in time of uncertainty). 

1H22 Results Highlights. Relative to the pcp: 

  • Look-through revenue of $282m, up +30% and Look-through EBITDA was up +15% to $149m, driven by strong domestic results in the Private and Media segments, growth in Encar in South Korea and good cost discipline. 
  • Adjusted NPAT of $89m up 20% and adjusted EPS of 31.4c. 
  • CAR reported strong cash flow with Reported EBITDA to operating cash flow conversion of 100%. The Board declared a fully franked interim dividend of 25.5cps, consistent with longstanding dividend payout policy of 80%.

Company Profile

Carsales.com Ltd (CAR), founded in 1997, operates the largest online automotive, motorcycle and marine classifieds business in Australia. Carsales is regarded as one of Australia’s original disruptors and has expanded to include a large number of market-leading brands. The Company employs over 800 and develops world leading technology and advertising solutions in Melbourne. CAR has also expanded to numerous global markets, such as South Korea, Brazil, and other countries in Latin America.

  • 1H22 Results Highlights. 

 (Source: Banyantree)

  •                    Given the

shareCompany Profi                             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.

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Technology Stocks

ADAS Safety Features To Be Part Of Future Standard Equipment For Vehicles By End Of The Decade

Business Strategy and Outlook

It is alleged Aptiv’s average yearly revenue growth to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles. 

In analysts opinion, Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by highly integrated customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. 

New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating. Legislators, especially in the United States and in Europe, have set NCAP guidelines that will progressively require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Financial Strength

In analysts view, Aptiv’s financial health is in good shape. Since 2015, pro forma for the spin-off of Delphi Technologies in 2017, total debt/total capital has averaged 15.2% while total debt/EBITDA has averaged 2.9 times.Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.6 billion, with around $3.1 billion in cash and equivalents as well as $2.0 billion in unutilized revolver and $510 million in available receivables factoring facility at the end of December 2021. The company has a debt/EBITDA covnenant ratio of 3.5 times. Aptiv’s $2.0 billion revolver expires in 2026.As of Dec. 31, 2021, Aptiv had approximately $4.1 billion in senior unsecured note principal outstanding with maturities that ranged from 2025 to 2051, at a weighted average stated interest rate of 2.8%. To fund a portion of the $4.3 billion acquisition of Wind River (remaining portion from available cash), in February 2022, Aptiv issued senior unsecured notes including $700 million at 2.396% due in 2025, $800 million at 3.250% due in 2032, and $1 billion at 4.150% due in 2052. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say’s

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, it is likely Aptiv’s revenue to grow mid- to high-singledigit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 12% of 2021 revenue, including sales to GM’s Shanghai joint venture, followed by Stellantis at 11%, and Volkswagen at 9%. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively. 

(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.

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Technology Stocks

Etsy Inc : Major e-commerce marketplace operator sets sights on encouraging repeat purchase behaviour

Business Strategy and Outlook

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties–Etsy, Reverb, Depop, and Elo7–all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.  

Etsy’s competitive strategy is viewed sound, with the quickly growing firm capitalizing on a surge of COVID-19 induced demand, providing one of only a handful of outlets through which customers could purchase facemasks during the nadir of the pandemic. Though mask sales have dwindled, the platform has remained sticky, with Etsy seeing its active buyer base swell to 96 million (up 18% annually) through 2021 despite lapping a halcyon 2020 in which it netted 36 million customers (75% growth from 2019). Experts claim 171% two-year stacked growth reflects investments made well in advance of the demand surge–from moving its marketplace operations to the cloud (through a partnership with Google), to investing heavily in search engine optimization efforts, and tinkering with performance and brand marketing to boost unaided awareness. 

Moving forward, Etsy is expected to continue to add unique inventory (recently onboarding a number of Indian sellers), to expand its burgeoning international operations (44% of fourth-quarter GMV), to continue to improve search functionality and to expand its suite of seller tools and advertising options, while periodically targeting competitively advantaged tuck-in acquisitions that offer exposure to similarly differentiated end markets. Particularly important will be efforts to increase repeat purchase behavior, with the long-term driver of GMV growth likely be increased average revenue per user in lieu of buyer acquisition after the firm achieves saturation in its six key markets–getting buyers to go to Etsy “not just for the cushions, but for the couch.”

Financial Strength

Etsy’s financial position is viewed sound. While the firm’s gross leverage looks high for an e-commerce company (averaging 5.2 times through 2024, according to analyst forecasts), main concerns are alleviated by a highly cash generative business, with free cash flow to the firm clocking in at 25% of sales in 2022, an operating model that requires minimal maintenance capital expenditure, and access to a $200 million credit facility. Moreover, a net debt position of only $1.3 billion as of the end of 2021 (1.6 turns) suggests only modest underlying leverage. Etsy’s convertible debt structure adds an interesting twist to financial statement analysis. The company has three outstanding series of convertible issuances–$1 billion in 0.25% 2021 notes (due in 2028), $650 million in 0.125% 2020 notes (due in 2026), and $650 million in 0.125% 2019 notes. The structure is common among technology firms, and offers a few key benefits; fewer restrictions, choice of cash or share settlement, cheap capital, and the ability to raise straight debt through subsequent issuance, which strikes us as reasonable (and aligns with practices at technology peers like Twitter and Wayfair). Etsy limits potential dilution with a capped call derivative strategy, with subsequent series that have been utilized to prepay outstanding balances. While the principal value of these notes is accounted for in long-term debt, the equity portion (option value) is accounted for as additional paid-in-capital, with premiums amortized as noncash interest expense over the option’s life. Finally, Etsy is expected to maintain substantial financial flexibility in order to meet its allocation priorities–investments in the business, strategic acquisitions, and share repurchases. Consistent with management commentary, any near-term cash dividend is not anticipated (2026 at the earliest, barring acquisitions), with management preferring the flexibility associated with buybacks.

Bulls Say’s

  • E-commerce trial amidst COVID-19 likely pulled forward e-commerce adoption by two to three years, benefiting digital native platforms like Etsy. 
  • After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, with high teens active buyer penetration across its core six markets heightening barriers to success for new entrants. 
  • The offsite advertisements offer a nice vehicle to increase platform take rates, GMV growth, and seller inventory turnover.

Company Profile 

Etsy operates a top-10 e-commerce marketplace operator in the U.S. and the U.K., with sizable operations in France, Germany, Australia, and Canada. The firm dominates an interesting niche, connecting buyers and sellers through its online market to exchange vintage and craft goods. With $13.5 billion in 2021 consolidated gross merchandise volume, the firm has cemented itself as one of the largest players in a quickly growing space, generating revenue from listing fees, commissions on sold items, advertising services, payment processing, and shipping labels. As of the fourth quarter of 2021, the firm connected more than 96 million buyers and more than 7.5 million sellers on its marketplace properties: Etsy, Reverb (musical equipment), Elo7 (crafts in Brazil), and Depop (clothing resale).

(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.

Categories
Technology Stocks

Pro Medicus Ltd – reported strong 1H22 results reflecting earnings of $20.68m, up +52.7% relative to the pcp.

Investment Thesis:

  • The stock is trading below our valuation and represents >10% upside to the current share price. 
  • Proven and market leading technology (management believes they are 24 months ahead of competitors), with PME’s product commanding a price premium. 
  • New contract wins (more win rates plus higher value per contract) and increasing usage by existing clients. 
  • New product launches – Enterprise Imaging solutions and moving into other “ologies” such as cardiology and ophthalmology. Developing artificial intelligence (AI) capabilities. 
  • Leveraged to the digital health data thematic and industry’s transition to cloud. 
  • Expansion into new geographies.
  • Potential M&A activity.

Key Risks: 

  • High valuation which subjects the stock price to more volatility.
  • Timing (long lead time to close contracts) and scale of new contract wins disappoints relative to market expectations. 
  • Contract renewals (pricing pressure) and potential budget cuts at hospitals leading to the delay of software upgrades / investment. 
  • Increasing competitive pressures (from large scale players and new entrants with innovative technology). 
  • Systems reliability – data breach or drop in quality. 
  • Regulatory / funding changes – reimbursement changes leading to lower imaging volumes. 

Key Highlights:

  • Pro Medicus Ltd (PME) reported strong 1H22 results reflecting earnings (net profit) of $20.68m, up +52.7% relative to the pcp.
  • Revenue was up +40.3% to $44.33m driven by contract wins and renewals in the U.S. and an extension of a European contract to cover new regions.
  • Underlying profit before tax $28.8m, up +53.5%
  • Net profit of $20.68m, up +52.7%.
  • PME retained a strong balance sheet with cash reserves of $76.17m, up $14.91m and remains debt-free.
  • PME reported key contract wins which bodes well for future earnings: Novant Health (A$40m, 7-year contract), a community-based integrated delivery network that spans three U.S. states; Contract renewal with Allegheny Health (A$12m, 5-year), a health network in Pittsburgh, Pennsylvania; and extension of German government hospital to a fourth site.
  • Management also highlighted PME made progress with all key implementations being on or ahead of schedule, including Intermountain and UCSF.
  • The Board declared a fully franked interim dividend of 10c per share, up +42.9%.

Company Description:

Pro Medicus Ltd (PME) was founded in 1983 and provides a full range of radiology IT software and services to hospitals, imaging centers and health care groups globally. In Jan-09, PME purchased Visage Imaging, which has become a global provider of leading-edge enterprise imaging solutions, pioneering the best-of-breed, or Deconstructed PACSSM enterprise imaging strategy. Visage 7 technology delivers fast, multi-dimensional images streamed via an intelligent thin-client viewer. The company offers a leading suite of RIS, PACS and e-health solutions constituting one of the most comprehensive end-to-end offerings in radiology. Pro Medicus has global offices in Melbourne, Berlin (R&D) and San Diego (Sales).

(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.

Categories
Technology Stocks

JD.com Inc : JD logistics and the Supermarket Category to hold back margin gains partially

Business Strategy and Outlook

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020 on our estimate. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. 

JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was two to three times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. Gross margin improved yearly from 5.5% in 2011 to 15.2% in 2016, and following the consolidation of JD Finance in second-quarter 2017, gross margin improved year over year from 13.7% in 2016 to 14.6% in 2020. 

In the medium term, it is likely to see the investment into community group purchase, JD logistics and the supermarket category will hold back some of the margin gains. JD is unlikely to have non-GAAP net margin increase in 2021. Starting in April 2017, the logistics business became an independent business unit that will open its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, gross profit margin improvement can be seen. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strength

JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to generate positive FCFF at CNY 8.1 billion in 2020. JD has not paid dividends.JD.com has invested heavily in fulfilment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. It is held management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so it is likely JD will be able to maintain positive non-GAAP net margin versus being unprofitable before. its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial headcounts. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.

Bulls Say’s

  • JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate. 
  • The partnership with Tencent could allow JD.com to gain significant user traffic from Tencent’s dominant social-networking products in China. 
  • JD is now the largest supermarket in China, the high frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

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.