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

Sonic Healthcare up to $500m on market buyback supportive at current share price levels

Investment Thesis

  • As the Covid pandemic subsides, near-term earnings may underwhelm but longer term, we don’t doubt the quality of SHL’s assets, which is geographically diversified, and high quality management team.
  • Ageing population requires more diagnostic tests, especially as Medicine focuses on preventative medicine.
  • Market leading positions in pathology (number one in Australia, Germany, Switzerland, and UK number three in the US). Second leading player in Imaging in Australia.
  • High barriers to entry in establishing global channels.
  • Ongoing bolt-on acquisitions to supplement organic growth and potentially improve margin from cost synergies.
  • Leveraged to a falling dollar. 
  • Globally diversified.

Key Risks

  • Disruptive technology leading to reduced diagnostics costs.
  • Competitive threats leading market share loss.
  • Deregulation resulting in new pathology collection centres.
  • Adverse regulatory changes (fee cuts).
  • Disappointing growth.
  • Adverse currency movements (AUD, EUR, USD).

Bulls Say’s

  • Revenue of $4,757m, up +7%. 
  • EBITDA of $1,540m, up +18%.
  • Net Profit of $828m, up +22%.
  • Cash generated from operations of $1,041m, up +28%, reflecting EBITDA growth and lower interest payments. SHL achieved 85% conversion of EBITDA to gross operating cash flow.
  • Earnings per share of 170.8cps, up +21%.
  • SHL retained a strong balance sheet position, with gearing at record low level of 12.9% (vs 12.5% in the pcp) and below covenant at <55%, interest cover of 44.9x (vs 33.8x in the pcp and above covenant limit of >3.25x) and debt cover of 0.3x (vs 0.4x in the pcp and covenant limit of <3.5x), and with ~$1.4bn of available liquidity.
  • SHL maintained its progressive dividend policy, with the Board declaring an increase of 4 cents (or up +11%) to 40 cents (100% franked) for the FY2022 Interim Dividend.

Company Profile 

Sonic Healthcare (SHL) is a medical diagnostics company with operations in Australia, New Zealand, and Europe. The company provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients along with providing administrative services and facilities to medical practitioners. SHL has three main segments: (1) Pathology/clinical laboratory services based in Australia, NZ, UK, US, Germany, Switzerland, Belgium and Ireland. (2) Diagnostic imaging services in Australia; and (3) Other which includes medical centre operations (IPN), occupational health services (Sonic HealthPlus) and laboratory automation development (GLP Systems).

(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

PayPal Holdings Inc. : FY21 Revenue of $25.37bn Largely in Line With Consensus Forecast of $25.35bn

Investment Thesis:

  • Leveraged to the structural growth story of electronics payments and e-commerce globally.
  • Strong market position (largest payments platforms in North America) and increasing global market share.
  • Sophisticated technology platforms which have been incrementally improved via R&D and acquisitions. PYPL’s technology stack are difficult to replicate and impose high barriers to entry to new competitors.
  • Value-accretive acquisitions.
  • Incoming strategic partnerships to further unlock payment efficiency and access to wider markets (e.g. Instagram, Uber, Paymentus).
  • Strong free cash flow generation gives way to capital management initiatives.

Key Risks:

  • Global macro-economic conditions deteriorate, impacting consumer spending and business activity.
  • Pricing pressures from emerging competitors and alternatives to PayPal. Leading banks or tech giants such as Amazon may develop their own payment platforms to cannibalize sales from Paypal (e.g. Apple Pay).
  • U.S.-China geopolitical tensions impeding cross-border e-commerce transactions.
  • Adverse currency movements and regulatory changes (data privacy / protection, governments’ intervention/protection policies).
  • Security and technology risks (including cyber-attacks).
  • Value destructive acquisition(s).

Key highlights:

PYPL FY21 revenue of $25.37bn was largely in line with consensus forecast of $25.35bn, however, GAAP EPS of $3.52 missed forecast of $3.60. The Company added 49 million NAAs (net active accounts) bringing total active accounts to 426 million, up +13%, leading to TPV growing +33% to $1.25 trillion with management forecasting TPV to reach $1.5 trillion in FY22. Management announced a pivot in strategy to shift emphasis more towards engagement and driving higher value NNAs, leading to scrapping of the 750 million accounts target by 2025. However, management remains confident of new strategy driving higher ROI

  • Pivot in strategy – Management has pivoted their strategy and is shifting emphasis more towards engagement and driving higher value NNAs (consumers who are more engaged, drive incremental sales for merchants which drive growth at much higher margins and ROI) rather than just focusing on generating account creation (over time the Company still expect to grow net new actives, but more in line with pre-pandemic levels), leading to management scraping their target of growing active accounts to 750 million by 2025.
  • eBay headwinds in the rearview – last revenue pressure in 2Q22. eBay’s migration of payments away from PYPL led to 1100bps headwind on top-line in FY21, however, the Company remains at final stage of transition with no pressure past 2Q22 and a final ~400bps revenue headwind in FY22 (concentrated in 1H22).
  • Capital management. Given strong cash flow generation (cashflow from operations up +8% over pcp to $6.3bn and FCF up +9% over pcp to $5.4bn) and strong balance sheet with ample liquidity of $16.3bn in cash, equivalents and investments, management continued shareholder return initiatives, returning $3.4bn in the year via repurchase of ~15.4m shares of common stock.
  • Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.
  • Revenue growth of ~15-17% Revenue growth of ~15-17% on a spot and FXN basis (excluding eBay to grow ~19-21%) vs prior guidance of high-teens, as spending remains impacted by omicron, inflationary pressures, and lack of stimulus.

Company Description:

PayPal Holdings Inc (NASDAQ: PYPL) is an American company in the global payments industry that acts as a payment gateway between merchants and customers, enabling electronic forms of payment instead of cash and cheques. The Company also provides an online payment system that allows individual persons to send and receive money between PayPal accounts. As of 2021, PayPal has 426 million active users and facilitates transactions across more than 200 countries and 25 currencies.

(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

Fineos Shares Remain Disconnected to Fair Value

Two businesswomen working late in office look at documents

Business Strategy and Outlook

Fineos is a core software vendor to the global life, accident, and health, or LA&H, insurance industry. The firm generates revenue mainly from subscriptions and product implementation services. Fineos help insurers streamline workflow, save costs, and win new business. Fineos is currently migrating customers to a cloud-based offering (from on-premise products). This makes it easier to rollout new features and support at lower marginal costs, while also providing more recurring subscription revenue. 

The firm executes a classic land and expand strategy. Building on its leadership in claims and absence products, Fineos aims to cross-sell its broader product set including payments, billing, data and more. It intends to expand the use of the Fineos platform across multiple jurisdictions with existing multinational clients. Higher customer expectations cost pressures, regulatory requirements, or increasing competition are prompting insurers to switch from clunky internal systems to external software like that from Fineos. 

There is ample room for Fineos to deploy new modules to existing customers and grow penetration over time. This further increases switching costs..Fineos has built multiple reference accounts from doing business with large insurers, who help with additional business wins. Risks include competition from larger competitors, and customer concentration, which may limit price hikes. These may be offset by Fineos’ high switching costs and the risk aversion of insurer clients in changing core systems. Fineos’ product switching costs are contingent on the group continuing to invest (such as in product development) to add value to customers.

Fineos Shares Remain Disconnected to Fair Value

Fineos had good top line growth in first-half fiscal 2022. Revenue grew 24% from the previous corresponding period, or pcp, to EUR 65 million. Morningstar analysts have lowered its fair value estimate to AUD 4.80 from AUD 5.10. But Fineos shares remain at a discount to Morningstar analysts estimate of intrinsic value. Morningstar analysts think the market is underpricing: 1) the inherent switching cost in Fineos’ products, stemming from the risk aversion of its customers to switching providers; and 2) the trend of insurers migrating their business administration processes to the cloud, providing opportunity for Fineos to take share. These drivers underscore Morningstar analysts expectation that Fineos will keep growing market share, noting around 55% of insurers still use legacy systems that have limited functionality and higher operating costs

Financial Strength

Fineos’ balance sheet is appropriately sound. As of Dec. 31, 2021, Fineos has cash and equivalents of EUR 48.6 million and no debt. But current earnings quality is weak. Cash flows have historically been maintained by equity raises, rather than from the ordinary course of business. Cash conversion (operating cash flows to EBITDA) has been irregular. Investing cash flows frequently outstrip operating cash flows due to constant reinvestments, such as for product development or acquisitions. Net cash should grow as the business scales. Morningstar analysts estimate Fineos can generate sustainable positive free cash flows by fiscal 2026-27. Until Fineos reaches scale, however, prospective business acquisitions over the next five years will likely require equity raises. Alternatively, FINEOS can drawdown debt for acquisitions, but this could result in gearing levels and debt coverage deteriorating quickly. Longer-term, we expect Fineos to realise operating leverage via a combination of revenue growth and the scaling of fixed costs. This should help maintain growth in earnings and help the firm become more cash generative. 

Bulls Say

  •  Fineos has low penetration in a sleepy industry that’s ripe for disruption. Operating metrics are solid and trending positively. 
  • Switching costs are high. A competitor who creates a better product only wins half the race. The other half is to build credible reference accounts and convince insurers to switch, which can be lengthy ordeals. 
  • Morningstar analysts believe Fineos will remain the leader in its niche space, as it continues to reinvest in its products or pursue acquisitions, bolstering its capabilities, increase the switching costs of its product suite and expand the modules on offer.

Company Profile

Fineos Corp Holdings PLC is an Irish company engaged in providing software solutions that include management and administration of policies and claims to the life, accident, and health insurance industry. The company’s platform, Fineos AdminSuite, comprises Fineos Absence, Fineos Billing, Fineos Claims, Fineos Payments, and Fineos Provider, among other solutions.

(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

WiseTech Global Ltd reported strong 1H22 results driven by strong top line revenue growth

Investment Thesis

  • Market leading position (significantly ahead of the nearest competitor).
  • Growing global trade and increasingly globalization of products sold.
  • High degree of revenue visibility and low customer annual attrition rates. 
  • R&D spend will ensure product/services are enhancing WTC products. WTC’s vision is to be the operating system for global logistics. Having completed 39 acquisitions since its IPO in 2016, WTC has assembled significant resources and development capabilities to fuel its CargoWise technology pipeline.
  • Scalability of the business model.  
  • Geopolitical tensions considered by management as “tailwinds” due to higher consolidation of the logistics software industry.

Key Risks

  • Company announces another earnings downgrade.
  • Organic growth could moderate further, which may no longer warrant such a lofty valuation. However, organic growth has improved over FY19.
  • Management noting that revenues from recent acquisitions actually declined and offered little margin. This means the return from these acquisitions could take longer than management’s expectations. 
  • Competitive threat (new product/technological advancements).
  • Disruption to technology (data breach).
  • Adverse currency movements.

1H22 Results: Relative to the pcp:

  • 1H22 Total Revenue of $281.0m, up +18% (+22% ex FX) on 1H21. 
  • CargoWise revenue was up +29% (+33% ex FX) to $193.0m, driven by Large Global Freight Forwarder rollouts, new customer wins, price and increased existing customer usage. 
  •  Acquisition (non-CargoWise) revenue of $87.9m, down -1% (up +2% ex FX). 
  •  Market penetration momentum continuing – two new global rollouts secured in 1H22 – FedEx and Access World – and Brink’s Global Services (Brink’s) signed post 31 December 2021. 
  •  Ongoing product development delivered 589 CargoWise new product features and enhancements and continued expansion of the CargoWise ecosystem. 
  •  Organization-wide efficiency and acquisition synergy program well-progressed – $20.2m of gross cost reductions in 1H22 (net benefit $19.7m). 
  •  EBITDA of $137.7m up +54% driven by revenue growth and cost reductions. Margin of 49%, up 12bps. CargoWise’s 1H22 EBITDA margin of 58% represents an increase of 4pp on 1H21. 
  •  Underlying NPAT of $77.3m, up +77%. 
  •  WTC generated strong free cash flow of $90.3m, up +85%. 
  •  WTC retained a strong balance sheet, with cash as at 31 December 2021 of $380.3m and no outstanding debt excluding lease liabilities. WTC has an undrawn, unsecured, four-year, $225m, bi-lateral debt facility, to fund future growth. 
  •  WTC’s Board declared a fully franked interim ordinary dividend of 4.75cps, which equates to payout ratio of 20% of Underlying NPAT.

Company Profile

WiseTech Global (WTC), founded in October 1994, is a leading provider of software to the logistics services industry globally. WTC develops, sells and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods, domestically and internationally. WTC’s software assists their customers to better address and adapt to the complexities of the logistics industry while increasing their productivity, reducing costs and mitigating risks. WTC services over 6,000 customers across more than 115 countries with offices in Australia, New Zealand, China, Singapore, South Africa, United Kingdom and the United States. 

(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

VMware’s VSphere and ESXi Hypervisor Being Virtualization Gold Standards

Graphic of investment stock market data analysis business

Business Strategy and Outlook

VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, it is seen VMware’s robust cloud provider partnerships, including the hyperscalers, should help the firm handle the changing market landscape. It is anticipated 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. 

Analysts’ 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 Analysts’ view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. It is held the November 2021 spin-off 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, it is foreseen its $11.5 billion special dividend, to all shareholders, as part of the spin-off 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. It is projected 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 likely, software cohesion across on-premises and clouds along with nascent networking products should give VMware sustainable growth.

Financial Strength

It is held 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 it is projected 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 it is anticipated 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, it is likely to quickly lower its obligations through cash on hand and its robust free cash flow generation.

Bulls Say’s

  • 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, enduser 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 Profile 

VMware is an industry leader 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)

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

Megaport Ltd – Company achieved 2,455 customers across 768 Enabled Data Centres

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors.
  • Strong cash balance of $104.6m. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key highlights:

(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer. 

(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost. 

(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy. 

(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific). 

(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.

Company Description: 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(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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Financial Markets Sectors Technology Technology Stocks

Megaport Ltd – Company achieved 2,455 customers across 768 Enabled Data Centres

The concept of 5G network with magnifying glass on modern circuit board, high-speed mobile internet and new generation networks technology background

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors.
  • Strong cash balance of $104.6m. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key highlights:

(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer. 

(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost. 

(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy. 

(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific). 

(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.

Company Description: 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(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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Financial Markets Sectors Technology Technology Stocks

Microsoft remains well positioned to strengthen its market leadership in cloud computing

Investment Thesis:

  • Cloud products are growing at attractive growth rates as the Company continues to innovate. 
  • Exposure to the fast growing online gaming segment. 
  • New product release and updates to existing suite of products.
  • Solid free cash flow generation and strong balance sheet. 
  • Strong management team.  

Key Risks:

  • Competitive & macro pressures in key markets – if the growth rate for Azure slows the market would view this as a negative in our view.   
  • New product releases or updates fail to resonate with customers leading to product switching to competitors. 
  • U.S. trade war with China escalates, given MSFT uses parts from China.  
  • Value destructive acquisition(s). 
  • Adverse movements in currency (USD). 
  • Intellectual property theft and piracy.
  • There is significant optimism priced into MSFT’s share price (the stock is well owned by investors), and as such any disappointment on growth or strategic misstep could see the stock disproportionately de-rate lower.

Key highlights:

  • Driven by rising digital shift by enterprises, MSFT’s cloud growth continued to exceed management’s expectations (Intelligent cloud revenues came in at $18.3bn in 2Q22, up +26% YoY
  • Management also announced an extension of infrastructure to the 5G network edge. As the demand for cloud infrastructure services continues to surge in the post Covid-19 era, benefiting from organisations upgrading their legacy IT infrastructure and migrating to cloud-based workloads
  • Well positioned to strengthen its market leadership in cloud computing (as of FY21 MSFT’s cloud revenues grew at a higher rate than top player AMZN, with a 3-year average of +70% compared to +39.8% for AMZN), aided by growth in on-premise amid its large enterprise partner ecosystem
  • Public-cloud infrastructure, in-turn driving the overall margin expansion for the Company (large fixed costs should continue to get better diluted with the rapid increase in revenues, driving segment’s operating income at a higher rate than revenue). 
  • Management announced the acquisition of Activision Blizzard for $68.7bn. The acquisition remains the last piece in the puzzle for MSFT to exert dominance in Metaverse, with the Company now owning the hardware, cloud services and content to dominate gaming industry.

Company Description: 

Microsoft Corp (MSFT) develops, manufactures, licences, sells and supports software products. Microsoft offers operating system software, server application software, business and consumer applications software, software development tool and Intranet / Internet software. The Company has three main segments: (1) Productivity and Business Processes; (2) Intelligent Cloud; and (3) More Personal Computing.

(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

Microsoft remains well positioned to strengthen its market leadership in cloud computing

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Investment Thesis:

  • Cloud products are growing at attractive growth rates as the Company continues to innovate. 
  • Exposure to the fast growing online gaming segment. 
  • New product release and updates to existing suite of products.
  • Solid free cash flow generation and strong balance sheet. 
  • Strong management team.  

Key Risks:

  • Competitive & macro pressures in key markets – if the growth rate for Azure slows the market would view this as a negative in our view.   
  • New product releases or updates fail to resonate with customers leading to product switching to competitors. 
  • U.S. trade war with China escalates, given MSFT uses parts from China.  
  • Value destructive acquisition(s). 
  • Adverse movements in currency (USD). 
  • Intellectual property theft and piracy.
  • There is significant optimism priced into MSFT’s share price (the stock is well owned by investors), and as such any disappointment on growth or strategic misstep could see the stock disproportionately de-rate lower.

Key highlights:

  • Driven by rising digital shift by enterprises, MSFT’s cloud growth continued to exceed management’s expectations (Intelligent cloud revenues came in at $18.3bn in 2Q22, up +26% YoY
  • Management also announced an extension of infrastructure to the 5G network edge. As the demand for cloud infrastructure services continues to surge in the post Covid-19 era, benefiting from organisations upgrading their legacy IT infrastructure and migrating to cloud-based workloads
  • Well positioned to strengthen its market leadership in cloud computing (as of FY21 MSFT’s cloud revenues grew at a higher rate than top player AMZN, with a 3-year average of +70% compared to +39.8% for AMZN), aided by growth in on-premise amid its large enterprise partner ecosystem
  • Public-cloud infrastructure, in-turn driving the overall margin expansion for the Company (large fixed costs should continue to get better diluted with the rapid increase in revenues, driving segment’s operating income at a higher rate than revenue). 
  • Management announced the acquisition of Activision Blizzard for $68.7bn. The acquisition remains the last piece in the puzzle for MSFT to exert dominance in Metaverse, with the Company now owning the hardware, cloud services and content to dominate gaming industry.

Company Description: 

Microsoft Corp (MSFT) develops, manufactures, licences, sells and supports software products. Microsoft offers operating system software, server application software, business and consumer applications software, software development tool and Intranet / Internet software. The Company has three main segments: (1) Productivity and Business Processes; (2) Intelligent Cloud; and (3) More Personal Computing.

(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

BorgWarner Positioned for Growth From Globally Ubiquitous Clean Air Regulations

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Business Strategy and Outlook

BorgWarner is well positioned to capitalize on industry trends arising from global clean air legislation, consumers’ demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. BorgWarner is well positioned for the trends in the auto sector that will result in revenue growth in excess of the growth in global automobile demand. 

Turbochargers, one of BorgWarner’s products for which it commands an industry-leading market share and accounted for 24% of 2020 revenue, are a cost-effective way for OEMs to improve engine efficiency. Fuel-injection technology from the Delphi acquisition also improves efficiency. Combined, both technologies increase fuel economy, lowering tailpipe emissions. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings. Torque transfer devices enable all-wheel drive and four-wheel drive for globally popular sport utility and crossover vehicles.

Financial Strength

BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, we think the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt.

The company refinanced a $251 million senior note that was due in September 2020. BorgWarner maintains a $2.0 billion multicurrency revolver that matures in March 2025. The company’s unsecured commercial paper program allows up to an aggregate $2.0 billion in principal amount outstanding. Total combined drawn borrowing between the revolver and commercial paper program is not permitted to exceed $2.0 billion. With the completed all-stock deal to acquire Delphi Technologies, trailing 12-month pro forma debt/EBITDA was 3.0 times. However, excluding the dramatic COVID-19 impacted second quarter and using the trailing 12-months EBITDA ending with the first quarter, BorgWarner proforma debt/EBITDA was 1.7 times, a relatively healthy result.

Bulls Say’s

  • Global clean air legislation enables BorgWarner’s top-line growth to exceed worldwide growth in demand for light vehicles. 
  • The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies. 
  • Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.

Company Profile 

BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produces e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.

(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.