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

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Business Strategy and Outlook

Zebra Technologies is a key partner for supply chain, logistics, and operational efficiency for customers across industry verticals. Zebra has acquired and maintained a dominant share position in the automatic identification and data capture, or AIDC, marketby pivoting into higher-growth technologies over its life.

Morningstar analysts agree with the firm’s ongoing pivot into software, developing platforms internally and through acquisitions to augment and complement its existing portfolio.  Layering prescriptive software with machine learning and artificial intelligence on top of these solutions allows customers to focus on activities with higher return on investment and creates a stickier solution by further embedding Zebra’s technology in customer processes. Morningstar analysts think Zebra’s custom solutions give rise to steep customer switching costs, which underpin our narrow economic moat rating.

 Morningstar analysts expect Zebra to benefit from ongoing secular trends toward digitization and automation, notably in omnichannel retail, which has been accelerated by the COVID-19 pandemic and is a tailwind for the firm. Analysts consider the firm’s highest-growth opportunities will come from further building out its software portfolio and growing its base of recurring revenue, as well as from expanding its footprint in the healthcare market as health records and hospital workflows become digitized. The firm is done paying down its debt from its transformative 2014 Motorola deal, and management is now committing capital to bolt-on M&A and its heady research and development budget.

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Morningstar analysts raise its fair value estimate for Zebra Technologies to $449 per share, from $430, after the firm reported solid fourth-quarter results and raised its long-term guidance. Morningstar analysts believe COVID-19 impacts have benefited Zebra’s growth through accelerating demand for digitized solutions and automated workflows, however, it has simultaneously resulted in cost headwinds for supply chain and logistics, pressuring margins. Morningstar analysts believe that the long-term outlook for Zebra to lead the market in end-to-end digital transformation solutions and durably grow margins will come to fruition, despite ongoing constraints and considered it as short term. Morningstar analysts have greater confidence in Zebra’s growing portfolio of high growth adjacent markets to bolster the top line and modestly raise its long-term growth expectations. Shares pulled back on weak short-term margin guidance, and Morningstar analysts now view them as fairly valued.

Financial Strength

The firm was highly leveraged following its 2014 acquisition of Motorola Solutions’ enterprise division, but in the years following it has steadily paid down its debt. As of Dec. 31, 2021, the firm carried $991 million in debt, making its ratio of net debt/trailing 12-month adjusted EBITDA 0.51 times, well below the top of its target range of 2.5 times. Morningstar analysts  forecast Zebra to generate an average of $1.4 billion in free cash flow each year through 2026 and  allow it to easily service its obligations. With the remainder, analysts  expect the firm to pursue additional bolt-on acquisitions and conduct opportunistic share repurchases. However, Morningstar analysts don’t anticipate a transformative deal (like Motorola) in the short term and anticipate Zebra to remain in its target debt/EBITDA range. Zebra engages in receivables factoring, mostly in its operations in Europe, to help fund working capital. If the firm were to encounter a cash crunch, it has over $800 million of its revolving credit facility, which doesn’t expire until 2024, currently untapped.

Bulls Say 

  • Zebra derives 80% of its sales from a robust ecosystem of channel partners, which can customize its technology to specific sub verticals. 
  • Zebra has the largest share of the AIDC market with over 40%, per VDC Research. 
  • Zebra’s pivot into software should enable it to pursue higher-growth opportunities, expand margins, and heighten switching costs at end customers.

Company Profile

Zebra Technologies is a leading provider of automatic identification and data capture technology to enterprises. Its solutions include barcode printers and scanners, mobile computers, and workflow optimization software. The firm primarily serves the retail, transportation logistics, manufacturing, and healthcare markets, designing custom solutions to improve efficiency at its customers

(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

The Market For Uber Remains Fragmented, And Uber Competing Many Local Ride-Sharing Platforms And Taxis

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Business Strategy and Outlook

Founded in 2009 and headquartered in San Francisco, Uber Technologies has become the largest on-demand ride-sharing provider in the world (outside of China). It has matched riders with drivers completing trips over billions of miles and, at the end of 2020, Uber had 93 million users who used the firm’s ride-sharing or food delivery services at least once a month. In light of Uber’s network effect between riders and drivers, as well as its accumulation of valuable user data, it is alleged the firm warrants a narrow moat rating. 

Uber helps people get from point A to point B by taking ride requests and matching them with drivers available in the area. Uber generates gross booking revenue from this service (the firm’s mobility segment), which is equivalent to the total amount that riders pay. From that, Uber takes the remaining after the driver takes his or her share. Mobility gross booking declined 46% in 2020 due to the pandemic, while net revenue declined 43% with a slightly higher average take rate, although it is anticipated the take rate will decline in the long-run. The pandemic spurred 109% growth in delivery gross bookings and 182% increase in net revenue. 

It is likely, Uber has 30% global market share and will be the leader in Analysts’ estimated $452 billion total addressable ride-sharing market (excluding China) by 2024. The firm faces stiff competition from players such as Lyft (mainly in the U.S.) and Didi, a business in which Uber has an 11% holding after the sale of its operations in China to Didi in 2016. While Uber no longer operates in China, it does compete with Didi in other regions around the world. Globally, the market remains fragmented, and Uber competes with many local ride-sharing platforms and taxis. Delivery, the firm’s food delivery service, will continue to be one of the main revenue growth drivers. Both the mobility and delivery segments will benefit from cross-selling opportunities on the demand and supply sides of the platforms. Further utilization of Uber’s overall on-demand platform for delivery services in other verticals can also help the firm progress toward profitability, in Analysts’ view.

Financial Strength

At the end of 2021, Uber had $4.9 billion of cash and $9.3 billion of debt on its balance sheet. Uber burned $4.3 billion, $2.7 billion, and $445 million in cash from operations in 2019, 2020, and 2021, respectively, while capital expenditures averaged a bit less than $500 million during this period. It is likely, the firm to generate positive cash from operations beginning in 2022. By 2031, it is anticipated Uber’s cash from operations could exceed $23 billion, outpacing top-line growth due to operating leverage. It is projected Uber to become free cash flow positive in 2022, after which Analysts’ model it will average free cash flow to equity/revenue (FCFE/Sales) of over 10% through 2031. While it is held, Uber FCFE/Sales to reach 19% by 2031, it isn’t foreseen the firm issuing dividends. Uber will likely use any excess cash for further acquisitions.

Bulls Say’s

  • Uber’s position in the autonomous vehicle race could equalize gross and net revenue, after no longer needing to pay drivers. 
  • Pressure to pay a minimum amount per trip to its contracted drivers could create a barrier to entry for smaller players, helping Uber in the long-run. 
  • Uber’s aggregation of multimodal offerings will drive in-app stickiness, making Uber a one-stop shop for all transport needs.

Company Profile 

Uber Technologies is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm refers to it, provides “aerial ride-sharing.” Uber Technologies is headquartered in San Francisco and operates in over 63 countries with over 110 million users that order rides or foods at least once a month. Approximately 76% of its gross revenue comes from ride-sharing and 22% from food delivery. 

(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

Aristocrat Leisure Ltd to invest in R&D to defend its narrow economic moat and maintain Market position

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Business Strategy and Outlook

Aristocrat Leisure will continue to dominate the electronic gaming machine, or EGM, market. With a strong balance sheet and commanding market position, Aristocrat’s research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its narrow economic moat. 

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Scientific Games. Aristocrat’s North American ship-share has increased to around 23% in 2019, from around 13% in 2012. This trails leader Scientific Games but is broadly in line with International Game Technology. Aristocrat commands a number one position in class II and class III leased machines with around a third of the installed base, bolstered by the Video Gaming Technologies acquisition in 2014.

EGM sales have been particularly hard-hit as coronavirus-induced shutdowns, social distancing measures, and travel restrictions weigh on the firm’s customers. It is anticipated these casino, pubs, and clubs have been slowing capital expenditure prior to shutdowns to protect balance sheets, grinding EGM sales to a halt. Visitations fell well below pre-pandemic levels, and capital expenditure remains heavily restricted. 

However, Aristocrat’s fortunes aren’t entirely tied to its customers’ capital expenditure cycles. Leased, rather than purchased, machines represent most American land-based sales and attract a fee-per-day arrangement (which can be fixed or performance-based). In our view, this revenue is more naturally recurring than direct EGM sales. While it is expected venue shutdowns and lower visitations in the near term to weigh on leased machine profitability, Aristocrat’s customers don’t appear to be removing machines from floors to reduce costs, painting a brighter picture for leased machines to rebound as visitations recover.

Financial Strength

Aristocrat Leisure is in strong financial health. At Sept. 30, 2021, the company had AUD 0.8 billion net debt, equating to net debt/EBITDA of 0.5–down from AUD 1.6 billion in net debt, equating to net debt/EBITDA of 1.4 at Sept. 30, 2020. EBITDA interest cover is comfortable at 15 times. The AUD 1.3 billion capital raising to fund the AUD 5 billion acquisition of U.K.-listed Playtech–a deal which eventually failed to reach an appropriate level of shareholder support–leaves Aristocrat’s balance sheet extremely well-capitalised to explore further opportunities in real money gaming, or potentially return capital to shareholders. Aristocrat to ramp up paying out dividends from approximately 30% of underlying earnings from fiscal 2021, back to 40% by fiscal 2022. Rather than increasing this pay-out ratio in the near to medium term, it is expected that Aristocrat will instead increase investment in the business through research and development to maintain its market position and defend its narrow economic moat.

Bulls Say’s

  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players. 
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat. 
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat.

Key Investment Considerations:

  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat. 
  • With less turnover likely up for grabs in the near-term, heavy discounting could weigh on Aristocrat’s profitability in the fiercely competitive electronic gaming machine industry. 
  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players.

Company Profile 

Aristocrat Leisure is an electronic gaming machine manufacturer, selling machines to pubs, clubs, and casinos. The firm is licensed in all Australian states and territories, North American jurisdictions, and essentially every major country. Aristocrat is one of the top three largest players in the space along with International Game Technology and Scientific Games. Through acquisitions of Plarium and more recently Big Fish, Aristocrat now derives a significant proportion of earnings from the faster growing mobile gaming business.

(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

Snowflake Inc shifting to subscription model from a usage-based model for boosting its Monetization of products

Business Strategy and Outlook

In the past 10 years, Snowflake has culminated into a force that is far from melting, in our view. As enterprises continue to migrate workloads to the public cloud, significant obstacles have arisen, compromising performance of data queries, creating hefty data transformation costs, and yielding erroneous data. Snowflake seeks to address these issues with its platform, which gives all of its users access to its data lake, warehouse, and marketplace on various public clouds. Snowflake has a massive runway for future growth and should emerge as a data powerhouse in the years ahead. 

Traditionally, data has been recorded in and accessed via databases. Yet, the rise of the public cloud has resulted in an increasing need to access data from different databases in one place. A data warehouse can do this, but still does not meet all public cloud data needs–particularly, in creating artificial intelligence insights. Data lakes solve this problem by storing raw data that is ingested into AI models to create insights. These insights are housed in a data warehouse to be easily queried. Snowflake offers a data lake and warehouse platform, which cuts out significant costs of ownership for enterprises. Even more valuable, in our view, is that Snowflake’s platform is interoperable on numerous public clouds. This allows Snowflake workloads to be performant for its customers without significant effort to convert data lake and warehouse architectures to work on different public clouds. 

The amount of data collected and analytical computations on such data in the cloud will continue to dramatically increase. These trends should increase usage of Snowflake’s platform in the years to come, which will, in turn, strengthen Snowflake’s stickiness and compound the benefits of its network effect. While today Snowflake benefits from being unique in its multicloud platform strategy, it’s possible that new entrants or even public cloud service providers will encroach more on the company’s offerings. Nonetheless, Snowflake is well equipped with a fair head start that will keep the company in best-of-breed territory for the long run.

Financial Strength

Snowflake is financially stable, given the early stages of the company, analyst is confident it will generate positive free cash flow in the long term. Snowflake had cash and cash equivalents of $3.9 billion at the end of fiscal 2021 with zero debt on its balance sheet. Undergoing its IPO in the 2020 calendar year, Snowflake raised over $3 billion from the offering. The cash generated from its IPO will act as ample buffer for Snowflake to keep its cash and cash equivalents positive without taking on debt over the next 10 years. It is forecasted that Snowflake will become free cash flow positive in 2026, after which it is believed, it will continue to invest heavily back in its business rather than distributing dividends or completing major repurchases of its stock. 

Bulls Say’s

  • Snowflake could remain the only multicloud offering of its kind for much longer than anticipated, allowing it to increase its top line more with minimal pricing pressure. 
  • Snowflake could move to a subscription model from a usage-based model, boosting its monetization of its products. 
  • Snowflake could expand to other multicloud data needs, pushing spending per customer to greater heights.

Company Profile 

Founded in 2012, Snowflake is a data lake, warehousing, and sharing company that came public in 2020. To date, the company has over 3,000 customers including nearly 30% of the Fortune 500 as its customers. Snowflake’s data lake stores unstructured and semi structured data that can then be used in analytics to create insights stored in its data warehouse. Snowflake’s data sharing capability allows enterprises to easily buy and ingest data almost instantaneously compared with a traditionally months-long process. Overall, the company is known for the fact that all its data solutions that can be hosted on various public clouds.

(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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Shares Technology Stocks

REA reports solid revenue up by 25%, EBITDA up by 27%

Investment Thesis:

  • Clear no. 1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America.
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure. 

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple.
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy.
  • Failing to get an adequate return on the recent acquisition of iProperty.
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market.
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating.
  • Recent tightening of lending practices by banks would affect Financial services business.

Key highlights:

  • REA reported a strong 1H22 result which was largely in line with expectations. 
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%. 
  • The core Australian residential business did the heavy lifting, with revenue up +31%, driven by solid residential buy listings growth of +17% over the half (up +11% in 1Q & up +22% in 2Q despite lockdowns in Melbourne & Sydney).
  • Management did note that listings in Jan-22 had been unusually high which may lead to a decent 3Q performance, however 4Q is likely to be lower.
  • The current negative sentiment towards technology stocks in an increasing interest rates environment also adds further pressure to REA’s share price.
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%.
  • REA delivered positive operating jaws over the half = revenue up +25% – operating expenses growth +17%, with growth in costs driven by higher headcount and salaries in a tight labour market.

Company Description: 

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and growing presence in Asia and other parts of the world.

(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

Netflix Inc Subscriber Growth Slows Down; while Reported Improved profitability in 4Q21

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Investment Thesis

  • Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
  • An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+).
  • NFLX is transitioning from solely content distribution to content creation which presents execution risk.
  • Significant existing user base, which is continuing to grow strongly, particularly in the International market. 
  • Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.  
  • International expansion opportunities across emerging markets as well as solidified position in established markets (US). 
  • Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures. 
  • Growing demand for Netflix exclusives.
  • Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences. 

Key Risk

  • High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
  • Escalation of intense competition and streaming wars, especially with Walt Disney(DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+. DIS also holds a majority stake in Hulu, which is an online streaming service provider.
  • Execution risks around content creation versus content distribution.
  • Increasing competition based on price or exclusive content contracts.
  • Investment into original content creation fails to live up to the success of exclusive contract deals of existing content. 
  • Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
  • The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.

FY Q21 Results Summary

  • Revenue grew +16% over pcp with a +8.9% increase in average paid memberships and +7% increase in ARM (average revenue per membership) on both a reported and FX neutral basis. The Company ended the quarter with 222million paid memberships with 8.3million paid net adds in the quarter, with UCAN region adding 1.2million paid memberships (vs 0.9million in pcp), marking strongest quarter of member growth in this region since the early days of Covid-19 in 2020. APAC grew paid memberships by 2.6million (vs 2million in pcp) with strong growth in both Japan and India. EMEA was the largest contributor to paid net adds adding 3.5million vs 4.5million in pcp and LATAM delivered paid net adds of 1million vs 1.2million in pcp. 
  •  Operating margin of 8.2% was down -620bps over pcp driven by large content slate in the quarter (margin was above beginning of quarter forecast of 6.5% due to slightly lower than forecasted content spend), resulting in FY21 operating margin of 20.9%, above management’s 20% guidance forecast. 
  • EPS increased +11.8% over pcp to $1.33 and included a $104m non-cash unrealized gain from FX remeasurement on Euro denominated debt. 
  •  Net cash generated by operating activities was an outflow of $403m vs outflow of $138m in pcp resulting in FCF of negative $569m vs negative $284m in pcp (for FY21, FCF amounted to negative $159m, in-line with management’s expectation for approximately break-even).

Company Profile

Netflix Inc (NASDAQ: NFLX) is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.

(Source: Banyantree)

  • Relative to the pcp: (1) 

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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Shares Technology Stocks

ResMed reported 2Q22 results reflecting strong revenue growth to US$894.9m, up +12%, or +13%

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Investment Thesis

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new masks releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks 

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights 2Q22 Results

  • Revenue increased 12% (13% in constant currency) to US$894.9m driven by higher demand for sleep and respiratory care devices and a major product recall by one of the Company’s largest competitors. Across geographies, revenue in the Americas climbed +14%, in Europe, Asia, and other markets it increased +12%, and RMD’s software-as-a-service business saw +8% revenue growth. By product segment, globally in constant currency terms device sales increased by 16%, while masks and other sales increased by 10%.  
  • Non-GAAP operating income of $267.7m, up +5%. This equated to US$1.47 per share, up 4%.
  • Net income was up +12% to US$201.8m. 
  • Gross margin declined 230 basis points to 57.6%.
  • Diluted earnings per share was up +11% to US$1.37.
  • The Board declared quarterly dividend of US42cps. 
  • RMD’s balance remains strong with cash balance of $194m, $680m in gross debt and $496m in net debt, whilst debt levels remain modest, and the Company retains ~$1.6bn for drawdown under its existing revolver facility.

Company Profile 

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(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

Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game

Business Strategy and Outlook

Coupa Software is a cloud-based business spend management, or BMS, platform that allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Morningstar analyts believe Coupa has a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases. In a go-to-market model that focuses on co-selling deals with system integrators, Coupa has been able to expand its market reach significantly. As back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor, morningstrar analysts expect Coupa’s partners to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic spend management tool. As the firm introduces new modules,  Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, analysts also  believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.

Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game

Coupa Software is a cloud-based business spend management, or BSM, platform that allows companies to monitor, control, and analyze expenditures to lower costs and improve operational efficiency.  Coupa has built a broad-reaching self-reinforcing ecosystem of AI-informed spend management and Morningstar analysts believe the firm will benefits from a strong network effect and high switching costs. Morningstar anlaysts fair value estimate for Coupa is $152 per share, down from $232, as they model more muted long-term growth. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic BSM tool. As the firm introduces new modules, Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, Morningstar analyst also  believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.

Financial Strength

Coupa is in a decent financial position. As of January 2021, Coupa had $606.3 million in cash and marketable securities versus $1.5 billion in convertible debt.Coupa has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Coupa does not pay a dividend, nor repurchase stock, and for a young company pioneering a novel offspring under the ERP umbrella,  it can be considered as  appropriate that the company focuses capital allocation on reinvestments for growth. Even so, the firm has historically demonstrated strong cash flows, with free cash flow margins averaging 13% over the last three fiscal years. While cash flows were pressured in fiscal 2021 as a result of the COVID-19 pandemic, Morningstar analysts expect healthy free cash flows in later years. Coupa reached non-GAAP profitability in 2019, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. The company has averaged a non-GAAP operating margin of 9.1% since 2019, and as the company scales, we expect non-GAAP operating margins to reach into the low-30% range at the end of our 10-year forecast period. These positive results should translate to profitability on a GAAP basis in the future as well.

Bulls Say 

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

About the Company

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

(Source: Morningstar)

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

Aptiv Sees Q4 Results Take Chip Crunch Hit, Sets New Revenue Growth Target

Business Strategy and Outlook:

Aptiv’s average yearly revenue growth is expected 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.

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 integral 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.

Financial Strength:

Aptiv’s financial health is in good shape. Total debt/total capital has averaged 16.9% 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 $5.2 billion, with around $2.8 billion in cash and equivalents at the end of December 2020. The company was also granted covenant relief, with a debt/EBITDA ratio of 4.5 times through the second quarter of 2021, up from 3.5 times. With the exception of the credit line that includes the revolver and a term loan, which expires in August 2021, the company has no other major maturities until 2024. The company has approximately $4.1 billion in senior unsecured note principal outstanding with maturities that range from 2024 to 2049, at a weighted average stated interest rate of 3.2%. Aptiv issued $300 million in 4.35% senior notes due in 2029 and $300 million 4.4% notes due in 2046 in March 2019 to redeem senior notes due in 2020 with an interest rate of 3.15%. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say:

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, we expect Aptiv’s revenue to grow mid- to high-single digit 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 13% of revenue, including sales to GM’s Shanghai joint venture. 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.

Categories
Technology Stocks

Arrow Stands Out Among Distributors for Efficiency and Profitability

Business Strategy and Outlook:

Arrow Electronics is one of the premier global value-adding distributors of electronics. Arrow uses its excellent sales, marketing, and net working capital management expertise to provide its supplier partners with a long tail of small customers while using its partnerships to service customers with a broad semiconductor selection—increasing profits for both ends of the supply chain in the process. Arrow is a more efficient operator than many of its distributor peers, which, along with its differentiated engineering expertise and design generation, leads to it holding among the best operating margins in the business.

Arrow is such an effective and streamlined operator that it earns an economic moat, while none of its peers under our coverage do. Arrow’s cash conversion cycle and average inventory days lead other top global distributors, which allows it to earn slim, but reliable, excess returns on invested capital. A focus on high-value semiconductors for transportation and industrial applications augments its returns. Its proficiency in chip distribution has led to it offering the broadest line card of any global chip distributor and the top market share in North America, including several high-profile exclusive supplier relationships, like with Texas Instruments and Analog Devices.

Financial Strength:

Arrow Electronics to remain leveraged and to use its available capital to invest in working capital and returning capital to shareholders. As of Dec. 31, 2021, Arrow had $222 million in cash and $2.6 billion in gross debt. The firm will easily service its obligations over the next five years, with an average of roughly $350 million maturing each year through 2025 while forecast has been on an average of over $1 billion in free cash flow over the same period. If the firm runs into a liquidity crunch, it has an untapped $2 billion revolver. Arrow will eventually finance more debt to remain leveraged and invest in the business. The firm needs to maintain a debt/EBITDA ratio under 3 times to keep its debt investment-grade and currently sits comfortably below 2 times. The firm’s greatest investment over the next five years will be in working capital. Finally, Arrow is a strong generator of cash, though it exhibits modest countercyclical cash flow generation. In semiconductor upcycles, the firm will invest heavily in inventory and extend more credit, trimming free cash flow. In downcycles, these activities get reined in and the firm can see over 100% free cash flow conversion. Still, when looking at operating cash flow as a proportion of non-GAAP net income (management’s preferred metric) over a cycle, Arrow has averaged 79% conversion, cumulatively, over the last five years. 

Bulls Say:

  • Arrow is one of the most efficient and value additive distributors in the world, resulting in some of the highest operating margins of its peer group. 
  • Arrow is entrenching its competitive advantage with exclusive supplier relationships that give it the broadest semiconductor selection of any distributor—covering over a third of global chipmakers. 
  • Arrow returns a significant amount of capital to shareholders in the form of repurchases, for which it used 95% of its free cash flow between 2017 and 2021.

Company Profile:

Arrow Electronics is a global distributor of electronics, connecting suppliers of semiconductors, components, and IT solutions to more than 180,000 small and midsize customers in 85 countries. Arrow is the second-largest semiconductor distributor in the world, and the largest for North American chip distribution, partnering with a third of global chipmakers.

(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.