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

Amazon.com Inc (AMZN) reported a solid 4Q21 results driven by very strong growth rates in previous quarters

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

Investment Thesis:

  • Well positioned as a market leader in e-commerce and cloud computing.
  • Strong operating cash flow profile provides the Company with significant amount of flexibility. 
  • Large base of loyal customers.
  • Strong senior executive team.
  • Entry into new regions (e.g. India) – although this is not without risk.
  • Re-accelerating investment expenditure should be positive for future revenue and earnings growth.

Key Risks:

  • It is a complex business with a lot of moving parts, thus forecasting future earnings can be difficult. 
  • Further de-acceleration in advertising revenue.
  • Increased investments fail to yield adequate returns to justify AMZN’s trading multiples. 
  • Increased e-commerce competition domestically and internationally.
  • Decrease in operating margins of AWS due to increased competition and price cuts.
  • Increased regulatory scrutiny (India being a good example).
  • Increase in overheads like free shipping and higher labor cost leading to margin contraction.  

Key highlights:

  • Relative to the previous corresponding period (pcp), 4Q21 group net sales were up +9% to $137.4bn, driven by AWS (up +40%) and Advertising Services (up +32%).
  • Operating income of $3.5bn was down -49% (due to inflationary pressures and disruptions to operations from Covid-19) and net income increased +99% to $14.3bn, predominantly due to the pre-tax valuation gain of $11.8bn on AMZN’s investment in Rivian Automotive Inc.
  • AWS (Amazon Web Services), with net sales up +40% YoY, had another very strong quarter despite lapping strong growth rates in previous periods (4Q20 was up +28%).
  • AMZN will increase the price of Prime in the U.S. in 1Q22, but at this stage has no plans to raise rates in any other region.
  • AWS is currently available in 25 regions globally, with management looking to launch in 8 more regions in the next few years.
  • Management provided good colour around staffing challenges on the analysts briefing and believe they may be through the peak of it.

Company Description: 

Amazon.com Inc. (AMZN) is a multinational technology company focusing in e-commerce, cloud computing and artificial intelligence. It is the largest e-commerce marketplace and cloud computing platform in the world as measured by revenue and market capitalization. The company operates through three segments; North America, International and Amazon Web Services (AWS).

(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

GOOGL’s 4Q21 results highlighted the strength in Google’s Search business

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis:

  • Commands a strong market position in online advertising and online eyeballs. 
  • Search advertising increases its share of advertising spend. 
  • Leveraged to online video streaming and advertising via YouTube. 
  • Strong balance sheet with over US$130bn in cash, which gives flexibility to invest in growth options or undertake capital management initiatives. 
  • Focus on innovation across advertising businesses, which should help to sustain growth.
  • Strong management team.
  • Value accretive acquisitions in existing and new growth areas. 
  • Recent disclosure suggests GOOGLE’s Cloud business building good revenue momentum. 

Key Risks

  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data. 
  • Regulatory changes which impact the way GOOGLE does business (e.g. forced changes to products). 
  • Expenses such asTAC (traffic acquisition costs) increase ahead of expectations and which the company is unable to pass onto customers.
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Facebook Inc., Amazon etc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results

Key Highlights: 4Q22 group results. 

Relative to the previous corresponding period (pcp), group revenues of $75.3bn was up +32% (or up +33% in constant currency). Group cost of revenues of $32.9bn was up +26%, mostly driven by other cost of revenues (up +25% to $19.6bn). The drivers of this were: content acquisition costs (primarily driven by costs for YouTube’s advertising-supported content); costs for subscription content; hardware costs; and costs associated with data centers and other operations. Operating income of $21.9bn was up +40%, with operating margin at 29%. Net income of $20.6bn was up +36%. GOOGLE maintains an attractive free cash flow profile, delivering FCF of $18.6bn in 4Q21 and $67bn in FY21. The Company ended FY21 with $140bn in cash and marketable securities and repurchased a total of $50bn shares in FY21.

Google Services is driven by strong consumers: Overall Google Services revenue for FY21 of $237.5bn was up +41% YoY, a significant acceleration on FY20A growth of +11%. 4Q21 revenue of $69.4bn was up +31% YoY, “driven by broad-based strength in advertiser spend and strong consumer online activity.” Over 4Q21, “retail was again by far the largest contributor to year-on-year growth of our ads business. Finance, media and entertainment, and travel, were also strong contributors.”

Company Profile

Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as Internet and television services.

(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

Arista Shining From High End Switching Demand Turned on as Cloud Data Centers Expand

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Business Strategy and Outlook

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and it is alleged customers will remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises. 

It is seen EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which is held, allows the company to focus on its core competencies. 

Arista works closely with its core customers to optimize their networking ecosystems, which it is alleged, can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, It is viewed, that Arista is growing alongside key customers and that new ventures have expanded from core competencies.  It is held that Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.

Financial Strength

It is considered Arista to be in a financially healthy position; its zero-debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. It is held that the company’s financial health will remain stable and that cash could be deployed for growth via bolt-on products or technologies.

Bulls Say’s

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.

Company Profile 

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific. (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

AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader

Business Strategy and Outlook

Advanced Micro Devices designs an array of chips for various computing applications. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. Morningstar analysts think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives analyst confidence that the firm will generate excess returns over the cost of capital over the next decade and thus warrants a narrow economic moat rating.

Morningstar analysts thinks the firm is well positioned to enjoy data center growth driven by the shift from on-premise to cloud computing. In the mature PC market, Morningstar analysts think AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in both PCs and servers, though analysts expect x86-based chips to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semicustom processor applications, such as game consoles. AMD’s semicustom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though Morningstar analysts don’t believe AMD is as competitive in GPUs as it is in CPUs.

AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader

In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. Consequently, Morningstar analyst are raising its fair value estimate for AMD to $130 per share from $128. The updated fair value reflects the combined entity .Management expects annualized cost synergies of $300 million within 18 months, based on synergies in cost of goods sold and shared infrastructure through streamlining common areas. Morningstar analysts assume the joint firm will enjoy better cost economics at TSMC, with both standalone AMD and Xilinx being prominent customers of the foundry leader. 

Financial Strength 

At the end of June 2021, the firm reported $2.6 billion in cash and cash equivalents against $313 million in long-term debt. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While the firm has generated solid cash flow in recent years, the company’s longer-term competitiveness remains heavily dependent on the ability of AMD to retain healthy market share across PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies. 
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage. 
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Profile

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

 (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

Uber’s Q4 results beat expectations; Margin expansion to continue on all fronts; Shares attractive

Business Strategy and Outlook:

Mobility demand continued to approach pre-pandemic levels, which further attracted drivers and stabilized prices for riders, expanding the adjusted EBITDA margin, displaying the platform’s strong network effect moat source. The firm’s ability to further monetize the platform via advertising and other verticals is also appealing. 

It appears that normalcy after the pandemic includes not only spending more time out of home and traveling, but also still ordering food and other products online for delivery or pickup as delivery continued to grow. While the mobility take rate dipped, the delivery take rate increased 60 basis points from last quarter and around 5 percentage points year over year.

A slowdown in the decline in air travel is witnessed, which we believe indicates that Omicron has already peaked and demand for travel and therefore airport rides and overall mobility demand may accelerate again. As Uber’s strong network effect continues to attract consumers, advertisers have begun to spend more on the firm’s marketplace platform.

Financial Strength:

Management guided to first-quarter year-over-year gross bookings growth deceleration due to a slight impact from omicron, which appears to have already peaked. Uber generated $25.9 billion in total gross bookings during the quarter, up 51% year over year, with contributions from mobility (up 67%), delivery (34%), and freight, which spiked 245% from last year due to the acquisition of Transplace. Mobility gross bookings hit 84% of pre-pandemic levels during the quarter, up from 79% in the third quarter. While the mobility take rate dipped, the delivery take rate increased 60 basis points from last quarter and around 5 percentage points year over year. Net revenue of $5.8 billion during the quarter was up 105% from 2021. Mobility net revenue grew 55%, while delivery net revenue went up 78%. Monthly active platform users increased 27% from last year to 118 million. Trip requests came in at 1.77 billion (up 23% year over year); however, due to omicron, frequency, or trips per user, declined nearly 10% from last year but stayed within the 14-15 trips range. 

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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Shares Technology Stocks

Twitter’s strong user growth and monetization keeps firm on track

Business Strategy and Outlook:

Despite the top-line miss, both user growth and revenue per user was impressive, as the firm continues to capitalize on the growing demand for brand and direct response advertising. Twitter’s effort to focus more on advertising opportunities is believed to mix well with its balanced brand and direct response revenue base in the long run, allowing the firm to capture more small- and medium-size business ad revenue and tap further into ecommerce growth. the firm has taken the right steps to focus on generating growth in advertising revenue. Following the sale of MoPub, the firm properly reallocated investment into direct response and commerce offerings, which should allow it to attract more small- and medium-size businesses and balance brand advertising. In addition, Twitter’s efforts to provide easier contextual advertising options combined with further user personalization and improvements to user experience in the app could attract even more brand advertising dollars. With the continuing user growth, it is expected that Twitter’s subscription products to slightly reduce its dependency on advertising.

On the commerce front, Twitter for Professionals profile options will attract more businesses as usage of the platform’s Shop module, which allows businesses to highlight their products to be purchased on Twitter, will drive transaction volume higher. However, the firm does face significant competition on this front, including from the likes of Facebook, Pinterest, and, of course, Amazon.

Financial Strength:

Total revenue came in at $1.6 billion, up 22% from last year, with growth in both advertising revenue (22%) and data licensing and other revenue (15%), bringing total revenue for the year to $5.1 billion in 2021. The firm’s user count increased 13% year over year to 217 million, with U.S. and international users up 3% and 16%, respectively. Management claims user numbers improved because of Twitter’s new single sign on feature and improved notifications that attracted former users to return to the platform. n the fourth quarter, costs and expenses totaled $1.4 billion, an increase of 35%, mainly due to increased investment in research and development as well as sales and marketing. The firm generated operating income of $167 million (11% margin) compared with operating income of $252 million (20% margin) last year

Company Profile:

Twitter is an open distribution platform for and a conversational platform around short-form text (a maximum of 280 characters), image, and video content. Its users can create different social networks based on their interests, thereby creating an interest graph. Many prominent celebrities and public figures have Twitter accounts. Twitter generates revenue from advertising (90%) and licensing the user data that it compiles (10%)

(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

Twilio’s software building blocks are constructing a cloud communications empire

Business Strategy and Outlook:

Twilio is a cloud-based communication-platform-as-a-service, or CPaaS, company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows developers to integrate messaging, voice, and video functionality into business applications. We believe narrow-moat Twilio has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform. 

In a go-to-market model that focuses on empowering developers to utilize the APIs to build products in a highly customized fashion, Twilio has been able to expand into use-cases that would be difficult to penetrate otherwise. For widely sought-after use-cases, Twilio has developed solution applications, like Flex Contact Center, which combine various channel APIs into a unified interface to create use-case-specific solutions.

Financial Strength:

Twilio is in a healthy financial position. Revenue is growing rapidly, and the company is beginning to scale, while the balance sheet is in good shape. As of December 2021, the company had cash and short-term investments of $5.4 billion and a debt balance of $985.9 million. In March 2021, Twilio issued $1.0 billion of senior notes, consisting of $500 million of 3.625% notes due 2029, and $500 million of 3.875% notes due 2031. In June 2021, the company redeemed its prior convertible notes, due March 2023, in their entirety. Since raising approximately $150 million in its IPO in 2016, Twilio has completed several secondary offerings, recently announcing a $1.8 billion offering of its Class. A common stock in 2021.Twilio 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. Twilio does not pay a dividend, nor repurchase stock, and for a young company in a relatively nascent industry, we find it appropriate that the company focuses capital allocation on reinvestments for growth.

Bulls Say:

  • The addition of SI partnerships and solution APIs should lead to increasing success in winning enterprise customers, which not only offer a greater lifetime value for a proportionally smaller acquisition cost, but also tend to be stickier customers. 
  • Twilio has stellar user retention metrics, with churn consistently below 5% and net dollar retention north of 130% in recent years. 
  • As Twilio focuses on developing more solution APIs and growth shifts from usage-based messaging to SaaS-like priced solutions, there should be a natural uptick in both gross margins and recurring revenue.

Company Profile:

Twilio is a cloud-based communication platform-as-a-service company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows software developers to integrate messaging, voice, and video functionality into new or existing business applications. The company leverages its Super Network, Twilio’s global network of carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.

(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

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

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

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.