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

Citrix Agrees To Be Taken Private for $104 Per Share; Reports Good Results; FVE Down to Deal Price

Business Strategy and Outlook

Citrix serves customers from enterprise-level to small and medium-size businesses and has come to dominate remote access and desktop virtualization while building a supportive portfolio of related networking solutions. A streamlined portfolio has allowed Citrix to focus on selling a holistic solution rather than endpoint products. This includes selling directly to CIOs, converting the installed base of point products to higher-priced and higher-value IT solutions, and winning new accounts. As if these changes were not enough of a challenge, the company is also in the midst of a model transition to subscriptions, which appears to be going well thus far.

While Citrix is strong in its core market, it is not a leader in other markets. In fact, Citrix remains one of a handful of competitors in each of the other markets it serves, including application delivery, endpoint management, software-defined wide-area network management, and web application firewalls, among other niches. The firm went through some turbulence in 2015-17. 2018 was a step in the right direction in terms of focus and execution, but Morningstar analyst believe management will have its hands full over the next several years executing its strategy. 

Morningstar analyst believe Citrix has established a narrow moat, as switching proven core software infrastructure components is something organizations try to avoid. Morningstar analyst  forecast mid single digit top-line growth over the next five years, with gradually improving operating margins. Morningstar analyst think Citrix is well positioned in the coming quarters to be an important partner as its customers expand their remote work strategies, especially with the addition of Wrike to the portfolio.

Citrix Agrees To Be Taken Private for $104 Per Share; Reports Good Results; FVE Down to Deal Price

Morningstar analyst  lowering  fair value estimate for narrow-moat Citrix to $104 per share from $116 after the company agreed to be taken private by Vista Equity Partners and Evergreen Coast Capital for $104 per share. Citrix has been hampered over the years by questionable acquisitions and a lack of operational discipline by previous management teams and was the target of Elliott Management’s activist involvement in 2015. Concurrent with this announcement, Citrix also reported surprisingly strong fourth-quarter results. Fourth-quarter revenue grew 5% year over year to $851 million, which topped the high end of the $825 million to $835 million guidance range. 

Bulls Say

  • Citrix dominates the desktop virtualization (broadly defined) market. 
  • A streamlined portfolio and optimized footprint from a period of major restructuring should help Citrix drive both revenue and margins over the next several years. 
  • The recent release of Citrix Cloud has helped jumpstart the business model transition to subscriptions.

Company Profile

Citrix Systems provides virtualization software, including Virtual Apps and Desktops for desktop virtualization and Citrix Virtual Apps for application virtualization. The company also provides Citrix Endpoint Management for mobile device management and Citrix ADC for application delivery and Citrix SDWAN for routing, security, and WAN monitoring.

 (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

Charter Claims More Than 70% Of Internet Access Market Across Territory

Business Strategy and Outlook

It is impressive, Charter’s aggressive effort to drive customer penetration by limiting price increases, improving customer service, and expanding its offerings to appeal to a variety of preferences. It is likely the firm will successfully navigate growing competition from the phone companies, though growth will likely slow in the coming years. Charter’s aggression extends to its capital structure, where heavy share repurchases have bolster shareholder returns but have also kept debt leverage high, which will likely add volatility to the share price and could limit financial flexibility. 

Charter’s cable networks have provided a significant competitive advantage versus its primary competitors–phone companies like AT&T–as high-quality Internet access has become a staple utility. It is anticipated the firm now claims about 70% of the Internet access market across the territories it serves, up about 9 percentage points over the past five years and still marching higher. Charter has been able to upgrade its network to meet consumer demand for faster speeds at modest incremental cost while the phone companies have largely ignored their networks across big chunks of the country. Phone companies, notably AT&T, are starting to increase fiber network investment, which is projected will hit Charter at the margin–the firm has faced less fiber competition than its major cable peers. However, it is held Charter will remain a strong competitor even when faced with improved rival networks. 

Wireless technology has emerged as a potential new competitor to fixed-line Internet access. Analyst’s sceptical of wireless’ ability to meet network capacity on a wide scale for the foreseeable future. Also, it is likely dense fixed-line networks like Charter’s will play an increasingly important role in powering wireless networks in the future. Charter also faces declining demand for traditional television services, but here again it isn’t seized investors should be concerned. The amount of profit the firm earns from television service has been declining for several years. Internet access, now the bedrock of Charter’s customer relationships, delivers the vast majority of cash flow today.

Financial Strength

Charter operates under a fairly heavy debt load, with net leverage standing at 4.6 times EBITDA, by analysts’ calculation, a level that has held steady in recent quarters. Charter’s management team has run with a net leverage target of 4.0-4.5 times EBITDA over the past several years, typical of firms under the influence of Liberty and John Malone. By the firm’s calculation, net leverage was 4.4 times EBITDA at the end of 2021. This debt level is higher than its peer Comcast, which has typically targeted net leverage of around 2.0-2.5 times EBITDA. On the other hand, Charter’s leverage is more modest than Altice USA’s at roughly 5.5 times EBITDA. Charter typically directs free cash flow and the proceeds from incremental borrowing to fund share repurchases as a means of keeping leverage within its target range as EBITDA grows. The firm believes that it could reduce leverage quickly if its borrowing costs or business outlook change materially in the future. The firm generated free cash flow of about $8.7 billion in 2021 and spent $17.7 billion repurchasing shares and partnership units held by Advance/Newhouse. As a result, net debt increased to $91 billion from $82 billion at the start of the year. Importantly, free cash flow will face headwinds in the coming years as Charter begins paying federal taxes, which are likely to be meaningful starting in 2022. Charter has actively managed its debt load in recent years, trimming interest rates and pushing out maturities. About $7.5 billion of debt comes due through 2024 and its weighted average maturity stands at about 14 years at an average cost of 4.5%.

Bulls Say’s

  • Like its cable peers, Charter’s networks provide a platform to easily meet customers’ growing bandwidth demands, which should drive market share gains and strong recurring cash flow. 
  • As the second-largest U.S. cable company, Charter has the scale to efficiently adapt to changes hitting the telecom industry. The firm will be a force in the wireless industry eventually. 
  • Holding prices down to drive market share gains will pay huge dividends down the road, pushing costs lower and cementing Charter’s competitive position.

Company Profile 

Charter is the product of the 2016 merger of three cable companies, each with a decades-long history in the business: Legacy Charter, Time Warner Cable, and Bright House Networks. The firm now holds networks capable of providing television, Internet access, and phone services to roughly 54 million U.S. homes and businesses, around 40% of the country. Across this footprint, Charter serves 29 million residential and 2 million commercial customer accounts under the Spectrum brand, making it the second-largest U.S. cable company behind Comcast. The firm also owns, in whole or in part, sports and news networks, including Spectrum SportsNet (long-term local rights to Los Angeles Lakers games), SportsNet LA (Los Angeles Dodgers), SportsNet New York (New York Mets), and Spectrum News NY1 

(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

Cerner to Be Acquired by Oracle for $95 Per Share in 2022

Business Strategy and Outlook

Cerner is a leading healthcare IT-services provider, offering an electronic health record platform to hospitals and health networks. Along with rival Epic, a privately owned peer, the two represent more than half of acute care EHR market share. While the market for acute care EHR is mature and offers little growth, the firm has been able to expand into other areas, such as ambulatory (outpatient) care and secure clients in the federal space, notably with the Department of Defense and Department of Veterans Affairs. Additionally, Cerner has started to cross-sell incremental analytics services to fortify retention rates. Incremental services are largely recurring in nature and include analytics, telehealth, and IT outsourcing.

Beyond EHR, Cerner has been investing in areas of strategic growth, in particular population health management and data-as-a-service, where it can use its domain expertise and intangible assets stemming from provider and patient data in other offerings. Cerner’s HealtheIntent is a cloud-based vendor-agnostic population health management tool that can aggregate and reconcile EHR data from any vendor and other sources (PBMs, insurance companies), for individuals across the continuum of care to create a longitudinal health record that can then score and predict risks to improve outcomes and lower costs for patients. The platform has approximately 200 clients and has been steadily growing in recent years. Cerner is also developing a data business, organically through utilizing the company’s leading market share and depth of EMR data and inorganically through tuck-ins acquisitions. In early 2021, Cerner acquired Kantar Health for $375 million, a life sciences research company providing real world evidence, data, and analytics for life science companies.

Cerner to be Acquired by Oracle in All-Cash Deal; Shares Valued at $95 20

 On Dec. 20, Oracle and Cerner jointly announced an agreement for Oracle to acquire Cerner through an all-cash deal, valuing Cerner at $95 per share. The deal is expected to close in 2022, rewarding Cerner shareholders with a 20% premium over the company’s market valuation earlier last week. The deal values Cerner at a 46% premium to our $65 fair value estimate. Morningstar analysts have a very high degree of certainty the transaction will go through without any regulatory pushback, as the combination of the two companies is unlikely to stir antitrust controversy. Morningstar analysts are raising the fair value estimate for Cerner to $92 per share, reflecting the sale price discounted half-a-year at the weighted average cost of capital.

Financial Strength 

Cerner has a standard level of financial strength. Revenue is growing steadily as the rollout of Cerner’s EHR platform at the DoD and VA commence, and incremental services to existing customers and international expansion add to the muted growth of the mature domestic EHR market. Non-GAAP margins are already solid, and we believe they are likely to expand further with the active rationalization of services with lower profitability and cost-saving initiatives. As of fiscal 2020, the company had over $1 billion in cash, equivalents, and investments, offset by roughly $1.3 billion in debt, resulting in a net debt position of approximately $300 million. Cerner initiated a quarterly dividend of $0.18 per share in mid-2019, which it subsequently raised to $0.22 per share at the end of 2020.

Bulls Say

  • Cerner has been able to maintain a leading market share in the acute care EHR market due to high switching costs. 
  • Despite the maturity of the domestic EHR market, Cerner’s federal contracts provide modest revenue growth through 2028. 
  • Cerner’s leading EHR market share gives the company valuable RWE that can be packaged and sold to pharma companies, payers, and providers in a data offering.

Company Profile

Cerner is a leading supplier of healthcare information technology solutions and tech-enabled services. The company is a long-standing market leader in the electronic health record industry, and along with rival Epic Systems corners a majority of the market for acute care EHR within health systems. The company is guided by the mission of the founding partners to provide seamless medical records across all healthcare providers to improve outcomes. Beyond medical records, the company offers a wide range of technology that supports the clinical, financial, and operational needs of healthcare facilities

(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

PerkinElmer renewed strategic focus on diagnostic product mix and life sciences business will drive growth

Business Strategy and Outlook:

With myriad acquisitions in the past few years, PerkinElmer has been in a constant state of evolution since 2016 when the company transitioned into two new business segments, Diagnostics and Discovery and Analytical Solutions (DAS), with life sciences being the most attractive segment of the DAS business.

The Diagnostics business makes up slightly over half of the company’s total revenue and is led by the immunodiagnostics business, followed by reproductive health, and finally applied genomics. The immunodiagnostics business is characterized by Euroimmun, the global leader in autoimmune testing, allergy testing, and infectious disease. The recent acquisition of Immunodiagnostics (IDS) and Oxford Immunotec has only extended product offering to PerkinElmer’s customer base. Although declining birth rates globally have negatively impacted growth in the reproductive health segment, the firm still holds leading positions in newborn testing worldwide. The U.S. market is characterized by stable profits and pricing power with opportunity to provide additional screenings for rare diseases. The firm should capitalize on the growth opportunities in newborn screening in China and India where there is opportunity to provide additional screening and expand reach. Finally, the applied genomics segment should see continued growth as the cost of sequencing goes down, increasing sequencing by genetic labs and a need for PerkinElmer products.

Financial Strength:

The fair value of the Perkin Elmer has increased to recognize recently generated cash flows, the company’s strong near- and long-term outlook including margin expansion (after a postpandemic reset), successful product mix shifts to diagnostics and life sciences, and recent acquisitions like BioLegend, IDS, and Oxford.

PerkinElmer carries a manageable debt load, but its history of consistent acquisitions tended to keep financial leverage elevated. At the end of September 2021, PerkinElmer held $0.5 billion in cash and $5.1 billion in debt with a leverage at the end of the quarter at 2.2 times net debt-to-EBITDA. Of said debt, $2.8 billion of new debt was added to fund the $5 billion BioLegend acquisition. Acquisitions remain the top capital allocation priority for excess cash flow. PerkinElmer does not tend to engage in significant share buybacks. The company pays a small quarterly dividend, amounting to about $31 million in 2020, and has not provided any recent updates to its payout ratio.

Bulls Say:

  • PerkinElmer possesses a well-entrenched niche in newborn screening and stands to benefit from growing menu expansion globally and expanding to emerging markets, particularly China and India. 
  • The Biolegend acquisition will accelerate new product growth in the Diagnostics and DAS business segments with high growth areas, including biologics, cell and gene therapy, and single cell analytics. 
  • Euroimmun is positioned to be a strong growth driver, especially since it is the largest player in autoimmune diagnostics and has more product offerings from the recent IDS and Oxford acquisitions.

Company Profile:

PerkinElmer provides instruments, tests, services, and software solutions to the pharmaceutical, biomedical, chemical, environmental, and general industrial markets. The company operates in two segments: diagnostics, which includes immunodiagnostics, reproductive health, and applied genomics, and discovery and analytical solutions, composed of life science, industrial, environmental, and food applications. PerkinElmer offers products and services ranging from genetic screening and environmental analytical tools to informatics and enterprise software.

(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

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Business Strategy and Outlook

PTC operates in the high-end computer-assisted design software market, but Morningstar analyst view this market as mature and don’t foresee significant top-line growth in this area. PTC’s foray into growth areas such as “Internet of Things,” AR, and midmarket CAD, on the other hand, will significantly add growth to the top line, and as per Morningstar analysts view, PTC’s revenue mix to shift significantly to these areas over the next 10 years. 

PTC’s Creo software is considered a staple among many large assembly and complex product engineer teams, whether it’s in designing the efficient transportation of fluids or cabling. The small high-end CAD market compared with the mid-market has safeguarded PTC from new entrants to some extent. However, Morningstar analysts think the firm has largely been able to maintain its claim in the CAD industry based on its high switching costs, which as per Morningstar analysts apply not only to its core CAD offering but also its product lifecycle management software and new growth areas–like its Internet of Things and AR platforms. Still, switching costs alone aren’t enough to drive hefty growth in high-end CAD.

While Morningstar analysts expect a mix shift in the future for PTC, a shift to a subscription model from a license-based model is largely in the recent past. PTC has suffered only temporary declines in revenue, margins, and returns on invested capital, as per Morningstar analysts view. As per Morningstar analyst’s perspective, the company will be able to recover well from the transition as its converted subscribers mature.

With this expected recovery, PTC’s growth areas will be able to contribute to a much greater portion of PTC’s business due to strong partnerships. While PTC’s mid-market SaaS CAD software, Onshape, is within the company’s growth segment, and Internet of Things will see better success as entering the mid-market will be a tough task. In contrast, partnering with Microsoft and Rockwell Automation, PTC’s Internet of Things platform, Thingworx, has been able to gain greater traction for its solution that is widely known as among the best of breed.

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Narrow-moat PTC kicked off its fiscal year 2022 by posting results slightly below Morningstar analyst top- and bottom-line expectations. Nonetheless, results weren’t discouraging, as PTC is accelerating its SaaS transition, which brings with it short-term growth headwinds–but worthwhile benefits in the long term. Despite slight earnings misses, Morningstar analysts are raising its fair value estimate to $105 per share from $97, in most part due to rosier long-term corporate tax rates that Morningstar analysts have baked in after updating in-house estimates. Shares remained flat after hours, trading around $113 per share, leaving PTC fairly valued.

Financial Strength 

PTC to be in good financial health. As of fiscal 2021, PTC had a balance of cash and cash equivalents of $327 million and long-term debt at $1.4 billion. This leaves PTC with a debt/EBITDA ratio of 2.77 at fiscal year-end 2021. We estimate PTC’s growing base of cash and cash equivalents will be more than enough to support mild acquisition spend going forward, at an average of $50 million per year. Despite the company’s financial health, we do not foresee the company starting to issue dividends given the relatively significant transition PTC will undergo over the next 10 years, as per Morningstar analysts view, and the consequent possibility of additional cash needs as a result.

Bulls Say

  • PTC’s revenue should be able to grow significantly as its Internet of Things solutions take off. 
  • PTC’s Onshape platform makes headway in the midmarket as Autodesk and Dassault Systèmes are slow to move to a fully SaaS-based model. 
  • PTC should be able to improve gross margins as its low-margin services business comes down as a percentage of total revenue

Company Profile

PTC offers high-end computer-assisted design (Creo) and product lifecycle management (Windchill) software as well as Internet of Things and AR industrial solutions. Founded in 1985, PTC has 28,000 customers, with revenue stemming mostly from North America (45%) and Europe (40%).

(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

Amphenol Expanding Technological and Geographical Breadth through M&A

Business Strategy and Outlook

It is seen Amphenol is a differentiated connector supplier, an excellent operator, and an exceptional steward of shareholder capital. Amphenol competes against myriad competitors in the fragmented electrical component industry, but its broad array of diverse end markets allows it to grow the top line even in the midst of an individual market downturn. It is also viewed the firm’s unique ability to effect cost controls gives it the highest operating margins of its peer group, and allows it to quickly bring its numerous acquisitions up to firmwide profitability. 

It is held, Amphenol provides connectors with high performance and reliability that are specialized for mission-critical applications in harsh environments. As such, it is alleged its customer relationships tend to be very sticky, with customers facing high financial and opportunity costs from switching to another component supplier, as well as higher risk of component failure. It is supposed Amphenol’s customers rely on the firm as a design partner to supply cutting-edge products and enable new capabilities in end applications. As older products become commoditized, the firm is able to maintain high prices with new designs for new sockets. As a result of these switching costs and pricing power, it is made-up Amphenol possesses a narrow economic moat. 

Going forward, it is likely Amphenol to maintain its diversified end market structure and expand its technological and geographic breadth through M&A, which has funded about one third of historical top line growth for the firm. Specifically, it is potential the firm will focus its resources on opportunities that expand its content in individual end products, allowing it to grow revenues at a faster pace than the underlying markets it serves. As Amphenol grows, it is observed it will maintain its best-in-class operating margins by expanding its decentralized organizational structure. The firm operates through more than 125 general managers that operate with great autonomy to respond to end customers’ needs and manage costs, and it is pragmatic this count will grow as the firm adds acquisitions and expands into new markets.

Financial Strength

It is perceived Amphenol is in good financial shape. As of its fiscal year-end on Dec. 31, 2021, the firm carried $4.8 billion in total debt, compared with $1.2 billion in cash and short-term investments. While the firm is leveraged, it is alleged, it generates ample cash to fulfil its obligations. Amphenol has less than $500 million due annually over the next four years, and it has averaged over $1 billion in free cash flow since 2017, generating $1.2 billion in free cash flow in 2021. It is foreseen the firm to average $2 billion in free cash flow over explicit forecast. If the firm were to run into a liquidity squeeze, it has a $2.5 billion revolver available that is currently untapped. It is not anticipated the firm needing to drawdown this credit line, though it has the option to if it wanted to supplement its cash for a larger acquisition. It is believed it will use the excess cash it generates over the next five years to maintain its dividend, conduct opportunistic share repurchases, and make tuck-in acquisitions.

 Bulls Say’s

  • No industry vertical represents more than 25% of Amphenol’s revenue, which insulates it from individual end market downturns. 
  • Amphenol’s organizational structure, featuring more than 120 general managers who operate with high levels of autonomy, gives it an unparalleled ability to control costs and maintain industry-leading margins. 
  • Amphenol benefits from sticky customer relationships, arising from its specialization in mission-critical applications for harsh conditions.

Company Profile 

Amphenol is a leading designer and manufacturer of electrical, electronic, and fiber-optic connectors and interconnect systems, sensors, and cable. The firm sells into a broad array of industries, including the automotive, industrial, communications, military, and mobile device markets, and no single market makes up more than 25% of the firm’s total annual revenue.

(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

TE Connectivity Ltd. to grow its midcycle operating margins and enhance its cash flow

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy and Outlook

TE Connectivity is a leading designer and manufacturer of connectors and sensors, supplying custom and semicustom solutions to a bevy of end markets in the transportation, industrial, and communications verticals. TE has maintained a leading share of the global connector market for the last decade, specifically dominating the automotive connector market, from which it derives more than 40% of revenue. While the firm’s entire business benefits from trends toward efficiency and connectivity, these are especially notable in cars, where shifts toward electric and autonomous vehicles provide lucrative opportunities for TE to sell into new vehicle sockets, like an onboard charger or advanced driver-assist system. 

TE’s products offer high performance and reliability for mission-critical applications in harsh environments. As such, its customer relationships tend to be very sticky, with customers facing high financial and opportunity costs from switching to another component supplier, as well as the risk of component failure in new products. TE’s customers also rely on the firm supplying cutting-edge products to power new capabilities in end applications. As older products become commoditized, the firm can maintain high prices with new innovations. As a result of these switching costs and pricing power, TE Connectivity possesses a narrow economic moat.

In the future, TE Connectivity will focus on increasing its dollar content in end applications across its end markets. TE’s products pave the way for greater electrification and connectivity in vehicles, planes, and factories, which allows the firm to occupy a greater portion of these end products’ electrical architectures. TE will remain a serial acquirer, bolting on smaller components players to expand its geographic and technological reach. Finally, TE is expected to continue expanding its margins via footprint consolidation, as it streamlines the fixed-asset portfolio it has gained over a decade of acquisitions

Financial Strength

TE Connectivity is expected to remain leveraged, using strong free cash flow to invest organically and inorganically, and to send capital back to shareholders. As of Sept. 24, 2021, the firm carried $4.1 billion in total debt and $1.2 billion in cash on hand. While the firm is leveraged, its cash flow generation will be more than able to fulfil its obligations. TE has less than $700 million a year in payments due through fiscal 2026, and it is projected to generate more than $2 billion in free cash flow annually over the next five years. Even in a severely soft macro environment in 2020, the firm generated $1.4 billion in free cash flow. After fulfilling its obligations, TE is expected to use the remainder of its cash to maintain its dividend and conduct share repurchases. The firm will remain leveraged, using extra capital for opportunistic acquisitions while using its heady cash flow to pay off its principal and interest.

Bulls Say’s

  • TE Connectivity is a leader in the automotive connector and sensor market, enabling OEMs to build more advanced and efficient electric and autonomous vehicles. 
  • TE’s products are specialized for mission-critical applications in harsh environments, where reliable performance creates sticky customer relationships. 
  • TE’s ongoing footprint consolidation should allow it to expand its midcycle operating margins and improve its cash flow.

Company Profile 

TE Connectivity is the largest electrical connector supplier in the world, supplying interconnect and sensor solutions to the transportation, industrial, and communications markets. With operations in 150 countries and over 500,000 stock-keeping units, TE Connectivity has a broad portfolio that forms the electrical architecture of its end customers’ cutting-edge innovations.

(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

Revised Tax Expectations Nudge Cooper’s FVE Upward

Young woman trading stock market by touching.

Business Strategy and Outlook

As a cash-pay business with sticky customers and few competitors, the contact lens industry is an attractive market, in our opinion. Four players (Johnson & Johnson, Alcon, Cooper, and Bausch Health) dominate the global market, and industry regulation creates strong barriers to entry, keeping new entrants away. Cooper’s surgical segment has contributed approximately one fourth of total revenue since 2018, following the acquisition of Paragard, a nonhormonal copper intrauterine device.

Though Paragard sales dropped during the COVID-19 pandemic, its believe that the product is well positioned to benefit from secular trends toward increased adoption of IUDs in the U.S. IUD usage rate to mirror the rate in other developed countries, leading to market saturation and a slowdown in segment revenue growth. 

Financial Strength

Cooper is in solid financial strength. While the company took on $1.4 billion in debt in fiscal 2018 to acquire Teva’s Paragard IUD, its vision and surgical segments should generate enough cash to allow the company to pay down debt and continue investing in its businesses. Historically, Cooper had no trouble paying down debt, with debt/EBITDA down from 3.1 in fiscal 2014 to 1.9 times by the end of fiscal 2017. Even with the large acquisition and significant upticks in COVID-19-related costs, the firm ended 2020 with debt about 3 times EBITDA. 

The contact lens market is already very consolidated, especially after the Sauflon acquisition, so future large acquisitions seem unlikely for CooperVision, but the firm may seek additional capital to pursue bolt-on deals in its surgical division. CooperSurgical has acquired about 40 companies since 1990, and we project this trend to continue. Cooper has spent $1.1 billion and $1.9 billion on acquisitions over the past five and 10 years, respectively.

Bulls Say’s 

  • CooperVision will benefit as customers trade up from weekly or monthly contact lenses to more expensive daily lenses. 
  • Paragard is the only nonhormonal IUD approved in the U.S. and does not have any serious competition. 
  • MiSight has first-mover advantage in a fast-growing market with a multibillion-dollar market potential.

Company Profile 

Cooper Companies operates two units: CooperVision and CooperSurgical. Accounting for approximately 75% of total sales, CooperVision is the the second-largest player in the oligopolistic contact lens market. Over 50% of CooperVision’s sales are in international territories. The second unit, CooperSurgical, develops and manufactures diagnostic and surgical products for gynecologists and obstetricians, including the Paragard IUD, which Cooper acquired from Teva in 2017. 

(Source: Morningstar)

General Advice Warning

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

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Technology Stocks

Adobe Remains Dominant in Creative While Building Its Second Empire in Digital Experience

Business Strategy and Outlook

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome ($1,000 or more up-front, versus plans as low as $10 per month) and a solution that is regularly updated with new features for users.

Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento and Marketo acquisitions in the second half of fiscal 2018 and Workfront in 2021, Morningstar analysts believe Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.

Financial Strength 

Morningstar analysts believe Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%. Morningstar analysts believe that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. It is believed that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term. Morningstar analysts also believe the company will continue to make opportunistic and strategic tuck-in acquisitions.

Bulls Say

  • Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates. 
  • Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection. 
  • Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.

Company Profile

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content across multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).

 (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

Alibaba Falling Weak as Competition Rising

Business Strategy and Outlook

Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. It is believed a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba. 

Alibaba’s Internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Questmobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD. 

While it is perceived the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it is also seen AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. 

Financial Strength

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, it is held the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, it is alleged the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. It is likely for the company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

 Bulls Say’s

  • Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD. 
  • Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021. 
  • Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Company Profile 

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%). 

(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.