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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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.

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Technology Stocks

Johnson Controls Is Well Positioned to Capitalize on Healthy and Smart Buildings Trends

Business Strategy and Outlook

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products. In early 2019, Johnson Controls sold its power solutions business to a consortium of investors for $11.6 billion of net proceeds. The firm used proceeds to pay down debt and repurchase shares.

It is believed that Johnson Controls’ prudent capital allocation strategy in tandem with its simplified business model that is clearly showing improving fundamentals has been catalysts for the stock. As a pure play building technologies and solutions business, Johnson Controls stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions. It is also expected that the COVID-19 pandemic will increase the market opportunity for healthy building solutions, such as air filtration and touchless access controls.

 These secular tailwinds should allow Johnson Controls to grow faster than the economies it serves. Indeed, over the next three years (through fiscal 2024), the firm is targeting revenue growth at a 6%-7% compound annual rate, compared with expectations of 4%-5% market growth. Key levers behind Johnson Controls’ targeted outperformance include continued product innovation (supporting market share gains and pricing); increased service penetration (a higher margin opportunity); and the firm’s participation in meaningful growth themes (for example, energy efficiency, smart buildings, and indoor air quality solutions).

Financial Strength

After selling its power solutions segment in April 2019, which netted Johnson Controls $11.6 billion, the firm paid down $5.3 billion of debt and repurchased 191 million shares (21% share reduction) for approximately $7.5 billion. The firm’s balance sheet is now in great shape, with a net debt/2021 EBITDA ratio of about 1.8, which is below management’s targeted range of 2.0-2.5. The firm finished its fiscal 2021 with $7.7 billion of debt, about $1.3 billion of cash on the balance sheet, and $3 billion available on two credit facilities. We see the firm’s significant liquidity as dry powder for additional buybacks or acquisitions

Bulls Say’s

  • Johnson Controls should benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building solutions.
  • The COVID-19 pandemic should increase the market opportunity for air filtration and touchless access control solutions.
  • Johnson Controls’ free cash flow conversion has been improving, exceeding 100% in 2020-21. A 100% free cash flow conversion is in line with other world-class firms.

Company Profile 

Johnson Controls manufactures, installs, and services HVAC systems, building management systems and controls, industrial refrigeration systems, and fire and security solutions. Commercial HVAC accounts for about 40% of sales, fire and security represents another 40% of sales, and residential HVAC, industrial refrigeration, and other solutions account for the remaining 20% of revenue. In fiscal 2021, Johnson Controls generated over $23.5 billion in 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

Masimo Still Seeing Solid Growth; F.D.A. Approval of Opioid SafetyNet Likely in 2022

Business Strategy and Outlook

Masimo has been a leading provider in pulse oximetry since developing signal extraction oximetry in the late 1990s, a technology that offered better accuracy and reliability. The firm’s business strategy depends on maintaining product advantages in core pulse oximetry, expanding its installed base of monitors, and developing innovative technologies to grow its footprint in the hospital setting, such as remote monitoring and hospital automation.

Further revenue and market share growth for Masimo will primarily come from one of two sources: winning business from Nellcor customers seeking a technology upgrade and expanding the use of oximetry beyond the critical-care environment with greater penetration in the general ward. In critical care, where pulse oximetry is often necessary for good patient outcomes, Masimo has a saturated position. However, on the general floor, Masimo is continuing to make the case that pulse oximetry can improve patient care and reduce hospital costs.

Apart from its core pulse oximetry business, Masimo has also prioritized the expansion of its hospital automation program, which involves integrating central monitoring with bedside vital-sign aggregation systems. This program is being established as a software-as-a-service business, with a per-bed cost for hospitals of $1,000 to $5,000, depending on services offered. We like the potential here, and we think Masimo is poised to significantly expand revenue from the program, despite having less than 100 hospitals currently under contract.

Masimo’s Opioid SafetyNet is another pipeline product that could have a material impact on the business over the coming decade. This product, a modified version of the company’s remote monitoring Patient SafetyNet system, is designed to monitor for Opioid overdose risk and alert emergency contacts if needed. Masimo was selected as one of eight companies to receive expedited development and regulatory approval support from the U.S. Food and Drug Administration to help with the ongoing opioid crisis, and Masimo expects to receive product approval in 2021. We see potential for Masimo to rapidly scale up this business.

Financial Strength

Masimo has excellent financial strength. The company operates without leverage and has consistently been able to generate strong free cash flow. In December 2018, Masimo established a credit facility for $150 million, with an option to increase borrowing to $555 million based on meeting certain lending conditions. Considering the strong free cash flow of the business, which we estimate will exceed $200 million in 2021, it’s clear Masimo has significant financial flexibility. While we don’t anticipate large-scale litigations like the ones Masimo fought against Nellcor and Phillips, the firm’s strong financial position would be advantageous in a lawsuit or settlement requiring significant legal fees or settlement funds. Given the many lawsuits in the pulse oximetry space over the past two decades, another major court action within the next 10 years is certainly possible, but we don’t think Masimo faces any major litigation risk.We expect Masimo to pursue several smaller acquisitions, and while the firm can make a larger acquisition if one is found that makes sense, we don’t expect material acquisition activity in the near term. Over the 2014-2015 time period, Masimo borrowed over $150 million, primarily using the funds to repurchase shares. This debt was fully paid down by year-end 2016. If Masimo draws from its credit facility at some point to acquire a business, we would likely expect quick repayment based on management’s accelerated debt paydown last time the firm used leverage

Bulls Say’s

  • The potential in Masimo’s product pipeline is underappreciated. An estimated $10 billion opportunity for products in development would provide diversification to a strong pulse oximetry business,
  • As Masimo continues to take share, the firm’s superior oximeters could become a de facto necessity for clinicians. Masimo could leverage this position to push pricing, generating a tailwind for revenue.
  • Masimo’s strong balance sheet and cash flow generation give the company resources to maintain high levels of investment and to explore accretive acquisition opportunities

Company Profile 

Masimo is an Irvine, California-based medical device business that focuses on non-invasive patient monitoring. It began by developing superior signal processing algorithms to measure blood oxygenation levels through pulse oximetry and has expanded this expertise into a wide range of measurements and applications. The company generates revenue globally, with the United States the largest market (67% of 2020 sales), followed by Europe, the Middle East, and Africa (21%), Asia and Australia (9%), and North and South America excluding the U.S. (3%).

(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

JD.com Going Towards Asset-Heavy Model Bulls For Now

Business Strategy and Outlook

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

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

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

Financial Strength

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

 Bulls Say’s

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

Company Profile 

Trip.com is the largest online travel agent in China and is positioned to benefit from the country’s rising demand for higher-margin outbound travel as passport penetration is only 12% in China. The company generated about 78% of sales from accommodation reservations and transportation ticketing in 2020. The rest of revenue comes from package tours and corporate travel. Prior to the pandemic in 2019, the company generated 25% of revenue from international business, which is important to its margin expansion. Most of sales come from websites and mobile platforms, while the rest come from call centers. The competes in a crowded OTA industry in China, including Meituan, Alibaba-backed Fliggy, Toncheng, and Qunar. The company was founded in 1999 and listed on the Nasdaq in December 2003. 

(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

Affirming USD 188 per HKD 182 Alibaba FVE; Revised Near Term Outlook Due to Weak Macroeconomics

Business Strategy and Outlook

Alibaba is a Big Data-centric conglomerate, with transaction data from its marketplaces, financial services, and logistics businesses allowing it to move into cloud computing, media and entertainment, and online-to-offline services. We think 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 has 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 generally been on an upward trend despite recent macro uncertainty, indicating that sellers are increasingly engaging with Alibaba’s marketplaces and payment solutions, although increased compliance of antitrust laws and more competition will put pressure on monetization in the near to medium term. 

Morningstar analysts  view the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, also believe AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the near 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. 

Affirming USD 188/HKD 182 Alibaba FVE; Revised Near-Term Outlook Due to Weak Macroeconomics

Morningstar analyst fine-tuned  estimates for wide-moat Alibaba’s fiscal 2022 China retail gross merchandise volume, revenue, and adjusted EBITA down by 300 basis points to 7%, by 370 basis points to 20%, and by 230 basis points to CNY 142 billion, respectively, due to weak macroeconomics and competition. These changes were offset by the increase in fair value estimate after rolling  model, so analysts are maintaining USD 188/HKD 182 fair value estimate. Morningstar analyst anticipate an economic recovery resulting from loosened monetary policies and fiscal policies in calendar 2022. These will help recovery in fiscal 2023, which ends March 2023. Morningstar analyst continue to believe that wide-moat Alibaba is materially undervalued.

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, Morningstar analysts believe 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, Morningstar analyst believe 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. Morningstar analyst expect 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 

  • 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.

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.

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Technology Stocks

RingCentral Poised for Success as UCaaS Becomes the Business Communication Standard

Business Strategy and Outlook:

RingCentral is a leading unified communication as a service, or UCaaS, provider that enables omnichannel cloud-based business communication and collaboration on one platform, creating a single user experience. As an increasingly mobile workforce requires greater flexibility in business communications, we believe the firm’s offerings become more critical, and narrow-moat RingCentral should exhibit healthy long-term growth.

RingCentral’s core product, RingCentral Office, deploys a global unified communications platform that integrates messaging, video, phone, and other cloud-based communication solutions. Users are assigned a single business phone number and profile that allows for connection to the business network from any device and location. We view the platform’s 5,000-plus integration offerings as being particularly important in defining the value and competitiveness of the Office product. RingCentral’s moat is supported by strong user metrics, with net dollar retention rates above 100%, and most of its revenue is recurring in nature.

Financial Strength:

RingCentral is in a decent financial position. As of September 2021, RingCentral has $345 million in cash and cash equivalents versus $1.4 billion in debt. In March 2020 and September 2020, RingCentral issued $1.0 billion of convertible senior notes, due 2025 and convertible at $360 per share, and $650 million of convertible senior notes, due 2026 and convertible at $424 per share, respectively. In the second quarter of 2021, RingCentral redeemed the outstanding principle on its 2023 convertible senior notes. RingCentral has yet to achieve GAAP profitability, as it remains focused on reinvesting excess returns back into the company. RingCentral does not pay a dividend and has only repurchased stock sporadically. The firm has historically demonstrated decent cash flows, with free cash flow margins averaging 3% over the last five years, including a downward skew from 2020 where free cash flow was pressured as a result of the COVID-19 pandemic.

Bulls Say:

  • Partnerships with legacy PBX vendors give RingCentral access to a significant portion of the 450 million on-premises users, providing a powerful advantage over competitors in winning a large portion of the legacy install base. 
  • RingCentral is the first in its space to offer a CCaaS solution in addition to UCaaS, an offering we expect to prove influential in winning enterprise deals again. 
  • As an increasingly mobile workforce requires greater flexibility in business communications, RingCentral should face higher demand and have success increasing enterprise adoption.

Company Profile:

RingCentral is a unified communication as a service, or UCaaS, provider. RingCentral’s unified communications platform foremost replaces on-premises private branch exchange (PBX) phone systems, which support voice-only desktop phones, with its cloud phone system. Beyond its flagship voice product, the company’s platform enables cloud-based integrated omnichannel communications, including voice, messaging, SMS, video meetings, conferencing, and contact center software solutions, among others. The software allows businesses to communicate and collaborate all on one platform across various device-types.

(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

Wipro’s Q3 Aided by Inorganic Growth, but EPS Falls Short; Maintaining INR 495 FVE

Business Strategy and Outlook

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. Wipro benefits from switching costs and intangible assets, although Morningstar analyst also see it benefiting from a cost advantage. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry.

In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near 15%). However, Wipro has pockets of solutions where it distinguishes itself. 

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, Morningstar analyst think Wipro benefits more from a cost advantage (which we only allot to Indian IT services companies) based on its labor arbitrage model. Morningstar analyst also thinks that benefits from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, analyst view that Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Wipro’s Q3 Aided by Inorganic Growth, but EPS Falls Short; Maintaining INR 495 FVE

Wipro gave guidance of 2%-4% sequential revenue growth in its IT services segment for the quarter ahead. All in all, Morningstar analyst maintaining  INR 495 fair value estimate for Wipro and  believe Wipro is overvalued even with shares down 8% upon results–much like other Indian IT services giants Tata Consultancy Services and Infosys.

Third-quarter revenue grew 30% year over year to INR 203 billion due to year-over-year growth in all seven of its sectors led by 50% year-over-year revenue growth in its largest sector, banking, financial services, and insurance, indicating continued strong results from its previous Capco acquisition. Wipro continues to see a large portion of revenue growth stemming from inorganic acquisitions completed earlier in 2021. . Still, IFRS EPS came in at INR 5.42 which missed our expectations of INR 5.64 due to salary increases and additional headcount.

Financial Strength 

Wipro’s financial health is in good shape. Wipro had INR 350 billion in cash and cash equivalents as of March 2021 with debt totalling INR 83 billion. Morningstar analyst expect that Wipro’s cash cushion will remain healthy, as it is expected that free cash flow to grow to INR 118 billion by fiscal 2026. This should allow for continued share buybacks and acquisitions. Morningstar analyst expect that share buybacks over the next five years will average INR 50 billion each year and forecast that acquisitions over the next four years following fiscal 2022 will average INR 9 billion each year. While analyst don’t explicitly forecast dividend increases over the near term, and think Wipro will have more than enough of a cash cushion to undergo any dividend raises as desired without needing to take on debt.

Bulls Say

  • Wipro could benefit from greater margin expansion than expected in our base case as more automated tech solutions decrease the variable costs associated with each incremental sale.
  • Wipro should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared for similar events. 
  • As European firms become more comfortable with outsourcing their IT workloads offshore, Wipro should expand its market share in the growing geography

Company Profile

Wipro is a leading global IT services provider, with 175,000 employees. Based in Bengaluru, the Indian IT services firm leverages its offshore outsourcing model to derive over half of its revenue (57%) from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service.

 (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

Welltower Poised to Take Advantage of Recovery of Senior Housing Fundamentals

Business Strategy and Outlook

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long-term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds.

In our view, Welltower will benefit from these industry tailwinds because of its portfolio of high-quality assets connected to top operators in the senior housing, skilled nursing facilities, and medical office buildings segments. The company has also spent years forming and developing relationships with many of the top operators in each segment. These relationships allow Welltower to push revenue enhancing initiatives and cost-control efficiencies at the property level, creating net operating income growth above the industry average, and provide a natural pipeline of acquisition and development opportunities to meet the needs of its growing operating partners. Welltower’s management team is forward-thinking and should be able to produce strong internal growth and accretive external growth.

The coronavirus was a major challenge to Welltower over the past several quarters. The senior population was one of the worst hit from the virus, and a few cases led to quarantines of entire facilities, which dramatically impacted occupancy. However, month-over-month occupancy improved through 2021 as vaccination rates went up, and we remain optimistic about the sector’s longer-term prospects given that the industry should eventually recover from the impact of the virus, supply has started to fall below the historical average and will remain low for several years, and the demographic boon will create a massive spike in demand for senior housing.

Financial Strength

Welltower is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Debt maturities in the near term should be manageable through a combination of refinancing, asset sale proceeds, and free cash flow. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 7.2 and 3.8 times, respectively, both of which are outside of the company’s targeted range, though we expect the company to return to normal historical levels as the senior housing portfolio recovers. As a REIT, Welltower is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cashflow from operating activities, providing Welltower plenty of flexibility to make capital allocation and investment decisions. We expect the company’s credit rating to remain stable through steady rental income growth in its existing portfolio, which should allow the company to continue to access the debt market in combination with equity issuance and asset dispositions to fund its debt maturities, acquisitions, and development activity

Bulls Say’s

  •  The firm’s intense focus on tenant and operator partnerships produces new off-market investment opportunities, benefiting shareholders. It should see same-store NOI growth above its peers in the senior housing sector due to its operational expertise and the strength of these relationships.
  • Welltower’s diverse strategy allows it to consider a range of opportunities across property types and business models as a means for growth.
  •  Welltower enjoys industry tailwinds, including an aging population and regulatory changes that expand the pool of participants in the healthcare system.

Company Profile 

Welltower owns a diversified healthcare portfolio of over 1,600 in-place properties spread across the senior housing, medical office, and skilled nursing/post-acute care sectors. The portfolio includes over 100 properties in both Canada and the United Kingdom as the company looks for additional investment opportunities in countries with mature healthcare systems that operate similarly to that of the United States. 

(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.