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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ARB Is an Attractive Business, but the Price Needs to Improve

Shares in ARB trade at a material premium to our unchanged fair value estimate of AUD 19.50. Granted, ARB is a high quality company. The firm’s ranges of vehicle accessories have established significant brand strength in Australia, underpinning our narrow economic moat rating for the firm.

The firms is extremely well-run and assign ARB an Exemplary capital allocation rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distribution. We expect ARB to enjoy some operating leverage as its store network expands and its international businesses, most notably in the U.S., improve scale. But we do not believe the firm’s international foray will replicate the success enjoyed domestically.

The firm has been unable to enjoy this pricing premium offshore, as demonstrated by lower segment margins. In our view, ARB’s current lofty share price indicates domestic success is being extrapolated by investors to the firm’s international business.

Financial Strength

ARB’s balance sheet is in pristine condition. At Dec. 31, 2020, the company had no debt and a net cash position of AUD 84 million. This is despite major investment in the Thailand and Victoria warehouses and continued new store rollouts. We forecast the firm remaining in a net cash position through fiscal 2021, with short-term financing facilities providing further headroom in the balance sheet to meet cash flow requirements. The firm’s major funding requirements are store rollouts, international expansion, and working capital in line with growing sales.

Bulls Say

  • Online competition is not a significant threat to ARB’s business. Products usually require professional fitting (often in ARB stores), and the often heavy and bulky accessories can make delivery cost prohibitive.
  • ARB’s range of vehicle accessories have established significant brand strength, underpinning its narrow economic moat, allowing the firm to enjoy pricing power and high returns on invested capital.
  • ARB has opportunities for growth with store roll-outs in Australia and continued overseas expansion.

Company Profile

ARB Corporation designs, manufactures, and distributes four-wheel-drive and light commercial vehicle accessories. The firm has carved a niche with aftermarket accessories including bull bars, suspension systems, differentials, and lighting. ARB operates manufacturing plants in Australia and Thailand; sales and distribution centers across several countries. The Australian division, which generates the vast majority of group earnings, distributes through the ARB store network, ARB stockiest, new vehicle dealers, and fleet operators.

(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

Palo Alto Networks : Platform Approach Resonating With Clients Across Network, Cloud, and Automation

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.

The complexity of an entity’s threat management increases as the quantity of data and traffic being generated off-premises grows. Network security can be attacked from various angles, and we posit that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers. Security point solutions were traditionally purchased to combat the latest threats, and IT teams had to manage various vendors’ products simultaneously, which leads us to believe that IT teams are clamoring for security consolidation to manage disparate solutions. Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. We believe the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand.

We expect that Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although we expect Palo Alto to remain acquisitive and dedicated to organic innovation, we believe significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers.

Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors.

The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

The large public cloud vendors are developing security suites that may be preferred over those of a pure-play security supplier. If these companies offer products outside their data centers, Palo Alto may be stuck with niche applications and on-premises products.

Palo Alto competitors are also offering consolidated platforms, which could make displacing competitors more challenging.

Cloud and software-based startups could disrupt Palo Alto’s high-growth plans. The market for acquiring bolt-on firms could be hotly contested, and Palo Alto could miss out on the next big technology.

 (Source: Morningstar)

Disclaimer

General Advice Warning

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

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Technology Stocks

BorgWarner’s annualized revenue growth that exceeds global vehicle demand

× We think BorgWarner’s economic moat sources derived from powertrain intellectual property and switching costs are misunderstood. The market, in our view, has valued shares as though revenue declines long term on shrinking demand for internal combustion engines, despite increasing penetration in ICE, exposure to globally popular sport utilities, and electrified powertrain growth potential.

× We forecast annualized revenue growth that exceeds global vehicle demand growth by 2-4 percentage points.

× $2.0-$2.4 billion booked net new business backlog through 2021, implies 5-6% organic CAGR.

× EBITDA margin has had a high, low, and median of 17.2%, 9.7%. and 16.7%, respectively. We assume a 15.0% normalized sustainable midcycle EBITDA margin. Investors would have to believe a 12.4% midcycle EBITDA margin for our model to generate a fair value equivalent to the sell-side consensus price target.

× In our opinion, the market values BorgWarner as though fundamentals are in permanent decline, giving no credit for the company’s economic moat in powertrain technologies and consistent ROIC generation above cost of capital.

Company Profile

BorgWarner Inc. provides solutions for combustion, hybrid, and electric vehicles worldwide. The company’s Engine segment offers turbocharger and turbocharger actuators; eBoosters; and timing systems products, including timing chains, variable cam timing, crankshaft and camshaft sprockets, tensioners, guides and snubbers, front-wheel drive transmission chains, four-wheel drive chains, and hybrid power transmission chains. It also provides emissions systems, such as electric air pumps and exhaust gas recirculation (EGR) modules, EGR coolers and valves, glow plugs, and instant starting systems; thermal systems products comprising viscous fan drives, polymer fans, coolant pumps, cabin heaters, battery heaters, and battery charging; and gasoline ignition technologies.

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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Delphi Technologies largest product group is Fuel injector technology

× Fuel injector technology is currently Delphi’s largest product group. This represents a risk as manufacturers switch to smaller engines with fewer cylinders.

× Even so, the growth potential for Delphi’s electric and electronic powertrain products is substantial and represents margin expansion potential from software-based applications. We think Delphi revenue will grow at 1-3 percentage points above our long-term forecast for global light vehicle demand.

× We assume a 15.5% normalized sustainable midcycle EBITDA margin, 160 basis points below 17.1% historical 10-year high but 50 basis points above the 10-year median owing to more favorable product mix.

× To force our DCF model’s fair value to equal the $22 consensus price target, investors would have to believe a 10.0% midcycle EBITDA margin. To reach the market price, the midcycle EBITDA margin would have to be 8.7%, 80 basis points less than the 10-year historical low.

Delphi Technologies, a spinoff from Delphi Automotive, provides advanced vehicle propulsion solutions through combustion systems, electrification products and software and controls for global automotive, commercial vehicle and aftermarket customers.

DLPH Stock Summary

  • The capital turnover (annual revenue relative to shareholder’s equity) for DLPH is 27.74 — better than 98.99% of US stocks.
  • DLPH’s went public 2.83 years ago; making it older than merely 8.53% of listed US stocks we’re tracking.
  • Equity multiplier, or assets relative to shareholders’ equity, comes in at 14.76 for Delphi Technologies PLC; that’s greater than it is for 97.12% of US stocks.

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

Tata Motor narrow-moat rating with Jaguar Land Rover group

× We agree with the market’s concerns, including higher JLR debt levels, exposure to the Europe diesel market, the threat of a no-deal Brexit, degradation in JLR margin on industry-disruptive technology spending, and the downturn in China’s as well as India’s vehicle demand, but these issues do not change our long-term view of the firm’s normalized sustainable midcycle potential.

× Excluding joint venture equity income, Tata’s 10-year historical high, low, and median EBIT margin is 10.2% (fiscal 2011), 0.6% (fiscal 2019), and 7.6%.

× We have assumed a normalized sustainable midcycle EBIT margin of 7.5%.

× To force our model to reach the current INR 168 sell-side consensus price target, we would have to believe a 3.5% normalized sustainable midcycle EBIT margin.

× Indicative of the market’s short-term thinking, at the current INR 110 market valuation, the midcycle would have to be 2.9%.

× We think consensus and market valuations treat the stock as though the effects of weak China and India demand, exposure to Europe diesel, a hard Brexit, and margin compression from higher-than-normal spending are permanent impairments to the company’s profit profile.

Tata Motors Limited is an automobile company. The Company is engaged in manufacture of motor vehicles. The Company’s segments include automotive operations and all other operations. The Company is engaged mainly in the business of automobile products consisting of all types of commercial and passenger vehicles, including financing of the vehicles sold by the Company. The Company markets its commercial and passenger vehicles in various countries in Africa, the Middle East, South East Asia, South Asia, Australia, and Russia and the Commonwealth of Independent States countries. The Company’s automotive segment operations include all activities relating to the development, design, manufacture, assembly and sale of vehicles, including vehicle financing, as well as sale of related parts and accessories. The Company’s all other operations segment mainly includes information technology (IT) services, and machine tools and factory automation services.

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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Tenneco stock ride performance products and systems for light vehicle

× In our opinion, Tenneco stock valuation has been unfairly punished because of the high level of debt after the Federal-Mogul acquisition; the postponement of the separation of DRiV, which implies previously unanticipated integration challenges; as well as transient operating environment and cost issues.

× The company has demonstrated an ability to perform in an unfavorable operating environment while carrying a high debt burden. In 2008 and 2009, total debt/EBITDA exceeded 4.0 times. In 2009, the stock hit a low of $0.70. Since then, shares have traded as high as $68.71 (2016), and total debt/EBITDA reached a low of 1.6 (2014). At the end of the second quarter of 2019, the credit metric was 3.5 times.

× Our forecast assumes 1% pro forma average annual revenue growth from 2017 (the year before the Federal-Mogul acquisition) to 2023 versus a 4% 10-year historical growth rate for old Tenneco. Our Stage I EBITDA margin assumptions average 9.7%, with a normalized sustainable midcycle of 9.6%.

× During the past 10-years, Tenneco’s high, low, and median EBITDA margins have been 9.6%, 7.3%, and 9.1%. In 2017, including targeted $200 million integration cost savings and adding $50 million for public company costs for the eventual spin-off of DRiV, we estimate pro forma EBITDA margin would have been 10.4% versus Tenneco’s as-reported 9.4%.

× We estimate that for our model to generate a fair value equivalent to the sell-side consensus estimate and the current market valuation, investors would have to believe midcycle EBITDA margins of 5.5% and 5.0%, respectively.

Tenneco Inc. designs, manufactures, and sells clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers worldwide. The company operates through Clean Air, Powertrain, Ride Performance, and Motorparts segments. It offers clean air products and systems, including catalytic converters and diesel oxidation catalysts; diesel particulate filters(DPFs); burner systems; lean nitrogen oxide (NOx) traps; selective catalytic reduction (SCR) systems; hydrocarbon vaporizers and injectors; SCR-coated diesel particulate filters systems; urea dosing systems; four-way catalysts; alternative NOx reduction technologies; mufflers and resonators; fabricated exhaust manifolds; pipes; hydroformed assemblies; elastomeric hangers and isolators; and aftertreatment control units. The company also provides powertrain products and systems, such as pistons; piston rings; cylinder liners; valve seats and guides; bearings; spark plugs; valvetrain products; system protection products; and seals and gaskets. In addition, it offers motor parts, including steering and suspension, braking, sealing, engine, emission, and maintenance products, as well as shocks and struts; and ride performance products and systems comprising advanced suspension technologies, and ride control and braking products, as well as noise, vibration, and harshness performance materials. The company was formerly known as Tenneco Automotive Inc. and changed its name to Tenneco Inc. in 2005.

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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Facebook merits a wide moat rating based on network effects

Facebook is the largest social network in the world, attracting more than 2.5 billion monthly active users. Mogharabi believes that the growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers over both the short and long term. Mogharabi also highlights Facebook’s continued innovation that helps the business increase its user base and engagement. This innovation has taken the shape of additional features and apps to keep users engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users.

Mogharabi also sees further economic tailwinds for the company as it is expected to benefit from an increased allocation of marketing and advertising dollars toward online advertising—more specifically to social network and video ads where Facebook is especially well positioned. The firm is also taking more steps to monetize its app portfolio while utilizing AI and virtual and augmented reality to drive further user engagement. This overall strength is driven by an ever-expanding social graph that helps the firm compile more data, which is used by Facebook and its advertising clients to launch targeted online advertising campaigns.

We believe Facebook merits a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Facebook is a textbook example of how network effects can form an economic moat. It is worth noting that all the firm’s applications become more valuable to its users as people both join the networks and use these services. These network effects serve to both create barriers to success for new social network upstarts (as demonstrated by the firm’s success against Snap) as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.

Mogharabi highlights the firm’s intangible assets as an economic moat source. These intangible assets are related to how much information the company has about its user base. Unlike any other online platform in the world, Facebook has accumulated data about everyone with a Facebook and/or an Instagram account. Facebook has its users’ demographic information. It knows what and who they like and dislike. It knows what topics and/or news events are of interest to them. With access to such data, Facebook is able to enhance the social network by offering even more relevant content to its users. This virtuous cycle further increases the value of its data asset, which only Facebook and its advertising partners can monetize.

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 One Ltd – Critics With Cash Flow Jump

Digital tablet display the stock market data

Since the firm turned profitable in 1992, earnings growth has been impressive, as is the track record of client retention. All this testifies to the quality of the company’s products, the benefits of its consistent research and development spending, and the strength of its staff and management. Critically, the nature of enterprise software and its intricate embedding into clients’ technology infrastructure are such that switching costs are very high, something that Technology One has further enhanced through its end-to-end solutions offering and track record of quality delivery.

Key Investment Considerations

  • Technology One offers enterprise software solutions that are deeply embedded in clients’ information technology, or IT, infrastructure, resulting in high switching costs for users.
  • The company generates revenue from software development and implementation, along with subsequent upgrades and ongoing support, providing revenue resilience and an impressive client retention rate. OAlthough the company operates in a highly competitive industry, its earnings growth track record since turning profitable in 1992 has been exemplary and testifies to the quality of the company’s products and staff.
  • Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet.
  • Technology One’s business model captures value in the entire software development and implementation chain. It develops and markets the software, implements the solution for clients, and offers ongoing subsequent support.
  • The company’s software products are embedded in customers’ business operations, locking in existing clients and underpinning recurring revenue streams in post-sales support and licence fees.
  • Cross-selling opportunities remain, as products taken up per customer are low at three, compared with 12 available in Technology One’s enterprise product suite.
  • Skills shortages in the information technology sector mean the loss of key personnel can be costly, and bidding for talent may drive up labour expense.
  • Development delays with new products and failure to keep pace with technological changes could significantly affect Technology One’s ability to compete in the fast-moving enterprise software industry.
  • Failure of the international expansion strategy in the United Kingdom could dent the company’s longer-term growth profile.

 (Source: Morningstar)

Disclaimer

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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Dell Posts Strong First Quarter and Capitalizes on Digitalization-Induced Demand

We are encouraged by Dell’s broad-based expanding addressable markets, as the company continues to benefit from accelerated trends toward digitalization, remote working and learning environments, and cloud-based infrastructure. We believe the secular trends of organizations accelerating the adoption of digitalization, cloud-based infrastructure, and facilitating remote working and learning environments, are aligned with Dell’s core capabilities, and the company is executing well. With shares trading in the mid- to high $90 area, we continue to view shares as slightly overvalued.

First-quarter revenue grew 12% year over year to $24.5 billion, led by CSG’s 20% year-over-year revenue increase to $13.3 billion. CSG continues to heavily benefit from high demand for computers to enable remote learning and work. CSG’s consumer business contributed significantly to the group’s success, up 42% year over year, capitalizing on ecommerce and digital entertainment accelerations. ISG revenue grew 5% year over year to $7.9 billion as demand for hybrid cloud solutions continues to increase. ISG’s growth was led by server’s revenue, up 9% year over year. VMware revenue increased 9% annually to $3 billion.

Guidance for the second quarter includes sequential revenue growth that is expected to be less than the historical 6% increase and a low- to mid-single-digit sequential decline in adjusted operating income as costs return after pandemic-related savings.

Dell continues to place emphasis on deleveraging its balance sheet, committing to a target of at least $16 billion in debt reduction for the full year. Management remains confident that the completion of VMware’s spin-off in the fourth quarter will help the company achieve an investment grade rating.

Dell Technologies Company Profile

Dell Technologies, born from Dell’s 2016 acquisition of EMC, is a leading provider of servers and storage products through its ISG segment; PCs, monitors, and peripherals via its CSG division; and virtualization software through VMware. Its brands include Dell, Dell EMC, VMware (expected to be spun off toward the end of 2021), Boomi (expected to be sold by the end of 2021), Secure works, and Virtustream. The company focuses on supplementing its traditional mainstream servers and PCs with hardware and software products for hybrid-cloud environments. The Texas-based company employs around 158,000 people and sells globally.

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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Narrow-Moat Splunk Continues to See Cloud-Transition Linked Uncertainty; Lowering FVE to $164

As a result, we are lowering our fair value estimate for Splunk to $164 from $212, but continue to view shares as undervalued at the moment. In spite of increased uncertainty, the cloud transition continues at a solid pace, with over 50% of software bookings coming from the cloud. We expect sustained cloud penetration, a growing robust product suite, and strong execution to lead to healthy long-term growth.

First-quarter revenue increased 16% year over year to $502 million. After several quarters of declines in the top line as a result of the cloud transition, accelerated adoption of Splunk’s robust product suite, as well as growing cloud traction have resulted in revenue growth once again. As cloud revenue is recognized ratably over time rather than up-front (as with term licenses), Splunk has been facing top line pressure for some time. This has been compounded by falling contract durations as a result of macroeconomic uncertainty and growing cloud demand. However, as we predicted, Splunk is now exhibiting growth in the latter part of the transition, and we expect this to persist in the future. First-quarter cloud revenue grew 73% year over year to $194 million, with cloud annual recurring revenue, or ARR, up 83% over the same period. This contributed to a 39% increase in total ARR. Even though management has withdrawn some long-term targets, healthy growth in cloud adoption has Splunk still on track to wrap up the cloud transition sooner than previously expected.

During the quarter, Splunk acquired TruSTAR, a cloud-based security threat detection and response solution. We believe this should augment Splunk’s security solutions by incorporating additional solutions into its already robust security product set and augmenting demand for the security buying center. The firm also rolled out the Splunk Observability Cloud, enabling businesses to use a unified platform to address a wide range of observability use cases. In addition, Splunk announced the appointment of Teresa Carlson in the position of President and Chief Growth Officer. In terms of guidance for the second quarter of fiscal 2022, management expects revenue between $550 million and $570 million, up approximately 14% at the midpoint. NonGAAP operating margins are expected to be negative 25%, reflective of the cloud transition and greater investments into the firm’s platform. While management did not provide full-year guidance, we expect the firm to successfully complete its shift towards the cloud and support healthy top-line growth in the future.

Splunk Inc’s Company Profile

Splunk provides software for machine log analysis. Its flagship solution, Splunk Enterprise, is employed across a multitude of use cases, including application management, IT operations, and security. The company has historically deployed its solutions on-premises, but the software-as-a-service delivery model is growing in popularity with Splunk Cloud.

The company derives revenue from software licenses, as well as cloud subscriptions, maintenance, and support.

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.