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Facebook faster growth in cash flow during the next five year by owning to operating leverage after 2022

along with the valuable data that they generate, makes Facebook’s platforms attractive to advertisers. The combination of these valuable assets and our expectation that advertisers will continue shift their spending online bodes well for Facebook, as the firm generates strong top-line growth and cash flow. Facebook has attracted users and increased engagement by providing additional features and apps within the Facebook ecosystem. 

The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone, smartphones. Facebook is taking steps to further monetize its various apps, such as providing interactive video ads and tapping into e-commerce. It is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

Financial Strength

In an industry where continuing investments are required to remain competitive and maintain market leadership, we believe Facebook is well positioned in terms of access to capital. The firm has a very strong balance sheet with $62 billion in cash, cash equivalents, and marketable securities and no debt. The firm generated $39 billion cash from operations in 2020, 7% higher than the prior year. Facebook’s strong operational and financial health is demonstrated by the 28% average free cash flow to equity/revenue during the past three years. We project average annual FCFE/sales to be in the 35%-40% range through 2025, as a result of strong top-line growth and slight operating margin expansion beginning in 2022. The firm may use some portion of its cash, as it remains active on the merger and acquisition front.

Bulls Say’s

  • With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising.
  • Facebook’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the firm.
  • The application of AI technology to Facebook’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

Company Profile 

Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.

(Source: Morningstar)

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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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IBM’s Q3 Disappoints With Weak Software and Kyndryl Sales

even when omitting its poor-performing Kyndryl business to be spun off soon. As IBM nears the spinoff of its managed infrastructure business, to be known as Kyndryl, we think that the real drivers for the remaining company lie in IBM’s consulting and software businesses. While consulting revenue surpassed our expectations (and consensus’), IBM’s software revenue missed—leaving us wary of the remaining company’s performance after the spin-off.

IBM reported revenue of $17.6 billion in the quarter, marking flattish year-over-year growth. While IBM’s global business services segment was a standout, growing at 12% year over year, the rest of IBM’s businesses disappointed. The cloud & cognitive software segment grew only 3% year over year. And while global technology services, part of which will be spun off as Kyndryl, with revenue down by 5% year over year.

IBM reported operating margins of 9% in the quarter, down 310 basis points from the prior year period. Non-GAAP earnings per share for the quarter was $2.52.

It is expected that Kyndryl will continue its downward top line trajectory as mass migration of workloads to the cloud have enterprises opting for cloud vendors to manage their cloud infrastructure, rather than traditional IT services providers, like IBM. This makes the worst performance in the quarter a matter of only acceleration of such decline. For software, on the other hand, we believe it, along with consulting (known as global business services) are the main growth drivers for IBM post spinoff. . We formerly expected a stronger relation between consulting and software sales—with the former driving the latter.

We’re maintaining our fair value estimate of $125 per share for narrow-moat IBM. Shares are down 4% upon results, which has moved IBM into fair value territory. As a reminder, IBM plans to spin off shares of Kyndryl after market close on Nov. 3, so our $125 fair value estimate reflects the value of IBM’s stock pre spin-off.

Company profile

IBM looks to be a part of every aspect of an enterprise’s IT needs. The company primarily sells infrastructure services (37% of revenue), software (29% of revenue), IT services (23% of revenue) and hardware (8% of revenues). IBM operates in 175 countries and employs approximately 350,000 people. The company has a robust roster of 80,000 business partners to service 5,200 clients–which includes 95% of all Fortune 500. While IBM is a B2B company, IBM’s outward impact is substantial. For example, IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in the world.

(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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Omnicom’s Q3 Results Display Growing Demand for Ad Holding Firms Services

the firm has attained that position less through acquisitions and more through organic growth. With very well-recognized creative agencies and sub-holding companies such as BBDO and DDB, we expect Omnicom to maintain its market position as it generates competitive organic growth, continues to make acquisitions, and increases focus on the faster-growing emerging markets and the overall digital ad markets.

Through various acquisitions, the firm has transitioned from traditional advertising toward becoming a complete solution provider with digital (including online video, social media, and mobile), along with other services such as public relations. Compared with its peers, Omnicom has been relatively quiet on the acquisition front since it ended merger talks with Public is in 2014. However, top-line growth has been in line with or above the other ad-holding firms.

Financial Strength

Omnicom reported mixed third-quarter results as revenue slightly missed the FactSet consensus estimates while the firm beat bottom-line expectations. With strong double digit organic revenue growth, the revenue miss was mainly due to Omnicom’s disposition of ICON in June. Solid organic growth of 11.5% and favorable foreign currency exchange rates were only partially offset by negative impact from agency divestitures (negative 5.9%). Management guided to 2021 full-year organic revenue growth of 9%, which is slightly below our 9.5% projection. Operating margin of 15.8% during the quarter was slightly higher than last year’s 15.6% due to top line growth and lower costs associated with less occupancy and lower travel expenses. The firm expects full-year 2021 operating margin above 15.1% compared with our 15.1% assumption.

Omnicom has a net debt of $210 million, with debt/EBITDA and interest coverage averaging 2.5 and 9, respectively, during the past three years. These ratios will average around 2 and 14 during the next five years. While Omnicom has not been nearly as aggressive in pursuing the acquisition route as some of its peers, cash allocated toward acquisitions and dividends during the past three years has been equivalent to 4% and 32%, respectively, of the firm’s free cash flow.

Bulls Say’s 

  • Omnicom’s management team is very experienced and has delivered solid results over an extended period through a variety of economic environments.
  • Omnicom’s agencies, such as BBDO and DDB, are some of the most acclaimed in the business.
  • The strength of Omnicom’s three major global networks allows the firm to retain even dissatisfied clients by switching them from one award-winning network to another.

Company Profile 

Omnicom is the world’s second-largest ad holding company, based on annual revenue. The American firm’s services, which include traditional and digital advertising and public relations, are provided worldwide, with over 85% of its revenue coming from more developed regions such as North America and Europe.

(Source: Morningstar)

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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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Dividend Stocks Expert Insights Shares

State Street Performing Well, Driven by Asset Appreciation and New Client Wins

Assets under custody or administration grew to $43.3 trillion versus $42.6 billion in the previous quarter and $36.6 in the year-ago period, driven by market appreciation as well as new business wins. 

Fee revenue grew 9% from the year-ago period with servicing fees growing 7%. We attribute the bulk of the servicing fee growth to market appreciation with the remainder from net new business partially offset by fee compression. Assets under custody or administration grew 18% to $43.3 trillion with new servicing wins contribution $1.7 trillion, a healthy number in our view. Management fees grew 10% year over year and 4% sequentially. Money market fee waivers continue to be a headwind but appear to be moderating. Charles River Development, which the firm acquired in 2018, saw annualized recurring revenue growth of 12%.

The firm continues to manage expenses well with expenses down 1% sequentially and flat year-over-year excluding notable items and foreign exchange effects. Looking ahead, we think low-single-digit expense growth is more realistic as productivity growth is balanced with the need to invest in its business and some inflationary pressures.

Given the strong business momentum and equity market tailwinds, State Street raised its full-year outlook with just one quarter left. State Street now expects fee revenue to be up 5% for the year with servicing fee growth of 7.5%-8.5%. Net interest income is expected to be in the range of $475 million-$490 million for the fourth quarter, which implies $1.90 billion-$1.91 billion for the full year. The firm’s tax rate is expected to be on the low end of the 17%-19% range.

Company Profile

State Street is a leading provider of financial services, including investment servicing, investment management, and investment research and trading. With approximately $38.8 trillion in assets under custody and administration and $3.5 trillion assets under management as of Dec. 31, 2020, State Street operates globally in more than 100 geographic markets and employs more than 38,000 worldwide

 (Source: Morningstar)

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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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Xero Investors Should Check Its ARPU and CAC in Its Interim Financial Result

SME accounting software users have historically shown little inclination to switch providers, and Xero enjoys annual customer retention rates of over 80%.

The transition from desktop- to cloud-based products offers a rare opportunity for relatively new providers to win market share via the transition of customers to cloud-hosted SaaS products that offer material productivity improvements. We expect switching costs to recapture their earlier resilience once customers transition to cloud products and accounting software becomes more integrated with third-party software.

Xero Investors Should Check Its ARPU and CAC in Its Interim Financial Result

Xero has announced little of note since its fiscal 2021 financial result in May 2021. However, the company will announce its interim fiscal 2022 financial result next month, which is likely to reignite investor attention. However, Xero shares are materially overvalued and the current market price of AUD 145 per share is significantly above our AUD 50 fair value estimate. 

Although Xero reported a NZD 20 million profit after tax in fiscal 2021, this was partly due to the company’s decision to cut back on spending in the first half.In the long term, we expect Xero’s EBIT margin to expand significantly, from 7% in fiscal 2021 to 30% by fiscal 2027.

We expect investors to largely overlook Xero’s profitability at its interim result and instead focus on other metrics like subscriber growth, revenue growth, customer acquisition costs, or CAC, and annual revenue per user, or ARPU. Particularly focused on ARPU because it forms a key component of our investment thesis, and expected that strong price-based competition to limit Xero’s ability to raise prices. This will be interesting because a strong subscriber growth figure may be supported by weak ARPU growth or possibly strong CAC growth, indicating Xero is competing harder for customers.

Financial Strength

 Xero is in reasonable financial health but needs to maintain high revenue growth rates to increase profits and justify its market capitalisation. We expect EBIT margins to expand to around 30% by fiscal 2025, in line with peer companies. As the company matures, we expect the capital-light business model to enable strong cash generation. Strong customer retention rates of over 80% should mean earnings volatility will be relatively low in the long term.

Bulls Say 

  • Xero is experiencing strong revenue and customer growth driven by the transition of desktop accounting software to the cloud, a trend we expect to continue for at least the next decade.
  • Xero operates in the software sector, which is typically an industry with low capital intensity and strong cash generation. We expect Xero to generate strong returns on invested capital and free cash flow in the long term. 
  • Xero has already achieved dominant positions in the New Zealand and Australian cloud accounting markets and is a leading competitor in the U.K. and U. S. markets.

Company Profile

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

 (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

TCS sees softer results than expected as it focuses on margin expansion

While in many regards there’s an uncanny resemblance between Tata and its India IT services’ competitors-Wipro and Infosys–such as in its offerings, offshore leverage mix (near 75%) or attrition rates (near 15%)-Tata stands out in regards to its scale. The company’s revenue is 1.6 times and 2.6 times greater than Infosys and Wipro, respectively, and this has its benefits.

While TCS’ best-in-industry attrition rate of 11.9% did not give the company, the extra boost needed to expand margins over this quarter as it is expected to lower in subsequent quarters and pay off in the future. It confirms that TCS is the best-of-breed Indian IT services firm. TCS’ status allows the company to attract and maintain India’s top talent, even amid fair competitors, such as moaty Infosys and Wipro.

It is estimated that TCS will grow at the compounded annual growth rate of 11%. This growth will be majorly driven by overall increased spend on IT services by enterprises as the IT landscape becomes more complex than ever and enterprises increasingly realize competitive edge in their products or services is distinguished foremost by their technological abilities.

Financial Strength:

Tata’s financial health is in very good shape. Tata had INR 356 billion in cash and cash equivalents as of March 2020 with zero debt, which has allowed Tata to feed significant payout to its shareholder base. Over fiscal 2014 through fiscal 2018, Tata’s average payout of its free cash flow to shareholders was 64%.

It is forecasted Tata’s dividend to grow to at least INR 53 per share in 2025 from INR 33 per share in 2020, which maintains the company’s 38% dividend payout ratio. It is expected that acquisitions over the next five years will continue to be moderate, at INR 350 million each year.

Analysts expect that Tata will fare in 2022 assuming revenue growth of nearly 18% as a result of a strong recovery from effects of COVID-19, followed by top-line growth of 11% in fiscal 2023 and long-term midcycle growth near 9% per year thereafter.

Bulls Say:

  • Tata should 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. 
  • Tata should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared with the onset of similar events. 
  • As the European market becomes more comfortable with outsourcing their IT workloads offshore, Tata should expand their market share in the growing geo.

Company Profile:

Tata Consultancy Services is a leading global IT services provider, with nearly 450,000 employees. Based in Mumbai, the India IT services firm leverages its offshore outsourcing model to derive half of its revenue 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, or BPaaS.

(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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Marvell taking aim at cloud, 5G and automotive markets

Between data processing units, or DPUs, optical interconnect, and ethernet solutions, Marvell has one of the broadest networking silicon portfolios in the world, and we think it is primed to steal market share from incumbent Broadcom with bleeding-edge technology.

Marvell has exited its low-margin legacy markets of consumer hard disk drives and Wi-Fi chipsets to focus on its networking portfolio and used the acquisitions of Cavium, Avera, Aquantia, Inphi, and Innovium to expand out of its enterprise market niche into the rapidly growing data center and 5G markets.

Marvell’s recent financial history has been choppy as a result of CEO Matt Murphy’s aggressive overhaul of the business’ focus. Trends toward disaggregated networks and merchant silicon, as well as 5G and data center buildouts, would act as secular tailwinds for Marvell.

Financial Strength:

As of May 1, 2021, the firm carried $522 million in cash and $4.7 billion in total debt—largely taken on to acquire Inphi. Marvell is expected to exit fiscal 2022 with a gross debt/adjusted EBITDA ratio of 2.4 times, above its target of 2 times. As per the analysts, Marvell is expected to stay leveraged but to pay down debt as it matures.

The firm’s free cash flow generation is expected to ramp up toward $2 billion a year by fiscal 2026, up from just over $700 million in fiscal 2021, as it exacts material operating leverage with top-line growth.

The firm would be prudent to postpone any M&A until it returns below its debt/EBITDA target, following $11 billion spent so far in fiscal 2022 on Inphi and Innovium.

Bulls Say:

  • Marvell has best-of-breed data processing units and optical interconnect products that should allow it to benefit from the rapidly growing cloud and 5G markets.
  • We think the combination of Inphi and Innovium under the Marvell umbrella could give it a technological advantage to Broadcom in high-performance networking.
  • We expect Marvell to exact significant operating leverage as it incorporates acquisitions and adds volume to the top line.

Company Profile:

Marvell Technology is a leading fabless chipmaker focused on networking and storage applications. Marvell serves the data center, carrier, enterprise, automotive, and consumer end markets with processors, optical

interconnections, application-specific integrated circuits (ASICs), and merchant silicon for ethernet applications. The firm is an active acquirer, with five large acquisitions since 2017 helping it pivot out of legacy consumer applications to focus on the cloud and 5G markets.

(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 Small Cap

Praemium Ltd balance sheet remains strong with cash reserves of $26.7m

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Investment Thesis

  • Merger with powerwrap creates a much better capitalized and resourced competitor in the market, with significant opportunities for synergies.
  • Increase diversification via geography and product offering.
  • Increase competition amongst platform providers such as HUB24, Wealth O2, BT panorama, Netwealth, North Platform, etc.
  • Very attractive Australian industry dynamics – Australian superannuation assets expected to grow at 8.1% p.a to A$9.5 trillion by 2035.
  • Disruptive technology and hold a leading position to grow funds under advice via SMAs.
  • The fallout from the Royal Commission into Australian banking has led to increased inquiries for PPS’ product/services.
  • Growing and maturing SMSF market = more SMSF demand for tailored and specific solutions.
  • Both-on acquisitions to supplement organic growth.
  • Further consolidation in the sector could benefit PPS.

Key Risks

  • Execution risk – delivering on PPS’s strategy or acquisition.
  • Contract or key client loss.
  • Competitive platform/offering.
  • Associated risks in relation to system, technology and software.
  • Operational risks related to service levels and the potential for breaches.
  • Regulatory changes within the wealth management industry.
  • Increased competition from major banks and financial institutions.

FY21 Results Summary

  • Australian business segment delivered revenue growth of +37% over pcp to $53.1m, driven by Platform revenue increase of+73% to $36.5m with Powerwrap revenue of $16.3m amid strong underlying growth from record platform inflows and Portfolio services revenue increase of +6% to $16.1m with VMAAS revenue up +40% from continued portfolio on-boarding. EBITDA declined -2% to $19m, primarily due to the transition of the Powerwrap cost base and some cost expansion to support growth and service across sales, marketing and operations (EBITDA margins declined -14% to 36%), however, management forecast growth investments and scale benefits from Powerwrap synergies will drive improved earnings into FY22.
  • International net revenue (net of product commissions) increased +6% over pcp to $12.5m, driven by Platform revenue growth of +30% to $8.1m from record inflows driving International platform FUA to $5bn (up+ 55%), partially offset by declines in the Smartfund range of managed funds, with fund revenue down -47% to $1.5m. Expenses were up +2% to $16.4m from operational capability to support growth, partially offset by continued cost management. EBITDA loss declined -7% to $3.9m, comprising UK’s EBITDA loss of $1.4m (27% improvement), Asia’s EBITDA loss of $0.9m (1% increase) and the inclusion of Dubai’s cost centre of $1.6m (up 17%).

Company Profile 

Praemium Limited (PPS) is an Australian fintech company which provides portfolio administration, investment platforms and financial planning tools to the wealth management industry.

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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Megaport retained strong balance sheet position, with a cash balance of $136.3m at year-end

Graphic of investment stock market data analysis business

Investment Thesis

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapidly growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1)  adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud  products/providers, which works well with MP1’s business model.
  • MP1 has a scale advantage over competitors. MP1 is over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take a number of years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors. 
  • Strong cash balance of $136.3m at year end and a reducing cash burn profile puts the Company in a strong position.
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers) 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Company Profile 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform.

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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ETFs ETFs

Vanguard Diversified Growth Index ETF: A Diversified fund at low cost

Investment Objective

Vanguard Diversified Growth Index ETF seeks to track the weighted average return of the various indices of the underlying funds in which it invests, in proportion to the Strategic Asset Allocation, before taking into account fees, expenses and tax.

Process

The Vanguard Diversified Index ETF series follows the investment process of the unlisted funds, but with some additional trade-offs of the listed structure, including brokerage costs and variable bid-ask spreads. The methodology starts by defining reasonable investment horizons for each portfolio and allocates to broad asset-class exposures such as equities and fixed interest based on the defensive/growth split. Then, sub asset allocation within classes follows a market-cap weighting approach, while allowing for behavioural biases and regulatory factors specific to each local market. The SAA determination is aided by the Vanguard Capital Markets Model, which forecasts asset-class returns through scenario analysis. An annual review may identify major structural shifts that can lead to a revised SAA.Underlying sector exposures are realised through in-house index-tracking funds. 

Portfolio

Vanguard’s straightforward approach applies a strategic asset allocation that is updated periodically and broadly mirrors its equivalent unlisted fund range. Dynamic and tactical asset allocation are not used. Vanguard sticks to the traditional asset classes of equities, fixed interest, and cash, while avoiding alternatives and unlisted assets. The four diversified options are designed to suit different investor objectives and risk profiles. Vanguard Conservative has a defensive/growth split of 70/30, Balanced is 50/50, Growth is 30/70, and High Growth is 10/90. 

Performance

 In comparison to unlisted peers, all ETFs sit in the top quartile over a trailing three-year time period as at June 2021.

Performance return (%)

Source: Fact Sheet

Asset Allocation(%)

Source: Fact sheet

About the fund

The ETF gives investors low-cost access to a variety of sector funds, allowing them to diversify across several asset classes. The Growth ETF is a growth-oriented exchange-traded fund (ETF) created for investors seeking long-term capital growth. A 30% allocation to income asset classes and a 70% allocation to growth asset classes are the goals of the ETF and suitable to buy and hold investors seeking long term capital growth, but requiring some diversification benefits of fixed income to reduce volatility.

 (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.