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Super Retail’s FVE Increases to an Expected Sales Uplift from Network Optimisation

The company’s fiscal 2021 sales of AUD 3,453 million and underlying earnings of AUD 307 million were broadly in line with our estimates. The trading update provided for the first seven weeks of fiscal 2022 is broadly tracking with full fiscal year estimate. Trading conditions in fiscal 2022 are likely to be more challenging than we anticipated just a few months ago with lockdowns heavily impacting retailing businesses in affected states. While the near-term trading outlook is similarly opaque as during Australia’s first COVID wave, we base our longer-term sales levels on historical growth trends. 

EBIT margins sharply increased in fiscal 2021, mostly due to less discounting because of greater consumer demand and relatively inelastic supply, as well as remarkable sales growth of 22% driving just as exceptional operating leverage. EBIT margins expanded some 450 basis points to almost 13%, after adjusting for lease accounting Standard AASB 16. In the five years to fiscal 2020, adjusted EBIT margins averaged just over 8%. Super Retail’s online sales increased by 43% in fiscal 2021, similar to the 44% achieved in fiscal 2020. E-commerce accounted for 12% of group sales in fiscal 2021, with outdoor specialist Macpac and sporting goods retailer Rebel leading with online penetration of 21% and 16%, respectively. The board declared a fully franked dividend of AUD 88 cents per share for fiscal 2021.    

Company’s Future Outlook 

We continue to expect consumer spending on auto parts, sporting goods, and outdoor gear to normalize by fiscal 2023 and with it currently elevated profit margins. In contrast, to match our intrinsic valuation with current share prices, we would have to assume increased spending levels on discretionary goods and higher profit margins to persist for much longer. We expect operating margins to weaken against a backdrop of replenished inventories, more discounting, and declining sales. we estimate a 9% drop in group revenue for fiscal 2022. The dividend was ahead of our AUD 84 cents forecast on a slightly higher than expected 65% payout ratio. While we maintain our 65% payout ratio forecast, we expect declining earnings to result in a lower dividend of AUD 64 cents in fiscal 2022, representing a 5% yield at current share prices

Company Profile 

Super Retail operates in Australia and New Zealand selling auto parts, sporting goods, and camping, fishing, and boating equipment. The group generates revenue of about AUD 2.5 billion. There are generally two to four larger players in each category in which the firm operates, with Super Retail the market leader in all three categories. The firm has been corporately active historically, adding to the sporting goods category in fiscal 2012 and acquiring Macpac of New Zealand in 2018.

(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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Dividend Stocks

Treasury Lacks an Economic Moat Amid the Highly Competitive and Volatile

particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 70% in fiscal 2021 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. We expect continued end-market premiumisation to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020

However, Treasury will face an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations. Treasury also faces risks from unfavourable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. But the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns.

The reason why Treasury lacks an economic moat:

  • Treasury Wine Estates has not carved out an economic moat, in our opinion. Although we expect the firm’s strategic shift to focus on high-end wines and its increased geographic diversification to benefit both long-term top-line growth and profitability, the wine industry’s high degree of competition, and volatile annual demand will likely limit Treasury’s ability to generate sustainable excess economic profits. These concerns are further exacerbated by persistent industry oversupply and specific taxation rules in Australia that award excise tax exemptions against the first AUD 350,000 in direct-to-consumer sales, a barrier to industry consolidation. Furthermore there is also continued pressure from powerful retailers in Australia, where liquor stores owned by grocery giants Woolworths and Coles account for over 50% of total wine sales and
  • We don’t believe owning a portfolio of wine brands builds a moat worthy intangible asset because wine brands are stand-alone assets and therefore consumer awareness of Treasury’s ownership in both Stags’ Leap and Berringer in the U.S., or Penfolds and St Huberts in Australia, leads to improved pricing for the respective brands versus peers, or if such awareness even materially exists. There are some cost benefits to running a portfolio of wine brands, as Treasury can optimise its grape sourcing and production within its many geographies. But we expect premium wines will likely continue to see fluctuations in supply and fruit cost year to year.
  • In all, despite the positives of premiumisation in recent years, ROICs considerably trailed WACC until fiscal 2019. This is due to the substantial inventory requirements of wine-making, the high cost of land ownership, difficult price competition in a very fragmented market, and Treasury’s lack of scale economies and brand intangible assets versus larger peers.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine.
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands.
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilisation, improving margins, and higher ROICs.

Company Profile

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(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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Technology Stocks

Computershare Ltd (ASX: CPU)

  • Two main organic growth engines in mortgage servicing and employee share plans should lead to organic EPS growth.
  • Expectations of margin improvement via cost reductions program.
  • Leveraged to rising interest rates on client balances, corporate action and equity market activity.
  • Potential for earnings derived from non-share registry opportunities due to higher compliance and IT requirements.
  • Solid free cash flow and deleveraging balance sheet.

Key Risks

  • Increased competition from competitors such as recently listed Link and Equiniti which affect margins.
  • Cost cuts are not delivered in accordance with market expectations.
  • Sub-par performance in any of its segments, especially mortgage servicing (Business Services) as a result of higher regulatory and litigation risks; Register and Employee Share Plans as a result of subdued activity.
  • Exchanges such as ASX are exploring block chain solution to upgrade its clearing and settlement system (CHESS). This distributed ledger technology can bring registry businesses in-house and disrupt CPU.

FY21 results by segments

Compared to pcp and in CC(constant currency): Issuer Services delivered revenue growth of +9% to $975.1m, with Register Maintenance up +3.2% amid a recovery in shareholder paid fees, new client wins and increased market share, Corporate Actions up +35.3% with volumes increasing in all major regions as a result of clients raising capital, improved IPO markets, especially in Hong Kong, and strong M&A activity, Stakeholder Relationship Management up +45.7%, Governance Service up +90.7% and Margin income down -44.3%. Management EBITDA gained +5.1% to $273.9m (with margin down -100bps to 28.1%), however, Management EBIT ex Margin Income was up +26.3% to $227.1m with margin expansion of +240bps to 24.4%, with management anticipating organic revenue ex MI growth of 0-3% p.a. and EBIT ex MI growth of 0-5% p.a. in medium term. Employee Share Plans saw revenue increase +6.3% to $308.5m, driven by Fee revenue (+4%), Transactional revenue (+15.8%) as equity markets rallied and units under administration grew +13% over pcp to $27bn as more companies issued equity deeper into their organisations, Margin Income (-4.8%) and Other revenue (-64.3%). Management EBITDA of $78.1m was up +40% (margins up +610bps to 25.3%), with Management EBIT ex MI of $69m up +68.3% (margins up +790bps to 22.6%), with management anticipating revenue ex MI growth of +3-6% p.a. and EBIT ex MI growth of +4-8% p.a. in medium term.  Mortgage Services saw revenue fall -9.5% to $574.8m driven by UK Mortgage Services (-36.6%) and Margin income (-84.7%), partially offset by US Mortgage Services (+7.7%). Management EBITDA of $103.3m was down -18.9% (margins down -200bps to 18%), with Management EBIT ex Margin Income a loss of $4.2m, with management expecting recovery in FY22 anticipating revenue ex MI and EBIT ex MI growth of 5-10% p.a. in medium term. Business Services delivered revenue decline of -15% to $207.1m, driven by Corporate Trust (-0.5%), Class Action (-30.6%) and Margin income (-48.8%), partially offset by Bankruptcy (+36.6%), Management EBITDA of $51m was down -42.2% (margins down -1160bps to 24.6%) and Management EBIT ex Margin loss of $20.4m decreased -34.4% with margin decline of -510bps to 11.5%, however, management anticipating revenue ex MI growth of 3-5% and EBIT ex MI growth of 2-5% in medium term.

Company Description  

Computershare Ltd (CPU) is a global market leader in transfer agency and share registration, employee equity plans, mortgage servicing, proxy solicitation and stakeholder communications. CPU also operates in corporate trust, bankruptcy, class action and a range of other diversified financial and governance 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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Technology Stocks

Megaport Ltd (ASX: MP1)

  • 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).

FY21 Results Highlights

Relative to the pcp: (1) Revenue of $78.28m, up +35%. EBITDA breakeven. Net loss for FY21 was $55.0m. (2) MRR of $7.5m, was an increase of $1.8m, or +32% (annualises to $90m). (3) Customers grew to 2,285, or up 443 or +24%. (4) Installed Data Centres increased by 39, or +11% to 405. (5) Enabled Data Centres increased by 92, or +14% to 761. (6) Ports increased 1,922, or 33% to 7,689. (7) Average revenue per port was down $2 to $978. (8) At year-end, MP1’s cash position was $136.

Company Description 

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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Dividend Stocks

Charter Hall Retail REIT Looks Defensive; Shares Fairly Valued

But we maintain our long-term assumptions and AUD 3.85 fair value estimate, which sees the stock screen as fairly valued. The REIT announced a final distribution of AUD 12.70 cents per security, taking full year distributions to AUD 23.40 cps. As a result of recent restrictions, the New South Wales and Victorian governments have reimplemented a landlord code of conduct similar to that enforced in 2020. The scheme forces landlords to provide rent waivers and deferrals for small to medium enterprises where turnover has been curtailed due to restrictions. This is likely to push more consumers to online shopping channels, fuelling the ecommerce trend.

While the near-term impact hurts especially with lockdowns potentially lasting late into calendar 2021 in line with the current vaccine rollout pace, the overall impact on Charter Hall Retail should be contained, relative to the impact in 2020. Its portfolio is increasingly dominated by major longleased tenants that are not eligible to defer rents under the government schemes. Also, the REIT has made significant efforts to increase omnichannel capabilities for tenants including click and collect facilities. This should reduce the financial impact on stores and thus reduce the need to waive or defer rent.

Company’s Future Outlook 

We forecast operating earnings per share to increase by 5% to AUD 28.60 per security in fiscal 2022, underpinned by a 2% increase in rental growth. We don’t expect there to be another equity raising, even in an extended lockdown, after one in 2020. Overall Balance sheet gearing looks modest at 33%, which sits at the midpoint of the target range of 30% to 40%. We view 55% of the REIT’s tenants as defensive (unlikely to miss a rent payment), which include the likes of Woolworths, Coles, bp, Wesfarmers, and Aldi. Supermarkets and service stations are also less likely to be impacted by COVID-19 restrictions. The proportion of portfolio income that these major tenants contribute to has steadily increased over the years, with the top five listed above representative of 54% of the portfolio income, up from 51% in fiscal 2020.

Company Profile 

Charter Hall Retail REIT, or CQR, owns and manages a portfolio of convenience focused retail properties, including neighbourhood and subregional shopping centres, service stations, and some retail logistics properties. The REIT is managed by Charter Hall, a listed, diversified fund manager and developer, which owns a minority stake in CQR, and frequently partners with it on acquisitions and developments. More than half of rental income comes from major tenants Woolworths, Coles, Wesfarmers, Aldi and BP (the latter occupies service station assets). The portfolio is more seasoned than some convenience rivals, with approximately two thirds of supermarket tenants at or near thresholds for paying turnover-linked rent.

(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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Technology Stocks

Netwealth remains overvalued yet well positioned

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

The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

Netwealth has exploited the bureaucracy and lethargy of the relatively small number of large and dominant Australian financial services firms to develop a superior investment administration platform that has quickly increased funds under administration (FUA). The company has benefited from regulatory change such as the Future of Financial Advice (FOFA) reforms, which require financial advisors to act in their clients’ best interests. It also got the advantage of banning of trail commission fees previously paid by investment administration platforms and investment advisors for recommending their products. Despite being the largest of the independent investment platforms, Netwealth has a number of independent platform competitors such as Hub 24 and Praemium.

Financial Strength:

The service-based and capital-light business model of Netwealth has minimum requirement for debt or equity capital, which keeps it in good financial health. The company expenses, rather than capitalises, research and development costs, which results in strong cash conversion. This means that most operating cash flow is available for dividend payments.

Funds under management and administration (FUMA) increased by 52% in fiscal 2021, the fee rate, or revenue divided by FUMA, fell by 23% due to pricing pressure, resulting in revenue growth of 17%. The PE ratio of Netwealth, in 2021, is as high as 78.0, which makes it overvalued.

From a balance sheet perspective, Netwealth remains in excellent shape, with net cash balance of AUD 81 million at the end of fiscal year 2021 and a consistent net cash balance since listing on the ASX in 2017.

Bulls Say:

Netwealth has only a small proportion of the investment administration market, at around 4%, but has won market share quickly, and significant growth potential remains.

Netwealth has a low fixed-cost base which means operating leverage is high and further strong revenue growth should be amplified at the EPS level. A high single digit CAGR increase in investment administration platform industry is expected which would provide a strong underlying tailwind for Netwealth.

Company Profile:

Netwealth provides cloud-based investment administration software as a service, or SaaS, in Australia via its proprietary platform. Netwealth’s platform provides portfolio administration, investment management tools, and investment and managed account services to financial intermediaries and directly to clients. The company charges SaaS fees based on funds under management on its platform. Netwealth also offers Netwealth-branded investment products on its platform which are managed by third-party investment managers.

(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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Shares Technology Stocks

Mirvac Group Ltd (ASX: MGR) Updates

20025825 - closeup image of businessman drawing 3d graphics
  • High quality portfolio composition with stronger weighting towards Melbourne and Sydney urban areas minimizing risk from submarket weakness from Brisbane. 
  • MGR has secured 90% of expected Residential EBIT for FY22.
  • Strong pipeline of residential projects to come, delivering earnings growth by FY22. 
  • Solid balance sheet. Gearing at 22.8% (at lower end of target range of 20%-30%).
  • Continuing recovery in weak retail sales especially for supermarkets.
  • Strong management team.

Key Risks

  • Deterioration in property fundamentals for Office, Industrial and Retail portfolio, such as delays with developments or lower than expected rental growth causing downward asset revaluations.
  • Tenant defaults as the economic landscape changes (increasingly competitive retail sector especially from online retailers such as Amazon). For instance, retailer bankruptcies causing rising vacancies in the retail portfolio.
  • Generally softening outlook on the broader retail market. 
  • Residential settlement risk and defaults. 
  • Higher interest rates impacting debt margins. 
  • Consumer sentiment towards impact of higher interest rates and effect on retail and residential businesses. 

FY21 Results Summary

Operating profit of $550m was down -9% over pcp and operating EBIT of $704m declined -12% over pcp, negatively impacted by lower development profit and higher unallocated overheads, partially offset by growth in NOI (especially growth in Integrated Investment Portfolio NOI following newly completed office asset developments).However, statutory profit was up +61% to $901m and EPS of 14cpss exceeded management’s earnings guidance of greater than 13.7cpss. 

AFFO declined -23% over PCP, reflecting the lower operating earnings together with increased tenant incentives and normalization of maintenance capex. Total distribution was $390m, representing a DPS of 9.9cpss, an increase of +9%, funded from operating cash flows which increased +41% over pcp to $635m, driven by final fund through receipts following capitalization of Older fleet, lower development spend and stronger cash collection from the investment portfolio. Net tangible assets (NTA) per stapled security increased +5% over PCP to $2.67.

The Company extended its development pipeline, ending the year with $28bn across mixed use, office, industrial, residential and build to rent. Balance sheet remained strong with cash and undrawn debt facilities of $867m, investment grade credit ratings of A3/A- by Moody’s/Fitch, gearing of 22.8% (lower end of target range of 20-30%). The Company saw cost of debt decline -60bps over PCP to 3.4%, with management expecting further reduction in FY22.

Company Description  

Mirvac Group Ltd (ASX: MGR) is a real estate investment and development company. The company operates in Residential and Commercial & Mixed Use space within the real Estate sector. Mirvac Group Ltd is headquartered in Sydney, Australia.

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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 Philosophy Technical Picks

Narrow-Moat Sysco’s Recipe for Growth Is Cooking up Improved Performance

the food-service market has nearly fully recovered, with sales at 95% of prepandemic levels as of the summer of 2021, and Sysco has emerged as a stronger player, with $2 billion in new national account contracts (3% of prepandemic sales) and 13,000 new independent restaurant customers. The plan should allow Sysco to grow 1.5 times faster than the overall food-service market by fiscal 2024. Sysco is investing to eliminate customer pain points by removing customer minimum order sizes while maintaining delivery frequency and lengthening payment terms. It improved its CRM tool, which now uses data analytics to enhance prospecting, rolled out new sales incentives and sales leadership, and is launching an automated pricing tool, which should sharpen its competitive pricing while freeing up time for sales reps to pursue more value-added activities, such as securing new business.

Further, Sysco has switched to a team-based sales approach, with product specialists that should help drive increased adoption of Sysco’s specialized product categories such as produce, fresh meats, and seafood. Lastly, Sysco is launching teams that specialize in various cuisines (Italian, Asian, Mexican) that should drive market share gains in ethnic restaurants. Looking abroad, Sysco has a new leadership team in place for its international operations, increasing our confidence that execution will improve.

Financial Strength 

Sysco’s solid balance sheet, with $5 billion of cash and available liquidity (as of June) relative to $11 billion in total debt, positions the firm well to endure the pandemic. Sysco has a consistent track record of annual dividend increases (even during the 2008-09 recession), and in May 2021 it announced an increase in its dividend, taking the annual rate to $1.88. Sysco has historically operated with low leverage, generally reporting net debt/adjusted EBITDA of less than 2 times. Leverage increased to 2.3 times after the fiscal 2017 $3.1 billion Brakes acquisition, and to 3.7 times in fiscal 2021, given the pandemic. But we expect leverage will fall back below 2 by fiscal 2023, given debt paydown and recovering EBITDA.

In May 2021, Sysco shifted its priorities for cash in order to support its new Recipe for Growth strategy. It’s new priorities are capital expenditures, acquisitions, debt reduction when leverage is above 2 times, dividends, and opportunistic share repurchase. Its previous priorities were capital expenditures, dividend growth, acquisitions, debt reduction, and share repurchases. In fiscal 2022-2024, as it invests to support accelerated growth, Sysco should spend 1.3%-1.4% of revenue on capital expenditures (falling to 1.1% thereafter). 

Bulls Say’s 

  • As Sysco’s competitive advantage centers on its position as the low-cost leader, we think Sysco should be able to increase market share in its home turf over time.
  • Sysco has gained material market share during the pandemic, allowing it to emerge a stronger competitor.
  • Sysco’s overhead reduction programs should make it more efficient, enabling it to price business more competitively, helping it to win new business, and further leverage its scale.

Company Profile 

Sysco is the largest U.S. food-service distributor, boasting 16% market share of the highly fragmented food-service distribution industry. Sysco distributes over 400,000 food and nonfood products to restaurants (62% of revenue), healthcare facilities (9%), travel and leisure (7%), retail (5%), education and government buildings (8%), and other locations (9%) where individuals consume away-from-home meals. In fiscal 2020, 81% of the firm’s revenue was U.S.-based, with 8% from Canada, 5% from the U.K., 2% from France, and 4% other.

(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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Technology Stocks

DoorDash Reported Strong Q2 Growth; Network Effect Remains Intact, but Shares Remain Overvalued

The firm is at the early stages in trying to attract a larger piece of what we estimate could be $1 trillion worth of goods and services by 2025 to its platform. DoorDash benefits from the network effects between merchants, deliverers (or “dashers”), and consumers, plus intangible assets, in the form of data, which we believe together warrant our narrow moat rating. Consumers use DoorDash’s app to order food for pickup or delivery from restaurants. Based on data from Second Measure, DoorDash currently is the market leader in the U.S., with 56% share, above Uber’s 26% and Grubhub’s 18%. The firm has over 450,000 merchants, more than 20 million consumers, and more than 1 million dashers on its platform.

DoorDash has also begun to provide similar service to businesses in verticals other than restaurants, such as grocery, retail, pet supplies, and flowers. With strengthening of the network effect, we expect DoorDash to maintain its leadership position in likely a market where there will be only one other viable player, Uber Eats, in the long run. The firm’s network effect should also lower consumer and deliverer acquisition costs, resulting in further operating leverage and GAAP profitability in 2023. 

Financial Strength 

Our $142 fair value estimate of narrow moat DoorDash and continue to view the very high uncertainty rated stock as overvalued. The firm reported mixed second-quarter results with revenue beating the FactSet consensus estimates, while losses were a bit more than expected. While DoorDash and Uber will hold the number one and the number two positions in delivery within the U.S., DoorDash’s stock price may be displaying too much optimism about how quickly and at what cost the firm can diversify its business within and outside of the U.S. market. At current levels, we prefer Uber, as our $69 fair value estimate on the stock represents a 61% potential upside. 

DoorDash’s gross order volume increased 70% year over year and 5% from the first quarter to $10.5 billion. Such growth was driven by an increase in the number of orders (69% year over year) and gross order volume per order (up 1%). The higher take rate resulted in $1.2 billion in total revenue, up 83% from last year. The firm generated a GAAP operating loss of $99 million during the quarter compared with $27 million in operating income in the second quarter of 2020. During the second quarter, sales and marketing as a percentage of revenue spiked to 35% (from 25% last year but slightly more comparable to last quarter’s 31%) mainly due to more aggressive marketing to consumers and drivers.

DoorDash went public in late December 2020, raising $3.3 billion to fund its operations as it continues to invest in growth. The firm likely will not become profitable until 2023. DoorDash holds $4.5 billion in cash and cash equivalents and no debt. The firm has access to a $400 million revolving credit facility from which nothing has been drawn.DoorDash burned $159 million and $467 million in cash from operations in 2018 and 2019, respectively, and generated $252 million in cash from operations in 2020 due to a smaller net loss and higher non-cash expenses, especially a significant year-over-year increase in stock-based compensation to $322 million from $18 million. The firm averaged $66 million, or nearly 6% of revenue, in capital expenditures in 2018-20.

Company Profile 

Founded in 2013 and headquartered in San Francisco, DoorDash is an online food order demand aggregator. Consumers can use its app to order food on-demand for pickup or delivery from merchants mainly in the U.S. The firm provides a marketplace for the merchants to create a presence online, market their offerings, and meet demand by making the offerings available for pickup or delivery. The firm provides similar service to businesses in addition to restaurants, such as grocery, retail, pet supplies, and flowers. At the end of 2020, DoorDash had over 450,000 merchants, 20 million consumers, and over 1 million dashers on its platform. In 2020, the firm generated $24.7 billion in gross order volume (up 207% year over year) and $2.9 billion in revenue (up 226%).

(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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Technology Stocks

Envestnet Inc to Ramp Up Investment Spending to Focus on Financial Wellness

Digital tablet display the stock market data

In 2015, Envestnet acquired Yodlee, which makes up the firm’s data and analytics segment. Yodlee’s revenue consists of its core data aggregation, alternative data to asset managers, and analytics to advisory firms. We do believe this segment is less moaty, as Yodlee faces competition from Plaid and MX Technologies as well as many alternative data providers. Following Visa’s announced (but ultimately nixed) acquisition of Plaid at a high valuation (we estimate over 20 times forward revenue), media reports have indicated that Envestnet is looking to sell Yodlee. For now, we believe Envestnet is comfortable keeping Yodlee in its product portfolio.

Envestnet believes marketplace exchanges can add to growth. In 2019, the company launched an insurance exchange with six national carriers to connect an advisor’s clients with annuity products. In addition to the insurance exchange, Envestnet launched Advisor Credit Exchange to help advisors address the lending needs of their clients. Envestnet is also focusing on growing asset-based revenue by providing value-added services such as impact portfolios, direct indexing, and tax overlays.

Financial Strength

Overall, Envestnet’s financial strength is sound. in our view, The company has used leverage for acquisitions. As of Dec. 31, 2020, Envestnet has approximately $385 million of cash and $756 million in convertible note debt. This equates to a net leverage ratio of about 2 EBITDA. While it’s true that the firm’s wealth solutions segment contains asset-based revenue, net of direct asset-based cost of revenue, these fees are less than 40% of the firm’s revenue. In addition, we estimate that 40% of Envestnet’s AUM/A are not in equities. Given this and the fact that the rest of Envestnet’s revenue is mostly recurring in nature, we’re comfortable with the company’s level of debt.

Bull Says

  • Envestnet has leading market share, and its product suite offers greater breadth than competitors.
  • Envestnet could pursue strategic alternatives with Yodlee.
  • Envestnet should continue to benefit from the trend of advisors leaving wire house firms to start their own practices and the shift from commission-based to fee based advice.

Company Profile

Envestnet provides wealth-management technology and solutions to registered investment advisors, banks, broker/dealers, and other firms. Its Tamarac platform provides trading, rebalancing, portfolio accounting, performance reporting, and client relationship management software to high-end RIAs. Envestnet’s portfolio management consultants provide research services and consulting services to assist advisors, including vetted third-party managed account products. In November 2015, Envestnet acquired Yodlee, a provider of data aggregation.

 (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.