Tag: Top Stories

Categories
Shares Technology Stocks

Tradeweb benefits from long-term tailwinds as bond markets become increasingly electronic

which tend to focus on a particular bond type or market segment, Tradeweb operates with a broad scope, offering trading in just about anything related to fixed income, including derivatives, as well as some equity exchange-traded funds. That said, Tradeweb’s interest-rate and credit segments are the heart of the company, making up 77% of its revenue in 2020, and are responsible for much of its growth.

Fixed-income markets globally are increasingly moving away from voice-negotiated trading toward electronic platforms because the liquidity and workflow enhancement of these electronic networks promise to lower implicit and explicit trading costs for increasingly expense-conscious firms. Tradeweb has been a major beneficiary of this trend, as its largest competitor is the implicit competition represented by traditional voice-based trading. As bond and derivative markets have shifted, Tradeweb has enjoyed significant tailwinds to its business and has steadily taken overall market share, with its interest-rate swap and U.S. investment-grade bond trading volumes in particular rising rapidly. With most fixed-income trading still primarily voice-based, this transition is still in its early days and Tradeweb has a long runway of growth ahead of it. While revenue growth is likely to decelerate somewhat from an impressive CAGR of 21% over the last three years, Tradeweb is expected to enjoy double-digit revenue growth in the mid- to low teens for years to come.

Financial Strength:

Tradeweb is in an excellent financial position, with more than $821 million in cash and investment securities at the end of September 2021 and no outstanding long-term debt. Tradeweb enjoys wide margins and strong cash flow, and there are no any real prospect of the company being placed under financial pressure in the foreseeable future, particularly given the countercyclical behavior its revenue generation exhibits. Tradeweb’s business has high upfront costs but requires little incremental capital to support growth once a trading platform has been developed, limiting the firm’s capital needs. With no debt to pay down, analysts expect that Tradeweb will continue to use its incoming cash flow to pay dividends, buy back shares, or invest back into its business, either in the form of internal development or external acquisitions.

Bulls Say:

  • Tradeweb benefits from the secular transition away from voice negotiations toward its electronic trading platforms in fixed-income markets, providing the firm with an easy path for continued market share and revenue growth. 
  • Tradeweb’s business features upfront costs and low variable expenses, creating an easy path for operating margin expansion as its revenue base grows. 
  • Tradeweb interest-rate swap and U.S. investment grade corporate bond trading platforms have enjoyed sharp market share gains in recent years, with the pandemic an additional catalyst to ongoing industry trends.

Company Profile:

Founded in 1998 and headquartered in New York City, Tradeweb Markets is a leading fixed-income trading platform. While it does offer electronic processing for some voice-negotiated trades, the company focuses primarily on providing electronic trading networks that connect broker/dealers, institutional clients, and retail customers. While the company offers trading in a wide variety of products, the bulk of its business is in U.S. and European government debt, mortgage-backed securities, interest-rate swaps, and U.S. and international corporate bonds. The firm also sells fixed-income trading and price data, primarily through a deal with Refinitiv’s Eikon service.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Expert Insights

Texas Instruments Has Secular Growth Opportunities in Industrial and Automotive

Texas Instruments has a leading share of the fragmented yet lucrative analog chip market. Analog chips are used to convert real-world signals, such as sound and temperature, into digital signals that can be processed. Since analog chips are neither particularly expensive, nor do they require cutting-edge manufacturing techniques, high-quality analog chipmakers tend to retain design wins for the life of the product, yet maintain healthy pricing and strong profitability on such sales over time.

Additionally, Texas Instruments’ size allows the firm to compete across a broader spectrum of industries, without its fortunes tied to a single customer or end market. Texas Instruments’ embedded chip business is a bit more exposed to the automotive and communications infrastructure end markets, but should also see healthy growth over the next few years. The “Internet of Things” is an interesting tailwind for TI, as the company’s chips could be key components in a massive array of new electronics devices with improved connectivity and processing power.

Financial Strength

Revenue in the September quarter was $4.64 billion, up 1% sequentially, up 22% year over year and above the midpoint of guidance of $4.40 billion-$4.76 billion as provided in July. Industrial chip demand was strongest, up 40% year over year, even though sales were down a mid-single-digit percentage sequentially. Automotive revenue was up 20% year over year and up more than 30% from pre-pandemic levels (fourth quarter of 2019). These near-term results still bode well for strong long-term tailwinds for TI, in terms of rising chip content per car and industrial device. Gross margin expanded 70 basis points sequentially to 67.9%, thanks to higher sales levels. In turn, operating margin expanded 130 basis points sequentially to 49.6%.

Texas Instruments is in a modest net debt position, with $6.6 billion of cash on hand versus $6.8 billion of debt as of December 2020. The company’s target is to pay out 100% of free cash flow (less debt repayments) to investors over time. The firm offers a $1.02 quarterly dividend that yields over 2%, and the company intends to issue 40%-60% of its 4-year trailing free cash flow out to investors via dividends. Meanwhile, Texas Instruments continues to make hefty share repurchases (over $2 billion per year in each of the last six years). Nonetheless, we do not believe Texas Instruments will adopt a balance sheet with reckless leverage anytime soon, as the industry is highly cyclical and firms with healthy cash cushions are often able to better handle the inevitable industry downturns.

Bulls Say’s 

  • Texas Instruments has a leading market share position in several chip segments, such as analog semiconductors and digital signal processors.
  • A key element of Texas Instruments’ success has come from its massive global sales staff, which allows the firm to cross-sell its extensive semiconductor product portfolio to existing customers.
  • Texas Instruments’ ability to manufacture analog parts on 300-millimeter silicon wafers has provided the company with robust gross margin expansion in recent years, and we anticipate further expansion in the years ahead.

Company Profile 

Dallas-based Texas Instruments generates about 95% of its revenue from semiconductors and the remainder from its well-known calculators. Texas Instruments is the world’s largest maker of analog chips, which are used to process real-world signals such as sound and power. Texas Instruments also has a leading market share position in digital signal processors, used in wireless communications, and microcontrollers used in a wide variety of electronics applications.

(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.

Categories
Technology Stocks

Microsoft Flexes Cloud Muscle

Additionally, Microsoft has largely transitioned from a traditional perpetual license model to a subscription model. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving Gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins. 

Azure is the centerpiece of the new Microsoft. It is already an approximately $30 billion business, it grew at a staggering 50% rate in fiscal 2021. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes. 

Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, and Dynamics 365, with these moves now beyond the halfway point and no longer a financial drag.Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.

Microsoft Continues to Impress with All Around Strength and Another Positive Guide; FVE Up to $345

Wide-moat Microsoft continues to benefit from digital transformation efforts at enterprise customers. Azure and commercial related demand was robust by any measure, and gaming and Windows were strong even as supply constraints for PCs and Surface tablets remain challenging. We see a slowdown in remaining performance obligation, or RPO, growth and commercial bookings, two forward-looking metrics, as driven by large Azure deals in the prior year period and not a reflection of deteriorating demand

For the second quarter, revenue growth accelerated by 22% year over year to $45.32 billion. All segments were ahead with more personal computing driving the most upside.Operating margin was 44.7%, compared with 42.7% last year, driven by improved scale, upside to quarterly results, and lower operating expenses generally resulting from COVID-19-related dampening of travel, entertainment, and related expenses. Gross margins were down 50 basis points year over year, with a prior change in depreciable life assumption serving as a headwind, offset by growing Azure margins. 

Financial Strength 

Microsoft enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2020, Microsoft had $136.5 billion in cash and equivalents, offset by $63.3 billion in debt, resulting in a net cash position of $73.2 billion, or nearly $10 per share. Gross leverage is at 1.0 times fiscal 20202 EBITDA. Free cash flow margin has averaged 30% over the last three years and the company has generated more than $32 billion in free cash flow in each of the last three years.

Bulls Say 

  • Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments. 
  • Shift to subscriptions accelerates growth after the initial growth pressure, and the company has passed the margin inflection point now such that margins are increasing again and have returned to pre-Nokia and pre-“cloud” levels. 
  • Microsoft has monopoly-like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

Company Profile

Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops).

 (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.

Categories
Shares Technology Stocks

Netflix’s Growth Will Increasingly Come From Outside the U. S

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

The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.

We believe that many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease. Larger firms like Disney and WarnerMedia have launched their own SVOD platforms to compete against Netflix. We think this usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn. 

We expect that Netflix will expand further into local-language programming to offset the weakness of its skinny offering in many countries. This will likely generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, we think Netflix’s international expansion will continue to hamper margin expansion.

Netflix’s Growth Will Increasingly Come From Outside the U. S.

Netflix reported decent third-quarter results as subscriber growth beat the low guidance issued a quarter ago but this is below the previous two years. The lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India. 

While we now project that EMEA will have more members than the U.S. by the first quarter of 2022, its revenue and implied margin contribution will remain much lower as its ARPU only hit $11.65 in the quarter. We continue to project price increases for the region but still expect a large gap between it and the U.S. to persist over the next five years.

Asia-Pacific, Netflix’s supposed long-term growth engine, increased revenue year over year by an impressive 31% in the quarter but ARPU remained under $10 and actually declined sequentially. We expect ARPU to decline going forward as the firm rolls out low-price plans in more countries across the region. 

Financial Strength 

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as we don’t see the need to spend decreasing in the near future. As of June 2021, Netflix has $14.9 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($500 million due 2021, $700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($2.7 billion recognized on the balance sheet and over $15 billion not yet reflected on the balance sheet).

Bull Says 

  • Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years. 
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

Company Profile

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, Internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

 (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.

Categories
Commodities Trading Ideas & Charts

Newcrest’s Numerous Development Projects Maturing Nicely; Shares Remain Undervalued

the large resource base, low-cost position, and the company’s record. Barring a dip in fiscal 2024 and 2025, when the company assumes Telfer exhausts, Newcrest expects gold production to remain steady around 2.0 million ounces a year for the next decade based on the projects it has in hand. The outlook for copper production is similarly relatively flat, around 140,000 tonnes a year, but should step up from around 2029 to over 170,000 tonnes a year. Neither outlook–for gold or copper production–sounds too exciting. But beneath that apparent steadiness, the forecasts show how far Newcrest has come to offset the inevitable decline in grade at Cadia and the possible closure of Telfer.

Company’s Future Outlook

Our AUD 29.50 fair value estimate for Newcrest after incorporating the refined development plans for Havieron and Lihir. However, we continue to incorporate it separately into our fair value estimate, and the latest prefeasibility study supports our estimated standalone valuation of about AUD 2.50 per share, which is less than 10% of our overall fair value estimate. The company expects all-in sustaining costs to roughly have by fiscal 2030. In part, that depends on the copper price; Newcrest assumes USD 3.30 per pound longer term, which is above our USD 2.50 per pound assumption from 2025, but nevertheless we expect the company to remain a low-cost gold producer and well placed relative to peers.

We think these deposits have been somewhat forgotten by the market, but they contribute just over 10% to our fair value estimate, and we think the market could reasonably quickly be reminded of the valuable optionality they bring. From the base cases that Newcrest outlined for Telfer, Havieron, and Red Chris, we think the upside potential at Red Chris is likely to be the most substantial of the three, but it’s also longer-dated. The transition from lower-grade open-pit ore to bulk underground mining is expected

Company Profile 

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(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.

Categories
Funds Funds

PIMCO Global Bond Fund attracts well – resource to the investment team

Well established and methodical investment Process

PIMCO’s investment process entails three main buckets: (1) the economic forum (top down analysis), which meets four times a year to debate the state of play on short and long – term basis. (2) the investment committee develops the strategic parameters for portfolios and set the risk parameters such as interest rate exposure, yield curve positioning and sector positioning. (3) Portfolio management (bottom-up analysis) consists of PIMCO’s rigorous analysis and research of securities.

Downside Risk

  • Interest rate risk – (bond price and yields are inversely related)
  • Credit risk (the risk of downgrade and default) & Inflation risk
  • Personnel risk – significant turnover among the 3 lead PMs

Fund Performance 

(%)Fund (net)BenchmarkOut-performance
1-month -0.15-0.22+0.07
3-months1.081.53-0.45
FYTD0.871.03-0.16
1-year1.690.55+1.14
2-years (p.a.) 2.541.53+1.01
3-years (p.a.)4.384.28+0.10
Since inception (%p.a.)3.863.84+0.02

Source: PIMCO

Sector Exposure

Source: PIMCO

About the fund

The ESG Global Bond Fund is an actively managed portfolio of global fixed-interest investment which incorporates PIMCO’s ESG screening. The portfolio predominantly invests in governments, corporate, mortgage and other global fixed interest securities.

  • The ESGGlobal

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.

Categories
Technology Stocks

HubSpot Narrow Moat Carves Out Rapid Growth for Marketing Automation in Midmarket

We see small/medium businesses and the midmarket as being underserved by enterprise software providers, as the smaller deal sizes make it harder to serve efficiently. Therefore, we believe that HubSpot’s robust and expanding suite has helped carve out a meaningful niche.

HubSpot provides a suite of software solutions that helps companies grow better. The five hubs (marketing, sales, service, operations, and CMS) combine to create the growth platform. HubSpot operates a “freemium” model that has allowed it to gather hundreds of thousands of free users, with approximately 15% of these moving into paid solutions. From the free version, a three-tier system emerges: starter, professional, and enterprise. HubSpot’s goal is to create as wide a funnel as possible for customer gathering, and then move users up the pricing tier as they evolve, upselling them to additional hubs as their needs change.

Company’s Future Outlook

We believe HubSpot is a financially sound company with a solid balance sheet, improving margins, and rapidly growing revenue. Capital is generally allocated to growth efforts, strategic investments, and acquisitions, with no dividends or buybacks on the horizon.As of 2020, HubSpot had $1.3 billion in cash, marketable securities, and restricted cash compared with $479 million in debt. The debt is a convertible bond issue that we believe will be converted rather than repaid. HubSpot generated a 6% free cash flow margin in 2020 and in the low double digits in 2018 and 2019, which improve steadily over the next five years. We are confident that HubSpot can satisfy its obligations while continuing to fund normal operations. HubSpot does not pay a dividend and has not repurchased shares, nor do we expect it to do so within the next several years. The company regularly makes small acquisitions and strategic investments.

Bulls Say’s

  • HubSpot has made a splash in the SMB market with its freemium model, easier implementation, and simple and feature-rich software.
  • HubSpot does not have to beat out Salesforce or Microsoft, but by offering a credible solution to the midmarket, we think it can grow rapidly in an underserved niche.
  • HubSpot’s record of introducing new solutions in adjacent areas, upselling existing customers, and moving customers up the stack as they grow has driven strong revenue growth thus far and seems likely to continue over the next several years.

Company Profile 

HubSpot provides a cloud-based marketing, sales, and customer service software platform referred to as the growth platform. The applications are available ala carte or packaged together. HubSpot’s mission is to help companies grow better and has expanded from its initial focus on inbound marketing to embrace marketing, sales, and service more broadly. The company was founded in 2006, completed its initial public offering in 2014, and is headquartered in Cambridge, Massachusetts.

(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.

Categories
Shares Small Cap

Wesfarmers’ Offer for API Still Appears the Most Likely

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

It then extended the brand to the Priceline Pharmacy franchise network as Australia prevents community pharmacies having corporate ownership. Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. While the conversion of stores to include a pharmacy is beneficial for distribution volumes, these stores dilute margin due to more PBS sales, and consequently have contributed to a decline in operating margin since fiscal 2017. Offsetting this is often higher foot traffic and sales. Nonetheless, as guided by management, this conversion process has played out and we expect no margin drag going forward.

Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, we have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush.

Company’s Future Outlook

API is in a strong financial position with net debt/adjusted EBITDA of 0.2 times at fiscal 2020. We forecast the company to hold a net cash position through fiscal 2025 and comfortably afford a 70% dividend payout ratio and continue to expand its retail footprint. We project API to open roughly 10 net new Priceline stores and five net Clear Skincare clinics per year. We forecast a total of AUD 225 million in capital expenditures over the next five years, including AUD 50 million for a new distribution centre in New South Wales, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding. Working capital management has improved over a number of years, effectively having the net investment in working capital to 4.4% of sales over the five years to fiscal 2020. We forecast investment to be roughly maintained at an average of 4.7% of sales.

Bulls Say’s

  • The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace.
  • API’s Corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS.
  • Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.

Company Profile 

Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.

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.

Categories
Dividend Stocks Expert Insights

Coach’s Enduring Popularity Provides Stability as Tapestry Works Through Its Acceleration Program

Due to the pandemic, all three of Tapestry’s brands suffered sales and operating profit declines in parts of the last two fiscal years, but results have been improving rapidly as it implements its three-year Acceleration Program strategy to cut costs and improve margins. 

Coach struggled with excessive distribution and competition in the past, but we think Tapestry has turned it around through store closures, restrictions on discounting, and increased e-commerce, which has grown by triple-digit percentages during the pandemic. Further, we expect growth in complementary categories like footwear and fashion. China to be a key growth region for Coach as Chinese consumers will compose 46% of the worldwide luxury goods spending in 2025, according to Bain & Company. We forecast Coach’s greater China sales will increase to nearly $1.5 billion in fiscal 2031 (24% of sales) from $931 million in fiscal 2021 (22% of sales). 

The acquisitions of Kate Spade and Stuart Weitzman don’t contribute to Tapestry’s moat. Spade was a natural fit for Coach as both generate most of their sales from Asia-sourced handbags. However, Spade merchandise is priced lower than Coach and lacks its international reach. Still, we think Spade can grow in both North America and Asia through store openings and new products, such as shoes (currently licensed).As for Stuart Weitzman, while its women’s shoes achieve luxury price points, we view it as a niche brand (less than $300 million in fiscal 2021 sales) with fashion risk. Stuart Weitzman is struggling so much that Tapestry recently wrote off all the goodwill and intangibles related to its purchase and is downsizing its store base.

Financial Strength

As of the end of June 2021, Tapestry was in a net cash position, with total debt of $1.6 billion and $2 billion in cash and equivalents. Some (33.5% as of the end of fiscal 2021) of the cash is held outside of the U.S. but may be repatriated. Tapestry’s earliest debt maturity occurs in 2022, when $400 million in 3.0% notes come due. Tapestry suspended share repurchases and dividends to maintain liquidity during the pandemic but has resumed both in fiscal 2022. We forecast the firm will generate more than $5.3 billion in free cash flow to equity over the next five years, most of which will be returned to shareholders. Tapestry has limited the amount of cash returned to shareholders since 2015 due to the acquisitions of Stuart Weitzman and Kate Spade and debt covenants. However, Tapestry approved a new $1.0 billion buyback program in May 2019, a clear signal it will resume significant buybacks. Further, we forecast Tapestry will pay out roughly 38% of earnings over the next 10 years as dividends. Finally, we expect Tapestry’s capital expenditures will be relatively high on store openings, remodels, and e-commerce investments. 

Bulls Say

  • Coach is one of the share leaders in the profitable categories of handbags and other leather goods. Coach bags achieve better pricing than many others, allowing for gross margins around 70%. 
  • Coach is a popular brand among Chinese consumers and has room for growth. Bain & Company estimates these consumers will compose 46% of worldwide luxury good spending in 2025, up from 33% in 2018. 
  • Tapestry unveiled a new strategic plan in August 2020 called the Acceleration Program to reduce operating expenses by about 10%, enhance e-commerce, and close low-performing stores.

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,400 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2021 sales), Europe, Asia (33% of fiscal 2021 sales), and elsewhere. Coach (74% of fiscal 2021 sales) is best known for affordable luxury leather products. Kate Spade (21% of fiscal 2021 sales) is known for colorful patterns and graphics. Women’s handbags and accessories produced 70% of Tapestry’s sales in fiscal 2021. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (99%) of its revenue from women’s footwear.

 (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.

Categories
Shares Technology Stocks

Oracle transition to the cloud to get benefit from the Data boom

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

However, growth has been lacking as more customers shift their workloads to the cloud, bypassing Oracle’s solutions. Despite Oracle’s cloud migration efforts, cloud competition will likely provide headwinds for Oracle.

 However, we don’t view the company as being on the forefront of recent software trends, and new and potential customers appear to be looking past Oracle for their database needs. Database preferences are far wider today due to the sheer number of ways to manipulate data, and the different data storage practices this necessitates. In turn, Oracle is losing database market share to new database types that may be better suited to the cloud. 

Additionally, the transition to the cloud is prompting enterprises to change software vendors away from all-in-one ERP systems to application specific that are best of breed. In response, Oracle is banking on its second-generation cloud to not only cater to its traditional enterprise workloads, like supporting databases, but also general use workloads. However, we view Oracle’s cloud as sub-scale to Amazon and others and we doubt Oracle can close this gap soon. In our opinion, Oracle should still be successful in moving a significant amount of its traditional on-premises workloads to Oracle cloud. However, migrating all of its customers is not such a sure thing, as cloud-first software vendors have been able to take meaningful share from legacy Oracle customers.

Financial Strength 

Oracle is in healthy financial standing. As of fiscal 2020, Oracle had $43 billion in cash and equivalents versus $72 billion in debt. However, Oracle should generate robust free cash flow in the years ahead to settle these debt obligations over time. We think that Oracle will have the capital to increase its total annual dividends to $1.28 in fiscal 2025 from $0.96 in fiscal 2020, as the company continues to make share repurchases and acquisitions. However, we think that the magnitude of acquisitions will moderate as the company comes off of its buildout of its second-generation cloud product and has stressed their recent preference to build new capabilities in house. In terms of capital expenditures, we think Oracle will spend an average of $1.6 million per year over the next five years, as the company continues to require build outs for its cloud operations.

Bulls Say

  • Oracle’s relational database should be able to post strong growth as customers continue to depend on its quality features, such as data partitioning which brings incomparable load balancing efficiency.
  • Oracle’s autonomous database and IaaS was built with ease of use in mind, which could bring a significant base of first-time Oracle users to the company, strengthening top line results. 
  • Oracle’s stake in TikTok Global and cloud services to TikTok’s U.S. operations should add a significant boost to Oracle’s top line and attract more “general use” cloud customers.

Company Profile

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(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.