by Todd Shaver | Aug 4, 2023 | Instant News Flash
This Is Where The Growth Is
Amazon had a blowout second quarter, with a beat on both ends, and an upbeat guidance for the third quarter sending the stock soaring by over 10% following the results, adding $14 billion in equity to stockholders. The company posted $134 billion in revenues, up 11% YoY, compared to $120 billion a year ago, with a profit of $6.7 billion, or $0.65 per share, a phenomenal improvement over a loss of $2 billion. Is this company big, or what! $134 billion in revenue for the quarter is quite amazing. The last four years of revenue look like this: $280 billion, $385 billion, $470 billion, and $515 billion last year. We can see them doing $600 billion in revenue for this year.
The company’s AWS cloud computing business posted $22 billion in revenues, up 12% YoY, which marks a slight deceleration but is remarkable nonetheless, considering the broad-based slowdown in enterprise IT spending. This segment has helped Amazon stay profitable and hold its head above water for years and still continues to do so, contributing over 70% to the company’s overall operating profits.
Despite substantial headwinds, the AWS segment leads in terms of sales growth and profitability, owing to steady demand for cloud computing infrastructure for generative AI and Machine Learning applications. In addition to this, the company’s advertising business continues to grow by leaps and bounds, hitting $11 billion in revenues, up 22% YoY, ahead of Alphabet and Meta at 3% and 12% growth, respectively.
Its core e-commerce business produced sales of $60 billion, up from $57 billion a year ago. Aided by its Prime Day event during the quarter, which saw a record 375 million items being delivered to customers at its quickest-ever delivery speeds, the segment posted an operating profit of $3.2 billion, emerging from a loss of $630 million during the year-ago period.
Following a 64% YTD rally, the stock still trades at a reasonable 2.5 times sales, offering plenty of value for investors. As it remains focused on unlocking value across its massive landed base, we expect its margins and profitability to consistently improve going forward, opening up avenues for dividends and buybacks. The company ended the quarter with $64 billion in cash, $180 billion in debt, and $54 billion in cash flow. Our Target is $205, the highest on the Street. We’re over 10% closer to that today. Our Sell Price is: We Would Not Sell Amazon.
by Todd Shaver | Jun 1, 2023 | Research Report
Cisco (CSCO: $50)
Coverage initiated June 1, 2023 at $50 in the Long-Term Growth portfolio
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.
Silicon Valley-based Cisco Systems (CSCO) stands as a shining example of a promising wunderkind that continuously pushes the boundaries of its potential. The four-decades-old company, which was once pegged to be the first trillion-dollar company, still trades below its all-time high of $77 during the dotcom bubble 24 years ago, despite a multifold rise in revenues, profits, and free cash flows during the same period. For years, the company has consistently pioneered groundbreaking new innovations, either via in-house developments, acquisitions, or partnerships, only to lose ground to fresh upstarts in those very segments. A prime example of this is WebEx, its video conferencing solution that was thoroughly outstripped by Zoom, despite having a head start and an established base of enterprise customers.
That being said, however, Cisco is far from the boring tech conglomerate that its valuations currently reflect. While the company is no longer plastered in headlines, or a mainstay in tech conversations as it once was, its products still play a crucial role in the broader ecosystem, particularly in its core networking business. This is precisely what makes the company such a compelling buy, especially at current valuations.
Enviable Product Mix
Cisco makes a broad range of networking and communication equipment that has long been dubbed the ‘backbone of the internet.’ From routers and switches to industrial networking and data center infrastructure, the company is an indisputable giant in this segment, with a market share of over 45% in ethernet switches. Gartner consistently crowns it as the lead in wired and wireless infrastructure.
During its third quarter results two weeks ago, the company posted a robust performance across the board, in the face of headwinds such as inflationary pressures, supply chain issues, unpredictable market dynamics, and economic uncertainties, among other things. We see this as a testament to Cisco’s products and services, which are still the backbone of networking infrastructure across enterprise organizations.
In addition to this, the company is now a sizable player in the hyperscale and AI markets, with its Silicon One Architecture, which is known for its efficient power consumption, which is crucial for hyperscale. Its recent acquisitions of ThousandEyes and AppDynamics have helped further bolster its profile in the observability space, which has since grown to become a vital element of the hybrid work environment. What is hyperscale? Hyperscale describes a system or technology architecture's ability to scale as demand for resources gets added to it. Examples of hyperscalers are Amazon AWS, Microsoft Azure, Google GCP, Alibaba AliCloud, IBM, and Oracle. As you can see, Cisco is right smack in the middle of this huge growth market.
Recurring Revenue
One reason Cisco has continued to underperform its big-tech rivals is its overreliance on hardware. In general, hardware companies come with a lot of baggage and are more prone to macro headwinds such as the present supply-chain constraints and inflationary pressures. Excepting Apple, hardware is a tough spot to be in this day and age.
Over a decade ago, Cisco recognized the importance of this and has since consistently strived for and witnessed a transition towards services and recurring revenues throughout its product range. While hardware still remains at the core of its offerings, starting in 2012, the company has quietly transitioned into a machine for services and recurring subscriptions, and this is precisely what our investment thesis is currently based on.
This was the logical next step for the company in order to build steady revenues. After all, even at large enterprises, it is rather rare to upgrade switches, access points, and firewalls on a regular basis. This transition has since paid off handsomely, with Cisco reporting monumental growth in subscription revenues, and in increasing remaining performance obligations, at $6 billion and $17 billion, respectively.
This shift has fundamentally altered the outlook of this stock, from being a low-margin peddler of utilities to a scalable, predictable, and largely low-overhead operating model. This shift further makes the company more resilient in challenging times, making it less prone to macro shocks, as no matter how dire the situation gets, large enterprises are unlikely to scale back on their wireless infrastructure.
Risk Factors
While this decade-long transformation has been off to a great start, it is not without its risks, or at least certain presumed risks. In recent months, investors have grown increasingly concerned about the company losing market share in its core networking business. Its well-known customers have been leaving in droves in favor of competitors such as Juniper Networks and Arista Networks.
This, however, is largely overblown in our opinion, as the company, being the dominant player in the market, is more prone to macro shocks, and will further bear the brunt of most competitive pressures as opposed to players with a smaller share of the pie. As a result, the stock has remained under pressure over the past few months, but things will subside as better sense starts to prevail.
Financial Analysis
The last four years of revenues have been solid, but flat. The company hit $52 billion in 2019 and then was hurt by the pandemic in 2020 and 2021 reporting $49 billion and $50 billion respectively. Fiscal 2022 ending in July last year saw $51.5 billion, and the company did $14.7 billion in the quarter ending April 30th, 2023, giving it a run-rate of $59 billion. The company is quite profitable, producing $4.1 billion in profits last quarter, a profitability rate of a huge 28% after tax. Very strong. Guidance: The company has predicted future growth rates of revenues at 15%, earnings per share of $1.05 for the quarter, and $3.80 cents for the full year ending July 31, 2023.
From the company in its recent quarterly report: Capital Allocation -- In the third quarter of fiscal 2023, we returned $2.9 billion to stockholders through share buybacks and dividends. We declared and paid a cash dividend of $0.39 per common share, or $1.6 billion, and repurchased approximately 25 million shares of common stock under our stock repurchase program at an average price of $49.45 per share for an aggregate purchase price of $1.3 billion. The remaining authorized amount for stock repurchases under the program is $12.2 billion with no termination date.
Icing On The Cake
Cisco’s core business, products, and fundamentals are beyond reproach, and now comes the icing on the cake, which is the company’s generous capital returns program. Since instituting its dividend program in 2011, it has been increased consecutively for 11 years, marking a 550% increase as of today. This represents an annualized yield of 3.1%, with a payout ratio of 43%, the best among the tech giants.
In addition to this, the company is all the more generous when it comes to its stock buybacks, having repurchased nearly 25% of its total shares outstanding since the end of 2013. During its recent third quarter results, the company similarly announced $1.6 billion in dividends and $1.3 billion in buybacks, with a further $12.2 billion in repurchase authorizations pending, with no expiration date mentioned.
All of this shows management’s confidence in the company’s steady cash flows, especially as it transitions to the subscription-based model. On top of this, the company has made remarkable strides when it comes to profit margins and free cash flow yields, in the face of substantial macro headwinds, ranging from inflation, supply issues, and waning demand.
BMR Take
Cisco is an outlier among the big-tech giants, trading at under 4 times sales, and a mere 12 times its free cash flow. During its third quarter results two weeks ago, the company posted a handy beat on estimates, with $14.6 billion in revenues, up 14% YoY, and a profit of $4.1 billion, or $1.00 per share. This was in addition to the boost in guidance figures, and yet the stock received a somber reception when the markets opened the following day. The company has $23 billion in cash, up from $19 billion last year, and less than $10 billion in debt. Cash Flow from Operating Activities -- $5.2 billion for the third quarter of fiscal 2023, an increase of 43% compared with $3.7 billion for the third quarter of fiscal 2022.
All of this points towards substantial coiled potential that is just waiting to be released, apart from the robust technical factors, with the RSI already above 75 and continuing to gain strength week after week, following the results. The old is forever new again. We believe we have found a diamond in the rough and we will be rewarded in the company years with the continued growth of big tech, electronics, wireless, computing power, networking, mobile and the like. Or, we could have just said we believe in Moore’s Law. Long live Gordon Moore’s legacy.
Added to our Long Term Growth Portfolio today, our initial Target is $60 with a Sell Price of $41. But we can see the day when Cisco hits triple digits.
by Todd Shaver | Feb 5, 2023 | Instant News Flash
Don't Believe The "Uninspiring" Part
Retail giant Amazon ($103) suffered after reporting its fourth quarter results last week even though $150 billion in revenues came in up 9% YoY compared to $137 billion a year ago. Even so, the company only posted a profit of $300 million or $0.03 per share, a sharp decline from the $14.3 billion or $1.39 per share it posted a year ago. This was a mixed quarter, with a beat on the top line, and a huge miss on consensus estimates at the bottom.
The company’s slowest ever quarterly growth in its 25-year history, coupled with a weak guidance for the upcoming quarters led the stock down by over 8%. Amazon was faced with a broad range of headwinds during the quarter, taking a $5 billion hit to the top-line from unfavorable foreign exchange rates, followed by supply-side issues owing to persistent lockdowns in China that have since come to an end.
Amazon’s full year figures were interpreted as equally "uninspiring," with revenues at $514 billion, up 9% YoY, and a loss of $2.7 billion, or $0.27 per share, against a profit of $33 billion, or $3.24 per share during the same period last year. This was mostly the result of a $12.7 billion valuation loss from its stake in Rivian Automotive during the year, along with the excess capacity the Online Commerce side of the company acquired during the pandemic and is now winding down.
During the quarter, Amazon Web Services once again led the way when it comes to sales growth and profit contribution. Revenues from the segment stood at $21.4 billion, up 20% YoY, with a profit of $5.3 billion, flat from the year before. This, however, marked a substantial deceleration from previous years, and came in below analyst estimates of 28% YoY growth.
AWS growth has been slowing down since 2015, in the face of saturation and rising competition, but things fared worse than expected during the quarter, as most enterprises across the world have started to cut back on cloud and tech spending in the face of broader uncertainties. This trend is expected to continue this new year, as the global economy sits firmly on the precipice of a recession.
Amazon had a few bright spots in its quarterly results that still anchor its broader, long-term growth story. This mainly pertains to its burgeoning advertising business which posted 19% growth YoY, while Google’s and Meta’s platforms struggle with a slowdown. This relatively new service already makes up 7% of the global digital advertising market, with a long multibillion-dollar runway ahead.
The stock has witnessed a pullback of almost 50% since its peak of $185 in November 2021, and trades at a perfectly reasonable two times sales. The company is yet to deliver value in the form of repurchases or dividends, but this will change as the economy continues to grow and its high margin services business continues to flourish. With nearly $60 billion in cash, $165 billion in debt, and $40 billion in cash flow, this company is a force to reckon with.
Our Target is $205 and we would never sell the stock. Amazon has continued to deliver exceptional value to consumers across many fronts, with its Prime streaming service continuing to gain traction, plus new partnerships commenced with HBO and Discovery during the quarter. Yes, the company had a rough time last year, but the company is a leader in retail and groceries, as well as the Cloud, and they continue to launch newer, high margin businesses such as healthcare, financial services, and supply-chain management, among others. Management will do everything in its power to remain at the top of its game and thrive in the future of world commerce. We believe in this company.
by Todd Shaver | May 13, 2022 | Aggressive Portfolio, Research Report
Asana (ASAN: $24)
Coverage initiated May 13, 2022 at $24 in the Aggressive portfolio
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.
Asana is becoming increasingly popular as an enterprise-level work collaboration solution. The company's platform enables teams to orchestrate daily tasks and strategic initiatives, and manages product launches, marketing campaigns, and organization-wide goal settings. The stock has had a rough couple of months, dropping 85% from its peak of $146 in November. It is trading at its IPO price of $21 during its direct listing in late 2020 and as you know, investors have fallen out of love with fairy tale tech growth stocks that so far haven’t turned a profit. And note that Asana is not planning on being profitable this year.
Over the course of its six quarters as a publicly traded company, Asana has consistently delivered impressive growth rates and operational metrics, producing YoY revenue growth in excess of 50% each quarter. While the company still loses money, its losses as a percentage of revenue continue to decline, from 125% of revenue in 3Q21, to 35% in its most recent quarter. Their next earnings date is June 2.
We expect the company to be turning corners in 2023, driven by strong revenue growth and improving profitability margins, coupled with substantial insider buying in recent weeks. Given the increasingly distributed nature of work at organizations across the world, Asana helps provide a semblance of normalcy, which explains its growing popularity in the workplace.
Business Overview
Founded in 2008 by Mark Zuckerberg’s famed Harvard roommate and Facebook co-founder Dustin Moskovitz, Asana is an SaaS* tool for workplace collaboration, communication, and project management. Even though it was hardly a groundbreaking innovation at the time, Asana quickly gained traction among small teams, freelancers and startups owing to its intuitive interface.
*Software as a Service
Asana’s core premise was that an average knowledge worker spends nearly 60% their time “on work about work”; that is planning for meetings, communicating about work, and dealing with context switching*, without actually accomplishing any meaningful work. The platform enhances productivity by integrating all aspects of work and communications at one place.
*the tendency to shift from one unrelated task to another
Over the years, Asana has packed its platform with powerful features such as forms, workflow builders, the Work Graph data model, and approval systems, along with a robust admin system, APIs, and third-party integrations, effectively making its way from a niche tool for small teams and startups to an enterprise workflow solution used by Fortune 500 companies. What started off as a simple project and task management solution, is now a full-fledged solution to orchestrate work across an enterprise. With a relentless focus on optimizing workflows, reducing friction and boosting productivity, the company is employing machine learning, along with the Graph Workspace that allows searches, filters, and algorithms to help organizations unlock value in their processes.
Asana has successfully executed the “land and expand” business model, with its freemium pricing helping sign up 35 million registered users, out of which 2 million have been converted into paying customers. Not only does this large user base provide the company with crucial data on challenges faced by teams and organizations, it also represents significant untapped monetization capabilities.
The company has witnessed stratospheric growth over the past two years, driven by strong structural tailwinds arising from the pandemic and the resulting shift towards hybrid and remote work. At the time of its listing in 2020, the company had just 82,000 paying customers; now that figure stands at 114,000, including marquee logos such as Vodafone, Google, NASA and Uber.
Over 83% of customers surveyed in recent months agree that Asana improves job performance, with 77% agreeing that it saves time. The overall dollar-based net retention rate stands at 120% in its latest quarter, with the retention rates for customers with annual spends exceeding $5,000 and $50,000 at 130% and 145%, respectively, which speaks volumes on the platform’s value proposition.
Asana’s platform and products have received a series of honors and recognitions over the past few months, being named a leader in the IDC Marketscape Worldwide Collaboration and Community Applications vendor assessment. It was also recognized by Fast Magazine’s list of Brands That Matter, followed by Inc. Magazine’s list of Best-Led Companies 2021.
As the company continues to build on its work management capabilities, it will increasingly become a mainstay for organizations around the world. As it ingrains itself in the digitalized workflows of organizations, the resulting network effects will propel its next round of growth, all the while keeping competitive forces at bay.
Financial Analysis
In its most recent 3Q22 earnings, the company reported another quarter of stellar revenue growth at $110 million, up 70% YoY, compared to $70 million a year ago. Despite posting a loss of $43 million, or $0.23 per share, against a loss of $38 million, or $0.34, it beat estimates across the board, with plenty of strength on other key metrics.
The total number of paying customers grew by 7,000 during the quarter, to reach a total of 114,000; the number of customers with annual spend exceeding $5,000 grew 58% YoY to 14,000; and the number of customers with annual spending exceeding $50,000 grew to 740, up by a mammoth 130% YoY. The total number of paid users on the platform reached 2 million for the first time. Asana has a sizable RPO or remaining performance obligation to the tune of $190 million, up 87% YoY, which should be realized over the next few months.
Asana witnessed significant improvements in gross margins, which stood at an impressive 90% during the quarter. The bulk of the company’s expenses arise out of research and development, followed by marketing, and general administrative expenses, amounting to a total of $160 million during the quarter. Considering the rate of revenue growth in recent quarters, the company remains on the cusp of operating profitability.
The company ended the quarter with $340 million in cash, and $250 million in debt. It projects revenues for 4Q22 at $105 million, representing YoY growth of 54%. It is projecting a loss of $52 million, or $0.28 per share. Even with the negative cash flow at $30 million during the quarter, the company has a sizable runway of cash reserves to keep it afloat, with plenty of options to raise additional funds if needed.
Competitive Analysis
A key concern among investors is the fierce competition in this space, which includes the likes of Monday, Atlassian, Trello, and even industry bellwethers such as Salesforce.
The biggest trump card on Asana’s side, however, is its massive user base, the envy of its existing competitors and newer entrants. The company is capable of tracking and maintaining heaps of user data to guide its future developments and capabilities, all the while tapping new trends and opportunities, and deploying solutions to its captive user base before competing firms can gain traction.
Asana is no longer in the project management space - it is a leader among work management platforms. Given the company’s obsession with design, user experience, and intuitive interfaces, it has a significantly lower learning curve compared to other platforms, while still offering similar levels of customization and sophistication as required.
BMR Take
Given Asana’s growing traction in this niche, and the massive addressable market, comprised of 1.2 billion knowledge workers throughout the world, expected to be worth $32 billion by 2023, this company’s growth story is just beginning. Even with the pandemic receding, there are strong secular trends pointing towards long term remote and hybrid work becoming the norm.
While there are many companies working to address this segment, Asana is clearly the winner when it comes to reach. The pecking order in the long run ultimately comes down to which company does the best in keeping up with the evolving market, and given Asana’s background of execution, we have plenty of reasons to favor it.
Asana currently trades at less than 10 times sales. It is relatively cheaper compared to competitors like Monday, trading at 12-15 times sales. These valuations are not at all expensive when you consider the extraordinary YoY growth rates experienced by these companies.
Taking all of this into consideration, Asana clearly shows a lot of promise, and given its market cap of just $3.8 billion, it has plenty of runway ahead to generate value for investors. The company’s shares are seeing plenty of activity in recent weeks, triggered by insider buying, namely the founder and CEO, Dustin Moskovitz, buying $1.1 billion worth of his company’s stock in the last year. As Peter Lynch said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” Moskovitz’s aggressive buying in recent months, and his current holding estimated at 17% of the company, means his interests are perfectly aligned with shareholders. We expect plenty of fireworks in the future of this company, and we are excited to be a part of the ride.
by Todd Shaver | May 12, 2022 | Instant News Flash
Time To Exit
Online consumer finances platform Sofi (SOFI: $5.30) released its first quarter results early this week, reporting $330 million in revenues, up 68% YoY, compared to $196 million a year ago. The company posted a loss of $110 million, or $0.14 per share, against a loss of $178 million, or $1.61.
Despite beating analyst estimates on top and bottom lines, and a raise in guidance figures for the second quarter and the full year, the stock tanked following the results. This can mainly be attributed to the accidental early release of the figures due to a human error, which caused the stock to halt trading for nearly three hours; an unpardonable offense in light of recent market conditions.
Sofi’s business and fundamentals remain as robust as ever, adding 408,000 new members during the quarter alone, up 70% on a YoY basis, bringing the total to 3.9 million, followed by 690,000 in new product, ending with nearly 5.9 million total products across its massive catalog of financial products, an increase of 84% YoY.
Apart from this, the company continues to lose money, and as we’ve seen over the course of the past few weeks, the market has lost all patience when it comes to companies that are losing money. With even profitable peers like PayPal and Upstart being obliterated due to a slowdown in growth, we expect Sofi Technologies to be a lot more fragile, especially with the steady rise in macro headwinds in recent months.
We love the company but can't fight the market mood. It truly takes results that are better than "better than perfection" to get any kind of traction on Wall Street right now. These are staggering numbers and extremely cheap at barely 2X 2023 sales targets, but mean nothing right now. It would take something monumental for Sofi to get out of this rut. Until that happens, there's no urgency in buying or even holding on.
Of course, one could make the argument of adding more at this level. But that's for investors with real conviction and an eye on the future. For now, the Sofi balance sheet looks a little stressed ($500 million in cash against $4.2 billion of debt) and it's time to look toward our own cash reserves. With this in mind, we are removing this stock from our portfolio. The company has great potential and is doing great things. The stock, sadly, is not.
