My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

"New Tech" / WFH Companies, Week 1

DISCLAIMER: Below are my opinions on three stocks: MTCH, PTON and PINS. I am not a research analyst or a registered investment advisor, and the information in this article is not a recommendation to buy or sell shares. It is just my two cents. In the spirit of full disclosure, I own shares of MTCH and PTON.


As earnings season kicks into full gear and the US equity market feels heavier, there is perhaps no better time to profile a group of relatively young companies that have had rather remarkable share price performance in the last year or so. Here is the list of companies I will be discussing in the coming weeks:

These companies have strong underlying businesses and are more often than not “disrupters”, having identified and developed business models to take advantage of certain macros trends shaping the world today. Many of these companies have also performed particularly well since the advent of the pandemic, which accelerated trends already occurring, like the growing use of social media and migration from “bricks & mortar” retail stores to e-commerce (GameStop aside!). Some of the companies have in fact only listed in the last 12-18 months, and most are still losing money on the bottom line. Many are also cash flow negative and could even face issues with access to capital should investor markets become less receptive (relevant given their cash burn rate). These attributes might cause investors to scratch their heads and wonder how the shares of these companies could have possibly doubled or tripled (or increased even more) in only a few months. The fact that the pandemic still looms large makes the incredible appreciation even more disconcerting. However, the fact that the shares of these companies have far outperformed the S&P 500 has certainly been earned as the growth by most metrics has been exceptional.


It must be acknowledged, of course, that the underlying macro environment has been extremely benevolent for risk assets like equities. The Federal Reserve is showering the US economy with enormous amounts of ongoing liquidity (i.e. QE) and has ensured that interest rates remain at record low levels, whilst the federal government has been equally accommodative by delivering two large rounds of fiscal stimulus to the US economy with another pending and likely at some point.


In determining what the “right” valuation might be for these companies, conventional fundamental analysis works poorly in most cases. Try as you might, traditional valuation metrics – like P/E ratios – simply don’t work for young, disruptive and fast growing companies like these, which are experiencing rapid customer growth and top-line revenues to match. Have no doubt – there is a certain amount of faith needed to buy these stocks at these valuations. To be even more clear, not all of these companies are on my own target list. However, there are enough in the 20 that I will present that are attractive should there be a market pullback or if the companies stumble (for understandable, short-term reasons) on this round of earnings releases. Also, it is important that in buying the stocks, you maintain a long-term perspective. These stocks are all particularly vulnerable to substantial downside corrections should overall risk sentiment change, and rest assured, it eventually will. Market gyrations should not affect the bright future for most of these companies assuming they stick to their strategy and remain focused on their business, recognising that the ride could be bumpy at times. As an anecdote, I mentioned to a friend the other day that when #AMZN looked expensive in the early 2000s and #FB the same when it listed in 2012, you could have walked away because the valuations didn’t work. However, investing in these companies was more about the business concept, the market position and the vision of management. Let these sorts of principals also influence your decisions in determining your interest in one or more of this interesting group of companies that I will present on a very “high level” in the coming weeks, because one or several of them might deserve a modest allocation in your portfolio.


My intent is to present a group of these companies at the beginning of each week, sequenced in groups based on when their earnings will be released. Here is the list of companies, organised by date of earnings release.

For this week, I am going to briefly discuss Match Group, Peloton and Pinterest, all of which release earnings this week. The chart below highlights some of the headline operating data and share price information for these three companies. At the end of the second table, I have included consensus sales growth and earnings for 4Q2020 so you can track these at release, along with FY2021 projected earnings and revenues for each company, very relevant in supporting the valuations of these companies.


Match Group Inc (Nasdaq: MTCH, investor website here):

Of the three companies that I am covering which report earnings this week, MTCH is the oldest as far as being a listed company (IPO in 2015) and has by far the most attractive operating metrics and cash flows. The company is one of the few I will be discussing in the coming weeks that is bottom-line profitable. MTCH is also one of the few of the “highfliers” that has public debt ratings (Ba2/BB), enabling it to access capital in the debt capital markets. Access to the capital markets is important for MTCH because it is highly leveraged from a balance sheet perspective, although not from a cash flow perspective (net debt-to-adjusted EBITDA of 3.5x).


With over 10 million subscribers, MTCH has a large stable of on-line dating apps, offered in 40 languages. The company has an international presence. MTCH is perhaps best known for its Tinder app, but it also operates a slew of other apps, some more niche-oriented that are focused on location of users or demographics, including Hinge, OurTime, and okcupid. The company has an informative and easily digestible presentation on its website that you can find here (dated August 2020). At the onset of the pandemic, investors weren’t sure how lockdowns and social distancing would affect on-line dating, and the stock slumped to below $40/sh at one point (March 18th 2020). Customers and ARPU held firm in 2Q2020 but increased significantly in 3Q2020 (along with revenues and EBITDA), illustrating that in fact on-line dating seemed to be getting a boost from the pandemic. There is competition, from – amongst others – FB (“Facebook Dating”) and Blackstone-backed Bumble, which is preparing for an imminent IPO (see FT article here).


Most analysts seem neutral on MTCH, although attention is likely to intensify depending on the valuation of Bumble in its IPO (expected EV as high as $8 bln). Motley Fool has MTCH on its 10 recommended stocks to own now, a list on which that the company has been on and off for several years. I remember it first being recommended at $15/share! The company’s shares are well off their highest intraday level of $159.85 on Jan 13th 2021. Amongst 16 analysts reporting targets to #YahooFinance, the average price target for MTCH is $153.17. MTCH missed its earnings target in the 2Q2020 but beat both earnings and revenue targets in 3Q2020. In summary, MTCH has a strong and entrenched client base, global presence and super-attractive operating margins in a low capex business. The company did well pre-pandemic, so it is much more than a pandemic-beneficiary. It is one of the more mature companies I will discuss. The company will release its 4Q2020 earnings on Feb 2nd after the market closes.


Peloton Interactive Inc. (Nasdaq: PTON, investor website here):

I wrote about PTON (along with SHOP) in an article in my blog on Nov 10th 2020, which you can find here. It is also the time I bought PTON, on a day when the Pfizer vaccine was announced and the great reflation trade took hold, pushing nearly all of the WFH companies to sizeable loses (10%-20%) as cyclicals reclaimed centre stage. Rather than repeat what I wrote in early November, I encourage you to go back to my blog and read the article because all of the salient points regarding PTON are mentioned in that post. Since then, Peloton has continued to struggle with its manufacturing, clearly a bottle neck illustrating that it cannot keep up with customer demand for new bikes. This could lead to brand damage if it continues, as there has been a growing crescendo of customer complaints about failed or late deliveries. To address its lack of sufficient manufacturing capacity, PTON announced on Dec 21st, 2020 that it would acquire Precor, a US-based but internationally focused developer and manufacturer of exercise machines to gyms and hotels, for $420m cash (note: PTON had around $2 bln cash on hand as of Sept 30th). The acquisition will close early 2021 and should help alleviate concerns regarding PTON’s ability to meet the strong demand for its products. The other question potentially dogging PTON will be “can it continue its amazing growth as the pandemic winds down eventually?” There’s little debate that the lockdowns and gym closures have benefitted PTON, but the fact is that the company was already gaining traction before the pandemic. Think of it like a streaming company (say NFLX) – once you subscribe and are hooked, the likelihood of cancelling your subscription is relatively low, visible in the company’s very low churn rates (subscription churn in 1Q21 of 0.65%). Connected fitness subscriptions were 1.3m at the end of 1Q21, an increase of 22% from the prior quarter. PTON also became operating and bottom line profitable in the quarter ended June 30, 2020 (4Q20) and has sufficient liquidity on hand to manage through its growth phase, at least for now. Having said this, “staying power” is the major issue for the shares, because PTON has to deliver strong numbers in coming quarters to justify its valuation of $40 billion.


I have never seen PTON on the Motley Fool top 10 recommended list, although scanning through some of their articles, the stock advisory service seems to be generally bullish on PTON, especially following the acquisition of Precor. The PTON equity summary score according to StarMine (from Refinitiv) is 8.6, or bullish, with only USB having a “sell” rating on the shares. The company is off its intraday high (Jan 14th 2021) by nearly 15%. YahooFinance reports that 26 analysts on average are targeting a share price of $153.69. PTON has positively surprised now for two quarters running, beating its earnings estimates. No conventional method of valuation works, but the company clearly has operating momentum and its products are gaining broader and broader appeal. Assuming that the company stays on track to deliver $4 billion of revenues this fiscal year (ended June 30 2021), then at just over 9x revenues, it looks relatively attractive still compared to other highfliers I will present. PTON will report earnings for its 2Q2021 after the market closes on Feb 4th.


Pinterest (NYSE: PINS, investor website here):

Of the three companies in this article, PINS is the one that I am least familiar with. PINS is a social media site that allows users to collect and organise content e.g. photographs, recipes, articles, etc., and organise them with “pins”. The company generates revenues from digital advertising. The company has one of the best click-through (conversion) rates of all social media sites, far better than Facebook and Instagram. The company was initially hurt by the pandemic as advertising waned, but then became a pandemic beneficiary as people spent more time on-line and advertisers returned as the initial lockdowns ended. The value proposition for PINS is the opportunity for the company to significantly grow its ARPU in international markets in the quarters ahead, where it actually has significantly more users. ARPU in international markets is only $0.21, compared to $3.85 in the US!


Compared to the other two companies I have discussed in this article, PINS is the smallest by revenues and makes the largest losses. It is also the one with the widest variation between actual and adjusted EBITDA and actual and adjusted net income, most of the difference of which is attributable to non-cash compensation in the form of stock and options.


PINS is currently on the top 10 buy list for Motley Fool, the third time it has been on the last since last October. The PINS equity summary score according to StarMine (from Refinitiv) is 7.1, which is bullish. I scanned through some analysts’ reports, and those bullish on the stock seem to have targets of $80-$90/share. The average price target of 26 analysts on YahooFinance is $75.15/share. PINS beat its earnings estimates in the last two reporting periods. Revenues have been steadily improving, and operating losses and bottom line losses have been diminishing the last three quarters. The share price is 10% below its intraday high (Jan 13th 2021). PINS will announce its earnings on Feb 4th after the market closes.


Conclusion: I openly acknowledge that I know the least about PINS, mainly because I do not own the stock and am not a user of their website. For this reason, I feel less positive on PINS than about PTON or MTCH, simply because I lack a strong feeling on improvement of PINS’ top line growth driven by increasing international ARPU. PTON needs to sort its manufacturing bottleneck. The acquisition of Precor should help enormously in this respect. One thing is certain – the company has a growing and devoted cadre of customers / users, although time will tell how the end of the pandemic will affect the usage of its equipment and its growth. In fact, PTON’s valuation metrics do not look unreasonable compared to some of the other companies on my list, perhaps because investors expect growth to moderate post-pandemic. MTCH is the most profitable of these three companies by a wide margin, although it will grow the least rapidly in the future. It is more mature with consistently strong cash flows, and its performance is proven both during and before the pandemic.


Although somewhat (admittedly) arbitrary and based on the 52-week trading range, I would conclude short-term that: MTCH looks attractive at $130-$135/sh, PTON at $135/sh, and PINS at $50-$55/sh. (This is not a recommendation to buy or sell stock in these companies.) As a long term "buy & hold" investor, I prefer MTCH and PTON over PINS, and would not agonise over a dollar here or a dollar there.

 

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