"New Tech" / WFH Companies: Week 3
DISCLAIMER: Below are my opinions on six stocks that are reporting earnings the week of Feb 15th 2021: APPN, FSLY, PLTR, ROKU, SHOP and TWLO. 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. I currently own shares of SHOP.
This is the third instalment of a look at some of the “new tech / WFH” companies, which includes six companies reporting earnings this week: Appian (APPN), Fastly (FSLY), Palantir (PLTR), Roku (ROKU), Shopify (SHOP) and Twilio (TWLO). As a reminder, the 23 companies that I will be discussing are listed in the table below.
As I mentioned last week, these companies tend to be disrupters and many have benefited from the pandemic. Some have been listed only recently, and most are still losing money on the bottom line. Nearly all of the shares of these companies have outperformed the S&P 500 recently. Valuing these companies using traditional valuation metrics is impossible in most cases, so you need to first get your head around what really makes these companies tick. Valuations aside, you might find one or more of these companies attractive should there be a market pullback or if one of these companies stumble (for understandable, short-term reasons) on this round of earnings releases. As these stocks are all particularly vulnerable to substantial downside corrections should overall risk sentiment change (and rest assured that it eventually will), you need to take a long-term view on the attractiveness of each company.
Last week I presented Uber and Lemonade, although subsequently, Lemonade officially confirmed its earnings in early March (rather than last week). I will revisit Lemonade then. Uber has mixed results vis-à-vis expectations last week, which I updated and discussed in the “comments” section of last week’s article, which you can find here: “New Tech” / WFH Companies, Week 2”.
At the end of this article, following the discussion of these six companies, I have included two tables which have company financial and share performance. Analysts’ consensus sales and earnings for 4Q2020 are included at the end of the second table so that you can track these at release, and the table also includes FY2021 projected earnings and revenues for evaluating forward guidance, very important to support the lofty valuations for these companies. Let me begin my looking at a graph that shows the relative performance of this companies since September 30, 2020, which is the date the last of the six (PLTR) went public, and a table with a few summary facts.
Palantir Technologies, Inc (NYSE: PLTR, investor website here):
Palantir is a software company that builds enterprise data platforms for use by organizations with complex and sensitive data environments. Its focus is big data analytics. The company’s business mix has been long-skewed towards business with the US government. It has a long history compared to many of these other companies, as it was started in 2003. One of PLTR’s best-known founding shareholders is venture capitalist Peter Thiel (PayPal, Facebook, etc.). The company is also unusual in that it decided to go public via a direct listing rather than an IPO, and this occurred on Sept 30th, 2020, with the stock opening at $10/share that day and closing at $9.50/share. There is limited historical information available on PLTR, as it reported 9-month but not quarterly figures for 4Q2019, 1Q2020 or 2Q2020. It is the best performing of the six stocks presented this week since the beginning of the year and is not heavily shorted. I never like companies that are overly dependent on government revenues, but part of the appeal for investors is that PLTR can realise strong growth as it expands its unique service offering to the commercial / private sector. The company also gets a fair amount of scrutiny and blame for being secretive and lacking disclosure, perhaps not entirely fair given its work with the U.S. government. There are also apparently issues with the company’s governance, which I did not dig into. PLTR had around $1.8 bln of cash on its balance sheet at the time it listed in late September and is expected to post a profit (adjusted) for 4Q2020. The shares are well off their highs should you have appetite for a company like this, although I do not consider it my cup of tea.
Twilio (NYSE: TWLO, investor website here):
Founded in 2008, Twilio's products allow businesses to integrate voice, video, messaging and email marketing into their customers’ apps and websites. Twilio’s software and applications are core technology for its customers. However, as a B2B focused company, it is not a name you will have heard much about outside of investor forums. It also has a bit of a mixed view amongst investors, with analysts generally bearish but stock services like Motley Fool being very bullish, with their first recommendation occurring around four years ago after the company did an IPO (June 2016), with the stock being recommended many times since. About three-quarters of TWLO’s revenues are generated on a per click revenue basis, with the remaining one-quarter being subscription-based. According to Motley Fool, the company serves 359 of Global 2000 customers, including the likes of Uber, Lyft, Yelp, eBay, Airbnb, Deliveroo, The American Red Cross, Marks & Spencer’s, QVC, Salesforce, and many other well-recognised companies. The company has historically been acquisitive, including most recently the acquisition of Segment.io, a market-leading customer data platform, for $3.2 bln (all stock, closed early November – press release here). In a nutshell, think “communications software” – TWLO helps its corporate users develop seamless digital interaction with their customer base. At 29.1x 2021 projected revenues, the stock is not cheap although relatively speaking, it stacks up well against the other stocks I am writing about this week. The company had $3.3 bln of cash on its balance sheet at the end of September. Adjusted EBITDA (mainly for non-cash comp) is positive, but the bottom line has been negative for some time although the company is expected to be profitable in 2021. TWLO beat consensus earnings every quarter this year so far. If I close my eyes and ignore the ridiculous valuation based on traditional metrics, this might be one to consider on any pullback, a possibility if for some reason they miss 4Q2020 consensus expectations. The company is trading not far from its all-time high.
Shopify Inc. (NYSE: SHOP, investor website here):
I wrote about SHOP last on November 10th, and you can find that article here. I was late in the game discovering this company, even though analysts and investor newsletter services like Motley Fool have been consistently bullish (and right). What has changed since I wrote about SHOP in early November? The only material thing from the company has been the announcement of its record sales on its platform over the US Thanksgiving/”black Friday” weekend – see company press release. The company had $6.1 bln of cash on its balance sheet at the end of September and has beaten quarterly consensus expectations the last four quarters. It is the only company I will present this week that is bottom-line profitable. SHOP caught the general market updraft since the beginning of the year (+28.6% YtD), which has pushed the shares to near all-time highs, a very rich valuation when looking at market value to expected 2021 revenues (47.6x). The bottom line is that SHOP is a favourite of mine, but I cannot see adding to my position at these lofty levels.
Fastly (NYSE: FSLY, investor website here):
Fastly is a cloud delivery company focused on Content Delivery Network, or CDN, which helps users view digital content more quickly. It also offers image optimization, video and streaming, cloud security, and load balancing services for its customers, all in an effort to enable websites to work faster and more efficiently in order to enhance a user’s experience. Fastly speeds up the internet experience by locating its servers closer to customers, so called on “the edge”, since the closer the servers are to customers, the faster applications work. The company was founded in 2011 and after many years of successful private fund raising, went public in May 2019. The company, like most others on this list, is not profitable. However, FSLY experienced a Q-o-Q sales decline between 2Q20 and 3Q20, very unusual for the high-flying companies on this list. The revenue decline was partially attributable to the fact that its largest customer – TikTok (10.8% revenues for 9 months ended 9/30/20) – was forced to remove its platform from the US during the quarter. Subsequently, ByteDance agreed to sell a minority interest in TikTok to Oracle and Walmart, although this agreement remains in limbo with the recent change in leadership in the U.S. Apparently, TikTok resumed operations and continues to operate in the U.S. (recent article here), awaiting a final decision from the Biden Administration. Of course, the company’s shares suffered as a result of the TikTok regulatory debacle, but still, the stock more than tripled in price in FY2020. FLSY shares have increased 16.8% YtD2021. Removing the TikTok noise, the fact is that the underlying customer trends for FSLY have remained solid. Its total customers, business customers, and the amount business customers are spending on FSLY services has shown solid growth Q-o-Q, and I see no reason this should not continue given the value of their services and the world’s migration to an ever-more digital world. However, investors and advisory services seem to feel otherwise. FSLY has the most bearish rating amongst analysts of any of the six companies I am discussing this week, according to from StarMine (via Fidelity), at 0.8 (scale of 1-10). It is not a Motley Fool selection because of its valuation, TikTok dependency and increasing competition from cloud giants like AMZN. I would reckon that FSLY has and will continue to face increasing pressure from much larger cloud players like Amazon CloudFront and Microsoft Azure CDN, and to me, this is by far the largest risk for FSLY. FSLY has an unusually large short interest as a % of float of 15.11%, perhaps not dangerous but still an indication that investors also believe that the shares are over-valued. The company’s shares trade at 28.5x revenues, and FSLY had $402 million of cash on hand at the end of 3Q20. This seems like a very binominal outcome to me – the shares will gap one way or the other post-earnings, but I doubt they sit still. I would like to better understand the competitive dynamics of FSLY but would otherwise consider this company if shares fell into the $90 area and depending on the update that comes along with 4Q20 earnings. However, one would need to carefully monitor the competitive playing field, as it will inevitably get increasingly crowded.
Appian (Nasdaq: APPN, investor website here):
Virginia-based Appian is a cloud company focused on low-code automation increasing using bots, AI and robotics. Its low-code automation platform enables businesses to create apps using little or no code. In layman’s terms the way I interpret APPN’s business is that the company allows its users to develop, maintain and update their software applications and websites without having to be coders. The company was formed in the early 2000s and went public in May, 2017, so the company has been around a while. APPN beat its earnings and revenue targets in 3Q20. The company is not profitable and had $251 million of cash on its balance sheet at September 30th. The company’s shares have been bid up very quickly in an environment in which its revenue growth is slowing, and part of this might be attributable to the fact that APPN – like WORK – would be an acquisition target for a larger SaaS company. Investors and analysts seem mixed. The company has the largest short interest of any company I am writing about this week (21.17% short % float). The consensus analysts’ rating from StarMine is 2.9, which is bearish. However, Motley Fool has APPN on its top 10 list, although it expresses concerns over valuation, too. I think the underlying revenue trends as far as subscription growth have been favourable but more volatile than expected. At 46x expected 2021 revenues, I would not buy APPN at these levels, especially since the company’s shares have had the largest gain YtD (38.2%) of any of the six companies I am profiling in this article.
Roku, Inc. (Nasdaq: ROKU, investor website here):
Roku is known for its digital media devices (i.e. streaming sticks and streaming boxes), which convert non-equipped TVs into smart TVs enabling access to a wide variety of streaming services like Netflix, Disney+, YouTube, Amazon Prime, Hulu, etc. It is a streaming device, not a storage device (so different than Apple TV). Some TVs also come with the Roku app already built in, including TCL (Chinese), Hisense, Enclave, Sound United and Bose. Roku offers some free channels and services, including its own Roku Channel, as well as subscription streaming services like Netflix. One of the major advantages of Roku is its consumer interface, which is considered top-of-class because it is sophisticated and easy to use. Roku is ideal for consumers who wish to “cut the cord” and end their reliance on cable TV providers. I read that Amazon (via Firestick) and Roku have about 70% of the available market for streaming devices. Roku is considered streaming service agnostic, as it focuses on devices without a nod towards any particular streaming company, which helps with its relationships with content/streaming companies like Netflix and Disney+. Roku has been around for some time. It was spun out of Netflix in 2007 and went public in September 2017. The company’s stock got absolutely hammered during the early stages of the pandemic, until investors recognised that it was a WFH company that in fact benefitted because of the pandemic. The company is mainly in the US (Roku TV 38% market share, per Protocol.com) and Canada (31% market share), so arguably, international markets represent huge potential. I looked at the operating metrics including number of active customers, streaming hours and ARPU, and all have consistently risen during the first three quarters of 2020. I see no reason why the 4Q20 will not show similarly strong underlying trends. The company was bottom line profitable in the 3Q2020 and ended the quarter with nearly $1.05 billion of cash on its balance sheet. Roku’s revenues come from its hardware sales, but increasingly from a combination of a cut of the streaming services it offers on is platform plus advertisements on its free channels. It is increasingly becoming popular as far as being embedded as the customer interface in smart TVs, continuing to disrupt the cable TV and becoming the digital go-to platform of choice. Motley Fool likes the stock, comparing its disruption capabilities to those of Amazon vs “bricks & mortar” retailers starting years back. StarMine consensus analysts have an average rating of 7.1x on the stock, a bullish rating. ROKU has shown some severe volatility in the past, but my instinct is that it is emerging as a clear winner with potential market growth ahead of it. At 26.3x projected 2021 revenues, it has the lowest multiple to sales of any of the six stocks I am discussing in this article. The company already released December subscriber growth, reaching 51.2 million subscribers at the end of the year (vs 46 million at the end of 3Q2020). Short interest is 2.73% for ROKU, at the low end of the usual 2%-4% for the high-fliers/WFH companies. I have a very difficult time not buying this stock, in spite of its amazing run already in 2021 (+41.2%), following an increase of 148% in 2020.
Summary of companies presented this week: The first table below contains principally operating results (generally LTM through Sept 30th 2020) for the six companies I discussed above, and the second table contains mainly stock data for these companies. Consensus earnings and revenue expectations for announcements this week are at the bottom of the second table.
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