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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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"New Tech" / WFH Companies: Week 5

DISCLAIMER: Below are my opinions on four stocks that are reporting earnings the week of March 1st 2021: ZM, LMND, SE and SNOW. 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 do not currently own shares of any of these companies.

This is the fifth instalment of my look at some “new tech / WFH” companies, consisting of four companies that will be reporting earnings this week: Zoom Video Communications (ZM), Lemonade (LMND), Sea Limited (SE) and Snowflake (SNOW). As a reminder, the 22

companies that I have presented or will be presenting their results this cycle are listed in the table to the left. These companies tend to be disrupters and most, but not all, have benefited from the pandemic. Some have been listed only recently, and most are still losing money on the bottom line (ZM exception). Three of the four of the shares of these companies (SNOW exception) have outperformed the S&P 500 YtD. 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 (as it did suddenly last week), you need to take a long-term view on the attractiveness of each company if you are to consider investing in any of them, because you might be in for a rough ride.

Last week I discussed six other companies: Square (SQ), TelaDoc (TDOC), Nvidia (NVDA), Etsy (ETSY), Airbnb (ABNB) and DoorDash (DASH). Four of the six companies beat their consensus earnings targets, with TDOC and DASH falling short. I provided an update on the results of last week’s high flyers which you can find in the comments section of the blog post here (scroll all the way to bottom).

At the end of this article following the discussion, I have included two tables which have information about each company’s financial results and share performance. Analysts’ consensus sales and earnings for 4Q are included towards the bottom of the second table so that you can track how the companies’ actual results compare to analysts’ expectations. The table also includes FY2021 projected earnings and revenues for each company. These are critical when listening to and evaluating forward guidance, because they form the foundation of the lofty valuations of these companies.

Both ZM and SE delivered nearly 400% returns to investors in FY2020, and LMND’s stock has increased 4.3 times since its IPO last summer. SNOW has had a more difficult time, although the stock is still slightly higher than its IPO price in September. The least expensive stock (MV equity to revenue) is SE, which is also the stock trading nearest its all-time high (at 83%). SNOW and LMND trade at high multiples to revenues, signalling high growth expectations. ZM has a valuation in the middle of the others and is the only company consistently profitable. Aside from SE, all three of the other stocks are 30%-40% off their 52-week highs, so now might be a good time to look hard at the companies that might strike your fancy.

To provide a preview of these four company stocks before getting into my more descriptive views of the companies, the table below contains summary data for the four high flyers being discussed this week.

Zoom Video Communications (Nasdaq, ZM; investor website here):

Certainly you will have heard of and probably used Zoom’s video conferencing and possibly its webinar capabilities by now. ZM was a massive beneficiary of the pandemic as businesses were shuddered and meetings were held virtually through platforms like Zoom. The macro-trend question is how much of this will stick once the pandemic ends. Not all of it will, but my bet is that the use of video conferencing for businesses is here to stay, because it is efficient and reduces actual costs and opportunity costs of getting to and from in-person meetings. Unlike the other three companies being discussed this week, ZM has a profitable business model. It was running a positive bottom-line business prior to the pandemic, although the advent of the pandemic really pushed the business to a different level from an operational perspective – revenues have increased fourfold and net income fivefold since the quarter prior to the pandemic. StarMine (from Refinitiv) analysts (consensus) ranking is 9.8, considered very bullish. Motley Fool has been recommending ZM well before the beginning of the pandemic, and consistently since then – often twice/month – since June 2020. They have clearly had it right so far! ZM beat analysts’ consensus expectations the last three quarters, the last two significantly. The current consensus for 4Q21 (year ends Jan 31, 2021) is $0.79/sh, which would be a decline from $0.99/sh in 3Q21, but a significant increase compared to the same quarter of FY 2020. ZM also raised around $2 bln in a secondary equity offering in February (post this upcoming earnings period), and this will increase the company’s cash balance to around $4 billion. From a valuation perspective, ZM is nearly 37% off its 52-week high but is not cheap since revenue and profit growth will moderate after this growth spurt. In addition to moderating growth, another risk is competition. Competitors like FB, GOOGL, MSFT and CSCO see what ZM has done and are jockeying for position. Recall also that ZM had some security concerns with its software in the past that seem for now to have faded.

Lemonade (NYSE: LMND, investor website here):

Here is what Lemonade does, extracted from their investor website: “Lemonade offers renters, homeowners, pet health, and life insurance in the United States, contents and liability insurance in Germany and the Netherlands, and renters insurance in France, through its full-stack insurance carriers. Powered by artificial intelligence and behavioural economics, Lemonade set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything. Lemonade gives unused premiums to non-profits selected by its community, during its annual Giveback. Lemonade is currently available for most of the United States, Germany, the Netherlands and France and continues to expand globally.” LMND was started in 2015 by three individuals (none insurance professionals FYI) who had decided that there was an opportunity to disrupt the insurance business, which had not changed in many years. In addition, they felt that insurance generally was not customer-centric, and as result, was a much-loathed but required product by most consumers. The company is transparent about its business model – 25% of premiums go to the company (to pay administrative costs and eventually profits) and 75% are used to pay claims and purchase reinsurance. LMND buys reinsurance from Lloyds of London. If there are unclaimed premiums, they go to a non-profit selected by the insured. The claims process is simple and transparent, and it is based on AI using a sophisticated app that is “bot based.” If you have 30 minutes and want to hear more about LMND, check out this video from their website.

LMND went public on July 1, 2020 at $29/share, and the company’s stock reached $184/share intraday on January 11th, a 52-week high. However, since then the shares have fallen to $125.79/sh, around 32% off their highs of seven weeks ago. With a market cap of just over $7 billion, it is by far the smallest of the four companies I am presenting this week.

LMND has a relatively high short interest of 11.42% (Feb 11th), although this is less than half of what it was one month ago. With an enterprise value of 73x LFQ revenues and 64x expected next year’s revenues, to say the stock looks expensive compared to incumbent insurance companies is an understatement. Based on a couple of articles I read, the bears / shorts point to the fact that LMND is not so much an insurance company as just a slick, “gimmicky” consumer app. The company had $575 million of cash on its balance sheet at the end of September, so it has ample liquidity to fund the growth of its business in the coming quarters. However, LMND simply cannot afford to disappoint even the slightest because the shares will otherwise get hammered even more as its business model would face even greater scrutiny . Time will not be LMND’s friend, so the company needs to prove quickly that its innovative model has both staying power and can eventually be profitable.

Motley Fool has LMND on its distinguished list of 10 stocks to buy, recommended first in December and then subsequently on February 11th 2021. The StarMine (from Refinitiv) equity summary score (amalgamation of analysts’ opinions) has LMND rated 1.2 (on a scale of 1 to 10), or “bearish”. That’s quite a difference in opinion between analysts and Motley Fool but is enough to make this stock one I will likely avoid until I see them better consolidate their position and develop more of a track record. One more thing – LMND is a pandemic-neutral stock, so the winding down of the pandemic will have no influence on LMND’s business one way or the other.

Sea Limited (NYSE: SE, investor website here):

Sea Limited is an interesting company because it is one I had not heard a lot about until I saw its ticker a few times on Twitter, and then did some research. Founded in 2009 and listed in 2017, SE is a Singapore-based consumer internet company listed on the NYSE, with a portfolio of three businesses focused mainly on users in southeast Asia and Taiwan. SE’s three businesses include: 1. video games, providing access to on-line gaming via mobile devices and PCs (brand “Garena”), 2. e-commerce, with a site that provides sellers with logistics, payment and other value-added support (brand “Shopee”), and 3. digital payments provider offering cash transfers, digital wallets and other financial products (“SeaMoney”). To me, this sounds like Activision, Shopify and Square rolled into one, with the unique opportunity of being focused on the world’s fastest growing region, southeast Asia and Taiwan (but not mainland China). Chinese internet giant Tencent has owned 20% of SE since 2017. The issues are that whilst the gaming business is very profitable, the e-commerce and payments businesses are significantly money losing, pushing SE to bottom-line losses quarter after quarter. E-commerce is a more difficult business than for AMZN and BABA, because SE has to transport goods long distances over water to serve its customers, and this is costly. Apparently, the corporate structure of the company is also tricky (very convoluted, not uncommon for companies in the region). Lastly and perhaps most importantly, the best days of growth for SE might be in the past, because all three businesses benefitted from the pandemic. As the world continues to reopen, things like gaming and e-commerce will almost certainly experience more moderate growth, and this should create a downward bias on the shares, which are relatively expensive still. In spite of this list of issues, the stock has increased nearly 16 times since its IPO in 2017, and it increased nearly 400% in 2020. Whilst many high flyers have been hit hard recently, some down as much as 30%-40%, SE is down less than 20% from its 52-week high. SE’s stock has had the best YtD return of the four companies I am presenting this week. There are not enough equity analysts with views to allow StarMine to come up with a consensus rating for the stock. Motley Foolmentions the company from time to time but the stock has never been on one of its recommended lists. The company doesn’t look that expensive compared to 2021 expected revenues, but losses of $960 million and $1.46 billion in FY 2018 and FY2019, respectively, with this year expected to also show a loss of over $1 billion, gives me pause. Also, the company missed the last three quarters of earnings (not that it seemed to matter!).

Snowflake (NYSE: SNOW, investor website here):

SNOW was founded in 2012 and went public with much fanfare on September 16th, 2020 with an implied market value of nearly $70 billion at the close of its first day of trading. Based in California, the company is a cloud-based data-warehousing company that provides a litany of data and analytical services to its customers, using cloud-based hardware and software. My understanding of Snowflake’s services, having done some quick research, is that SNOW offers its customers user-friendly access to the cloud, offering more than enough bandwidth to store, retrieve and analyse data in more ways that most users can imagine. It has unlimited storage and is super-fast. All data is encrypted, so it is very safe for users. If you want to learn more, this article is good albeit slightly dated: “Introducing Snowflake: Cloud-Based Data Storage”. The technology is beyond my ability to understand it without doing much more work, which I have not done. The stock does not have enough analyst coverage to generate a StarMine ranking, but I checked Refinitiv (here), and of 25 analysts, one rank it a “strong buy”, eight a “buy”, and 16 a “hold”. There are no “sell” recommendations on the stock. Motley Fool does not actively cover the company, and it has never been on a top 10 list for MF. The company continues to have a high short interest of 15.74% of float. Personally, I think SNOW is a super company, and its cloud-agnostic approach to data storage and data management is innovative and disruptive. Its customer growth and retention data are also very strong. However, even though SNOW is 40% off its 52-week high, it is very expensive given it loses money – a lot of money – without a clear path (that I could find in my research) towards profitability. It is currently valued at 150x trailing 4Q revenues, and 66x expected FY2022 (year ended 1/31/22) revenues, the most expensive stock on this week’s list. The stock has lost 7.8% YtD, and as much as I like what the company does, it would have to fall a lot further to make sense as an investment for me.

Summary of companies presented this week: The first table below contains operating results for the four companies I am writing about that will release earnings this week. These include LFQ through Sept 30th 2020 for LMND and SE, and LFQ through Oct 31st, 2020 for ZM and SNOW. 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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