Category: General Investing

Ser Jing and I manage an investment fund that invests in a number of software-as-a-service (SaaS) companies.

Over the past few weeks, a handful of them reported their quarterly earnings results. Here’s a quick summary of how they performed and highlights from their respective analyst briefings.

DocuSign Inc (NASDAQ: DOCU)

The leader in e-signatures posted a solid set of results for the quarter ended 30 April 2021. Revenue was up 58% year-on-year to US$469.1 million, billings grew 54% to US$527.4 million, the gross margin improved to 78%, and free cash flow more than tripled to US$123.0 million. DocuSign’s free cash flow margin (free cash flow as a percentage of revenue) is also now a healthy 26%.
To me, the most impressive part was that the company’s revenue grew 9% sequentially. This is a solid achievement considering that DocuSign’s last three quarters prior to the latest reporting quarter have been positively impacted by COVID-19. 

In the quarter ended 30 April 2021, DocuSign added 96,000 and 11,000 net new total customers and enterprise and commercial customers, respectively. These translate to respective sequential growth of 10.7% and 8.8%, and should set DocuSign up well for the rest of the year.

DocuSign’s CEO Dan Springer said the following in the company’s latest earnings conference call: 

“Since the start of the pandemic, DocuSign has helped accelerate access to healthcare, government, education, small business lending and many other services around the world. What began as an urgent need has now transformed into a strategic priority. And as a result, DocuSign has become an indispensable part of many organization’s business processes.

Put another way, once businesses usually transform their agreement processes, they simply don’t go back. We believe this trend will only accelerate as that anywhere economy continues to emerge.”

MongoDB Inc (NASDAQ: MDB)

The leading NoSQL database provider started its fiscal year 2022 with a bang.

For the first quarter of fiscal year 2022, revenue climbed 39% year-on-year to US$181.6 million and the company turned free cash flow positive this quarter (US$9.6 million) from a negative figure (-US$7.4 million) a year ago.

MongoDB also recorded sequential revenue growth of 5.8%, which should set it up nicely for the coming quarters as the company laps last year’s strong results. 

During MongoDB’s earnings conference call for the first quarter of fiscal year 2022, CEO Dev Ittycheria said, 

“As we look to the future, there are a number of reasons why we are bullish about our long-term prospects. 

First, we are seeing increased adoption, enterprise adoption of Atlas. In the first quarter, approximately two-thirds of new business won by our field sales team was Atlas, more than double the percentage from 2 years ago. Not only are our customers choosing more of Atlas, they’re building or moving mission-critical workloads onto Atlas, which is the biggest driver of growth of our more than 1000 six-figure customers.

Second, cloud partners are recognizing the value that MongoDB and Atlas bring to their own businesses. Using Q1 as an example, we had a record co-sell quarter with AWS, GCP and Alibaba. We are seeing increasing opportunities to expand ways we partner with cloud providers through both technical integrations as well as go-to-market initiatives to enable more customers around the world to derive the benefits of using MongoDB.

Finally, our C level customer conversations indicate that our application data platform strategy is clearly resonating in the marketplace. Customers increasingly tell us that they prefer to standardize on a general-purpose platform, rather than use a myriad of single function databases that add more cost and increase the complexity of running workloads in the cloud.”

Veeva Systems Inc (NYSE: VEEV)

Continuing the winning theme, Veeva, which provides a suite of cloud software solutions for the global life sciences industry, announced a good set of results for the quarter ended 30 April 2021. 

Revenue grew 29% from a year ago to US$433.6 million, operating income rose 47% to US$128.4 million and the company added 59 new customers to bring its customer account above 1,000. On a sequential basis, Veeva’s revenue grew 9.2%.

Veeva’s CEO Peter Gassner shared the following comments during the company’s latest earnings conference call: 

“Our level of partnership with the industry is noticeably increasing, and there are multiple reasons for this. With every quarter of customer success and reliable delivery, Veeva becomes a more trusted partner. Our expanding product footprint, with products such as CDMS, Safety, MyVeeva, and Data Cloud, also makes Veeva a more strategic partner. The move to a digital-first way of working is also making technology and data more strategic overall to our customers. And finally, our move to operating as a public benefit corporation is encouraging to our customers as they look to us for long-term partnership.”

Okta Inc (NASDAQ: OKTA)

Okta, the leading identity and account management company, reported a 37% year-on-year rise in revenue to US$251.0 million for the quarter ended 30 April 2021. The company’s current remaining performance obligation rose 45% year-on-year to US$899 million, setting it up nicely for the next 12 months. Okta’s free cash flow margin also improved to 21% from 16% in the same quarter a year ago.

Notably, Okta’s revenue grew by 7.3% sequentially, which shows that the company can still grow from its high base in the last fiscal year. Okta also added 650 net new customers in the quarter bringing its total to 10,650.

Okta’s CEO, Todd McKinnon, is bullish on the company’s prospects of becoming a primary cloud provider as it expands its capabilities and integrates with its recent acquisition of Auth0. He said the following in the company’s latest earnings conference call:

“Okta is well-positioned to become the standard for digital identity. The Okta and Auth0 platforms are made up of core technologies that are flexible, extensible, and incredibly customizable to make that spectrum possible. By building a platform that connects with everything and meets every identity use case, over time, we’ll push the technology ecosystem to be safer and create more value for everyone. Together, Okta and Auth0 create a powerful combination.

We’ve strengthened our position as the world’s leading independent identity cloud. We’ll create even more powerful network effects that will drive platform innovation, allowing us to better serve our customers with a broader range of use cases and audiences. And as a result, we’ll capture more of the massive and growing $80 billion identity market opportunity even faster. The world is still in the early stages of modernizing its identity infrastructure.

The secular trends I mentioned earlier that have been driving our business will continue to drive our business for years to come. With that as a backdrop, we’re establishing a new long-term financial target, which is a significant step-up from our prior FY ’24 framework. Given our market-leading position, unmatched technology portfolio, and the massive market opportunity, we’re confident that we can grow our revenue base to achieve $4 billion in FY ’26. With growth of at least 35% each year, along the way, we will continue to invest in driving product innovation and our go-to-market initiatives while targeting a free cash flow margin of 20% in FY ’26.”

Salesforce (NYSE: CRM)

One of the pioneers of SaaS business model, Salesforce had a strong start to fiscal 2022. Revenue was up 23% year-on-year to US$5.96 billion, current remaining performance obligation grew 23% to US$17.8 billion, while the weighted average diluted share count only increased 2.9%.

On a sequential basis, Salesforce’s revenue rose 2.4% which is decent as Salesforce has a seasonal sales cycle. The compant’s CEO Marc Benioff is as bullish as ever. During Salesforce’s latest earnings call, he commented: 

“Now, for fiscal 2022. I’m thrilled we are raising our revenue, our guide by $250 million to $26 billion. This is one of the largest raises we’ve really ever had. It represents 22% projected growth year-over-year. And we’re not just raising revenue. And again, thanks to Amy, we’re raising our operating margin to 18%. So that is incredible. And in a few years, we’re going to be doing $50 billion ($21.25 billion in 2020) and by the fiscal year 2026. So that is an incredible thing.”

He also touched on why he believes Slack will make a good addition to Salesforce. He said, 

“And this pending acquisition of Slack also. We’ve never been better positioned for the future. This is an all-digital, it’s an all work from anywhere world. It’s made our companies, Salesforce and Slack, more important to customers than ever. So bringing them together is so exciting. And once this merger is approved, we’re going to be able to build Slack and all of our products will all become Slack-first. It’s going to make our customers more productive.

We’re going to work with software companies on building incredible new capabilities like we’ve seen these amazing examples of what Slack can do. I’ll tell you we’re really excited about creating this number one enterprise applications company.”

Zoom Video Communications Inc (NASDAQ: ZM)

One of the biggest winners of the COVID-19 pandemic, Zoom continues to post excellent results.

It reported a 191% year-over-year increase in revenue to US$956.2 million in the quarter ended 30 April 2021. GAAP net income increased more than eight-fold to US$227.4 million and free cash flow increased by 80% to US$454.2 million. The free cash flow margin for the quarter was an industry-leading 48%.

On a sequential basis, Zoom’s revenue grew by 8.4%, allaying fears that customer-churn from the reopening of economies around the world would impact Zoom’s revenue growth.

Although Zoom’s growth is expected to slow from the incredible numbers seen in FY2021 (326% revenue growth), Zoom still expects total revenue in 2022 to be between US$3.975 billion and US$3.99 billion, compared to US$2.6 billion in FY2021. This translates to growth of 50% at the low end.

Zoom’s CEO, Eric Yuan, said in the company’s latest earnings call: 

“In a recent survey we conducted, 80% of U.S. respondents agreed that all interactions will continue to have a virtual element post-pandemic, and that figure was even higher in many of the other markets we surveyed. The hybrid model is here to stay, and Zoom Events will be an excellent solution for our customers who are looking to create and host company events with a versatile and powerful solution.”

Yuan also highlighted some big customer wins during the quarter, which demonstrates Zoom’s strong value proposition in the midst of heavy competition from the other tech giants that are trying to shoulder their way into the videoconferencing space.

Summary

It has, without doubt, been a great start of the year for the SaaS companies in our portfolio.

Although the amazing growth in 2020 is not expected to repeat, the above-mentioned companies continue to see strong secular tailwinds and are executing well.

Sequential growth from the last quarter also shows that these companies are continuing to grow and are experiencing minimal customer-churn despite the reopening of the economy.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Ser Jing and I currently have a vested interest in the shares of Veeva, Zoom, Salesforce, MongoDB, Okta and Docusign. Holdings are subject to change at any time.

With most major e-commerce companies having reported their earnings updates for the first quarter of 2021, here are some of the key themes I picked up and the companies that are winning in this space.

South Korea e-commerce growing fast – Coupang riding the wave

Korea may have one of the most mature e-commerce markets globally, but there is still plenty of room for growth.

During Coupang Inc‘s (NYSE: CPNG) earnings conference call for the first quarter of 2021, CEO Bom Suk Kim said: 

“Korea is a massive e-commerce opportunity. It’s the fifth-largest globally and grew at a 20% CAGR over the last five years, second only to China. And it’s the largest e-commerce opportunity not won by Amazon or Alibaba, but there is a broader play here.

Similar to China, Korea is leapfrogging the offline retail revolution. The US has more than 10 times the offline retail footprint per capita of Korea.

We believe we are at the centre of two revolutions, not just the transition from offline to online, but also a retail revolution that happened first offline in the US, but is now starting online in Korea. The market also boasts a highly connected tech-savvy consumer base with high mobile usage. We believe these structural characteristics create strong tailwinds for e-commerce that will lead to higher online penetration than other markets.”

In the first quarter of 2021, Coupang delivered total revenue growth of 74%, approximately three times faster than the overall Korean e-commerce segment. 

This growth is even more impressive when considering that the company lapped a COVID-induced spike in e-commerce demand in the first quarter of 2020, which started in Korea in late January 2020.

Personalised e-commerce on the rise – Etsy well-positioned

E-commerce activity for products that are customisable, handmade, or unique has grown faster than the e-commerce market in general.

Etsy Inc (NASDAQ: ETSY), which is a global marketplace for unique handcrafted products, saw its gross merchandise sales in the first quarter of 2021 grow by a staggering 132% from a year ago. For perspective, this was more than double Amazon’s 64% growth in third-party seller services revenue for the quarter. 

Etsy’s team has done an excellent job in driving traffic to its marketplace and building a two-sided network. Etsy CEO Josh Silverman commented in the 2021 first-quarter earnings conference call that Etsy is focused on building brand awareness, creating more buyer triggers, and creating in-app personalisations to help improve the buyer experience. 

Although Etsy’s management warned of slower growth in the latter part of 2021 due to difficult year-on-year comparisons, CFO Rachel Glaser remains bullish on the long-term prospects. She said the following in Etsy’s 2021 first-quarter earnings call:  

“We remain very excited about the opportunity ahead and believe that now is the right time for us to invest for growth. These investments primarily are in the form of people and marketing dollars. Our growth has vastly outpaced our hiring and we are leaving far too many great ideas on the cutting room floor. We’ve already added 100 employees in Q1 and intend to keep hiring throughout the year. So we have ample resources in time to impact the holiday season and beyond.”

Arming the rebels- Shopify 

Shopify Inc (NYSE: SHOP), which provides the tools for merchants to start an online shop, saw revenue growth of 110% in the first-quarter of 2021. Shopify’s revenue for the quarter was also sequentially higher than 2020’s fourth quarter, which is usually a seasonally stronger quarter.

Shopify’s merchants are growing fast. The company’s gross merchandise value soared 114% from the same period last year. Like Etsy, Shopify’s growth outpaced the revenue growth recorded in Amazon’s third-party marketplace services.

Shopify’s partnerships with Facebook and TikTok are also going smoothly. Harley Finkelstein shared the following comments during Shopify’s 2021 first-quarter earnings conference call:

“We are ushering in a new era of social commerce and helping more brands and consumers engage in the Digital Main Street. The number of shops actively selling on Facebook shops has more than quadrupled since Q1 a year ago, as well as the GMV through Facebook. While still small, the launch of Facebook shops in May of last year is clearly starting to make a difference here.

In Q1, we expanded our marketing partnership with TikTok internationally to an additional 14 countries in North America, EMEA, and APAC. So far, we’ve seen good traction in the adoption of TikTok in the U.S. since we launched the integration last October. And we recently expanded our Pinterest channel into 27 additional markets, opening discoverability and sales opportunities worldwide.”

Latin America e-commerce – Mercado Libre triple-digit Growth in GMV

Latin America continues to see higher e-commerce adoption. MercadoLibre Inc (NASDAQ: MELI), the e-commerce front runner in Latin America, reported a 114% increase in gross merchandise value (GMV) on a currency-neutral basis. 

MercadoLibre’s GMV grew 183%, 92%, and 114%, respectively, in its three core markets of Argentina, Brazil, and Mexico. The company’s logistics network is also steadily spreading its influence with more than half of MercadoLibre’s Brazil consumer packed goods being shipped from its own fulfilment centre.

The company’s product mix continues to shift towards big brands as MercadoLibre has put an emphasis on attracting global and local household name-brands. MercadoLibre’s Chief Financial Officer, Pedro Arnt, explained during the company’s 2021 first-quarter earnings call:

“In consumer electronics, for example, we have added partnerships with Panasonic, Asus and Intelbras, while our CPG portfolio now includes stores by JMacedo and Mondelez.

As a result, approximately 20% of our marketplace sales are already from Official Stores, an increase of 7 percentage points over the same quarter last year.

Overall product depth continues to improve, as live listings have reached almost 300 million listings this quarter, increasing versus Q4 in all major geographies. Part of this increase was driven by the growth of unique sellers in our marketplace, with almost 1 million total sellers with successful sales during the quarter.

We will continue to grow our already ample seller base, adding almost 200k new sellers to our marketplace this quarter.”

Southeast Asian E-commerce booming- Shopee and Lazada both reporting triple-digit growth

Its boom town for e-commerce in Southeast Asia. Alibaba (NYSE: BABA) reported that Lazada recorded another quarter of triple-digit growth in the gross number of orders. But while Lazada continues to grow, all eyes seem to be on Sea Ltd‘s (NYSE: SEA) Shopee, which since its launch in 2015 has quickly overtaken Lazada to become the number one e-commerce player in the region.

The number of orders on Shopee surged 153% year-on-year and even exceeded the orders seen in the fourth quarter of 2020, which is a seasonally busier period for commerce. Shopee’s gross merchandise value also increased by 103% year-on-year and 6% sequentially.

According to App Annie, Shopee ranked first across its core markets in Southeast Asia and Taiwan by  monthly active users and total time spent in-app on Android in the Shopping Category.

Shopee also recorded a gross profit in the first quarter of 2021, a welcome turnaround from its negative gross profit a year ago. Sea’s CEO, Forrest Li, commented in the company’s 2021 first-quarter earnings call:  

“To conclude, we believe that e-commerce penetration remains low across all our markets, in spite of the step change in digitalization since the onset of the pandemic. Against this backdrop, we remain committed to investing with efficiency to capture the attractive potential over the long run.

We believe our hyperlocal and highly targeted approach, alongside our commitment to focus and invest with efficiency for the long term, will allow us to build a healthy and sustainable ecosystem that can offer the best long term value for buyers and sellers and in turn our other stakeholders.”

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Mercado Libre, Etsy Inc, Shopify Inc, Coupang, Amazon Inc, Sea Ltd, and Facebook Inc. Holdings are subject to change at any time.

As an investor, I am constantly on the hunt for what my blogging partner Ser Jing and I call “compounders.” These are companies that are able to grow their cash flows at an exponential rate by reinvesting their cash.

This is where the truly great companies stand out. They have great capital allocators at the helm who are able to reinvest their cash at high rates of return. The biggest companies in the world all seem to share this common trait.

Let’s take a look at the three largest companies in the US stock market in terms of their market capitalisation.

Growing beyond computers

Take Apple Inc (NASDAQ: AAPL) for example. It feels like a long time ago that Apple was merely a computer company. 

The company which used to sell only computers pivoted to sell smartphones. This revolutionised the company and set the stage for it to become the most valuable company in the world.

The late Steve Jobs was a visionary leader who made important investments to make Apple’s iPhone one of the most popular smartphones in the world. 

His early investments into smartphones have clearly paid off as Apple continues to rake in the cash from its iPhone sales. In its last reported quarter, Apple sold US$47.9 billion worth of iPhones.

Today, Apple’s management team has made other excellent capital allocation decisions, such as placing a focus on services and new products – such as Apple Watch and AirPods – which have become billion-dollar businesses themselves. 

The company also seems to be making the right decision by purchasing its relatively low-priced shares in the market, returning shareholder’s capital at this opportune time, which should further increase shareholder value.

From Windows to the cloud

Microsoft Corporation (NASDAQ: MSFT) made its first big break when it sold its “Windows” graphical operating system for computers. This was a huge breakthrough and a highly profitable business.

It was an easily scalable, asset-light, and high margin business. But as with any product, growth eventually slowed as personal computers made their way to nearly every household in the developed world. 

To keep growing, Microsoft made some extremely intelligent but difficult capital allocation decisions. It built Azure, its cloud computing infrastructure-as-a-service platform. This was capital intensive and a lower margin business than software. But as seen today, Azure has become an important part of Microsoft’s business and is growing quickly.

Microsoft also built other cloud software products such as Office 365 and Dynamics 365 and has even ventured into gaming through Xbox. These investments have paid off and Microsoft is now in a much better position for growth.

Pivoting from first-party selling

Amazon.com Inc (NASDAQ: AMZN) has grown from a simple online book shop to an e-commerce and cloud computing behemoth. The company made several important investments. 

In the early days, it invested in growing its product suite beyond books.

Another major pivot was growing its third-party marketplace. In 2020, analysts estimate that Amazon’s third-party marketplace makes up US$300 billion of its total US$490 billion in gross merchandise volume. The third-party market place is a more profitable business as it is high margin. Amazon makes money through commissions, ads, and other services it provides to sellers.

But perhaps the best investment that Amazon made was to build AWS. While the company may have chanced on the opportunity due to its massive cloud computing requirements, Jeff Bezos was quick to realise that he could profit by providing other companies with cloud computing infrastructure services. AWS now has US$54 billion in annualised revenue and in 2020 accounted for 60% of Amazon’s profit. 

Common traits

As we pull back the curtain, a recurring pattern emerges. The biggest companies in the world all tend to be able to invest and grow new and meaningful revenue streams. Rather than sitting on their cash flows, these companies find thoughtful ways to put their cash to use in unexpected but useful ways.

As investors, we can analyse a business to death but over a truly long time frame, even the best businesses will start to slow down. This is normal as competitors erode margins and as industries mature.

However, the truly lasting compounding machines are able to allocate capital to grow new lines of businesses. 

The three companies mentioned above are not isolated cases. 

Facebook Inc’s (NASDAQ: FB) acquisition of Instagram. Alphabet Inc‘s (NASDAQ: GOOGL) acquisition of Youtube and Android. Berkshire Hathaway’s (NYSE: BRK.B) consistently smart use of capital to purchase whole or minority stakes in companies. Salesforce.com Inc‘s (NYSE: CRM) expansion of its product suite. The list goes on. These companies have each become long-term “compounders”.

All of them have grown their businesses through smart capital allocation decisions. Some investments may have seemed strange at that time, such as Google’s purchase of Android, but they have paid off handsomely. The biggest companies today have businesses that look very different from where they started.

The lesson here is, rather than simply focusing on a company’s business, it is also wise to look at the company’s track record of capital allocation decisions. Over a sufficiently long period of time, the companies with the best capital allocators will become the fastest and most reliable compounders.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Facebook, Amazon, Alphabet, Microsoft, Salesforce and Apple. Holdings are subject to change at any time.

Last week, many US-listed companies started reported results for the first quarter of 2021. Here are highlights from some of the companies I have a vested interest in, through the investment fund I co-founded, that reported this week.

Tractor Supply Company (NASDAQ: TSCO)

The US retail chain focusing on the “out here” lifestyle started the year on a strong footing. Comparable sales increased by a staggering 38.6%, the result of traffic growth of 21% and average ticket size growth of 17.6%. The latter was driven by sales of big-ticket items such as safes, fencing, and utility vehicles. Diluted earnings per share (EPS) was up by 118% to US$1.55. And the company is now projecting full-year diluted EPS for 2021 of between US$7.05 and US$7.40, a step up from previous guidance of US$6.5o-US$6.90, and from US$6.38 in 2020.

During Tractor Supply’s earnings call for the latest results, CEO Hal Lawton highlighted increasing millennial home-ownership, migration to urban areas, and greater pet adoption as long-term trends that will benefit Tractor Supply. He said:

“Over the last 12 months, we’ve seen a 400 basis point shift in the customer age cohorts of 18 to 45 years old. This demographic has long resisted many of the traditional generational norms, things like household formation and homeownership. But the pandemic has shocked this generation and accelerated their embracement of these types of activities. There continues to be a net migration out of urban areas largely driven by the millennial segment.

The most robust homeownership growth is in the millennial cohort, with the growth coming in suburban and rural areas. We believe growth in this customer segment has staying power and could be a structural game changer for us.

Another structural customer trend that is working to our advantage is the significant increase in pet-owning households and number of pets adopted. Compared to the overall U.S. household pet ownership of approximately 2/3, our customers over-index in pet ownership by about 10 points. And our current survey work with our customers indicate 25% have recently acquired and adopted a new pet. New companion animal ownership acts as an annuity for our business as these puppies and kittens grow up and have growing life cycle needs. We’re also uniquely positioned to offer a growing menu of services such as pet wash, vet clinics, prescriptions and tele-vet services.

Whether it’s more food, treats, toys, containment and more, the humanization of pet provides us with future opportunities for growth. These customer trends are an indication that we continue to benefit from the numerous tailwinds such as pet ownership, the millennial urban exodus, backyard poultry, homesteading and home as an oasis. We believe many of these consumer trends will be enduring shifts well into the future. Our brand momentum is stronger than ever, and we’re investing to ensure we continue to play offence in the context of these trends. We are making excellent progress on our Life Out Here strategy and initiatives.”

Intuitive Surgical Inc (NASDAQ: ISRG)

The robotic surgery company which manufactures and sells the da Vinci brand of robotic surgical systems also had a strong start to 2021.

New system placements increased by 26% year on year from 237 to 298 and the installed base of da Vinci systems grew by 8% from the first quarter of 2020 to 6,142. Worldwide da Vinci procedures grew by 16%. Revenue was up 18% to US$1.29 billion and net income surged 36% to US$426 million, with diluted EPS up 34% to US$3.51. With 2020 procedure growth coming in at just 1% due to the COVID-19 pandemic, the company anticipates a swift rebound in 2021 with full-year procedure growth of between 22 and 26%.

As COVID-19 infections begin to subside in parts of the world, more non-emergency surgeries which were postponed due to the pandemic will eventually have to be performed.

Gary Guthart, Intuitive Surgical’s CEO, is bullish on the impact of the company’s two new platforms (Da Vinci SP and Ion), and the rebound in business as COVID numbers decline. He said the following in Intuitive Surgical’s 2021 first-quarter earnings call:

“We’re in the early innings of commercialization of two new platforms for Intuitive while advancing digital enablement of our ecosystem. Our teams are making good progress in all three areas. Overall, we’re seeing some pandemic recovery, but improvement has been uneven with significant regional variation. Our experience shows that our business rebounds as COVID drops…

…Overall, capital strength indicates anticipation of future procedure opportunity by our customers. A significant number of systems were part of multisystem deals by hospitals and integrated delivery networks, supporting a theme in which customers who know robotic-assisted surgery well continue to invest with us.”

Chipotle Mexican Grill, Inc (NYSE: CMG)

The Mexican fast-casual food chain was off to a promising start in 2021. Revenue was up 23.4% to US$1.7 billion, driven by staggering comparable restaurants sales growth of 17.2%. The company’s restaurant-level operating margins improved by 4.7 percentage points from a year ago to 22.3%. Digital sales were up 133.9% and the company opened 40 new restaurants during the quarter, bringing its total to 2,764. All these helped bring adjusted diluted EPS to US$5.36, up 74% from a year ago.

As Chipotle laps pandemic-induced closures last year in the second quarter of 2021, it expects comparable restaurant sales to be high in the range of high-20s to 30%.

The long-term outlook for Chipotle looks promising too. During Chipotle’s 2021 first-quarter earnings call, Brian Niccol, who became the company’s CEO in 2018, described some of the company’s strategies to achieve its long-term goals of having more than 6,000 restaurants, average unit volume (revenue per restaurant) of more than US$2.5 million, and a restaurant-level operating margin of more than 25%. He commented:

“These are one, making the brand visible, relevant and loved. Two, utilizing a disciplined approach to creativity and innovation. Three, leveraging digital capabilities to drive productivity and expand access, convenience and engagement. Four, engaging with customers through our loyalty program. And five, running successful restaurants with a strong culture that provides delicious food with integrity while delivering exceptional in-restaurant and digital experiences.”

Netflix Inc (NASDAQ: NFLX)

It was a mixed bag of results in the first quarter of 2021 for global streaming giant Netflix. Although revenue was up 24% from a year ago to US$7.16 billion, the company only added 4 million global net new subscribers during the quarter – 2 million below analyst expectations – bringing the total to 208 million. The company also forecasts just 1 million net new subscribers in the second quarter. According to Netflix’s management, there were two reasons for this. First, there was pull-forward of new subscribers in 2020 due to COVID-induced shelter-in-place measures, and second, there was the delays in the release of hit programs due to production pauses (again because of COVID-19). Nevertheless, I think the long-term growth story remains intact.

And on a bright note, the company was free cash flow positive in the quarter, producing US$692 million, up significantly from US$162 million a year ago. Netflix also announced that it will be buying back shares and said it is on track to be free-cash-flow neutral this year and positive in the years ahead.

Ted Sarandos, Netflix’s co-CEO and chief content officer, explained in the latest earnings call why he thinks subscriber growth should return in the latter half of the year. He said:

“And we think we’ll get back to a much steadier state in the back half of the year and certainly in Q4 where we’ve got the returning seasons of some of our most popular shows like The Witcher, You, and Cobra Kai as well as a big temple movie that came to market a little slower than we’d hope like Red Notice with The Rock and Ryan Reynolds and Gal Gadot and Escape from Spiderhead with Chris Hemsworth, a big event content. Now, all that being said, in every quarter of the year, we release more content than we did in the previous quarter and in the previous year quarter by quarter and every — in every region. It’s just that I think the shape of the mix of the content is, you know, become a little more uncertain, and then the long-term impacts of the corporate shutdown are also becoming a little more uncertain in that — in that timeframe in the first half of this year.”

Reed Hastings, co-CEO and co-founder, added that despite the slowing net adds, Netflix still has a long runway to grow into. He mentioned:

“So outside of China, I think, pay television peaked about 800 million households. So you know, lots of room, and that was several years ago that at peak, lots of room to grow.”

ASML Holding NV (NASDAQ: ASML)

The supplier of lithography machines to semiconductor manufacturers extended its recent run of fine results.

During the first quarter of 2021, revenue was up 78% to €4.4 billion. Net income growth was even more impressive at 240% to €1.1 billion. In the quarter, ASML also repurchased 3.5 million shares. The undisputed leader in lithography expects overall revenue in 2021 to be 30% higher compared to 2020, when there was already healthy growth of 18%.

ASML CEO Peter Wennink believes that the company is benefiting from cyclical semiconductor demand in 2021 due to COVID-disruptions in 2020. At the same time, there is a long-term secular trend that should benefit ASML too. He shared the following in a video interview on the company’s 2021 first-quarter results:

“I would like to separate the growth profile into three trends. One trend is more a cyclical trend. 2020 – the COVID year- was really a year where also customers were cautious. Looking back, too cautious. So that underspend you could call is now translating into demand for 2021. Of course, that will take some time before we have our output done. So second half will be indeed higher and that trend you could argue should go away or should taper off in 2022.

There is a second trend. That’s a secular trend, the underlying trend. I think it is the continuous innovation and the drive for innovation driven by the rollout of 5G, its artificial intelligence, its High-Performance Computing. That underlying trend is the digital transformation. We see it everywhere. Leading to distributed computing. That will be there for years to come. That trend will also lead to higher demand for semiconductors and for our equipment. Which is one of the reasons why we’re stepping up our capacity.

He also mentioned a third long-term driver which is governments wanting their own countries to be able to produce semiconductors independently. This could be a blow to major foundries such as Taiwan Semiconductor Manufacturing Company, but will open the door for other companies to manufacture for their country’s needs. Wennink explained:

“The third trend is driven by the geopolitical situation which actually leads to major regions looking for technological sovereignty. Basically being able to be self-sufficient when it comes to electronics and semiconductors. We’ve seen announcements, governments, but also companies, focusing on expanding capacity. In the US, there are significant talks in Europe, in Asia. Well, that will lead to higher capital intensity because it’s decoupling as a worldwide eco-system. But it also leads to some capital inefficiency. Well there is a beneficiary of that capital inefficiency and that’s us.“

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of ASML, Chipotle Mexican Grill, Intuitive Surgical, Netflix, and Tractor Supply. Holdings are subject to change at any time.

Recently, there has been a flurry of activity in the Singapore stock market. 

In early March, Jardine Matheson Holdings Ltd (SGX: J36) announced that it would acquire the remaining 15% of Jardine Strategic Holdings Ltd (SGX: J37) it did not already own at a proposed acquisition value of US$5.5 billion.

And just a few weeks later, local property giant CapitaLand Limited (SGX: C31) announced that it was proposing to restructure itself by privatising its development arm while keeping its investment management arm public. 

Although both deals were offered at a premium to their respective “last trading prices”, shareholders of the acquired companies will still receive less than the net asset value of their respective companies.

Jardine Strategic is being acquired at a 19% discount to the value of its listed assets while shareholders of CapitaLand are receiving 0.08 units of CapitaLand Integrated Commercial Trust (SGX: C38U) and S$0.951 in cash for the development arm of CapitaLand, which translates to a 5% discount to its actual net asset value.

Fertile hunting ground?

These bring us to the question- is there likely going to be more privatisation offers in Singapore?

The two companies being acquired/restructured are just two of numerous companies in Singapore that are trading at discounts to their book value. 

With Singapore stocks trading at depressed valuations, even if acquirers offer a premium to a stock’s last trading prices, they may still be able to obtain their target assets at a hefty discount to book value.

This could make the Singapore stock market the perfect hunting ground for acquirers who are looking to buy companies at a cheap price.

This is exacerbated by the Singapore stock market’s failure to recover to pre-COVID levels. The Business Times reported that there was a 70% increase in deal value in 2020 compared to 2019.

With no catalyst in sight to lead Singapore stocks to more reasonable valuations, it is very likely that these low valuations will persist, leaving room for acquirers to swoop in.

Taking advantage?

This could open the door to a potential strategy for investors who want to take advantage of the flurry of privatisation deals. Companies that are most likely to be privatised usually trade at a relatively cheap valuation to earnings or assets and have a large shareholder who can easily consolidate their position.

But that does not mean that investing in potential privatisation targets is a fool-proof strategy.

Predicting which companies could be acquired is a shot in the dark. What may seem like a potential privatisation deal may never materialise, leaving investors holding on to a chronically undervalued stock with no catalyst for rerating the stock.

Although holding on to dividend-paying stocks will provide income while you wait, the limited capital gain could end up hindering investment returns- an expensive price to pay when stock markets in other parts of the world are rising considerably.

Final thoughts

Many investors may consider Singapore a boring stock market with few companies offering attractive business growth, but the low valuations of some companies may throw up unique opportunities for acquirers and investors alike. 

Nevertheless, investors who are looking to speculate on privatisation targets should proceed with caution. If a deal does not materialise as you had hoped for, the stock may trade sideways for years, becoming an expensive opportunity cost in a rising market.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have no vested interest in any companies mentioned. Holdings are subject to change at any time.

Software-as-a-service (SaaS) companies are one of the more exciting groups of growth companies in the market today. Many SaaS companies are growing their businesses at lightning speed, boast giant addressable markets, fat gross margins, and have sticky user bases. 

With the recent drop in SaaS valuations, it may be a good time now to take a look at which SaaS companies are offering the best valuations and growth.

Scatterplot of SAAS companies

In his recent weekly update on SaaS stocks, venture capitalist Jamin Ball provided a scatterplot of US-listed SaaS companies based on their growth and enterprise-value-to-next-12-months (EV-NTM) revenue multiple.

The horizontal axis shows the companies’ NTM consensus growth rate, while the vertical axis shows their EV-NTM revenue multiples.

Companies that are further right on the scatterplot are growing the fastest and the companies that are higher up have the highest valuation multiples.

The companies that are expected to grow the fastest in the next 12 months tend to also sport the highest valuation multiples. This is why we see that companies that are further right on the scatter plot tend to be higher up too.

For example, at the most top right of the chart, we see Snowflake Inc (NYSE: SNOW) which is, by some distance, the company that is expected to grow the fastest among US public-listed SaaS companies. It also has the highest EV-NTM revenue multiple at more than 50.

The cheapest SaaS companies today

As investors, the companies that may be the most attractive are those that are further to the right and to the bottom.

The blue line running across the scatterplot is what is statistically called the fitted regression line. This line shows where the companies tend to place in the scatterplot. Anything under the line can, therefore, be considered cheaper than average and vice versa.

From the chart, there are a few notable companies that are trading below the fitted regression line.

These include companies such as Zoom Video Communications Inc (NASDAQ: ZM), Crowdstrike Holdings Inc (NASDAQ: CRWD), Twilio Inc (NYSE: TWLO) and even Snowflake inc.

Notable companies that are above the line are Bill.com Holdings Inc (NYSE: Bill), Cloudfare Inc (NYSE: NET) and Shopify Inc (NYSE: SHOP).

Other things to consider?

While the scatterplot does give us a good comparison of the growth and valuation of SaaS companies, investors have to consider other factors too.

Some important things to consider include:

• Sustainability of growth: The chart only shows the consensus growth estimate for the next 12 months. Companies that can sustain growth at a high rate for a long time, or accelerate their growth beyond the 12 months consensus, should warrant a higher multiple. Factors that can affect sustainability are balance sheet strength, management capability, size of the addressable market etc.
• Margins: Investors tend to use revenue multiples to value non-profitable SaaS companies. This makes sense due to the absence of profit but as revenue is a high-level metric, it tells us little about the company’s eventual profitability which is what counts in the end. As such, companies that boast higher gross margins and the ability to increase operating leverage warrant being priced at a higher multiple
• Organic vs inorganic growth: Related to the sustainability of growth, the type of revenue growth is also important. If the growth is coming from the consolidation of revenue due to an acquisition, then this revenue growth will be a one-off.

An exciting place to invest…

Thanks to the ease and affordability of SaaS products, they have increasingly become part and parcel of not just everyday business dealings, but everyday life. From customer relations management to human capital resource management to video communication, SaaS has become something we can’t live without.

With the scalability of the cloud and the relatively tiny incremental cost of deploying the product to each new customer, SaaS companies enjoy operating leverage and immense growth potential. Gartner predicts that SaaS revenue will grow from US$104 billion in 2020 to US$140 billion in 2022. 

Investors who are keen to invest in the space should consider valuations, growth, sustainability of the growth, and profit margins.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Shopify, Twilio, and Zoom. Holdings are subject to change at any time.

Note: Data as of 8 March 2021; an earlier version of this article was first published in The Business Times on 17 March 2021

Technology stocks in the USA have not been in the good graces of market participants in recent weeks. Take for instance, the NASDAQ index, which has a heavy weighting (nearly half) toward companies in the technology sector. The index closed at a high of 14,095 this year on 12 February 2021, before falling by 10.5% to 12,609 on 8 March.

Many technology companies’ share prices fared far worse over the same period. E-signature specialist DocuSign’s share price declined by 27%. Peloton, which sells its eponymous internet-enabled indoor bikes, saw its share price fall 34%. Latin American e-commerce powerhouse MercadoLibre, digital payments provider PayPal, and e-commerce enabler Shopify, were down by 30%, 24%, and 26%, respectively. Fiverr, which runs an online platform to connect freelancers with businesses looking for freelancing services, experienced a 39% drop in its share price.

What’s behind the declines?

Rising interest rates have often been cited as the key reason for the recent turmoil in technology stocks. The US 10-year Treasury yield, an important interest-rate-marker, had increased from 1.20% on 12 February 2021 to 1.59% on 8 March 2021.

There’s plenty of attention being paid to interest rates because of its theoretical link with stock prices. Stocks and other asset classes (bonds, cash, real estate etc.) are constantly competing for capital. In theory, when interest rates are high, the valuation of stocks should be low, since bonds, being an alternative to stocks, are providing a good return. On the other hand, when interest rates are low, the valuation of stocks should be high, since the alternative – again, bonds – are providing a poor return.

Some stocks in particular, such as high-growth companies that depend on the future growth of their long run cash flows for the lion’s share of their value, are theoretically even more sensitive to changes in interest rates. The technology companies I mentioned earlier that have experienced sharp falls in their share prices belong to this category.

Beneath the hood

But a few things are worth pointing out about the idea of interest rates being a massive driver for the recent volatility seen in technology stocks.

Firstly, the US 10-year Treasury yield was at less than 0.70% at the end of March 2020, which was near the nadir of the pandemic panic that the financial markets experienced last year. So in less than one year, the US 10-year Treasury yield had doubled and then some. The NASDAQ index, meanwhile, gained 64% from the end of March 2020 to 8 March 2021.

Secondly, the real relationship between interest rates and stock market valuations is nowhere near as clean as what’s described in theory. Yale economist Robert Shiller, who won a Nobel Prize in 2013, has a database on interest rates and stock market prices, earnings, and valuations going back to the 1870s. According to his data, the US 10-year Treasury yield was 2.3% at the start of 1950. By September 1981, it had risen to 15.3%, the highest rate recorded in Shiller’s dataset. In that same period, the S&P 500’s price-to-earnings (P/E) ratio moved from 7 to…  8. That’s right, the P/E ratio for the S&P 500, a broad-based US stock market index, increased slightly despite the huge jump in interest rates.

(It’s worth noting too that the S&P 500’s P/E ratio of 7 at the start of 1950 was not a result of earnings that were temporarily inflated.)

Yes, I’m cherry picking with the dates for the second point. For example, if I had chosen January 1946 as the starting point, when the US 10-year Treasury yield was 2.2% and the P/E ratio for the S&P 500 was 19, then the theoretical relationship between interest rates and stock market valuations would appear to hold up nicely.

But what I’m really trying to say with the first and second points are these: Interest rates have a role to play, but it is far from the only thing that matters and; one-factor analysis in finance – “if A happens, then B will occur” – should be largely avoided because clear-cut relationships are rarely seen.

So what’s really going on?

The recent volatility in technology stocks might be due to stocks simply doing what stocks do: Experiencing wild price fluctuations. 

Even the stock market’s greatest long-term winners have also been through periods of sickening declines. We can look at two US-based companies that are well-known to Singaporeans: Amazon.com (NASDAQ: AMZN), the e-commerce and cloud computing juggernaut, and Netflix (NASDAQ: NFLX), the global streaming services provider. In the 10 years ended 8 March 2021, Amazon.com and Netflix’s share prices were both up by 1,670%. By any measure, they have both been massive long-term success stories.

But in that period, both companies saw their share prices decline by 20% or more from a recent high on at least six separate occasions each. So in the past decade, Amazon.com and Netflix – two US-listed stocks with massive long-term gains – have both experienced share price falls of 20% or more every 1.7 years on average.

An important takeaway for investors here is that volatility is a feature of the stock market. It’s something normal. Accepting this can also lead to a healthy change in our mindset toward investing in stocks. Instead of seeing short-term volatility in stocks as a fine, we can start seeing it as a fee – the price of admission, if you will – for great long-term returns. This is an idea that venture capitalist Morgan Housel (who also happens to be one of my favourite finance writers) once described. 

So what should investors focus on now when it comes to technology stocks?

If you’re an investor in US-listed technology stocks, it has been a painful few weeks. In times like these, it’s easy to forget that stocks represent partial ownership of businesses. It’s important to remember what stocks represent, because it will be the performance of a stock’s business that will ultimately determine where its price ends up. Earlier, I said that clear-cut relationships in finance are rarely seen – this is one of those rare times.

We can take some cues from Warren Buffett. The legendary investor gained control of Berkshire Hathaway in May 1965. At the start of that year, the US 10-year Treasury yield was 4.2%, according to Shiller’s data. I mentioned earlier that the highest interest rate seen in Shiller’s dataset for the US 10-year Treasury was 15.3% and that occurred in September 1981. From 1965 to 1981, a 21.4% annual increase in Berkshire’s book value per share drove a 25.1% annual jump in the company’s share price. 21.4% in, 25.1% out, over a 17 year period (1965-1981), despite the massive increase in the yield for US 10-year Treasuries. 

So if you’re interested in technology stocks or are currently invested in them, focus on their business fundamentals while knowing that their share prices are going to be all over the place in the short run. Will their businesses grow materially in the years ahead? And are their current valuations sensible in the context of your estimation of their growth? The answers to these questions will be far more important to technology stocks’ future prices in the long run compared to where interest rates are headed.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in the shares of Amazon, DocuSign, Fiverr, MercadoLibre, Netflix, PayPal, and Shopify. Holdings are subject to change at any time.

The share prices of SaaS (software-as-a-service) companies have risen massively over the past year. Even after the sharp pullback many of them experienced in late-February and March this year, the share prices of SaaS companies still trade at relatively higher multiples than they did in the recent past.

The chart below by venture capitalist Jamin Ball shows current SaaS company valuations:

The blue line on the chart shows that the median EV-to-NTM revenue (median enterprise value to next twelve months revenue) multiple for SaaS companies has risen sharply in the last two years. And despite the sell-off over the last couple of weeks, SaaS companies still trade at a higher multiple than they did at any other time before mid-2020. 

This has led to some investors assuming that SaaS company valuations are still too high.

On the surface, that may seem the case but it could also be that valuations for SaaS companies were simply way too low in the past.

Justified?

Venture capital firm Bessemer Venture Partners (BVP) has an index of emerging cloud-computing companies – many of which are SaaS companies – that are listed in the US stock market. The chart below shows the performance of the BVP cloud index (EM Cloud) relative to other major US stock market indexes.

The blue line shows the BVP cloud index. Since tracking began, the BVP cloud index has significantly outperformed the rest of the market. It has even outperformed the tech-heavy NASDAQ by 3.6 times. 

Part of the cloud index’s growth was undoubtedly fueled by an expansion in the aforementioned EV-to-NTM revenue multiples that SaaS companies have experienced. But a big part of the growth is also due to the relatively faster revenue growth in SaaS companies.

Doing some quick math and assuming that revenue multiples contract from 14 to 5 times (what they were in 2015), the BVP cloud index would still be outperforming the NASDAQ – the BVP cloud index outperformed the NASDAQ by 3.6 times while the multiple expansion in SaaS companies included in Jamin Ball’s graph was just 2.8 times*. 

Given all of this, rather than assuming that current valuations of SaaS are too high, it could be that historical valuations were actually too low.

Market participants in the past may have underestimated SaaS companies’ growth potential and the sustainability of that growth.

Today, the market may have wisened up to the immense addressable market opportunity of cloud companies and are beginning to better price in their immense potential.

Conclusion

SaaS companies are currently still trading at higher EV-NTM revenue multiples than they were in the past. Just taking this fact alone, one may assume that valuations are stretched now.

But if we take a step back, we can see that SaaS companies may have been mispriced in the past. The pace and sustainability of revenue growth should have warranted a higher valuation back then.

The market may now be smartening up to the wonderful economics that SaaS companies offer. Not only do best-in-class SaaS companies offer a long growth runway, but they also address a huge and growing market.

If their revenues continue to grow as fast it has in the past, SaaS stocks will likely keep going higher.

*Jamin Ball’s universe of SAAS companies and those in the BVP cloud index may not be exactly the same but there is a significant overlap

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

This week, The Information reported that Chinese tech conglomerate, Tencent Holdings Ltd (HKG: 0700), has made a killing from its investment portfolio.

In 2020 alone, the tech giant made US$120 billion in unrealised gains from its minority stakes in about 100 publicly listed companies. That’s around six times as much as Tencent’s own projected operating profit for the whole of 2020.

Tencent, which began life as a messaging company, has grown to become a diversified tech behemoth, with operations spanning cloud computing, social networks, enterprise software, mobile payments, and much more. 

But outside of its operational businesses is where all the fun truly begins. China’s largest tech company has minority stakes in companies ranging from electric vehicle manufacturers to e-commerce, music streaming to ride-hailing and payments and much more. 

Without exaggeration, Tencent’s investments in publicly-listed companies look like a who’s who of tech companies. Tencent owns stakes in Meituan (HKG: 3690), Sea Ltd (NYSE: SE), JD.com Inc (HKG: 9618), Pinduoduo Inc (NASDAQ: PDD), Tesla Inc (NASDAQ: TSLA), Spotify (NYSE: SPOT), Nio Inc (NYSE: NIO), Afterpay Ltd (ASX: APT), Snapchat (NYSE: SNAP), and many more.

But that’s just the tip of the iceberg.

Tencent also owns significant stakes in up and coming privately-held companies such as Gojek, Ola, Reddit, Epic Games, Webank ,and many others.

Should other tech giants follow in Tencent’s footsteps?

The apparent success of Tencent’s investment arm has led to the question: Should other big tech companies follow in Tencent’s footsteps?

US-based tech giants such as Alphabet Inc (NASDAQ: GOOGL), Facebook Inc (NASDAQ: FB), Apple Inc (NASDAQ: AAPL), and Microsoft Corporation (NASDAQ: MSFT) boast tens – sometimes hundreds – of billions of dollars on their balance sheets and generate billions more in cash each year.

With so much cash lying around, their shareholders may be asking if these tech giants are doing enough with their heaps of cash.

Tencent’s strategy to put its excess cash to use through investments in public equities and young startups are starting to pay off and seems to be the perfect blueprint for other cash-rich companies to follow.

Why minority investments may make sense

Tech giants are usually not known to make minority investments in companies but rather prefer buying up whole companies to reap the benefits of synergies.

But, arguably, minority investments may actually be an even more cost-efficient way to put their capital to use. Acquiring whole companies is a more tedious process, which regulators scrutinise. In addition, the acquirer tends to have to pay a big premium to purchase a company outright.

On the other hand, minority investments can be made much less publicly and usually at relatively better valuations.

Taking minority stakes also offers the US tech giants the ability to dip their toes in a range of different companies that would not be possible if they wanted to make whole acquisitions. Moreover, the US tech giants also have a significant advantage as they can provide portfolio companies with expertise, networks, and partnerships.

It therefore would not be surprising to find that young companies may want to have these tech giants as investors to leverage their technology and expertise. This could open the door for the US tech giants to get in on some of the most sought after companies in the world.

Maybe the US tech giant that is most akin to Tencent is Alphabet. The parent company of Google has two investment arms, one of which is called GV, formerly known as Google Ventures. GV’s current assets under management is only around US$5 billion, less than 5% the size of Tencent’s portfolio but it is a good start. GV has investments in companies such as Medium, Uber, Stripe, Impossible Foods and many more. 

Expertise required…

Despite the apparent upside, making minority investments in companies is by no means an easy task.

Investing in early-stage companies, or even publicly-listed entities, requires patience and expertise. Tencent, though, seems to have found a winning formula with many of its investments working out extremely well so far. But other big tech companies, with their access to talent, should be able to replicate Tencent’s success should they choose to follow a similar path.

They will need time and money to bring the best talent to manage their vast amounts of capital but, if successful, the fruits of these investments could be substantial.

The bottom line

Tencent is a great example of how companies that generate billions of dollars in cash every year can put their excess capital to use. Tencent has created a tech behemoth that spans numerous businesses and has diversified its investment portfolio to an extent that is unmatched by any company in the world.

Other tech giants could potentially follow suit.

Rather than letting their cash build up, or simply returning cash to shareholders through buybacks or dividends, investing the capital through minority-stake investments could be an even better use of cash.

While the market’s bull run in tech companies in 2020 may never be replicated, there is still value being created by tech companies around the globe today. With billions of dollars in their banks, the Apples and Facebooks of this world can certainly look to capitalise on that.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Afterpay, Alphabet, Apple, Facebook, Meituan, Microsoft, Tencent, and Tesla. Holdings are subject to change at any time.

A company’s earnings conference call can be extremely informative. Not only does it provide information on how a company has done in the last quarter, but management also gives investors a glimpse into the early trends shaping the company’s future.

With many companies having reported their full-year earnings results for 2020, here are some of the key management insights on what to expect in the year ahead. 

Video conferencing is here to stay…

Leading video conferencing company, Zoom Video Communications Inc (NASDAQ: ZM) capped off a truly remarkable year as it reported a 369% year-over-year increase in revenue for the fourth quarter of its fiscal year ended 31 January 2021 (FY2021).

On a full-year basis, Zoom saw revenue increase by 326%. More impressively, the company expects to build on that solid performance as management forecasts a further 42% increase in revenue for FY2022.

Zoom’s founder-CEO, Eric Yuan, said:

“As the world emerges from the pandemic, our work has only begun. The future is here with the rise of remote and work-from-anywhere trends.”

With employers getting used to remote working conditions, many are starting to embrace the convenience, efficiencies, and cost-savings associated with it. In addition, employees prefer the flexibility of working remotely.

We have already seen companies such as Shopify (NYSE: SHOP) announcing a permanent shift toward remote working. As forward-looking employers pave the way, the shift towards permanent remote work is only just beginning.

E-commerce growth to normalise but upward trend to persist

There was an interesting chart put up by Shawspring Partners earlier this year showing the e-commerce penetration growth that took place in early 2020 as countries around the world began lockdowns to combat COVID-19.

As the chart shows, e-commerce penetration in the USA grew as much as it did in the eight weeks leading up to April 2020 as it did in the 10 years before then.

Consequently, the leading e-commerce marketplace for entrepreneurs and DIYers, Etsy (NASDAQ: ETSY) saw a 107% increase in annual gross merchandise sold on its platform in 2020. Meanwhile, e-commerce enabler Shopify experienced 96% year-on-year growth in the gross merchandise volume (GMV) facilitated by its platform during the year.

Although e-commerce growth rates are expected to normalise, the overall upward trend should persist.

Shopify CFO, Amy Shapero, said in the company’s 2020 fourth-quarter earnings conference call:

“Our outlook coming into 2021 assumes that as countries roll out vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve, some consumer spending will likely rotate back to offline retail and services and the ongoing shift to e-commerce, which accelerated in 2020, will likely resume a more normalized pace of growth.”

Similar to how remote work is advantageous over traditional office set-ups, e-commerce holds many advantages over traditional retail. 

Online purchasing is more convenient, offers shoppers a wider selection of products, and tends to be cheaper. It is inevitable that these advantages will result in an eventual migration of more purchases from offline to online over the longer term. 

The rise of BNPL (buy now, pay later)

Consumers are increasingly looking for smarter ways to pay for their purchases.

Enter buy now, pay later services. As the name suggests, buy now, pay later – or BNPL – allows customers to buy a product or service and pay for it in instalments, often interest-free, over a few weeks after the purchase is made.

Millennials increasingly prefer this option as it provides greater cash flow flexibility. And unlike credit cards, BNPL does not result in expensive interest expenses snowballing should they miss any payments.

This year, Shopify teamed up with Affirm (NASDAQ: AFRM) to offer its merchants the ability to accept BNPL functions from customers.

Meanwhile, digital payments giant, Paypal (NASDAQ: PYPL), has also gotten in on the act, as it launched its BNPL service late in 2020. The take up was so good that Paypal CEO Dan Schulman said in the 2020 fourth-quarter earnings conference call:

“I would also highlight the rapid growth of our buy now, pay later functionality. We saw tremendous and growing demand throughout the quarter and witnessed the fastest start to any product we have ever launched.”

Afterpay (ASX: APT), a leading BNPL provider, also reported a staggering 106% increase in underlying sales in the six months ended 31 December 2020.

With the rise of e-commerce and millennials increasingly looking for better ways to manage their cash flow and expenses, it seems that BNPL companies are set for a bright future.

Final thoughts

Covid-19 accelerated the digitalisation of the world.

Although economies will eventually reopen, the way we live, work and play will have changed. As the world adapts, companies that embrace these changes stand to gain the most.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Afterpay, PayPal, Shopify, and Zoom. Holdings are subject to change at any time.