Posts in category: Stock Analysis

Cathie Wood is known for her Tesla pick as well as many other high-growth tech stocks. Her signature exchange-traded-fund (ETF) is ARKK or the ARK Innovation ETF which unfortunately has not been doing well for the past year or so, just looking at the price chart below. The fund has fallen by 50% off the peak which happened just at the beginning of 2021.

So is it wise to still invest with the many ETFs Cathie Wood manages? And specifically, is ARKK going to be a falling knife from this point?

Let’s take a look at ARKK and the top 10 component stocks.

Majority of the stocks are high-growth (high revenue growth specifically) but they do not have a profit yet or have just become profitable recently.

Performance of stocks in terms of share price appreciation over the long term is a result of revenue and eps (earnings per share) growth, so isn’t this good when these companies show 50% and even 100% revenue growth year on year? Well, in general yes but is the growth momentum sustainable and are you paying the right price for it?

Let’s take a look at a few selected stocks and the price performance:

Square

Unity

Block (or Square before they changed their name) dropped 50% from its all time high while Unity fell by 40% but has re-bounced somewhat these few days.

Block is a fintech darling, tremendous growth trajectory, already turning a profit with good FCF (free cash-flows) and its very popular Cash App has 70 million annual transacting active customers, catching up with PayPal’s Venmo.

Unity as mentioned in the previous post on Metaverse, has many quarters of 40% plus YoY growth and we believe it to be able to dominate its space for many more years to go.

Why is it that both Block and Unity have corrected so much the recent months. A large part of the reasons is well reported, high inflation, Fed tapering and impending interest rate hikes. Lower liquidity and higher interest rate environment will cause a lower valuation premium especially for high-growth stocks with no profits yet.

However, we see that the reasons why some of these stocks were well liked remain intact, meaning the fundamentals and competitive advantages of these companies have not changed. No doubt, the over exuberance before has certain investors chase the prices to unbelievable highs and the huge corrections may just price these stocks fairly now.

Of the many stocks in ARKK, we particularly like the following stocks which we believe have tremendous economic moats and if you are a patient and long-term investor, you could well see the prices 2x or 3x over the next 3 to 5 years.

These are:

• Unity Software
• Block
• Palantir
• Twitter
• Roblox

However, have we found the bottom yet? Nobody can answer this question, and thus using the Dollar Cost Averaging strategy would probably be a good bet.

What do you think and which other stocks in ARKK do you like? Do leave your comments.

Disclaimer : contents presented here do not constitute any financial advice, and you should do your homework and make your own investment decision.

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Metaverse is probably the biggest buzzword in 2021, after Facebook changed their name to Meta and announced huge plans and investments around the potential next Big Thing. In this article, we analyze what we think are 3 great metaverse stocks to invest in 2021.

What is Metaverse

What is the Metaverse and are there really good opportunities that are worth investing in earlier in the game or one should just wait and see?

Converging physical, augmented, virtual, and mixed reality, the Metaverse is where real life meets digital life, a world where the ‘digital twins” of yourself, your friends, and your home co-exist in a parallel universe (definition extracted from DBS report).

The entire Metaverse ecosystem is of course quite wide ranging and complicated as depicted in the diagram below.

We will focus on 3 areas and the specific companies where we think there are great investment opportunities now:

Ad network, social media, AR/VR – Facebook

Facebook or Meta has nearly 3 billion monthly active users (MAU) and that is a tremendous network effect economic moat that is going to drive growth for many years to come. Let alone if Metaverse takes off in a big way.

Theater experiences – Disney

Disney with its un-paralleled rich contents like Disney, Marvel series, Starwars, Pixar etc etc is in a great position to gel the many beloved characters and heroes from the physical world into the digital Metaverse. The possibilities are up to the imagination. For the video streaming industry, it is either Netflix or Disney. Disney offers you the winner in both streaming and Metaverse.

3D, AR/VR Engines and Gaming – Unity

Unity is a clear winner as far as platform for creating and operating interactive, real-time 3D content. About 65% of the top 1,000 mobile games are made with Unity. Again, being a clear winner provides it a compelling competitive advantage as this space develops further

Our goal in this article is to provide further analysis of these three companies, two usually very profitable companies and one which does not have profit yet but is growing revenue more than 40% YoY. With the deep-dive, we hope to provide insights for you to make an informed decision whether to add these three wonderful companies to your existing portfolio.

Facebook (or Meta)

In terms of fundamentals, Facebook has a set of numbers (top-line, bottom-line and free cash-flows) envied by many and the solid performance has been over a long period of time. There is no reason to doubt Facebook will continue to do well for many more years to come.

Using discounted cashflow (DCF) valuation, we can estimate that Facebook’s intrinsic value is around $350 a share, and based on the current price of Facebook, it is probably fairly valued.

Our bullish investment thesis for Facebook includes the following:

• Facebook is a great quality growth company with about $68 Billion net cash position
• Facebook has 3 billion monthly active users (MAU) and this is a tremendous network effect economic moat (or competitive advantage)
• Based on Facebook’s current business, it is in our opinion already a good buy, and if Metaverse takes off, it will be a great bonus
• Facebook is also developing its digital currency Diem, and this again can be an additional growth engine

Disney

In analyzing Disney, we will have to consider that their streaming service Disney+ as a key strategic driver that may determine its relevance in the future. And if that is the analysis angle we take, we can compare its business and valuation to its key rival Netflix.

Disney has many lines of businesses in addition to Disney+, its market cap as of the date of this article is $270B while that of Netflix is $260B. In terms of subscribers, Disney has a total of 174 million sitting on Disney+, Hulu and ESPN+ while Netflix has 213 million subscribers. Disney has projected that by FY2024, it will have a total of 300 to 350 million subscribers and given that its lines of business also include the Media Networks, Studio Entertainment, Parks and Consumer Products, we believe its current valuation is not excessive and good growth is in place.

Our bullish investment thesis for Disney includes the following:

• Disney has unparalleled rich contents (think Disney, Pixar, Marvel, Star Wars, National Geographic)
• Disney+ is very likely going to thrive together with Netflix as the number 1 and 2 streaming services
• Disney absolutely has a strong branding and is in a great position to leverage its great content assets, to gel the many beloved characters and heroes from physical world into digital metaverse. The talents at Disney will not be short of imagination once Metaverse technology and gadgets become more commercially available and adopted. It will be up to anyone’s imagination how exciting a Disney’s metaverse is going to be

Unity Software

Unity is a clear winner as far as platform for creating and operating interactive, real-time 3D content. 65% of the top 1,000 mobile games are made with Unity and its business is spread across US, Greater China, Middle East & Africa, as well as Asia-Pacific.

For the last few quarters, Unity has continued to grow its YoY revenue by more than 40% and it may seem that the recent dip in its share price could be a buying opportunity. Many high-growth stocks which are not profitable yet have been punished by Mr Market recently as funds flow into the indexes as well as established big techs etc. We do not see any change in the business fundamentals and this could be rotation of funds into different sectors as well as fear of high inflation and interest rate hikes.

It currently trades at a Price-to-Sales of about 40 for a company which has yet to turn a profit but we really like this company and our bullish investment thesis includes the following:

• We strongly believe market domination as much as 65% is a big thing, a network effect that will be so strong that developers using the platform will continue using it and switching out has to take a lot of efforts
• The continued high revenue growth is likely going to persist, probably justifying its current valuation
• It presents a great buying the dip opportunity especially if the price does continue to drop to the support level

This article is written with materials presented at our Webinars, and the slides can be downloaded 3 Great Metaverse Stocks To Invest In – For Distribution.

Disclaimer : contents presented here do not constitute any financial advice, and you should do your homework and make your own investment decision.

Facebook has a tremendous Network Effect economic moat. with enviable billions of users on their family of very popular apps like Facebook, Instagram, Messenger and Whatsapp. I have profited from investing in this gem but has since exited all positions given the recent tech sector share price run-ups. With the recent days’ rout of the tech companies led by Apple (which happens to be very over-valued IMO), I got interested again to see how I can position my entry again.

Facebook is a high-growth company and with so many users on their platforms, there is tremendous future potential if they just increase the average revenue per user they can get (reminds me of my hypothesis about Apple growing their Services revenue as they have billion plus iOS devices). They are definitely trying to expand service offerings such as Room, Watch, Marketplace etc kind of becoming a super-app but there are also alternatives, so it depends on users’ reception to new features they launch.

I read their Q2 earnings reports and immediately zoomed into the following chart.

Q2 2020 YoY growth is 10.7%, this rings alarms bells as my previous key assumption is a growth rate of at least 15% to 20%. Perhaps this is also arising from the current pandemic situation where some advertisers cut down advertising budget? I don’t know but I will re-do the valuation of Facebook:

I think given the current share price, there is really no margin of safety however optimistic you want to be regarding this stock.

I remain very positive about the outlook of Facebook but the company tends to attract controversies which usually result in the share price falling quite a bit, so there are perhaps better times to catch a bargain. I personally will be keen to see if the growth rate picks up soon or their indication that the slowing down is a result of the pandemic and they will recover soon.

There are a few ways to determine which e-commerce company in the world is the biggest, by revenue, market capitalization or gross merchandise volume (GMV). GMV refers to the total value of all items sold on the online platform.

Alibaba has surpassed the milestone of USD 1 trillion in GMV for the financial year ended 31 March 2020, and is undoubtedly the biggest e-commerce company by this measure, far ahead of Amazon in second place.

Does this mean one should definitely buy Alibaba since growth of e-commerce is slated to continue its high growth trajectory?

PHD Analysis

Profitability

Let’s first take a look at Alibaba’s fundamentals. As of the financial year ended 31 March 2020, Alibaba is a highly profitable company as can be seen below. The net margin achieved is impressive and the cash generation is powerful. No doubt, there seemed to be some margin pressure in 2019 and free cash flow seemed to have declined in recent years but this could perhaps be attributed to continual investment in new businesses and investments.

Financial Health

It is also quite obvious that Alibaba has a strong set of balance sheet. The tremendous free cash flow generated every year will further strengthen Alibaba’s financial position and also allows it to invest in further innovations.

Growth Drivers

How fast can Alibaba continue to grow over the next 10 years, or the next 20 years? The past 10 years has been a stage of exponential growth for Alibaba, with CAGR of more than 50% for both revenue and eps. Where are the further growth drivers? Is e-commerce growth sufficient to drive the future growth of Alibaba? Will Alibaba lose a lot of market share to JD.com and Pinduoduo? These are perhaps questions a long-term investor has to ponder through. It is obvious that the global e-commerce sales is still projected to trend up but does Alibaba have the durable economic moat to withstand more and more competitions?

Alibaba’s Lines of Businesses

It is important to realize Alibaba’s ownership of diverse lines of businesses across e-commerce, cloud computing, digital media & entertainment and other innovations. Alibaba also has a 33% stake in Ant Financial which is slated to have its IPO on the Shanghai and Hong Kong stock exchanges. E-commerce is still the core today, with 86.7% of the revenue contribution. The one that particularly catches my attention is the cloud computing business. Alibaba is number one in cloud computing in Asia Pacific and the YoY growth is tremendous. This line item is still yielding negative earnings but it is moving towards profitability, the latest quarter showing -3% EBITA margin.

I believe the cloud computing business is of strategic importance to Alibaba’s future growth, something the CEO Daniel Zhang has emphasized too.

This chart below may be of interest to you. Many people say Alibaba is the Amazon of China but actually there are important differences between them which I shall not cover here. The important point here is that Amazon derives most of its income from its AWS cloud computing services! What does this mean for Alibaba when it achieves further scale for its cloud computing business and turns profitable?

Google has “other bets”, Alibaba has too from video streaming services to New Retail, Artificial Intelligence, Electronic Vehicles (they have invested in Xpeng which is filing for IPO too) etc etc. Would any of these become the next super growth engines?

Valuation

I am absolutely very positive about the further growth potential of Alibaba. We started discussing this company a while back and some of you have picked up some shares or use Sell Put strategy with good profits. The share price has reached all time high now at $289, so is it too late to enter?

As always, you will have to make your own personal investment decision. This is just my view. With some conservative growth projection, I estimate the intrinsic value to be about $300, this is not taking into consideration the gains from Ant Financial IPO and when cloud computing turns profitable. I want to have better entry points into the stock, and any pull back of the share price perhaps arising from further US-China tensions will present good opportunities, especially for long-term investors. Sell put strategy continues to be great and if you would like the strike price to be lower, you can choose to go for longer option expiry dates.

Disclaimer: materials presented do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.