Happy Sunday ☀️
Last week Richard Branson flew to space on his Virgin Galactic rocket plane and safely returned. Leaving aside all the gossip and definition of where “space” begins, the flight is a great achievement.
"I was once a child with a dream looking up to the stars. Now I'm an adult in a spaceship looking down to our beautiful Earth" - Richard Branson
Branson’s resourcefulness has made him one of the most successful entrepreneurs in the world - btw highly recommend his autobiography, Losing My Virginity. Despite this it took him until the age of 70 (17 years after founding Virgin Galactic) to make his dream come true.
It seems that half a century after the first moon landing it is still pretty difficult to go to space. Either way, it is great to see people realizing their dreams.
Now let’s get down to business.
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NEWS | OPPORTUNITIES | OTHER
US Inflation in June increased to 5.4%, the highest level since 2008 and significantly above the forecasted 4.9%.
Why does this matter?
If policymakers underestimate the persistence of price growth, they risk having to raise interest rates much more abruptly later in an effort to control inflation.
On the other hand, if they act too quickly to withdraw the pandemic economic support measures, it could risk the recovery at an important stage. This is a particular danger given the growing spread of coronavirus variants across many parts of the world. More here.
So where did consumers feel the most pain?
If in June you rented a car or bought one second hand, you probably (definitely) overpaid! This category alone accounted for 1/3 of the overall Consumer Price Index (CPI) increase.
The other major culprits were anything to do with reopening: hotels and motels, airfare, restaurants, etc.
J-Pow acknowledged that inflation is hotter than expected but still says it’s too soon to begin scaling back on the monthly $120 billion Treasuries and mortgage-backed securities allowance.
Big Bank Earnings. Several major banks announced their Q2 results this week. In short:
JPMorgan:
Revenue: $31.4 billion rev. vs. $29.9 billion est
EPS: $3.78 a share vs. $3.21 est
Highlight: $3.4 billion investment banking rev. vs. $300 million est
Morgan Stanley:
Revenue: $14.8 billion rev. vs. $14 billion est
EPS: $1.85 a share vs. $1.65 est
Highlight: $2.83 billion equities-trading revenue beat estimates by +$400 million
Goldman Sachs:
Revenue: $15.4 billion rev. vs. $12.2 billion est
EPS: $15.02 a share vs. $10.24 est
Highlight: $3.6 billion investment banking revenue vs. $3 billion est
Wells Fargo:
Revenue: $20.3 billion rev. vs. $17.8 billion est
EPS: $1.38 a share vs. $0.97 est
Highlight: $6 billion net income compared to $3.8 billion loss in Q2 last year
Citigroup:
Revenue: $17.5 billion rev. vs. $17.2 billion est
EPS: $2.85 a share vs $1.96 est
Highlight: $1.1 billion equities-trading revenue vs $879 million est
Clearly a good quarter for banks, helped by the release of billions in reserves that had been set aside for loan losses (COVID) that did not materialize.
ByteDance, the world’s most valuable unicorn and the owner of TikTok, put on hold its intentions to go public after Chinese government officials told the company to focus on addressing data-security risks. More here.
ByteDance was last valued at a whopping $180 billion in a funding round in December 2020. In the secondary markets, ByteDance’s shares have recently been trading at an implied valuation of about $330 billion.
Netflix plans to add games as a new category to its library and has hired Facebook’s Mike Verdu, who led the company’s virtual reality games business, to lead the effort. Among other things, the company announced “Stranger Things” game and choose-your-own-adventure content.
It is too early to tell which approach Netflix will take but gaming is becoming a very competitive space with several Apple, Facebook, Microsoft and other large players wanting to own a piece of the cake. More here and here.
Intel is reportedly looking to buy GlobalFoundries, one of the largest specialist chip-production companies, for around $30 billion. More here.
China sent state security officials to ride hailing company Didi as a part of a cybersecurity investigation. Didi’s shares fell 7% in pre-market trading and are down 30% since the IPO opening-high at the beginning of July. More here and here.
NEWS |
OPPORTUNITIES
| OTHER
Index Landscape
The chart below shows the valuation (multiple) vs the expected revenue growth for an index of software companies. A clear correlation is visible. Correlation is not causation but it does indicate that investors are willing to pay higher prices for companies with stronger growth.
After running analyses on a broad range of KPIs including profitability, capital efficiency, customer retention, marketing efficiency, and several others, I could see that growth has the strongest impact on the valuation multiple. In other words,
expected revenue growth is the strongest financial valuation driver for software companies.
We can spot a few outliers:
BILL - my high-level overview here.
DBCO - my high-level overview here.
PEXIP - my high-level overview here.
OKTA - My employer was an investor in Auth0, the company that Okta acquired for $6.5 billion this year, so I cannot cover or invest in Okta.
API - Agora is a Chinese software company focusing on real-time voice and video engagement. Chinese regulators are currently shortening the leash on public tech companies and the environment is different in many ways, so I have not covered the company yet.
While growth is the most important valuation driver, pricing is of course based on additional factors which can create price differences among software companies:
Company-specific. This includes product, brand, management, intellectual property, financials/KPIs and others
Market-specific. Market size, growth and competitiveness. Regulation. Also the attention from investors towards different verticals like HR Tech, FinTech, Cybersecurity, etc., fluctuates and can therefore have temporary effects on valuation multiples
So the chart above can point us in the right direction towards companies and verticals which we should have a closer look at in order to find an undervalued / overvalued opportunity.
Reach out or comment if you want a deep dive on one of the players on the map.
Quarterly Performance
Darktrace (DRKTF), the cybersecurity company that listed in April, shared a high-level performance update based on its financial year which ended with June 2021.
Annualised recurring revenue (ARR) at the end of June was $340 million, representing 44% YoY growth, well above the 35% forecast from analysts
The company also increased its growth-guidance to 29% and 32% for the year to end-June 2022, up from 27% to 30% previously
The share price jumped 15% after the update. Over the last 30 days, the share price has increased by ~65%.
Darktrace is now trading at a 15.8x NTM revenue multiple
Active Investments
Bill.com (BILL) - Target price: $100. Analysis
Pexip (PEXIP) - Target price: $15. Analysis
Docebo (DCBO) - Target price: $70. Analysis
ECOMI (OMI) - Target price: MOON. Analysis
NEWS | OPPORTUNITIES |
OTHER
🔨 Elon Musk is transforming an entire neighborhood into a solar-powered town
🚀 Winner who paid $30m for space flight with Bezos won’t go due to ‘scheduling conflicts’
🤿 Dubai’s 60m deep pool with a ‘sunken city’
⚫ BMW’s sinister X5 Black Vermilion SUV
📷 7,777 daily selfies. A daily aging process over 20+ years in 2 minutes. Fascinating
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I am long DCBO, PEXIP, OMI and short BILL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
I am not a registered investment, legal or tax advisor or a broker / dealer. All investment / financial opinions expressed by me are from personal research and experience and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.