|
On May 24th, 2023, $750M Nvidia jumped 26% after its earnings release while reporting a 13% year-over-year revenue growth decline. How can a mega-cap stock jump nearly 30% in one day, and how is that possible when revenue growth decelerates? The answer is the AI boom. The company designs and builds semiconductors and chips that power data centers with the computation capacity to run generative artificial intelligence applications and large language models. The data centers are foundational to other large tech businesses, such as Microsoft and Google, who want to meet the rush of demand by companies of all sizes for generative AI applications. Aside from the recent price rally, Nvidia's stock price is no stranger to big jumps in price thanks to similar technological boom cycles such as cryptocurrencies. As a matter of fact, in five years, the stock went from a low of $35 per share in 2018 to a high of $400, generating more than a 1000% return on the day of recording this episode. The question is, after a 5-year 1000% gain, is it too late to buy Nvidia? Let's talk about that!  I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories. This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), and JD.com (JD). I'll continue with this series for a few more weeks. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask you name and email address when you sign up. Before discussing Nvidia's fundamentals and assessing whether it's time to buy, let's point something out. If you are already investing in the broad market index ETFs such as SPY or QQQ, you already have a big exposure to Nvidia. The stock is the 4th largest holding in SPY ETF and the one I the largest stocks in the QQQ ETF. So no! it's not too late to buy Nvidia, you are already an investor if you are an index investor through your 401K or other similar accounts. You now need to ask whether you'd want direct exposure to Nvidia too. The stock has a few interesting fundamental characteristics that can help you decide whether the company has more room to grow. Let's go through the stock's fundamental analysis using our usual fundamental framework:
NVIDIA's Fundamental AnalysisNvidia makes money by selling computer chips that it designs and builds for other technology companies to run data centers, make video games and computers, and build autonomous vehicles. Interestingly, Nvidia doesn't manufacture its own chips. It works with Taiwan Semiconductor (TSM) to make the actual chips. But the company develops the technological architecture and the software that makes those chips unique and powerful. There are two important fundamental characteristics in what we just discussed:
NVIDIA's Topline & Bottom Line: Fundamentally speaking, Nvidia has solid top and bottom lines, two important factors we consider when researching a stock. It's also important to notice that the roughly 30% jump after the recent earnings report comes from the company's forecasted $11B revenue for the next quarter, up from the $7.2B in the year's first quarter thanks to the AI boom which strengthen its topline growth and health. NVIDIA's Free Cash Flow: Having a growing topline is good, but better is the company's ability to turn that revenue into cash. Typically, free cash flow is a good indicator that a company's business is working. And Nvidia doesn't disappoint. It generated $2.6B in free cash flow. NVIDIA's Balance Sheet: On top of its cash-generating business, it has more than $19B in cash and cash equivalents on its balance sheet against roughly $7B in current liabilities. Nvidia generates cash and has access to enough cash to invest in its future growth without any concerns. Why Does NVIDIA Want To Issue New Shares? Talking about cash and balance sheet, there is a rather surprising announcement but the company's SEC filings. It has announced that it may sell up to $10B in new shares at some point, raising additional capital. It's surprising because of all the cash it already generates and holds on its balance sheet. Raising capital doesn't sit well with current shareholders because it increases the number of shares and dilutes the existing shareholders' ownership of the company. Most likely, the company is trying to take advantage of the AI boost to its market cap to authorize share issuance without worrying about the market's negative reaction if it was announced at any other time. My guess is that the new shares can be used to fund the repayment of its current debt, or Nvidia expects it needs much more capital and R&D to stay competitive in the market and that investment is much higher than the cash it has on hand and can generate in the future. Nevertheless, both reasons don't sit well with me and are a red flag in my books. NVIDIA's Valuation: Aside from those fundamental metrics, the important question we should discuss now is whether the company deserved the 25% jump on the earnings release day and the follow-on price increases since then. Today, when I'm researching, Nvidia boasts a 200+ price-to-earnings and 37+ price-to-sales ratio. The Forward price-to-earnings ratio of 53 times indicates the company is expected to be more profitable in the future, but still, these valuations seem quite extraordinary. To grow into 37 times the P/S ratio in 10 years, Nvidia must grow its revenue by roughly 43% annually all else equal. Nvidia has grown by almost 30% per year compounded in the last few years. But still, 43% compounded annual growth is quite aggressive. Moreover, the generative AI market is expected to grow by 27% annually in the next ten years. Even if Nvidia grows as fast as the market, it still has a 16% difference between the market growth and the required growth rate to grow into its current valuations. That's HARD to do. Before summarizing Nvidia's fundamental analysis, and discussing what we should do with the shares, let me invite you to look up Nvidia's Stock Card to research the company on your own. I leave a link to its Stock Card in the show notes. Better yet, if you don't feel comfortable paying such a high price for Nvidia, we recently launched the generative AI stock list on Stock Card so you can find stocks like Nvidia working in this rapidly growing industry. Type "generative AI" in the search bar and get the list. I leave a link to that list in the show notes too. NVDIDA's Fundamental RecapNow, let's recap Nvidia's fundamental analysis:
Is NVIDIA A Buy Now?Knowing all that, what should we do with Nvidia shares? I have no doubt NVDA's stock price can and may go up in the coming months. That's how hype-driven stock prices tend to move. They go up until something disrupts their momentum. In the case of Nvidia, any new stock issuance, any disruption to the huge revenue forecast, competitors' announcements, or any supply challenges can qualify as a disruption, and then, it can easily give back its 25% jump in a day. If you own NVDA as I do, taking some profit off is not a bad idea, especially if you have other or better investment options. And, then, buy the stock back when it comes off the AI hype. Be careful that you may sell, and the stock may still go up. You need to be satisfied that you took some profit, reduced your risk, and can sleep better. Remember, investing is a game of probabilities. The investment return is not an absolute figure. You need to consider how much risk you take to generate a return and whether that risk is justified. After Nvidia's big recent jump, the probability of a decline goes up, and staying away is a prudent strategy. Also, remember, as we discussed at the beginning, if you are investing in SPY or QQQ index ETFs through your 401K or automated passive investing, you already have massive exposure to Nvidia. Ultimately, you need to decide whether you are okay to chase the momentum and risk higher drop probabilities or prefer to take some profit off now and wait for the next cycle by adding the stock to your buy-the-deep watchlist. I decided to sell my Nvidia shares, and if you were a Roll with Our CEO portfolio follower, you must have received an update notification. See you next time!
Michael Burry is as close as it gets to a stock market celebrity. Investors like to follow his every move. The always-pessimistic investor has earned the right to his celebrity status by enduring the emotional toll it takes on one's mind to go against the mainstream. His famed bet against mortgage-backed securities in 2008 made him and his clients millions. His bet on GameStop and the consecutive short-squeeze solidified his status as the dark prince of the stock market. In later 2022, he forecasted an extended multi-year recession for the U.S. economy, and now he is making big bets on China's consumer spending recovery by picking up shares of Alibaba (BABA) and JD.com (JD). Is he right about those Chinese stocks? Let's talk about that!  I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to research companies that are down significantly from their all-time highs to decide whether to buy more or sell and allocate money to other companies. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), and Unity (U). I'll continue with this series for a few more weeks. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask you name and email address when you sign up. Chinese stocks and whether to invest in them is a fascinating story in the market. Some hate investing in the country due to political and philosophical differences between the U.S. democratic system and China's government-controlled economy. Some prominent investors, such as Charlie Munger, who have been quite bullish about investing in companies such as Alibaba, have recently changed their minds about the company. I have discussed how I disagree with Munger in a recent episode that I recommend you watch if you are interested in Alibaba. I'll leave a link to it in the show notes. Today's episode is about JD.com (Ticker JD), one of the two Chinese stocks Burry has invested in based on the last 13F report for this investment management company, Scion Asset Management. Interestingly, one of our YouTube channel viewers has also recently requested detailed research on JD, so I'm doubly glad to spend today's episode on this company's fundamental analysis. If you have any stock ideas you'd like me to cover in the future, don't forget to share them in the comments. You never know, it can find its way to future episodes. On to JD's fundamental analysis. As always, we look at the company across six criteria:
JD.com's Fundamental AnalysisJD.com is a Chinese e-commerce company headquartered in Beijing. According to the company's website, it is the largest online retailer in China and the biggest internet company by Revenue. This is interesting because I thought Alibaba owned that title. JD's Topline: The company just recently announced its earnings release report, with 243M in Chinese Yuan quarterly revenue, down 18% quarter over quarter. Not a so good start for a company to bet big on. That's certainly a red flag. But, let's not rush and understand the reasons for the decline. The decline isn't as bad when you compare the revenue with Q12021, which is up nearly 1.5%. When you look at the revenue across all business units, JD Logistics drives growth while new businesses and retail suffer. We discussed this in the past when we analyzed Snap together, revenue is a lagging indicator. To see where a company is going, we must look at its leading indicators, such as daily active users. Engagement inevitably results in higher revenue if more users are active on the platform daily. JD's application saw double-digit year-on-year growth in March. Additionally, there is a revenue mix shift. JD is focusing on moving toward more high-margin categories, such as Services, which is a segment that grew 34% in Q1. The Services refer to marketplace and advertising revenue it charges merchants and advertisers to leverage the company's platform. My point is that the business isn't in downward disarray. It has growing segments that will result in future revenue growth. Complex Organization: While researching the company's different divisions, I came across another red flag which is the complex organizational structure of JD. As you read through the company's annual reports, it's cumbersome to understand the relationship between different divisions. Every segment of the company acts like a stand-alone company in which the broader JD has ownership interests and agreements. The CEO talked about reorganization efforts to simplify the structure, and we have seen similar efforts at Alibaba. A complex organization isn't bad by its nature. For example, Berkshire Hathaway is a complex organization with multiple equity ownership, full ownership, and part investments in various businesses. It just makes understanding the business harder, and that's a red flag in my books. JD.com's Bottom Line: This seems to be an area the management focuses on. Even the core retail business, which has been shrinking in terms of top-line revenue, has managed to grow its profitability by almost 5% year on year. The improvement comes from cutting marketing expenses by 8% and R&D by 4.5%, with most other costs staying relatively steady. It's good to see high profitability, but not good to see R&D cuts. JD.com's Free Cash Flow: Profits are good, but better yet is free cash flow which is a true indicator of a business's ability to make money. Although the company didn't make free cash flow in its latest quarter, the trailing 12-month free cash flow is 19B Chinese Yuan. On a roughly 1 trillion Chines Yuan annualized revenue, 19 B free cash flow represents about 2% of free cash flow to revenue ratio, It's good to see the company makes free cash flow, but the FCF to revenue ratio isn't as impressive as I had hoped. JD.com's Balance Sheet: The next point is JD's balance sheet strength. The company has some cash and some liabilities with its primary metrics, such as debt to equity, debt affordability, and current ratios, all hovering in an acceptable range. Summary of JD.com's Fundamental Analysis: So let's recap JD's fundamental analysis before turning to its valuation because the company's fundamentals aren't a slam dunk as some of the other companies we have discussed in the past, which you can watch and view if you go to the "Beaten Down Stocks" playlist on our YouTube channel. However, they could all be overshadowed if we can buy JD at a good valuation. In summary:
Why Did Michael Burry Invest In JD?Knowing all that, why did Michael Burry allocate over 19% of Scion Asset Management's fund to this company? The answer lies in the valuation:
Michael Burry is making a value bet on JD's stock, most likely expecting a recovery in consumer spending in China in the years to come and understanding that the company is indeed able to grow its revenue in the future. Also, the upside expectation isn't limited to Burry. 9 analysts who updated their JD's price target in the last six months expect an average 100% upside for the stock with 7 Buy recommendations and 2 Hold. Knowing all that, what should we do with the shares? Should we follow the dark prince of the stock market to buy more JD's shares? Is JD.com A Buy Now?Buying this stock goes back to how comfortable you are with owning and holding a Chinese stock. I believe the stock is truly undervalued and has an upside. But, there is no guarantee the recovery to happen anytime soon. If we compare JD's market cap with Alibaba, we see a 4X difference between the two. Although Alibaba gets a big valuation boost because of its cloud and mobile payment businesses, they are relatively comparable. I expect that JD can double my money if I'm patient enough. But I don't see the evidence that the stock can be a significant multi-bagger. You should decide if you have the patience and the interest to hold JD.com in your portfolio for a chase to double your money. Now it's your turn to lock up JD's Stock Card. See you next time!
Unity (U) Software is a platform that lets other companies tell beautiful stories in video games and beyond. Unity and its nemesis, Unreal Engine, owned by Epic Games, dominate this digital experience development software market as a duopoly. Unity is more focused on mobile experiences and Unreal on PCs. Believing in Unity's story and expecting its stock to generate a massive return on your investment is so easy to accept, especially in a world where digital experiences become more immersive, beautiful, and unbelievably real. But, as investors, we can't fly with the stories. We must look behind the proverbial curtain and see what's happening behind the scenes. The last time I looked at Unity Software (Ticker: U), several investors I trust were selling their Unity shares because of the company's revenue growth slowdown, high stock-based compensation that results in diluting current shareholders, and the management's tendency to keep information close to the chest and not be straightforward with investors. That was back in November 2022. Fast forward five months, and the stock just popped over 13% after releasing its latest earnings report on May 10th. Is Unity a buy now, or do the concerns of growth, dilution, and management attitude still hold true? Let's talk about that!  I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to research companies that are down significantly from their all-time highs to decide whether to buy more or sell and allocate money to other companies. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP). and Airbnb (ABNB). I'll continue with this series for a few more weeks. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask you name and email address when you sign up. How To Fundemantally Research UnityI own Unity's shares directly and indirectly through owning ARKK ETF, which allocates 3.5% of its assets to this company. Therefore researching Unity's fundamentals is quite interesting to help me decide what to do with its volatile shares. In October 2021, the stock was priced at more than $170. As I'm recording this episode today, the stock is up 12% during market hours and down by 6% in the after-hours trading on the same day. It's quite volatile and hovers around $32 per share, down 80% from October 2021's price. We can only hold on to the shares after such a big drop if we have a fundamental conviction that the stock is worth holding. In the next few minutes, we'll research Unity fundamentally using a 6-part framework:
Unity's Latest Earnings RecapUnity software is mostly known for its presence in the video game industry. However, its software enables any developer or artist that wants to make high-quality 3D content to do that easily and beautifully. It also offers its customers ways to sell advertisements through the 3D environments they create using Unity's software. In Q1 2023, roughly 40% of the company's revenue came from the 3D creation software and solutions and 60% from advertisement and monetization. Unity has been making new acquisitions to strengthen its advertisement and monetization division. And it is still integrating ironSource, one of the key acquisitions for the advertisement division, to shore up the revenue. Topline: We can see the result of all its effort in its 56% year-over-year revenue growth, which is entirely due to the revenue from the acquired companies such as ironSource. Without the acquisition's contribution, commonly known as a proforma basis, revenue was down 2%, Y-O-Y. This is a double-edged sword. On the one hand, as investors, we are happy to see the company growing; on the other hand, we are worried that the company has lost its ability to grow revenue organically. There's our first red flag. If we dig deeper, it looks like Create Solutions, the 3D creation unit, was up 14% year-over-year. That's not bad, but it is far from the rapidly-growing company Unity once was or needs to be. The management believes the revenue growth will accelerate in the coming months due to price increases, new customer adoptions, and growth in China. That promise to accelerate growth reduces my worry about the slow revenue growth we discussed earlier. Unity's Net Dollar Retention Trend: The other red flag related to the revenue is the net dollar expansion rate reduction. In Q1 2021, the company had a 140% net dollar expansion, which means for every dollar the customer was paying Unity, it spent 40% more the next quarter. In Q1 2023, the rate is down to 107%. Some of that decline can be due to price increases, but it is still a red flag. Unity's Bottom Line: On the bottom line, the company is still committed to generating $1B in adjusted EBITDA by the end of 2024. This means the company takes its net loss and adds back stock-based compensation, amortization of its assets, and a few other non-cash expenses and gets to its adjusted EBITDA. With that method, Unity made $32M in adjusted EBITDA this quarter. What's surprising is the company's belief in getting to $1B in adjusted EBITDA by 2024. The major contributor to Unity's net losses is a more than $100M increase in sales and marketing expenses, which the company attributes to a higher headcount related to the ironSource acquisition. You can see the impact of such an increase in headcount on the number of outstanding shares as the company issued more than 100M shares compared to Q1 2022 but flat compared to Q4 2022. Generally, as investors, we don't like new shares issues because it reduces our company ownership and earnings per share. Regardless, the company plans to keep its outstanding shares stable in 2023 and manage its headcount well, which is good news. Overall, the company's profit generation power isn't better or worse than what we discussed in November. I leave a link to November's Unity review video so you can compare it with today's episode and notice the changes. Unity's Balance Sheet: The next point is Unity's balance sheet strength. It holds $1.6B in cash and cash equivalents and more than $2.3B in current assets, including accounts receivables. Compare that to $1B in liabilities. Overall, Unity doesn't have a major balance sheet risk. The red flag on the balance sheet is not associated with running out of cash but is related to future share issuance. Unity has almost $3B in convertible notes, eventually converting into common shares and further diluting us, the existing shareholders. Unity's Free Cash Flow: Talking about cash on the balance sheet, Unity returned to negative free cash flow this quarter, and that means it still needs to use the cash it holds on its balance sheet to fund portions of its projects to grow in the future. The management explained it expects to generate free cash flow in the year, and that is something to hope for. So let's recap Unity's fundamental analysis:
Unity's ValuationKnowing all that, Unity isn't yet the slam-dunk company it once was. So when I look at its valuation ratio of more than six times the price-to-sales ratio, this seems quite expensive. Compare this with Tencent's valuation, which owns Unity's competitor and is priced five times sales. We can argue Tencent is a much different business because its Unity comparable business is just a small portion of its operations. So, instead, let's do some math. To become six times bigger in the next five years:
Is Unity's Stock A Buy Now?Overall, it seems Unity is on the right track. But the stock market investors are also already jumping ahead, pricing the stock for success. I wouldn't have been buying new shares if I didn't own shares. Since I own it, the shares go to the hold-until-find-a-batter-choice bucket. Unless I find a better opportunity to reallocate my capital, I'll monitor the company to see how it executes its plans to generate free cash, reach $1B in adjusted EBITDA, and return to rapid growth. In a way, my conclusion didn't change much compared to the last November. Now it's your turn to lock up Unity's Stock Card and share your research in the comments so we can all learn from each other. If you have a recommendation for better stocks than Unity to buy now, don't forget to share them too. I left a link to Unity's Stock Card and a few other resources and YouTube channels I used to create this video in the show notes too. See you next time!
Airbnb (ABNB) lost more than 11% after releasing its earnings report on May 9th. What happened, and is the double-digit drop a buying opportunity? Let's talk about that! I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to research companies that are down significantly from their all-time highs to decide whether to buy more or sell and allocate money to other companies. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) and Shopify (SHOP). I'll continue with this series for a few more weeks. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask you name and email address when you sign up. Airbnb's Fundamental AnalysisAs usual to conduct fundamental stock analysis, we would review six things:
Airbnb's Fundamental Analysis: Airbnb started as a way to rent your extra room to others for a few nights, and grew into a travel industry disruptor, eating into legacy hotel chains' market share. It's much easier to rent an entire house for you and your family instead of cramping into an expensive hotel room where your lovable giant pooch or your kids can run around while you can make a five-course meal all from the comfort of a professionally-designed and well-kept house in a new city or country. At least, that's what my family does when we travel and stay at an Airbnb. Airbnb's Top Line: Airbnb makes money by charging people a booking fee when they reserve a home through its platform. Later, the company launched a way for locals to offer tours and experiences to travelers and added a new source of booking fees. In Q1 2023, the company generated $1.8B in fees, up by 24%, excluding the impact of the currency exchange rate. Customers booked 19% more nights and experiences this quarter than in Q1 2022. The company is rapidly growing across all regions, including China, the E.U., and Latin America, with Brazil and Germany being two of the fastest-growing markets. Airbnb's Bottom Line: Airbnb turned a positive net income this quarter thanks to higher interest income on its $8.2B in cash and cash equivalent. However, its operational loss was negative $5M in Q1 2022. There lies the first red alert. Why did the company lose the same amount of money if its revenue grew by 24%? If we dig into the profit and loss statement, you'll notice some costs, such as Product Development and Operations and Support are up a few million dollars. But nothing comes close to a $105M increase in sales and marketing. In other words, the revenue was up by $309M in exchange for $105M in incremental sales and marketing. Why? Most of the increases are due to good old advertising campaigns. Airbnb has recently gone back to its origins, enhancing and promoting the room-rental experience (as opposed to an entire home) and that's one of the reasons investors are worried. Airbnb plans on investing more on advertising to promote its room-rental refocus among other things. Let's have that in mind as a risk. To grow, Airbnb has to keep piling up on digital marketing. Airbnb's Moat: Even though the core operations aren't profitable, Airbnb has a unique competitive advantage, its business model. You may have heard or read this statement that the world's biggest travel company (i.e., Airbnb) doesn't own or run any property. Indeed if you compare Airbnb with the list of lodging stocks by typing "lodging" in the search bar on Stock Card's website, you'll see lodging stocks, and the biggest one on the list is Marriott (MAR) with $54B in the market cap, compared to Airbnb's $70B. Using the lodging stock list, you can easily see such a unique business model's advantage in Airbnb's financial figures. The company generates an impressive free cash flow. In Q1 2023, it generated $1.6B in free cash flow, up from $1.2B. This is extraordinary. Airbnb made $1.8B in revenue and $1.6B in free cash flow. That's an 88% free cash flow to revenue ratio. Of course, if you dig into the company's Cash Flow statement, this is mostly because the company received nearly $1B in bookings, which is not recognized as revenue this quarter. After all, people book travel well ahead of time. Airbnb's business model is a cash-generating machine because it doesn't have to spend capital on purchasing and maintaining real estate and properties. Why Airbnb's Stock Is Down After Its Earnings Report on May 9thAirbnb stock was down significantly after the earnings report because it warned investors of slower growth in Q2. The company explained it is due to a very difficult comparison with 2022 when people started to travel after COVID. Airbnb is also talking about a lot of new product developments. You can see that in its investment in product development. We also heard CEO Brian Chesky talking about so many new and interesting product ideas coming through the product development pipeline to expand beyond its core vacation rental business. It gave investors a bit of pause to wait and see what happens and comes out in the next few quarters. One Big Risk Of Investing In Airbnb (ABNB)Discussing Airbnb's fundamental strengths above, it's no wonder the stock is priced 10X its sales. With the price decline on May 9th, that ratio goes down slightly, but still, it's an expensive stock. A 10 times increase in value puts its market cap in the $800B range, higher than META's current $700B market cap, which makes $117B in revenue, $7B in free cash flow, and $6B in profit. So at a 10X P/S ratio, investors expect Airbnb to grow its revenue by 100X or generate more than 6B in profits, or more than triple its free cash flow. That's a tall order, to say the least. Summary of Airbnb's Fundamental AnalysisWe can summarize Airbnb's stock in five bullets:
Knowing all that, what should we do with the shares? Is Airbnb's Stock A Buy?As a long-term investor, I'm not worried about the stock price drop and its earnings report. Airbnb's management team has proven itself year after year to be able to innovate and improve the product. However, I'm concerned about the high P/S ratio we discussed earlier. For my personal portfolio, I don't see any room for Airbnb. My investment strategy has four main components:
Because of such an investment strategy, I don't add Airbnb to my portfolio. But for the reasons we discussed earlier, Airbnb can be a great investment for patient long-term investors who can accept the risk of buying a stock with a 10X price-to-sales ratio. Now, it's your turn to look up Airbnb's Stock Card to start your research. See you next time!
The so-called Amazon-killer company, Shopify (Ticker: SHOP), is up more than 20% in the last few days like it's 2021 all over again. What did the company share in its latest earnings report that has investors piling up shares, and is it too late to get in on the action? Let's talk about that! I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories. This post is part of a series I started last week to research companies I own that are down significantly from their all-time highs to decide whether to buy more or sell and allocate money to other companies. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) and I'll continue with this series for a few more weeks. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. What Happened To Shopify's StockShopify's story and success in the stock market are indeed fascinating. Founder and CEO Tobias Lutke started his journey to entrepreneurship from a snowboards online store to the $68B company it is today. Shopify is more than an online store platform. It enables business owners to run their entire online commerce business on Shopify. From accepting payments to shipping orders to getting loans, Shopify does it all. That's why some call it an Amazon killer. If Amazon created the Everything Store, Shopify would make everyone an online store owner. But killing a giant like Amazon isn't an easy task. Building the infrastructure required to accomplish such a lofty goal requires lots of capital, patience, and sustained periods of unprofitability. It's no wonder that stock price has been so volatile. The stock price has gone from $152 per share at the end of October 2021 to $27 in August 2022, experiencing an 82% drop in less than a year. And, then from there, the stock price gradually clawed its way back up with a 23% jump this last Thursday, followed by another 7% on Friday when I'm recording the episode. It's only natural to look at the double-digit growth in one or two days and wonder whether you've missed the boat on Shopify's recovery. Even more importantly, is it reasonable to assume that the stock price can ever return to the all-time high of $152 or even higher? Let's dig into Shopify's earnings report and see what clues the management team has left us. By the way, I own shares of Shopify indirectly through significant investment in ARK Invest's flagship ETF ARKK which has 5% of its fund allocated to the stock. Shopify's Latest Earnings ReportThe most important update from the latest earnings report is the company's divestiture of its logistics business. This is a part of the company's operations that enables Shopify customers to deliver their products to the doorstep of their customers. The company is selling this part of its business to Flexport, a logistics company, in exchange for 13% equity ownership in that company. Flexport is a private company we can't invest in, but I wish we could have. These types of businesses are typically very stable and profitable. Back to Shopify, it won't lose its logistic operations. Flexport stays a preferred logistics partner, but the move makes Shopify focused on its core, profitable software business. This is a good move, preventing Shopify from significant capital expenditure in physical shipping and logistics operations. It's also another good sign and an indicator of management's ability to move fast. Shopify acquired Deliverr in 2022 to strengthen its logistic business. But in less than a year, it decided to leave that business. I interpret that as the management team's ability and courage to move fast if its earlier decision wasn't panning out at planned. Shopify's Top Line: Aside from the logistic business, Shopify reported a 25% revenue growth in Q1, higher than forecasts. Even more impressively is the improvement in a Shopify-specific metric, Attach Rate. The Attach Rate is calculated by dividing Revenue by Gross Merchandise Volume or GMV. Because Shopify is in a retail business, the value of the merchandise sold through its platform isn't equal to its revenue. However, it wants to transform a bigger portion of that Gross Merchandise Volume into its revenue. For Shopify, in Q1 2023, that rate was more than 3.04%, up from 2.79% in 2022. This means Shopify customers use more of Shoipify's systems and solutions to run their business, attaching their success to Shopify. A good example is the growing volume of Shopify payments. Shopify's Bottom Line: Analysts were worried about losses and negative free cash flow in the last quarterly earnings report. I reviewed that earnings call back then and remember Shopify management scoffing over the analysts' comments and saying that returning to positive free cash flow and profitability isn't a problem. I leave a link to that video in the show notes if you want to go back to it. The good news is that Shopify made good on its promise and generated $86M in free cash flow, up from negative free cash flow of $41M last year. Even more impressive is the management's forecast of free cash flow profitability for each quarter of 2023. Wow! They are giving the analysts and shareholders what they like to see. Shopify's Balance Sheet: Aside from the top and bottom lines, the company's solid balance sheet is the next important factor. Shopify has nearly $6B in cash and cash equivalent against $1.6B in liabilities. So even if it isn't profitable for a while, it has the cash to allocate to its future growth. Risks Of Investing in Shopify
Recap of Shopify's Fundamental AnalysisLet's recap Shopify's fundamental analysis:
Without a doubt, if you are an investor in solid companies for the long term, you should always have Shopify on your watchlist for picking up shares when it hits lower valuation multiples like what we saw in October 2022. You can own shares of Shopify indirectly through investment in an ETF that is betting big on the company, like ARKK or one of the ETFs in that family of ETFs. That's what I'm doing. Because even if the ETF is wrong about Shopify, there are still other companies to compensate for that mistake in the long run. This allows me to keep cash for those smaller, 100-bagger stocks I'm always keeping my eyes open for. Those are the two things I would do. But, certainly, we have seen the market can get exuberant about companies that keep on growing and also generating cash. Shopify is indeed one such company that can potentially excite investors well above the normal realms of valuation logic. You haven't yet missed the boat if you believe that. Just expect a massive price swing. The higher the valuation, the harder the fall with even small bad news. Look up Shopify's Stock Card to start your research, and share your thoughts in the comments so we can all learn from each other.
|
Archives
May 2023
Categories
All
|
RSS Feed