by Todd Shaver | Jun 1, 2023 | Research Report
Cisco (CSCO: $50)
Coverage initiated June 1, 2023 at $50 in the Long-Term Growth portfolio
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.
Silicon Valley-based Cisco Systems (CSCO) stands as a shining example of a promising wunderkind that continuously pushes the boundaries of its potential. The four-decades-old company, which was once pegged to be the first trillion-dollar company, still trades below its all-time high of $77 during the dotcom bubble 24 years ago, despite a multifold rise in revenues, profits, and free cash flows during the same period. For years, the company has consistently pioneered groundbreaking new innovations, either via in-house developments, acquisitions, or partnerships, only to lose ground to fresh upstarts in those very segments. A prime example of this is WebEx, its video conferencing solution that was thoroughly outstripped by Zoom, despite having a head start and an established base of enterprise customers.
That being said, however, Cisco is far from the boring tech conglomerate that its valuations currently reflect. While the company is no longer plastered in headlines, or a mainstay in tech conversations as it once was, its products still play a crucial role in the broader ecosystem, particularly in its core networking business. This is precisely what makes the company such a compelling buy, especially at current valuations.
Enviable Product Mix
Cisco makes a broad range of networking and communication equipment that has long been dubbed the ‘backbone of the internet.’ From routers and switches to industrial networking and data center infrastructure, the company is an indisputable giant in this segment, with a market share of over 45% in ethernet switches. Gartner consistently crowns it as the lead in wired and wireless infrastructure.
During its third quarter results two weeks ago, the company posted a robust performance across the board, in the face of headwinds such as inflationary pressures, supply chain issues, unpredictable market dynamics, and economic uncertainties, among other things. We see this as a testament to Cisco’s products and services, which are still the backbone of networking infrastructure across enterprise organizations.
In addition to this, the company is now a sizable player in the hyperscale and AI markets, with its Silicon One Architecture, which is known for its efficient power consumption, which is crucial for hyperscale. Its recent acquisitions of ThousandEyes and AppDynamics have helped further bolster its profile in the observability space, which has since grown to become a vital element of the hybrid work environment. What is hyperscale? Hyperscale describes a system or technology architecture's ability to scale as demand for resources gets added to it. Examples of hyperscalers are Amazon AWS, Microsoft Azure, Google GCP, Alibaba AliCloud, IBM, and Oracle. As you can see, Cisco is right smack in the middle of this huge growth market.
Recurring Revenue
One reason Cisco has continued to underperform its big-tech rivals is its overreliance on hardware. In general, hardware companies come with a lot of baggage and are more prone to macro headwinds such as the present supply-chain constraints and inflationary pressures. Excepting Apple, hardware is a tough spot to be in this day and age.
Over a decade ago, Cisco recognized the importance of this and has since consistently strived for and witnessed a transition towards services and recurring revenues throughout its product range. While hardware still remains at the core of its offerings, starting in 2012, the company has quietly transitioned into a machine for services and recurring subscriptions, and this is precisely what our investment thesis is currently based on.
This was the logical next step for the company in order to build steady revenues. After all, even at large enterprises, it is rather rare to upgrade switches, access points, and firewalls on a regular basis. This transition has since paid off handsomely, with Cisco reporting monumental growth in subscription revenues, and in increasing remaining performance obligations, at $6 billion and $17 billion, respectively.
This shift has fundamentally altered the outlook of this stock, from being a low-margin peddler of utilities to a scalable, predictable, and largely low-overhead operating model. This shift further makes the company more resilient in challenging times, making it less prone to macro shocks, as no matter how dire the situation gets, large enterprises are unlikely to scale back on their wireless infrastructure.
Risk Factors
While this decade-long transformation has been off to a great start, it is not without its risks, or at least certain presumed risks. In recent months, investors have grown increasingly concerned about the company losing market share in its core networking business. Its well-known customers have been leaving in droves in favor of competitors such as Juniper Networks and Arista Networks.
This, however, is largely overblown in our opinion, as the company, being the dominant player in the market, is more prone to macro shocks, and will further bear the brunt of most competitive pressures as opposed to players with a smaller share of the pie. As a result, the stock has remained under pressure over the past few months, but things will subside as better sense starts to prevail.
Financial Analysis
The last four years of revenues have been solid, but flat. The company hit $52 billion in 2019 and then was hurt by the pandemic in 2020 and 2021 reporting $49 billion and $50 billion respectively. Fiscal 2022 ending in July last year saw $51.5 billion, and the company did $14.7 billion in the quarter ending April 30th, 2023, giving it a run-rate of $59 billion. The company is quite profitable, producing $4.1 billion in profits last quarter, a profitability rate of a huge 28% after tax. Very strong. Guidance: The company has predicted future growth rates of revenues at 15%, earnings per share of $1.05 for the quarter, and $3.80 cents for the full year ending July 31, 2023.
From the company in its recent quarterly report: Capital Allocation -- In the third quarter of fiscal 2023, we returned $2.9 billion to stockholders through share buybacks and dividends. We declared and paid a cash dividend of $0.39 per common share, or $1.6 billion, and repurchased approximately 25 million shares of common stock under our stock repurchase program at an average price of $49.45 per share for an aggregate purchase price of $1.3 billion. The remaining authorized amount for stock repurchases under the program is $12.2 billion with no termination date.
Icing On The Cake
Cisco’s core business, products, and fundamentals are beyond reproach, and now comes the icing on the cake, which is the company’s generous capital returns program. Since instituting its dividend program in 2011, it has been increased consecutively for 11 years, marking a 550% increase as of today. This represents an annualized yield of 3.1%, with a payout ratio of 43%, the best among the tech giants.
In addition to this, the company is all the more generous when it comes to its stock buybacks, having repurchased nearly 25% of its total shares outstanding since the end of 2013. During its recent third quarter results, the company similarly announced $1.6 billion in dividends and $1.3 billion in buybacks, with a further $12.2 billion in repurchase authorizations pending, with no expiration date mentioned.
All of this shows management’s confidence in the company’s steady cash flows, especially as it transitions to the subscription-based model. On top of this, the company has made remarkable strides when it comes to profit margins and free cash flow yields, in the face of substantial macro headwinds, ranging from inflation, supply issues, and waning demand.
BMR Take
Cisco is an outlier among the big-tech giants, trading at under 4 times sales, and a mere 12 times its free cash flow. During its third quarter results two weeks ago, the company posted a handy beat on estimates, with $14.6 billion in revenues, up 14% YoY, and a profit of $4.1 billion, or $1.00 per share. This was in addition to the boost in guidance figures, and yet the stock received a somber reception when the markets opened the following day. The company has $23 billion in cash, up from $19 billion last year, and less than $10 billion in debt. Cash Flow from Operating Activities -- $5.2 billion for the third quarter of fiscal 2023, an increase of 43% compared with $3.7 billion for the third quarter of fiscal 2022.
All of this points towards substantial coiled potential that is just waiting to be released, apart from the robust technical factors, with the RSI already above 75 and continuing to gain strength week after week, following the results. The old is forever new again. We believe we have found a diamond in the rough and we will be rewarded in the company years with the continued growth of big tech, electronics, wireless, computing power, networking, mobile and the like. Or, we could have just said we believe in Moore’s Law. Long live Gordon Moore’s legacy.
Added to our Long Term Growth Portfolio today, our initial Target is $60 with a Sell Price of $41. But we can see the day when Cisco hits triple digits.
by Todd Shaver | May 13, 2022 | Aggressive Portfolio, Research Report
Asana (ASAN: $24)
Coverage initiated May 13, 2022 at $24 in the Aggressive portfolio
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.
Asana is becoming increasingly popular as an enterprise-level work collaboration solution. The company's platform enables teams to orchestrate daily tasks and strategic initiatives, and manages product launches, marketing campaigns, and organization-wide goal settings. The stock has had a rough couple of months, dropping 85% from its peak of $146 in November. It is trading at its IPO price of $21 during its direct listing in late 2020 and as you know, investors have fallen out of love with fairy tale tech growth stocks that so far haven’t turned a profit. And note that Asana is not planning on being profitable this year.
Over the course of its six quarters as a publicly traded company, Asana has consistently delivered impressive growth rates and operational metrics, producing YoY revenue growth in excess of 50% each quarter. While the company still loses money, its losses as a percentage of revenue continue to decline, from 125% of revenue in 3Q21, to 35% in its most recent quarter. Their next earnings date is June 2.
We expect the company to be turning corners in 2023, driven by strong revenue growth and improving profitability margins, coupled with substantial insider buying in recent weeks. Given the increasingly distributed nature of work at organizations across the world, Asana helps provide a semblance of normalcy, which explains its growing popularity in the workplace.
Business Overview
Founded in 2008 by Mark Zuckerberg’s famed Harvard roommate and Facebook co-founder Dustin Moskovitz, Asana is an SaaS* tool for workplace collaboration, communication, and project management. Even though it was hardly a groundbreaking innovation at the time, Asana quickly gained traction among small teams, freelancers and startups owing to its intuitive interface.
*Software as a Service
Asana’s core premise was that an average knowledge worker spends nearly 60% their time “on work about work”; that is planning for meetings, communicating about work, and dealing with context switching*, without actually accomplishing any meaningful work. The platform enhances productivity by integrating all aspects of work and communications at one place.
*the tendency to shift from one unrelated task to another
Over the years, Asana has packed its platform with powerful features such as forms, workflow builders, the Work Graph data model, and approval systems, along with a robust admin system, APIs, and third-party integrations, effectively making its way from a niche tool for small teams and startups to an enterprise workflow solution used by Fortune 500 companies. What started off as a simple project and task management solution, is now a full-fledged solution to orchestrate work across an enterprise. With a relentless focus on optimizing workflows, reducing friction and boosting productivity, the company is employing machine learning, along with the Graph Workspace that allows searches, filters, and algorithms to help organizations unlock value in their processes.
Asana has successfully executed the “land and expand” business model, with its freemium pricing helping sign up 35 million registered users, out of which 2 million have been converted into paying customers. Not only does this large user base provide the company with crucial data on challenges faced by teams and organizations, it also represents significant untapped monetization capabilities.
The company has witnessed stratospheric growth over the past two years, driven by strong structural tailwinds arising from the pandemic and the resulting shift towards hybrid and remote work. At the time of its listing in 2020, the company had just 82,000 paying customers; now that figure stands at 114,000, including marquee logos such as Vodafone, Google, NASA and Uber.
Over 83% of customers surveyed in recent months agree that Asana improves job performance, with 77% agreeing that it saves time. The overall dollar-based net retention rate stands at 120% in its latest quarter, with the retention rates for customers with annual spends exceeding $5,000 and $50,000 at 130% and 145%, respectively, which speaks volumes on the platform’s value proposition.
Asana’s platform and products have received a series of honors and recognitions over the past few months, being named a leader in the IDC Marketscape Worldwide Collaboration and Community Applications vendor assessment. It was also recognized by Fast Magazine’s list of Brands That Matter, followed by Inc. Magazine’s list of Best-Led Companies 2021.
As the company continues to build on its work management capabilities, it will increasingly become a mainstay for organizations around the world. As it ingrains itself in the digitalized workflows of organizations, the resulting network effects will propel its next round of growth, all the while keeping competitive forces at bay.
Financial Analysis
In its most recent 3Q22 earnings, the company reported another quarter of stellar revenue growth at $110 million, up 70% YoY, compared to $70 million a year ago. Despite posting a loss of $43 million, or $0.23 per share, against a loss of $38 million, or $0.34, it beat estimates across the board, with plenty of strength on other key metrics.
The total number of paying customers grew by 7,000 during the quarter, to reach a total of 114,000; the number of customers with annual spend exceeding $5,000 grew 58% YoY to 14,000; and the number of customers with annual spending exceeding $50,000 grew to 740, up by a mammoth 130% YoY. The total number of paid users on the platform reached 2 million for the first time. Asana has a sizable RPO or remaining performance obligation to the tune of $190 million, up 87% YoY, which should be realized over the next few months.
Asana witnessed significant improvements in gross margins, which stood at an impressive 90% during the quarter. The bulk of the company’s expenses arise out of research and development, followed by marketing, and general administrative expenses, amounting to a total of $160 million during the quarter. Considering the rate of revenue growth in recent quarters, the company remains on the cusp of operating profitability.
The company ended the quarter with $340 million in cash, and $250 million in debt. It projects revenues for 4Q22 at $105 million, representing YoY growth of 54%. It is projecting a loss of $52 million, or $0.28 per share. Even with the negative cash flow at $30 million during the quarter, the company has a sizable runway of cash reserves to keep it afloat, with plenty of options to raise additional funds if needed.
Competitive Analysis
A key concern among investors is the fierce competition in this space, which includes the likes of Monday, Atlassian, Trello, and even industry bellwethers such as Salesforce.
The biggest trump card on Asana’s side, however, is its massive user base, the envy of its existing competitors and newer entrants. The company is capable of tracking and maintaining heaps of user data to guide its future developments and capabilities, all the while tapping new trends and opportunities, and deploying solutions to its captive user base before competing firms can gain traction.
Asana is no longer in the project management space - it is a leader among work management platforms. Given the company’s obsession with design, user experience, and intuitive interfaces, it has a significantly lower learning curve compared to other platforms, while still offering similar levels of customization and sophistication as required.
BMR Take
Given Asana’s growing traction in this niche, and the massive addressable market, comprised of 1.2 billion knowledge workers throughout the world, expected to be worth $32 billion by 2023, this company’s growth story is just beginning. Even with the pandemic receding, there are strong secular trends pointing towards long term remote and hybrid work becoming the norm.
While there are many companies working to address this segment, Asana is clearly the winner when it comes to reach. The pecking order in the long run ultimately comes down to which company does the best in keeping up with the evolving market, and given Asana’s background of execution, we have plenty of reasons to favor it.
Asana currently trades at less than 10 times sales. It is relatively cheaper compared to competitors like Monday, trading at 12-15 times sales. These valuations are not at all expensive when you consider the extraordinary YoY growth rates experienced by these companies.
Taking all of this into consideration, Asana clearly shows a lot of promise, and given its market cap of just $3.8 billion, it has plenty of runway ahead to generate value for investors. The company’s shares are seeing plenty of activity in recent weeks, triggered by insider buying, namely the founder and CEO, Dustin Moskovitz, buying $1.1 billion worth of his company’s stock in the last year. As Peter Lynch said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” Moskovitz’s aggressive buying in recent months, and his current holding estimated at 17% of the company, means his interests are perfectly aligned with shareholders. We expect plenty of fireworks in the future of this company, and we are excited to be a part of the ride.
by Todd Shaver | Dec 16, 2019 | Research Report
Agilent (A: $84)
Coverage initiated December 16, 2019 at $84 in the HEALTHCARE portfolio.
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.
Company Overview. Agilent is a Healthcare company that was spun out of Hewlett-Packard in 1999. At the time, it was the largest IPO in Silicon Valley history. The company improves the laboratory workflow by providing analytical instruments, software, and various other services that enhance quality and efficiency. The company also provides lab management services, including asset management, equipment management, laboratory business intelligence, software maintenance, and genomics and cloning.
Business Model. Management divested the company of several underperforming business lines during the early 2000s, when economic uncertainty reduced demand for Healthcare products. The company subsequently sold its semiconductor business to private equity companies for nearly $3 billion. The company also sold off its Healthcare and medical products divisions to Phillips Medical Systems for $11 billion. The dual-sales effort was part of a strategic decision to concentrate more fully on the laboratory test/measurement business.
Since 2010, the company has grown its core business line through both innovative product offerings and strategic M&A activity. Luxcel Biosciences, Lasergen, ProZyme, Genohm and Advanced Analytical Technologies are just some of the acquisitions the company has made in 2018 alone. Clearly, management has a growth strategy predicated on purchasing strong, nascent companies that enhance the product line and help attract and retain customers.
Competitive Analysis. Healthcare is a vast sector, with many large subsectors full of competing organizations. As a laboratory workflow manufacturer, Agilent occupies one of the more niche areas of Healthcare. Prominent and publicly-traded competitors include Thermo Fisher Scientific, Abbott Labs, Bruker Corporation, Shimadzu, ULVAC Technologies and Bio-Rad. Thermo Fisher and Abbott are by far the largest players in the space, with 70,000 and 100,000 employees, respectively. Thermo Fisher has a $130 billion valuation, and Abbott has a $150 billion valuation. By comparison, Agilent has about 16,000 employees and is valued at $26 billion.
That said, Agilent is the third-largest player in the space. It’s worth noting that both Abbott’s and Thermo Fisher’s revenue and net income have been soaring over the past couple of years. Abbott’s revenue rose 50% from 2017-2019, to $31 billion, and net income rose from $480 million at the start of 2018 to $2.4 billion at the beginning of 2019. Thermo Fisher’s revenue grew 30% in the two years from 2017-2019, and its net income rose 50% during that same time, to $3 billion.
The revenue and net income growth of the two major players in the space is a strong sign for the broader laboratory workflow sector, as it implies a robust demand for the products and services that the sector provides. Also, a rising tide lifts all boats, and as the third-largest ship in this ocean, Agilent is poised to benefit from both Abbott’s and Thermo Fisher’s rapid growth.
Financial Analysis. Agilent has strong financials. 3Q19 (which was the company’s fourth quarter) came in robust, with revenue of $1.3 billion up 6% YoY. Earnings were almost $200 million. Fiscal year revenue of $5.2 billion grew 5% YoY, and EPS of $3.37 was up a whopping 250% YoY. The company is guiding next year’s fiscal year revenue at 4-5% growth once again, and earnings guidance is expected to tick up slightly, as the company ramps up its M&A and sales and marketing efforts to continue to grow.
The company has a market cap of $26 billion, with cash of $1.4 billion and debt of $2.4 billion. That’s not bad for a Healthcare company, which generally assumes high levels of debt. All that cash has come by way of the company growing earnings at an average clip of 17% per year over the last three years. Revenue has been growing at 8% over that same time frame, and management has done an excellent job of keeping operational costs down.
Stock Performance. The stock has performed in-line with the broader market this year, up 27% YTD. The 1% annual yield puts it right on the S&P’s YTD return. The stock is currently at its all-time high. Yet this is clearly the brightest point in the company’s history, as Agilent spent a good chunk of years disposing of underperforming business lines and ramping its core laboratory workflow business. The company is in terrific shape today, and its spate of mergers and acquisitions illustrate the strong financial and fundamental position of the company. Management is dead-set on growth, and has the cash on hand to continue to fulfill its M&A strategy. The stock has reflected the excellent forward-looking prospects for this company.
Agilent is mainly held by institutional investors like T. Rowe Price, BlackRock, Fidelity and Vanguard. That’s a good sign, as heavy hitters in the Financial Analysis space are on board with the stock. The stock even got a boost recently when Bill Ackman’s Pershing Square announced a purchase of nearly 3 million shares, with the distinct possibility of future buy-ins. Ackman is a legendary hedge fund manager, so his investment into Agilent really means something.
BMR TAKE: Agilent is a growing company in a growing sector. The financials are strong, with solid revenue and earnings growth year-over-year. On top of that, management’s M&A strategy is accretive, and shows that the company is willing to improve its products and services by purchasing rising stars in the sector and absorbing them and synergizing the costs. The growth of both Abbott Labs and Thermo Fisher shows how popular the sector is, and what high demand exists for laboratory workflow companies – and that spells great news for the third-largest player in the space, that continues to make proactive strategic growth decisions.
What’s more, the recent investment by Bill Ackman, which only adds to the laundry list of institutional brand names aboard this stock, signals confidence by some of Wall Street’s best investment professionals. While not a reason to invest in a stock alone, it’s good to know that major hedge funds and investment firms are participating in the Agilent growth story.
Management has steered this company through some tough times, disposing of key business lines, reducing staff, and guiding the company through the pressure of a low-demand climate. Demand for laboratory services is growing, and management is intent on growing the company to take advantage of the boom times. We’re expecting big things from this stock next year as a result.
by wilsondigital | Jun 17, 2016 | Research Report, Stocks for Success
Is Apple a growth stock or a value stock? Let’s take a look at the values. Cash and Investments equal about $40 per share, about 44% of the current market value of the company. Take out that cash and it leaves a value of only 6 times earnings...
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by Todd Shaver | Mar 29, 2016 | REIT, Research Report
With over 1400 properties, Welltower is the biggest healthcare dedicated REIT in this large, growing and highly fragmented field.
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by wilsondigital | Mar 29, 2016 | Research Report, Stocks for Success
Visa is not a bank, although to many credit card holders, it may feel like one. In reality Visa doesn’t take deposits or lend money. It has no branches or ATM machines. It assumes no credit risk. It never even touches the billions of plastic cards that bare its name and familiar logo...
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