June 25, 2017
by Todd Shaver | Jun 25, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
Two themes are dominating the headlines heading into next week. First, several GOP Senators have come out to say they won’t vote for the Health Bill in its current form. But this is a yawn. Healthcare stocks rallied to end the week pushing past the uncertainty. Congress knows they need to do a good job because Americans are tired of their lack of accomplishments.
Second, everybody is talking about how Amazon will rule the world. Literally, the common question on conference calls now is: “Does your company have any Amazon risk?”. From Capitol Hill to Silicon Valley the bull market is rockin’ and rollin’. What a great time to be an investor. It won’t always be this good that’s for sure.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: First Solar, Athenahealth, Tesla, Twilio, Bristol-Myers, and Eli Lilly.
Highlights From The Past Week
Fed Stress test results are in. And everyone passes. On Thursday the Fed released the first phase of its annual stress test which, once again, found that all 34 of the US largest banks "passed", exceeding minimum projected capital and leverage ratios under severely adverse scenarios, based on their projected ability to withstand economic shocks, which shows that "firms are getting the hang of the once-dreaded reviews." The result marks the third straight year all firms cleared the minimum requirements in the exams’ first phase, begging the question just how "stressful" this test truly is. Results covered the "Dodd-Frank Act Stress Test" that measures banks’ capital under stress over the nine quarters. The banking system is very healthy. This is good news for the bull market!
OPEC deal to impact the oil market. OPEC’s production cut deal is unlikely to survive beyond its current deadline in March 2018 many believe. This would result in a huge amount of extra oil to hit the market. OPEC’s most recent deal has not had the cartel’s desired effect on the markets, neither in terms of oil prices nor in drawing down the global glut. Why? OPEC finally decided to cut back production. This should have reduced supply and in turn led to oil prices recovering. But what happened instead? Those darn US swing producers just jumped right back into ramping up production at the opportunity of the void left by the OPEC cuts. Now we are seeing oil prices fall again.
OPEC can’t be pleased with the US nullifying their efforts. The ongoing oil drama is likely to continue. Fortunately, the bull market doesn’t seem to care. We will keep a close eye on the situation just in case as historically, energy boom and busts have had far reaching effects.
BMR Companies & Commentary
First Solar (FSLR: $40, up 11% for the week)
President Donald Trump proposed a solar wall across the Mexican border. And guess who is the likely winner of the contract, First Solar!
At a rally this week in Iowa, Trump announced plans to build a solar wall across the Mexico border.
It appears that the department of Homeland Security has issued 2 RFPs for border wall design prototypes - one for a solid concrete wall and a second for other alternative designs. One of the applicants has submitted plans to construct a border wall with solar panels that would be used for lighting, sensors and patrol stations at the border site as well as to sell excess electricity to the U.S. and Mexican customers. Selection of winning bids is expected sometime this month.
Media reports suggest that the border wall could be about 50 feet tall and would require anywhere between 1.5 to 5GW of solar panels resulting in $10-15 billion of expenditures. While more details have yet to be announced around transmission, permitting constraints, and so on, we expect this announcement to be an incremental positive as it shows that despite pulling out of the Paris accord, the current administration is actually thinking of plans to increase the use of solar and renewables. Moreover, a number of state governments have recently announced plans to promote solar
In terms of actual beneficiaries of the Trump wall, we note that the bidding process would likely involve a number of solar companies but considering the company's established market position, First Solar remain best-positioned to win much of this business opportunity.
BMR Take: Not including the above contract, First Solar EPS is expected to ramp from $0.51 this y ear to $1.34 in 2019, according to consensus estimates. This earnings level is expected off of a revenue base of $2.8 billion this year. You add the potential for a multi-billion dollar government contract and you can see why we like the stock.
Yes, we are underwater on this stock as the firm disappointed investors right after we added it to our Special Opportunities portfolio early last year. It happened fast and we elected to stay with the company through the turmoil. We have noted many times that a turnaround is in full force but it is going to take time, at least into 2018 for the turnaround to be fully successful. It appears to be on track and the stock is on a long slow trajectory to get back to the $60 level and beyond. Last week was a strong statement.
Athenahealth (ATHN: $146, flat)
Would Apple acquire Athenahealth? It might make sense. If Apple were looking to plunge deeper into the digital health market, it would make sense for Apple to buy Athenahealth in order to quickly get some scale. After all, the company’s market cap is less than $6 billion.
CNBC previously reported that Apple is working on ways to turn the iPhone into a way for patients to centrally manage their health data, with connection to a cloud-hosting platform. The idea rings familiar, as it’s the same strategy the company deployed with music.
While the industry continues to make progress, a major issue in Healthcare is adequate interoperability to ensure the seamless exchange of medical data. Apple has more than 1 billion iPhone users, but currently has limited access to clinical systems that capture data in hospitals and physician offices. Meanwhile, Athenahealth has instant access to approximately 10% of the market, 83 million patient records, and roughly half of all U.S. doctors through its health app. Athena’s platform could be a ‘disruptor’ for Apple.
Putting some credibility to the talk, we point out this interested fact - Athena’s CEO & co-founder Jonathan Bush is passionate about making a difference in Healthcare including bringing its technology into the 21st century and according to sources, apparently Apple would be one of few homes for the firm he’d consider.
BMR Take: Athena’s EPS is on track to grow from $0.65 this year to $1.45 in 2019. This growth was good enough for a major activist investor, Elliott Management, to get involved in recent months, which has sent the stock price soaring. But the upside is not done yet. A takeout could push shares much higher.
Tesla (TSLA: $383, up 3%)
Tesla set a new all-time high on Friday at $387, before settling a bit to close at $383. The market cap is $63 billion, as compared with GM at $52 billion and Ford at $44 billion. It’s got a ways to go to catch Toyota at $165 billion, but after you read our BMR Take, below, catching Toyota is not out of the question.
Tesla is reportedly considering launching its own streaming music service. The company has already spoken to the major labels about acquiring the rights to stream songs and albums from the biggest names in the world.
The company may still be a niche player in the auto world, but it is quickly becoming a more serious competitor, and there is no cooler or more in-demand product than Tesla right now.
It is already fairly easy to link a streaming platform and listen to music in a Tesla, but Musk and his employees are clearly interested in upping their offerings, which could make their cars that much more enticing to potential buyers.
Tesla apparently wants to offer several different tiers of this new musical product, all available at different price points. That’s a solid plan that few streaming outlets have been able to master, and few have even tried. If the company can deliver several different options for music lovers looking for different features at different prices, it could give the new service a competitive edge. And by helping it sell more cars, it could generate serious marketing revenue for Tesla.
BMR Take: Tesla is just one of the most innovative companies in the world. Who would of thought of a doing a music service? But they have the resources to pull it off. While Tesla is losing money this year (consensus calls for -$5.80 of EPS), the long term vision and potential here is unrivaled in the Auto sector. If you can’t drive a Tesla, at least ride the stock.
Note that we can foresee another secondary coming in the not too distant future. Tesla goes to the market to raise capital since they are still losing money in a huge way. The have 3.0 billion shares outstanding so selling just 1% of this in new shares, 30 million, would raise over $11 billion in fresh new capital. As we write this we are astounded at the math. No wonder the shorts are getting absolutely destroyed.
Twilio (TWLO: $29.70, up 10.5%)
We see several positive indicators ahead of Twilio. First, Twilio is seeing 20,000 inbound leads per month, up from 5-10,000 at the beginning of the year. Twilio hosted its Signal 2017 Developer Conference in May, which may have helped increase the lead flow. Twilio recently disclosed that it now has 1.6 million developer accounts on its platform, up from 1.0 million a year ago
Second, the sales organization at Twilio remains quite bullish and optimistic about the company’s prospects. According to reports, the long-time sales people at Twilio “have never been more bullish about this company.” Customer reviews show that 85% of reviewers have a positive business outlook about the company, 92% approve of CEO Jeff Lawson, and the overall rating for the company is 4.2 out of 5.0.
Lastly, there is a wisp of hope surrounding the Uber relationship. On the 1Q17 earnings call, management announced that its largest customer, Uber, was “changing the way they utilize and consume communications services.” Twilio said it expects Uber to remain an “important customer…going forward,” but lowered its 2017 base revenue guidance by $11-12 million as a result of the diminishing relationship.
All this aside, some people in the industry are now saying that Uber business might be back. Apparently, after an adjustment period in which Uber implements and executes on its multisourcing strategy, Twilio might be able to see its Uber business return to a growth phase. We sure hope this is the case.
BMR Take: We believe the stock represents an excellent opportunity for long-term capital appreciation. With sales ramping from $275 million a year ago to $360 million this year and heading to $600+ million by 2019, the lucrative 25% top line growth is an impressive feat.
Bristol-Myers (BMY: $57, up 4%)
Bristol-Myers’ stock has doubled the Healthcare sector index since April. While it has taken longer than expected for Bristol, the business outlook is finally starting to improve.
Hospital sales of Opdivo rose 13% in May compared with the 4-month moving average, according to data compiled by Symphony Health Solutions. Opdivo provided 23% of the latest quarterly revenue at the company. This blockbuster drug is having a major effect on lung cancer. It’s great to see these strong growth figures.
BMR Take: Many people continue to speculate that Bristol could be acquired. Recall that famous hedge fund investor Carl Icahn took a major stake in Bristol on this investment thesis and remains one of the company’s top shareholders. But at $93 billion, this would be a BIG acquisition. We don’t think a buyout will happen, but we are a secret admirer of Icahn. After all, he is worth $16 billion. We think he knows a thing or two.
Bristol is a healthcare bellwether. The EPS outlook is $2.90 this year and $3.15 next year, placing the P/E multiple attractively under 20x. With a 2.7% dividend yield, we like the fact that you get paid while you hold the shares. We see substantial upside potential with or without a takeout.
Eli Lilly (LLY: $84, up 2.4%)
As CEO of a 141-year-old Big Pharma company, Eli Lilly’s David Ricks has a fairly good platform for surveying the Healthcare ecosystem. He gave an interview this week and we highlight below some of the key takeaways.
Innovation and productivity are always a challenge for Big Pharma, so the unveiling of Lilly’s new expanded R&D facility warranted some celebration. Right now, the most exciting place is oncology. Something like half of the venture-backed investment is going into oncology companies. That’s because there’s a massive opportunity.
As everyone knows, the battle doesn’t end with an FDA approval. Drug pricing is a heated debate right now and soured sentiment on all of healthcare lingers. Obviously, there’s a lot of frustration with the drug pricing topic. Though one of the core problems is the changing model for insurance design, which is impacting the affordability of medications for people with chronic illnesses. A lot of the cost burden in the healthcare market right now has been shifted to premiums paid by consumers. The high level of premiums being paid today by consumers is not necessary. If political leadership can set new policies that take healthcare back to operating more efficiently, the cost burden currently being placed on consumer can ease up meaningfully.
BMR Take: Lilly is a top franchise in its market. With EPS of $4.10 this year expected to rise 5-10% a year for the foreseeable future, we like the prospects just on this alone. You add upside from innovation in oncology, and the possibility for drug price reform to increase sentiment, and a 2.5% dividend yield while you wait, it adds up to a recipe for investment success.
Upcoming Economic News
Dallas Fed Index
Monday, June 26, 10:30 AM
Period: JUN
Actual: N/A
Consensus: 18.2
Prior: 17.2
Notes: This is an indication of business activity.
Consumer Confidence
Tuesday, June 27, 10:00 AM
Period: JUN
Actual: N/A
Consensus: 116.7
Prior: 117.9
Note: The Conference Board's Consumer Confidence Survey is a monthly measure of the public's confidence in the health of the U.S. economy.
Pending Home Sales Index
Wednesday, June 28, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 110.5
Prior: 109.8
Note: The National Association of Realtor's Pending Home Sales Index is designed to be a leading indicator of housing activity. This index measures housing contract activity.
Personal Income
Friday, June 30, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 0.30%
Prior: 0.40%
Note: Monthly Personal Income and Outlays data are published by the U.S. Bureau of Economic Analysis. Personal income measures total pretax income earned by individuals, non-profit organizations, and private trust funds.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The week which follows June option expirations (two weeks ago) has historically been one of the worst. But not this year. What we also like is the fact that oil has broken down below $45 per barrel and it hasn't dragged the market with it. Plus, the Fed raised rates AND laid out a plan to unwind its $4.5 trillion balance sheet (which represents its bond portfolio.) We said last week that such a move would likely be a headwind for the market, so one would think that the economy would have to be rather strong for them to approve both moves. It isn't, however, so we are at somewhat of a loss to understand the "exuberance" of the market in light of the statistics that clearly show a "softening" economy as opposed to a strong one:
Wholesale and Retail Inventories Down: Revised wholesale inventories shrunk 0.5% in April, the largest contraction in more than 12 months. The Commerce Department reported that retail sales fell 0.3% in May, marking the largest one-month drop since January of last year. That is just not a signal of a strong and growing economy, particularly in view of the fact that consumers are 70% of our economy.
Housing Data Weaker: U.S. homebuilding fell for a third straight month in May to the lowest level in eight months. Housing starts dropped 5.5% to a seasonally adjusted annual rate of 1.09 million units, which is well below forecasts of a 4.1% increase. Remember, 10,000 people turn 65 every day in the US (and will for the next 10+ years). These folks will eventually move, so homebuilding will have its own demographic headwinds to contend with in addition to the usual economic ones.
Economic Slowdown: The Fed has always targeted 2% inflation, but inflation slowed in April to an annual rate increase of 1.7% year-over-year, down from 1.9% recorded in March and 2.1% in February. Falling oil prices, excessive auto inventories and increasing apartment rental inventories will pretty much put the kibosh on reaching the Fed's target rate of 2% unless there is a dramatic turnaround in the last half of the year. We know that economic growth slowed in the first quarter, with GDP increasing at only a 1.2% annual rate - down from 2.1% in Q416. It's supposed to come in above 2% for the 2nd Qtr, but we'll have to wait for the numbers to come out.
Lower Expectations: Last but not least, the Bloomberg U.S. Economic Surprise Index, which measures whether economic data beat expectations, fell below zero for the first time this year. This signals potential headwinds moving forward.
Many experts believe the market has already priced in some of the new Administration's "growth agenda". However, the "Trump" trifecta (lower taxes, infrastructure spending and healthcare reform) is a nofecta at this point. Unless something gets done before the August recess, the markets will have to face the probability that zero gets done this year. If that happens, we will really need to get excellent earnings to avoid hearing the dreaded sound of air coming out of the market's balloon. And, it will be interesting to see if the Fed moves forward with another rate hike in 2017 in light of the weaker "Big Picture."
Cloudera Update
Cloudera (CLDR: $16.35, down 6%) had another rough week. The stock has gone straight down since we added it three weeks ago. In the earnings report for the June quarter, revenue was $80 million, an increase of 41% from the year ago quarter – a strong showing in our book. They operated at a loss which had been expected, but the market didn’t like this and took it out on the stock. The company went public two months ago at $15 and the firm was able to pocket $250 million in cash, so the company can stand a few quarters of losses, as long as revenues continue growing at this exalted rate.
BMR Take: Nothing has changed in the last three weeks except for the price of the stock. The company is still moving forward dramatically with increased revenues and we don’t expect this to change. Big revenue increases like this always win in the end. But this is not a stock for the weak. It is below our Sell Price, so if it is too painful for you, you should reduce or eliminate your position and watch from the sidelines. We believe in the company but obviously are too early on this one.
Nutanix Update
Nutanix (NTNX: $19.31) had a great week, up 9%. The firm is knocking down new business in bigger chunks lately, with two of its new orders valued at more than $5 million, while 35 deals were more than $1 million each. The firm added 800 new customers last quarter, hitting the 6000 customer mark, and the market is just starting to recognize this and is anticipating another strong quarter ending this week.
BMR Take: Revenues last quarter were big, hitting $192 million, up from $115 million a year ago. That’s 67% growth. We’ll take that to the bank any day of the week. This is still a relatively small firm, with a market cap of just $2.3 billion, so it’s not like investing in a Google at $675 billion, almost 300 times as big. So when you invest in firms that we recommend, do some serious thinking about the relative risk involved. Of course, Nutanix at $19 can go to $38 a lot easier than Google going from $966 to $1932. And for that matter, Nutanix and go to $9.50 a lot easier than Google can go to $483. It’s all relative. Risk vs. reward.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
The AGIC Equity and Convertible Income Fund (NIE: $19.69) had a relatively flat week despite a fall in price on Wednesday with volumes slightly higher than the fund’s average. That’s helped the fund achieve a 7% year-to-date return on top of the current 7.7% yield, which is in excess of the 6% annualized return since the fund’s inception in 2007. We’ve seen the fund maintain its dividends with no evidence so far that the dividend will be cut. The fund’s NAV has also seen a 9% return year to date, meaning the fund’s discount to its NAV has improved slightly from the start of the year. We like this one.
The PIMCO Dynamic Income Fund (PDI: $30, flat) had a similarly solid week, although the price action here has been more steady. The stock is up 2% in the last 30 days. The fund is currently trading at a 7% premium to its NAV as a result of a strong price appreciation over the last two years. Currently, Pimco Dynamic is up 8% year-to-date and is up 11% from a year ago, which excludes the fund’s 9% dividend yield. Huge.
And keep in mind that this excludes the fund’s special dividends, which have been 3% or more of the fund’s market price in recent years. While it’s too early to make any estimates of what that special dividend will be at the end of 2017, it is evident that we will see another special dividend come to shareholders. Remember last year in the fall and early winter? We talked about it incessantly and guess what? They came through in flying colors, issuing a $1.45 dividend on December 22nd. What an awesome Christmas present.
And now, let’s take a look at REITs. The Bull Market Report High Yield portfolio is heavily focused on a variety of REITs of various types. This week was favorable to all of them.
Digital Realty Trust (DLR: $120, up 4%) has been on a non-stop tear as investors continue to bet positively on the firm’s recent merger with DuPont Fabros Technology (DFT: $65), with synergies from the merger, making this an increasingly valuable reason to buy the stock. Shareholders can rejoice in the 23% gain in 2017.
While the data center space is seeing continued mergers and investor enthusiasm, the Healthcare sector is enjoying a much more low-key run. Omega Healthcare Investors (OHI: $34, up 4%) saw steady price gains for the week. Omega has been an interesting stock for a few reasons. After hitting the current level in April, we saw a pretty heavy dip to bring the REIT to be flat for the year, a rarity in 2017, which has treated REITs kindly. Previously at The Bull Market Report, we have discussed this as a somewhat random outflow of capital with no clear catalyst. The firm’s funds from operations, which is the primary metric when analyzing income and dividend sustainability, is stronger than ever, and the stock’s 7.5% yield is not at risk. So what’s driven the decline? There really is no clear answer, but it doesn’t matter much anyhow; no bad news has come from the firm and it’s since recovered to be up 8% for 2017. Omega Healthcare remains a firm hold for income investors.
Our other Healthcare REIT recommendation has also done extremely well. Care Capital Properties (CCP: $28) is up a whopping 5% for the week, being one of the best REIT performers of the week. That brings Care Capital’s price growth to 10% for the year. This is an eventuality that we have been waiting for for a long time. Care Capital was significantly oversold late in 2016 as a result of market fears that the Healthcare REIT sector would be decimated by President-elect Trump’s plans to overhaul Medicare/Medicaid. But nowadays the news from D.C. has much more to do with politics than policy, and healthcare reforms seem to be sidelined as D.C. focuses on other things. This has helped investors return to Care Capital. As they well should. It’s a solid REIT with over 100% dividend coverage and growing FFO, making us long term holders.
Note that Capital Care is being acquired by Sabra Health Care REIT (SBRA: $25) and it too, had a good week, up 5%.
Government Properties Trust (GOV: $23) was flat on the week with very little volume. In fact, volume has plummeted from a year ago. This may in part be a result of the strong showing the stock has had in 2017 - we’re up 19% already. When The Bull Market Report first recommended this stock, it was yielding 11% thanks to market fear around the company’s pivot towards more private office acquisitions. We did not see a problem with this, identifying it more as a diversification strategy that would lower the firm’s risk profile. The market seems to have taken to this view, as the stock now yields less than 8% thanks to its recent price run-up. Despite the significant capital gains this stock has provided The Bull Market Report REIT portfolio, we encourage investors to hold on to their shares and see what happens at the firm’s late-July earnings call. Any dramatic change in FFO or occupancy rates could make us change our view, but that seems to be an extremely unlikely eventuality.
Finally, a note on AstraZeneca (AZN: $35, up 1.5%). This was one of our big contrarian recommendations last year and we saw the stock fall significantly after our recommendation. Stubbornly, we stuck it out and encouraged readers to hold the company while the market gets its act together and recognizes that dividend coverage is solid thanks to well-managed cash flows, and a pipeline with many promising drugs ensures earnings growth is around the corner. Finally the market has realized its mistakes, and shares are up 29% in 2017. We are now up 17% from our initial recommendation, but more price growth is expected down the road. Again, investors should keep their AstraZeneca shares and enjoy the unrealized gains they’ve had, along with the gains in other High Yield Portfolio holdings. We see more gains coming ahead.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
June 18, 2017
by Todd Shaver | Jun 18, 2017 | Weekly Newsletter 7pm Sunday
The Week Just Passed and the Week Ahead
Amazon set fire to the market on Friday as they announced a major deal to buy Whole Foods. Grocery stocks plunged as everybody wonders how much havoc Amazon will have in the new industry vertical. The M&A announcement re-energized the market that had been sagging due to FAAMG* stocks slowing down. But clearly there is a reason the FAAMG stocks are market leaders: they are the most innovative, the most savvy, and the most aggressive companies on the planet when it comes to raising the bar. The bull market in technology that everybody was questioning just last week is alive and well!
* FAAMG – Facebook, Apple, Amazon, Microsoft and Google.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Amazon, Apple, Square, Facebook, and Google.
Highlights From The Past Week
Trump Says ‘Very Good’ GDP Numbers Are Coming. He May Be Right. President Donald Trump said Thursday that “some very good numbers” are coming out soon on U.S. economic growth. If he’s talking about the second quarter, he’s probably right, though the figures are about six weeks away from publication. While the White House didn’t immediately respond to a request to clarify Trump’s comments, there are wide expectations among researchers that the rate of expansion in the April-to- June period will rebound from a first-quarter slowdown. The pace of gross domestic product gains was dragged down earlier this year by temporary factors such as warm weather that resulted in lower utility bills. Seeing a pick-up in GDP growth is a major positive for the stock market.
The Sweetest Stretch of Bull Run Since 1995 is At Risk as Buy-The-Dip Strategy Fails. The sell-off in the Tech sector that started a week ago has erased $250 billion from the value of technology shares and is threatening to end the industry’s longest stretch of uptrend in more than two decades. Down around 4% since the decline started, this move has put the Tech sector on the edge of breaking its 50-day moving average. It’s stayed above the threshold for 131 consecutive days, the longest stretch since 1995. Are the good days ending? The last two times when the 50-day average was broken, Tech shares did poorly in the next few months. What do we make of this? Stocks can’t go up forever. We are seeing the Tech sector take a breather and would buy this weakness.
Don’t Be Tempted To Buy High-Flying Equities. Stick With Solid Stock Picks Recommended By The Bull Market Report. Bond investor Bill Gross warned on Tuesday that investors should reduce their risk appetite, given the U.S. growth rate is stunted by secular forces "which monetary and even future fiscal policies seem unable to reverse." In his June investment outlook letter, Gross of Janus Henderson said: "Strategies involving risk reduction should ultimately outperform 'faux' surefire winners generated by central bank printing of money.” He continued, "It’s the real economy that counts and global real economic growth is and should continue to be below par." Gross runs the $2.1 billion Janus Henderson Global Unconstrained Bond Fund.
BMR Companies & Commentary
Amazon (AMZN; $988, +1% for the week; up $23 on Friday)
Amazon is guided by four principles: customer obsession rather than competitor focus; passion for invention; commitment to operational excellence; and long-term thinking. Customer reviews, 1-Click shopping, personalized recommendations, Prime, Fulfillment by Amazon, Amazon Web Services - AWS, Kindle Direct Publishing, Kindle, Fire tablets, Fire TV, Amazon Echo, and Alexa are some of the products and services pioneered by Amazon.
Amazon and Whole Foods Market announced that they have entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at $13.7 billion, including debt. This is Amazon’s biggest acquisition ever. Whole Foods will continue to operate stores under the Whole Foods Market brand and continue to buy from trusted vendors and partners around the world. John Mackey will remain as CEO of Whole Foods and the headquarters will stay in Austin. The deal is expected to close by the end of this year.
For Amazon, the deal marks an ambitious push into the mammoth grocery business, an industry that in the United States accounts for around $800 billion in annual sales. Amazon is also amplifying the competition with Walmart, which has been struggling to play catch-up to the online juggernaut. Amazon has designs on expanding beyond online retail into physical stores. The company is slowly building a fleet of outlets, and much attention has been focused on its supermarket dreams. It has already made an initial push through AmazonFresh, its grocery delivery service. Now, BANG, just like that, they will have 430 stores in place for delivery and warehousing. Is Bezos smart or is Bezos smart?
BMR Take: The current consensus EPS outlook calls for almost $7 this year going to $27 by 2020. That’s explosive growth and the innovation machine known as Amazon is far from done. Amazon remains one of our top favorites. And DO NOT be disconcerted by the price of the stock. If you want to buy $15,000 of Amazon, buy 15 shares. Don’t agonize over it. Just be invested in this great company.
Apple (AAPL; $142, down 4.5%)
After an action-packed world-wide developers conference (WWDC) with a plethora of new software and hardware announcements last week, the stock was under pressure all week. The sell-off in Apple represents yet another buying opportunity. With the expanding capabilities of Apple's network of hardware and software products, Apple is very well-positioned to capitalize on the trend toward more "things" becoming a computer. Last week, Apple filled key gaps in its portfolio with entry into the digital home assistant market with HomePod, combined with new AR and VR initiatives* to support these important trends. This further expands the breadth and depth of Planet Apple, making it more difficult for competitors to offer an experience at the same level of Apple.
* Augmented and Virtual Reality
BMR Take: Earnings are expected to be $9 this year and increasing toward $11 over the next 2 years. The business is steadily generating a massive amount of money – $800 million a week, totaling over $255 billion now. The naysayers will be proven wrong on Apple again – remember when it hit $91 exactly a year ago, after peaking at the $125 level in 2015? Well guess what – the new all-time high is $156 set just last month. That number is sitting there ready to be broken again.
Square (SQ: $23.50, up 2%)
Square is a commerce ecosystem. The company enables its sellers to start, run and grow their businesses. It combines software with hardware to enable people to turn mobile devices and computing devices into payments and point-of-sale solutions.
Square may be able to "take on the big boys," as a substantial ramp in large merchant sign-ups in the near-future should lead to a positive inflection in gross payment volume (GPV) growth. While Square’s pricing for big merchants is competitive, the true driver of the business model is a great suite of value-added services that address the rapidly expanding $60 billion market opportunity in loyalty, payroll, and lending products. Square is just so much more innovative than incumbent financial players like American Express.
We expect to see GPV growth of greater than 30% compared to consensus expectations for just 25%. This should drive a revenue CAGR* of greater than 25% and earnings at the top end of guidance for 35-40%.
* Compound annual growth rate
BMR Take: This year Square will lose a bit of money (around 19 cents per share.) But stay the course. Earnings are expected to hit an inflection point of profitability in 2019 and from there the sky is the limit. Note that the market cap is just less than $9 billion, a nice size, but still small in the whole scheme of things. They remain an attractive buyout candidate for Amazon or Google or PayPal or any of the giants of eCommerce out there. Our Target is $24 which it hit a week ago Friday, the day the Tech stocks started tanking. The stock has held up well this week, in fact rising 2%. We hereby raise our Target to $29 and our Sell Price from $17 to $20.
Facebook (FB; $151, up 1%)
Facebook is focused on building products that enable people (better yet – the world) to connect and share through mobile devices, personal computers and other surfaces. The company's products include Facebook, Instagram, Messenger, WhatsApp and Oculus.
Facebook has hired more than 150 counterterrorism experts and is increasingly using artificial intelligence that can understand language and analyze images to try to keep terrorists from using the social network for recruiting and propaganda. Facebook says, “We agree with those who say that social media should not be a place where terrorists have a voice.” The move comes as Facebook is being hounded by governments to do more to combat terrorism.
Mark Zuckerberg, Facebook’s co-founder and chief executive officer, has also been trying to position the company as a positive force for building communities both online and off. This new emphasis from Zuckerberg has followed discussion over Facebook’s role in the proliferation of false news accounts during the U.S. election campaign last year, as well as the spread of extreme content posted to Facebook.
Many of these new hires have backgrounds in law enforcement and they collectively speak almost 30 languages. In addition, Facebook has thousands of employees and contractors around the world that respond to reports of violations of its terms of service, whether that’s online bullying, posting inappropriate content or hate speech.
BMR Take: One of the major risks in front of Facebook is dealing with free speech rights versus meeting obligations to be a model corporate citizen. We are glad to see steps in the right direction. EPS is expected to go from almost $5 this year to $9.50 in 2020. This stock can go much higher if the company can avoid a few key risks.
Google (GOOG; $940, down 1%)
Google spans Internet products, such as Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome and Google Play, as well as its hardware initiatives. Google is engaged in advertising, sales of digital content, applications and cloud offerings, and sales of hardware products. This is a mouthful, so one other way of looking at Google is: Most of their revenue comes from search. Period.
This week Google launched a new cloud computing platform in Singapore that aims to reduce data transmission delays for its cloud customers here, as it seeks to gain ground against rivals Amazon and Microsoft globally. It has opened dedicated cloud platform servers - called a "Google Cloud Platform (GCP) region" - in Singapore and this is the group's first GCP region in South-east Asia.
The Singapore cloud platform is the company's third in Asia, after Taiwan and Tokyo, and it is looking to launch dedicated servers in Mumbai and Sydney as well, they added. The launch of the Singapore service has significantly reduced latency, which refers to delays in data transfer over a network connection, for Google's cloud platform customers and users in Singapore and South-east Asia. The platform offers products and services such as application hosting, security, language translation and analytics.
Businesses can save anywhere from 50-70% by using a cloud platform in general compared to other options such as hosting data storage themselves. The migration to the cloud is a mega-trend and Google is in the forefront of this new world.
We mention these new events to give you the scope of what this company is doing. While you and I worry about what’s happening here in our own little worlds, Google is out there setting the stage for controlling and profiting from places around the world this year, next and for decades to come.
BMR Take: EPS is on track for $34 this year going to $55 by 2020. We see a compelling opportunity in this large cap tech giant.
Upcoming Economic News
Current Account
Tuesday, June 20th, 8:30 AM
Period: Q1
Actual: N/A
Consensus: -$121B
Prior: -$112B
Notes: The international transactions accounts are a quarterly statistical summary of transactions between U.S. and foreign residents organized into three major categories: The current account, the capital account, and the financial account. The current account includes exports and imports of goods, services, income, and current transfers. The capital account includes capital transfers, such as debt forgiveness. The financial account includes transactions for official assets, for U.S. Government assets other than official reserve assets, for direct investment, for portfolio investment, and for other investment.
Existing Home Sales
Wednesday, June 21st 10:00 AM
Period: MAY
Actual: N/A
Consensus: 5,545,000
Prior: 5,570,000
Notes: Each month, the National Association of Realtors (NAR) collects data on existing single-family home sales from Boards or multiple listing services (MLS) nationwide. NAR estimates that it captures between 30-40% of all existing home sale transactions with its monthly survey. The data provide the total number of closed existing home sales in each area as well as total sales within price categories ranging from less than $30,000 at the bottom to more than $500,000 at the top.
Leading Indicators
Thursday, June 22nd,10:00 AM
Period: MAY
Actual: N/A
Consensus: 0.40%
Prior: 0.30%
Notes: Leading indicators are economic series that tend to change direction ahead of shifts in the business cycle. There are 10 components of the U.S. Leading Composite Indicator published by The Conference Board. The index is constructed by averaging the individual components in order to smooth out a good part of the volatility of the individual series. Historically, the cyclical turning points in the leading index have occurred before those in economic activity.
New Home Sales SAAR
Friday, June 23rd, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 600,000
Prior: 569,000
Notes: The U.S. Census Bureau collects new home sales based upon the following definition: "A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit." The house can be in any stage of construction: not yet started, under construction, or already completed.
A Word From Gary Jefferson
First Vice-President, Investments
UBS Financial Services
A week ago Friday saw the tech-focused Nasdaq's biggest fall versus the Dow Jones since 2008, with the drop in technology stocks spilling over into Asia and Europe on Monday. A lot of the sell-off came from "rumors". Still, this selling of the top tech stocks is causing some investor nerves. After all, the Nasdaq is up by more than 15% this year (around double the S&P 500's performance). Technology accounts for 10 of the S&P 500's 20 best performing stocks, and the Nasdaq's market cap has grown by $1.2 trillion year-to-date, roughly equivalent to the annual GDP of………(drum roll)……. Russia. The idea that tech stocks have gained as much as the entire GDP of Russia sounds fairly impressive.
There was a research report from Goldman Sachs that ultimately "captured the eye balls" and moved the market. The Goldman study caused a sell-off in big name tech because it expressed concern that the sector is overvalued. The Goldman note highlighted the valuations of the FAAMG are equal to 13% of the S&P 500, but had provided 40% of the gains so far this year. It also expressed concern over the lack of volatility within the group, stating that, "In the 'real world', many traders would not expect a trend like this to continue forever." Gee…….who could have ever thought that stocks only had one direction they could go in and that was straight up?
That said, there was some follow-through selling in several of the big tech names this week, and we could obviously see some more over the next few days.
All in all, we don't expect the S&P 500 Index to be renamed the S&P 495, simply because the top five or so FAAMG stocks have accounted for the bulk of the gains over the past few years. (Annualized gains of FAAMG have nearly tripled the other 495 stocks over the past three years. The main reason for outperformance is because these companies have been growing earnings and revenues at a pace much higher than the rest of the market. Be aware, however, that a couple of these stocks have come close to reaching the bubble status of the dot.com era, while others have not. It is always a market of stocks – not a stock market. Also, remember that pullbacks from extended valuations have always been a healthy thing for long-term investors.
Tesla Week
Tesla (TSLA: $371, up 4%) had a great week, in spite of the Fed and the Tech sell-off and everything else. Up 4%. Huge. The stock was upgraded by Berenberg Bank from a "hold" rating to a "buy" rating. They now have a $464 price target on the stock, up previously from $193.
BMR Take: This is a car company and this is a Tech company, and it is run by a one of the smartest men on the planet.
Annaly Update
We love this stock. We have been following Annaly Capital Management (NLY: $12.36, up 2%) since 1997 when they first went public. They have survived thick and thin: bull markets and bear; high interest rates and low; recessions and boom. And they continue to give you a 10% dividend, year in and year out.
With that said however, it may be time to take some profits in the stock. We added the stock in early 2016 at $10 and it is now over $12, up 25%. The key is book value. It is currently at $11.23, thus trading at 10% over book. Annaly generally sells right at book, so it is getting ahead of itself. Our Target is $12, so one could certainly sell now and be happy campers. Or you could watch and wait. We are going to watch book like a hawk. If it keeps moving higher we are golden. But if it stalls, and the stock moves back towards $12, we will most likely be saying so long to a great company.
Letter to the Editor about Shopify (SHOP: $87, down 5%)
From: John Hoogerheide [mailto:johnhooger17@xxxx.net]
Sent: Thursday, June 15, 2017 11:23 AM
To: Todd at The Bull Market Report
Subject: SHOP
Todd - A while back you had suggested Shopify as a stock just to own and forget in your portfolio as it will have very large daily bounces. In your reports you indicated the stock COULD be a likely candidate for a buyout and that their fundamentals looked solid. Shopify had been on a tear but the Nasdaq fallout has killed the stock. I assume the Nasdaq fallout is only temporary and things will go back to normal. BUT has anything changed in your attitude towards Shopify? Thanks Todd
Hi John –
No. Just the price. And it is very frustrating. I’m trying to be patient and get through the Fed raise which is just about done. The bond market was WAY up yesterday (10-year Treasury down big to 2.13%. Up a tad today, but not much.) Then the question is – are we in a Tech AND overall stock selloff? If so, then we should move to high yield, like Apollo, Annaly, etc., and bide our time until things become normal in Washington. If not, then the bull market continues. Where ELSE can you put your money? And this is not an idle question. People have been say it for YEARS, with interest rates at historic lows. And they are STILL at historic lows, really. Thus, we have this amazing bull market since 2009.
Note that I don’t believe we ever said you could put it away and not look at it. But we certainly feel that it is a long term hold and the prospects look good.
Todd Shaver, Founder and Editor in Chief
And then on Friday we wrote to him:
Nice bounce-back yesterday and today, John, after hitting $81.50 at the low point yesterday.
This one is real.
The sell-off was not.
Let’s hope it holds.
Todd Shaver
[Note that the stock closed at $87 Friday. Our take? This is a volatile stock in a nervous Tech market right now. If it’s too hot for you get out of the kitchen. Again, we are trying to be patient here with this amazing company.]
More (Good) News on Shopify
Shopify sold 5.5 million shares at $91 on May 24th in a secondary, raising $500 million. Then just last week they completed the overallotment. Do you know what that is? It is an extra block of stock that can be sold as part of the original secondary if there is demand. Well, there was, and Shopify sold another 825,000 shares at the same price worth $75 million. Not bad. So now the company is sitting on a ton of cash (we believe the total to be close to $1 billion), they have no debt, and revenues are growing like a weed.
Letter to the Editor about Cloudera (CLDR: $17.40, down 10%)
AND
Some BMR Philosophy on Target and Sell Prices
From: Ron Schack [mailto:RonSchack45@xxxxxx.com]
Sent: Friday, June 16, 2017 2:28 PM
To: info@bullmarket.com
Subject: Re: Cloudera
Cloudera closed below your Sell Price of $18. Are you out? I think you owe your readers some clarity on the SELL price listed for your portfolio stocks. Does SELL price mean any time you see a trade below that price?
Or after it closes below that price?
Or wait for a message from you?
Have a good weekend.
Ron
Our answer:
I hear you, Ron, but the answer is quite subjective based on each stock, the market as a whole, what that particular stock does, AND the individual investor – you.
Todd Shaver
So here dear Bull Market Reader, are a few thoughts on Sell and Target prices:
When we add a stock to our portfolio we have a Target and a Sell Price. The Target is where we think it can go and the Sell Price is the price that if it hits, you have some thinking to do. The Sell Price is usually 10-15% below the price where we added the stock. Taking a 10-15% hit is a big deal, and some may even say that if a stock drops 5-7% you should get out. Everyone has their own rules to follow. However, there are companies that are young and unproven that we feel have the potential to be 2-baggers and 5-baggers and more. Cloudera, Twilio and Nutanix are three of these. What happens with these stocks is that the world as a whole doesn’t recognize their greatness yet, and aren’t willing to hold them through tough times. It’s called the Market. (There were times in Amazon’s young life when the market sold off the stock because of various reasons. The strong held on, the weak got out.)
The problem however, is that hindsight is 20-20 and we at The Bull Market Report a) might be wrong on a stock, or b) might be early. Both of these scenarios can cause a Cloudera to go from $23 on June 6th when we added it, to the level it is at today. Not pretty, but this is the life we lead when we invest.
Now, with that said, what do we mean with the Sell Price? The answer actually is not what do WE do, it is what YOU do. The Bull Market Report very rarely tells you to SELL a stock. We SUGGEST things to you based on FACTS. We leave it up to you to decide as intelligent human beings. In this case we believed in Cloudera at $23, and now at $17.40 we believe in it more. Why? The only thing that has changed is the PRICE. It is less expensive than it was. We still think it can go to $28, and $40 and beyond, and now it is cheaper. Yea! BUT – WHAT IF IT GOES LOWER FROM HERE? What if it goes to $14? What if it goes to $10? Then we have a big problem as you can see.
So the safest thing to do is to “Sell.”* We take a licking in our portfolio, and if you follow suit, you do too, and it prevents a disaster if it goes to $14 or $10. BUT, what if this recent Tech sell-off is over now. What if Apple and the rest of them start to shoot higher over the coming weeks, which we fully expect? And what if Cloudera heads back into the 20s like we believe it will do?
No guaranteed answers here as you can see. But plenty of food for thought. Speaking of thoughts, if you have a question about this or anything else, please write us at Info@BullMarket.com.
* No one at The Bull Market Report buys or owns the stocks in our portfolios. We don’t play that game.
The High Yield Corner
By Michael Foster
The biggest news of the week was the interest rate hike, but before we get to that, let’s talk a little bit about Digital Realty Trust (DLR: $117, up 4%, plus a 93 cent dividend paid on Tuesday.)
This data center REIT has been a Bull Market Report pick since March last year. Since then the stock has gone up 38% while paying 4% in dividends. A 42% return in a little over a year is breathtaking for any type of investment, but it’s relatively uncommon in the high yield world where you often sacrifice big short-term gains for cash flow. But Digital Realty is different.
The reason is simple: Digital Realty isn’t just a high yield stock; it’s also a Tech stock. Digital Realty has a very simple business model that positions it to benefit from the hypergrowth of tech companies: it rents out server space for firms that exist in the cloud. Any cloud computing startup depends on Digital Realty for the bare infrastructure that makes their product possible; and, unlike startups, Digital Realty’s revenue stream and profitability come first.
From that perspective, Digital Realty is a very attractive business; it’s part utility and part a hypergrowth tech stock. It’s rare to find a company that combines the two extremes of the finance world - dull safety with cutting-edge high-risk technological innovation - but Digital Realty has combined the best of both worlds for years. As a result, the company has attracted capital slowly over time, but the stock was limited until the middle of 2015 by one risk factor: competition from others in the space. At the end of 2015, Digital Realty initiated some expansion efforts that essentially gave the business a “moat” and protected it from competition. The firm very smartly placed facilities in ideal geographical positions to get the attention and demand from telecommunications giants and government agencies, putting the company at a distinct competitive advantage.
The stock market swiftly reacted, and the stock has doubled since the middle of 2015. Insiders have also taken notice, which is why DuPont Fabros Technology (DFT: $64) announced it would merge with Digital Realty in an all-stock transaction*. What exactly does this merger mean for Digital Realty shareholders? Well, the stock initially fell on the news but very swiftly recovered (it’s now up about 4% for the week following the initial decline). Apparently the market first thought the merger was a bad idea and then changed their minds. The market loved the news for DuPont, however; that stock is up 20% following the news.
* June 9, 2017 San Francisco's Digital Realty Trust has agreed to acquire Washington, D.C.-based data center developer Dupont Fabros Technology for $7.6 billion in stock, bolstering its reach in and around Silicon Valley. The companies operate as real estate investment trusts that rent out space to corporations to house their high-powered computer servers, used in cloud supercomputing, streaming video and data storage. Dupont Fabros has a dozen such complexes, including one in Santa Clara, two near Chicago and nine in Northern Virginia.
The merger is extremely good for Digital Realty shareholders for one simple reason: it adds a new dimension to the company’s incremental expansion efforts. Now with DuPont’s properties, Digital Realty will have 157 properties in 12 different countries added to its portfolio. The combined firm is going to have 26 data centers operating at 97% occupancy. Remember that Digital Realty had been mostly a U.S. focused REIT with most of its properties in Northern Virginia, Chicago, and Silicon Valley. The firm clearly saw an opportunity in providing for the government’s and tech startups’ growing digital footprint.
Note that the market cap of Digital Realty is $19 billion. After the merger it will be around the $25 billion mark.
But this also means buying and holding Digital Realty has become a very different game. When The Bull Market Report originally recommended the stock, it was yielding 4%; even with dividend hikes, the stock is now yielding a little more than 3%. The company will undoubtedly have enough funds from operations to keep growing payouts, but Digital Realty has become more of a tech growth stock than a high yielding stock. Holding it now is more a bet on capital gains appreciation than a way to capture a high stream of income.
The big news for the market last week was the Federal Reserve’s rate hike. Now for the first time in over a decade the Federal funds rate is over 1%. This sounds like big news, but the market shrugged. the S&P 500 was down slightly and the Dow and Nasdaq flat following the announcement, indicating the very risk-on and risk-averse equity investors agree that this isn’t important news.
What’s even more shocking is the bond market. With higher interest rates on the short end of the curve, you’d naturally expect higher interest rates on the long end of the curve. But interest rates barely budged following the announcement, and actually went down sharply shortly before the announcement. There are a lot of ways to interpret this, but each is a variation on a singular theme: the bond market is daring the Fed to raise rates further. Either the bond market isn’t expecting the Fed to keep raising rates (the next rate hike, Yellen pretty much said, is coming at the end of this year), or bond traders are waiting until the last possible moment to sell Treasuries, or there is too much demand for Treasuries and not enough supply. Each of these moves is either a bet on or a hope for the Federal Reserve to go more dovish in the future.
Personally, we disagree. We think the Fed will blink first and slow their rate hike plans. This is essential to avoiding an inverted yield curve, which generally portends a recession here in the United States. At the Fed’s currently stated rate of rate hikes, that inverted yield curve would likely come at the end of 2018 or the beginning of 2019, indicating a recession in the middle to end of 2019. A slower rate of increases would delay that eventuality to more like 2020 or 2021.
In either case, all indications suggest that we are nowhere near a market downturn or an economic contraction. While the interest rate hikes have been big financial news for years now, and many doomsayers have said this portends a sharp downturn soon, a more reasonable interpretation is that we still have at least two years before the first sign of trouble. So it isn’t time to sell yet, but vigilance will slowly become more and more important.
There is one more pressing issue, however, especially for the high yield world: Higher interest rates on the short end and lower interest rates on the long end cut the profitability of leverage. This makes it tougher for Mortgage REITs, although a few particularly well-managed and differently structured firms (such as Bull Market Report’s recent pick, Apollo Commercial Real Estate Finance (ARI: $18.92), and Annaly Capital Management (NLY: $12.36)) are exceptions to this rule. It’s also a concern for business development corporations, which have suffered “yield compression” for years and are now suffering higher borrowing costs on top of that.
The trend is also not good for junk bonds, although many junk bond funds have priced this in over the last two years, so it’s not a major issue. However, if the Federal Reserve continues on its promised rate hike path, high yield investors will need to get ready to rotate out of the most at-risk asset classes. We’re not quite at that point yet, but it is definitely visible on the horizon.
Good Investing,
Todd Shaver, CEO, Founder and Editor in Chief
The Bull Market Report
Since 1998
June 11, 2017
by Todd Shaver | Jun 11, 2017 | Weekly Newsletter 7pm Sunday
To end the week, the market experienced a notable rotation out of Tech (particularly the mega-cap FAAMG* stocks) and into Financials and Energy. Recall that Tech is the market-leading sector this year (+19% YTD) while Financials and Energy have been two notable laggards relative to the S&P 500 (+4% and -13% YTD, respectively). The FAANG complex has seen some significant strength this year, though concerns have been raised about valuation, positioning extremes, and complex risk narratives. We wouldn’t worry too much about the weakness to end the week related to the sector rotation just described. The bull market is alive and well.
* Facebook, Amazon, Apple, Microsoft and Google. This moniker keeps changing. From FANG – which left out Apple, to FAANG, which had Netflix, to FAAMG. We like this the best. The market cap of these five stocks is $2.4 trillion, led by Apple at $780 billion (it was over $800 billion on Thursday). Amazon is at $470 billion, Google is at $665 billion and Facebook is sitting at $450 billion. Combined, the FAAMG stocks have added $660 billion in market value this year.
Friday was a wild day. Listen to this: the Dow was up 89 points to close at 21, 272, a new all-time high. But, the S&P was flat and the Nasdaq was hammered, down 1.8%. It was the Tech stocks, that did it. It started at about 11 AM – the sellers stepped up and sold and never quit until the close. We’re going to watch the futures as they open tonight (Sunday) at 6 PM eastern. We are hopeful things will be calm, but watch out for some fireworks Monday.
The cost to have lunch with Warren Buffett fell this year. Is that a sign of an impending bear market? Of course not – how silly people can be. Lunch went for $2,680,000, down from $3,460,000 last year. The new winner is anonymous. It’s amazing how much money he has, this Mr. Anonymous! The winner gets to bring seven friends to dine with Buffett, 86, at New York’s Smith & Wollensky Steakhouse. Proceeds benefit Glide, a San Francisco charity.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Apple, PayPal, Cloudera, Facebook, and Visa.
Highlights From The Past Week
Credit Card Defaults Surge Most Since Financial Crisis. In late April, after some disturbing monthly charge-off reports from major credit card vendors, per the latest data from the S&P/Experian Bankcard Default Index, as of March the default rate on US credit cards jumped to 3.3%, an increase of 13% from a year ago, and the highest default rate since 2013. The troubling deterioration prompted Moody's to warn investors about the steep increase in credit card charge-off rates in 1Q17 and 4Q16 that were the largest since 2009. The size of the jump was particularly surprising considering the ongoing strength of the US employment market.
Oil Price Drought Lingers On. With crude (and gasoline) prices doing nothing but tumble since OPEC announced that it was extending the production cutbacks, erasing all the hope-fueled bounce off cycle lows, the question once again becomes, is $50 oil still realistic? Oil prices have plunged back to levels not seen since OPEC announced its original production cut deal last November. The underlying factors for the price drop are the same as before: U.S. shale production continues to rise; inventories remain elevated; and the markets are concerned that the OPEC cuts are not doing enough to drain the surplus. But, in fact, the outlook has grown a bit darker more recently, as downside risks to the market have grown. Note that for the 21st week in a row, US rig count is up.
Household Wealth Has Never Been Higher Relative To Income. For 45 years - until roughly 1994 - the average wealth-to-income of American households had held steady around 4.9x. Then the stock bubbles started, first under Greenspan, then Bernanke, and now Yellen, and as a result, as of 1Q17 for the first time in US history, household wealth reached a point where it is over 6.6x larger than household disposable income in America. The surge in wealth, driven almost entirely by new all-time highs in the S&P, has pushed this measure of rational exuberance (think of it as the country's price-to-earnings ratio), above the housing boom peak of the mid-2000s and well above the dot-com bubble-driven highs of the late 1990s.
BMR Companies & Commentary
Apple (AAPL: $149, -4%. Note that all prices in the newsletter are for the week)
Founded in 1976 by Steve Jobs and Steve Wozniak, Apple began as a personal computer vendor. Today, Apple enjoys a more diverse portfolio with the iPhone, iPad, Mac, Apple TV, Apple Watch and iPod, combined with a growing service and software offering that includes Apple Pay, iTunes, Apple Music, CarPlay, iCloud, iBooks, the App Store and more.
Apple's quarterly results will be less important this summer as investors are focused on the iPhone 8 this fall, along with the potential for increased dividend payments, P/E multiple expansion, and new innovations as showcased at Worldwide Developers Conference this week.
On Monday, Apple's innovation engine was in full force at WWDC with a plethora of software and hardware announcements that further expanded the depth and breadth of “Planet Apple”. This included the introduction of a new product category called HomePod, combined with important augmented and virtual reality announcements.
The star of WWDC was HomePod, which Apple believes will “reinvent home music” and will be a “go to” gift this holiday season. It is designed to fight it out with Amazon’s Echo – Alexa (which we have at home and love.) The HomePod will be available just in time for the holidays. As part of the iOS 11 announcement, Apple unveiled ARKit that allows developers to create apps that will enable users to place virtual content over real-world scenes. Apple believes it will create the “largest augmented reality platform in the world” given the hundreds of millions of iPads and iPhones in the market. Also, Apple announced that virtual reality support for content creation will be coming to the Mac for the first time.
BMR Take: We can’t say it enough about this company. Apple remains among the most underappreciated stocks in the world. The stock trades at 9x this year’s consensus EPS estimate of $9, and sits there with over $255 billion of cash.
PayPal (PYPL: $54, flat)
PayPal Holdings provides a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. PayPal’s Payments Platform offers a wide range of products, including PayPal, PayPal Credit, Venmo, Braintree, Paydiant, and Xoom.
The stock has steadily appreciated since the 1Q17 earnings announcement in April. Why? Fears about take-rate* deceleration have diminished, among other things. Qualms over the Apple Cash announcement and impending Zelle** launch have faded. Instead investors have re-focused on fundamental usage trends. We expect consistent performance in operating metrics in the quarters ahead will bolster the cause.
* take-rate is the % collected per transaction.
** Bank of America is launching a person to person payments platform called Zelle.
Instead investors have re-focused on fundamental usage trends. We expect consistent performance in operating metrics in the quarters ahead will bolster the cause.
Payments is obviously not just about the transaction. There is a lot that goes into the user interface, risk decision, merchant- and consumer-side protection and services, and easy onboarding. All these factors build platform relevance, which in turn supports ongoing robust growth.
BMR Take: We continue to view PayPal as the way to invest in the digital commerce trend. The stock is compelling, trading at 25x next year’s consensus EPS of $2.12, versus long-term EPS growth prospects of 20%. Don’t forget about the $9 billion of cash with no debt.
Cloudera (CLDR: $19.40, -15%)
Cloudera is a developer of a data management and analytics platform designed to turn data into real business value. The company's Enterprise Data Hub is a secure and flexible big data software program that offers data engineering, real-time insights for modern data-driven businesses, all within this single, easy-to-use product, enabling businesses to access untapped opportunities currently hidden within their data which allows them to gain value from both data at rest and data in motion and to explore data in deeper context.
A subscriber wrote in to us and said that it wasn’t clear that we were adding Cloudera to the portfolio. We’ll he was right. We didn’t actually say that. But we should have. So yes, we are adding Cloudera to our Special Opportunities Portfolio.
Cloudera reported a solid first quarter. We will walk through what happened Friday as the stock was down hard. We are buyers on the weakness.
The company reported strong 1QF18 results this week – its first quarter as a public company. EPS came in at -27 cents, beating consensus of -36 cents on revenue of $80 million, beating the consensus of $76 million. Sales were fueled by impressive subscription revenue growth of 60%. Moreover, the net expansion rate* remained best-in-class at 140%, cash flow from operations was a pleasant surprise at $5 million, versus consensus of -$15 million, and the company guided well for future quarters this year.
* How much sales did you have ffrom a customer this year? How much last year? 140% means your old customers are growing their revenue nearly 2.5x over how much business they did with you a year ago.
Total revenue in the quarter was $80 million, an increase of 41% from the first quarter fiscal 2017. Subscription revenue was $65 million, an increase of 60% from the year-ago period. Subscription revenue represented 81% of total revenue, up from 72% in first quarter fiscal 2017.
"We had a strong first quarter as a public company, making progress against many of our key objectives," said Tom Reilly, CEO.
Loss from operations for the quarter was $30 million, compared to a loss from operations of $37 million in the year-ago period. Operating cash flow for the quarter was +$5.0 million compared to operating cash flow of negative $24 million in the first quarter of fiscal 2017.
After brushing against the all-time high on Thursday, the stock traded down 15% Friday due to billings that came in below consensus expectations. Management does not consider billings to be an accurate proxy for its business. We note that the company was satisfied with the performance of its sales team.
BMR Take: We think management has credibility on the outlook and just can’t view the stock’s sell-off as anything other than a major over-reaction. Stepping back from the quarter details, our thesis on Cloudera remains unchanged - we like its huge top-line growth (60%), enterprise focus, subscription-based model, large addressable market opportunity, solid gross margins, and opportunities for operating leverage. The stock looks compelling now trading at 4x the 2020 consensus revenue forecast of $540 million (which is nearly double this year’s revenue target).
Facebook (FB: $149, down 3%)
Facebook is focused on building products that enable people to connect and share, through mobile devices, personal computers and other surfaces. The company's products include Facebook, Instagram, Messenger, WhatsApp and Oculus. Facebook enables people to connect, share, discover and communicate with each other on mobile devices and personal computers.
The door is open for Facebook to knock the cover off the ball in the second half of this year. We expect ad revenue growth outperformance. Let’s re-visit why.
Facebook will be able to drive long term revenue growth without a material lift in ad load volume as the rollout of Instagram, Premium Video, and Dynamic Ads* will increase the amount Facebook can charge to advertise.
* From the Facebook website: Facebook dynamic ads automatically promote products to people who have expressed interest on your website, in your app or elsewhere on the internet. Simply upload your product catalog and set up your campaign one time, and it will continue working for you — finding the right people for each product - for as long as you want, and always using up-to-date pricing and availability. [Wow. One more reason for us to love this company. And stock.]
Street models are too conservative and underestimate the long-term monetization potential of upcoming new products. So we see optionality and upward bias to estimates, which do not contemplate contributions from multiple other products including Messenger and WhatsApp.
There was a change in ad impressions and pricing growth which came in this most recent quarter at +32% on impressions and +14% on pricing (versus prior quarters' range of +50% on impressions and 6% on pricing. The company took steps to prioritize longer form video content higher up in the newsfeed. Hence, this opens the door for pricing growth to accelerate further in 2H17 when Facebook takes more deliberate steps to moderate ad load – and presumably ad impression growth.
BMR Take: We believe Facebook can continue to dominate advertising. The stock's valuation has room to the upside as it is trading at 28x the consensus EPS outlook for this year of $5.42 despite the massive long term growth prospects. EPS is expected to double by 2020. Stick around!
Visa (V: $95, -2%)
Visa is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. Visa operates one of the world’s most advanced processing networks — VisaNet — that is capable of handling more than 65,000 transaction messages a second, while offering fraud protection for consumers and assured payment for merchants.
What’s new at this blue chip? Visa recently added 13 new token service providers to broaden global access to Visa Token Service. What? Let us tell you why this is so cool and important.
Visa announced it has signed 13 new partners to participate in its token service provider (TSP) program, as the payments industry shifts from plastic to digital and broader access to new standards, such as tokenization*, are needed. With demand expected to increase for payments to be embedded into a growing number of devices, services and experiences, Visa has built out a global network of partners to offer secure, digital payment token services and ensure that regardless of form factor, an Internet-of-Things (IoT) device, appliance, wearable or beyond, can become a more secure place for commerce.
* Tokenization, when applied to data security, is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token, that has no extrinsic or exploitable meaning or value. In other words, when you swipe your Visa card at the Starbucks counter, your debit/credit card information gets tokenized. So if it gets stolen later on, it is just a random number and not your actual bank info.
IoT is a monster trend. Billions of devices in the next several decades are going to end up being connected to the internet. Your refrigerator. Cars. Tractors. And anything you can think of. Why not? Hence the name—Internet of Things.
By Visa getting in now with tokenization, the company will be able to process payments on all these devices. Money, money, money! The growth we see at Visa is going to continue.
Don’t just take it from just us. Jim McCarthy, executive vice president, innovation and strategic partnerships at Visa said: “A potential tidal wave of new payment accounts is approaching — conservative estimates expect 21 billion Internet-connected devices in just three more years, so having both the partner network and the right technology in place are fundamental to driving payments on those devices.”
BMR Take: Visa defines the word blue chip. Do you remember how much Visa is worth now? $220 billion. Unreal big. And getting bigger. The stock trades at 24x next year’s consensus EPS estimate of $3.94 with EPS growth running at 15-20%. And it will stay that way for a long time with the IoT mega-trend coming online in the next few years. Plenty of growth ahead for this cash machine. Speaking of cash, they have $8 billion, with $16 billion of debt. A good ratio.
Upcoming Economic News
Producer Price Index ex-Food & Energy Y/Y
Tuesday, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 2.0%
Prior: 1.9%
The Producer Price Index (PPI) is for all items less food and energy, often referred to as Core PPI.
Consumer Price Index ex-Food & Energy Y/Y
Wednesday, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 1.9%
Prior: 1.9%
The Consumer Price Index for all items less food and energy, often referred to as Core CPI, excludes the two most volatile components of the overall CPI.
Industrial Production M/M
Thursday, 9:15 AM
Period: MAY
Actual: N/A
Consensus: 0.20%
Prior: 0.98%
This includes data measuring output in the industrial sector, which the Federal Reserve defines as manufacturing, mining, and electric and gas utilities.
Housing Starts
Friday, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 1,225,000
Prior: 1,172,000
The number of housing units started in the United States. The U.S. Census Bureau's New Residential Construction release provides statistics on the construction of new privately-owned residential structures in the United States.
Some Thoughts on Splunk (SPLK: $58, down 7%)
Growing Pains Emerge in Q1, but the Opportunity Remains. Splunk billings grew 30% YoY, beating consensus expectations by a solid 6% in FY1Q18. The Americas region showed strong execution despite a recent sales reorganization, but European execution faltered, necessitating a change in sales leadership in the region. We see Q1 more as evidence of near-term growing pains as the company puts into place a distribution channel capable of efficiently taking revenues to the $2 billion FY20 target.
Total billings of $240 million grew 30% YoY, a deceleration from 35% in Q4, but still 6% ahead of consensus. Total revenues at $242 million also sustained 30% YoY growth, despite a growing contribution from subscription based Cloud business pushing license growth down to +16% YoY in the quarter versus
35% in Q4. Splunk added 500 new customers in the quarter, in-line with the 500 added in each Q1-Q3 FY17.
FY18 Outlook Moves Modestly Higher. Despite European execution issues, management expressed confidence in the fundamental demand environment (and Splunk's ability to accrue that demand) via an increase to full year top line targets. The revenue guidance moves up modestly from $1.18 billion to $1.19 billion. Further, the company remains committed to expanded sales capacity in line with last year's increase, as the company remains capacity constrained versus opportunity constrained.
Large Deal Growth Slows. Splunk signed 360 deals over $100K in value, up 13% YoY, however this represents a deceleration vs. the 34% growth in large deals seen thru FY17 and 33% growth in Q4. The company saw 80% of business derived from existing customers in the quarter. We don’t really think getting 80% of its revenue from existing clients is a bad thing. In fact, that means 20% came from new business. We’ll buy that logic.
Q2 Guidance Brackets Consensus, FY18 Top Line Guidance Moves Higher. Management is looking for 2Q18 revenue of $268 million and operating margins of 4%.
BMR Take: We like this company; we like the numbers they are doing; we are long term investors at this price level.
SNAP (SNAP: $18.08, down 14%)
Snap, owner of Snapchat, had a rough week. We don’t like this one here at The Bull Market Report and we want to make you aware of why. We just think they are losing too much money and their user numbers are slowing. They are the most shorted Tech IPO out there, with a 28% short interest. Now some, including us, say that a large short position is bullish. Well, yes and no. It is bullish because those shares have to be bought back at some point. But it is bearish because many of the smartest minds on Wall St. think it is going lower. We’re in the latter camp this time.
Some negatives –
User growth is slowing.
Citigroup downgraded the stock.
CEO Evan Spiegel got a $750 million bonus for taking Snap public.
They lost $200 million in the 1st quarter of 2017. That’s a lot of dough.
BMR Take: Some say this is the next Facebook, so that’s the positive angle and this cannot be discounted – there is a lot of money riding on this company succeeding. We just don’t want to be playing this game at this time. A year or two from now? Maybe. We’re happy to watch and wait patiently on the sidelines.
Apple Corner
There was a rumor that the new Apple 8 can’t handle the new, faster data speeds that are coming down the pike. Well, let us say this. First of all, Apple doesn’t comment on new products that haven’t been announced, so there is no way we can know if this is true. Secondly, the new data speeds of the internet are years away. And guess what? Apple will have new software to handle the bigger speeds, AND they will have the Apple 9 out by then. So we say: Bunk.
Apple (AAPL: $149) had a bad day Friday, down $6 from $155, and after flirting with its all-time high of $156.65, set May 15th. We’re really not too concerned about this one-day, 3% drop. Nothing has changed really – just the perception that the Tech stocks can go down from time to time. But we already knew that. Stocks are inherently risky, but we’d rather take the risk of owning an Apple, as we are up 54% from the date we added it 16 months ago. And all the while the 10-year Treasury note is paying a little over 2% a year. Take your pick.
Tesla (TSLA: $357) Update
Pacific Crest, a Wall Street research firm, put a new price target on Tesla of $439. Wahoo! The stock hit an all-time high Friday of $377 and then got hammered down to $357, finishing the week up $17 or 5%. Our Target was $350 which we raised just a week or two ago. We actually think the stock can go a lot higher, as the future of the company is ahead of it, especially as they get closer to delivering cars in massive quantities later this year and next. But what if what happened Friday is indeed the beginning of the end for Tech stocks, including Tesla?
BMR Take: Let’s do this. If the stock gets hammered Monday and Tuesday and falls below $350, let’s get out, take a breather and watch what happens. After all, having added the stock at $199 17 months ago, we have had quite a run, now up 80%. We wouldn’t want to give up these gains.
The High Yield Corner
By Michael Foster
Before we start talking about high yield, we want to talk about oil.
Oil futures have not been doing well. If you’re a futures trader, you’re probably laughing at the absurd understatement of that sentence. Crude oil futures slumped 4% this week after the steep drop on Wednesday, bringing it closer to its 52-week low of $44, which it reached in early May during another moment of energy volatility. Oil is now down about 20% year-to-date, leading to the somewhat rational question of whether 2017 proves to be the worst year for the commodity since the blood bath of 2014.
With oil prices tumbling, everyone is affected. Of course, the effect is quite different depending on where you are in the market and who your customer base is. The classic argument is that low oil is good for consumer discretionary stocks. If Americans are spending less at the pump, so the theory goes, they’ll have more money to spend buying all kinds of stuff they normally wouldn’t buy.
Simple theory. It sounds logical enough to be compelling, although it’s very wrong. The problem with the theory is that it doesn’t take into account things like income growth, ex-energy CPI trends, and labor participation rates. The macroeconomics are quite different now, so consumer discretionary may not be as unaffected by cheaper oil than in 2014, but the Consumer Discretionary SPDR (XLY: $91) is already up 12% for 2017, so it may be too late to play oil’s weakness this way—especially since other macroeconomic factors make the correlation not so 1-to-1.
Likewise, other sectors and entire asset classes get impacted by changes in oil. High yield is one of them. Back in 2014, high yield assets were hit pretty hard with the fall in oil; when oil prices got even worse in 2015, high yield assets were hit yet again. To make matters worse, the Federal Reserve was hinting at raising interest rates, which itself tends to be bad for high yield. All of this meant high yield funds like the SPDR High Yield Bond Fund (JNK: $37) had an awful run, and high yield was being rejected as an asset class by the broader market.
Now that oil is repeating its 2014-2015 decline and consumer discretionary is repeating its 2014 run-up, you would expect high yield to also repeat its historical weakness and be at best on the decline and at worst in a full-on bearish downtrend. But the SPDR fund and most high yield bond funds are up healthily for 2017. The SPDR fund is up 2% so far excluding its near 6% yield, and The Bull Market Report pick Pimco Dynamic Income Fund (PDI: $30) is up 8% for the year excluding its near 9% dividend (which doesn’t exclude special dividends, which last year brought the yield up to a whopping 14%). From the start of 2016, the Pimco fund is up over 9% excluding the $5.19 in dividend payouts since then (giving the fund a 19% total return over the period, well above the S&P’s 15% return over the same period).
That leads to the question of whether it’s time to sell, since you’d expect cheap oil and rising interest rates to be significant problems for bonds. Remember the Fed is widely expected to raise rates this week. Cheaper oil will cause poor performing energy companies to be insolvent and default on loans; higher interest rates will make it harder for existing firms to pay back their loans while also lowering the price in the market for corporate bonds. All of this is really, really bad for junk bond funds.
Again: So the simple theory goes. In reality many of these problems have been priced into junk bonds for a long time. The low and depressed prices of junk bonds in 2014-2015 helped create the bull market from 2016 to today. But it goes back even further than that. If you look at the SPDR High Yield fund’s price return from 2013 to 2015, you’ll see that every year saw the fund’s net asset value go down due to lower and lower demand for risky corporate bonds. Junk was really acting like junk.
Go back even further, and you’ll see that junk bonds stayed pretty much at the same price range from the end of 2009 to early 2015, which is actually 8% lower than today’s current price for high yield corporate bonds.
High yield debt isn’t supposed to act this way. These debts are supposed to go up in price during times of economic growth and go down very sharply in times of economic weakness and/or recession. But the U.S. since 2012 has been in a state of admittedly slow but steady improvement. Corporate bonds should be attracting more capital, not less.
Finally, starting last year, this began to happen in a noticeable way. But the bonds are still not priced where they should be relative to the business cycle. This means high yield bonds still have room to go up in value.
This isn’t just true of corporate bonds. In fact, something very similar has been happening to municipal bonds and REITs, which is why we have been aggressively recommending them for a long time. Sadly, there isn’t enough room this week to go into the details of why these asset classes are also well-positioned in this odd business cycle. But next week we’ll take a closer look at why both of these, like junk bonds, are deeply underappreciated in today’s market.
Good Investing,
Todd Shaver
Editor, Founder and CEO
The Bull Market Report
Since 1998
Disclosure: The Bull Market Report is a compilation of original writings, news from publicly available sources, and third-party research. The subscriber agreement acknowledges that The Bull Market Report is an information source to give you the background to invest in the stock market.
June 6, 2017
by Todd Shaver | Jun 6, 2017 | 3pm News Flash
Cloudera (CLDR: $22.45)
June 2, 2017
Company Description:
Cloudera offers the leading platform for data management, machine learning, and related analytics, leveraging the open source Big Data technology framework known as Apache Hadoop [stay tuned!] Cloudera’s solution not only allows enterprises to ingest any type of data and store it in a centralized place, but also provides various other capabilities, such as real-time analytics at a fraction of the cost of legacy systems. Cloudera’s differentiation versus other commercial players in the market stems from its enterprise-grade proprietary capabilities wrapped around the open source core that preserves the open-source nature of the product while giving the largest companies in the world the confidence to use the platform. The broad-based success of Cloudera’s platform is underscored by its list of more than 1,000 customers, including about 500 Global 8,000 customers such as Cisco, Barclays, SanDisk, Samsung, NYSE, ADP, Siemens, Cerner, PWC, Cox Automotive, Caesars Entertainment, and MasterCard. All these great corporations know about Cloudera. It’s time you do too.
So what’s the short and simple investment thesis? If you think data is valuable, then Big Data is a sector you want to be in. If you think Machine Learning can advance the way companies and the world interpret information, then you have to find an investment that gets you in the game of artificial intelligence. Cloudera checks both boxes. The company is pioneering the space. Cloudera’s partnership with Intel places the company way ahead of its competition. We think shares are worth $25-30 based on 5x the consensus estimate of 2020 sales. This is a very realistic valuation compared to other technology companies in huge growth markets.
Background
Cloudera was formed in 2008, founded by Michael Olson, now the Chairman and Chief Strategy Officer. In fiscal 2017 (ended January 2017), the company generated total revenues of $260 million, and grew to 1,500 employees. From its roots as a simple open source technology company, Cloudera has pivoted to now serve major enterprises with an industrial-strength technology platform. Cloudera hired Tom Reilly as its CEO in 2013, the former CEO of ArcSight before its sale to HP. In 2014, Cloudera closed an enormous $750 million equity raise from Intel that valued Cloudera at $4 billion. The company went public in April of this year at $15 and is on track to exceed $330 million in annualized revenues, as they grew by 60% in fiscal 2017, one of the fastest growth rates in the enterprise software sector for a company at this scale.
The Evolution of Hadoop
[This is going to get technical, so stick with it or skip to the next section!]
Before discussing Cloudera’s business model, competitive differentiators and financials, let’s take a step back and describe Hadoop technology (the historical underpinning of Cloudera’s platform), how Hadoop has evolved over the years and how and why Cloudera has now moved well beyond core open source Hadoop software.
It all started with Google. The evolution of Hadoop can be traced back to Google’s internal effort in the early 2000s to deal with massive data volumes as it began to digest and crawl the entire web and do very sophisticated data analysis. Traditional off-the-shelf data management solutions couldn’t handle the data volumes and types that Google was acquiring, at least not at a reasonable cost. Google engineers created an alternative, more scalable, and much cheaper data environment rooted in a software framework known as MapReduce, a data storage system called Google File System (GFS), a distributed database called BigTable, and an underlying hardware layer made up of thousands of servers linked to form a cluster or grid.
MapReduce enabled Google’s programmers to replicate and scatter data to many different servers or nodes and effectively split the analytics tasks among these machines. This allowed for parallelization (improving query speeds), data protection in the event of a node failure (high availability), and the ability to add servers to the grid without the need to make any changes to the MapReduce code (maximizing scalability). BigTable added much greater flexibility. These core elements gave Google a competitive edge and spawned Hadoop, Cassandra and an entire ecosystem of open source data management technologies.
In late 2004, Google engineers published a paper describing GFS, BigTable, MapReduce and other components of Google’s proprietary data processing infrastructure. Soon after, Yahoo software engineer Doug Cutting (who since joined Cloudera) combined these Google technologies with other open source software components and created Hadoop, which is now the centerpiece of Yahoo’s data processing and analytics environment. Hadoop was open-sourced by Yahoo and is now part of the Apache Software Foundation, a non-profit that incorporates Hadoop code improvements from the open source community. The technology was commercialized by a number of specialized vendors including Cloudera.
Of course Google was early! We digress for just a minute here to reiterate our recommendation of this amazing company, given how repeatedly it’s proven to be a pioneer.
The Addressable Market For Cloudera Is Enormous
Cloudera is targeting the existing $40+ billion data management market dominated by incumbents such as Oracle, IBM, and Microsoft for a host of Big Data applications. The addressable market is likely larger, as high as $66 billion according to Cloudera. Data is increasingly becoming a top priority strategy for how companies build themselves a competitive advantage. Accordingly, demand for data management technology is on the rise. In particular, everybody wants new innovative technologies that can do things that were previously not possible. Cloudera is right in the mix on this front.
Strategic Partnership with Intel Provides Strong Competitive Moat
Cloudera’s partnership with Intel is a key competitive differentiator. The partnership allows Cloudera to have exclusive visibility into Intel’s chipset roadmap for the next 5-10 years. Intel is also committing a dedicated R&D team focused on working with Cloudera engineers to optimize performance of Cloudera’s Hadoop distribution on the Intel chipset. The $750 million capital infusion from Intel in 2014 gave Cloudera an advantage in the market to accelerate investments for global expansion and into emerging technologies like Machine Learning and Advanced Analytics, ahead of its competitors. Finally, the partnership has helped Cloudera to gain the confidence of large global organizations as well as influence new channel relationships. Do you realize how hard it is to be a close partner of Intel’s like this! The Intel partnership is worth some serious money.
Best-in-Class Leadership Team
You have to have good people at the helm or it just never works. Fortunately, check this box as excellent. The maturity and intellectual capital within the management team, with a solid mix of technical and business expertise, is a competitive differentiator and highly regarded seemingly everywhere across Wall Street. On the technical side, the team includes Doug Cutting (Chief Architect), one of the two cofounders of Apache Hadoop; Mike Olson (co-founder of Cloudera) with more than 30+ years of experience in database technology; and Dan Sturman (SVP Engineering), one of the brains behind Google Compute Cloud. The technical prowess is balanced by solid public company business experience from Tom Reilly, CEO, with 30+ years of enterprise software experience, including as the ex-CEO of a firm acquired by SAP; and Vishal Rao, SVP Field Ops, who was the head of sales at Splunk.
Strong Predictable Business Model
Cloudera enjoys a highly visible and predictable business model, as over 77% of its revenue is recurring in nature (on long term contracts) with best-in-class customer retention rates of over 90% (nobody leaves!) It all adds up to a healthy installed base of technology at companies across the globe. It so hard to get in the door, but once you do, the opportunities for add-on sales can be lucrative.
The Knock On The Company Is Large Operating Losses
It’s large operating losses running around $140 million currently, undeniably stand out when considering the risk profile of the business. The operating losses are staggering, especially when compared to other recurring revenue companies of similar size, but are partially a function of this stage of the Big Data platform market, which has some very different characteristics versus other enterprise software markets. It is a technical sale with a longer-than-average sales cycle, thus leading to higher-than-average expenses as a percent of revenue, but which improves over time as the customer scales. Additionally, the capital infusion from Intel led Cloudera to accelerate its investments, not only in building a global infrastructure, but also to accelerate investments in R&D to capture workloads for emerging use-cases. While it is typical to see a better growth vs. margin profile for companies pioneering a new industry, we and everybody else on Wall Street will remain critical of losing money and hope to see the profitability inflection point sooner than later.
Financial Outlook
