Where The Action Is
Square (SQ: $250) continues to expand its foothold in the Financial Services landscape with a formidable ecosystem of apps and solutions, catered towards consumers and business owners, along with bold multi-billion dollar acquisitions in recent months. The company is rightly dubbed "the Google of Fintech."
From a shareholder perspective, the analogy is apt. The stock is a proven performer with shares rallying over 2,100% since 2016. We added it in 2017 at $17 and are up 14X. They have a strong management team that includes the likes of Jack Dorsey and Jim McKelvey, and importantly the company has a track record of successful execution and delivery, constantly outperforming its own projections.
The Price/Sales ratio has been dropping as revenues have skyrocketed of late. The market cap is $115 billion and last 12-months revenues are about $16 billion, giving it a very reasonable P/S of just 7. The stock remains poised for further growth, with Jefferies upgrading the stock to a Buy with a target of $300, representing a 20% upside from present levels. Our own Target is $335, with a Sell Price of $235. But if it goes to $235 or lower we would like it even more. Tough decisions we all have, don’t we!
The analyst cites Square’s 40 million highly-engaged daily active users (DAUs), along with the outperformance of its Cash App, which will drive nearly two-thirds of the company’s gross profits over the next five years. The company is also witnessing significant quarter-on-quarter improvements in unit economics as it reaches widespread adoption among merchants and consumers. Many analysts are predicting 80 million DAUs within two years.
Square’s Cash App also received favorable coverage from a semi-annual research into youth trends titled ‘Taking Stock With Teens’ by Piper Sandler, ranking second among payment apps, gaining steady market share against PayPal’s Venmo, which is currently ranked first.
All good background. But what we really want to emphasize today is the way Square's recent $29 billion announcement of the acquisition of AfterPay (AFTPY) could be a game-changing equation in the Fintech market, especially considering the popularity of Buy Now, Pay Later services among the youth.
Despite remaining flat during the past few quarters, Square has quietly transformed into a Forever Stock, operating in a segment that is still at its nascent stage and ripe for disruption, the company provides services only in a handful of countries, with many more markets opening up for such disruptive technologies.
With $5.6 billion in cash, debt of $6.1 billion, and significant free cash flows, the company has a robust balance sheet, and is rightly termed a ‘Must Own’ by any investor looking for exposure to the Fintech sector. We are BIG believers in this one.
Netflix (NFLX: $362, down 3% earlier this week) disappointed last night and the stock's precipitous overnight decline provides us with a different kind of wake-up call. Whether you're in Netflix or not, you're going to want to read this flash.
On the surface, Netflix delivered a quarter almost entirely in line with what investors told themselves they wanted to see. Revenue of $4.92 billion was only 0.1% below guidance and reflects healthy 26% year-over-year improvement. Even quarter-to-quarter, the company squeezed 9% more cash out of its subscribers than it did three months ago.
Furthermore, despite profit being a lower priority while management invests vast amounts in original content, it was nice to see that Netflix carried $0.60 per share across the bottom line, $0.04 better than we expected.
But the market found fault as Netflix missed its subscriber growth target, losing 126,000 paid U.S. accounts and only adding 2.83 million new viewers overseas. Management told us to expect the audience to grow by an even 5 million accounts, so it's a clear disappointment.
There are some compensating factors like the way revenue hit guidance. Netflix raised prices in many markets and this is apparently where the pain point is. We know that now. Furthermore, management has doubled down on its aggressive growth forecasts and now expects subscriber adds to accelerate again in the current quarter.
We've had it with Netflix. We've warned throughout that it's going to be a volatile ride. The stock is now down 20% since we started covering it this time around, after making 65% back in 2016-17. We're worried about competitors like Disney and Apple starting to crowd into the space. With a negative $3.5 billion of free cash flow this year and next, we'd rather be invested in a company that actually makes money. We hereby remove Netflix from our High Tech portfolio. We added them on July 16th last year. We're gone now on July 18th, 2019.
However, even for a volatile stock, the reaction to so-so numbers was so extreme that we now suspect that the market as a whole is getting overheated. It's not Netflix. It's Wall Street. And an overheated market can lurch lower as fast as it soars. Even counting the stocks that fizzled and left our list under a cloud, the BMR universe is up a dramatic 33% YTD. This is a great time to lock in some of that profit before a moody market can take it away.
Is It Time to Take Some Profits?
Why are we asking this question?We can’t predict the future. You may think we can, but we can’t. And we want YOU to think about where YOU are and where you are going with your investments. We have made some amazing stock picks and we’ve made you a lot of money in many of these. (We’ve had a few losers too.) Roku is now a triple since we added it last year. Shopify is up 350% in two years. Square is another quadruple play. PayPal, Twilio, Paycom, Microsoft, Apple, Visa: all strong performers.
Is it time to take some of that off the table? There are a lot of things to worry about in the world today: Trump, Chinese tariffs, Iran, immigrants, global slowdown, flat earnings for the past quarter and next; negative interest rates in Europe and Japan . . . can they happen here? If so, will the Fed run out of ammunition if short rates go to zero? What about the attacks on Big Tech by Congress and the European Union? Can Facebook, Amazon and Google survive this onslaught? Of course they will, but why sit around with someone hitting you on the head with a hammer. Maybe it’s better to step a little away from the scene.
Lots of questions. No solid answers. Irrational exuberance was proclaimed by Alan Greenspan on December 5, 1996 after an amazing bull run in the preceding few years. But the bull market continued to skyrocket until the Spring of 2000. That’s almost 3½ years after Greenspan’s call. So is it too early to start taking profits now?
Again, we don’t know, but we do know that there are things you can do. You can sell some calls against your stocks. This brings in cash and cushions you on the downside a bit. But if Roku, which was at $32 at the start of the year goes from $110 now to $90 or even lower, it’s not going to cushion you much with $5 of call option income. So perhaps you can take some profits off the table. Maybe you should put some stops in place. Sell some at $104. Sell some shares if it hits $96. Sell some more if it hits $90. Then if it goes to $70, which is a distinct possibility in a nasty bear market, you’ve protected your profits and have cash in the bank.
And don't forget, we’ve got 17 stocks in our High Yield and REIT portfolios that are paying from 3% to 11% dividends. (Be wary of Annaly and New Residential, though.) These stocks are just waiting for you to place some cash in them so that you can sleep better at night.
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