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Market Outlook

December 2023 Payroll Report: Job Gains Exceed Expectations Amid Rising Wages

Category – Market Outlook

Payroll Report for Dec 2023

Net job gains 216K, higher than the 175K expected.

Hourly wage gains 4.1%, higher than 3.9% expected.

The two-month payroll revision, though, shows a 71,000 reduction in gains.

The 10-year treasury is up 8 basis points to 4.07%, with hourly wage gain increase being the main culprit.

S&P Futures down 0.4%

Expectations of the Fed reducing rates at their March meeting are down to only 50% based on a good jobs report and the higher wage increase.

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Enterprise Software

UiPath: A Strong Buy in Robotic Process Automation

UiPath (PATH) Buy $23  Industry: Robotic Automation Processes (RPA)

Secular Growth – 5 Years, Target $55 to $60. Annual Gain around 22%

Why UiPath?

Saving customers money: I believe that for AI to succeed, enterprise software businesses will have to come up with genuine economic and money-saving use cases and applications for their business customers by improving productivity.

Unlocking Data: Mark Moerdler, from Bernstein Research, commented on Barron’s AI Roundtable.

“But arguably, the bigger value creation is going to be unlocking the data within enterprises, to leverage that data to drive efficiencies within organizations, make leaps of intuition in coming up with answers, or make decisions faster, or in some cases reach conclusions you couldn’t previously reach because you didn’t have easy access to the data.” 

UiPath is a Robotic Process Automation (RPA) leader, that started improving productivity for its business customers since its inception and the availability of faster chips and new forms of faster, more efficient parallel computing should turbocharge its business.

Fast-growing industry: The RPA industry is in its early stages and has a long runway of fast growth, especially with AI hardware support. The RPA market is expected to grow at an astounding 33% to $27.5Bn, with cognitive or intelligent computing being one of its key drivers.

UiPath generates enough context to create AI solutions

UiPath’s co-founder had this to say on the earnings call

  • “To be effective, Generative AI needs context, which our software robots can deliver by gathering information from across the enterprise – in data, documents, CRM, ERP, and beyond. It also needs our platform to take action and operationalize the promise of AI today with an integrated set of capabilities that combines our Specialized AI with Generative AI. 
  • Yeah, I would like to add that more customers are realizing that automation is a great means to get more value from Generative AI.”

Strong margins and growth – GAAP margin of 83%,  revenue growth 21% for the next three years, Adjusted operating profit margin at 15%.

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Enterprise Software

Confluent: A Strategic Buy in Data Streaming

Confluent (CFLT) Buy $22.25 Industry: Data Streaming

Secular Growth – 3 years, Target $43-45. Annual Gain 24%

Open-source Apache Kafka is ubiquitously used for data streaming. Confluent’s founders originally built Kafka and its wheelhouse is scalable data streaming and infrastructure management. The demand for real-time, low-latency data streams from IoT, Ad-Tech, and Autos to name a few, is only going to get greater and Confluent has the best cloud platform to constantly stream it at scale, enhance, maintain, and provide analytics for it. 

What makes Confluent stand out?

Best in Class Product: Confluent does have large competitors; Amazon’s (AMZN) AWS, Microsoft’s (MSFT) Azure, and Alphabet’s (GOOG) Google Cloud have their own managed data streaming products. However, none have the focus, scale, rich features, implementation, integration, support, and cost savings that Confluent does.  A Comparison of the products revealed 26 integrations for Confluent Versus 9 and 10 for the rest, much wider deployment, and stronger support and training.

Symbiotic Relationship: Besides, Confluent, having an agnostic platform, has partnerships with the CSPs (Cloud Service Providers) to fill in their data streaming product needs or bring them customers for storage and processing.  So, it’s a symbiotic relationship and helps both the CSP and Confluent. 

  • Integration: Confluent’s  Data Streaming Platform has several integrated components that will lead to greater engagement and monetization. Given the massive $60Bn Total Addressable Market, and the speed at which data streaming is moving, a comprehensive best-in-class platform at scale is a necessity, and building it gives them a big competitive advantage.

Several Monetization Streams: With Kafka as the foundation, the DSP does a lot more than just stream data, it uses 5 integrated processes of streaming, connecting, governing, processing, and sharing. All these components, including the non-Kafka ones, can be monetized and Confluent has started Freemium licensing/subscriptions to increase engagement and revenue. Using Apache Flink, it’s also increasing engagement and monetization for stream processing, governance, and sharing from customers like Netflix (NFLX) and Instacart (CART). The stream-sharing offering would be very valuable to the finance, insurance, and travel insurance industries, which need to share data with providers and customers.

Confluent had a slower-than-expected 3rd q-2023 revenue growth and in a day sank from $28 to $17, so it is volatile. Now, at $22, it’s a lot cheaper at 8.5x sales, and with 26% revenue growth on the anvil is reasonable for a startup, growth stock that started only in 2014 and IPO’d in 2021. While still making heavy losses, there has been significant improvement in margins and management has committed to continue doing so.

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Semiconductors

Qualcomm (QCOM): An Underappreciated GARP Opportunity in Wireless Technology

Qualcomm (QCOM) $137.50

Qualcomm is an underappreciated GARP (Growth At A Reasonable Price). 

Apple stays on as a handset customer for an extra two years than originally planned, till FY 2027. Clearly, developing in-house modems is an enormously difficult undertaking and even the mighty Apple is still struggling to achieve the same levels of expertise and product quality that Qualcomm provides.

Qualcomm’s crown jewels of extensive, essential patents for wireless networks, such as a near-monopoly in 3G wireless networks, a large share of 4G patents, which contributed enough innovation to warrant earning royalties on virtually all 4G devices and a good portion of essential patents with 5G – ensure a lucrative stream of royalty revenue from most cell phones. 

The crown jewels continue to bolster and monetize the business. 

Qualcomm’s auto segment should power growth for the next decade.

Qualcomm has a large auto pipeline of $30Bn through 2030, larger than Nvidia’s $14Bn and Mobileye’s $22Bn. I expect the auto segment to grow from $1.9Bn to $4.3Bn by FY 2026, a CAGR of 33% in the next 3 years. 

Qualcomm’s main strengths are:

  • Its connectivity, from its decades of experience in the cell phone industry.
  • The one-stop shop integrating ADAS, Infotainment, Car to Cloud services, and connectivity.
  • Its massive capacity to scale and handle the complexity needed to manage different systems, stacks, and vendors.
  • Building a better platform at scale – Qualcomm would be the digital chassis for traditional ICE automakers 
  • Unlike Mobil Eye, Qualcomm could take market share by being more flexible and building heterogeneous SoCs the way they did in phones and IoT.

Given the emphasis on technology and the high growth, Mobileye, Qualcomm’s largest competitor is valued at a whopping 16x revenues. I don’t believe the markets are valuing the strength of Qualcomm’s $30Bn pipeline and 33% growth correctly and see this as an opportunity to buy.

The Company’s lucrative treasure trove of patents in connectivity should continue to ensure high-margin revenues for a long time.

Its Snapdragon technology in partnership with Microsoft can find opportunities in the PC space.

The auto industry, as it moves towards autonomous driving, is an extremely difficult one to work in with its maze of regulations, emphasis on safety, adherence to stringent quality standards, and the time from pipeline to production, which sometimes stretches up to 7 years. ICE (Internal Combustion Engine) automakers have to make a paradigm shift embracing technology as the main driver and not looking at digitization partners as parts suppliers.

Categories
Semiconductors

indie Semiconductor (INDI): A Compelling Buy in the Auto-Tech Growth Sector

indie Semiconductor (INDI) $7.35

BUY 

indie Semiconductor is a compelling growth story in the auto-tech industry, with a decade of secular growth ahead.

It has durable competitive advantages of providing agnostic and holistic solutions to the ADAS (Advanced Driver Assistance Systems) segment of the auto-tech industry. As cars progress towards becoming computers on wheels, there are myriad ADAS solutions for traditional internal combustion makers to pure tech companies making electronics and autonomous vehicles.  The industry is fragmented, finding its feet, thus having agnostic solutions is a big plus. 

Another plus is that it’s run by a solid team of industry veterans with decades of production experience and deep roots in the auto-tech industry. Auto production is deeply regulated for safety standards, the sales and production cycles take years from design to production, and having veterans instead of tech-whiz kids is a big competitive advantage. 

Also, indie’s small size (just $350Mn in sales in 2024) makes it nimble and well-positioned to take on difficult projects deemed unprofitable by large, rigid, complacent auto parts manufacturers.

indie’s pipeline has leapfrogged to $6.3Bn from $4.3Bn leading to forecasted revenue of $1Bn for 2028, about 5x 2023’s revenue. That was the clincher for me; its current market cap is only 1.4Bn, just 4x 2024 sales. 

A COMPELLING BARGAIN. 

Categories
Enterprise Software

Klaviyo (KYVO): A Promising Buy in Marketing Automation

Klaviyo (KYVO) Buy – $27.50 

3-5 Years, Target $50 to $60. Annual Gain – 16 to 20%

Secular growth story – 4-year forecasted revenue CAGR of 32% 

Klaviyo (NYSE: KVYO) is a marketing automation Guru with a 10% stake owned by Shopify (SHOP) with an option to purchase an additional 5%.

Within marketing automation, there are the plain vanilla, single-channel solutions like Mail Chimp and Customer Contact, and one 800-pound gorilla Hubspot (HUBS) which is 3 times its size, and four times its valuation. Taking share from single-channel customers, the smaller Klaviyo is growing much faster at 32% than Hubspot’s 23%.

What’s special about Klaviyo – These are the main competitive advantages:

  • Klaviyo’s integrated data platform integrates customer and automated marketing data.
  • A full stack of tools to provide customers with complete marketing solutions. Single-channel solutions lack data analytics and personalized experience capacity, while marketing solution providers have no segmentation or data capabilities and cloud warehouses have all the data but zero messaging infrastructure and campaign flows.
  • Because of the integration, their targeting is much more precise, scalable, and much faster – this is automated at a large scale and machine-driven for smaller customers to self-operate. Other vendors don’t have that capability or have customers’ data stored across different datasets and databases, which are less user-friendly than Klaviyo’s solution. 
  • Its close association with Shopify, which contributed to 77% of Klaviyo’s revenue; Shopify itself is growing at 22% – so this advantage should endure for a while.

The metrics are impressive 

  • High-value customers grew faster, and customers over $50K per year grew 89%, faster than the overall 24% growth for the company.
  • The Net Revenue Run Rate stayed high at 119%, the 10th quarter with an NRR over 115%, 
  • Cash Flow Margin at 15% of sales
  • Sticky – 73% of orders were from repeat customers

Importantly, with the solid operating cash generation Klaviyo doesn’t need to choose between growth and profitability, which is a huge deal for a startup. It has a cash hoard of $724Mn. With the advantage of already having and generating even more data, M/L could likely become its core competency, which should allow it to dominate this space in the decade ahead.

Klaviyo is still under the radar and a steal at $28 a share.

Categories
Industrials

Investing in Vestis Corp (VSTS): A GARP Opportunity in Uniform and Workplace Supplies

Vestis Corp (VSTS) Buy $20

3-5 Years, Target $40 to $45. Annual Gain – 18 to 20%

GARP (Growth at A Reasonable Price)

Vestis (NYSE: VSTS) is a uniform and workplace supplies provider that’s just been carved out of Aramark (ARMK). A competitor to the very successful Cintas (CTAS), now just likely to start hitting the gas. Cintas, priced around $50 on December 13th, 2013, closed at $600 at year-end, 2023 – a twelve-bagger in 10 years! That’s an annual growth of more than 28%! I believe Vestis can emulate Cintas’ story.

These are the main reasons to buy Vestis:

1. Sustainable long-term revenues and income from long-term contracts with 93% of clients renewing each year.

2. ScaleIt is the second largest provider in the rental uniforms and industrial supplies market after the $6.9Bn Cintas. Scale matters, making it a barrier to entry for smaller players unable to serve multiple locations. Operational efficiency is the reason for Cintas’ dominance – smaller players can’t do it at the same price as Cintas and Vestis, and it is far more expensive for industrial customers, local government authorities, franchises, hospitals, and restaurants to do it by themselves.

3. Fragmented market – the opportunity is tremendous, the big three players control only 25%, and it being the second largest player there is plenty of room to increase market share.

4. Cross Selling – increasing revenue per customer. Management believes that only 30-40% of Vestis’ product line is being sold and there is ample room for improvement, especially for workspace supplies.

5. Leverage Delivery agents to increase sales – continue leveraging the front line by making salespeople of its delivery agents. Currently, Vestis’ delivery agents sell on 96% of routes. These are valuable assets and will be leveraged more.

Even if Vestis emulates most of Cintas’ story we have a solid winner on our hands.

Categories
Market Outlook

January Inflation Surprises: Rates Climb Above 3%

Inflation rose more than expected in January, still hanging over 3%

  • MoM January Consumer Price Index: +0.3% vs. +0.2% expected and +0.2% in December (revised from +0.3%).
  • YoY +3.1% Y/Y vs. +3.0% expected and +3.4% prior.
  • Core CPI, which excludes food and energy: 
  • MoM+0.4% vs. +0.3% expected and +0.3% prior.
  • YoY +3.9% Y/Y vs. +3.7% expected and +3.9% prior.

The biggest factors:

The shelter index increased 0.6% in Jan. after rising 0.4% in Dec.

Health insurance climbed 1.4% on the month, the most since September 2022. Vehicle insurance rose the same amount, and that’s on top of a long string of outsize gains. The year-on-year increase in car insurance continues to be the biggest since 1976.

Treasury yields soared across the curve. Both two-year and 10-year yields jumped about 15 bps.

The market sees no chance for a rate hike in March. The odds for an increase in May are about 1/3. A hike in June is fully priced in, though.