Every quarter we go looking for new ideas. We screen 15-30 stocks on fundamentals and narrow down to what stand out to us as the best opportunities. The challenge in our approach is that we are, at times, only an inch or two deep on a specific stock. The opportunity is that we are not encumbered by bias or sometimes less relevant information. This is part of our internal quarterly process, last presented to clients in June (HERE). The below is a list of our first pass review on the narrowed down 11 tickers that emerged from this process in the current quarter. As a reminder, our process typically goes from Idea Hunt to Bullish/Bearish Bias to Deep Dive/Best Idea. As an example, UPWK is a name that was born out of our idea hunt process below, and for which we presented our deep dive on 2/11, HERE.
BULLISH:
- UPWK: Unique, potentially disruptive model for scaling freelance workforce into traditional workplace, enabling enterprise capacity without major fixed cost changes.
- SLAB: Only semi left opening up new markets using (mixed signal) technology; Timing + Iso will be big this cycle + IoT recovery. Need the dying parts to die slower to harvest full benefit.
- FIVN: Strategically unique position relative to UC market, potential takeout candidate, new CEO plans can accelerate the business down the road. Risks are the penetration curve, tech transformation required, and pace of growth potentially dictated by CRM cycle.
- TSM: Leader of the Semis world, one year through estimate reduction, with a growth penetration curve still ahead, and a rich dividend yield to support. Risk is data center exposure embedded in growth.
- ROKU: Bullish but volatile. Roku is a new platform for cord cutters, a new ad revenue source for content, when pre-built into TV makes it unmovable, with more upside ahead as more TV makers adopt it, making it a fait accompli; and once they are in the stack they have a position that can carve out monetization. It is volatile also because what they have is a skinny OS on a commodity object with proliferating screen preferences, unplumbed depth on potential white space around their content which may be temporally shallower than understood, and executives whose execution is +/-.
BEARISH:
- SMAR: Is this a must-have or a nice-to-have? Lightweight analyst day, hard to get a good sense of what are the durable barriers here.
- PTC: One EPS blowup may be just the beginning for this company that has tried to message that ‘all is new’ when really PMI is underlying exposure with greater risk today thanks to having grown the SMB exposure from the channel, acquisitions add some smelliness here, and conversion of license to subscription puts taking price behind them. What could possibly go wrong with a subscription business, with low organic secular growth, in an iffy macro environment? Hm.
- DELL: In 5 years of being a private company they managed such drastic transformation as to move PC from ~50% of revenue in 2013 to ~50% of revenue in 2018. The Long is just valuation and financial engineering, screens negative on fundamentals.
- PS: Expensive for a no barriers business with risk that good enough content, and slower forward tech changes, help press the commodity button.
- PVTL: Does the market understand that there is a hard circumference around net expansion rate which falls as soon as we comp 3 years of K8 disruption in the marketplace? Does anyone believe a K8 wrap will comp against self-created PCF? PFS is another band-aid. Maybe the net expansion rate lasts through FY 1H20 (1H CY19) but then we think it breaks, we also see s-t positive on achieving OL breakeven as soon as F4Q19 but no cash flow to drive valuation for what will be a falling growth story.
- AYI: Putting on my cycle hat, this stock has been destroyed, and $120 was the downside target for bears, with unit volumes recently accelerating Y/Y. Here is the problem: the accounting looks so shady at first glance and the M&A program seems to have been used as revenue filler, makes me wonder where the bodies are buried and how much needs to get shared with us before positive unit growth can drive healthy organic P+L growth
We welcome constructive feedback on these first pass high-level takes. More to come.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
