KeyStone’s Your Stock Our Take: Cryptologic Corp. (CRY:CSE) & Amazon.com Inc. (AMZN:NASDAQ) and STAR: Nvidia Corp. (NVDA:NASDAQ).
In our Your Stock Our Take Segment we answer two listener questions on two stocks that could not be more different. The first, Cryptologic Corp. (CRY:CSE) – is it a payment processor, a crypto miner, or a cannabis producer? Frankly, the company appears unsure. Nevertheless, a listener asks us if the company is worth his investment dollars.
Our second company is one of, if not the biggest business success stories of the past couple decades, Amazon.com Inc. (AMZN:NASDAQ), the world’s largest online retailer. The company reported approximately $365 billion in gross merchandise sales in 2019 and $281 billion in net sales. Shares in the online giant have been on a long-term tear, averaging annual returns of over 40% over the last 5 years and was up 35% over the last 12 months.
Our Star of the Week is Nvidia Corp. (NVDA:NASDAQ), which focuses on personal computer (PC) graphics, graphics processing units (GPU) and also on artificial intelligence (AI). The stock was up around 16% this week and up over 80% in the past 6 months. We examine what is driving the gains and if it can continue.
Your Stock, Our Take
This listener says that he, unfortunately has owned Cryptologic for a couple years now and lost all of his initial investment. He asks us if there is any hope?
- Normy – via email.
Your Stock, Our Take
Cryptologic Corp. (CRY:CSE)
Current Price: $0.285
Market Cap: $3.6 million
What does the company do?
While typically a simple question to answer, in the case of Crytoplogic, even the company itself seems confused.
Let’s look at a timeline on the business to help explain.
Timeline:
Back in 2016 – Cryptologic Corp., then known Vogogo Inc. was a specialized payment processing business – this business, was a complete failure and in order to preserve cash, it was shut down to explore alternative.
By 2018 – the company then raise around $30 million during the crypto mining craze to buy Crypto 205 Inc. which is engaged in the business of mining for cryptocurrencies.
On June 29, 2018, the company acquired another crypto miner 9376-9974 Quebec Inc. for a whopping $46 million.
Five short months later, after an audit, the company was forced to impair the two crypto mining assets it just purchased by a total of $65.45 million dollars – put bluntly, these were terrible purchases.
Effective February 14, 2019, the company conducted a 30-1 share consolidation.
On July 31, 2019, the company changed its name change from Vogogo Inc. to Cryptologic Corp. The common shares trade on the CSE under the symbol “CRY”.
On August 3, 2019, the company known as Cryptologc entered into a non-binding letter of intent to purchase Wayland Group, a vertically integrated cultivator and processor of cannabis in Langton, Ontario.
In Conclusion
This short history of this business would be rather comical if it did not lose over $103 million dollars in investor capital in the process.
Cyptologic, a company whose name cannot even keep up with the business of the day it is trying to sell to investors, is a cautionary tale.
To be frank, there appears to be little in terms of a long-term business plan at Cryptologic. What we see is more of a scheme, involving the raising capital promoting the hot market segment of the day, enriching management, losing shareholder capital, rinse and repeat. If you want exposure to a cryptocurrency, just buy a crypto itself, not Cryptologic.
We have zero interest in this type of business.
Your Stock, Our Take
I’ve owned a small position in Amazon for several years and wished that I bought more. Is it too late? Do you think there is further upside in the stock?
- Jay – via email.
Amazon.com Inc. (AMZN:NASDAQ)
Current Price: $2,181
Market Cap: $1.08 Trillion
What does the company do?
Amazon is the world’s largest online retailer. The company reported approximately $365 billion in gross merchandise sales in 2019 and $281 billion in net sales. Online product and digital media sales accounted for 50% of net revenue in 2019. Commissions, related fulfillment and shipping fees, and other third-party seller services accounted for 19% of net sales. Amazon Web Services or AWS which includes cloud computing, storage, app development, AI and machine learning services were 13% of total net sales. Amazon’s Prime membership fees and other subscription-based services were 7% of sales. Whole Foods and other physical store retail formats were 6% and advertising services and cobranded credit cards were 5% of sales.
Key Points:
Amazon’s stock price has been on a tear pretty much over any time horizon you look at. The share has averaged annual returns of over 40% over the last 5 years and was up 35% over the last 12 months.
The narrative with Amazon is that they are a threat to every industry. Obviously, the company’s online retail platform has been a major blow to brick-and-mortar retailers. Amazon is the leader in cloud computing and a major force in tech themes like AI and machine learning. Amazon also purchased grocer Whole Foods in 2017 which has led to the belief it will successfully disrupt yet another industry.
Recent Financial Performance
Fourth Quarter Results:
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- Net sales increased 21% to $87.4 billion in the fourth quarter, compared with $72.4 billion in fourth quarter 2018.
- Operating income increased to $3.9 billion in the fourth quarter, compared with operating income of $3.8 billion in fourth quarter 2018.
- Earnings per share increased 7% to $6.47.
Full Year 2019 Results:
- Net sales increased 20% to $280.5 billion.
- Operating income increased 17% to $14.5 billion.
- Earnings per share increased 14% to $23.01.
Valuation:
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- Price-to-earnings of 108 times.
- Price-to-cash flow of ~30 times.
Conclusion
First of all, congratulations to anyone who has owned this stock for any period of time. Its been a major winner and there are no signs that this will necessarily change anytime soon.
That said, the problem we have always had with Amazon comes down to valuation. The stock has fairly consistently traded at over 100 times earnings, at least during the periods that I have checked in and did my research. This is a huge valuation and generally KeyStone we would not consider a stock that trades at a such a premium.
Now if the growth were higher then that would be different. If for example, we were very confident that earnings per share would be growing at a rate of 50% or higher over the next several years then the 100+ times PE multiple would be justified. However, Amazon’s growth has not been that great. 20% revenue growth and 14% earnings growth are attractive but does not in our opinion justify the stock’s current valuation. To be fair, Amazon has never traded based on its earnings. It has traded based on future expectations that it will continue to disrupt and take over new industries. That’s not the way KeyStone invests.
I do like the company’s exposure to tech themes like cloud computing, AI and machine learning. However, in our U.S. research we have recommended other tech plays which have actually performed much better over the last 1 to 2 years. As an example, we recommended Microsoft almost exactly a year ago, which is Amazon’s next largest cloud computing competitor, and Microsoft is up about 80% over this period which is more than twice the return of Amazon.
Weekly Star
Nvidia Corp. (NVDA:NASDAQ)
Current Price: US$309.50
Market Cap: US$177 Billion
Dividend Yield: 0.22%
What does the company do?
Nvidia focuses on personal computer (PC) graphics, graphics processing unit (GPU) and also on artificial intelligence (AI).
It operates through two segments:
- Graphics Processing Unit (GPU) – Where about 85% of its revenue comes from and this segment focuses on specialized markets for gamers, designers and data scientists.
- Tegra Processor – Which integrates an entire computer onto a single chip and incorporates GPU’s and Central Processing Units to drive supercomputing, autonomous robots, drones and cars.
Star Performance:
The stock was up around 16% this week and up over 80% in the past 6 months.
What is driving the stock?
The company really had a difficult 2019 with the share price consolidating after posting weak growth in its financials. To put this into perspective revenue decreased approximately 31% throughout the 2019 fiscal year. But recently, the stock has rebounded and reached new all-time highs after posting record financial results and providing optimistic guidance.
Financial Results
Q4, 2020
- Revenue increased 40%, to $3.11 billion compared to the same quarter last year.
- Adjusted EBIT improved 154% to $1.22 billion year-over-year.
- Fully diluted adjusted Earnings per share (EPS) was an increase of 136% to $1.89 per share.
- Despite the outbreak of the Coronavirus guidance for Q1, 2021 indicated revenue of $3.00 billion and adjusted EBIT of approximately $1.127 billion – So a big increase year-over-year but sequentially, relatively flat.
Conclusion:
Looking at the company’s balance sheet, they have a net cash position of $8.3 billion which we like to see. And on a current valuation basis, the company has a trailing Price-to-Earnings (PE) multiple of around 50 times which I believe right now indicates the company is fairly valued to slightly overvalued. With a technology company here, we are certainly getting a tech valuation but seeing the company’s past weakness in 2019, I would be hesitant to purchase the stock at the current valuation.
Nvidia is a great company and I believe as the world becomes more interconnected and dependent on data – more and more companies will come to rely on Nvidia’s products. If someone wanted exposure to gaming, AI and computing, I personally think that Nvidia would be a decent stock to hold but they are not currently a company that KeyStone is recommending to clients right now. We have a few other U.S. recommendations in the technology sector that we like over Nvidia.
We will continue to monitor the stock going forward, but its recent share price performance after its turnaround in its financials make it our Star of the Week.
