KeyStone’s Stock Talk Show, Episode 172
We are back this week after rave reviews, a few crying babies, and further shock and awe at our faces-for-radio now revealed on our YouTube platform. We kick of this week’s show with a brief discussion on the strong stock market gains to end July following the worst first half in U.S. markets in 52 years. In our Your Stock, Our Take segment I will take a look at a TV streaming platform Roku Inc. (ROKU:NASDAQ). The Pandemic stay at home star is down 72% year to-date and 86% from its 2021 highs. A listener asks if the stock finally offers value. Aaron is going to take you to school by looking into “Three things to never do when valuing a stock on a PE or price-to-earnings basis.” Brett is going to launch our legendary or famous investors series with a look into recent market darling Cathie Wood. Wood is an American active investment manager who is the current CEO and CIO of Ark invest, which was founded it in 2014. Incidentally, Roku is one of the top holdings in her flagship fund alongside well-known names such as Tesla, Zoom, Crispr Therapeutics, and Block. Brennan will handle our Star and Dog of the week. The Dog of the week is Datametrex AI Ltd. (DM:CSE) a Canadian-based IT company focused on, Machine Learning and Artificial Intelligence which collects and analyzes data – that is a bunch of buzz words. The micro cap is down 35% year-to-date and 61% since its 52-week high. The Star of the week is Enphase Energy Inc. (ENPH:NASDAQ), an energy technology company and the world’s leading supplier of microinverter-based solar and battery systems. The stock has jumped 25% in the last 5 trading sessions and is up 61% year to date and was the top-performing stock in the S&P 500 in the last quarter powered by strong quarterly growth. But without further ado, let’s get to the show.
Welcome, my cohosts Aaron, Brennan, and Brett!
2022 First Half Worst in 52-Years, Followed by Best Month Since November 2020.
The stock market bounced back from its worst first half in 52 years with its best month since November 2020, as the S&P 500 index gained 9.1% in July (5.3% in just the last three trading days of the month), trimming its year-to-date losses to 13.3%. On Friday, all major indexes gained, posting winning weeks and capping off the best month of the year so far and then some. The Dow gained 6.7% in July, while the S&P 500 added 9.1%. The Nasdaq Composite rose 12.4% as investors rushed into the tech stocks beaten up the most during this bear market.
I have heard analysts rationalize July’s gains with the thinking that recessionary fears were already priced in, and second-quarter earnings over the last couple of weeks have generally been better than the low expectations investors were bracing for. The danger in this thinking is that if earnings were expected to be “whale crap” and they landed somewhere just above, you are still floating in toilet water. In our recent U.S. technology report where we highlighted a number of names to start buying in the sector a month ago to clients, we ran the numbers. Even at the lows, the 10-year historical valuations had just reached average to still slightly above average – in my opinion, that is not pricing in a recession as pricing in higher risk, would imply multiples below the 10-year average valuations.
Overall, I would say that earnings were not nearly as poor as some expected, but I would caution that the earnings numbers we have been looking into recently are from the April-June quarter, a period when the full effect of the aggressive rate increases and inflation had yet to be felt. A consumer spending halt does not typically occur with the flick of the switch, it is often lagging and felt more gradually. We will see how this affects future quarters.
Last week did see news U.S. GDP contracted for a second straight quarter, a common indicator of a looming recession, and another 75 basis point interest rate hike by the Federal Reserve on Wednesday.
Roku Inc. (ROKU:NASDAQ)
Market Cap: $10.62 Billion.
Roku operates a TV streaming platform. Roku devices are small streaming boxes and streaming sticks that connect to your television. The company essentially puts streaming content from Netflix, Spotify, Hulu, Disney+ and more (subscriptions required) in one easy-to-search place on a TV screen. Roku has also started producing its own content.
The Pandemic stay at home star is down 70% year to-date and 83% from its 2021 highs – on Thursday of last week, the stock dropped another -23.07% after it reported Q2 GAAP earnings per share of -$0.82 misses by $0.13. Revenue of $764.4 million (+18.5% Y/Y) misses by $40.24M.
Recent Financial Results:
Q2 2022 Key Results
- Total net revenue grew 18% to $764 million.
- Adjusted EBITDA was a loss of ($12.1 million) down from a gain of $122.4 million in Q2 2022.
Strong Historic Growth Revenue Growth, Minimal to Negative Operating Income Historically:
While the negative turn in operating income and adjusted EBITDA as well as weaker revenue growth in Q2 were not ideal, what really crushed the shares was management’s Q3 outlook. Citing a weak economic environment defined by recessionary fears, inflationary pressures, rising interest rates, and ongoing supply chain disruptions, the company guided for net revenue to increase only 3% year over year to $700 million. Adjusted EBITDA will be negative $75 million from a gain of $130.1 million in Q2 2021. The company also withdrew its full-year revenue growth rate estimate.
From a valuation perspective, Roku trades at with a price to sales of 3.15 which is significantly below the tech segment, but it is not profitable on a GAAP basis and its Enterprise Value/EBITA is 150 and will go higher near-term.
In the end, the company has great products (I have used them), but despite the massive share declines, the the valuations remain high and the stock does not meet our growth at a reasonable price criteria. Growth is slowing and earnings remain elusive.
The Dog of the week is: Datametrex AI Ltd. (DM:CSE)
Down 35% year-to-date and 61% since its 52-week high.
The stock is currently trading at:
Market Cap: $46 million
Description: DataMetrex is a Canadian-based information technology company focused on, Machine Learning and Artificial Intelligence which collects and analyzes data (use cases: Cybersecuirity, Marketing, Crisis Management). Blockchain technology for the collection, storage, transfer, analysis, and presentation of big data. In 2020 they started providing COVID-19 related testing services, concierge medical services and telemedicine services. And just recently they made an acquisition within the EV space which provides Mobile EV Charging solutions for people with electric cars.
Driving the decline: Is a reduction in the company’s revenue down 43% from its 2021 highs – triggered by a decrease in Covid 19 testing services in its health segment – which made up (80%) of the company’s total revenue during the quarter. The decline in revenue also translated to a collapse in profitability, with Net Income down 86% from the first quarter of 2021 – and potential further declines ahead as the world pushes on from Covid 19.
Datametrex is really a do it all kind of company, orrrrrrrrrr we could call it a conglomerate of “Buzzwords”. The company has grown its Machine Learning and AI segment in the last quarter to $2.1M (Q1) up from just $400K in Q1 2021. But its Covid 19 related revenue has collapsed. And the business is making some big bets on its telehealth/Medi-Call app which is expected to start generating revenue in Q3 2022 and is only beginning to scale its EV charging business.
The company does have a healthy cash balance of $15.7 million with essentially no debt. But the company issued 66 million shares at $0.15 per share for the recent EV Charging acquisition, and the company now has 416M shares outstanding and continues to trade at 50x earnings.
Looking forward, shareholders are really gambling that Datametrex can continue to grow its AI & Machine learning segment (which it has struggled to do in the past) and successfully launch its news lines of business which will likely be a drain on its cash balance and profitability.
And given the declines in the share price over the past year, it has claimed the title of our Dog of the Week.
The Star of the week is: Enphase Energy Inc. (ENPH:NASDAQ)
Gained approximately 25% in the last 5 trading sessions and is up 61% year to date.
Where it now trades at:
Market Cap: $40.4 Billion
Description: Enphase Energy is a global energy technology company which provides a semiconductor-based microinverter system that converts energy at the individual solar module level and brings a system-based high-technology approach to solar energy generation, storage, control, and management.
Enphase has shipped more than 45 million microinverters, and over 2 million Enphase-based systems have been deployed in more than 135 countries.
Driving the share price Gains: Are the company’s record Q2 2022 financial results announced last week on July 26th. Revenue was up 68% to $530 million (exceeding its upper end of guidance of $520M), Diluted Adjusted EPS was up 102% to $1.07, and the company generated FCF of $192 million in the quarter. Plus, the momentum in its financial results appears to be keeping pace, with Enphase’s Q3 guidance displaying sequential revenue growth of approximately 15% at the midpoint over Q2.
Enphase has a slight net-debt balance and trades with a trailing P/Adj. EPS multiple of 93 times, which is not cheap – but it has been growing phenomenally.
And considering the company’s stellar growth which has propelled the stock to new all-time-highs Enphase has claimed our coveted status of Star of the Week.
1: Cathie Wood is an American active investment manager who is the current CEO and CIO of Ark invest, founding it in 2014. She has over 40 years of investment experience, previously working at AllianceBernstein as CIO, co-founding the hedgefund Tupelo Capital Management, as well as working at Jennison Associates and The Capital Group.
2: Thematic investor. Her investment allocation focuses on her five big ideas Artificial Intelligence or AI, Battery Technology, Blockchain, Robotics, and Gene Sequencing.These are all emerging technologies and industries that she sees as significant disruptors to the status quo.Due to being disruptors she believes that the industries will provide higher returns than traditional industries.To sum up her investment philosophy a quote from her: “We are dedicated completely to disruptive innovation. Innovation solves problems.”
3: Her flagship fund is the Ark Innovation ETF symbol A-R-K-K on the NYSE ARCA. The top 5 equities in the ETF are Tesla, Zoom video communications, Roku, Crispr therapeutics, and Block. Aligned with her philosophy these are all growth companies in her five disruptive sectors. She is an active manager meaning she will rebalance her portfolio based on her own outlook, in contrast to a passive management style which replicates an index.
4: Investing in the future sounds great, with a long-term perspective, right? We would agree investors should take a long-term perspective, but that does not guarantee long-term returns. She has not been very successful in recent years as the market became bearish. The ARKK ETF has returned 48% over the past five years versus the Nasdaq 100 Index returning 118%. The ARKK ETF was producing a higher return until early this year, but as the market collapsed Cathie’s funds dropped more, why is that?
She is a strong believer in these technologies and was willing to pay any price, which during the post-pandemic bull run got higher and higher misaligning prices from fundamental valuations.
This is our main criticism of her style, paying any price for a company. No matter how strong a company is, you can always pay too high of a price for that company.
5: Investing in growth stocks in emerging industries always has a higher risk, especially in mania phases like 2021. When you do buy growth stocks at these high prices like she had you are accepting even higher risk and need them to pay off. Most of her holdings do not have positive historic earnings, and if they do they are low in respect to the price. Being true to her style she has accepted the risk of no earnings for the expectation of extremely high earnings in the future implied by the high price. She believes that not holding innovative companies has a higher risk than investing in entrepreneurs and startups.
Her current market expectations look into the 2030s and we will likely have to wait until then to see if her picks work out.
In summary: She is a visionary thematic investor who takes higher-risk bets on the future.