Valuentum Exclusive Analysis for the Discerning Investor

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Dec 10, 2020

FTC Attacks Facebook, Win-Win Scenario for Investors
Image Shown: Facebook Inc has a large digital advertising business with global reach, but it does not have a monopoly on digital advertising or social media by any means. Image Source: Facebook Inc – Third Quarter of 2020 IR Earnings Presentation. Facebook is being sued by the FTC for allegedly engaging in monopolistic activities via its acquisition program. It's important to note that the government is not seizing Facebook's assets and that Facebook investors own the future free cash flow stream of the entire entity under any and every scenario--whether Facebook is retained in current form or whether it is broken into different parts through a potential IPO/spin-off of its Instagram and WhatsApp properties. Under a status quo scenario, we believe Facebook's shares are worth $413 each, an estimate that is backed by the company's vast net cash position and future expected free cash flow stream. In such a scenario, the company would remain one of our favorite ideas, retain its material competitive advantages (i.e. the network effect) and continue to build upon its very healthy financial profile. Further, in light of the FTC news, we believe the market will look to price Facebook more and more on a sum-of-the-parts basis, which could help to accelerate price-to-estimated fair value convergence relative to our intrinsic value estimate. In a highly improbable break-up scenario, Facebook investors could receive more than our status-quo intrinsic value estimate. The IPO market is very, very healthy at the moment, with investor interest in new issues at historic highs and many recent IPOs soaring on their first day of trading. If Facebook is forced to IPO Instagram or WhatsApp, the very, very healthy IPO market could generate proceeds for Facebook investors far in excess of what the implied value of Instagram and WhatsApp contribute to our current $413 per share fair value estimate of the combined company. Further, the cash proceeds of an IPO of Instagram or WhatsApp would stuff the coffers of Facebook's balance sheet with even more excess cash that could be used for material share buybacks or a vast one-time cash dividend--or for other value-generating opportunities. In an IPO or spin-off of Facebook's Instagram or WhatsApp properties, please note that investors are merely capturing the present value of these properties' future free cash flows sooner (not losing them)--and the market may price them at a substantial premium above our implied valuation within Facebook. The FTC news, which was largely expected, will generate headline risk for Facebook's shares, and it will undoubtedly be a source of continued share-price volatility and confusion for investors. In many respects, however, the FTC's attack on Facebook may turn out to be a win-win for Facebook investors. At the very least, if investors start to look at Facebook more and more on a sum-of-the-parts basis (pricing Facebook, Instagram and WhatsApp separately with consideration of current market conditions/relative prices, which are undoubtedly healthy for new issues), it may only accelerate status-quo-scenario price-to-fair value convergence. Facebook remains a top-weighted holding in the Best Ideas Newsletter portfolio, and we will continue to follow developments related to the FTC news.

Dec 10, 2020

Alphabet Continues to Move Higher, Supported By Its Promising Long-Term Growth Runway
Image Shown: Alphabet Inc Class C shares have surged higher year-to-date as of this writing. We see room for additional capital appreciation upside. Alphabet is one of our favorite companies, and we include Alphabet Class C shares as a top weighting in the Best Ideas Newsletter portfolio. Shares of GOOG have staged an impressive recovery since March 2020, when the coronavirus (‘COVID-19’) pandemic sent equity markets spiraling lower, and we still see room for significant capital appreciation upside. Our favorite companies are firms with pristine balance sheets (Alphabet had ~$118.7 billion in net cash, inclusive of short-term debt and not including long-term ‘non-marketable investments,’ at the end of September 2020), high-quality cash flow profiles (Alphabet generated over $25.6 billion in free cash flow during the first nine months of 2020), and impressive long-term growth runways (ideally) supported by secular growth tailwinds (allowing for multiple “winners” in the space). We continue to be big fans of Alphabet as the firm checks all three boxes!

Dec 9, 2020

3 Speculative Stocks for Your Radar
Image Source: Mark Morgan. Etsy operates the online marketplace Etsy.com, which connects creative entrepreneurs with consumers looking to find unique crafts and goods. Stitch Fix was founded in 2011 and provides customers with personalized shipments ('Fixes') of apparel, shoes and other items that are hand-picked by the company's stylists. Uber Tech first started in 2010 to make it easy for people to get a ride from point A to point B with the simple touch of a button. All three are breaking out to new highs, and we wanted to put them on the radar of risk-seeking investors.

Dec 8, 2020

Visa Is a Great Company
Image Shown: Visa Inc’s operations are on the rebound, though meaningful headwinds remain. Image Source: Visa Inc – Fourth Quarter and Full-Year Earnings for Fiscal 2020 IR Presentation. We recently took a fresh look at our valuation of Visa, and we raised the company’s fair value estimate to $219 per share. The high end of Visa’s current fair value estimate range sits at $263 per share, indicating there is room for substantial capital appreciation upside under a more bullish/upside scenario (note that upside and and downside scenarios help inform each company's fair value estimate range). We continue to be big fans of Visa, and the firm is not only one of our top ideas in the financial-technology/payment-processing space that includes innovators in blockchain and cryptocurrency, but it is also one of our top ideas in our entire coverage universe.

Dec 7, 2020

Dollar General Continues to Impress
Image Shown: Shares of Dollar General Corporation have surged higher over the past year. On December 3, Dollar General Corp reported third quarter earnings for fiscal 2020 (period ended October 30, 2020) that saw its same-store sales grow by over 12% year-over-year, which when combined with its steadily growing store count, saw the firm’s GAAP revenues jump higher by over 17% year-over-year. Dollar General has made great strides in upgrading its digital operations, expanding its store base, adding new products to its stores, and improving its cost structure during the past several fiscal years. These past initiatives are filtering down to Dollar General’s bottom line as its diluted GAAP EPS was up 63% year-over-year in the fiscal third quarter. We continue to be big fans of Dollar General and include shares of DG in the Best Ideas Newsletter portfolio.

Dec 7, 2020

Salesforce’s Growth Story Continues
Image Shown: Salesforce Inc expects its impressive revenue growth story will continue at a brisk pace going forward. Image Source: Salesforce Inc – Company IR Presentation. On December 1, Salesforce Inc reported third quarter earnings for fiscal 2021 (period ended October 31, 2020) that saw the Software-as-a-Service (‘SaaS’) giant beat both consensus top- and bottom-line estimates. While Salesforce has historically focused on growing its core customer relationship management (‘CRM’) offerings, the firm more recently has been expanding into new and adjacent areas to extend its impressive growth runway. Salesforce announced it was acquiring Slack Technologies at the start of December for ~$27.7 billion in a cash-and-stock deal. This acquisition will significantly grow Salesforce’s collaboration offerings (particularly for workplace needs), an area it has had trouble expanding into in the past. Our fair value estimate for Salesforce sits at $221 per share (under our “base” case scenario) and the top end of our fair value estimate range sits at $265 per share (under our “bull” case scenario).

Dec 4, 2020

DocuSign Has All the Makings of a Long-Term Winning Enterprise
Image Source: DocuSign Investor Presentation Winter 2020. DocuSign is executing well on its strategy to transform the foundation of doing business. The company’s large and under-penetrated market opportunity, essential cloud product suite that lines up favorably against the competition, accelerated billings expansion, and growing customer base with well-known brand names (which add credibility to its product offering) represent a number of key positives to the investment thesis. Though GAAP losses continue to pile up, DocuSign is free cash flow positive and sports an asset-light business model with considerable earnings leverage (as sales continue to expand at a rapid clip). DocuSign’s largely subscription-based business model offers a nice degree of visibility into future revenue trends, and its balance sheet is relatively healthy with a decent net cash position. DocuSign has all the makings of a long-term winning enterprise, as long as it avoids any security/execution miscues that could tarnish its brand and/or derail trust among its customers, impairing future growth. We expect to raise our fair value estimate of DocuSign upon its next report update and point to the high end of our existing fair value estimate range of $295 per share for bullish investors.

Dec 4, 2020

Dividend Increases/Decreases for the Week December 4
Let's take a look at companies that raised/lowered their dividend this week.

Dec 3, 2020

This Stock Just Registered a Rare (Perfect) 10 on the VBI!
The Valuentum Buying Index (VBI) combines rigorous discounted cash flow (DCF) analysis, relative (behavioral) valuation, and technical/momentum indicators. For a stock to register a rating of a 10 on the VBI, the company would need to be 'UNDERVALUED' on a DCF basis and 'ATTRACTIVE' on a relative (behavioral) value basis. The stock would also have to be exhibiting 'BULLISH' technicals. The firm would need a ValueCreation rating of 'GOOD' or 'EXCELLENT', exhibit 'HIGH' or 'AGGRESSIVE' growth prospects, and generate at least a 'MEDIUM' or 'NEUTRAL' assessment for cash flow generation, financial leverage, and relative price strength.

Dec 2, 2020

Things Are Looking Up at Cantel Medical But Many Risks Remain
Image Source: Cantel Medical Corporation – Fourth Quarter and Full Year Earnings for Fiscal 2020 IR Presentation. Medical device and instrument maker Cantel Medical will be a major beneficiary of recent news regarding the growing chances that a safe and viable COVID-19 vaccine will potentially get approved soon. Though the company’s financial performance has deteriorated in recent fiscal years and organic revenue has faced headwinds, the firm’s upwardly-revised guidance (particularly its sales guidance) for the first quarter of fiscal 2021 was a highly encouraging sign, and Cantel noted that the level of elective medical procedures are starting to stabilize. Its recent October 2019 acquisition of Hu-Friedy’s dental operations will put the company in a better position to compete for business as well, though we note rising confirmed COVID-19 hospitalizations around the world continue to pose a threat to the pace of elective surgeries/procedures. Cantel’s near-term outlook is looking up, in our view, but high financial leverage (net debt to adjusted EBITDA), weak organic growth trends, rising expected operating expenses and capital spending, stronger and larger rivals that compete through bundling partnerships across the medical device/instrument arena, moderate customer concentration risk, and recent capital-spending cutbacks (coupled with a suspended dividend) to shore up capital put this idea firmly in the high-risk/speculative category. Nonetheless, given signs of a turnaround based on the recent guidance raise, we think Cantel Medical is one for the radar of a risk-seeking investor. We’ll be paying close attention to its revenue and margin performance when it reports fiscal first-quarter 2021 earnings December 8.