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Follow-ups on two classic 21st century growth stocks – Tesla and The Trade Desk; four newcomers to the portfolio – ASML, Keyence Corp, Mettler-Toledo and Taiwan Semiconductor Manufacturing and one bold tip after results – Futu Holdings

November 19, 2020

 

Tesla Inc. TSLA  Buy @ $497  MV: $461bn  Next figures due: 2 February 2021  Number of times recommended: 11  First recommended: $75.96

Tesla has been a massive winner for Quentinvest for Shares. When I first started recommending them in Quantum Leap (now renamed Quentinvest – Great Stocks but otherwise much the same) at even lower prices having been blown away by Elon Musk, one of my subscribers reacted furiously saying that a business reliant on subsidies could never be successful. I don’t try to analyse stocks like that; I leave it to Elon Musk and team to run the business and assume they know what they are doing. I am more interested in whether I think Elon Musk is the real deal or not and that I certainly do, eccentric sure but a business genius, absolutely. It is much the same with Nio. I like that stock partly because I am super impressed with CEO and founder, William Li, who has a devil-may-care candour which is both disarming and inspirational.

The scary thing with Tesla is and always has been the valuation. It is still statistically not that big a business yet it is valued at around the whole of the fossil fuel car industry. I actually think this is not at all crazy. Fossil fuel car businesses are history which makes them either worthless or even a liability. The whole value of Toyota, Volkswagen, Mercedes-Bezn, BMW et al is can they reinvent themselves as sustainable new energy businesses. They are valued on the hope that they can become Tesla; Tesla already is Tesla. I have already said in Quentinvest that I expect Tesla to become the world’s biggest business. They seem to me like Apple for cars except that cars are far more expensive than smart phones and the car industry is much bigger than the phone industry, which isn’t to say that I don’t think Apple is an amazing business. It clearly is with huge opportunities from owning the world’s most valuable brand.

Tesla is on track to make over 500,000 cars in the next quarter. It has or is making four gigafactories for car production in the western US, the eastern US, Shanghai and Berlin. Other gigafactories that may be under consideration are a second one in Asia and one in the UK to make right hand drive cars. There is also a gigafactory for lithium ion batteries and a gigafactory for solar roof panels. If we assume that each carmaking gigafactory can make around 500,000 vehicles a year we are already looking at a road map to 2m cars a year, which could soon be 3m. Even that is a drop in the ocean for a global car industry that makes around 80m cars in a good year. I think Musk’s ultimate plan is for Tesla to make 20m cars a year.

In order to reach those sort of levels the cars will have to be very affordable and to achieve that batteries need to be better and cheaper. At his September battery day Musk set out a plan for exactly that to happen. He also has plans for the business as car production builds. Just like Apple he is going to move into services, which generate regular reliable income. This could take many forms, transport as a service with millions of Tesla taxis as people move from owning to renting cars just as happens now with cloud computing, where most organisations no longer want to own their own data centres. It could mean Tesla selling car insurance, which Musk has said is far too expensive and hard for insurance companies to price because they don’t have the data Tesla has from all its customers using their increasingly autonomous vehicles. It could mean something else altogether. Musk and team are nothing if not inventive.

Nor should we forget the solar panel business, which Musk says could become bigger than the car business. Musk is a man who thinks ridiculously big. I think he sees Tesla not as a car company or a solar panel manufacturer but as an organisation on a mission to save the planet. That means sustainable energy to power how we travel, how we transport goods and how we power our homes. Tesla is into all these things and is walking the talk. There is so much going on at Tesla the mind boggles. What is that worth? I don’t know but I think investors are still trying to find out.

The shares have jumped in the last couple of days because Tesla has finally been added to the S&P 500. The committee was reluctant because Tesla is such a loose cannon of a businesses but it has met the criteria in terms of successive quarterly profits and it is clearly big enough. It is the biggest company by value to ever join the S&P 500. This should lead to more buying by index trackers and institutions, which have previously been sceptical. This is my 12th alert for Tesla in Quentinvest and at a sharply higher price than any of the other recommendations. I get scared too by that valuation but I do think Tesla is one of the most amazing businesses on the planet and the shares are not done yet.

 

 

The Trade Desk  TTD  Buy @ $810 MV: $36bn  Next figures due: 25 February 2021  Number of times recommended: 14  First recommended: $127.98

Amazingly, The Trade Desk has done even better for subscribers than Tesla. I should have sold my flat and bought the shares when I first recommended them but unfortunately you never know for sure what is going to happen. Investment is all about probabilities, never certainties. Like Tesla,The Trade Desk has an amazing visionary leader in the form of founder and CEO, Jeff Green. He loves telling the world why The Trade Desk is such an incredible business and he is as good at doing that as he is at running the business, which means that every time I read his comments at the latest quarterly report I always go away wanting to buy the shares.

The shares were floated in 2016 and in the prospectus Green made a telling comment – “I believe we have a unique opportunity to be THE primary ad buying technology.” We need to remember that he said that because I believe that is exactly what is happening and is the key driver for the astounding share price performance. Since the float the shares have risen around 20-fold but they could still be just getting started.

The long term growth has been incredible. The business was founded in 2009. it is called The Trade Desk because Green thought that buying and selling ads should be as transparent and data driven as buying and selling shares in the stock market. TTD is basically a platform making this possible so its revenue is a function of the ad spend on the platform. As it gets more customers and those customers spend more (buy more ads) TTD’s revenue grows. The ad buying progress is an auction. “Our technology makes it possible for ad buyers to compete in real-time auctions.” Group revenue was $44.5m in 2014. In 2019 it was $661m and is forecast to reach $1,340m for calendar 2022. The group is also profitable but that is not a key factor in the valuation yet which is all about growth and the battle for territory.

The shares and the company took a hit in the early months of lockdown. This was because of the flexibility of programmatic advertising. Ad spots on traditional linear TV have to be booked well in advance making them hard to cancel. Programmatic you can just stop doing it and that happened at first so TTD revenues fell in March and April. However companies soon realised that cutting their most effective ad spending was a mistake and programmatic has come roaring back to such effect that when TTD reported its Q3 results, way ahead of expectations, the shares exploded higher though they have since lost some of those gains. As Green noted: “Despite the headwinds of a global pandemic, we had healthy growth in the third quarter, up 32pc year over year, far surpassing our own expectations.”

One of the most exciting opportunities for TTD is connected TV. This is TV like Netflix and BBC iPlayer, which is delivered over the Internet. Some connected TV is paid for by subscription like Netflix but an increasing amount is ad funded. Consumers are used to ads and they like free TV. Green believes that ultimately even Netflix will offer an ad-funded option but so far they are happy adding subscribers. Connected TV revenue has been growing explosively for the company. In the latest quarter CCTV revenue grew more than 100pc. This was achieved despite the virus still causing widespread uncertainty and lockdowns and has made Green more optimistic than ever. “While we are a long way from being completely out of the woods, I do believe that in 2020, so far, we have gained more market share or said another way, grabbed more land than at any point in our company’s history….Our rate of grabbing land in Q3 might be the biggest bullish indicator we produced as a publicly traded company.”

Green believes that advertisers have become much more focused on being able to measure the ROI (return on investment) from their advertising and this drives them to programmatic, data driven advertising and TTD’s platform.

For the first time, advertisers are aggressively committing to the open Internet because of the scale and results of Connected TV and premium video. I maintain my prediction that eventually all premium video will eventually make up about half of the global advertising pie. Now that advertisers can apply data to their premium video campaigns where hearts and minds are truly won, the long-term opportunity for The Trade Desk could not be more promising.”

The company also remains highly innovative. “Another reason I’m so bullish for our future is product. In 2021, we will launch one of the biggest upgrades to our system in company history. The release is called Solomar. As some of you saw in 2018, we delivered a massive upgrade to our platform, which accelerated our market share gains. That one was called Next Wave. We are still relentlessly committed to innovating and staying on the leading edge of our industry. We never take leadership for granted, and we are always looking to improve our platform and deepen our relationships with our customers. Solomar will include a better user interface, one that brings all of our customers buying and planning tools together for greater ease of use. We’re also making it easier than ever to onboard and deploy their first-party data. We’re improving data management. We’ll continue to expand our identity products around the world. We’ll make planning on our platform even better, with a focus on ingesting and achieving customer-specific goals and we’ll release a meaningful integrated upgrade to Koa, the machine learning and AI engine that is always powering campaigns even if users are away from their keyboards. Finally, this launch will include a new measurement marketplace that provides advertisers with more transparent reporting. This represents an even more compelling measurement alternative to the walled gardens who continue to grade their own homework.”

The company is also excited about the international opportunity. “Fourth, I’m very confident about our international growth. Early on in the pandemic, many of our international market slowed down first. But since started seeing the green shoots of recovery, many of them have returned to very healthy year-on-year growth, including Tokyo and Paris, which have grown spend over 100pc year over year. The same dynamics that are happening here in the U.S. are happening around the world. Innovation and disruption have been accelerated.”

The opportunity for The Trade Desk is huge because the global advertising market is vast. There seem to be loads of different numbers depending what you are measuring but one estimate is that by 2024 it will be worth $770bn. TTD expects a huge chunk of that to become programmatic, maybe all of it one day given the huge advantages of data driven advertising for all participants. I see The Trade Desk as a rival to what they call the walled gardens, Google and Facebook. TTD has an open internet approach. There is more to be done on measurability which is a whole new topic about advertising industry standards but TTD is very active here as well. If they or anyone else can deliver a common standard accepted by all that would be another huge boost for an already very exciting business.

 

New entries.

ASML   ASML  Buy @ $420/ 355 euros  MV: $177bn  Next figures: 20 January 2021

ASML is a key player in the world semiconductor industry and describes itself as “the most important technology company you have never heard of”. Good point because I have been slow to pick up on this one. Since 2009 the shares have risen over 26 times so no problem with the chart bit of 3G. The growth is also good with sales projected to rise from 9bn euros for 2017 to 17bn euros for 2022 and profits rising faster. ASML is a European business, which makes lithography systems which are used to make chips which appear in everything that involves technology – hence the most important technology company you have never heard of because you will undoubtedly use their products every day. The following quote from the October results gives a flavour of what is happening at ASML. “We had a very strong quarter with EUR4bn in revenue and good profitability, driven by strong growth in Logic. We expect Q4 to be a solid finish to the year in both sales and profitability. And in spite of added macro uncertainty in the first half of the year due to COVID-19, our view on growth this year is largely unchanged from what we believed at the start of the year. This is a clear reflection of our customers’ drive to innovate and continue to invest in future technology nodes. In Logic, customers continue to see strong demand for advanced nodes in support of the buildup of the digital infrastructure, which includes secular growth drivers such as 5G, AI and high-performance compute. And as we are still in the early stages of this digital transformation, we expect Logic demand to remain healthy and continue to drive demand for our products. In Memory, customers are continuing to indicate that they are seeing healthy demand in data centres, with improving demand for consumer electronics. With customers’ expectations for higher bit growth next year and taking into account the longer lead times and qualification schedules for advanced litho, we are starting to see a recovery in lithography demand for DRAM with strong growth expected in Q4 this year. Based on the confirmation of this improving end market environment, we expect this Memory recovery to continue into next year. Sales to China continued to grow and accounted for 21pc of our systems revenue this quarter. We expect sales to our domestic Chinese customers to grow to above EUR1 bnn this year, which includes sales to both Logic and Memory customers in China, with the mix skewed toward Logic this year, but trending to higher Memory sales next year.” So ASML is the total 3G package – strong chart, strong growth, strong story.

 

Keyence Corp  Code: 6861 Buy @ Japanese yen52,310/ US$502  MV: JY12.6 trillion/ US$120bn  Next figures: 29 January 2021

Keyence Corp is another mystery technology giant, (mystery to me) located in Japan. Here in a nutshell is what Keyence is all about. “KEYENCE has steadily grown since 1974 to become an innovative leader in the development and manufacturing of industrial automation and inspection equipment worldwide. Our products consist of code readers, laser markers, machine vision systems, measuring systems, microscopes, sensors, and static eliminators. Our innovative products not only meet current needs but also future customer requirements in the manufacturing and R&D sectors. We strive to anticipate the market’s future goals to provide tomorrow’s solution today. At KEYENCE, we pride ourselves not only on our products, but on our support as well. Our customers benefit from working directly with our highly knowledgeable sales engineers who can help them solve applications and answer technical product questions quickly. Our business results are a direct result of the relentless focus on our business philosophies, and our success is recognised throughout the business world. KEYENCE has been continuously ranked in prominent company rankings such as “The World’s Most Innovative Companies” (Forbes), and we are among the top five companies in Japan based on market capitalisation as of Mar 2020.” As we know the Japanese, like the Germans, are amazing at making high quality producuts so I am not surprised that Keyence is such a huge success. The shares are up over 18-fold since 2009. Growth between 2017 and 2022 is forecast to be solid rather than amazing with a setback in the current year because of lockdown. What is striking though is the dividend which is expected to quintuple between 2017 and 2022.

 

Mettler-Toledo  MTD  Buy @ $1145  MV: $27.2bn  Next figures due: 11 February 2021.

Mettler-Toledo is a market leader in the production of stuff like pipettes used in laboratories. Many of the things it makes are important but a tiny part of total costs so what is crucial to MTD is service levels and it really scores here. The result is that has become a trusted supplier of consumables with very little price sensitivity so great margins. Mettler-Toledo is a cash generation machine but what is also amazing is what it does with all this cash. It doesn’t pay dividends. Instead it has the most aggressive share buyback programme I have ever encountered. Fewer shares in issue means that for any given increase in profits earnings per share will increase faster and that is what MTD delivers. A case in point was Q3 results for 2020. Sales were affected by lockdowns but still grew by seven percent in US$ terms; that’s not bad but helped also by improving profit margins, earnings per share rose an incredible 28.5pc. Performances like this have made Mettler-Toledo one of the best performing equities in the world. Since the 1997 flotation the shares have risen 105 times! This share is perfect to buy and forget.

 

Taiwan Semiconductor Manufacturing? TSM Buy @ $95.50  MV: $502bn  Next figures due: 21 January 2021

ASML makes the lithography systems that turn wafers into chips. Taiwan Semiconductor Manufacturing makes the wafers  and it’s a big business, one of the biggest in the world by market value. Taiwan is practically a company town for this company. I think I had better tell you what they say they do because my comment is no doubt a gross oversimplification. “Pioneered the dedicated semiconductor foundry business model, enabled fabless IC [integrated circuit] design industry to flourish and unleashed innovations with all Logic IC designers. Built the world’s largest semiconductor design ecosystem, open innovation platform, and collaborated with its customers/partners to form the most powerful force in semiconductor innovation – about 85pc of worldwide semiconductor start-up product prototypes were enabled by TSMC, Produced 10,761 different products using 272 different process technologies to serve hundreds of customers with the world’s largest logic capacity of >12 million 12″-equivalent wafers in 2019. Enjoys a total foundry market share of 56pc by unleashing customers’ innovations and nurturing customers’ success, which formed the foundation of the company’s future success.” This is driving great financial results. “The only foundry that consistently delivers excellent financial results. Delivered 17.4pc revenue CAGR [compound annual growth rate] and 16.1pc earnings CAGR since listing in 1994. Strategic financial objectives: (1) minimum 20pc ROE [return on equity] across cycles; (2) earnings CAGR to be between 5pc and 10pc for the next few years. Fortress balance sheet with semiconductor industry’s highest credit rating  (S&P: AA-, Moody’s Aa3). Have relied only on internally generated funds to finance organic growth. Highly disciplined in mergers and acquisitions.” Latest quarterly results showed the business growing strongly. “We concluded our third quarter with revenue of NT$356.4bn or $12.1bn, which was above our guidance, mainly due to better demand across all our platforms in our forecast three months ago. Moving into fourth quarter 2020, we expect our sequential growth to be supported by strong demand for our industry-leading 5-nanometer technology, driven by 5G smartphone launches and HPC [high performance computing] -related applications.” Like ASML but even more so TSM is a key player in the global technology revolution and its economies of scale make it unbeatable at what it does.

 

One for the bold

Futu Holdings  FUTU  Buy @ $48  MV: $2.9bn  Next figures due: 19 November (after Wall Street closes today).  Number of times recommended: 2  First recommended: $29.40

Futu Holdings is a technology driven business addressed to Chinese consumers and aiming to transform buying and selling shares and wealth management. It is being helped by the growing emergence of Hong Kong as an important financial centre for Chinese shares, increasingly a rival to Nasdaq or complimentary to Nasdaq as a place for exciting Chinese businesses to be quoted and raise money. Both Tencent and Alibaba are now listed in Hong Kong. Futu is growing at an incredible rate. Turns out I was wrong about when Futu was going to report. They have already reported and the results for Q3 2020 are very strong. The total number of paying clients rose 137pc to 418,000. The group said at Q2 that it expected to add 280,000 new clients during 2020 and is well on track to meet this goal. Client assets grew 178pc and total trading volume grew an exponential 381pc [their words] to surpass HK$1 trillion. The business is clearly on fire and shaping up as a potential major winner.

 

The focus of Quentinvest for Shares is on helping subscribers to build great portfolios while encouraging them to add to positions in strong performers. Keep doing this and be reluctant to sell shares in companies where the 3G rating remains intact and you should do well, maybe very well, conceivably fantastically well. This is especially the case because stock market conditions are favourable, there is a great choice of exciting, fast growing companies in which to invest and a powerful tailwind in the form of an ongoing, accelerating technology revolution.

 

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