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Great businesses of the 21st century – seven to buy now

December 7, 2020

 

One of my favourite indices, the Nasdaq 100 Technology index, is hitting new peaks and looks to be on another upward leg. Below I list another seven shares from the QV portfolio that look timely to buy against this background.

 

Docusign  DOCU  Buy @ $242  MV: $45bn Next figures due: 12 March 2021  Number of times recommended: 9 First recommended: $83   Docusign facilitates e-signatures and offers a platform to automate the agreement process. The business is growing strongly with analysts projecting sales growing from $519m for the year to 31 January 2018 to $2,404m for the year to 31 January 2023.  The just reported Q3 2021 was another great quarter. “We saw results significantly outperform this quarter with billings growth of 63pc year-over-year and revenue growth of 53pc  leading to record levels of profitability. Our international business also showed substantial strength with revenue up 77pc,  representing 20pc of total revenue. We landed 73,000 new customers bringing our total to nearly 822,000 worldwide and our customers expanded their use of DocuSign at the highest levels we’ve seen yielding a net revenue retention rate of 122pc.”  As CEO , Dan Springer, says “These results showcase the continued tailwinds for the expansion of eSignature as the first step in the adoption of the Agreement Cloud.”  There are exciting new developments too. “In September, we launched an important new product called DocuSign Analyzer. Imagine receiving a new contract from a vendor and having risks automatically flagged like a bad indemnification clause or the absence of a clause you’d normally expect, Analyzer makes this possible. Thanks to the legal AI Technology we acquired with Seal Software earlier this year. It’s a fantastic aid for legal teams and their business stakeholders. It can also integrate with DocuSign CLM helping to automatically route documents depending on analyzer’s output, sending a high risk contract to a more senior legal approver for example. I am pleased with how quickly we’ve been able to apply Seal’s technology in this new and exciting way.” There is the usual punchy outloo0k statement. “This acceleration in demand is laying the foundation for future expansion across the Agreement Cloud. And while substantial global, social and economic challenges undoubtedly remain, we believe we are still just scratching the surface of our long-term opportunity.”

 

Domo  DOMO  Buy @ $44.50  MV: $1.3bn  Next figures: 9 March 2021  Number of times recommended: 2 First recommended: $40  Lowest recommended: $19.34  Domo is a cloud-based platform designed to provide direct, simplified, real-time access to business data for decision makers across the company with minimal IT involvement. It is a software-as-a-service (SaaS) venture. Domo integrates with multiple data sources, including spreadsheets, databases, social media and other cloud-based or on-premise software programs.  The business was founded by Josh James in 2010 and has received significant backing in Silicon Valley. So much is this the case that a critical observer might feel the company’s performance had been disappointing. In total, including the $193m raised at the 2018 IPO the company has received $929m in equity funding yet is still only valued at $1.3bn. By enterprise software sector standards growth looks solid rather than earth shattering with sales projected to rise from $109m for the year to 31 January 2018 to $276m for the year to 31 January 2023 with ebitda (similar to operating profits) remaining negative throughout. The two positives are that both my alerts are in profit and the latest quarterly results were impressive. CEO, JOsh James, described himself as ecstatic to announce “As of Q3, Domo is a recurring revenue, cash flow positive company that has happy customers with gross retention north of 90pc, growing subscription revenue north of 20pc, with a total annualized revenue run rate of over $200m.” As usual for ambitious enterprise software concerns he adds “we are only just getting started. We are the only publicly traded independent cloud-based BI [business intelligence] company and we have countless opportunities in front of us.”  He seems to be walking the talk. “In Q3, we posted 25pc billings growth, an acceleration from 23pc last quarter.” He explains why Domo is doing well. “As we all know, what has happened this year has forced companies and their employees, customers and supply chains to reimagine how they operate. The need for real-time information, speed and business agility that digital transformation provides has only accelerated. These elements have always been crucial and are the reason we founded the company. But in this climate, these business priorities have moved to the forefront. Our customers have challenged us to solve their business problems with data at an unprecedented speed, and we’ve delivered for them. Domo’s unique platform has three pillars that drive our differentiation. The first is our data integration capabilities to sell back-end integration at cloud scale without moving data. Second, is our ability to drive insight and action with AI and to put a well-governed business intelligence power into the hands of business users in an easy to use, self-service and mobile-first solution. Third, is the ability to build data-driven apps in a low-code, no-code way that can modernize business processes at high speed and extend the value of data analytics and insights outside the organization to customers and partners. Our platform’s ability to solve at scale and in record time, the back-end and the front-end challenges to make data more valuable internally and externally for customers is a huge key to our differentiation. Through intelligent analytics-based applications built on the Domo platform in a low-code no-code environment, we are helping customers to rapidly modernize business processes, leverage artificial intelligence and automatie workflows. Our platform through our Domo Everywhere offering, also goes beyond traditional embedded analytics capabilities and enables customers to extend their analytics and the value of their data to external stakeholders such as customers and supply chain partners, while also generating new revenue models.” The implication is that Domo has reached some kind of tipping point and growth is going to stay strong. This analysis is supported by a positive price chart.

 

Intuitive Surgical  ISRG  Buy @ $780  MV: $100bn  Next figures: 21 January 2021  Number of times recommended: 13  First recommended: $329.13  Intuitive Surgical is the king of robotic surgery. This is still performed by doctors but with massive use of technology/ robotic systems to add precision to the process, shorten hospital stays and take out cost. Business has been negatively affected by the Covid-19 crisis with many procedures being put on hold. A vaccine would be a massive positive putting the business back on track and making it possible to capitalise on all the exciting initiatives taking place within a company that is on a strong growth path. Thanks to the virus, calendar 2020 sales are expected to be modestly down on 2019 but overall the business is forecast to grow sales from $3.13bn for 2017 to $5.87bn for 2022. Earnings per share are expected to grow more rapidly from $5.67 to $12.1. This still leaves the business highly valued but this reflects the business model. ISRG is a razor and razor blades type of business. It makes one-off revenue from selling its robotic equipment but the profits come from selling the consumables that are needed to support the number of procedures using the equipment. This means that the profits on any given level of sales come through years down the road. For Q3, reported in October, CEO, Gary Guthart, noted “Operational performance inside the company has been strong, with remarkable focus and diligence by our teams. Turning first to global procedures, Q3 2020 procedures grew 7pc compared with Q3 2019. Procedure growth varied widely by country, with growth returning to most of the countries we serve with a direct commercial team. U.S. growth was in the mid-single digits and procedure growth in China’s stood out as particularly strong.”  New installs highlight the continuing effect of Covid-19. “Given the slowdown in procedures due to the pandemic we expected weaker capital demand in the third quarter. For the quarter, we installed 195 new systems. This compares to 275 installs in Q3 2019 and 178 installs in Q2 2020.”  Guthart adds, surely correctly, “While the pandemic has created near- and mid-term uncertainty in the form of competing healthcare priorities and economic stresses, I have high confidence in the need for high quality, minimally invasive surgery and therapies in the long-term.”  Intuitive Surgical remains the same exciting company it has been for many years now. Progress has been interrupted by the virus but investors can see clearly the path back to growth and are buying the shares accordingly.

 

Paycom Software  PAYC  Buy @ $437  MV: $25.6bn  Next figures: 5 February  Times recommended: 8 First recommended: $171.89    Paycom Software describes its business as “one HR and payroll solution for managing employees from recruitment to retirement”. It has been doing this since 1998 when the business was founded by CEO, Chad Richison. Sales are forecast to grow from $433m for calender 2017 to $1,234m for 2022 with ebitda climbing from  $137m to $505m. The company reported Q3 results on 4 November and these were strong. “I’m very pleased with our performance in the third quarter with continued strong demand for our solutions in a large and expanding human capital management market. We have less than 5pc market share, which gives me a lot of confidence in our long runway. The unemployment headwinds across our pre-pandemic client base remain relatively unchanged from the second quarter, but our product value proposition is having a lot of success, and we are plowing through the headwinds with strong new business sales. Q3 revenue and adjusted EBITDA came in at $196.5m and $67.5m, respectively, both ahead of our guidance, thanks to strong new client adds and benefits from operational efficiencies.” Prospects look good. “Our marketing plan in the third quarter delivered strong demo leads, leading to strong new client sales, and we plan to continue to spend aggressively on advertising to fuel future revenue growth. The challenges created by the pandemic are exposing the shortcomings of disparate HCM [human capital management] systems, which are cobbled together from multiple vendors, and the value proposition of Paycom’s single database solution is stronger than ever for companies of all sizes, including companies well above our target range.” The group continues to develop new products. “Manager on-the-Go continues to gain popularity and was recently named a top HR product at this year’s HR Technology Conference. We are receiving more leads and referrals as the industry shifts toward an employee usage strategy. Since the end of Q1 2020, usage of Manager on-the-Go has nearly doubled. 98pc of all Paycom clients have deployed Manager on-the-Go. Manager on-the-Go fundamentally changes manager workflows and accelerates the speed that data moves throughout the system, which further increases the ROI [return on investment] of our solution and sets us up for future usage patterns that pave the way for future product innovation and automation. DDX  [direct data exchange] usage continues to trend upwards toward the 100pc mark, up from the low 90s. In July, we changed our sales procedures to ensure that new clients commit to 100pc usage. We are now at our highest DDX usage rate since launching the industry’s only software of its kind last year. CEOs and HR executives continue to see the savings from an employee’s direct relationship with the database. As a reminder, when an employee makes a data change themselves, the company saves $4.51, and the savings are calculated in real time using the DDX. As we work through these unique times, we will continue to remain focused on three controllable activities: providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. Our execution along these three fronts has been exceptional. Based on the strength of our new client revenue trends, differentiated value proposition, less than 5pc estimated market share, and the effectiveness of our marketing and advertising campaigns, I’m confident we can deliver even stronger full-year revenue growth next year on top of our newly established base even without any improvement in our pre-pandemic clients’ employee base. The digital transformation for businesses is accelerating, and our investment to expand our market share is working.

 

Sea Limited  SE  Buy @ $198  MV: $67.9bn  Next figures: 2 March 2021  Times recommended: 6 First recommended: $79.80  Sea Limited is the online games, e-commerce and online payments king of south east Asia. As they describe it “Sea Limited is a leading global consumer internet company founded in Singapore. Our mission is to better the lives of consumers and small businesses with technology. We operate three core businesses across digital entertainment, e-commerce, as well as digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest pan-regional e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.” This is a good place to be partly because all these businesses are growing dramatically around the world but also because by doing it in a slightly off the radar spot like SE Asia, Sea Limited has grabbed first mover advantage and may be on course for something like a winner takes all result. On top of that it is extremely well managed. The top management team have glittering CVs and educational backgrounds. It’s a bit like Carvana, a US car business run by graduates of Stanford and Harvard. The top team at Sea Limited are very much an all-star premier league team. It also helps that although the business activities are heavily concentrated in SE Asia with a strong gaming presence also in South America that the shares are US quoted with all the investor credibility which that provides. The group reported Q3 2020 results on 18 November and they were very impressive. “We continued to see robust user growth and deepening of user engagement on each of our platforms during the quarter. We believe the accelerating shift to digitalisation in our global market is a sustainable trend. As the market leader in our core segments, we are well positioned to capture the growth opportunities presented by this acceleration. Our strong financial and operational results for the quarter once again underline our ability to execute well and see a disproportionate share of the faster-growing markets. On the group level, our quarterly GAAP revenue grew 99pc year on year to reach $1.2bn. Gross profit grew 101pc year on year to reach $407.6m. We also recorded very strong bottom-line results, with adjusted EBITDA reaching $120.4mn. This further demonstrates the strength and efficiency of our business model. We will continue to drive rapid growth with efficiency as we further extend our market leadership. In line with our strong results, we are raising our guidance for both digital entertainment and e-commerce for the full year of 2020.” In US investor parlance this is a classic beat and raise, beat on what was forecast for the quarter and raise guidance for future results. Sea Limited shares rocketed by around 10pc last Friday. The most likely reason is news that they are one of only two business to be awarded licenses to run new digital banks in Singapore in what is described as the city state’s biggest banking shakeup in decades. Singapore is where Sea Limited is based and is also the major financial centre for the region so this is a huge win for Sea. The new digital banks are expected to start operating from early 2022 and given Sea’s huge presence in the region especially among younger users, who often will not yet have bank accounts, the growth potential looks enormous. In its Garena online games business Sea reported 65.3m quarterly paying users which is 11pc of quarterly active users.

 

Snap SNAP  Buy @ $48  MV: $71bn  Next figures: 9 February  New entry  Snap is a social media sight for younger generations enabling them to exchange short-lived photos and videos. Theyd escribe themselves as a camera company whgich is reinventing the camera for the digital era. It feels a bit like the one which got away since it has featured in two sister publications (QL and CB both now rebadged as part of Quentinvest) but has never been alerted on the main Quentinvest for Shares service. Snap was founded in 2011 by three entrepreneurs of whom Evan Spiegel was the youngest and is now CEO. Another, Bobby Murphy, is the chief technology officer. Spiegel is best known for becoming the world’s youngest billionaire at 25 and being married to Victoria’s Secret supermodel, Miranda Kerr. It’s no surprise that most of his photos show him smiling. Prior to the April 2017 IPO Snap turned down bids around $31bn from rival social media giants and then after flotation user growth slowed dramatically and the shares spent the next year and a half plummeting. Not any more! Q3 2020 earnings reported on 20 October painted a picture of strong growth and innovation. “We added 11m daily active users this quarter for a total of 249m, up 4pc quarter-over-quarter and 18pc year-over-year, demonstrating the benefits of years of investment in our product and partnerships across a wide range of geographies. We generated $679m in revenue this quarter, up 52pc year-over-year, outperforming our expectations and highlighting the substantial value we drive to both direct response and brand advertisers during this continued period of uncertainty. Our year-over-year growth rates for both daily active users and revenue were higher this quarter than they were in Q3 of the prior year. In fact, they represent our highest Q3 growth rates since 2017.” There is a lot happening at Snap. “Our success underscores the excitement that our community and our advertising partners have around our innovative products and services. The adoption of augmented reality has happened faster than we had previously imagined, and we feel well positioned to execute on the many opportunities that lie ahead. Two years ago, we transformed our business by relentlessly focusing our attention on delivering return on investment for advertisers and building new products and experiences to serve our community. The revenue and community growth we have generated as a result of these efforts has afforded us the opportunity to double down and innovate even more, especially around our camera and augmented reality platform. The creative and technical teams at Snap have worked hard to support Lens Studio creators, and evolve our camera’s capacity to entertain our community and help our partners grow their businesses. For example, this quarter we introduced more Lenses for try-on and commerce, with Sally Hansen creating AR trial and purchase for nail polish, and Champs doing the same for sneakers. Snapchat community engagement is strong, as we continue to grow in new markets, broaden our product offerings, and improve our underlying infrastructure. This was our fourth consecutive quarter of more than 15pc year-over-year daily active user growth. We also saw strong retention in our vast community, and we continue to reach over 90pc of the Gen Z population and 75pc of the Gen Z and millennial population in countries like the U.S., the U.K., and France. One key driver of growth across all of our markets has been product innovation and infrastructure improvements. Following the successful rebuild of our Android application last year, we are rolling out a newly streamlined messaging infrastructure that we expect will make messaging faster and more efficient, which will help drive increased engagement, especially as we expand our community across different countries and devices. These foundational investments in our core architecture have also enabled us to innovate faster and release new product features at a rapid pace. In the last year alone, we launched Brand Profiles, Minis, Places on the Map, Dynamic Ads, Bidded AR Lenses, Dynamic Lenses, Camera Kit, Snap ML Lenses, and new creative tools, with lots more to come.”  Prospects look exciting. “As we look to the future, we believe that the fundamental changes we made to our products and business over the past two years have put us in a strong position to continue executing in a rapidly evolving world. Our improvements to both our core product infrastructure and our internal team and operations have enabled us to accelerate the velocity of our product innovation. Meanwhile, our deep investments in building a scalable advertising platform have allowed us to focus more of our attention on these big future opportunities. We are so excited about our progress in AR, content, and our growing platform, especially as we look to build on our momentum in these areas going forward.

 

Spotify Technology SPOT  Buy @ $319  MV: $58bn  Next figures due: 28 February  Times recommended: 6 First recommended: $175  Spotify is the music streaming service that has been developing a new business opportunity in podcasts. Spotify’s strategy is to “become the world’s leading audio platform and focus on growing audio monetization across the industry”. As well as buying the rights to strongly followed podcast properties Spotify is also acquiring companies. Recent deals include “Megaphone, one of the world’s most innovative podcast advertising and publishing platforms. Together, Spotify and Megaphone will help advertisers and podcast publishers realize the full potential of podcasts. The two companies will achieve this through the power of the Megaphone Targeted Marketplace and by making Streaming Ad Insertion available to third-party podcast publishers for the first time.’ The acquisition follows Spotify’s launch of Streaming Ad Insertion, an innovative podcast ad technology that delivers the intimacy and quality of traditional podcast ads with the precision and transparency of modern day digital marketing. The group says “Advertisers will now be able to activate across Spotify’s Original & Exclusive podcasts while scaling reach through the Megaphone Targeted Marketplace. For podcast publishers, the acquisition will unlock innovative tools that will help them earn more from their work. This includes the opportunity to opt-in to have their content monetized, matching their listeners with even greater demand from advertisers. Following transaction close, Spotify will soon make Streaming Ad Insertion available to all podcast publishers on Megaphone, the first time this technology will be made available to third-parties. With Streaming Ad Insertion, podcast publishers will be able to offer more valuable podcast audiences to advertisers based on confirmed ad impressions.”  They see the deal as a great opportunity. ““We are still in the early chapters of the streaming audio industry story, but it is absolutely clear that the potential is significant,” said Dawn Ostroff, chief content & advertising business officer, Spotify. “We look forward to Megaphone joining Spotify on our mission to accelerate smarter podcast monetization for advertisers and podcast publishers powered by a scaled audience and state-of-the-art technology.” Between 2017 and 2022 revenue is forecast to grow from $4.1bn to $11.5bn. Latest results were strong. “Monthly active users beat the top end of our guidance and subscribers hit the very top end of our range and our service now reaches 320m users and a 144m subscribers. The size of our total catalogue increased significantly, and our advertising business returned to growth. We also beat expectations in our newest markets, where we’re seeing growth continue to accelerate. I think this affirms our belief that there’s a significant pent up demand for Spotify around the world, even in places where our service has yet to launch. These results illustrate the power of our business despite COVID and other related challenges across the globe. The group believes it has established a powerful virtuous circle/ flywheel effect. “Our team remain laser focused on building the world’s largest audio network. And while it’s still early days, it’s clear to us that our strategy is working.So we know that when we reach more listeners, we’re able to attract more creators to our platform. So with more reach, comes more content. And with more content, especially content unique to Spotify, there comes more opportunities to monetize. And that interplay is super important, because it’s really the foundation of our flywheel. And that flywheel continues to accelerate faster with every new user and creator that comes on our platform.”  There is also scope for price increases as the group delivers ever more value to subscribers. “Another benefit of the investment that we made in our content and user experience is that Spotify listeners are enjoying greater value than ever before. And we believe this presents two distinct opportunities.Firstly, with about 60pc of Spotify subscribers starting out in our free tier and are performance on MAUs [monthly active users]  in 2020, we are confident that we have a long runway to continue to grow our subscriber base in the months and years ahead. The second long term opportunity comes because engagement and/or our listener value per hour is high which gives us the ability to selectively increase our price. So here’s how I think about it. While our primary focus remains user growth based on our maturity in certain markets, and the increasing value we provide to our subscribers, including enhanced content, we’ve seen engagement and more specifically value per hour grow substantially over these past few years. And I believe an increase in value per hour is the most reliable signal we have in determining when we’re able to use price as a lever to grow our business. And while it’s still early, initial results indicate that in the markets where we’ve tested increasing prices, our users believe that Spotify remains exceptional value and they’ve shown a willingness to pay more for our service. So as a result, you’ll see us further expand price increases, especially in places where we’re well positioned against the competition, and our value per hour is high.” And the long term opportunity remains large. “I continue to believe in the long term value of each and every listener on Spotify and there are still billions of listeners that we’ve yet to reach around the world. Listeners who tried Spotify tend to stay, and they often convert to a subscriber. That is why our continued focus is on reaching more listeners, as ultimately, this will translate into long term value for our investors.”

 

I feel as nervous about recommending shares as you probably feel about buying them but actually that is good news. It is when a share feels obviously right to buy that it often isn’t. The more nervous we are the more likely we are to be right. In this sense I operate QV as a system. I have my own ideas, almost a set of rules, about when it is right to buy shares. Based on those rules I am effectively forced to make the recommendations. My comfort in doing this is the long term record. The performance is excellent, which tells me that what I am doing works so I keep on doing it.

 

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