Kim Bolton, president and portfolio manager of Black Swan Dexteritas

FOCUS: Technology stocks

MARKET OUTLOOK:

July’s stock market price action reflected the latest market narrative, which is all about “peak growth”. This buzz phrase discusses the rate of change in corporate earnings, gross domestic product, stock prices, government and central bank stimulus, and inflation. It’s the trend that matters for investors, as well as the outlook toward a deceleration on several of these fronts.

The bottom line is, there are a number of legitimate catalysts for a continued melt-up in the stock market, and particularly the technology arena, balanced by number of equally legitimate catalysts supporting a bearish case for equity markets:

In this environment of equity market Pros and Cons, we have therefore positioned the BSD Global Tech Hedge Fund with the expectation of more market volatility. The Fund is 85 per cent invested across a couple dozen tech vendors and tech end-users, with a 55 per cent short equity indices hedge on the invested stock portfolio that will incrementally grow (with a ‘laddered’ Nasdaq put option position) if the market deteriorates.

TOP PICKS:

ServiceNow (NOW NYSE) (US$660.60 PT) 

NOW develops a cloud-computing platform to help companies manage digital workflows for enterprise operations. NOW was founded in 2003, and since it’s 2012 IPO the company has strategically acquired 16 companies to be the go-to company for “incident, problem, and change” IT operational events. Given the strong moat, we expect ServiceNow to post growth of at least 23 per cent CAGR until 2025. Their product has a 99 per cent contract renewal rate. They serve over 1100 clients who spend over US$1 million and have grown their client base which spends more than US$5 million by 40 per cent. Their platform is being used to support the NHS in Scotland to administer vaccines to 5.5 million people. They have a tremendous impact in the banking sector, with a major U.K. bank reporting a 70 per cent improvement in payment processing due to the platform. ServiceNow's Q2 earnings report beat on all metrics, subscription revenue, billings, operating margin, and FCF. The company also guided a gross margin of 85 per cent, non-GAP operating margin of 24.5 per cent, and FCF margin of 31 per cent. We believe ServiceNow is a reasonably valued stock when compared to its high-growth peer group. ServiceNow is currently trading at 15.7x EV.C2022 sales versus the high-growth peer group average of 22.1x.

Buy one-third of a NOW position here at ~ US$580; add at ~US$560; and at ~US$540 .

Market Cap – US$116.4 B

Upstart Holdings Inc. (UPST NASD) (US$145.45 PT)

Upstart offers revolutionary data analytic solutions to the banking system. Upstart provides analytical tools to assess borrowers' creditworthiness using proprietary AI tools. Currently the company operates in the personal loan market and rapidly penetrates into the auto loan market. 96 per cent of total revenues come from fees from banks, and do not bear credit risk. If the bank partner decides not to finance a loan originated by the model then Upstart sells the loan to its institutional investors or the company acquires the loan. In 2020, 21 per cent of the loans originated by Upstart models banks retained and institutional investors acquired 77 per cent. Upstart AI models reduce default rates by 175 per cent. However, there is increasing competition in Upstart's industry as the largest banks are developing their own AI based models. Recently Upstart's stock price reached its support level and reversed course.

Buy one-third of a UPST position here at ~ US$130; add at ~US$120; and at ~US$110 .

Market Cap - US$10B

Fiverr International Inc. (FVRR NYSE) (US$290.85 PT)

Fiverr is an online platform that allows buyers and sellers to connect so they can buy and sell digital services. It gets its name from the starting price of services, which is US$5. Fiverr is a two-sided marketplace that enables flexible and remote work, which has been in high demand since COVID hit. As the leading freelancing platform with 3.8 million active buyers and over 500 categories, Fiverr enjoys considerable advantages from scale and network effects. By providing greater transparency and removing friction for its highly fragmented user base, the company is able to charge an attractive take-rate of over 25 per cent. Valuation may look high, but the company enjoys attractive unit economics and free cash flow is inflecting, offering an attractive free cash flow yield. Currently Fiverr is not profitable, but consensus estimates forecast a positive US$0.21 EPS in 2022. Fiverr is positioned to be a much bigger company in the future. 

Buy one-third of an FVRR position here at ~ US$230; add at ~US$210 and ~US$190.

Market Cap – US$8.4B

PAST PICKS: August 19, 2020

Twilio (TWLO NSYE)

• Then: $251.00
• Now: $367.00
• Return: 46%
• Total Return: 46%

Fastly Inc. (FSLY NYSE)

• Then: $79.34
• Now: $45.21
• Return: -43%
• Total Return: -43%

Intel Corp. (INTC NASD)

• Then: $48.33
• Now: $54.05
• Return: 12%
• Total Return: 14%

Total Return Average: +8%

BSD website: www.blackswandexteritas.com