Thursday, November 5, 2020
Monday, November 2, 2020
A Small Cap Equity holding: F5 Networks, Inc. (FFIV, $133.57): “Traveling Up with Software in the Clouds” by: Grace Flynn, AIM Student at Marquette University
F5 Networks, Inc. (FFIV, $133.57): “Traveling Up with Software in the Clouds”
By: Grace Flynn, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• F5 networks, inc. (NASDAQ: FFIV) engages in software for development and provision of defined application services. The company have two business segments, services (56% of revenue) and products (44% of revenue) focusing on delivery, application, and performance for networks. It mainly operates in United States (50.7% of revenue), China, Japan, and Germany.
• F5 has increased their revenue in the past quarter and growth percentage by $24.4 M in revenue and +4% growth due to an increase of 52% in their software sales.
• F5 announced in its latest earnings call that they are on their way to becoming a software led business led by cloud application security.
• Management introduced new AI-powered solution that blocks fraud missed by technologies to increase customer base and customer satisfaction.
• Shares rose by 4.3% indicating better results than the street expected due to management guidance of software and cloud systems.
Key points: The Covid-19 pandemic has demonstrated great demand for software and application delivery due to increased use of online traffic and stay-at-home orders. F5 has embraced this opportunity with increasing their software sales by 52% accounting for most of the revenue growth for the quarter. This resulted in a 6% increase in product revenue year-over-year and software revenue grew 36%. The service segment was 5% of their revenue growth. F5 has made efforts to focus of their hardware security system which is a reason why their software sales have increased by so much. Their hardware and software security continues to increase during the pandemic and is one of the reasons that F5 is able to reach several geographies.
During their Q4 earnings call on October 26, 2020, management discussed moving this business to a more software-lead business based on these past quarter results. They experienced a decline of -10% in their system business but this was offset by the strength of their software business. By providing multi-cloud application security in their software, their software product was their main driver in 2020 as reported 5% of GAAP and non-GAAP revenue growth. They are currently working on innovating and investing to keep this software momentum going for the future by using a diversified base of subscription and SaaS revenue.
In addition to software innovations, management has announced new innovations to block fraud and increase the satisfaction of their customers. They introduced this innovation, Shape Al Fraud Engine (SAFE), in October in order to eliminate fraudulent transactions from getting past current fraud tools. By using artificial intelligence, these engines can do a complete evaluation of the transactions to implement preventative controls and catch fraud before it is too late. SAFE is now available for applications.
Recently, shares of F5 networks rose 4.3% topping expectation for the future. Their revenue was reported $615 M which matched the management’s guidance range of $595-$615M for the quarter. This can be explained to more personalized software systems and innovation within their own management in order to increase their revenue and shares during the pandemic.
What has the stock done lately?
In the past month, F5’s stock price rose 8% from $122.77 to $133.2. On October 27, this price reached a high of $136.26 which outperformed the market and the street’s estimates for the quarter. They also outperformed some of their top competitors such as Cisco Systems Inc. and Juniper Networks Inc. Their 52-week range is currently at a low of $79.78 and at a high of $156.36. They did have a drop in price this month but was able to combat that and is currently trading at $133.57.
Past Year Performance: In the past year, F5 has price has dropped from $146.10 to $133.57. F5 is currently underperforming when compared the Russel 2000 and YTM return for F5 Networks is down -7.09%. Their 52-week range is currently at a low of $79.78 and at a high of $156.36. Their biggest increase was late July with a price of $154.84 which was the highest for the year.
Source: FactSet
My Takeaway
F5 Network’s current stock performance has had some drawbacks, but management has recently made many initiatives for growth in the future. Underperforming against the Russel 2000 could be an indicator for loss, but the latest quarter’s result indicates increasing revenue and increased competitor advantage. New innovations to move this company into a more software and cloud-based companies gives the company an opportunity for expansion of their customer base and revenues. 2020 Q4 revenue growth of 4% indicates positives returns for the upcoming year, even though the company has suffered during 2020. Increasing their software products will drive their product segment to be majority of their revenue giving them the chance to offset the consequences of the Covid-19 pandemic. Therefore, I recommend a hold considering last quarter results.
Source: FactSet
An International Equity holding: L’Oréal (OR-FR, €277.70): “L’Oréal Covers Some Blemishes and Positions for Reopening” by: Ciara Jones, AIM Student at Marquette University
L’Oréal (OR-FR, €277.70): “L’Oréal Covers Some Blemishes and Positions for Reopening”
By: Ciara Jones, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• L’Oréal (OR.FR): manufactures and sells beauty and hair products. Founded in 1909, the company is known for their high-end skin care and beauty products. L’Oréal operates through four business segments which include Professional Products, Consumer Products, L’Oreal Luxe and Active Cosmetics.
• Based on reported figures in the company’s Q2 2020 earnings report, L’Oréal’s sales for the six months ended June 30, 2020 were €113.07 billion, down -11.7% from same period last year.
• On June 25, 2020, L’Oréal launched its new sustainability program “L’Oréal for the Future”, laying out the company’s latest set of ambitions for 2030. This program will accelerate L’Oréal’s ESG positioning in the fields of sustainability and inclusion.
• L’Oréal announced its long-term succession plan with Jean-Paul Agon as Chief Executive Officer and Barbara Lavernos as Deputy CEO effective May 1, 2021.
• Despite the recent declines of consumer sales in the cosmetic industry during the COVID-19 pandemic, L’Oréal is well positioned to respond to continued lockdown measures.
Key points: L’Oréal can be considered a well-positioned makeup and beauty brand during the COVID-19 pandemic because of its multiple business channels. During its Q1 2020 earnings call in April, L’Oréal discussed a -10.5% decline in sales in its Professional Products division, as well as a -9.3% sales decline in its L’Oréal Luxe division. Despite these declines, L’Oréal experienced a significant 57% increase in e-commerce sales worldwide and an impressive 13.2% sales increase in its Active Cosmetic Division. L’Oréal is well positioned to respond to increased online consumer demand through their strength in ecommerce and expertise in digital media services that will help enrich customer’s experience on an online platform. Additionally, the 13.2% increase in its Active Cosmetic division is due, in part, to its retail presence in pharmacies and drugstores. Given that these channels have a main priority of supplying medicine, they have been deemed essential businesses and have remained open throughout the pandemic. Despite its ability to shift sales to new channels, the company announced in its Q2 2020 earnings report an overall -11.7% decline in sales for the first six months of 2020, highlighting the challenge that many well-established cosmetic brands continue to face.
Although L’Oréal’s sales were down for the recent six-month period, the company has continued to stay relevant with important public policy issues. In June, L’Oréal announced its decision to commit to becoming a more sustainable brand by 2030. Looking at its ESG rating, their overall score of 20.4 and their 56th percentile ranking for corporate governance shows that this recent commitment to sustainability will help to make the company more socially responsible.
Looking toward the future, on October 14, 2020, L’Oréal announced the succession of Jean-Paul Agon as Chief Executive Officer effective May 1, 2021. This decision came after the company’s Board of Directors decided on new governance and a long-term succession plan that would guarantee the sustainability of the performance, values and commitments of the company. L’Oréal’s plan is then that, after 15 years as the company’s CEO, Agon will be replaced with Barbara Lavernos, who will serve as Deputy CEO and lead research, innovation and technology during the interim period. In a statement on these decisions, Jean-Paul Agon said, “Given her background, skills, and personal qualities, Barbara Lavernos is perfectly equipped to take on the strategic role of Deputy CEO. With her appointment, research is placed at the highest level of the company, confirming its critical role for L’Oréal.” This shows a strategic business move by L’Oréal to make research the critical theme for business improvement.
What has the stock done lately? Over the last month, L’Oréal has experienced a stock price range from a low price of $277 per share to the highest price reached of $290 per share. These stock price fluctuations and the recent decline are likely due to the announcement of a return to lockdowns in France, as well as other parts of Europe, which many expect to have a negative impact on retail sales of beauty products.
Past Year Performance: L’Oréal’s performance in the last year reflects the decline many cosmetic brands have experienced during the outbreak of the COVID-19 pandemic. The stock price fell to $210 per share in March at the outset of the global pandemic, but recently it has performed better than the fall season of last year.
Source: FactSet
My Takeaway
Despite the decrease in sales in many of its business segments, L’Oréal is well positioned to come out of the COVID-19 pandemic as one of the leading cosmetic brands. L’Oréal’s commitment to both improving its sustainability commitments as well as its recent management change shows that the brand is investing in its long-term success and positioning itself for the future. L’Oréal along with other beauty product brands may prove to be frontrunners of economic rebound as consumers begin to purchase makeup and beauty products once again if there is reason to leave the sweatpants in the drawer and get dressed up once again.
Source: FactSet
A Small Cap Equity holding: ShotSpotter, Inc. (SSTI, $29.31): “Spotting the Sell” by: Dominic Brisson, AIM Student at Marquette University
ShotSpotter, Inc. (SSTI, $29.31): “Spotting the Sell”
By: Dominic Brisson, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• ShotSpotter, Inc. (NASDAQ: SSTI) provides acoustic gunshot detection and sensor solutions to assist policing and law enforcement officials to detect, prevent, and reduce gun violence in cities, campuses, and corporate facilities.
• SSTI revenue streams are nearly 100% subscription based and generated from the United States (97.5%), South Africa (2.4%), and the Bahamas (0.1%) and total revenue has grown at an impressive 36% 5 Year CAGR (2015-19).
• SSTI’s two largest customers (Chicago and New York City) account for nearly 31% of total revenues generated.
• SSTI’s revenues have held up well during the COVID-19 pandemic and as of June 30, 2020 their revenues had increased 6 months ended YoY by 9%.
• SSTI will look to boost revenues with existing customers through their ShotSpotter Missions solution improving visualization and crime forecasting/analysis.
• In late September SSTI’s CFO Alan Stewart took a medical leave of absence and has been temporarily replaced by Mary Hentges who is serving as the interim CFO as of October 26.
Key points: ShotSpotter, Inc. has performed well during the past year since they have increased revenues and boosted profit margins. From their Q2 2020 performance, it was evident their business was not severely disrupted by the COVID-19 pandemic with many of their client’s government entities. During Q2 2020, SSTI saw 6 months ended YoY revenue growth of 9% despite pandemic adversity for much of the quarter. Their revenues were primarily generated from their ShotSpotter Flex solution (96% of total revenues) which comes from the 109 cities they serve.
To continue expanding revenues during these uncertain times SSTI indicates they will focus on growing engagement among existing customers through increased offerings with ShotSpotter Missions. ShotSpotter Missions is extremely beneficial to existing clients since they will gain access to SSTI’s cloud-based software enhancing police patrol visualization. With the ShotSpotter Missions solution police forces will also have access to real time crime forecasting based on past area activity.
SSTI’s management remains concerned about new domestic growth opportunities in city markets where entities have suffered from significant budget shortfalls. Furthermore, SSTI’s revenue dependence on cities will hurt their business should cities begin devoting less funding to police forces in the years ahead. In addition, Management is concerned about the inability to grow their international presence as the pandemic persists making it increasingly difficult to penetrate those markets.
During September, SSTI attended the Gateway Conference virtually in San Francisco where they reiterated some of their long-term strategic growth initiatives. One of the key takeaways from the conference was SSTI continued belief in their platforms and intentions to actively deploy their solutions to more universities and colleges which represent a $250M TAM.
What has the stock done lately?
SSTI’s stock price has decreased in the past month by 5.6% and had been performing well up 3.6% until October 26 when the stock had fallen with the broader market. During the past 3 months, SSTI had increased 24% and has had minimal fluctuations since the sharp increase in early August when they crushed Q2 earnings.
Past Year Performance: SSTI has increased 44.28% in value during the past year. SSTI’s strong Q2 results have benefitted them immensely as investors feel increasingly more confident about the businesses ability to endure the pandemic’s adversity.
Source: FactSet
My Takeaway
ShotSpotter has been a strong performer and addition to the AIM portfolio since it was originally added in March of 2018 with a price target of $27.00. Many of ShotSpotter’s existing customers have suffered disruption due to the pandemic and it will continue to hurt SSTI with growing revenues in cities. In addition, revenues are expected to be between $43.5-45.5 million for 2020 which represents a much lower YoY increase against how they have performed during the past 5 years. Given the investment thesis has largely played out in revolutionizing safety and policing through technology, it is recommended SSTI’s stake either be trimmed or sold from the portfolio.
Source: FactSet
A Small Cap Equity holding: Castle Biosciences, Inc. (CSTL, $51.34): “Bright Future Ahead for this Kingdom” by: Adam Webb, AIM Student at Marquette University
Castle Biosciences, Inc. (CSTL, $51.34): “Bright Future Ahead for this Kingdom”
By: Adam Webb, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• Castle Biosciences, Inc. (CSTL, $51.34) is a commercial-stage dermatological cancer company, that offers proprietary multi-gene expression profile (GEP) tests that predict the risk of metastasis and the recurrence for patients with melanoma.
• Decision Dx-Melanoma is still the only product offering a genomic based test for a niche amount of patients dealing with the most common and fast growing cancer in the US, Melanoma.
• This year castle has an additional $81M cash on hand compared to FY19 and has doubled its research and development costs since FY19 working on new products and product improvement.
• A release of CSTL’s third product by the end of the year, a GEP test on SCC and Lesion that is predicted to be used in 300,000 cases per year and generate $500M in revenue.
• Health care costs are projected to continually grow at 5.5% in future years.
Key points:
Dermatological cancer is the most common cancer diagnosed per year around 5.5 with close to 5 million cases per year. This number is larger than all other types of cancer combined. Assessing the patient’s risk of metastasis is a critical part of such diagnosis, and CSTL’s Decision Dx – Melanoma is still the only product in this critical step for some patients dealing with the disease.
From sale of treasury stock, CSTL generated and additional $73 Million in funds since FY19. Not only a great testament to the current products CSTL offers, but a commitment to its future products. As CSTL is doubling its R&D expense from prior year, the company should have freedom to pursue its objectives with little credit restrictions.
The next product CSTL plans to release is its unnamed test on suspicious pigmented lesions. The company gave a status report on the test on October 28th illustrating its great testing performance and the company’s expectations to make the test available for commercial use by the end of the year. In addition, the update also mentioned that the product will be sold to the same dermatologists it already calls on.
Looking further long-term, health care costs have grown at a 7.7% CAGR since 1960 and are projected to continue to grow at a 5.5% rate through 2030. In addition, castle stated in its Q3 earnings call that it still has plenty of “runway” to operate in its niche market of testing components of melanoma to reaffirm the growth that CSTL could continue to see in the near future.
What has the stock done lately?
Castle is currently on a resurgence from its pullback which occurred after it reached its all-time high on October 10, 2020 of $55.35. Since added to the small cap portfolio in March of this year at $27.45, it has created an annualized ROI of 189%. With its new product scheduled for release soon and its 50% revenue growth from last year for during the first 6 months of this year the stock should be poised for continued success.
Past Year Performance:
CSTL has increased 307.97% in the past year and the stock has reservations for nothing but higher prices as more mutual funds and institutional investors begin to create positions in the newly listed company. The 52 week H-L for CSTL is $16.56 - $55.31. The top ten institutional stakeholders - holding 30.24% of shares outstanding cumulatively - increased their positions in CSTL with purchases of an additional 1.971 million shares.
Source: FactSet
My Takeaway
Institutional confidence in the company, coupled with its vibrant growth in revenue, cash, and R&D over the year along with its additional products coming out are all green lights for CSTL. The 52 week high that was hit on October 10th should be retested if not broken through within a the upcoming year. This equity should remain as part of the AIM portfolio.
Source: FactSet
