Our conversation with Suthan Sukumar, Principal - Technology Research from Eight Capital will begin shortly.
Today I am joined by Suthan Sukumar from Eight Capital. He covers 11 stocks with a focus on the technology sector.
Thank you for joining us today, Suthan.
Good morning, thanks for having me
Before we delve into your top stock picks, can you tell me what trends you are seeing in the technology landscape, and more importantly, how investors can benefit from emerging technology trends?
Absolutely, there are a number of emerging technology trends across the landscape today...
one of the key areas where I've been seeing a lot of investment in recently has been in the Machine Learning and Artificial Intelligence space...
Machine learning is an application of AI and has been around for years, but has been becoming a more strategic focus for tech firms given opportunities to gain a competitive edge while driving process efficiencies
One way to think about it is, AI is the science behind building systems that can operate autonomously and intelligently, like humans, while machine learning is the algorithm that makes these systems smarter by analyzing patterns in large data sets to better predict outcomes.
Both of my current top picks are uniquely leveraging machine learning given the large volumes of data sets generated on their respective platform
With Shopify, my top large cap pick, machine learning has been playing a key role in automating cash advance offers to merchants, and will be playing a greater role in aiding discovery of relevant apps, functionality to merchants, and eventually more broader business management capabilities to support merchant growth and success on the platform.
With AcuityAds, my top small cap pick, the company’s programmatic advertising platform is built from the ground up around its proprietary machine learning algorithm which has been helping the company exceed client expectations on ad campaign ROIs
Let's delve into your first top pick then, Suthan, Shopify (SHOP-T). Give us a description of the company's business operations please.
Sure, Shopify provides a cloud-based, multi-channel eCommerce platform catered towards entrepreneurs, and
small to medium sized merchants...
The platform provides easy set up and management of online storefronts and features a suite of integrated, enterprise-grade capabilities for merchants at a fraction of the cost of traditional enterprise platforms, allowing them to better compete against larger retailers who have deeper pockets and resources.
Last year, Shopify’s grew its merchant base by 55% (which now sits in excess of 500k), nearly doubled the GMV processed on its platform, and grew top-line revenues by 90%, and we believe the company is on track to post similarly strong results this year.
Your target price is $120 (U.S.). What are the key drivers that will may lift the share price to your target?
In our view, Shopify is a dominant e-commerce platform that has been executing well, but still in the early innings of its growth...
Despite impressive growth to-date, a large, growing addressable market provides significant
opportunity to grow penetration beyond the current low single digits...
Further traction of growth initiatives like Shopify Shipping, Capital, and Plus will continue to drive underlying fundamental growth while strengthening the company's competitive m
and a significant balance sheet is expected to fuel further platform innovation focused on enhancing merchant success via investments in key areas such as analytics, native sales/marketing tools, etc..and potentially M&A
Its seems like they have a lot of organic growth potential. Is the company's growth primarily organic/internal or is it a combination of organic and growth by acquisition?
Absolutely, growth to-date has been primarily organic. M&A historically has been focused around smaller tuck-ins and acqui-hires of founder-led technology firms as a means to bolster the platform and merchant capabilities. We expect this trend to continue.
Let's discuss the stock's valuation.
Given your target price, you don't see the valuation as lofty but has room to expand.
Sure, Shopify currently trades at around 10x F18E Sales, a premium to higher-growth SaaS-based comps trading near 8x, which is largely
justified by its projected revenue CAGR through 2018 of 66%, vs. SaaS peers anticipated to grow at a slower 35% pace.
Is that enterprise value-to-sales?
Our US$120 per share target implies 12.5x F18E Sales, given the growth outlook, justified further by improving operating leverage (expecting first quarter of operating profit in Q4/F17) , and large, expanding and underpenetrated TAM, further supported by our DCF analysis
What are the company specific downside risks that investors should be aware of?
The largest risks to growth include increasing competition impacting new merchant acquisition trends, challenges in increasing adoption/uptake of payments and newer initiatives like Shipping and Capital within the merchant base, and deceleration in GMV growth, which could lead to lower revenue growth and margin pressure.
Is there anything else you would like to add/summarize before we move on to your other top pick, Suthan?
sure, in our view, Shopify is a dominant e-commerce platform that has been executing well, but still in the early innings of penetrating its addressable market. We believe that the company will continue to outperform expectations in the coming quarters with strong sustainable revenue growth over the next several years.
Let's turn to your second stock pick. It’s a micro cap stock with a market capitalization of approximately $100-million that trades on the TSX Venture Exchange, AcuityAds Holdings Inc. (AT-X). Tell us about the company.
AcuityAds is a digital advertising technology company, known as a Demand Side Platform (DSP).
The company is focused on programmatic advertising which is an automated, more efficient, data-driven approach to digital ad buying. This
allows advertisers to deliver targeted ads to specific audiences, instead of taking a ‘spray and pray’ approach...
The company’s technology is based on its proprietary machine learning algorithm which has been delivering better campaign ROIs for advertisers...
AT goes to market with two primary offerings: 1) managed service; and 2) self-service. While both segments have demonstrated impressive growth, the latter has been accelerating on an organic basis and is a key growth driver for the company going forward...
AT’s self-service model allows clients to direct their own ad purchases without significant assistance from support staff, which allows revenue to continue growing faster than expenses, making it a highly scalable business.
Who are among the company's clients?
AT works with a wide range of advertisers including small to mid sized
media agencies and brands spanning multiple industries
You have a price target of $6, what is your investment thesis? What are the catalysts?
With the advertising industry shifting to digital and programmatic, we think AT is a great way to play the strong secular drivers tied to this large and growing market...
Our thesis is based on 1) improving operating leverage and sustaining positive EBITDA growth from a rapidly scaling self-serve business...
2) Strong organic growth prospects from growing traction in mobile, video channels (highest growth ad spend segments) and international expansion...