October 18, 2021

Markets rallied strongly last week, with growth stocks in particular showing strength, so the odds are improving that the recent correction is over and new highs are ahead. If so, today’s recommendation of a data-warehousing company will likely thrive.

As for selling, I have no recommendations today, just one downgrade to hold. And I’ll be following Tesla carefully, reading the quarterly report on Wednesday, and watching the stock’s reaction.

Details inside.

Cabot Stock of the Week 370

Long-term market trends remain positive, but short-term trends remain troubling. Still, growth stocks snapped back strongly last week, so it’s possible the weakness has passed and the market will become more cohesive and begin a renewed advance. If so, today’s recommendation, which has a blockbuster growth story and a sky-high valuation to match, could do very well. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Snowflake (SNOW)
Snowflake is a hyper-growth stock that has brought the benefits of public clouds (scalable, flexible, etc.) to data management so customers can better understand their data.

Unlike many other high-tech data software solutions, Snowflake’s offering isn’t aimed at just the mega enterprises. It is used by a wide range of companies, from small operations of just a few people all the way up to the largest companies in the world.

The company is likely to post average revenue growth of 40%+ for at least the next seven years. For a large-cap tech stock, that’s next-level growth, reminiscent of Microsoft (MSFT) back in the 1990s.

This isn’t a best-case growth scenario either. It’s based on management’s own long-term revenue target ($10 billion in calendar year 2028) based just on the current product lineup. And it’s likely the company will introduce meaningful new solutions and/or make some acquisitions in the next decade. Near term, we’re looking for at least 94% revenue growth this year then mid-60% growth in 2023.

The business is doing so well because Snowflake has developed a disruptive cloud-native data warehouse solution that is becoming part of nearly every cloud data warehousing discussion, included with offerings from Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN).

The technology is cloud agnostic, hugely scalable, very flexible, easy to use, and different from other options in the market, so much so that Snowflake has the potential to create its own market, currently referred to as the Data Cloud.

Should this vision materialize, we would see a network of data providers and consumers all sharing and analyzing data across clouds and across the world. Those not in the network would want in as the value of being “inside” grows exponentially, thereby fueling significant long-term growth that’s not factored in today.

That future is becoming reality today as some sellers say it’s not so much about selling Snowflake – because customers know they need it – it’s more about selling the data warehousing environment that surrounds the solution.

The main challenge with the stock, besides the risks of security breaches, software spending trends, etc., is valuation. On an Enterprise Value to Forward Year (EV/2023 Revenue) basis SNOW trades with a multiple near 43. That’s roughly twice the multiple for the peer group. Granted, a premium is warranted, but even Shopify (SHOP), a stock that always carries a big valuation, trades with an EV/2023 Revenue multiple closer to 30.

On the other hand, trying to justify valuation for some stocks just breaks the brain. Look at Tesla (TSLA). If you’re willing to throw valuation concerns out the window and just focus on growth and opportunities, Snowflake may well be for you. Valuation risk is potentially offset by the reality that SNOW is really in a class of itself and has tremendous scarcity value.

In Q2 2021 (reported August 25) revenue grew 104% to $272 million. The health care and financial services verticals went bonkers, growing by 200% and 100%, respectively. Growth in Europe and the Asia Pacific region was also off the charts, with sales up 185% and 170%, respectively.

With a rapidly growing revenue base the bottom line continues to improve (adjusted EPS of -$0.64 beat by $0.03). However, Snowflake is not taking its foot of the growth pedal and continued investments mean profitability is several years away.

As for the chart, SNOW came public at 120 in September 2020 and jumped 112% the first day. After chopping around in the 200 to 300 range for a few months, shares rocketed up to 429 in December. That was the peak, and SNOW came back to earth in the following months, ultimately falling as low as 185 on May 13. The stock has looked a lot healthier since. SNOW moved above its 50-day line on May 18 and, aside from dips back to the 50-day line in August and two weeks ago, has remained above that trendline since.

Current Recommendations

In recent weeks we took the portfolio down to 17 stocks, reducing risk by selling our worst stocks as the market wallowed. But last week the market rallied strongly, with growth stocks in particular showing strength, so I’m feeling a bit more optimistic that the correction is over and that new highs are ahead. Time will tell. In any event, there are no recommended sells today, as the portfolio grows to 18 stocks, and just one downgrade to Hold. Details below.

Changes
Dexcom (DXCM) to Hold

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems—and the stock hit a new high last week, right after Mike added the stock to his portfolio in Cabot Growth Investor. Here’s what he wrote: “The firm spent a few years and a ton of money developing new computer vision chips (including an artificial intelligence architecture and video processors) that allow machines to better “perceive” and make decisions, boosting automation in fields like security cameras and, most important, automobiles. The new chips are still a minority of revenues, but revenues are exploding, and the Q2 report (on September 1) crushed estimates and looks like a coming out party for the stock. It’s not all sunshine and roses here—the sector (semiconductors) remains wobbly, but AMBA’s pullback was completely normal and now we’re seeing another round of big-volume buying show up.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is still in a long-term uptrend and still working to break out above (and stay above) resistance at 500. The dividend means it’s a fine buy here for conservative growth investors looking to benefit from the spread of 5G. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, tagged its 200-day moving average four weeks ago and has been trending up since, aiming for its old high of 58. As a long-term play on the demand for infrastructure in this country, it’s still attractive. HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, dipped as low as 53 two weeks ago before bouncing on light volume to 55. It’s not a strong stock, but Bruce says it’s a good value. In his latest update, he wrote, “Cisco is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet. CSCO has about 10% upside to our 60 price target.” BUY

ConocoPhillips (COP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, and featured here just three weeks ago, remains red-hot, hitting another new high today! In his latest update, Bruce wrote, “We like Conoco’s low valuation at about 5x EV/EBITDAX as well as its free cash flow yield of close to 12%. Many analysts still have oil prices of perhaps $55-$60/barrel in their earnings estimates, implying that profits and cash flow will be stronger than estimated.

Conoco has an investment-grade balance sheet, produces strong free cash flow, and has publicly committed to limiting its capital spending to 50% of its annual cash flow. The shares offer a respectable base-level dividend to shareholders that appears rock-solid.

West Texas Intermediate crude is currently trading at $80.57/barrel, while natural gas in the United States is priced at $5.48. At these prices, we anticipate considerable profits from Conoco.

ConocoPhillips shares have about 9% upside to our 80 price target. We note the 4-6% increase in the consensus earnings estimates, likely reflecting the steady increase in oil and natural gas prices.” BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, is a leading maker of diabetes monitoring and controlling tools and the stock has been very strong for months, but the past few weeks have brought a correction that’s seen the stock playing with its 50-day moving average. In his update last week, Mike wrote, “DXCM is beginning to bounce off its 50-day line, its first test of that key support area since its summer breakout. The trick is that earnings are due two weeks from today.” I’m going to downgrade it to hold, reflecting both the stock’s weakness and the risk of the earnings event. HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, broke below its 50-day moving average three weeks ago, and has now rallied back up to it. In his latest update, Mike wrote, “The sharp dip that started late last month wasn’t pleasant but, given the stock’s trading history (lots of ups and downs), we don’t view it as a death knell, and the recent show of support leads us to believe the major uptrend is still intact. The company will be opening another new warehouse later this month (in Tacoma, Washington), which will be the second new opening this month (Oxnard, California opened today), so the cookie-cutter story remains intact.” Mike has the stock rated buy, so if you like the story, you can buy here, but I’ll stick with hold. HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is back above all its moving averages, heading for its June high of 64. In his update last week, Bruce wrote, “GM held its investor meeting last week, highlighting its ambitions for the next decade or so. Our initial impression of the 59-page slide deck and various Day 2 more in-depth presentations is that GM has laid out a fascinating and all-encompassing vision, in at least reasonable detail, for its rollout of all kinds of new technologies and services. The company is aiming for revenues to at least double, to nearly $300 billion, by 2030, with overall margins expanding to 12-14%, well above the 6-8% margin rate of prior years. EV revenues are projected to be as high as half of total vehicle revenues, or about 35% of total sales. New technology and services will go from maybe $2 billion in revenues today to as much as 30% by the end of this decade and produce wide profit margins.

Yet in stepping back from what is a brain-full to digest, the upshot is that GM will make capital investments of $10 billion a year, basically forever, on top of spending that runs through the income statement. That’s a lot of money going out the door that otherwise could go into shareholders’ pockets. And, it is all going toward new technologies and other stuff that doesn’t really exist today and may or may not have strong demand in the future. GM’s case IS compelling, but speculative, nevertheless.

GM hopes to garner a higher valuation through all of this, maybe move GM from its current 1x revenues valuation today to perhaps a 2-3x revenues valuation. This would compare to Tesla’s 15x revenues valuation. But, many (most?) of GM shareholders today aren’t the same ones that bid up Tesla and other tech stock to high valuations. To earn a 2-3x or higher valuation, GM investors would require consistent execution, impressive results and a reasonably robust gas-powered vehicle market basically every year, for perhaps five or more years, to achieve full investor buy-in. That’s a lot to ask for. Especially when one is reminded that GM just recalled, for the second time, its Chevy Bolt EVs, has run into a colossal shortage of semiconductors, and is recovering from a brief but deep pandemic – none of which were in its plans as recently as 19 months ago.

So, we don’t see GM soon becoming a high-multiple company, although from the opposite perspective the shares embed low expectations. We’ll let the shares ride up a bit more, perhaps to our 69 target, then say goodbye for now. This stock will likely get cheap again, and we’d be thrilled to buy it back.” BUY

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, blasted out to a new high last week on big volume after the company announced a new digital “end-to-end” payment system that would be built into the HubSpot system and allow the company to get a piece of the competitive e-commerce/payments markets. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, hit a record high two weeks ago and has pulled back minimally since, so technically, the picture is very strong here. And fundamentally, the story remains very attractive. In Carl’s latest update, he wrote, “Credit Suisse recently upgraded the stock, calling Marvell ‘one of the most strategic assets in semiconductors.’ Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of 5G capabilities. I recommend buying at current prices if you have not already done so.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, bounced off its 200-day moving average three weeks ago and is up since then so is still a fine choice for income-oriented investors. In his latest update, Tom wrote, “This regulated/alternative utility used to be a superstar stock that investors loved to buy as a conservative way to play the growth in clean energy. But it’s just been a utility stock this year. It rallies when cyclical stocks struggle and falls when cyclical stocks go higher. That’s okay. A defensive cyclical alternative rounds out the portfolio. But NEE is much more than this. Eventually, alternative energy will come back in favor and NEE will benefit.” BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, is hitting new highs today! In his update last week, Carl wrote, “Shares have surged…IBD lauded the company as its stock of the day on Wednesday. The company expects that its e-commerce revenue will grow by 121% this year. I would be an incremental buyer of this stock, but long-time holders should definitely take partial profits from time to time.” HOLD

Signet Jewelers (SIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, hit another new high last Friday, so trends are good for America’s largest jeweler. BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, first topped 60 in early January, and since then has trading in a range between 55 and 60. In his update last week, Bruce wrote, “ST is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%.ST shares have about 32% upside to our 75 price target. The stock trades at an attractive valuation, including its 10.9x EV/EBITDA multiple based on estimated 2022 results.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has accelerated its rate of advance over the past week, but trading volume in the stock has been shrinking, telling us it’s very likely this advance will pause as it nears the stock’s old January high of 900. And then there’s the third-quarter earnings report, due after the market close on Wednesday. There’s no question the news will be very good, but I think the stock is likely to peak on the good news. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out to new highs a week ago and has pulled back minimally since. In his update last week, Tom wrote, “USB benefits from the steepening yield curve. Rising rates should have this regional bank firing on all cylinders. Although the current market could drag everything down in the near term, USB should move higher from here over the rest of the year.” BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Early Opportunities and featured here last week, is an important company in the middle of the semiconductor value chain, with accelerating revenues and a healthy chart. BUY

The next Cabot Stock of the Week issue will be published on October 25, 2021.

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