Cabot Early Opportunities Issue: December 18, 2024

Stocks in This Issue

Last Portfolio Update of 2024

First and foremost, I hope you’re looking forward to a happy and healthy holiday season surrounded by the very best people in your life.

Thank you for a great year!

Let’s jump right into portfolio updates.

Apple (AAPL) is stretching its legs after breaking out to all-time highs above 238 at the beginning of December. While there is chatter about exciting new products like a foldable phone and 20” foldable iPad, the stock is really moving higher because of an expected upgrade cycle starting with the iPhone 17 and the upside margin potential represented in Services revenue, which is growing faster than Product revenue. Look for revenue growth to pick up from about 2% this year to 6% next year, with EPS growth reaccelerating from flat to around 21%. We’re up about 34%. BUY

Astera Labs (ALAB) has been on a beautiful streak since we jumped in a month ago, pushing our current paper gain north of 30%. Nothing has changed since the Q3 report a couple weeks ago. Astera is still a leader in AI compute/networking due to its Aries products (PCIe Gen5 and Gen6 retimer solutions), with the new Taurus (AEC networking connectivity solutions) and Scorpio (fabric switches) ramping and expected to each drive well over 10% of revenue in 2025. Love the trend but moving to hold today to be a little conservative. HOLD HALF

AST SpaceMobile (ASTS) has been up and down, but over the last couple of months, the stock price is basically unchanged. The company has recently signed a long-term deal with Vodaphone (through 2034) for space-based cellular broadband connectivity. Vodaphone also placed an order for its first Block 1 BlueBird gateway, which connects data from satellites to hand-held devices. Looking forward to updates from management regarding the launch schedule for 2025 and 2026, which should include approximately 60 block 2 BlueBird satellites. I am also very interested to hear when this service will first be available to consumers in the U.S. HOLD HALF

FTAI Aviation (FTAI) has been in a downtrend since things have begun to improve for Boeing (BA), both in terms of production and ending strikes. I elected to sell half our stake last week for a profit of 131% and we’re holding the other half. I’m watching closely as I love this story but also don’t want to see the paper profit we have on our remaining half position slip much more. HOLD HALF

GE Vernova (GEV) is still trading around our entry price. Management recently held an investor day which included long-term targets that left wiggle room for improvement both in terms of revenue growth (should be in the high single digits) as well as profit margins. One of the issues remains the offshore Wind business, though the core Power and Electrification segments continue to surpass expectations. The company announced a $6 billion share repurchase authorization. BUY HALF

Klaviyo (KVYO) has gone from acting well to blasting off, with shares breaking out to new all-time highs this week. There’s been some positive press around how Klaviyo’s software solutions for retailers have helped its customers deliver record-breaking results between Thanksgiving and Cyber Monday. That’s likely one of the reasons KeyBanc recently boosted its share price target. BUY

Microsoft (MSFT) has woken up from its three-month-long nap and is finally creeping higher again. The stock is just 3% from its all-time high (from July). There isn’t a specific catalyst, other than potentially more confidence that Azure remains on track to accelerate in the next three quarters. BUY

OneStream (OS) is literally trading smack dab on our entry price as I write this update so I’m going to seize the opportunity to say the stock has done absolutely “nothing” since we’ve owned it. I’ll admit that’s somewhat surprising given the software platform’s potential to really catch on among CFOs and other functional layers in finance departments. But to be fair, we jumped in before IPO lockup expiration, which often drives some selling pressure. I think we’re still good here and I’m looking for OS to go on a KVYO-type move any day. BUY

Soleno Therapeutics (SLNO) has been under some pressure since the company announced the FDA extended the review period for the New Drug Application (NDA) for DCCR extended-release tablets by three months. The new PDUFA target action date is March 27. The FDA didn’t cite any safety, efficacy or manufacturing concerns, saying only that responses to recent information requests required a major amendment to the NDA. Speaking at the Piper Sandler Healthcare Conference on December 5, management talked about how, at the time when information requests were coming in from the FDA, two of the four weeks prior to the previous PDUFA date were absorbed by Thanksgiving and Christmas, so time was getting pretty tight. This could be a situation where the FDA really just needed more information, or they could be contemplating a slight labeling change (like minimum age requirement). The bottom line is we’re in a holding pattern for a company that was expected to have a go-no go decision soon. SLNO stock has pulled back to its 200-day line, giving us a roughly 6% paper gain on our half position. HOLD HALF

What to Do Now

We’ve begun to see a little more choppiness in the market after a multi-week period where it seemed that every stock out there was working. That type of market is beautiful, but of course, it can’t last forever.

The modest turbulence of the last two/three weeks is actually a little comforting since it feels more normal.

The big event on the immediate horizon is this afternoon’s FOMC announcement (25bps almost a given) and commentary on future rate cuts. I expect Powell to lay the foundation to slow down the pace of rate cuts.

Given that we don’t know exactly how the market will take Powell’s commentary and that there could be some selling early in 2025 (selling winners prior to January 1 would trigger capital gains taxes that could be deferred by a year) I don’t see a ton of incentive to go in big with new positions right now.

That’s why we’ve taken some profits, sold off some weakening stocks and are just adding two positions today. I’d rather leave the door open to add more positions in January than feel like we overdid it in December.

In other words, don’t get extended right now and consider pulling back a little. It’s OK to pay some taxes, it means you’ve made money.

That all said, I think there is a lot of momentum in the market and that the outlook is pretty strong for 2025. Should we see some weakness in the beginning of 2025 I’d expect that to represent a buying opportunity. But as always, we’ll take things as they come.

NEW STOCKS

Clearwater Analytics (CWAN) ★ Top Pick ★

Despite huge advances in artificial intelligence (AI) and machine learning (ML), the old computer science term “garbage in, garbage out” remains as true today as when it was first coined in the late-1950s.

If data is poorly organized, full of errors, not normalized, etc., well then … you know what you’re going to get.

This is especially true for data and AI models used by banks and credit unitions given the huge numbers of transactions and variables in the underlying data.

Financial data collected more than a few years ago is even more disorganized. It’s like the digital version of a gazillion Lego pieces tossed into a gigantic balloon with every random nut, screw and bolt you’ve ever come across, then dropped from 10,000 feet onto a sandy beach.

Good luck sorting that out.

But, financial institutions, don’t lose all hope! Clearwater Analytics (CWAN) just might be the knight in shining armor the financial services industry has been fantasizing about.

The software company’s Investment Accounting-as-a-Service (IAaaS) platform has a multi-tenant, cloud-based architecture that’s robust enough to gather proprietary data and use it to train AI models, all while adhering to the extremely strict data governance requirements of the heavily regulated financial services industry.

The company’s solutions help firms simplify their investment accounting, compliance, and risk reporting, and mix in a variety of automation tools that help with user productivity.

While “multi-tenant” reeks of being just an industry buzzword, it’s central to this story. That’s because it means client data is kept separate, but still supported by common security measures, and accessible by all customers.

One example of how this translates into a customer-facing product is Clearwater’s new “Insights” solutions released in September.

Insights is a comparison tool that allows users to benchmark their portfolios against Clearwater investment data, even with custom peer groups, to help clients make better portfolio decisions and maximize returns.

The critical functionalities permitted by multi-tenant architecture are not possible with old-school, on-premise software. Or even with single-tenant cloud solutions.

This puts Clearwater in a very strong competitive position for firms looking to leverage AI technologies, which is pretty much every financial services firm out there.

The company beat on both the top (revenue +22.4% to $115.8 million) and bottom lines (EPS +33% to $0.12) when it reported Q3 results on November 6.

Guidance for Q4 revenue growth of +21% will likely turn out to be conservative. And management’s profit outlook has left room for higher sales and marketing spend, which is needed when solutions are in high demand.

As it stands today, analysts are looking for full-year 2024 revenue to grow 21.1% and EPS to grow 34.1%, to $0.44. Momentum should keep up in 2025. Consensus is calling for 19.7% revenue growth and EPS growth of 20%, to $0.53.

The Stock
CWAN came public at 18 in August of 2021. The stock briefly traded in the mid-20 range but by mid-2022 CWAN was trading below 14. Fast forward to the end of 2023 and the stock was coming off a multi-month rally that had pushed it close to 22. Shares faltered then spent the first eight months of 2024 consolidating in the 15.6 to 22 range. The big breakout came after the Q2 report on July 31. CWAN rallied 20%, closed above 23 (breaking through the previous 2023 high), and spent the next four months making a series of higher lows and higher highs on its way to 28. The Q3 report on November 6 catalyzed another rally that saw CWAN surge to an intra-day all-time high of 35.71. That proved to be a little much and shares soon pulled back to 30. The stock has been resilient since, trading up and down in the 28.7 to 32.7 range for the last five weeks. BUY

Core Scientific (CORZ)

Core Scientific (CORZ) is a business that’s transitioning from something of a troubled bitcoin miner (it emerged from Chapter 11 bankruptcy in January) into a more diversified digital infrastructure company.

This transition makes it a somewhat complicated story, which is part of why we’ll get more familiar with Core Scientific by adding it to our Watch List and not buying today.

That said, this transition also makes it a pretty darn compelling story given the rising demand for computing resources as AI sweeps the globe.

Core Scientific’s goal is to become one of the largest public data center companies in the U.S.

It’s building out capacity at its nine operational data centers in Alabama, Georgia, Kentucky, North Carolina, North Dakota and Texas, with specialized graphics processing units (GPUs) to support artificial intelligence (AI) and Machine Learning (ML) related workloads.

That’s not to say the company isn’t still leveraged to bitcoin mining and the price of bitcoin. It very much is. That Digital Asset Self-Mining segment (self-mining bitcoin to hold or sell) drove 80% of revenue over the last nine months.

But the other two emerging segments are gaining momentum

Core Scientific now provides hosting services for other customers engaged in bitcoin mining. This segment is called Digital Asset Hosted Mining and drove 17% of revenue over the last nine months.

And beginning in April 2024, the company began offering digital infrastructure and third-party hosting services for high-performance computing (HPC) operations through its new HPC Hosting Segment. This segment only drives about 3% of revenue now but should grow significantly in the years ahead.

Those HPC investments began to turn into contracts in March. One of the big customers is CoreWeave, the Nvidia (NVDA)-backed cloud computing services company.

In November, Core Scientific announced that CoreWeave signed another 120 MW HPC hosting contract, bringing its total IT load to 500 MW. Management says this could translate into potential revenue of $8.7 billion over 12 years.

Backing out to the 10,000-foot view of Core Scientific, the addition of hosting and HPC services changes the business model from a company that mines bitcoin to hold as an asset and/or sell, with profit dependent on the trend in the price of bitcoin, to a company that also sells computing resources at much more reliable profit margins.

This might be clearer if we look at Q3 results.

In Q3 Core Scientific’s gross margin from self-mining bitcoin was -9% (costs to mine bitcoin have increased significantly over the last year), whereas gross margin from hosting was 29%, and gross margin from HPC was 13%.

While this is still something of a messy story given the ongoing transition, the takeaway should be that Core Scientific is building out its HPC hosting capacity to attract new customers. The hyperscalers and major AI cloud providers top the list of targets.

Consensus estimates suggest total revenue growth will be about 2% this year (to $512 million) then about 20% in 2025, with EPS growing from $0.28 this year to $0.54 next year (+94%).

I imagine actual results could be quite different, however, given the ongoing transition. The company has decent coverage (and lots of “buy” ratings), with Jefferies, BTIG, B. Riley and Needham among the firms providing coverage.

We’ll add it to our Watch List today and keep tabs on the story as it develops.

The Stock
CORZ began trading in late January after the company emerged from bankruptcy. Shares traded in the 2.7 to 4.3 range through late May then broke out and rallied above 10. Another consolidation phase (6.7 to 12.3) lasted until early October, then CORZ began climbing again, briefly trading above 14 before falling back just ahead of the November 6 Q3 earnings report. That event catalyzed a convincing breakout above 15. For the last six weeks, CORZ has been looking strong in the 15 to 18.7 range. WATCH

Primo Brands (PRMB)

Back in 2016, I added a small bottled water company to my Cabot Small-Cap Confidential advisory service. We did well on the stock. But what I remember most is how much fun I had researching the story of Billy Prim, the company’s founder, and his journey to starting Primo Water.

The short version is that he was traveling in Paris in 1989, saw a propane cylinder exchange display, and returned to the U.S. to start Blue Rhino, the propane exchange brand that still exists today. He eventually sold Blue Rhino to Ferrellgas Partners, L.P.

Primo Water was his next adventure. It followed the same business model as Blue Rhino.

Primo set up water exchange locations so that customers could drop off a water jug and grab a full one. He also set up refill stations, something that wasn’t possible in the propane business given the regulations and risks.

It worked.

But of course, Primo’s business model wasn’t all that difficult to emulate. Over the years other bottled water brands popped up, driving waves of consolidation in the bottled water and delivery industry.

Fast forward to June 17, 2024.

On that day Primo Water and BlueTriton announced they would merge to “create a leading North American pure-play healthy hydration company” in an all-stock transaction.

The pitch for the new company, Primo Brands (PRMB), is that it will enjoy an estimated $200 million in annual cost synergies within three years of closing and generate a combined $6.5 billion of revenue and $1.5 billion of Adjusted EBITDA in the twelve months ending March 31, 2024.

There will also be room for more M&A and better potential to go head-to-head with premium important brands Perrier, San Pelligrino, Fiji and Aqua Panna.

Primo Water’s annualized dividend of $0.36 will continue as well, until a long-term dividend policy for the new company is announced.

Primo brings its brands Primo Water, Mountain Valley, Crystal Springs, Sparkletts and Alhambra. BlueTriton brings Poland Spring, Deer Park, Ozarka, Ice Mountain, Zephyrhills, Arrowhead, Saratoga and Pure Life, as well as the home and office delivery business, ReadyRefresh.

The merger just closed on November 8, 2024. After an initial dip, likely due to a delisting in Canada, PRMB stock looks fantastic.

The new company holds well-recognized hydration brands across retail, club stores, restaurants, hospitality, convenience stores, hospitals, schools and offices. It has direct-to-consumer offerings through its Water Direct (delivery), Water Exchange (customer refill) and Water Refill (self-service) businesses.

Primo Brands even sells water filtration units for home and business customers.

Pre-merger, both companies were growing revenue in the mid-single digits and had low to mid-single-digit volume growth. We won’t get combined company financials until February but should see trailing four-quarter revenue of around $6.7 billion.

I like this story, so we’re jumping in.

By the way, Billy Prim remains on the Board of Directors. If you want to read his book it’s called Rhino Tuff. I suspect Amazon (AMZN) is your best bet to find it.

The Stock
PRMB’s stock chart goes back decades but what really matters is the trend since the merger closed on November 8 when PRMB was trading near 25. There was initially a couple of days of volatility due to forced selling as PRMW was delisted in Canada, then a surge of buying pushed PRMB above 28. The stock has continued to gain altitude since, pushing above 30 on December 6 and staying firm in the low 30s since. BUY

Reddit (RDDT)

It’s very difficult not to be impressed with Reddit (RDDT) after the company’s Q3 report and subsequent rally in the share price. The company has only been public since mid-March and shares are up fourfold from the IPO price.

Given the recent surge in the stock price, we’re not going to jump in today. But this is definitely a name I want to keep an eye on early in 2025.

So, what exactly is Reddit?

Reddit is an online forum where registered users talk about everything under the sun. Those conversations happen in subreddits.

It’s essentially a discussion board. But as compared to a lot of other options, Reddit is reasonably well-organized, and because it’s so popular, the content is fresh and relevant, and users pick up on trends early.

The company mainly makes money through advertising, which pits it against digital ad platform giants Meta (META) and Google (GOOG).

That’s some stiff competition, but Reddit’s engagement, monetization and earnings growth tops the charts. And the flywheel should keep spinning since more time on platform by users means higher ad pricing.

It starts with daily average users (DAUs), which came in at 97 million in Q3 (+47%). DAUs are trending about 20% higher than expected, partially because machine learning (ML) tools have been implemented to analyze data and improve the user experience.

The company has also been investing in customized content recommendations, elevating conversations and videos, improving search functionality and growing internationally and adding translations.

On the advertising front, Reddit is making considerable progress, but analysts believe it’s still well behind peers, with pricing about 50% lower. Initiatives like new automations, Reddit Pro (business tools to help discover and engage in communities and conversations relevant to a particular industry) and Reddit Shopping (ecosystem to help people find products they want) should help drive ad growth in 2025.

The bottom line from Q2 is that revenue grew 68% to $348.4 million (an 11% beat), driven by 56% growth in advertising (to $315.1 million). Adjusted EPS of $0.61 crushed expectations by $0.23.

Since the call, analysts have been trying to figure out how much better than expected future growth could be. Revenue should be up by around 60% this year, and in 2025, growth projections range from around 33% (consensus) to over 40%.

A lot will depend on user growth and average revenue per user (ARPU). It seems like 20% DAU growth is a somewhat conservative projection (i.e., 127 million by end of 2025), as is 7% ARPU growth (i.e., $14.5).

But actual results could be a lot better if management’s engagement and advertising initiatives continue to bear fruit.

Reddit is a hot story and a hot stock. A little too hot to touch right now. But I want to put it on our radar and begin following more closely.

The Stock
RDDT came public on March 21 at 34 and the stock was up over 100% within a week. It soon pulled back, almost returning to its IPO price in April. But RDDT got into a groove and by mid-July shares were trading above 70. Another drawdown pulled the stock down to 49 by the Q2 earnings date on August 6, then RDDT spent two and half months grinding back to its all-time high of 78 (from July). The Q3 earnings report on October 29 catalyzed a massive breakout (+42% to close at 116 the next day) and RDDT has been steadily gaining altitude since. It’s currently trading around 180. WATCH

Viking Holdings (VIK)

If you’re looking for a way to play the luxury end of the $1.9 trillion (and growing) global vacation market, look no further than Viking Holdings (VIK).

The ocean, river and expedition cruise company has been operating since 1997, offering immersive experiences to travelers that want less of everything under the sun and more curated, cultural experiences. Viking’s trips span all seven continents.

While the company is the smallest of the cruise line operators, it’s arguably the best in the group, with the fastest growth and highest booking visibility as compared to Carnival (CCL), Royal Caribbean (RCL) and Norwegian (NCLH).

Viking is growing revenue at a solid double-digit rate and has roughly 70% of inventory for the next twelve months already booked. That’s well above the 25% to 40% rate of the competition.

Part of this is because Viking doesn’t have that many ships to begin with. It has a fleet of 100 small ships, which it sees as floating hotels. They’re state of the art and offer a more enriching experience than the floating cities the other operators have.

Viking doesn’t have casinos, doesn’t allow kids under 18 and doesn’t charge for all the extras, like Wi-Fi, beer, wine, access to a spa, etc.

Instead, it focuses on the journey, the destinations (often smaller ports than the mega-liners can access) and cultural enrichment.

This is part of why the company was rated #1 for Rivers, Oceans and Expeditions by Condé Nast Traveler in the 2023 Readers’ Choice Awards.

When the company reported Q3 results in mid-November, management said bookings for 2024 were 95% sold with pricing up 8% over 2023. Capacity for 2025 was already 70% sold, with pricing up 7%.

To be clear, the “Big Three” cruise ship operators are also doing well. But Viking is leading the pack. We’re looking for revenue growth to accelerate from +13% this year to +17.5% in 2025, with earnings expanding 32% to $2.24.

The one big question from the Q3 earnings call was whether or not price gains would slow down relative to 2024. We’ll just have to wait and see. For now, we’ll keep an eye on VIK stock.

The Stock
VIK just came public on May 1 at 24 and was strong right out of the gate. The stock ran as high as 37.3 by late July before the first meaningful pullback, which was roughly 18%. Shares bounced back and forth between 30.5 and 37 through September, then broke out above 38 on October 9 and ran to 40 by November 4. Another big rally pushed VIK above 45 just before the Q3 earnings report on November 19, which kicked off a couple days of downside volatility. But VIK regained its footing quickly, and over the last four weeks, shares have been trading in the 44.3 to 47.6 range. WATCH

PORTFOLIO CHANGES SINCE LAST ISSUE

On December 12 we sold half our position in FTAI Aviation (FTAI) for a gain of 131%. We followed that up with sales of BBB Foods (TBBB) for a 13% loss on December 13, the same day we locked in a gain of 17% with MakeMyTrip (MMYT), a position we held for less than a month. MMYT is now back on the Watch List. Yesterday, December 17, we sold our half stake in Loar (LOAR) for a 3% gain.

An updated table of all stocks rated BUY, HOLD and WATCH as well as recent stocks SOLD, is included below.

Stocks rated BUY are suitable for purchasing now. I suggest averaging into every stock to spread out your cost basis.

For stocks rated BUY A HALF, you should average into a position size that’s roughly half the dollar value of your typical position.

Those rated HOLD are stocks that still look good and are recommended to be kept in a long-term-oriented portfolio. Or they’ve pulled back a little and are under consideration for being dropped.

Stocks rated SOLD didn’t pan out, or the uptrend has run its course for the time being. They should be sold if you own them. SOLD stocks are listed in one monthly Issue, then they fall off the SOLD list.

Please use this list to keep up with my latest thinking, and don’t hesitate to email with any questions.

Active Positions

Recently Sold Positions

The next issue of Cabot Early Opportunities will be published on January 15, 2025.

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