Cabot Early Opportunities Issue: January 15, 2025

Stocks in This Issue

Recent Portfolio Highlights

Apple (AAPL) App Store revenue and App Store downloads in Q4 were ahead of historical trends (according to Sensor Tower data), though the month of December was a bit softer than usual. That somewhat muddy data, combined with Wave7 Research data showing the iPhone 16 upgrade cycle tracking lower than the iPhone 15 cycle over the same period, suggests that consumers have not yet jumped onto the Apple Intelligence bandwagon. That’s probably because they don’t know what it does yet. So far, high-end iPhones (iPhone 16 Pro Max) have led sales. It’s easy to look at this data and the APPL stock chart and think the two are directly linked, but I wouldn’t overthink it. I believe we’re so early in the iPhone upgrade cycle and Apple’s jump into AI that we don’t really know where this will go. The pullback in the stock isn’t totally out of whack with retreats in other Mag-7 names. BUY

Astera Labs (ALAB) continues to offer some of the best growth in the AI infrastructure market with several new connectivity products yet to really hit the market and which have meaningful growth potential given they’ll become increasingly necessary as data speeds and bandwidth needs grow. Not a cheap stock, but we’re not here as value hunters. HOLD HALF

AST SpaceMobile (ASTS) recently signed an agreement for long-term access (80 years) to lower mid-band spectrum in the U.S. The spectrum became available as part of Ligado’s messy restructuring effort and will cost ASTS around $550 million upfront, 4.7 million penny warrants (12-month lockup) and $80 million a year for usage rights. ASTS says this spectrum will help it expand subscriber capacity and peak transmission speeds across the U.S. and Canada. I believe this spectrum will represent the company’s only owned spectrum (i.e., not owned by AT&T (T), Verizon (VZ), etc.) which adds an interesting wrinkle to the ASTS story. That said, the spectrum has apparently been a challenge for Ligado to monetize for terrestrial communications due to interference, an issue that may not be an issue given ASTS’ plans to use it for space-based communications. HOLD HALF

Clearwater Analytics (CWAN) is down about 6% from our entry point in mid-December. On Monday the company announced its intent to acquire Enfusion (ENFN). Reading about the deal, it appears to make a lot of sense. ENFN’s platform has similar architecture (multi-tenant cloud-native) and complementary market positioning. Whereas CWAN’s focus has historically been on larger asset managers, insurers and corporations, ENFN has focused on smaller hedge funds. ENFN generates 38% of its business from international markets whereas CWAN gets only 18% from outside of North America. This deal could expand the customer base while also broadening out the set of solutions to create a truly end-to-end solution set. In terms of financials, ENFN (+16% - 17% revenue growth expected in 2024 and 2025) has been growing more slowly than CWAN (20%+ revenue growth), though CWAN management says it hopes to bring ENFN growth back toward 20% while also expanding gross margins for the combined company. That said, the growth outlook for ENFN was recently lowered (maybe deals slipped due to expectations ENFN would be acquired) implying that it may take considerable work to get growth to accelerate again. The acquisition is expected to close in Q2. As far as our game plan, I’m intrigued by this acquisition as I think it makes CWAN a better business, but I’m not convinced it will help CWAN stock in the near term. Shares did not get a boost from the deal’s announcement and, given that it’ll be several months before the acquisition can close, CWAN stock may be in something of a holding pattern for a while. Bottom line is we’re going to step aside and keep an eye on CWAN as I think near-term upside is limited. We can always revisit after the ENFN deal closes. SELL

FTAI Aviation (FTAI) recently announced a Strategic Capital initiative with third-party institutional investors that should provide the Aerospace Products business with significant volumes of engine and module exchanges. The first partnership will focus on acquiring 737NG and A320ceo aircraft, with all engines owned by the partnership to be powered exclusively through FTAI’s Maintenance, Repair and Exchange (MRE) business. This initiative should bring in meaningful volumes of engine and module exchange (FTAI management estimates 80 engine shop visits) as well as provide a feedstock of engines that can be repaired and used for other customers. The partnership structure could serve as a model for future engine programs, provided FTAI executes on its end of the bargain. It looks to me like analysts are factoring in a relatively modest 2% (roughly) increase to 2025 sales (estimated at $1.49 billion) and around a $0.10 bump to 2025 EPS ($4.53 now expected). HOLD HALF

GE Vernova (GEV) has benefited from recent bullish notes from several analysts, with a significant amount of interest specific to new pricing (as of December) for gas equipment. Given that management just held an Investor Day in December, the upcoming earnings event (January 22) may not hold a lot of surprises (though new pricing disclosures could be incrementally positive). The stock looks fantastic. HOLD HALF

Klaviyo (KVYO) is best known for its e-mail marketing solutions for retail and eCommerce markets (95% of revenue), though the company has been expanding the product lineup. The stock may not do much until investors see that these new products are adding growth, however. We’re currently looking at revenue growth slowing from around 32% in 2024 to 25% in 2025, while EPS growth also slows from 36% to 16%. Granted, there is ample potential for Klaviyo to beat expectations (as has been the trend). Given that we’re sitting on a roughly 20% gain in the stock and that there are no near-term catalysts (earnings not due until March), I’m going to go ahead and lock in the profit. I’ll keep an eye on KVYO and consider adding back to our portfolio in the future. SELL

Microsoft (MSFT) has pulled back with the market since mid-December in what should be a temporary bit of weakness. The company is in the pole position in terms of AI while also holding the largest share of IT spend and remaining the preferred public cloud vendor. Lots to like, not much to dislike. BUY

OneStream (OS) was picked up with an “Outperform” rating and PT of 40 by Wedbush in late December. The stock hasn’t looked great lately (not many software stocks have), but that may just be the best reason to stick with it. Especially given potential for the newly public company to become better known in 2025 while also delivering higher revenue and EPS than many investors expect. BUY

Primo Brands (PRMB) has been acting well since we jumped on board in December. Recent coverage from BMO Capital (Outperform, PT of 40) likely helped, as did a price target increase from RBC Capital (35 to 38). BUY

Soleno Therapeutics (SLNO) remains in the penalty box following the November announcement that the FDA asked for more information and pushed back 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. 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). In mid-December, Soleno secured up to $200 million in debt financing from Oxford Finance to support a drug launch. This should be viewed as a positive and reduces the risk of a dilutive equity offering upon FDA approval. HOLD HALF

What to Do Now

The market remains a little on edge following the recent surge in bond yields, policy uncertainty (tariffs, etc.) and concerns about an uptick in inflation (though Tuesday’s PPI inflation print and this morning’s CPI print were better than feared).

Despite this morning’s rally, there may be more turbulence in the short term depending on what happens after President-elect Trump’s inauguration (Monday) and what’s in the expected slew of Executive Orders.

That all said, we’ll get slightly more aggressive today and try to take advantage of the dip to pick up shares of quality growth stocks. We’re also stepping aside from one stock that may be in a holding pattern for several months (CWAN) while locking in profits on another (KVYO).

NEW STOCKS

Alphabet (GOOG)

Alphabet (GOOG) looks like it could be our next Mag-7 diamond hiding in plain sight.

Once considered the leader in AI, the company experienced a period of stagnation in 2022 and 2023. However, Google is now accelerating its innovation efforts, not only in AI but across various business segments.

The first area of potential (and risk) is the Google Services segment, which encompasses Search, YouTube, and a range of subscription services. This segment accounts for the majority of revenue (87% over the past nine months, +13%).

Despite being a major driver of financial stability for the company, Google Services has become a risk factor lately given the impending DOJ trial related to Google Search.

However, recently the market has adopted a more balanced perspective on the risks following Google’s remedies proposal on December 20, 2024.

Google is advocating for the removal of search exclusivity across browsers and Android agreements, rather than the more drastic measures initially proposed by the DOJ. Final remedies will be submitted by the two parties on March 7, with a ruling expected in early August.

Analysts are increasingly considering the potential for a settlement (a likely positive for the stock) given the new administration.

The second area of potential is the Google Cloud segment, which represented 12% of revenue over the past nine months +31%). This segment includes the company’s cloud infrastructure, AI solutions (such as Gemini, Astra, Project Mariner, and Jules), and Workspace solutions (Gmail, Docs, Drive, etc.).

The big recent development is Gemini 2.0 (announced December 11), which has generated significant interest in GOOG stock.

Gemini 2.0 Flash, designed for developers, is twice as fast as Gemini 1.5 Pro and supports multimodal inputs (text, images, video, and audio) as well as multimodal output. This is a substantial improvement over earlier versions that only handled text.

Additionally, Gemini 2.0 Deep Research, available to Gemini Advanced subscribers, acts as a personal AI assistant to explore complex topics. For example, a graduate student can use Deep Research to create a multi-step research plan, analyze relevant information across the web, and summarize it with source annotations.

The takeaway here is that the Google Cloud segment is finally releasing AI products that generate excitement again.

The third area of potential is the Other Bets segment, which accounts for less than 1% of revenue but grew by 43% over the past nine months. Recent announcements include the upcoming launch of Waymo (driverless taxis) in Japan in early 2025 and the Wing drone delivery service at Dallas-Fort Worth malls in partnership with DoorDash.

The bottom line here is that Google appears to be regaining its position as an innovation leader.

The company should grow revenue by 14% in 2024 and 12%+ in 2025, while also delivering double-digit EPS growth (+11% to $8.85 in 2025). All this while trading at a reasonable valuation of less than 19 times estimated 2026 EPS.

GOOG is being added to our Watch List today.

The Stock
After a tough 2022, GOOG revisited its pandemic-era all-time highs near 150 last January. By July the stock had made a series of new highs and was trading in the low 190s. That was the high for a while. Shares sold off in July and August, ultimately trading as low as 148 in early September. Momentum came back to GOOG in the fall, and the release of Gemini 2.0 in December sent the stock to new all-time highs just above 200. For the last five weeks, GOOG has been consolidating in the 186 to 203 range. WATCH

Amer Sports (AS)

Amer Sports (AS) found a place on our Watch List in November and the stock has acted well enough since then to make the jump into our portfolio.

Amer Sports makes and sells apparel, footwear, equipment and protective gear.

Oddly enough, it began as a Finnish tobacco company in 1950. The evolution into the sporting goods company of today had more than a few twists and turns, with the last tobacco-related divestment occurring in 2004.

The current collections of brands include Salomon (French roots, outdoor gear), Arc’teryx (Canada, outdoor apparel), Louisville Slugger (American baseball brand), Armada (U.S., skis), Peak Performance (Swedish outerwear), Atomic (skis, bindings, winter gear), Wilson (U.S., sports equipment, gear), EvoShield (protective gear), ATEC (baseball and softball training machines) and DeMarini (baseball bats).

When I profiled Amer Sports in November the company had just reported a third-quarter revenue and earnings beat driven by both the Outdoor Performance and Ball & Racket segments.

Revenue grew 17% to $1.35 billion (a 4% beat) while EPS of $0.14 beat by $0.04.

Performance in China (+56%) was particularly strong thanks to a government stimulus program that began in September, as well as consumer interest in health, wellness and outdoor categories.

We saw continued performance from the expanding Arc’teryx flagship brand, which not only delivers the highest profit margins but is opening new retail stores (nine new in Q3, for a total of 134) across North America, China and Europe. Arc’teryx has 68 branded stores in China today and could have up to 200 in the future.

Salomon is another focus brand for Amer Sports right now, especially Salomon footwear. As with Arc’teryx, management is leaning into the strength in China, opening 29 new Salomon shops in Q3, which brings total stores up to 165. There should be 200 Salomon stores in China by the end of 2024, and 404 globally.

This week the company pre-released Q4 2023 results, saying operating margins look better than expected and full-year revenue should come in at the high end of the previous 16% to 17% guidance range. Management also said it paid down more than half of its debt, which should further help margins in 2025.

That said, current EPS expectations are about the same as two months ago ($0.46 this year and $0.68 in 2025), implying analysts have yet to update their figures.

With the recent pre-release derisking the next quarterly report, Arc’teryx continuing to lead growth and both Salomon and Wilson pulling above their weight, it’s time to add AS to our portfolio.

The Stock

AS came public in February of this year at 13. The stock traded as high as 18.2 a few weeks later, then a summer slump pulled it down to an all-time low of 10.1 in August. A solid Q2 report soon sent shares back above 13 and, despite a few pullbacks, the stock has been climbing ever since. The stock closed just shy of 29 yesterday, only a fraction below its all-time closing high of 31 from last Friday. BUY

Cellebrite (CLBT)

Cellebrite (CLBT) is a $4.5 billion market cap software company that has emerged as the leading provider of solutions for digital investigations.

While the Israeli company has been around since 1999, it’s only been public since mid-2020. Revenue growth has accelerated since the IPO.

In 2022, revenue grew by just 10%. In 2023, revenue expanded by 20%, and it should have grown by nearly 23%, to $400 million, in 2024.

Looking out into 2025, consensus is currently calling for 17% revenue growth, but I think 20%+ is much more likely. Management commentary at the 2024 Investor Day implies roughly 20% annual revenue growth for the next five years. We’ll know more when the company reports Q4 results on February 13.

So, what exactly does Cellebrite’s software do?

Public and private-sector clients use the company’s platform to help convict bad actors and bring justice for a wide variety of crimes, from drug and human trafficking to fraud to homicide.

Cellebrite’s solutions help users navigate the complexities of legally sanctioned digital investigations, doing everything from collecting, reviewing, analyzing and managing data.

Customers include all 50 U.S. states, the country’s biggest police departments, federal offices, the DEA, FBI, etc., top accounting, pharma, telecom, banks and software companies.

Cellebrite also has a presence overseas (EMEA is 34% of sales and Asia Pacific is 12%), selling to agencies like the Mi5 and Mi6.

The company has three flagship product suites, all of which have had good growth traction in the last year.

Inseyets, the company’s digital forensics solution, is leading the pack (90% of annualized recurring revenue). It is advertised as helping clients get the most comprehensive evidence in the shortest amount of time.

Guardian (data management) and Pathfinder (AI analytics to streamline casework) are also driving considerable growth and account for the remaining 10% of ARR.

Cellebrite is continuing to invest in bringing its solutions to the cloud (subscriptions 87% of sales in Q3 2024 vs. less than 50% in 2021) and expanding AI use cases.

Looking forward, investors should expect an expanding salesforce to continue to push Inseyets adoption (management increased their adoption target from 10% of customers to 15%), more traction with the U.S. Federal Government (Cellebrite Federal Solutions launched last summer), and continued focus on cloud-ifying the product lineup.

On the potential risks front, the company’s CEO of 20 years, Mr. Yossi Carmil, stepped down at the end of December, and that role has been temporarily filled by executive chairman Mr. Thomas Hogan. There has also been a jump in stock-based compensation due to strong stock performance, though this should normalize in 2025 when adjusted EPS is expected to be roughly flat as compared to 2024 (around $0.42 - $0.45).

The Stock
CLBT came public at 10 via SPAC IPO in 2021 and had a rough start, ultimately bottoming near 3.8 in October 2022. The road to the stock’s current level of 22.3 has been relatively smooth, albeit with a few notable consolidation phases and the occasional pullback. The trend since the Q3 earnings report on August 15 has been marked by higher highs and higher lows and CLBT has reliably bounced off its 50-day moving average line. With the stock only pulling back the slightest amount over the last four weeks, we’ll jump in. BUY

Reddit (RDDT)

This is by far our most aggressive addition this month.

It may well not work out. But there’s a case to be made that Reddit (RDDT), which I added to our Watch List in December, will be one of the most popular tech stocks of the year.

Sometimes you have to climb out on a limb for an expensive growth stock.

If you’re not familiar, or just need a refresher, Reddit is an online forum where registered users talk about everything under the sun.

Those conversations happen in subreddits.

The company makes most of its money through advertising. It’s benefiting from AI applications since people are using AI to create content that finds its way to Reddit.

While reliance on advertising means Reddit competes with digital ad platform giants Meta (META) and Google (GOOG), the company’s engagement, monetization and earnings growth suggests it’s more than holding its own.

In Q3, daily average users (DAUs) came in at 97 million (+47%), roughly 20% higher than expected thanks, in part, to machine learning (ML) tools to analyze data and improve the user experience.

The company has been investing in customized content recommendations, elevating conversations and videos, improving search functionality and adding translations, which is helping to drive international growth.

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.

There also appears to be considerable potential to drive growth through search ads, video ads and the growing user economy, none of which have crept into analyst forecasts yet.

It’s hard not to be impressed by Reddit’s 68% revenue growth from Q3 ($348.4 million, an 11% beat) and profitability (adjusted EPS of $0.61 crushed expectations by $0.23).

That said, consensus expectations haven’t changed much from a month ago. Full-year 2024 revenue growth is still expected to be around 60%, and 2025 revenue expectations are currently landing near 35%.

But as recent history shows, actual results don’t necessarily line up with expectations.

With the trends currently working in Reddit’s favor, and taking note of the exponential growth sometimes enjoyed by social media companies, we’ll step in with a half-size position.

The Stock
RDDT came public on March 21 at 34 and the stock was up over 100% within a week. It traded back down near its IPO price in April but then got into a groove. 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 moved higher through early December until it got to 180. Shares have traded between the 156 and 188 levels over the last five weeks. BUY HALF

SharkNinja (SN)

I’ve been keeping an eye on SharkNinja (SN) since we stepped away from the stock in November. With shares acting relatively well and a few new potential catalysts on the horizon, we’ll move SN back to our Watch List today.

To refresh your memory, SharkNinja is a small-appliance manufacturer with innovative products that span 30+ categories, including cooking, cleaning, food prep, home environment and beauty.

The small-appliance market is extremely fragmented with a lot of white space for new products as well as potential to make current appliances better.

SharkNinja does both.

The company’s two brands, Shark and Ninja, are widely available at retailers in 25+ markets around the world. Amazon (AMZN), Target (TGT) and Walmart (WMT) all carry them and drive roughly 40% of total sales.

SharkNinja has seen revenue growth accelerate from 14.4% in 2023 to 30% over the first three quarters of 2024.

Fourth-quarter expectations are likely muted given that management issued guidance prior to the election when there was a lot of uncertainty. Neilson data suggests holiday sales were quite strong across both the U.S. and Europe, and I expect SharkNinja to report a healthy revenue beat when it reports Q4 results on February 13.

The company should beat on EPS in Q4 as well (it has done so in the last three quarters).

In terms of looking forward, analysts aren’t yet ready to stick their necks out with overly bullish forecasts, preferring to pencil in 12.3% revenue growth for 2025 ($6.03 billion) and 14.2% EPS growth ($4.85).

One of the reasons I was concerned about SN back in November was due to the company’s manufacturing footprint and potential for tariff impacts. On that front, recent commentary from management suggests the company will have shifted roughly 90% of production out of China by Q2. That’s considerably faster than prior expectations to be 90% out by the end of the year.

On the new product front, the newest potential blockbuster is the Shark CryoGlow Cooling & LED Face Mask. The product was recently launched in the U.S. after receiving FDA approval. It’s supposed to tighten fine lines, reduce acne & breakouts and firm skin.

The Stock
SN was a part of JS Global until it was spun out in July of 2023. We first jumped into the name last March, then stepped aside in November following a negative reaction to the Q3 earnings report, which sent SN from its all-time high near 113 back to the mid-80s. Since the beginning of December, SN has traded relatively tight to the 100 level, with the biggest dip (92.9) happening on December 18 and the biggest rally (to 108.4) happening last Friday. WATCH

PORTFOLIO CHANGES SINCE LAST ISSUE

Klaviyo (KVYO) moves to SELL today to lock in a roughly 20% gain. Clearwater Analytics (CWAN) moves to SELL today for a roughly 6% loss.

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 February 19, 2025.

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