Keep all companies in sectors that I may be selling out of this year (Defense, Entertainment, Real Estate)
Delete all companies that had a "Low" conviction rating
Delete all companies with a rank lower than my live portfolio's weighted average (3.03)
I started with 141 tickers in my watchlist and removed 96. Now down to 45. I am focused on continuing to build a strong portfolio and don't want to spend time with tickers that will not improve my portfolio. The Breakdown of what was removed:
Removed 32 "Low" conviction tickers
Removed 64 tickers below my Portfolio Weighted Average
Kept 12 tickers that were either Low Conviction or below my Weighted Average but were in one of my target sectors (Defense, Entertainment, Real Estate)
I will be doing my first Commonstock Watchlist update for 2023 in February to start my refined Watchlist of front-runners for next year's Birthday Buys.
$TSM is a fascinating company in a cut-throat industry. Spent a couple of weeks researching the business. While it's a fantastic business, I don't really think it's cheap enough at the moment to peak my interest. If you can look beyond the geopolitical issues however, it's not a bad addition to a watchlist. See more below 👇🏽
Starting on February 28th, Amazon Prime members will have to spend at least $150 on their Amazon Fresh order in order to get free delivery, this is quite a large increase compared to the $35 minimum we have today.
There are also new fees for orders under $150, here they are:
Orders between $100-$150: $3.95
Orders between $50-$100: $6.95
Orders under $50: $9.95
The free delivery on grocery orders over $35 was largely a part of the reason I joined Amazon Prime in the first place, it really was a great deal and I think many will realize that once it's gone!
Amazon claims this was done in order to keep the prices down on groceries. I wonder if it would have been better to not have raised the minimum so high though. I know when I am just buying a few things, I usually end up getting a few more things just to clear that threshold and get free shipping, now with the threshold being so high, people may just buy what they need and not so much of anything extra, or just go to a store themselves.
What do you all think of this change? Here is the article I read :)
"With two of the largest TV events of the year (the NFL conference championships) last week and the Super Bowl on deck, I have been thinking about how sports — mainly American football — will impact the streaming wars in the years to come.
There’s also the new Acquired podcast on the NFL, which was great and is linked to later in this post.
The NFL just signed a decade-long deal with its traditional broadcast partners (ESPN/ABC, Fox, CBS, NBC). Amazon was included for the Thursday night game. The deals will likely stem subscriber losses for the traditional cable bundle, at least if you include virtual providers like Hulu Live and YouTube TV.
But at what cost? The contracts are clearly not profitable for the broadcasters. They also take capital away that should be invested in streaming video platforms, all of which are destined for failure except for the Disney bundle.
Eventually, whether it is five, ten, or 15 years down the road, the majority of sports content will be streamed over the internet. This will mean the death of cable/traditional TV. So what are these broadcasters’ plans? Again, excluding Disney as it should be able to transition content over to ESPN+.
I have high conviction in saying this latest NFL deal won’t be the savior for the broadcasters, but what kills them. It allows streamers (Netflix, Amazon, Apple, HBO, Hulu) to go full steam ahead and win all of the non-sports eyeballs, which they are doing with ease.
Then, when sports deals steadily come up for renewal in the next 15 - 20 years, these broadcasters will be on their last breath, all thanks to these current unsustainable sports rights contracts. Who will be there to scoop up the rights? The streamers, of course.
This blatant misjudgment by the legacy entertainment companies is playing right into the long-term strategies of Netflix, Amazon, YouTube, and Apple. Disney will probably be fine given its success with ESPN+ but needs to walk a fine tightrope. Fox Sports will be a wildcard but seems outmatched financially.
Whatever happens, it will be exciting to follow through a business/investing lens."
$RKLB - Rocket Lab Successfully Launches First Electron Mission from U.S. Soil
The mission was Rocket Lab’s 33rd Electron mission overall, but the first launched from U.S. soil, introducing a new responsive launch capability to the nation
Rocket Lab USA successfully launched its 33rd Electron rocket and first mission from Virginia. The “Virginia is for Launch Lovers” mission lifted off at 18:00 EST on January 24th from Rocket Lab Launch Complex 2 (LC-2) at Virginia Space’s Mid-Atlantic Regional Spaceport within NASA’s Wallops Flight Facility. The mission deployed three satellites to a 550km orbit for leading radio frequency geospatial analytics provider HawkEye 360. Rocket Lab has now successfully deployed a total of 155 satellites to orbit from the Company’s three launch pads across the U.S. and New Zealand.
Electron lifts off from Launch Complex 2 at NASA's Wallops Flight Facility at the Mid-Atlantic Regional Spaceport in Virginia. The mission was Rocket Lab's first launch from U.S. soil. Image Credit - Brady Kenniston
The successful launch from LC-2 marks the beginning of a new era of responsive launch capability for small satellites from U.S. soil. Built with support from Virginia Space, the Commonwealth of Virginia and NASA Wallops Flight Facility, Rocket Lab Launch Complex 2 is designed to serve the responsive space needs of commercial, civil, defense, and national security customers, supporting up to 12 missions per year. Combined with Rocket Lab’s private Launch Complex 1 site in New Zealand, the Company’s launch sites can support more than 130 launch opportunities every year, delivering flexibility and rapid launch capability for customers.
ServiceNow - The Platform for Digital Business $NOW
ServiceNow has evolved over the last ten years from a specialized ITSM provider to a full-featured low code platform with ready-made solutions for a number of common enterprise business functions. If you were to believe the often hyperbolic CEO, ServiceNow will become the only software platform needed by enterprises to address digital transformation. While their product expansion has been impressive, I think their scope will land somewhere in between.
ServiceNow (NOW) is a company that I have followed for years and have owned in the past. While we tend to see large software services vendors slow down revenue growth as they pass $1B in sales, ServiceNow is exhibiting staying power by executing product expansion across multiple, adjacent service categories and then cross-selling them into the largest enterprises. This motion drives enormous spend elasticity, with nearly 100 customers exceeding $10M in ACV.
The company started in 2004 with IT Service Management, basically delivering a better software solution for the enterprise IT Helpdesk. This naturally expanded into other IT services, like asset management, operations management, portfolio management, governance and compliance and more recently security operations. At their core, all of these business processes are organized around “workflows”, which represent a series of steps taken by the user, a specific data model to store the state of their interactions and logic to control the flow and enforce business rules. The original model mirrored a “ticketing” system. Since then, workflows have evolved into full-fledged applications.
ServiceNow’s goal is to help enterprises automate much of this repetitive work and store it on a digital platform. This automation is often described as digital transformation, although that term is overloaded and also encompasses consumer experiences. As a first pass, workflows are addressed through packaged solutions for different business processes with some basic customization available. As customers increasingly requested flexibility in the design and data associated with their workflows, ServiceNow’s offering morphed into a generalized low code / no code platform to be used by “citizen developers” to build applications.
Customers can customize all the steps, UI and rules for these workflows to match the business processes within their company. They can re-use templates and create distinct data models. While customers can fully customize their application, they still have some guardrails at the infrastructure level for delivery in areas like security, governance and analytics. Most application builders are not full stack developers, but have some light scripting skills.
The benefit to customers is that their skilled developers can be focused on building custom apps for customer experiences, addressing interactions where the enterprise wants to create competitive advantage. To be clear, ServiceNow is not the platform for building a high traffic consumer application, like an Airbnb or Uber. Its scope is primarily for internal business functions that have well-defined and repeatable logic. Users are typically the enterprise’s own employees and supply partners. ServiceNow can be applied to address workflows with outside customers, but these tend to be delivered in a controlled environment and involve a defined sequence of actions.
As ServiceNow grew, it soon dominated the IT Service Management market. Gartner has named them a Leader in their ITSM Magic Quadrant for the 9th straight year. To continue their growth, ServiceNow identified workflows in other enterprise business processes that they could help automate. In many ways, they simply duplicated the patterns they had established for managing IT services. These extensions include employee workflows, like those in HR, Legal, Procurement, Supplier Lifecycle and the Workplace. The also added customer workflows to address repeatable processes in dealing with end customers, like customer service functions, field service management, financial services and order management. For several of these categories, ServiceNow has created specialized workflows by industry category, like health care, technology provider, telecommunications and public sector. These add value for the customer by including context specific to that industry.
Finally, to enable more free-form application development on a low code platform, ServiceNow added a product segment called Creator Workflows. This hinges on three capabilities – App Engine, Automation Engine and Integration Hub. These tools allow developers of all skill levels to create custom apps to model a unique workflow. Included are modules for writing the code (IDE), storing it (source control), deployment (CI/CD) and even support for mobile apps. Processes can also be automated with RPA and integrated with other enterprise SaaS systems like Salesforce, DocuSign, SAP, Oracle and Workday.
These workflows are all supplemented by a set of underlying shared services that make up the Now Platform (what ServiceNow calls their solution). These include task management, service catalog, security, developer tools, analytics, virtual agent, AI / ML and RPA. The platform includes connectors to access popular solutions across CRM, ERP, HCM, Infrastructure and DevOps.
ServiceNow has been able to grow steadily over many years, maintaining a revenue CAGR over 30% even as they passed multiple billions in revenue. At their Financial Analyst Day in May 2022, the CEO set a FY2026 revenue target of $16B. Further, he claimed their ascension to that revenue level would be faster than any other enterprise software company, including Salesforce, Oracle, Adobe and SAP.
ServiceNow has over 7,700 enterprise customers, which includes 85% of the Fortune 500. Yet, they consider themselves under penetrated in their target market. They include any company with more than 1,000 employs and $100M in revenue as a candidate for their services. Capital IQ indicates that there are 50,000 of this sized companies worldwide, without including China. More importantly, even with their largest customers, they see significant incremental expansion opportunity. Only 10% of their existing customers are using all four of their workflow product categories.
With their largest customers, ServiceNow also feels they have a high threshold for total spend, particularly as they facilitate digitization of more and more of the enterprise’s business processes. In 2021, 88% of their revenue was generated by existing customers. This is primarily driven by large customers increasing their spend. ServiceNow enjoys steady growth in $1M+ customer counts and their average ACV keeps increasing. ServiceNow leadership even tracks the number of customers spending $10M+. At their Analyst Day, the CFO revealed that the count of $10M+ customers increased by 95% a year between 2017 and 2021. Further, more than 20 customers now exceed $20M in ACV.
This growth in product adoption has resulted in a Net Expansion Rate over 125% in 2021. Management also claimed that over 2/3 of their customers increased spend in 2021. This growth is typically driven by the addition of product modules and upgrades to a higher service tier.
At the Financial Analyst Day, the CFO shared an example of a large telecomm company’s journey with ServiceNow. They started as a customer in 2013 spending $1M+ on three products, led by IT Service Management and IT Operations Management. In years 3-4, they doubled their spend by increasing use of ITSM and adding App Engine and Platform Foundation. Years 5-6 included the addition of Security and more expansion. In years 7-9, they layered on another $4M in contract value through the addition of ITSM Pro, SPM, Risk management, CSM, ITAM and HR.
Now, the company is using 10 products and spending more than $10M a year. Leadership thinks this customer will continue to expand. They provided another example of a public sector customer with even faster acceleration. That agency started with $4M over 6 products in 2019 and expanded to 9 products with more than $10M in annual spend by 2022.
Because ServiceNow’s revenue growth is driven by spend expansion with their largest customers, it is important that they continue to add new product modules to cross-sell. Fortunately for ServiceNow, they have found many adjacent product categories for expansion from their core groupings in technology, employee, customer and creator workflows.
Each year, they add a handful of new offerings within these workflow groupings, spanning both generalized business processes and industry specific solutions. Recent examples include ESG, order management, supplier lifecycle and enterprise asset management as generic workflows, and telecomm, healthcare, manufacturing, insurance and public sector as industry specific products. ServiceNow’s product team also keeps building out generalized capabilities for the Now Platform that can be applied across all products. Recent additions include RPA and Process Mining.
While ServiceNow’s largest customers are demonstrating spending levels over $20M+ a year, few customers are taking advantage of all product offerings at this point. In fact, only 10% of customers use products across all four workflows. While we wouldn’t expect this to reach 100%, the workflows do represent common business functions that likely exist in most enterprises. This makes it probable that large customers will continue to add modules.
In today’s macro environment, many enterprises are looking to consolidate spend onto fewer vendors, particularly where solutions look similar or in-house efforts are tying up resources. During ServiceNow’s Financial Analyst Day in May 2022, they shared a slide from the JP Morgan Chase Investor Day just prior, in which the CTO at JP Morgan Chase was highlighting significant IT projects completed recently.
In their case, JP Morgan consolidated 24 different in-house applications onto the Now Platform. The outcomes were $50M in cost savings over 3 years, a more centralized customer data set and improved employee satisfaction with the IT service desk. The implication is that other large enterprises could realize similar benefits.
ServiceNow reported their Q4 and full year results on January 25th. The timing of their report was interesting, as Microsoft had jarred investors the day prior with better than expected results for the prior quarter in cloud spending, but soft guidance. ServiceNow provided another data point with the first set of results for a cloud-based enterprise software company.
Overall, the results met or exceeded expectations. NOW stock had already enjoyed a 16% gain YTD by January 25th. Just after earnings were released, the stock dropped as much as 8% before clawing back a few points after hours. The following day, it closed up 3.2%. Coming into the report, expectations were high as ServiceNow’s CEO indicated steady demand during some public interviews prior to the event. A few sell-side analysts published positive reviews underscored by favorable channel checks as well.
Microsoft’s results had put a damper on sentiment for enterprise software and cloud infrastructure providers, as they cited workload optimization and cloud migration project delays as part of their low guidance for the current quarter. Investors were looking to the ServiceNow results for confirmation of that trend, particularly the circumstance where Q4 revenue might beat, but Q1 and FY2023 estimates would be weak.
I think ServiceNow’s results provided support for the notion that forward demand may not be as bad as feared. Q4 subscription revenue of $1.860B was up 27.5% in constant currency and beat the company’s prior estimate for $1.834B – $1.839B for 26% – 27% growth in cc. Current RPO provides a measure of future demand and came in a hair below prior guidance for 26% growth in cc. The CFO clarified that they actually outperformed their target for net new ACV and renewal ACV for contracts expiring in the quarter. The lower cRPO growth came from fewer early 2023 renewals than is typical in the fourth quarter, but that is just a timing issue.
Looking to Q1, the company projected subscription revenue of $1.990B – $2.000B for growth of 25% – 25.5% in constant currency. Analysts had estimated just 19% growth on total revenue and had a consensus for $1.95B in subscription revenue. Leadership projects cRPO growth of 24% in constant currency for Q1. Assuming a beat of 1% on these measures, annual growth for Q1 would be roughly linear to Q4 (about 1% decel). This is much better than the 7% or so deceleration in annual growth projected for Azure in Q1.
For the full year, ServiceNow provided a preliminary subscription revenue target for $8.440B – $8.500B, for annual growth of 22.5% – 23.5%. The estimate for constant currency is the same, as the company expects 2023 to be currency neutral (which eliminates a headwind, particularly for those software companies that don’t publish a FX translation). Considering that ServiceNow just delivered 27.5% annual growth in Q4, a preliminary full year 2023 growth estimate for 23% at the midpoint is actually pretty good. This assumes some conservatism.
Profitability measures tracked nicely as well in the earnings report. ServiceNow delivered operating margin of 26% for the full year of 2022 and set a baseline for the same in 2023. Similarly, FCF margin ended 2022 at 30% and now starts at 30% for the current year. We can assume some improvement on these as the year progresses.
During the Q4 earnings call, an analyst asked about the long term revenue targets that had been set at Analyst Day in May 2022. Those targets represented revenue of $11B+ by FY2024 and $16B+ by FY2026, as well as 27% operating margin and FCF margin of 33%. The CFO responded that underlying demand was strong, but FX headwinds may have impacted those targets.
However, she didn’t rescind them, saying that they would provide updates at the next Analyst Day in May. She confirmed that the 27% operating margin target was easily achievable, with revenue and FCF margin subject to change.
At their Analyst Event in May 2022, ServiceNow updated their long term revenue targets for $11B+ in revenue by 2024 and $16B+ in 2026. These were raised by $1B from the prior estimates for $10B and $15B. The CEO also emphasized the “+” as he thought they could beat them at the time. We will receive an update on these targets, as well as profitability goals, at the next Analyst Day in May. For now, let’s assume they will come close to these targets (maybe removing the “+”).
Considering that ServiceNow just finished 2022 with $7.54B in total revenue, growth to $11B in 2024 would represent a 20.8% CAGR. To reach $16B in 2026 would be about the same growth rate at 20.7%. So, leadership expects roughly linear revenue growth for the next 4 years of at least 21%. This is dependent on continued expansion of the product offering, broader customer adoption in more countries and closer collaboration with the partner ecosystem.
With an estimated TAM of $200B by FY2024, they are only about 3-4% penetrated. ServiceNow is generating the majority of new revenue from existing customers with a NRR rate of about 125% exiting the year. And while some customers exceed $10M in annual spend, ServiceNow leadership still thinks they are relatively under penetrated with less than 10% of customers subscribing to products across all four of their workflow groupings.
These revenue targets include a Non-GAAP operating margin estimate of 27% by 2024, up from 25% in 2022. For free cash flow margin, they expect to reach 33% in 2024, which is up from 31% in 2022.
The market cap on NOW is currently $92.7B with an EV of $89.9B. The P/S ratio is 12.9 with a Price / FCF of 43. Looking to FY2024 with the current revenue estimate of $11B, these drop to 8.4 and 25.5 respectively. For a 21% growth rate with strong FCF generation, those values appear fair. CRM currently enjoys a P/S ratio of 5.4 on annual growth of 14%. ORCL has a P/S ratio of 5.3 on 18% revenue growth and a similar range for cash flow margin using cash from operations (accounting for their large CapEx spend due to the cloud business).
While there doesn’t appear to be much upside to the current price, ServiceNow could raise these revenue estimates over the next few years, assuming macro pressures abate. They had maintained revenue growth around 30% far beyond $1B in sales. They could also be compared to larger cloud operations like MS Azure that are still just above 30% growth on a much higher run rate.
Given the size of ServiceNow’s market and their disciplined execution, I don’t see them underperforming these targets. As evidenced by the 18% price increase YTD in 2023, any dips in NOW price going forward would likely provide investors with upside. Similarly, indications of higher revenue growth or recovery of macro with lower interest rates could result in a re-rating. For investors looking for a steady grower with strong FCF generation in a large market segment, ServiceNow is worth consideration.
Visa $V Q1 2023 Results: Payment Gateway Continues
Q1 2023 Results for Visa $V were released January 26, 2023
Albert Kelly, outgoing CEO, replaced by Ryan McInerney on Feb 1, 2023.
“In our fiscal first quarter of 2023, Visa grew netrevenues 12% year over year as we saw stable payments volume and processedtransaction growth and a continued cross-border travel recovery. We had 8%growth in GAAP EPS, 21% growth in non-GAAP EPS and returned $4 billion toshareholders. I continue to see a bright future for Visa and believe that wehave the right strategy to invest in and capitalize on the opportunities aheadacross consumer payments, new flows and value added services.”
Source: App Economy Insights
All charts and graphs courtesy of $V, unless otherwise noted
What we need to know:
$V grew revenues of $7.9B of 12%, with earnings of $1.99 up 8% YoY.
Payments volume grew 7% YoY, and processed transactions grew 10%.
The uber important cross-border volume totals grew 22% YoY, with cross-border volume, ex Europe up 31%.
Additional stuff to know:
Total processed transactions on the Visa network equaled 52.5 billion in Q1, a 10% YoY.
Operating expenses grew 25% in the quarter, driven by increases in personnel and litigation provisions.
$V returned $4B in capital via share repurchases and dividends.
Payments Volumes 2022-2023
Cross Border Recovery 2022-2023
Payment volumes credit vs debit
All in all, $V had a good quarter, and $V continues to
Howard Marks (Co-Chairman of Oaktree Capital) - "The Most Important Question Is Whether We’re Going to Have Stagflation"
Howard Marks, Co-Chairman of Oaktree Capital, was the latest guest at "The Market NZZ". The interview was just published today with some great topics discussed, particularly focused on the long-term macro environment.
"... One of the most important things is patient opportunism: Try to avoid mistakes, and when there is nothing clever to do, the mistake lies in trying to be clever. So now is a good time to sit on your hands, read about how to be a good investor, ignore the noise, and try to get ready for the opportunities when they come." (The Market NZZ)
📈 What are you doing to prepare for the upcoming bull market?
During the relatively short history of modern stock investing, substantial recoveries and bull markets have always followed substantial declines--eventually.
Another one of those substantial recoveries started after the Great Recession ended in March 2009 and developed into the bull market which continued through 2021 with three obvious speed bumps along the way.
The market as represented by the S&P 500 rose 607% from March 2009 through the end of 2021 which is great but rather insignificant when compared with the 32,281% gain for the Optimum Mix during that same period.
Commonstock is a social network that amplifies the knowledge of the best investors, verified by actual track records for signal over noise. Community members can link their existing brokerage accounts and share their real time portfolio, performance and trades (by percent only, dollar amounts never shared). Commonstock is not a brokerage, but a social layer on top of existing brokerages helping to create more engaged and informed investors.