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Earnings Review - Week of 03/05/2021

Joshua Chapter 1 verse 9 states, "Have I not commanded you? Be strong and courageous. Do not be afraid; do not be discouraged, for the Lord your God will be with you wherever you go."

Whenever I face adversity, a verse like this from the Bible is good to read. It may be a concern over health, financial, relational, etc., but God's promise is that He will be with me, no matter what I face. It is not simply an emotional response either, but a command from God to be strong and courageous, to not be afraid or discouraged. If God is with me, who can be against me?

This is a verse that I need to hear and respond to, especially as market volatility has been increasing. The CBOE Volatility Index has jumped above 30% for the year twice now over the past few weeks. Pressure for the "rotation" from growth to value/dividends has also continued to be a narrative. Meanwhile, inflationary concerns continue to add pressure - the 10-Yr Bond has increased by nearly 70% and oil is up 37%.


With stimulus on the horizon and COVID cases declining, we could be headed for an extremely volatile year, including a potential recession/correction by year's end. Navigating these waters can be challenging to say the least, but it all comes down to the Bible's wisdom - be strong and courageous, do not be afraid, nor discouraged.


This week's earnings review includes the following companies:

  • Lemonade

  • MercadoLibre

  • Okta

  • Opendoor Technologies

  • Schrodinger

  • Snowflake

  • Vroom

  • Xencor

  • Zoom Video Communications

Lemonade


Key Points

Lemonade, Inc. (LMND) is diversifying its insurance products which now include property rental, home ownership, pet, and life, while stating that another big announcement is on the way. Despite this, the company is not yet looking to break out metrics for these products accordingly for its financial reporting.


Lemonade, like Root, Inc. (ROOT) remains a challenging investment for investors as Insuretech plays. The most confusing aspect for investors is the way analysts appear to be measuring Revenue between the two. For Lemonade, analyst estimates are based on GAAP Revenue, but for Root, they appear to be based on Direct Written Premium instead. If Lemonade were to use an equivalent metric, it would include the company's In Force Premium. In either case, the Direct Written Premium / In Force Premium is derived by taking the number of insurance customers, and multiplying this number by the premium per customer.


Clearly, the rate of increase of insurance customers and premium per customer are very important metrics regarding performance. For 2020, Lemonade witnessed customer growth at 56% to 1 million, and premium per customer growth at 20% to $213. This translated to 87% growth in In Force Premium to $213 million. Gross Earned Premium increased by nearly 110% to $159 million - Gross Earned Premium reflects the earned portion of Gross Written Premium, as the premium is earned pro rata over the term of the policy. However, GAAP Revenue increased by only 40% to $94 million, driven by 21% growth in the Net Earned Premium, and 45% when factoring for both Net Earned Premium and Ceding Commission Income, the core drivers of GAAP Revenue.


Lemonade, like Root, relies upon reinsurance agreements that allow for a portion of premiums to be ceded to third-party insurers to spread the risk. As of Q3 2020, Lemonade increased the proportion of premiums ceded to 75%, which has impacted GAAP Revenue performance substantially, making the comparisons "misleading" as the company stated. As part of these reinsurance agreements, Lemonade also concurrently receives a ceding commission of 25% for each dollar ceded. Therefore, combining Net Earned Premium and Ceding Commission Income accounts for these relationships.


Based on the company's guidance for Q1 and full year 2021, it appears that the percent of Gross Earned Premium for GAAP Revenue will be tracking in the low 40% area. This is important to note as ideally, this will provide better visibility regarding how gross premium estimated growth will relate to GAAP Revenue moving forward.


This is important to get more clarity on the top-line GAAP Revenue, because the long-term thesis for the investment to play out will depend on Lemonade's ability to generate Cash Flow. Currently, the company is losing around $120 million in Net Income, and reconciliation is not likely to turn this positive at any burn rate north of $40 million. Working Capital is positive, so GAAP Revenue growth and the corresponding Gross Margin and Net Income performance will be very important to drive long-term business success, translating to investment returns.

I am modeling Lemonade with a PT near $124 per share over the next 18-month period. This assumes 45 times EV/Revenue and continued cash burn, including Revenue approaching $185 million for 2022. Lemonade will likely be able to increase its gross and GAAP Revenue performance as the company continues to grow its insurance customers through both expanding products, and cross-selling of these products. More visibility is needed as this occurs to get a better sense of Cash Flow impacts, but I am optimistic that the company will be able to become Cash Flow positive over the mid-term, as GAAP Revenue scales towards $500 million. The recent equity capital raise positions the company well over this time frame.


The recent sell-off is not necessarily concerning for a company like Lemonade. Sure the valuation premium is steep, but Lemonade is looking to target a core technology transition in the insurance industry. The company has zero credit risk and with the current Net Cash position, is poised to sustain its operations easily for 5-10 years, with the potential to become Cash Flow positive over the mid-term. I view Lemonade as a good company to continue owning under the current pressure-selling environment, and/or add to the position as it has dipped towards $90 per share.


I will continue to monitor the discrepancy with analyst estimates for Lemonade and Root, as well as consider Hippo's recent IPO announcement via SPAC with Reinvent Technology Partners (RTP). Lemonade is in a far stronger financial position. While Hippo has announced, it will be important to review the company's financials to cross-compare with Lemonade and Root.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $1.2 billion

  • Revenues: $94 million

  • Gross Margin, GM: 26%

  • Operating Cash Flow, OCF / Margin: ($92) million / (97%)

  • Free Cash Flow, FCF / Margin: ($93) million / (98.5%)

  • Shares Outstanding: 61 million

  • Customers: 1 million

  • In Force Premium: $213 million

  • Premium per Customer: $213

  • Gross Earned Premium: $159 million

Valuation Metrics

  • Enterprise Value, EV: $4.5 billion

  • EV/Revenues: 47 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: N/A

MercadoLibre


Key Points

MercadoLibre, Inc. (MELI) had an excellent year for 2020, and like other "pandemic benefitting" stocks, is being punished wrongfully so. The company's Revenue growth acceleration has been a strong reflection of management's keen execution in growing both its E-commerce and Fintech platforms. For 2020, MercadoLibre generated $21 billion in GMV, and $50 billion in TPV, of which, $20 billion was on the company's marketplace. GMV was driven by 719 million items sold, and 649 million items shipped; while TPV was driven by 1.9 billion payment transactions. MercadoLibre had 133 million Unique Active Users at the end of the year.


MercadoLibre's growth in Latin America, all while companies like Amazon, Inc. (AMZN) and eBay, Inc. (EBAY) have attempted numerous times to compete within these markets and failed, is a very strong indication that the future is very bright, especially as the company has successfully seen both E-commerce and Fintech businesses accelerate growth both pre-COVID and during the pandemic. The performance in Mexico has been especially encouraging as this is another market that Amazon has not been as successful with.


Analyst estimates have been revised, and there is a clear disconnect with MercadoLibre's current valuation and PTs. Today, MercadoLibre is trading 18 times EV/Revenue and 62 times OCF per share. This valuation is a substantial discount against technology-based peers, and a deserved premium against companies like Amazon and eBay. This multiple is very reasonable to be sustained over the next two years, especially as analysts are now assuming that the company will be trekking towards $8 billion in Revenue by 2022.

I am modeling MercadoLibre with a PT near $2,840 per share over the next 18-month period. This assumes 18 times EV/Revenue and 60 times OCF per share, including Revenue approaching $7.9 billion for 2022, in line with most analyst estimates.


MercadoLibre is a strong buy with conviction for the portfolio. The recent technology sell-off has added some challenges as many companies have been punished of late. I personally am looking for a bottom price towards $1,250 per share with the current climate Today's action was highly schizophrenic so it remains to be seen whether it will serve as a bottom.


Another good reason why it is prudent to have exposure to MercadoLibre is that a post-COVID environment will see non-U.S. countries stock markets perform well, especially for emerging countries. MercadoLibre, similar to Coupang is a leader in a market that will continue to see strong and stable growth for both E-commerce and Fintech, where each company is the top player benefitting the most from these mid-term trends. In my opinion, MercadoLibre is trading at its fair valuation from the sell-off, keeping these multiples constant affords a very promising investment return in the short-term.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $2.5 billion

  • Revenues: $4 billion

  • Gross Margin, GM: 43%

  • Operating Cash Flow, OCF / Margin: $1.2 billion / 30%

  • Free Cash Flow, FCF / Margin: $1.2 billion / 30%

  • Shares Outstanding: 50 million

  • Commerce Rev: $2.6 billion

  • Fintech Rev: $1.4 billion

  • Gross Merchandise Volume (GMV): $20.9 billion

  • Successful Items Sold: 719 million

  • Successful Items Shipped: 649 million

  • Total Payment Volume (TPV): $49.8 billion

  • TPV on Marketplace: $20 billion

  • Total Payment Transactions: 1.9 billion

  • Unique Active Users: 132.5 million

Valuation Metrics

  • Enterprise Value, EV: $71 billion

  • EV/Revenues: 18 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 62 times

Okta


Key Points

Okta, Inc. (OKTA) had a very strong year in 2020, growing Revenue by 42% to $835 million. The big news however, was the company's acquisition of Auth0 for $6.5 billion in an all-stock transaction. Auth0 was listed as a unicorn with a valuation at just under $2 billion as of the summer of last year. Okta paid nearly 4 times that valuation level. I was mixed with the deal as I'm sure that it will be accretive and compliment Okta's identity security business, but the degree to add to Okta's TAM is not perfectly clear. Analysts were mixed on the deal. What we know for sure is that this deal will dilute Okta shareholders, and add a substantial amount of Goodwill to the B/S.


Okta is the second company in the portfolio to pursue an acquisition, albeit much larger than Datadog's (DDOG) recent moves during earnings. This begs the question as to whether these acquisitions were truly opportunistic and/or highly valuable, or were they forced out of management's concerns about slowing growth. Twilio, Inc. (TWLO) has made some large acquisitions over the past few years as well, and I'm not eager to see companies in the portfolio making such moves, especially if it becomes a habit, as I view growth-by-acquisition as a weakness in most cases.


Like Datadog, I will remain patient in assessing Okta's deal with Auth0. Okta is expected to provide further guidance on the impact to Revenue and operations once the deal is completed, passing customary regulatory reviews. As such, analysts have estimated an average expectation of Revenue growth near 30% for the next couple of years.


As this earnings season marches on, I am finding myself less impressed with certain companies, with Okta falling into this category. This is not to say that the company is not achieving success, but rather, that upon review of the mid-term outlook, it is getting tougher to justify the current valuation, as well as future valuations based on growth trajectories. Datadog, Atlassian, Inc. (TEAM), Splunk, Inc. (SPLK), which was liquidated recently, Paycom, Inc. (PAYC), among others all find themselves in positions where top-line growth may not be capable of driving future OCF justifying enough growth into today's multiple levels.

I am modeling Okta with a PT near $284 per share over the next 18-month period. This assumes 28 times EV/Revenue and 150 times OCF per share, including Revenue approaching $1.4 billion for 2022. The remaining years over the mid-term is where I have some concerns regarding Okta's ability to continue to see growth allow for the company to grow further into a more justifiable multiple valuation.


As others have been listed in this review, I will likely continue to hold and reassess at a more opportune time as to whether it makes more sense to continue to hold over the mid-term, or whether liquidating and redeploying capital elsewhere may be a better decision. The other option is to continue holding while not looking to increase the position further. But I am hesitant to hold companies that do not immediately foster actions, especially during strong pressure-selling like we are experiencing today - Okta is not as appealing as other options in the portfolio right now, but I will scrutinize this further before taking action.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $790 million

  • Revenues: $835 million

  • Gross Margin, GM: 74%

  • Operating Cash Flow, OCF / Margin: $128 million / 15%

  • Free Cash Flow, FCF / Margin: $182 million / 22%

  • Shares Outstanding: 130 million

  • Subscription Rev: $797 million

  • Professional Services & Other Rev: $39 million

  • Remaining Performance Obligations: $1.8 billion

  • Calculated Billings: $976 million

Valuation Metrics

  • Enterprise Value, EV: $27.5 billion

  • EV/Revenues: 33 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 221 times

Opendoor Technologies


Key Points

Opendoor Technologies, Inc. (OPEN), witnessed a challenging year as the pandemic forced the company to transition from a growth strategy, to a de-risking approach in liquidating the B/S and putting a pause on listing homes. This led to a 47% decline in Homes Sold to 9,913, and a corresponding 46% decline in Revenue to $2.6 billion.


The company hit a low-point of Real Estate Inventory at around $150 million during Q3 2020, and ended the year at $467 million, still much lower than the $1.3 billion at the end of 2019. Also at Q3 2020, Opendoor had generated over $1 billion on a LTM basis, so there was an inverse correlation with a decline in OCF and increase in inventory, as OCF dropped to $682 million for the year. This relationship will be the key focal point from an investment perspective as the company looks to double its markets to 42 in 2021. Investors should expect to see continued declining Cash Flow as inventory once again ramps up.


Management's guidance has been spot on so far and the company is expecting to generate $613 million at the midpoint for Q1 2021, marking a return to sequential Revenue growth across markets with strong and increasing demand for Opendoor's service and an accelerating pace of home acquisitions. Six new markets are anticipated in Q1 2021. It is to this point that we are likely to see Opendoor witness increasing inventory and a likely return to negative OCF performance.


Prior to the company's IPO, it was typical for Net Debt rather than Net Cash with debt used to finance home acquisitions to drive Revenue growth. With the recent IPO proceeds and further equity capital raise, it will be important to see if current Net Cash of $1.1 billion will sustain business operations through the next couple years, and whether the company will be able to generate positive OCF thereafter.

I am modeling Opendoor with a PT near $62 per share over the next 18-month period. This assumes 6 times EV/Revenue and cash burn through 2022, including Revenue approaching $6.2 billion.


For now, Opendoor is poised for further growth, but the company still has to prove that it can get to positive OCF sooner than later. Opendoor is in a very similar position as Zillow Group (ZG), which will also be dependent on its Home Sales unit as the key catalyst for future growth. Zillow continues to trade at a premium to Opendoor Technologies, while the latter is the leader in this transition to digital buying of homes. Both companies will be at risk of needing to raise more capital to build inventory to drive Revenue. As market volatility is punishing everything growth, I have continued accumulating the position with Opendoor Technologies.


Today's action was especially interesting as Opendoor witnessed a sever decline during the day's low towards $17 per share, while Zillow by day's end saw its SP increase by nearly 2% - Opendoor closed down 10%. Analysts and champions for Zillow are not going to positively receive Opendoor as the new leader for the digital transition for home buying. Opendoor is now valued 4.5 times Revenue, a severe discount versus Zillow.


As Opendoor continues to scale at a faster pace than Zillow, it will be important to consider Gross Margin performance and Cash Flow. As Zillow's business substantially shifts towards its Homes unit, Opendoor's valuation multiple will be in a position to witness robust expansion.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $1.1 billion

  • Revenues: $2.6 billion

  • Gross Margin, GM: 8.5%

  • Operating Cash Flow, OCF / Margin: $682 million / 26%

  • Free Cash Flow, FCF / Margin: $672 million / 26%

  • Shares Outstanding: 577 million

  • Number of Markets: 21

  • Homes Sold: 9,913

Valuation Metrics

  • Enterprise Value, EV: $11.6 billion

  • EV/Revenues: 4.5 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 19 times

Schrodinger


Key Points

Schrodinger, Inc. (SDGR) was crushed after its earnings announcement to say the least, with an immediate 27% drop. The reasons were twofold - first Schrodinger missed Q4 2020 estimates, and second, it then guided below analyst consensus for 2021. For those following SP moves, that is definitely a recipe for disaster.


Schrodinger's SP definitely had gotten ahead of itself as the company announced that it had entered into a strategic collaboration with Bristol Myers Squibb (BMY) to discover, develop, and commercialize therapeutics in multiple disease areas. Under the terms of the agreement, Schrodinger received $55 million in an upfront payment and is eligible to receive up to $2.7 billion in preclinical, development, regulatory and sales-based milestone payments in addition to royalties on net sales of each product commercialized by Bristol Myers Squibb.


This upfront payment was also a driver for Schrodinger's stronger performance for Cash Flow. The company is seeing progress as Revenue increased by 26% to $108 million. This was driven by customers exceeding $1 million increasing by 60% to 16, customers exceeding $100,000 increasing by 17% to 153, and customers exceeding $1,000 increasing by 16% to 1,463.


Analysts were looking for Schrodinger's Revenue to be approaching $180 million in 2021, while Schrodinger guided at the midpoint for Revenue of $133 million. The collaboration with Bristol Myers was thought of as an indication of the company gaining momentum for its products. Like most Healthcare stocks, success is never linear and there are often setbacks, and/or longer time periods prior to larger momentum opportunities.

I am modeling Schrodinger with a PT near $87 per share over the next 18-month period. This assumes 30 times EV/Revenue and 200 times OCF per share, including Revenue approaching $210 million for 2022. I am giving Schrodinger a premium multiple under the assumption that the company will potentially enter into another strategic collaboration with another company, and/or see further upside potential with Bristol Myers upon existing collaboration.


Schrodinger's cash burn is not very high and with the company's current Net Cash position, there will be plenty of time for collaborations to lead to larger opportunities. In the event a larger deal is executed as a result, the SP will take off. Seeing Schrodinger continue to get more collaboration opportunities will be important to afford the company the best potential to see an acceleration of Revenue growth over the mid-term.


With potential mid-term Revenue approaching $500 million and higher, Schrodinger will positioned to see substantial Cash Flow expansion.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $689 million

  • Revenues: $108 million

  • Gross Margin, GM: 59%

  • Operating Cash Flow, OCF / Margin: $17 million / 15.5%

  • Free Cash Flow, FCF / Margin: $18 million / 17%

  • Shares Outstanding: 70 million

  • Software Products & Services Rev: $92.5 million

  • Drug Discovery Rev: $15.6 million

  • Total Annual Contract Value, ACV: $92 million

  • Number of Customers > $1 Million in ACV: 16

  • Number of Customers > $100,000 in ACV: 153

  • Number of ACV > $1,000: 1,463

Valuation Metrics

  • Enterprise Value, EV: $4.2 billion

  • EV/Revenues: 39 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 291 times

Snowflake


Key Points

Snowflake, Inc.'s (SNOW) earnings report is a little deceiving. On the one hand, we have very robust growth and performance. Revenue increased by nearly 125%, Total Customers increased by 73% to over 4,000, and importantly, Customers with LTM Product Revenue > $1 Million increased by nearly 90% to just below 80. Remaining Performance Obligations increased by 200% to $1.3 billion, showing strength in sales. At the same time, the company's current Revenue level is still below $600 million.


At the same time, the valuation is clearly difficult to wrap one's head around. Snowflake currently trades 106 times EV/Revenue with a $63 billion valuation. But investors should consider the growth trajectory for the company, including the potential for substantial Cash Flow inflection. Snowflake is sitting on a big opportunity for its data cloud products and services. Over the mid-term, it isn't a question of if Snowflake will exceed $5 billion in Revenue, but when.


At the same time, at a scale of just below $600 million, Snowflake witnessed substantial improvement in the company's cash burn. Working Capital generated $107 million led by Deferred Revenue, while reconciliation adjustments for Net Income generated a loss of $152 million. As the company scales above $1 billion in Revenue next Fiscal Year, improving margins will likely lead to stronger Cash Flow performance overall. Taking this further towards $5 billion in Revenue and Snowflake is poised to potentially become a 25% OCF margin business.

I am modeling Snowflake with a PT near $369 per share over the next 18-month period. This assumes 60 times EV/Revenue and 600 times OCF per share, including Revenue approaching $2 billion for Fiscal Year 2023. I am modeling (conservatively) that Snowflake will attain a 10% OCF margin in 2023.


Snowflake is a difficult company to own as the premium valuation for EV/Revenue is very steep. I bought in with an average SP now at $260 per share. I recognize that while the company will be capable of substantial growth over the mid-term, that it is best to attempt to get as discounted of a position as feasible. Investors are possibly best suited waiting for Snowflake to decline further during either a correction or recession. We just had a brief 10% correction for the NASDAQ, and Snowflake's SP at around $230 per share isn't a bad one. However, more volatility may be on the horizon as inflation concerns persist, get a SP for Snowflake closer to $200 or lower is ideal.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $5.1 billion

  • Revenues: $592 million

  • Gross Margin, GM: 59%

  • Operating Cash Flow, OCF / Margin: ($45) million / (8%)

  • Free Cash Flow, FCF / Margin: ($41) million / (7%)

  • Shares Outstanding: 284 million

  • Product Rev: $554 million

  • Professional Services & Other Rev: $38 million

  • Remaining Performance Obligations: $1.3 billion

  • Total Customers: 4,139

  • Net Rev Retention Rate: 168%

  • Customers with LTM Product Rev > $1 Million: 77

Valuation Metrics

  • Enterprise Value, EV: $63 billion

  • EV/Revenues: 106 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: N/A

Vroom


Key Points

Vroom, Inc. (VRM) is another stock, similar to Schrodinger that fell off a cliff immediately following its earnings report. Vroom has witnessed several major volatile declines over the years as analyst expectations continue to be very robust over the mid-term. Vroom is capitalizing on another major digital consumer purchasing trend, similar to Opendoor through e-commerce-based used vehicle sales.


Q4 2020 did miss analyst estimates, so similar to Schrodinger, Wallstreet was brutal in dealing with the miss. Despite the miss, Vroom had a strong fourth quarter, with significant year-over-year growth in its ecommerce business. Management stated that inventory and marketing continue to scale as planned, which is increasing the velocity of the Vroom flywheel, driving conversion and increased sales and Revenue.


To the focal point of e-commerce, Vroom's e-commerce Revenue unit grew by 56% to just below $1 billion in Revenue, with E-commerce Units Sold increasing by 82% to over 34,000. translating to an increase in Gross Profit of 90% to $61 million. The company's Texas Direct Auto, TDA, segment was hampered by COVID impacts seeing Revenue and units decline by 49% and 47% respectively. The Wholesale business also saw mixed results from COVID leading to modest unit and Revenue gains.


Vroom also announced the acquisition of CarStory, a leader in AI-powered analytics and digital services for automotive retail, which closed in January 2021. Vroom's position is, as the used vehicle market continues to embrace the ecommerce model, the company will continue to execute its plan and invest in scaling its business and improving the customer experience as Vroom transforms the market for buying and selling used vehicles. To this point the company guided for the full year 2021, expecting triple digit year-over-year growth in ecommerce unit sales and more than 200% year-over-year growth in aggregate gross profit.


On a down note, Vroom witnessed a further increase in cash burn to $315 million. This was largely driven by the increase in inventory, and also hampered by Net Income losses. For the upcoming year, a better balance of improving margins and inventory relationships as the company scales should improve the cash burn rate moving forward. This will be the most important element to pay attention to as a burn rate in the $300-$400 million range is not sustainable for very long.

I am modeling Vroom with a PT near $80 per share over the next 18-month period. This assumes 3 times EV/Revenue and 125 times OCF per share, including Revenue approaching $3.6 billion for 2022. I suspect that in the event things play out well through 2021 (stimulus, improving COVID situation, etc.) that Vroom will see a return to an EV/Revenue multiple at 3 times. Also, I am cautiously optimistic that the company may be able to get towards an OCF margin of 2.5% over this time period. 2021 remains a pivotal year assuming growth reaccelerates to get a better sense of these items.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $1.1 billion

  • Revenues: $1.4 billion

  • Gross Margin, GM: 5%

  • Operating Cash Flow, OCF / Margin: ($355) million / (26%)

  • Free Cash Flow, FCF / Margin: ($370) million / (27%)

  • Shares Outstanding: 136 million

  • E-commerce Vehicle Rev: $885 million

  • TDA Vehicle Rev: $188 million

  • Wholesale Rev: $246 million

Valuation Metrics

  • Enterprise Value, EV: $3.2 billion

  • EV/Revenues: 2.4 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: N/A

Xencor


Key Points

Xencor, Inc. (XNCR) continued to advance multiple clinical programs, as well as introduced several new XmAb® bispecific technologies. The company saw the progress of many partnered programs, including U.S. regulatory approval for tafasitamab, the second antibody with XmAb technology to achieve commercialization. Internally, early-stage clinical data have guided decisions to advance several candidates into new studies scheduled for 2021.


Recent business and clinical highlights include:

  • Plamotamab (CD20 x CD3): In November 2020, the company entered into a clinical collaboration with MorphoSys AG and Incyte Corporation to investigate the chemotherapy-free triple combination of plamotamab, tafasitamab and lenalidomide in patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL), first-line DLBCL and relapsed or refractory follicular lymphoma.

  • XmAb717 (PD-1 x CTLA-4): In November 2020, the Company presented updated interim data from the Phase 1 study of XmAb717 (formerly XmAb20717) in patients with multiple types of advanced solid tumors at the SITC Annual Meeting.XmAb717 was generally well-tolerated.

  • Vibecotamab (CD123 x CD3): In December 2020, the Company presented updated data from the Phase 1 study of vibecotamab in patients with relapsed or refractory acute myeloid leukemia (AML) at the ASH Annual Meeting.

  • XmAb564 (IL2-Fc Cytokine): XmAb564 (formerly XmAb27564) is a wholly owned, engineered IL2-Fc fusion that the Company is developing for the treatment of patients with autoimmune diseases. In January 2021, an investigational new drug (IND) application for XmAb564 was allowed by the FDA, and the Company plans to initiate a Phase 1 study in healthy volunteers in early 2021.

Select new collaborations and progress across partnered programs include:

  • Janssen Biotech: In November 2020, Xencor entered into an agreement with Janssen Biotech, Inc., focused on the discovery of XmAb bispecific antibodies against CD28, an immune co-stimulatory receptor on T cells, and an undisclosed prostate tumor target, for the potential treatment of patients with prostate cancer.

  • MD Anderson: In December 2020, Xencor entered into a new agreement with The University of Texas MD Anderson Cancer Center to develop novel CD3 bispecific antibody therapeutics for the potential treatment of patients with cancer. MD Anderson will work to identify and develop promising antibodies, and the Company will apply its XmAb Fc bispecific technology to create therapeutic candidates. MD Anderson will then conduct and fund all preclinical activities to advance candidates toward clinical studies.

  • Viridian Therapeutics: In December 2020, Xencor entered into a technology license agreement with MiRagen Therapeutics, Inc., which received a non-exclusive license to Xtend™ Fc technology and an exclusive license to apply Xtend Fc technology to antibodies targeting IGF-1R. MiRagen subsequently changed its name to Viridian Therapeutics, Inc.

  • In November 2020, Xencor entered into a product license agreement with a newly formed, privately held biotechnology company which received the exclusive worldwide rights to develop and commercialize three preclinical-stage Fc-engineered drug candidates for autoimmune disease—XmAb6755, XPro9523 and XmAb10717—programs incorporating an Xtend Fc Domain, a Cytotoxic Fc Domain, or both.

  • Ultomiris® (Alexion): Alexion’s Ultomiris® uses Xtend Fc technology for longer half-life, and it has received marketing authorizations from regulatory agencies in the U.S., Europe and Japan for the treatment of adult patients with paroxysmal nocturnal hemoglobinuria (PNH) and for patients with atypical hemolytic uremic syndrome (aHUS).

Xencor remains at an early development stage for its research, collaboration, and pipeline development. This is why analysts are assuming that Revenue will remain muted in the short-term, and depending on the company's success, will continue to have bigger potential over the mid-term.

I am modeling Xencor with a PT near $65 per share over the next 18-month period. This assumes 35 times EV/Revenue, including Revenue remaining flat towards $120 million for 2022. This estimate assume that Xencor will continue to progress successfully towards its milestones over the coming quarters. Like most Healthcare sector plays, upcoming news can always have a volatile impact on the SP, whether good or bad.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $620 million

  • Revenues: $123 million

  • Gross Margin, GM: 100%

  • Operating Cash Flow, OCF / Margin: ($5) million / (4%)

  • Free Cash Flow, FCF / Margin: ($1) million / (1%)

  • Shares Outstanding: 58 million

  • Milestone Rev: $50 million

  • Licensing Rev: $50 million

  • Research Collaboration & Royalties Rev: $22 million

Valuation Metrics

  • Enterprise Value, EV: $2.2 billion

  • EV/Revenues: 18 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: N/A

Zoom Video Communications


Key Points

Zoom Video Communications (ZM) had a phenomenal end to 2020. The company generated $2.7 billion in Revenue with a 55% OCF/FCF margin at $1.5 billion. For Fiscal Year 2020, the company believes it is well positioned for strong growth with its innovative video communications platform, on which customers can build, run, and grow their businesses; its globally recognized brand; and its team focused on delivering service to its customers.


Zoom Video has been a controversial company for retail investors, as the argument has been that the company's success could potentially not be sustainable in a post-COVID world. However, management guided full Fiscal Year 2022 total Revenue to be between $3.76 billion and $3.78 billion, higher than Wallstreet's average $3.5 billion estimate. Naysayers have looked at Zoom Video's substantial increase in Customers with More Than 10 Employees growth of 470% during 2020 as a red flag of smaller customers relying less on Zoom Video post-COVID. But Zoom Video still saw nearly 160% growth for Customers Contributing More Than $100K in TTM Revenue.


Zoom Video has won some very large customer accounts in 2020 for enterprise communication solutions. This is a very large addressable market, that can propel Zoom Video towards $10 billion in Revenue over the mid-term, and further long-term. This is the area that is most competitive from stalwarts like Microsoft Corporation (MSFT), Cisco Systems, Inc. (CSCO), and other smaller players like Citrix Systems, Inc. (CTXS), and RingCentral, Inc. (RNG). Zoom Video has established itself as a clear leader, based on its cloud technology.


It's easy to just say Microsoft, and think how can another company take Microsoft's market? Regulators are scrutinizing Big Tech much more so, as companies like Zoom Video (Mid Tech) are getting big enough to challenge these companies. Just look at Spotify Technology (SPOT) and Slack Technologies, Inc. (WORK) with European Union, EU, challenges against both Apple, Inc. (AAPL) and Microsoft. One could contend that even Salesforce, Inc. (CRM) acquisition of Slack is an indication of growing pressures against Big Tech, and Mid Tech's opportunity as a result.


The other issue many have with Zoom Video is its valuation. I agree that Zoom Video has a premium valuation, but like other companies that have emerged stronger from 2020, there will likely continue to be a disconnect in EV/Revenue and OCF/FCF per share multiples. On the one had, Zoom Video seems expensive as it is trading 36 times EV/Revenue, but from a scale perspective and OCF per share multiple from Cash Flow growth, the company is not necessarily expensive, even more so after the Tech sell-off of late.

I am modeling Zoom Video with a PT near $556 per share over the next 18-month period. This assumes 36 times EV/Revenue and 75 times OCF per share, including Revenue approaching $4 billion for Fiscal Year 2023. Clearly, the market is once again turning against growth as it did multiple times last year. The risk with Zoom Video is that Wallstreet looks to push valuation multiples lower, this has already occurred fairly significantly. The risk play remains on Zoom Video's abilities to continue to prove Wallstreet wrong - as Wallstreet has pitted itself against the company over the next couple of years. Recent PTs are now out for Fiscal Year 2023, and Wallstreet continues to afford Zoom Video continued robust estimates, despite the reoccurring questions of the potential. I for one will continue to look forward to Zoom Video's mid-term opportunities.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $4.2 billion

  • Revenues: $2.7 billion

  • Gross Margin, GM: 69%

  • Operating Cash Flow, OCF / Margin: $1.5 billion / 55%

  • Free Cash Flow, FCF / Margin: $1.5 billion / 55%

  • Shares Outstanding: 298 million

  • Customers with More Than 10 Employees: 467,100

  • Customers Contributing More Than $100K in Trailing Twelve-Month (TTM) Rev:1,644

  • TTM Net Dollar Expansion Rate in Customers with More Than 10 Employees: 130%

Valuation Metrics

  • Enterprise Value, EV: $96 billion

  • EV/Revenues: 36 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 68 times

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