Earnings Review - Week of 03/19/2021

Psalm Chapter 23 verses 1-3 state, "The Lord is my shepherd, I lack nothing. He makes me to lie down in green pastures, he leads me beside quiet waters, he refreshes my soul. He guides me along the right paths for his name's sake."

For me, the word of God truly is a guide to all of life's seasons and events. During times of difficulty, God's word is refreshing and true. I often find myself in the midst of a frustrating situation, already knowing where my fault lies, and recognizing from His truth, how I have errored. During times of success, I am constantly reminded to not get too caught with myself (danger-danger), and to always be humble for all that I have.

As earnings season is coming to a close, there sure are moments where select companies require more challenging decision making. It's during these times, that I consider the word guidance, and think about how fractured our information system really is. Far too often, there is no guidance regarding truth, which is what reduces conflict and division.

This week's earnings review includes CrowdStrike Holdings and Lordstown Motors. On the one hand, we have a rock solid business as usual report; on the other, a challenging situation with strong negative claims and accusations regarding the business.

CrowdStrike Holdings

Key Points

CrowdStrike Holdings (CRWD) had a tremendous final quarter capping off a very strong Fiscal Year 2021. The momentum is poised to continue and the company is in a position to set its targets on leap frogging competitors including FireEye, Inc. (FEYE), McAfee Corp. (MCFE) and Palo Alto Networks (PANW) over time. The company finished the year with Revenue up 82% to $875 million, driven by a parallel increase in Subscription Customers to 9,900, with Annual Recurring Revenue growing to over $1 billion.

Average Revenue growth over the next two Fiscal Years is anticipated at 42%, towards $1.8 billion. CrowdStrike affords a very steep premium versus its peer group, but factoring for growth, no one is close to what the company has accomplished and is expected to continue seeing. Peers like Microsoft Corp. (MSFT), VMware, Inc. (VMW), and Palo Alto Networks are all anticipated to witness annualized growth of around 13% the next two years. CrowdStrike has already leap frogged BlackBerry (BB) and will soon be seeing Revenue greater than FireEye as their growth expectations are much less robust.

A major bright spot for CrowdStrike has been the company's Cash Flow inflection. OCF has improved from (9%) in 2019 to 41% in 2021, while FCF has improved from (25%) to 41% during the same period. Gross Margin has expanded from 65% to 74% during this time as well, and from 35% back in 2017. Based upon Revenue growth expectations, CrowdStrike will likely be able to sustain these margins and/or expand them further.

Despite all of this robust performance, CrowdStrike is difficult to value. I am modeling the company with a PT near $260 per share over the next 18-month period. This assumes 36 times EV/Revenue and 90 times OCF per share, including Revenue approaching $1.8 billion for Fiscal Year 2023. I have taken a more conservative approach assuming a 40% OCF margin over the mid-term.

The average EV/Revenue multiple for CrowdStrike's peers is 7 times, while the average OCF per share is around 34 times. Based on growth prospects and scale, Palo Alto Networks is the closest peer and trades 22 times OCF per share, Microsoft is trading 25 times. To justify a mid-term OCF per share multiple north of 50 times, and as high as 65 times, CrowdStrike is going to need to see sustained Revenue growth towards 30% or higher, which is definitely achievable. However, EV/Revenue will remain elevated towards 25 times in such a scenario. If Cash Flow expands further, multiples may come down quicker.

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

  • Net Cash Position: $1.2 billion

  • Revenues: $875 million

  • Gross Margin, GM: 74%

  • Operating Cash Flow, OCF / Margin: $357 million / 41%

  • Free Cash Flow, FCF / Margin: $356 million / 41%

  • Shares Outstanding: 224 million

  • Subscription Customers: 9,900

  • Annual Recurring Rev: $1 billion

  • Dollar-Based Net Retention Rate: 125%

  • Subscription Rev: $805 million

  • Professional Services Rev: $70 million

Valuation Metrics

  • Enterprise Value, EV: $42.4 billion

  • EV/Revenues: 48.5 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 122 times

Lordstown Motors

Key Points

Lordstown Motors (RIDE) has had a tumultuous week to say the least. It all began with the Hindenburg Research short report on March 12th, and then culminated with the company's earnings report for the year this past Wednesday.

First, I of course have reviewed all of Hindenburg's claims - I was actually going to publish a response to it, but decided not to as I focused on other tasks to optimize my time. I feel that Hindenburg's focus on E Squared Energy Advisors was a very weak and feeble attempt. E Squared Energy Advisors Advisor Group Client List is shown below.

The fact that the company isn't fully engaged with electric vehicle, EV, OEMs right now as Hindenburg uses as its key claim, is not the issue. The bigger issue would have been if their business overall was misleading based on any misrepresentation of clients. E Squared Energy Advisors represents 14,000 of the LOIs out of Lordstown Motors 100,000, and the remaining other parties mentioned reflected around 4,000. Based on the company's client list and access to capital, it is clear that they are expanding their energy management services. The client list substantiates their ability to conduct business. Hindenburg focused on a gap in experience, but the client list tells a different story, and substantially weakens the claim.

The other major section from Hindenburg focused on the CEO Steve Burns credibility through personal attacks and "former employee" interviews; as well as on the hub technology, the fire issue this past January, among others. Attacking Steve Burns credibility is weak as well, especially poaching college records from over 30 years ago, when Mr. Burns has been leading Workhorse Group (WKHS) for over a decade. The vehicle catching fire was what Mr. Burns refers to as a "mule" vehicle meaning it was not a beta version, there are plenty of videos of evidence on beta performance, more on that in a minute. Hindenburg relies on former employees, and competitive technology component suppliers/partners to build negative sentiments. These are individuals and parties that do not share in seeing Lordstown Motors succeed, so claims based on biased entities are highly suspect.

The timing of the short report is highly suspect. If Hindenburg wanted to really blow up Lordstown Motors, they would have waited towards the company's milestone timing to Start of Production, SOP. By getting ahead of the earnings report, and pushing the SP lower at this time, there is ample time for other catalyst events to pop the stock higher. I view this as a quick short-term strategy; the SP has dropped from $24 to just below $13 at the low point providing for ample gains.

During the earnings report, Lordstown Motors provided an overview of where they are as a pre-production company. They have been consistently transparent that despite the anticipated potential and nearing towards SOP, they still remain in development. For investors, the most important items to measure and track the company on are the release of beta products to customers, the San Felipe 250 race in Baja Mexico, and ultimate SOP in the fall of 2021. All these milestones were reaffirmed.

Having customers beta test the Endurance will lead to firm orders assuming durability and operations meet or exceed expectations. The race in Baja Mexico is one of the toughest races for a pick up truck to attempt, and seeing the Endurance perform and finish this race will also be a major testament to its success. These events will be occurring over the next couple of weeks to month with betas being released potential customers and the race in mid-April.

Management also mentioned that they will be ramping up CAPEX and expect to have over $200 million cash by the end of the year. This led to questioning as to the increase so quickly versus the prior initial guidance during the SPAC merger announcement. For the SPAC merger announcement, just less than $300 million was expected to be spent including negative operating expenses and CAPEX through 2023. The operating expenses for 2021 are consistent, but the ramp up in CAPEX is substantially higher, even considering the spread that was initially disclosed through 2024.

Lordstown Motors management has justified this ramp up to meet 60,000 annual vehicles being produced sooner than later. There's probably some higher cost investments that were not accounted for, management discussed tooling needs and other equipment considerations on the call. With 100,000 LOIs, if the Endurance proves highly successful this year, then having more scale to produce and getting ahead of the demand curve is prudent.

Lastly, the company also mentioned that a second vehicle prototype, an electric van will be unveiled later in Q2 2021, which leverages the Endurance skateboard. I find this very intriguing especially as Mr. Burns left Workhorse Group. I view the transfer to Lordstown Motors as an indication of opportunistic motive, especially now that it has been confirmed that Workhorse Group did not get the United States Postal Service, USPS, contract - this was a long-shot to begin with as the USPS was not going to go completely EV immediately, let alone over the mid-term.

I am modeling Lordstown Motors with a PT near $43 per share over the next 18-month period. This of course assumes that they do indeed meet their schedule and milestones, including 5 times EV/Revenue and 250 times OCF per share. I am leaving the Revenue projection at $1.7 billion for 2022. The company's Stock Price, SP, has been hit hard over the past month dropping from $24 to today's $13.30. I have averaged my cost basis to $17.60.

Getting back to Hindenburg's timing, I think that they focused just before the Q4 2020 report to instill fear and push the SP lower as a result to make their gains. However, they were careful to time it now versus later as Lordstown Motors will have a lot more information the upcoming months to garner stronger orders and get momentum moving towards SOP. If Hindenburg was more confident in their work, they would have waited, similar to what they did with Nikola Corp. (NKLA). The timing of this short hit gives Lordstown a lot of time to get its SP back up to where it will likely recover, with positive catalysts in the short-term.

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

  • Net Cash Position: $630 million

  • Revenues: N/A

  • Gross Margin, GM: N/A

  • Operating Cash Flow, OCF / Margin: N/A

  • Free Cash Flow, FCF / Margin: N/A

  • Shares Outstanding: 179 million

Valuation Metrics

  • Enterprise Value, EV: $1.7 billion

  • EV/Revenues: N/A

  • Net Debt/OCF: N/A

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

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