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Early Opportunities
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December 5, 2022

Updates on SNOW, PBF and Select Watch List Stocks

Snowflake (SNOW) reported late last week that Q3 revenue rose 67% to $557 million (beating by $18.1 million) while adjusted diluted EPS of $0.11 beat by $0.06. Management acknowledged that consumption patterns in certain markets/geographies (tech, Asia-Pacific) have slowed and are offsetting strength in other areas (like financial services). Remember that Snowflake has a consumption-based business model so if/as users spend less time on the platform they pay less. That said, net revenue retention was still an incredibly impressive 165%, 41 new customers with product revenue over $1 million were added (+94% year-over-year) and free-cash-flow (FCF) is ticking higher. In fact, FCF ($65 million in Q3) margin of 23% is close to management’s 25% target. Big investors will notice this. Management gave initial 2024 guidance of 47% revenue growth (market was looking for closer to 51%) and FCF margin guidance of 23% (market was looking for 18%). This may be conservative, but still, the stock isn’t doing great. That said, as compared to last year (and in early 2022) it now lacks such a demanding valuation. It is a name that will take off once macro fears abate. Admittedly, timing that is challenging. For now, patient investors can continue to buy up to a half position (less-patient investors may want to steer clear if they don’t want to stomach any volatility). We’ll keep a close eye on the November low of 123. BUY UP TO A HALF

While the price of oil has been holding up just fine (until today), PBF Energy (PBF) slid below its 50-day line last week. The culprit appears to be a weakening crack spread and uncertain demand dynamics as U.S. demand tracks lower and European refinery strikes trail off (i.e., supply may be improving). On the potential flip side, there is a possible EU Russian product import ban coming up in February. On balance, the result is that West Coast refiner stocks, like PBF, are selling off. While the longer-term potential here certainly remains, as PBF has repaired its balance sheet, I’m not interested in getting tied up in an oil stock that doesn’t have any momentum. SELL

Turning to our Watch List …

Today I’m dropping Make My Trip (MMYT) and Privia Health (PRVA). Regarding MMYT, we haven’t seen any durable trend take shape, and without, it I’m not comfortable wading into the risks specific to the Indian travel market. If the wind were at MMYT’s back, it would be different. But it’s not. Regarding PRVA, the stock sold off into the fall, then management completed a secondary stock offering at 23.5 in November. This is just a messy chart and that offering price (stock was above 40 as recently as early September) tells us all we need to know. I’ll delete these two stocks from my Watch List today.

On a brighter note, shares of Watch List name Arhaus (ARHS) are looking relatively strong. ARHS made a move through overhead resistance in the 9.5 to 10 range last week. I am considering adding Arhaus to our portfolio. Even though I’m a little wary of consumer stocks like this, there are a number of higher-end brands (Lululemon (LULU), which reports later this week, also comes to mind) that are seeing their stocks do well. For now, just keep an eye on ARHS.

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.