Sea Regains Momentum, IBM Goes Quantum Crazy
To begin, an unequivocal mea culpa regarding last week’s mix-up on the ticker for Fisker (FSR). I have a long story and a short story but I will spare you both. Suffice it to say that I relied on unreliable information. No excuse for not double-checking.
While the market continues to move forward, The “Buffett Indicator,” which takes the broadest Wilshire 5000 Index and divides it by the annual U.S. GDP, is now at a record high. In doing the math, the Buffett Indicator stands at about 194%. This figure is well above the 159% seen just before the dot-com bubble.
So it’s not just the big tech stocks that look a bit ahead of themselves. Over the past year, the combined revenue of the five biggest U.S. tech companies grew by 20% to reach $1.1 trillion. Their aggregate profit rose by 24%, and their combined market cap soared by half to $8 trillion. Incredible.
I thought I would use this update to dive into a bit of detail about two Explorer stocks.
Sea Limited (SE) has been a classic blue ocean stock over the last two years. Its core market in Southeast Asia, with 650 million tech-savvy, younger people; its partnership with Tencent, giving it rights to market Tencent’s gaming products in the region; the explosion of its e-commerce sales in part induced by the pandemic; and finally, its move in to fintech and payments through SeaMoney, are all among the many reasons to like the company and the stock.
In some ways it seems to be following the Amazon model of eschewing profitability and instead focusing on growing revenues and moving into new markets. Its net loss in the first quarter of 2020 was $0.52 per share. But total adjusted revenue was up 58% year over year. A key question is whether Sea can replicate this growth in Latin America and India.
Financially, Sea has been able to leverage its increasing stock price to raise substantial capital as it has about $3.5 billion of cash on its balance sheet.
They will need this and more as the company continues to pour money into marketing expenses. In the last reported quarter, sales and marketing expenses jumped 87% and research and development soared 139%. It helps that Sea’s gaming arm, Garena, produced substantial free cash flow but Sea has also issued a lot of new shares.
Between March 2017 and September 2020, the company almost doubled the number of shares outstanding. Some of Sea shares’ valuation numbers are amazing. For example, its share price is trading 169 times its book value.
International Business Machines (IBM) is a more conservative Explorer stock but it is nice to tuck some of these forgotten value blue chips in your portfolio. It is certainly not as nimble as we would like but there are positive trends that, with time, should boost the stock.
Just last week, IBM announced that it has made significant improvements to its quantum computing software. The company suggested that it would see performance increase by a factor of 100. In other words, IBM expects its software to perform 100 times better on its existing quantum computing hardware.
Equally impressive is the road map that IBM laid out for its quantum computing hardware. It is on track to release its 127-qubit IBM Quantum Eagle processor later this year. That’s quite a leap over its signature 27-qubit quantum processors.
As a reminder, qubits are the basic units that enable a quantum computer to function. It’s the quantum equivalent of the “bits” that power our laptops and desktop computers. The more qubits, the more computer processing power. Even better, IBM plans to have a 433-qubit quantum computer by next year, tripling qubits from 2021 to 2022. And by 2023, IBM expects to develop a quantum computer with 1,000 qubits.
As impressive as this all is, I wonder just what the Chinese are up to these days in quantum computing.
Speaking of China, tomorrow is the Chinese New Year holiday. It marks the end of winter and the beginning of the spring season.
The coming year is the Year of the Ox.
Position Updates
Afterpay (APT.AX) shares tacked on 14 points this week to move from 144 to 158, though it pulled back a tad yesterday. This has been a great story and we have recently taken some profits. I’m going to keep this a hold for now as we await the next earnings report. This momentum stock is growing fast but its valuation is quite rich. I suggest you take partial profits here if you have not already done so. HOLD A HALF
Cloudflare (NET) shares jumped from 83 to 91 this past week in anticipation of releasing fourth-quarter 2020 results today. Identity and security needs continue to make this a viable and even preferred cloud play. Think of it as an Internet infrastructure play that helps deliver and secure the data and services traveling across the Internet. I will keep NET a hold at these levels and again recommend that you to sell some shares to lock in some profits. HOLD A HALF
ElectraMeccanica (SOLO) shares continue to face some volatility but finished slightly up for the week. Like many electric vehicle plays, this stock is ahead of the fundamentals, which is why I have been recommending taking some profits. SOLO recently announced that the company is expanding its retail footprint to three new West Coast locations in the United States, slated for a March opening. These additions will bump the company’s total retail location count to 13 across 10 major markets. This is a speculative idea that will attract some serious media attention into 2021. HOLD A QUARTER
Fisker Inc. (FSR), recommended just last week, announced yesterday that it would report its fourth-quarter and full-year 2020 financial results after market close on February 25. While Tesla has about an 80% market share of U.S. electric vehicles sales, competitors are coming alive, from giants like Ford (F) to smaller, more niche players that are now being largely overlooked by the market. One such company is Fisker, a company headed up by luxury auto veteran Henrik Fisker and based in Manhattan Beach, California. Fisker’s first product is the Ocean, a mid-priced SUV with modern, upscale styling and flair, and full of recycled materials and the latest gadgets. A production-intent prototype is slated for a summer 2021 unveiling.
I like this company and stock for four reasons.
First is the Ocean’s price point, starting at $37,500, which seems to me to be a sweet spot for a midsized five-person EV SUV. Second, Fisker has logged over 10,550 reservations for the Ocean and has $1 billion in the bank to fund its launch in the second half of 2022. Third, I like its model of outsourcing the production of the EV to Magna much like Apple lets Foxconn assemble the iPhone.
Finally, unlike many other EV-related SPACs (Special Purpose Acquisition Companies), Fisker has not moved significantly beyond the SPAC IPO price. BUY A HALF
Foley Trasimene Acquisition II (BFT) (merging with Paysafe) shares lost a little ground this week.
This company is a SPAC formed in October 2020 by Bill Foley, who has been involved in more than 100 acquisitions and many spinoffs. His success stories include Fidelity & Guaranty Life, which he took over in 1984 and made into a Fortune 500 company, Black Knight, and Dun & Bradstreet.
Late last year, Foley Trasimene signed an agreement and plan of merger with Paysafe Group. Upon closing of the transaction, the newly combined company will operate as Paysafe and plans to list on the New York Stock Exchange under the symbol PSFE. Founded in 1996, Paysafe, based in London, is a payments platform that connects businesses and consumers across 70 payment types in over 40 currencies globally. This SPAC will receive more attention as it nears a merger with Paysafe; this could work out well. I would add that this an aggressive idea so I would suggest you put in place a 20% trailing stop loss. BUY A HALF
International Business Machines (IBM) shares were up slightly, reaching 122. This story will take some time to develop as IBM is increasing its cloud and AI portfolios through acquisitions and strategic partnerships. CEO Arvind Krishna expects the cloud industry to soon reach $1 trillion, as only 25% of workloads have been moved to the cloud so far.
IBM stock is trading at just over 11 times projected earnings, which is less than half the average for the S&P 500 index. This is a solid, conservative growth play to begin 2021 and on top of all this, IBM offers a 5.3% current dividend yield. I encourage you to buy IBM as a great core holding if you have not yet done so. BUY A HALF
LogiQ (LGIQ) shares were choppy this week but up slightly, though they’re underperforming so far this year after gaining ground in late 2020. LogiQ is a New York-based leading global provider of e-commerce, mobile commerce, and fintech business enablement solutions for three big markets: Southeast Asia, Europe and the United States. LogiQ’s stock is an aggressive idea that is trading at under four times 2020-projected revenue. I would be a buyer here but only incrementally and if it doesn’t start showing some momentum, I will likely move this to a hold. BUY A HALF
NeoGenomics (NEO) shares finally made a decent move this week, going from 52 to 58 after treading water over the past month. l moved NEO to a hold pending the stock developing an uptrend. NeoGenomics is a leading operator of a network of cancer-focused testing laboratories in the United States, Switzerland, and Singapore. As the world’s leading oncology testing company, revenue should accelerate in 2021 as the pandemic recedes and pent-up demand drives catch-up in-person testing. This is an aggressive play in a critical, high-growth market. HOLD A HALF
NovoCure (NVCR) shares continued their run to follow up last week’s surge from 157 to 174 to close yesterday at 182. Two weeks ago, the company released preliminary numbers for calendar 2020 with $494 million in net revenues, representing 41% annual revenue growth. NovoCure also launched three new clinical trials, expanding its development pipeline to include eight ongoing global studies. Yet this is still a relatively small company and its Tumor Treating Fields delivery system – for glioblastoma, the most common primary brain cancer – is gaining traction. I rate this stock a buy for long-term investors who have not yet purchased shares. BUY A FULL
Sea Limited (SE) shares are now firmly in an uptrend, soaring this week from 245 to 271. Year-to date, the shares have gone from 196 to 271 and the stock is up five-fold from its lows in March of last year. Sea is Southeast Asia’s biggest gaming, e-commerce and payments firm with more than 40 million daily active users in a region populated by 655 million tech-savvy consumers. There is more on Sea’s prospects in the introduction to today’s update. I’m maintaining a hold rating on the stock but feel free to take some profits from time to time on this impressive stock. HOLD A HALF
Taiwan Semiconductor (TSM) shares increased from 126 to 134 this past week as the chip shortage continued. The lack of chips is hitting the auto sector hard as electric vehicles contain about 3,000 microchips and China is taking measures to stockpile chips and purchase semiconductor fabrication equipment as it struggles to keep up with the latest technology. Taiwan Semiconductor is the undisputed leader in this sector and announced it will raise capital expenditures to $28 billion in 2021, a 47% year-over-year increase.
Taiwan Semiconductor dominates global chip making with a market share over 50%. The chip-making business is both capital and brain intensive with half the company’s workforce having postgraduate degrees. The company delivered an impressive return on equity of 31% with operating margins in excess of 40% in its most recent quarter. I maintain a buy rating on the stock. BUY A HALF
Virgin Galactic (SPCE) shares have gained 158% in the past three months though the stock ticked down a couple of points this past week as UBS downgraded SPCE from buy to neutral based on valuation. We recently sold a half position and will let the remaining half position ride. The stock may very well be ahead of itself. On the positive side, publicly traded companies in the space sector are limited and there are three ETFs being planned for this sector, which will clearly generate demand. Given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I will keep this stock a hold but you should feel free to sell some shares based on your time horizon and risk tolerance. HOLD A HALF
