November 9, 2023

The broad market has traded higher for eight straight sessions, the longest run since 2021. The Nasdaq is up for nine sessions.

The S&P Small Cap Index is up in five of the last nine sessions, but the last four have been down. What the ...?!!

Big picture, this isn’t great for the broad market as we want a more broad-based rally. And in theory it’s not great for us.

But the reality is our portfolio isn’t diversified along the same lines as the small-cap index. We’re not overweight financials, energy and health care (we have little to no exposure to all three) and instead are focused on pure-play opportunities that aren’t expected to trade in lockstep with the small-cap index.

Our portfolio has made very nice progress over the last week.

That said, clearly we want the small-cap asset space to get in gear.

This morning’s biggest news is shares of Duolingo (DUOL) are up nicely after the Q3 report. All the details are below.

Recent Changes

Build-A-Bear (BBW) moves to BUY

Updates

Alphatec (ATEC) pre-released a few weeks ago but the official report came out on Monday and shares had a good reaction Tuesday. The most interesting part of the call was management talking about the equity raise, and why now. The high-level answer was that with some M&A in the spine space they see an opportunity to go after salespeople and customers and it feels like time to go on offense. They need cash to do that. The company has a good history of executing and, while the market isn’t 100% behind them this time around, this move sets up potential for ATEC to do either very well or pretty poorly in 2024 (i.e. blow past expectations or fall short). I’m banking on the former, though keeping the stock at hold for a bit longer. HOLD

Braze (BRZE) isn’t likely to report until December and there’s been no company-specific news on the stock lately. As far as expectations go, we’re looking for Q3 fiscal 2024 revenue to grow at least 26% to $117.3 million and EPS to come in around -$0.13, two cents better than last year. This should set up a year where the company grows revenue by about 28% and EPS lands near -$0.37, almost 42% better than last year and putting the company on pace for first profits in fiscal 2026. BUY

Earnings Expected: Early December

Build-A-Bear (BBW) just released its movie, Glisten and the Merry Mission, on November 3. Something for the kids and/or grandkids this holiday season. Anecdotal note here: We have an 8 and 11 year old and birthday gatherings seem off the charts these days. If we had a BBW closer, I’d probably be up for changing things around from mini-golf and bowling! Anyway ... the company’s Q3 of fiscal 2024 just ended in October. The report date hasn’t been announced yet but should be toward the end of the month/early December. Consensus is calling for revenue to grow 4.2% to $108.8 million and EPS to be flat at $0.51. We moved to hold a few weeks ago as the market was looking really iffy. With the market looking better now and BBW having pulled back but holding just above the 200-day moving average line, this looks like a good buy zone. Move to buy. BUY

Earnings Expected: Early December

Duolingo (DUOL) reported yesterday after the close with results that beat on the top and bottom lines and user activity, subscribers and bookings were all nicely ahead of expectations. This was a very good quarter. Guidance was raised for 2023 (not given for 2024). Third-quarter revenue grew 43.3% to $137.6 million (4.2% beat) while EPS of $0.06 improved massively from -$0.46 last year and beat by $0.13. Monthly Active Users (MAUs) were 83.1 million (+47%) versus consensus of 78.3 million, Daily Active Users were 24.2 million (+63%) versus consensus of 22.3 million and paid subscribers were 5.8 million (+60%) versus consensus of 5.6 million. Total bookings were $153.6 million versus $137.8 million. Management talked about how much better their marketing and sales efforts are now than a year ago, and also how brand placements in the Barbie movie and on Saturday Night Live are impossible to forecast but certainly help raise awareness. On the product front both Math and Music, which launch today, will be courses in the core Duolingo app (just like Spanish, French, English, etc.). Overall a very good quarter that should have shares up nicely today (looking for a breakout above 180). The only “issue” is it’s an expensive stock. But so long as it puts up the numbers we should be in good shape. BUY HALF

Enovix (ENVX) reported Tuesday after the close and a good report sent shares up 14.8% yesterday. Highlights from my review of the quarter: Gen2 Autoline is on track for factory acceptance testing (FAT) by January, site acceptance testing and sample production in April 2024, high-volume production should begin by mid-2024. Start with batteries slated for IoT applications followed by smartphones in 2025. Analysts are in favor of a strategy shift to focus on a smaller number of really large customers. Revenue ramp looks something like $20 - $30 million in revenue next year (2024) then $110 - $120 million in 2025, ramping up to roughly $350 million in 2026 and $700 million or so in 2027. Looking for the stock to follow through on yesterday’s move. HOLD

Intapp (INTA) jumped 11% yesterday after Tuesday’s Q1 fiscal 2024 report beat expectations and management raised guidance for the year. Cloud average recurring revenue (ARR), a metric Wall Street LOVES, grew 38% to $242.5 million and now accounts for 69% of total ARR. The company now has 626 customers spending over $100K in ARR, up 20% from a year ago. Interest is high, the sales teams are doing well and the partnership with Microsoft (MSFT) is bearing fruit, especially now that those salespeople are incentivized to sell INTA solutions. BUY

Liquidity Solutions (LQDT) was last week’s new addition and there’s not a whiff of new news on the name since my report. The company operates the world’s largest business-to-business (B2B) e-commerce marketplace, connecting millions of buyers and thousands of sellers through auction marketplaces, search engines, asset management software and related services. It focuses on capital and surplus assets, salvaged goods, excess inventory and customer returns, working with major companies that include Delta, Boeing, Target, Amazon, Home Depot, Caterpillar, and Merck, as well as all manner of federal, state and local government agencies across North America. Current consensus is that Q4 (report date of December 7) revenue should grow by 10% to $82.7 million and EPS should grow 26.3% to $0.24. Looking out to 2024, revenue is currently seen growing by 8.3% to $343.6 million while EPS is seen up 7.6% to $0.99. BUY

Earnings Date: December 7

Repligen (RGEN) reported on October 31 and bucked the trend in the bioprocessing space of companies issuing gloomy reports and shares falling. RGEN rallied 17.9% after its report and the stock is on the verge of getting back into its “comfort zone” in the range of 150 – 180 (stock closed at 147.9 yesterday). Reality is that bioprocessing is still recovering but second-half 2024 is looking a lot better and RGEN is arguably the most attractive pure play in the space. Holding on. HOLD A QUARTER

Remitly Global (RELY) was whacked after it reported on November 2 (stock down 32% that day) with shares currently looking for stability around their 200-day line and showing strength in three of the last four sessions. The quarter was a mixed bag as revenue beat (up 42.8% to $241.6 million, beating by 1%) while EPS of $0.00 missed by $0.04. Higher advertising and customer acquisition costs (CAC) are a concern as that can hurt lifetime value (LTV) of each customer, i.e., how much is made off each over the lifetime of the relationship with Remitly. Management says they’re going on the offense, that they see opportunities to raise awareness of the brand and that, in concert with the partnerships with MasterCard (MC) and Visa (V) will pay dividends in 2024. So higher costs short-term to drive higher revenue long-term. That concept has merit. Since the report, director Morris Nigel has purchased about $5.8 million worth of RELY. Interesting. BUY

TransMedics Group (TMDX) soared 50% on Monday after the Tuesday evening Q3 2023 earnings report showed all segments (heart, liver, lung) doing better than analysts expected and the aviation business not looking like the total disaster TMDX stock has implied it will be. Management isn’t willing to give any formal guidance on aviation revenue, profit margins, etc. since it’s too early (their words) to say for sure. Rather, focus is on growing revenue and margins in the business and they’re expanding the fleet and staffing to achieve those goals. It appears short flights could generate $25-$30K whereas longer ones could be up to $100K. A very good quarter that DRAMATICALLY increases confidence in the business outlook and the aviation component. Keeping at hold and looking for TMDX to keep showing strength. HOLD A QUARTER

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

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