Even though there was some crazy action in the market last week the bulls remain in charge and many stocks are breaking out to fresh highs.
In fact, the S&P 500 Index is approaching its January high …
… while the S&P 600 Small Cap Index has been inching higher since May and is trading at an all-time high right now.
Two of the underlying reasons for the broad strength are summed up in the following four charts, which show revenue and EPS trends for the two aforementioned indexes.
Here you see historical and forward revenue estimates for the S&P 500 …
The bottom line is that revenue and EPS are going up and estimates for 2019 suggest significant acceleration. Now, in aggregate, consensus estimates could be wrong. But, do you want to make a bold contrarian statement in the face of the current market and given the consensus estimate trends? I’m certainly not convinced that would be a wise move, especially given the strong results most of our positions have reported.
While we’ve seen our fair share of pops and drops this earnings season, for the most part things are going just fine. After kicking out one stock and bringing in one new one, we’re still up an average of 73% across our portfolio.
Changes this week:
AxoGen (AXGN) Moved to Buy
Instructure (INST) Moved to Hold
Updates
AppFolio (APPF) has held up incredibly since rallying after issuing its earnings report. Shares are trading near an all-time high. Revenue was up 32% to $47.2 million while EPS of $0.21 was up by 163%. Management also gave full-year revenue guidance above consensus that implies growth of around 28%. We’ve taken partial profits and are up around 150% on our remaining stake. AppFolio provides cloud-based software solutions for small- and medium-sized businesses in the property management and legal industries. Continue to Hold Half. HOLD HALF.
Earnings: Done
Apptio (APTI) has been kicking around above its 50-day line since reporting last Wednesday. Recall that revenue growth of 30.6% to $59.1 million beat by $3.4 million while EPS of $0.01 beat by $0.02. Those results were good enough to motivate at least a few analysts to bump up their price targets into the high 30s and low 40s. I still like the stock and think the business is trending in the right direction, so keeping at Buy. Apptio makes software that helps IT leaders analyze, optimize and plan technology investments and benchmark financial and operational performance against peers. BUY.
Earnings: Done
Arena Pharmaceuticals (ARNA) reported this week. Shares have stopped drifting down and are now trading around their 200-day line. The report was fine. That said, there isn’t much to get excited about right now due to the lull in news flow. Arena is still just working on trial designs. The main events to look forward to are Olorinab data in September, and an R&D day in October, which should be a significant event given all the trials going on. In bullet point format, here are the updates from Q2 2018:
Etrasimod: Next generation, oral, selective sphingosine-1-phosphate (S1P) receptor modulator intended for the potential treatment of multiple immune and inflammatory diseases.
• Ulcerative colitis (UC): Submitted meeting request to the FDA; Phase 3 planning ongoing
• Crohn’s disease (CD): Submitting meeting request to the FDA; Phase 2/3 planning ongoing
• Primary biliary cholangitis (PBC): Phase 2 trial ongoing
Ralinepag: Next generation, oral, once-daily, selective prostacyclin receptor agonist intended for the potential treatment of pulmonary arterial hypertension (PAH).
• Initiating three Phase 3 trials for the most comprehensive PAH clinical program:
o Advance Outcomes (301): Time to clinical events outcomes study in approximately 700 patients; initiated study and expect to enroll patients in August
o Advance Capacity (302): Exercise capacity study to evaluate a peak oxygen uptake (VO2) via cardiopulmonary exercise testing (CPET) in approximately 140 patients in a 7-month fixed treatment duration; expect to initiate in Q4:18
o Advance Endurance (304): Exercise capacity study measuring 6-minute walk distance (6MWD) in approximately 280 patients in a 7-month fixed treatment duration; expect to initiate in Q1:19
• Open-label extension interim trial results expected in H2:18
Olorinab: Peripherally restricted, oral, full agonist of the cannabinoid 2 (CB2) receptor intended for the potential treatment of visceral pain, specifically pain associated with Crohn’s disease.
• Completed enrollment in Phase 2 study in June, data expected in late September
Arena is still planning to go it alone with these assets, and with almost $600 million in the bank it’s in a good position to do so, for now. There’s no doubt management is trying to do things as comprehensively as possible to make sure they increase the chances of getting drugs to market without setbacks (assuming the data is good).
The conference call was dominated by talk of trial-related things and was honestly quite boring. A lot of questions just couldn’t be answered at this time, in part because the timeline in some cases is determined by the FDA. We’ll learn more in September and October. For now, expect the stock to just drift around and keep in mind that Arena has at least two potential best-in-class assets that could be huge. Keeping at Buy. BUY.
Earnings: Done
AxoGen (AXGN) was moved to hold last week after shares sold off hard following the earnings release. The major news was that revenue growth was “only” 35.7%, which was light given management’s pledge to grow by at least 40% in 2018. I went back and listened to the conference call again and it’s clear that analysts were searching for more detail on exactly what distractions there were with the independent sales agencies that made them come up light on sales. AxoGen’s management team answered as best they could, and repeatedly stated that they’re doing what they can to build out their independent sales rep network, but still plan to use independent agencies (of which there are around 19) to keep its products in certain geographic markets, especially those that are just too small to justify an independent rep.
I think management was asked the same basic question in enough different ways and kept coming back with the same answer (“We believe we are on track to achieve at least 40% growth this year”), that at this point we have to take them at their word. After all, we’re a month into Q3, and if the trends looked bad I would expect a more conservative tone. AxoGen took a big hit (down over 25% from its peak), part of which is probably due to the volatility that swept through the market the week before it reported, and part of which is due to the weaker-than-expected results. I think the growth story has been dented a little, but it’s far from broken—for that we’d need at least one more quarter of subpar results, along with reduced forward guidance.
Shares should be able to claw back some of their losses, so I think there is money to be made here before the next earnings release. And, if AxoGen hits its numbers in Q3, the stock should move up quite a bit after that quarterly earnings report. It’s a little risky, but I’m moving back to Buy. BUY.
Earnings: Done
Bottomline Technologies (EPAY) was last Friday’s new addition and we already have an earnings report! The company, which sells digital payment solutions into the business-to-business market, reported fourth-quarter fiscal 2018 results last night that beat on both the top and bottom line. Revenue growth of 13.9% to $106.5 million beat by $5.4 million while EPS of $0.35 beat by $0.05. Subscription and transaction revenue was up 20%.
Management was very bullish on the company’s growth prospects given Bottomline’s strong position in this $20 trillion market and the strong reputation the company has when it goes to bid on new contracts. One of the major points the CEO made over and over on the conference call was that its customers are increasingly competing and differentiating based on technology, and that Bottomline is a key part of their strategy.
The company has been making progress across its product portfolio, including with Paymode-X (25 new payers on the network), Digital Banking (three new customers) and Legal Spend Management (three new insurers and seven that expanded their relationship). With Paymode-X Bottomline says industry participation is really broad-based, from healthcare, government and education to property management and retail. It’s really a product for any business that wants to pay and get paid digitally.
Given that Bottomline is just entering its fiscal 2019 it didn’t stretch in terms of issuing guidance, opting instead to stick with what it’s already said, which is that it’s on track to hit its goal of $300 million in subscription and transaction revenue and $100 million to $102 million in EBITEDA over the next 12 months. The report confirmed that the favorable trends in this business remain intact, therefore keeping at Buy. BUY.
Earnings: Done
Chefs’ Warehouse (CHEF) reported last Wednesday with results that were well ahead of expectations. Revenue was up 12% and adjusted EPS grew by 71% to $0.24. Management also issued guidance for the full year, calling for revenue of $1.41 billion to $1.45 billion and adjusted EPS of $0.71 to $0.80. Both metrics straddle consensus expectations. Like many of our stocks CHEF sold off going into earnings, then popped back up to its 50-day line afterward. It’s trading around that level right now—basically exactly where it was after the report. The growth story is still good and I like the diversification that this little business lends a more aggressive growth-oriented portfolio. I also like that it is moving into “harvest” mode, with profit growth set to accelerate after years of investments in technology, supply chain, e-commerce and small acquisitions. Chefs’ is a specialty food distributor that has been supplying artisan and high-quality food products to chefs across the U.S. for over three decades. BUY.
Earnings: Done
Everbridge (EVBG) reported another great quarter on Monday. Revenue growth of 43% was well above the 37% growth expected, and EPS of -$0.18 beat by $0.04. Full-year guidance also went up to around 38% revenue growth and EPS of -$0.56 to -$0.58. Management flagged sales in the core Mass Notification solution as well as accelerating market acceptance of the Critical Event Management (CEM) suite, as well as international sales (helped by the UMS acquisition) as fueling growth.
Here’s a slide of the product lineup/market opportunity from a recent Everbridge Analyst Day if you need a refresher. Notice the increase in total addressable market (TAM) on the right, and the different modules included in each of the three main product segments (on the left):
Average selling prices are up 7% to $45,000, though CEM deals have a value of over five times this amount. Most CEM wins are with Fortune 500 companies, who want the full scope of situational awareness, integrative incident response and communications/collaboration that the platform offers.
Management talked a lot on the conference call of the benefits that come along with scale, as well as the recently-announced FedRAMP certification. This boils down to the reality that as Everbridge gets adopted by more users, and especially users in the government market, the incentive for others to sign on goes up since they don’t want to be off on some other platform that doesn’t integrate with what the government is using. In the corporate space, management talked about a large restaurant chain and a retailer who both went with Everbridge because the platform can help keep employees safe and deal with major weather events. I like that this software has broad applications across both corporate and government markets.
In short, there are a lot of good things going on with Everbridge and it seems like the story is gathering momentum. The acquisition of UMS is going better than expected. We’re up nicely on the stock (well over 200%), but I think there’s more upside. Shares are back above their 50-day line and look ready to challenge their previous all-time high of 53.42 from mid-June. Keeping at Buy. BUY.
Earnings: Done
Instructure (INST) reported last week and shares sold off fairly dramatically since guidance was a little light, as were billings. I moved the stock to buy when it was down huge, and it’s come back some since then. However, with a few analysts downgrading shares it’s probably going to take some convincing before a lot of money comes back in to the name. By “convincing” I mean a solid Q3 report. That’s a few months away, so we’re probably looking at dead money for a little while here. Therefore, I’m moving back to hold and suggest putting money to work in stocks that are working better right now. I like Instructure, we just need the stock to start working in our favor again before I move back to buy. Moved to Hold. HOLD
Earnings: Done
IntriCon (IIN) is, in the words of one subscriber, a “beast”! The stock is working exceptionally well and has doubled since I added it just two months ago. I’ve had a hold since I don’t want you chasing it. But at the same time, with a trend as powerful as this it’s hard not to. Feel free to pick up a few more shares, preferably on dips. But officially, I’m keeping at Hold. HOLD.
Earnings: Done
MiX Telematix (MIXT) reported solid results for its first fiscal quarter of 2019 but the stock hasn’t done much since. I’m keeping a close eye on this one since momentum has stalled and the stock is trading right at the level it was at prior to the blastoff rally in May. Keep Holding. HOLD.
Earnings: Done
Q2 Holdings (QTWO) reported a good quarter this week, though there were a few items from the digital banking software company’s report that that didn’t sound great on the surface, but which aren’t a concern in my book (at least, not at the moment). Revenue was up 23.1% and EPS of -$0.20 was about flat with last year’s second quarter (when EPS was -$0.19). The company didn’t land any of the big “Tier 1” banks in the quarter but did sign a number of Tier 2 and 3 banks, as well as a top 50 credit union with $6 billion in assets. Q2 has a lot of products now (I think over 40 SKUs) and is enjoying a lot of cross-selling, as well as solid momentum with Q2 Open (an open banking solution that uses APIs to allow third-party developers to build apps and services).
One of the more interesting tidbits from the conference call was that an analyst asked what percentage of banking and credit union clients have gotten to the point where their digital banking solutions are dynamic in nature enough to help drive deeper relationships with their customers (like a millennial logging in to a bank account and then using a solution to help save for a car or house, or a loan offer to help finance either one). Q2 management said 99% of them still need to make that progress! That suggests a long, long runway for growth in the digital banking space and a market that will be dramatically different a decade from now.
Q2 appears to be on track to be a major player, and one of the things that could help is the newly-announced acquisition of Cloud Lending for just over $100 million. This company is a SaaS vendor of lending and leasing software. In the words of Q2’s CEO Matt Flake, “Their solutions help lenders close more loans, close them faster and provide a better experience to borrowers throughout the process. Consumers in businesses today experienced the majority of their financial journey digitally, and loans are a key component of that journey. And while there has been substantial progress transforming digital banking systems and solutions, the digitization and automation of lending and leasing has lagged. As a result, lending remains a largely manual paper-driven process, making it inefficient for lenders and frustrating for borrowers. With Cloud Lending, Q2 looks to deliver a cloud-based next generation platform that helps lenders drive efficiencies, reduce cost and substantially improve the borrower experience.” Cloud Lending is reportedly growing faster than Q2 so it should be accretive to revenue. We’ll find our more financial details when the transaction closes, which should happen early in the fourth quarter.
Q2 gave us guidance for the year that was a little higher than previously expected ($238 million to $239.2 million). The surprises came on third-quarter guidance, which was a little light, most likely due to the shift to ASC 606 accounting. Also, cash from operations was negative for a second quarter due to delayed invoicing resulting from a new billing system. Finally, deferred revenue declined, probably because of the cadence of implementation revenue that moves on and off the balance sheet. These nuances in the business model aren’t something we’ll dig deeper into, and none of the quarterly impacts suggest a dramatic change in the health of the business. But some analysts might get hung up on them because of the way financial modeling works (thankfully I don’t spend all my time in an excel spreadsheet!).
I think the slight weakness in the stock that followed the report is due to the market digesting these nuances. But it should get over it. This is a good company with a dependable business model and a sizeable market opportunity. Shares are trading on the 50-day line and we’ve seen them top out at 64 three times now over the past two months. It could easily take some time for the next breakout to come, but I think that scenario is more likely than a big decline. Therefore, I’m keeping at Buy. BUY.
Earnings: Done
Rapid7 (RPD) reported Monday, with results that were ahead of consensus and good enough to send shares soaring to an intra-day all-time high. They settled down by the end of the session and are now trading right around previous resistance in the 33 to 34 zone. The press release gives a lot of numbers because of a conversion to new accounting standards (ASC 606 from ASC 605), but I’m going to ignore the 605 numbers because it’s just too confusing to analyze both (for those that are interested, the old 605 method makes revenue look better).
The punchline is that revenue was up 23.1% to $58.4 million (beating by $3.26 million) while EPS of -$0.13 beat by $0.06. The transition to a subscription pricing model is moving much faster than expected and demand for vulnerability management solutions is another major tailwind. These combined to push annualized recurring revenue (ARR) up 44% and prompted management to increase its 2018 guidance for ARR growth to 40% from 30%. Over 45% of customers are now on the Insights platform. Rapid7’s expanded portfolio of SecOps solutions is also working as evidenced by net retention of 122% in the quarter (meaning lots of customers adding additional solutions to what they already had). Customer additions was 10%, to 7,200, which is good, but not great.
On the downside, the company is likely to keep investing in the business (which isn’t exactly bad news), including new headquarters. This means operating cash flow should be positive this year (but a decrease over 2017) while free cash flow will likely be much lower than analysts had expected this year (closer to -$9 million than the previous estimate of roughly -$3.5 million).
Putting it all together, there’s little doubt the opportunity in front of Rapid7 is huge. The company is generating over 80% of revenue from North America but is seeing a lot of interest overseas as well (rest-of-world revenue was up 33%). The company is tapped into two of the big trends in security (security solution automation and industry/vendor consolidation), and with new solutions has expanded its market opportunity dramatically (from around $2 billion to $7 billion). Cross-selling appears to be accelerating, which is a very good sign.
For the stock to really fly, I think the market wants to see greater growth in customer count (i.e. over 10%) and tangible progress toward profitability, which might be curbed by investments over the next few quarters. We’ll just have to watch and see where the numbers come in. In the meantime, there should still be decent upside, so I’ll keep at Buy. Another plus: news that Rapid7 is going to complete a convertible note offering helps to remove concern of a dilutive secondary offering. BUY.
Earnings: Done
