Cabot Stock of the Week Issue: May 6, 2024

Calm has been restored on Wall Street in May after a tough April. But as I’ve written several times in recent weeks, pullbacks – even those of more than 5% – are perfectly normal in bull markets and don’t necessarily signal something more ominous. Yes, inflation and the Fed are still looming, and geopolitical turmoil is rampant, with Gaza, in particular, front of mind these days. But there’s always something to “worry” about in investing. Best to pay close attention to the charts and what’s actually happening with your stocks. And right now, all that’s showing is one down month (about 4% in the S&P 500) after five straight up months. That’s not really cause for panic.

So this week, we keep our foot on the growth pedal by adding a formerly very familiar name (it had a series of Super Bowl commercials that pushed the envelope) that has found new life thanks to – you guessed it – artificial intelligence. It caught Tyler Laundon’s attention, and he recently added the stock to his Cabot Early Opportunities advisory.

Here are Tyler’s latest thoughts on it.

GoDaddy Inc. (GDDY)

There is a lot I could write about GoDaddy (GDDY), but the main thing that attracted me to the stock is the recent launch of the company’s AI product “Airo.”

I’ll get to details on that in a minute. First, the high-level review of the business.

GoDaddy’s main business is registering internet domain names and hosting websites. It’s one of the biggest players in that market.

There are a lot of different products and features that make a difference when entrepreneurs and businesses are deciding what domain/hosting company to work with. GoDaddy has just about everything that matters.

Solutions range from website-building tools and templates, to privacy, domain transfer abilities, competitive pricing and more.

Behind the scenes, GoDaddy breaks its business into two segments. The larger segment, Core, generates around 66% of revenue (domain registrations, renewals, hosting, security, etc.) while Applications and Commerce (proprietary software, 3rd party email, productivity, commerce and specialty solutions) make up the balance.

It’s now a slow but steady and profitable growth business. Revenue was up 4% to $4.25 billion in 2023 while EPS jumped to $9.20.

Current estimates (updated since last week’s Q1 earnings report) suggest revenue will accelerate to 6.5% this year, then 7% in 2025.

In Q1, growth for the all-important bookings figure picked up to 9.5% versus expectations of about 6%. That suggests management’s decision to keep full-year guidance the same is likely conservative.

One of the wildcards that could move the needle and isn’t yet priced into estimates is GoDaddy’s new AI product, Airo.

The tool is specifically aimed at helping customers, including a lot of entrepreneurs and solo creators, get their websites up and running faster. One of the challenges to this group is that they have an idea or concept for a business but get stumped when trying to implement it.

Specifically for the solo creators, Airo supposedly helps a ton in the creative process. It can help choose a domain name, select a website template and create the site, write text, synch marketing schedules across social media platforms and create social media captions.

Help overcoming these barriers is potentially huge. And while it’s early days, Airo seems to be helping.

On last week’s Q1 earnings call (results were slightly better than expected) management said Airo, which began to roll out to new customers in April, is showing high website attach rates.

The product will roll out to existing customers soon, and then internationally. Management talked at length about how the company is using data to better understand how to charge customers for all the features Airo offers and how early results show more customers opting for a website when offered Airo.

This is interesting when coupled with a recent bump in transaction fees across the customer base as GoDaddy tries to bring fees up closer to competitors (it has historically had relatively low fees).

For somewhat larger customers focused on e-commerce, Airo helps address three pain points: managing real-time inventory, online ordering and tip management.

Last year GoDaddy ran a survey and found only 11% of respondents had used generative AI tools. That number today is north of 70%.

You don’t need to be a data scientist to understand that a more engaged customer base and AI tools to create better websites faster should be good for GoDaddy.

As for the stock, GDDY came public in 2015 at 20 and had a good early run. Then came a roughly five-year period when the stock didn’t make any sustainable upside progress, though it avoided most of the truly harsh drawdowns affecting most other growthy names.

The recent change of character followed the November 2 earnings report, after which GDDY jumped 14% to a new all-time high above 85 then kept running north of 100.

There was a little soft spot in January, but momentum picked up again until GDDY hit 127 about a month ago. Last week’s earnings report coincided with a little dip, and since then, shares have popped right back up to recent highs near 127.

Current Recommendations

Changes Since Last Week: None

No changes this week, as most of our stocks were either up or flat, as a few still await forthcoming earnings reports. Again, with a bloated portfolio, we will be looking to trim in the coming weeks … but don’t want to do so haphazardly. We’ll likely cut a position or two on signs of weakness.

Fortunately, there wasn’t much weakness in our portfolio this week, and a few stocks (Cava Group, Core & Main, Main Street Capital) have really been on a tear. Here’s what’s happening with all our holdings.

Updates

Alamos Gold Inc. (AGI), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down marginally along with gold prices. The stock hasn’t budged much since reporting earnings late last month. The gold miner achieved record quarterly revenue of $277.6 million, up 10% from Q1 of 2023, thanks in part to record gold prices and its own 6% uptick in production, to 135,700 ounces. But while AGI has been rather dormant in recent weeks, it’s still near a decade high and will likely remain a solid play on gold’s resurgence as both geopolitical fears (wars in Gaza, Ukraine) and Fed/inflation concerns are driving investors to gold, a traditional safe harbor. BUY

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, was up from 119 to 122 as it continued to draw strength from its recent earnings report. Here’s Tom with the details: “This one-of-a-kind life science property REIT, which owns properties in highly sought-after innovation clusters throughout the country, reported strong earnings last week that beat expectations. Adjusted funds from operation grew at 7.3% over last year’s quarter, and it raised the quarterly dividend by 5%. Occupancy and the rate of acquisitions reflected a solid business and the dividend hike showed confidence. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties.” HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was flat this week after a big rebound (+11%) the week before. There was no news. We have a 47% gain on AEO shares in just over six months. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was flat this week. There’s been no news lately for the U.K.-based life insurance and investment management firm. The stock has 17% upside to Bruce’s/my 14 price target and continues to be a reliable performer for us. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was flat this week, along with the market. BX remains a very strong Bull Market Stock (a phrase Mike coined), and as long as the bull market remains intact, this stock should continue to thrive. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, gave back most (but not all) of its gains from the previous week, as the stock continues to ping-pong around. But it’s still more than doubled in the last year, so a pause is normal. This has been one of the biggest AI winners and is one of the rare big tech companies that pays a solid dividend (1.64% yield). There’s a lot to like here in the intermediate to long term despite the recent pause; keeping at Buy. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, is on fire, and our timing appears to have been perfect! After a 15% run-up last week, the stock added another 7% this week. In his latest update, Mike wrote, “CAVA certainly has the look and feel of a new leader, though it’s also a bit out of control—after testing and holding the 60 level during the worst of the selling two weeks ago, the stock (along with some growth-y restaurant peers) soared back to new high ground … only to give up a chunk of that move this week after some sour earnings news in the restaurant sector (especially from Starbucks on Wednesday). We’ll see how it goes, but net-net, CAVA is still well off its recent lows, the overall uptrend is intact and, of course, the growth story is hard to beat. We’re not anxious to average up given the volatility and the market environment, but if you don’t own any, we’re OK with a nibble on CAVA here. Earnings likely won’t be released until late May.” BUY

Core & Main (CNM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a good first week in our portfolio, lifting about 3.5%. It’s an infrastructure play, and while the story isn’t sexy (Core & Main is one of two nationwide distributors of pipes, valves and fittings, storm drainage and fire protection products as well as water meters), it’s solid and reliable as the U.S. pours money into improving its decaying infrastructure. The stock has clawed its way back near all-time highs it hit in early April. A break above 60 (i.e., new turf) would be quite bullish. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, was up 3% this week and has rebounded nicely since dipping to the low 280s in mid-April. Here’s Mike’s latest take on it: “CRWD has been quiet on the news front of late, though it is hitting the conference circuit this month ahead of earnings on June 4. The overall story here remains the same, with a best-in-class cybersecurity platform leading to outstanding sales and free cash flow growth as firms of all sizes move to protect their ever-growing technology and data. Indeed, just this morning the company announced that Amazon is replacing many point solutions and standardizing on CrowdStrike’s Falcon platform, while CrowdStrike itself is deepening its ties with Amazon Web Services. And it also said it’s partnered up with Tata Consultancy Services, one of the largest IT services firms in the world, which will offer and get clients up and running with Falcon. (Outside of the tech field, there are rumblings that the huge February hack of UnitedHealthcare’s technology unit, Change Healthcare—which handles 50% of all U.S. medical claims (!)—is only going to accelerate cybersecurity spending in that sector.) As for the stock, it’s been tedious but has remained north of its February lows as it attempts to round out a new launching pad. We’ll continue to hold our remaining shares.” We will too. HOLD

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, got mixed reviews on earnings last Thursday but is getting a nice bump this morning. Revenues beat estimates by 4.6%, although earnings fell 6% short. The online sports-betting company did raise full-year revenue guidance to a midpoint of $4.9 billion (up from $4.775 billion), however. That prompted at least one analyst (Benchmark’s Mike Hickey) to nudge his target up from 50 to 52. Also, while the EPS losses (-$0.30) were more than expected, they were a big improvement from the first quarter a year ago (-$0.87). So, it seems Wall Street is coming around to the results, and shares are up from 42 to 43 since the report. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, got a nice shot in the arm from earnings last week. Here’s what Tom had to say about it: “The pharmaceutical company stock jumped more than 6% on Tuesday morning after reporting earnings. Although the company missed slightly on revenues, earnings per share were much better than expected and, even more importantly, Lilly significantly raised guidance for this year. The main reason is that its weight-loss drug revenues obliterated forecasts with $517.4 million in revenue for the quarter versus an expected $373 million. The company is also aggressively expanding production for future quarters and raised its 2024 revenue projections by $2 billion. The weight-loss drug is a monster and looks like a mega-blockbuster, and the Alzheimer’s drug should get the nod in the next few months.” The stock is already way more than a double for us. But given its leadership position in the booming new weight-loss drug subsector, it’s still a Buy. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, had a good but extremely volatile week – getting a major one-day bounce last Tuesday when a report came out that the Drug Enforcement Administration (DEA) was on the cusp of its long-anticipated cannabis rescheduling approval, which would make marijuana a Class III drug instead of its heretofore Class I designation, lumped in with heroin, cocaine and basically all the most harmful drugs out there. But the DEA hasn’t pulled the trigger yet, so shares immediately slumped back. In the aggregate, however, the stock is about 6% higher now than it was a week ago, with potentially much bigger gains to come if and when rescheduling does get approved. Also, Green Thumb reports earnings this Wednesday, May 8. BUY

Honda Motor Co. (HMC), originally recommended by yours truly in the Growth & Income Portfolio of Cabot Value Investor, was up about 2% this week on no news. The automaker reports earnings this Thursday, May 9. Revenues are expected to grow by 21%, which would be a third straight quarter of accelerating revenues (from +12% to +16% in the last two quarters); that’s one of the more bullish “tells” we like to see in a stock. Meanwhile, the stock is dirt-cheap, which is why I added it to the Cabot Value Investor portfolio; it trades at less than 8x earnings, at a mere 0.46x sales, and with a microscopic 0.04 EV/EBITDA ratio. We’ll see what happens with earnings on Thursday, but it’s a strong buy regardless, with a price target of 45. BUY

International Business Machines (IBM), originally recommended by Carl Delfeld in Cabot Explorer, finally got its act together and was flat since we last wrote following an earnings implosion the week before. A mere 1.5% revenue growth was uninspiring, despite being offset by 73% EPS growth. So the stock plummeted from 184 to as low as 164, though it has since bounced back to 167. We downgraded to Hold on the weakness last week. Let’s see if it can continue to claw its way back this week. HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has steadily recovered after a mid-April retreat, advancing back to 381 after bottoming at 366. There’s been no news. But the maker of the da Vinci robotic surgical system is coming off a strong earnings report in late April and received approval for its new da Vinci 5 system in March. Though full-scale launch won’t come until possibly next year, it’s a potential game changer for the company, and investors have taken notice, pushing ISRG shares up 37% in the last six months. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, just keeps hitting new all-time highs ahead of this Friday’s (May 10) earnings report. In his latest update, Tom wrote, “The Business Development Company didn’t get hurt at all in the rough market. The stock isn’t interest rate sensitive because it has a higher yield, and its companies perform well in a strong economy. Although MAIN is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and most valuation measures are below the 5-year average. It has also shown resilience in the tough market over the last week. The safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a wild ride this past week, dipping to four-month lows at one point. But, net-net, the stock is up 2% since we last wrote. Why the rollercoaster? First, the company reported another strong quarter in late April, with revenue +16% and EPS +20% year over year. Particularly encouraging is that its generative AI revenue (the biggest reason for the company’s resurgence in the last 18 months) is really taking off. Then, the stock pulled back along with the market early last week. Now it’s up again after a report that the company is training a new, in-house large AI language model to compete with Google and OpenAI. A preview of the new model, referred to internally as MAI-1, could come as soon as its Build developer conference later this month. Regardless of the “when,” it’s the latest evidence of Microsoft’s leadership position in AI, and last month’s stronger-than-expected earnings report demonstrates how powerful AI has become in driving the company’s top- and bottom-line growth. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, bounced back in a big way after dipping to the mid-550s on earnings last week. The stock was up 7% since we last wrote. The swift bounce-back isn’t a surprise (in fact, I predicted one in this space last week!), considering there wasn’t much wrong with the earnings report: Revenue grew 15.2% to $9.4 billion (beating by 1.3%, or $125.2 million) while EPS grew 83.3% to $5.28 (beating by 16.7%, or $0.76). Net streaming additions was 9.3 million, way ahead of expectations. The one caveat was that full-year guidance came in a bit light, and the company said it would stop sharing subscriber numbers, drawing suspicion. Still, Netflix’s position as the dominant streamer is clearer than ever, and the stock still trades $100 per share below its late-2021 peak. There’s plenty more upside here. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has been rangebound (between 122 and 129) for about six weeks. The other of our two weight-loss drug breakout stars (along with Eli Lilly), shares of the Danish drugmaker have hit the pause button after a huge run-up in 2023 and early 2024. In his latest update, Carl noted that the company “announced it was reducing prices for its products in Denmark by roughly a third. Goldman Sachs projects the market for obesity medications could grow to $100 billion in the next decade.” BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is in full-on recovery mode, tacking on another couple points last week after dipping below 59 two weeks ago. In his latest update, Mike wrote, “NTNX is hardly super-strong, but given the damage seen among growth, software and now AI stocks, we think the action has been solid—to this point, in fact, the stock has only given up just over one-quarter (27%) of its entire October-March advance at its recent lows, which is among the best out there among leading titles. (As a comparison, NVDA has given up as much as 37% of its run, and as mentioned earlier, the Nasdaq gave up as much as 33%.) Of course, good-looking stocks can go bad in a hurry in a weak environment, so we’re certainly not declaring victory, but the action so far is clearly resilient. Fundamentally, the move to a subscription (recurring revenue) model adds reliability to the results, which is a good thing, and we’re thinking the company could be gaining more business than expected from VMware as that firm’s clients look to diversify after Broadcom’s acquisition. Long story short, we’ll stay on Buy, though we favor keeping new buys on the small side given the market.” BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, pulled back below 66 after touching as high as 68 last week. The company reported earnings last week, which were solid but failed to wow investors. First-quarter EPS improved 27% year over year, while revenues increased 10%. Despite the improvement, earnings actually fell 11.5% short of analyst estimates, hence the modest dip in the stock price. But the trend toward digital payments remains: According to Boston Consulting Group, the worldwide fintech sector is expected to be worth $1.5 trillion by 2030. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, has recovered quite nicely from its early-April swoon and got another boost from earnings last week. Here’s what Mike had to say about it: “There’s no question interest (and mortgage) rates are going to impact perception of Pulte’s stock, but so will the firm’s actual results—and after another great quarterly report that featured strong orders and backlog, earnings estimates have again been bumped up: In early 2023, the outlook for 2024 was for just $7 per share of earnings, while by November, it had risen to $11.25, and now analysts see nearly $13, and that could prove conservative even if the housing market remains tricky—and the bottom line could go much higher than that if rates actually come down in a meaningful way. As for the stock, PHM is in the middle of its range, is holding most of its earnings bump from last week and is near the 50-day line, all of which is encouraging.” Last week, we bumped PHM back up to Buy on renewed signs of strength, and it rewarded our faith in it. If you haven’t already bought, it’s not too late. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, got quite the earnings boost last Wednesday, gapping up from 164 to 181 – a new 52-week high! The company beat EPS estimates for its fiscal second quarter and raised guidance for the current (fiscal third) quarter – a classic “beat-and-raise”! Year over year, earnings for the chipmaker improved 13% while revenues were up 1%. I urged caution ahead of the report, suggesting that new buys should be small. Now, after the strong quarter and subsequent breakout, new buys – preferably on dips – can be a little more sizable. We have a 20% gain in less than three months. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, continued its steady ascent, going from 64 to 66. The company reports earnings on May 14. As Carl noted in his latest update, “Its $163 million in profit in 2023 was its first annual profit. Analysts believe the improvements will continue, as they predict 116% earnings growth this year and a 163% increase in 2025. Sea stock trades at just over two times sales and has the potential to grow in the most dynamic markets in the world. Sea generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back about 5.5% after a big rally the week before on the strength of Elon Musk’s stealth trip to China to secure a contract with the Chinese government to allow Tesla’s driver-assisted software in Chinese cars. A drawdown after the high of that news was to be expected. Now, Musk is lobbying Warren Buffett to use some of Berkshire Hathaway’s $189 billion in cash to buy shares of Tesla, which is still undervalued by its usually lofty standards. We’ll see if he takes the bait. In the meantime, we’ll keep TSLA at Hold until it can get back above, or at least near, its 200-day moving average (219). HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been up and down of late, but generally in the 25 to 27 range ahead of earnings tomorrow (May 7). Analysts are looking for 9.9% sales growth but a modest dip in earnings per share. We’ll see if tomorrow’s results can exceed those forecasts and push TRIP above 27 resistance. BUY

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, finally bottomed at 66 and bounced nicely, reaching close to 72 as of this writing. In his latest update, Mike wrote, “UBER was already pulling in with the market and growth stocks, and it looks like the much-hyped Robotaxi service from Tesla—a fleet of autonomous vehicles that compete with traditional taxis, as well as Uber and Lyft; the big unveiling is set for early August—has dented investor perception a bit more. We’ll see how it goes, but autonomous competition didn’t come out of nowhere (Uber’s top brass has been working on their own autonomous offerings for a while), and we doubt that Uber’s market share will tumble (not to mention its business in grocery, drug store and other delivery, as well as ancillary services like advertising) after spending years building it up. Of course, what really counts is the stock itself, which is where our focus is: So far, it’s pulled back a maximum of about 20%, which is acceptable, but if all’s well, we’d expect buyers to show up soon. Earnings, due out Wednesday (May 8), will be key.” HOLD

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com.

Here, too, is the latest episode of Cabot Street Check, the weekly podcast I host with my colleague Brad Simmerman.

The next Cabot Stock of the Week issue will be published on May 13, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.