The Weekend Edition #7

Welcome to the seventh issue of the Weekend Edition. 

Firstly, a big thank you to all who’ve read and subscribed to the newsletter!

Now, grab a cup of coffee ☕️, and relax while we take a look at what happened in the markets this week. 

Here’s what we cover:

• Market Recap - a look at the major indices

• Charts of the Week - More jobs data…

• Earnings of Week - $ZM vs. $DOCU, and a few more

• Around the Market - Electric Trucks; Apple

• The Week Ahead

• Closing Thoughts - IPOs for the fall season

Let’s dive in ⬇️

Market Recap - 30 Aug 2021 - 03 Sep 2021

We started the trading week on an important day… 30 Aug was Warren Buffett’s 91st birthday. And while this may be quite the cliche, I’m a big fan of Buffett. So let’s start with a quote:

The markets were raging with both the NASDAQ hitting 15,380.07 and the S&P hitting 4,545.85, reaching all time highs yet again on Thursday. The month seemed to have started off on a high note, despite the horror stories of September historically being the worst month for the markets.

Unfortunately, Friday’s worse-than-expected job report put a slight dent in that. The non-farm payroll for August recorded 235k vs 750k forecasted; down from previous July numbers of 1.053M.

After Jackson Hole last week, when Fed Chief Powell’s primary focus was on jobs, the market started speculating on what this may mean for the tapering of asset purchases. Bond Yields shot up temporarily and the all three indices opened lower on Friday morning, with the Nasdaq and S&P recovering by the end of the day.

The Unemployment Rate, however, came down to 5.2% from 5.4%, meeting expectations, which could still mean a taper announcement later this month during the Sep 20-22 Fed meeting.

Chart of the Week

While overall jobs data missed estimates drastically, the industry breakdown shows an interesting pattern of recovery. Clearly, leisure and hospitality was hit hard because of the resurgence of Covid leading to cancelled plans for travel and outdoor dining.

Professional & Business Services led the monthly increase, of which, the highest increase came from architectural & engineering services (+19000). It would seem that the Infrastructure Bill is already creating tailwinds.

Jobs in every industry, apart from Transportation and Logistics, is still below pre-pandemic levels with the Labour Force participation rate remaining 1.6% below and 5.6million people are still out of work due to the pandemic.

Next week, on 06 Sep, Pandemic Unemployment Benefits will expire. Almost 9.2million people were claiming these benefits, as of mid-August. This could mean an increase in the employment levels as people are forced to return to work.

Earnings of the Week

I enjoy this exercise of comparing earnings every week. It gives me a good insight into companies that I don’t always follow, such as Signet Jewelers ($SIG). Look at those numbers… what a beat! Signet beat EPS estimates by a whopping 220% this quarter. Not to mention NCino ($NCNO), beating EPS estimates by 34%.

According to FactSet, the S&P reported growth in earnings of 91% for Q2, 2021 and 87% exceeded EPS expectations. Baffling numbers!

Zoom vs. Docusign

But on to the usual suspects… Zoom and DocuSign, two so-called pandemic plays that don’t seem to be getting much love from the market anymore. But are these two really finished?

Let’s look at the prints first.

• Revenue: Zoom ($ZM) post absolutely phenomenal results crossing the $1B mark in revenue for the quarter. Docusign ($DOCU) was no less crossing the $0.5B mark in revenue for the quarter. Both companies posted double digit growth with Zoom at 54% YoY, and Docusign at 50% YoY.

• Margin: Zoom’s gross margins were 74.4% (+3.4% YoY), while Docusign’s gross margins were 78% (+4% YoY). At the Operating Margin Level, Zoom does better with a margin of 28.8% (+0.49% bps YoY) and Docusign makes a loss of -4% (+13% YoY). Yet, both are improving margins.

• Free Cash Flow & Cash: Zoom’s FCF Margin is 45% while Docusign’s FCF margin is 32%. Zoom holds $5B in cash, while Docusign holds about $800M.

Clearly both are solid companies and looking at just the numbers, Zoom is doing slightly better. Zoom guided a 51% growth in revenue till the end of the year while Docusign guided 42% growth in revenue. Still promising on both fronts.

Yet, Zoom plunged almost $50 on earnings down to $292 (-13%), while Docusign also took a small dive of -4% to about $291 at its low during the week but rebounded to $313 on Friday. Zoom also received downgrades across the board:

So where’s the problem?

Zoom signaled a deceleration in their growth during the earnings call and this was hit on hard by the analysts. The Company suggests that with the re-opening of the economy they’re seeing a slowdown in their online web users, who are primarily individuals and small business users. Docusign also admitted that they’d probably seen peak growth levels during the pandemic and it’s likely that growth will slowdown. Yet, the market has been very unforgiving towards Zoom but not so much Docusign.

My opinion is that while Zoom is not finished, they do face headwinds in the coming months. They have a great basic product and have ridden the pandemic wave well. But, companies are likely to move to an ecosystem, and Zoom faces intense competition from the big boys like Microsoft, Google and even Cisco.

Even the Zoom Phone which has added 2million users in the last year, doesn’t bring much innovation to the market. I haven’t personally used this but it doesn’t seem too far from what Skype does. Eventually, Zoom may take the lead because their products are easy to use and they are innovating. They probably will end up replacing the likes of Cisco as Cathie Wood points out, after promptly buying more Zoom shares as the price plunged. For the next few quarters though, things will be rough.

Docusign on the other hand, has just been improving their offering. They are so much more than an e-signature system. They’ve got an offering that provides an end-to-end solution and can integrate with almost any ecosystem - Salesforce, SAP, Microsoft, Oracle, Google… need I go on?

In the past year, they’ve developed the Agreement Cloud, that can practically make offices go paperless, for good! For one client, they’ve digitized over 400 paper-based workflows. They’re now introducing AI to help smaller companies make better contracts and they even have an option for online notarization. Full disclosure, I am long Docusign because I do think this company is impressive and they really are the future of work. I’m happy to take a few punches in the coming quarters, although it doesn’t seem likely.

Since the start of the pandemic in March 2020, Zoom is up 184% while Docusign is up 259%. 2021 however, presents a very different story with Zoom declining -11.57% year to date, while Docusign is still up 39.5% for the year.

Around the Markets

Electric Truck Battle Heating Up

Earlier this week, Rivian revealed that they’d filed a confidential S-1 to go public by 25 Nov, this year. The electric truck maker’s total funding since 2017 of $10.5B, has primarily been led by Amazon, with the intent of securing 100,000 electric delivery vans by 2030, for their own use. Apparently, 10,000 vans will be delivered by 2022 and can go 150miles on a single charge.

Rivian Trucks claim 300+ miles on a single charge with a starting price of $67,500. After several delays, Rivian now expects their first trucks to be launched in Sep 2021 with deliveries following in Jan 2022.

While Bloomberg reported a valuation of ~$27.6B earlier in January, the Company is now claiming a valuation of $80B. And of course, Elon Musk had something to say about this…

But, you know the saying… People in glass houses shouldn’t throw stones. Well, we found out yesterday, that Tesla’s ($TSLA) futuristic looking, Cybertruck was going to be delayed, launching at the end of 2022 with deliveries starting in 2023.

While it seems like Rivian might beat Tesla to the punch, Elon Musk proposes to deliver a vehicle that is superior on all counts. The Cybertruck boasts an armor-like exoskeleton & payload capacity of 3500 pounds. The top of the line Tri Motor AWD boasts 500+ miles on a single charge, 0-60 in under 2.9s and a starting price of $69,900.

While the two fight it out, Lordstown Motors ($RIDE) who had the other promising contestant in the race is fighting their own battles, with a DOJ probe into their claims of pre-orders, after the short-seller Hindenburg brought matters to light. It’s too bad really because I think they actually had the best-looking truck.

Apple in the News

Apple ($AAPL) hit yet another all time high this week at $154.98 on 01 Sep 2021, crossing $2.55T in market cap. Despite troubling news on their app store payments, delay in the new software, and possible delays in the newer bigger Apple Watch 7, Apple rallies on. Tim Cook will need to find a really top-notch successor when he steps down in 2025, because he’s doing an incredible job.

The Week Ahead

US Markets will be closed for Labor Day on Monday, 06 Sep 2021, but we still have a few interesting earnings next week:

Closing Thoughts

IPOs are back for the fall season. A few interesting names are coming to market:

• Warby Parker (WRBY) - DTC Eyewear

• Freshworks Inc. (FRSH) - SaaS CRM

• AllBirds (BIRD) - DTC Sustainable shoes and clothing

• Amplitude (AMPL) - Product Intelligence Platform

• Toast (TOST) - Restaurant POS & Management System

Not to mention Authentic Brands (AUTH), who filed in July and still hasn’t priced their offering, quite possibly because they bought Reebok in the meantime.

The ones I’m watching are AUTH & TOST. Recent IPOs have been rocky so a wait-and-watch approach may be prudent.

So, before I go let me leave you with another timeless piece of wisdom.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $AAPL, $CRWD, $TSLA, $BRK-B, $DOCU as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.