Previously, I shared 3 tech stocks that were on my watchlist. With the latest round of pullback in tech stocks, some of your portfolios may be in the red especially if you have greater weightage to technology stocks.
Nonetheless, a pullback or even a market crash is a great time to buy companies with great business fundamental. As such, opportunistic investors should look at this minor sell-off as an opportunity to grab more shares.
If you do not have any stocks on your radar currently, here are 3 stocks to consider.
Amazon.com Inc (NASDAQ: AMZN)
Business Model
With a market cap of $1.6 trillion, Amazon is currently the fourth largest companies in the world by market cap. During its early days, Amazon started as a bookseller and has since grown into an e-commerce giant today.
In the US alone, its gross merchandise value far exceeds its competitors like eBay and Walmart. Comparing to its global competitors, Amazon is now the world’s 2nd largest online retailer, in terms of the gross merchandise value, right behind Alibaba (NYSE: BABA).
Apart from its core e-commerce business, Amazon is also a digital advertiser and cloud services provider which rents data storage and computing resources over the internet.
It also retails a range of hardware products such as Alexa personal assistant, Kindle e-reader and its subscription service Amazon Prime.
Source: Visualcapitalist.com
Financials
In FY2020, Amazon net profit margin improved as it achieved greater operating efficiency. With growing revenue and an improved profit margin, the company net income came in at $21.3 billion, a whopping 84.1% increase from FY2019!
We can break down Amazon into its three segments – North America, International and AWS. The first two represent the geographical breakdown of Amazon’s retail business, while the third is Amazon’s cloud computing services.
Currently, Amazon’s North America business still accounts for the main bulk of the revenue. In FY2020, 61% of its revenue came from this segment.
Amazon’s North American operating income has been growing quarter on quarter as shown below. Last year alone its year-on-year percentage growth was 38%.
Amazon’s International business makes up 27% of Amazon’s revenue in FY2020. Likewise, this segment’s operating income has been growing quarter on quarter with a year-on-year growth rate of 40%. Its FY2020 growth has more than doubled that of FY2019, which was at 13%.
The last segment is Amazon’s up and coming income-generating machine – Amazon Web Services (AWS). AWS was launched in 2006 to provide an infrastructure platform for businesses, in the cloud.
In FY2020, this segment only accounts for 12% of Amazon’s total revenue.
Nonetheless, AWS’ profit margin is substantially higher, as compared to other segments. As a result, the AWS segment accounted for about 59% of Amazon’s operating income.
Today, Amazon owns 31% of the global cloud market in terms of revenue while its closest competitor Microsoft Azure comes in at 20%. This was the result of the seven years head start AWS had and is one which would allow AWS to keep its lead in the coming years.
Latest earnings report
Amazon has recently reported its Q1 2021 earnings, beating analysis predictions by a wide margin.
Earnings per share was at $15.79, 65.2% above analysts’ projections. Its revenue also came in at $108.5 billion, 3.8% higher than analysts’ projections.
Other than that, Amazon’s free cash flow increased to $26.4 billion for the trailing twelve months, compared to $24.3 billion a year ago. These are extra cash that can be further reinvested into the company to create more growth in the future.
Source: Investopedia
Moving ahead, Amazon has provided its second-quarter 2021 guidance. It expects net sales to grow between 24% and 30%, compared to the second quarter of 2020. (This guidance anticipates a favourable impact of approximately 200 basis points from foreign exchange rates)
Given that online sales only make up a small proportion of US total sales as of 2020, with an average e-commerce sales growth rate of 15%, we can expect Amazon to continue to grow in the years ahead. This is the reason why I like Amazon.
Valuations
In terms of comparative valuation, AMZN is undervalued against the market. At a stock price of $3190.49, AMZN can be consider undervalued too, with a potential 20% upside based on the discounted cash flow model done by Finbox.
JD.com Inc (NASDAQ: JD/ HKG: 9618)
Business Model
Next up is JD.com, one of China’s leading e-commerce company. JD.com can be seen as the Amazon of China, given the similarities between the two. Both companies operate as a first-party e-commerce seller and runs a third-party marketplace.
In China, JD’s direct competitor would be Alibaba which has twice the market share of JD, though both companies operate with different business models. Alibaba does not take in inventories or fulfil its own orders, instead they aim to connect sellers and buyers through their platforms – Taobao and Tmall. Orders are then fulfilled by its logistics affiliate, Cainiao which shoulders the fulfilment costs for Alibaba. Other than that, Alibaba generates revenue from paid advertising by charging fees for higher-ranked listing on its platform.
JD on the other hand, takes in inventories and fulfils orders via its logistic network that contains roughly 800 warehouses (more fulfilment space than Amazon). With this model, JD has a tighter control of the quality of its product and delivery speed which comes at the cost of lowered operating margins compared to Alibaba.
As one of China’s key logistics operator, JD’s operation covers almost every county and district in China. JD’s network is vast and it is not stopping. In fact, it is investing to develop the next generation delivery solution that includes automated warehouse, drones and autonomous delivery vehicles to further expand its logistics network.
To take advantage of its superior logistic service, JD has also started to offer this service to other companies which unlocks a higher margin for them. JD is also venturing into new businesses like cloud business and JD Health (an online pharmacy that specialises in online medical consultation and pharmaceutical sales).
All in all, these businesses have allowed JD to consistently grow its revenue. In year-end 2020, it recorded RMB745 billion in revenue, up by 30% from the year before.
Breaking down into its various segment, JD’s retail brought in RMB703 billion for FY2020 which accounts for 94% of JD revenue while the remaining came from its new businesses. *
* New businesses of the company include logistics services provided to third parties, overseas business, technology initiatives, as well as asset management services to logistics property investors and sale of development properties by JD Property.
Financials
JD’s operating cash flow for the full year of 2020 increased to RMB42.5 billion (US$6.5 billion) from RMB24.8 billion in 2019. Free cash flow, which represent the leftover cash the company can use to grow the company, for the full year of 2020 has also increased to RMB34.9 billion (US$5.4 billion), compared to RMB19.5 billion for the full year of 2019.
JD’s non-GAAP operating margin has also improved from 1.5% to 2.1%. While this is relatively low, this is expected due to its business model.
Valuations
While JD does carry certain risks that are unique to China businesses, I believe this has been priced in. With a range of fast-growing businesses, including JD’s e-commerce, logistics, and telehealth segments, I believe JD will continue to grow in the coming years.
Comparing JD’s price to earnings with its peers, its PE of 15.7 is relatively low compared to Alibaba’s PE of 25.8 and Amazon’s PE of 60.7. This could be a sign that JD is undervalued and a stock that you should look into, since it has recently corrected 30% from its high.
Veeva Systems Inc (NYSE: VEEV)
Business Model
Lastly, we have Veeva Systems Inc, a cloud computing company dedicated to providing cloud services to biotech and pharmaceutical companies.
Veeva software helps its clients manage sales and operations while also ensuring compliance with the health industry regulations. In layman terms, Veeva’s application aims to improve the efficiency of companies in the way they handle their data, so that they can be effectively stored and used.
Veeva currently offers two main products to its customers, Veeva Commercial Cloud and Veeva Vault, both of which contributed equally to Veeva’s revenue for the first half of 2021.
Veeva Commercial Cloud offers CRM (customer relationship management) services, data analytics application and other related services to its clients. Veeva Vault, on the other hand, is a content management platform with the unique capability to manage both content and data. This allows companies to streamline end to end process across commercial, medical, clinical, regulatory, quality, and safety. Currently, Veeva has over 900 customers which include pharmaceutical giants like AstraZeneca and Merck.
Financials
Being a Software as a Service (SaaS) platform, 80% of its total revenue came from the subscription of these 2 platforms. Such a business model not only ensures a consistent flow of income for Veeva, it is usually very sticky which is why I like it a lot. Over the past years, Veeva’s total revenue has been growing at a rate of 25% to 28%.
Its non-GAAP net income has also been increasing over the years as shown below.
Veeva has maintained a high gross margin of 74.7% over the years, which show us the scalability of its business model and its pricing power.
With an increasing operating cash flow, Veeva’s business looks sustainable. It is generating more cash from its business than it needs to fully pay off its debt.
Valuations
Moving forward, Veeva has maintained its long-term goal of generating $3 billion in annual revenue by fiscal 2025 (compared to its guidance of about $1.4 billion in revenue for 2021). Veeva expects to continue growing by more than 20% annually, over the next five years.
While Veeva has great prospects ahead, this has probably been priced in by investors, the stock is currently trading over 100X its forward earnings. Based on a 5-year discounted cash flow model by Finbox, Veeva System’s fair value is around $215 which at its current share price, it is overvalued by 14%. Nonetheless, Veeva is a great business and could be placed on your watchlist for now.
Disclosure: At the time of writing, I do not hold any of the 3 stocks discussed.
P.S. If you’re looking for opportunities to invest in tech stocks at a discount, Dr Wealth’s SaaS investing trainer shares how he evaluates tech growth stock using Value Investing 3.0 principles. You can join his live webinar here.
