US stocks continued to chart big swings, almost on a day-to-day basis, as investors vacillated between fear and greed. Clearly, investors are struggling to assess the fallout from Russia’s invasion of Ukraine — the prospect of prolonged supply and logistics disruptions that are driving prices broadly higher for commodities and the knock-on effect on inflation. Some inflationary pressures will persist for longer — for example, high fertiliser costs will affect future harvests for both human consumption and feedstock — though we think the price increases are also partially being driven by speculative activities. Regardless, rising energy and food prices will result in severe hardship for low-income households, and especially in poorer developing countries.
Unlike during the global financial crisis and Covid-19 pandemic, central banks are now caught between the need to tamp inflation, by raising interest rates and pulling back on massive QE (quantitative easing) programmes, and keeping monetary policies sufficiently loose to support the economy, amid rising risks to growth. A case in point: The European Central Bank accelerated plans to end its long-running asset buying programme, by 3Q2022, widely seen as a prelude to higher interest rates. The US Federal Reserve raised its short-term policy rate by 25 basis points last week, and has pledged to tackle inflation more aggressively, if necessary.
That said, monetary policies remain very accommodative and liquidity is ample from a long-term historical point of view. Meanwhile, households and corporates in the developed world have emerged from the pandemic with excess savings and solid balance sheets.
There is no doubt that heightened uncertainties are keeping investors very nervous and less inclined to aggressively “buy the dip”. Earnings too appear to have taken a back seat to growing worries. Shares in US companies that failed to meet market expectations in the just-ended 4Q2021 earnings reporting season were unsurprisingly beaten down. But reactions to those that did exceed expectations too were more muted than usual — and importantly, many saw their share price gains fizzling out within days.
For our Global portfolio of stocks, only Grab Holdings reported earnings that were below expectations. Its losses widened owing to higher incentives and promotions spent on customer engagement in the latest quarter. Earnings for Alibaba Group Holding, Adobe and Singapore Airlines were in line with market forecasts. The remaining 14 companies in the portfolio reported earnings that were well above market estimates. CrowdStrike’s share price jumped 6.6% the day after it announced strong earnings results for the financial year ended January 2022. Revenue grew 66%, where 94% of revenue is recurring under its subscription-as-a-service business model.
In an increasingly digital world, cybersecurity — protecting devices, servers, systems, networks, data centres and data from malicious attacks — is a critical component for all businesses. Global spending on cloud security is expected to grow from US$6.1 billion in 2020 to US$12.4 billion by 2023.
CrowdStrike is a pioneer and global leader in cloud-based protection of endpoints (desktops, laptops, mobile devices, servers and so on), cloud workloads, identity and data. Its cloud-based solutions leverage big data, artificial intelligence and machine learning to identify both known and unknown threats in real time. The platform is highly flexible, scalable and can be deployed quickly.
Revenue is driven by both the ability to upsell existing customers — the company is continuously expanding its modules, and hence the total addressable market — and secure new customers. For instance, its net dollar-based retention rate in the latest quarter was 123.9%, meaning that existing customers are spending 24% more than in the previous corresponding quarter. In fact, retention rate has exceeded 120% every quarter in the past four years.
CrowdStrike guided for revenue to grow 47% to 49% in the current financial year, estimated to top US$2 billion for the first time. It is already profitable before taking into account stock-based compensation expense (non-cash) and generates positive free cash flow. The market currently forecasts a net profit in the quarter ending January 2024.
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Elsewhere, shares in Alphabet and Amazon.com rose 4.5% to 4.7% immediately following their latest quarterly results. Both companies, coincidentally, announced 20-for-1 stock splits. While stock splits do not change the intrinsic values, anecdotal evidence does suggest that lower absolute prices per share make stocks more appealing to retail investors. The stock splits may even raise the odds of the companies being included in the global benchmark Dow Jones Industrial Average, which is a price-weighted index, especially considering their dominant positions in the economy.
In addition to the stock split, Amazon is starting to return capital to shareholders, via share buyback. The company upped its total buyback allocation to US$10 billion and made its first acquisition earlier this year under a previous US$5 billion programme that was authorised back in 2016. The last time Amazon repurchased its own shares was in 2012 — it also pays no dividends — opting instead to spend heavily on capex to expand its cloud-technology infrastructure and fulfilment network. Cash generation has been strong, with cash pile having quadrupled since 2016, to US$96 billion.
Amazon Web Services (AWS) remained the strongest growing segment, with revenue rising 40% in the latest quarter. Enterprise spending on public cloud is still far from mature, especially in terms of higher-value services. Increasingly, businesses will choose to migrate to cloud platforms, for cost savings, scalability, flexibility and cybersecurity, among others. A case in point: Amazon is reporting a rising percentage of revenue from platform-as-a-service products, and a declining percentage from infrastructure-as-a-service products.
Incidentally, CrowdStrike collaborates with both AWS and Google Cloud to provide end-to-end protection. The company highlighted its partnership with AWS as one of the key drivers for growth — annual recurring revenue transacted through the marketplace more than doubled in its latest financial year.
Higher-margin services — including AWS, advertising, third-party seller services and subscription — have been growing at a much faster pace than product sales and are fast catching up with the latter as the biggest revenue generator for Amazon. This bodes well for future overall margins and profits. For instance, advertising grew 33% year on year in 4Q2021, and is now large enough to warrant its own separate line item. Revenue totalled US$31 billion last year.
One of the biggest boosts in the current financial year would come from the latest hike in subscription fees for some 150 million Prime members, from US$119 to $139 per year. As mentioned, Amazon has been investing heavily in Prime member benefits, including expanding products-areas eligible for fast, free and unlimited shipping. A previous survey indicates that Prime members outspend non-members by about four times on its e-commerce platform. The company is also spending big on boosting up content. This includes the highly anticipated “The Lord of the Rings: The Rings of Power”, slated to premiere in September, which may well end up as the biggest-budget TV series ever produced.
There is no question that the level of uncertainties in markets is now higher than it has been for some years. This will very likely widen the liquidity premium. It would be foolish for investors to not keep a watchful eye on developing events and the accompanying risks. We suspect earnings for all companies will be affected by rising costs and the fallout from geopolitics. The only question is to what degree. But history also tells us that it does not pay to sit on the sidelines when you cannot accurately time the market. Take the longer-term view.
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The Global Portfolio was up 2.6% for the week ended March 23, recouping more lost ground from the recent sell-off. The biggest gainers for the week were Alibaba (+29.6%), CrowdStrike (+15.7%) and Amazon (+6.7%). On the other hand, Adobe (-4.4%), Home Depot (-4.2%) and Builders FirstSource (-2.4%) were the notable losers. Total portfolio returns rose to 49.7% since inception but is still underperforming the benchmark MSCI World Net Return Index, which is up 53.9% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
Cover photo: Bloomberg
