WEEKLY ISSUE: Booking more Habit gains and redeploying into another Digital Lifestyle investment
Key points in this issue
- We are issuing a Sell on Habit Restaurant (HABT) shares and removing them from the Tematica Investing Select List. As we say goodbye to Habit, we’d note the position generated a blended return of more than 80% over the last four months.
- We are issuing a Buy on Alibaba (BABA) shares as part of our Digital Lifestyle investing theme with a $230 price target.
- Chatter over Apple’s (AAPL) potential new products begins to swell ahead of its upcoming Fall event, and it’s looking for our Universal Display (OLED) shares as well. Our price targets for AAPL and OLED shares remain $225 and $150, respectively.
Exiting Habit Restaurant Shares
A few weeks ago we took some of our Habit Restaurant (HABT) shares off the table, which gave us a tasty 68% profit on that half of the position. In the ensuing weeks, Habit shares have continued their climb higher and with last night’s close, the remaining portion of our HABTshares were up almost 89% from our early May buy. Not only is that a hefty profit, but it equates to a very rich valuation as well.
As of last night’s close, HABTshares were trading at 278x expected 2019 EPS of $0.06 vs. a PE range of 16-80 for peers that that range from El Poll Loco (LOCO) to Shake Shack (SHAK). On a price to sales basis, HABTshares are trading near 1.15x expected 2018 sales, well ahead of the 0.9x takeout multiple at which Zoe’s Kitchen is being acquired by Cava Mezza Grill.
As we often hear, it pays not to fall in love with the stock one owns, lest we are tempted to not do the prudent thing. I still like the Habit Restaurant story, and that goes for its Ahi Tuna burger as well. That said, given the phenomenal run and rich valuation, I’m calling it a day and removing HABTshares from the Tematica Investing Select List. I’ll be keeping tabs on the company and its geographic expansion in the coming months, but I’d be more inclined to revisit the shares at a more reasonable set of valuation metrics.
- We are issuing a Sell on Habit Restaurant (HABT) shares and removing them from the Tematica Investing Select List. As we say goodbye to Habit, we’d note the position generated a blended return of more than 80% over the last four months.
Gearing into Alibaba Shares
One of the shortcomings in the perspective for most investors is they tend to be focused on the geographic region in which they reside. Given the global nature of our investment themes, I try to keep an open mind and look for thematic opportunities no matter where they are. One such company that sits at the crossroads of our Digital Lifestyle and Rise of the New Middle-Class investments, and has a dash of Disruptive Innovators and Digital Infrastructure is Alibaba (BABA). Alibaba has long been heralded as the Amazon (AMZN) of China given its position in digital shopping (84% of revenue) but that’s about where the similarities end…. For now.
Last week Alibaba reported its latest quarterly results, in which revenue hit $12.23 billion for the quarter, beating consensus expectations of $12.02 billion. Paired with double-digit earnings before interest, tax, depreciation, and amortization (EBITDA) growth is more than overshadowing a $0.02 per share miss on the company’s bottom line, which came in at $1.22 per share.
At Alibaba, all the company’s operating profit is derived from its core commerce business with the remaining 16% of its revenue stream spread across cloud, digital media and innovation initiatives all weighing on that profit stream. By comparison, Amazon’s Amazon Web Services (AWS) is the company’s profit and cash flow secret weapon as I like to call it.
That’s the negative, but if we look at the year over year comparisons of the non-core commerce businesses, not only are they growing quickly, but year over year Alibaba is shrinking their losses across the board.
In many respects this is similar to one of the key concerns investors once had with Amazon not too long ago — can it turn a consistent profit? We have seen Amazon do just that for a number of quarters in a row, and investors have removed that objection, which has sent AMZN shares significantly higher.
With Alibaba, the question is not whether those businesses become profitable, but rather when. Yes, much like Amazon, Alibaba continues to invest for future growth as evidenced by the level of capital spending in the June quarter vs. the year ago and declining cash on the balance sheet.
Both of these reflect investments to — much like Amazon — move past its core commerce platforms, into physical retail and food-delivery services, as well as expanding its footprint in areas such as logistics and in overseas markets.
That said, the company is benefiting from the continued tailwinds of the Digital Lifestyle investment theme. This is evidenced by the continued growth in both active consumers on its retail marketplace as well as mobile monthly active users. Exiting June, the company’s annual active consumers reached 576 million, up nearly 24% year over year, while its mobile monthly active users hit 634 million, up 20% year over year.
Much like Amazon’s Prime business, as Alibaba expands its scope of product and services, at least in the near-term, it should continue to win new users and retain existing ones. Also much like Amazon, Alibaba will continue to grab incremental consumer wallet share. The combination should continue to drive top-line growth and pull its non-core commerce businesses into the black.
Following last week’s earnings report, consensus EPS sits at $5.71 per share, up from the $4.78 achieved in 2017, with expectations of $7.75 in 2019. What the math shows is an expectation for roughly 27% EPS growth over the 2017-2019 time frame, and against that backdrop BABA shares are trading at a PEG ratio of 0.85 based on 2019 EPS expectations.
In coming months, odds are we will see continued growth in China digital commerce as China consumers build up for the year-end holidays and Chinese New Year. That along with other gains in its cloud and digital media businesses should see Alibaba closing the profit gap leading to not only more comparisons to Amazon but to multiple expansion to a PEG ratio of 1.1x that offers upside to $230, if not more.
The one obvious risk is the impact of trade and tariffs between the U.S. and China, which stepped up today. My thinking is given the slowing economic data of late from China and potential mid-term election risk, President Trump could be angling for an October-early November trade win. Not only would that send the overall U.S. stock market higher, but it would remove the trade concerns from BABA shares as well.
- We are issuing a Buy on Alibaba (BABA) shares as part of our Digital Lifestyle investing theme with a $230 price target.
Apple ChatterCcontinues to Build Ahead of its 2018 Product Launch
With Apple’s (AAPL) annual fall event inching closer, chatter about new products is increasing and the internet is filling up with speculation over the number of iPhones and other products that the company could ship later this year. The current buzz has three new models being released:
- an iPhone X successor
- a new 6.5-inch iPhone X Plus
- a mass-market 6.1-inch LCD iPhone with thin bezels and Face ID just like the iPhone X
Accompanying this chatter is speculation concerning the impact on Apple shipments, with DigiTimes saying “new iPhone shipments should hit 70-75 million units through the end of the year, the highest level since the iPhone 6/6 Plus super cycle. This number is purely on new 2018 iPhone shipments, it does not include sales of older generations.”
These happenings help explain the favorable move higher in Apple shares registered in recent days as well as for fellow Select List holding Universal Display (OLED).
Based on the rumblings, it looks like Apple will have two iPhone models utilizing organic light-emitting diode display technologies, up from just one last year, a positive for Universal’s chemical and IP business, especially as shipments of those model will likely continue to grow in 2019. Remember, too, that some months ago Apple was expected to fully transition its iPhone lineup to organic light-emitting diode displays with its 2019 lineup. Going from one model to two or three of its new models appears to be a confirming step as organic light emitting diode capacity expands and display prices come down.
I continue to see an improving outlook for OLED shares as smartphone competitors follow suit and adopt the organic light-emitting diode technology, and its uses expand into other markets (interior automotive lighting, specialty lighting and eventually general illumination, much the way light emitting diodes did). Our price target on OLED shares remains $150.
With Apple, I expect the shares to continue to melt up ahead of its rumored mid- September event and look to revisit our $225 price target based on products the company does announce, not rumors.
- Chatter over Apple’s (AAPL) potential new products begins to swell ahead of its upcoming Fall event, and it’s looking for our Universal Display (OLED) shares as well. Our price targets for AAPL and OLED shares remain $225 and $150, respectively.
