It's not easy to break the internet, figuratively speaking, of course.
There was the "Ice Bucket Challenge" of 2014, which took the world by storm and raised around US$220 million for ALS. Then, of course, there was Kim Kardashian's risque photoshoot with Paper Magazine, and more recently, Will Smith slapping Chris Rock at the Academy Awards, Taylor Swift's Eras concert tour and dating life, and the Barbenheimer cultural phenomenon.
Virality in today's fast-paced world is often fleeting. And what has gripped the globe today is unlikely to remain relevant in the future.
But does the same go for stocks?
In this episode, Livewire's Ally Selby was joined by Perpetual Asset Management's Anthony Aboud and WaveStone Capital's Catherine Allfrey for their analysis of three of the hottest stocks on the ASX right now.
Plus, they also each name one stock that is making headlines for all the right reasons (unlike a few of the celebrity names on the list above).
Note: This episode was filmed on Tuesday 17 October 2023. You can watch the video, listen to a podcast, or read an edited transcript.
Ally Selby: Hello and welcome to Livewire's Buy, Hold, Sell. I'm Ally Selby and today we'll be attempting to break the internet by analysing three stocks that are hotter than Kim Kardashian. Unlike the Kardashians, these stocks have been making headlines for all the right reasons, but with their share prices soaring since the beginning of the year, are they now too hot? To find out, we're joined by Anthony Aboud from Perpetual Asset Management and Catherine Allfrey from WaveStone Capital. Okay, first up today we have family tracking app Life360. Its share price has skyrocketed 67% since the beginning of the year. Anthony, I'll start with you. Is it a buy, hold or sell?
Anthony Aboud (SELL): I'm going to say sell, controversially. It's a family tracking, some might say stalking app. It's done remarkably well. It's a freemium business model. It's got over 50 million active monthly users, and so, the growth in the revenue has been off the charts. I can't fault what it's done. It's now turning a profit at the EBITDA line. Again, you can't fault what they've done, where they've come from. Where I struggle with is on a go forward basis, what the competitive environment is going to look like in four or five years, whether it's a company we've never heard of or even Apple.
My second issue is the revenue they generate - only a small portion of their monthly users actually pay for it in their Circles. It's very hard to work out the churn rate, but our work suggests the churn rate is quite high. I think the average customer lasts two, two and a half years, which means that just in order to stand still, you do need to spend a lot of money on sales and marketing. So I question the ability to get that operational leverage that people need in order to justify the $1 billion valuation.
Ally Selby: 90% of the brokers who cover the stock actually rate it as a buy. Catherine, over to you, is it a buy, hold or sell?
Catherine Allfrey (HOLD): It's in that speculative bucket for me, so I'm going to sit on the fence and set it as a hold. We don't invest in businesses that aren't profitable and they are going profitable this year, so it's come back on my radar. But I can't get over the fact that parents can be so paranoid to have to pay for this product. I'm quite happy with my little Find My Phone app on Apple. But I get it, particularly in the United States with all their gun laws, that if you're a paranoid parent you would want it. So there is a need for the company, but I just can't get my head around the valuation in terms of its market cap – It’s now $1.7 billion, so it's pretty amazing. Good luck to them.
Ally Selby: Next up we have another tech darling. It's Altium. Its share price has lifted around 22% year to date. Catherine, staying with you, is it a buy, hold or sell?
Catherine Allfrey (HOLD): It has retraced recently, so again, I'm sorry, I'm going to have to sit on the fence on this one, hold. There is a bit bit of scepticism because they were a COVID winner with their Octopart business, and they do have some pretty lofty targets out there for their 2026 revenue numbers. It's circa $500 million US. The management have executed well, but it's a reasonably expensive product. We are going through a big change with artificial intelligence. You tell me in terms of the PCB to designers, where is that industry going to be in five years’ time? So good luck to them, but I'm sitting on the fence on this one.
Ally Selby: It had a really strong reporting season and share price jumped 25% in one day. Anthony, do you think the stock's now overvalued? Is it a buy, hold or sell?
Anthony Aboud (HOLD): I've got a hold. Again, this is a really hard one to analyse over the medium term five years. You speak to a bull on it, they say artificial intelligence is good for it and you speak to a bear and they say artificial intelligence will result in designers of PCBs being made obsolete. I don't feel I've got much edge on which way that's going to fall. It's not ridiculously expensive. It is profitable. It's not ridiculously expensive, where if they do meet their 2026 targets of 40% EBITDA margins on $500 million US of revenue and so yeah, that's why it's a hold rather than a buy or sell for me.
Ally Selby: Last up today, we have Carsales. Its share price has soared around 42% since the beginning of the year. Last one for you, Anthony, is it a buy, hold or sell?
Anthony Aboud (BUY): Well, it's not cheap, but relatively speaking to what we've been talking about, it's a buy. These three classifiers, the big boys, Realestate.com.au, Seek and carsales.com. What I know about carsales is from a competitive landscape, there's a lot of companies who've tried to knock them off their perch. A lot of car dealerships and big chains which are trying to knock them off their perch and say, "We don't need to spend as much on leads." Each time, carsales has just managed to continue to power through and really seen off all competitors.
The second point I'd make is that that most of these companies, even Realestate.com.au and Seek, have reinvested the cash that they've generated into what have been a real mixed bag of international expansion. I think outside of Zhaopin, most of them been pretty poor, to be honest. Whereas carsales, it's been okay. I know it's early days for Trader Interactive, but we feel that they are leveraging their skillset to help another classified business overseas, and we do think that one of the areas with Australian companies have been a bit ahead of the curve has been some of these verticals in classified. And so we think that their capital management has been good, their capital deployment has been good and their strong market position has been good. It's not cheap, but relative to the other ones we're talking about, it's a buy.
Ally Selby: Brokers are pretty bullish on the outlook for this stock. 65% rated as a buy. Last one for you today, Catherine. Is it a buy, hold or sell?
Catherine Allfrey (BUY): It's a buy for us still. We own it. We've owned it for about 18 months and it's performed exceptionally well thanks to great execution for the management team. In Australia, they've seen a change in their competitive landscape like Anthony was touching on. Gumtree has actually started charging for ads for car ads, so where would you rather advertise privately? You'd rather advertise with carsales every day of the week than Gumtree, so they've seen a big shift in volume across. Plus, immigrants coming to this country, the first thing they do is buy a car, so the car market actually here is quite buoyant, believe it or not. Then offshore, as Anthony is suggesting, they've set themselves up this great platform in terms of Trader Interactive, the United States, Web Motors in Brazil and Korea, and they've executed well. They've got both pricing, new products that they can move into these markets and I think that's setting themselves up for nice double-digit growth, so I'll stick with a positive one on that one. Okay.
Ally Selby: We asked our guests to bring along a hot stock they're still buying today. Catherine, what have you brought for us?
Catherine Allfrey: Well, it is hot, has been hot and we own it and that's Xero. I still think there's legs in this one. It's very early in its penetration story, so it's got roughly four million subscribers, but across its markets in which it's operates about 45 million sub opportunities, so there's plenty of market share to grow in. Plus the product is actually cheap and it is such a good product. It's costs roughly $33 a month for a small business to utilise this product. So as far as we're concerned, there's plenty of pricing power for that product over the next few years. You've got this combination of penetration, you've got pricing coming through, you've now got financial discipline in the business because Sukhinder Cassidy Singh has come in from February. She said, "Right, I'm going to operate on a 75% operating margin." And so, what we're seeing is great financial discipline coming through, so we're getting that free cashflow. We got $100 million last year, hopefully we're going to double that this year, so it is looking really good on a five to 10 year view.
Ally Selby: Your time in the hot seat, Anthony. What's your stock that you're buying right now?
Anthony Aboud: Goodman Group. It is... I mean, I don't want to say the buzzword artificial intelligence, but it is the artificial intelligence REIT of Australia through their data centres. What we like, look, we always like founder-led businesses. Again, like all other founder-led businesses, they've gone into the property downturn with a very, very strong balance sheet. But what we like about the management team there is they're opportunistic. They basically have seen a trend, they're looking at the assets which they've got and they can see the demand that you're seeing for data and data centres specifically, and they've got something which could actually contribute to that. If you've got access to power and the property that they've got, there will be an ability for them to develop those.
And whether they do on their own balance sheet, how far down they actually develop is unknown. How they get the asset from an existing fund to a new fund, again, unknown. Whether or not they go through just build and give it to one of the hyper players, again, you don't know. Or they go all the way down to even operation. I don't think they'll go that far, but there's a lot of unknowns about that. But it's about 30% of their work in progress. For me, it means that their growth profile, as far as both development and growth of FUM, I think it's got a good now five, six, seven, eight year profile, we feel is a nice place for them to be. And so, yeah, it's hot, but we think there's a fair bit more to go.
Ally Selby: Well, I hope you enjoyed that hot episode of Buy, Hold, Sell as much as I did. Thank you to Catherine and Anthony for your insights today. Remember to subscribe to our YouTube channel and don't forget to give this episode a like.
Written By
Get the latest news and insights direct to your inbox