Some of the most fabled investment success stories of today include the likes of Apple, Afterpay, Microsoft and Shopify. If we consider the common factors that tie these companies, they include: 1) They offer a loved or essential product; 2) Their business model can be scaled easily, and 3) Most importantly, the end market is gargantuan and covers most consumers and businesses globally.
In this episode, Arden Jennings of Ausbil Investment Management and Tobias Yao of Wilson Asset Management discuss 5 tech-oriented ASX small caps that possess these three explosive ingredients. Their end markets range from the US$6 trillion digital payments opportunity in the US, Canada and Australia combined to soaring data storage demand and the church itself.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 29 July 2020.
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Vishal Teckchandani: Welcome to Buy, Hold, Sell, brought to you by Livewire Markets. My name is Vishal Teckchandani. You're going to want to buckle up for this episode because we're talking about five small cap tech stocks with massive end markets because that's been the name of the game over the last few years. Joining me on the show today is Tobias Yao from Wilson and Arden Jennings from Ausbil. Arden, let's start with you. Sezzle, a company that needs no introduction. It says its market opportunity is $6 trillion, when you combine Canada, the US and Australia combined Buy, hold, sell?
Arden Jennings (Buy): Yeah. I think it's a buy, Vishal. Sezzle has shown great traction in the US with over a million active customers now. Obviously, the buy now pay later leader in the market being Afterpay over in the US, has shown fantastic results but the US market is huge. And when you combine it with Canada as well, there is plenty of room for a few players. What we really like about Sezzle is that the management are fantastic in terms of, they're entrepreneurs. We also like the fact that they have recently hired a PayPal executive to really spearhead their enterprise part of the division to sign up more merchants. So that's what we're looking for over the next 12 months, to see if they can sign up a few high profile merchants that can really accelerate the customer acquisition growth in the business. It’s a buy.
Vishal Teckchandani: Okay. Tobias, can Sezzle's share price keep sezzling? Buy, hold, sell?
Tobias Yao (Buy): Yes. Sezzle's a buy for us. Like Arden said, the North America total addressable market is very large. We like the buy now pay later space because they are exposed to the offline to online retail shift, as well as the credit cards to debit card, the shift. Particularly by the millennial cohort. Right now, we are in this land grab phase and Sezzle has done incredibly well over the last couple of years growing in the US. And we think with the capital they raised recently, they can continue to drive growth really hard.
Vishal Teckchandani: Tobias, staying with you. Next stop is NextDC, the data centre giant. Pardon the pun, its share price is going to the Cloud. But is it all in the price, is the growth story there? Buy, hold, sell?
Tobias Yao (Buy): So NextDC's actually exposed to cloud adoption. We think that thematic is here to stay. So NextDC is a buy.
Vishal Teckchandani: Okay. Arden, IBISWorld recently did a piece of research on the data storage industry and they said that the revenue run rate is going to double on the back of COVID. Is it all in the price for NextDC though? Buy, hold, sell?
Arden Jennings (Buy): Well, I won't question your statistics, Vishal, but I definitely think there's been an acceleration in the structural shift to the cloud and that's really going to benefit those data centre players. And NextDC is one of the best ways to get exposure to that. They've delivered over the last couple of months with some really chunky contract wins. And we believe that the pipeline is still healthy and they'll continue to execute on their strategy. So it's a buy.
Vishal Teckchandani: Okay. Next stop is Redbubble. It says it's got a less than 1% share of a total $280 billion addressable market by wholesale.
Arden Jennings (Hold): Yeah, it's a hold for me. So I think in the short term, they've definitely benefited from the shift to online, whether that be for customers or artists looking to join their platform. But I think in the longer term, I still need to see them prove up their platform and execute quarter on quarter. It's been a volatile bumpy road since IPO in 2016. So I'd like to see them string together a few more quarters of execution before we can really look at it seriously, but perhaps that's the opportunity. So for the moment it's a hold.
Vishal Teckchandani: Its share prices had a cracking run, Tobias, up from 40 cents in March to nearly $2.50. But begs the question, is Redbubble in a bubble?
Tobias Yao (Buy): Look, Redbubble's still a buy for us. We believe right now we're seeing a permanent shift in the growth trajectory of online companies. Their marketplace is gaining quite a bit of traction globally. If you search Redbubble on the TikTok platform, which is now very popular, they have now over more than 19 million views. So we think it's going viral. Over the longer term, we believe consumers are preferring personalised products, which is where they're coming in. And in addition, social influencers use the Redbubble platform as a way to promote their own brand and sell their own merchandise. So we think the growth profile is still very strong and they are trading at a big discount to their USP Etsy. So it's a buy.
Vishal Teckchandani: Staying with you, Tobias. One company that's had a bit of a breather in its share price run is Megaport. Buy, hold, sell?
Tobias Yao (Hold): Megaport is a hold for us. We really like the business long-term. It's a leader in its niche. It's about two to three times larger than the next competitor. It's exposed to cloud adoption and it's helping businesses connect to their cloud service providers. It's a hold for us purely because we're looking for a better entry point.
Vishal Teckchandani: Okay. It's all about the cloud. Buy, hold, sell on Megaport?
Arden Jennings (Buy): Yeah, it's a buy for us, Vishal. High conviction position within our smaller micro-cap funds. Megaport, as Tobias pointed out, is really exposed to the adoption of the cloud. And Megaport's providing network as a service, connecting up cloud technologies amongst various data centres globally. So if there's one chart that I could point our listeners to, it would be the customer cohort chart they produce annually in their results. And it demonstrates that the customers love Megaport's product and that's shown in the adoption of their services and also the monthly revenue that they're receiving per port. And it's backed by great management and Bevan Slattery as founder is still on the board and still a significant shareholder. So we see the pullback in the share price as definitely an opportunity. And I think this is one where you can let your winners run.
Vishal Teckchandani: Last stop, Arden. Pushpay, a payments beast of a different kind. It allows church attendees to donate through their mobiles rather than putting money out and putting it on the collection plate. Processing volumes have exploded since COVID. Buy hold, sell?
Arden Jennings (Buy): Yeah, I think this is a buy, Vishal. Obviously with the onset of COVID then religious organisations, particularly churches, are still for the majority of the cases operating online. Obviously online giving is a key driver for them. They need to receive those collections. And in the US, Pushpay is one of the only providers in the space. So they're taking away what churches aren't necessarily focused on, being administration and church management systems and releasing them to really focus on their engagement with customers essentially. So yeah, we think it's a buy.
Vishal Teckchandani: Tobias, when your total addressable market is every church in the world and the statistics pre COVID are that 90% of donations were cash and check, is this the stock that investors have been praying for? Buy, hold, sell?
Tobias Yao (Buy): Pushpay is a buy for us. As you said, it's a beneficiary of the structure shift to digital and cashless payments. Management has a medium to long term target of $1 billion in revenue. We believe that's very achievable given the total addressable market. We believe the market underestimates the operating leverage in a payment processing platform at scale. Pushpay also has a very healthy balance sheet, which they can deploy into acquisitions. So it's a buy for us.
Vishal Teckchandani: A lot of these companies don't even make a profit but if the experience of Afterpay has shown us anything, if you push too hard on valuation, you may end up paying the price.
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On Sezzle: I can understand the argument that Sezzle is a buy. However - depending on the logic underlying your portfolio - is it the best buy? For example the payment services stocks in my portfolio include NASDAQ: PYPL (Record high 6 Aug 20), NYSE:V (6.8% below its 19 Feb 20 record), ASX:APT (5.05% below its 21 Jul 20 record). On its own, Sezzle may be a buy, but how does it compare as a buy against its competitors? How would Arden, Vishal and Tobias rank Sezzle against its competitors?
OMG, so glad you asked about PPH. I locked a buy on that last night and was wondering why no one is talking about it. Was going to ask and seeing it this morning on Livewire is just magic. This episode is so on time for me. Megaport entry point has been hard to decide, as in the past week or so it has been staggering on 13 mark so is NEXTDC. Thanks again for a great BHS episode Vishal.
Hi Lloyd, I'll check with the experts and come back to you soonest. Vas: very glad to hear that feedback, thanks and good luck!