The Buy Scan October 28th

Published on 10/28/22 | Saurav Sen | 2,702 Words

The BuyGist:

  • We've been building something big - the best equity research tool we can imagine.
  • We're build the Buycaster because we need it. 
  • Below you will find a sneak peek of The Buycaster, along with some live examples - the top 10 most requested stocks from our subscribers.

The Watch List is dead.

The Watch List is dead. Long Live the Buycaster.

Well, not quite yet. We’re still about a week away from unveiling what we’ve been working on for the past few weeks. Compared to our current, somewhat interactive Watch List, the Buycaster turns it up a few notches. Compared to our previous Watch List, the Buycaster will:

  1. Analyze more than 3,000 stocks (instead of about 500)
  2. Be more interactive – you’ll be able to filter the analysis by stock and “desired return” (more on this later)
  3. The analysis will be almost entirely graphical, on a dashboard – for easy digestion.
  4. The dashboard will include much more detailed analysis for each company/stock than our current Watch List provides.
  5. Before the end of the year, the Buycaster will also include a world class stock screening tool – also with a list of >3,000 stocks to slice, dice, and analyze.

Think of the Buycaster as your personal equity research team that gives you actionable insights, without the Wall Street price tag.

In the sections below, we briefly dig into what the “Buycast” is, and then publish the latest Buycasts for the 10 most requested stocks:

  1. Alphabet (Google)
  2. Amazon
  3. Apple
  4. Meta (Facebook)
  5. Microsoft
  6. Netflix
  7. Nvidia
  8. Shopify
  9. Snapchat
  10. Tesla

The Buycast: What needs to happen

The Buycaster is called that because it’s a tool to quickly calculate…well…The Buycast. We believe this is the most important metric to gauge a stock’s potential upside. Instead of forecasting, we back-solve. We usually have a minimum required return (ours is about 10% annualized), which gives us our “target price”. Given that target price, we can back-solve to what needs to happen in the underlying business for the stock to get to that target price.

Here’s a quick definition:

The Buycast = What needs to happen in the underlying business to justify an X% increase in the stock price. 

So, we need to double-click on a few variables here. In our Buycast:

  1. What needs to happen is boiled down to Revenue Growth…that needs to happen
  2. X% is the Desired Return. In the new Buycaster, users will have a choice on this metric.

Through our experience and through the wisdom of Michael Mauboussin, we’ve learned that investing is a game of expectations. The way to make money is to buy low expectations and sell high expectations. Our experience has taught us that those expectations can be boiled down to revenue growth. The key, then, is to deconstruct the current stock price to find out what’s really baked in. If what’s baked in is too low, it may be a screaming BUY!

The Buycaster is being built to deconstruct thousands of stocks with the push of a button. We’re building this tool because we need it to make investment decisions with our hard-earned savings. So, we figured that you probably need it too. We can (should) all have a tool at our fingertips that crunches the numbers and tells us “What needs to happen in the business over the next few years for us to consider buying the stock today?”

Yes, we can! Yes, we should!

Here’s a sneak peek of the Buycaster in the oven (the final product will look better):

There is one caveat to the Buycaster that you’ll probably see us repeat ad nauseum over the next few months: The Buycast should always be used as a supplement to good old-fashioned qualitative analysis of the company – like analyzing competitive advantage and management strategy.

If you like the story, leave the number-crunching to us. Here’s a common scenario in which The Buycaster will be immensely helpful:

You like a company’s product or service, presumably because you have some knowledge advantage – like being an avid consumer or an employee or an enthusiast of that industry (for example videogames). The company releases a new product that has no direct competition yet, and you believe that competitors will find it difficult to match the benefits of this new product (Buffett calls this a wide economic moat). So, now you’re tempted to buy the stock. Why not? The product will sell like hot cakes! But wait…is this already priced into the stock? You now remember that a great business does not necessarily mean it’s a great investment. Is the stock terribly overpriced? 

Ahhh…if only you had an equity research analyst to run the numbers!

Your wish is our command. While we’re busy pouring in our blood, sweat and tears to build the best equity research tool we can imagine, we’ve been getting a lot of emails about some of the usual suspects. Many companies that seemed invincible during the pandemic have seen their stock prices drop precipitously this year. Many of our subscribers are wondering whether they should buy the dip. As always, the answer is, “it depends”. Depends on what? The Buycast, of course.

In the sections below, we’ve let the Buycaster do its thing with these popular requests. Your portfolio probably has at least one of these.

Alphabet (Google) Buycast

Google reported earnings this week, which disappointed Mr. Market. Management’s revenue growth guidance was tepid given the uncertainty in the global economy. And right there is a reason why we zoom into “revenue growth that needs to happen…” when we evaluate potential investments. It’s the mismatch in growth expectations of cash flows (like revenue and free cash flow) that moves stock prices. We like to zoom into revenue growth because it’s easier to match up with a qualitative story.

Here’s the latest Google Buycast.

The best way to use the Buycast is this

“Can I believe – with reasonable confidence – that Google’s revenue growth can hover around an average of 12% for the next 5 years? If so, why?

Hint: We believe this is a very reasonable Buycast. We did a deep dive on Google quite recently (available to subscribers).

Amazon Buycast

Amazon’s latest quarterly results were on trend – they too disappointed the market with “only” 15% year-over-year revenue growth. When you compare it to the chart below, you’ll see why the steep fall in AMZN today seems rational. What really spooked us was this little bullet point in the earnings release:

“Free cash flow decreased to an outflow of $19.7 billion for the trailing twelve months, compared with an inflow of $2.6 billion for the trailing twelve months ended September 30, 2021.”

Ouch. Fortunately, we don’t hold AMZN. But we’re very curious now. We’ll need to dig in.

The Buycast below does not factor in the latest quarterly numbers – if anything the Buycast will increase a bit once those latest financial statements flow through our system. That means that we’d need to believe MORE in terms of future revenue growth to buy into the Amazon story.

The best way to use the Buycast is this

“Can I believe – with reasonable confidence – that Amazon’s revenue growth can hover around an average of 30% for the next 5 years? If so, why?

We have a hard time believing this.

Meta Buycast

Meta’s stock price has dropped about 70% this year. Naturally, many investors (and traders) are interested in buying the dip. But is it still overpriced? Or has Zuck totally lost it with his Metaverse ambitions?

Well, it helps a lot to know “what needs to happen in the business” for us to expect a 65% (10% annualized) return over the next 5 years.

The best way to use the Buycast is this

“Can I believe – with reasonable confidence – that Meta’s revenue growth can hover around an average of 8% for the next 5 years? If so, why?

The probability of making our desired returns increases substantially when the story matches the numbers and vice versa. If you’re reasonably confident about the Meta story, then these numbers should confirm your thesis. For example, if you believe that Facebook can monetize Instagram and Whatsapp in the same way as its original FB product (similar revenue per user KPIs), then this Buycast looks believable even without any vague projections for their future Metaverse products. The Metaverse stuff in that case, if not a drag, is just gravy.

Or is it Virtual Insanity!?

Microsoft Buycast

Microsoft also reported earnings this week, and disappointed Mr. Market just like Google, Amazon and Meta did. Again, there were worries about the overall global slowdown affecting sales. Management guidance on future revenue growth came in below market expectations. Again, this is why we love using the Buycast – this is the variable it estimates.

Here’s what needs to happen in Microsoft’s business for us to buy (or keep holding) MSFT:

We still hold MSFT at 3% allocation in our portfolio. Based on this Buycast, we’ll keep holding until we find a better (a more believable 65% upside) alternative. We’re not worried about the latest quarter.

Netflix Buycast

The most hated stock of 2022 has made somewhat of a comeback recently. We still get embarrassing facial twitches when we recall April 19th, 2022, when they released their Q1 numbers. NFLX dropped more than 30%! In one day!

It took us every shred of courage left in us to keep holding the stock. Even with increased competition from Disney and HBO, our target of 400 million global subscribers, while less likely than before,…looks achievable. But even if they get to 300 million, there is some upside left in the stock. If you want to buy NFLX today, this is what you’ll need to believe about the business:

By the way, The Crown Season 5 is out next week! Look out for a stock pop. Just kidding. That is not an investment thesis.

Shopify Buycast

Shopify is another global dominator in what they do – ecommerce SaaS for online retailers. But since Covid ended, it turns out that online shoppers are less bored at home because they’re actually going out more. Online shopping growth rates took a beating. SHOP’s performance this year has been abysmal – the stock has dropped about 75%!

But now that the stock is beaten down, is it time to pick some up? Well, what do we need to believe about the business to continue expecting a high enough (10% annualized) return when we look back 5 years from now?

With Shopify, we’re always wary of an Amazon or Google threat. They could launch an ecommerce SaaS that totally kills SHOP. The synergies are obvious – Amazon is the big shark in online retail and Google is the only shark in search-based-advertising. On the other hand, one of them could just buy Shopify! That would almost certainly be a big premium to its current stock price.

We’re not sure what the Finance guys at Amazon are thinking. But would you buy SHOP today with a Buycast of about 30%?

Snap Buycast

Snap’s stock has been one of the worst among pandemic darlings – SNAP is down nearly 80% year-to-date. Take that SHOP! It looks ridiculous but there is some logic to this, well, snap-back (pun always intended…sorry), because it was ludicrously overpriced during the pandemic. How do we know it was overpriced? Well, The Buycast was too high. We recall that to buy the stock in late 2020, we needed to believe that Snap’s revenue would grow by about 40%...annualized! We had picked up Pinterest instead. In the ensuing quarters, Snap’s Buycast dropped precipitously.

The Buycast today is more reasonable but still too high, in our view:

Tesla Buycast

Will Elon make it possible to voice-tweet while driving a Tesla? Imagine the garbage from grumpy commuters that will fill up the app on a Monday morning. It’s totally possible now that he’s the boss of both companies, with the intention of creating some sort of “super-app”. Elon will probably be the most avid voice-tweeter.

Tesla has been the darling of the “have fun staying poor” traderbro crowd. Most of the Tesla investment “theses” center on how amazing the cars are, on how Elon is the real-life Tony Stark, and on how Tesla’s software will dominate the world. Of course, our impression is anecdotal, but we wouldn’t be surprised to hear that, say, 70% of TSLA holders (by count of unique shareholders, not by amount held) don’t even know what they need to believe about the business to keep holding the stock! Well, maybe they need the Buycaster.

Elon, let that sink in!

That’s all for today.

Next week, we will roll out The Buycaster to our subscribers. Until then, many happy returns.

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