Internet & Retail Play - BUY Recommendation!
The major indices are all trading modestly higher following an active morning session on Wall Street, with the tech sector at the center of attention. Netflix's (NFLX) mixed earnings report made the biggest waves this morning even though the streaming giant beat on both its top and bottom lines, its subscriber growth was much weaker-than-expected causing a sharp drop in the firm's shares. On the bright side, Dutch semiconductor manufacturer, ASML (ASML, +3.9%) reported bullish numbers in pre-market trading, sparking a rally in the sub-sector and mitigating the impact of Netflix's plunge.
Stock Pick Summary:
While investors continue to punish growth stocks recklessly, we continue to identify promising opportunities among them. We are not worried about the short term pressure on top quality growth stocks and are looking ahead few years down the lane. Today, we are doubling down on a Chinese retail growth stock that we picked in 2017, and are sitting on a 100% profit on it!
However, we believe there is lot more upside remaining, as we expect it to continue to grow its revenue by at least 15% annually. Its revenue rose 29% to $114.3 billion in 2020. Its annual active customers increased 30% to 472 million, led by its expansion into China's lower-tier cities. Its adjusted operating margin also expanded, and its net income rose 57% to $2.6 billion.
While its approach is capital intensive, the economies of scale continue to improve enabling it to generate a higher margin revenue with its push to sell to third party customers. It continues to invest in its infrastructure, that is allowing merchants to increase their reliance on its omnichannel capacity to deliver in more innovative ways. While not being a free cash flow story, the stock trades at around 17x forward free cash flow and does look cheap. Note that the stock is prone to negative investor sentiment for Chinese stocks, but we want to look ahead and add another position in it today!
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