Salesforce Slack Acquisition Trade

Salesforce Earnings and Acquisition

Wall Street was not enthusiastic about Salesforce’s (CRM), Slack (WORK) acquisition as the Salesforce stock fell around 17% from when the acquisition was first rumored last week. Aside from that, Salesforce reported solid Q3 numbers in their earnings report. Reporting earnings $1.15 per share vs. $.75 per share as expected and a revenue of $5.42 vs. $5.25 expected. Slack has also become a very popular tool for small to mid-size businesses, and while Slack’s leadership’s execution has been lackluster - Marc Benioff, Salesforce’s CEO, has a strong track record of successfully integrating large acquisitions like Tableau and we remain optimistic about the Slack acquisition.

Behind the Cloud: The Untold Story of How Salesforce.com Went from Idea to Billion-Dollar Company - and Revolutionized an Industry

The Trade

In the short term, we think the sell off here is over done and we’re willing to bet that Salesforce will begin it’s move in the coming weeks if not days, especially when the news cycle moves off from the Slack acquisition.

At the time of this writing, the stock is well below it’s 100 day moving average which is 235, though still a good ways higher than it’s 200 moving average which is around $201 - but we don’t think it will get there.

The trade: We’re entering a put credit spread on Salesforce.

  • Sell $220 12/18 Put - for $930 credit
  • Buy $210 12/18 Put - for $480 debit

The combined credit (max profit) is $480, if the CRM finishes above $220 by 12/18. And a max loss, which for a credit spread is always the width of the strikes minus the credit received, is $520.

Since CRM is at $221 at the time of the trade, the stock needs to stay at the same level or go higher to receive the full credit. Unlike buying a call spread, which usually requires the stock to go higher to profit, this is a less bullish strategy and profits if the stock stays the same, goes higher or even dips very slightly.

Getting options even further out will increase the credit received, but may take additional time to realize profits. With the volatility in the market we prefer getting slightly more near dated expirations right now, leaving some room to roll this trade out longer and adjust the strikes if it begins moving against us.


This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Bitcoin ETF Exists?

Bitcoin ETF - Sort Of

Bitcoin, and many other crypto currencies, have been on a wild ride the past couple of months. Bitcoin has been up more than 60% over the past three months, and up 4x-5x from its pandemic lows.

The SEC doesn’t yet allow Bitcoin or other cryptocurrencies to be in an ETF - however, this may likely change one day, which would be a huge catalyst to fuel further growth. Once Bitcoin is cleared to trade in an ETF (think GLD), it would likely create a large inflow of institutional and retail investors alike, pushing the price of crypto’s even higher.

While changes in policy and regulations may be years away - there is at least one ETF which has exposure to crypto today.

ARK Invest’s wildly successful ARKW “Next Generation Internet” ETF’s 6th largest holding is GBTC, “Grayscale Bitcoin Trust”. This fund owns Bitcoin Cash and their price is loosely tied to the price of Bitcoin Cash which is another popular cryptocurrency which has also run up in recent months. GBTC, Grayscale Bitcoin Trust, is traded OTC and not on a major exchange which is why it is not subject to the same SEC regulations regarding cryptocurrency.

GBTC can also be traded directly on certain brokerages - however investors looking to hold cryptocurrency are probably better off holding it directly. One way of owning cryptos like Bitcoin, Bitcoin Cash and Ethereum is through Robinhood. If you’re new to Robinhood you can sign up using this code and receive a free stock.


This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Nano-X

High Risk - High Reward

Nano-X Imaging (NNOX) went public in the second half of 2020 and has been on a rollercoaster of a ride. The Israeli company purchased imaging technology in 2012 from Sony, and is planning to produce a new imaging device with a much smaller footprint and lower price than a tradition x-ray machine. The produced images are fully digital and the company uses it’s own software, which can be combined with other artificial intelligence technologies to potentially improve diagnosis and further aid clinical imaging analysis. For investors this is especially compelling since the company is planning on making this a subscription model with a charge per image - similar to a SAAS software model. Nano-x is even planning on giving the machine to hospitals for free, in jurisdictions where that’s legal, and profiting on the per image subscription fee.

Founder and Backers

The founder and CEO Ran Poliakine has a long track record of starting successful companies, which include: Powermat, Wellsense, Years of Water, QinFlow, Illumigyn, Tap Systems, SixAI, Musashi AI

Polakine’s largest other company, Powermat Technologies, has become one of the two major wireless charging formats which has been adopted by AT&T, Duracell, Starbucks, Flextronics,Energy Star.

Nano-X also has secured partnerships with Foxconn Technology Group for manufacturing and Fujifilm, a veteran of the imaging space. It’s also received a large investment from South Korea Telecom.

Risks

This company does not yet have an approved device or any real revenue. Investing in such an early phase company naturally carries a lot of risk. The recent run up has also expanded their market cap to over 2 billion, and with all of it’s volatility there may be pullbacks ahead.

Shortly after the IPO the stock ran up over $60 a share, but a short seller report targeted the company which pushed the stock price back down closer to where it initially IPOed. However, the announcement of the demo(see catalysts below), has re-assured some worried investors of the alleged concerns and has helped the stock rebound.

Catalysts

The stock has three catalysts which are helping drive up the stock price

  1. Thursday December 3rd 2020 - Live demo of the Nano-X Arc at the Radiology Society of North America 2020 virtual conference. This is especially important to refudiate the claims of the short sellers.
  2. Any week - FDA 510(K) application in for a single-source device which could get approved before 1H 2021.
  3. Mid-year 2021 - FDA 510(K) approval of the multi-source device, the one planned on being commercialized. This one is the bigger deal and is needed to drive revenue.

The FDA approvals get updated weekly at 1AM (EST) each Monday and can be found here.


This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Rule of 40 - November 2020

With so many tech stocks running hot, it's worth taking a look at the Rule of 40. The Rule of 40 is one way to analyze tech companies, especially SAAS (software as a service) companies, to check if their growth rate combined with their profitability is enough to warrant a premium valuation.

The Rule of 40 is calculated by adding the revenue growth rate and profit. The profit is usually calculated with Free Cash Flow Margin or EBITDA. When a company is in hyper-growth mode it's prudent to fund rapid growth and for the time being run at a deficit or a meager profit. However, it can be problematic if the company isn't growing fast enough, and doesn't have a sizeable profit yet either. The Rule of 40 can help us quickly measure this. The higher the number, the better. The rule of thumb is that a number higher than 40, meets this criteria.


Measuring Valuation

While the Rule of 40 is a useful tool to measure the growth vs profit, it doesn’t tell us anything about the current valuation. One other method is to check the PS Ratio (price to sales), if it is 5 times less than the Rule of 40 score, then it’s often considered a good value.


For an even better insight, you can divide the Rule of 40 score by the PS ratio. The higher the number, the better the growth and profit is relative to the price of the stock.


We ran a few examples using data from gurufocus. The below list is ranked by the highest Rule of 40/PS score. TWOU, ETSY, SE, MELI, CHGG appear to be the winners here.

Examples

Symbol PS Ratio 1-Year Total Revenue Growth Rate FCF Margin % Rule of 40 Rule of 40/PS
TWOU 2.98 37.2 -5.75 31.45 10.55
ETSY 15.28 84.2 36.76 120.96 7.92
SE 24.08 113.3 8.14 121.44 5.04
MELI 22.66 62 24.34 86.34 3.81
CHGG 16.78 48 13.75 61.75 3.68
ESTC 20.81 53.2 -2.3 50.90 2.45
ROKU 22.3 55 -2.08 52.92 2.37
ZM 103.49 190.4 52.34 242.74 2.35
CRWD 48.69 86.4 27.07 113.47 2.33
TEAM 32.46 30.9 31.58 62.48 1.92
TWLO 29.3 53.3 -3.05 50.25 1.72
WORK 29.4 51.4 -1.04 50.36 1.71
SHOP 49.58 75 7.46 82.46 1.66
FVRR 42.01 66.1 3.75 69.85 1.66
DDOG 56.15 73.6 14.35 87.95 1.57
DOCU 35.49 40.6 11.51 52.11 1.47
OKTA 41.22 44.6 9.09 53.69 1.30
MDB 30.88 45 -8.64 36.36 1.18
FSLY 31.25 46.5 -10.48 36.02 1.15
PINS 29.41 36.5 -6.47 30.03 1.02
TTD 57.93 20.9 18.08 38.98 0.67
NET 57.56 50.5 -23.69 26.81 0.47
APPN 45.4 15.7 -7.38 8.32 0.18
SPLK 13.56 14.6 -18.26 -3.66 -0.27

Valuation Course: An Introductory Course to Measuring the Value of Companies (Wiley Finance)

This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice

Booking Holdings

Booking Over Extended on Vaccine News

The vaccine news has quickly lead to a large rebound in virtually every COVID recovery, “value”, travel stock. However, with the pandemic numbers rising to unprecedented levels some stocks in particular have seemingly gotten ahead of themselves.

This is especially true for travel stocks. Today we’re looking at Booking Holdings (BKNG). Booking operates Booking.com, KAYAK, priceline, agoda, Rentalcars.com, and OpenTable. BKNG has been historically a great company with a strong balance sheet and great returns over the past decade. While we’re bullish on BKNG over the long term, and think it is likely it will come out of the current pandemic and rebuild it’s strength and continue to grow over the coming years, it’s very difficult to see how now it should continue trading at 52 weeks highs, and just a few percent of all time highs given the current climate. A vaccine is great news, but the travel will continue being largely a troubled industry for a minimum of another couple of quarters.

As you can imagine with any travel stock, the past couple of quarters have been challenging ones - yet the stock is now at 52 weeks highs.

Prior to this week, it’s previous 52 high close week was 2,080.50 on January 13th, 2020.
It’s all time high 2206.09 was over two years ago on March 12, 2018.

On November 9th it reached a high of 2,128.02 but closed below that.

We’re entering a trade where we think this will begin reverting to the mean once the vaccine euphoria settles. For this trade we’ve entered a call credit spread. Here we’re selling the 12/11 $2120 call and buying the 12/11 $2140 call.

  • Sell 12/11 $2140 call
  • Buy 12/11 $2120 call

Net credit/max gain: $900
Maximum loss: $1100

With a credit spread, your hope is that both options expire worthless and you get to keep the premium. If the thesis is correct, the closer to expiration the option is and the lower the stock price is, the more the value of spread decreases. Assuming it finishes below 2110, the calls expire worthless and the premium is kept either way.

If BKNG goes beyond these levels, depending on risk tolerance, it’s possible to roll out the spread out in time, expand the width and increase the strike prices.


This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Disclosure: we are net short BKNG with call credit spreads.