Higher-growth stocks, sometimes known for burning through cash, seem to be feeling the pressure lately – particularly against a global backdrop of rising bond yields. But does this mean the boom for higher-growth stocks is over, or are there still opportunities for investing?
Senior analysts Alex Shevelev and Gaston Amoros explain that they evaluate stocks using a bottom-up approach – but that an important factor is determining which businesses burn cash at a rate which means they’ll need to raise more capital in future, and which should make it through.
While the Australian Shares Fund doesn’t contain too many stocks of this nature, the team highlights two businesses of note. The first is Whispir (ASX: WSP), whose communications platform allows businesses to engage with their employees and customers, and who successfully raised capital earlier this year to fund an expansion into the United States.
The second is sporting performance-tracking technology provider Catapult (ASX: CAT). While Catapult struggled through COVID, it has since raised capital to expand its business through acquisition and support its technological development. With progress already made on some significant growth targets, the team anticipates Catapult will come out stronger on the other side.
Hello everybody and welcome to this week’s Forager video. My name is Alex Shevelev, senior analyst on the Australian Shares Fund and I’m joined today by Gaston Amoros, my colleague on the Australian Shares Fund. Now, last video Gaston and I talked about some reopening business in the travel and other sectors of the economy today we’re going to talk about higher growth businesses. Over to you Gaston.
Thank you Shev. We’re talking about businesses that tend to be growing very fast because they’re early in their life or they are being propelled by technology innovations. They’re taking share very quickly from incumbents that makes them more prone to be burning cash or barely break even which means it’s highly difficult for the market to value them on near-term profits. Therefore you end up placing more reliance on cash flows that are longer dated which makes them more vulnerable to interest rates and this is the reason why we’re talking about them.
As bond yields rise in the world, then a bunch of these names come under pressure and they start to look very weak and people start wondering, is there something wrong with them? So maybe the question that I’ll ask you Shev is, does this change in macro regime mean that the technology investing boom over the last few years is over? Or are there still opportunities left?
Well as with a lot of things we’ll be going bottom up on these stocks but one interesting way to categorize the stocks in this bucket is to see which ones are burning cash at a rate where they will need to raise capital again and which ones can actually make it through. Now for businesses that can make it through they’ve raised the capital already. They might be reasonably close to break even and on their way to generating meaningful free cash flow. They might not necessarily care, the management teams or potentially the shareholders of these businesses, because they’re moving towards a goal that they can see and can fulfill with their existing resources.
Now the other bucket is a bit more interesting in that context. So over the last couple of years we’ve had businesses that have raised money they’ve plowed that money into sales and marketing and research and development to grow their business and they’ve made certain acquisitions. Now with share prices a little bit lower in that type of business investors are asking the question, will they need to continually raise here? Management teams will respond to this though. They will look at that that concern and they will look at their share prices and say well perhaps we won’t do that incremental project, perhaps we won’t make that incremental acquisition and we will bring the cost base more in line with what the revenues are doing and reduce the amount of time it takes to businesses to break even and then generate cash.
So let’s talk about some of those sorts of businesses, the former category more than the latter in our own portfolio Gas.
We don’t own a lot of these expensive high growers that are burning cash but we do own just a handful that we really like and where I think we got very interesting entry points. So one of them is Whispir. Whispir is a messaging platform for companies to communicate with employees and customers. They raised capital in April at 370 dollars per share to fund the expansion into the US which is a huge opportunity for them and the company has since then met every single quarterly annualized recurrent revenue expectation in the market including today’s. We’re recording on the day where Whispir just released the first fiscal quarter update and they also met that expectation yet the share price has nearly halved since April.
So from 370 we’re down to nearly two dollars per share and this has entirely been driven by these rising interest rates and the environment becoming a little more difficult from a macro perspective to these companies which I think presents us with a great opportunity. We recently added Whispir to our portfolio, it’s a very exciting business they keep growing 25 30 per annum, they have a very low churn rate two percent of revenue insurance every year which is absolutely very low net revenue retention is 117 which means that the business grows nearly 20 every year just with existing customers and you get all these for like three and a half times EBIT revenue which is a fraction of their comps in Australia.
So very exciting and I think it’s one of the opportunities that comes up in this sell-off in technology names. What else do we have in the book that ticks these boxes Shev?
So one of the other stocks in the portfolio is Catapult. It’s been listed in Australia for a while. It is a provider of some very cool technology for tracking professional players. So in sport you might want to track the player via a wearable device or via video or both in fact and the business has now married these two solutions together into a really interesting set for professional teams. Now the business has had its ups and downs in the past. A new management team took over two years ago and ran smack bang into covid which damaged their ability to sell as those teams were effectively hibernating.
It is a large market though it’s growing very quickly and the level of contracted recurring revenue in this business is close to 80 percent of the total revenue and growing quite quickly. As Gaston mentioned with Whispir this is also a very sticky revenue stream so the churn is only about five percent per year. The recent acquisition they made, is also one that they raised capital for, allowed them a little bit of a better product on the video side and it also put some capital on the balance sheet for them to spend over the next two years where they will be spending free cash flow negative. Now we think at the end of that period that the business comes out stronger and management have some very significant growth targets for this business and have already shown some progress towards that. Thanks for your time Gaston and thank you everybody for listening in. We’ll see you again next time.
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