INSIDE:
Economic growth could slowly pick up in the U.S. and globally, as inflationary pressures continue to ease, with the Fed joining the rate-cut “party,” which could lead to even stronger corporate earnings growth following this year’s robust gains
The megatrends behind the secular bull market in stocks aren’t going anywhere, with the tech revolution, the AI boom, the medical revolution, the expansion of global trade, and the emergence of China’s and India’s middle class fueling global growth in the coming decade
The U.S. economy’s relative strength will likely persist, and there is no reason to believe that domestic stocks will give up their global dominance, meaning that the U.S. market is still the place to be for outsized returns
After hitting new record highs and consolidating their gains, the major indices are primed for further gains, leaving the key technical levels of 40K in the Dow, 18K in the Nasdaq, and 5,500 in the S&P 500 behind for good following the elections
Growth-focused companies could take center stage as financing costs drop, and despite two stellar years, tech stocks might continue their dominance
Cyclical stocks, the Dow, and small-caps, which have already started to flex their muscles, could catch up with the market-leading Nasdaq as the impact of easing monetary conditions increases
Volatility could continue to trend lower, with a few spikes above 20 in the VIX, corresponding to orderly profit-taking events in stocks, which should still be treated as buying opportunities
Five Stocks To Own Going Into The Elections & Beyond
2024 began exactly how bulls hoped it would, with stocks extending last year’s technical breakout to new record highs, thanks to the tech sector’s continued leadership and the bull market’s broadening base. Overseas stocks joined the party in earnest, too, with even European equities eclipsing their prior highs, despite a mild recession on the Old Continent, proving that, against all odds, a global bull market began in 2023.
Despite the promising long-term trends and the early-year rally, geopolitical tensions, lingering inflation fears, and the market-leading Nasdaq’s extremely overbought momentum readings led to several months of sideways price action and a deep, albeit brief, selloff in August. While the past few months were frustrating for investors, they likely set the stage for something big toward the end of the year. Although the pre-election uncertainty could weigh on risk assets, this autumn could provide one of the best opportunities to load up on stocks in years.
The positive backdrop doesn’t mean that you should ignore stock picking and buy stocks without thinking. In fact, we are still in the “New Golden Age of Stock Picking” that started in 2022, and this year’s strong divergences between the main sectors prove just that.
But, before diving deep into the Gorilla’s top picks, let’s see the fundamental and technical drivers behind the bull market in detail!
Bullish Technicals In The Wake Of A Frustrating Summer
Despite all the fear, the case for the bull market’s continuation remains as strong as ever, with fundamentals and technicals lining up for a potentially stellar end to 2024, and extending well into 2025. The major indices are trading in strong long-term advancing trends, and following last year’s major technical breakout, the benchmarks just had their first meaningful pullback, which is considered one of the best, lowest-risk entry points by trading pros.
August’s deep pullback came and went so quickly that you might have missed it during your holiday trip. And even though some analysts, including one of Goldman Sachs’ (GS), believe that this is a warning sign for bulls, the Gorilla tends to disagree. Such quick recoveries are hallmarks of strong markets. While it’s true that sentiment was a bit too bullish before the summer, many retail investors are waiting on the sidelines right now, providing ample future buying power.
There is still plenty of skepticism about the bull market when it comes to professional investors as well, which is not how bear markets begin, as market tops and euphoria usually go hand in hand. In all likelihood, this summer’s pullback will only be a side note in the history of 2024, and the secular bull market will march on. But, if you don’t believe in the power of technicals and sentiment analysis, maybe the changing monetary conditions and the improving economic outlook will be enough to convince you that stocks should be near the top of your investment shortlist.
The Fed’s New Focus: Jobs and Growth
The Fed’s fight against inflation was long and painful for some sectors, with the real estate sector suffering the most, but overall, the economy and the stock market weathered the storm very well. That said, lower-income consumers were hit hard by surging prices and rising interest rates, which led to weaker growth in the consumer economy, but those trends have already reversed or are about to reverse. Real wages are rising, energy prices are near their war-era lows despite the sky-high tension in the Middle East, and inflation indicators have been surprising to the downside across the globe this summer.
What’s more, inflation is now officially in the Fed’s rear-view mirror, and the past few months’ trends will likely give confidence to the Central Bank to be as aggressive in cutting interest rates as it was raising them. At the Fed’s Jackson Hole Symposium, which has a history of huge announcements, Chairman Jerome Powell all but confirmed that a rate cut is coming this month. Mr. Powell also stated that full employment is the Fed’s new focus, hinting at a brand-new monetary era, which will likely last for many years.
Most experts now agree that going into the elections, the Fed will likely ease at least one more time. Yields hit one-year lows in August, with more cuts to follow in 2025. Furthermore, the ongoing tech revolution and the artificial intelligence (AI) boom, in particular, will mean that long-term deflationary forces, such as increasing productivity and the impact of global trade will dominate again, leading to another extended period of low interest rates.
Let’s see how the economy is doing ahead of the Fed’s easing cycle.
Financials Are Breaking Out, Goldilocks Rally Ahead?
Most seasoned investors would agree that one of the best ways to lose money on Wall Street is to go against the trends in the financial sector. The banking system’s strength is not only essential for growth, but the sector is usually a great forward-looking indicator of the economy and, in turn, the stock market. In fact, the bank sector’s stability in the face of last year’s regional bank crisis was among the Gorilla’s main reasons to expect a sustained breakout to new all-time highs from the major indices in 2024.
So, what are financials up to these days, you might ask? Well, they are busy breaking out to new record highs. Focusing on this summer’s gloomy headlines, this might be quite the head-scratcher, but financials were among the first issues erasing August’s pullback. Why is that? Just in August, U.S. GDP growth was revised higher, retail sales blew away expectations, and the all-important services sector signaled accelerating growth, which is enough to make a feared recession highly unlikely anytime soon.
Evidence for a “soft landing” is piling up and even though manufacturing is still struggling, the housing sector could start to contribute to GDP growth in a big way soon as demand remains strong, the financial system remains healthy, and mortgage rates are finally dropping. From a broader standpoint, the economic super-cycle that began following the COVID crisis and the shock of Russia’s war in Ukraine has the potential to last for many more years, and the technological leadership of the U.S., unique domestic market, solid demographic trends, and stable supply of resources provide a great fundamental backdrop for domestic stocks.
With all the above in mind, the coming quarters could easily bring “Goldilocks” conditions for the market – solid growth coupled with easing monetary conditions – which usually means outstanding returns for stocks and other risk assets, but investors will have to keep adapting to the ever- changing market conditions.
A Maturing Bull Market
Before the start of 2024, the Gorilla expected a “slightly boring, frustrating, but bullish year.” By the end of August, even the worst-performing Dow was up nearly double-digits, with the Nasdaq and the S&P 500 sporting gains of over 15% each. These lofty gains – the product of the first quarter’s grinding and “boring” advance – might come as a surprise for investors who don’t closely follow the market, but such gains are normal in mature bull markets.
Short-term traders likely experienced plenty of frustration, as volatility also followed the Gorilla’s expectations, with the Volatility Index (VIX) spending most of the year under the widely watched 20 level, outside of a few brief spikes. As before, all selloffs should be considered buying opportunities, but making a quick buck becomes more and more difficult in low-volatility markets. Small-caps surged to new multi-year highs after lagging the major indices last year, and even though the Russell 2000 is yet to take out its 2021 high, the broadening of the rally’s base is undeniable.
The odds are that this year’s trends will continue well into next year, and the positive global developments mean that an accelerating rally could be in the cards following November’s elections, meaning that the current buying opportunity might not last long. This year’s increasing valuations make stock- picking even more important, and the Gorilla is ready to share his picks, which could thrive no matter the winning party!
American Tower Corp. (AMT):
The Ideal Interest Rate Play?
If following Warren Buffet’s investment principles is your goal, American Tower (AMT) checks at least one of the boxes; it’s a simple business that is protected by a sizable moat and a stable client base. American Tower specializes in leasing real estate to telecommunication companies suited for a wide range of mobile, broadcast, and wireless applications across the globe, with its market capitalization climbing above $100 billion this year.
The company was founded in 1995, and thanks to its three decades of experience and vast know-how, it is dominating its primary markets while having a competitive advantage throughout its secondary geographies.
Through its comprehensive offerings, American Tower became one of the largest specialized REITs (Real Estate Investment Trusts) globally, giving it excellent bargaining power and comparatively low financing rates. The company has over 220K sites under its umbrella, spanning five continents and over 30 countries, with a clear focus on North and Latin America but a strong presence in Europe, Asia, and Africa as well. Increasing global mobile penetration rates, surging data usage, the 5G rollout, and the looming generative artificial intelligence (AI) boom all but guarantee that the secular growth trend behind the company’s growth won’t slow down anytime soon.
Stable Income Streams, Global Exposure, And Relentless Growth
AMT’s average lease agreement lasts nearly eight years, which, together with a very high client retention rate, leads to predictable and stable long- term income streams, with economic cycles barely affecting its core business. American Tower also enjoys very high renewal rates across its geographies, making it unique among REITs and a top pick to benefit from a sustained decline in interest rates. Its bargaining power and lean structure also place the company near the top of the industry’s profitability rankings, while presenting a strong barrier to entry to its potential competitors.
American Tower has long implemented a strategy based on global growth, but over the past couple of years, it has refocused its capital allocation toward developed markets, and India, in particular, in a bid to reduce risk and further improve stability. This shift could improve execution, project success rate, and the spread between rental rates and financing costs. Since growth remains strong in the Americas and Europe, its growth impact will likely be negligible. That said, the bulk of the company’s revenue relies on a specific niche, with some uncertainty regarding long-term demand, prompting a push to diversify while maintaining its competitive edge.
Through the $10 billion acquisition of CoreSite, the company entered the data center business in 2021, complementing its core offerings, and American Tower now operates 25 sites, accounting for 7% of its total revenues in the second quarter of the year. This expansion aided growth while improving margins and providing exposure to a quickly growing market with deep synergies connected to the company’s core business. The new segment posted double-digit year-over-year growth in the latest quarter, and thanks to its AI exposure and substantial CAPEX spending, data center growth could even accelerate in the coming quarters.
Financials and Valuation
American Tower’s short-term performance is strongly tied to interest rate rates due to its financing and income structure, but digging down to its organic growth metrics shows steady growth and improving operational efficiency. The company’s sales have been growing at a high-single-digit rate over the past five years, with operating expenses consistently surprising to the downside under new CEO Steven Vondara, and the company’s crucial Funds From Operations (FFO) metric – essentially cash-flow for REITs – beating expectations. American Tower recently upgraded its bottom-line projections for the next couple of years, forecasting a growth rate of over 6%, with analysts predicting earnings growth to top 25% per year through 2029.
The company’s growth strategy utilizes leverage, hence its strongly rate- sensitive nature, Despite its debt-based business model, the company’s balance sheet is also stable, with a declining net leverage ratio. Since American Tower uses a Consumer Price Index (CPI) -based re-pricing clauses in its contracts, its revenue has also been tracking the past couple of years’ surge in inflation, and contract resets will continue to increase cash-flow in the coming years. The company is paying a respectable and stable dividend of roughly 3%, but American Tower still boasts stable Free-Cash-Flows (FCF) generation, which easily covers its dividend and provides the base for further growth.
American Tower’s valuation remains attractive despite this year’s gains, and an aggressive rate-cut cycle from the Fed could see the company’s valuation metrics plummet, making its current price a substantial bargain. With the entire real estate sector currently “underinvested” due to its recent struggles, retail investors could provide additional buying power once the recovery gains steam, which could lead to a multi-year rally.
The potential downside should there be a rebound in inflation, is limited at its current level. Hence, the stock offers a low risk/reward ratio for investors, with the company’s substantial backlog and the recent surge in rental demand, assuring healthy top-line growth.
Technicals and Recent Performance
AMT staged a turnaround this year following a grueling three-year period, and since the company’s fundamentals have been steadily improving over the past several years, the stock might have plenty of gas left in the tank. AMT is now trading in a well-established long-term bullish trend, well above its 200-day moving average, and after breaking out above the $235 level, bulls could, in the medium-term, have their sights on the stock’s all-time high from 2021. The stock recently formed a classic cup-and-handle pattern, confirming its trend reversal, which could provide technical tailwinds for the rest of the year.
International Business Machines Corp. (IBM):
A New Dawn for the IT Giant?
Despite its pivotal role in establishing the modern tech industry, IBM has been dismissed as a perpetual laggard for over a decade, and for a good reason. Even though the company tried to reinvent itself multiple times, its bloated organizational structure, surging costs, sluggish growth, and low margins made it a tough choice as an investment. Over the past five years, IBM went through a real transformation under CEO Arvind Krishna, spinning off a significant portion of its low-margin legacy IT infrastructure business into Kyndryl Holdings (KD) to entirely focus on its hybrid-cloud-based software and consulting business.
Since the spinoff, IBM has managed to enter a phase of organic growth. Although IBM hasn’t solved all of its issues, the company’s recent track record in execution, cost management, and strategic decisions make it an attractive and cheap option in the tech space. The company’s quickly improving financials, combined with its massive knowledge base and research and development prowess, give its shares significant upside potential. What’s more, IBM’s growth has been greatly aided by its business-to-business (B2B) AI offerings, which could be one of the catalysts of the company’s developing turnaround story.
Software and Consulting Surge Fueled by Generative AI Adoption
Why is IBM, of all companies, such a promising low-risk AI play? Well, IBM primarily serves business customers across multiple industries, providing essential productivity, communication, and analytics tools. One of generative AI’s most relevant use cases, at its current level, is customized “in-house” productivity solutions, which align perfectly with IBM’s expertise, especially given the company’s “hands-on” approach to its projects, which manifests in close long-term collaborations with its clients. The company recognized this synergy and was quick to implement a wide range of AI-driven software solutions, such as customized assistants, knowledge bases, and data-analytic tools, which were met by strong demand over the past couple of years.
IBM’s strategic focus on its software and consulting segments resulted in steady top and bottom-line growth over the past years, and analysts expect continued mid-single-digit expansion in both areas. The company’s hybrid cloud platforms have been driving growth in its software segment, but AI adoption also led to an uptick in infrastructure revenues through an accelerated upgrade cycle. IBM’s latest software partnerships on cybersecurity, cloud infrastructure, and AI data solutions with industry leaders such as Microsoft (MSFT) and Amazon’s (AMZN) AWS have increased its reach, and its stable B2B client base provides a great foundation for further cloud growth.
IBM has been active on the acquisition front this year, making use of its improving financial position, and the market reacted well to the company’s growth push, with its $6.4 billion HashiCorp deal making the biggest waves. The cloud automation company’s offerings fit well into IBM’s strategic vision, and its quick integration into the company’s platforms shows that IBM is a different, more agile beast that can maintain its momentum. That said, IBM is still a laggard in the eyes of a slew of players in the industry, and the company has plenty of room to improve its brand, but IBM’s new management seems to be on the right path.
Financials and Valuation
IBM’s margins have been improving across the board since 2019, with the company’s revenue hitting a five-year high over the past twelve months, with its operational costs flat over the same period. Since 2020, IBM’s operational costs are down by roughly 10%, which might not seem much, but given the size of IBM’s operations and the 100% increase in comparable sales, its margin impact is massive, and the company’s further cost-saving initiatives could lead to rapid improvements in the coming quarters.
IBM’s latest quarters have been consistently stronger than analyst expectations, with its free cash flow of over $13 billion, in particular, turning heads, which vastly improved the company’s financial position. IBM’s debt load of $53 billion remains higher-than-average compared to its competitors, but thanks to its improving profitability and steady growth, the company is unlikely to face financing issues, especially during the Fed’s easing cycle.
In fact, IBM is now in a position to significantly reduce its debt burden or refinance it at lower rates in the coming years, with the company having enough resources to continue investing in growth while returning capital to investors. IBM offers a dividend yieldof 3% at its current price level, which will become more and more attractive as the Fed cuts interest rates in the coming quarters. Even though the consensus regarding IBM’s business is starting to shift, its stock still trades at a hefty discount compared to its peers, both based on current and future earnings, giving it massive upside potential for years to come.
Technicals and Recent Performance
IBM has been showing relative strength compared to the large-cap benchmarks and its closest peers since the summer of 2023, and the stock is currently “testing” the $200 level after hitting decade-long highs earlier this year. Currently, IBM offers a unique blend of low volatility and outperformance that could provide stability and above-average returns for years to come, with plenty of headroom once the stock clears its all-time high from 2013. IBM is trading in a strong bullish trend, above both its 50- and 200-day moving averages, and while up by over 20% on a year-to-date basis, the stock could enjoy technical tailwinds throughout the rest of the year, should it complete its technical breakout above $200.
Spotify(SPOT):
The Next Billion-User Tech Giant?
Spotify is the undoubted global leader in the audio streaming market, controlling roughly one-third of the quickly growing segment. Spotify has over 625 million active users, up from 77 million in 2015 and 232 million in 2019, with the company registering continuous growth thanks to its dual freemium model, based on an ad-supported free tier and ad-free premium tiers. Spotify also boasts nearly 250 million paying subscribers. With the secular shift toward streaming in music consumption still in full swing, the company’s mid-term goal of reaching 1 billion users seems realistic.
The company’s mobile app remains one of the fastest-growing apps globally, with the company having a strong presence in North America, Europe, Latin America, and Asia. The Swedish company’s biggest market is still the U.S., despite strong competition from the likes of Apple (AAPL), Google (GOOG), and Amazon (AMZN), but its other geographies have been growing quicker than its established markets in recent years, transforming Spotify into a truly global powerhouse in audio streaming space. Spotify is often referred to as the Netflix (NFLX) of music, and for a good reason, as the company’s audio offerings are comparable to Netflix’s video products, with a few caveats, which analogy will be crucial in understanding the company’s huge potential and the strategic challenges it faces.
Product and Pricing Innovation Fueling Growth Amid Owned -Content Push
For nearly a decade, Netflix faced scrutiny over the viability of its business model due to its high royalty costs, expensive content strategy, and stiff competition across its key markets. However, the video streaming company showed that such a model could be successful in the long run with a strong brand, global presence, and aggressive growth strategy. That said, Spotify and other audio services generally pay higher royalty fees, and audio streaming services products tend to be more comprehensive but more homogeneous than video services, with less exclusive content. In theory, this makes switching between services less costly for customers, but Spotify has a few aces up its sleeve that have been helping it with these strategic weaknesses.
Spotify, thanks to its high engagement levels, has a huge competitive advantage compared to its closest peers and even Netflix; according to research firm, Antenna, of all video and audio streaming services, Spotify’s customers are the least likely to cancel their subscriptions in the U.S. with a monthly cancellation rate of less than 2%. This explains that, despite the fierce competition, Spotify’s U.S. market share has steadily increased over the past three years, capturing market shares from big guns like Apple and Amazon, a feat deemed unlikely by many analysts.
Spotify continues to be laser-focused on growing its user base of its core business globally while expanding its offerings and increasing the share of its owned-content portfolio. The company recently started offering audiobooks with promising initial results, with paid podcasts also being an important part of Spotify’s diversification push. These new products could broaden the company’s demographic reach beyond its traditional young adult audience, Spotify is offering its new products both individually and in bundles – which are being rolled out across its geographies – and the company’s bundling strategy could significantly boost its margins in the long run.
Financials and Valuation
Spotify proved its pricing power and user retention capability over the past couple of years amid a global surge in inflation, raising its prices two times in some regions, with its average price now above its major peers’ fees, such as Apple Music, in the U.S. Paying subscriber growth has been very strong in recent quarters, with its paid segment outperforming its ad-supported segment, despite its price hikes, and the company’s increasing global footprint means that its growth potential continues to be exceptional. Paid subscriptions comprise over 85% of Spotify’s total revenue, and should its owned-content strategy pan out, the path to becoming a “cash cow” would be clear, especially given the company’s low churn rates.
When it comes to evaluating Spotify’s financials, profitability is the elephant in the room, with some analysts doubting the company’s ability to turn a sustained profit, as effectively monetizing its quickly growing user base could prove tricky. Furthermore, royalties make up the vast majority of the company’s costs, and since the royalty-holding studios are in a strong bargaining position, Spotify could face long-term margin pressures. At the same time, Spotify’s optimized subscriber plans and new monetization avenues have already boosted its profitability measures, leading to a surge in its share price.
Spotify’s revenue neared $16 billion over the past twelve months, with its quarterly revenue growing by 20% on a year-over-year basis, despite the headwinds in the consumer sector. The company executed a significant cost- cutting program following its COVID-era boom, and its gross margin climbed back to nearly 30% in the second quarter of 2024, after dropping below 25% in 2022.
Thanks to the past couple of years’ positive developments, the company’s financial position has improved significantly, with its FCF reaching $490 million and its cash hoard topping $5 billion in the second quarter of this year, which eclipses its total debt of $2 billion. Based on its current earnings, Spotify’s valuation is sky-high. Still, its recent momentum and its lofty long- term profit potential could easily justify its market cap of $60 billion, even considering substantial execution- and competition-related risks.
Technicals and Recent Performance
SPOT has been on a tear ever since the start of 2023, coinciding with the company’s cost-cutting push, and the stock is still trading in an explosive bullish trend. Despite its lofty year-to-date gains, the stock is only now nearing its all-time high from 2021, and a technical breakout could open a brand new chapter for SPOT in the coming months. As the company’s business continues to mature, the stock’s sky-high volatility is bound to decline, but SPOT is the riskiest of the Gorilla’s picks while having the most upside potential as well.
Tradewed Markets(TW):
Exceptional Growth in a Unique Market
Even though Tradeweb (TW) is a lesser-known company, it has definitely made its mark in the institutional bond trading space, exploding into the scene with unique and modern solutions aiming to bring the market into the 21st century. Government bond and credit markets are still stuck in the past in a sense, with traditional deal-making methods holding up in the face of the retail trading markets’ rapid electronification. That said, the secular trend of modernization is clear, and Tradeweb is in a prime position to benefit from it in the coming decade, which has been the company’s strategic focus since well before going public in 2019.
Despite fierce competition in its markets, Tradeweb has been executing its growth-focused strategy – expanding into new products and geographies while increasing its market share – without hiccups. The company’s platform- based strategy makes it easy to expand into new product segments, and currently, Tradeweb is already offering trading, processing, and data services for over 50 products, making it the go-to provider for a slew of institutional investors.
The company navigated the past couple of years’ bond turmoil in an exemplary fashion, sticking to its strategic plans and using the market’s weakness for “bolt-on” acquisitions, such as By now, Tradeweb provides services for over 2,500 clients primarily in North America, Europe, and Asia, including the vast majority of the top global asset managers and their clients, with its market share nearing 20% in its main electronic markets., and its reach is still growing in the professional space.
Connecting Markets and Providing Synergies for A Wide Range of Clients
Tradewed defines itself as an “operator of electronic marketplaces for rates, credit, equities, and money markets,” which, in layman’s terms, places it somewhere between an exchange and a brokerage, with the company serving institutional, wholesale, retail, and corporate clients. Tradeweb’s average daily trading volume was above $1.8 trillion in the second quarter, with double-digit growth across its U.S. credit, European credit, municipal growth, credit derivatives, and money markets offerings. Even though growth rates, such as Tradeweb’s, often lead to organizational issues and mismanagement of resources, the company’s growth is largely based on providing products previously unconnected to existing clients.
For example, Tradeweb recently became the first electronic trading platform to connect repo (short-term borrowing for bond dealers) and IRS (interest rate swap) markets while expanding its data services based on real-world needs. Thanks to its product expansion, the company’s addressable market has been growing by over 10% over the past five years, but its sales are up by an annualized 20% in the same period, highlighting its increased market share and organic growth potential.
The company’s latest acquisitions reflect its client-first approach and its goal to target new clients. Earlier this year, Tradeweb bought Institutional Cash Distributors, an investment technology provider focusing on corporate clients trading short-term Treasury-related investments, for $785 million to open a whole new client channel leveraging its existing infrastructure. Last year, through its acquisition of r8fin, Tradeweb dipped its toes into algorithmic trading while entering the Australian and New Zealand fixed- income markets via the $80 million Yieldbroker deal.
Financials and Valuation
Tradeweb aims to be a disruptor in its business while maintaining a lean corporate structure, which is no easy feat, but the company’s low cost and debt levels suggest that it has efficiently dealt with its double-digit growth rate. Looking at its last quarter, its revenue and earnings were up by 30% and 35%, respectively, with Tradeweb’s profits topping $400 million while its sales surpassing $1.5 billion over the past twelve months. The company’s revenue roughly doubled since 2021, with its earnings growing even more.
Tradeweb’s rates and credit segments provide the bulk, roughly two-thirds of its sales. However, its money market and market data businesses are also increasing organically and through its acquisitions.
Despite its stellar growth and the seasonal nature of its business, the company’s financials have been steady, with Tradeweb successfully harnessing economies of scale while integrating its acquisitions. Looking at just its current P/E ratio of over 50, Tradeweb might seem expensive, but the company’s growth outlook is unparalleled in its industry, with the consensus calling for a yearly earning growth rate north of 15% for the next five years.
Tradeweb has over $1.5 billion in cash and cash equivalents, providing ample liquidity and funds for further expansion, and the company has been returning capital to investors ever since its IPO, both through dividends and stock repurchases. TW is operating with very low debt, and although growth always has its risks, the stock’s valuations seem reasonable, and its relatively low institutional ownership suggests that demand for its shares could remain strong for years to come, especially since TW is not yet part of any major index.
Technicals and Recent Performance
Tradeweb’s great execution is reflected in its shares’ performance and the company’s valuation, with TW being up nearly 300% since its initial public offering (IPO) in 2019 while also registering a gain of over 100% since its 2022 trough. TW hit a new all-time high in February, eclipsing its COVID-era spike, and after consolidating its technical breakout, the stock continued its march to new highs during the summer. TW is trading in a bullish long-term trend, with plenty of technical “support” below, and given the company’s expansion, this year’s breakout could be the start of a multi-year bull run, while easing financial conditions could provide additional tailwinds for the stock.
Uber(UBER):
Global Innovation and Growth Powerhouse
Uber is the leader in the global app-based ride-hailing market, both in the
U.S. and globally, while being a major player in food and grocery delivery as well through its Uber Eats brand. Uber’s core business is sporting a monthly active user base of 150 million, with the company’s ever-growing platform boasting a global user pool of well over 500 million. Uber emerged as a poster child of the “new economy” over the past decade, despite its controversies, emerging from the “unicorn” status as a sustainably profitable but still growth-focused tech company.
Throughout its 15-year history, the company has had its fair share of legal scrutiny, but Uber has been successfully navigating the legal minefield, always maintaining its focus on relentless growth. Uber carved out significant market shares in multiple markets and geographies, taking full advantage of its platform, with innovative pricing models and aggressive cost management strategies aiding its expansion, and Uber’s revenues crossed $40 billion for the first time over the past twelve months, with its market capitalization breaching $150 billion.
The Gorilla believes that Uber’s growth story is far from over, and as an investment, it entered a new phase of its life cycle this year, as the company reached stable profitability while maintaining its growth potential. Uber might now be ready to join the “big guns” of the tech sector. Although Uber’s markets aren’t considered highly interest-rate- sensitive, the company’s stock has been showing as strong a correlation with yields as the real estate and utilities sectors over the past few years. With all that in mind, Uber is in a unique position to benefit from the Fed’s easing cycle, while transitioning from a low-margin growth powerhouse to a more mature but still agile tech giant.
Network Effects Drive Strategic Strength
Even though Uber faces stiff competition in its core markets while eyeing already competitive new opportunities, its personalized, flexible, and dynamic pricing practices give it a clear edge over its traditional competitors, with its closest peers also being forced to adapt to the company’s strategies. Uber has a history of executing bold expansion strategies, with a clear focus on achieving dominance in its markets to harvest network effects and platform synergies. Be it its ride-hailing or delivery segments, Uber managed to disrupt established markets, and with 85% of its major markets being already profitable and its margins improving in the vast majority of its geographies, it’s hard to question its strategic vision.
Uber One, the company’s membership program, is a great example of its focus on aggressive growth, and the fact that in just over two years, the service reached a 50% share of gross delivery bookings underlines the company’s great execution.
Uber One has already contributed to consumer retention, gross booking growth, and cross-selling across its segments while maintaining its competitive advantage and pricing strength and providing an easy path to enter new niches. Uber’s platform allows the company to rapidly deploy and test new offerings at a low cost while offering its strategic partners easy access to a massive pool of potential clients, which could remain a strong growth driver.
According to a slew of analysts, autonomous vehicles or robotaxis are considered a major threat to Uber’s ride-hailing business in the long run. However, given its market penetration, strategic advantages, and platform strength, the company might even benefit from the technological shift. Uber is well aware of the looming revolution and, through expanding its portfolio and forming strategic partnerships, such as its Waymo deal, the company is actively managing the robotaxi risk, which likely won’t impact its business in a meaningful way until at least the 2030s.
Financials and Valuation
In its early years, profitability was Uber’s achilles heel, but since 2018, the company’s revenue is up by a whopping 300%, and doubts about the company’s ability to turn sustained profits diminished in recent years. Uber not only delivered consistent growth despite the challenges of the past five years, but it also outperformed its peers both in the U.S. and globally. Year- over-year booking and revenue growth were roughly 20% and 15%, respectively, in the second quarter, despite a slowdown in the consumer economy, with its Mobility and Delivery segments fueling growth.
Even though its shift toward subscription-based pricing led to a slight drop in delivery margins, the company continues to lead the market in profitability while keeping up with its main competitor, DoorDash, in pure growth metrics.
Uber has also been expanding its offerings while improving network density and expanding into retail fulfillment, and the segment now accounts for 50% of its bookings. The company’s strong brand recognition and increased offerings helped maintain the inflow of new customers, which has been one of the main catalysts behind UBER’s strong performance over the past couple of years.
Although the company’s debt load is still substantial, Uber’s swift expansion, improving margins, and other profitability metrics led to a sharp drop in its financing costs, which, together with the global rate-cut cycle, is expected to have an outsized effect on the growth-focused company’s bottom line and its balance sheet. This positive shift is yet to be fully priced in by the market, and even though its current valuation is rich from a simple P/E perspective, its post-COVID growth rate and its financing costs -which allow for further expansion – make its shares fundamentally attractive here.
Technicals and Recent Performance
Since its IPO in 2019, UBER had multiple volatile swings, with the twin crises of the past four years leading to quite the roller-coaster ride for its investors. That said, 2023 saw a clear shift in the stock’s market value, with the company’s surging profitability fueling a bullish trend and an eventual breakout to new all-time highs. UBER’s relative strength compared to its closest peers suggests that this technical breakout was just the start of a multi-year bull run, and its exceptional growth potential could finally translate to great sustained returns for its investors. UBER is in a great position to ride the next wave higher in the bull market, and its 2021 high provides ample technical support, meaning that the stock is at a low-risk- high-reward entry point.
Conclusion
Even though the media always likes to paint a picture of an imminent crisis to grab people’s attention, the “boring” truth is that we are in a secular bull market with plenty of room to run following a hectic start to the 2020s.
Investors, understandably so, remain cautious and exit their positions at the first sign of trouble, which explains August’s historic surge in volatility – one of the Volatility Index’s (VIX) most violent ones in its 30-year history – which lasted for a mere three days.
Folks, bull markets generally last way longer than anyone dares to predict, so it’s important to keep your eyes on the target: increasing your capital by investing in strong businesses. The current bull easily survived the recent surge in inflation, the Fed’s painful cure, the escalation in the Middle East, and the rising tensions between the West and the Global South, and there is still no crisis in sight that could derail the secular trend. This means that violent pullbacks such as the one we experienced this past August, however scary they are, should be viewed as buying opportunities, as they usually set the stage for the next swing higher.
That said, we are entering a new phase of the bull market, with easing monetary conditions and a transition to a maturing economic cycle. Like at the start of the inflationary crisis and near the end of the Fed’s tightening cycle, a new crop of stocks will have an advantage over the prior leaders due to the changing financing and economic backdrop. Taking advantage of this “rotation” could be the key to beating the market and elevating your investments to the next level.
This doesn’t mean that you should completely overhaul your portfolio, in fact, sticking to your guns during bull markets usually pays off, but changing conditions will lead to new opportunities. That’s where the Gorilla’s hand- picked picks come in, offering different levels of risk and upside potential.
Early- and late-stage disruptors, a dominant real estate giant, and a potential turnaround star give you plenty of options, with all companies being well- positioned to benefit from the ongoing macroeconomic and monetary shifts moving toward the elections.
With fundamentals and technicals looking bullish again following a frustrating summer, these stocks could greatly boost to your portfolio!
Ken Berman (aka “The Gorilla”)
Founder & CEO GorillaTrades, Inc.