The Canadian Investor - Growth stocks to watch for a pullback & Unity Software

Episode Date: March 8, 2021

In this week’s episode, we start with by discussing some growth stocks on our watchlist to keep an eye on if this pullback continues. We finish the episode by a breakdown of Unity by Braden. Tickers of stocks discussed: TDOC, ETSY, MELI, CRM, SPOT, ADBE, ADSK, U, BEP-UN.TO, BEPC.TO, NEE, AY Want to send us a question? Check out our Anchor.fm link in the description below and leave us a voice message! Getstockmarket.com Candian Investor Pod Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital --- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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Simon and I are going to talk about some of the pullbacks we've seen in particularly tech stocks but some exciting opportunities because a lot of these companies are reporting excellent results but maybe not as high as some crazy expectations of them and so i look at that as an incredible opportunity. And I know Simon does as well. How are you doing, Simon? I'm doing well. I'm doing well. Second recording of the day. You can't tell them our secrets.

I mean, it's exceptional, right? It's all good. So if we just have to make sure, you guys will probably hear that on March 8th if I'm looking at the dates correctly. So just keep in mind it's being recorded on February 25th so if the drops we're talking about don't make sense go back to February 25th uh and then I'm going to talk about unity I did a deep dive for stratosphere subscribers I do a couple a month and send them out I recently recently started sending them out right into your inbox if you're a subscriber. But I'm going to talk about Unity as well, because this is a perfect example of what we're talking about today, which is very exciting companies, many of them in the software space. Software multiples have gotten frothy, to say the least but i'm not saying this is early 2000

or some bubble some some would say that it might be a bubble in tech valuations i think that's garbage because we're also going to put your money you know even as interest rates are being signaled to rise and rising and bond yields are going up, I don't want a 1.5% yield on my bonds. No. So where is money going? It's going into stocks. A lot of these asset prices are going up, of course. So there's some frothy valuations out there, but these are good companies, more often than not. They are very good quality companies, some exceptions to the rule, but great companies growing very quickly, building a moat. But the risk is how expensive they are. They could do nothing for so long as they try to grow into these insane prices and potentially have extreme volatility and massive drawdowns if they come

back to lower multiples, if they have that multiple compression compared to what we talked about last episode, which is multiple expansion. So Simon, do you want to do you want to kick us off here, we're going to be just very casually talking about some names that we might have on a watch list, or we might have small positions in that, as these come down, and as a lot of these NASDAQ names sell off, we are very excited to add to them. And, you know, this is, this is what excites us. You know, when we see a sea of red and volatility in the markets, that just brings, you know, joy to me and Simone's face. So I'll let you kick that off. Yeah, yeah, definitely. So there's like, I have tons of growth stock on my watch list. Obviously, with the run-up we had this year, there's some really good companies in there.

But a lot of them, I just don't feel comfortable just yet. But if this pullback continues for growth stocks, I'm probably going to pull the trigger on a few names. And these are some of the companies that I'm watching and also Braden. So the first one, I know I've talked about this on the last episode, Teldoc. I mean, their earnings release got earnings got released yesterday. And you know what? They had a really solid year. It was to be expected with the pandemic. Obviously, it was a huge tailwind. So of course, today it's dropped 13%. Of course. I mean, exactly. That's logical. I mean, you double your revenues, you're projecting doubling your revenue next year. So I mean, 13% makes sense. I'm obviously being a little bit facetious here, but this is really a valuation thing.

And it's really important to keep in mind when you invest in growth stocks i mean we saw that with shopify a few weeks ago you know they can have a really amazing year and really great projections going forward it doesn't matter if the valuation is really up there you, the results almost don't matter if they're not like blowing them up out of the water, like 3x or whatever it is, there's probably going to be a pullback. So keep that in mind. But yeah, if some of you were looking to start a position Teladoc, I mean, you know, I wouldn't say necessarily do it right now, but keep it on your watch list. And if it keeps pulling back um it could definitely

be a stock that you're interested in um so the next one did you want to do one and then we can kind of go back and forth um i'm just gonna go a little off the rails here etsy just reported as we're talking and you own this stock this could be in the list here dude they just smashed every estimate and revenue doubled so good for you simon you own this dog holy crap and surprise it's up it's up yeah well it closed like down five percent and it's up ten percent after hours now after they reported uh yeah revenue happy shoulder revenue more than doubled uh wow okay well that's a that's a moat building company right now and i should probably own some shares of that business it's very very cool very well executed and it shows that there's lots of players in e-commerce that you cancommerce that have interesting niches that you don't have to just be scared of Amazon about.

So that's a good example. But that wasn't the one I was going to pick. I am picking Mercado Libre, ticker M-E-L-I. This is a business I need to do more work on, but has really, really interesting upside. It's like a mix of Shopify and Amazon, like kind of having both of those. It's a big marketplace seller like Amazon, but also allows small businesses to go online like a Shopify, build their site, build out some of that logistics. I am no expert in the name,

but they are dominant in Latin America. I would probably add PayPal. And payments. Sorry, yes. And payments. It's like Sea Limited and, yeah, like Sea Limited, how out in Asia, it's like a bunch of these different interesting tech verticals like payments, gaming, e-commerce, kind of all rolled up into one. So that's what MercadoLibre is like in South America and Central America or just Latin America in general. in south america and central america or just latin america in general and this is a very interesting business growing like crazy and it's interesting and i think it's like what analysts

talk about are some of the biggest risks is it reports in like i guess argentinian dollars is that right simon i don't know if you're an expert in the name at all yeah no I'm not sure I know it doesn't report in US dollars or they have to make adjustments if they do but I know at least at the very least like the vast majority of the revenue is in non-US denominated obviously so it does it does affect a bit the currency changes has an impact on them for sure yeah there's all this like weird currency things happening because like they make money in like brazil colombia and argentina which are on different currencies and there's been you know argentina has not had a great performing

macro ecosystem for a long time so i guess what people are worried about is when you convert that back into like usd you're like oh what the hell is happening here so as for the business you know i don't care about all that accounting stuff as for the business it is really growing fast and becoming huge in south america Central America. And I think the upside is absolutely bonkers for something like this. But again, it's an expensive tech stock. And a lot of this stuff is that's the risk you're taking, right? Is when you pay really high prices for businesses, there's a chance that it just doesn't work out even if the business does great. So I think you tweeted that today on Twitter, Simon.

You're like, just understand that every business has, every investment has risk even if the business does well. And I think that's important. That's like what this episode is about, right? No, that's it. So that's Mercado Libre. Again, I need to do more work on it. Maybe when I do, I'll talk more about it. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using

Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is Questrade.com.

Yeah, so my other one, so it kind of goes back to what you talked about last episode, so the lessons from 100 baggers. So you've got CRM, so Salesforce, with Mark Benioff. Just a really solid business, solid management. I have to dig a bit more into it, but everything I've read on them seems to be really good they grew 20 percent um last year in 2020 they're projecting another 20 percent going forward and i can only i can only imagine they'll continue benefiting years down the line

of that new uh kind of work from home working remotely maybe you know the new way of work from home, working remotely, maybe, you know, the new way of working. And they also bought Slack earlier this year, right? So it'll be interesting how they integrate that. And I think that's been actually weighing a little bit on the valuation compared to other kind of type of companies that are growing really fast. But Salesforce is definitely a company I have my eye on and if it goes down a little more and probably will start a small position and obviously i have to do a bit more research but so far so good yeah crm is a cool business i just wonder i just worry that it becomes the incumbent too fast you know what i mean yeah yeah i mean we'll see i mean it's still uh still really really

interesting i mean i think they're really lining up to i feel like that industry is kind of going to a two-headed monster with microsoft and salesforce yeah yeah it's true. Slack was, Slack, the stock was undervalued. It had a bad narrative of just being like, oh, Microsoft Teams is going to just destroy this. But all the tech companies were on Slack and Slack saw, you know, expansion from customers who were already paying more and that there was good growth in the business still.

So I guess Benioff recognized that and he says, okay, well, we're just going to buy it off the public market. So he's a smart, he's a really smart guy. There's just no question about it. He's a really smart guy. Okay. I am going to talk about Spotify. Maybe you're listening to this podcast on Spotify.

Spotify has taken a beating lately, like multiple 10% drops I'm getting from my brokerage. It seems like every day the stock's just falling off a cliff more and more. Again, let's not kid ourselves. It's been an incredible performer. So a lot of these companies are like, oh, they've been a dog lately. It's like, yeah, they've been a dog for two days. This stock's done really well. And another founder-led tech company, right?

These are things that are important. And the reason why a lot of people buy Facebook stock is they look at Facebook and they go, Zuckerberg's only 36. Come on. Think of all the things he can still do. Spotify is a great business. It's Netflix for your ears and the upside in podcasting, the margins are great. The monthly subscribers of both premium and free users is great. That model is perfect for converting those free users into paid users. So it has that good funnel. And they can do all kinds of interesting things like Netflix did in terms of their own content, their own labels, their own podcasts, their own very, very specialized AI driven advertising. driven advertising again this is a company that is great firing on all cylinders sure if it misses guidance a little bit and they said oh they were going to throw on 36 percent more users and they only did 34 percent and wall street overreacts i am happy to take their shares i own a small piece of spotify and uh you know i like the price here so that's it that's another perfect example yeah yeah definitely I think that's one of the businesses I got wrong as Spotify I really

I had really hard time seeing how they could like with the content that they're paying to artists and the royalties that they're paying how they could really become a force with always that kind of price pressure. But I think they're starting to prove me wrong. So it's definitely a company I have on my watch list. Yeah, I mean, well, Netflix proved me wrong. So this is my chance. I mean, it's the Netflix of audio, basically. It is, yeah, it fully is.

That's what it is. And they have, so the thing that I was just wrong about was pricing power. I thought that, you know, if Netflix goes from $13 to $15, that they're going to have all this churn. No chance. All the industry did was prove that, oh, they can afford to pay Amazon Prime, Disney Plus,ulu+, and Netflix. Like, come on. I was just so dead wrong. You cut the cable from $80 a month to these four streaming services are $40 a month, and it's good value. So Netflix has way more pricing power than I gave them credit for, and I think it's important to recognize some of the things that you mispriced and are looking forward to not making mistakes again. Yeah, exactly.

So now on to my next one, so Adobe. So we've talked about Adobe in the early stages of the podcast, but they really have sticky products. I'm sure people are familiar with Photoshop, Adobe Acrobat. products. I'm sure people are familiar with Photoshop, Adobe Acrobat. They also have a good market share when it comes to digital signatures, along with DocuSign, which is a competitor. But yeah, there's a lot of things to like about Adobe. It's been a really well-managed business. They've really transitioned well to a kind of SaaS business from a more legacy business. And kind of SaaS business from a more legacy business.

And they must have started, I'd have to check, but they must have started in the late 1990s because I remember I was a teenager and their products were still, they were the top back then, especially Photoshop. But yeah, that's a great company. That's one I have on my radar. And if the valuations can come a little more reasonable, it's probably one that that'll

start a position in yeah very well run tech giant and i like companies like adobe that are i've been writing about this a lot you know the creator economy is real and the companies that are powering the creator economy are really thriving like think about it i mean i this is one of the reasons why i like twitter and think it's worth more than 40 billion dollars is companies that are powering the creator economy are doing really well and adobe's creative cloud is very important for a lot of these businesses to have subscriptions of that you know whether you're a solopreneur who needs to make marketing material on adobe or you're a full-scale professional or you're a freelancer and you do graphic design you know adobe is an important business on that have you seen the growth of like substack lately do you know

do you know substack no i'm not familiar with that either substack is it's big in like the finance community of people who have newsletters and stuff and they have like paid newsletters and this creator economy is exploding um the rise of like the solo creator being able to make you know serious bucks from living anywhere and adobe is one of those ones that power the creator economy so i'm bullish on that think about like etsy that's the creator economy that is the market the two-sided marketplace for creators look how yeah it reminds me it reminds me a lot of autodesk to how sticky they are and kind of the transition uh that they did although i feel like adobe did a bit sooner than autodesk so that that's probably why there's gonna be more value in

autodesk going forward that's true autodesk didn't do their sas transition until 2016 so yeah anyways on on to the next one because we still uh we don't want to go too long and you still have to do your unity uh deep dive so do you want me to do my next one yeah do your next one because i'm gonna be blabbing on about unity okay so let's do those last one and then that's all yours so um the last one i would be looking at and i get a lot of questions people know i own brookfield renewable partners so and the renewable space has really kind of taken off last year specifically i always found it before that i was a bit undervalued and i really didn't understand why people weren't looking at it more. But I mean, recently in the past month, month and a half, there's actually been a pretty broad base pull

back for renewables. So whether you're looking at Brookfield Renewable Partners or other names, I know there's Atlantica Yield. Which one did you mention again? I'm kind of before the podcast. Which one did you mention again? I'm kind of before the podcast. Oh, in terms of renewables? Oh, I forget. Yeah, it's okay. Yeah, it's all good. And then another one that's interesting and I need to dig into more, but it's one of the largest, if not the largest, renewable energy producer in the U.S. is NextEra Energy.

energy. So those are all names that would be interesting, especially if you're looking to get a position and get skin in the game when it comes to renewable. I mean, Brookfield Renewable Partners is actually almost yielding close to 3% right now. And I think we haven't seen that since kind of mid 2021, mid 2020. So, you know, it might be something to word considering. I know a lot of people are looking to that space so um now might be a good time to just start a position if you had an eye on some of those names i remember it was algonquin power ah there you go yeah a lot of these you talked about a lot of these wind producers got you know sell-offs because of the Texas thing. Yeah, I mean, that's ridiculous. But anyways, let's not waste time on it.

Yeah, well. Yeah, that's okay. Texas is completely different. And just for the record, most of the energy produced in Texas is actually from fossil fuels. So I find it funny that they're blaming that on renewable powers

when it's really the fact that they have a grid that's not connected to other states and they anyways i won't go into detail but um look i mean i think there i know i know power grids pretty i know power grids pretty well there is some merit to the complaints about wind i'll'll say that. There's some merit. Really? Okay. But at the end of the day, their grid was not proofed enough for that kind of extreme condition. And that is something they need to fix. As do-it-yourself investors,

we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Okay, so Unity, ticker U, IPO'd last year. It was still relatively new to public markets. It was still relatively new to public markets. It had quite a run after its IPO, and it's come back quite a bit. This is a perfect example of a business that is doing absolutely great. Maybe management said, okay, we're not going to grow this fast forever.

And everyone's like, oh, no, you're not going to grow it 50% a year for 100 years? Dang. And of course, not only is that never going to grow it 50% a year for 100 years? Dang. And of course, not only is that never going to happen for any company, but this company is firing on all cylinders, and it's not new at all. They just IPO'd recently, but this is a company that has been making software for their gaming engine since 2005. They have a huge market share. So this is

not a new business. So for as for what they do, they have a gaming engine for real time 2d and 3d content for all kinds of different devices started in the gaming industry. But there are many applications beyond gaming, which I find exciting and as an engineer I'm seeing it happen now I'm seeing it with my own eyes and it is really really cool okay so let's go back 2005 Unity launched the gaming engine on Apple's Mac operating system X. Now this was a weird choice because Unity was written in C sharp, which was a Microsoft programming language from 2000. So C sharp is powerful, good language. And that's still what Unity runs on. But it was strange that it was only on the Mac. So eventually it goes on and becomes on all different platforms and has the app for not only just Mac.

But Unity was set up for something to hit the big time for one reason, is that the App Store, which launched in 2008, the Apple App Store, Unity was in a perfect position to take almost all the market share for game development and app development in the iOS ecosystem. And that was really important and a change step for Unity's history and their trajectory moving forward. So now they have a huge market share on the iOS ecosystem. And they compete in pretty much a duopoly in terms of game engine with Epic's Unreal Engine, which is owned by Tencent. Tencent owns 40% of Epic Games, and Epic Games owns the

Unreal Engine. So both engines are very powerful. They both have their pros and cons. Unreal's engine has unmatched graphics. That's one advantage it has over Unity. But Unity has all kinds of other advantages to it that I will get into. But I just want to clear that up right away. In terms of competition, the Unreal engine is also really, really solid. So what do I do? I own Tencent as well. Pretty simple solution. They're both great businesses. Okay, so now here's what's really exciting to me is that the gaming engine expands beyond gaming. And the total adjustable market of gaming is already huge. But if you throw out that total adjustable market to all kinds of industries like architecture, engineering, automotive, manufacturing, film animation, the gambling business, branding agencies, creative agencies, like the total adjustable market. seeing it i'm telling you simon i'm seeing it the gaming engine is really cool to use in other uh other industries because it's just you heard it here first you heard it here first

man i've played with the tech i've seen it it is cool very cool okay so the reason I titled the post on Stratosphere was 0 to 60. It was a play on engine. But really what it is, is users, creators from just the small little creator economy to full on game development studios. They can build, deploy, and monetize their game on Unity, all with Unity, through their Create Solutions, which is their multiple subscriptions to the gaming engine platform, but also the Operate Solutions. So you can advertise. You can deploy it to the cloud. You can connect multiplayer. You can have build servers. You can connect voice for players. You can create backends for multiplayers that shows some players are the leaders. You can create a very, very cool game and you can deploy it all on Unity. unity. Now, what that does is that operate solutions is now a SAS recurring revenue high

margin, and it's about 61% of revenue is the actual operate solution. So that's that deployment and letting people monetize their game or app. Very cool. What's also interesting about their financials is that 144% dollar-based net expansion. What that means is that customers every year are spending a lot more money than they did the year before. And that's really important. They have 793 customers that spend over $100,000 a year, and that's grown from 506 last last year so they're growing that big game development studio clientele and that's really important for their financials and ultimately how they're going to cash flow the business um so looking ahead i mean the post goes into all different kinds of things but looking ahead the gaming engine is not only gonna be a great place to be

in the future because of how much gaming is growing but because of the applications of the gaming engine in other verticals uh i don't know if you're star wars fan if you've watched the mandalorian on the disney plus thing have you seen have you watched it i might have asked you before fan if you've watched the mandalorian on the disney plus thing have you seen have you watched it i might have asked you before yeah of course i've watched that yeah i'm a nerd that way okay you know baby yoda you know i if you don't know this i'm about to blow your mind all of the mandalorian was done on the unreal engine did you know that uh i think i heard it before like i knew it was done on one of the big engines i wasn't sure if it was like the unreal engine or the uh the unity but i i remember hearing that yeah so i'm talking about this post as the unity engine but that was done

on the unreal engine like what i'm saying is that both of them have all kinds of interesting ways to be used beyond just gaming. And even if they just continue to dominate gaming, the growth is incredible. But that's the really exciting upside is that all these other industries, they can disrupt. is that all these other industries, they can disrupt. Like if you're a civil engineering firm, you can actually connect your Autodesk and BIM to, which is like building information management. We don't need to get into that,

but you can connect that right into Unity and like deploy full-on gaming engine scale of the buildings that you're building. And for real estate developers, you can show that to clients and they can play around with it. It's like touchscreens, it can be deployed on web-based so they can see, like they can basically see the building be built in the actual location of where it's going to be built before they put a shovel in the ground. So this is like kind of the next level of modeling. And the game engine allows people to do that next level of modeling and be able to interact with it. So I find it really exciting.

Is the business trading at a super cheap multiple? No. God, no. These things are expensive, right? But I think that if what I'm seeing currently right now in the other areas beyond gaming, I think today that the Unreal Engine and Unity both provide one of the largest total adjustable markets I can think of in the market right now. So I like it here. I bought some, and that's Unity. Did I miss anything? You can grill me on my thesis, by the way, if you want.

Yeah, I mean, I think you hit it all, and I mean, I think you have a great thesis. We'll see how it plays out going forward I think the only thing probably holding it back personally is again the valuation but that's been a theme of today and who knows maybe it gets a bit more of a pullback and it's a great spot to start a position the next few weeks or months yeah exactly like if you're a momentum trader you'd think I'd be out of my mind recommending right now because it's i think it's down like 30 percent from the high but that's exactly why i'm talking about it more right now is because it's down 30 from the high right yeah and people know

that we're not momentum traders so we invest because we want to hold these businesses for a long time so um yeah you have to look at the long term and make sure there's uh there's a great story behind it and great story going forward exactly so if the thesis continues which i would need to of course monitor which is the fact that unity and the unreal engine which now my portfolio is exposed to both of them if they continue to be in that kind of duopoly there's other game engines out there but they're it's like talking about visa and mastercard sure there's there's little guys out there trying to get their card in the market but these are the big players and i think that they're going to see lots of interesting things happen uh with their businesses over the next 10 20 years and i'm

i'm happy to be a part of it do we need to talk about anything else we could be deployed we could be uh sending out this episode and stocks have rallied in a major way and we look like absolute goofballs but i mean not really i think we remind people that it was on February 25th, and I feel like if we go on for too long, we'll probably be rambling a little bit after recording, like an hour and then some of recording. So it's probably best to end it soon. This is Simon telling me to shut the hell up. And I back it.

I mean, you know what happens when I go on these deep dives. Like, you just hear my voice for 25 minutes. All right, that does it for this week, guys. Thank you so much for listening. Give us a five star. We appreciate it. It helps the pod grow. And if you haven't gone on to Stratosphere yet,

which you can go on getstockmarket.com, you can do that. I publish these deep dives to subscribers gets it right in your inbox things i'm looking at things i'm going long on and yeah you might enjoy it we'll see you guys next week take care bye bye the canadian investor is not to be taken as investment advice braden or simone may own securities mentioned on this podcast always make sure to do your own research and due diligence before making investment decisions