RBC Capital is bullish on a Chinese Internet giant and two fast-growing software names heading into the new year, as well as one well-known ride-hailing giant that's trading far below its IPO price.
Alibaba (BABA) , Salesforce.com (CRM) and Uber (UBER) made it onto RBC's list of top 30 global stock ideas for 2020, as did Canadian software conglomerate Constellation Software (CNSWF) , which is listed in Toronto.
RBC's Zack Schwartzman sees Alibaba ($240 price target) growing its revenue at a 27% compound annual rate (CAGR) from 2019 to 2022, and its EBITDA at a 30% CAGR. Despite Alibaba's big 2019 gains, Schwartzman remains a fan of its valuation: Alibaba carries an enterprise value (EV - market cap minus net cash) equal to 18.5 times his 2020 adjusted EBITDA estimate, even with large investments in growth initiatives that are depressing near-term profits.
For Salesforce ($200 target), RBC's Alex Zukin likes the fact that its current remaining performance obligations (CRPO - all of the contracted revenue that's expected to be recognized within 12 months) is still growing at a 20%-plus clip. He also notes that Salesforce still has several growth engines, including its Service Cloud and Marketing Cloud platforms, its cloud developer platforms and international expansion.
The Tableau Software acquisition is seen as a potential growth catalyst for Salesforce, as are adoption of Salesforce's Einstein AI/machine learning platform and untapped pricing power. Microsoft (MSFT) , whose Dynamics 365 CRM apps have been gaining ground with mid-market businesses, is highlighted as a competitive risk.
The $64 Uber price target set by RBC's Mark Mahaney is more than 100% above Uber's current trading price, and also 42% above its $45 IPO price. The valuation is based on an EV/sales multiple of 4 times Mahaney's 2021 Uber revenue estimate, which in turn assumes a 30% revenue CAGR.
Though admitting Uber is still posting massive losses, Mahaney also notes Uber's operating expenses and driver/rider subsidies have been gradually declining as a percentage of revenue since 2016. He argues "further rationalization" in the ride-sharing competitive environment will improve Uber's bottom line, as will long-term pricing power, insurance leverage and opex leverage. Regulation, elevated subsidy spend and autonomous driving are cited as potential risks to his thesis.
RBC's Paul Treiber asserts that Constellation (CAD $1,500 target), which has acquired dozens of software businesses providing vertical/industry-specific solutions, is "likely to generate one of the highest returns for shareholders over the long term in our coverage universe." He adds his thesis reflects the high hurdle rates Constellation sets for its purchases, as well as the scalable nature of a decentralized business model that gives individual businesses a high degree of autonomy and is "pushing decisions for allocating capital further down into the organization."
Treiber points out that there are now 40,000 software companies within Constellation's database of potential targets, and sees its operating margin growing by 1.6 percentage points in 2019 to 27.2% in spite of a headwind from recent acquisitions. He admits Constellation is trading at an elevated valuations -- its enterprise value is equal to 19 times expected EBITDA for the next 12 months -- but also argues the company deserves a premium valuation thanks to its proven ability to drive free cash flow per share growth over the long-term.