Ticker Reports for July 18th
This Cybersecurity Stock Gains Analysts' Favor for Strong Growth
As the global economy becomes more digitized by the day, business and customer data are kept in what’s now the most common term in the technology sector: The Cloud. Companies rely on cloud computing services and artificial intelligence to make the vast databases they can access work for them. While this is good for companies like Amazon.com Inc. (NASDAQ: AMZN) web services and the chip makers that enable computing power like NVIDIA Co. (NASDAQ: NVDA), there’s a better play out there.
Investors are recognizing a critical trend in cybersecurity: the speed of technology doesn't matter if safety measures are lacking. This is becoming a reality for many cloud-dependent companies. To bring this trend home, investors can look at Alphabet Inc. (NASDAQ: GOOGL) and its latest acquisition of cybersecurity startup Wiz for a price tag of $23 billion.
Why would one of the world’s largest technology companies be willing to pay this much for a startup that isn’t that established or deeply entrenched in its industry yet? Because cybersecurity is becoming the most essential thing today. By association, other cybersecurity stocks will be rallying or at least attracting Wall Street attention, with the latest being Datadog Inc. (NASDAQ: DDOG). Up to three Wall Street analysts covered the stock in July as a Buy.
Understanding Wall Street's Perspective on Datadog Stock
Starting with price action, Datadog stock looks like the leader among its peer group in cybersecurity. The stock now trades at 88% of its 52-week high, compared to Zscaler Inc. (NASDAQ: ZS), which trades at a lower level of 76% of its 52-week high.
Another worthy mention to peg Datadog against is Fortinet Inc. (NASDAQ: FTNT), where momentum has yet to favor that stock as it trades at only 73% of its 52-week high. Analysts on Wall Street rarely stick their necks out to back a stock that is not seeing favorable price action, so Datadog’s recent moves gave some on Wall Street a confidence boost.
With a consensus forecast for up to 25% earnings per share (EPS) growth, Datadog stock also beats its peers. Zscaler expects to see just under 10% EPS growth for the next 12 months, while Fortinet analysts landed on a forecast for 9.5% as well for this year. Leaning on another bullish factor, here’s what valuations look like today.
Those at Loop Capital saw it fit to place a price target on Datadog of up to $160 a share as recently as July 2024, daring the stock to rally 30.3% from where it trades today. While not as bullish as Loop Capital, other analysts still see a double-digit upside for Datadog in the quarters ahead.
Evercore analysts justify a price target of $150 for Datadog stock, implying a net upside of 22.1% from today’s prices. Mizuho is in the middle of Loop Capital’s high range and Evercore’s low range. Analysts at Mizuho see a $155 valuation for Datadog stock, calling for a rally to the tune of 26.2% higher.
Datadog's Financial Momentum: Evaluating the Numbers for Investors
Looking into the company's financials can be a good way for investors to justify the currently bullish views on Datadog stock held by Wall Street analysts. Most importantly, digging into the first quarter 2024 earnings results can uncover recent financial momentum.
Starting with the top line (revenue), investors can see the press release led by 27% annual growth, bringing Datadog's net revenue to $611 million. However, not all revenue is equal, as subscription revenue is the better part of cybersecurity businesses since it is more predictable and stable than one-off sales.
Regarding subscription revenue, the customer count grew to 3,340 annual recurring revenue members, paying over $100,000 a year for Datadog's services. Trickling down from this user and revenue growth are Datadog's net income figures, which went from a net loss per share of $0.08 to a net gain per share of $0.12 for the quarter.
On a more tangible basis, in accounting terms, investors should examine Datadog's free cash flow (operating cash flow minus capital expenditures). Operating cash flow grew from $133.7 million last year to $212.3 million this quarter, and adjusted for this quarter's $14.1 million in capital expenditures, Datadog has $198.2 million in free cash flow.
Achieving and maintaining positive free cash flow is what every investor should look for in an investment. Why? Businesses can use this capital to reinvest into business growth, the foundation for investors to compound their wealth on an investment.
Datadog's growth in recurring revenue carries a gross margin of 81.4%, so investors can reasonably expect the company to continue generating positive free cash flow and improving its value offer to attract more customers. Knowing this, Wall Street analysts made the potentially right call.
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Parabolic Rise of This Stock Shows No Signs of Slowing
Cintas Corporation’s (NASDAQ: CTAS) Q4 results and guidance prove its parabolic share price movement can continue. The results continue a trend that includes organic and acquisitional growth, widening margins, robust cash flow, and capital returns. The trend has the stock price up more than 800% in the last decade, and another 800% is possible.
That’s why the company will split its shares this fall: the current high share prices and the potential for another triple-digit gain. Persistent business trends drive its share price, including healthy, resilient labor markets and an improving outlook for easing economic headwinds through lower interest rates. Investors looking to ride the Cintas wave can buy in now, wait to see if a dip forms after the split, and buy more later.
Cintas Has Mixed Quarter; Results Shine Where It Counts
Cintas had a mixed quarter regarding the analysts' estimates, but there is no bad news. The $2.47 billion in net revenue aligns with the consensus, a tepid result, but it is up 8.3% compared to next year, compounded by a wider margin and improved guidance. The organic growth, ex acquisitions, is 7.5%, driven by strength in both segments. The core uniform services segment advanced by 7.8%, led by a larger 9.5% increase in Other.
The margin is where the results shine brightest. The company reported a 150-basis-point improvement in the gross margin and a 120-basis-point gain in operating margin that drove accelerated growth on the bottom line. The improvements are due to reduced costs and expenses and were compounded by increased interest income. The net result is a 19.6% increase in income, a nearly 20% increase in GAAP EPS, and a cash-flow positive quarter.
Cash flow came in at $2.08 billion, sufficient to cover CAPEX and improve the balance sheet. FCF topped $1.5 billion, leaving ample money for acquisitions, dividends, and share repurchases. Balance sheet highlights include a 3x increase in the cash reserve, increased receivables, increased current and total assets, debt reduction, reduced liability, and an 11% increase in shareholder equity.
Because the cash position is robust and leverage ultra-low at 0.5x equity and 0.2x assets, the company is set up for another year of dividend growth and share repurchases. Share buybacks aren’t robust but offset dilution. The dividend is more substantial but near historic lows, yielding about 0.75%, with the stock trading at new highs. The salient detail is that Cintas increases the distribution annually, and recent increases have been double-digit, a trend that can be sustained.
The Sell-Side Tailwind Is Strong for Cintas
Cintas has an enviable business and sell-side support that provides a tailwind for the market. Analysts rate the stock at Moderate Buy and are raising their price targets. The consensus lags the price action by a few hundred basis points but is up 7% in the month before the Q2 release, 35% in the last 12 months, and expected to continue higher now. The recent revisions lead to the range's high end, suggesting another $40 or 5% is now possible. Institutions, which own 64% of the stock, have bought on balance for six consecutive quarters. Their activity spiked in Q1 2024 and remained bullish into the first month of Q3.
The Cintas' Technical Outlook: Bullish with a Chance of Correction
Cintas’ stock price surged more than 5% at the open following the Q2 release. The move put the market at a new high, but fresh highs may not come quickly. The market shows some signs of resistance and profit-taking at this level and may cap gains, allowing the market to consolidate and potentially close the gap that formed at the open. Assuming no change in the outlook, a move to retest support at or near $720 would be an attractive entry point and may trigger a rally.
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Risk Tolerance vs. Risk Appetite: Key Differences
Keep reading to learn more about what risk tolerance and risk appetite are, how they are different, and why they are crucial factors to consider when making investment decisions.
What Is Risk Tolerance?
Risk tolerance refers to an investor's psychological and emotional ability to withstand losses in their investment portfolio without experiencing undue stress or making impulsive decisions. It reflects their capacity to handle market volatility and downturns.
Think about how you handle losing money. Are you quick to sell a losing position? Or can you stomach market drawdowns without sweating? If you can tolerate significant drawdowns without losing your nerve, you may have a high risk tolerance and can participate in more advanced trading strategies. If high-flying stocks with lots of volatility cause you more stress than the potential profits are worth, you may have a low risk tolerance.
What Is Risk Appetite?
Risk appetite is the level of risk an investor is willing to take in pursuit of their financial goals. It reflects the degree of uncertainty and potential loss they are comfortable with in order to achieve desired returns.
Are you willing to invest in high-risk, high-reward opportunities to potentially achieve significant returns? Or do you prefer more stable, low-risk investments even if it means lower potential gains? If you are open to taking substantial risks for the possibility of higher returns, you may have a high risk appetite. Conversely, if you prioritize preserving capital and seek steady, predictable growth, you likely have a low risk appetite.
Key Differences Between Risk Tolerance and Risk Appetite
Data Source
Risk tolerance is personal and subjective, varying greatly from one person to another based on individual emotions and experiences. Risk appetite is more objective and strategic, helping you make investment decisions based on facts.
Influencing Factors
Focus
While risk tolerance focuses on how much loss someone can emotionally handle without making impulsive decisions, risk appetite focuses on the level of risk an individual or institution is prepared to take to achieve desired returns.Application
Your risk tolerance guides your behavior during market downturns, helping with your personal financial planning to avoid panic selling. Your risk appetite determines your overall investment strategy, aligning your long-term financial goals and risk management.
Examples Of Risk Tolerance and Risk Appetite
Consider two individuals saving for retirement. The first is a 25-year-old recent college graduate with minimal capital but a lucrative new job and decades of earnings ahead of them, and a 60-year-old who has built a substantial nest egg in their retirement accounts and plans to retire in five years.
Risk Tolerance
Being young with minimal financial responsibilities, the 25-year-old can handle market volatility and potential losses without significant stress. They understand that market fluctuations are part of the investment process and that they have the time to recover from downturns. Their ability to stay calm and maintain their investment strategy during market dips reflects their high risk tolerance.
As they approach retirement, the 60-year-old is less emotionally equipped to handle significant market volatility and potential losses, which could directly impact their retirement plans and financial security. The stress of potential losses and market downturns at this stage of life is something they prefer to avoid, leading to a preference for more stable investments. As such, this soon-to-be retiree has a low risk tolerance.
Risk Appetite
With a well-paying new job, the 25-year-old is willing to take on significant risk to achieve substantial long-term financial growth. Their willingness to invest in riskier assets shows their strategic approach to potentially maximize returns over a long investment horizon. Because their risk appetite is high, they may invest in high-growth stocks, startups, or other volatile assets, aiming for high returns despite the risks.
But with retirement only five years away, the 60-year-old has a low risk appetite. At this stage in life, their primary goal is to preserve capital and ensure steady, reliable returns. In order to achieve that, they will avoid high-risk investments and focus on protecting their accumulated wealth by investing in bonds, fixed-income securities, and low-volatility dividend-paying stocks.
Risk Tolerance and Risk Appetite Examine Different Parts of the Same Concept
Risk tolerance and risk appetite are both essential for making well-rounded investment decisions. Risk tolerance deals with the psychological side of investing, ensuring you don’t take on more risk than you can handle without stress. On the other hand, risk appetite is a strategic measure that defines the level of risk you are willing to take on to reach your financial goals. By understanding and balancing both metrics, you can create a more effective investment strategy that aligns with your emotional capacity to endure market fluctuations and your financial objectives for growth and stability. Using both risk tolerance and risk appetite together increases your chances of achieving investment success while maintaining peace of mind.
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