Tech Stocks in Focus: Growth Opportunities and Valuation Resets

Freshworks: Growing Software Portfolio At An Attractive Price

The stock trades at a very cheap ~3.7x current-year revenue multiple. In my opinion, value-oriented growth stocks are in short supply these days as the stock market continues to rally to all-time highs, fueled by AI hopes as well as enthusiasm over the potential of coming rate cuts. But all-time highs are also a great time to be more cautious, and I've continued to rotate more of my portfolio away from sharp winners and into rebound plays, particularly "growth at a reasonable price" stocks. Freshworks (NASDAQ:FRSH) caught my eye in this regard. Freshworks operates an attractive portfolio of customer service software products and is best compared to its largest competitor ServiceNow (NOW): but at a much better price, especially after Freshworks' >40% YTD decline. In my view, Freshworks' decline has very little basis in fundamentals. Unlike many other software peers, the company has not seen substantial growth deceleration over the most recent few quarters; and at the same time, its share price plunge has rendered its valuation quite attractive. For these reasons, I'm initiating Freshworks at a buy rating. The bull case for Freshworks The first thing to point to supporting the bull case for Freshworks: the company operates a portfolio of three very attractive, large-TAM software businesses. The company's solutions in IT and employee service and customer service form a very similar portfolio to the likes of ServiceNow (NOW) and Zendesk, while it also has a portfolio of CRM tools that rival the big name in the space, Salesforce.com (CRM). While it's tempting to think that a smaller upstart like Freshworks may be oriented more for SMB customers and not enterprise (investors have been wary of SMB exposure this year, as churn risks have been more elevated in the current macro environment), this isn't the case. Freshworks' customer base includes a number of what we can consider mid-cap enterprises as well as larger ones, ranging from electronics maker Toshiba to retail market giant Carrefour and Marvel, the superhero subsidiary of Disney (DIS). Needless to say, Freshworks' area of expertise and its end-markets are competitive, as the company rivals much deeper-pocketed competitors in the software arena. Still, the company has managed a way to sustain ~20% revenue growth while also boosting margins. Valuation advantage Where Freshworks stands out versus its competition, at least from an investor point of view, is where it's trading. Its revenue multiples are cheaper than all of its key peers, including Salesforce.com, which is growing at a slower pace than Freshworks as its product portfolio, particularly Sales Cloud, ages. At current share prices near $12, Freshworks trades at a market cap of $3.81 billion. And after we net off the $1.20 billion of cash on Freshworks' most recent balance sheet (another reason to be enamored of Freshworks: it has a fortress balance sheet with tremendous cash reserves and no debt), its resulting enterprise value is just $2.61 billion. Meanwhile, for the current fiscal year FY24, Freshworks is guiding to $695-$705 million in revenue, representing 17-18% y/y growth. And for next year FY25, Wall Street analysts have a consensus revenue target of $821.5 million for the company, representing 17% y/y growth. This puts Freshworks' valuation multiples at: 3.7x EV/FY24 revenue 3.2x EV/FY25 revenue It makes sense for Freshworks to trade at a discount to ServiceNow, which is both larger and still growing at a ~25% y/y clip. But Freshworks should at least trade on par with Salesforce.com, which is growing revenue at a mid-teens clip instead of Freshworks' ~20% growth. To me, Freshworks is deeply undervalued, especially when considering many other ~20% growth software stocks command revenue valuation multiples of at least ~5x. No red flags in financials Despite the sharp YTD drop, we can find no major red flags in Freshworks' financials. In fact, Freshworks is one of very few software companies, aside from those that had a major growth catalyst in AI this year, that have not seen tremendous revenue deceleration owing to macro-based pressures this year. The chart above shows that Freshworks' constant-currency revenue growth rates have hovered consistently in the ~20% range for the past four quarters (which may also indicate that the company's guidance for 17-18% growth for FY24 may be a bit light). We are seeing some softening of net revenue retention rates, but it's only minor: down to 106% in the most recent quarter, from 107% from a constant-currency standpoint in the prior quarter. This mirrors trends that many other software companies are reporting, and it stems largely from headcount reductions at end customers (due to layoffs and IT budget optimization). Freshworks attributed the softness to its SMB segment (again, many peer software companies have reported elevated churn from smaller businesses) - but at least Freshworks' revenue itself isn't decelerating. A major growth catalyst for Freshworks in the back half of FY24 is its recent acquisition of Device42, an IT infrastructure company, for $230 million. Though the first major acquisition for Freshworks since going public in 2021, even this purchase is just a small chunk of the net cash that Freshworks has on its balance sheet. Speaking to the merits of the transaction on Freshworks' recent Q1 earnings call, CEO Girish Mathrubootham noted as follows: With more than 800 customers around the world, Device42 provides enterprise grade IT asset management capabilities, which we believe can further strengthen our Freshservice offering. This is our first acquisition since we became a public company in 2021 and I'm excited about how this will enhance Freshservice, which is currently our fastest growing business. With this acquisition, we will be able to provide advanced asset discovery and application dependency mapping across data center and cloud environments. Combined with our robust ITOM and ITSM capabilities, this will help IT infrastructure and Ops teams track and understand the IT landscape to achieve greater efficiency in service delivery and reliability in IT operations. Through the combination, we'll be able to offer a more comprehensive solution for our customers. We have historically partnered with Device42 on large enterprise opportunities in the field and after the transaction closes, we look forward to serving customers as one integrated team. We expect the transaction to close later in Q2." Freshworks isn't ignoring profitability, either. Pro forma operating income in the most recent quarter more than quintupled y/y to $21.8 million, representing a 13.2% pro forma operating margin: 1040bps better than 2.8% in the year-ago quarter. Key takeaways Freshworks stock has been a falling knife this year, and for no apparent reason at all other than the same broad-based macro pressures and IT budget optimization concerns that other software companies are reporting. I'm buying Freshworks with a year-end price target of $15, which represents 4x EV/FY25 revenue and ~20% upside from current levels. Use this dip as a buying opportunity. With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in FRSH over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

HubSpot: Google's Canceled Acquisition Is Driving A Much-Needed Valuation Reset (HUBS)

I last covered HubSpot, Inc. (NYSE:HUBS) in March, when I reiterated my "Sell" rating on this company that makes inbound marketing software. In my March coverage, I stated why I was not encouraged by the revenue growth that HubSpot was demonstrating given its nosebleed valuation levels. At the same time, my previous coverage also had me "concerned as to the impact of the [latest] pricing change on the top line, especially in an uncertain macroeconomic environment." Since then, the stock has fallen 25%, justifying my previous Sell thesis on the company as shown below. Google's (GOOG) planned acquisition of HubSpot temporarily changed things for HubSpot's valuation. However, with Google reportedly walking away from the deal, it's back-to-business for HubSpot, where demand and deal progression have slowed, along with a weakening Average Selling Price ("ASP") after its Q1 FY24 earnings. Although the management is optimistic about its long-term prospects as it continues to drive robust product innovation, I believe that selling pressure will likely continue, especially in the short term. After assessing both the "good" and the "bad," I have decided to remain on the sidelines and rate the stock a "hold" at its current levels. In late May, Google began exploring a potential acquisition of HubSpot, with the idea that it would expand its products and applications to better position it in the customer relationship management sector to compete against Microsoft's (MSFT) Dynamics 360 products. While Microsoft is focused on attracting big enterprise customers, acquiring HubSpot would have enabled Google to appeal to smaller businesses, which constitute the bulk of HubSpot's current customer base. However, given the risks of possible antitrust regulators, Google has shelved its acquisition plans as of June 10. Meanwhile, HubSpot also reported its Q1 FY24 earnings, where its revenue grew 23% YoY to $617.4M, while non-GAAP operating income expanded 33% YoY to $92.6M. While the customer count grew 22% YoY to 216,840, what is concerning is that the Average Subscription Revenue per customer grew just 1% YoY to $11,447. Although I like its go-to-market strategy, where it uses a bi-modal approach to drive volume at the lower end of its customer segment while driving value in the upmarket segment with a multi-hub adoption approach, it faces the following challenges: 1) Demand is weakening with deal cycles getting longer. During the earnings call, the management discussed weaker demand conditions in Q1 than expected, with buyer urgency fading from December onwards. In fact, Yamini Rangan, CEO of HubSpot, elaborated that deal cycles are indeed getting longer, with greater deal scrutiny and friction in the procurement process, which has pushed deals from Q1 into Q2. Along with that, the company is also seeing a decline in higher-quality inbound lead flows into lower-quality rep-sourced leads, which further delays deal progression. I believe that this could be driven by macroeconomic factors, especially given the concentration of its customer base in small and midsize businesses, which are disproportionately impacted by tighter financial conditions, like we are today. At the same time, its pricing change, which got into effect in March, has had a negative impact, leading to a lower ASP, and the company expects the weakness to continue for a couple of months. In March, the company rolled out its seat-based pricing model to all subscription tiers, where they introduced Core Seat and View-Only Seat, while removing seat minimums for Sales Hub and Service Hub. This gives customers more flexibility and greater control over their total cost of ownership. This has resulted in low ASPs for new cohorts; however, the management remains optimistic that this strategy will eventually lead to high customer volume and a higher rate of upgrades over the course of time. Meanwhile, the company is seeing positive impact from multi-hub adoption of their Professional and Enterprise customers. It has 35% of Pro Plus customers on 3 or more hubs, especially as it continues to drive its product innovation roadmap with Content Hub, Service Hub, and HubSpot AI. For now, given weaker than expected deal progression along with lower ASPs, this has pushed down further on the company's net revenue retention rate ("NRR"), which now stands at 101%, compared to 103.9%. At the same time, the management kept its revenue guidance for the full year FY24 unchanged between $2.55-$2.56B, while increasing the range of its projections for non-GAAP operating income from a midpoint of $410M to $428M, an increase of 4.3% in expectations. Although the company is seeing a slowdown in deal progression from weaker macroeconomic conditions as well as headwinds from its pricing updates, I believe it is looking at the bigger picture when it comes to its product innovation to drive durable growth, especially when these macro factors subside. During its Spring Spotlight, it featured over 100 new product releases with 70 AI features across three innovation areas that include Content Hubs, Service Hub and HubSpot AI. Specifically, when it comes to Service Hub, the company is bringing together customer support and customer success teams with advanced SLAs, robust routing, and support management tools. It is also launching a new customer success workspace to help CSM track their pipeline and monitor customer health scores with AI-powered tools to speed up resolution. As for adoption trends, 50% of enterprise portals are using AI across use cases that include content generation, call summarization, and automating marketing campaigns to drive higher productivity. At the same time, I believe there is plenty of white space to drive deeper usage and adoption and unlock customer value, especially as we see the easing of macroeconomic conditions improving business conditions for small and midsize businesses. Looking forward, I believe that the company should reach its FY24 revenue target, especially as macroeconomic conditions stabilize with improvements in deal cycles and ASPs. Assuming that it grows in the high teens range over the next 3 years, followed by a slowdown in the mid-teens after that, as it continues to land and expand customers leveraging its bi-modal go-to-market strategy and product innovation, HubSpot should generate close to $4.87B in revenue by FY28. From a profitability standpoint, the management has provided a long-term financial model where it expects a non-GAAP operating margin of 18-20% by FY26 and 20-25% after that. Assuming that HubSpot can reach a non-GAAP operating margin of 25% from its projected 16.7% margin in FY24 as it can unlock operating leverage from higher ASPs and streamlining operating expenses, it should generate $1.2B in non-GAAP operating income by FY28. This would be equivalent to a present value of $833M when discounted at 10%. Taking the S&P 500 as a proxy, where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15-18, I believe HubSpot should trade at least twice the multiple. That is because of the growth rate of its earnings during this period of time. This will result in a P/E ratio of 34, or a price target of $488, which represents an upside of 3-4% from its current levels. I believe that the recent volatility in the stock, especially after Google shelved its acquisition plans, has provided a much-needed haircut to the company's valuation, which I had written about in my previous two posts. Even though the company is now trading more or less at "fair" value as per my valuation assumptions, I will choose to be on the sidelines. This is because I believe the short-term selling pressure may continue, especially as the company faces increasing weaker demand, increased deal scrutiny, and ASP headwinds from its pricing updates. While I am optimistic about HubSpot, Inc.'s focus on growing its overall profitability while driving targeted product innovations to effectively position their customers in their AI roadmap, I think it is prudent to wait for further commentary. In particular true about how the new low-ASP cohorts are progressing along the upgrade cycle. Plus, the S&P 500 is also trading at an extremely elevated level, with its P/E ratio far extended from its 5- and 10-year averages of 19.1 and 17.7, increasing the probability of at least a 10% pullback (if not more) in the near term. Given the high beta of HubSpot at 1.60, it increases the probability of a deeper correction. Therefore, after assessing both the "good" and "bad," I will wait for a better entry point from a risk-reward standpoint and rate the stock a "hold" at its current levels.

Why Pure Storage Stock Is A Smart Buy: Unpacking The Growth Drivers (NYSE:PSTG)

Based on a reverse DCF valuation, the stock may still have some upside after a big move up over the last year. Pure Storage (NYSE:PSTG) is an enterprise data storage and management provider that entered the public markets in October 2015. The market has long viewed the data storage business as commoditized, and the stock hovered around $20 from when it became publicly traded until around the middle of 2021. Then the stock began to catch fire. Pure Storage made significant contributions to modernizing data infrastructure, heavily promoting ideas like using flash memory for storage, developing a container data management platform, and creating a Storage-as-a-Service Platform. The company's innovations have helped it become a leader in Gartner's (IT) 2023 Magic Quadrant for Primary Storage for the fourth consecutive year. Several positive secular trends are also taking place in the data center market, one of which is the proliferation of artificial intelligence ("AI"), which has driven the company's recent market share growth. Chief Executive Officer ("CEO") Charlie Giancarlo said the following on the company's first quarter FY 2025 earnings call, "We also believe that long-term secular trends for data storage are no longer based on the expectation of commoditized storage, but rather on high-technology data storage systems, and run very much in our favor." This article will discuss several secular trends driving the need for improved storage systems and Pure Storage's product lineup to address those secular trends. It will also review the company's risks and valuation and explain why aggressive growth investors can still buy at the current price. The following three secular trends drive much of Pure Storage's revenue growth. Over the last decade, the need for Big Data analytics, AI, scientific and engineering simulations, financial modeling and risk analysis, and the creation of special effects for movies, animation, and video games has driven the need for High-Performance Computing ("HPC"). The Information Technology ("IT") industry became increasingly aware of the need for advanced storage solutions as the usage of several different HPC applications began to grow. Older storage solutions that utilized Hard Disk Drives (HDDs) or, in some cases, tape drives were not up to retrieving information fast enough to feed the processors in several HPC applications. HDDs have mechanical parts that lead to slower read times. Tape drives may be even slower and require manual loading/unloading. The following commentary from Pure Storage highlights a problem that enterprises face today (emphases added): Since 2019, up to 80% of primary storage workloads have been handled by all-flash arrays. Meanwhile, hard disk drives (HDD) are now largely relegated to secondary workloads, where factors like capacity and cost take precedence over speed. Despite this shift, HDDs still account for 90% of the total stored enterprise data, underscoring their significant presence and increasing negative impact in the storage landscape. The rapid adoption of a specialized form of AI named generative AI only exacerbated the need for storage solutions with high-speed data retrieval rates. If organizations want to properly utilize their data for generative AI and other purposes, they must switch the 90% of total stored data from HDD to all-flash arrays. Pure Storage claims that by 2028, virtually all new data center storage solutions sold will be flash storage. Since the company only sells flash storage, the trend of enterprises switching from HDDs to flash memory should be a secular tailwind behind its business over the next several years. Flash storage helps create a lower total cost of ownership ("TCO") for customers versus HDDs and solves several other issues. The above image shows how Pure Storage's DirectFlash has lower costs than HDD, with one of those costs being power consumption, which has become a significant concern in data centers. The following quote comes from a May 15, 2024, Mission Critical Magazine article: Currently, mission critical data centers are responsible for 2% of overall global energy consumption, according to the International Energy Agency (IEA). The projection is even more concerning in the US, with data centers accounting for 4% of total energy consumption. IEA projects the industry's rate of energy consumption will double in the next two years. A new study suggests that for every 30 responses generated by an AI platform, the equivalent of a 16 oz. bottle of water is consumed in the necessary processes that data centers use to functionally cool servers. The company claims on its website that (emphasis added) "Pure Storage's DFMs [DirectFlash Modules] are already up to 10x more efficient in terms of energy and floorspace consumption than HDDs today." Notice the commentary about floor space consumption. Data center space is at a premium. When a company gains data center space, it wants to use that space judiciously and prefers equipment with a smaller physical footprint over a larger one while still getting the job done. The last significant factor driving enterprises to their all-flash solutions is the growth of unstructured data, which is data that doesn't fit in structured formats like SQL databases. Unstructured data comes in different forms, from social media posts to music files, live chat, video, PDF files, and more. Flash memory can handle large volumes of unstructured data efficiently; HDD has suboptimal performance when handling the same data. Despite the growing adoption of public cloud, organizations still spread their computing and storage needs across on-premises systems, edge, private, and public clouds. Some of the reasons that organizations are not 100% on the public cloud include: Treating multiple computing resources as one computing platform is called Hybrid computing. An article on the Pure Storage website says: The big idea behind hybrid cloud computing is to treat all your clouds as a single environment. This can be difficult to pull off in practice, but the closer you get to a seamless integration between compute, storage, and networking resources across your on-premises, private, public, and edge environments, the more powerful your hybrid cloud. Mordor Intelligence forecasts that the hybrid cloud market will grow from $129.68 billion in 2024 at a CAGR of 22.12% to $352.28 billion by 2029. The market's growth is a secular tailwind for Pure Storage, which offers a solution to assist hybrid cloud architecture. One massive potential issue some organizations run into when using their data in AI or generative AI applications is data fragmentation and storage devices delivering data too slowly to the AI inference engine. CEO Giancarlo said in the company's first quarter FY 2025 earnings call, "Data stored on widely diverse platforms, with different operating and management systems, which are siloed and individually managed, are unable to feed real-time data to AI inference engines." Since the company offers hardware, software, and cloud products capable of feeding data to AI inference engines at the necessary rate, Pure Storage can help its customers utilize AI applications effectively. Pure Storage can be confusing to analyze at first glance because it is part hardware storage, part software, and part cloud company. The following descriptions of Pure Storage's products and services may contain slight inaccuracies because I am not an IT professional or storage expert. Much of this company's technology can be hard to understand for a novice. However, I did a lot of research and tried to be as accurate as possible. If you are like me and listen to the company's conference calls without knowing what products and services the company performs, it's easy to get confused by what Pure Storage does. On top of that confusion, the company is also transitioning from mostly selling its hardware products in a one-time sales model to managing a customer's storage needs in a subscription model. I tried to make my descriptions of these products and services informative and understandable without getting too geeky. However, understanding enterprise storage systems is a geeky topic, and it may be challenging to understand what makes Pure Storage's memory products better than NetApp's (NTAP) or Dell Technologies' (DELL) without delving a little into some technical aspects of the storage market. The following image shows several of the company's products and services. These products are the company's hardware storage solutions. Pure Storage sells multiple FlashArray models to suit its enterprise customers' needs. The company bases its FlashArray on flash memory drives rather than spinning-disk HDD technology. The company initially only sold FlashArray for HPC applications, as the first flash memory was more expensive than HDD and cost-prohibitive for storage needs outside of HPC. However, the economics of flash memory have changed to the point where FlashArray is now viable for storage needs outside of HPC. The company's FY 2024 10-K states, "Pure//E family of products delivers flash reliability and efficiency at prices now comparable to traditional hard disk [HDD] systems." FlashArray handles block and file workloads. Customers buy FlashArray when they want to scale up by adding more modules to a storage array to increase total storage capacity. Customers also use FlashArray to address more structured data workloads. The company also sells FlashBlade, which handles file and object workloads. Without getting into the weeds of file management systems, file, block, and object are different methods of storing data. Customers buy FlashBlade when they want to scale out by adding more servers and networking the storage in those servers to act as a single unit. Customers also use FlashBlade to process unstructured data workloads and for AI applications. The company's FlashBlade//S is especially suited for AI. Pure Storage uses it in the company's recently released AI infrastructure product, which it created in collaboration with NVIDIA (NVDA) named AIRI on NVIDIA DGX BasePOD. The company states on its website that "Cloud Block Store™ (CBS) is enterprise-grade block storage in the public cloud." This solution extends specific Purity data architecture and services into Microsoft's (MSFT) Azure and Amazon's (AMZN) AWS public cloud. Purity is the software that directly controls its FlashArray, FlashBlade, and Cloud Block Store products. The company describes the software as "Secure, highly scalable, and simple to use, Purity powers all of Pure Storage®, including FlashArray//X™ and FlashArray//XL™ to deliver comprehensive data services for performance-sensitive applications, FlashArray//C™ for capacity-oriented applications, and Pure Cloud Block Store™ for seamless data mobility." The company believes that this software differentiates the company's FlashArray and FlashBlade storage products from standard solid-state drives ("SSDs") in the following three ways that it lists in its FY 2024 10-K (emphasis added): Our extended advantage stems from three technology differentiators: Our leadership with direct-to-NAND software, our integrated hardware/software direct flash modules, and our data reduction capabilities. Because our highly sophisticated flash management software requires less NAND, we drive significant efficiency advantages over SSDs by eliminating over-provisioning, extending endurance, requiring far less common equipment and reducing environmental impact. NAND is the technical term for flash memory, which is a memory that continues storing data after the removal of power (long-term memory). The company states on its website, "DirectFlash is a flash module designed by Pure Storage that allows all-flash arrays to communicate directly with raw flash storage." What raw flash storage means for the non-memory expert is that Pure Storage buys custom-made flash memory chips from manufacturers and avoids using pre-built off-the-shelf SSDs from Micron or Samsung. This custom-made flash memory chip that Pure Storage uses is a high-density TLC (Triple-Level Cell) or QLC (Quad-Level Cell). The most significant advantage of TLC and QLC flash memory is that they can store more data in a smaller area than other NAND flash memory types. Additionally, QLC is a more economical chip than other NAND flash types. The disadvantage of a QLC chip is that it needs sophisticated management software (Purity) and requires much calibration to get the chip to work effectively. DirectFlash and Purity software communicates with and controls the custom-made TLC and QLC NAND flash memory chips. The company believes this module and software combination gives it a competitive advantage in efficiency and performance over other Flash memory providers. Pure1 is the company's cloud management service for managing FlashArray, FlashBlade, Cloud Block Store, and Purity software (private cloud). The company uses machine learning and analytics to make it easier for IT staff to monitor and manage a company's storage needs globally using mobile devices. This service gives IT staff information and suggestions for them to act on. Additionally, the company later added Pure1 Meta, which the company calls "self-driving storage" and analogizes it to how self-driving cars automate the driving process. Pure1 Meta's goal is to " eliminate manual operations" by automating the management of the company's hardware and software private cloud storage products. To understand Portworx, one must first understand containers and Kubernetes. A container is an all-in-one package that holds everything an application needs to run in almost any computing environment. The Kubernetes website describes Kubernetes as "an open-source system for automating deployment, scaling, and management of containerized applications." Portworx is Pure Storage's proprietary platform that sits on top of open-source Kubernetes. It provides complimentary data services to Kubernetes functionalities, including disaster recovery, backup functionality, storage services, and DevOps integration. The company describes Pure Fusion as a way to "Automate your enterprise storage, and deploy and scale workloads across any environment. Streamline complex tasks and boost efficiency, enabling your business to focus on growth while reducing risks and overhead." This Software-as-a-Service (SaaS) application uses AI to automate storage management on private clouds, containers, Virtual Machines (VMs), and public clouds. Pure Fusion enhances the operation of a hybrid cloud environment. One disadvantage of traditional storage systems is that they can quickly become obsolete. Pure Storage addresses this problem through a service named Evergreen. The company describes the service in its latest 10-K: Our differentiated Evergreen architecture enables our hardware storage systems to not become obsolete or require wholesale replacement like traditional systems. Our architecture includes several key technology elements that allow our arrays to be upgraded non-disruptively, which is a critical underpinning of delivering a full as-a-service experience. Pure Storage designs its hardware system so customers can easily replace or upgrade each component. The company can also update its software online without disrupting its operations. It offers customers three services named Evergreen that include these services: Please pay close attention to the company's Evergreen business, as higher-margin subscription services are becoming a more significant percentage of its revenue. Customers must like the company's products. The following image shows the company's market share changes compared to competitors over the last decade. According to IDC, by the end of the calendar year ("CY") 2023, the company had grown to the second largest market share for all-flash storage, at 19.9% The following pie chart shows that as of the end of the March quarter, Pure Storage had a 21.1% market share in the Enterprise storage market. According to the chart, it looks like it picked up most of its market share gains at the expense of Dell/EMC. This market share grab has caught investors' eyes and is one reason some are interested in the company. Let's go over the recent trends in Pure Storage's revenue growth. The following chart compares Pure Storage's quarterly revenue growth with that of its peers. Like several of its peers in the enterprise storage industry, growth rapidly declined starting around the middle of 2022 as the impact of rising interest rates stirred up recession fears. After the company produced declining year-over-year revenue growth in the first quarter of CY 2023 (FY 2024), investors were disappointed that management gave a dismal revenue forecast for its fourth quarter of FY 2024. The stock sank 14% on November 30, 2023, the day after reporting its weak guidance. When the company did report its fourth quarter numbers, year-over-year revenue growth had declined by 3%. If Pure Storage has such a great growth story, what is going on here with such weak growth numbers? Remember when I said to pay close attention to the company's Evergreen subscription business? The following table shows that since 2020, subscriptions as a percentage of total revenue grew from 25% to 43%. This growth in Evergreen subscription revenue has hurt revenue growth in the near term since accounting rules call for subscription revenue recognition over time instead of revenue recognition at the time of sale, such as the company's hardware sales. The following table from the company's first quarter FY 2025 earnings release shows that product revenue grew 12% year-over-year. Subscription revenue grew even faster at 23% year-over-year. Subscription services revenue is now at nearly 50% of total revenue. Virtually every company that has switched from one-time product sales to a subscription business has seen a temporary drop in revenue growth as the percentage of subscription revenue increases. However, over the long term, a subscription business can be more beneficial to Pure Storage, as it should have steadier, more predictable revenue growth. The following image shows that year-over-year revenue growth rebounded to 18% in the first quarter. Pay close attention to the company's subscription-related numbers in future quarters. Ideally, we want to see subscription ARR (annual recurring revenue), the revenue the company expects to receive annually from subscriptions, growing faster than subscription revenue growth. We also want to see RPO (Remaining Performance Obligations), the revenue the company expects to receive once delivering contracted future services to customers, grow faster than subscription revenue. Higher ARR and RPO represent future growth potential, and when both numbers grow faster than revenue growth, they often represent faster growth of predictable future revenue streams. Since subscription ARR of 25% and RPO growth of 27% are higher than subscription revenue, it portends future solid revenue growth. The company ended FY 2024 with 2.80% revenue growth. The following table shows Pure Storage's guidance for the second quarter and FY 2025. The company expects revenue growth of 9.6% in the second quarter and 10.5% for FY 2025. The guidance also includes TCV (total contract value) of the company's storage-as-a-service Evergreen// One and Evergreen// Flex offerings, which are the most critical subscription services. The TCV number reflects the future revenue potential from these subscriptions. This guidance for 50% TCV for FY 2025 is a positive indicator for future revenue growth. The following table shows analysts expecting annual revenue growth to double digits over the next several years. One analyst believes annual revenue growth will reach 20% by FY 2028. The following image includes non-GAAP (Generally Accepted Accounting Principles) gross margins and operating margins. Note that subscription gross margins are higher than product gross margins, implying that the company's profitability should increase as subscription revenue becomes a larger portion of income. Additionally, over the past three years, first-quarter margins have increased for both product revenue and subscription revenue, a positive trend. The company's non-GAAP operating margin for the first quarter of FY 2024 was 3.3%, substantially lower than the previous quarter. However, operating margins improved to 14.5% in the first quarter of FY 2025. The company guidance for the second quarter of FY 2025 non-GAAP operating margin of 16.6% and FY 2025 operating margin of 17% is a positive indicator of improving profitability. The following chart compares Pure Storage's cash flow from operations ("CFO") to sales to competitor NetApp's CFO-to-sales. Pure Storage should have room to increase this metric by several points. Its CFO-to-sales of 24.74% means that for every dollar of sales, Pure Storage generates $0.25. Investors should monitor this metric, as a growing CFO-to-sales has positive implications for free cash flow ("FCF"). The following chart shows that at the end of the first quarter, Pure Storage produced $533.42 million in trailing 12-month FCF. It has $1.72 billion in cash and short-term investments and $100 million in long-term debt. Pure Storage spent $49 million on capital expenditures ("CapEx") during the first quarter, approximately 7% of revenue. This level of spending is a drag on the company's FCF. For example, although competitor NetApp spent a similar amount on CapEx during the quarter ($46 million), it's only 2.75% of its total revenue, a partial reason that NetApp has an FCF margin nearly 6% better than Pure Storage. The company's Chief Financial Officer Kevan Krysler said the following on the company's first quarter FY 2025 earnings call, "Factors contributing to capital expenditures included test equipment supporting our engineering teams for new innovations, continued build out of our new headquarters, and infrastructure supporting our Evergreen// One storage-as-a-service sales." These investments could lead to future growth and potentially improve FCF margins in the long term. The most significant risk for Pure Storage is competition. Although the company has been a leading innovator in flash technology, other companies may be catching up. For instance, Meta Platforms (META) has been a significant customer since 2017 and Pure Storage was in line to help the company build a massive supercomputer in 2022. However, in March, the market learned that rival private company Hammerspace will assist Meta in building its supercomputer. Block & Files published an article that stated: Meta has partnered with Hammerspace "to co-develop and land a parallel network file system (NFS) deployment to meet the developer experience requirements for this AI cluster ... Hammerspace enables engineers to perform interactive debugging for jobs using thousands of GPUs as code changes are immediately accessible to all nodes within the environment. When paired together, the combination of our Tectonic distributed storage solution and Hammerspace enable fast iteration velocity without compromising on scale." Analysts have woken up to competition potentially hurting Pure Storage's market share. Seeking Alpha published an article quoting UBS Group (UBS) analyst David Vogt on July 2, 2024 (emphasis added): "Pure's valuation has benefitted from the view that AI infrastructure investments will accelerate growth," analyst David Vogt wrote in an investor note. "However, AI related storage spending will likely be slower than the [market] expects and more tied to inference, a slower growth market than training. Finally, private vendors like Weka, VAST Data, and Hammerspace are gaining share as evidenced by Meta's announcement it is partnering with Hammerspace to co-develop and land a parallel network file system deployment in its GenAI clusters." Other competitors in the flash space, such as NetApp's C-series, [Hewlett Packard Enterprise's] (HPE) Alletra and others are expected to gain market share, leaving Pure Storage with roughly 15% of the market, below the 19% consensus estimate, Vogt added. Investors should monitor future earnings reports for signs that competition has negatively impacted the company's market share and results. Pure Storage has a price-to-sales (P/S) ratio of 7.6, well above its five- and seven-year median and above the Information Technology ("IT") sector's median of 3.03. Some think the market overvalues the stock at the current valuation. Its price-to-earnings (P/E) ratio is 234, well above its two primary competitors, NetApp and Dell, and the IT sector median of 30.55, a potential sign of overvaluation. The stock trades at a price-to-FCF of 41.93, well above its peers and the IT sector median of 19.59. Seeking Alpha Quant rates the stock's valuation a D-. Let's compare the company's forward P/E ratio to its EPS growth estimates over the next three years. The following image shows that Pure Storage's forward P/E exceeds its year-over-year EPS growth estimates over the next three fiscal years, which suggests that the market overvalues the stock. The risk of the stock falling if the company misses profitability and revenue growth estimates is high. Let's do a reverse discounted cash flow ("DCF") analysis of the stock to see what FCF growth rate the current stock price implies. Pure Storage Reverse DCF NetApp, one of its older competitors, achieved an FCF margin of 24.4% in its latest quarter. Suppose Pure Storage achieves an FCF margin of 24%; the FCF growth rate it would need to achieve to justify the current stock price is 13.2%. According to one analyst, Pure Storage will grow revenue at a 17.45% compound annual growth rate over the next eight years to reach $10.25 billion. Let's say it can achieve a revenue growth rate of 16% over ten years; the estimated intrinsic value is $83.50, above the July 10 closing price by 23.3%. This company should be a massive beneficiary of companies adopting AI, which should be a rising tide that lifts many boats. Although competition is rising, Pure Storage is still an innovation leader in the storage industry. If you are an aggressive growth investor willing to invest in a high-risk, high-reward investment, the company's valuation based on a reverse DCF still leaves room for potential upside. I give Pure Storage a buy recommendation.

UiPath Stock: On The Long Road To Recovery (NYSE:PATH)

Under the hood of perception, there still is a good product with decent market demand. UiPath's (NYSE:PATH) sales execution challenges have amplified a multitude of issues both specific to the company and macro-economic. While the market was right to punish the stock for performance issues, we think it's a bit overdone. However, considering the macroenvironment we would not enter the stock at this point but would also not be sellers. UiPath started out as an automation solutions and computer vision solution provider. The company has gradually expanded into providing an integrated business automation platform. UiPath sells its offerings through cloud and on premise, along with associated professional services. UiPath's Q1 2025 results had three key takeaways: It is anyone's guess if the CEO's ouster was an outcome of the lack of results or was it truly a 'personal decision'. We think that the markets like consistency and lack of surprises. All the points above were about inconsistency and surprises. While the slew of negative news will put immense pressure of delivery on the new management for Q2 2025, we like what we read. [Q]: You talked about some deals getting pushed out of the quarter, particularly for large contract customers. Have you started to see some of those deals close in 2Q? And are they also closing smaller than maybe originally anticipated like you saw in 1Q? Or have some of them been lost completely? Are they still in the pipeline? [A]: The only thing is we don't really see losses. Source: UiPath Inc. Q1 2025 Earnings Call Transcript on Seeking Alpha This one-line answer tells us that the sales execution was a person issue and that seems to have been addressed. The founder, who grew the business from 0 to 1 is back and wants to revamp the organizational culture of centrality etc. We think the company's operational elements went off-track; however, the product is still brilliant. In addition to being a leader in the Gartner Magic Quadrant, the business cases that UiPath serves are quite compelling. All these use cases benefit from the increased focus on AI. As the founder-CEO puts it: I want to start by saying that the AI and Gen AI is a tailwind for us. And we have invested significantly over the years and in particular, over last year in Gen AI. In June, we are going to launch our first cities of autopilots in GA. This being said, I think that AI is creating a little bit of confusion with our customers. And they are evaluating what kind of tasks are better suitable to automate the AI, which task are better with using our platform. But what I hear from many of our customers. It's actually the combination between Gen AI and automation, it's something that makes a lot of sense to them. We said it before, but it's like the human body, and it's -- AI is the brain and our platform is the arms and the legs. Source: UiPath Inc. Q1 2025 Earnings Call Transcript on Seeking Alpha The ability to find and then automate manual processes is of immense value, which become more valuable when such processes can be used to feed LLMs (or large language models). The distinction between AI (artificial intelligence) and automation is an important one. Furthermore, Gen AI (or generative AI) as the application of AI and automation running atop Gen AI makes UiPath's business model more relevant. AI is like we said, has always been infused within our platform. So when you look back computer vision, as I talked about, that was embedded deeply within our platform. Task mining. You really need to understand and analyze data at scale and use AI to give the appropriate suggestions and inferences that are there. The advent of Generative AI has given us really an open source set of LLMs to build more efficiently specialized models. So where does that help us? We're not building our own general LLMs. We're really specializing on top of the LLMs that are there. And so what that allows us to do is if you look at Autopilot. Autopilot, we have almost -- which is our version of Copilot, generates expressions for our developers to be able to code faster, lowering total cost of ownership and reducing the barriers of entry for automations -- for harder and tougher automations. There is a 70% acceptance rate on the expressions that our Autopilot is generating in the hands of our test -- of our pilot group. Source: UiPath Inc. William Blair 44th Annual Growth Stock Conference Transcript on Seeking Alpha In addition to the AI headwinds, we think the management has build itself a reasonable partner ecosystem to evangelize its product offering. Some of UiPath's large partners include Microsoft, Accenture, and SAP. It is notable that much of the business these partners drive is from digital transformation, which feeds a flywheel for UiPath. Processes continue to evolve in response to market demand and companies continuously need to re-invent (read: transform) themselves to stay relevant. Hence, in a manner of speaking, UiPath's fortunes are increasingly getting tied to the need for digital transformation - and digital transformation is not just moving from paper to computer but continual enhancement of processes. Another interesting element of the business model is the clean balance sheet and strong cash generation. Despite the sales execution challenges, the company has been firm of its guidance of $300 million in FCF for fiscal 2025. We would also want to touch upon the topic of revenue vs FCF. While large deals were affected and some of them are even closing smaller, the company maintained its FCF projection of $300 million. The first is I want to remind everybody that we follow ASC 606 accounting. And so that -- when you have multiyear deals that are impacted, that has a more or an outsized impact to revenue. And you can see that even the differential between our revenue growth rate and our ARR growth rate, right? Within our guidance, we're talking about a 14% ARR growth rate, which is significantly better than the revenue growth rate for the reasons that the complexities of 606, both deployment as well as duration impacts our accounting. Source: UiPath Inc. Q1 2025 Earnings Call Transcript on Seeking Alpha This is a curious observation - while ratable recognition of revenue is well known in ASC 606, the money must come through at the income statement and cash flow level, albeit at different times. If revenue is getting hit, so should the cash collected be hit. The other way to think about it is from an ARR standpoint: UiPath possibly has annual or multi-year contracts with a floor in place and that ensures collections are stable. (The lack of short-term debt would support the stability in the collections.) However, this school of thought would imply that the added revenue that was coming in previously was FCF neutral - either the margin on it was going to be 0 or the collections would have been questionable. In both the cases, which was possibly bad revenue and getting rid of it, UiPath may have saved itself from a much bigger challenge than just lowering its current guidance. UiPath is not inexpensive at 23-24x 2025E FCF of $300 million (or sub 5% yield). We think that the growth prospects of the company are good and hence we would not be sellers of the stock. It is also worth mentioning that with the macro-economic setup changing there could be potentially better entry points in the stock. We think this is an asset for the long-term and we would hold the stock. Sales execution issues: If the change in sales compensation is not able to bring about the desired impact to the H2 outlook, the stock could see pressure. Revenue recognition: If the management is unable to maintain its FCF targets, it would be a major red flag. Furthermore, clarity around how the revenue translates into FCF would be greatly appreciated. Stock based compensation or SBC: The SBC impact to the cashflow is still significant. The cash flow of the company is highly dependent on deferring the stock grants. While a growth company can afford this for a while fine, continuation of such elevated levels of SBC is risky. As the company matures it will significantly dilute existing shareholders and will also push out GAAP profitability. We draw some comfort from the management commentary around reducing S&M and G&A expenses, which should possibly lead to reduction in SBC going forward. We think the fundamentals of the business remain intact, as shown by the growth, which experienced a hiccup due to the change in organizational setup. The execution issues around sales appear to have been fixed but the impact of those will really come through in the outlook for H2 and beyond. Furthermore, we think the acknowledgement around inertia having crept in the organization due to bureaucracy was quite credible and was another reason for the ouster of the CEO. Founders are typically quite passionate and in UiPath's case the founder has also helped grow the company significantly. Hence, we would be quite bullish on him returning to the helm.

PayPal Stock: An Undervalued Profitable Growth Stock (NASDAQ:PYPL)

PayPal's new management will emphasize profitable growth as the payment segment consolidates. Financial Institution inefficiency, digitalization, and regulation, such as PSD2, led to the explosive growth of fintech, which proliferated into payments, insurance, asset and wealth management, and real estate. PayPal Holdings Inc. (NASDAQ:PYPL), the leading US fintech payment company, benefitted from this industry development by providing a secure and frictionless payment experience. With competitors such as banks, big tech, and other fintech companies eager to grab a slice of this fintech segment, PayPal is at a crucial inflection point. It needs to respond or risk losing market share to its competitors. The new management and its strategy to refocus PayPal on its core competence, emphasizing profitable growth, and PayPal's stock selling at a 25% discount convinced me that PayPal is an excellent profitable growth stock you can buy right now. PayPal has gone on an acquisition spree to improve its payment service, from Coupon to Logistics. However, these acquisitions have contributed little to what customers want from PayPal: secure and frictionless transactions between merchants and consumers. After its acquisition spree, the company did too many things at a time instead of focusing on sustaining innovation, such as improving its branded checkout experience by making it more seamless or frictionless. PayPal's New CEO, Alex Chriss, acknowledged this in his interview at the Morgan Stanley Technology, Media & Telecom Conference last March 4, 2024. I'll tell you a story. I started September 27. That was a Board meeting week. The week after, I've gathered all of our product leaders in Austin for a product review. We sat down. It was a three-day review. Four hours in, I stopped the meeting because we were reviewing 300 different items. And I said, "Not all of these are created equal. It's time for us to focus." Dedicated to refocusing PayPal on its core competence, PayPal's new management divested and is looking to divest some of these acquisitions. Alex Chriss remarks when asked how PayPal plans to improve its Transaction margin growth. Then we have another component of really other products and services that we have that are a drag to the business. These are a combination of acquisitions that we've done over the course of the year, products that have been defocused and were, in many ways, orphaned throughout the organization. And we're now looking at top to bottom as a leadership team and understanding, are they core to the business? Are they places that we should invest in? Are they areas that we should divest because they're just not core anymore and they're boat anchors to the business? And we will address those over the course of the year. PayPal recently sold Happy Returns, a logistics company, to UPS (UPS), which indicates that it will sell any businesses that are dragging PayPal's profitability and don't contribute additional value to PayPal's payment service. I expect further divestment or restructuring of some of the acquisitions, now subsidiaries of PayPal, as the management continues refocusing its business to its core competence, which can improve PayPal's profitability. Additionally, the new management will be particularly motivated as their stock compensation will be granted during a period of low valuation for a high-growth company like PayPal. Consequently, they have a solid incentive to improve PayPal's profitability and growth. PayPal is processing approximately $1.5 trillion in transactions annually on its platform. Along with its huge data on customer's buying behavior and merchants' offerings, it is in a prime position to enter the digital advertising market. With its 426 million active accounts and 36 million merchants in over 165 countries transacting inside its platform, It already has the required scale needed to make this business economically viable cause it no longer has to spend so much money trying to acquire new customers. With digital advertising costs continuing to increase in recent years, merchants are trying to find alternative advertising channels, such as retail media. PayPal is in a prime position to take advantage of this trend and is leveraging all the data being processed on its platform by introducing 'Smart Receipts,' where they leverage AI to analyze the customers' buying history or patterns and recommend products on its receipts through email or app, in which the customer might have a particular interest. Additionally, they have introduced PayPal's Advanced Offer Platform; similar to how Meta (META) or Google (GOOG) handles its advertising business, PayPal is again leveraging AI to provide recommendations to consumers based on their buying patterns. For example, if you have historically purchased luxury beauty products, PayPal will recommend a product based on your buying interest. Moreover, unlike Google and Meta, they will charge merchants for advertisements based on performance, not impressions, providing tremendous value proposition for merchants trying to find other advertising channels. Lastly, PayPal can benefit from the 'Network Effect' as they scale this business. Digital Advertising is forecasted to grow at 9.1% CAGR; PayPal, along with its high growth payment business potential, can tap into another high growth market. With 60% of online purchases still done on 'Guest Checkout,' PayPal introduced 'Fast Lane,' aiming to provide a more frictionless transaction. This feature takes advantage of customers who have used PayPal once during their past purchases to fill out their payment details automatically, resulting in more seamless transactions that provide a tremendous value proposition for merchants wanting to increase their checkout conversation among customers who want to keep their debit or credit card information private and customers who wish to have a smooth guest checkout experience. According to research done by Baymard, 25% and 22% of the consumers abandoned during the checkout process due to not wanting to provide credit card information and the complicated checkout process, respectively. PayPal Fast Lane can provide a solution that is on par or better than the competition. While I believe Fast Lane isn't the "Breakthrough Innovation" that convincingly beats the competition and can gain market share, it provides the sustaining innovation PayPal needs to protect its market share against other fintech and big tech trying to steal market share from them by providing an even more frictionless online payment experience. By enticing customers with rewards, PayPal is also leveraging Fast Lane to onboard consumers who want to avoid logging in to their PayPal account. PayPal CEO Alex Chriss comments on how they will leverage Fast Lane to onboard customers on their platform at the Morgan Stanley Technology, Media & Telecom Conference. What that does from a branded perspective, though, is that now allows us to follow up with that customer and say, "Hey, thank you for purchasing and doing the guest checkout through Fastlane. Did you know that if you actually used PayPal, you could have saved 2% or you could have gotten this reward?" This is a smart move by PayPal; they are leveraging their innovation to onboard potential consumers onto their platforms, benefiting their advertising business. PayPal experienced a gross margin decline from 2021 to 2023, which resulted in the stock price plunging by 80% since peaking in 2021. Former PayPal CEO Dan Schulman attributed this to the increasing percentage of revenue from its unbranded checkout business, which mostly comes from Braintree, pressure on discretionary spending due to elevated inflation, and the slowing growth of E-Commerce transactions due to the easing of COVID restrictions. While these factors, excluding Braintree, will continue to be a significant headwind for PayPal. They are expected to correct themselves as the economic cycle normalizes. We will instead focus on Braintree since this is where PayPal has control. No public records of Braintree's financial performance are available. Still, we will rely on a Forbes article and PayPal investor presentation to estimate its revenue, gross margin, and percentage of Braintree's revenue into PayPal's total revenue. Braintree experienced a greater than 30% revenue growth from 2021 to 2023. PayPal CEO Alex Chriss remarked that they priced aggressively to gain market share, which serves as a beachhead in this segment. They are now in a position to add more value to their offerings. Thus increasing their price to value. On unbranded, this is a processing business that we have established growth in and established a beachhead in over the last few years. But now is the time for us to take all that great innovation, the value-added services, the proof points that we put into the market and price to value and ensure that we're driving profitable growth from a processing business as well. You add on top of that new innovation that we brought to market, things like Fastlane, that enable us to now delight customers with best-in-class checkout conversion experience. And we believe that's a wonderful opportunity to monetize. While this may turn out to be true, it doesn't change the fact that Braintree's high growth rate and PayPal's core payment stagnation resulted in PayPal's consolidated gross margin declining from 55.17% to 46%. Although Braintree is an important strategic business for PayPal -- PayPal bought it for $713 million in 2013 and generated around $2 billion in gross profit in 2023 -- this part of the business constitutes a lower margin due to the nature of the customers in this segment. Typically, large enterprises such as Uber (UBER), Adobe (ADBE), and Airbnb (ABNB), among others, have pricing power due to their scale and have in-house software developers who can do most value-adding activities, such as complex coding or integration. Thus, Braintree's ability to charge a premium in this business is limited. Dan Schulman comments on concerns about unbranded checkout's profitability on Management Presents at 51st Annual JP Morgan Global Technology, Media and Communications Conference. I also want to grow the profitability of it as well and so we know exactly what we need to do there as well. We need to expand internationally because there are better margins. We are predominantly on Braintree domestic right now. We are going to move down market with PayPal Complete Payments, PPCP, which has higher margin structures, and we are adding value-added services on top of that, that have higher margins. PayPal is turning its attention to its PayPal Complete Payment Platform(PPCP), which targets Small to Medium Sized Businesses(SMBs). This segment is a higher margin business for PayPal since most value-adding activities, such as integration or coding, are now done by PayPal with its promise of No or Low Code Integration for its customers. They can charge a premium for this service since the customers in this segment have lower pricing power and can avoid hiring expensive software developers to handle the value-adding integration and coding activities, which can increase their overhead costs and allow them to focus on their core business. PayPal's unbranded and overall margin should also improve as this business scales. Like any industry, it experiences periods of high growth and low profitability into a period of low growth and focus on profitability. During times of high growth, businesses in an industry often prioritize growth and scaling their business over profitability. Eventually, the industry enters a period of consolidation along with slower growth, forcing companies to focus on increasing their profitability. In the fintech payment segment, scale matters cause businesses aren't using your offering if only a few consumers use you, or consumers will not use you if they can't use your offering to buy from multiple merchants or if they need to go from your platform to another platform to pay the merchant, which create friction. This is why only firms that have managed to be successful in this segment are incumbents such as PayPal, AliPay, and Stripe, and Big Tech Firms such as Apple (AAPL), Samsung, Amazon (AMZN), and Google that have existing ecosystems where payment can play a vital role in increasing the value proposition to their customers and prevent them from switching to other ecosystems that provide a similar experience; Apple into Android or Samsung Ecosystem and vice versa. The above reasons led PayPal's CEO, Alex Chriss, to focus on ventures that promise profitable growth. Look, every company is at a different stage and gets to decide what they want their True North and their North Star to be. For me, it's now a time at this stage of the company to focus on profitable growth. I've been consistent from day one, it's where we've organized the company around, it's the way we do our operating mechanisms and the conversations that our leadership team has with each other and the way that were compensated. And so that is the North Star for the company. Additionally, while the payment segment still receives the lion's share of capital funding in fintech, there is a clear declining trend in the amount of capital investments made into the fintech payments segment, which could lead to fewer startups challenging the incumbents and further consolidation where the incumbents are buying all the smaller players to eliminate competition or increase their scale. While some can argue that the high-interest environment causes lower funding, I argue with what I said earlier. The payment segment will be dominated by players that the majority of people already use, such as PayPal, Apple Pay, Stripe, Samsung Pay, etc... Upcoming startups will most likely structure their business on providing value-added service to certain parts of the digital payment business value network or niche part of the digital payment market, where scale doesn't provide a competitive advantage. According to multiple research firms, digital payment is forecasted to grow at 12-20%. Although estimates widely vary, they show the potential growth of the market in which PayPal participates. I will use the Discounted Cash Flow Method to valuate PayPal. I will conservatively project an 8% revenue growth rate to emphasize that even if PayPal underperforms the industry growth rate, it shows that PayPal is still undervalued. With an intrinsic value of $79.57 per share, it is undervalued by around 25%, which is a decent margin of safety for the company's growth potential. Competition PayPal has experienced a decline in active accounts since 2020 due to competition from other digital wallets, such as Apple. I expect further intense competition from companies with existing ecosystems and scale, where embedding finance services such as digital wallet and payment services enhances the value proposition of their main business, such as Meta's Facebook with Metapay, Google's Google Pay, and Grab's Grab Pay, among others. Ultimately, it will come down to if people continue to value PayPal's other value propositions, which others don't have, such as Seller & Buyer Protection. Economic Cycle Like any business, PayPal is sensitive to the ebb and flow of the economic cycle since a significant amount of its Transaction Volume comes from discretionary spendings, which tend to get less prioritized by consumers since they are switching some of their discretionary budgets into staple ones. But as I said earlier, economic cycles usually correct themselves in a long course. It's just a matter of when it will correct itself, which is always hard to guess. PayPal is entering a crucial inflection point. Even with competition heating up, I believe it is not too late for PayPal to turn the ship around; well, there's no ship to turn around since they only need to partially correct a ship that has been slightly coursed in the wrong direction. The management is doing the right thing by focusing their attention on PayPal's competence and diversifying in the ads business, which is a natural extension of their business due to the amount of data they are processing on their platform. Plus, You get to buy PayPal at a price where these potentials aren't even factored in, and more importantly, you buy a profitable fintech company, which is a rare breed in this space.