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ASX Travel Stocks and a look at high growth US chip company Wolfspeed: Investor Webinar 16 August 2023

August 16, 2023

Flight Centre, FLT, JAY, Jayride, QAN, Qantas, Revasum, RVS, SDR, Silicon Carbide, SiteMinder, Wolfspeed

ASX Travel Stocks and a look at US chip company Wolfspeed … in this week’s Investor Webinar:
  • Travel is back with a vengeance and ASX Travel Stocks are benefitting. Here’s 4 travel stocks we like a lot!
  • US-based Wolfspeed (NASDAQ: WOLF) might be new to you, but you should definitely take a closer look at this high-growth chip stock!

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Marc: Good morning. It’s the 16th of August. Good morning, Stuart.

Stuart: Good morning.

Marc: A lot to talk about. Stuart, you were on Ausbiz last week talking about travel stocks. So, we’ll take a look at that. And also, we’ve got a stock listed on NASDAQ for people to have a look at. And I think they should put it on their watch list. This company’s reporting tomorrow. It’s a company in the chip space, we’ll look at that as well. But, Stuart, kick it off with travel stocks.

Stuart: Travel. Travel is one of those themes that is gonna keep going for a while. People didn’t travel for two years as you know for obvious reasons. But before COVID, people were traveling at a fairly brisk rate in terms of the number of trips per year. So, you’ve got that catch-up effect, plus the fact that it’s a growth industry, to begin with. What do I mean that travel was a thing? It used to be people didn’t travel much. There was one big overseas trip or two in their lifetime, and that was it. More recent generations have traveled more often, and particularly millennials travel all the time. And as I like to joke, those people don’t think they can afford a house, and therefore they’re much more into experiences. And, you know, one of the premier experiences you can enjoy in the year 2023 is travel.

So, travel was a thing before COVID. The revenge thing is still playing out, taking revenge for those two years we didn’t do it. And what I’m hearing is that household budgets are actually dropping other things before they drop travel. So, basically, my message to the listeners today is don’t sell your travel stocks. Until you start hearing people complain, they might not be able to spend as much this year as they did last year on their trip, because that’ll tell you that the industry’s choking off. Three statistics I picked up that I thought were interesting. Airbnb, which is a public company, disclosed that their nights booked had risen 11% year on year in the June 2023 quarter.

So, that says to me, Marc that revenge travel is still going on. Now part partly it could be at the expense of hotels, but I doubt it. But Airbnb’s a great bellwether about how this sector is doing. What I’m seeing is, as recently as a few months ago, both leisure travel and business travel were both growing in the order of 30%. And don’t rule out the fact that China will be a big contributor. For a while there they couldn’t even travel internally, let alone outside the country. Now that that country’s unlocked, you’re going to see the return of Chinese tourists in a big way. In fact, you know, we’re yet to see it in Sydney. I’m not seeing large numbers of tourists, Chinese tourists on the streets like what was happening, pre-COVID. So, that will also be a strong contributor to growth going forward.

So, who wins? Well, you’ve heard me talk ad nauseam about Flight Center, and we’ll look at the chart that one in a second. The airlines have done okay, but I think people are worried that the price of fuel, and also the price of tickets might balance each other out, and plus labor costs as well. So, those stocks haven’t moved too much, but I’m actually expecting some decent results in the current half to fuel a better FY24 for those stocks.

We’ve talked about SiteMinder before. SiteMinder are the folks who put the software in between hotels and the booking engines that allow people to go to those hotels. So, as well as the underlying growth story of hotels looking for more efficient booking solutions, you’ve got the fact that those hotels are a lot busier now and looking for a solution to attract people to come and stay with them. So, that company has started to kick along quite nicely in terms of its underlying growth. And then there’s Jayride. Marc, I bet you’ve never heard of Jayride before.

Marc: Actually, I have, Stu. One of the brokers I used to work at was involved in that IPO [crosstalk 00:03:59]. When was it? [crosstalk 00:04:01] years ago.

Stuart: Yes. Some time ago. So, that company’s had enough time to evolve now to the point where it’s about to, I think, explode out of nowhere. So…

Marc: Is that run by a guy named Jay, by the way? Or…?

Stuart: No, I don’t know where they got the name from. It’s run by a guy called Rod Bishop, which we’ll talk about in a moment. Let’s look at the chart of Flight Center, as an indicator of how this travel theme is going. You’d think if people stopped traveling, that that chart would’ve burned itself out. And obviously, Flight Center had a bad June and July. It is a volatile stock and tends to cycle around every few months. But the trend has remained consistently up for this, that one since the start of the year. So, don’t rule out Flight Center anytime soon. Remember, this company has evolved from a single, old-fashioned brick-and-mortar travel agency in Brisbane back in the early ’80s, to being one of the [inaudible 00:04:56] largest travel companies in the world. Always evolving, always a little bit ahead of the game in terms of moving into new segments such as, you know, ultra-luxurious travel or corporate travel, for example.

So, a lot of naysayers tend to diss the fact that it’s got a substantial brick-and-mortar investment. That’s really only part of the story. If you were to lay out all the brands that Flight Center operates under, you’d probably fill up this whole slide, and the internal culture that fuels that growth isn’t going away anytime soon. Graham Turner, as I understand it, still shows up to work most days of the week, even though he’s a billionaire, and sits in an open-plan office, up there in Brisbane. So, keep an eye on Flight Center. Historically, it’s been the gift that keeps on giving as a fast-growing top 200 company. And I think it’s gonna get its mojo back.

But let’s talk about this mysterious Jayride. So, there’s the chart for Jayride. It’s been caught in the technology downswing for stocks in late ’21 and through ’22, showing a bit of stability there, I think, at around the current share price as we near the middle of 2023. And that would be consistent with tech stocks showing some green shoots of recovery again. So, worth paying attention to just because the chart is looking a little…it’s not threatening, anyway, if I could put it like that. Let’s talk about the actual business itself. There’s Rod Bishop the founder of Jayride and its current CEO. Sydney-based company, market cap of only, $24 million. And what’s Jayride’s thing? It’s the portal that lets you book rides from the airport to your hotel. That might seem an insignificant thing, but think of what it’s like if you’ve just been on a long flight to the Seychelles, for example, and you’ve never been to the Seychelles before, how the heck are you gonna get from the airport at whatever the capital of the Seychelles, to whatever resort you’re going to. Marc, you’ve been everywhere. You must’ve been to the Seychelles before.

Marc: No, but I’m wondering what the capital of the Seychelles is, Stuart.

Stuart: You’ve got me curious now. Do you mind if we pause this video? Wherever it is. The last thing you wanna do is have to muck around looking for transport to get to your hotel after a long flight. Well, Jayride’s the solution there, and they’ve signed up everyone, 3,700 individual ride service companies, 1,600 airports, 110 companies. Which means just about all the airlines you expect to fly on are linked up in some way to the Jayride portfolio to reduce the hassle factor of [inaudible 00:07:29] travel. That’s actually a thing these days. When we first busted out to enjoy our first revenge travel, we didn’t care how uncomfortable it was. We were just happy to be out of doors.

Nowadays, people are focused on the comfort factor, and these people have an important feature that reduces the level of anxiety you would have about that. They just bought a business called Airport Shuttles. So, this business is truly global now. It gets about 2/3 of its revenue from Europe and North America. If you look at the presentations, the growth has been pretty steady in terms of revenue, and they’re just about to break even the operating cash flow line. So, FY24 brings home the bacon in terms of many years of investing in this platform. So, it has a fairly dependable user base. The current run rate just crossed over 1 million trips a year. And the addressable market’s about 10 times that.

So, if they keep growing at the current rate they’re growing, this stock is not gonna be capped at $24 million for too long, I think. So, don’t buy it yet. I mean, it does suffer a bit of liquidity, but there’s a reason why Alex Waislitz is a billionaire. Alex Waislitz’s the owner of Thorney. He knows how to spot valuable small-cap growth stocks. And Thorney has gone up to 19% on this one, and saying some good things about it. So, beneficiary of this great trend we’re seeing in revenge travel and beyond that the market has yet to seat up and take notice of.

Marc: All right, awesome. By the way, I looked up the capital of the Seychelles, it’s called Victoria, Stuart, just so you know.

Stuart: Okay. Good. I’ll never forget that now.

Marc: All right. Good stuff. So, then another stock that we’d like to talk about briefly it’s a NASDAQ-listed stock and one that we think you should put on your watch list. So, let’s have a quick look. Wolfspeed, previously known as Cree in the US. NASDAQ code is WOLF. And you’ve probably never heard of this stock, but you can be pretty sure…

Stuart: I much prefer the new name, Marc. Wolfspeed sounds a lot more aggressive than Cree.

Marc: It does. Yeah. But, Stu, you said at some point you’ll own an electric vehicle. Well, the chances are 100% that you’ll have one of their products, Wolfspeed’s products in that particular electric vehicle. And let me explain why that is. So, in a nutshell, it was founded in ’87 based in North Carolina, U.S., and they manufacture what is known as wideband semiconductors, focused on silicon carbide and gallium nitride. And what’s so special about this, these chips are…if you compare that to regular silicon chips are much better in terms of properties, much better, able to handle high voltages. So, for instance, in power applications radio frequency as well. So, you’ll see these chips in electric vehicles for power management applications in solar inverters, but also in broadband communications and in radar chips. So, I’d say that is a pretty high-growth market, and they’re reporting earnings tomorrow. So, that’s the 16th of August in the U.S. So, they’ll have a conference call late in the day. But I assume they’ll report earnings before opening of the U.S. market. So, you can track that tomorrow morning.

Stuart: And Marc, are they still based in North Carolina, or they moved to Silicon Valley?

Marc: Well, they’re still based there, especially the research center. They’ve got a fab in New York. So, they just opened last year, and they’re ramping that one up. That’s called Mohawk Valley Fab. You can see a picture to the right. But basically, headquarters is still in North Carolina, Durham. They’ve got an existing silicon wafer facility there. And basically, what they do, and I’ll start at the top here because otherwise, people might get confused. But they manufactured two, actually two sorts of products. One is the compound semiconductors that I just mentioned. So, based on silicon carbide and gallium nitride, these have, like I said, much better properties than regular chips for power applications, but they’re more expensive to produce as well, right? Which is why, for instance, Tesla said, “Well, we use a lot of silicon carbide chips in our electric vehicles, but we’re looking to other alternatives.”

So far, I don’t think they’ve really succeeded in that because other alternatives are expensive as well. Plus, you know, you still need to get these, the benefits that you get from these particular types of chips working in your car, right? So, it’s not easy to replace this sort of stuff. So, Wolfspeed is a big player in that space. They also manufacture the wafers that other manufacturers, all other silicon carbide manufacturers will buy off them to manufacture their own silicon carbide chips. So, they’ve got, basically, in that sense, two major revenue streams. One is the actual silicon carbide and gallium nitride chips. The other one is the wafers. So, they are supplied to other chip manufacturers there.

Again, coming back to your question, Stu, so they’ve got the Mohawk Valley Fab, which opened last year with a lot of delays and stuff. They’re ramping that up now, it’s not fully ramped up yet. So, they’ve got that initial lines, they’ve got those running, and as they increase yields on those lines, they’ll expand the facility. Then there’s the existing fab they had in…still have in North Carolina. They’re expanding that one. And then just this year in February, they said they’re opening a completely new silicon carbide fab in Germany, obviously, with some support from the local government there. But that will expand the manufacturing capabilities of Wolfspeed quite substantially. And we’ll see what that means for earnings.

Stuart: And Mark, is this company a virtual monopoly in this field, or are there other competitors nipping at their heels?

Marc: Yeah, there’s more companies that manufacture silicon carbide chips, also more companies that manufacture the wafers themselves. So, they don’t have the space to themselves, but there’s not a lot of players out there. And this market is growing fast, which is why I think, you know, people need to look at this. The stock broke to a downtrend as you can see on the left there, just recently. It’s gone up since three months, basically, like the rest of the chip sector in the last four weeks or so, and the broader tech space, they’ve suffered some weakness in the share price, again, like everyone else. But this stock will report earnings tomorrow, fourth-quarter earnings. And as you can see in the table at the bottom left there, once these new fabs start to ramp up, especially the Mohawk Valley Fab, you’ll see that EBITDA will ramp up quite significantly.

So, that’s the first line in that table going from 65 last year to around 80 in the current financial year, they just closed to 188 in the financial year that basically just started, and then 590 and 947. So, that’s a massive jump, right? So, if you look at the growth numbers there, 135% in the current financial year that just started then more than 200%. And then once they sort of, you know, once they plateau, but the growth sort of tapers off still 60%, right, in 2026. And in 2027, that’s when the German facility should come online. So, we should see, you know, prolonged growth in EBITDA there. If you then look at the EV/EBITDA multiple, so the valuation, you could say, well, for FY23, which just ended, it’s insanely high at 147, but that comes down really fast, right? Sixty-three for the current financial year, then 24 the year after, and 12.5. And, Stuart, as you know, we always like to compare those valuation numbers to the actual growth that you’re buying at those multiples.

Stuart: Yeah, this one is a steal. I’ve never seen any of our picks this inexpensive on next year’s earnings.

Marc: Exactly. So, at EV/EBITDA to EBITDA growth, which basically, ties the valuation into the growth that you’re getting for next year, it’s 0.5 for the year after it’s 0.1, and then it normalizes around 0.2. Anything below one is considered cheap, and I think anything below 0.5 is insanely cheap, and 0.1 is ridiculously cheap in my book. And this reminds me, Stuart, of our call on Afterpay, you remember that three years ago?

Stuart: Yes.

Marc: When everyone was saying it was expensive, we looked at this same sort of numbers, and I think if I remember off the top of my head, Afterpay at that point was I think 0.3 and 0.4 for the two years that were coming up. And that was at the share price, I think, of $40 or $50 or something like that. And we all know what happened with Afterpay after that. It shot up, you know, I think it went to three times that level. I think for…

Stuart: And you were John the Baptist on that one, the voice crying in the wilderness. It had very few backers as loyal as you at that time.

Marc: Yeah, look, and I think if you look at these numbers, we’re seeing something similar in terms of valuation related to growth. So, in my view, at the very least, you should put Wolfspeed on your watch list, and they report numbers tomorrow. By the way, what’s interesting, an ASX-listed company that we actually know in quite well, Revasum, ASX code is RVS, they supply tools for silicon carbide manufacturing specifically to grind and polish the wafers so that they’re extremely flat. So, it’s all the way at the start of the production line of wafer manufacturing. And Revasum in general should benefit from this trend in silicon carbide. And they can’t tell who their customers are, but I’m pretty sure that Wolfspeed is one of them, in addition to a whole bunch of other players, by the way.

So, I think that’s interesting in itself. So, have a look at that one liquidity there obviously is a bit low because it’s still a small cap or micro-cap on ASX. But I think their fortunes could be about to change as well as is the silicon carbide growth, which I think secular growth, in other words, it’s growth that will sort of not follow the regular semiconductor market completely because the underlying growth is much stronger here in my book…

Stuart: And it all comes down to the point you made at the start, people like me looking to buy a Tesla in the next few years will end up potentially with a Wolfspeed chip inside. So, there’s your secular growth trend that bucks the usual rise and fall of semiconductors as a cyclical industry.

Marc: Yeah, definitely. And that’s exactly proper definition, a good definition, secular growth. It will grow regardless of the…independently of the…sort of the broader economic cycle. So, that’s Wolfspeed for you. I think it’s a really interesting stock. It’s shown weakness, but yeah, let’s see what happens tomorrow when they report earnings. But this could definitely be a very interesting one for the longer term for investors that don’t shy away from a bit of volatility.

Stuart: So, Marc, we ought to have a little bit of a wager on this one. Which one is gonna shoot the lights out faster in the next six months? Wolfspeed or Jayride?

Marc: Well, I’m betting you’re taking the Jayride side of this bet, right?

Stuart: Right.

Marc: Or Wolfspeed.

Stuart: I like them both, you know me, I never saw a stock I didn’t like.

Marc: Yeah. Well, maybe you like my pitch so much that now you wanna bet on Wolfspeed be doing better.

Stuart: Great ideas from the dream team at “Stocks Down Under” today, folks, as well as two sectors that have got a lot of life in them, semiconductors and travel. So, pay attention.

Marc: And we’ll see you next week. Thanks for watching.