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Investor Webinar 5 October 2022: Have we seen the market bottom?
October 22, 2022
APM, APM Human Services, bear market, Whispir, WSP
In a recent investor webinar, we talked about whether we have seen the market bottom in the 2022 bear market (from 7.22).
– APM Human Services (ASX:APM) is doing good and making money in the process!
Full transcription below.
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Marc: Good morning. It’s the 5th of October, and this is the weekly webinar with Stocks Down Under. Morning, Stuart.
Stuart: Good morning, Marc.
Marc: We’ve got a lot to talk about, a few companies that we wrote about this week, and also, I think this is important for the general market, a look at where the NASDAQ composite has bottomed on Friday and what that means for the outlook going forward in combination with the RBA not raising interest rates as much as expected yesterday. But…
Stuart: Can we pause this webinar, Marc, and I’ll go get some champagne to celebrate, or have you got some bad news for us later in the webinar?
Marc: No, I don’t. So, it’s actually a good idea, but it’s early in the morning, right? So, let’s wait a little bit with that. But let’s kick it off with Whispir, a company that we wrote about in Stocks Down Under, and that we actually use as well.
Stuart: So, here’s the thing about stocks right now, the technology sector, if Marc is right in his view on the NASDAQ composite, the technology sector is said to have a rapid rollback, in which case Whipsir, ASX:WSP, is gonna look absolutely fantastic given where it is at the moment. Let’s talk about this company, which we wrote about in emerging Stocks Down Under yesterday, the 4th of October, 2022.
What is Whispir? It provides cloud-based communication workflow management platform. Sounds complicated, but it’s really a way to be able to send messages out to your customers and other collaborators via multiple formats, but particularly via text message. The idea was the brainchild of Jeromy Wells, a kiwi who now lives in Melbourne. You can see pictured there. Company’s headquartered in Melbourne. Marc kept this one as a mere $84 million, which we think is cheap.
They’ve got a major partnership with Telstra. Stock is trading at less than half what it went public on just three years ago, where they raised a heck of a lot of capital. Markets, they knock this stock around, like it has a lot of technology stocks, but there’s a heck of a lot of upside coming if we understand this company correctly.
So, Whispir is growing rapidly, why? Enterprises need to communicate with their customers and their collaborators, and Whispir’s got the ideal platform. Marc, when you and I were looking for a way to easily communicate with Stocks Down Under subscribers and Stocks Down Under Concierge subscribers, a new idea, Whispir, it was so screamingly obvious as the right platform to use, we didn’t go anywhere else, right?
Marc: Yeah. We looked at the usual suspects like MailChimp and ActiveCampaign, and then we had a meeting with Jeromy, and he showed us what it looked like on mobile, for instance, and we were convinced right on the spot.
Stuart: I was sold when I discovered that Whispir had created the communication systems for Qantas. So, when check-in is open for a Qantas flight, I get a text message and at the back of that is Whispir’s technology, for example. It’s just a very elegant and easy platform to use. So, how do they build a business out of this? They charge users like us, as in Stocks Down Under, a monthly fee, small fee per message per recipient, and that all adds up.
FY22 they got just under 71 million in revenue, and that was up 48% on the previous year. Still loss making at the EBITDA line, but that doesn’t matter too much. It was better than expected. They’ve got 26 million in cash, they expect to be profitable in the financial year we’ve moved into, and reach cash flow profitability in 2024 financial year.
So, this company is still at the early stages of growth. Now, look at that chart there, bouncing at the moment off around 71 cents a share. It looks like a half-decent support level at the moment after the stock’s been banged around badly. Market hasn’t liked tech stocks, and it hasn’t liked companies that haven’t yet reached profitability at the moment, which is why you need a magnifying glass to see the market cap of this one.
But if we’re reaching the bottom of the tech record of 2022, this could be interesting because a company that’s growing that fast at the top line and rapidly reducing its bottom line, has got to turn out to be valuable at some point. So, why do we like it? We’ve got a clear path to profit and cash flow. This company is growing globally. Now, Marc, the picture on the right-hand side, have a guess what city that is.
Marc: It’s probably Boulder, Colorado.
Stuart: You’re a genius. In fact, it is Boulder, Colorado.
Marc: It was actually a guess, I didn’t know, but I figured because you’ve got this city, you’ve got the mountains close by, and Boulder is a mini tech hub in the U.S. as well.
Stuart: Absolutely. So, you’re an emerging communications company, a SaaS-based communications company like Whispir, and you wanna expand in the U.S. market, where do you go? Where you don’t wanna have to pay a fortune for your talent. Well, Boulder, Colorado is where they’ve set up their office. So, this company’s actually growing globally. In Asia, in North America.
Most of the business is coming from down under at the moment, but there’s a chance to take this platform globally. See, it ain’t just the communications capability. They’ve built a whole lot of AI algorithms and other data in there which guide users as to how they actually communicate with the people they wanna communicate with.
Victorian government used this for alerts to people related to the infections during the pandemic. So it’s actually proved how valuable it is, and now multiple government departments are picking up where that came from in other states as well. They’ve got a partnership with Telstra and others like it. When you look at the customers, there’s not much churn and they get a higher retention rate. And in terms of the metrics, we’re talking 0.8x FY23 consensus CV to sales 0.7x FY24.
Now, the risk is that the market will continue to hate companies that are not yet profitable. Mitigating against that is the fact that there’s plenty of cash in the bank that enables this company to grow quite strongly, and they’re delivering. Marc, if we had a criticism, sometimes it’s hard to get the support team to pick up the phone when we’ve got a problem, right?
Marc: Yeah. Well, that’s one issue. So support could be a bit better. My main point of criticism for Whispir as a user is the fact that the user interface is not great. If you look at other stuff like ActiveCampaign, and there’s a few more like that obviously, Whispir is all the way at the bottom of the stack when it comes to user experience. If they can improve that. And I think they’re working on a new look and feel.
We’ve seen the beta version of that. It’s not live, I think, but it looks better. It’s a good beginning. But yeah, that’s the main point of criticism is that, as a user, sometimes it leaves a bit to be desired really.
Stuart: Now, the fact that we’re not intended to go anywhere else is telling you something, right? So, it’s sticky even at this suboptimal level of user experience. How much money are they gonna make when they really get this thing to hum, in terms of the user experience?
Marc: Yeah. Look, it’s a great sign, right? And looking at Net Promoter Score, would I recommend someone to use Whispir? Yes, but again, with that caveat of improvements on the user interface. So, but overall, I’d say they’d probably have a pretty high Net Promoter Score, not the highest out there in the market, but yeah, overall, it’s doing what it’s supposed to do. So, yeah, pretty happy with it.
Stuart: Now, Marc, I’ve just told you about a great tech stock. Tell me why the whole tech sector globally is set to turn around after a pretty torrid nine months or so?
Marc: Yeah. The million-dollar question is, have we seen the bottom of the bear market in 2022? And so, this bear is a bit confused. And everyone should be confused because it’s a very confusing time, but there are indications that maybe we’ve actually seen the bottom, and I’m saying this a bit conservatively, a bit cautiously because you never know what’s gonna happen.
But a little while ago in our webinar, we signaled that support could be around 10,500, and if that didn’t hold, around 8,900, in the NASDAQ composite. So, that’s the circles there. That’s from the webinar from the 14th of September. So, you can see there the two lines and then the red circle, all the way to the right there. And what happened on Friday is…
Stuart: Ooh, big red circle. Yeah. Okay.
Marc: Yeah. So it bounced up from 10,572. So, the question then is, looking at the bounce that we saw on Monday and also overnight, another big one overnight, in semiconductors, for instance, the semiconductor index, the SOX rolls by almost 5%, so, that’s pretty strong. So the question now is, have we indeed seen the bottom?
Well, we’re becoming bullish again. And actually, yesterday before the RBA decision, over lunch, Stuart, you and I were talking about, we could maybe have seen sort of the most of the negativity in the market. For one, because we believe we’ve seen peak inflation or are very close to it, and not just in Australia, but also in U.S. and Europe. So that’s a big one. If inflation from here on is coming down, core inflation, that basically signals that maybe these interest rate hikes are not over yet but are getting smaller like the RBA yesterday.
Stuart: And [inaudible 00:09:18] as well, Marc. Neither you nor I were drinking through that lunch, we were cold-stone sober the whole time.
Marc: Yeah, it was a bit of a boring lunch actually. All kidding aside, I think that’s a key one. Inflation peak, I think we’re very close to it, if we haven’t seen it already. And then, the second thing is, supply chains, they’ve been disrupted for the better part of two years now. But I think they’re slowly being resolved. When we speak to companies, what we’re hearing is that, finally, they’re getting their components in, their equipment in, and all that sort of thing. So, it seems like it’s slowly resolving itself.
And also the chip shortage, which is a critical aspect in the whole thing, obviously, should be overlayed this year, early next year. And I think for some of the trailing edge technologies, that’s already over, it’s, I wouldn’t say back to normal completely but it’s getting there quickly. And economic growth is already slowing down.
And indications, just in Australia, for instance, is that tradies are now reaching out to construction companies again for work. And a little while ago, just, I don’t know, three, four, five months ago, these guys were all booked out for an entire year basically. But I think their order books have slimmed down quite a bit. So construction, we’re seeing it there, but I think in general, globally, you’re seeing economies are…the growth is slowing down now.
But that brings us to the most important one, which is that I think that most of the future interest rate hikes that we know are coming have basically been discounted into valuations at the moment. So, yes, interest rates will go up further in the U.S. and Europe, and also in Australia, but these hikes are not gonna push down stocks any further than they have already.
And one obvious one yesterday with the RBA raising 25 basis points instead of 50 bits, that was a clear indication that maybe central banks will be sort of, you know, they’re taking stock off what they’ve done so far. They were way behind the curve, they’ve increased very aggressively. And it’s now time to see, you know, what the result is, what the effect is of their actions.
Stuart: I mean, Marc, if I could liken the economy to a patient that’s been ill, because the illness was mild, you don’t need to hit the patient with some drugs which might kill the patient before he gets off his sick bed. We’ve had a bad cold, but there’s probably been enough medicine administered to allow the patient to get up and get going again, is what I would say.
Marc: Yeah, it seems like the fever is coming down a bit. It might still need a little bit more medicine, like interest rate hikes, but it seems like things are slowly improving. It doesn’t mean we won’t have a tough year, maybe next year, purely in the rural economy. We’ll see unemployment go up, but in terms of the markets that look out six to nine months, at the very least, I think we might be moving into, you know, better situation with the patient not recovered yet, but it’s not getting any worse by the looks of it.
So, from a stock investment point of view, purely looking at stocks, there are still uncertainties. So, how do you move forward from here? Well, we think start building positions again, do it cautiously. So, let’s say if you want an X amount of dollars in a certain stock, start by, you know, buying 25, maybe 50% at the current levels. That way if the market does rebound, at least you’re in the market. But if it comes down…
Stuart: And watch those stop losses carefully, is what we’d say as well, right?
Marc: Well, you can do that, or you could argue, “Look, I want this stock for the long term.” So, if the market comes down further, you could build up, you know, the position, you can build out that position. Or use the stop loss, depending on your philosophy. If you’re in it for the short haul, stop loss is probably a good idea.
If you look at sort of quality stocks that you want to own for the next three to five years, it’s probably good to start building up a position, keep some of your powder dry, and build it up further, depending on the situation. So, quality stocks that have taken a beating. Well, you mentioned, Whispir, it’s a small stock, and some people would argue it’s not a quality stock because it’s not cashflow positive, but it’s on its way to get there.
One stock that I think is very interesting in the current environment is ZERO. We’ve always kept a close eye on ZERO, we like the company, but at $146 or whatever it was last year, it was insanely expensive. Right now it’s 75 and it’s still a very interesting company, I think. So, at these levels, that is actually a pretty interesting candidate. And there’s a bunch of stocks out there like that.
For instance, our Concierge stocks. And so have a look. If you haven’t taken out a trial subscription to Concierge, do that right now, because there’s some interesting stocks in there. So, have a look. But the general message is…
Stuart: [inaudible 00:13:57] the unnamed stock we just included last week, that’s actually performing quite well now, right?
Marc: Yeah. That one is doing well. It’s come down quite a bit and we quite like that one. So, have a look at Concierge because that’s really where we have put in some of what I think are pretty good ideas in this kind of market. But there’s more, like ZERO is a good example, and there’s a few others that we’ve been keeping a close eye on that we really like in this environment.
So, hopefully, we’ve seen the bottom. And one stock that we haven’t talked about yet, we have written about it, is actually, how do we describe this stock, Stuart? A company that helps out people at various levels?
Stuart: It does well by doing good. APM Human Services. Went public on ASX recently, Perth-based company. And a lot of the services they provide relate to vocational services for people with disabilities, other services to help say ex-prisoners integrate into the community, etc. This is a huge company, 1.3 billion revenue, and close to 300 million in earnings. And more growth expected where that comes from.
But I guarantee you, with the barbecue this weekend, if you talk to people about APM Human Services, no one will know about this high-quality top 200 company. APM did a lot of good for a lot of people in the last 12 months. Helped out about 600,000 job seekers, 100,000 people with mental health needs, close to 200,000 people with disability, helping them to stay as independent as possible, 40,000 ex-cons, and about 26,000 defense personnel trying to transition to civilian life and some of their health issues.
A big trend in provision of government services for a number of decades now is where you hand out to the private sector, or to quality operators in the private sector the provision of those services, which would be provided by government departments related to the kind of issues I’ve just described to you. APM’s one of those.
Now, the key is you’ve got to provide quality services, where the clients like you and where the taxpayer knows they’re getting a good deal. That’s why APM is so good. Stock obviously took a beating in the middle of this year, but because its business is fairly defensive, in the sense that, there’s a lot of people who need APM’s help and a lot of their contracts will not automatically renew, but come up for renewal and then get renewed, this one was able to recover.
But it’s bumping up at a resistance level of about $3.50 a share. Once you see that firmly broken, I think there’s probably a lot more where this one can go, because the growth that’s expected from it is reasonably solid. So, let’s talk about in summary why we like this one. Strong growth are expected. Megan Wynne, the founder, is still with the company, she’s got about 20% of the stock, and that’s made her a fairly wealthy lady.
Public policy support. You can’t switch on the evening news without hearing about some initiative related to the national disability support programs, etc. And so long as you’re clean, in terms of being known to be a quality operator, there’s plenty of public money coming the way of companies like APM. When you survey the customers, clients, whatever you wanna call them, everyone talks about the satisfaction they have with APM services. And they keep on getting contracts renewed.
That’s great in a human services company. Probably warrants a bit more work coming into the interim result. But we’d encourage readers to take a look at that one and get ready ahead of potentially that $3.50 resistance level getting broken.
Marc: All right. Yeah, we’re pretty close to it, right? Just 20 cents?
Marc: All right.
Stuart: And if the market generally returns to bull market territory, companies that are not so well known could potentially have the double benefit of a rising market as well as, you know, the discovery factor as well.
Marc: Yeah. All right. Good stuff. That’s all we have time for, and we’ll leave it here. Stuart, thank you. And to our live viewers, thanks for watching and we’ll see you next week.
Stuart: See you next week.