24 Feb 24th February 2025
Index Movement Last Week
| S&P500 | -1.7% |
| Nasdaq | -2.3% |
| Aussie All Ords | -2.9% |
Last week was not a happy one for stock bulls for just about all markets around the world.
The week started well with the Nasdaq and the S&P500 both making new record highs but then a series of events sent stocks into a tailspin.
First was the minutes from the Fed meeting that showed they are becoming concerned that inflation is sticking around the 3% mark and they might even need to increase rates later this year. The general tone was that most speakers were comfortable continuing with rates on hold as they evaluate the trajectory of inflation. They also have high uncertainty about the economic impact of new policies from the incoming administration, which is viewed as another reason to be patient about adjusting the trajectory of policy.
Yet bond yields fell this week which shows the market has a different view.
The market reacted poorly to some weak housing numbers, which led to a -1.7% fall on Friday.
But this drop does not even make it into the 10 biggest down days since the bull market began in October 2022. 7 of the worst 20 days for the S&P500 since October 2022 have come in the last 6 months, and yet we made a new all time high last week.
Big down days, as attention-grabbing as they are, have not been signs of an impending turn lower. Rather they have been a good time to buy stocks.
More evidence of why Friday’s move is of no consequence can be seen by looking at the yields on the worst US corporate debt. This is the lowest rung of corporate debt and therefore highly sensitive to recession risk.
(We consider recession the only reason to turn bearish. Every other dip is just a buying opportunity)
ETFs make things easy for us these days. There seems to be an ETF for everything. Including this rubbish rated CCC and below corporate debt. This ETF lost just 0.3% on Friday. So whilst stocks might have taken a tumble, other markets are not at all concerned with the weak housing numbers.
We continue to believe we are in the mid cycle Bull market and therefore you should continue to buy dips.
Australia Lowers Interest Rates
I didn’t think they would do it, but they did. The RBA dropped rates by 0.25% last week. That will save me about $200 a month on my mortgage so hardly solves my cost of living crisis.
The funny thing about all this is how every country in the world is almost on the same interest rate cycle. We truly are a global economy.
Notice how every country goes through a similar pattern. Look how they all started to rise at the same time, then all peaked together and now are all cutting together. I think Australia was the last to cut.
Makes me wonder just how much impact the RBA has over the economy and inflation. If every country is doing the same it means every country is experiencing the same economic conditions. Which is strange. Unless we are all somehow interconnected.
It is one of the reasons why we focus on the US. There is a lot more information available in that market and whatever it does, Australia does. So you can just look there and apply the same to Australia.
Zoom Media (ZM)
I’m sure everyone reading this would have, at one time or another, been on a Zoom video call. So you all know what this company does.
At the height of the Pandemic, this stock was a market darling and traded over $500, which was obviously way over priced. Since then it has come down to a much more realistic $80. But what caught my eye was how it has been growing cashflow in this time but the stock price is yet to really move.
It’s most recent financials showed some nice numbers. Key amoungst them was Free-Cash-Flow which came in at $1.8 billion for the year. When you consider the market-cap is only $25 billion, that is a lot of cash coming in every year. It has been growing on the balance sheet and now sits at $7.7 billion and trades on a trailing PE of just 27 and a forward PE of just 16.
Part of the reason for the low PE is due to slow growth. Revenue was up just 3.8% over last year. But margin expansion is another matter, going from 12.42% to 17.58%.
Management have just approved a $2 billion stock buyback – 8% of the market cap.
But I think we could see more growth in the future as the company has launched new initiatives and is entering the AI space.
In 2023, ZM acquired Workvivo, offering its enterprise clients an employee experience and engagement platform (similar to slack). In the most recent quarter, Workvivo customers surged by 72% y/y and secured three new customers with more than $1 million in ARR. Earlier in 2024, Meta (META) had chosen ZM’s Workvivo as its exclusive platform after retiring its own platform. All of these suggests that Workvivo has tremendous potential and will continue to contribute to ZM’s topline in the near future.
Apart from ZM’s Workvivo, the company’s Contact Centre solution has also been making tremendous progress. Thus far, total customers for ZM’s Contact Centre solution have exceeded 1,250, growing by 82% y/y in its most recent quarter. More importantly, ZM is demonstrating that it is able to win huge contracts in the high-end market; the company has recently onboarded Spain’s national revenue service (i.e., Agencia Tributaria), securing a contract with more than 20,000 seats.
Finally, ZM’s is slowly transiting into an “AI-first work platform” by investing and releasing more AI-related solutions, further expanding the company’s potential TAM. Recently, ZM launched its new AI assistant, AI Companion 2.0, which primarily help its users to boost productivity; this new solution integrates information across multiple sources such as Gmail, uploaded documents, Zoom Meetings, and more. For example, users can use AI companion 2.0 to generate a post-meeting note based on the contents of the meeting. Separately, ZM will be introducing customized AI companions and its AI studio next year, providing further upselling opportunities for the company.
ZM is trading at around 14 times Free-Cash-Flow. Other tech companies trade around 62 FCF. This discrepancy can’t last forever and even if the stock price doubles, it would still be considered only fairly valued.
Things are starting to change with the stock price too. This is what has happened recently
This Week
All you need to know is NVidia will release earnings after the market close on Wednesday. It will be very interesting to see how this is received by the market.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.