Our 2019 Technology CEOs of the Year included Andy Florance of CoStar Group (tkr: CSGP), Lance Uggla of IHS Markit (tkr: INFO), Ajay Banga of Mastercard (tkr: MA), Satya Nadella of Microsoft (tkr: MSFT) and Bill Stone of SS&C Technologies (tkr: SSNC).
The risk/reward ratio for the equity markets hasn’t been this unfavorable since the dot com bubble of 1999-2000, especially for high-multiple SaaS stocks. Valuation aside, we provide a quick take on each company. Given that markets are decoupled from economic reality, now is as good a time as any for investors to overweight quality management teams in their investment decision-making process.
CoStar Group (tkr: CSGP): The commercial real estate (“CRE”), industry is experiencing a down cycle especially within Retail and Hospitality. Multi-family, Office and Industrial will hold up better than other segments in our view given macro trends around home ownership/renting; long-term employee growth in the Technology sector (even if offices transition to more common areas and less dedicated space post COVID); and E-commerce’s continued growth. CRE transactions have all but ground to a halt. We expect many property owners – particularly small and mid-sized owners of Retail and Hospitality properties – to default in coming quarters as in-store sales and occupancy rates rebound more slowly than many expect making it increasingly difficult to service debt (approximately 60% occupancy required for many hotels to service debt). CoStar’s organic bookings activity will likely slow as a result but don’t expect CSGP’s business to roll over. The company held in well during the 2007-09 great recession and is operationally stronger today.
Aside from the CRE backdrop which CoStar is not immune to, the company continues to invest in its product portfolio. The recently announced RentPath and Ten-X acquisitions are two such examples. Further, CoStar’s product portfolio – particularly its analytics offerings – provide immediate value to customers (think property owners), whom are paying extra attention to liquidity, cash flows, various exposures and general risk management.
IHS Markit (tkr: INFO): IHS Markit’s exposure to the Energy markets (“Resources”), is the company’s primary near-term risk area. Standalone IHS withstood the great recession well and the 2016 merger with Markit put the company on even stronger footing. As is the case with CoStar and SS&C, it is always a positive in our view to have a founder CEO (Uggla founded Markit) at the helm during a difficult economic environment.
It is fair to expect IHS Markit to execute opportunistic acquisitions during the downturn insofar as target companies have reasonable valuation expectations (there is little that is reasonable about public equity valuations at the moment in our view) and insofar as target company sales pipelines may be qualified within an acceptable range. In addition, IHS Markit was one of the few companies (along with SS&C) that provided investors with three potential scenarios related to its business outlook. Recall that many Technology companies withdrew their upcoming quarter and full year outlooks coming off of the calendar Q1 earnings calls.
Mastercard (tkr: MA): The payments leader will have a new CEO (Michael Miebach) in January 2021 as CEO Ajay Banga will become Executive Chairman. Mastercard’s card not present (“CNP”) transaction volumes ticked up in May. It will be interesting to monitor consumer purchasing behavior and MA’s transaction volumes as PPP expires in the U.S. and as unemployment remains high.
We would like to see CEO-Elect Miebach become more aggressive on the M&A front as payments competition heats up. Competitor Visa (tkr: V) was early to invest in payments infrastructure company Stripe (private) and announced its acquisition of Plaid in January 2020. PayPal (tkr: PYPL) and Square (tkr: SQ) are the peer-to-peer leaders (Venmo and Cash App respectively). Further, the platform companies are investing heavily in payments: Facebook (tkr: FB) with Libra, Apple (tkr: AAPL) with Apple Pay and Apple Card, Amazon’s (tkr: AMZN) Amazon Pay and Alphabet (tkr: GOOG), with Google Pay and Bill Ready leading the firm’s Google Commerce unit. Each of the Technology platform giants is in it for the long haul. All are better capitalized than Mastercard.
Microsoft (tkr: MSFT): Microsoft is perhaps the most durable company of all and had the most impressive comment during the recently completed earnings season when CEO Satya Nadella said: “We’ve seen two years’ worth of digital transformation in two months..” Microsoft’s Azure cloud platform is a significant driver of the company’s success and is right there with Amazon’s AWS offering. Azure was recently awarded DoD’s $10 billion JEDI contract which Amazon is contesting. Longer-term we expect Alphabet’s Google Cloud Platform (“GCP”) to make gains on both Azure and AWS given Google’s leadership position in Artificial Intelligence and the fact that cloud platforms such as Azure, AWS and GCP are increasingly competing on baking advanced capabilities such as AI, machine learning and the like into their respective cloud offerings.
A key point of differentiation for Microsoft versus Amazon and Google is the former’s leadership position in the Enterprise thanks to its Productivity Products. To that end, a near-term milestone to keep tabs on is Microsoft’s end of June Microsoft Teams release which is slated to incorporate Skype. This should help MSFT better compete with Zoom Video (tkr: ZM) in the video communications space and give Microsoft Teams a distinct advantage over Slack (tkr: WORK).
SS&C Technologies (tkr: SSNC): We recently covered this vertical powerhouse in our TEK2day article: “Verticalization Is Where It’s At” which includes our recent podcast with SS&C executives Scott Kurland and Kyle Fields. We expect for SS&C to win more than its fair share of investment operations outsourcing deals given its technology-focused service delivery model that is unencumbered by non-core operations such as a depository institution, commercial banking operation or large investment management arm. SS&C’s outsourcing capability is an easy choice for customers who may be stretched thin while operating in a work-from-home environment and looking to share the workload with a partner. It is logical to expect that SS&C will successfully expand certain of these “outsourcing on-demand” COVID-driven outsourcing relationships to full outsourcing arrangements as customers gain confidence around SS&C’s ability to deliver outsourced services that consistently meet or exceed expectations.
We applaud the fact that SS&C plays offense in both up and down economies. For example, investing in cutting edge technologies such as the firm’s AI-powered investment operations platform Singularity to drive sustainable competitive differentiation. Second, opportunistically executing strategic acquisitions that enhance the customer value proposition. Examples include recent acquisitions Algorithmics, Captricity/Vidado, CLPSI and Innovest.