Tiger Management (Trades, Portfolio) is the investment firm that was founded by Julian Robertson, who was dubbed the “Wizard of Wall Street” after starting his fund with just $8 million in the 1980s and growing it to a staggering $22 billion by the 1990s. Since that point, the firm has gone through various transitions, and Robertson even mentored several younger aspiring hedge fund managers who were dubbed the “Tiger Cubs."
Even though Robertson himself has passed away, his legacy lives on in Tiger Management (Trades, Portfolio)’s investment strategy, which focuses on bottom-up stock investing and aims to identify undervalued companies with growth potential. The successful investment traits that the firm focuses on include solid earnings growth, high returns on invested capital and great management.
In this article, we will take a look at two stocks that the firm was buying in the fourth quarter of 2022 that demonstrate turnaround characteristics; let’s dive in.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Workday
Workday (WDAY, Financial) offers a software-as-a-service platform that helps organizations improve the efficiency and user experience of many back office services. This includes Human Resources, Spend Management and Financial Management.
Since the company was founded in 2005, it has been tremendously successful and scaled to over 10,000 customers, including over 50% of the Fortune 500.
Growing financials
Workday reported strong financial results for the fourth quarter of its fiscal year 2023. The business generated revenue of $1.65 billion, which increased by a solid 19.6% year over year.
The company also increased its subscription revenue backlog by 28% year over year to a staggering $16.45 billion. This is great for revenue consistency which has become more important than ever given the macroeconomic environment.
Workday also reported a high retention rate of over 95%. This means the majority of customers are staying with the platform. I believe this makes complete sense, as once the software is embedded into vital services such as HR, payrollm etc., it is unlikely to be changed due to the potential disruption caused.
The company has also turned its product into a platform with its Extend service, which enables developers to build applications on top of the Workday solution.
For the fiscal fourth quarter, Workday reported an operating loss of $89 million at a -5.4% operating margin. This may seem atrocious at first glance, but it is actually an improvement over the $101 million operating loss and -7.3% operating margin reported in the equivalent quarter of the prior year.
Therefore, the business has begun to show signs of improving operating leverage, which is a positive sign, as it means its revenue is growing faster than expenses. This is a major characteristic of software companies and why they are my favorite type of business model. Software is highly scalable by nature.
On a non-GAAP basis, which the company says excludes stock-based compensation, Workday reported earnings per share of $0.99, which surpassed analyst forecasts by $0.09.
Workday also has a robust balance sheet with $1.89 billion in cash and cash equivalents, as well as $4.2 billion in short-term investments. Surprisingly, the value of these short-term investments is actually up substantially from the $2.1 billion reported in the prior year. This may have been driven by a partial rebound in certain areas of the stock market.
In terms of debt, the company has high long-term debt of $2.98 billion. However, its short-term debt due within the next two years is close to zero.
Valuation and guru investors
Workday trades at a price-sales ratio of 7.65, which is ~34% cheaper than its five-year average.
If we take into account debt and cash on its balance sheet, its enterprise-value-to-Ebitda ratio is 22.19, which is 53% cheaper than its five-year average.
The GF Value chart indicates a fair value of $291 per share, making the stock “significantly undervalued” at the time of writing.
Tiger Management (Trades, Portfolio) purchased 1,800 shares of Workday in the fourth quarter of 2022, during which shares traded at an average price of $156 per share. This transaction brings the firm's total position to 92,800 shares.
Other gurus buying the stock recently include Baillie Gifford (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)'s Brigewater Associates.
2. Shopify
Shopify (SHOP, Financial) has effectively developed an “all in one” e-commerce platform to help small-medium-sized businesses set up an online store and process payments.
Its products include everything from website design to hosting, payment processing and even shipping. In order to generate revenue from its serviced, Shopify offers a subscription model. The company also charges a transaction fee for each sale made through its platform, which enables the company to directly benefit from the upside growth of the businesses built on its service.
Shopify has also turned its service into a platform by enabling third-party developers to build and sell apps. This has two major positives. Firstly, it boosts the product capabilities of the platform (improving the customer value and experience). Secondly, Shopify takes a cut of these profits.
Improving financials
Shopify reported improving financial results for the fourth quarter of 2022. Its revenue was $1.73 billion, which beat analyst forecasts by $84.28 million and increased by nearly 26% year over year.
This is a slower growth rate that the 41% level generated in the year-ago quarter. However, this was expected due to the cyclical decline in the e-commerce market after a major boom in 2020 and 2021.
A positive is its fourth-quarter 2022 growth rate was an improvement over the prior quarter's growth rate of 22% year over year.
At a macro level, Shopify’s results look to have been due to its strong market position with 10% of the e-commerce market, making it second to Amazon's (AMZN, Financial) 57%. Shopify’s gross merchandise volume was a staggering $197 billion, up three times more than in 2019.
The company also reported its customers had their most successful Black Friday and Cyber Monday sales period with $7.5 billion generated in gross merchandise value, up a solid 21% year over year. This was a positive sign to see, especially given the macroeconomic uncertainty which one would have assumed would have impacted growth rates.
Moving on to profitability, the company did report a loss per share of $0.49, which missed analyst forecasts by $0.32. A positive is on a non-GAAP basis, EPS was $0.07, which beat analyst forecasts by $0.09.
Shopify has a strong balance sheet with $5 billion in cash and short-term investments. The business does have total debt of $1.4 billion, but the vast majority of this is long term debt.
Valuation and guru investors
Shopify trades at a price-sales ratio of 9.6, which is 67% cheaper than its five-year average.
The GF Value chart indicates a fair value of $206 per share, which is below the share price as of this writing, but the system warns of a possible value trap due to the rapidly-declining bottom line and ongoing lack of profitability.
Tiger Management (Trades, Portfolio) purchased a new stake worth 7,300 shares in Shopify in the fourth quarter of 2022, during which shares traded at an average price of $34.
Other gurus that were buying the stock include Tom Gayner (Trades, Portfolio), Frank Sands (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio).
Final thoughts
Both Workday and Shopify are two tremendously successful software companies. Workday focuses on the back office of business and has a strong competitive advantage due to its product stickiness in organizations. Shopify’s moat is less deep as e-commerce websites can be easily created with other platforms. However, the company has built a solid market position and its subscription model means its revenue is often more consistent. Both stocks are poised to be great long-term turnaround opportunities in my view.
