Part 3

Starbucks Corporation (SBUX)

Last recommended @80. It went up to $108 in 8 weeks, thus generating a 35% return

Company Background

Founded in 1971 in Seattle, US, Starbucks has become the largest coffee brand in the world. The company operates 30,000 locations in 77 countries around the world and especially over the past decade has managed to create a very well known brand, globally famous as the “third-place” where the company is committed to creating a culture of warmth and belonging where everyone is welcomed.

In addition to fresh, rich-brewed coffees, Starbucks’ offerings include many complementary food items and a selection of premium teas and other beverages, sold mainly through the company’s retail stores. The company’s popular brands include Starbucks coffee, Teavana tea, Seattle’s Best Coffee, La Boulange bakery products and Evolution Fresh juices.

Other than the company’s own retail stores, it generates revenues through licensed stores, consumer packaged goods and food service operations. The company receives royalties and license fees from the U.S. and international licensed stores. Under its consumer packaged goods operations, Starbucks sells packed coffee and tea products as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores. It also includes revenues from licensing deals with many partners to produce and sell its Starbucks and Seattle’s Best Coffee branded products. Under its foodservice operations, Starbucks supplies some of its products to restaurants, office coffee distributors, hotels, airlines and other retailers. Starbucks is among XLY’s biggest holdings with its 4.13% weight within the ETF.

Current Position – Financial Performance and Future Growth Prospects

We all know that 2020 was a very difficult year for many different industries, and the consumer discretionary space has been no exception. A generally weaker economy results in reduced job-related income for consumers, which in turn lowers the overall consumer spending levels, thus affecting companies like Starbucks in a negative manner. In times of difficulty, the one thing that separates successful from unsuccessful businesses is the company’s leadership and the capacity of the senior management to make the right decisions in repositioning the company in a way that will preserve its business. Although the coronavirus pandemic is hurting the company’s original store opening program, it managed to open nearly 500 new stores in China in fiscal 2020. Despite the pandemic, the company opened 130 net new stores in third-quarter fiscal 2020. New store productivity and Return on Investment (ROI) in the United States and China are high. By fiscal 2021, the company intends to open approximately 12,000 stores globally. This will take the total store count to an estimated 37,000. Notably, Starbucks’ long-term growth targets include 3-4% comps growth, yielding high-single digit revenue growth and EPS growth of at least 12%.

Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings. Starbucks is leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives.

The company’s financial performance has been very solid over the past few years and we have been following closely its quarterly earnings reports where SBUX has been beating analysts’ expectations every single quarter in a row since the beginning of 2018, without a single worse than expected earnings per share (EPS) figure. That of course has been extremely positive for its overall share price performance and we have been taking advantage of a few great bullish movements on the stock ever since.

By looking at the two latest reported quarter results, we shall say that the company beat both revenue and earnings expectations showing that even though its financial performance has taken a meaningful hit during the coronavirus pandemic, the management’s plan of preserving the business and limiting the negative impact of the current social environment is working well. The Q3 earnings per share came out at -$0.46, while analysts had expected -$0.61 (24.59% better than expected). Total revenues for Q3 came in at $4,22 billion, which also beat the consensus estimate of $4,11 billion. The Q4 EPS reading was a phenomenal success coming at $0.51 or 54.55% above the consensus estimates.

Total revenues were also up to $6,2 billion in Q4, which surpassed the consensus estimate of $6,08 billion. The company provided fiscal 2021 guidance. Management noted that fiscal year 2021 is a 53-week year instead of the normal 52 weeks. The company anticipates global comparable sales to increase between 18% and 23% in fiscal 2021. Moreover, the company anticipates Americas and U.S. comparable store sales to increase in the range of 17% to 22% in fiscal 2021. The company expects to open nearly 2,150 (850 stores in Americas and 1,300 internationally) news stores and 1,100 (50 stores in Americas and 1,050 in internationally) net new stores worldwide in fiscal 2021. In China, the company expects to open 600 net new stores.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 9 months taking the price from the March 17th lows of around $54 to the $108 highs in the beginning of January. This represented a complete 100% appreciation for the stock in 9 months. Since then, we have seen a rather modest correction that has taken the price down with 7.4% in the last 2 week. The stock is currently sitting at the $102 mark right above the confluence support zone of $100, where we have the strong diagonal trendline support at $99, the strong horizontal support and former ATH at $100 and the 50 DMA dynamic support at $100.50. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong 9 month long bullish rally in the past it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the effect of the transition of power in the White House, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners will continue to win. We remain bullish on the SBUX stock as long as the stock remains above the $94 level and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing that if the current support zone is breached then recent correction could extend further towards the $91 level before resuming its long-term uptrend after that.

We believe that the expected correction for the stock will be short-lived and that it will soon resume its uptrend movement. However, if the price manages to break the $90-92 strong support levels, then it would be heading towards the next strong horizontal support mark around the $82 level and towards the other strong horizontal support at $71.50. The stock is expected to find lots of buying pressure there, which will inevitably send the price back to the $110 highs.

Chart: Starbucks Corporation

We will start buying SBUX at the $90 mark, just above the key support line at $89.
In case of a further depreciation of the price, we will be interested in adding more to our long positions at the next key support mark at $82.
Our first profit target would be at $107, followed by the longer term target at $114 where we will be fully cashing in profits and waiting for another correction on the price in order to buy SBUX again at a discount and maximize our followers’ profits to the upside.

Salesforce Inc. (CRM)

The company was founded back in 1999 and it’s headquartered in San Francisco, CA. Salesforce.com has established itself as the worldwide leading provider of on-demand Customer Relationship Management (CRM) software with the remarkable 20% market share. Its nearest rival, SAP is way behind at a market share of around 8%. About 90% of the Fortune 100 companies uses at least one Salesforce software. The company’s products and services enable organizations to better manage critical operations, such as sales force automation, customer service and support, marketing automation, document management, analytics and custom application development.

The company has leveraged its expertise in on-demand software to increase its scale of operations. It also offers a technology platform for customers and developers to build and run a variety of business applications.

The reason why Salesforce is uniquely positioned to continue growing in the future is associated with the fact that the company solves a very important problem that organizations of all sizes are facing on a daily basis all over the world – the communication with their clients. Salesforce helps companies of every size and industry to connect with their customers in new ways through existing and emerging technologies including cloud, mobile, social, IoT and artificial intelligence (AI).

Rapid digital transformation and the company’s sustained focus on introducing more aligned products as per customer needs is driving its revenues higher. Over the last five years, Salesforce’s annual revenues have tripled from $5.4 billion in fiscal 2015 to $17.1 billion in fiscal 2020.

The two main revenue streams for the company are: Subscription and Support and Professional Services & Other.

Subscription revenues are the largest revenue generator for Salesforce as they include subscription fees from customers, accessing the company’s enterprise cloud computing services (Cloud Services), software licenses and subscription fees recognized from customers for additional support beyond the standard support lent by the company. This segment accounted for more than 94% of Salesforce’s fiscal 2020 revenues.

Professional Services & Other revenues consist of fees that the company derives from consulting and implementation services and training. This segment accounted for the remaining 6% of Salesforce’s fiscal 2020 revenues.

Current Position – Financial Performance and Future Growth Prospects

The company dominates the market owing to its strong clientele. Per IDC’s Worldwide Semiannual Software Tracker, salesforce remained the #1 CRM providers for the seventh straight year, demonstrating the attractiveness of its cloud-based solutions. The company cemented its overall market share position and inflated its revenue base more than any other CRM vendor, the firm added. Management intends to double the company’s top line by fiscal year 2024 with a revenue target of $34-$35 billion, thus making it the fastest enterprise software entity to attain that milestone.

Salesforce is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for its products. Salesforce’s sustained focus on introducing more aligned products as per customer needs is driving its top-line. Continued deal wins in the international market is another growth driver. Furthermore, the recent acquisition of Tableau positions the company to be a leader in business analytics for actionable results in everything from operations to HR

The company has various SaaS applications and platforms to serve its focus areas. SaaS deployments are easy and help to reduce ownership costs for customers. The company’s ability to provide an integrated solution for customers’ business problems is the key growth driver. According to IDC estimates, spending on public cloud services will grow from $229 billion in 2019 to nearly $500 billion by 2023, at a CAGR of 23%. Per a ResearchAndMarkets.com report, the global CRM software market, valued at $25.5 billion in 2018, is projected to reach $36.53 billion at a CAGR of 9.4% through 2022. With its SaaS-based CRM and social enterprise applications, we think that salesforce is well-positioned to lead the market.

The overall acquisition activity that the company has shown is one of the key growth strategies, strengthening Salesforce’s position in the CRM solution-providing space. Notably, buyouts of Tableau, ClickSoftware, Mulesoft, Datorama and CloudCraze over the last couple of years have been immensely lucrative for the company. Salesforce’s partnership agreements with the likes of Amazon and Alphabet for the firms’ cloud services have been helping it expand its international operations. In keeping with its strategy of growing in Europe, in Aug 2015 Salesforce’s investment arm, Salesforce Ventures, announced its decision to invest $100 million specifically in European start-ups.

From a purely financial standpoint Salesforce is a cash rich company with a strong balance sheet. The company delivered better-than-expected results for second-quarter fiscal 2021. The company’s fiscal second-quarter non-GAAP earnings soared 118% year over year to $1.44 per share and beat the consensus estimate of 70 cents. Salesforce’s quarterly revenues of $5.15 billion climbed 29%, year on year, surpassing the consensus estimate of $4.9 billion. The top-line figure also improved 29% in constant currency. As of July 31st, 2020, the company had cash and cash equivalents of nearly $9.3 billion, which is significantly higher than its long-term debt (including current maturities) of approximately $3.4 billion. Since it has net cash available on its balance sheet, the existing cash can be used for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders. Additionally, Salesforce’s total debt to total capital ratio of 0.09 is significantly lower than the industry average of 0.5.

The latest reported quarter for Q3 of the fiscal 2021 back on December 1st also showed a remarkable overall performance of the company with metrics like:

Third Quarter Revenue of $5.42 Billion, up 20% Year-Over-Year, 19% in Constant Currency

Current Remaining Performance Obligation of Approximately $15.3 Billion, up 20% Year-Over-Year, 19% in Constant Currency

Third Quarter GAAP Operating Margin of 4.1% and Non-GAAP Operating Margin of 19.8%

Initiates Fourth Quarter FY21 Revenue Guidance of Approximately $5.665 Billion to $5.675 Billion, up Approximately 17% Year-Over-Year

Raises FY21 Revenue Guidance to Approximately $21.10 Billion to $21.11 Billion, up Approximately 23% Year-Over-Year

Total third quarter revenue was $5.42 billion, an increase of 20% year-over-year, and 19% in constant currency. Subscription and support revenues for the quarter were $5.09 billion, an increase of 20% year-over-year. Professional services and other revenues for the quarter were $0.33 billion, an increase of 22% year-over-year.

Third quarter GAAP diluted earnings per share was $1.15, and non-GAAP diluted earnings per share was $1.74

Cash generated from operations for the third quarter was $0.34 billion, an increase of 14% year-over-year. Total cash, cash equivalents and marketable securities ended the third quarter at $9.49 billion.

From a purely financial standpoint Salesforce is a cash rich company with a strong balance sheet. The company delivered better-than-expected results for second-quarter fiscal 2021. The company’s fiscal second-quarter non-GAAP earnings soared 118% year over year to $1.44 per share and beat the consensus estimate of 70 cents. Salesforce’s quarterly revenues of $5.15 billion climbed 29%, year on year, surpassing the consensus estimate of $4.9 billion. The top-line figure also improved 29% in constant currency. As of July 31st, 2020, the company had cash and cash equivalents of nearly $9.3 billion, which is significantly higher than its long-term debt (including current maturities) of approximately $3.4 billion. Since it has net cash available on its balance sheet, the existing cash can be used for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders. Additionally, Salesforce’s total debt to total capital ratio of 0.09 is significantly lower than the industry average of 0.5.

The latest reported quarter for Q3 of the fiscal 2021 back on December 1st also showed a remarkable overall performance of the company with metrics like:

Third Quarter Revenue of $5.42 Billion, up 20% Year-Over-Year, 19% in Constant Currency

Current Remaining Performance Obligation of Approximately $15.3 Billion, up 20% Year-Over-Year, 19% in Constant Currency

Third Quarter GAAP Operating Margin of 4.1% and Non-GAAP Operating Margin of 19.8%

Initiates Fourth Quarter FY21 Revenue Guidance of Approximately $5.665 Billion to $5.675 Billion, up Approximately 17% Year-Over-Year

Raises FY21 Revenue Guidance to Approximately $21.10 Billion to $21.11 Billion, up Approximately 23% Year-Over-Year

Total third quarter revenue was $5.42 billion, an increase of 20% year-over-year, and 19% in constant currency. Subscription and support revenues for the quarter were $5.09 billion, an increase of 20% year-over-year. Professional services and other revenues for the quarter were $0.33 billion, an increase of 22% year-over-year.

Third quarter GAAP diluted earnings per share was $1.15, and non-GAAP diluted earnings per share was $1.74

Cash generated from operations for the third quarter was $0.34 billion, an increase of 14% year-over-year. Total cash, cash equivalents and marketable securities ended the third quarter at $9.49 billion.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the period March-September taking the price from the March 17th lows of around $115 to the $285 all-time highs in the beginning of September. This represented a phenomenal 148% appreciation for the stock in less than 5 months. Since then, we have seen a rather volatile and sideways price action for the stock including few steeper declines from the $270 horizontal resistance down towards the strong support zone at $230. This has established a well-defined range trading for the stock with lots of buying pressure coming around the bottom of the channel and lots of selling pressure coming at the top. The stock is currently sitting at the $213 mark after experiencing a rather steep selloff throughout December and early January. We believe that the selloff was largely caused by the major profit taking interest present in the stock after its remarkable 148% run earlier in 2020. The zone between $200-210 is filled with a lot of different major support levels including diagonal trendline supports, multi-year horizontal supports strong round psychological levels, which will definitely attract a lot of buying interest and will help the stock resume its long-term uptrend. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong 5-month long bullish rally it was more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners would continue to win. We remain strongly bullish on the CRM stock at these levels and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent correction and are signaling that the uptrend might be resuming very soon.

The daily chart shows that the price is currently testing the first key diagonal support line at $211, which actually matches with the strong horizontal support sitting at $210. We believe that the short-term correction for the stock is almost over and that it will soon resume its uptrend movement. However, if the prices manages to break the current support levels in play, then it would be heading towards the next strong support mark around the $193 level. The stock is expected to find lots of buying pressure there, thus sending the price back to the all-time highs around $285 and beyond. Our first take profit target will be the $290 mark, with a secondary take profit placed at $305.

We will start buying CRM at the $210 mark, just above the key support line at $209.50.
In case of a further depreciation of the price, we will be interested in adding more to our long positions at the next key support mark at $195.
Our first profit target would be at $290, followed by the longer term target at $305 where we will be fully cashing in profits and waiting for another correction on the price in order to buy SBUX again at a discount and maximize our followers’ profits to the upside.

Sincerely,

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