Bi-weekly recap #5
Reply
Far from being at risk of disruption from AI, since the initial post last September, Reply has continued its focus on cloud computing, data analytics, cybersecurity, the ‘Internet of Things’ and, you guessed it, AI. As technology continues to evolve, new products will be released, and old products will fade into obsolescence. However, corporations will always need a trusted partner like Reply with broad, product-agnostic expertise to help them navigate the increasingly complex environment: its ability to adapt has earned the company the reputation of a trusted partner that clients can rely upon throughout their digitalisation journey.
In 2023 revenues grew by 12%, slightly less than the 5-year average (15%), also due to the fact that last year there were no acquisitions vs a more frenetic M&A process over the previous periods. Operating income, however, was up +25%, with the operating margin increasing from 12.4% to 13.6%. Cash flow generation was also good, with lower capex and better working capital management.
2024 has started along similar lines, with revenues in Q1 up a more modest +6.5% (compared to the corresponding period for 2023) but operating profits again up +16% for a 13% margin. Debt is still minimal and the company has again a net cash position, as it used to have in the past.
I concluded my initial post with: “Overall, I consider Reply’ quality as very good. […] It was definitely overvalued in 2021 (P/E 45x, FCF yield less than 2%, hence the de-rating), and is probably fairly valued right now.” Since then, the stock is up by +61% (+18% YTD): and while fundamentals have also grown, the stock price has outpaced them. Today Reply trades (2024e) at P/E of 29x, EV/EBIT of 16x and free cashflow yield ~3%: not bubble territory, but not as cheap as last year.
Interesting readings
FT: Cineworld considers closing quarter of its UK cinemas (reference is to Kinepolis, which does not operate in the UK and does not have all the debt Cineworld has, but this is not a good sign for the industry
“Hedge Funds: A Poor Choice for Most Long-Term Investors?” On balance, they are “alpha-negative and beta-light” and investors mute the performance of the best ones by over-diversifying.