Howard Marks (Trades, Portfolio) is a legendary investor and the founder of Oaktree Capital, an investment firm with a U.S.-listed common stock portfolio worth approximately $8 billion according to its latest 13F filing with the SEC and GuruFocus Real-Time Picks, a Premium feature.
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.
Marks focuses on value investments across a variety of structures. Often when investing, he believes it makes sense to “fish where others aren’t fishing” in order to get the best deals. Large technology stocks are covered extensively, but often smaller more niche companies are less covered.
Thus, in this article, we will take a look at two of the little known tech stocks which Marks has been buying recently, according to data from his firm's latest regulatory filings.
1. SmartRent
Oaktree purchased 3.125 million shares SmartRent (SMRT, Financial) in the first quarter of 2023, according it its latest 13F. During the quarter, shares traded for an average price of $2.68 per share. Oaktree’s total number of shares in the company stood at 7.5 million.
SmartRent offers a platform that allows the "smart management" of properties. This enables property managers and residents to control every aspect of their homes from the lights to locks, thermostats and much more. Its platform even offers the ability to easily rent out unused parking spaces.
Its customers include a variety of huge property companies such as GreyStar, which has over 817,000 units under management, and Equity Residential, which owns over 80,000 units.
The company generates revenue via its channel partners, software subscription and hardware sales. Its “smart” revenue model can scale based upon the number of units, which can make large deals incredibly lucrative.
Growing financials
In the first quarter of 2023, the company generated $65 million in revenue, which beat analyst forecasts by $9.16 million and rose by a blistering 74% year over year.
This is an amazing growth figure, given the property market is currently facing cost struggles due to the high interest rate environment. Many property owners have had their mortgage servicing costs rise as they have built their business models on taking on new debt to pay off existing debt, which only works well in a declining interest rate environment.
In its first-quarter earnings call, management put this growth down to the return on investment of the platform, which makes it popular even during tough economic conditions.
Its hardware revenue rose by close to $20 million and professional services rose by $4 million. Total SaaS Annual Recurring Revenue (ARR) rose by 11% quarter over quarter to $32 million, while Average Revenue Per User (ARPU) increased by $2 to $5.21.
SmartRent’s total units deployed ballooned to a staggering 602,000 and increased by a rapid 29% quarter over quarter. This is a clear sign a company has strong product market fit and is now in the scale up phrase.
SmartRent also has a huge number of cross selling opportunities as its customers generally start with installing the basic “smart home package” before moving on to the self guided tour product, which is higher margin.
The business has also continued to roll out new features which include its Community WiFi solution, which the company believes can offer operators an extra $30 to $50 per month per unit. This makes complete sense as 99% of the residents are likely going to purchase WiFi anyway from a third party provider, so why not include it via an all in one system and make residents pay for a service that gives the property owner an extra commission?
Moving forward, the company aims to expand its product offering and channel partners to the SMB market, which offers a “long tail” opportunity.
The company reported a loss per share of $0.07 in the quarter, which beat analyst forecasts by $0.01. Its overall operating loss was $15.2 million, which is actually an improvement over the $27.8 million loss in the equivalent quarter in the prior year.
The company also has a strong balance sheet with $203.9 million in cash and short term investments, with virtually no debt thanks to strong fundraising efforts.
Valuation
The company trades at a price-sales ratio of 2.9, which is cheaper than historic levels.
SmartRent went public in February 2021 at a valuation of $2.2 billion, or $10 per share, which is the standard rate for a SPAC merger, as SPAC shares are sold to investors for that price before they know what company they will be acquiring. At the time of writing, the stock is trading at close to $4 per share, despite a 74% increase in sales in the first quarter alone.
2. MagnaChip Semiconductor
Marks' firm purchased 549,858 shares of MagnaChip Semiconductor Corp. (MX, Financial) in the second quarter of 2023 according to GuruFocus Real Time Picks. This represented an increase in his position in the stock by 24% to 2.8 million shares. On the day of the trade, shares traded for an average price of $8.71.
MagnaChip designs and manufactures semiconductor solutions designed for today's power hungry devices. Its three main product categories include Display, Power and Automotive solutions.
Its Display solutions include cutting edge OLED (Organic Light emitting diode) solutions. These have a variety of applications from smartphones to TV’s and automotive dashboards. Its Power solutions consist of MOSFET (transistor) chips which are used for the switching of power electronics, which is vital for automotive applications.
On May 30, the company announced plans to do an internal spinoff of its Power and Display businesses into two separate entities. CEO Young-Joon Kim believes this will be vital in “unlocking long term value” thanks to enhanced “transparency, accountability and flexibility."
MagnaChip’s technology is also well protected with over 1,100 patents across various areas. Its R&D center in South Korea is known as a hub for innovation, which is expected to continue due to industry growth trends such as IoT (Internet of Things).
Cyclical financials
In the first quarter of 2023, MagnaChip reported revenue of $57 million, which declined by an eye watering 45.2% year over year. This was driven by a cyclical decline in the semiconductor industry as well as a shortage of 28nm wafers.
A positive is its revenue from Displays rose by 43.5% quarter over quarter to $10.8 million, despite being down year over year. Therefore this could be an indication that its supply chain issues have been resolved and demand is improving as excess inventory is sold off.
Its Power business also reported a similar trend with a 12.7% increase in sales to $40.7 million quarter over quarter, despite being down 37.3% year over year.
The company reported a gross margin of 21.2% in the quarter, which was down from the 37.5% in the year-ago period. This was driven by lower utilization of its fabrication facility, which was impacted by the lower volume. A positive is during strong demand, this margin has a tendency to reverse as the company benefits from economies of scale. Management expects higher volume and greater utilization during the second half of 2023, which should help to improve this margin.
Operating expenses have begun to stabilize with $12.2 million in the first quarter of 2023, down from the $12.6 million reported in the previous quarter, while its R&D actually increased by $1.3 million to $13.3 million. This shows that despite the industry pullback, management believes investing into future technology is vital, and I agree due to its fast paced nature, although this may be felt negatively on margins in the short term.
MagnaChip reported an overall operating loss of $21.8 million in the recent quarter, which was worse than the $12.9 million loss reported in the year-ago quarter. The loss per share was $0.49, which missed analyst forecasts by $0.33.
Its balance sheet is rock solid with $212 million in cash and short-term investmtents compared to $6.1 million in total debt.
Valuation
MagnaChip trades at an enterprise-value-to-sales ratio of 0.78, which is 11% cheaper than its five-year average. The stock also trades at a price-sales ratio of 1.38, which is slightly cheaper than historic levels.
The GF Value chart indicates a value of $10.21 per share and thus the stock is “fairly valued” at the time of writing.
Final thoughts
Howard Marks (Trades, Portfolio) is an exceptional value investor who is also great at discovering hidden gems and little known stocks. In my opinion, SmartRent and MagaChip are two intriguing companies which are poised to benefit from the forecasted growth in property technology and semiconductors as a whole. SmartRent is my favorite of the two in terms of business quality, given its exceptional growth despite a tough economic backdrop. MagnaChip is a cyclical play.
