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Margaret Moran
Margaret Moran
Articles (252) 

Al Gore Buys 2 Stocks, Cuts Nvidia in 3rd Quarter

Generation Investment Management invests in cloud communications and tourism

Al Gore (Trades, Portfolio)’s Generation Investment Management recently disclosed its portfolio update for the third quarter. The investment management firm closed the quarter with 36 stocks, two of which were new buys, for a portfolio value of $14.55 billion. The new buys were Twilio Inc. (NYSE:TWLO) and Huazhu Group Ltd. (NASDAQ:HTHT). Major additions to existing positions included Alphabet Inc. (NASDAQ:GOOGL) and Charles Schwab Corp. (NYSE:SCHW). The firm did not sell out of any holdings during the quarter, but it disposed of the majority of its shares of Nvidia Corp. (NASDAQ:NVDA).

Generation Investment Management was founded in 2004 by a group of seven partners led by former U.S. Vice President Al Gore (Trades, Portfolio) and David Blood, the head of Goldman Sachs Asset Management. Its offices are located in London in the U.K. and San Francisco in the U.S. The company practices an active investment process that fully integrates sustainability analysis when deciding on which stocks to invest in. According to Generation’s website, a sustainable company is one that meets the following criteria: 1) current earnings do not borrow from future earnings, 2) sustainability practices, products and services drive revenues, profitability and competitive positioning and 3) goods and services have a low carbon footprint and low negative environmental impact.

In terms of sector weighting, Generation is most heavily invested in technology (31.27%), health care (20.39%) and industrials (16.43%). As its goal is to invest in sustainable capitalism, the firm primarily places money in the more environmentally-friendly companies among the most environmentally-unfriendly sectors.

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Twilio

Generation Investment Management established a new position of 932,356 shares in Twilio, impacting the equity portfolio by 0.7%. Shares traded at an average price of $129.82 during the quarter.

Twilio is a provider of cloud-based communications platforms that allows companies to communicate more easily and efficiently with their clients. Its application programming interface includes text to speech, natural language understanding, communications cost optimization, custom programming and more. As of Dec. 9, it has a market cap of $13.55 billion and an enterprise value of $11.9 billion.

GuruFocus has assigned Twilio a financial strength score of 7 out of 10 and a profitability score of 3 out of 10. The company has a price-earnings ratio of 357.14, a cash-debt ratio of 3.02, an operating margin of -31.76% and a three-year Ebitda growth rate of 19.4%. As you can see in the chart below, the company has yet to enter a phase of overall profitability, with net income decreasing as revenue increases.

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Twilio has a corporate social responsibility score of 38, meaning it beats 38% of 17,894 surveyed companies in the U.S. in terms of social responsibility initiatives. This score is approximately 30% higher than industry competitors and is mainly attributable to Twilio’s 1% pledge, in which the company uses 1% of its earnings for various social responsibility projects.

Similar to the approach that many young tech stocks take, the cloud communications provider is currently focused on revenue growth and expanding its basis of operation, even if it means overall financial losses in the short term. It reported 172,000 customer accounts in the third quarter of 2019, compared to 162,000 in the previous quarter and 61,000 in the previous year, as well as revenue growth of 75% for the quarter.

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At this point of consistent net loss, the value of Twilio shares is mostly dependent on investor sentiment, which declined from a peak of $150 per share at the end of July after being bid up in light of Twilio’s acquisition of API-centric email platform SendGrid. A turn to profitability would likely cause the stock to skyrocket.

Huazhu Group

Generation bought 839,547 shares of Huazhu group, impacting the equity portfolio by 0.19%. During the quarter, shares traded at an average price of $33.70.

Huazhu Group is a Chinese hotel management group headquartered in Shanghai. Most of its hotels are midscale and economy, though it has recently been aiming to increase its holdings in luxury and upscale hotels. As of Dec. 9, Huazhu has a market cap of $9.96 billion and an enterprise value of $13.63 billion.

GuruFocus has assigned Huazhu a financial strength score of 3 out of 10 and a profitability score of 8 out of 10. The company has a price-earnings ratio of 100.2, a cash-debt ratio of 0.11, an operating margin of 21.34% and a three-year Ebitda growth rate of 15.3%. The hotel group reached the peak of its yearly revenue cycle at the end of the third quarter.

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Huazhu plans to close a deal to acquire German luxury hotel company Deutsche Hospitality in January 2020 for an estimated 700 million euros ($779 million). The acquisition will increase Huazhu’s luxury and upscale hotels by five brands, 118 hotels and 39 unopened hotels in 19 countries and will represent a profitable integration of hotel management knowledge and technology between East Asia and Europe.

According to the Peter Lynch chart, Huazhu shares are currently trading above their fair value. However, if the hotel group can maintain its growth rates, earnings have a chance to catch up to the high valuation.

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Nvidia

Generation’s largest reduction of the quarter was Nvidia; the investment management group sold 1,099,176 shares, reducing its stake by 89.09% and impacting the equity portfolio by -1.25%.

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Nvidia is a Santa Clara, California-based technology company that designs graphics processing units (for video games, marketing, etc.) and system on a chip units (for mobile computing, automotive, etc.). It is the company that sparked the growth of the PC gaming market in 1999 and developed the GPU-accelerated deep-learning framework for artificial intelligence more recently. As of Dec. 9, it has a market cap of $132.68 billion and an enterprise value of $125.46 billion.

As you can see in the chart below, Nvidia’s stock took a dive in anticipation of declines in revenue and net income in the following quarter. In this case, investor sentiment proved predictive of market outcomes, as Nvidia’s revenue declined from $3.1 billion to $2.2 billion the quarter after the share price drop.

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The company’s loss of approximately a third of its revenue resulted from the escalation of the trade war between the U.S. and China and the subsequent decline in international demand for semiconductors produced in the U.S. Accompanying the loss of a good chunk of its semiconductor business, Nvidia also faces stiff competition in its AI business from startups with venture capital funding that are solely focused on AI.

Due to its history of producing profits and shareholder value, Nvidia has some aspects that look good on paper. For example, it has a GuruFocus financial strength score of 8 out of 10 and a profitability score of 9 out of 10, as well as a cash-debt ratio of 3.32. However, its price-earnings ratio has increased to 55.59 from less than half of that in March 2019.

Nvidia’s results for its third quarter of fiscal 2020 showed revenue increasing to $3 billion again, so perhaps shares can recover to their previous prices as well. Just like Generation is doing by keeping a smaller number of shares in the company, it is worth keeping an eye on Nvidia.

Disclosure: Author owns no shares in the stocks mentioned.

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