Updates: PAYC, FTNT, TEAM, MELI

Several more Watch List and portfolio (Buy List / Hold List) stocks reported earnings over the past week. None of them reported any major new news or thesis-altering events, so we'll summarize them here. There are some price target changes, but they are minor moves (less than 10% in either direction).

Paycom (PAYC)

Paycom is one of those "steady Eddie" companies that just continues to quietly perform. Sales were up an impressive 28% over last year, and the firm continues to deliver these increases down to the "bottom bottom" line in free cash flow, which also increased 26%.

Management continues to express excitement around its "Beti" platform, which provides employees with the tools to do their own payroll entry. Paycom says - and its customers have confirmed - that this model drastically reduces payroll errors while also freeing up HR resources to do other things. Beti is driving competitive wins due to this double benefit.

Paycom still has a lot of growth ahead. Management believes it has only 5% of its total addressable market (TAM), and with the firm building out new feature additions to its platform, the TAM should only increase over time.

One interesting piece of news was the announcement of the company's first ever dividend. It will be an annual rate of $1.50 per share, starting in June. While this is a modest yield at present (0.5%), it nevertheless is further indication of Paycom's financial strength and stickiness with its customers.

Paycom continues to trend very close to our modeling. I'm raising its fair value estimate slightly, to $327 from a previous $321.

Mercadolibre (MELI)

The "Amazon and PayPal" of Latin America, Mercadolibre, has been one of our best performers, up 39% to date and outpacing the market by 34%. Q1 results were plenty impressive. Revenues were up 58%, gross merchandise volume (GMV) in the commerce segment was up 43%, and total payment volume (TPV) in the fintech business rose 96% (all FX-neutral figures). Growth was broad-based, with solid results from all of the firm's top 3 geographies (Brazil, Mexico, and Argentina).

Two particular things that impressed me were Mercadolibre's Ads business and off-platform TPV in fintech. The Ads business, which are essentially featured listings in search results on its marketplaces, grew over 60% and reached nearly 1.5% of GMV. This is a nice new revenue stream that should scale well with users and listings.

Off-platform TPV grew over 100%. As a reminder, off-platform means that Mercadolibre's payment platform (known as Mercado Pago) is being used for purchases directly from merchants, instead of to pay for purchases on the company's own shopping sites. This is a great development, as it dramatically expands the growth potential for the payment service.

I continue to be impressed with this company's cash conversion. Mercado generated over $770 million in free cash flow this quarter, vs. a loss a year ago. Trailing 12 month free cash margin is 32%, which crushes my modeling estimate of 18.5%. I'm still not totally convinced the firm can maintain that kind of cash profitability, as most similar businesses in the U.S. are in the mid-to-high teen's in cash margin. Nevertheless, I do think it warrants some upped targets, and as a result the fair value price is increasing from $1,409 to $1,460.

Fortinet (FTNT)

Fortinet's Q1 results came right in at expectations. Growth metrics look good: a 32% rise in revenues, and a 30%+ increase in both billings and deferred revenue indicate good continued future growth. Quarterly free cash flow, at $650 million, was a record and an eye popping 52% free cash margin.

Management continues to believe that Fortinet's combination of an integrated operating system and custom-built hardware offers clients the best combination of cost of ownership combined with the most secure networking option available. The opportunity is large - secure networking is expected to overtake traditional networking by 2030. Considering the global traditional networking hardware/software market is worth $150 billion at present, that's a BIG opportunity for continued growth! Fortinet re-iterated its target of $10 billion in billings by 2025, representing a more than 50% increase over its current run rate of $6 billion.

The firm continues to track pretty close to the model. I'm bumping the fair value estimate a few bucks from $106 to $110. Fortinet looks like a solid buy at present.

Atlassian (TEAM)

The final update comes from Atlassian, our enterprise project management / documentation / service management software provider.

Its results were not bad by any means. Total revenue grew 24% year-over-year, right in line with expectations. Subscriptions revenue was up 37% and represented 83% of the total, compared to 75% a year ago. This is what we have been expecting as the firm migrates its customers away from the traditional self-hosted "Server" product and into the SaaS-based public and private cloud options.

There are some macro factors here that are moderating growth. Atlassian is seeing slower paid seat expansions, fewer free customers transitioning to paid, and even some seat reductions from customers who have enacted large layoffs. Atlassian counts a large percentage of tech companies as clients, and these firms have been re-adjusting from over-investing during the pandemic. These challenges don't look company-specific, and it should moderate over time, but is something to continue keeping an eye on. Management stressed that it saw no underlying problems in churn or demand.

A few small adjustments to my growth expectations do affect the fair value estimate enough to drop it by a few bucks, from $200 to $188.