Some Things Are Just Too Nice To Let Pass You By, So Buy It – NICE Ltd. (Ticker: NICE)

My Moves:

Company Overview:

NICE primarily has two main areas of focus:

· Customer Engagement, which allows firms to monitor customer engagement, implement new methods for customer interaction, and ensure that every step of the journey delivers what the customer demands and expects.

· Financial Crime and Compliance, which protects financial services organizations, digital banks, and their customers’ accounts and transactions, with solutions that identify risks and help prevent money laundering and fraud, as well as help ensure compliance in real-time.

My previous write-ups were about homebuilders, shoes, and online retail brokers, which were businesses and products I understood relatively well as I have had experience with all of them.  At a high level, I understand what NICE does, but I have never bought or sold Customer Engagement products and even though I understand that all the financial firms use a variety of products to monitor financial crime and compliance, I can’t tell you how hard it is for NICE to keep getting new clients.  However, I do believe that numbers tell stories and as a first step I focus on performance and NICE financials tell a great story.

1. Financial performance

The moral of the story: 

• With Cloud revenue moving from 47% of the total revenue in 2020 to 67% in 2023, management is clearly doing a great job transitioning to a recurring revenue model

• Cloud revenue is growing at an impressive pace of over 20%, with the company adding almost $300MM of cloud revenue in 2023.  That seems very impressive!

• Growth is profitable!  Cash Flow margin is approx. 16% of revenue (Incidentally, even though stock-based comp is not cash, I consider it as a cash expense, because I believe that if the company wouldn’t issue shares they would need to pay cash)

2. People 

First and foremost, I always believe in betting on people.  Microsoft didn’t do much with Steve Balmer as a CEO, but proceeded to go up almost 10x when Satya Nadella took over.  Barak Eilam, CEO of NICE has a degree in electrical engineering, spent time in the Intelligence Corps of the Israeli army, and joined NICE in 1999, becoming a CEO in 2014.  It seems like a perfect setup – the person worked his way to a CEO position and for the last 10 years has been putting up very impressive numbers!  

Valuation Metrics

Given the financial profile, the current price of $240 per share seems reasonable.  My covered calls have a strike price of $190-$200, a level at which I feel pretty good given the company’s growth and revenue profile.

Musings

Data, Information, Knowledge, Wisdom - DIKW Pyramid is a great concept, but I think investing should have its own DIKW pyramid - it should be Data, Information, Some Knowledge, and Pattern Recognition. Perhaps instinct is a better word, but I would venture to say it is two sides of the same coin.  Look at enough financial statements, go through enough earnings calls, and listen to enough management presentations and I believe good investors develop a pattern recognition or an instinct when they come across an interesting opportunity.  When looking at companies such NICE, where I don’t fully understand how and why they win, I look at numbers and read earnings transcripts, and occasionally pattern recognition will get the “light switch to go on”. 

I was told that as of last week, the names that I wrote about have outperformed S&P by 10% since the date of the writing.  That’s certainly exciting, but my focus with this newsletter is on covered calls, with the aim of approximately 12% in annualized unlevered returns without a lot of fluctuations.  However, I do also own stocks without options, and I do own NICE – I think it is one of those stocks that will reward me for “sitting” and not “thinking”. I owned NICE for $57 per share in 2015 and sold it for $68 per share in 2106 because I was “thinking”.  I recently bought it back during a sell-off for $199 per share and intend to now focus less on “thinking” and more on “sitting”... at least as long the current CEO stays in place and he keeps putting up these amazing numbers.

Final thought.  I recently came across a great quote by Morgan Mousel, who wrote The Psychology of Money and Same as Ever, both of which I highly recommend. 

“Save as a pessimist, invest as an optimist” – I think I will make it my new motto

Happy Investing.

Sam

 Behind the Curtain: The Story Behind Endgame Mindset Newsletter

After graduating from NYU’s Stern, I started my adult life as an Investment Banker in Lehman Brothers’ Mergers and Acquisitions group. I have spent the majority of my professional career as an investor, investing on behalf of large institutions such as Morgan Stanley, Merrill Lynch, and Bank of America, as well as a private equity fund and helping companies buy other companies.  In my free time, I spend a lot of hours researching stocks.  A lot. It is hard to save your way to retirement without making good investments. 

Recently, I have also started focusing on Covered Calls.  My goal with covered calls in the current rate environment is to generate a 10-12% unlevered return.  In writing this newsletter, I share my analysis and what I own with others, hopefully helping them earn steady and attractive returns as well.

Disclaimer:

Although the information contained in the newsletter is obtained from sources I believe to be reliable, I cannot guarantee its accuracy. Calculations made in this letter are based on my estimates and not only do I make mistakes but actual performance will almost certainly be different from my projections. The opinions expressed in the newsletter are mine and may change without notice. The information in the newsletter may become outdated and I have no obligation to update it. The information in the newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell, or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were or will be profitable. I strongly advise you to discuss your investment options with your financial adviser before making any investments, including whether any investment is suitable for your specific needs.

Do your homework before putting money at risk!