The Case for Atos at 800€
Atos stock price (actual): 40.2 EUR
Reinstated target price for a three year period ending July 2024: 800 EUR
My thesis:
The whole market is misunderstanding Atos. The market has (1) not been able to understand Atos' business operations. Therefore, Analysts have not been capable of understanding the (2) clear and evident business strategy Atos' board has been following. In addition, due to not understanding Atos services, (3) Analysts expect lower future operating margins. This expectations (4) also can be proven to go against the nature of the whole business. The misunderstanding has also (5) led analysts to wrongly categorize Atos' competitors and (6) try to valuate Atos according to industry partner's peers (7) leading to a whole miss valuation of Atos' equity. This Situation has been going on for years, leading the stock price of Atos' shares to trade at 20 year historic lows. These misunderstandings share together (8) severe lack of research by market analysts as their only cause. It can also be noted that (9) the fact that this company is not well known, combined with the fact that the stock has been underperforming for years, lead to a lack of press and research that would've normally corrected the valuation. Since the company also has the business strategy to not have a popular name and targets to be behind the operations to not worry their customers of potential competition thus helping them and staying behind the scenes, the research and correct understanding of Atos' operations becomes key to the valuation and brand image, but the problem is, that part of Atos' business is to stay silent about their operations. Therefore, if you don't read A TON about them, you won't even know what Atos is doing. Atos is not telling that analysts as nowadays almost every company does through so called Analysts Days.
This interesting combination of characteristics is what makes the Atos' case so interesting to me. However it only accounts and explains half of the current mis-valuation of the company.
The other factor that helps to explain the devaluation of Atos' is the management. Many independent investors accuse the management of being simply useless and only in place due to their aristocratic social connections. I can't conclude with certainty if the management is in place only for that reason. Neither can I prove the statement true or false. However, I do personally not believe that is the case. For me the management is great in regards to business execution, but all the good aspects go away with the weight of miscommunication, which is the tiny key that gives room to unlimited superstitions trying to answer a simple question. What are the true intentions of the management and the board of directors? Some reasons for the limited communication between management and shareholders could for example be:
-Atos is undergoing a grow through mergers and acquisitions strategy and therefore can't inform shareholders about everything or competitors could buy target companies (like Cryptovision).
-The management wants to lower the stock price. This is a possibility we can't exclude since:
The company suspiciously released very bad press releases on the same week options for its stock expire dropping the price 20% the last three expirations. These being on December 2020, April 2021 and july 2021. All these times the stock dropped 20% and put holders pocketed a ton of money.
The company actually offers solutions related to it's decarbonization services which claim to be able to generate a conference day, with partners Atos can find and a decarbonization plan engineered by Atos. Atos literally claims on it's website that the presentation event with partners, as well as the fast execution plan could be designed to "Builds consensus and momentum with our stakeholders" in Atos own words. This proves, Atos is very up to date with the meaning and potential productivity of "stakeholder momentum" generated through company presentations about future plans. However, this also raises some questions. If they are aware of "stake holder momentum" and "stakeholder momentum news or events" (the whole text is on copied on the mindmap I did, check it to read more details about this and many similar statements in the decarbonization solutions that raise moral questions) could they be using such tactics to lure Atos' own stakeholders. Either for appreciation or devaluation of the company. Could Atos be selecting which news to release to stakeholders in order to generate a predetermined movement in the equity price? Since all the news Atos has released for the past year appear to be bad, could the management be releasing bad only news to either allow the company repurchase stock at low prices and leave later the company with personal favorable recognition for those buys, enrich themselves or hedge fund friends with an already known stock price trend either buying or selling. If someone suspected that, it is undeniable that the management has the tools to do that. Annual stakeholder meetings have been done, for the past 2 years, with closed doors due to covid. The decarbonization branch of the business includes carbon offsetting for clients, which could perfectly allow them to run operations at a loss for some time until the full service is provided and then the client needs to pay for it. The service does not even need to be reported since Atos only shows the results from all operations combined in each region. The same happens with the pre payment for big contracts. How much should be payed upfront and how much after the service is not reported and only decided by some executives. The management could perfectly reduce upfront payment conditions, thus reducing quarterly income, increasing retained earnings depending on the quality of the service provided and making final results less attractive. In fact, you can see that Atos has over 4 Billion Euros in retained earnings for more than a year. Certainly something to think about. All the tools are available and since we are not the management, we can't unfortunantely arrive to a conclusion.
The bad communication between the management and shareholders has led to fear among investors and the start of rumors of accounting fraud. These factors obviously lead analysts and investment funds to lower the PER ratio for the stock, because of the involved supposed "risks" that are really based on fear and nonsense, as I will prove with this article.
In conclusion, the combination of misunderstanding of Atos' operations and the consequences generated by the difficult to understand lack of communication from the part of Atos' management, has lowered the price of Atos stock to 40 Euros. This values Atos at the same way the market did back in November from th year 2012. In few words, this is a once in a lifetime opportunity for value investors (finally I can say once in a lifetime, i didn't want to say that at 60 a share).
Valuation:
When it comes to valuation of companies, spreadsheets are key. However, we must not forget they are not the only tools for valuing a business and that they are not perfect or enough to come to a valuation conclusion by by itself. In some cases, its use and the use of traditional valuation methods and formulas leads to heavy huge failures in the final result. Especially when the business is not properly understand with help of additional methods, like what is happening now with Atos. The consensus and expectation only changes once a huge quarterly earnings result surprise arrives. And that surprise on the Atos case, will reveal the need of basic structural changes in some parameters of the spreadsheets Analysts have developed thus far, once they try to figure out where they were wrong. Big movements can be expected in such a case.
One great example is what happened to TeraData, a server and IT solutions company that doubled its market cap in less than one week because earnings results surprised so much that analysts changed the way they understood the business. With Atos I would not expect only a 2x in market cap. Atos is by far not only a datacenter and HPC seller or provider. It's much more, a top cybersecurity player, a website developer, custom app developer for business with a particular need, a top player behind the internet of things revolution which is also exploring posible use cases for blockchain tech in this sector, a top player in data protection, monetization and encryption, one of the biggest players in the chatbot space, bots which you provably have already talked to one day and didn't even notice. When Analysts get the earning surprise and review the business, expect a swing in valuation 10x bigger than what happened to Teradata. It's about if that swing and change in forecast calculations will happen, it's only a question of when it will actually take place. 6 months, 10 months, 2 years? Who knows...
Now that I have shared my expectations I would like to go to the evidence that led me to this conclusion. To the actual arguments that will back my whole article and target price.
I would like to start talking about the methods I used to conclude a final valuation. As explained before, the limitations of spreadsheets to valuate companies are clear as water. However, their utility is almos always still pretty good. Since I am yet not in a economics or finance BA, in fact, I am now trying to get admitted into an Economics BA but my test will only take place in one month, I am well aware of my limitations and you should too. I know only what is strictly needed to valuate a business with a DCF model, however I enjoy walking around live looking at what is really happening out there, in the streets, what people are doing weekends, where they are spending their savings, see who is working and who is not, what kind of people is working at home, what businesses are doing, as well as all the value people and their actual work is bringing the society. I don't hate numbers and spreadsheets, but i find real life analysis much more interesting. I also take into account external factors, like weather, natural events, life cycles, society trends and try to figure out how those impact people and their behavior.
Then I usually start to see the numbers, see if analysts and people on the markets that have not identified any trends or potential impacts, that I did or expect to take place in the future based on what I see in real life. If i find a sector and see that a potential impact I happen to identify or expect is not already priced in, I start to look deeper for any equity, that may be undervalued. Then use the DCF's, spreadsheets and other traditional methods, but I already have an advantage over analysts that lack my experience, haven't seen what I did or simply saw it but where to busy to notice it or arrived to a different conclusion with the same evidence because of bias or personal belief. Months later , the market rewards who was right.
For example, back when the pandemic started, I made a very easy play. In expectations of peripheral demand rising due to home office trend, I bought Logitech. However, why Logitech and not any other keyboard seller like corsair or a general one? I bought a wireless keyboard and mouse from logitech myself. It blew my mind how great they were, how much quality had the product shipped. Therefore, I ended up ordering a wireless headset. This is when I knew i needed to buy Logitech stocks. The stock was trading high, at 20 per, and that made me a little nervous. However, I had identified that all the increase in sales, wasn't going to be only at the start o the pandemic. There was going to be a second wave of high sales for Logitech even months after the pandemic. It was going to be composed by all those satisfied customers with the quality of their product, who decided to complete their whole pc desk with logitech products. For example, first time they bought a mouse because their last one had the cable half broken. before the pandemic there was already a need. However, the second wave of orders, wasn't going to be produced by need to replace. it was going to be triggered by an "Idea" to upgrade the current but working gear for a better one now that the customer experienced the high quality Logitech offers. My advantage over Analysts was that I had ordered the product, I knew how that experience was and had therefore a complete different expectation of customer behavior in the future. Analysts expected the sales to drop because the demand was going to vanish. However, I waited for the second wave and expected it to happen. Then I sold my shares. My advantage was the use of empirical research and personal experience as a method to analyze customer behavior and generate future expectations based on the results. In addition, I also checked inventories at local retailers, Amazon, Best Buy and Logitech site itself. There was a shortage of Logitechs products. I paid 200$ for a mouse. A great one, but 200$. And there was only one left. With that second method, checking inventories and prices, I realized logitech was going to make a ton of money. Analysts can buy data from Amazon upfront. I can't tell to what extend i was in advantage thanks to checking all stores selling Logitech products since Analysts usually have more resources to reach that data. But if an Analyst relied only on data coming from Amazon, he surely didn't realize what was happening until after logitech stock rose on results. During the shortage, Amazon sells were limited to the stock of products from Logitech sold on the platform, but in a shortage, customers tend to visit new websites that either have stock or offer better prices. Finally, after opening my position on Logitech, I used a third method. I analyzed all the products logitech offered. That led me to realize something interesting. Before the pandemic, one of the best selling mouses from logitech was the G502. I bought the mouse and realized it was really great. Specially after asking some friends that play pc games, I realized the mouse was mostly appealing because it had many lateral buttons that were comfortable and useful in games. And the mouse was propperly advertised like that by logitech. However, because it had extra buttons, it weighted a ton. I checked the weight and it was 121 grams. That means very high shipment costs and a bad operating margin on the sales of that mouse. Researching and analyzing each product sold by Logitech at the time I bought the stocks, I realized that this mouse was no more the best seller. In fact, it sold really poorly. In contrast, i realized mouses recently designed were the best sellers and they all shared one thing in common. They were marketed as low weight wireless mouses and were sold at a premium compared to the old G502. The G502 had a price of 60$ and weighted 120 gm. The new best seller, the Logitech Pro wireless sold at 200$ if you managed to find any stock left and voilla! weighted 64 grams. The second best seller, a low cost mouse offering wireless capabilities but for low budget clients. At only 40$, the logitech G305 was a wireless mouse with a worse sensor and a weight of 99 grams. However, the materials had very poor quality. This third method of research led me to a conclusion, next quarter, Logitech's operating margin from operations was going to skyrocket and beat any expectations. And it did so at the end. That alternative method of research gave my analysis advantage over people restricted to Amazon data, DCF's and spreadsheets. Finally, I also researched if Logitech had any interesting patents. And they did. They filed 4 new patents the week i researched that. And that led me to discover they had some interesting patents on their Lightspeed technology used to connect their products to pc's without using Bluethooth and paying for that. They had many more patents i liked but i won't go in depth since this is not an article about logitech. I only use this investment i did in the past to prove how useful alternative methods of research are in some cases and how they can smash entire DCF spreadsheets and expectations. I published all my toughts and research results at the time on my twitter profile and you can still check them if you scroll down enough to october of 2020, when Logitech reported 2Q2020 results.
Here is a table on how eps expectations and actual eps ended.
Here is the table for operating margin reported.
Expected EPS were at 0.54$, meanwhile actual eps were at 1.87$. Much more sales than expected combined with much better operating margins obtained on products than before led to that impressive surprise. One week before the next quarter results (3Q2020) were released and at a time when Analysts were again fooled by the data they get from amazon, which by the way retail investors like me don't have yet I was lucky to read Analysts managed that data during my research and incorporated that fact and it's possible implications in my valuation process, the shares were trading impressively higher and had already hit 100 USD, if i don't fail to remember, mainly due to impressive sells of logitech produchts on christmas. Parents didn't know what was better to gift their children than the moused they used to play during online school classes. That very easy to expect conduct marked what at the time I tought was the top on sale volume for logitech proucts. The second sales volume wave, marked by teenagers asking their parents the new logitech wireless headset for christmas, was going to start declining. Being aware that in the long run there was nothing as bright to expect from logitech I, against all the love I had at the time for the company and it's products, making an effort to leave sentiment as much out of the ecuation as possible, sold the 11 shares I bought of Logitech for my Mom with 1000$ she trusted me. And 1000$ for my family is a ton of money, much more money than I would spend alone under pre pandemic conditions in a whole year. I bought the stock at 78$ and sold them each for 100$ a week before earning results were released on January of the current year. I sold mainly because, the quality factor I identified some time ago on Logitech products, and which I expected to cause customers place a second order, was a clear double edged sword. The people that completed their setup with their second order was probably not going to need a replace in years. In addition, when people started going outside, the money spent was going to focus outside rather than on boring pc peripherals that remind of bad times and boring work from home. With expectations also on people eventually coming back to office, I concluded the market of high quality pc peripherals, specially bluetooth ones, was going to face a supply surplus since everyone would have a mouse, keyboard, headset or pc camera, that logitech also made when they were most needed, at home as well as the old one sitting on their work desk. 2 times more supply and declining demand is not what I would like in a business i own. On top of that, the stock was priced to, in my opinion, more than beat old consolidated eps expectations so I sold instead of holding witihout reason to. I also took into account that limitations on production were going to limit how many products Logitech was going to be able to sell before people started going more outside and that resellers were going to take most part of the profits produced by the shortage instead of logitech itself. Lighter products were going to be difficult to make, and wireless technology already present on logitech products was a recent started trend. All of this without mentioning competition with lower prices that was about to arrive. At the end, logitech eps beat a ton. Rose to an impressive high of 2.45$, beating the eps estimate of 1.13$, but the stock dropped like 8%. I remember that day so clearly. Analysts were starting to look to the future and were developing new expectations. I am not sure if those 2.45$ will at the end be peak of sales for Logitech in a decade or if it will start a change of trend in Logitech's sales that will continue for years to come, but Q4 eps dropped to 1.45$. There is much more to talk about this investment like the role of ASMR microphones sold by Blue (part of logitech) or the rise on the amount of data collected by Logitech through streamlabs, a platform used by streamers on twitch that was very popular during lockdown. However, it's time to go to the Atos' case and see how similar it is and how much alternative research methods are to value it.
In the Atos' case, is hard to come to a final valuation because of two factors. The company operations are extremely complex to analyze because the range of industries in which the different subsidiaries from Atos operate is huge. To understand the entire business strategy and decisions taken by the management, analysts would need to be experts in: cybersecurity and encryption(Atos Cybersecurity, Sec Consult, Ipsotek, Unify, Bull and Paladion), climate action consultancy, including decarbonization solutions, eco firendly engeneering, carbon offsetting, financial reporting for climate friendly operations (Ecoact), Artificial Intelligence, including chatbots development like SyntBots (Syntel), Internet of things (Atos), Blockchain solutions (Atos) and IT services, like those needed to guarantee safe operation of railway systems (Atos) and finally High Performance Computing (Atos).
Right now, banks like UBS or JPM have a very small team of analysts covering Atos. In most cases only 1 analyst specialized on high performance computing. I fear that for that reason they are completeky misunderstanding the company and it's operations. For example, when the DXC takeover failed on march, analysts feared Atos was acquiring companies without a clear strategy and many even suggested it was with intentions to hide on the financial reporting of US operations lack of growth or even accounting fraud. Therefore, auditors issued reservations and the stock dropped like a GM when Marcopolo made it's research public.
Unlike most analysts, I think the DXC failed takeover was more than in line and clearly with the business strategy. I was happy it didn't happen since DXC was loaded on debt and Atos almost debt free. I also think Atos can beat DXC on the US in the lung run without the need to spend such a huge amount of money.
However, to be able to understand why the management wanted to buy DXC, I needed to research Atos operations before and undertand them completely. I have run through every Atos solution and all business operations realized by Atos, thus far. I am sure I am not the best understanding them since I am not an expert on any of the fields mentioned before, but I invested approximately 1000 hours tracking down all of the operations, every client and trying to understand some of Atos' products.
For the purpose of sharing my knowledge, explaining why i am so sure accounts are fine and no accounting fraud took place I made a mindmap showing 80% of Atos businesses operations. It is organized by solutions, the equivalent to products for Atos' business model. For each solution i included the biggest clients and explained how Atos helped them. I also linked resources Atos developed to explain these services to potential clients to each corresponding solution. These resources, varying from images and infographics to complete pdf's and white papers, are almost all of those publicly available on the internet. They account for a total of 93 solutions provided by Atos and the mind map collects every single detail for the 80 most important ones. I will link the mindmap in pdf format and in MindNode format (the app i bought to develop it since it was the best way to share my knowledge). If you use the pdf, you will only see the portrait of the pdf but you can copy the title in google and with few clicks you will be able to see the pdf entirely. Otherwise, if you click the mindnode app I assume you will need to download the free version of Mindnode from the appstore, but you will be able to fold and unfold all the nodes to only see those that interest you the most and all the pdf's will be already downloaded and ready for you to read without further effort.
With the Mindmap I hope to achieve two things. First, enable you to see all of Atos' business operations and understand them. That will then help you understand my argumentation of why the market is wrongly valuing Atos. I will also use some of those operations, explained in detail in the mindmap, as examples for the coming arguments. Therefore it is key you understand Atos operations, or at least those used in the examples. I hope you share my passion for research, you enjoy this Mindmap and value all the required work involved in it's development. You will find them later on this article.
Wrong understanding of business operations and strategy:
Because a single analyst isn't able to cover and understand all of the fields in which Atos operates, I suppose a team of 5 analysts may be covering the company as a team for a financial institution. If they don't see independently all business operations, and skip them to focus only on the areas in which they are specialized, they will not understand the business strategy that the management has in mind nor the current business model of Atos. Then they get together and share what they find (or maybe only have a conference via zoom) but are not able to conclude what the business model is, what are the next steps the management will take. They also fail to understand business operations and the current business strategy in place for the future. Prove of that, is their inability to understand why DXC was more than a proper target to buy. Then they have no clue or even a possible explanation. Instead of restarting their whole research to draw new conclusions that match the what the facts, their just throw the towel and say "Oh, accounting fraud".
So, to help them, let's understand the business operations and strategy.
My take is that even considering that the company management has changed a lot the past two years, including the CEO, the strategy remains being the same it has been since 2017. Overturn an old business, sale of HPC computers, that is not expected to grow in the future because of new cloud services, into a new business that has a brighter future successfully. In 1997, Atos started as a business that sold data centers to big companies. Then it started to sell high performance computers to researchers too. This is not necessary the best business to be in when amazon web services and google cloud is expected to take it's market share in a few years. It's not a bad business either. In fact, there are many reasons why big companies and governments would not want to use Amazon servers and prefer to buy Atos computers instead. However, Atos was and is able to do much in order to set themselves in a fast growth environment.
It is key to understand Atos HPC and Atos Quantum computers. Analysts think Atos is an HPC business. In part it gives a sensation of owning a tobacco company, in the sense that the valuation is made on expectations of how much time the business has before it closes. However, Analysts also identify some chances for Atos to growth. These are: creating a cloud hosting in Europe through data center wear-houses and being a leader in quantum computing. Since in Europe OVHCloud is already positioned as the leader in data server hosting and is not even having great margins or being able to keep up against google or amazon, that hope they had for Atos is already gone. On the other side, Atos quantum computers are great. Currently their quantum pc's are sold to universities and they were targeting to develop a 100 Qubit pc in 2020 before the pandemic arrived. However, their computers were never the best. D-Wave already unveiled a computer with 5000 Qubits. That hope is long gone too.
But two things are interesting. Why Atos continues to spend in quantum computer research and development instead of only selling the business and why Atos partnered with OVHCloud if they should be direct competitors? That is clearly suggesting we have interpreted the business strategy and business model wrong.
I suggest we look at the following diagram of Atos subsidiaries, services and companies that were bought by Atos since the start of 2020.
In the center we find the traditional Atos' HPC and Quantum business. The so called value trap.
In orange, we see services, infrastructure and products that are tools for Atos.
In black is listed every subsidiary Atos bought since 2020 and the biggest important ones from all the company's history.
Finally, on blue are listed some of the most well known services Atos offers to clients like governments and any private business.
Take some time to inspect the diagram.
What do you think is going on?
Let's start with the companies recently bought by Atos. What do they all have in common?
For those without a concrete interpretation, I may be helpful sharing my mine.
Let's start from the center. It is a profitable and well established business composed of high performance computing and quantum computing products. To guarantee the products are those clients need, Atos partners with Graphcore (a Nvidia rival nobody knows and one that I love; it is a private company but you can buy an indirect stake through the fund "Draper Esprit PLC" from the UK, you are welcome) Intel, Nvidia, and AMD. Atos has the best partnership status with all of them, what is nice. I really like that business segment since it gives exposure to the future of HPC without the need to bet in a single player, like Nvidia, succeeding. In addition, Atos also has great Quantum Computers, so they have a solid offer. But I reinstate, that is not a business i would buy by itself. There is no magic there, to many competitors. IBM, HPE on the HPC business. Amazon, Microsoft and Google on the other side eating market share with cloud offerings and all of them with huge quantum computing projects and amazing goals for 2030 that crush Atos hopes.
Where the magic really resides, is on combination. The HPC business, what analysts consider "the core of the business" is a loser alone. But let's see all the companies Atos bought. Look at their description. You need to read that to answer this question. What do they all have in common. They all need a High performance computer to process data, encrypt documents, process video, render in 3D, calculate with precision carbon footprint, and so on. They need services from the circle that contains Atos' HPC. They generate sale volume to the center. In addition, they lever any of the tools Atos already has and that are written in orange right past the black circle. Finally, once those three parts connect each other and get vertically integrated, the final service, that is written in blue, can be provided.
For me the strategy is simple and has a single question as it's foundation. We have a profitable HPC sale business, what else can we do with it? The answer for many years has been to also offer end services to clients, that also require a HPC. For example, selling SAP to companies. Other end service providers would also need to buy the pc from HPE that the end client need. However, Atos already has a HPC business. Atos can lever that to offer better prices over competitors or to simply drive higher sales volume to their traditional business.
In addition, for cybersecurity reasons, some end services require control over the whole production chain to guarantee that no hardware has been compromised, for example, with ransomware. Guess what, Atos is the only company I know, that is a pc developer and a cybersecurity top 5 worldwide. That combination, leads to amazing possibilities and the chance to accept high risk projects that others can not due to their supply chain. For example, how do you guarantee the Tokyo Olympics are not boycotted with a ransomware attack. That's right, Atos. No one else can do it.
In other cases, having the whole supply chain can lead to immense profits. For example, to offer video surveillance with AI recognition. The amount of storage for HD recorded video is impressive and also high amounts of processing power is required. Therefore, offering services with Ipsotek and providing the hardware with Atos HPC business is a genius idea.
I will call this strategic organization of the business segments and activities "The HPC Value Tree", because the traditional business it what creates the value in combination with the end solutions. It enables better offers to clients, advantages over competitors and much higher operating margins in all of Atos' end solutions.
The second identifiable aspect that rules current business strategy in Atos is what I will name "The Digitalization Gold Mine".
That is the business model. Offer services that require the buy of computers with better margins and exploit the digitalization gold mine concept as much as possible. Right now Atos is a lonely miner, but no one says it can't change. The vertical integration also generates more opportunities for cybersecurity improvement that could be another offer to clients that will improve even more current margins. Finally, the next step is Data.
Right now the management know in which direction to expand each company segment. For example, Atos needs to be a leader selling HPC's because their whole business relies on the operating margin generated there. Cloud hosting is not an objective nor a desired future flagship solution. Therefore, Atos knows it only needs to have enough data centers required for it's operations. That number is 50 Data Centers world wide. More than that is not persued. Therefore, Atos marked their operations territory and avoided potential unnecesary competition with OVHCloud through a partnership. Better for everyone. However, Atos still needs to be an amazing HPC manufacturer and shipper. That's why it has many manufacturing and delivery plants all over the World. For example manufacturing centers in France and delivery centers in India, the US, Brasil, France and many other locations. The biggest threat to the whole business could be a huge change from actual HPC's to Quantum PC's. Atos has to secure it's spot as top middleman, reseller and manufacturer of the best Quantum Computers possible to be made at any moment. That's why it needs to be at the forefront of the research in quantum computing. Atos does not need to produce the most powerful quantum computer or make significant money selling them. It only needs to be able to build quantum computers, understand with perfection everything happening in the industry and be ready to build a quantum pc with third party parts whenever IBM, Intel or any other company finally develop a desired and practical quantum computer. In the meantime, Atos has used that knowledge to build and sell some of their own quantum pc's. However, the real need to put money there is to be ready to build quantum pc's and understand everything on the industry.
The way the management has been expanding the company are two.
A) buying businesses that would enable Atos to offer a new service, sell more HPC's and collect more data.
B) Developing new solutions, either services or digital platforms, that qualify in the "Digitalization Gold Mine" concept to increase future cash flow and operating margin.
Right now however, the Data has been put in focus. All the vertical structure Atos already owns is surprisingly very practical in combination with a data exchange service for clients.
Data is super sensible. However, it is also very valuable. That is why nowadays there are many marketplaces in which businesses buy any kinds of data. Google Data Marketplace, Adobe Data Marketplace and Snowflake Data Marketplace. The one i most like is Snowflake Data Marketplace, launched in June of 2019. It connects people with data to those interested in buying it. Like amazon but with data. The problem is, Snowflake is a business that helps you manage your data between Amazon Web Services, Microsoft Azure and Google Cloud. Those are exactly the kind of places where customers with high valuable data go to store their files. In fact, they are fleeing those services because they are realizing they can sell their data for a ton of money if they don't share it with Amazon / Microsoft / Google for free.
In contrast, Atos offers a digital twin service, super safe and encrypted, that pharmaceutical companies like Johnson and Johnson and GSK use in development of vaccines. Digital twins help transfer a lab sample test result from the laboratory in the US that realized the test and found something useful, to any other research lab from the company in digital format, in a safe way. For that, Atos requires proprietary entire telecom infrastructure, encryption and cybersecurity procedures, a ton of HPC and AI. These are the kinds of customers Atos is helping right now. Many of Atos services focus on making data an asset for the company with machine learning algorithms. the client wins from value of data they can use or sell, and Atos wins because a ton of their HPC's will be used to process and store that data for machine learning and AI. Look solutions like the Customer's Digital Identity DNA aimed for financial institutions that can be found and detailed in the Mindmap. Literally Atos is helping banks monetize their data, generate identities for their customer's data to classify them better and offer targeted products.
The biggest problems with a marketplace is how to make data get uploaded without getting leaked so that by the time it is sold it's still useful or to guarantee the conditions of the contract will be met and the safety of anyone with relations to the content of the article sold.
Atos has recently announced the development a new data exchange platform to allow it's clients collaborate, share or trade their data in a safe way. And think about it for a second. Atos has been thus far making the jump from HPC business to other solutions that allowed to lever the HPC segment. One of the most focused these past years was cybersecurity and Atos developed an entirely controlled supply chain to offer clients best in class security. It was such a hit, GSK used it's safe twin to develop their covid vaccine. The GSK vaccine went badly compared to other companies, but independent of the result, the fact is they trusted Atos with their data. If Atos was capable enough to handle the data safely and smoothly, who would be better to develop a data exchange platform or network. Literally no one. Not even Snowflake could compete. The data exchanged would not need to ever leave the safe environment. In fact, all the safe digital workplace solutions Atos' already developed will come in very handy. Atos would only need to handle Business "A" files, to Business "B", all in a network they already have. The upcoming platform is called "Atos Digital Hub" was announced 16 days ago (7, July 2021) and you can read more in the following press release. Link:
- https://atos.net/en/2021/press-release_2021_07_07/atos-digital-hub
Atos has successfully transitioned the business from HPC only to end services backed by HPC in the past. That transition analysts haven't figured out ever took place is almost a year in the past. I am confident Atos will be able to make this second transition to reach a further end service level with the safe data sharing platform. It is a much smaller jump than the last one and with all the cash Atos received from selling Worldline (Another move analysts hate and don't understand), proper amounts of funding capital are guaranteed.
Right now, Analysts think Capgemini is the biggest competitor for Atos. To some extent it is an understandable competitor, but I would take Snowflake as a much important competitor. What Snowflake does, is tenfold more decisive in Atos future. HPE is also not a great competitor to pick. HPE business is purely to sell HPC's. Atos business is not as close as it seems. Atos business is to lever HPC manufacturing to increase operating margin in subsidiaries. It is a completely different business model.
Coming back to the valuation mistakes. Now it's clear why Analysts don't understand business operations, the business model and strategy. DXC was the perfect company to acquire since it is a unique competitor. There are almost none companies with Atos business model, but DXC was one of them. It was a provider of IT services. Just like Atos only that without the HPC component. That's why DXC is loaded on $33 Billion of debt and why Atos is currently worth it. However, DXC was a pain that the management at the time decided to avoid with a buy out that failed. Analysts understood the acquisition of all companies that I wrote in the diagram that were acquired by Atos since 2020 with perfection. Why? Because these companies were a tool to offer a service. Like Ipsotek with Video Surveillance services or Syntel with Chatbots. However, DXC was not a tool to offer a service, DXC was another Atos. It was another distributor and an imminent competitor. DXC would have been noted inside the circle that contained Atos HPC, because it is another distributor of services. However, Analysts lacking of research on Atos operations, never understood Atos' business model. Therefore they didn't even have a clue of why it was so important for Atos to buy DXC. They quoted it an acquisition target "Out of nowhere", panicked and raised the accounting fraud flag. Just like humans explained rain 2000 years ago with quoting gods.
Not only analysts are undervaluing Atos stock because of the uncertainty generated by them and fueled by fear, they are also valuing Atos stock at 8 times 2020 yearly earnings. Yes, 2020, the year of the pandemic. Not even a Tobacco company is expected to die so soon.
The cherry on top, by courtesy of our great friends at UBS and Deutsche Bank, are the valuation methods. They are valuating Atos based on cash flow metrics. Then they use the same metrics they would use for Capgemini: 15 times expected 2022 net operating income. However, since Atos works more actually implementing tech in the real world and therefore they expect A REDUCED OPERATING MARGIN when compared to the one of Capgemini. As a result, they only use 10 times expectations for 2022. Finally, all accounting uncertainty is reduced from there to reach their justification of whatever unjustifiable thing they want to say or conclude with papers.
It is mostly interesting to see the discrepancy in Analyst price targets.
Morgan Stanley: 38 EUR
Barclays: 44 EUR
Deutsche Bank: 50 EUR
Societe Generale: 60 EUR
They literally have no clue what to value and how. And we have recognized previously in this article, a tremendously important factor they are leaving behind while valuing the business with DCF method. They are completely ignoring the "Digitalization Gold Mine" concept. They are only valuing subsidiaries based on revenues and net incomes, but I am overly sure they are forgetting to value any byproduct of operating costs incurred by these parts of the business. Why am I so sure? Because I have seen all the solutions Atos has and literally those are that byproduct. Those are the ROI analysts at banks are ignoring. And all of those byproducts are tracked on the mindmap. It is indirectly a Mindmap of intangible assets unnoticed by Analysts.
Since the communication with the management is a current limitation. Since financial results are also blurry at the moment and can be manipulated according the management's preferences, I have decided to use, in addition to DCF, two alternative methods. Just like with logitech. The first one was to track all of Atos operations in a mind map and understand them. Then, I would be able to estimate how much it would cost to produce such a platform, how much are competitors of individual subsidiaries valued at. All these different approaches would give me an idea of how appropriate is the valuation that banks are making with DCF's models. And I personally find a huge discrepancy. But I will leave the Mind-map here so that you can make your own conclusions.
The mind map, work of more than 1000 hours of researching, reporting and reading is on this link. Enjoy:
-https://drive.google.com/file/d/1UeFHgAB4tAvfkE4rxAHlmCY7jfsPSE8o
The second method was field inspection to get clearance that Atos was not faking operations and finally put end to any minimal doubts I had, which were produced by the financial press around Atos "accounting fraud" investigation.
I chose to see Atos offices in Zurich, Switzerland myself.
I obviously don't have access to the building so I had to walk around the block and see the offices from outside and past the parking lots. However, there are no high walls so I was able to see everything.
The impact of home office was undeniable. However, I also passed through to the IBM, Logitech and Siemens offices when I was walking in direction to Atos. The buildings from IBM, Logitech and Siemens were desolated compared to the one of Atos. On the Atos site, really few curtains where open, but the parking spaces where surprisingly occupied. More less 50% of the lot were occupied and I saw two vans parked with the logo of Bouygues "Energies and Services" division. I have also seen many of these vans over the city parked, I assume some projects are going on over Switzerland that involve both companies. In addition, I saw many cars from Siemens "Healthcare for Life" division. Atos rooftop was well equipped with a nice looking antena and it was very clean overall. I would have left with more confidence if I had seen more people working there, but at least I saw many people, like four, leaving the building at that time. So, easy conclusion, Atos is not a fake company and Atos is definitely not the next Wirecard. That gave me the only tiny bit of complete confidence to continue buying equity of the company. Banks are currently giving us a gift and only fools do not receive gifts.
Now, I can reiterate my three year target price of 800 EUR for Atos shares.
I hope you enjoyed reading the article and please,
if you can't stomach 10 months or even years holding a stock and are not able to continue researching all that time, please limit the influence of my target prices. However, if you are willing to stomach bad times and be patient to get a result, you are more than welcomed and I can guarantee you that target price comes only as a result of incorporating all the pieces of my research and that it is what I consider my best estimation of Atos shares fair value at the moment.
And I hope you like the thumbnail of this article :)
@broadcast_real
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