7investing July 2021 Team Podcast: Potential Acquisition Targets | 7investing
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7investing July 2021 Team Podcast: Potential Acquisition Targets

July 22, 2021 – By Simon Erickson

Mergers and acquisitions play a crucial role in the business world. Companies that combine forces can expand their overall book of business, execute in new markets, or serve new customer groups where they previously had no presence.

The importance of M&A is even more pronounced in today’s digital age. Popular websites, apps, or platforms can now serve hundreds of millions or even billions of users. Innovative technologies or new products can be infinitely scalable and quickly applied across an entire business. Sometimes, even very small teams who possess extremely promising IP or serve a strong product-market fit can be acquired by the right company for a huge premium.

Those premiums paid for acquisitions can also be extremely rewarding for investors. When a publicly-traded company gets acquired, its stock price can increase by 50%, 100%, or more in a single day on the news of the acquisition. And the companies who build their businesses around M&A activity — such as Salesforce (NYSE: CRM), Middleby (Nasdaq: MIDD), or Berkshire Hathaway (NYSE: BRK-B) — can methodically unlock hidden value that compounds their own investment returns for decades.

So where are the most lucrative potential acquisition targets today? Are there sectors of the market that are particularly appealing? Are there clever leadership teams leveraging new technologies that could fit perfectly in a more established company? Are there specific signs that investors should look for, which might suggest to us that a company is gearing up to make an acquisition…or to have itself be acquired?

In our July Team Podcast, our 7investing advisors share seven companies we believe could be prime acquisition targets right now.

We describe what makes these companies particularly appealing and who their most likely suitors could be. We even taking things one step further, and predict which of our previous 7investing recommendations these acquisitions would have the greatest impact on. If you’d like to see that report, as well as get immediate access to all 119 of our previous recommendations, use this link to sign up for 7investing today.

We’ll also be providing a short text description below of each potential acquisition target we mentioned in the podcast. We’ll update these recaps daily (adding one new writeup each day), so come back often to see our most updated descriptions!

Potential Acquisition #1: Alteryx (Nasdaq: AYX) — Anirban Mahanti believes Alteryx’s (Nasdaq: AYX) expertise in transforming raw data sets into insightful analytics positions it as an excellent acquisition target. Its stock price has languished on slowing growth, though Anirban believes this was largely due to the COVID pandemic and also a change in the company’s revenue recognition policy. Alteryx was a leader in on-premise deployments, making it attractive for any company looking to expand its expertise to the cloud. He believes Salesforce (NYSE: CRM), IBM (NYSE: IBM), or Oracle (Nasdaq: ORCL) could be the most likely suitors. Click here to read Anirban’s July 2021 Perspective on Potential Acquisitions.

Potential Acquisition #2: Box Inc (NYSE: BOX) – Matthew Cochrane believes Box checks several – er – boxes when it comes to what potential Big Tech suitors would like to see in acquisition targets: strategic synergies, sensible valuations, growth opportunities, and high margins. Box also offers many applications and programs on top of its secure and accessible data storage, including data governance, workflow automation and management, administrative controls, and a platform that makes it easy to build customized apps. While it has struggled to keep up with more innovative competitors, such as Docusign (NASDAQ:DOCU) and ServiceNow (NYSE: NOW), the company’s valuation is more than reasonable, especially in today’s high-flying SaaS world. He believes Salesforce, IBM, or Oracle could be the most likely suitors. Click here to read Matthew’s July 2021 Perspective on Potential Acquisitions.

Potential Acquisition #3: Nutanix (Nasdaq: NTNX) – Steve Symington has identified Nutanix as a compelling acquisition candidate for a number of potential tech titans, including Hewlett Packard Enterprise, Cisco, and Google parent Alphabet. The leader in hyperconverged infrastructure (HCI) not only continues to make steady progress in its transition toward a cloud-based subscription model, but also recently unveiled plans to expand its reach to be a broader cloud platform provider. Management has made it clear, however, that they prefer to continue independently — so it might take an offer shareholders simply couldn’t refuse for a takeover to happen. Click here to read Steve’s July 2021 Perspective on Potential Acquisitions.

Potential Acquisition #4: Fastly (NYSE: FSLY) – Simon Erickson has identified Fastly as a leader in edge computing, which is a movement that is improving the overall performance of websites and apps and also reducing the latency of the Internet of Things. Fastly has several large customers who are spending liberally and have excellent retention. However, its stock price has fallen in recent months as competition emerges, and its new leadership team has a tenured track record of completing M&A transactions. Simon believes any of the cloud service providers would be interested in acquiring Fastly to complement their existing cloud infrastructure. He names Amazon or Oracle as Fastly’s most likely suitors. Click here to read Simon’s July 2021 Perspective on Potential Acquisitions.

Potential Acquisition 5: Kohl’s (NYSE: KSS) – Dan Kline has very mixed feelings on Kohl’s. It has a strong lineup of stores in excellent locations and it has made many smart moves to adapt its business to an omnichannel world. The problem is that the chain has tired merchandise and it’s not a top-tier partner for many brands. That means it needs an infusion of new merchandise to remain relevant. That makes it a perfect acquisition target for one major digital player which could use the brick-and-mortar chain to show off its many owned-and-operated apparel brands. Click here to read Dan’s July 2021 Perspective on Potential Acquisitions.

Potential Acquisition #6: Talkspace (Nasdaq: TALK) – Dana Abramovitz believes that with the pandemic, mental health has become top of mind. It is also something that we as a society are starting to talk a little more openly about. That’s why she believes Talkspace is an excellent acquisition target. Talkspace connects people with therapists for a wide range of mental illnesses. With something so stigmatized, being able to message over text, video, and audio maintains privacy and increases utilization. She believes a company that is looking to add mental health to their other care offerings, like CVS Health could be a good acquirer.  Click here to read Dana’s July 2021 Perspective on Potential Acquisitions.

Potential Acquisition #7: Deciphera Pharmaceuticals (Nasdaq: DCPH) – Maxx Chatsko has identified Deciphera Pharmaceuticals as an intriguing takeover target, but it all depends on an important data readout expected in the fourth quarter of 2021. The commercial-stage drug developer’s sole approved product, Qinlock, is approved for a relatively narrow subset of patients with a rare cancer. If the upcoming clinical trial is successful, then it could expand Qinlock’s peak annual sales potential by 10X. Considering the company has a market valuation of only $2 billion and owns full rights to all of its products and pipeline programs, a large pharma leader looking to boost its oncology pipeline might gobble up Deciphera Pharmaceuticals. Click here to read Maxx’s July 2021 Perspective on Potential Acquisitions.

Publicly-traded companies mentioned in this interview include Alphabet, Alteryx, Amazon, Box, Cisco, CVS Health, Deciphera Pharmaceuticals, Docusign, Fastly, Hewlett Packard Enterprise, IBM, Kohl’s, Oracle, Salesforce, ServiceNow, and Talkspace. 7investing’s advisors may have positions in the companies mentioned.

Timestamps

00:00 – Introduction: Potential acquisition targets

00:55 – Anirban Mahanti: Alteryx (AYX)

06:28 – Matt Cochrane: Box, Inc. (BOX)

09:52 – Steve Symington: Nutanix (NTNX)

14:47 – Simon Erickson: Fastly (FSLY)

18:22 – Dan Kline: Kohl’s (KSS)

23:48 – Dana Abramovitz: Talkspace (TALK)

29:43 – Maxx Chatsko: Deciphera (DCPH)

Transcript

Simon Erickson  00:00

Hello everyone and welcome to this edition of our 7investing team podcast for July 2021. I’m 7Investing founder Simon Erickson joined by my entire team of 7investing Lead Advisors, Maxx Chatsko, Steve Symington, Dana Abramovitz, Dan Kline, Matt Cochrane, and Anirban Mahanti, we’re all going to be talking today about a fun topic, which is potential acquisition targets.

Simon Erickson  00:25

It’s always fun to speculate of who might get acquired out there in the stock market, and by who, but it’s even more fun when you put some real research between seven advisors into who actually might get acquired. And we’ll take a closer look at each one of these. And we’ve got a diverse team that’s going to be looking at a whole bunch of different ideas here, Anirban and how about if I start with you, your idea of a potential acquisition target is the company that’s  had its share price fall kind of significantly this last year?

Anirban Mahanti  00:55

That’s right, Simon. So I think Alteryx (NYSE: $AYX) which trades on the New York Stock Exchange, $AYX is a really good potential candidate for an acquisition. So this company was a big favorite, maybe a year or so back, it was growing really quickly. And the share price, as you said, was about 100% higher from where it is, right now. It’s dropped 50%. And it’s about a $5 billion company. And what it really does, it does something really important. It works in the space called extract, you know, load and transforms, it extracts data from different sources, you know, you can load them together, and then you can transform them the way you need to, so that you can run some analytics – it’s data analytics company.

Anirban Mahanti  01:44

It’s used by a bunch of blue chip companies, people like Coca Cola use it as an example. So its main thing is to make data analytics easy for the citizen data scientist, which basically says that, well, you don’t need to have a PhD, you don’t need to really know are, you can use our tools to make sense out of data. Data is the new oil, right? And one more thing that this company should be flying and growing. But one of the things that happened during the pandemic is that its growth actually slowed down, a couple of things happen. One is just the fact that, you know, the people using this tool, they figured that they need to make this big billion, a million dollar deals or $100,000 deals. And the part of the reason for that is that they are still not a cloud based, you know, self service offering. So they’re basically on prem, or you can host it on the cloud if you want, right, or you can get someone else to host it for you.

Anirban Mahanti  02:43

But it’s not a cloud based self service model, which means it is hard for you to sort of try it out. Right, that makes it difficult, you need to make these big deals and big deals were on hold during the pandemic, but nobody was signing those big checks. And then combine that with sort of this accounting tool, which says that if you’re doing Term Life, you’re basically doing, you know, say, what, three year long term license, because of the way the accounting rule works, you get to basically recognize 40% of that upfront and the remaining ratably over the period. So if you do a big deal, so you do a million dollar deal, you get 40% of that recognized upfront, but if you do a small deal, right, for a shorter time period, you actually recognize a smaller portion.

Anirban Mahanti  03:27

You might still get the recurring revenue happening, because people don’t actually cancel it, right, what I’m trying to get to is, your revenue growth here might be actually masking the real thing, which is the annual recurring revenue, right? How much of the revenue is recurring, and how much is likely to stick around is what matters. But the market is focusing on on revenue growth, which is getting masked by the duration of contracts, and the fact that they were doing shorter term, he tried out sort of thing to get people to know, to use the software.

Anirban Mahanti  03:56

So I think there’s, there’s this dynamic going on, I think this is a great company of fit, like they have like, for example, a partnership with Tableau. Tableau got acquired for 16 billion by Salesforce (NYSE: $CRM), this seems to me like a natural fit something like Tableau. And if somebody else comes in and acquires this company, then there are opportunities here, another company like Microsoft or, you know, Salesforce and so on. So I think the devaluation is attractive, the fact that this is an important area is attractive, and the fact that there’s a market dynamics here going on in terms of the contract is, is sort of masking the growth and making the valuation worthwhile for somebody to go and bite it.

Simon Erickson  04:45

That’s fantastic Anirban, but I’ll ask everybody the same couple of follow up questions on this. The first one will always be Who do you think is going to acquire the company that you just mentioned, and then the third one, which we’re not going to talk about on this podcast, is which companies on the 7Investing scorecard will be most impacted. That’s behind the paywall. And I encourage anyone listening to this podcast to sign up for 7Investing to see what the impact is going to be. But I never want to sound like maybe Salesforce was one company, you said that might be interesting is that because they’re cloud native, and they’re such a leader in the cloud, they might bring Alteryx’s technology into the cloud.

Anirban Mahanti  05:20

Absolutely. So I think Salesforce is an acquiring company, keeps acquiring stuff, right, and then integrated in on their cloud native, they’re basically the Big Daddy and cloud. But it doesn’t have to be Salesforce. It could be Microsoft, it could be somebody like Adobe, it could be anybody who wants to basically strengthen their analytics capabilities, right? All these companies have analytics that they do. So, you know, those seem like potential candidates, at least three. So that same four probably could be somebody like Oracle, somebody like IBM. And, you know, I think it’ll be interesting if it is somebody who is cloud native and knows really how the cloud works. Yeah, I mean, that’s my guess, you know, I’d put Salesforce up high up on the potential list, but you know, somebody like Adobe could be another potential.

Simon Erickson  06:10

Makes a lot of sense. Thanks very much Anirban. Alteryx ticker is $AYX, keep an eye on that readable revenue recognition and annual recurring revenues. Matt Cochrane, let me come to you next, because Anirban was just talking about cloud based analytics, I believe that your company kind of is in that same space as well. Right?

Matt Cochrane  06:28

Yeah, actually, Simon I think big tech companies should be thinking about inside the box. That is, as in, Box Incorporated (NYSE: $BOX). And when you think about what do publicly traded companies look for and their acquisition targets, you know, profitability, Box, Incorporated is right on the verge of it. Strategics synergies, a sensible valuation, growth opportunities. And I think Box, no pun intended, checks a lot of those boxes off. And Box enabled us enterprise customers to securely manage your content on its cloud platform that organizations can then share freely to any any device.

Matt Cochrane  07:06

So in a world where like users create data from different operating systems, devices and applications, Box has partnered with several of those big tech companies to offer nearly 1500 different integrations to ensure its customers can access data from anywhere like any device, any app, any platform. It also offers many applications and programs on top of it secure and accessible data storage. So that includes data governance, workflow automation, and management, administrative controls. And it’s just a platform that makes it easy to build customized apps. So Box offers all these things.

Matt Cochrane  07:43

Now, while all that sounds nice, this company should be seeing an incredible tailwinds from the digital transformation that these corporations are experiencing basically worldwide, and which was only accelerated by COVID-19. Its revenue is growing a lot slower than its peers, like in this most recent quarter, its revenue only rose 10% year over year. And it really it’s no secret that the company I feel like and I think many others have struggled to keep up with other competitors that ranges from DocuSign to ServiceNow, and Box has significantly underperformed the market in recent years. \

Matt Cochrane  08:24

Now, the thing is, though, its valuation is almost a value stock, which is such a rarity in the tech world as the price to sales ratio under five, it has a forward P/E ratio of about 24. And it’s with a market cap still under $4 billion. Box could easily be gobbled up by gobbled up by several companies, if I had to pick just one that would make this acquisition, it would be Salesforce, because they’re a very acquisitive company, they just finally closed the Slack deal. And, and, you know, I just think there’s a lot of synergies there that Salesforce could use it and its cloud offerings. That being said, I also see a lot of like tech legacy companies like IBM or Oracle maybe wanting to make the acquisition too. But I think its size, its valuation. And like many of its features that it offers. I think Box is a prime candidate for an acquisition.

Simon Erickson  09:20

Great, great ideas. Thanks very much, Matt, you know, mentioning again, that Oracle and IBM and Salesforce could also be suitors for Box as well. And plus, I’ve got to give you a gold star for thinking inside the box times another gold star there for the second box related acquisition oto so that would be gold star times gold star that’s gold star squared for box. Just wanted to point that one out. Thank you for the puns, Matt. Let’s continue to talk about the cloud. Moving on to Steve Symington, you also have a cloud based company that deserves our attention.

Steve Symington  09:52

As soon as I recover from the bad dad joke so far,

Simon Erickson  09:55

I couldn’t help it. I couldn’t help it Steve

Steve Symington  09:56

They’re amazing. You know, I appreciate them. Yeah. So A lot of people haven’t heard of Nutanix (NASDAQ: $NTNX) and trades on the NASDAQ, it’s $NTNX. Yep. A lot of people haven’t heard of them before. But I think they’re sort of this, there’s always acquisition speculation swirling for the company because of the value in the markets that they’re chasing. So they’re this sort of budding leader in the hyper converged infrastructure space HCI. And that sounds really confusing and techie. But it’s not, you know, that hard to really understand. But I do think, you know, Nutanix, could be an excellent acquisition candidate for a number of enterprise tech behemoths.

Steve Symington  10:36

So hyper converged infrastructure basically offers legacy era, it offers enterprise customers a way to replace their legacy networks with more of a cutting edge solution, like a cloud based solution for this. So when you talk about legacy three tiered network infrastructures, you think compute power, right? computing, storage, and networking. And, you know, Nutanix software sort of acts as like a digital traffic cop, so to speak, to seamlessly match applications with the data center resources they require. So regardless of which cloud environment its customers are using, whether it’s private or public, hybrid, or multi cloud, Nutanix allows them to basically replace their old network infrastructure with something that’s software and cloud based.

Steve Symington  11:28

So really attractive for these enterprise clients. That legacy three tiered infrastructure market is already worth over 100 billion annually. But it’s worth noting, you know, Nutanix, itself, they had an investor presentation last month that said, they view their total addressable market closer to I think it’s like 20 billion or so have a grown to about 30 billion over the next several years. And, you know, either way, that’s, that’s also not to mention, you know, they’re expanding their reach, they don’t want to be just this HCI vendor, they want to be more of like a cloud platform services vendors. So kind of expanding that way, which basically doubles, triples their total addressable dress, one market over the process.

Steve Symington  12:10

But I mean, we’re talking about a business, that’s only seven and a half billion market cap right now. And I think they’re looking at annual sales, maybe 1.4 billion, but part of its they’re transitioning to a subscription model, in a way from an old hardware centric hardware and software centric model. So you see, you always see people sort of, you know, they kind of balk at this this business model, where initially, you see revenue growth slowing down because of the transition, because of the way it’s rapidly recognized over the period of the subscription. So it kind of results in the stock being held back a little bit.

Steve Symington  12:50

But, you know, it’s funny, because actually, Hewlett Packard Enterprise and Cisco both tried to acquire Nutanix, prior to its IPO in 2016. So there’s precedent for this, they both have their own kind of competing HCI solutions. And I think Microsoft has one as well. And I think a company like Alphabet could even benefit with their own cloud computing platforms from there’s a lot of different companies, that it would sort of be sort of like a blip in their balance sheet to acquire a company like this. But yeah, so I could see them getting gobbled up. And, yeah, it they’re, they’re just sort of, you know, there’s a reason that there’s constantly speculation that they’re going to get bought,

Simon Erickson  13:37

And hyper converged infrastructure. Nutanix was kind of early to the party, right? And they figured out there needed to be a lot more efficiency in the cloud. When a lot of people were just kind of going to transition to the cloud in the first place. Steve, you said yourself, there’s been speculation in the past about Nutanix getting acquired those obviously did not fall through, but you think it’s gonna be one of the cloud service providers, one of the big cloud titans that gobbles them up? Potentially?

Steve Symington  14:01

Yeah, I think that’s that’s who they end up being. You know, I wouldn’t be surprised if we saw like a Hewlett Packard Enterprise, or Cisco, or an alphabet or Microsoft, come to the table. But I think it really depends on whether they’re willing to do that. I think they want to try and go it alone. But it would probably take you know, considering they’ve rebuffed offers before their IPO. It would take either some pretty heavy hiccups and their subscription model or an offer shareholders just couldn’t refuse. And I think that’s that’s what it would take for it to happen. So but I do think a lot of these big cloud tech titans kind of have keep them in the side I you know, they they’re, they’re watching them, just to see if there’s an opportunity to do that. And we’ll see.

Simon Erickson  14:47

Thanks very much. Steve Nutanix is NTNX for anyone following that company, definitely leader in cloud efficiency. I’m going to continue this trend one step further and talk about another cloud based company that I think is going to get a lot of attention right now, and this is a company that is enabling edge computing networks, and that company is named Fastly (NYSE: $FSLY).

Simon Erickson  15:07

What we’ve learned is that as we do things to the cloud, the cloud was great, it was definitely a lot more efficient than on premise infrastructure was, but it couldn’t always do everything perfectly. There were certain things where latency really mattered. And you didn’t want to send a whole lot of bandwidth up to these centralized cloud data centers. And so there started to become this need for edge computing, where you actually got the servers that were doing the computing as close to the end users as possible. And edge computing is now some some of the progress that’s been made for that has allowed for things like Tesla’s self driving cars to steer around the neighborhood, or iRobots, robotic vacuums to steer around your living room, both are using edge computing.

Simon Erickson  15:46

And that’s made possible by Fastly. Not only is Fastly kind of one of these important enablers of the internet of things where we’ve got 20 billion some odd devices that are connected to the internet and collecting data, you don’t always want to send that to the centralized servers, you might want to do a lot of that computing locally, or you might want to have it at the edge. But in addition to that, we also see that Fastly is enabling websites to run faster to load web pages faster for Amazon (NASDAQ: $AMZN), Amazon is using Fastly. Right now they’re a customer. And they went out and they got a lot of really lucrative enterprise level customers. And so Fastly’s average customer right now is spending $800,000 a year with them. They are spending 39% more this year than they did last year.

Simon Erickson  16:32

So these are the big fish in a very large pond, as everyone’s understanding what edge computing is going to mean. Fastly went out there, and they signed some really lucrative contracts. But they’ve been having some problems lately, right? We’ve seen Fastly stock price fall pretty significantly in the past 12 months. We did see a couple of years ago, their CEO Arthur Bergman stepped down, we just saw recently they replaced replaced their CFO, with someone who has a 10 year history of doing mergers and acquisitions. And it seems like the stars might be aligning with a lower stock price, a lucrative customer group and an executive team that’s eager to do some m&a for this to be an acquisition target in my mind, as edge computing is catching on.

Simon Erickson  17:12

The company that I think originally was going to acquire Fastly was Amazon. Amazon is very, very interested in edge computing, it wants to give its customers the option of doing the computing wherever they want to, if you want to do it locally, great, you want to be on the edge, great, you want to do it in the cloud, great, wherever you want to be Amazon wants to be there with a platform that fully supports you.

Simon Erickson  17:34

But then I started thinking, you know, Amazon really likes to build things on its own. And I think it might be more interesting, and even more likely, that kind of one of those not top tier cloud providers, perhaps Oracle, might be intrigued in buying up that lucrative customer base catching up with this larger rivals like Amazon like Microsoft Azure. And I think that we might start seeing, you know, a couple of bids coming in for Fastly, especially from those big cloud titans, or deep pocketed could afford a multi billion dollar acquisition like this. So Fastly, $FSLY is the ticker.

Simon Erickson  18:08

Between me, Steve, Matt, and Anirban, but I think we’ve got tech and cloud pretty well covered here. I think it’s time to change gears and talk about something a little different. Dan Kline, let me bring this to you know, bring us somewhere outside of the cloud man, what’s the company that’s not tech on your radar?

Dan Kline  18:23

So I looked at this differently, so I picked a company and a match for who should acquire. So I did it a little bit differently. But the company I think needs to be acquired is Kohl’s (NYSE: $KSS) . Why is that? So they’re a retailer that’s done a lot of things right? They have really good locations they’ve made some partnerships. Sephora is a really good one. They focused on turning some of their stores into back end for online fulfillment, but their merchandise is tired, and they’re not the go to place for New Deal.

Dan Kline  18:54

So if you’re a hip company that wants to go well, you’re talking to Target, you might even talk to Walmart before you talk to Kohl’s so that’s a problem. So who do I think should buy Kohl’s? I really think there’s one deal here. And I think it’s Amazon. Now why is that? Amazon has spent hundreds of millions if not a billion on owned and operated clothing lines. Now, Simon, I know you and I don’t buy a lot of women’s underwear. I mean, I’ll just speak for me but I buy very little women’s underwear certainly none for myself and probably none for my wife in most cases. Amazon has five or six lines of women’s underwear, multiple lines of bathing suits for men and women now men’s bathing suits not a particularly tricky fit. And they have multiple men’s lines. They have multiple sportswear lines, multiple athleisure lines, and well.

Dan Kline  19:42

It’s pretty easy to buy, say a battery or you know a phone charger from Amazon. It’s not so easy for my wife to look at a bathing suit and go Is that a good fit or to you know, for me to look at some like sweat pants and go Are those going to be flattering or you know, a shirt to wear to the gym. So where does this match? Well, Amazon could always use more brick and mortar. They already have a deal with Kohl’s for returns that I think 100% benefits Amazon and 2% benefits Kohl’s so that could be even enhanced. But if all of a sudden you could take all of these Amazon lines that exist and put them into Kohl’s, all of a sudden Kohl’s has fresh vibrant merchandise. And it feels like Target It feels like a brand that just has different stuff that it controls.

Dan Kline  20:26

And they don’t just sell clothing at Kohl’s. Kohl’s has electronics section. They sell instant pots. So all of these different things that Amazon has products in it fits really nicely. And you know, Simon, I’ve joked about this, I thought Amazon should buy RadioShack because they know what batteries, what cables, what all the things you need. Well, they still know you don’t know all those things. So they could put in a little 1000 foot corner in your local Kohl’s that’s just the right cables and accessories and whatever you need for your neighborhood. And obviously, if you live in the suburbs, where 65 inch televisions are common, the things you need are different than you live in a city apartment and a 42 inch television is big. And I know that sounds silly. But that’s something Target has done really, really well with the city. Small targets don’t sell a lot of 80 inch televisions, they sell a lot of smaller stuff, you don’t have to buy 12 rolls of paper towels, because how are you going to carry it in your carts that you will to your house.

Dan Kline  21:18

So I think Kohl’s makes a ton of sense as part of the Amazon portfolio and it becomes another back end logistics shipping location. And they could do so many things like right now they’re partnered with Aldi in a number of locations and you know Simon I don’t like Aldi, not as a business, I’m just not a fan of going grocery shopping and not knowing if they’re gonna have what I think what I want. They could make those Amazon Go stores, they could try out new concepts.

Dan Kline  21:43

It’s just a great retail portfolio, they tend to be in top tier strip malls, or in very, very good sort of semi mall locations. I don’t know what you call that when it’s not fully enclosed, but it’s kind of a mall. So I think this deal makes sense. And honestly, Amazon could buy this at a relatively attractive price. Because I think it’s touch and go whether Kohl’s makes it. It’s painful for me to say that because it’s a retailer I like it’s a retailer I shop at. But it’s not a distinctive retailer. It’s not a retailer that really needs to exist. And Amazon can rescue a huge investment and turn the Kohl’s business around. I have no idea how long I’ve been talking. So I feel free to ask follow up questions. But I’m gonna stop talking now.

Simon Erickson  22:23

Yeah, perfect, great idea Dan. It seems like something that Amazon’s very interested in having the bricks and mortar locations like we saw with Whole Foods, you know what’s getting traffic through there. Obviously a great way to leverage Amazon prime to even give special deals when they’re there at the store. If you have an Amazon Prime.

Dan Kline  22:37

Yeah. Which they do for Whole Foods. And look, they have all the whole foods data. They might be able to like grab and go lunch at Kohl’s or something like that as fulfilled by Whole Foods. Like there’s just so much you could do. And obviously they’re building out a chain of grocery stores. No reason and some of those plazas where they have a Kohl’s they might look at like an abandoned Michaels or an abandoned Circuit City or where hh Greg or whatever it is and say well, let’s put our grocery store in there.

Dan Kline  23:02

And now our trucks have better logistics because they’re shipping to two things that are sharing the same back end. So look, I think Amazon’s gonna be a brick and mortar giant history says other than Whole Foods, they haven’t made this type of acquisition. But this is very much like a Whole Foods acquisition. If you remember wholefoods was a pretty struggling brand at the time they bought it now they weren’t in danger of going out of business and Kohl’s is not in imminent danger of going out of business. But long term that trajectory for Kohl’s is irrelevance, and this would be a pretty good way to turn it around.

Simon Erickson  23:33

We want to keep an eye on the ticker on Kohl’s $KSS for anyone who’s following along. Thanks very much, Dan. Dana, let’s go to you next, let’s change gears a little bit, you wanted to talk about a kind of a something that we need to address in American mental health. What’s the company that you’re talking about here?

Dana Abramovitz  23:48

So I’m talking aboutTalkspace (NASDAQ: $TALK). Yeah, just talking about Talkspace. I also took a different approach, kind of thinking about what’s going on in the world? What do we need as a society and also the synergy between the acquirer and you like where, you know, a company like Talkspace can kind of fill out an existing offering. So that’s kind of the way I thought about it. But mental health is a problem. It’s been a problem before the pandemic, it’s gotten much worse during the pandemic. And there’s a lot of stigma behind mental health and mental illness. And a lot of people don’t like to talk about it, right. But there are all sorts of different apps, so thinking about, you know, digital health and, you know, applications to connect to a therapist or you know, even you know, like meditation and just, you know, just that that whole, you know, mind body connection and so how do we improve our mental health.

Dana Abramovitz  24:59

So if you look, there are actually over 20,000 mental health and mental illness application apps, right? Digital health companies. And you know, sometimes they think, like, Are they a business? Or is it just a product? Right? And what is it, but with Talkspace, you know, they, they actually connects to therapists, right? So they, you know, so it’s a real person, right. So it’s not just an AI, it’s not just you text and then they text back. And, you know, like, you know, like, you have a smiley face and you’re done. Like, you actually get to talk to a real person. And they cover all sorts of different mental illnesses and mental health issues, ranging from couples therapy, all the way to cash might need medication. And if you look at, you know, mental illness in the world, or at least in the United States, one in five adults, has some sort of mental illness issue, so and it’s across genders, it’s the cause cross races. So, you know, it’s very likely that you know, somebody, but a lot of times, we don’t talk about it.

Dana Abramovitz  26:12

And, you know, like, we need to help people out. So Talkspace just became public recently through a merger with a SPAC. It’s doing a lot of good things, right, it’s the number one rated app. But you know, as a business, I kind of worry about it for its potential. And unfortunately, I feel that way with a lot of digital health apps is, it’s hard. You know, like, with the App Store, a lot of people think that they get products for free. And so it’s really hard to create, like a thriving business around it, especially in the healthcare industry, when you want to go to sell to hospitals, or employers, and, you know, people are just like, ‘Well, why isn’t this free, I can download this for free, why do I have to pay for that.’

Dana Abramovitz  27:00

So Talkspace has a good product, it has a good reputation. And so, I was kind of thinking of where it could fulfill a need, and that would be in within a company that was already offering general broad health care to communities, but might be missing this mental health aspect, or wanting to provide a mental health, but aspect, but you know, doesn’t necessarily have the therapists or doesn’t have that remote access to, you know, a digital platform. And so my potential acquirer, and there could be several, but the one that I was thinking of is CVS Health Corp. (NYSE: $CVS) CVS Health they acquired minuteclinic, a couple several years ago, where in store there you can meet with a nurse practitioner for some various elements, so it’s kind of one stop shopping, you see a nurse practitioner, if you have something, you can get that prescription filled, also pick up a can of soup on the way out, that kind of thing.

Dana Abramovitz  28:11

And then they did an acquisition of Aetna, which is, you know, like a larger provider network, in 2018. So, you know, kind of expanding out to community health. And then recently, with the pandemic, they started offering mental health services just to kind of help people with that. And so just kind of thinking about that I think that Talkspace would be a nice compliment to a company like CVS where they want to fill out their offerings, but don’t necessarily have a team of therapists, a plot of secure platform that’s going to have all the patient privacy, and that convenience of being able to have really private personal conversations that have that stigma associated with it with somebody and just be able to, you know, help people get the help that they need. And that’s, that’s really what I was thinking about is just helping people get the help they need.

Simon Erickson  29:12

Yeah, great point Dana, like you said, you know, CVS has expanded its footprint right? You can go and talk to a nurse at the medic clinic you can pick up your prescription at the pharmacy seems like a missing piece there right now as mental health which could be definitely approached by Talkspace something we need to be talking about ticker on that one $TALK. Thanks very much, Dana. Great idea for that one and Maxx bring us home. Let’s let’s stick with the the health care. space, but a much smaller company, I think is the one that you were talking about that might be acquired here.

Maxx Chatsko  29:43

Yeah, you know, one of the biggest criticisms I get here Simon is ‘Maxx, why do you pick all these really obvious, well known companies? And I’m just not gonna be able to shake that here. So the one company that I think could be acquired is Deciphera Pharmaceuticals (NASDAQ: $DCPH). Everyone knows Deciphera of course. So it has a very important clinical trial that’s supposed to have data in the fourth quarter of this year, so in a few months, and the reason I think it might be a good acquisition target, and it hinges on what the data say from this trial, but right now it’s at about a $2 billion market cap. So it’s very small, depending on the results from this clinical trial, its lead product, which is already approved, and on the market could see its sales potential increased by 10x. And it owns the entire program and all of its pipeline.

Maxx Chatsko  30:29

So it does not partnered with any other companies doesn’t have any collaborations. So there’s a lot of really big pharmaceutical companies that are very eager to bolster their oncology pipelines. So these 10s of billions of dollar companies or even the mega cap companies, right, your Bristol Myers Squibb, your Johnson and Johnson’s, they might be very eager to acquire something like this, if it works. It has, you know, blockbuster potential, and it’s pretty easy. There’s no other tie ups with other companies that they have to navigate. So this company has a product on the market. It’s a cancer drug that inhibits a certain protein to treat gastrointestinal stromal tumors, or GIST, also known as GIST, and this product is approved.

Maxx Chatsko  31:11

So the branded name is Qinlock, and it’s approved for fourth line GIST. Fourth line means that patients have had at least three other treatments and they’ve failed to respond, or maybe they’ve grown resistant, so then they need a fourth line treatment. Now qinlock in clinical trials was shown to have a pretty high progression free survival, it actually outperformed second line treatments in fourth line patients. That’s noteworthy because patients at later stages of disease or have been treated with more therapies often have more fragile immune systems, sometimes they have a fatigued immune system, sometimes they just have more organ damage from receiving more treatments. So it’s usually we see smaller responses, and less durable responses in later lines of treatment. But qinlock actually bucked that trend.

Maxx Chatsko  32:03

And interestingly Deciphera Pharmaceuticals actually ran a smaller clinical trial, just testing out this drug compound in earlier lines of treatment. So it tested qinlock in second line, third line and fourth line GIST. And it actually observed in second line GIST that it had a median progression free survival of about 11 months. So that’s interesting, because the current standard of care, which is a compound or branded name called Sutent actually only delivered a progression free survival of about six months. So it’s not approved for a second line, it’s only proven fourth line. But it did achieve a higher progression free survival than the standard of care.

Maxx Chatsko  32:43

So that’s exactly what this clinical trial that’s so pivotal right now, it’s going to be have results in the fourth quarter. It actually pits qinlock head to head against the standard of care in second line treatment, which is sutent. So this head to head is comparing both of those, and it’s straight up one to one randomization for patients. And the primary endpoint is progression free survival.

Maxx Chatsko  33:06

Now, it’s very tempting to look at all the results from all the studies and say, well, gee, I mean, they’ve already demonstrated about 11 month progression free survival from qinlock in second line GIST . So it’s obviously going to come out successful on this in this head to head trial. And it’s you can’t do that you can’t compare, you know, the the trial from sutent to the earlier trial. For qinlock, that’s very dangerous. So in order to achieve statistical significance, they need like a two to three month benefit for qinlock over sutent and even like a little decrease in qinlock’s progression free survival rate, and a little bit of an increase in the sutent arm would mean this trial would actually fail. I call this in my article, the mother of all binary events, because there’s it’s just like razor thin margins, and they could go either way. But there’s gonna be fireworks I think no matter what the outcome is.

Simon Erickson  33:59

And you think one of the big pharma companies, you mentioned, Bristol, or j&j might just be intrigued enough about the potential the swing for the fences, if this actually does continue to progress as well as it has been?

Maxx Chatsko  34:09

Yeah, absolutely. I think this is a very good takeover target. There haven’t been very many, like we’ve seen in 2020. And so far this year, there haven’t been very many large acquisitions in drug developers, a lot of that’s because premiums are pretty high right now. But I think we’re about 18 months into you know, since like the beginning of the pandemic, for the most part, a lot of really large pharmaceutical companies have weathered it pretty well. They have a large cash position. So I think, you know, if the opportunity arose, there might be some, some obvious opportunities. I think Deciphera Pharmaceuticals might be one could be a good takeover target for a very large company looking to bolster its oncology pipeline.

Simon Erickson  34:49

That’s fantastic. Thanks very much, Maxx. Thanks also, for putting some new words on my radar that I don’t think I’ve ever heard before that pitch. It’s a good one. Deciphera Pharmaceuticals, $DCPH for anyone who wants to follow Maxx’s pitch. Dana mentioned Talkspace $TALK is the ticker on that one. Dan mentioned Kohl’s $KSS. Steve mentioned Nutanix $NTNX. I mentioned Fastly $FSLY. Matt mentioned Box, Inc. $BOX and Anirban mentioned Alteryx $AYX.

Simon Erickson  35:20

We now invite you to take the next step, which is to sign up for 7investing at 7investing.com/subscribe and see what impact each of these acquisitions could have on the existing recommendations that we have on our scorecard. That’s been a really fun exercise for us to think about as well, as well as who these potential acquisition targets could have been. So on behalf of my entire lead advisor team here at 7investing, we appreciate you tuning in. Thanks for listening to this episode of our 7Investing podcast. We are here to empower you to invest in your future. We are 7investing.

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