'It's a great Canadian company with a good backlog and growing': Zechner on MDA Space

Key Concepts

• Microsoft (MSFT): Software giant, cloud services (Azure), Artificial Intelligence (AI) integration (Copilot), valuation analysis.
• AI Disruptors: Small companies challenging established tech firms in the AI space.
• Torx Gold (TOR): Gold mining company operating in Mexico, net asset value (NAV), forward cash flow, Media Luna & El Limon deposits, geopolitical risk in Mexico.
• MDA: Canadian space technology company, satellite contracts (EchoStar, GlobalStar, Arctic Shield), Low Earth Orbit (LEO) satellites, backlog.
• Forward Earnings/Cash Flow: A valuation metric based on expected future earnings or cash flow.
• Net Asset Value (NAV): The value of a company's assets minus its liabilities.
• Moat: A company’s ability to maintain competitive advantages over its rivals.

Software Sector & Microsoft Analysis

John Zner discusses a renewed investment in Microsoft (MSFT) following a recent stock pullback. Previously, he exited the position due to valuation concerns, specifically a price-to-earnings ratio of 35-40x, which he deemed “too rich” compared to potential growth elsewhere. However, the decline in stock price now presents an opportunity, with the stock trading at approximately 24x forward earnings, making it “attractive.”

Zner emphasizes Microsoft’s continued dominance in the software market, citing its operating system’s 80%+ market share on global computers. He highlights the successful migration of businesses to Microsoft’s cloud services (Azure) as a key growth driver. He provides a personal example of his firm, Jay Zner Associates, transitioning their server infrastructure to Azure for a cost of approximately $2,000, compared to a $50,000+ replacement cost for physical servers. This transition also addresses cybersecurity, data storage, and accessibility concerns.

Zner believes Microsoft’s established enterprise and consumer base provides a strong “moat” protecting it from disruption, allowing for a gradual integration of AI platforms like Copilot and continued growth. Azure revenue is currently growing around 40%.

AI Landscape: Big Tech vs. Disruptors

The conversation shifts to the role of size in the AI landscape. While acknowledging the emergence of disruptive AI companies like Deep Seek, Zner argues that larger players like Microsoft possess significant advantages. These advantages include established platforms, vast data resources, and stronger customer relationships (“bigger moes”). He believes these factors will provide better long-term protection against disruption compared to mid-sized and smaller companies.

Gold Sector & Torx Gold Investment

Zner expresses a positive outlook on the gold sector, particularly in light of potential US dollar weakness. He anticipates that a potential 15% growth target proposed by a political figure could lead to significant inflation and a subsequent dollar collapse. He believes gold stocks are currently undervalued, trading at levels reflecting a $3,000/ounce gold price, despite the potential for $5,000/ounce.

He specifically highlights Torx Gold (TOR) as a particularly attractive investment, trading at a discount to its net asset value (NAV) at approximately 4.5x forward cash flow. Torx Gold has successfully transitioned from the declining El Limon deposit to the new Media Luna property, ensuring continued production and cash flow. Furthermore, they have expanded deposits at both Media Luna and El Limon, extending their mine life into the mid-2030s with a 30% copper content.

Zner acknowledges recent concerns regarding security in Mexico, noting a slight dip in Torx Gold’s stock price potentially linked to events at the US-Mexico border and broader concerns about cartel activity. However, he maintains that Mexico is a more stable jurisdiction than many other mining regions (e.g., West Africa, South America), despite the tragic events at the Vizsla Silver mine.

Space Technology & MDA Analysis

Finally, Zner discusses MDA, a Canadian space technology company. The stock experienced setbacks last year due to the loss of the EchoStar contract, with concerns about losing the GlobalStar contract as well. However, Zner believes the GlobalStar contract is secure due to its importance to Apple’s satellite initiatives.

He notes that MDA has secured new contracts in the space sector, including projects related to Low Earth Orbit (LEO) satellites and the Arctic Shield program, a significant future contract. He views MDA as undervalued relative to its peers, possessing a strong backlog and long-term growth potential, describing them as “the arms dealer of the space race.” The company experienced a rough year previously but is positioned for future growth.

Logical Connections

The discussion flows logically from a broad market overview (software) to specific sector analysis (gold, space). The conversation consistently links macroeconomic factors (dollar strength, inflation) to investment opportunities in specific companies. The analysis of each company includes both positive aspects (growth potential, competitive advantages) and potential risks (valuation, geopolitical concerns).

Synthesis/Conclusion

John Zner presents a cautiously optimistic investment outlook, identifying opportunities in Microsoft, Torx Gold, and MDA. His investment thesis centers on identifying companies with strong fundamentals, undervalued relative to their growth potential, and possessing durable competitive advantages. He emphasizes the importance of considering macroeconomic factors and geopolitical risks, but ultimately believes these companies are well-positioned for long-term success. He highlights the value of finding opportunities during market pullbacks and focusing on companies that are adapting to evolving technological landscapes (cloud computing, AI, space exploration).