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Entrepreneur
Kurra Bewarse
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Registered: 05-2011
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Posted on Thursday, April 08, 2021 - 7:45 pm:   Insert Quote Edit Post Delete Post Print Post

TWTR Twitter is trending today on a Bloomberg report that it had been in talks to acquire Clubhouse (70.21 +1.15)

Twitter (TWTR +2%) is trending today following a Bloomberg report that the social media giant had been in talks regarding an acquisition of Clubhouse, an audio-based social network, for roughly $4 bln. Discussions are no longer ongoing, but it was intriguing to hear that Twitter showed interest.

Right now, Twitter makes most of its money from ads. However, advertising can be lumpy depending on the state of the economy. Also, ads are subject to event-driven up-and-down swings, as seen during election seasons. As such, Twitter has been looking to add non-advertising revenue streams.
Twitter ideally would like revenue streams with a high recurring revenue component, which would help to reduce the lumpiness of overall results and increase predictability. As an example of the unpredictability of its current model, Twitter had five consecutive earnings misses before posting back-to-back solid EPS beats in Q3 and Q4 when the election provided a tailwind.
Specifically, Twitter has been looking at possibly adding subscription-based services and possibly getting more into online commerce. On its last earnings call, the company did not go into details, but management reiterated that it's looking increasingly at non-advertising subscription-based revenue streams and that it will experiment with some ideas in a more meaningful way in 2021.
Audio-based social media apps are still very new but are gaining in popularity. Clubhouse lets users host their own online radio shows and panel discussions. Topics can run the gamut from sports to politics to friends chatting to a celebrity being interviewed. Listeners are allowed to raise their hands to speak, but it's up to the moderator to permit interaction. There is also an air of exclusivity to the app, as it's invite-only, like a real club. Also, it's only available on iPhone, not on Android.
Why would Twitter want to buy Clubhouse? Twitter's interest in Clubhouse is a bit surprising considering that it just launched a similar service in late 2020 called Spaces. It's still in beta testing, but we wonder if maybe the early results have been a bit underwhelming if Twitter is already looking to buy a more established name like Clubhouse. The other aspect to this is that Twitter would need to figure out the best way to monetize a service like Clubhouse. It currently has no advertising, but maybe users would pay a monthly fee or pay extra to chat with a celebrity.

In sum, we think buying Clubhouse would make sense, as we see all kinds of ways that Twitter could link its core service to Clubhouse chats. A deal would also show that Twitter is serious about expanding beyond its advertising base. We do not have the financials on Clubhouse, but $4 bln seems pretty reasonable and easy to swallow. Audio social media is still an emerging trend, but maybe this early period is the best time for Twitter to strike and buy a category leader before the space gets too big.
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Kurra Bewarse
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Posted on Thursday, March 18, 2021 - 6:41 am:   Insert Quote Edit Post Delete Post Print Post

Kopin (KOPN #1) is a supplier of microdisplays and subassemblies for augmented reality (AR), virtual reality (VR)and mixed reality (MR) systems. Its microdisplays are currently mostly used for defense and industrial applications for US defense programs. Its displays are used for soldier, avionic, armored vehicle and training & simulation defense applications. AR technologies are being used by the military to provide personnel with enhanced situational awareness by overlaying digital imaging over the real-world scene. In the future, Kopin believes it can branch into other AR and VR applications like industrial, public safety and medical headsets; 3D optical inspection systems; and consumer wearable headsets. Kopin finished 2020 on a strong note, with full year revenue growing 36% to $40.1 mln. Q4 revenue growth was particularly strong at 60% yr/yr, Kopin's strongest quarterly growth since 4Q17. Results in Q4 were led by robust defense product revenue, which increased 112% yr/yr, driven by the FWS-I thermal weapon sight program and displays for the F-35 Fighter jet program. Kopin expects these programs will continue to generate strong revenue in the coming years. Also, Kopin is on track to transition three more products, out of a dozen programs currently in development, to initial low-rate production, with revenue expected to begin ramping in 2H21 with accelerated growth momentum for 2022 and beyond. Its development pipeline includes applications such as armored vehicle targeting systems, rotary-wing aircraft helmets, rifle day scopes and targeting systems, among others. Kopin believes it's the sole source supplier to most of these programs. It's not just military applications, Kopin also sells industrial wearables (RealWear), a market leader in enterprise AR and computing headsets. Kopin is also developing a headset for surgeries. The stock has been on a huge move in 2021, fueled by some contract wins and that robust Q4 report. The company is small, which is a bit of a concern, but it's dominant in its market niche with additional opportunities in the pipeline, which makes it a name to watch.

MarineMax (HZO #11) is the nation's largest recreational boat and yacht retailer. It focuses on premium brands, such as Sea Ray, Boston Whaler, Hatteras etc. MarineMax sells new and used recreational boats and it provides yacht brokerage and charter services. MarineMax also owns Fraser Yachts Group, a superyacht brokerage and luxury yacht services company. MarineMax currently has 100+ retail locations. The stock has been ramping in recent months. Like several other boating stocks, HZO is benefitting from strong demand as consumers shift to spending more time outdoors due to the pandemic. Results have been eye-popping: same-store sales grew over 20% in Q1 (Dec), driven by even greater growth in comparable new units sold of over 35%. And the 20% comp was lapping a very difficult +24% comp last year. HZO is benefitting from a foundational shift of new customers embracing the boating lifestyle. This shift positions HZO to build on this growth for years to come, as many existing and new customers should upgrade to larger boats. HZO has also been growing via M&A. With one of the strongest balance sheets in the industry, HZO says it remains well capitalized to make strategic accretive acquisitions to add to its marina strategy and to further grow its higher margin businesses. To that point, HZO recently added super yacht powerhouse Northrop & Johnson. Together with Fraser Yachts, this unified combination provides unrivaled global scale, while further diversifying MarineMax into higher margin businesses.

Ultra Clean Holdings (UCTT #13) is a supplier of critical subsystems, ultra-high purity cleaning and analytical services primarily for the semiconductor industry. Products include chemical delivery modules, frame assemblies, gas delivery systems, fluid delivery systems, precision robotics, process modules as well as other high-level assemblies. UCTT also has a Services business, which provides ultra-high purity parts cleaning, process tool part recoating, surface encapsulation and contamination analysis primarily for the semiconductor device makers and wafer fabrication equipment (WFE) markets. UCTT is benefitting from multi-year industry demand for applications such as 5G ad new CPU architectures which are enabling higher performance servers, and cloud, AI and Machine Learning. UCTT had a great year in 2020 with record revenue of $1.4 bln, record operating margin of 11.3% and record EPS. Q4 benefited from ongoing strength in foundry and logic, as well as increased demand in memory as customers planned for expansion and equipment investment in 2021 and beyond. UCTT says it remains solidly on track to outpace the accelerated growth of its served markets again in 2021. The pandemic is accelerating the adoption of semiconductor growth drivers such as AI, high-performance computing, IoT and 5G. Overall, demand is booming for UCTT right now as the pandemic has ramped up the need for companies to go digital. This mean more chip sales and more sales of UCTT's equipment.

Energy Recovery (ERII #18) makes equipment used in industrial fluid flow markets, specifically water desalination (turning salt water into fresh water) and oil & gas. ERII's products are used in these markets to either recycle and convert wasted pressure energy into a usable asset or preserve pumps that are subject to hostile processing environments. In water desalination, ERII makes energy recovery devices (ERDs) which lower operating costs by capturing and reusing the otherwise lost pressure energy from the reject stream of the desalination process. Rather than dissipating the pressure energy from the discharge brine, ERDs can transfer the pressure energy from the discharge water directly to the unprocessed feed water, thereby reducing the amount of ongoing pressure energy required by the processes' pumps. This results in a much more efficient process as the size of the high-pressure pumps and the corresponding energy usage are reduced. As a result, ERDs have made SWRO (seawater reverse osmosis) desalination a viable economic option in the production of potable water. Water scarcity is growing and desalination is a drought proof option. ERII's PX generates no emissions and it decreases energy use by up to 60%, making seawater reverse osmosis far more cost effective and environmentally sustainable. ERII later expanded into the oil & gas market. Basically, it allows oil & gas operators to save money by isolating pumping equipment from highly abrasive fracturing fluids. These fluids contain proppants (sand or ceramics) so when this fluid is propelled under high pressure, it causes frequent failures in hydraulic fracturing pumps, which are expensive. We caution that ERII is small (2021 revs expected just over $100 mln) and is speculative. However, water scarcity will become more of an issue in the coming years and ERII is a play on this trend.
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Kurra Bewarse
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Posted on Thursday, March 18, 2021 - 6:40 am:   Insert Quote Edit Post Delete Post Print Post

COUP Coupa Software trading more than a coupa points lower despite reporting a surprise profit (250.81 -21.13)

Coupa Software (COUP -8%) is trading more than a coupa points lower today even though the company reported impressive earnings last night. Coupa, which provides business spend management software, surprised investors with a profit in Q4 (Jan) after guiding to a loss. Coupa also reported significant revenue upside. However, digging deeper into the report reveals a few trouble spots. Why is the stock lower despite the strong Q4 upside?

The guidance was mixed: Coupa expects a Q1 (Apr) loss while the market was looking for breakeven. As was the case with Smartsheet (SMAR), Coupa tends to lowball guidance a bit, so this target does not concern us too much. However, what's more concerning is that the upside revenue guidance was pretty modest in comparison to last quarter's sharply higher guidance. Again, Coupa tends to be conservative on guidance, but this may be spooking investors a bit.
Non-GAAP gross margin in Q4 was 70.1%, well above prior guidance of 67-68% but 250 basis points lower than Q3. In November, Coupa acquired a company called LLamasoft that provides AI-powered supply chain design and planning software. This was a large purchase at $1.5 bln, and its $100 mln in annual revs represents a big addition for Coupa, which posted $378 mln in revs for the first nine months of 2020. Given the size of LLamasoft and its lower margin profile, Coupa expects this deal to lead to meaningful gross margin compression for most of FY22.
Part of the problem is that COUP plans to convert Llamasoft's legacy on-prem license arrangements to the cloud. License revenue is recognized upfront whereas cloud revenue is recognized ratably over time. Therefore, cloud conversions will create a decrease in revenue on the front end. This may be why COUP's revenue guidance is a bit muted.
Coupa also made a few concerning comments on the call. While the company sees the vaccine rollout as a positive, management concedes that a return to normalcy will still take time. Coupa went on to say that many customers and prospects continue to operate with caution, making it difficult to predict the timing of deal closings. We, and likely many investors, would have expected more upbeat language with there being a light at the end of the tunnel for the pandemic.
Also, tech stocks are weak today generally ahead of the Fed Statement at 2 p.m. ET.
Coupa Software is not a name most investors are familiar with. It was a huge mover through much of 2H20, although it has pulled back in 2021 as investors rotate out of tech stocks. Nevertheless, we have been fans of Coupa since its IPO debut in 2016. It's still a fairly small company, but it sees a lot of runway for growth, as only 20-30% of spend is actually being managed through an IT platform while the majority is still being managed through paper, fax, email, phone calls, etc.

The main concern we have for COUP is its lofty valuation, trading at a current P/S of 27x, but the high valuation results from COUP seeing a multi-billion dollar marketplace that is just starting to be tapped into. The problem is that this valuation can be used as an excuse by investors to exit a stock when any perceived weakness appears, as was the case here on account of COUP's guidance and commentary.
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Kurra Bewarse
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Posted on Thursday, March 18, 2021 - 6:40 am:   Insert Quote Edit Post Delete Post Print Post

MU Micron ups the ante in the data center market with its new product portfolio strategy (92.26 +0.83)

Semiconductor bellwethers Micron (MU) and Intel (INTC) are making waves today after MU announced last night that it's undergoing significant changes to its portfolio strategy. At the center of the shift are 3D XPoint memory products, which MU will cease producing in order to focus on new data center memory systems that utilize the Compute Express Link (CXL).

INTC's involvement in this news dates back to mid-2015 when the company and MU formed a partnership to develop 3D XPoint technology. The concept was to create a non-volatile memory offering that fills a gap in the storage market between DRAM and NAND flash. Utilizing a different architecture than traditional flash products, INTC and MU promoted 3D XPoint as being many times faster than NAND, while also benefiting from more storage density than DRAM.

Although the rivals worked together on the technology, the companies produced and branded their own 3D XPoint products. In 2017, INTC launched its first product based on the technology under the Optane brand, while MU brought its version to market under the QuantX banner.

MU's decision to halt development may seem sudden and surprising. However, the pieces come together after realizing that INTC discontinued its lineup of Optane SSDs for desktops back in January. This move almost entirely eliminated Optane's position in the consumer market, leaving only one high-end SSD that's targeted for laptops.

About a month earlier, INTC announced the launch of Optane SSD P5800X, which is designed specifically for data center applications. Therefore, MU's new portfolio strategy isn't necessarily a repudiation of INTC, but, rather, it's a decision that's in alignment with INTC's recent maneuvers.

It's not difficult to understand why both companies are ramping up their R&D activities and investments for the data center market. Last quarter, healthy demand for DRAM chips fueled a 29% increase in MU's Compute and Networking segment, which includes sales in the data center and cloud markets. A primary catalyst that's driving robust growth for semiconductors in data centers is the buildout of infrastructure to support the surge in data resulting from the digitization of businesses and the work-from-anywhere transition.

Last night's press release from MU states that the company will "shift resources to focus on accelerating market introduction of CXL-enabled memory products." Technical jargon aside, CXL is an industry standard interface that supports high-speed data processing by enabling fast connections between computers, memory, and storage. In the press release, the company states, "... Micron sees immense promise in new classes of memory-centric solutions that utilize CXL to scale the capacity, performance and content required by applications to run on infrastructure with greater architectural freedom..."

Although MU didn't offer specific financial implications regarding this transition, it does anticipate that the actions will be accretive to its near-term and long-term performance. Since the company intends to sell the facility that was manufacturing 3D XPoint products, nonrecurring items are likely to materialize in the coming quarters.

The main takeaway is this: We view MU's updated portfolio strategy as a logical and positive development since it more fully aligns the company with the high growth opportunity still evolving in the data center market.
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Kurra Bewarse
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Posted on Thursday, March 18, 2021 - 6:39 am:   Insert Quote Edit Post Delete Post Print Post

SMAR Smartsheet not getting a smart reception from investors despite Q4 upside (66.47 -2.28)

Smartsheet (SMAR -3%) is not getting a smart reception from investors despite reporting pretty significant upside for Q4 (Jan) EPS, revenue, and especially billings. SMAR benefited from an easing of COVID-related sales headwinds seen earlier in the year, saw continued strength from larger transactions, and had a strong close to the fiscal year.

So, why is the stock lower?

The guidance could have been better. SMAR guided to a wider-than-expected Q1 loss, but that's been par for the course for the company, so we are not worried; the company will likely report EPS upside. Of greater concern is the modest revenue upside expected for Q1 following big upside guidance last quarter. Also, the billings guidance of $118-119 mln (+31-32% yr/yr) represents a sequential step down from Q4 on both a percentage and a raw number basis: Q4 billings grew 49% yr/yr to $151.2 mln.
Expanding on the billings a bit more, SMAR expects FY22 billings to be seasonally weighted towards the back half of the year. Billings, then, could be a bit of a headwind in 1H, which is a disappointment.
Gross margin improved to 81% from 79% in Q3. As we mentioned in our preview, SMAR has been transitioning its legacy data centers to the public cloud, which has pressured margins. This was completed in Q3, which helped margins in Q4. However, margins could continue to be a bit of a headwind in FY22 as SMAR now looks to leverage public cloud infrastructure internationally.
Tech stocks are weak today generally ahead of the Fed Statement at 2 p.m. ET. A rate change is unlikely, but the Fed's language on its outlook will affect the market. Higher rates are bad for stocks, especially for high-flying tech stocks.
Despite the stock's reaction today, this was another good overall report. The billings number was the standout metric, in our view, and Q4's upside was quite robust. We think the comment about billings being more back-half weighted is being viewed as a disappointment, as SMAR had seemed to be turning a corner on billings in the past couple of quarters.

Finally, the stock has pulled back over the past month as investors have rotated out of work-from-home plays and tech stocks generally and into reopening plays. We think this guidance was not eye-popping enough for SMAR to mitigate that rotation trend. Overall, SMAR has underperformed other work-from-home plays over the past year, but it sounds like business will pick up in the second half of the new fiscal year.
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Posted on Thursday, March 18, 2021 - 6:39 am:   Insert Quote Edit Post Delete Post Print Post

CRWD CrowdStrike secures more gains as impressive report helps justify rich valuation (205.28 +8.97)

CrowdStrike (CRWD), the leading provider of endpoint security systems, operates at the crossroads of a few powerful trends that have shaped it into one of the fastest growing cloud computing companies of all time. As a cybersecurity company, CRWD's technology is in high demand due to the growing volume, complexity, and severity of cyber-attacks. Since the company also specializes in securing the ever-increasing number of devices that access enterprises' cloud networks, CRWD is at the center of the digital transformation and the work-from-anywhere transition.

Combined with its expanding capabilities and acquisitions, these trends pushed CRWD's annualized recurring revenue (ARR) to over $1 bln this past fiscal year, making it the third fastest cloud-based SaaS company to reach that milestone, according to CEO George Kurtz. The two ahead of it are cloud bellwethers Salesforce.com (CRM) and Zoom Video (ZM).

The company's astounding growth was on display again last night when it reported strong, upside Q4 results that featured several impressive metrics. We're struggling to identify any real blemish within CRWD's results, but some may point out that revenue growth slipped to 74% from the mid-80% range it generated over the past few quarters. If that is the worst aspect of CRWD's report, though, then it's clear that the company is performing exceptionally well.

Indeed, the company's results reveal that business is booming, as illustrated by the 1,480 net new subscription customers (+82% yr/yr) it added during the quarter. Not only is CRWD adding new customers at a breakneck pace, but its existing customers are also expanding their usage. Customers that have adopted four or more of its modules surged by 63%, validating CRWD's land-and-expand approach.

During the earnings conference call last night, Kurtz addressed the recent high-profile cyber-attacks perpetrated against SolarWinds (SWI) and Microsoft (MSFT). Although Kurtz doesn't believe that the SWI hack had a material impact on CRWD's Q4 results, he did state that the event represents another longer-term tailwind to the industry. Regarding MSFT, Kurtz characterized the situation as a "crisis of trust" among MSFT's customer base, adding that CRWD has seen MSFT customers become more concerned about protecting their cloud directories, including Azure AD.

According to Kurtz, this rising threat awareness is creating demand for CRWD's zero-trust products, including those offered as a result of its September 2020 acquisition of Preempt. This acquisition, which is on track for initial integration by the end of Q1, along with its more recent purchase of Humio (Feb. 18, 2021), are expected to become significant contributors this year. Humio will expand CRWD's presence in the $4.9 bln log management market while broadening CRWD's use cases beyond traditional security.

Looking ahead, CRWD is forecasting Q2 revenue of $287-292 mln, equating to yr/yr growth of 62-64%. The company has a track record of easily exceeding its guidance, so this outlook is being viewed as conservative. CRWD's downside EPS guidance of $0.27-0.30 vs. the $0.33 consensus estimate also stands out, but its outlook includes $0.17 in added operating expenses for Humio and higher interest expense for debt. In other words, the guidance doesn't reflect any negative anticipated change in the demand environment or in its operating efficiency.

The most pressing concern we see is the ultra-rich valuation. At ~34x estimated FY22 sales, the stock is priced to perfection. However, we see little reason to believe that the trends and growth catalysts that are fueling its business will subside any time soon. To the contrary, momentum only appears to be building, and its leadership position is solidifying, thereby justifying the premium valuation.
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Posted on Friday, March 05, 2021 - 2:17 pm:   Insert Quote Edit Post Delete Post Print Post

AVGO Broadcom rings up strong results as iPhone 12 provides boost, but supply chain concerns linger (442.22 -1.37)

Heading into Broadcom's (AVGO) Q1 earnings report, one topic has dominated the semiconductor industry, creating plenty of angst among investors: namely, supply chain constraints and the possibility that customers are stockpiling chips, artificially inflating demand in the process. Competitor Marvell (MRVL) stoked these concerns on Wednesday, reporting mediocre quarterly results as CEO Matt Murphy also predicted that supply chain issues will persist at least through this year.

However, AVGO CEO Hock Tan sang a different tune during last night's earnings conference call, stating that the company has enough production from outsourced providers to meet demand. This remark is backed up by AVGO's strong quarterly results and guidance.

As anticipated, the wireless business cashed in on Apple's (AAPL) iPhone 12 launch. Typically, AVGO would reap the benefits from new device launches in Q4, but the delayed iPhone 12 launch pushed a substantial amount of wireless revenue out to Q1 this year.

Therefore, this quarter represented the seasonal peak for wireless with revenue surging by 52% yr/yr, essentially inline with AVGO's bullish forecast from last quarter.

Driven by solid demand from data center and cloud computing providers, business also remains healthy on the networking side. For the quarter, revenue increased by 15% with sustained momentum, reflected by an 80% jump in bookings.

Considering that this earnings season featured impressive quarterly reports from plenty of semiconductor companies (AMD, NVDA, MU, TXN, etc.), the upside report from AVGO didn't come as a surprise. Prior to this week's pull-back, the stock had rallied by 15% since its last earnings report, illustrating the positive sentiment.

The main uncertainty was whether the widely-documented supply constraints would weigh on AVGO's outlook. Easing those fears, the company issued better-than-expected guidance, forecasting Q2 revenue of $6.50 bln vs. the $6.33 bln consensus estimate.

Furthermore, Tan immediately addressed the supply chain issue during the earnings call, asserting that "our revenue reflects what's being consumed by end users." He supported the bold proclamation by shedding light on a rigorous process AVGO put in place last May. Specifically, the company consistently reviews its backlog and aligns its supply chain to better match end-user consumption.

Based on the stock's sluggish reaction to AVGO's beat-and-raise report, it seems that investors aren't completely sold on the positive supply chain assessment. A significant red flag that's gaining some attention is that industry lead times have risen to about 14 weeks. The lengthening of lead times suggests that customers are bulking up on orders to avoid supply shortages in the future.

Time will tell if a major supply glut materializes later this year, but many investors aren't keen on sticking around to find out. On the other hand, if Tan is correct, and end-user demand is authentic, then this recent dip in the stock looks like a buying opportunity.
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Posted on Friday, March 05, 2021 - 2:16 pm:   Insert Quote Edit Post Delete Post Print Post

GPS Gap is gapping higher today on earnings; makes us think spinning off Old Navy makes sense (26.72 +1.42)

Gap (GPS +6%) is gapping nicely higher today following its Q4 (Jan) earnings report. This was a nice rebound after the apparel retail giant disappointed investors last quarter. What stands out right off the bat is that Gap reported a sizable $0.10 EPS beat even though revenue came up light. That tells us that margins were significantly better than expected.

The shortfall in sales was caused by a mid-quarter resurgence in COVID cases that resulted in unplanned mandated store closures or restrictions across Canada, Japan, China, and Europe as well as through parts of the US, including California and the Northeast, which impacted store traffic.
There is definitely a disparity among Gap's four key brands and has been for some time. Old Navy and Athleta have been the stars of the show while Gap and Banana Republic have been laggards. That trend played out again in the same store comps in Q4: Old Navy +7%, Athleta +26%, Gap -6%, and BR -22%. Its Intermix unit is undergoing a strategic review.
Another example of brands' success is that Old Navy gained share in 2020 to become the number two apparel brand in the US, second only to Nike (NKE), and Athleta surpassed $1 bln in sales and grew 16% for the full year despite the pandemic.
Combined, Old Navy and Athleta represented 63% of 2020 sales, on the way to the company's target of 70% by the end of 2023.
In order to turn Gap around, the company has been closing underperforming stores, reducing mall exposure, and increasing its focus on online sales. As for BR, they are also closing stores and, more importantly, have new leadership, as Sandra Stangl has recently taken over. She is tasked with repositioning BR for a post-COVID world through relevant marketing and products and a boosted digital profile.
GPS is clearly making progress boosting online sales, which grew 54% in 2020 and closed the year at about 45% of total sales vs 25% at the end of last year. At over $6 bln, its online channel is ranked number two in US apparel e-commerce sales.
In sum, Old Navy and Athleta have seen booming sales while Gap and BR continue to struggle. With a strong FY21 now in the books, it makes us question the company's January 2020 decision to not spin off Old Navy and let the stock achieve a higher multiple. We do not really see the benefit of keeping these brands together. Plus, Old Navy generates more annual sales ($7.5 bln) than Gap ($3.4 bln) and BR ($1.5 bln) combined. Maybe at least a name change is warranted.
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Posted on Friday, March 05, 2021 - 1:11 pm:   Insert Quote Edit Post Delete Post Print Post

FLGT Fulgent Genetics giving shareholders a booster shot with big earnings upside (88.21 +2.68)

Fulgent Genetics (FLGT +4%) shareholders are getting a booster shot today although the stock is down from its highs. The stock is up sharply after reporting monster Q4 earnings results last night. FLGT has rapidly scaled up to become one of the top providers of COVID-19 testing in the country. It currently can process more than 60,000 tests per day. Throughout the pandemic, the company has been seeing booming demand.

FLGT caught our attention in recent months owing to a few huge guidance increases. On November 9, FLGT upped its full year guidance from $135 mln to $235 mln, then it quickly upped that to north of $300 mln. The final 2020 revenue number was $421.7, mln and the company's guidance for 2021 amounts to $800 mln. As you can see, even Fulgent has had trouble keeping up with its surging revenue targets.

Everyone was expecting big Q4 numbers from Fulgent, but not this big: EPS of $6.20 vs consensus of $4.05 and revenue of $295 mln vs the $199 mln consensus. FLGT also guided Q1 ($325+ mln) and FY21 revenue well above expectations.

Naturally, one might wonder how long FLGT can keep this up as the country gets vaccinated in 2021. This is a fair question, and we have some skepticism ourselves. However, it's important to note that Fulgent does provide a lot more than just COVID-19 tests. Customers use its genetic tests for hereditary cancer detection, cardiovascular genetics, neurological genetics, reproductive health, and many others. At this point, FLGT has one of the largest, most diversified genomic test menus in the industry, and further new tests are in development.

Beyond just the revenue benefit, what the pandemic has really done for FLGT is put its name on the map. This year, CEO Ming Hsieh says Fulgent "made inroads with numerous new customers, established new reimbursement agreements, expanded [its] capacity and commercial capabilities, and ha[s] grown [its] direct-to-consumer genetic testing platform, Picture Genetics."

So even after the country moves on from COVID-19, we think there could be a lasting impact, if likely not at the big numbers it's producing now. The pandemic has opened a lot of doors for Fulgent. Many institutions had never heard of Fulgent before the pandemic. However, with the company proving that it can deliver large volumes of high-quality tests in a quick and efficient manner, FLGT has been able to sign deals with large customers for its other tests.

Bottom line, we were expecting a huge Q4 result from Fulgent, but this was even better than we expected. Also, the company's 90% revenue growth guidance for 2021 indicates that COVID-19 testing will remain robust this year. Plus, FLGT has also begun using its capabilities to aid in identification and screening of potential new strains and mutations. And while COVID-19 tests are a big driver right now, FLGT is not a one-trick pony, as it has a large platform of genetic tests. The pandemic has really raised its profile, which has led to new contract wins for its other tests.
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Posted on Friday, March 05, 2021 - 1:10 pm:   Insert Quote Edit Post Delete Post Print Post

COST Costco earnings hit by COVID-related expenses as tough yr/yr comparisons also loom (310.17 -8.87)

At this time last year, the initial wave of food and essential goods stockpiling landed at Costco (COST) as pandemic fears began gripping the country. As shoppers frantically stocked up on bulk items, it soon became clear that COST was in line to produce robust financial results. Even as the stockpiling phenomenon diminished later in the spring, customers continued filling their shopping carts to the brim to avoid making additional trips to the store. Meanwhile, sales in COST's formerly insignificant eCommerce channel began booming due to the monumental shift toward online shopping.

Today, these favorable trends remain largely in place, as indicated in last night's 2Q21 earnings report, but slower growth for COST is on the horizon. In anticipation of this deceleration, shares have tumbled by 15% this year. Not only will the warehouse retailer begin lapping very difficult yr/yr comparisons, but shopping activity could soon return to more normalized behaviors.

These headwinds haven't fully materialized yet, though. In Q2, total company comparable sales, excluding changes in gasoline prices and FX, grew by a healthy 12.9%. COST benefited from a strong holiday shopping season early in the quarter, while fresh foods continued to experience high demand.

The eCommerce channel was a standout once again, as sales soared by 75%. A familiar set of product categories led the way, including consumer electronics, home and garden, and health and beauty. Each of these groups experienced an upswing during the pandemic, driven by increased spending for at-home related products.

While total sales grew by nearly 15% to $44.8 bln, topping the $43.7 bln consensus estimate, EPS of $2.14 missed the $2.31 expectation. In fact, this was COST's first bottom-line miss in three years. On the surface, COST's earnings shortfall may look alarming, but some context is needed.

During the quarter, the company incurred $246 mln in COVID-related costs, including higher wages and cleaning/disinfecting expenses. Excluding these costs, the company would have generated EPS of $2.55, easily exceeding analysts' forecasts. In other words, COST's earnings miss wasn't the result of poor execution or weak sales.

Additionally, the $2/hour boost that COST provided to employees throughout the pandemic expired on February 28. Although the company is permanently bumping starting wages higher by $1/hour, the $1 bln+ wage expense increase that COST experienced over the past twelve months will be cut by more than 50% this year.

The reduced expense comes at an ideal time because yr/yr growth will be difficult to generate moving forward. In February, U.S. comparable sales on a reported basis were up 10.3%, reflecting a sharp slowdown from January's 15.4% growth. During last night's earnings conference call, CEO Richard Galanti noted that the fourth week of February last year saw a surge in sales due to stockpiling. This effect positively impacted February 2020 sales by about three percentage points.

It doesn't get easier for COST from here. Last March, U.S. adjusted comparable sales jumped by 12.1%, followed by a brief reprieve in April (flat yr/yr) as sales were hindered by the closure of optical, travel, and photo kiosks, along with food courts. Thereafter, COST faces a gauntlet of tough comparisons with May U.S. adjusted comparable sales up 5%, followed by growth of 13.6% in June, 15.7% in July, and 14.3% in August.

Although the Q2 earnings miss is an easy target, the weakness in COST shares is more related to the company's lower growth prospects this year. Looking beyond the challenging yr/yr comparisons and the normalization of shopping patterns, COST is a premier retailer that is likely taking market share. Once this readjustment in the stock plays out, we believe that COST will begin to look appealing to investors again.
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Posted on Thursday, March 04, 2021 - 7:01 pm:   Insert Quote Edit Post Delete Post Print Post

Ciena dials up a welcome surprise with earnings/guidance; 2H rebound looks on schedule (CIEN)
Updated: 04-Mar-21 13:43 ET
Ciena (CIEN -1%) dialed up a strong Q1 (Jan) earnings report this morning. The telecom and networking equipment giant has been pretty hit-or-miss around earnings, but today's report was quite encouraging.

The quarter's EPS upside was a bit of a surprise because while the pandemic and working from home has increased demand for bandwidth amid growing network traffic, Ciena has not been a primary beneficiary of that shift. Its service provider customers are generally risk-adverse in terms of spending on equipment these days. Instead, they are running their current networks "hotter" and focusing more on access points as opposed to the metro and the core, which are Ciena's bread-and-butter.
Coming into this quarter, Ciena had reported an EPS miss in two of the past five quarters, including a $0.03 miss in Q4 (Oct). As such, the $0.07 EPS beat this quarter was a pleasant surprise. Ciena does not guide for EPS, so seeing where EPS ends up is always a bit of an adventure.
What stands out even more is the in-line revenue guidance for Q2 (Apr) at $810-840 mln. CIEN had guided revenue below consensus in each of the past four quarters, so in-line guidance is music to investors' ears.
Last quarter, Ciena's view was that the pandemic would hurt orders in the first half of FY21 but that Ciena's pipeline of new activity would kick in the second half of the fiscal year because secular demand for things like 5G needs network infrastructure to be successful. Our thought heading into this report was that we were just hoping Ciena would not kick the can further down the road in terms of the recovery. It turns out that Ciena was pretty bullish, to our surprise.
The company conceded that it still saw Tier 1 service providers, primarily in North America, remain financially cautious. However, Ciena also said it's seeing encouraging early signs of improvement. In fact, orders in Q1 slightly exceeded revenue for the first time since 1H20. These trends are giving Ciena increased confidence for a strong second half performance this year. Ciena also remains very confident in its competitive position, and it continues to take share.
In sum, we were holding our breath coming into this report. Ciena previously laid out a plan for a rough Q1-Q2 to be followed by a big rebound in Q3-Q4. We are relieved that this trajectory remains in place, and Ciena's bullish comments strengthens our confidence in this outlook. Investors must be frustrated that Ciena has not benefited more from the pandemic-fueled acceleration in bandwidth consumption. However, Ciena's day will come. While many customers are running their networks hotter right now, these networks will eventually need to be augmented with additional capacity to maintain performance, especially as 5G ramps up.
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Posted on Thursday, March 04, 2021 - 7:00 pm:   Insert Quote Edit Post Delete Post Print Post

Marvell under fire as supply chain woes add another element to tech stock sell-off (MRVL)
Updated: 04-Mar-21 14:20 ET
The robust demand seen across the semiconductor industry has recently produced exceptionally strong quarterly reports from companies across the space. For instance, in late January, Marvell (MRVL) competitor Advanced Micro Devices (AMD) issued 4Q20 results that easily surpassed expectations and provided FY21 revenue guidance that crushed the consensus estimate.

The issue, though, is that the strong growth currently experienced in several semiconductor end markets (cloud computing, automotive, PCs, gaming) is already factored in to the stock performance for most companies. To illustrate the point, since factories and plants began reopening late last spring, shares of MRVL have soared by ~60%, while AMD and Broadcom (AVGO) have gained roughly 50% and 70%, respectively.

This scenario presented a difficult set-up ahead of MRVL's 4Q21 report last night, especially as investors have cooled on technology stocks as interest rate concerns flare up. To reignite the bullish momentum, MRVL needed an impressive quarterly performance that exceeded lofty expectations, while easing fears about the highly-publicized supply constraints facing semiconductor producers.

Although the results reflect the healthy business climate, MRVL fell short on both accounts.

In an environment in which the vast majority of semiconductor companies are blowing out expectations, MRVL's inline EPS of $0.29 is viewed as a disappointment. To be fair, the company doesn't have a track record of blowing out expectations, but the lack of upside is noticeable in the current climate.

The good news is, demand for its chips remains brisk, particularly in the 5G and automotive end markets. To put the strength into perspective, revenue more than doubled in these verticals and account for over 25% of FY21 revenue.

Looking ahead, MRVL is very optimistic about its prospects in its automotive business. During the quarter, the company secured multiple Ethernet design wins for model year 2021 vehicles. This momentum is expected to continue with CEO Matt Murphy predicting that FY22 will be a "breakout year" for the business.

Investors, however, aren't sharing in the enthusiasm, instead focusing on MRVL's cautious guidance and concerning commentary regarding the ongoing supply constraints. The mid-point of its 1Q22 EPS guidance ($0.27) is merely inline with expectations, while the company provided a very wide-ranging revenue outlook of $760-$840 mln vs. the $786.3 mln forecast.

It's not surprising that MRVL continues to be impacted by supply chain issues. The disruptions have been highlighted by many semiconductor suppliers, including AMD, AVGO, and NVIDIA (NVDA). What's troubling, though, is that MRVL anticipates the supply gap to persist at least through FY22, while noting that lead times have extended.

The bottom line is that MRVL is facing a mixed picture and that the company is struggling to meet its growth potential due to ongoing supply chain issues. That is not an ideal situation in the current stock market landscape as technology and growth names come under increasing pressure.
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Posted on Thursday, March 04, 2021 - 7:00 pm:   Insert Quote Edit Post Delete Post Print Post

Okta not looking very OK today on lackluster guidance and pricey acquisition (OKTA)
Updated: 04-Mar-21 11:22 ET
Okta (OKTA -3%) is not looking very OK today. The stock is lower although the company reported a sizable earnings beat for Q4 (Jan). Analysts had expected a small loss, but Okta surprised with a $0.06 profit and strong revenue upside. However, the company's guidance and its announcement of a major acquisition have provided Okta investors with more to scrutinize today.

As a cybersecurity company focusing on identity management, Okta has surely benefited from the shift to remote working/learning as thousands of companies have had to adapt quickly to new work procedures and environments, seeking solutions to allow employees to easily connect and collaborate with colleagues. Additionally, as web and app traffic surged, companies have needed to modernize and strengthen their security and identity postures.

So, why is the stock lower?

For both Q1 (Apr) and FY21, Okta is guiding to a much larger loss than had been expected. The main reason for the full year shortfall is that Okta plans to spend money to scale its business, including increased head count in sales, especially internationally, and across R&D to drive innovation. We think scaling for growth makes sense, but there will be a near-term impact on margins and EPS.
Investors should be aware that Okta tends to low ball guidance, so the larger losses are less likely to be realized, in our view. What concerns us more is that revenue guidance for both periods is basically in-line, whereas Okta usually provides upside guidance. Perhaps it is just being conservative.
Okta furthermore announced that it will acquire Auth0, which also provides identity security. We like the pairing because Auth0 brings a more developer-centric approach to the market. Auth0 should get to $200 mln in ARR in FY22, representing growth of over 50%. Also, like Okta, Auth0 has a highly recurring revenue stream that is very loyal. Auth0 will add thousands of customers, many of them are developers, and hundreds of millions of users. The deal also increases Okta's international footprint.
We like the Auth0 deal as a good fit, but the $6.5 bln price tag is hefty at 32x ARR. Perhaps even more troubling is that it's an all-stock transaction. It makes sense for Okta to use its lofty stock price as currency, but using stock also has a dilutive effect. Plus, it's a signal that Okta management feels its stock price is pretty fully valued.
In sum, this was another great quarter for Okta and another example that the pandemic has been great for its business given the upsurge in people logging on remotely. However, the guidance makes it clear that Okta's near-term priority is not profits, but rather on scaling its business, so investors will need to be patient. Finally, the Auth0 deal makes sense strategically, but the hefty price tag and all-stock component are weighing on investors' minds today.
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Posted on Thursday, March 04, 2021 - 6:59 pm:   Insert Quote Edit Post Delete Post Print Post

Disney making it "A Small World After All" by ramping up digital transformation (DIS)
Updated: 04-Mar-21 11:20 ET
The pandemic, and its forceful effect on consumer behavior, has extensively altered business strategies, capital investment plans, and workforce numbers and responsibilities for companies across the world. Few companies, though, are undergoing a more profound transformation than entertainment and media icon Walt Disney (DIS).

It can be argued that DIS's evolution began before the pandemic even struck when the company launched the ultra-successful Disney+ streaming service on November 12, 2019. The awe-inspiring growth of Disney+, which has accumulated nearly 100 mln subscribers since its debut, set the stage for the company's broader direct-to-consumer (DTC) transition.

By elevating the prominence of its streaming services (Disney+, Hulu, ESPN+), DIS is aiming to counteract any lasting changes and damage that the pandemic inflicted on its theme parks and studio businesses. The results so far have been better than DIS imagined, as DTC revenue surged by 73% in 1Q21 to $3.5 bln, generating an operating loss of $(466) mln. Originally, the company anticipated that the segment would post an operating loss of around $(1.2) bln.

With the Media and Entertainment division making huge strides in its digital transition, DIS is now upping the ante by putting its Parks, Experiences, and Products segment under the microscope. In particular, CNBC reported last night that DIS plans to close 20% of its brick-and-mortar stores while bolstering its eCommerce capabilities.

After witnessing the massive eCommerce growth recently achieved by retail giants like Target (TGT) and Walmart (WMT), it's hard to argue with DIS's logic. However, there is an experiential component to DIS's retail shops that creates excitement for its content, its characters, and ultimately, its parks and experiences. This intangible asset will be very difficult to replicate on a mobile device.

DIS is making a bet that the ongoing shift to digital shopping, combined with the savings generated from shuttering stores, will more than offset the value generated by its emotion-tugging stores. The company didn't provide any financial details or projections revolving around this move, but with consumer product sales up only 2% in 1Q21, the bar to hurdle is pretty low.

Given the powerful secular trend towards eCommerce, it seems like a slam dunk decision for DIS to ramp up its digital channel. The strategy will likely pay off in the long run, but it's not without some uncertainty. In addition to stamping out some of its "Disney magic" by closing physical stores, its decision to focus more on adult apparel collections and high-priced home products and collectibles isn't without risk. This decision likely stems from the surging popularity in new content such as "The Mandalorian", but it remains to be seen whether that strong viewing interest will translate into significantly higher product sales to adults.

Like a sudden drop on "Space Mountain", the pace of change at DIS has been breathtaking. So far, investors have really enjoyed the ride, as its DTC conversion has progressed exceedingly well. The move to a more eCommerce-centric retail model represents the next step in DIS's digital transformation, but the approach does carry some risk.
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Posted on Wednesday, March 03, 2021 - 6:52 pm:   Insert Quote Edit Post Delete Post Print Post

Lyft riding higher as update points to possible U-turn ahead for rideshare business (59.17 +2.11)

When Lyft (LYFT) reported 4Q20 results on February 9, CEO and Co-Founder Logan Green characterized the ridesharing company as a "tightly coiled spring" that's poised to generate strong growth and margin expansion. After the company raised its 1Q21 adjusted EBITDA guidance last night, it appears that the spring is about to be sprung as more business restrictions are lifted and as vaccines are distributed.

LYFT now believes it can manage its 1Q21 adjusted EBITDA loss to $135 mln vs. its prior outlook of $145-150 mln. While aggressive cost cutting measures are the main driver behind the improved profitability, we believe that the encouraging trends in the rideshare market are carrying more weight with investors. Underscoring that premise, we note that shares of Uber (UBER) are also rallying on LYFT's update.

The recovery occurring in the rideshare market has been subtle and gradual but also meaningful and potentially foretelling of a stronger upturn in the near future.

Momentum began building in February; ridership in the last week of the month hit the highest level since March 2020. What's especially promising is that average daily rideshare for the entire month was up 4% compared to January, despite the fact that severe weather ravaged several states, including Texas, during the month.

LYFT expects this push to continue, predicting that rideshare volume beginning the week ending March 21, 2021 will show positive yr/yr growth. Also, LYFT's expectation for this growth trend to continue throughout the remainder of the year suggests that the rideshare market may have just reached a key turning point.

The "tightly coiled spring" then comes into play because LYFT is emerging from the pandemic as a much leaner company. In Q4, the company cut fixed costs by $360 mln on an annualized basis, with an emphasis on lowering driver acquisition costs. Furthermore, LYFT slashed operating expenses by over $200 mln, with declines seen across sales and marketing, operations and support, and R&D.

As rideshare demand picks up steam, margins are set to expand considerably due to the lower cost structure. In turn, adjusted EBITDA profitability by the end of this year seems very attainable. In fact, during the Q4 earnings call, CFO Brian Roberts commented that profitability on an adjusted EBITDA basis may be possible in Q3 if the rideshare market experiences a robust recovery during the summer.

LYFT's update and improved outlook has the feel of a prime event in its recovery journey. Business conditions are still far from optimal, but there's a sense that the tipping point is near. Barring an unforeseen setback with vaccines or the economy, LYFT is on the verge of a major financial turnaround due to the combination of cost cuts and improving rideshare demand.
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Posted on Tuesday, March 02, 2021 - 8:38 pm:   Insert Quote Edit Post Delete Post Print Post

C3 (AI) -12% reported underwhelming results given the 50x sales multiple. C3 reported revenue modestly above estimates, growing 19%, but missed billings estimates as the company goes after shorter term contracts. Its hard to justify 50x sales when billings miss and revenue growth is less than 20%. The company guided Q4 revenue modestly above estimates with a slightly larger than expected net loss. The company is diversifying its business away from the energy sector (38% mix down from 59% last year) and remains poised to accelerate growth but the multiple was too rich. Recall, I loved this stock heading into the IPO, but I sold for a quick gain in December as the multiple became excessive relative to the financial performance. Throwing valuation aside, this looks like a good potential entry while the stock retests the low end of its range near $100/share. This stock may not get much cheaper, but I would like to at least wait for a flush under $100 before getting back in.
Zoom (ZM) +7% reported another massive beat and raise report, as expected. Cash flow increased 10x yr/yr to $399M. While this may be the last real blowout before comps become difficult, a return to "normal" in 2021 won't include everyone returning to the office everyday or going on as many busines trips. As a result, the Zoom phenomenon of 2020 isn't going anywhere. The stock is not cheap but I would view a pullback in to the $415-425 area as a buying opportunity this morning.
3D systems (DDD) -7% appear to be vulnerable after the company reported Q4 results in-line with its upside preannouncement last night. The company identified material weakness in its financial reporting and delayed its 10-K filling. Mgmt also didn't provide any guidance other than a gross margin forecast, which was toward the low end of expectations. Commentary or guidance on the top line will be critical to the stock this morning; unclear whether they will provide any more guidance on the call underway... The stock needs to hold the ~$35 support level and appears vulnerable without some incrementally positive news after its recent rally.
Roku (ROKU) +1% is acquiring Nielsen's Advanced Video Advertising (AVA) business, which includes Nielsen's video automatic content recognition (ACR) and dynamic ad insertion (DAI) technologies. "The acquisition will accelerate Roku's launch of an end-to-end DAI solution with TV programmers. In addition, Nielsen and Roku will enter into a strategic partnership to integrate complementary Nielsen ad and content measurement products into the Roku platform and further advance Nielsen ONE, the company's cross-media measurement solution." The deal may not provide much of a lift near term, but it seems to expand Roku's TAM by allowing it to eventually sell targeted advertising on linear TV, not just in streaming. This seems like a fairly significant deal for Roku, which is further leveraging its already strong position as the leading smart TV operating system to become an even stronger player in the high margin advertising business (where it makes all its money). A focus on the $1B equity offering (dilution!) misses the point, in my view. Much like TWLO, ROKU is focused on scaling its business as large as possible over the long term (not near term profitability). While the +$50B valuation at 20x sales is increasingly rich, ROKU and TTD are the best ways to play streaming along with NFLX or now DIS.
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Posted on Tuesday, March 02, 2021 - 8:37 pm:   Insert Quote Edit Post Delete Post Print Post

Target hits the bullseye in Q4 as performance points to additional market share gains (191.13 +5.04)

Coming off back-to-back blowout quarterly reports, Target (TGT) once again exceeded expectations in 4Q20 as robust holiday eCommerce sales provided the impetus for strong performance. The magnitude of the EPS upside wasn't nearly as substantial this quarter ($0.13 beat) compared to the last two (average of $1.45), indicating that analysts' estimates are catching up to TGT's momentum. However, the results still tell a bullish and familiar story, characterized by market share gains and the company's ability to capitalize on its digital and same-day service capabilities.

For the quarter, comparable sales increased by 20.5%, topping the 17.5% forecast, fueled by a 118% surge in digital sales. While impressive on an absolute basis, what especially stands out is TGT's outperformance relative to rival Walmart (WMT). When WMT issued 4Q20 results on February 18, it reported an 8.6% increase in U.S. comparable sales as its eCommerce channel generated 79% growth.

This divergence in growth is an ongoing matter. In 3Q20, TGT's comparable sales growth outpaced WMT's by about fourteen percentage points. The numbers clearly suggest that TGT is taking market share from WMT, which is a concept that TGT CEO Brian Cornell embraces.

In this morning's earnings press release, he put a figure on those gains, stating that the company gained nearly $9 bln in market share in 2020. At the core of TGT's market expansion is its multi-category product assortment and shopping experience that is resonating well with customers.

For example, the company recently announced partnerships with Disney (DIS), Ulta Beauty (ULTA), Levi Strauss (LEVI), and, most recently, Apple (AAPL), to significantly bolster its portfolio of national brands. Enhancements to its product offering, along with strength in TGT's private brands, is driving market share across all five of its core merchandising categories.

Additionally, the added convenience of TGT's same-day services is creating another competitive advantage within the retail space. In Q4, growth for same-day deliveries and store pick-up was spectacular at 212%, accelerating from last quarter's 193% jump.

As strong as TGT's results were, there are a couple blemishes worth noting.

While this may be construed as nit-picking, in-store comparable sales slid to 6.9% from 9.9% in Q3. That's still very respectable, but it plays into one of the primary concerns facing TGT this year: digital sales growth will likely taper off in the coming months due to vaccine rollouts. With the company already facing increasingly difficult yr/yr comparisons, the slowdown for in-store comparable sales and the anticipated deceleration in digital sales will produce much slower growth ahead.

On a related note, TGT once again opted against providing specific EPS or revenue guidance. The company isn't alone in this regard, joining Home Depot (HD) and Lowe's (LOW) in opting to withhold guidance. The issue, though, is that it creates doubt and uncertainty, leaving the door open for investors and analysts to make erroneous assumptions. On the positive side, TGT is instilling some confidence by reinstating its share buyback program, which currently has $4.5 bln of remaining capacity.

TGT turned in another very solid quarterly result, defined by further market share gains and triple-digit digital sales growth. Although a slowdown in growth is inevitable this year, the primary story for TGT continues to revolve around its breakaway performance against its main rival, WMT.
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Posted on Tuesday, March 02, 2021 - 8:37 pm:   Insert Quote Edit Post Delete Post Print Post

Zoom Video is zooming modestly higher today on large beat and guidance (417.39 +7.73)

Zoom Video (ZM +2%) is going zoom zoom today after reporting a significant beat-and-raise last night. As the provider of a cloud-based video-conferencing platform, Zoom Video has been one of the most direct beneficiaries of the shift to remote working, learning, etc. during the COVID-19 pandemic; in Q4 (Jan), the strength of its recent positioning was once again evident in its financials. Beyond the headline EPS and revenue numbers, Zoom's operating metrics were also impressive.

Last quarter the stock pulled back on a strong beat-and-raise, but this time the stock is trading modestly higher. So, why is Q4 different?

For one thing, the $0.43 upside was huge, nearly double the $0.23 upside last quarter and more in-line with the massive early-pandemic beats we saw, which included $0.47 upside in Q2. Revenue achieved big upside as well. Zoom is in that rarefied air where its earnings need to be perfect, so perhaps a modest beat is not going to cut it.
A concern we had going into this earnings report was the guidance. About half of Q1 (Apr) will be lapping the huge growth of the early pandemic days. However, Zoom guided sharply above consensus for EPS and revs.
A sequential increase in margins was great to see. This was a trouble area last quarter when margins took a hit because Zoom was adding a lot of free users. The hope is that those customers will convert into paying customers down the road, but such is never a certainty. Non-GAAP gross margin was down yr/yr, but at 71.3%, it was an improvement from 68.2% in Q3. Zoom expects gross margin to remain around 70% as long as it supports free K-12 education.
Non-GAAP operating margin also rebounded to 40.9% in Q4, a large improvement from 20.4% in Q4 last year and a decent uptick from 37.4% in Q3.
Looking ahead, investors have gotten spoiled with Zoom's monster growth rates this year. However, the yr/yr comparisons will get a lot tougher when Zoom starts to lap the start of the pandemic in Q1 (Apr) and beyond. It faces a double whammy of lapping last year's huge growth while, at the same time, encountering vaccine rollouts and related economic re-opening, which should lessen the need for video conferencing.

The counterargument is that the pandemic could perhaps foster long-term structural changes in terms of remote work and moving from urban environments, which would continue to drive demand for Zoom's services. We think this is a valid argument, and Zoom should continue to see strong growth, especially with so many consumers having tried and liked Zoom. However, tougher comparisons and a rotation by investors into re-opening plays could present challenges for a high multiple stock like Zoom.
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Posted on Tuesday, March 02, 2021 - 8:36 pm:   Insert Quote Edit Post Delete Post Print Post

AutoZone in the zone as stimulus dollars and harsh winter weather boost results (1188.71 +17.31)

AutoZone (AZO +2%) is in the zone today after reporting strong upside results for Q2 (Feb) this morning. Stimulus dollars plus harsh winter weather that finally arrived in February helped to drive a surge in comps.

What jumps off the screen are the robust same store comps of +15.2%. This was a noticeable acceleration from +12.3% comps in Q1, though still a good bit below the record Q4 comps of +21.8%.
We were nervous about the Q2 comps given the downward cadence of comps observed during Q1: +16.5% in the first four weeks, followed by +11.4%, and ending +8.8% in the last four weeks. Thus, the quarter's +15.2% comps represented a welcome rebound. Granted, AZO was lapping a mild winter last year (cars tend to break down more during harsh winters), but this was still a great result, and it bodes well for upcoming Q1 comp results for others in this space, including AAP and ORLY.
We cover a lot of earnings reports from automotive part retailers. Something we have noticed is that these companies are among the most vocal about being big beneficiaries from pandemic stimulus dollars. AZO says it saw a noticeable uptick in sales when the $600 checks started going out in January. While that amount was smaller in size than the April 2020 disbursements, AZO's business picked up nicely nevertheless, and sales remained elevated throughout the remainder of the quarter.
Most of the country performed well for AZO in Q2, with the Midwest and Northeastern markets underperforming the others. The separation was likely due to the lingering effects of a mild winter last year and colder weather happening later this winter. However, winter pounded the upper US this year, and the performance gap closed.
So, why is the stock not trading higher? At the risk of sounding like we're nitpicking, we think it may be that the EPS upside in Q2 was not as robust as the company's beats in recent quarters. Also, Advance Auto Parts (AAP) and O'Reilly Automotive (ORLY) both reported solid numbers last month, so perhaps this performance was priced in already.

In sum, despite the tepid stock reaction, this was a good quarter for AZO. Also, a key takeaway here is that if AZO could get this big of a boost from $600 stimulus checks, imagine what $1,400 might do for comps in the coming months. Also, winter started slowly this year but packed a wallop in February with cold and snow. All of these factors point to potential for robust comps in Q1 for AAP and ORLY and in Q3 (May) for AZO.
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Posted on Tuesday, March 02, 2021 - 8:36 pm:   Insert Quote Edit Post Delete Post Print Post

Square's financial service offerings rounding into shape after its industrial bank officially launches (255.14 +14.19)

Fueled by the rampant success of its digital payment platform, Cash App, Square (SQ) has been on an extraordinary role. Since this time last year, its stock has skyrocketed by nearly 230% as the company's top-line growth rate has exploded into triple digit territory. Today, shares are once again on the move higher following SQ's announcement that its industrial bank, Square Financial Services, has officially begun operations. This development adds another layer to the company's growth prospects, thereby, enticing a new wave of buying from investors.

Initially, this news may seem a little confusing because SQ already has a financial services branch called "Square Capital" which provides loans to small business owners. However, the loans originated through Square Capital are funded by third party lenders. While this approach limits SQ's balance sheet risk, it also reduces its income generating potential since it doesn't collect interest payments.

With the approval from the FDIC and the Utah Department of Financial Institutions, SQ is now legally authorized to act as a bank, providing business loans and deposit products. The company's plan is to make Square Financial Services the primary lender for U.S businesses, essentially replacing Square Capital.

Investors shouldn't anticipate an immediate windfall, though.

While SQ's popular Cash App and its ability to facilitate Bitcoin transactions has produced remarkable growth, the company's seller ecosystem continues to be hamstrung by the pandemic. In Q4, gross profit in the seller ecosystem was up a rather modest 13% as brick-and-mortar stores and restaurants grapple with ongoing restrictions and capacity limitations. Consequently, SQ has significantly pulled back on offering new loans through Square Capital. In fact, loans facilitated in Q4 plunged by 62% yr/yr.

As local economies continue to reopen and as a sense of normalcy returns, SQ's business lending activity will likely pick up. However, the pace of acceleration may be very gradual since the company doesn't expect Square Financial Services to have a material impact on total revenue, gross profit, or Adjusted EBITDA in 2021.

In the meantime, momentum for Cash App continues to build while SQ's Bitcoin investments also pay hefty dividends. Any additional growth that the new bank provides this year will be icing on the cake. Looking beyond FY21, SQ now has another potent growth catalyst in its arsenal.
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Posted on Monday, March 01, 2021 - 2:49 pm:   Insert Quote Edit Post Delete Post Print Post

MIDD Middleby provides a window into restaurant spending and checkbooks are opening up (153.54 +7.13)

Middleby (MIDD +5%) is not a name we normally profile. However, it's a huge player in the commercial foodservice equipment space, having recorded $2.5 bln in 2020 sales. As such, we like to check in on it from time to time to get a sense of how the restaurant industry is faring generally. Its Q4 earnings report this morning was very encouraging and bodes well for 2021.

Middleby reported a solid EPS beat, and while its revenue declined yr/yr, trends overall point to a gradual comeback for the restaurant industry. Revenue fell 7.4% yr/yr in Q4, but that was a noticeable improvement from -12.4% in Q3 and -38% in Q2.

In Commercial Foodservice, orders have consistently improved since the pandemic started. What's notable is that restaurants have been getting more proficient with delivery, carry out, drive-through, and curbside pickup service. Many chain restaurants that had fluid processes in place pre-pandemic have explored ways to shorten wait times and reduce labor needs. Consumer demand has proven resilient, and that has spurred restaurants to spend.
MIDD is also benefiting from indoor dining consistently opening up across the country. There is pent-up demand for indoor dining, and this is benefiting MIDD's casual dining customers and leading them to open their checkbooks.
MIDD primarily focuses on the commercial side, but it also has a sizable residential segment. Its residential business has helped to offset declines on the commercial side. MIDD has been benefiting from favorable conditions in the housing market, which has seen an increase in remodels and kitchen upgrades due to more time spent in the home.
MIDD's smaller Food Processing segment also performed well. MIDD has been looking to increase its presence in fast-growing segments, such as cured meats and alternative protein.
Bottom line, it looks like restaurants are spending again. After going into survival mode in Q2 and early Q3, restaurants are starting to invest again to speed up drive-thru and curbside service and to prepare for what likely will be huge pent-up demand once vaccines get rolled out on a wide scale. Also, MIDD's residential business has been robust thanks to the housing boom and remodels. These contributions showcase why it's important for companies to diversify across different customer verticals.

While Middleby is not a name widely followed by most retail investors, it's worth a look as a way to play an improving restaurant landscape in 2021. Rather than hitting or missing on a particular restaurant chain, Middleby works as a vehicle to get exposure to the restaurant turnaround generally. Also, MIDD will be lapping some very easy comps in Q2-Q3, so it could be posting some big growth numbers soon.
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Posted on Monday, March 01, 2021 - 2:49 pm:   Insert Quote Edit Post Delete Post Print Post

JNJ Johnson & Johnson injects dose of optimism into market as FDA approves vaccine on emergency use basis (160.20 +1.74)

Johnson & Johnson (JNJ) is providing the market with a booster shot after the FDA granted Emergency Use Authorization (EUA) for the company's COVID-19 vaccine, which is being produced by its Janssen Pharmaceuticals subsidiary. Along with Pfizer (PFE) and Moderna (MRNA), JNJ becomes the third company to gain a COVID-19 vaccine approval for use in the U.S. The addition of JNJ to the mix should significantly accelerate the pace of vaccinations, especially since it's a single-shot vaccine compared to the two-dose regimens from PFE and MRNA.

At first glance, JNJ's vaccine doesn't seem to stack up to PFE's and MRNA's. Back in late January, JNJ reported that its shot was only 66% effective in preventing COVID-19 compared to around 95% for PFE's and MRNA's injections.

However, that statistic doesn't paint the entire picture. What's most encouraging about the JNJ data is that overall efficacy for severe disease across all regions studied was very high at 85%. This includes South Africa, where a new, more contagious strain of the virus has emerged.

Combined with positive safety data, the vaccine's strong protection against severe cases was the likely impetus for the unanimous approval from the FDA's advisory committee.

Furthermore, the known efficacy rate against the new strain provides JNJ with an important competitive advantage. PFE and its partner BioNTech (BNTX) recently disclosed that they are in discussions with the FDA and EMA regarding potential clinical studies to evaluate a variant-specific vaccine. As the timeline for any additional trials remains unclear, the PFE/BNTX team will have some ground to make up here.

Overall, though, PFE and MRNA have already vaccinated around 15% of the U.S. population. With only 4 mln doses currently available, JNJ will fall further behind the lead. The good news, though, is that the company plans to have 20 mln doses ready to go by the end of March, enabling an acceleration of the inoculation rate. By the end of June, JNJ expects to complete its full commitment of 100 mln doses to the U.S. government.

It's important to note that JNJ's vaccine is "not for profit", unlike the vaccines from PFE and MRNA. Still, the vaccine represents a meaningful catalyst for JNJ's top line in FY21 and FY22. The company has exceeded analysts' revenue estimates for four straight quarters. and the vaccine approval should help JNJ keep that upside streak alive.

With the approval of JNJ's vaccine, the road to normalization and to a full economic recovery has been shortened. From a company-specific perspective, JNJ's ability to quickly branch out into vaccine development and rapidly produce an effective treatment is a testament to its versatility and scientific aptitude.
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Posted on Monday, March 01, 2021 - 2:45 pm:   Insert Quote Edit Post Delete Post Print Post

CDLX Cardlytics charges higher despite mixed results; 2021 outlook and Dosh deal both look promising (140.55 +8.12)

Cardlytics (CDLX +6%) may be surprising investors today by being up so sharply despite reporting what looks to be a mixed Q4 report with no specific guidance. CDLX reported a loss in Q4, but it was $0.02 larger than expected. The good news is that revenue was above analyst expectations, although it still declined on a yr/yr basis.

Cardlytics operates an advertising platform wherein it partners with banks to run their rewards programs, and it in turn receives data on how consumers spend their money, which it then analyzes and sells to marketers. Not surprisingly, CDLX's business has been hurt hard by a reduction in consumer spending and credit card usage due to retailers and restaurants (CDLX's primary verticals) operating on a limited basis in response to the COVID-19 pandemic.

So, why is the stock higher? We think encouraging comments from CDLX during its earnings call are providing a boost:

Q4 billings from restaurant clients more than doubled sequentially from Q3. Importantly, 12 of the top 15 US restaurant chains were live on CDLX's platform in Q4. Furthermore, it's also notable that US billings returned to pre-COVID levels in Q4 and were essentially flat with 4Q19.
In the retail category, CDLX was able to secure additional budgets from key advertisers in Q4. This not only drove additional Q4 billings but positioned CDLX for larger annual budgets in 2021. Cardlytics also worked with one of the largest businesses in the US to help it launch a new membership subscription service.
CDLX sounded pretty bullish on 2021, saying that it believes recent momentum will continue throughout 2021, reflecting the continued gradual recovery in consumer spending.
In addition to responding to the company's earnings, investors may also be excited by Cardlytics' announcement that it will acquire Dosh, which operates a consumer app that provides cash back for millions of consumers from thousands of merchants. CDLX is paying $275 mln in cash and stock. In the past year, Dosh expanded into banks and fintech companies (Venmo, Betterment, Ellevest). CDLX benefits because Dosh brings new banking partnerships, and CDLX should be able to leverage its current banking relationships to drive Dosh's growth. Dosh's platform will also give CDLX access to smaller and medium-sized advertisers and expand its exposure to advertisers in the travel industry.

Overall, our sense is that investors are happy that Q4 results were decent — it could have been much worse. CDLX is highly tied to consumer spending and advertising budgets. After taking a hit in 2020, CDLX looks positioned to be an attractive economic re-opening play in 2021 as restaurants and retailers open back up. Also, this Dosh acquisition seems like a good fit that should provide notable expansion opportunities both for CDLX and for Dosh.
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Posted on Monday, March 01, 2021 - 2:44 pm:   Insert Quote Edit Post Delete Post Print Post

Stratasys molding a winning formula with strategy to focus on manufacturing applications (38.20 +3.71)

Stratasys (SSYS), which was a high-flyer during the 3D-printing phenomenon several years ago, is making a notable comeback after falling off many investors' radar screens. The company, along with competitors 3D Systems (DDD) and voxeljet (VJET), never truly lived up to the hype adorned on them when 3D printing burst onto the public scene about a decade ago. At that time, the possibilities seemed endless for 3D printing as the companies and their investors envisioned everything from toys, to packaging, to aircraft parts being produced by the equipment.

Looking back, this grandiose view may have been a main stumbling block for the industry because it clouded the ability to identify the best target markets for the technology. Based on SSYS's solid beat-and-raise quarterly report, it seems that the company is finally finding the right home for its business.

Specifically, last August, SSYS shared its new strategy with investors, stating that the company will hone in on the fastest-growing manufacturing applications. Meanwhile, prototyping applications, which have lower utilization rates, according to SSYS, will move to the back-burner.

The shift in the company's go-to-market strategy is significant because only ~25% of its FY20 revenue was derived from manufacturing solutions. However, the potential rewards are also substantial since manufacturing represents a much larger addressable market than prototyping. Additionally, manufacturing customers generate more recurring revenue from consumables, resulting in a higher-value opportunity.

SSYS's $100 mln acquisition of Origin last December served as a major step in this transition. In particular, Origin's proprietary "Programmable PhotoPolymerization" technology will bolster SYSS's production-oriented applications.

While SSYS is experiencing some initial success with its new strategy, the full impact will take some time to materialize. In fact, the company anticipates that Origin will be a more meaningful contributor next year and beyond, forecasting the acquisition to generate up to $200 mln in new annual business by 2025.

Simultaneously, the pandemic-induced economic headwinds that battered the company in FY20 should ease this year as vaccines become more accessible. Last year, factory shutdowns and office closures pressured sales of systems and consumables. With revenue increasing by 11% sequentially in Q4, the company sees early indications that pent-up demand is surfacing.

After fizzling out and becoming a mostly-forgotten busted growth stock, it's interesting and rather surprising to see SSYS reemerge. While SSYS may never live up to the sky-high expectations placed on it long ago, the company can successfully reinvent itself and produce improved financial results that recapture investors' attention. The company's 4Q20 strong report did just that, sparking renewed enthusiasm in the stock.

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