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Sonos, Tencent, Quest Diagnostics, Quidel and LabCorp highlighted as Zacks Bull and Bear of the Day
Read MoreHide Full Article
For Immediate Release
Chicago, IL – September 15, 2021 – Zacks Equity Research Shares of Sonos, Inc. (SONO - Free Report) as the Bull of the Day, Tencent Holdings Limited (TCEHY - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Quest Diagnostics Incorporated (DGX - Free Report) , Quidel Corporation (QDEL - Free Report) and Laboratory Corporation of America Holdings (LH - Free Report) .
Sonos is taking the world of digital speaker technology by storm, with a cutting-edge product line-up of luxury home audio systems. Sonos has become a household name in the past 18-months of economic lockdowns as consumer spending on 'smart' home upgrades takes off.
The pandemic tailwind continues to propel this audio innovator into profitable growth on soaring margins over the past 4 quarters, illustrating this company's operational superiority. Sonos's last year of financial results have blown past analysts' expectations and propelled its share price up an unprecedented 170%. Yet, I still see more room for SONO to run from here as conservatism keeps these shares below their intrinsic value.
Analysts have raised their EPS estimates and price targets alike on this premium wireless speaker business since its June quarter report last month, thrusting SONO into a Zacks Rank #1 (Strong Buy). The recent pullback from its post-earnings pop combined with fresh price hikes across its product lines (7.3% increase on average) has provided us with an excellent opportunity to jump into this internet of things (IoT) consumer device business.
The stock is being held up by a robust support level at SONO's 50-day moving average (represented by the blue line below) around $36 a share, representing its March support price. This should provide the stock with a springboard to bounce off. If $36 doesn't hold, I'll be looking to its 200-day at around $34.25, then $31 (support it hasn't been below in over 7 months).
Once the markets understand that consumers are more than willing to spend a measly 7.3% more (on average) for this brand's luxury audio devices, I expect to see this stock make another run higher.
The Business & Stock Performance
Sonos is "the world's leading sound experience brand," with a propensity for innovation in a space that has seen little change over the past couple of decades. The company's devices utilize the internet of things (IoT) to allow its customers to stream best-in-class acoustics in multiple rooms at once with spatially aware technology that adjusts for the ideal quality in the space you are listening in.
This growth-fueled consumer electronics business went public just over 3 years ago for a price of $15 a share with a $1.5 billion market (now trading around $36 and $4.5 billion, respectively) and was a market dog for years. It wasn't until the back half of the pandemic (late 2020) that Sonos really started making waves in this market.
Sonos is a consumer discretionary company with less financial visibility than subscription-based models (the gold standard in tech these days). This lack of long-term earnings visibility makes it much more difficult for analysts to accurately value a business like this, which typically leads to conservative estimates and potential undervaluation. The skyrocketing demand for Sonos products, management's ability to deliver incredible margins with consistent profitability, combined with a continually improving annual outlook, gave this apprehensive market enough reason to drive these shares to the stratosphere.
Since its September quarter (fiscal Q4) results hit the wire last November, SONO has more than doubled in value, with each subsequent report since sending fresh bullish capital into this audio innovator.
The Opportunity
The company outlined its still nascent market opportunity in its latest earnings presentation, stating that its total addressable market (TAM) is nearly $90 billion annually (as of last September). According to this presentation, it's only penetrated about 7% of its core "premium global home audio" end-market and has designs on extensive international growth that should grow this TAM.
The company is confidently targeting $2.25 billion in revenue for its full-year 2024 (ending in September 2024), which would represent a 32% improvement from management's projected 2021 results. Now, this doesn't sound like the rich growth narrative we are looking for, but Sonos's management team, led by Patrick Spence since 2012, has upwardly revised their conservative FY 2021 estimates following each of the past 3 reported quarters. I believe that this 2024 guidance is exceptionally conservative, and so do analysts who estimate the company will reach this goal a year prior.
The fact that there is still growing demand for Sonos's endless stream of innovative products as we exit the pandemic gives me confidence that the pandemic sales pull-forward won't catalyze significant deceleration in the coming quarters. This is something that is already playing out in the quarterly results of many other consumer tech players.
The company's global expansion is already proving to be a success. Its most recent quarter illustrated over 100% year-over-year growth in its Asian Pacific region and an annual sales increase within its Europe, Middle East, & Africa (EMEA) operations of more than 50%. International revenues now make up 41% of revenues compared to the 39% from the same quarter last year. I suspect that further global penetration will infuse growth into the nature of this business's operations.
SONO is trading at a 31x P/E, which seems high for a consumer discretionary business at first glance, but is primarily due to its recent turn to profitability. When factoring growth into this valuation multiple (aka its PEG), it is trading at 0.75x, coming in well below the consumer electronics industry average of 1.15x (any PEG multiple below 1x is generally seen as a value play, as long as growth is sustainable).
Final Thoughts
Sonos is competing in a highly competitive space, but it has achieved brand awareness in the premium home audio space that only Bose can rival (and it looks like Sonos is slowly but surely taking that market away from Bose). Sonos's dedication to quality and innovation should allow this firm to remain at the innovative forefront of this niche market. Its proven management team is unquestionably savvy enough to do so.
The tremendous rally that SONO has exhibited in the past year of trading reflects conservative estimates and unconvinced investors, who were all proven wrong by this IoT speaker company's skillful leadership team. The stock has been trading sideways for over 7 months now, and with estimates on the rise, this lack of upward impetus has compressed its valuation multiple and created a valuable opportunity for us.
5 out of 7 analysts are calling SONO a buy today with no selling ratings. The average price target on this stock sits at 43.67 with a bullish target of $51, representing upsides north of 20% & 40%, respectively, from where SONO is trading today. These shares and their 1.9x beta are subject to short-term volatility, but I like the valuation today as a long-term play in the consumer electronics space.
I am pitching Tencent, China's largest publicly traded enterprise out of China, as the bear of the day due to geopolitical risk. The significant and highly uncertain regulatory overhang coming out of Beijing has made Chinese tech an uninvestable class of public equities. Despite Tencent's unbelievably profitable growth acceleration that consistently impresses analysts quarter after quarter, the danger surrounding Xi Jinping's recent crackdown on tech has investors running for the hills.
The latest decree out of this increasingly authoritarian communist regime came from the National Press and Publication Administration restricting those under 18 years of age from playing online video games except for 3 predetermined hours per week, which sounds like something straight out of George Orwell's 1984. This business throttling ordinance almost looked to be a direct assault on TCEHY investors, with this gaming giant's operations being the most vulnerable to this new element of Beijing's autocratic control.
Analysts have been downwardly revising EPS estimates on TCEHY for the next few years as they price in the regulatory blows that Xi's increasingly autocratic regime will have on this digital powerhouse moving forward. Tencent has fallen to a Zacks Rank #5 (Strong Sell), and its stock is currently a falling knife that I would want to catch.
Bear Market For Chinese Tech
Hong Kong officially entered a bear market at the end of August as its innovation-powered Hang Seng Index experienced seemingly endless regulation catalyzed capitulation. Beijing has been busy releasing a flood of value-killing statutes that have brought Chinese tech stocks to their knees.
Minors will no longer be allowed to play their favorite video games from Monday thru Thursday and will only be permitted to game with their friends between 8 pm and 9 pm on Friday thru Sunday and public holidays (aka State determined holidays). According to Government officials, this move is an attempt to curb an apparent gaming epidemic amongst the country's youth to "effectively protect the physical and mental health of minors." In reality, the administration is likely just inhibiting the new normal of social interaction in a digitalizing world that the older generations fail to understand.
This ruling is nothing less than ruthless and is just one more element of control that the Party will now hold over its citizens in the world's second-largest economy. Minors will now be required to connect "anti-addiction" systems to their gaming devices. Game producers like Tencent will be prohibited from allowing individuals under 18 to play outside of the predetermined times. This punitive action should be a decision made by parents/guardians, not the State.
Tencent, the largest gaming company in China (over 50% market share), will be losing 10s of millions of daily users, but this didn't seem to shock investors. In early August, the digital gaming enterprise announced that it expected to see elevated regulation over the next couple of months. TCEHY is down 40% from its February highs, with the broader Hong Kong Exchange having lost 18% of its value over that same time frame. The endless flood of tech-focused controls can almost entirely explain both drop-offs.
Chinese legislators also recently approved one of the world's strictest data privacy laws, which would curb tech enterprises' ability to collect consumer data (a precious asset to these businesses). This was just another dagger to the already beaten-down tech sector in the region.
The new privacy laws will be put into place on November 1st and require businesses to collect minimum data, obtain consent for sensitive information, offer easy opt-out options, and direct government approval to transfer data overseas.
As I mentioned above, I wouldn't be trying to catch any of the falling knives in Chinese tech because we have no idea what Xi's end game is here. Whether it is to rid China of US investors, demonstrate to the private tech space who is really in charge, or maybe it is just Xi's administration attempting to match regulations used in countries abroad. The latter is doubtfully considering the 'convenient' timing of these various restrictions, but I still cling to the hope that Xi will eventually loosen his tyrannical grip.
How It Started & Where It Is Headed
Eccentric tech tycoon, Jack Ma, founder of Alibaba, seems to have catalyzed this endless flow of tech-focused regulation in China.
Xi's regime impeded Ma's fintech giant Ant Group's nearly half a trillion-dollar IPO last year. It wiped out more than $100 billion of its market value with a fresh regulatory overhaul aimed at Ant Group's unique micro-lending methods. This move by Chinese officials appeared to be in retaliation to Jack Ma's (founder and owner of the business) public criticism of the republic's financial system. Jack Ma's denouncement of China's economic practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of the masses to ostentatious billionaires like Ma.
Another 'timely' restriction came just 2 days after DiDi, the Uber of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost over $50 of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since these restrictive announcements became a systemic issue earlier this year.
The progressing Chinese communist regime seemingly headed towards capitalism is now reeling back towards what looks like a government-controlled autocratic economy.
That being said, it is not unusual for the Chinese stock market to see these 20%+ stock market sell-off in any given year. In the past decade, the Hang Seng Index has experienced an over 15% market downturn in all but 2 of those years, and entered a bear market (20%+ decline) in 4 of the last 6 years. The volatility that we are seeing in the Chinese market today is not unusual, but the mounting regulatory overhang causing this value deterioration is definitely unique to 2021. As I said, the unusual uncertainty here is what continues to compress Tencent and its cohorts' valuations.
Xi Jinping's rule is reversing decades of progress that China had been seemingly making towards a democratized international growth machine. I only hope that it doesn't turn into a full-on totalitarian nation.
Final Thoughts
There is nothing systemic about Tencent that I dislike. In fact, the business has a very healthy-looking balance sheet, accelerating profitable growth and rapidly expanding margins which appear attractive in the absence of the progressively authoritarian regime in Beijing. The geopolitical risk in the region is just too high for US investors today. The trade war between the US and China has me, and many other analysts concerned, that Beijing is attempting to rid its GDP growth powering tech giants of US investors by making these companies uninvestable.
If Xi's administration shows signs of backing off its crackdown on tech, I won't hesitate to buy up shares of Tencent and the rest of Chinese tech, for that matter, but as of now, I am staying clear.
Additional content:
3 Diagnostics Stocks in Focus on Delta Variant Mandate
Although the overall economic prospect for the second half of 2021 was originally bright on lower COVID-19 cases and improving market trends, the mutations of SARS-CoV-2 have led to an alarming rise in cases in recent weeks.
While uncertainties over the pace of economic recovery due to the resurgence of COVID-19 cases led to market volatility, the spike in infection rates has opened up opportunities for testing stocks.
Meanwhile, last week, the President released a mandate asking federal employees to ensure vaccination, and large and small private sector businesses to get their staff fully vaccinated and regularly tested. This certainly bodes well for diagnostic stocks.
Let us delve deeper.
Decline in Testing Demand in 1H21
When the pandemic first hit, demand for COVID-19 testing was at a peak which led diagnostic companies to witness a significant boost in testing revenues during 2020.
However, the story surrounding COVID-19 eventually changed since the beginning of 2021. The diagnostics companies experienced a "sudden" and fundamental drop in demand for COVID-19 testing, particularly for surveillance and screening with rapid testing. The changing testing landscape driven by a significant reduction in coronavirus cases and the rollout of vaccines across the globe led many diagnostics companies to witness a substantial drop in testing demand.
In line with this, Abbott Laboratories quantified the change – noting that in April, COVID-19 testing sales declined to $2.2 billion in the first quarter from $2.4 billion in the last-reported quarter. In June 2021, the company lowered its financial outlook for 2021 due to a "sharp and rapid" decline in demand for COVID-19 testing.
Furthermore, in June 2021, QIAGEN lowered its full-year 2021 outlook due to lower COVID-19 test demand. The company slashed its full-year 2021 outlook for net sales growth to at least 12% constant exchange rate (CER) compared to the prior guidance of about 18% to 20% CER.
Resurgence of COVID-19 Cases in 2H21
Per a report by Reuters, the United States is reporting more than 94,819 COVID-19 cases on a seven-day average, a five-fold increase between July-August 2021.
The Delta variant now accounts for more than 90% of known COVID-19 cases in the United States, according to the Centers for Disease Control and Prevention (CDC). The Delta variant is more infectious and effective at evading vaccines. Even in vaccinated individuals, the variant is highly contagious, which allows it to spread easily.
Although the economy is ravaged with the new strain of the virus, diagnostics stocks are starting to recover on higher demand for COVID-19 testing.
Diagnostics Stocks in Focus on Biden's Mandate
As stated earlier, President Joe Biden announced a new mandate on Sep 9 aimed at curtailing the surge in COVID-19 infections, which signals a sharp rise in testing. The President unveiled a series of steps to combat the surging pandemic, including the announcement of a forthcoming federal rule that all businesses with 100 or more employees have to ensure that every worker is either vaccinated for COVID-19 or will have to submit weekly coronavirus testing results.
The President's plan on the diagnostic side of the mandates calls for the government to work on ramping up test supply. Going by a Reuters report, QIAGEN has already shown support for this mandate. At the same time, Abbott stated that it is quickly working to scale up manufacturing of its BinaxNOW and ID NOW test kits and hire additional employees.
Going by the aforementioned discussion, diagnostics companies are expected to witness a sharp rise in testing demand over the coming months. Investors can choose to bet on the following stocks that have shown tremendous promise amid the pandemic and challenging market conditions. These stocks also possess considerable growth potential.
Our first pick is Quest Diagnostics recently raised its full-year projection significantly. The company noted that since its second-quarter earnings release on Jul 22, COVID-19 molecular testing volumes were stronger than anticipated through the end of August on the Delta variant spike. Revenues for 2021 are now expected in the range of $9.84 billion to $10.09 billion, up from the prior view of $9.54 billion to $9.79 billion.
The company also noted that it expects the Delta-driven surge to stay stronger than anticipated, with Quest Diagnostics now assuming average volumes of at least 40,000 molecular tests daily for the second half of the year versus the previous guidance of 20,000.
The stock currently carries a Zacks Rank #3 (Hold). Over the past three months, the stock has gained 20% against the industry's 24.3% decline.
Our next pick is Quidel Corp. In September 2021, Quidel announced that the company will make Quidel's non-prescription QuickVue At-Home OTC COVID-19 Test available to consumers at more than 7,000 CVS Pharmacy locations across the United States and online at cvs.com.
The company recently witnessed a surge in demand for the portfolio of Sofia SARS and QuickVue COVID-19 rapid antigen tests. Making rapid antigen tests available through CVS Pharmacy will help Quidel address customers' demand.
This Zacks Rank #3 company has gained 28.6% over the past three months compared with the industry's 2.4% rise.
Laboratory Corporation of America Holdings or LabCorp is our final pick. In terms of COVID-19 testing, till the end of the second quarter, LabCorp performed more than 50 million tests. In the second quarter, a steady decline in positive cases led to an overall drop in COVID-19 testing.
However, following the rise in demand later, the company announced expanded availability of its Pixel by Labcorp COVID-19 PCR Test Home Collection Kits at 6,000 Walgreens stores nationwide and through Walgreens' collaborations with on-demand delivery services like DoorDash and Instacart.
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Sonos, Tencent, Quest Diagnostics, Quidel and LabCorp highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – September 15, 2021 – Zacks Equity Research Shares of Sonos, Inc. (SONO - Free Report) as the Bull of the Day, Tencent Holdings Limited (TCEHY - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Quest Diagnostics Incorporated (DGX - Free Report) , Quidel Corporation (QDEL - Free Report) and Laboratory Corporation of America Holdings (LH - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Sonos is taking the world of digital speaker technology by storm, with a cutting-edge product line-up of luxury home audio systems. Sonos has become a household name in the past 18-months of economic lockdowns as consumer spending on 'smart' home upgrades takes off.
The pandemic tailwind continues to propel this audio innovator into profitable growth on soaring margins over the past 4 quarters, illustrating this company's operational superiority. Sonos's last year of financial results have blown past analysts' expectations and propelled its share price up an unprecedented 170%. Yet, I still see more room for SONO to run from here as conservatism keeps these shares below their intrinsic value.
Analysts have raised their EPS estimates and price targets alike on this premium wireless speaker business since its June quarter report last month, thrusting SONO into a Zacks Rank #1 (Strong Buy). The recent pullback from its post-earnings pop combined with fresh price hikes across its product lines (7.3% increase on average) has provided us with an excellent opportunity to jump into this internet of things (IoT) consumer device business.
The stock is being held up by a robust support level at SONO's 50-day moving average (represented by the blue line below) around $36 a share, representing its March support price. This should provide the stock with a springboard to bounce off. If $36 doesn't hold, I'll be looking to its 200-day at around $34.25, then $31 (support it hasn't been below in over 7 months).
Once the markets understand that consumers are more than willing to spend a measly 7.3% more (on average) for this brand's luxury audio devices, I expect to see this stock make another run higher.
The Business & Stock Performance
Sonos is "the world's leading sound experience brand," with a propensity for innovation in a space that has seen little change over the past couple of decades. The company's devices utilize the internet of things (IoT) to allow its customers to stream best-in-class acoustics in multiple rooms at once with spatially aware technology that adjusts for the ideal quality in the space you are listening in.
This growth-fueled consumer electronics business went public just over 3 years ago for a price of $15 a share with a $1.5 billion market (now trading around $36 and $4.5 billion, respectively) and was a market dog for years. It wasn't until the back half of the pandemic (late 2020) that Sonos really started making waves in this market.
Sonos is a consumer discretionary company with less financial visibility than subscription-based models (the gold standard in tech these days). This lack of long-term earnings visibility makes it much more difficult for analysts to accurately value a business like this, which typically leads to conservative estimates and potential undervaluation. The skyrocketing demand for Sonos products, management's ability to deliver incredible margins with consistent profitability, combined with a continually improving annual outlook, gave this apprehensive market enough reason to drive these shares to the stratosphere.
Since its September quarter (fiscal Q4) results hit the wire last November, SONO has more than doubled in value, with each subsequent report since sending fresh bullish capital into this audio innovator.
The Opportunity
The company outlined its still nascent market opportunity in its latest earnings presentation, stating that its total addressable market (TAM) is nearly $90 billion annually (as of last September). According to this presentation, it's only penetrated about 7% of its core "premium global home audio" end-market and has designs on extensive international growth that should grow this TAM.
The company is confidently targeting $2.25 billion in revenue for its full-year 2024 (ending in September 2024), which would represent a 32% improvement from management's projected 2021 results. Now, this doesn't sound like the rich growth narrative we are looking for, but Sonos's management team, led by Patrick Spence since 2012, has upwardly revised their conservative FY 2021 estimates following each of the past 3 reported quarters. I believe that this 2024 guidance is exceptionally conservative, and so do analysts who estimate the company will reach this goal a year prior.
The fact that there is still growing demand for Sonos's endless stream of innovative products as we exit the pandemic gives me confidence that the pandemic sales pull-forward won't catalyze significant deceleration in the coming quarters. This is something that is already playing out in the quarterly results of many other consumer tech players.
The company's global expansion is already proving to be a success. Its most recent quarter illustrated over 100% year-over-year growth in its Asian Pacific region and an annual sales increase within its Europe, Middle East, & Africa (EMEA) operations of more than 50%. International revenues now make up 41% of revenues compared to the 39% from the same quarter last year. I suspect that further global penetration will infuse growth into the nature of this business's operations.
SONO is trading at a 31x P/E, which seems high for a consumer discretionary business at first glance, but is primarily due to its recent turn to profitability. When factoring growth into this valuation multiple (aka its PEG), it is trading at 0.75x, coming in well below the consumer electronics industry average of 1.15x (any PEG multiple below 1x is generally seen as a value play, as long as growth is sustainable).
Final Thoughts
Sonos is competing in a highly competitive space, but it has achieved brand awareness in the premium home audio space that only Bose can rival (and it looks like Sonos is slowly but surely taking that market away from Bose). Sonos's dedication to quality and innovation should allow this firm to remain at the innovative forefront of this niche market. Its proven management team is unquestionably savvy enough to do so.
The tremendous rally that SONO has exhibited in the past year of trading reflects conservative estimates and unconvinced investors, who were all proven wrong by this IoT speaker company's skillful leadership team. The stock has been trading sideways for over 7 months now, and with estimates on the rise, this lack of upward impetus has compressed its valuation multiple and created a valuable opportunity for us.
5 out of 7 analysts are calling SONO a buy today with no selling ratings. The average price target on this stock sits at 43.67 with a bullish target of $51, representing upsides north of 20% & 40%, respectively, from where SONO is trading today. These shares and their 1.9x beta are subject to short-term volatility, but I like the valuation today as a long-term play in the consumer electronics space.
Bear of the Day:
I am pitching Tencent, China's largest publicly traded enterprise out of China, as the bear of the day due to geopolitical risk. The significant and highly uncertain regulatory overhang coming out of Beijing has made Chinese tech an uninvestable class of public equities. Despite Tencent's unbelievably profitable growth acceleration that consistently impresses analysts quarter after quarter, the danger surrounding Xi Jinping's recent crackdown on tech has investors running for the hills.
The latest decree out of this increasingly authoritarian communist regime came from the National Press and Publication Administration restricting those under 18 years of age from playing online video games except for 3 predetermined hours per week, which sounds like something straight out of George Orwell's 1984. This business throttling ordinance almost looked to be a direct assault on TCEHY investors, with this gaming giant's operations being the most vulnerable to this new element of Beijing's autocratic control.
Analysts have been downwardly revising EPS estimates on TCEHY for the next few years as they price in the regulatory blows that Xi's increasingly autocratic regime will have on this digital powerhouse moving forward. Tencent has fallen to a Zacks Rank #5 (Strong Sell), and its stock is currently a falling knife that I would want to catch.
Bear Market For Chinese Tech
Hong Kong officially entered a bear market at the end of August as its innovation-powered Hang Seng Index experienced seemingly endless regulation catalyzed capitulation. Beijing has been busy releasing a flood of value-killing statutes that have brought Chinese tech stocks to their knees.
Minors will no longer be allowed to play their favorite video games from Monday thru Thursday and will only be permitted to game with their friends between 8 pm and 9 pm on Friday thru Sunday and public holidays (aka State determined holidays). According to Government officials, this move is an attempt to curb an apparent gaming epidemic amongst the country's youth to "effectively protect the physical and mental health of minors." In reality, the administration is likely just inhibiting the new normal of social interaction in a digitalizing world that the older generations fail to understand.
This ruling is nothing less than ruthless and is just one more element of control that the Party will now hold over its citizens in the world's second-largest economy. Minors will now be required to connect "anti-addiction" systems to their gaming devices. Game producers like Tencent will be prohibited from allowing individuals under 18 to play outside of the predetermined times. This punitive action should be a decision made by parents/guardians, not the State.
Tencent, the largest gaming company in China (over 50% market share), will be losing 10s of millions of daily users, but this didn't seem to shock investors. In early August, the digital gaming enterprise announced that it expected to see elevated regulation over the next couple of months. TCEHY is down 40% from its February highs, with the broader Hong Kong Exchange having lost 18% of its value over that same time frame. The endless flood of tech-focused controls can almost entirely explain both drop-offs.
Chinese legislators also recently approved one of the world's strictest data privacy laws, which would curb tech enterprises' ability to collect consumer data (a precious asset to these businesses). This was just another dagger to the already beaten-down tech sector in the region.
The new privacy laws will be put into place on November 1st and require businesses to collect minimum data, obtain consent for sensitive information, offer easy opt-out options, and direct government approval to transfer data overseas.
As I mentioned above, I wouldn't be trying to catch any of the falling knives in Chinese tech because we have no idea what Xi's end game is here. Whether it is to rid China of US investors, demonstrate to the private tech space who is really in charge, or maybe it is just Xi's administration attempting to match regulations used in countries abroad. The latter is doubtfully considering the 'convenient' timing of these various restrictions, but I still cling to the hope that Xi will eventually loosen his tyrannical grip.
How It Started & Where It Is Headed
Eccentric tech tycoon, Jack Ma, founder of Alibaba, seems to have catalyzed this endless flow of tech-focused regulation in China.
Xi's regime impeded Ma's fintech giant Ant Group's nearly half a trillion-dollar IPO last year. It wiped out more than $100 billion of its market value with a fresh regulatory overhaul aimed at Ant Group's unique micro-lending methods. This move by Chinese officials appeared to be in retaliation to Jack Ma's (founder and owner of the business) public criticism of the republic's financial system. Jack Ma's denouncement of China's economic practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of the masses to ostentatious billionaires like Ma.
Another 'timely' restriction came just 2 days after DiDi, the Uber of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost over $50 of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since these restrictive announcements became a systemic issue earlier this year.
The progressing Chinese communist regime seemingly headed towards capitalism is now reeling back towards what looks like a government-controlled autocratic economy.
That being said, it is not unusual for the Chinese stock market to see these 20%+ stock market sell-off in any given year. In the past decade, the Hang Seng Index has experienced an over 15% market downturn in all but 2 of those years, and entered a bear market (20%+ decline) in 4 of the last 6 years. The volatility that we are seeing in the Chinese market today is not unusual, but the mounting regulatory overhang causing this value deterioration is definitely unique to 2021. As I said, the unusual uncertainty here is what continues to compress Tencent and its cohorts' valuations.
Xi Jinping's rule is reversing decades of progress that China had been seemingly making towards a democratized international growth machine. I only hope that it doesn't turn into a full-on totalitarian nation.
Final Thoughts
There is nothing systemic about Tencent that I dislike. In fact, the business has a very healthy-looking balance sheet, accelerating profitable growth and rapidly expanding margins which appear attractive in the absence of the progressively authoritarian regime in Beijing. The geopolitical risk in the region is just too high for US investors today. The trade war between the US and China has me, and many other analysts concerned, that Beijing is attempting to rid its GDP growth powering tech giants of US investors by making these companies uninvestable.
If Xi's administration shows signs of backing off its crackdown on tech, I won't hesitate to buy up shares of Tencent and the rest of Chinese tech, for that matter, but as of now, I am staying clear.
Additional content:
3 Diagnostics Stocks in Focus on Delta Variant Mandate
Although the overall economic prospect for the second half of 2021 was originally bright on lower COVID-19 cases and improving market trends, the mutations of SARS-CoV-2 have led to an alarming rise in cases in recent weeks.
While uncertainties over the pace of economic recovery due to the resurgence of COVID-19 cases led to market volatility, the spike in infection rates has opened up opportunities for testing stocks.
Meanwhile, last week, the President released a mandate asking federal employees to ensure vaccination, and large and small private sector businesses to get their staff fully vaccinated and regularly tested. This certainly bodes well for diagnostic stocks.
Let us delve deeper.
Decline in Testing Demand in 1H21
When the pandemic first hit, demand for COVID-19 testing was at a peak which led diagnostic companies to witness a significant boost in testing revenues during 2020.
However, the story surrounding COVID-19 eventually changed since the beginning of 2021. The diagnostics companies experienced a "sudden" and fundamental drop in demand for COVID-19 testing, particularly for surveillance and screening with rapid testing. The changing testing landscape driven by a significant reduction in coronavirus cases and the rollout of vaccines across the globe led many diagnostics companies to witness a substantial drop in testing demand.
In line with this, Abbott Laboratories quantified the change – noting that in April, COVID-19 testing sales declined to $2.2 billion in the first quarter from $2.4 billion in the last-reported quarter. In June 2021, the company lowered its financial outlook for 2021 due to a "sharp and rapid" decline in demand for COVID-19 testing.
Furthermore, in June 2021, QIAGEN lowered its full-year 2021 outlook due to lower COVID-19 test demand. The company slashed its full-year 2021 outlook for net sales growth to at least 12% constant exchange rate (CER) compared to the prior guidance of about 18% to 20% CER.
Resurgence of COVID-19 Cases in 2H21
Per a report by Reuters, the United States is reporting more than 94,819 COVID-19 cases on a seven-day average, a five-fold increase between July-August 2021.
The Delta variant now accounts for more than 90% of known COVID-19 cases in the United States, according to the Centers for Disease Control and Prevention (CDC). The Delta variant is more infectious and effective at evading vaccines. Even in vaccinated individuals, the variant is highly contagious, which allows it to spread easily.
Although the economy is ravaged with the new strain of the virus, diagnostics stocks are starting to recover on higher demand for COVID-19 testing.
Diagnostics Stocks in Focus on Biden's Mandate
As stated earlier, President Joe Biden announced a new mandate on Sep 9 aimed at curtailing the surge in COVID-19 infections, which signals a sharp rise in testing. The President unveiled a series of steps to combat the surging pandemic, including the announcement of a forthcoming federal rule that all businesses with 100 or more employees have to ensure that every worker is either vaccinated for COVID-19 or will have to submit weekly coronavirus testing results.
The President's plan on the diagnostic side of the mandates calls for the government to work on ramping up test supply. Going by a Reuters report, QIAGEN has already shown support for this mandate. At the same time, Abbott stated that it is quickly working to scale up manufacturing of its BinaxNOW and ID NOW test kits and hire additional employees.
Going by the aforementioned discussion, diagnostics companies are expected to witness a sharp rise in testing demand over the coming months. Investors can choose to bet on the following stocks that have shown tremendous promise amid the pandemic and challenging market conditions. These stocks also possess considerable growth potential.
Our first pick is Quest Diagnostics recently raised its full-year projection significantly. The company noted that since its second-quarter earnings release on Jul 22, COVID-19 molecular testing volumes were stronger than anticipated through the end of August on the Delta variant spike. Revenues for 2021 are now expected in the range of $9.84 billion to $10.09 billion, up from the prior view of $9.54 billion to $9.79 billion.
The company also noted that it expects the Delta-driven surge to stay stronger than anticipated, with Quest Diagnostics now assuming average volumes of at least 40,000 molecular tests daily for the second half of the year versus the previous guidance of 20,000.
The stock currently carries a Zacks Rank #3 (Hold). Over the past three months, the stock has gained 20% against the industry's 24.3% decline.
Our next pick is Quidel Corp. In September 2021, Quidel announced that the company will make Quidel's non-prescription QuickVue At-Home OTC COVID-19 Test available to consumers at more than 7,000 CVS Pharmacy locations across the United States and online at cvs.com.
The company recently witnessed a surge in demand for the portfolio of Sofia SARS and QuickVue COVID-19 rapid antigen tests. Making rapid antigen tests available through CVS Pharmacy will help Quidel address customers' demand.
This Zacks Rank #3 company has gained 28.6% over the past three months compared with the industry's 2.4% rise.
Laboratory Corporation of America Holdings or LabCorp is our final pick. In terms of COVID-19 testing, till the end of the second quarter, LabCorp performed more than 50 million tests. In the second quarter, a steady decline in positive cases led to an overall drop in COVID-19 testing.
However, following the rise in demand later, the company announced expanded availability of its Pixel by Labcorp COVID-19 PCR Test Home Collection Kits at 6,000 Walgreens stores nationwide and through Walgreens' collaborations with on-demand delivery services like DoorDash and Instacart.
This Zacks Rank #3 company has gained 14.2% over the past three months compared with the industry's 8.2% rise. You can see the complete list of today's Zacks #1 Rank stocks here.
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