For Immediate Release
Chicago, IL – September 13, 2018 – Zacks Equity Research KLA-Tencor (KLAC - Free Report) as the Bull of the Day, Tencent Holdings (TCEHY - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on AppFolio, Inc. (APPF - Free Report) , Paycom Software, Inc. (PAYC - Free Report) and Five9, Inc. (FIVN - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
KLA-Tencor is a $16.5 billion semiconductor equipment manufacturer that became a Zacks #1 Rank Strong Buy in early August after delivering a solid June quarter and outlook for their coming fiscal year 2019, which began in July.
Wall Street analysts raised EPS estimates for the year from $8.86 to $9.28, representing 16% growth. And the top line now sits at $4.45 billion for 10.25% growth.
But shares took a hit recently after the company made subdued comments at the Citi Global Technology Conference last Thursday, September 6. CFO Bren Higgins gave a tempered view of the wafer fabrication equipment (WFE) industry, offering less enthusiasm about an expected December rebound.
At the conference, Higgins said that while the company continues to expect the September quarter as the "trough" for shipments, He was less optimistic for the strength of the snap back he saw for the December quarter in previous statements.
In his comments, he gave a "modestly weaker" view of his expectations for a rebound. Higgins now expects that shipments could be "flat to down a few single digits or so," versus a prior projection of flat to up by low single digits.
The WWE Battleground of WFE
The KLA-Tencor caution is directly related to the DRAM and NAND memory space, where Micron and Samsung are big buyers of WFE hardware. Stifel Nicolaus analysts commented "We believe this update adds on top of some of the other push outs and capex cuts that have occurred recently and certainly raises concerns that a larger cutback, pause, or extended downturn could be building in the near term."
WFE peers Lam Research and Applied Materials also fell sharply on September 6 and in the days since as they depend so heavily on the outlooks of giants Micron and Samsung.
And one of the bigger Street bulls in this space, Bank of America/Merrill Lynch, downgraded those two but stayed positive on KLAC on August 28...
Analyst Vivek Arya downgraded Lam Research and Applied Materials, both to Neutral from Buy, after lowering his WFE growth outlook for this year to +7% from +10%. Arya cut his growth estimates for 2019 and 2020, primarily to account for lower memory capital expenditures.
The BofA/ML analyst now expects relative growth in foundry/logic paired with declines in memory within the context of a muted WFE recovery in 2019. He lowered his price target on Applied shares to $49 from $65 and cut his target on Lam shares to $200 from $235.
But Arya maintained a Buy rating on KLA-Tencor as he see it being more defensive as it is levered more to technology transitions than production.
Goldman Chip Analysts Drop the (Final) Hammer
Then today as I write (Wednesday Sep 12), two different semiconductor analysts at Goldman Sachs lowered the boom on both of these industries.
For the memory-maker Micron, Goldman analyst Mark Delaney downgraded the stock to Neutral as he sees weaker fundamentals for DRAM and NAND ahead. Delaney cited memory industry margin pressure into the first half of next year and lowered his price target on the shares to $50 from $68.
And for the WFE makers that serve Micron, Goldman analyst Toshiya Hari downgraded Lam Research to Neutral and lowered his price target for the shares to $180 from $224. The analyst lowered his coverage view on the semiconductor capital equipment space to Neutral from Attractive as he sees memory capex expectations running into early signs of excess supply.
Hari was initially hopeful this quarter that Samsung's decision to push out DRAM spending was specific to the company and related to node transition issues as opposed to supply/demand issues. But he now envisions a more broad-based correction in memory capex in 2019, as memory manufacturers digest excess capacity.
If the Semi Cycle Isn't Over, the Industry Correction Should Be
The logic of these analysts with deep experience in the chip industry is that it is a very cyclical business. Goldman's Delaney reminds investors that memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices.
But earlier this week, Stifel analyst Patrick Ho and his team reiterated their view that new technologies -- from smartphones, tablets, and the IoT to data centers, autonomous cars/machines and AI -- are driving the semi cycle to last longer.
Following last week’s sharp group sell-off, they affirmed their near-term positive outlook for WFE and their longer-term “cycles are dead” thesis.
Micron CEO Sanjay Mehrotra would agree as he explained during May's Investor/Analyst event that they have evolved beyond the old PC cycles to creating customized memory solutions for their customers in dozens of end markets. And that's why I bought more MU shares on Wednesday ahead of his company's quarterly report next Thursday, September 20.
I detailed the expanded solutions arena for Micron in Artificial Intelligence: Investing in Life 3.0, my August special report for Zacks Confidential. (If you don't have access to ZC -- where you get 52 special reports per year on all industry and investing trends for only $59 -- email Ultimate@Zacks.com today for a trial and tell 'em Cooker sent you!)
Also presenting at Citi's Global Technology Conference last Thursday, Micron's CFO Dave Zinsner said that the company is going to be "more of a product company than we've ever been" and that Micron's DRAM products that go into automotive and IoT end-markets are a focus of the company and do not get a lot of attention from the market.
KLAC Trading 11X in the Tech Super Cycle
And I almost bought some KLAC on Wednesday too, but I'm going to give the bears a few more days to feast and see how this all settles out. I think these bearish "semi cycle top" calls from Goldman and others may finally put a bottom in all these stocks.
Because what we are hearing from Apple and NVIDIA about technology expansion and demand -- from the consumer to the enterprise -- doesn't fit with the Goldman pessimism.
I'll let Sanjay's outlook next week help me decide whether the call is valid.
Bear of the Day:
Tencent Holdingsis the giant Chinese Internet portal which provides mobile, telecom, entertainment, social media, and financial services to the largest middle class on the planet -- and monetizes most of these services with online advertising.
The stock slipped to a Zacks #5 Rank on August 20, when it was trading above $44 per share, because analysts took EPS estimates down for this year and next as trouble in China's economy begins to surface.
Before I give you the details about the decline in Tencent growth, let me share some really seismic news about the power of Internet companies in the brave new world of the World Wide Web.
Next week, a new S&P 500 Communication Services sector will replace the current Telecoms sector, and it will absorb some of the biggest stocks from other sectors like Technology and Consumer Discretionary, with the big targets being Alphabet, Facebook, Disney and Netflix.
This "re-balance" of the structure among Tech/Media titans should add some market volatility this month as the stock market architects at S&P grapple with the "4th industrial revolution" we now so glibly take for granted and just call "the web"... and its machine learning tentacles.
But let's hear it from a leader of the sector re-hab...
"The lines among media, communications, and content are blurred," David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said. "It is time to acknowledge this convergence and the overlapping services these companies provide."
Investing in the Web/Media Titans of China = No Brainer
I wrote a Bear of the Day article about Tencent on August 20 to highlight the drop in growth estimates ahead of their earnings report that week. Since the company's slight miss and subdued outlook, analysts have taken down both revenue and EPS targets further.
To summarize, in the last 30 days, 2018 analyst EPS projections have fallen nearly 10% from $1.34 to $1.21 and 2019 estimates were cut a chunky 14% from $1.80 to $1.55.
More importantly, revenue projections have dropped significantly from about $49.5 billion to $47.5 billion for this year.
And the top line drop for next year was even faster from $65.4 billion to $62.2 billion.
Still, a true growth investor like me can't help but notice the sales trajectory remains solidly above 30%.
As I explained in my last update in August, it's hard not to love 30%+ annual revenue growth, year after year -- especially for a $400 billion Internet behemoth.
And despite the downward estimate revisions, which will keep Tencent a Zacks #5 Rank Strong Sell for some time, 15% and 25% EPS growth this year and next is nothing to complain about from a company on par with Alibaba, the so-called "Amazon of China."
But the fact remains that analysts are having to keep lowering their growth projections month after month. And if that trend persists, all future estimates remain in jeopardy.
It appears best to stand aside until more visibility about the Chinese economy and its dominant consumer companies comes into clearer view.
The Zacks Rank will let you know.
3 Cloud Stocks to Buy Right Now
In a matter of just a few years, “the Cloud” has evolved from a budding new tech feature to one of the main factors driving growth in the technology sector. Cloud computing is now an essential focus for software-related companies, and cloud stocks have piqued the interest of many tech-focused investors.
New technologies and changing consumer behavior have changed the shape of the technology landscape, and an industry that was once centered on the personal computer has adapted to survive in the world of mobile computing and the Cloud. The markets have been paying attention, and some of the best tech stocks have been those that are either primarily cloud-based companies, or those that have shown growth in their cloud operations.
With this in mind, we’ve highlighted three stocks that are not only showing strong cloud-related activity, but also strong fundamental metrics. Check out these three cloud stocks to buy right now:
1. AppFolio, Inc.
AppFolio offers cloud-based software solutions for the property management and legal industries. The company’s AppFolio Property Manager is a leading solution for property management, while its MyCase application is ideal for practitioners and small law firms. APPF is holding a Zacks Rank #2 (Buy) right now.
AppFolio has locked down consistent profitability in recent quarters, crushing estimates by posting earnings of $0.24 per share in its most recent quarter. Now, forward-looking estimates are trending upward, and AppFolio’s full-year earnings growth is expected to touch 93% in 2018. But that is expected to continue to the tune of another 55% next year. This is also a hot momentum play as shares have surged more than 15% in the past month to reach new highs.
2. Paycom Software, Inc.
Paycom Software is a provider of a cloud-based human capital management software solution delivered as Software-as-a-Service. Paycom was one of the first fully online payroll options out there, so this is a really interesting example of a company that has that first-mover advantage and industry leading product that still has a mountain of growth ahead of it.
PAYC is currently sporting a Zacks Rank #1 (Strong Buy). Based on our latest consensus estimates, we expect the company to witness EPS growth of 103% and revenue growth of 28% in its current fiscal year. Looking further ahead, Paycom is projected to improve its bottom line at an annualized rate of over 25% over the next three to five years. Shares are trading at an expensive 60x forward 12-month earnings, but its PEG ratio of 2.4 is actually quite reasonable.
3. Five9, Inc.
Five9 provides cloud software for contact centers. The company offers software products such as workforce management, speech recognition, predictive dialer, and voice applications, as well as an all-in-one contact center cloud platform. Currently, FIVN holds a Zacks Rank #1 (Strong Buy).
FIVN is on fire after crushing earnings estimates last month, and now the company is looking for even great bottom-line growth. Earnings are expected to improve by 264% this year and 32% next year on the back of 23% and 18% projected revenue growth. Shares are now up nearly 60% in six months and continue to test new all-time highs, with earnings expansion likely to inspire further momentum.
Wall Street’s Next Amazon
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