For Immediate Release
Chicago, IL –September 30, 2019 – Zacks Equity Research Shares of Zix (ZIXI - Free Report) as the Bull of the Day, Chico (CHS - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Lyft (LYFT - Free Report) and Uber (UBER - Free Report) .
Here is a synopsis of all four stocks:
Bull of the Day:
Zix is a small-cap cloud security player with large cap dreams. The stock has propelled back into growth following a savvy acquisition earlier this year. Sell-side analysts have become increasingly optimistic about this stock and have continued to push their estimates higher. ZIXI has been thrown into a Zacks Rank #1 (Strong Buy).
Zix is an under the radar stock that not many investors or analysts are familiar with. Its lack of visibility in the market makes this stock more vulnerable to be undervalued and creates an opportunity for us as investors.
Between 90-95% of enterprise data breaches occur over email creating an enormous amount of demand for email protection software. Zix‘s intuitive cloud-based encryption and data protection platform makes it easy for any business to protect themselves from digital adversaries no matter the firm’s internal infrastructure. Zix’s focus is on small to midsized businesses, a market that has not been fully penetrated and one that has a vast need for this type of protection.
The firm’s primary product offering is intuitive email encryptions that makes its easy for both the business and the recipient to communicate safely without the fear of their information being at risk. Most of Zix’s customers are in healthcare, financial services, insurance, and government sectors.
Zix uses tech’s golden business model of reoccurring revenue, which gives the firm a safeguard against most cyclicality. The company’s cloud-based offering makes up 79% of its annual reoccurring revenue.
The company had been growing its topline at single-digit levels up until its acquisition of AppRiver.
Zix’s timely acquisition of competitor AppRiver in the first month of 2019 has positioned the combined firm to be a leading playing in cloud-based email protection for small and midsized businesses (SMB). The deal was worth $275 million, which doubled Zix’ prior market value.
According to Zix’s press release in January the “combination creates leading cloud-based email security provider to small and midsize business (SMB) market with over $180 million of annual recurring revenue.”
This acquisition significantly escalated the level of long-term topline growth for Zix into double-digit expansion. Below is the breakdown of the past 5 quarters of revenue and the growth that AppRiver is bringing to the table for Zix.
Performance and Valuation
ZIXI had traded relatively flat up for year until its acquisition announcement of AppRiver. This year so far this stock has traded up almost 100% and then trailed down a bit as investors are trying to find the sweet spot that fully illustrates the combined synergies of this new company. Today the stock is up over 25% for the year.
ZIXI is trading at very reasonable multiples, both on the lower side of its 5-year trends and far below its competitors. The stock is trading at a forward P/E of 16.4x and a P/S of 2.1x which represents a value buy for a stock that has growth written all over it.
Cloud-based email protection is becoming a necessity for businesses of all sizes. Customer and proprietary information are increasingly at risk and a big portion of the SMB market isn’t protected. Zix is positioned to take control of this massive market and its cloud-based offering makes it accessible to any business no matter the infrastructure
ZIXI’s low valuations, large growth potential and under the radar characteristics creates an opportunity for you to get in while it is still cheap.
Bear of the Day:
The retail apocalypse strikes again with Chico’s being the trends latest victim. This stock has lost 73.3% of its value in the past 5 years and it continues to disappoint investors with an almost 30% break down so far this year. Sell-side analysts are becoming progressively pessimistic about this stock and continue to lower expectations pushing this stock down to a Zacks Rank #5 (Strong Sell).
Chico’s is a women’s fashion brand that began out of Sanibel, Florida 36 years ago. The company operates three separate retailers under the brands Chico’s, White House Black Market, and Soma.
The peak of this retailer’s performance was back in 2014 but has since fallen prey to the changing digital commerce landscape. Amazon and the other large online retailers have left less versatile firms like Chico’s in the dust. Chico’s operated 1,547 stores in 2014 and has since closed 129 stores and expects to close another 250 in the next three years.
This once women’s fashion icon’s inability to adapt to the digitalizing world has led to 16 straight quarters of sales decline and shareholders have suffered. Chico’s revenue decline is expected to continue in the years to come.
Chico’s has demonstrated years of profitability and has just recently been experiencing red on their income statement. This is a horrible sign as this income deterioration could point to an impending bankruptcy.
Analysts have dropped estimates and are now forecasting an EPS deficit for the next few years. Analysts are still estimating a further decline in stock price.
The best thing that could happen to Chico’s at this point in time is an acquisition, otherwise I see this firm filing bankruptcy in the next year or so.
CHS is trading at $4.00 which causes the stock price to be quite volatile, adding more risk to any investor holding these shares.
The retail apocalypse is real and its effecting almost every retailer in our economy today. Chico’s is just another domino teetering, ready to fall. There are significant systemic issues with this company at this time and I would not put any position on this stock at this time.
Peloton (PTON) Takes Latest Skid in 2019 IPO Bonanza
Another disappointing IPO hit the markets with Peloton (PTON) shares spinning their wheels and going nowhere but down. PTON’s IPO’ed at $29 per share and broke down 11% to below $26 in its first 4 hours of trading. This appears to be par for the course as investors lose their appetite for unprofitable IPOs.
PTON’s offering was the second-worst debut of the year, following SmileDirectClub’s IPO on September 12th, which experienced an almost 30% price drop on its first day of trading.
Peloton’s prospectus illustrates the company has been driving a strong topline but at escalating costs. The firm’s revenue has grown 4-fold over the past 2 years, but its losses have quadrupled in just one year.
The high customer acquisition costs have been weighing heavy on the company’s ability to profit. Luckily the firm has been able to secure a 95% retention rate and long-run reoccurring revenue from the subscription that comes with the products.
PTON is trading at a 7.8x P/S, which is not outrageous for a firm that has been doubling its topline, but investors are concerned about the sustainability of its growth.
Peloton’s business model is easily replicated, and it is already facing increasing competition with Equinox’s SoulCycle about to release their own at home bike and virtual classes. The business model isn’t proprietary, and I do not think that its current growth rate is maintainable.
Peloton’s opening day slump is just another example of an unprofitable, shaky business model getting what it deserves in the markets.
The 2019 IPO Landscape
This year’s IPOs market is redder than it has been in almost two decades as 76% of firms enter the market with a loss on their income statement. Investors’ attraction to money hemorrhaging companies is coming to an end as our economic cycle is ostensibly about to expire.
The distress started with Lyft’s IPO back at the end of March. Investors were overzealous about the first ride-hailing firm hitting the public exchanges and drove the stock price up 10% on the first day of trading. This excitement quickly turned to panic, with the stock losing over 20% of its value in the first month and has lost almost 50% since its opening day close.
Uber experienced a similar narrative, though investors were much more cautious when these shares started trading in May. UBER is down 24% since its first day of trading.
Both ride-hailing firms have business models that continue to lose an increasing amount of money. They lose money on almost every ride with the goal being to bleed out every other competitor with the lowest prices. This business model doesn’t drive up valuations with shareholders just hoping they aren’t holding a position in the losing firm.
WeWork was planning on going public this month but had to delay its IPO indefinitely as the shares saw a lack of interest in the public market. WeWork is a real estate company trying to sell itself as a tech company. Its business model is a commercial real estate firm at best and a Ponzi scheme at worst. Its last round of funding valued the company at $47 billion, and today analysts are saying the company value is closer to $10 billion.
Founder and CEO Adam Neumann was ousted this week following the failed IPO.
Endeavor Group pulled its offering off the table yesterday after seeing the IPO market’s disappointing performance with PTON’s first-day skid being the final straw.
The 2019 IPO bonanza was underlined by red on the income statement and disappointed investors. The fact that investors and traders are so skeptical of these unprofitable companies with shaky business models is a good sign for our markets. It further demonstrates that overzealous investors aren’t creating a valuation bubble as we saw in the dotcom bubble that burst in the early 2000s.
These firms that have seen valuation slashes aren’t failing, but investors are just more cautious with riskier investments. Keep an eye on these firms future announcements and earnings releases as the time to buy may be around the corner. If these stocks begin to show a clear path to profitability, expect to see valuations to rally.
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