What happened

If you thought the coronavirus crisis on Wall Street couldn’t get any worse after Wednesday — surprise! — it just did. Markets that were merely shaky earlier in the day on Thursday ended in a rout in the closing minutes of trading. When the closing bells rang, the Dow Jones Industrial Average and the S&P 500 were both down 4.4%, and the Nasdaq had fallen 4.6%.

In percentage terms, this was the eighth biggest drop in the Dow in history. By “points” lost, however, it was Wall Street’s worst day ever.

And yet, even on this arguably worst day in recorded Dow history, three tech stocks managed to buck the tide. As stocks fell left and right around them, shares of fintech stock Square (NYSE: SQ) closed the day up 3.6%; remote videoconferencer Zoom Video (NASDAQ: ZM) closed up 6.2%; and online freelance work-finder Upwork (NASDAQ: UPWK) closed up 7.3%.

So what

What made these three stocks defy the downtrend? Each company had its own specific reasons for showing strength yesterday.

In the case of Zoom, for example, analysts at Bernstein in a note today observed that “average daily downloads” of Zoom’s app “are up 90% … in the last 30 days alone,” compared to last month, and “user engagement” is up, as well. So far this year, Zoom has added more new users than it did in all of 2019.

At Upwork and Square, meanwhile, it was earnings that drove stock gains.

Upwork reported positive profits in Q4 ($0.03 per share) versus the loss Wall Street had anticipated. Upwork also beat on sales in the quarter. Even with the company guiding to lower revenues than analysts had predicted in the year ahead, Upwork’s news stood in such stark contrast to what everyone else has been saying lately that the stock really couldn’t help but go up.

Square said it earned $0.83 per share last quarter, which appears to be far more than the $0.21 per share that Wall Street was expecting (although TheFly.com points out that Square’s numbers “may not be comparable” to Wall Street’s consensus). Like Zoom, Square guided cautiously on the year ahead, but its first-quarter 2020 guidance, at least — $0.16 to $0.18 per share in profit — appears likely to beat Street expectations for $0.16.

Now what

As businesses build on the idea of permitting workers to interact remotely — in contrast to close enough for person-to-person transmission of the coronavirus — both Upwork and Zoom appear well-positioned to not just survive, but also potentially thrive in this current health crisis. Square, which is tied more to in-person sales transactions, may yet see its sales slide if the contagion worsens. For the time being, however, let’s just be pleased with its Q4 performance.

In fact, on a day like yesterday, let’s just be happy that any company is still doing well.

The post Three Stocks That Went Up on Wall Street’s Worst Day appeared first on The Motley Fool Canada.

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iPhones are selling like hotcakes — well, lukewarm cakes — and Apple (NASDAQ: AAPL) stock is on a tear, up 32% since its lows of early June.

But that’s not what I’m here to talk about today.

Today, I’m talking about two of Apple’s suppliers, the companies that make the innards of the iPhone: Skyworks Solutions (NASDAQ: SWKS) and Qorvo (NASDAQ: QRVO), both of which were upgraded by analysts this morning.

Citing a raft of factors, of which Apple’s iPhone success is just one, this morning analysts at investment bank Cowen announced upgrades on both Skyworks stock and Qorvo stock.

Upgrading Skyworks

Skyworks’ “content continues to ramp this iPhone cycle,” wrote Cowen today in a note covered on StreetInsider.com. The analysts see a positive risk/reward scenario and earnings per share of $8 to $8.50 possible in 2021. When applied to Skyworks’ current share price of $84 and change, that works out to a forward price-to-earnings ratio of about 10 — two years out.

Why focus on what Skyworks might earn in 2021? The answer comes in two parts.

First is 5G mobile internet, and its implications for tech stocks. Apple, you see, isn’t expected to sell a whole lot of iPhone 11s this year or next, as consumers are expected to husband their cash in anticipation of the arrival of a 5G-capable iPhone in the next upgrade cycle. Once that happens, though (toward the end of 2020 and into 2021), Cowen says it sees upside for Skyworks.

But this isn’t the only factor getting Cowen excited about this stock. Looking forward to the eventual end of President Trump’s trade war with China, Cowen notes that with restrictions on sales of U.S. technology to Chinese tech companies now mostly priced into Skyworks stock, any early resolution to the trade spat will be a boon. Should Skyworks be allowed to sell its chips to Huawei sometime in 2020, for example, Cowen sees the potential for Skyworks’ sales to surge as much as $350 million higher than most analysts are modeling right now — adding a potential “$0.60 EPS upside” to next year’s earnings.

Upgrading Qorvo, too

The situation with Qorvo is similar.

Here again, Cowen argues that good news is more likely to drive Qorvo stock up, than bad news will drag it down. Focusing on the potential for 5G to drive sales of iPhones (and other phones), Cowen estimates that in 2021, Qorvo could earn as much as $7.50 to $8 per share.

If the final number turns out to be, say, $7.60, then, at a price of $76 and change, this means that Qorvo, too, is selling for a multiple of about 10 times 2021 earnings.

Admittedly, the risk is a little higher with Qorvo than with Skyworks. Cowen notes, for example, that Qorvo’s “content is lower this iPhone cycle.” Qorvo stock also hasn’t been as badly hurt by the Huawei mess, with only 75% of the sales that Qorvo would otherwise have made to the Chinese tech company (absent the restrictions) “discounted into 2020.”

On the other hand, Cowen says that “we see [iPhone] unit upside ahead of higher RF content in a 5G-enabled phone in [calendar year] 2020.” And a 2020 resolution to the trade war could still give a sizable lift to Qorvo’s prospects — as much as $500 million in extra revenue next year, and perhaps $1 per share more in earnings.

Additionally, Cowen notes the potential for the increasing acceptance of Wi-Fi 6 smart-home technology to boost Qorvo’s business — and Skyworks’, too, for that matter.

What it means for investors

According to data from S&P Global Market Intelligence, Wall Street analysts see 15% earnings growth for both Skyworks and Qorvo over the next five years. At 10 times earnings, that obviously makes both stocks look pretty attractive — although that earnings multiple is based on what Cowen thinks these stocks will earn two years from now.

So how do they look today, based on what they’ve already earned?

At $9 billion in market cap and with just $203 million in trailing earnings reported under generally accepted accounting principles (GAAP), Qorvo at first seems the less likely stock pick, costing more than 44 times trailing earnings. The good news is that Qorvo’s robust free cash flow — $765 million over the last 12 months — gives the stock a price-to-free-cash-flow ratio of less than 12. With only moderate debt on its balance sheet to mess up the math, I have to say that, whether or not Cowen is right about 2021, Qorvo stock looks attractive right now.

Skyworks, too: Here we’ve got a bigger tech player, weighing in at $14.6 billion market cap — with no debt, and nearly $1 billion in cash on its balance sheet. Given the cash surplus, I think the stock looks at least fairly valued right now at 15.7 times trailing earnings.

Granted, I have some reservations about free cash flow at Skyworks, but the catalysts are enticing.

While I prefer Qorvo over Skyworks right now, I think Cowen is basically right: Both of these stocks are good candidates for investors focusing on “growth at a reasonable price.”

The post Qorvo and Skyworks Stocks Upgraded: 2 Great Ways to Play 5G appeared first on The Motley Fool Canada.

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Every day, Wall Street analysts upgrade some stocks, downgrade others, and “initiate coverage” on a few more. But do these analysts even know what they’re talking about? Today, we’re taking one high-profile Wall Street pick and putting it under the microscope…

On Oct. 9, 2018, shares of mobile and internet satellite communications provider Iridium Communications (NASDAQ: IRDM) closed their trading day at $20.46. One year later, the final trade of Iridium stock placed yesterday evening closed at…$20.46.

One entire year. Zero growth.

But that is all changing today, and Iridium stock is on a tear at last, up more than 8% in early trading Wednesday thanks to a bullish note from equity research firm Sidoti & Co.

Here’s what you need to know.

Get ready for the Iridium report

Iridium set a date for its Q3 2019 earnings report yesterday: Tuesday, Oct. 29, before trading opens.

Analysts in general aren’t particularly optimistic about the report, with the consensus on Wall Street being that Iridium will lose money — $0.13 per share, or exactly as much money as it lost a year ago, despite an expected 4% uptick in sales. And yet, one analyst is breaking from the herd, with Sidoti & Co. upgrading Iridium from neutral to buy ahead of earnings.

Why?

Upgrading Iridium

Iridium stock may be precisely prone over the past 52 weeks, but it’s been a bumpy ride getting back to zero. Indeed, at one point in April, shares had gained an astounding 37% from its year-ago price, before worries about the arrival of competing sat-com services from SpaceX, Amazon.com, and OneWeb began eating away at the stock’s gains.

As the months rolled on, Iridium saw all its gains whittled away, and ultimately, the stock ended up back where it began — and 27% below its peak.

Sidoti, however, believes that Iridium deserved to be bid up in the first place, and that its subsequent sell-off was a mistake. True, Iridium’s Q2 report wasn’t much to write home about: sales up only 6% year over year, GAAP losses growing (past $18 million), and free cash flow still deeply negative.

But as the analyst explains in a note covered on TheFly.com, Iridium’s new Certus Broadband and Narrowband services have the potential to get revenue growing strongly once more, while the company’s space-based air traffic monitoring service, Aireon, is “underappreciated” by investors. And on the cash front, Sidoti emphasizes not the fact that free cash flow was negative in Q2 2019, but that it was less negative than in Q2 2018 (negative $42 million in Q2 2019 versus negative $50 million in Q2 2018, according to S&P Global Market Intelligence data).

Is merely better good enough?

Is that good enough to justify rating Iridium stock a buy, however?

I’m not so sure it is. Consider: Negative free cash flow in a single quarter shouldn’t necessarily be considered a black mark against a growth stock, but in Iridium’s case, free cash flow has been running negative for nine straight years — and going on a 10th. Granted, the $82 million in cash burned over the last 12 months is less than the $140 million burned in 2017 or the $127 million burned in 2018.

But still — this is a lot of cash going up in flames.

And while I agree with Sidoti that the trend is positive, I’m not convinced that Iridium is reducing its cash burn at a fast enough pace to get the company to cash breakeven, or to enable it to get its $1.7 billion debt load under control in time to effectively compete with all the new entrants rushing into the satellite communications market right now.

Granted, Iridium’s NEXT constellation of 75 satellites in orbit is impressive, but can it compete with the likes of Amazon’s Project Kuiper (3,000-plus satellites envisioned), SpaceX’s Starlink (12,000 satellites), or even just OneWeb’s planned 900 sats? Can the company effectively take on all these rivals simultaneously, at the same time as it’s both losing money and servicing a big debt load?

Suffice it to say I have my doubts…both about Iridium’s viability, and about Sidoti’s decision to upgrade the stock.

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Raise your hand if you remember Zynga (NASDAQ: ZNGA)?

Once considered the best way to invest vicariously in a then-still-private Facebook, Zynga faded in relevance after the Facebook IPO. But 2019 has seen a dramatic comeback at Zynga, where revenue is rocketing, profits are flowing — and analysts are naming it their favorite stock in the (video gaming) world.

Last month, for example, investment banker Wedbush doubled down on its long-standing love of Zynga and put the stock its “best idea” list. And today we learn that Zynga has another fan who likes it just as much.

Here’s what you need to know.

Everybody loves Zynga

Early this morning, investment bank Stephens joined Wedbush in naming Zynga stock its “Best Idea” in video gaming.

Stephens has an overweight rating and a $8.25 price target on the stock, according to our friends at TheFly.com. And with Zynga selling for less than $6 a share, that makes for a potential 38% profit from today’s prices.

But Stephens’ recommendation of Zynga is about more than just the stock price.

Zynga: Empire builder

As Stephens explains in its note: “We believe the next 6-18 months will be a period of consolidation as established mobile players further leverage their core publishing infrastructure by acquiring sub-scale studios to drive growth,” and Zynga itself “is well positioned [to lead any such] consolidation in the mobile gaming market.”

“Zynga has … proven [its] ability to successfully execute this strategy,” argues the analyst, having spent close to $600 million on acquisitions over the past two years, according to data from S&P Global Market Intelligence. In so doing, the company has transformed itself from a business that was burning more than $50 million in cash annually as recently as just a few years ago into one generating positive free cash flow of more than $200 million ($213.5 million, to be precise) over the last 12 months.

At this rate, Zynga’s last two years of acquisitions could pay for themselves in less than three years.

What comes next

And Zynga probably isn’t done acquiring, either. At the heart of Stephens’ recommendation today lies the banker’s belief that “the potential for future deals along with the current state of their portfolio make for a very compelling risk/reward profile.”

I think the analyst might be right about that.

Just three months ago, Zynga announced the issuance of a batch of “convertible senior notes” expected to raise anywhere from $584.5 million to $672.3 million in “net proceeds” after deduction of fees. Some of this money will go to corporate purposes like paying the cost of “capped call transactions” designed “to reduce potential dilution to Zynga’s common stock.” But the company noted at the time that it may also use the money to pay for “potential acquisitions and future transactions” — a clear indication that Zynga has mergers and acquisitions on its mind.

The upshot for investors

As of today, Zynga’s balance sheet looks well-positioned to support such an acquisitions-based strategy, boasting nearly $830 million in cash versus total debt of only $585 million, and with more cash flowing in by the day. Growth trends look strong — even without factoring the potential for accretive acquisitions — with analysts forecasting that the company will post $0.06 per share in GAAP earnings this year, double that figure in 2020, and then grow these earnings to as much as $0.43 per share by 2023.

Although Zynga isn’t GAAP-profitable at present, its cash flow statement confirms that the business is in fact generating copious amounts of cash. At a price-to-free-cash-flow ratio of less than 26 (and even cheaper with net cash factored in), I see the shares as attractively priced given the company’s growth prospects.

If the stock can grow even faster than analysts are predicting by rolling up competitors along the way, Zynga could do even better.

The post Analysts Agree: Zynga May Be the Best (Video Game) Stock on the Market appeared first on The Motley Fool Canada.

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True to its name, Zoom Video Communications (NASDAQ: ZM) zoomed right out of the gate, soaring 72% to close at $62 a share on its IPO day back in April.

Trading close to $80 yesterday, Zoom stock has already turned into more than a two-bagger for early investors — and one analyst believes that it could go even higher within a year. Here’s what you need to know.

Initiating coverage on Zoom

Early this morning, investment bank R.W. Baird announced it’s initiating coverage of Zoom stock with an overweight rating and a $100 price target.

Zoom has only been in existence for about eight years now, and only began reporting revenue a couple of years ago ($60.8 million booked in 2016, according to data from S&P Global Market Intelligence). But already, the videoconferencing-as-a-service business has taken off like a rocket. Sales more than doubled between 2016 and 2017, then did that again in 2018. Things have slowed down a bit since — but even so, Baird points out, Zoom’s 95.7% year-over-year revenue growth in fiscal Q2 2020 was pretty impressive.

Profits are growing impressively, too. The company delivered full-year GAAP profits for the first time in 2018 — about $7.6 million — and is up to $12.9 million in GAAP profit on a trailing-12-month basis.

In adjusted terms, that works out to about $0.08 per share — four times the pro forma profit earned in fiscal Q2 2019. And Zoom has even bigger plans for the future.

Zooming out to guidance

Q2 earnings released earlier this month revealed Zoom management giving new guidance for this year: Sales rising as much as 78% to $590 million, and adjusted profits more than quadrupling to $0.18-$0.19 per share.

Reviewing the results, Baird believes that Zoom Video has a “large” total addressable market of folks who could potentially benefit from better videoconferencing, and is impressed at how quickly the company has moved to capture this market “in just a few short years.”

Aside from video, the analyst argues that Zoom’s “Zoom Phone” service, which launched in January 2019, could be another key to growth, opening “another large frontier in replacing legacy phone systems” among its customers. In the post-earnings Q2 conference call, CFO Kelly Steckelberg confirmed that the cloud-based phone service’s rollout is “doing well, we’ve seen traction in Zoom Phone across all segments of the business … [and] approximately 50% of Zoom Phone is coming from customers with [annual revenue] greater than 100K or more.”

Valuing Zoom

With sales growth rates at or near 100%, and profits growing even faster, you’d probably expect Zoom stock to cost a lot — and you’d be right!

In contrast to “most other high-growth SaaS names,” notes Baird, Zoom already boasts “strong profitability,” with GAAP profits of $0.03 per share over the past year, and adjusted profits expected to be six times as strong by the end of fiscal 2020. But to own a piece of that growth, you’re going to be expected to pay through the nose: 2,742 times trailing GAAP earnings (according to Yahoo! Finance’s latest tally) and 442 times forward earnings. (Valuation based on trailing free cash flow is very close to that based on forward earnings — about 451 times.)

Baird acknowledges that this is kind of a “premium valuation” for the stock, yet nonetheless argues it is “justified by the industry-leading growth, estimate upside potential, strong profitability and significant Zoom Phone potential.”

But is the analyst right about that?

Honestly, I’m not so sure Baird is. Consider that although profitable today, analysts who cover Zoom — on average — predict that it will dip back into GAAP unprofitability as early as next year as the company continues to invest in growth. Moreover, most analysts see GAAP losses growing, not shrinking, as time goes by — $0.03 per share in losses next year becoming $0.21 in 2021, and $0.36 in 2022.

Granted, if you look far enough down the road, these same analysts see adjusted profits and free cash flow exploding in outlying years, with Zoom potentially earning more than $1 a share (pro forma) in 2023, and generating more than $400 million in free cash flow that year, according to S&P Global. Still, that’s a long time to ask an investor to wait to learn if Zoom will really turn out to be a profitable company, and it gives competitors a lot of time to disrupt Zoom’s business before it ever becomes consistently profitable.

Personally, despite Baird’s recommendation today, I think I’ll pass on Zoom.

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August 2019 was not a great month to own Etsy (NASDAQ: ETSY).

In one single day, Etsy shares lost more than 12% of their value after the company reported a sharp decrease in “service” revenue in its Q2 2019 earnings report. By early September, the selling had subtracted nearly 30% from Etsy’s share price, and the stock remains 16% below its pre-earnings price today.

According to one analyst, this makes now a great time to buy Etsy stock.

Upgrading Etsy

Thanks to August’s sell-off, Etsy’s gains of earlier this year have been almost entirely erased, and the stock now trades up by just single digits from its share price a year ago — only a slightly better performance than the S&P 500. While not exactly cheap at 66 times trailing earnings, this appears to give investors a second bite at the Etsy apple — and according to investment banker Wedbush, the opportunity couldn’t come at a better time.

This morning, Wedbush announced it is upgrading Etsy stock to outperform, with a $66 price target. Not only is the stock cheaper than it was before Q2’s earnings disappointment, but Etsy has also announced “a critical mass of new initiatives, highlighted by Etsy Ads and free shipping”; Wedbush believes these will help to expand profit margins, driving stronger earnings “over time.”

Wedbush likes two of Etsy’s new “initiatives” in particular.

Etsy Ads

Etsy derives revenue from two main businesses — facilitating sales between sellers and buyers on its platform (“marketplace revenue”) and providing services to the sellers (“service revenue”). It’s the second of these revenue streams that appears to have investors worried.

In the first half of 2019, Etsy’s larger marketplace business grew sales 45% year over year, to $261 million. Service revenue, on the other hand, grew only half as fast — up 22% to $88 million. Worse, service revenue decelerated markedly from Q1 to Q2 2019, showing 29% growth in the year’s first quarter — but only 16% growth in Q2.

But the announcement of Etsy Ads promises to perk up those lagging service revenues, and to help salvage Etsy’s reputation as a growth stock.

As my fellow Fool contributor Robert Izquierdo explained last week, in a marketplace where “millions of sellers [are] competing for consumer eyeballs,” Etsy Ads offers Etsy sellers the ability to pay for “streamlined advertising capabilities” to help them stand out in the crowd. The new Etsy Ads product has the potential to “improve upon the company’s current, clunky advertising options,” attracting ad dollars to the company — and probably boosting service revenue in the process.

Free shipping

At the same time, Etsy is encouraging more of its sellers to offer (and pay for) free shipping on the wares they sell — on orders of $35 or more. This has two advantages for Etsy.

On the one hand, free shipping removes a barrier to making sales, by lowering the apparent cost of shopping on Etsy from the customer’s perspective. At the same time, requiring customers to place orders for at least $35 to obtain free shipping promises to increase the average size of orders placed on Etsy as customers reach a little higher to get the deal — boosting both gross merchandise sales and revenue for Etsy.

Granted, this is hardly a new idea, offering free shipping in exchange for placing an order of sufficient size. But it’s a tried and true strategy, and one likely to pay off for Etsy.

Why buy now?

Wedbush approves of both these initiatives. It especially likes that Etsy has chosen both to improve its advertising capabilities and to offer free shipping benefits “launching into the holiday season,” with support from a “brand marketing push” on television and social media.

Getting all of this rolling right at the moment many consumers begin thinking of their Christmas shopping lists, again, isn’t an entirely original idea. But it is undeniably good timing nonetheless.

Etsy is rolling out all of the above at a time when its stock is generating all-time high free cash flow (nearly $200 million, according to data from S&P Global Market Intelligence). But it’s selling for a big discount off its pre-earnings share price — and that makes now a great time to buy into Etsy.

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Every day, Wall Street analysts upgrade some stocks, downgrade others, and “initiate coverage” on a few more. But do these analysts even know what they’re talking about? Today, we’re taking one high-profile Wall Street pick and putting it under the microscope….

On Wall Street, growth stocks remain all the rage — and I’m afraid that’s bad news for investors in HP Inc. (NYSE: HPQ).

Despite the abbreviated name, the company once known as Hewlett-Packard remains best known for producing old-tech-economy products such as PCs and printers (and printer ink) — rather than the tablets and smartphones that are making paper-focused devices less essential. As the world goes ever more digital, Wall Street is beginning to worry that HP — and in particular, HP’s printer division — is a business in terminal decline.

Yesterday morning, HP stock was getting dinged by a downgrade from the analysts at Bernstein, who cut the shares from “outperform” to “market perform” on worries over the health of the ink division. But is the news really as bad as it sounds?

Let’s find out.

Downgrading HP stock

In the downgrade, Bernstein observes that sales of printing supplies have “declined at a 4% CAGR [compound annual growth rate] since 2011,” and growth is “expected to be negative in both 2019 and 2020” as well. Add it up, and that’s a decade-long trend of negative growth in printer ink, which was once a mainstay of its business.

“We worry,” writes Bernstein, “that printing may be facing greater structural headwinds from the shift to digital and increased pressure from cloned/remanufactured supplies.”

What it means to HP

How big of a deal is this for HP? That’s not easy to discern right off the bat, as the company doesn’t break out “printer ink” as a separate business, instead lumping it in with sales of printer hardware. Still, if you review the printing division’s numbers from HP’s quarterly reports (as helpfully collated for us by our friends at S&P Global Market Intelligence), the trend certainly doesn’t look great.

Quarter over quarter, printing sales declined in each of the last three quarters, with the latest Q3 earnings report showing a 5.3% decline. And sales of printer supplies such as ink were down even more — 7%, according to management.

Printing supplies in general make up 64% of sales from the company’s printing division. Accordingly, even if overall printing sales were up in the last couple of years, the downturn in ink sales appears likely to limit, if not absolutely prevent, growth in printing sales.

As Bernstein terms it, printer ink appears to be a “melting ice-cube,” and one that could swamp HP’s attractiveness as a stock.

A bull case for HP

And yet, even if that’s all true, I still see reasons to like HP stock. For example, sales at HP’s personal systems division (basically, PCs) grew a respectable 13% last year, faster than the growth in printing sales and more than enough to offset declines in “supplies” revenue.

Analysts aren’t looking for any kind of spectacular growth out of HP — 6.7% annual earnings growth is the consensus. But that actually looks like plenty of growth to justify the stock’s price-to-earnings ratio of 6.7, especially when it’s viewed in light of the company’s strong free cash flow (better than reported net income), its almost-zero net debt load, and its generous dividend.

HP pays its shareholders 3.4% annually in the form of dividend checks — about 70% above the market average. And the company’s payout ratio (the percentage of profit required to cover the dividend) is a modest 23%, leaving plenty of room for improvement.

And with all the cash HP is bringing in, there’s plenty of money to pay for further improvement.

S&P Global data shows that over the last 12 months, HP generated nearly $4.4 billion in positive free cash flow, a number that’s been growing for three years straight (despite the problems with sales of printer ink). The stock is valued at just 6.4 times free cash flow; I see HP’s dividend already paying for about half that valuation, and the modest growth rate more than justifies the other half.

Even if it’s not growing by leaps and bounds anymore, HP stock still looks pretty good to me.

The post HP Stock Downgraded: What You Need to Know appeared first on The Motley Fool Canada.

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