Alcatel-Lucent (ALU) and Netflix, Inc. (NFLX) are two technology stocks that received the most upgrades in the past three months. In this article, analysts' calls and projections will be provided for both stocks, which will also be analyzed fundamentally. Investing strategies will also be reviewed.
Alcatel-Lucent, a France-based company, is a provider of telecommunications technology and services, which also engages in mobile, fixed, Internet Protocol and optics technologies, applications and services. ALU was down 207% and closed at $1.42 on March 6, 2013. ALU had been trading in the range of $0.91-$2.48 in the past 52 weeks. ALU has a market cap of $3.22B with a high beta of 2.36.
ALU had received six upgrades from several analysts in the past three months. On March 1, 2013, Bernstein upgraded ALU from underperform to market perform with a price target of $1.46 (from $0.79). On February 8, 2013, Morgan Stanley upgraded ALU from underweight to overweight following Q4 results and CEO move. On January 23, 2013, Citi upgraded ALU from sell to neutral and raised its price target to EUR1.30 (USD $1.69). The firm cited a positive carrier spending environment and reduced bankruptcy risk.
On January 7, 2013, Goldman Sachs removed ALU from its Pan-Europe conviction sell list but is keeping a sell rating and EUR1.2 (USD $1.60) price target. The analyst said,
In our view outperformance has been driven by upside to capex intentions of US Telcos, granular disclosure on ALU's patent portfolio and the announcement of a planned significant change in Alcatel's capital structure, mitigating tail risk. We remove ALUA.PA and ALU from the Conviction List but they remain Sell given the group's Q4 industry positioning and returns.
On January 3, 2013, Credit Suisse raised its rating on ALU from underperform to neutral, boosting its price target from €0.70 ($0.91) up to €1.25 (USD $1.62). Credit Suisse commented that while Alcatel is likely to burn cash through 2014, its new debt agreement makes it a viable business through 2015. The firm also said that management's long-term sales goals would be difficult to achieve with the effectiveness of operating expense restructuring still questionable.
Lastly, Natixis upgraded ALU from neutral to buy on December 17, 2013.
Analysts currently have a mean target price of $1.50 and a median target price of $1.57 for ALU. Analysts, on average, are estimating an EPS of $-0.11 with revenue of $4.25B for the current quarter. For 2013, analysts are projecting an EPS of -0.13 with revenue of $18.67B, which is 2% less than 2012.
ALU is improving fundamentally and has strong ROE of 36.3, which is higher than the industry average of 10.1. At the current price level, the bottom line is supported with its book value of $1.10. ALU will continue to benefit from the growing trend of LTE.
Netflix, Inc. is a provider of internet subscription service streaming TV shows and movies. NFLX was up 0.67% and closed at $182.94 on March 6, 2013. NFLX had been trading in the range of $52.81-$197.62 in the past 52 weeks.
NFLX had received five upgrades and one new positive coverage from several analysts in the past 3 months. On March 4, 2013, RBC Capital initiated coverage on NFLX with an outperform rating with a price target of $210.00. On January 24, 2013, Raymond James upgraded NFLX from underperform to market perform following strong Q4 results. On the same day, following strong Q4 results, Macquarie upgraded NFLX from underperform to neutral, and Lazard Capital upgraded NFLX from neutral to buy. JPMorgan upgraded NFLX from neutral to overweight with a price target of $180.00 (from $88.00).
Lastly, on January 18, Janney Montgomery Scott upgraded NFLX from neutral to buy with a price target of $129.00. Analyst Tony Wible said the company will benefit from a reduced float that will amplify improving fundamentals. The analyst commented,
Recent developments, including the DIS deal, the potential for a Sony deal, and the new CDN platform, are changing how Studios, MSOs, and investors approach the company. Expectations for sub growth have come down, and sell side sentiment is generally pessimistic, setting the stage for upside driven by new subs, content cost control (for existing content), and a potential price increase. Competition has not yet materialized to the extent that it poses significant near-term risk.
The analysts also stated,
While we still believe NFLX earnings growth will be subdued in the foreseeable future, in part due to international expansion costs, we believe investors are looking past this and valuing the company more on its longer term growth potential, implying that a higher multiple can be sustained. There may be near term volatility around earnings, but we believe any pullbacks represent buying opportunities.
Analysts currently have a mean target price of $136.73 and a median target price of $127.50 for NFLX. Analysts, on average, are estimating an EPS of $0.16 with revenue of $1.01B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.29 with revenue of $4.26B, which is 18.10% higher than 2012.
There are a few positive factors for NFLX:
- Stronger revenue growth (3-year average) of 29.3 (vs. the industry average of 7.5)
- NFLX generates an operating cash flow of $22.76M with a levered free cash flow of $1.70B.
At current P/E of 631.48 and Forward P/E of 45.5, strong revenue growth must be maintained. From the contrarian point of view, NFLX's high valuation might be caused by multiple upgrades from the analysts in the past few months.
Key Stats Comparison
Operating Cash Flow
Levered Free Cash Flow
Growth Estimate This Year
Growth Estimate Next Year
PEG Ratio (avg. for comparison categories)
Source: Google Finance, Yahoo Finance, and Morningstar
In Short, unlike ALU's turn around supported by stronger demand, NFLX's amazingly high valuation needs to be sustained by really strong growth while high expectation is baked in. ALU has a low PEG ratio (average for comparison categories) of 0.41 while NFLX has a very high PEG ratio of 7.04. The author believes ALU is still undervalued while remaining on the side-line for NFLX.
Note: All prices are quoted from the closing of March 6, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALU over the next 72 hours.