The S&P 500 rallied 3% last week, a rise in magnitude not seen since mid-March. The market was helped by strong earnings from Apple (AAPL) and Amazon.com (AMZN). The Nasdaq fared even better, rising 3.5%. An area of focus for investors seeking opportunity comes from companies that failed to participate in the rise last week. In some cases, the sharp decline for these companies was driven in most cases by earnings results and forecasts that failed to meet investor expectations.
Does the stock price dip represent a new bearish trend for these companies, or have shares bottomed out?
Alcatel-Lucent shares are down 33.90% for the month after closing at $1.56. Investor skepticism heightened after the company reported earnings that revealed weaknesses in the sale of its older technologies in China. The most important points coming from the quarterly report were that:
GSM bids in China did not take place during Q1 and are now expected to take place in Q2, resulting in a 90% drop in GSM revenues.
Reduction in SG&A of EUR 100 million ($132M).
IP grew 23.5%.
Gross margin seen to be at its low-point in Q1.
Gross margin rise in Q2 and beyond is expected.
211% growth in Mexico, helped by build-out in fiber, but dropped 20% in the Middle East.
Quarter ended with EUR 5.2 billion ($6.88B) in cash and marketable securities.
The company said it expected the delay in the GSM rollout in China to be resolved in Q2.
CDMA is already expected by the company to continue to be weak. Alcatel-Lucent recognizes this weakness, and is relying on IP and next-generation optical, LTE, to make up for its decline. Products based on Light Radio are also a growth area for the company, but revenue from this segment will not be meaningful until 2013.
Alcatel-Lucent has a book to bill ratio greater than 1 in China. This suggests that Q1 was a low-point for the company.
Clearwire continued its free fall in share price that began on April 12, when shares traded at $2.20. Shares traded recently at $1.42. During the recent conference call, the company said it is expecting retail churn to increase in 2012. This is due to the sale of unsubsidized phones that are no-contract in nature. During the quarter, the lower cost channels generated substantially lower commissions for Clearwire.
There are some positives from the quarterly results:
Total net additions were 586,000.
Total subscriber base is 11 million, up 80% from 6.1 million in first quarter of 2011.
The company is targeting 5,000 LTE sites within top-tier markets beginning in 2013.
Retail business grew by 49,000 net subscribers (1.3 million total subscribers).
Clearwire renegotiated its terms with Sprint. The company will receive $900 million ($600 million in 2012 and $300 million in 2013) from Sprint for supplying unlimited WiMAX services until 2013. Sprint is benefiting from this arrangement. In its last quarter, the company saved $40 million by shifting 4G roaming expenses, and $15 million from 3G roaming expenses.
Shares in Clearwire sold-off last week as investors digested the 700 megahertz spectrum sale from Verizon (VZ). Clearwire is funding its expansion from its wholesale revenue, but the Verizon sale threatens the health of this operational model. The bearish trend is likely to continue, as consistent funding remains a challenge for the company.
Zynga dropped 9.55% to $8.52 after reporting earnings. The company reported a growth in revenue of $321 million in Q1 2012 over Q4 2011, but still managed to generate a loss. The loss was due to the company paying out $133.9 million in stock-based compensation.
Bullish investors would argue that the company offers investors exposure to the explosive growth in mobile gaming. Margins are far better with its OMGPOP acquisition, because Zynga does not need to pay Facebook. The company saw its user-base double last quarter for the game, "Draw Something."
With shares trading well-below the $10 IPO price, Zynga is a company investors will soon consider accumulating. Weakness in Electronic Arts (EA) shares suggest that investors who want exposure to mobile gaming growth will prefer to buy Zynga shares.
LSI shares are up 32.61% year-to-date, but pulled back since peaking at around $9 in early-March. The company dropped again, trading recently at $7.89 even after reporting healthy earnings. In its quarterly conference call, the company forecast growth in SoCs (System on a Chip) will benefit from the hard disk drive manufacturing recovery in Thailand. Investors sold LSI because Western Digital Corporation (WDC) gave cautious outlook. Hard drive competitor Seagate Technology (STX) also fell in sympathy. LSI is heavily exposed to enterprise drives sold by Seagate, Hitachi, and Western Digital. This segment is expected to grow, benefiting from cloud deployments.
The company earned $0.20 per share (non-GAAP) or $0.30 per share (GAAP), grew revenues by 19% sequentially, and improved margins to 52.4%.
In its quarterly call, the company provided the following outlook:
Q2 revenue forecast in the range of $630 million to $670 million, up 4% sequentially.
Non-GAAP earnings per share increasing 17.5% to between $0.15 and $0.21 per share, or $0.03 to $0.13 per share GAAP.
LSI is a multi-year growth story that offers upside for investors who accumulate shares on short-term weakness.
Disclosure: I am long EA.