The Nasdaq composite index sold off sharply last week, and closed down below 3,000 to 2,956.34. The technology-heavy index dropped more than 3%, its worst weekly performance for the year. A combination of a weak payrolls report on May 4 and a dim forecast from technology companies for the next quarter hurt stocks.
What does the share price decline mean for companies re-testing recently-made lows? More importantly, which of these companies offer the greatest upside in the months ahead?
Yahoo Inc (YHOO)
Yahoo closed recently at $15.15. The company's CEO is receiving negative attention after Third Point, a large activist and holder in Yahoo shares, discovered discrepancies in the CEO's resume. Yahoo's shares remain under immense selling pressure. The IPO of Facebook (FB) will draw investing interest away from a company that continues to be in transition.
Key points that support upside for Yahoo shares come from its most recent earnings call:
Q1 gains were driven by changes Yahoo made to the Search experience that drove higher click-through on our Search ads.
Display was down, engagement on Yahoo News grew, driven by partnerships with ABC News, and by Yahoo's social bar.
Year-over-year revenue grew for the first time since the third quarter of 2008.
Cash flow from operating activities grew 45% from 2011. Free cash flow grew than 245%.
On the cost reduction side, the $375 million cost savings associated with the reduction in work force will take about a year.
Share value will improve if Yahoo succeeds in improving its operational effectiveness. Its current margin (excluding traffic acquisition costs or ex-TAC) is 18.5%. The company has a goal of achieving a margin of 25%.
E*Trade Financial Corporation (ETFC)
E*Trade shares rose to close to $11 after reporting Q1 earnings, only to be dragged down with the Nasdaq index to close at $9.98. The key points from the conference call supporting a bullish stance for shares are:
DARTs, or Daily Average Revenue Trades, grew by 12% sequentially.
New net brokerage assets grew by $4 billion in the quarter (11% annualized growth rate and over double the $1.7 billion growth from the previous quarter).
Brokerage related cash was $31 billion.
Troubled legacy loan portfolio was $12.4 billion, down 62% from its peak and down by $780 million in the quarter.
Delinquencies dropped 56% and are at a 4-year low
The company completed the launch of E*Trade 360, added an investor education section, and offered FOREX-related products for its customers. E*Trade also attracted more retirement assets. Retirement accounts now account for 28% of all accounts, and are 16% of the total assets.
In April, trading dropped 7% from March 2012. E*Trade may see further share weakness as market trading activity drops. Investors with a longer-term time horizon should consider a long position in E*Trade. The company's focus on the customer experience will help attract more assets and reduce attrition. Renewed optimism in markets will also help options activity and increase margin balances, supporting higher earnings.
OCZ Technology Group Inc. (OCZ)
OCZ plummeted by 19.91% for the month, and shares are now down 42.35% in the quarter. OCZ closed recently at $5.39 even after a steady earnings report. The company reported a loss due to higher expenses in R&D and sales and marketing. The short-term cost will support healthy growth in the longer term. The positive points for OCZ from its quarterly conference call on May 1 are:
Expectations that recent declines in NAND flash pricing will make SSDs more attractive to mainstream applications (i.e. SANs, network appliances, Ultrabooks and mainstream servers.
Transition of sales from Vertex 3 to Vertex 4 will improve margins.
Guided net revenues for the fiscal quarter to be in a range of $110 million - $120 million.
Guided annual revenues to be between $630 million to $700 million.
Gross margins rose to 25% from 16.6% last year.
One negative in the quarter was that OCZ saw inventory days rise to 101 days, up from 77. OCZ said that its sales staff increased by 75%, a bullish signal that implies the higher inventory was needed to meet an anticipated rise in sales.
First Solar, Inc. (FSLR)
First Solar shares closed at around a 52-week low at $16.94 after reporting earnings. Shares are now 88.09% below its 52-week high. Investors looking for exposure to the solar energy sector should consider First Solar, but the macro environment remains negative. The company is transitioning its business away from areas that had once benefited from generous government subsidies.
In its conference call, the company outlined three steps in its strategy:
Be prepared to price solar electricity at levels sufficient to make solar-generated electricity a compelling value proposition.
Design and engineer utility scale solar power plants that will deliver reliable levels of energy production with sufficient mitigation of intermittency that allows a plant to behave more like a renewable generation from a conventional power source.
Integrate large-scale solar generation onto the transmission grid without destabilizing the grid or imposing excessive grid management costs on the local grid operators.
The strategy looks to achieve a 5-year target of selling 2.6 - 3 gigawatts in 2016.
NVIDIA Corporation (NVDA)
NVIDIA underperformed the Nasdaq by 100 basis points, dropping 4% to $12.26 for the week ending May 4. The company unveiled a $999 discrete graphics card, but shares were still hurt after Intel (INTC) unveiled its Ivy Bridge line-up of processors. The integrated HD4000 from Intel will hurt low-end NVIDIA graphics processors that sell below $50.
Analysts remain optimistic for NVIDIA. The average target price is $16.77, implying an upside of 36.78%. NVIDIA is scheduled to report earnings on May 11.
NVIDIA and OCZ Technology offer the greatest upside relative to the Nasdaq index. The sell-off in these companies created a buying opportunity for investors who missed the recent run-up. Both companies continue to be well-positioned for higher demand stemming from steady demand in server, desktop, and mobile (for NVIDIA) markets.