Monday, October 12, 2015
- Analysts say examination of the options market indicates shares of Consol Energy (NYSE:CNX), Chesapeake Energy (NYSE:CHK) and Transocean (NYSE:RIG) are each expected to either rise or fall by ~20% in the next six weeks.
- The oil and gas sector as a whole is pricing in more volatility, mostly because of the price of crude oil itself: "If you look at the options market, it's suggested that we could see moves of 2.5% on a single day at least twice a week," says the head of derivative strategy at Susquehanna, adding that a year ago, "the expectation was for that to happen once a month."
- "All this volatility in the oil market just wreaks havoc on these particular companies," says a market strategist at RJO Futures. "We've seen deteriorating net income levels [and] we've seen operating cash start to dwindle a lot."
- Charles Kau, chairman of Micron (NASDAQ:MU) and Nanya's Inotera DRAM JV, has been hired by China's state-controlled Tsinghua Unigroup, which was previously reported to have bid for Micron. Kau will act as one of Tsinghua's three global EVPs and be responsible for its memory business, while remaining Inotera's chairman.
- "We have cooperation with Micron on the business level," says Tsinghua chairman Zhao Weiguo. "We’d like to conduct business by cooperating with current memory giants, by setting up JV plants in China." The remarks come shortly after a Tsinghua subsidiary took a 15% stake in hard drive giant Western Digital, and a few months after rumors of a full-blown Micron bid drew hostile responses from politicians.
- Zhao suggests Tsinghua is more interested in manufacturing NAND flash (at least directly) than DRAM. However, he adds the company has no interest in buying NAND vendors SanDisk, Toshiba, or SK Hynix (assuming regulators would approve).
- Meanwhile, Barron's provided a bullish write-up for Micron over the weekend. The paper cited the potential of Micron/Intel's 3D XPoint memory tech - commercial shipments start next year, with "meaningful" revenue contribution by 2018 - and a belief DRAM demand is bottoming. It also sees Micron benefiting from chip industry consolidation, either as a seller or a buyer.
- In spite of the Barron's piece, Micron fell 0.7% today. The Nasdaq was up fractionally.
- After closing below its $17 IPO price on Wednesday and falling as low as $15.50 on Thursday, Pure Storage (NYSE:PSTG) has staged a strong 2-day rally that has brought shares above $18. The enterprise flash storage array vendor is now worth $3.3B; it was valued at $3B+ in a 2014 funding round.
- FBN's Shebly Seyrafi launched coverage with an Outperform and $23 target last week, arguing Pure, aided by its FlashReduce data-reduction tech, can take plenty of share in a ~$24B external storage hardware market. "With revenue of ~$359M this year, [Pure's] share of the market would be around 1.5% or so. Our data show that last quarter PSTG gained .6pp of relative share Y/Y vs. its top peers, and we expect the company’s market share momentum to continue. Furthermore, Gartner ranked PSTG and EMC/XtremIO tops in the solid-state array (SSA) market."
- EMC, which just announced it's merging with Dell and offers flash arrays through its XtremIO unit (and perhaps soon its DSSD high-end array unit), is viewed as Pure's toughest rival. "EMC disclosed that XtremIO exceeded a $1B annual run rate in CQ4 2014, just three quarters after first shipping the product in CQ1 2014. In the most recent quarter (CQ2 2015), XtremIO revenue grew by >300% Y/Y. We estimate that PSTG’s revenue is currently ~28% of EMC’s XtremIO bookings, and this % has been declining. However, we believe that with PSTG’s focus that it could start outgrowing EMC in F2017 and F2018."
- SA author The Value Investor argues Pure's heavy losses (equal to 70% of sales over its last two quarters, as the company invests heavily in sales and R&D) should give would-be buyers pause. Lior Ronen, on the other hand, thinks Pure's growth (still in triple digits) overshadows near-term losses.
- Prior Pure Storage coverage
- "2U (NASDAQ:TWOU) is not a SaaS company. In reality, it is a for-profit outsourced online degree provider that was founded almost eight years ago, yet still generates ~85% of revenues from only 4 clients," writes Citron Research. "2U’s addressable market is tiny, there are dozens of competitors, and its contract economics are unattractive."
- Citron argues 2U's business model requires major up-front capital investments for each client and the maintenance of a full-time staff for each online degree program it hosts - it estimates a staff-to-program ratio of 50 - putting in stark contrast to cloud/SaaS software peers with low marginal costs to support additional clients. It also notes 2U us responsible for finding students to enroll in its programs, thus giving it low revenue visibility.
- Meanwhile, 2U's focus on tier-1 educational institutions is declared to limit its addressable market, particularly given the reluctance of many such institutions to offer online degree programs and a low % of students who prefer online programs to on-campus programs. Its average ~10-year contract is estimated to have a net present value of just $8M ($0.17/share), and current programs outside of ones with USC and Georgetown are collectively estimated to have generated a $34M 2014 EBITDA loss.
- Citron: "Assuming the company scales to 48 contracts from 24 today ... with an average of 650 students per contract, this business would be worth around $384M in 2020 ... Discounting that back by 10% to today gets you to a present value of the 48 contracts of around ~$230M. Adding in the cash currently on the balance sheet ... gets you to an equity value for the firm of ~$410M, which implies ... ~67% downside from the stock’s current levels."
- Citron's report (.pdf)
- Believing risk/reward is now unfavorable, Raymond James has downgraded Tech Data (TECD -2.4%) to Underperform. While making note of capital returns and margin expansion, the firm thinks European growth is unsustainable and believe trailing 12-month (TTM) cash flow will likely peak in FQ3.
- The IT hardware distributor remains up 15% YTD. Shares go for 12x an FY17 (ends Jan. '17) EPS consensus of $6.07.
- As part of a resumption of coverage, Morgan Stanley's Craig Hattenbach has started NXP (NXPI +2.5%) with an Overweight rating and $115 target. Merger partner Freescale (FSL +2.3%) is following NXP higher.
- With Freescale on board, Hattenbach expects NXP's revenue growth to top a 6% chip industry CAGR over the next few years, with its core business (includes smart card/electronic ID microcontrollers) growing at twice the rate of peers thanks to "strong leadership in a number of secular growth themes, including rising penetration of mobile payments, transition to chip based payment cards in the US and China and continued digitization of government documents."
- He adds the Freescale deal will cut NXP's Apple dependence and (as expected) deliver major cost synergies. Broader industry challenges are seen presenting risk to Q4 estimates, but Hattenbach thinks NXP "likely protects EPS better than peers in this difficult macro environment."
- The launch comes ahead of NXP's Q3 report. Shares +17% YTD.
- Believing customer acquisition costs/marketing spend is rising and that new services carry lower margins, Monness Crespi has launched coverage on ETSY with a Sell rating and $10 target.
- Monness is also worried about growing competition and a 3-stage lockup expiration occurring between this month and April 2016. The first stage arrives tomorrow.
- Etsy sold off last Thursday after Amazon officially launched a rival handmade goods marketplace, before partly recovering its losses on Friday. Shares go for 3.5x a 2016 sales consensus of $355.1M after backing out net cash.
- Thomas Schroeder of Chart Partners, who correctly predicted the recent rebound in China stocks, says what we're seeing is a bear market rally.
- Schroeder says the Shanghai Composite (currently 3,260) will rally to 4,100 before plunging another 41% to 2,400 in early 2016.
- The bump in oil prices and a rebound in emerging market currencies will fuel a China rally in the coming months, which will reverse as the Fed starts raising interest rates.
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