Portfolio Ups and Downs: Akamai, Intuitive Surgical, Click Commerce and Formfactor

by: Travis Johnson

Many of my holdings have been moving in almost perfect mirror trajectories over the past couple of days, following earnings reports that either disappointed or encouraged investors.

Akamai (NASDAQ:AKAM) did much better than I had expected -- and even though it showed accelerating growth, which is the holy grail for investors, I was shocked to see it climb back to within a hair of it's 52 week high. I thought the shares were already priced for some pretty dramatic outperformance, but clearly the wave of analyst upgrades following their earnings did their job as the shares zoomed higher by better than 20% yesterday. A nice surprise.

On the flip side, Intuitive Surgical (NASDAQ:ISRG) shareholders reacted to strong growth and forecasts with much more anger -- we've gotten spoiled with ISRG, as with AKAM, and expect blowout growth every single quarter, so merely great growth isn't going to cut it if you're carrying a high multiple. Intuitive had very strong recurring revenue growth from their sales of instruments, which means procedure growth is very good. I think that's the most important thing to see, that surgeries using the da Vinci are continuing to grow, but clearly a lot of investors were looking for much more dramatic growth in system sales.

ISRG surprised everyone to the upside in the first quarter with 35 systems sold, many of them the newer, more expensive da Vinci S Surgical System, but even a 50% rise in systems sold year over year to 39 in this quarter was inadequate for many, even with a small-scale beat on earnings. I think folks expected a dramatic sequential climb in installations and didn't get it. However, the growth there is still continuing and the second quarter can be pretty soft for big ticket purchases, so I'm not worried. I still think that the key for ISRG will be procedure growth in hysterectomies now that they have proven that they can build a dominant position in prostatectomies, but it's early days still for the da Vinci in gynecological surgery.

And because my ISRG position is roughly twice as large as my AKAM position, they completely cancelled each other out yesterday.

The same thing happened today with two more volatile stocks -- Click Commerce (CKCM) disappointed due to a much higher tax rate and some slowing sales growth, and Formfactor (NASDAQ:FORM) surprised with greater than expected growth in both earnings and sales.

I was a little disappointed with CKCM's performance, but not enough to sell my shares -- and frankly, given their low multiple, I think the shellacking the shares have taken this morning is quite overdone. Even if they were not growing very robustly, which they are even though taxes have taken a big bite out of earnings this quarter for the first time, they're being valued at a PE of about 9 on both forward and TTM earnings. That's just silly, and it implies an assumption that investors are assuming that their investments in R&D and in marketing will not allow them to build the business. They're priced for no growth now, but I expect good growth that will, within a couple quarters, come down to the bottom line. I am tempted to buy more but already have a large position, so I'll have to think about it a bit.

Formfactor, on the other hand, continues to delight. As I wrote a few weeks ago, the competition and innovation in the semiconductor industry is mother's milk for FORM as it allows them to sell a greater variety of testing probe cards, in higher volume. I don't see a significant downside even with overall semiconductor market volatility, given the remarkable diversity of customers and end user semiconductor applications that they serve. They have managed sequential sales growth of 14% and YOY growth of 77% ... no complaints there, even though the year ago quarter was a low point. And more impressively, they turned that 14% sales growth into better than 20% sequential earnings growth. Unlike CKCM, FORM is priced now for significant ongoing growth, but I still like their chances. FORM is actually a relatively small position for me because I was never wise enough to double down last summer when the price was very enticing -- if it was one of my larger holdings I'd be tempted to take a small portion of my profits off the table given their high multiple, but as the situation stands it makes more sense to just hold and watch.

Formfactor's industry colleague MEMC Electronic Materials (WFR), by the way, is clearly confusing investors on a very fundamental level. They soundly beat the earnings estimates AND significantly increased their guidance for this year's earnings, and the shares actually went down. They're poised to invest in capacity to serve the solar power industry, thanks to an agreement with Suntech Power (NYSE:STP), and they continue to supply scarce wafers to the semiconductor fabricators at very nice margins. Given the average market multiple and their dramatic decline over the course of this year so far (from $48 to below $28), I can only imagine that the reason WFR is falling is that everyone is terrified of the Intel (NASDAQ:INTC) /AMD (NASDAQ:AMD) problems. That's close to irrelevant for WFR, in my opinion, as long as chips continue to be required to run everything from laptops to cell phones to cars.

AKAM vs. ISRG 1-yr chart:

CKCM vs. FORM 1-yr chart:

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