Archives for April 3, 2018

What happened

Shares of Alnylam Pharmaceuticals, Inc. (NASDAQ: ALNY), a precommercial pioneer of RNA-based therapies, continued a slide that began just ahead of the weekend. A clinical trial win that Pfizer Inc. (NYSE: PFE) announced on Thursday could mean potential competition for Alnylam’s lead candidate could be much worse than expected. In response, the stock is down 15.7% as of 11:30 a.m. EDT on Monday.

So what

Patisiran is one of several valuable candidates in Alnylam’s pipeline at the moment and furthest along the development timeline. The Food and Drug Administration is expected to hand down an approval decision this August that could make patisiran one of the first available treatments for the inherited form of a rare, life-threatening disease called transthyretin (TTR) amyloidosis.

Image source: Getty Images.

Ahead of Pfizer’s announcement, most had assumed a candidate from Ionis Pharmaceuticals (NASDAQ: IONS) called inotersen was the only serious contender for a very small population of TTR amyloidosis patients. The FDA rejected an application for Pfizer’s tafamidis years ago, citing lack of evidence proving efficacy. It took a long time, but Pfizer shot back on Thursday with long-term survival data that shows a significant benefit for patients taking tafamidis compared to placebo after 30 months.

Now what

Alnylam investors certainly have reasons to be nervous. However, there are still too many questions about tafamidis to assume a commercial launch is already doomed. Pfizer’s been marketing the oral treatment as Vyndaqel in the European Union for years, but sales figures have so far been too low to mention.

I’d call the recent plunge a bargain buying opportunity, despite Alnylam’s market cap still being up around $10 billion at the moment. Though the company has three other drugs in late-stage development, it still needs to score a string of victories to support its lofty valuation. Sanofi will fund late-stage development of a hemophilia candidate, and The Medicines Company has circled its wagons around a cholesterol candidate. While both have delivered excellent data, they also face increasingly fierce competition.

2017 was an absolutely banner year for the stock market. After historically rising by 7% a year, inclusive of dividend reinvestment and when adjusted for inflation, the broader market catapulted higher by nearly three times that amount last year. And with it, some of the hottest stocks logged triple-digit percentage gains. Payment processor Square (NYSE: SQ) gained 154%, online home-goods retailer Overstock.com (NASDAQ: OSTK) surged 265%, and Latin American e-commerce giant MercadoLibre (NASDAQ: MELI) vaulted higher by 102%.

But the big question is: Can these top performers continue pushing higher?

Image source: Getty Images.

With this in mind, we asked three of our Foolish investors whether they believed Square, Overstock.com, and MercadoLibre were still buys today. Here’s what they had to say.

Mobile payments aren’t going anywhere

Travis Hoium (Square): Payment processing company Square has had an incredible run the past 15 months, nearly quadrupling in value for investors. The gains have been driven by Square’s revenue growth and an improving bottom line, which investors hope will continue. Square isn’t profitable yet, but if businesses continue to adopt the company’s platform it’s possible the company will be able to start reporting positive net income soon.

What Square has been able to leverage the last few years is its suite of products that surround its payment processor, including calendars, inventory management, an e-commerce platform, and more. If you’re starting a food truck, salon, or coffee shop, Square makes all the sense in the world. That’s the foundation of the company right now, but it’s just scratching the surface of its potential.

Where Square has struggled, and where it has a great opportunity, is in businesses with over $500,000 in annual payment volume. Square is an attractive point-of-sale system for businesses with very small transactions, because the 2.75% flat fee is less expensive than other options. But as transaction prices go up, the attractiveness of Square’s fees goes down. Visa’s interchange rates are 1.51% plus $0.10 for a credit card transaction and 0.8% plus $0.15 for a debit card transaction, and most processors charge a small fee on top of Visa’s fee. Square does custom rates for some larger customers, but it’s missing an opportunity to grow into higher-transaction businesses with its current fees and locking itself into money-losing low-volume transactions. Creating a fee structure that would increase profitability for low-revenue transactions while attracting more high-revenue transaction businesses could drive Square’s stock significantly higher. That’s where I see upside for the stock in the future.

Given its payment platform and services, Square has become a go-to for small businesses across the country, and I think the company can expand that to higher revenue businesses as well, driving growth for many years to come. That’s why I think Square is still a buy, despite the stock’s gains already seen in the past year.

Should you “Go for the O”? Well, no.

Sean Williams (Overstock.com): Few stocks were on fire in 2017 quite like online home-goods retailer and now blockchain developer Overstock.com. From start to finish, Overstock shares galloped higher by 265%.

Overstock has benefited from the emergence of blockchain technology — the digital, distributed, and decentralized ledger that’s often tethered to cryptocurrencies and is responsible for logging all transactions — which is being developed by a subsidiary. It also rose in step with cryptocurrencies as it’s been accepting bitcoin and a few dozen other virtual currencies as payment on its online website. Overstock has been hanging on to a growing percentage of its virtual currency holdings, rather than converting them immediately into cash, which has boosted its underlying valuation as the market value of digital currencies has soared.

The big question is, can this rally continue? Put plainly, this investor isn’t convinced.

If we look at Overstock’s core online home-goods business, it’s rather unexciting. Despite its niche focus and the convenience of online purchases, Overstock.com hasn’t been able to hold a candle to Amazon.com. Amazon has deeper pockets and a considerably more loyal customer base, leaving Overstock muddling along with a mid-single-digit growth rate and breakeven profitability. That’s hardly worth a 265% increase in share price.

What’s more, CEO Patrick Byrne is practically going all-in on blockchain development and has tinkered with the idea of selling Overstock.com’s online business to fund blockchain development at its subsidiary. Even if blockchain proves to be the game-changing technology that everyone believes it could be, the chance that will happen within the next few years is slim. We’re still trying to move beyond the proof-of-concept conundrum, which makes placing too much faith in blockchain a potential mistake.

Should investors be buying Overstock.com following its 265% rise in 2017? Heck, no!

This is just the beginning

Danny Vena (MercadoLibre): After years of being held back by fears involving political unrest, hyperinflation, and currency devaluation, Latin American e-commerce leader MercadoLibre roared ahead in 2017, gaining over 100% — five times the performance of the S&P 500. Improving economic and political conditions in the region spurred the company’s results to new heights. In light of the stock’s significant spike, however, investors will rightly be asking themselves if MercadoLibre is still a buy.

A look at what drove the company’s gains last year might give us insight into whether MercadoLibre still has gas in the tank.

Worldwide e-commerce is expected to grow to $4.88 trillion by 2021, more than double the $2.3 trillion achieved in 2017. MercadoLibre stands to benefit from the increasing adoption of online sales. Over the years, the company has worked to remove the friction points that kept consumers from joining the e-commerce revolution.

MercadoLibre created its own online payment service, MercadoPago, that has been a key to its success, as 70% of consumers in the region don’t have a bank account and only between 20% and 50% have a credit card, depending on the country. The company also created its own shipping solution, MercadoEnvios, and has been rolling out free shipping, to counter the coming encroachment of Amazon.com.

The company also helps solve issues for business owners in a variety of ways. MercadoLibre provides working capital loans to vendors in a region that has low penetration rate for typical banking services. The company has more than a decade of granular data for longtime merchants, allowing it to more accurately assess the likelihood of repayment. It also provides an easy-to-adopt platform vendors can use to set up online sales.

With a host of advantages and an improving business climate, MercadoLibre seems destined to continue the significant gains it achieved in 2017.

Value stocks have become scarce thanks to the nine-year bull market, which has only recently started to show its age. Even a few months ago, it was tough to find anything that could legitimately be called a value stock.

The market is no longer moving in only one direction, and that means value investors should be on the lookout for opportunities. Where to start? How about Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Best Buy (NYSE: BBY), and Cypress Semiconductor (NASDAQ: CY)? Here’s what you need to know.

Image source: Getty Images.

A surprisingly inexpensive tech giant

Steve Symington (Alphabet): Alphabet stock is trading at around $1,035 per share as of this writing, but don’t let its four-figure price fool you into thinking it’s expensive. The parent company of Google is expected to increase revenue nearly 21% this year (to around $134 billion), while 2018 earnings should climb by an even more impressive 38% to roughly $42 per share. Assuming Alphabet lives up to those expectations — and it typically does, despite not offering quarterly financial guidance to Wall Street — that would mean the stock trades at below 25 times forward earnings, an attractive premium given its growth. And that’s not to mention the fact that Alphabet has nearly $101.9 billion in cash and marketable securities — or roughly $147 per share — on its balance sheet.

Of course, the vast majority of Alphabet’s sales and profits come from advertising and digital product sales from its incredible core Google business, which boasts seven products with at least one billion monthly users each: Search, Gmail, Chrome, Maps, YouTube, Google Play, and Android.

But Alphabet also enjoys the promise of substantial incremental growth from its “other bets” segment, which houses a group of mostly early-stage businesses with massive long-term promise. Even still, these other bets are seeing their collective top lines grow quickly; sales from the segment soared 49% last year to $1.2 billion — mostly from Nest connected home products, Fiber high-speed internet, and Verily life-sciences innovations. And while they simultaneously generated an operating loss of $3.4 billion last year (narrowed from $36 billion in 2016), if even one or two of these businesses can eventually grow to rival Google’s existing core operations, they will prove money well spent.

This retailer is killing it

Tim Green (Best Buy): There are a lot of retail stocks trading at severely beaten-down valuations. Consumer electronics retailer Best Buy isn’t one of them. The stock has soared since the company embarked on its turnaround in late 2012. Over the past five years, shares of Best Buy have more than tripled:

Best Buy has slashed unnecessary costs, removed layers of management, lowered prices, invested in its stores, and expanded its e-commerce operation. The company’s fourth-quarter results show the fruits of those labors: Comparable sales jumped 9% higher, online sales surged 17.9%, and adjusted earnings per share exploded 25%. On top of solid execution, the company’s results were aided by the decline of competitors like Sears Holdings and the bankruptcy of regional chain H.H. Gregg.

Best Buy produced adjusted earnings of $4.42 per share in 2017. Back out the $1.78 billion of net cash on the balance sheet, and the stock’s price-to-earnings ratio sits at 14. Use the $5.50 to $5.75 per share Best Buy expects to earn in fiscal 2021, and the ratio drops to 11 at the midpoint of that range.

Best Buy’s future growth will depend on its success expanding its services, e-commerce, and international businesses. The company doesn’t expect the blockbuster growth numbers it put up in the fourth quarter to repeat. But with a relatively low valuation, Best Buy doesn’t need to hit a home run every quarter for the stock to be a solid investment.

An overlooked niche chipmaker

Leo Sun (Cypress Semiconductor): Cypress Semiconductor is often overshadowed by larger chipmakers, but it’s the market leader in five high-growth niche categories — Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, automotive instrument cluster microcontrollers, automotive NOR flash memory chips, SRAM memory chips, and USB-C controllers.

The chipmaker’s core growth strategy, dubbed “Cypress 3.0,” aims to turn it into a “one-stop embedded solutions provider” for the IoT market. That strategy got a big boost from its acquisition of Broadcom’s wireless IoT business in 2016.

Cypress has a lot of irons in the fire. Its core growth comes from the automotive and industrial markets, where smarter machines now require more semiconductors, but it also has a major foothold in the consumer electronics market, where the USB-C standard is gaining traction.

Bears think its growth could be hurt by soft auto sales or an economic slowdown which hits industrial chips, but Cypress consistently gains content share in both the auto and industrial markets — which means that a large number of chips installed per machine could easily offset any cyclical declines. That’s why 80% of its revenues came from customers who bought “two or more” product families last quarter.

Analysts expect the company’s revenue and earnings to rise 7% and 37%, respectively, this year. Yet the stock trades at 14 times forward earnings and pays a forward dividend yield of 2.4%. Cypress already rallied 11% this year, versus the 6% gain of the PHLX Semiconductor Index, but I think that it’s still a great value play in a lofty sector.

One of Uber’s driverless SUVs was recently involved in an accident which killed a pedestrian on a dark road in Tempe, Arizona. Neither the car nor its backup driver spotted the woman, Elaine Herzberg, who was walking her bike across the road.

This was the first fatal accident directly caused by an autonomous vehicle. Uber halted all of its driverless vehicle tests across the US, while Arizona’s governor suspended all of Uber’s tests in the state.

Image source: Getty Images.

As a result, the industry’s autonomous efforts, which aimed to put driverless vehicles on public roads by 2020, could hit a lot more speed bumps this year. That’s a worrisome development for chipmakers that are dependent on the driverless market. Let’s examine three chipmakers in the blast zone: NVIDIA (NASDAQ: NVDA), Intel (NASDAQ: INTC), and Qualcomm (NASDAQ: QCOM).

NVIDIA

Uber’s driverless vehicles are powered by NVIDIA’s hardware (but not its Drive PX platform). Upon announcing that collaboration, Uber Advanced Technologies chief Eric Meyhofer stated that “NVIDIA is a key technology provider to Uber as we bring scalable self-driving cars and trucks to market.”

On March 27, Reuters reported that NVIDIA had suspended all its self-driving tests. The stock tumbled 8% after the news, although the decline was likely exacerbated by a broader sell-off across the markets.

This development could hurt NVIDIA, which saw its auto revenues — once a pillar of growth — fall 8% sequentially and rise just 3% annually last quarter. On the bright side, the business, which also includes its Tegra CPUs for infotainment and navigation systems, only accounted for 5% of its top line.

NVIDIA’s weakness in autos was easily offset by its massive growth in gaming GPUs and data centers, which lifted its total revenues by 34% annually last quarter. Therefore, NVIDIA’s auto business could struggle, but that probably won’t throttle its top line growth.

Intel

Intel owns Mobileye, the largest provider of ADAS (advanced driver assistance systems) in the world. ADAS solutions use a combination of radars and cameras that help drivers spot hazards, park correctly, and remain in the right lanes.

Intel, Mobileye, BMW, and Fiat Chrysler are co-developing a driverless platform aimed at putting fully autonomous vehicles on the road by 2021. Intel also owns Movidius, a maker of computer vision chips that helps cars “see” and analyze their surroundings.

In a blog post, Mobileye CEO Amnon Shashua criticized “new entrants” which lacked the experience necessary to ensure the safety of driverless cars. Upon reviewing the police video of Uber’s crash, Shashua stated that Mobileye’s ADAS would have detected Herzberg “approximately one second before impact.”

Intel doesn’t report its automotive revenues separately. But we know Mobileye generated $358 million in revenues in fiscal 2016 (its last full year before being bought by Intel), which represented 49% growth from 2015. Assuming its revenue rose another 40% to $500 million in fiscal 2017, that would still equal less than 1% of Intel’s top line. Simply put, a slowdown in Intel’s fledgling driverless business won’t hurt its core business, which generates most of its revenue from x86 CPUs for PCs and data centers.

Qualcomm

Qualcomm narrowly escaped a hostile takeover by Broadcom, but the chipmaker still faces severe headwinds. Regulators and OEMs are still demanding that it lower its licensing fees, which account for the lion’s share of its profits.

Apple (NASDAQ: AAPL) is suing Qualcomm over unpaid exclusivity rebates and its licensing practices. Apple and another major OEM, widely believed to be Huawei, also suspended all their licensing payments to Qualcomm. Qualcomm’s chipmaking business, which generates most of its revenues, still faces tough competition from cheaper chipmakers like MediaTek and first-party chips from OEMs like Huawei.

Qualcomm’s escape plan was to buy NXP Semiconductors (NASDAQ: NXPI), the biggest automotive chipmaker in the world. NXP owns BlueBox, a driverless platform that competes against NVIDIA’s Drive PX.

However, that takeover remains in limbo. NXP’s shareholders still haven’t tendered enough shares, and China’s MOFCOM (Ministry of Commerce) hasn’t cleared the deal. The Broadcom battle also forced Qualcomm to raise its bid for NXP by 16% to $44 billion — so it could now be overpaying for a chipmaker in a slowing industry.

The bottom line

Driverless cars are a new technology, and tragic accidents were inevitable. Therefore, a slowdown is probably healthy for the industry — which should reevaluate its safety standards and testing practices.

Investors shouldn’t abandon NVIDIA and Intel over this news, since automotive chips are still mere slivers of their businesses. But they should take a more critical view of Qualcomm, and see if its original plans for NXP still hold up in this tougher market.