Ticker Reports for May 10th
Bounce Alert: 3 Large Caps With RSIs Too Good To Ignore
The past week has seen a strong rebound across equities. After a little wobble during the first half, investors were getting nervous. This uptick, reflecting a revived risk-on sentiment in the face of stubborn inflation readings, is drawing investors back.
But not all stocks are rallying -- at least not yet. The sudden divergence has made it particularly clear that some laggards, those with ultra-low RSI readings, might just be too good to ignore. Let's take a look at three such companies.
1. CVS Health Corporation
As a big and bulky defensive stock, shares of healthcare titan CVS Health Corporation (NYSE: CVS) will never have the agility or speed that their peers in the tech space do. Because shares had been trending down through much of April, their earnings-inspired 20% plunge last week was unexpected.
The stock's biggest one-day drop for more than a decade came about after the company reported dismal earnings that missed analyst expectations across the board. It didn't help that management's forward guidance for the year ahead was cut in the face of rising medical costs.
However, with an RSI that dropped as low as 13 at one point in the past week, there's a case to be made that this initial drop is way overextended. With CVS shares continuing to consolidate above last week's low and the RSI starting to rise, it's starting to feel like the bears might be running out of steam. This might not be a stock to be backing for the long term, at least not yet, but we could be looking at a near-term bounce back from the depths.
2. Bristol-Myers Squibb Company
Another stock that will never light investors' imaginations on fire, Bristol-Myers Squibb Company (NYSE: BMY) shares touched off multi-year lows last week. The pharmaceutical manufacturer has been trending down since 2022's all-time high, but the most recent leg down took it into way oversold territory.
Like with CVS, Bristol-Myers shares continue to consolidate above last week's low, with a solid up day on Thursday boding well for the coming weeks. The stock's RSI has already moved up from 22 to the low 30s, and while it's technically out of oversold territory, that doesn't take away from its bounce potential.
Investors should watch for shares to hold onto yesterday's gains going into the weekend, with an open above $45 likely the precursor to a strong bounce in a northerly direction.
3. TripAdvisor, Inc.
Travel service company TripAdvisor, Inc (NASDAQ: TRIP) saw its shares rally all through the end of 2023 and through much of March as well. But a 35% plunge over the past few days turned what was a promising start to the year into a nightmare. Making the drop an even more bitter pill for investors to swallow, TripAdvisor managed to beat expectations for its Q1 earnings on Wednesday. As is often the case, the devil was in the details, and the lack of any progress on a potential sale of the business was enough to send investors running for the exit.
But with an RSI that's currently just above 16 and a stock that's well off its low from Wednesday, there's some serious bounce potential at play here. To be sure, TripAdvisor is not without its risks, and it has arguably the most volatile short-term prospects of the three stocks listed here but arguably the greatest reward.
Just yesterday, Goldman Sachs reiterated their Buy rating and gave shares a fresh price target of $27. From the $17 they were trading at on Friday morning, that's pointing to more than 50% in potential upside.
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Unity Software's Mixed Q1, But Long-Term Outlook Remains Positive
Revenue, Profitability, and Cash Flow
Unity's Q1 2024 earnings report revealed an 8% year-over-year decline in total revenue, amounting to $460.4 million. This decline can be attributed to strategic portfolio adjustments, as the company divested several non-strategic businesses. Despite the overall decrease, Unity's strategic portfolio, including its core offerings, demonstrated 2% year-over-year growth, reaching $426 million in revenue. This indicates the resilience and continued demand for Unity's primary products and services.
Unity reported a GAAP net loss of $291 million for Q1 2024. This figure includes the impact of restructuring charges totaling $212 million and a $61 million gain related to the repurchase of convertible notes. The adjusted net loss would be $141 million, excluding these one-time items. A crucial metric to consider is Adjusted EBITDA, which excludes the impact of stock-based compensation, amortization, depreciation, and other non-cash expenses. Unity's Adjusted EBITDA for Q1 2024 was $79 million, marking a significant $50 million improvement compared to the same period last year. This demonstrates the positive impact of the company's strategic portfolio and cost optimization efforts.
Unity's free cash flow for Q1 2024 was negative $14.56 million, indicating a greater cash outflow than inflow during the period. While this may raise concerns, it's important to consider it within the context of the company's ongoing investments in growth initiatives and strategic adjustments.
Create Solutions and Grow Solutions
Unity's Create Solutions segment, encompassing its core development tools and services, exhibited strong performance in Q1 2024, with revenue reaching $133 million, a 17% year-over-year increase. This growth can be attributed to increased adoption of Unity's subscription plans and successful strategic partnerships. Notably, core subscriptions, excluding those in China, experienced a 13% year-over-year growth, demonstrating the sustained demand for Unity's development tools among creators worldwide.
The Grow Solutions segment, focusing on advertising and monetization solutions, reported $294 million in revenue for Q1 2024, marking a 4% year-over-year decline. Unity is actively working to enhance the performance of its mediation platform and ad networks by leveraging data to improve the efficiency of its models and deliver stronger returns on ad spend for its customers. These efforts are expected to contribute to the segment's growth in the coming quarters.
Future Outlook and Strategic Initiatives
Unity has provided revenue guidance for Q2 2024 and the full year, reflecting its strategic focus on driving growth across its core segments. For Q2 2024, Unity anticipates revenue from its strategic portfolio to range between $420 million and $425 million, representing a 6% to 7% year-over-year decline. This is primarily due to ongoing adjustments within the Grow Solutions segment. For the full year 2024, Unity reaffirms its strategic revenue guidance of $1.76 billion to $1.8 billion, indicating a 2% to 4% year-over-year growth.
Unity is actively investing in integrating artificial intelligence (AI) into its offerings to empower creators and streamline the development process. Unity Muse and Unity Sentis are AI-powered tools that assist developers in creating realistic and engaging experiences. Unity Muse leverages AI to generate art, textures, and animations, while Unity Sentis enables the creation of intelligent, responsive characters within games and simulations.
Expanding beyond its core gaming market, Unity strategically targets the automotive, manufacturing, and e-commerce industries. Unity aims to become the go-to platform for creating real-time 3D experiences across various sectors through partnerships and industry-specific solutions. These initiatives are expected to drive significant growth for the company in the coming years.
Leadership Transition and Investor Considerations
Unity appointed Matt Bromberg, former Chief Operating Officer of Zynga (NASDAQ: ZNGA), as its new CEO. Jim Whitehurst, the previous interim CEO, transitioned to Executive Chairman. Bromberg brings extensive experience in the gaming industry, having played a key role in Zynga's turnaround and held leadership positions at Electronic Arts (NASDAQ: EA). This leadership transition signals Unity's commitment to growth and innovation within the gaming sector.
Despite short-term volatility, Unity Software’s analysts maintain a generally positive outlook on its long-term prospects. The consensus analyst rating for Unity is a Hold, with a price target of $37.03, suggesting a potential upside from Unity’s current stock price. Institutional investors hold a significant stake in Unity, demonstrating confidence in the company's future potential. However, a notable short interest exists, indicating some investors anticipate a decline in the stock price. This interplay between bullish and bearish sentiment contributes to the stock's volatility.
Unity Software's Q1 2024 earnings report provides valuable insights into the company's financial performance, strategic direction, and the evolving landscape of the gaming industry and beyond. While the company navigates challenges related to portfolio adjustments and macroeconomic influences, its core business remains strong, driven by the growing demand for its development tools and the expansion into new industries.
Unity's focus on AI integration, strategic partnerships, and leadership expertise positions it well for continued growth and innovation in the years to come. As the lines between the physical and digital worlds continue to blur, Unity's role as a leading platform for creating and operating real-time 3D experiences is poised to become increasingly significant, offering investors a compelling opportunity to participate in the future of interactive content creation.
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JFrog Stock Gets Punished for Solid Results: Buy the Dip
JFrog (NASDAQ: FROG) is a small DevOps platform shaking up an industry projected to grow at a 20% CAGR for the next five years. Its Enterprise+ package provides an end-to-end software supply chain that resonates with users, which is important in today's world of accelerating digital usage and AI. The problem with the Q1 results is that growth is slowing for this highly-valued business. It was among the highest-valued tech stocks worth buying, trading at 67X this year’s and 58X next year’s earnings outlook ahead of the release. At those levels and projected growth rates, it will be four to five years before the results align with sentiment, which is reason enough for investors to take profits.
The takeaway for today is that JFrog is gaining momentum with its enterprise-level clients and could accelerate growth and profitability over time. The company is among the smallest DevOps platforms, with about $430 in projected revenue for 2024, less than half the projected take for GitLab (NASDAQ: GTLB). It will take time for JFrog to grow, but it is on track to double in size over the coming years, putting the high valuation back into perspective. In this light, the pullback in price action is an opportune time to buy this innovative tech stock; the question is, how low can it go before bottoming?
JFrog had a Strong Quarter: Guidance is Tepid
JFrog had a strong quarter in Q1, producing $100.3 million in revenue for a gain of 25.7%. The top line beat the consensus estimate by 170 basis points and is compounded by a wider margin. Cloud services grew by 47% to 37% of the total, up 600 basis points from last year on increasing client usage. The beat is significant because of the high bar set by analysts; all revisions in the last 30 days were upward. Enterprise+ subscriptions, the company’s end-to-end package, grew by 40% to 49% of the take. Net retention rate, a measure of client penetration, came in at 118%.
The highlight of the report is the margin. The company widened margins significantly, reporting a 79.5% gross margin, 85.1% adjusted, and a 14% adjusted operating margin, up nearly 1000 bps YOY. The net result is adjusted EPS of $0.16, up a dime compared to last year despite a higher share count. Adjusted EPS beat the Marketbeat.com consensus by $0.02, suggesting the guidance may be cautious.
The company's guidance plays into the decline in stock price. The guidance was raised at the top and bottom line but forecasts additional slowing and aligns with the consensus. The opportunity for investors is that this company shows momentum and will likely outperform and raise guidance as the year progresses. In this light, the 12% stock price decline is a knee-jerk reaction to news that has reset the market and positioned it for a solid rebound.
Analysts See a Double-Digit Leap for JFrog Stock
The first two analyst revisions to pop up following the release include price target reductions, but that is the worst that can be said. The reductions come from Morgan Stanley and Needham to $47 and $45, both above the consensus. The consensus has been trending higher; that trend may be over, but it is up 60% YOY, showing a high level of conviction among analysts and 20% above the current action. Analysts' consensus aligns with the recent highs and may cap gains until later in the year.
The technical action is mixed. The post-release plunge is concerning but has not crossed critical support targets and aligns with a larger reversal pattern. JFrog stock hit bottom in 2022, confirmed it in 2023, and began to rally higher later that year. Now, it is pulling back from a higher high to confirm support at a higher low possibly. The support target near $35 is a significant pivot point if confirmed. In that scenario, the market should begin to rebound soon and may retest the recent highs by mid-summer. If not, JFrog could fall to a new low and continue lower to the next target for support near $30.
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