Ticker Reports for October 7th
Ciena Stock Powers the AI Cloud Boom—Don't Miss Out
Ciena Co. (NYSE: CIEN) can be considered a legacy company in the computer and technology sector when it comes to the Internet. It was one of the original manufacturers of optical fiber, which provided networking switches and connectivity solutions since 1992. The company has managed to stay relevant, unlike so many internet boom companies, and remains on the cutting edge of the artificial intelligence (AI) revolution. Ciena is essential to the AI boom as it provides one of the crucial elements required for AI deployment: high bandwidth and low latency connectivity.
Ciena operates in the computer and technology sector, competing with networking companies like Cisco Systems Inc. (NASDAQ: CSCO), Juniper Networks Inc. (NYSE: JNPR), which was acquired by Hewlett Packard Enterprises Inc. (NYSE: HPE), and Infinera Co. (NASDAQ: INFN) which is being acquired by Nokia Oyj (NYSE: NOK).
How Ciena Is Essential to the AI Revolution
Ciena is a leader in the optical networking segment, as its products enable long-distance, high-capacity data transmission solutions for the backbones of numerous networks. Data transmission volumes will only grow, driven by AI deployment and cloud computing. Its optical transceivers enable low-latency transmission, which is essential for AI applications to relay responsiveness and fast performance. Its Blue Planet AI-powered software-defined network (SDN) enables network operators to program, automate, and manage networks, orchestrate end-to-end services, and scale bandwidth on demand as needed.
Cloud Providers Lead the Recovery
Ciena is approaching positive normalization after many volatile years driven by the pandemic shortage and post-pandemic inventory glut. Cloud providers are leading the recovery, building out networks to support cloud and growing AI traffic. Data centers are a big chunk of Ciena’s cloud provider clients. Three of the four major cloud providers are driving demand for Ciena’s 400 ZR, a high-capacity datacenter interconnect (DCI) capable of transmitting 400 GB ethernet over DCI links, targeting a minimum of 80 kilometers.
Ciena's other client group, service providers, is experiencing a gradual recovery as the inventory glut is digested. Ciena still expects the U.S. to recover fully in a few quarters, while Europe continues to lag due to geopolitical and macroeconomic headwinds.
Gloomy Headline Numbers Underscore Improving Metrics
Ciena's third-quarter of 2024 earnings report was a sign of relief as results underscore the recovery occurring, enabling a turnaround after many negative quarters. The company reported EPS of 35 cents, beating analyst expectations by 6 cents. GAAP net income was $14.2 million, down from $29.7 million last year. Adjusted net income was $50.8 million, which was also lower than the $89.1 million non-GAAP income in the year-ago period. Revenue fell 11.8% YoY to $942.3 million, which was better than expected compared to the consensus estimates of $928.31 million. Ciena reported a strong book-to-bill ratio above 1, indicating stronger demand that it can fulfill.
Ciena Issues Flat Guidance
Ciena expects revenues of $1.06 billion to $1.14 billion in the fourth quarter of 2024 versus $1.12 billion in consensus estimates. Adjusted gross margin is expected to be in the low 40% range, and adjusted operating expenses are expected to be around $350 million. Full-year 2024 revenues are estimated at around $4 billion, with a 4% to 8% CAGR long-term. CIEN stock tumbled 7% the following days.
Ciena CEO Gary Smith commented, "We delivered strong results for the fiscal third quarter that reflect growing momentum with cloud providers and continued gradual recovery with service providers. With leading innovation that is well-aligned with our customers' focus on building cloud and AI-capable infrastructures, we are well-positioned to continue to gain share and deliver profitable growth.”
On Oct. 2, 2024, Ciena announced a $1 billion stock buyback program commencing in fiscal 2025 and ending in fiscal 2027. CIEN stock surged 7% on the announcement.
CIEN Is Forming a Potential ABCD Reversal Pattern
An ABCD pattern is a harmonic reversal pattern comprised of two higher peaks and one higher low. The pattern resembles a rising lightning bolt. A market structure high (MSL) sell trigger often triggers the reversal.
CIEN stock initially sold off on its earnings report and guidance to a swing low of $50.83, forming the C-point. Shares rallied higher through the B-point pre-earnings peak at $59.42 to continue higher toward an imminent D-point, which could trigger a reversal. The daily anchored VWAP support is rising at $56.78. The daily relative strength index (RSI) is rising to the 75-band. Fibonacci (Fib) pullback support levels are at $62.91, $57.69, $53.76, and $50.83.
Ciena’s average consensus price target is $61.00, and its highest analyst price target is $68.00. Analysts have given it 10 Buy ratings and three Hold ratings.
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Affirm's Path to Profitability Elevates with Interest Rate Cuts
Affirm Holdings Inc. (NASDAQ: AFRM) is a fintech offering buy-now-pay-later (BNPL) options for consumers to finance their purchases, enabling merchants to generate additional sales that otherwise may not have been made. The transactions are a win-win for consumers and the merchants, while Affirm is the middleman facilitating the financing. The company is growing and working its way towards profitability. The interest rate cut cycle can further accelerate its path to profitability as the busiest time of the year approaches, the holiday shopping season.
Affirm operates in the business services sector, competing with BNPL providers like Afterpay, owned by Block Inc. (NYSE: SQ), PayPal Holdings Inc. (NASDAQ: PYPL), and Sezzle Inc. (NASDAQ: SEZL). Affirm is a pioneer in the BNPL industry founded by PayPal co-founder Max Levchin.
How Interest Rate Cuts Impact Affirm
The U.S. Federal Reserve (Fed) has started its interest rate cut cycle with a 50 bps cut, with more expected on the way. This makes borrowing costs cheaper. Affirm benefits directly as it reduces its cost of capital, improving its profit margins and enabling it to offer more competitive interest rates. Interest rate cuts also stimulate consumer spending, leading to more transactions for Affirm with higher loan volumes.
However, on the flip side, it will also reduce interest income as Affirm passes on the lower interest rate to consumers, thereby reducing revenues. Affirm wouldn't be the only BNPL company benefitting as its competitors are in the same boat, which will continue to put more pressure on the company's market share and pricing.
Affirm Uses AI to Improve Efficiencies
Affirm has been using artificial intelligence (AI) algorithms to bolster its operations. Its AI algorithms are used in a data-driven approach to assessing risk and creditworthiness for every transaction to determine the financing options for qualified consumers. It also provides financing for customers who may not qualify for traditional credit cards. AI is also used to detect and prevent fraud. AI helps to provide personalized offers and financing recommendations for consumers to improve their shopping experience. Workflows and processes are automated with the help of AI.
Affirm’s Popularity and Partnerships Grow
The service is notably most popular with millennials and Gen-Z-ers as they opt to avoid conventional credit cards. Incidentally, Affirm now offers its Affirm debit card through Visa Inc. (NYSE: V), which enables its users to use Affirm for in-store purchases. It's also available to Apple Inc. (NASDAQ: AAPL) Apple Pay users in the United States to pay over time for eligible purchases with the option to pay in bi-weekly or monthly installments at 0%. Affirm is a BNPL option for customers of Target Co. (NYSE: TGT), Walmart Inc. (NYSE: WMT), and Amazon.com Inc. (NASDAQ: AMZN). Affirm has grown its merchant network to over 300,000.
Affirm is Still in Its Hypergrowth Stage
Affirm reported a fiscal Q4 2024 EPS loss of 14 cents, which was 34 cents better than consensus estimates for a loss of 48 cents. Revenues surged 48% YoY to $659.2 million, crushing the $604 million consensus analyst estimate. Gross merchandise volume rose 31% YoY to $7.2 billion, significantly outpacing overall e-commerce growth. Transaction volume in the Affirm network rose 42% YoY to 24,7 million and 15% QoQ.
Affirm Raises Guidance for Fiscal Q1 2025
The company raised its fiscal first quarter 2025 revenue guidance to $640 million to $670 million, crushing consensus estimates of $625.04 million. GMV is expected between $7.1 million and $7.4 million. Adjusted operating margin is expected between 14% and 16%.
The company raised forecast operating income profitability on a GAAP basis by fiscal Q4 2025, a year from now. Their goal is to operate on the path to profitability with a fiscal 2025 GMV of more than $33.5 billion, revenue 10 bps or higher, and an adjusted operating margin greater than 18.4%.
CEO Levchin stated in its shareholder letter, “We made great progress in FY’24. The opportunities ahead of us are significant, and we are excited to take full advantage of them. Scaling the Affirm Card, amplifying engagement with personalized incentives, rolling out new integrations, going live in the UK, and doing it all while achieving GAAP profitability is our plan for FY’25, and we are off to a fine start.”
AFRM Sets Up a Potential Seed Wave Breakout
A seed wave is a rare pattern comprised of two consecutive higher market structure low (MSL) triggers. Based on fib extensions of 1.27, 1.414, and 1.618, the seed wave sets the upside potential reversal zones (PRZs) as targets.
AFRM triggered a price gap on its solid fiscal Q4 2024 earnings report to $37.52. The first MSL formed at $35.52 and triggered above $40.29. The second MSL formed around the $37.52 gap fill with a trigger near the first MSL trigger. This foreshadows upside PRZ targets at $51.29, %53.06 and $55.56. The relative strength index (RSI) is attempting to bounce back up through the 50-band. Fibonacci (Fib) pullback support levels are at $37.95, $35.71, $32.55, and $28.27.
Affirm’s average consensus price target is $35.53, and its highest analyst price target is $65.00. Analysts have given the stock seven Buy ratings, nine Hold ratings, and five Sell ratings. The stock has an 8.39% short interest.
Actionable Options Strategies: Bullish investors can buy AFRM stock on pullbacks using cash-secured puts at the Fib pullback support levels to buy the dip.
By implementing a bullish call debit spread, bullish options investors can limit the maximum downside and profit from modest upside gains for less capital than owning the stock.
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RPM International Thrives in Rate-Cut Driven Construction Rally
RPM International Inc. (NYSE: RPM) is a global manufacturer of specialty chemicals, coating, sealants, and building materials used for industrial and construction applications. The name may not sound familiar since it’s the parent company of a portfolio of more than 85 brands for professionals and do-it-yourself-ers (DIY). Its product can be found at The Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW) as well as Walmart Inc. (NYSE: WMT) and Target Inc. (NYSE: TGT). The construction sector giant has surged to all-time highs with more runway thanks to the start of a new interest rate cut cycle that is expected to stimulate construction activity.
RPM International’s Diverse Portfolio of Leading Brands
RPM's brands are familiar to construction industry professionals and DIY home renovation amateurs. The brands are categorized into four groups.
- Construction Products Group (CPG) brand products are made for building construction, restoration, and maintenance. The products are sold to distributors, contractors, and end-users across 130 countries. It benefits from the data center construction boom. The CPG's revenues are tied to the commercial construction market, which has an 8.5% compound annual growth rate (CAGR) until 2033. The interest rate cut cycle is expected to stimulate construction activity. Some of its brands include Tremco, Dryvit, Nudara, Vandex, and Euclid Chemical. This segment generates the most revenue at 37% of net sales.
- Specialty Products Group (SPG) brand products accommodate a variety of commercial, industrial, and niche applications, mainly in the United States but starting to expand in Europe. Its products are sold to distributors and contractors. This SPG should gradually improve with interest rate cuts. These brands include DayGlo, Radiant, Legend Brands, Kopcoat, Drieaz, and Valvtect. This segment generates 10% of net sales.
- Performance Coating Group (PCG) group products protect, decorate, and extend the life of concrete and steel in the infrastructure and industrial segment. Brands include Stonhard, Kemtile, Logiball, Plastite, Prime Resins, Dudick, and Logiball. The PCG is mostly driven by the restoration and maintenance market, which generates 20% of net sales.
- Consumer Group brands cater to professional contractors and home DIYers for home improvement and maintenance. These brands can be found in hardware, paint, home improvement stores, mass merchants, and craft shops. These include Rust-Oleum, Dynaflex, Kwik Seal, Roto-Rooter, Wolman, Touch ‘n Seal and Zinsser. The Consumer Group has felt the effects of weak Home Depot sales as they reported a 3% YoY decline in same-store sales. Home Depot is a key distributor of RPM International's goods. This segment generates 33% of net sales.
Interest Rate Cut Cycle Springs RPM Back to Life Despite Flat Earnings
RPM International reported its fiscal Q1 2025 EPS of $1.84, which beat consensus estimates by 9 cents. Revenues fell 2.1% YoY to $1.97 billion, missing the consensus analyst estimate of $2.01 billion. Under the hood reveals improving efficiencies as the company generated an 11th consecutive quarter of record earnings before interest and taxes (EBIT). EBIT was $303.9 million, and adjusted EBIT was $328.3 million, up 6% YoY. The CPG and PCG generated organic growth, while SPG and Consumer groups expanded adjusted EBIT margins despite weakness in the housing markets.
The company generated a strong cash flow of $248.1 million from operating activities. The stock gapped to new all-time highs regardless in anticipation of a recovery in the construction cycle from interest rate cuts.
RPM International Issues Mixed Guidance
The company issued downside fiscal second quarter of 2025 revenues of $1.79 billion versus $1.82 billion consensus estimates. Consolidated adjusted EBIT is expected to grow in the mid-single digit range YoY.
Revenues for the fiscal full year 2025 are expected to be around $7.47 billion. Consolidated EBIT is expected to rise in the mid-single to low double-digit percentage range YoY.
Repairing Damage from Hurricane Helene
RPM International CEO Frank Sullivan offered his sympathies to North Carolina residents and everyone affected by Hurricane Helene. Sullivan underscored that its businesses, including Legend Brands and Tremco, are supplying disaster restoration equipment, tarps, generators, and products, enabling businesses and people to save and restore homes and roofs with water damage.
Sullivan also noted how disciplined the company has been in the backdrop of an uncertain economic climate, “The last comment I'll make is across every segment of RPM, we have been very deliberate in focused SG&A spends on new product areas and growth areas, as Rusty commented. We are moving our sales forces to the few pockets where growth exists. But in each of our segments in Q1, our dollar spent in SG&A was below last year, so we are taking a pretty targeted and disciplined approach to SG&A, and you'll see that continue in Q2.”
RPM Stock Triggers a Bull Flag Breakout
A bull flag breakout forms when the stock surges up through its descending upper trendline resistance. The flag formation precedes the bull flag, which forms after the steep run-up flagpole peaks. The flag is formed as the stock pulls back in a descending parallel channel.
RPM peaked its flagpole run up at $125.35 on Sept. 19, 2024, as the flag formed on parallel descending (falling) upper and lower trendlines. The pullback found support at the daily anchored VWAP at $120.27 heading into its fiscal Q1 2025 earnings report. While the report wasn't exactly a blowout, it demonstrated the company's efficiency, as evidenced by its record EBIT. The hopes for a resurgence in the construction sector prompted a price gap, triggering the bull flag breakout at the $1229.96 upper gap fill. Shares continued to grind higher, testing its consensus price target at $129.70. The daily relative strength index (RSI) is still rising at the 66-band. Fibonacci (Fib) pullback support levels are at $128.18, $123.22, $119.72, and $113.16.
RPM International’s average consensus price target is $129.70, and its highest analyst price target is $149.00. Six analysts have Buy ratings, and four have Hold ratings. The stock trades at 23.4x forward earnings.
Actionable Options Strategies: While RPM is making new all-time highs, the recovery of the construction sector could provide much more runway. Bullish investors can use pullbacks to enter stock using cash-secured puts at the fib pullback support and write covered calls to execute a wheel strategy for income in addition to the 1.43% annual dividend yield.
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