LinkedIn Corp’s (LNKD) Sales Navigator business has the opportunity to become larger than the company’s Marketing Solutions and Talent Solutions business lines, and LNKD is also growing EBITDA at a 60% CAGR from 2013 to 2016, cementing the company’s value for the long term, says Brian Pitz, Managing Director and Senior Research Analyst at Jefferies & Company, Inc.
“We like LinkedIn. It’s one of our favorite midcap and large-cap names. We’re not only positive on their advertising business — the Marketing Solutions business line and the Talent Solutions business — but think there is really upside opportunity longer term for the Sales Navigator business to continue to evolve and become arguably larger than the Talent Solutions business longer term,” Pitz said.
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The Sales Navigator business is a social selling solution that gives sales professionals the ability to find and create new opportunities while expanding their network, and this burgeoning business coupled with the company’s growth in EBITDA position LNKD well for the long term.
“We think the biggest pushback from investors centers around valuation, but remember, the company is growing EBITDA at a 60% CAGR from 2013 to 2016,” Pitz said.
Electronic Arts Inc. (EA) holds a number of core franchises in the electronic gaming field, with “Battlefield” set to compete against Activision‘s “Call of Duty” this holiday season, yet the real opportunities for EA remain unclear as the company struggles to remain profitable in an increasingly competitive industry that is also going through a console transition, says Brian Pitz, Managing Director and Senior Research Analyst at Jefferies & Company, Inc.
“Activision (ATVI) is the best-in-breed core gaming company, and we believe that EA (EA) has a couple of great core franchises like ‘FIFA Soccer,’ ‘Madden’ football and ‘Battlefield.’ ‘Battlefield’ is anticipated to be released for the holiday season, so clearly a competitor in the first-person shooter space to Activision‘s ‘Call of Duty,'” Pitz said.
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Despite a strong gaming core, EA has struggled to be as profitable as they would like, as the company has had other games perform poorly relative to the investments they made in them, and now will also face challenges within the gaming space due to an increase in competitors and a game-console transition, Pitz says.
“We just wonder what the real opportunity is for EA, other than an easy comp in the December/holiday quarter. Our belief is that ‘Battlefield’ will do well, but it’s pretty much the one title that we’re focused on for EA, and their other games, like ‘Star Wars,’ have performed very poorly, especially relative to the significant investments that EA has made in them,” Pitz said. “Furthermore, within the space, there may be too many core gaming companies headed into the next cycle…we’re not convinced it’s the best time to own these stocks, because gaming companies are on the heels of a console-transition cycle.”
Facebook (FB) faces pressures from online audience fragmentation and the loss of eyeballs to other more mobile platforms such as Twitter, Snapchat and WhatsApp, says Brian Pitz, Managing Director and Senior Research Analyst at Jefferies & Company, Inc.
“We were concerned in terms of some of the engagement metrics; the data we have suggests that the Millennial demographic might be churning off a bit faster than other demographics, which are shifting to more mobile-centric apps and/or platforms. We think Facebook tried to address this early on through its acquisition of Instagram, but what is happening since then is further fragmentation of the audience onto other platforms or apps such as Twitter, Snapchat or WhatsApp,” Pitz said.
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Pitz says that, although FB can still take more advertising market share from media such as radio and display advertising compared to competitors such as Yahoo! (YHOO) in the shorter term, the longer-term outcome remains uncertain.
“We are remaining on the sidelines until we believe there is a catalyst for an upgrade. We still believe that they are well-positioned longer-term to gain share. Furthermore, we believe that companies such as Yahoo! have a lot more work to do to turn around their core business, so Facebook is probably much better positioned to steal display or radio advertising share versus Yahoo! in the near term. But longer term, I still think there is a substantial fight for the number two and number three spots behind Google,” Pitz said.
Rackspace Hosting (RAX) faces increasing competition and uncertainty about the future growth of its cloud business, with the most recent fourth-quarter results showing a revenue growth outlook which implied lower capex guidance than the Street hoped for, says Todd Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“We decided to downgrade the stock after we had a great multiyear run with it. I think at this point we remain more cautious than optimistic, and again some of that is just we feel that to become more constructive, we need to have a better understanding of what sustainable growth looks like, because again, things seem to have changed — and trying to figure out if they’re a low 20% grower or high-teens grower, or how to think about that,” Weller said.
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Weller has a “hold” rating on RAX, saying the current growth and competition environment makes it difficult to make a valuation call on the stock. He says he needs more confidence that sustainable growth is on its way, and also confidence that estimates have baselined.
“The increase in competition on the cloud side is an issue that is likely to persist. For example, Rackspace recently lowered their pricing, which I think makes sense, because whenever you’re competing against very big competitors like Amazon (AMZN), who has cut prices over 20 times, it seems like there is a fair amount of headline risk related to competition,” Weller said.
Equinix (EQIX) is proving to be a solid global player in the network-dense colocation space, reporting record bookings from cloud customers in its March quarter results and making acquisitions to expand into new geographies, says Todd Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“There’s been a lot of controversy recently around whether cloud is a positive or a negative driver for data center companies, and we think it is a positive driver, as we’ve talked about, and Equinix pointed out that they had record bookings from cloud customers in the quarter,” Weller said.
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Weller is bullish on the network-dense colocation space, because it has higher barriers of entry and is less prone to impacts from increased supply in addition to being a beneficiary of secular drivers such as mobile, cloud and social media. In this space, EQIX has expanded its global presence by making small acquisitions; however, EQIX is facing challenges as it eyes a REIT transition in 2015, Weller says.
“In the network-dense colocation space, pretty much we’ve seen Equinix make smaller tuck-in acquisitions to expand into new geographies. One of the key advantages they have is they are the only global player,” Weller said. “The fundamentals there are good, and I think valuation is attractive. I think one near-term challenge from a stock perspective is that we may be in a vacuum period in terms of who the incremental buyer of the stock is, given the company is in the midst of converting to a REIT on January 1, 2015.”
Cisco Systems, Inc. (CSCO) and Juniper Networks, Inc. (JNPR) are two legacy players in the tech arena that are set to gain market share in the cybersecurity segment if they put their large balance sheets to work by acquiring small, fast-growing companies, says Jonathan Ho, Analyst at William Blair & Company, L.L.C.
“Cisco (CSCO) and Juniper (JNPR)…have broad distribution capabilities and they have large balance sheets. These legacy companies can potentially put their balance sheets to work by buying some of the smaller companies that are out there that are growing very fast and have very solid technology, but don’t have the distribution and execution capabilities that the larger organizations have,” Ho said.
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Ho says that cybersecurity as a theme is becoming more broadly recognized, as organizations continue to try and resolve security challenges and therefore increase their spending. This sets up players such as CSCO and JNPR to acquire smaller high-growth companies, which Ho recommends investing in due to their enhanced technologies and acquisition potential.
“Our perspective is that we’re more attracted to the faster-growth companies in the space and believe that that’s where investors can benefit, not just from the secular growth trends where companies are buying newer technologies but also benefit from the potential for acquisitions particularly from the sector as well,” Ho said.
Baidu.com (BIDU) hasn’t found a meaningful strategy to monetize their online traffic yet and continues trying to increase its mobile market share and increase recognition of its application-based search, says Cynthia Meng, Managing Director of Jefferies & Company, Inc.
“What will make us change our mind [about Baidu] is some meaningful revenue contribution coming from mobile search. They are seeing more than 30% of the traffic shifting from PC to mobile already, while mobile search monetization hasn’t really started for Baidu. So we are waiting to see some tangible evidence that it is going to be meaningful for them or going to be effective monetization of the mobile search,” Meng said.
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Meng has a “hold” rating on the stock, and she is looking for tangible evidence of mobile monetization and a filling up of the capability gap in its mobile Internet positioning.
“They don’t have very high market share or a recognition or presence in the mobile application-based search compared to what they are being recognized in the mobile browser-based search. But most of the mobile search, as we understand, is happening within the mobile applications, so they need to fill up that capability gap. This is something that I believe investors are interested to look for,” Meng said.
Coronado Biosciences (CNDO) uses Trichuris suis ova to treat autoimmune diseases, putting the hypothesis of autoimmune diseases being caused by too much hygiene to the test and currently posting encouraging clinical data, says Dr. Finny Kuruvilla, Portfolio Manager at Eventide Funds.
“The basic thesis behind Coronado is that there has been an explosion in the Western world in all sorts of autoimmune diseases. That includes diseases like multiple sclerosis, Crohn’s disease, ulcerative colitis, type I diabetes and psoriasis,” Kuruvilla said. “Interestingly, when you go into the developing world, places like India, you generally find those diseases are much less common — yet if you take a person from India and they immigrate, say, to the United States, you’ll find that they begin to assume the incidence of the host population. So it’s more than just a genetic phenomenon.”
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CNDO is close to $300 million in market cap and is a core holding of Kuruvilla’s health care portfolio, a company he says is underfollowed and underowned. He adds that the choice of TSO as a colonizing organism is because it cannot colonize the human body permanently, and it cannot be transferred from human to human.
“They did these pilot studies with TSO and saw impressive effects in inflammatory bowel disease, in ulcerative colitis, and there was a very small multiple sclerosis study that was run. The company is currently running a larger randomized study in Crohn’s disease that’s going to come out later this year, in second half of 2013, and if those read out positive, then this could be one of the big game changers that patients and physicians have seen,” Kuruvilla said.
FLIR Systems, Inc (FLIR) and Verint Systems Inc. (VRNT) are two plays in the defense analytics space that are showing promise to the long-term investor due to their lower share prices, despite the current challenges in this tech arena, says Jonathan Ho, Analyst at William Blair & Company, L.L.C.
“[FLIR and VRNT] are not cybersecurity companies, but they play more in the defense analytics space. One of the challenges that we see is just lumpiness and difficulty predicting what’s going to happen in some of the technology investments that are being made by the U.S. federal government. Many companies in this area are struggling with budget constraints coming from sequestration and from the continuing resolution of the U.S. defense budget,” Ho said.
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Ho says that while it will be challenging to see growth over the next few years, FLIR and VRNT have the ability to wade through the choppiness and provide value to the long-term investor.
“The share prices of these companies are not overly expensive, and so to a patient investor, these are still good companies. They just need to get through some air pockets in terms of their end market spending environments,” Ho said.
Sarepta Therapeutics Inc’s (SRPT) innovative technology treating gene mutations in Duchenne muscular dystrophy patients is showing remarkable results in clinical trials, and this technology has the potential to treat other gene mutations within DMD as well as other diseases, making SRPT a promising big story in corrective medicine, says Finny Kuruvilla, Portfolio Manager of the Eventide Gilead Fund.
“One of the things that’s really interesting about this company that I don’t think the market has fully digested is the fact that the way they treat Duchenne muscular dystrophy…DMD patients have a mutation in a gene called dystrophin, and their muscle cells tend to rupture and lyse… [Sarepta‘s technology] enables the patient to be able to make normal dystrophin like you and I have, unlike what they’ve had before. It’s nearly science fiction; real mind-blowing technology,” Kuruvilla said.
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SRPT‘s treatment has already shown dramatic effects in a handful of patients that are showing incredible turnaround and a regain of function that was not possible before, Kuruvilla says. He adds that the technology is showing promise in being generalizable to other areas of DMD as well as in different diseases, placing SRPT at the forefront of one of biotech’s potentially historic breakthroughs.
“Right now, I think the market is incompletely valuing it on its lead indication, this 15% of DMD subset, but if you begin to think about, and have a little bit of imagination about, other forms of Duchenne muscular dystrophy and other diseases, this becomes one of the most significant technology platforms that biotech has seen in a number of years,” Kuruvilla said. “This can be one of the big stories not just in DMD, but in corrective medicine and truly disease-modifying therapy to come around in a long time.”
