TickerTalk Headlines for June 24th
In this newsletter:
Ciena Stock: Powering the AI Boom - A Network Infrastructure Play
Network infrastructure solutions provider Ciena Co. (NYSE: CIEN) plays a critical role in the artificial intelligence (AI) revolution. AI platforms require computing power, data storage speed and capacity, and optimal networking with low latency and high bandwidth to transmit oceans of data quickly. Ciena develops and manufactures the components for optical networking equipment and provides the services and software to enable communication networks. Ciena was a key player in the growth of the internet, cloud economy, and digital transformation, which pales in comparison to the potential of the AI revolution. Ciena has been growing its non-telco business to account for nearly 46% of total revenues.
Ciena operates in the computer and technology sector and competes with other network solutions providers, including Cisco Systems Inc. (NASDAQ: CSCO), Extreme Networks Inc. (NASDAQ: EXTR), and Hewlett Packard Enterprise Co. (NYSE: HPE) with its acquisition of Juniper Networks.
Networking is a Key Element of AI Infrastructure
While NVIDIA Co. (NASDAQ: NVDA) gets the major headlines for producing AI chips, these chips would be useless without the ability to process and transmit oceans of data quickly and efficiently. This entails having a reliable high-speed network infrastructure. This is where Ciena plays a critical role. Their high-performance networking equipment and WaveLogic technology act as the backbone of networks, enabling massive amounts of data to be transferred back and forth between AI computing centers, storage facilities, and end users.
Ciena utilizes and provides AI software for optimal routing and switching, throttle, and scaling to manage traffic efficiently. Ciena enables the AI revolution to flourish by providing the adaptive network infrastructure hardware and software to support the huge data flows of AI applications and processes.
CIEN Attempts an Ascending Triangle After Earnings Gap and Crap
The daily candlestick chart on CIEN illustrates the large price gap to $53.58 following its earnings release, which completely sold off the following to a swing low of $44.69. The ascending trendline formed from the swing low and the subsequent higher lows on pullbacks up towards the flat-top upper trendline at $49.67. The daily relative strength index has bounced back up through the 53-band. Pullback support levels are at $47.46, $44.69, $42.20, and $39.94.
CIEN reported Q2 2024 EPS of 27 cents, beating consensus estimates by 12 cents. Revenues tumbled 19.6% YoY to $910.8 million, handily beating $895.8 million consensus estimates. The non-GAAP operating margin was 6.8% compared to 13.8% in the year-ago period.
Ciena Stock: Full Year 2024 Revenue Forecasts at Low End of Range
Ciena expects full-year 2024 revenues of $4 billion, representing the low range of the previously forecasted $4 billion to $4.3 billion expectation. Q3 2024 revenues are expected between $880 million to $960 million versus $1 billion consensus analyst estimates. Adjusted gross margins are expected in the low to mid-40s range. Adjusted operating expenses are expected to be around $345 million. Its WaveLogic 6 Extreme is seeing strong early traction and remains on track to be generally available within several months. The company expects orders to increase meaningfully in Q3 2024. Service provider orders are slower than originally expected.
Ciena CEO Details Some Product Customer Counts
Ciena CEO Jim Moylan noted the company ended the quarter with nearly $1.4 billion in cash and investments. The company bought back 1.1 million shares for $57 million in the quarter and is on track to buy back a total of $250 million for the fiscal year. Ciena added 20 new customers for WaveLogic 5 Extreme, bringing the total customer count to 290. The company has shipped over 123,000 WaveLogic modems to date.
Reconfigurable line system (RLS) revenues jumped 12% YoY with the addition of 7 new customers. WaveLogic 5 Nano 400 ZR and ZR+ pluggables gained 18 new customers, leading to strong early traction for its next-gen WaveLogic 6 Extreme systems with 14 orders already in the system for the industry’s first and only 1.6 terabit solution. Fundamental demand drivers are incredibly strong as data generation and network traffic will continue to grow at very healthy rates.
CEO Moylan commented, “Based on our pipeline and current projections, we believe that orders will increase meaningfully in Q3 and actually have the potential to meet or exceed our revenue during the quarter.”
Moylan cautioned, “ However, in the near-term, while we see signs of improvement, the recovery of service provider order patterns is still slower than initially expected, as they continue to absorb and deploy large amounts of their inventory.”
Ciena analyst ratings and price targets are at MarketBeat. The consensus analyst price target has 18% more upside.
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Is NVIDIA Stock Done Playing With the Market? Buy, Sell, or Hold
There is no other sector in the stock market today like the technology sector. Inside that space, no company comes close to replacing shares of NVIDIA Co. (NASDAQ: NVDA). Companies that took decades to earn their place in the NASDAQ have now been blown past by NVIDIA’s quick rise to fame, as Microsoft Co. (NASDAQ: MSFT) and even Alphabet Inc. (NASDAQ: GOOGL) have fallen below NVIDIA in market capitalization.
Today, NVIDIA is worth up to $3.1 trillion, with a high last week at $3.3 trillion. In comparison, Google is worth only $2.2 trillion, while Microsoft is at the top of the list at $3.3 trillion. Considering NVIDIA’s stock sell-off, which wiped out $200 billion in market value over two days, investors may wonder whether the company can stay at these valuations much longer.
There are reasons to believe that NVIDIA won’t be able to sustain these valuations, and there are also those that support an even higher valuation. Without confusing investors, here are some factors going for and against NVIDIA’s stock price, using history as an example and some other market fundamentals.
Why NVIDIA Could Follow in Cisco's Footsteps Instead of Being the Next Miracle
Comparing NVIDIA to Enron would be a complete misunderstanding, as the company has its merits backing recent bullish price action. However, it is easy for markets to become intoxicated by such quick success, as seen in other such runs, like in ‘meme stocks,’ sending stocks like GameStop Corp. (NYSE: GME) flying and crashing.
It looks like NVIDIA could be compared more to Cisco Systems Inc. (NASDAQ: CSCO), but not today’s Cisco. Cisco, from the year 2000, drew its investors to incredible levels of excitement as it rode the internet stock bubble. If investors replace the word ‘internet’ with ‘artificial intelligence,’ a potential bubbly thesis could start to form for NVIDIA.
During the internet bubble of 2000, Cisco's market capitalization reached over $560 billion, which made up roughly 5.3% of the total United States GDP that year. However, its market cap fell to less than $70 billion.
The stock reached its all-time high peak of $80 a share, a level it has yet to go again two decades later. No matter the story back then or how important the internet was to the nation’s technological prowess, no stock should ever be worth that much as a share of GDP.
Today, NVIDIA’s market cap represents over 12% of U.S. GDP, twice the relative size that Cisco stock reached in the internet bubble.
Now, adding additional—and more common—factors for investors to watch out for can be beneficial in making a sensible forecast for NVIDIA, so here’s what Wall Street feels is right for the future.
Can NVIDIA Stock's Growth Forecast Sustain Its High Prices?
Wall Street analysts forecast up to 23% earnings per share (EPS) growth for NVIDIA in the next 12 months. While this metric alone can be enough to justify any stock price, there is a way for investors to gauge whether this potential growth has already been priced into the current stock price.
It is called the price-to-earnings growth ratio (PEG). This valuation metric answers the question, “Is the market paying too much today for tomorrow’s growth?” NVIDIA’s multiple takes care of that right away.
Here's where NVIDIA stands, calculated as the stock's P/E ratio divided by EPS growth projections. A P/E of 73.9x today, divided by analyst projections for 23% EPS growth, will give investors a 3.2x PEG multiple. Here's what that means.
Typically, any PEG ratio below 1.0x implies a stock’s valuation is cheap today compared to how much EPS is set to grow in the future, and anything above 1.0x becomes increasingly overvalued.
Compared to peers like Taiwan Semiconductor Manufacturing (NYSE: TSM), the story becomes much more transparent for investors. Analysts think Taiwan Semiconductor Manufacturing will grow its EPS by 25.4% in the next 12 months. The stock trades at 29.0x P/E, making for a PEG ratio of 1.1x.
While Taiwan is not that cheap of a deal today, still, based on this additional metric, it is definitely less bloated than NVIDIA.
Market Perspectives on NVIDIA Stock's Future Trajectory
It’s not looking good. Even Jensen Huang (NVIDIA’s CEO) started selling stock recently. As of June 2024, Jensen has sold up to 120,000 shares for a total dollar value of $15.5 million. If the CEO himself has no reason to hold as much stock as he can, then why should outside retail investors?
More than that, NVIDIA’s short interest has exploded by 947% in the past month, a scary statistic for those who hold the stock today.
Those at Schwab Charitable Fund decided to unload up to 3.5% of their stake in NVIDIA stock. It could be a reduction out of a winning name to reduce exposure, but it could also be something else. Analysts see a price target of $121.7 a share for NVIDIA stock, which is actually 3.8% lower than today’s stock price.
As the negative evidence mounts, it could be a good time for those holding NVIDIA stock to consider investing their earnings in other potential winners, such as these.
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Didn't Buy Occidental Like Buffett? Look at These 3 Oil Stocks
Over the past few weeks, Warren Buffett has been buying shares of Occidental Petroleum Co. (NYSE: OXY) to bring his net stake up to 29%, which is not Buffett's usual behavior. When the Oracle of Omaha invests this heavily—and this quickly—in a stock, there must be a good enough reason to justify these quick and aggressive decisions.
While there is enough evidence to back up a bullish rotation in the energy sector, what investors need to know today is that they must not let fear of missing out (FOMO) drive their decisions today, as tailgating Buffett's Occidental stock purchase could be a "too late" to follow the moment. Dissecting his reasoning for picking Occidental and not its peers, investors can land on three similar companies to ride today's oil wave.
Starting in this leading pack is ConocoPhillips (NYSE: COP), sharing some characteristics with Occidental, enough to also make it a potential Buffett buy for retail investors. Next on the list is Marathon Oil Co. (NYSE: MRO), with a similar tier of factors to back it as a potential watchlist addition, and last but not least, there’s Shell PLC (NYSE: SHEL). Here’s what they all have in common with Occidental.
Why Oil Stocks Could Dominate the Market in 2024 and 2025
Historically speaking, the second half of the year is always a good run for oil. But today, there's more than past data to back up a thesis for the industry. The latest ISM manufacturing PMI trends show that, despite being in a contraction, oil was the only sector that pushed signs of revival.
With a breakout in employment, new orders, and production, the industry looks ready for increased demand and activity in the coming months.
Seeing how the Energy Select Sector SPDR Fund (NYSEARCA: XLE) has underperformed the broader S&P 500 by as much as 12% in the past year, investors can lean on these PMI trends to close this performance gap.
ConocoPhillips Stock Discount Attracts Wall Street Attention
The stock is now trading at 83% of its 52-week high, which may sound like a discount once investors see other valuation metrics, like the one that drove Buffett to buy Occidental stock.
ConocoPhillips stock is valued at roughly 13.8x today, compared to Occidental’s 8.5x valuation on a price-to-free cash flow basis. While not as cheap as Buffett’s find, investors still can tap into future upside in this name.
Wall Street analysts now forecast up to 17% growth in earnings per share (EPS) for ConocoPhillips stock this year, driving price targets higher. Those at Truist saw it fit to boost valuations for ConocoPhillips stock up to $165 a share, daring it to rally by 48.2% from where it trades today.
While Buffett couldn’t come to buy ConocoPhillips stock today, Price T Rowe Associates (the stock’s largest shareholder) bought it during the past quarter. The asset manager boosted its stake in ConocoPhillips stock by 35.8%, bringing its net investment to $4.1 billion today.
Marathon Oil Stock Rattled by Buffett's Oil Move, Short Sellers React
For Marathon Oil, short interest has declined by over 5.6% in the past month. Buffett’s presence in the oil sector may have scared these short sellers away, but even apart from this factor, Marathon Oil has enough merit to command the type of upside it presents today.
Wall Street analysts now forecast 15.5% EPS growth for the company in the next 12 months. Based on these projections, analysts at Scotiabank saw fit to boost Marathon Oil’s valuation up to $45 a share, daring it to rally by roughly 62% from where it trades today.
Based on these factors, the Vanguard Group, Marathon Oil stock’s largest shareholder, decided to boost its position in the stock by 10% over the past quarter. This buying now represents a dollar value of $2.2 billion for Vanguard.
The company’s $15.5 billion market capitalization would value the stock at roughly 7.6x on a price-to-free cash flow basis. This deal is not only cheaper than ConocoPhillips but also a more attractive deal than Buffett was able to pick up.
Shell Stock's Valuation Boosted by Wells Fargo Analysts
Analysts at Wells Fargo led the way on Wall Street to become bullish on Shell stock. Today, they see a price target of $90 a share, representing roughly 28.7% upside from where the stock trades today.
As for Marathon Oil stock, short sellers were scared away by Buffett’s move into the energy sector. Over the past month, short interest for Shell stock plummeted by 5.3%, leaving more room for institutions to pick up these additional shares.
T Rowe Price boosted its position in Shell by 13% in the past quarter, bringing its net investment to $450 million today. According to Shell’s financials, the stock’s $224 billion market capitalization would give investors a price-to-free cash flow multiple of 7.2x, even a better deal than what Buffett found in Occidental stock.
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