Given that its business thrived rather than struggled during the worst of the COVID-19 pandemic, Domino’s Pizza (DPZ) stock delivered a solid performance during 2020.
Last March, when markets cratered as the coronavirus spread, Domino’s held up reasonably well. Sure, it saw a brief decline during the market-wide sell-off, but already coming off of a spike in February 2020, shares were pretty close to where they were at the start of the year.
And with lockdowns providing carry-out restaurant chains a windfall, strong results helped push the stock well above its pre-COVID price levels. Now, though, as vaccine optimism rises, “stay-at-home” restaurant plays are fading in popularity among investors.
DPZ stock may have bounced back a bit after its late February correction (partly due to a disappointing earnings release), but don’t expect the pullback to end here. Although shares aren’t necessarily going to fall completely back to their early 2020 prices, as growth slows and more compelling opportunities present themselves, there’s going to be less interest in this stock.
Domino's Stock And Slowing Growth
Late last month, the pizza chain released quarterly results. With both revenue and earnings falling short of expectations, shares dipped on the news.
Wall Street analysts expected $1.39 billion in sales for the quarter. Instead, the top line came in at $1.36 billion. Sell-side consensus called for $3.89 per share in earnings, but the company posted adjusted earnings of only $3.46 per share.
While results were up from the prior-year quarter, they still missed investors’ expectations. As mentioned above, in the weeks since its pullback, we’ve seen DPZ stock partially recover.
Yet, with the outlook calling for slowing growth, shares may have room to fall. How much further? Given its slightly higher valuation relative to similar names, expect only a modest pullback from here.
Slight Pullback Possible, But Nothing Dramatic
As its growth slows, and investors focus more on restaurant recovery plays, it’s going to be hard for Domino’s Pizza stock to resume its prior upward trajectory.
It should be noted, though, that the situation here differs from other restaurant stocks that thrived during 2020. A good example is Chipotle (CMG), which has clearly gotten ahead of itself valuation-wise.
Yet, with significant growth projected for the coming year, Chipotle likely has enough to keep its stock price steady. However, with DPZ’s sales and earnings growth set to fall back into the single-digits, this stock might not be able to grow into its valuation.
Instead, expect valuation contraction. Fortunately, though, not to a severe degree. With a forward P/E ratio that is only slightly higher than similar names like McDonald’s (MCD), additional pullbacks may be minimal.
What Analysts Are Saying About DPZ Stock
According to TipRanks, DPZ is a Moderate Buy, based on 11 Buys and 7 Holds. At $414.24, the average analyst price target suggests 14% upside potential. (See Domino’s stock analysis on TipRanks)
Bottom Line
As investors become more interested in bidding up recovery plays, restaurant stocks that thrived during the pandemic (such as Domino’s) will likely fade in interest.
And unlike some other names, which have high levels of growth potential to keep their share prices stable, this company’s slowing growth doesn’t offer that opportunity.
So, where’s DPZ heading from here? Expect another pullback, though likely nothing dramatic. But more importantly, don’t expect shares to make another move higher anytime soon.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Widely recognized for its leading real-time non-structured data search capabilities, Elastic N.V. (ESTC) counts companies such as Uber (UBER), Lyft (LYFT), and Match Group (MTCH) as customers. Despite the ongoing pandemic, Elastic put up some pretty impressive numbers in Q3'21, with year-over-year revenue growth of 39% and a net expansion rate of 130%. Given that the business model is consumption-based, Elastic should thrive in the coming year as the economy opens back up.
But Mr. Market doesn't necessarily agree, and the price of Elastic stock has fallen this year from an all-time high of $171 in January to $111.59 currently, for a drop of 35% in a little more than two months, partially due to the tech market sell-off, but also because of company-specific factors.
Factors Impacting The Stock Price
One major factor contributing to Elastic's downtrodden stock price is the soft guidance issued for Q4'21, with forecasted year-over-year revenue growth of 28% and non-GAAP operating margin in the range of -8.5% to -7.5%.
The revenue growth appears to be on the light side, and margins are also a concern, especially given that management has indicated during the last earnings call that operating margin is expected to fall in 2022 as the economy opens up. "Given the higher investment profile and the return of travel and event expenses, we are currently expecting that our operating margin in fiscal 2022 will be a few percentage points lower than in fiscal 2021," the company said.
Apart from weak guidance, Elastic is expanding into observability and endpoint security, two extremely competitive market niches. While Elastic is clearly an industry leader in search, it is a small player in the other markets.
The investment community is likely skeptical about Elastic's ability to compete in observability and endpoint security given that Wall Street darling and endpoint security leader, CrowdStrike (CRWD), is now entering the observability market with the acquisition of Humio, announced back in February.
Finally, a recent change to Elastic's licensing model has developers concerned that the company may be moving away from an open-source business model. The licensing has been modified to address occurrences such as Amazon's (AMZN) use of Elasticsearch and apparent brand and trademark abuse. Now, the licensing model restricts how cloud service providers can use Elasticsearch and Kibana in their own products.
Wall Street’s Take
From Wall Street analysts, Elastic earns a Strong Buy consensus rating, based on 12 Buys and 2 Holds. Additionally, the average analyst price target of $181.21 puts the upside potential at 62%. (See Elastic stock analysis on TipRanks)
Summary And Conclusions
Elastic is an industry leader in real-time non-structured data search applications, and has an extensive list of customers. However, in spite of its excellent financial performance in Q3'21, the stock has underperformed due to weak guidance for the remainder of FY'21 and expected margin compression in FY'22.
In addition, there is also concern that competition in Elastic's secondary markets, observability and endpoint security, may intensify, especially given CrowdStrike's apparent entry into the observability market niche.
Despite these concerns, the depressed stock price may present an opportunity to investors amid the economic reopening.
Disclosure: On the date of publication, Steve Auger did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Marathon Digital (MARA) is among the best performing stocks over the last year, having skyrocketed over 7,000%.
Given the rally in Bitcoin, the surge in Marathon Digital stock is probably not surprising. As a Bitcoin miner, the company seems like a good proxy to owning the cryptocurrency and there is a strong likelihood that the Bitcoin price could remain firm.
A fundamental reason behind this strength is that Bitcoin is priced against the dollar and there is no limit to the amount of dollars that can be printed. On the other hand, Bitcoin has a limited supply.
Recently, Citigroup (C) opined that Bitcoin is “at a tipping point of mainstream acceptance or speculative implosion.”
There is ample data to suggest that Bitcoin is positioned for wider acceptance. For example, Square’s Cash App reported 3 million Bitcoin users in FY2020, and in January 2021, more than one million customers purchased Bitcoin for the first time.
So how does higher Bitcoin price benefit Bitcoin miners like Marathon Digital?
Marathon Digital could decide to sell the mined cryptocurrency and boost its cash position, or it could choose to hold onto the Bitcoin, similar to other assets on its balance sheet.
Factors That Make Marathon Digital Attractive
Marathon Digital has already reported strong top-line growth. For the first nine months of 2020, the company reported revenue of $1.7 million, which was 89% higher on a year-on-year basis. However, cash used in operations was $3.4 million for the same period.
Marathon is positioned to generate positive cash flows in the current year as a result of its expansion plan for the coming quarters.
As of September 2020, Marathon reported 2,060 miners. The company is expecting to deploy 23,560 miners by the second quarter of 2021, which means that its mining capacity will be 11 times higher by Q3. This could have a significant impact on Marathon’s top-line growth in the coming quarters.
Furthermore, Merrick Okamoto, Marathon’s chairman & CEO, is targeting the deployment of 103,060 miners by Q1, 2022. The CEO estimates that based on the current mining rate, a complete deployment could enable Marathon to mine approximately 55-60 bitcoins per day.
Even if the company can only mine 50 Bitcoins per day, revenue growth will be significant. At a current Bitcoin price of $56,000, this equates to over $250 million per quarter, or $1 billion per annum if all the mined cryptocurrency is sold.
Marathon held a $250 million common stock offering in Jan. 2021, of which the company invested $150 million into Bitcoin. The key point is that Marathon has ample liquidity to fund its expansion plan in the next few quarters.
As top-line growth accelerates, the company is expected to turn operating cash flow positive, which should increase its financial flexibility for the next-leg of growth.
A wider adoption of blockchain technology is likely and according to forecasts by Gartner, a leading research and advisory company, blockchain will generate annual business of more than $3 trillion by FY2030. If this holds true, the best part of growth is still to come for crypto companies.
Wall Street Weighs In
Marathon receives a Moderate Buy consensus rating based on a solitary Buy recommendation and a price target of $50 per share. This implies upside potential of around 16% from current levels over the next 12 months. (See Marathon stock analysis on TipRanks)
Concluding Views
Amidst these positives, regulatory headwinds could pose potential challenges. India, for example, is considering a ban on cryptocurrency mining and trading while increased regulation of the cryptocurrency market could affect the decentralisation for which Bitcoin was originally intended.
Still, the positives seem to outweigh the concerns and Marathon Digital looks interesting at current levels.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
It has been a rough period for optical suppliers, as reduced spending from telco service providers like AT&T (T) and Verizon (VZ) has led to weaker demand for Ciena (CIEN), as well as peers and rivals like Cisco (CSCO), Infinera (INFN), and Juniper (JNPR).
That said, Ciena has likely seen the worst of this cyclical slowdown, as book-to-bill has climbed back above 1.0 and orders should translate to stronger revenue in the second half of the year. Beyond the near-term recovery, there are also opportunities for Ciena to displace Huawei with European and Asian customers and gain market share in new metro/edge applications.
Bearing this in mind, Ciena should trade closer to $62 today, with longer-term annual return potential in the high single-digits to low double-digits as the company executes on market expansion opportunities.
Better Fiscal Q1 Results, But Not Meaningfully So
Ciena posted fiscal first quarter results that were ahead of Street expectations, but the significance of the outperformance is low. Revenue declined 9% year-over-year and almost 9% quarter-over-quarter (to $757 million), beating expectations by 1%, while gross margin landed in-line with expectations at 48% (up about three basis points year-over-year). Operating income rose 2% year-over-year and operating margin of 14.6% (up 150 basis points) was two points better than expected. However, with the company pushing some expenses out into the second quarter, it doesn’t net out to any meaningful change in outlook.
It was a tough quarter overall. Like Infinera, Ciena saw better results in the international segment. That said, this was the weakest quarter for the North American business since the first quarter of 2019.
Service provider revenue fell 15% year-over-year, while cable provider revenue fell 35% year-over-year, and that’s a difficult headwind to overcome. Webscale performance was also soft. The business grew 25% year-over-year against a weak comp, but declined 14% quarter-over-quarter, and management only guided for mid-single-digit growth for the year.
As far as bright spots go, though, cable provider revenue did improve more than 12% quarter-over-quarter. Additionally, the book-to-bill did turn positive for the first time in a year, and management continues to expect stronger 800G deployments in the second half of the year. The company also continues to see strong interest for its WaveLogic 5 Extreme, with initial customer adds running double the rate of the prior WaveLogic Ai.
Growth Opportunities Beyond 2021
One of the most attractive parts of the Ciena story is the company’s opportunity to displace Huawei in the service provider market, as multiple countries in Europe and Asia have banned further use of Huawei’s optical equipment.
Ciena has historically underperformed in Europe (10% share against global share excluding China of 30%), and taking a meaningful part of Huawei’s legacy 35% share in Europe is a major growth opportunity. Nokia (NOK) will fight hard for that business too, but it has had some serious product development/performance issues and has had to compete largely on the basis of price in recent years – something that has become increasingly difficult to maintain.
Beyond the Huawei opportunity (which also extends to non-European markets like India), the edge/metro application market is substantial. It is becoming too cumbersome to place routers everywhere they would traditionally go, and Ciena has developed solutions that bring together optics and IP functionality (along with software automation) and offer an elegant solution to this problem. This could increase the addressable market from around $3 billion today to around $4.5 billion in 2024.
The Outlook
There are multiple threats to Ciena’s outlook. Nokia could prove to be more successful than Ciena in displacing Huawaei, and Ciena faces meaningful competition in the enterprise market from Cisco and Inphi (IPHI). That said, the WaveLogic 5 Nano should offset some of Inphi’s momentum with its new upcoming ZR product. In terms of other risks, service provider spending could be slower to rebound, particularly after huge industry-wide expenditures on spectrum, but equipment spending has to come at some point (or the spectrum does them no good).
Full-year revenue growth will likely be quite modest in fiscal ’21 at around 1.5% (versus guidance of 0%-3%), but growth should accelerate to over 9% in FY’22 and stay above-trend through FY’24. In the long-term, revenue growth could be around 5%, with free cash flow margins in the low-to-mid teens, driving high single-digit long-term annualized free cash flow growth.
Analysts Weigh In
Looking at the consensus breakdown, 10 Buys and 2 Holds have been assigned in the last three months. So, CIEN is a Strong Buy. At $59.17, the average analyst price target implies 7% upside potential. (See Ciena stock analysis on TipRanks)
The Bottom Line
Based on discounted cash flow and a margin-driven EV/EBITDA valuation approach, Ciena could trade in the low $60’s near-term, with longer-term total annualized appreciation potential in the high single-digits to low double-digits. Given the upcoming recovery in revenue and a still-underappreciated opportunity to gain share in Europe and expand into new markets, Ciena is an attractively-priced stock today.
Disclosure: At the time of publication, Stephen Simpson owned shares of CIEN.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Match Group, Inc. (MTCH), the parent company of popular dating apps such as Tinder, Pairs, OkCupid, Hinge, and PlentyofFish, announced on March 15 the decision to acquire Garbo, a non-profit platform that helps users run background checks on individuals. In a press release, Match Group confirmed that Tinder users will have access to Garbo to run background checks on their potential dates by the end of this year, and the company is planning to roll out this feature on its other dating apps as well.
Investors already seem to be divided on the prospects of this new feature. Although this new addition will make online dating apps safer for many women, some argue that users will decide to quit Tinder because of privacy concerns, resulting in a decline in revenue for Match Group.
Short-Term Pains Will Be Converted Into Long-Term Gains
The introduction of background checks might initially lead to a decline in the number of users, but in the long run, Match Group stands to benefit from this decision. Bumble (BMBL), which recently made its U.S. market debut, is a significant competitor and has recently gained traction as it requires women to make the first move on the dating app. Match Group’s decision to implement background checks will help the company thwart the threat from the likes of Bumble in the long run by establishing itself as an innovative and women-friendly dating solutions provider.
This move will also help Match Group gain traction in emerging regions such as Asia and Latin America as safety concerns have prevented many women from using online dating apps in the past. According to a recent research report published by 360i Research, the Asia-Pacific region will be the fastest growing online dating market through 2025 due to favorable demographics such as the increasing internet penetration rate and the high concentration of young people in this region.
The Resilient Business Model
With mobility restrictions in all major regions of the world in the first half of 2020, Match Group initially took a massive hit as its userbase found no reason to be active on dating apps. The company, however, was quick to react to this negative development by introducing various features such as video messaging, as well as a free trial for the Passport feature that allows users to connect with their matches regardless of their geolocation.
These strategies paid off handsomely in 2020, which is evident from the 17% year-over-year growth in total revenue and 15% growth in EBITDA. Match Group’s dating products remained relevant during a very challenging year, which is a testament to the competitive advantages enjoyed by the company as the world’s largest online dating solutions provider.
Match Group Is Spreading Its Wings
Timely and value accretive acquisitions have also played a major role in Match Group’s dominance within the online dating industry, and the company is laser-focused on executing this strategy to gain market share in the fast-growing Asian region.
On Feb. 9, the company announced the acquisition of Hyperconnect, a leading social media and video technology company based in South Korea, for $1.725 billion. Hyperconnect operates Azar, which is the highest-grossing one-on-one live video app in the world. It also operates Hakuna, which is an interactive social media app that is popular in Korea for group video chats and broadcasts. This acquisition will help Match Group expand its presence in the all-important Asian region, reflecting a potential catalyst for growth in the future.
Wall Street’s Take
MTCH’s Moderate Buy consensus rating breaks down into 8 Buys and 3 Holds. The average analyst price target of $163.82 for Match Group shares implies an upside potential of just 7% from the current market price.
The recent acquisitions and the strong demand for online dating apps expected in the second half of this year are likely to push the stock to new highs, and upward revisions from analysts are in the cards. (See Match Group stock analysis on TipRanks)
Takeaway
Match Group is a leader in the global online dating industry, but the competition is intensifying. That said, the recent decision to offer background checks will help Tinder and other Match Group-owned platforms remain competitive in the future, and this creates a strong position for the company to gain market share in emerging regions that are yet to embrace online dating apps because of safety concerns.
Disclosure: Dilantha De Silva did not have any positions in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.