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J.P. Morgan: 5G Ramp Provides Upside for These 2 Stocks

J.P. Morgan: 5G Ramp Provides Upside for These 2 Stocks

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Which technology is set to take the world by storm? 5G, or fifth generation wireless. The technology everyone’s talking about is expected to be so transformational, it has been dubbed the future of communications.  

Bursting onto the scene in 2017, the wireless standard enables an enhanced network that promises to connect almost everyone and everything. What exactly is so special about this technology? 5G is meant to deliver faster data speeds, ultra-low latency, more reliability, massive network capacity and increased availability, improving overall performance and efficiency.  

While 5G networks already started coming online in 2019, it will take some time before the standard is fully rolled-out. It doesn’t help that the pandemic has slowed the infrastructure work needed to deploy it as well as delayed the release of some 5G smartphones. However, Wall Street pros know that the 5G revolution is approaching, and with this new technology comes a host of exciting stock opportunities.  

Research firm J.P. Morgan is among those honing in on the space, pointing out that the names tasked with manufacturing the components needed to make 5G a reality stand to gain as the trend takes over. To this end, four-star analyst representing the firm, Samik Chatterjee, cites two stocks that are particularly well-positioned as possible beneficiaries of the 5G movement.  

Using TipRanks’ database, we wanted to take a closer look at these Buy-rated picks to get the rest of the Street’s take. Here’s what we found out. 

NeoPhotonics Corporation (NPTN) 

The first of J.P. Morgan’s picks is NeoPhonics, which designs and manufactures advanced hybrid photonic integrated optoelectronic devices for ultra-fast communications networks as well as ultra-pure light lasers. With its strong manufacturing capabilities and core integration technologies, the firm sees a clear path to long-term growth. 

The company already has a solid track record, as demonstrated by its most recent quarterly results. Management reported that Q1 EPS came in well above expectations and above the high-end of its guidance range at $0.17, driven by better than anticipated revenue, gross margins and opex. Chatterjee had called for EPS of $0.04, with the figure also surpassing the consensus estimate of $0.05 and guidance of $0.00-$0.10.  

Chatterjee does acknowledge that opex was helped by one-time benefits, but he points out “revenue strength in the quarter was led by strong underlying demand, particularly from customers in China, which accelerated the pace of 5G deployments following the extended shutdowns immediately after Chinese New Year to try and offset the deployment delays relative to their aggressive 5G infrastructure plans.” He added, “At the same time, gross margins benefited from favorable product mix as well as the roll-off of tariffs.” 

Even though the impressive revenue growth seen during Q1 could moderate in the second half of 2020, Chatterjee believes there will be a reacceleration in the first half of 2021 as its 400G DCO product is adopted. It should also be noted that customer inventories in China were higher in Q1, but this will most likely be more balanced by the end of the second quarter once the pace of deployments ramps up.  

Looking specifically at gross margins, there was a significant improvement during Q1. Overall, gross margins reached 31.2%, and product gross margins hit 35.8%, benefitting from product mix and price declines as NPTN highlighted a better pricing environment for the latest technologies, according to Chatterjee. Adding to the good news, these tailwinds are slated to persist in Q2 as the product mix continues to expand and utilization improves. The elimination of tariffs should also provide a full quarter benefit. 

Based on all of the above, Chatterjee stayed with the bulls. Along with his Overweight rating, he bumped up the price target from $11 to $13, indicating 48% upside potential. (To watch Chatterjee’s track record, click here)   

Judging by the consensus breakdown, the rest of the Street is in agreement. 7 Buys and a single Hold add up to a Strong Buy analyst consensus. In addition, the $12.06 average price target brings the upside potential to 37%. (See NeoPhotonics stock analysis on TipRanks)

Qualcomm Inc. (QCOM) 

Chip maker Qualcomm has undoubtedly faced headwinds as a result of the disruption to the smartphone market. That being said, J.P. Morgan argues that it has been able to fly past its peers in the industry, which speaks to the strength of 5G smartphone volumes as a whole. 

Chatterjee highlights the fact that the company has outperformed with respect to not only its fiscal Q2 results, but also its fiscal Q3 guidance. “Relative to F2Q, Qualcomm delivered largely in line with prior guidance, despite the massive dislocation in the end-market since the time that the guidance was issued in early February helped by resilience of estimated demand for 5G Quanta Cloud Technology (QCT) volumes, which also enabled the company to deliver to the ramp in ASP embedded in the guide...Qualcomm pleasantly surprised investors with an estimated QCT shipment outlook of flat to up modestly on a sequential basis — again led by resilience in 5G volume outlook and better customer mix. Overall, as we look through the upside on results/guidance, we see the resilience of 5G volumes driven by the consumer upgrade cycle as well as aggressive 5G launch plans from smartphone OEMs, to be the primary driver of the upside to investor expectations,” he commented. 

Turning now to the Qualcomm Technology Licensing (QTL) segment, part of what makes the outlook so resilient, in Chatterjee’s opinion, is QCOM’s new long-term global patent license agreements with OPPO and Vivo. These deals bring its total number of 5G licensing agreements to 85, with the long-term licenses from customers on the verge of wide-scale 5G smartphone adoption also underscoring the strength of the patent portfolio. Not to mention its multi-year agreement with Apple shows its strong standing in the industry from a technological standpoint.  

Expounding on the 5G opportunity, Chatterjee stated, “We expect Qualcomm’s QCT group to benefit substantially from 5G modem and RFFE sales to smartphone manufacturers and non-handset OEMs as well. In addition to the strong growth expectations for the QCT group, Qualcomm will stabilize its QTL licensing revenue as a consequence of a landmark agreement reached with Apple, which will also mitigate potential risk from litigations from other OEMs.” 

While some investors have expressed concern regarding the hefty competition facing QCOM, Chatterjee noted, “Qualcomm continues to consistently deliver to implied QCT gross margin of ~48%, representing disciplined pricing actions in line with changes in cost of 5G solutions.” 

To this end, Chatterjee kept a bullish call on the stock. Additionally, he gave the price target a lift, from $94 to $100. This new target conveys his confidence in QCOM’s ability to surge 24% in the next year.  

Shifting focus to the rest of the Street, QCOM’s Moderate Buy consensus rating breaks down into 9 Buys, 7 Holds and 2 Sells. At $87.73, the average price target puts the upside potential at a modest 9%. (See Qualcomm stock analysis on TipRanks)

The post J.P. Morgan: 5G Ramp Provides Upside for These 2 Stocks appeared first on TipRanks Financial Blog.

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Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.

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Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

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That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.

  

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‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans…

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'Kevin Caved': McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans have been outright rejecting the debt ceiling deal which raises it by roughly $4 trillion for two years, doesn't provide sticking points sought by the GOP.

In short, Kevin caved according to his detractors.

Some Democrats aren't exactly pleased either.

"None of the things in the bill are Democratic priorities," Rep. Jim Himes (D-CT) told Fox News Sunday. "That's not a surprise, given that we're now in the minority. But the obvious point here, and the speaker didn't say this, the reason it may have some traction with some Democrats is that it's a very small bill."

*  *  *

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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Government

“Hard Pass”: Here’s What’s In The Debt Ceiling Deal Republicans Are About To Nuke

"Hard Pass": Here’s What’s In The Debt Ceiling Deal Republicans Are About To Nuke

After President Biden and House Speaker Kevin McCarthy (R-CA)…

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"Hard Pass": Here's What's In The Debt Ceiling Deal Republicans Are About To Nuke

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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