This week’s spotlight is Facebook (FB), as the company reveals its new cryptocurrency offering today (June 18, as I write this), and on the US Federal Reserve as the Board’s Federal Open Market Committee will conclude its regular policy meeting tomorrow with a much-anticipated position announcement on interest rates. Facebook’s news has been feeding grist to the rumor mills for nearly a year; the company’s white paper will separate facts from wishful thinking. The Fed has been holding rates steady since December last year; with week’s meeting, market watchers expect some guidance on future cuts.
So, the big news is crowding the spotlights, which can make it difficult to see what the smaller guys are up to. But those smaller companies offer plenty in the way of market action. For investors willing to shoulder a bit of extra risk, the rewards can be compelling. We’ll use the TipRanks Trending Stocks data to look at three companies that Wall Street’s top analysts think are positioned for strong gains.
Lumentum Holdings (LITE)
Lumentum is leading provider of optical and photonic products for datacom, telecom, and commercial lasers. If you’re one of the 900 million iPhone users, then you’re familiar with Lumentum products – the company is a supplier of screen components for the popular smartphone.
It’s prominent place in the tech ecosystem – Lumentum is also part of Huawei’s supply chain – has left the company vulnerable to the ‘China Contagion,’ the fallout from ongoing trade tensions between China and the US. The tech industry is generally is vulnerable to the trade spat, as the US is the world’s largest tech consumer and China is a massive exporter of tech products. Lumentum, with its exposure to both Apple (AAPL) and Huawei, is more vulnerable than most. Between May 14 and May 20, LITE shares lost almost 13% when the trade war flared up again.
The company is not without hope, however. Writing from Goldman Sachs, analyst Rod Hall has run the numbers on a series of scenarios for LITE’s future. He took careful note of a “a worst-case earnings scenario that assumes 100% of Huawei related revenues are lost and Apple’s iPhone volumes end up being 20% lower than his below consensus estimates.”
In that scenario, he described the downside as “…likely [to] deliver about $3.27 in FY (to June) EPS which implies a current forward trading PE of 13.2x vs. a recent historical median PE of 12.3x.”
Hall continues, summarizing the case thus: “While acknowledging that a range of outcomes may exist outside our analysis, we highlight that even in our most bearish scenario the implied PE multiple is ~13x at current trading levels. This compares to Lumentum’s median multiple of ~16x since it started trading in 2015… We also flag again that we see our most bearish scenario as unlikely, given iPhone unit weakness is already built into our model. In our note published on May 20 we estimated ~34% of Huawei revenue is replaceable in our central case.”
To put it plainly, Hall sees LITE’s vulnerabilities as known factors, which investors are already seeing and taking into account. His most bearish estimates, also, still show the company maintaining a profit. With that in mind, he gives LITE a ‘Buy’ rating and a $69 price target, suggesting a 39% upside.
Wall Street’s analysts are in general agreement with Hall’s thesis. With a unanimous 15 buy ratings, LITE has a ‘Strong Buy’ from the analyst consensus. Shares trade for $49, so the average price target of $67 gives a 36% upside.
RingCentral, Inc. (RNG)
Cloud computing has revolutionized communications and networking technology, along with the software industry. Unified Communications as a Service (UCaaS) brings all three together, routing telephone, video links, and data communications through one server. RingCentral is a leader in the industry, with a reputation for reliability and trustworthiness.
A strong position in a growing field have put RNG on firm footing. Last month, Oppenheimer analyst Brian Schwartz took note of the company’s “strong Q1 results, anchored by a record deal size, solid business metrics and higher 2019 growth outlook.” Schwartz added that he is “increasingly confident in the company's ability to grow its subscriptions business at Tier 1 rates, while improving operating margins with scale.” In light of that, he raised his price target on RNG shares by 11%, to $130, indicating an 10% upside potential.
Writing earlier today, June 18, Needham’s Richard Valera gives RNG an even more bullish target of $140. He said that he “…sees the company deriving benefits from the continued shift from premises-based communications to the cloud as well as its strong product and superior execution.” With that foundation, Valera believes “RingCentral remains well positioned to grow its revenue and increase profitability.” His price target suggests an upside of 18%.
RingCentral is another ‘Strong Buy,’ based on an analyst consensus of 9 buys and 1 hold. The average price target is $135; with a share price of $117, that gives an upside of 14%.
Square, Inc. (SQ)
Square has rapidly become a leader in online payment processing. The company’s products are a combination of software and small gadgets designed to conduct transactions from any mobile device. Small merchants can use Square’s reader to run charge cards from a smartphone, while businesses can use Square’s Stand to operate an iPad as a cash register. From a customer perspective it’s a clever idea, while for a small business owner it’s a money-saver.
That’s the company’s foundation. Square hasn’t rested on it however; it has been promoting its Cash App for P2P money transfer, and last summer Square’s Cash App surpassed PayPal’s (PYPL) Venmo, its chief competitor, in total downloads. A key factor in the rapid growth of Square Cash is its no-nonsense approach to transactions; where Venmo has been plagued by privacy concerns stemming from its social media newsfeed, Square Cash avoided that pitfall by simply offering quick access to basic financial services.
Nomura analyst Dan Dolev has been tracking Square Cash’s performance compared to Venmo, in his coverage of Square, Inc. Dolev notes an increase in Square Cash downloads last month, growing from 2 million in April to 2.2 million in May. According to Dolev’s data, Cash regularly has a monthly download advantage of 400K to 500K over Venmo. He gives SQ shares a ‘Buy’ rating and a $90 price target, based on his read of May’s optimistic data. His price target suggests an upside of 25% to the stock.
Writing from Tigress Financial, five-star analyst Ivan Feinseth also sees strong growth potential in Square’s future. He gives the stock a ‘Buy’ rating, and explains: “The company is increasing its gross payment volumes and deepening its seller relationships to expand its customer service base… Square's ability to grow its ecosystem will continue to drive its growing return on capital and increasing economic profit.” Following his usual habit, Feinseth did not set a specific target price for SQ.
Shares in Square have a ‘Moderate Buy’ from the analyst consensus, based on 13 buys and 9 holds given in the last three months. The upside potential of 18% is derived from a share price of $71 and an average price target of $85.
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