NeoGenomics and Marvell Technology have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – January 12, 2024 – Zacks Equity Research shares NeoGenomics NEO as the Bull of the Day and Marvell Technology MRVL as the Bear of the Day. In addition, Zacks Equity Research provides analysis on BlackRock, Inc. BLK, Invesco Ltd. IVZ and WisdomTree, Inc. WT.
Here is a synopsis of all five stocks:
Bull of the Day:
NeoGenomics is a small-cap provider of cancer genetics diagnostics. They boast one of the most comprehensive oncology-focused testing menus in the world to help physicians diagnose and treat cancer.
I last wrote about NEO as the Bull of the Day in late October, right before shares surged from $14 to $21 and we were enjoying over 50% gains in my Healthcare Innovators portfolio.
But in late December, shares took a big hit on patent litigation with competitor Natera (NTRA). Let's review the primary commercial business of NEO and then that will help put the legal news into context.
Oncology Diagnostics: Precision = Prevention
NeoGenomics serves the needs of pathologists, oncologists, academic centers, hospital systems, pharmaceutical firms, integrated service delivery networks, and managed care organizations throughout the United States, and pharmaceutical firms in Europe and Asia.
The company likely grew sales in 2023 over 15% to nearly $590 million. And this year's topline is projected to hit $635 million, for an 8% advance. With a $2 billion market cap, NEO trades just over 3 times forward sales estimates.
While NeoGenomics is not yet profitable, EPS estimates have been moving higher, with 2023 set to post a 71% increase to a loss of 16-cents and this year forecast to see another 78% rise to minus 4-cents.
Small Global Player in Fast Growing Market
Headquartered in Fort Myers, FL, NeoGenomics operates CAP accredited (Certified Analytics Professional) and CLIA certified (Clinical Laboratory Improvement Amendments) laboratories in Fort Myers and Tampa, Florida; Aliso Viejo, Carlsbad and San Diego, California; Research Triangle Park, North Carolina; Houston, Texas; Atlanta, Georgia; Nashville, Tennessee; and Phoenix, Arizona; and CAP accredited laboratories in Cambridge, United Kingdom; Rolle, Switzerland; and Singapore.
In research screening for attractive long-term companies to add for my Healthcare Innovators (HI) portfolio in October, I found NeoGenomics to be a screaming buy near $11. In late September, I put the stock on my Top 10 List and advised HI members to buy between $10 and $11.
Part of my enthusiasm about the stock was that it had sold off so dramatically from 52-week highs above $20 in May. And the cause of that selling was largely based around a broad FDA rule change concerning Lab Developed Tests (LDT) which was impacting the entire industry.
During the market volatility of the first week of October, NEO shares dipped to $11.03 and then moved quickly higher, including a 9% surge on October 17.
But I still liked the upside so much, I decided to make it an official buy for the portfolio and issued this Healthcare Innovators Buy Alert on October 19...
NeoGenomics: Buy between $13 and $14. We almost had our chance to buy under $11 the first week of October, but after reading some recent research on the LDT space, I think we can still jump on the big bull flag that popped up on Tuesday. NEO is a high-complexity CLIA-certified clinical laboratory that specializes in cancer genetics diagnostic testing, the fastest growing segment of the laboratory industry.
The company's testing services include cytogenetics, fluorescence in-situ hybridization, flow cytometry, morphology studies, anatomic pathology and molecular genetic testing. While only growing sales at about 10% to cross $600 million next year, it trades at a discount price/sales multiple and Piper Sandler has a $23 price target on shares with projections it should trade at 5X next year's sales.
FDA Oversight of Lab Developed Tests (LDTs)
The FDA rule change that drove most diagnostic companies down since the summer concerns the idea that LDTs are increasingly risky, and may lead to inaccurate test results, or may not perform as well as FDA-cleared tests. The FDA is also concerned that these tests could lead to unnecessary treatments, or delay/forgo appropriate treatments.
According to Piper Sandler analyst David Westenberg, after months of anticipation the FDA finally issued their updated position on LDTs on Sep 29. This explains the 1-month crash in these stocks. Although FDA plans on now having direct oversight over labs, the FDA will grandfather in most existing tests and the enforcement will not come until 2028.
Westenberg thinks the late Sep announcement is largely in line with investors' expectations, though the Piper team admits the FDA's stance on regulatory intensity remains a bit ambiguous.
While they recognize there might be a few added costs for companies getting into compliance in the next five years, Westenberg's team thinks existing tests will mostly not be impacted. They reiterated their bullish calls on lab providers such as Guardant, also in precision oncology screening, and Natera, the provider of non-invasive prenatal genetic screening.
NeoGenomics Receives Injunction Against RaDaR
NEO dropped 18% Thursday Dec 28 after the company received a preliminary injunction related to a copyright infringement lawsuit by Natera (NTRA), one of our other genetic diagnostic companies.
Natera alleged in the suit that NeoGenomics' RaDaR infringed on Natera's patent.
The District Court for the Middle District of North Carolina on Wednesday issued a preliminary injunction barring NeoGenomics from producing, selling, and promoting its RaDaR assay product, which Natera claims infringes its patented technology. The court order allows the continued use of RaDaR in ongoing treatments and trials.
"We continue to believe in RaDaR's innovative and distinguished technology and plan to appeal the court's ruling and defend our technology," NeoGenomics Chief Executive Chris Smith said in a statement. "We remain committed to bringing our highly sensitive test to market and providing cancer patients and their clinicians with options for their care."
Needham analyst reaction: A longer-term growth driver for NeoGenomics may be off the table due to a patent-infringement lawsuit, Needham's Mike Matson said in a research note. The analysts see the preliminary injunction as a bad sign, since they are rarely granted by courts and tend to signal merit in the underlying patent infringement case. Still, the analysts see NeoGenomics with other growth catalysts from its clinical services and advanced diagnostics businesses.
"We believe that the preliminary injunction is clearly disappointing since it disrupts a longer-term growth driver for NEO. But we do not expect a significant impact to 2024 or even 2025 estimates given minimal near-term sales expectations for RaDaR," the analysts said.
Needham maintained a $21 price target on NEO and concluded they expect revenue from RaDaR to be insignificant during 2023 and project minimal sales during 2024.
Piper Sandler analysts led by David Westenberg also had little revenue modeled for the NEO RaDaR assay and see the stock sufficiently de-risked now to make it attractive with an $18 PT. Here's what they wrote after the court ruling which prevents NEO from commercializing RaDaR at this time...
The decision follows a similar ruling against Invitae/Archer and likely demonstrates that Natera has a strong IP position on tumor informed MRD (minimal residual disease). The silver lining for NeoGenomics is that the order still allows for ongoing research and clinical trial to continue. Assuming NeoGenomics wins on appeal, the company would probably lose little in terms of time to market. Saying all that, our call on NeoGenomics has always been around its strong commercial channel, and we think RaDaR matters little.
Bottomline: I would own either NEO or NTRA at these levels. In fact, I own them both.
Bear of the Day:
Marvell Technology reported better-than-expected results for the third quarter of fiscal 2024, as the top and bottom lines outpaced the Zacks Consensus Estimates.
Plus, the chipmaker's Q3 revenues and earnings came above the midpoint of management's guidance range.
Despite reporting stronger-than-expected Q3 results, MRVL stock fell 10% over the coming week as its guidance for Q4 top and bottom lines fell short of the consensus mark.
And the primary catalyst to dump MRVL into the cellar of the Zacks Rank is that EPS estimates for the new fiscal year (begins in February) were taken down from $2.30 to $1.98.
Analyzing the Quarter
Before discussing specific Q4 forecasts, let's delve deeper into Q3 performance first.
Wilmington, DE-based Marvell reported non-GAAP earnings of 41 cents per share, beating the Zacks Consensus Estimate by a penny. The bottom line was also above the midpoint of the company's previous forecast of 40 cents (+/- 5 cents).
The semiconductor company reported revenues of $1.42 billion, which surpassed the consensus mark of $1.40 billion. The top line was also higher than the midpoint of management's guidance of $1.40 billion (+/- 5%).
However, non-GAAP earnings per share and revenues fell 28.1% and 7.7%, respectively, from the year-ago quarter. This decline can primarily be attributed to customer inventory reduction actions and a weakening demand environment across the enterprise networking end market amid the ongoing macroeconomic uncertainty.
Quarterly Details
Data center revenues of $555.8 million decreased 11% year over year but increased 21% sequentially. The robust sequential increase was primarily driven by strong revenue growth across artificial intelligence (AI) and standard cloud infrastructure, partially offset by depressed demand for data center storage.
The segment accounted for 39% of the quarter's total revenues, highlighting that it is currently MRVL's largest end market. Our estimate for Data Center's third-quarter revenues was pegged at $532.7 million.
Revenues from enterprise networking plunged 28% year over year and 17% sequentially to $271.1 million and accounted for 19% of the total revenues. The year-over-year decline was primarily due to inventory corrections and weak demand environment in this end market. Our estimate for enterprise networking's third-quarter revenues was pegged at $290.4 million.
Carrier infrastructure revenues, which constituted 22% of the total revenues, soared 17% year over year and 15% sequentially to $316.5 million. The rise was primarily driven by the increased demand for its wireless infrastructure. Our estimate for the division's third-quarter revenues was pegged at $281.8 million.
Automotive/Industrial revenues grew 26% year over year to $106.5 million, mainly driven by strong growth in the automotive business. However, the segment's revenues declined 3% sequentially. Revenues from this segment constituted 8% of the total revenues. Our estimate for the Automotive/Industrial's third-quarter revenues was pegged at $110.1 million.
Consumer revenues, representing 12% of the total revenues, decreased 5% year over year to $168.7 million. However, sales from this end market increased 1% sequentially. Our estimate for Consumer's third-quarter revenues was pegged at $185.7 million.
Marvell's non-GAAP gross profit of $859.2 million reflected a year-over-year decline of 12.7%. However, the non-GAAP gross profit improved approximately 6.3% sequentially. The non-GAAP gross margin of 60.6% contracted 340 basis points (bps) on a year-over-year basis but expanded 30 bps sequentially. The sequential increase in the non-GAAP gross margin was mainly driven by higher revenues and cost improvements.
Non-GAAP operating expenses of $437 million increased 4% year over year but declined 2.4% sequentially.
Marvell's non-GAAP operating margin of 29.8% contracted 690 bps from the year-ago quarter but improved 290 bps sequentially. The quarter-over-quarter expansion in the non-GAAP operating margin was mainly driven by an improved gross margin and lower operating expenses.
Balance Sheet and Cash Flow
Marvell exited the third quarter with cash and cash equivalents of $725.6 million compared with the previous quarter's $423 million. The company's long-term debt totaled $4.09 billion, higher than the previous quarter's $3.13 billion.
The company generated cash worth $503 million through operational activities in the third quarter and $823.9 million in the first nine months of fiscal 2024.
Marvell returned $101.8 million to shareholders by repurchasing $50 million worth of common stock and $51.8 million in dividend payments in the third quarter. During the first nine months of fiscal 2024, the company repurchased stocks worth $50 million and paid out $154.9 million in dividend payments.
New Year Guidance
For the fourth quarter of fiscal 2024, Marvell expects revenues of $1.42 billion (+/- 5%), slightly lower than the Zacks Consensus Estimate of $1.46 billion. The non-GAAP gross margin is likely to be approximately 63.5%-64.5%, while non-GAAP operating expenses are estimated to be approximately $430 million.
The company projects non-GAAP earnings per share for the fourth quarter to be approximately 46 cents (+/- 5 cents). The consensus mark for fourth-quarter non-GAAP earnings is currently pegged at 49 cents per share.
Additional content:
3 Stocks to Watch as SEC Finally Approves Bitcoin ETF Applications
On Wednesday, in what can be dubbed a watershed moment for the crypto market, the U.S. Securities and Exchange Commission ("SEC") finally green-lit the launch of 11 spot Bitcoin ETFs. This now allows retail investors to trade the world's largest cryptocurrency without having to own it.
In the previous session, an official social media account of the SEC announced that the regulatory body had already approved the applications, leading to Bitcoin (BTC) soaring above the $48,000 mark on Jan 9. However, soon afterward, SEC officials clarified that the account had been hacked and the ETF applications had not been approved yet, sending Bitcoin crashing down to the $45,500 level. The Wednesday announcement put an end to this chaos, and the benchmark cryptocurrency topped the $47,500 mark on the news.
These approvals from the SEC follow years of stalling and outright rejections of numerous attempts to launch spot Bitcoin ETFs. However, in 2023, the loss of a major lawsuit may have been the chief catalyst in the regulatory body finally giving the nod. In August, a court ruled that the SEC was "arbitrary and capricious" in its decision to reject Grayscale's attempt to convert its roughly $26 billion Grayscale Bitcoin Trust (GBTC) into a spot ETF. In fact, SEC Chair Gary Gensler even pointed out the significance of the court ruling behind the approvals.
"The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale's proposed ETP (the Grayscale Order). The court therefore vacated the Grayscale Order and remanded the matter to the Commission. Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares," he said.
This set of approvals from the regulators had been anticipated for several months, and a decision was being expected before the end of the week. Despite the volatility and risk attached to cryptocurrencies in general, this move to take them mainstream was much awaited as this will also ensure closer monitoring of the digital coin market, something the sector had always resisted.
Investor optimism is currently at a very high level, and one must track some of the major spot Bitcoin ETF applicants at this current juncture to understand the impact this news might have on them. These are some of the biggest names in the traditional marketplace that have decided to explore the crypto space in recent months, starting June 2023.
BlackRock, Inc.: This enterprise risk management and fixed-income institutional asset manager applied to launch a crypto exchange-traded fund in June. BlackRock is the world's largest asset manager. BlackRock's expected earnings growth rate for the current year is 4.4%. BLK currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Invesco Ltd.: This investment management company had first filed for a Bitcoin ETF in 2021 but dropped it in October of the same year. However, in June of 2023, it joined the race to be the first investment industry giant to launch a Bitcoin ETF. Invesco's expected earnings growth rate for the current year is -15.5%. However, it is expected to grow 13% next year. IVZ currently carries a Zacks Rank #4 (Sell).
WisdomTree, Inc.: This ETF sponsor and asset manager also joined the crypto ETF race by applying for one in June 2023. WisdomTree's expected earnings growth rate for the current year is 42.3%. WT currently carries a Zacks Rank #4.
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