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Synopsys, Alibaba, Zendesk and Roku highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – July 16, 2021 – Zacks Equity Research Shares of Synopsys, Inc. SNPS as the Bull of the Day, Alibaba Group Holding Limited BABA as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Zendesk, Inc. ZEN and Roku, Inc. ROKU.

Here is a synopsis of all four stocks:

Bull of the Day:

The global chip shortage has had a rippling impact across the economy, creating a massive opportunity for semiconductor stocks. Lawmakers are now considering a $52 billion bill to attack the chip shortage head-on in the US, providing funding to help chipmakers increase their capacity to meet the unending demand. Now is the time to jump into this momentum-building segment, and Synopsys is an under-the-radar chip player that is poised to take off.

Synopsys is the backbone of innovation for global electronics. SNPS is a prudent way to invest in the semiconductor and electronics space while still profiting off the current chip shortage going into the grand 4th Industrial Revolution. This company is the global market leader in chip-making software and intellectual property (IP) related to semiconductors. Synopsys has exceeded expectations consistently and has progressively risen guidance, driving analysts' estimates and price targets higher, propelling the stock into a Zacks Rank #1 (Strong Buy).

The world of semiconductors is proliferating with Moore's Law, which was established 50 years ago by the co-founder of Intel (Gordon Moore), still holding today. The 'law' hypothesizes that every two years, the number of transistors on a microchip doubles, and the cost halves. Today, integrated circuits or computer chips can hold billions of transistors on a chip the size of your fingernail.

The demand for the newest and fastest technology is always there, and we are on the brink of the next tidal wave of tech. Artificial intelligence (AI), cloud computing, the internet of things (IoT), autonomous driving, and 5G are driving the next wave of technological advancement. Synopsys is at the foundation of new technology and will ride this demand wave.

The Business

Synopsys is a global leader in electronic design automation (EDA) and semiconductor IP. Its EDA software serves chip and hardware designers every step of the way, from initial design to verification for quick and efficient turnarounds. The EDA market was worth over $10 billion in 2019 and is expected to grow by 8% annually for the next 6 years (over $20 billion by 2027), according to Global Market Insight.

Its duopoly with Cadence and high entry barriers gives the firm robust pricing power. This high-margin business is going to continue to drive healthy profitability. Analysts are expecting these margins to expand as the company enjoys economies of scale.

Its IP products provide customers with ready-to-use chip designs that are proven and save customers time. It is the largest global player in this rapidly growing space which is expected to reach $8.8 billion by 2026 (assuming a compounded annual growth rate of 7.5%), according to Business Wire. Synopsys's massive IP portfolio and over 15 years of investments give it a firm grip on this market.

Synopsys also offers products that improve software developers' code, ensuring there are no code defects and verifying that the code is secure. Its software integration revenue only makes up 10% of the topline, but it is the fastest-growing segment at healthy double-digit growth levels.

The Financials

The pandemic created the perfect storm for the future of this business, with digital adaptation accelerating 10 years in just 10 months. The company and its stock show no signs of slowing down as the economy reopens and chip demand proliferates as the transformation to 5G connectivity takes off.

Synopsys's growing annual free-cash-flows of roughly $770 million (in the past 4 quarters), $856 million in cash, and minimal amounts of debt on the balance sheet give this business an enormous amount of financial flexibility to continue acquiring/investing in IP and advancing software in these fragmented markets.

SNPS is trading at a discount to its biggest competitor, CDNS, and these shares show strong signs of renewed momentum as optimism about the space drives chip stocks back towards fresh highs.

The Opportunity

Investors continue to pour money into this innovation machine, despite the pandemic. SNPS is up nearly 70% above its pre-pandemic highs but remains 8% below its mid-February highs. These shares now have legs to run and are sitting materially below analysts' price targets. I see no reason to wait to purchase these shares but be prepared for short-term volatility as the market consolidates during this Q2 earnings season.

I am confident they have more room to rally, with 8 of 9 analysts calling these shares a buy right now (0 sell ratings).

Bear of the Day:

I chose Alibaba as a bear solely on its geopolitical risk, which has grown seemingly every day since Jack Ma's criticism of China's financial system. BABA has been trading at a significant discount to its US rival, Amazon, and the reasoning behind this markdown is becoming increasingly clear. Think of this piece as more of a warning about a mounting threat than a sell everything red flag.

Analysts have been dropping their EPS estimates on BABA since its fintech subsidiary, Ant Group, was forced to suspend its IPO by Xi and his increasingly autocratic communist administration, pushing BABA down to a Zacks Rank #5 (Strong Sell). Alibaba has a 33% stake in Ant Group, which was expected to go public in the US at nearly half a trillion-dollar valuation earlier this year.

Xi's regime wiped out $100 billion in market value from this fintech titan, with a fresh regulatory overhaul aimed at Ant Group's unique lending methods. This move by Chinese officials was ostensibly a retaliation by the administration to Jack Ma's (founder and owner of the business) public criticism of the State. Jack Ma's denouncement of China's financial practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of his economy to ostentatious billionaires like Ma (the man who founded both Alibaba & Ant Group), or worse, US investors.

China Gives US Investors One More Reason To Worry

ByteDance, the owner of TikTok, an increasingly popular social media platform for short-form videos, is now putting its highly anticipated US listing on indefinite hold following local government officials in China voicing concerns about its data security. This appears to be just another move by Xi's communist administration to show its tech giants who's really in charge. The only problem is that every restriction deteriorates the value and growth potential of China's fast-growing tech players.

US investors have been shedding Chinese equities like my golden shed's hair (tons) as the spreading regulatory overhang pushes China's tech giants out of market favor. In the first couple weeks of July trading, $1.2 billion has flown out of Chinese stocks, compared to the $8.1 billion inflow over the same period last year.

The progressing Chinese communist regime seemingly headed towards capitalism is now reeling back towards what looks like a government-controlled autocratic economy. I don't think China wants US investors to have any stake in its country's tech giants.

Just 2 days after DiDi, the Uber of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost 27.5% of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since this announcement.

There is geopolitical risk in every foreign entity, but it would appear that China tech shares may hold the most at the lofty valuations many of them still trade at. Since this wave of regulation was catalyzed by Jack Ma, founder of Alibaba, I see significant risk in these shares specifically, though there is a value argument to be made for BABA at these levels.

Additional content:

2 Tech Stocks to Buy at Discounts and Hold for Long-Term Growth

The heart of Q2 earnings season is officially underway. JPMorgan and other financial powers kicked off what is poised to be an impressive second quarter earnings season that marks real growth from the pre-covid period in FY19.  

The market has surged to records in the early days of Q3, with the Nasdaq up 12% since mid-May. Wall Street has showcased its eagerness to buy technology stocks at discounts during the last year, as the nearby chart shows.

Some technology stocks could be poised for a healthy pullback sometime soon, as Apple, Adobe and many others hover above overbought RSI levels of 70. And whenever there is a recalibration, investors should be ready to jump on strong stocks at discounted prices just like the big Wall Street players. And Q3 earnings season might be used as a chance to take profits.

That said, there are some strong tech names with impressive growth outlooks still trading at discounts. Let's dive into two of these technology stocks that investors might want to consider as long-term buy and hold candidates...

Zendesk

Zendesk is a cloud-focused software firm that helps businesses with their customer service needs in the digital age. The firm boasts that it connects over 100,000 brands with "hundreds of millions of customers over telephony, chat, email, messaging, social channels, communities, review sites and help centers."

ZEN has grown its top-line at an impressive clip since it went public in 2014. This includes 26% sales growth in FY20 that saw it climb above $1 billion for the first time.

ZEN topped our Q1 FY21 estimates and it continued to add larger clients, with its total annual recurring revenue from clients with ARR of $500,000 or higher up 50%. Zacks estimates call for its FY21 revenue to climb 27% to $1.3 billion, with FY22 set to jump another 25% to $1.6 billion.

Meanwhile, its adjusted EPS figures are projected to surge 24% this year and 47% in 2022. Zendesk has crushed our bottom-line projections in three out of the last four quarters, including a 42% beat in Q1.

ZEN shares have soared 375% in the last five years to blow away its industry's 160% average, which includes a 55% climb in the past 12 months. But the stock has fallen 4% in 2021.

Zendesk, which grabs a Zacks Rank #3 (Hold) right now, closed regular hours Wednesday roughly 15% below its February records at $137.62 a share. On the technical front, ZEN is approaching its 200-day moving average, and even if it breaks below the threshold the nearby chart shows the stock has rarely stayed there for long.

The stock sits below neutral RSI levels (50) at 42, while the Nasdaq-100 Index-tracking Invesco QQQ is currently well above overbought levels (70) at 76. Zendesk also trades at a 23% discount to its own year-long highs at 11.1X forward sales, which represents value compared to its median as well. These factors could give ZEN plenty of room to climb and might make for an attractive entry point for long-term investors—though some might want to wait for it to report Q2 earnings on July 29.

Wall Street remains high on Zendesk, with 12 of the 14 brokerage recommendations Zacks has at "Strong Buys," with none below a "Hold." The stock also sports an "A" grade for Growth in our Style Scores system, and clearly customer service needs aren't going out of style. In fact, they are becoming more complicated as they span a range of channels, and companies big and small continue to invest in their digital futures.

Roku

Netflix helped kickstart an entertainment revolution and the streaming market still has room to grow as more people cut the cord and global titans invest billions in their TV platforms and content, including Amazon, Apple and Disney. Roku has helped fuel this expansion from behind the scenes and it's prepared to thrive no matter who wins the streaming wars.

Roku's small devices that plug into TVs and allow users to watch streaming TV content helped it become a mainstay in the industry. Roku's tech is also built into smart TVs and it was the No. 1 smart TV OS sold in the U.S. in 2020, with nearly 40% market share. The company also sells wireless sound systems. But digital advertising and marketing is now its core business.

Roku makes money by selling ad space across its marketplace and taking a share of streaming service subscription revenue and ad inventory. Roku allows marketers to buy targeted ads, promote their streaming movies or platforms, and more. Digital could account for 65% of the roughly $240 billion-a-year industry in the U.S. by 2023, up from just one-third of ad spending only a few years ago, as people leave legacy media in droves in favor of subscription services such as Netflix and Spotify.

Roku bought Nielsen's Advanced Video Advertising business and "entered into a long-term strategic partnership" to boost its advertising credentials. The firm also has its own channel that allows users to watch free, ad-supported streaming movies and TV shows.

Roku beat our Q1 estimates, with its ad-heavy platform revenue up 101% to account for 80% of total sales. The company also added 2.4 million active accounts to close at 53.6 million. Plus, it's monetized video ad impressions more than doubled YoY.

Roku's EPS estimates surged following its Q1 release. And Zacks estimates call for Roku's FY21 revenue to surge 54% from $1.8 billion to $2.7 billion, with it set to add another $1 billion, or 39% in FY22. Plus, it's projected to swing from an adjusted loss of -$0.14 a share to +$0.45 and then soar 116% to $0.97 a share next year.

Roku shares have soared 755% in the last three years and 167% in the past 12 months. The stock took a hit along with many other high-flyers in 2021, but it has already mounted a big comeback since early May.

Luckily for those who might have missed the run, the stock closed regular hours Wednesday roughly 15% below its records at $413 a share. ROKU also trades at a 30% discount to its year-long highs at 17.1X forward sales. And a recent pullback has it trading near neutral RSI territory (50) at 53, even as the Nasdaq 100 is at overbought levels.

Like ZEN, Wall Street is largely bullish on Roku, with 16 of the 20 brokerage recommendations Zacks has coming in at "Strong Buys." The stock sports a Zacks Rank #3 (Hold) at the moment, accompanied by "A" grades for Momentum and Growth in our Style Scores system. And those with long-term horizons might want to add Roku as a way to invest in both the future of entertainment and advertising.

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