5 Huge Analyst Calls: Oracle AI Story Not Over Yet, Says UBS; Shopify Upped to Buy
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Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrades for Macom Tech, Oracle, SunRun, Arista Networks, and Shopify.
InvestingPro subscribers always get news like this first. Never miss another market-moving upgrade.
Macom Technology Solutions upgraded at Benchmark
What happened? On Monday, Benchmark upgraded Macom Tech (NASDAQ:MTSI) to Buy with a $92 price target.
What’s the full story? Benchmark analysts have upgraded their rating on MTSI to Buy from Hold, and set a $92 price target, after the company’s acquisition of the RF GaN on SiC assets from Wolfspeed (NYSE:WOLF). The analysts estimate that the acquisition will add about $0.58 to MTSI’s annualized earnings per share, excluding the benefits from the fab facility, which will be transferred in two years.
The analysts at Benchmark are also bullish on MTSI’s datacenter artificial intelligence (AI) opportunity, which is just starting to materialize. Benchmark cites NVDA’s strong results and outlook as a positive sign for MTSI’s 400/800G solutions, which are linked to NVDA’s Spectrum 4 networking platform.
The analysts acknowledge that the acquisition price was significantly discounted, but they do not think it reflects any structural issues with the assets. Rather, they believe it reflects the complexity of the transaction and the mutual understanding of both parties, especially regarding the fab transition.
Buy at Benchmark means: “Stock is expected to outperform the analyst’s defined Sector/Industry Index over the following 6 to 12 months.”
How did the stock react? Shares jumped about $0.50 to $80.57 on the headline and ended Monday’s session a penny higher at $80.58, up about 0.7%.
Oracle Corp.
What happened? On Tuesday, UBS upgraded Oracle (NYSE:ORCL) to Buy with a $140 price target.
What’s the full story? Oracle’s stock has soared some 45% year to date, reflecting its strong position in the AI market according to UBS. However, UBS analysts think that the AI story is far from over, and they see more room for growth in the future.
The analysts point out several factors that could boost Oracle’s performance, such as:
a) the increasing demand for OCI from AI start-ups, especially Cohere, which has not yet started its ramp-up;
b) the upcoming CloudWorld event and investor day, which could showcase Oracle’s OCI capabilities and strategy;
c) the attractive price-to-earnings multiple of 20x, which is lower than its peers; and
d) the relatively low consensus rating on Oracle shares, which suggests a potential upside surprise.
The analysts have raised their fiscal 2024 revenue growth estimate for Oracle to 9.3% C/C, and they view the CloudWorld event on September 18 as a possible catalyst for OCI.
Buy at UBS means: “FSR is > 6% above the MRA” where FSR means “Forecast Stock Return,” where MRA means “Market Return Assumption.”
How did the stock react? Shares closed higher by 3.3% to end the session at $120.65.
Sunrun Inc.
What happened? On Wednesday, Citi upgraded Sunrun (NASDAQ:RUN) to Buy with a $21 price target.
What’s the full story? Citi analysts have upgraded RUN to Buy/High Risk, arguing that the stock has already priced in the negative effects of higher rates and net energy metering (NEM) changes. The analysts also highlight several positive factors that RUN is not getting due credit for, such as:
1) market share gains from the shift to third-party ownership (TPO) model,
2) path to free cash flow (FCF) generation,
3) no need for corporate level equity raises,
4) projected component cost deflation,
5) investment tax credit (ITC) adder benefits, and
6) demonstrated success in selling battery storage (with more than 80% attach rate on new sales in CA and more than 30% nationally).
Citi does acknowledge that CA will face headwinds in 2024, but they believe that RUN’s leading TPO market share and financing runway will enable it to meet the consensus expectations of ~6% megawatts (MW) installation growth in fiscal 2024, as consumers seek out solar and storage to save on utility bills. The analysts also think there is upside to net subscriber value estimates.
They value RUN at ~$21 per share in the long term, based on a conservative valuation approach.
Buy at Citi means the following: “Buy (1) ETR [estimated total return] of 15% or more or 25% or more for High risk stocks.”
How did the stock react? Shares closed the seesaw trading day higher by 1.8% to $15.43.
Arista Networks
What happened? On Thursday, Citi upgraded Arista Networks (NYSE:ANET) to Buy with a $220 price target.
What’s the full story? Citi analysts are bullish on Arista’s positioning in the cloud and 400G segments, which are the fastest growing areas of the market. Citi also sees Arista as a long-term beneficiary of the AI megatrend, which will drive more demand for high-performance networking.
Citi analysts expect Arista’s revenue to rebound next year, as its top customer resumes its spending and the hyperscalers invest more in data center infrastructure. Arista is also well positioned to capture any early opportunities related to AI, such as edge computing and machine learning. The analysts additionally see Arista as a long-term player in the AI market, where Ethernet is expected to gain share over InfiniBand in 2024/25.
Citi analysts have increased their fiscal 2024 and 2025 EPS estimates by 10% and 12%, respectively, reflecting higher revenue growth and margin expansion. They value Arista at $220 per share, based on a 31x P/E multiple of their revised fiscal 2024 EPS of ~$7. This represents a modest premium over the stock’s three-year average P/E of 28x.
Buy at Citi means: “Buy (1) ETR [estimated total return] of 15% or more or 25% or more for High risk stocks.”
How did the stock react? Shares spiked immediately on the headline from $187 to $192. Arista ended Thursday’s regular session up some 4.4% to close at $195.23.
Shopify
What happened? On Friday, Canaccord upgraded Shopify (NYSE:SHOP) to Buy with a $70 price target.
What’s the full story? Canaccord’s analysts think that Shopify is well positioned in the e-commerce space, which is a secular growth market, and that it has become the standard platform for small and medium-sized businesses, as well as some larger enterprises.
The analysts also note that Shopify has not seen any significant slowdown in its customer base despite the weaker consumer discretionary spending, and that its merchants are outperforming the broader industry. Canaccord highlighted two areas that they expect to drive more gross merchandise volume (GMV) for Shopify in the future: point-of-sale (POS) and business-to-business (B2B). The analysts say that Shopify is attracting new customers with its POS solution, which is offline only, and that it has an opportunity to monetize its B2B functionality better, which is currently included in its Plus subscriptions.
The analysts also point out several levers that Shopify can use to increase its GMV attach rates over time, such as Markets Pro, Installments, and new products. Canaccord thinks these initiatives will boost both revenue growth and gross margin for Shopify. Canaccord also praises Shopify’s recent moves to expand its product offerings beyond Plus, such as CCS and headless capabilities, which will enable it to capture more share in the enterprise segment. The analysts also view the “Buy with Prime” integration announcement with Amazon (NASDAQ:AMZN) as a favorable development, as it will allow Shopify to leverage Amazon’s fulfillment and delivery capabilities, while keeping checkout and payments with Shopify. Canaccord analysts further believe that this will enhance merchant GMV.
The analysts see an opportunity for Shopify to increase its prices on Plus plans next year following the successful price increase on Standard plans, which had limited attrition, and believe this will improve Shopify’s growth and margin trajectory.
The analysts moreover believe that the near-term setup for Q3 is pretty good, as this will be the first clean quarter after the restructuring and the exit of fulfillment. They expect gross margins to improve significantly, attach rates to remain stable, and operating leverage to increase.
The analysts admit in their report that they have been reluctant to upgrade Shopify before due to its high valuation of ~9x EV/R on C2024E for a business with low-50% gross margins. However, they now think that Shopify deserves a premium valuation, given its strong position in the e-commerce market and its growth potential. They regret not upgrading the stock earlier, when it was trading at 4x revenue last October, but they say that they were cautious due to the rate hike cycle, the macro environment, and the uncertainty around fulfillment. Canaccord now thinks that Shopify is a Buy.
Buy at Canaccord means: “The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.”
How did the stock react? Shares closed the session barely in positive territory, up 0.3% to $66.71.
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