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Early Opportunities
Get in Before the Crowd

February 23, 2021

Last week wasn’t great for growth stocks and so far, this week is just plain awful. The primary culprits are known; risk of inflation and higher interest rates have pushed cyclical stocks up and growth stocks down (generally speaking).


FIVN, FRPT, KRNT, SEDG, TXG Earnings Updates

Last week wasn’t great for growth stocks and so far, this week is just plain awful. The primary culprits are known; risk of inflation and higher interest rates have pushed cyclical stocks up and growth stocks down (generally speaking).

Big picture, we want some level of inflation and higher interest rates than what we’ve had. But timing, velocity, and scale matter.

Until lately, investors have been more focused on the eventuality of a return to “normal” brought on by vaccine development and distribution. What we are experiencing right now is likely the first wave of reality as the market tries to wrap its mind around the messy process of getting from full-blown pandemic to a more normal state.

There are a lot of moving parts, and interest rates and inflation, as well as employment and stimulus, are big ones. Too big to get into the weeds with today.

The message for now is that, while there are signs of abnormal action in certain stocks (especially early this morning) and the Nasdaq is clearly struggling, this is a somewhat rational market reaction to the recent increase in yields and the huge run up in growth stocks since the market bottomed last winter.

We are not making any big changes to the portfolio today, but I am watching closely and, as we’ve been doing in recent weeks, I am considering trimming some of our exposure to tighten things up a little.

But for now, let’s simply check in on five companies that have recently reported earnings.

FIVN, FRPT, KRNT, SEDG, TXG Earnings Updates

Five9 (FIVN) reported yesterday afternoon that Q4 revenue grew 39% to $128 million (beating by $12.7 million) and adjusted EPS rose 26% to $0.34 (beating by $0.11). Management said demand for the company’s contact center software remains strong and that it sees 2021 revenue growth near 20% to $519 million to $522 million, nicely above consensus expectations of $500 million. The extent of the guidance above consensus is notable from a typically conservative management team. EPS guidance for $0.75 to $0.79 is slightly below expectations of $0.84 as investments in public cloud to support international expansion and higher R&D and sales and marketing spending will come into the picture. The stock is up nicely today in the face of a very tough market and analysts are moving price targets higher. FIVN looks like a stock to keep holding, and maybe even peck away at if you want a few more shares. HOLD

Freshpet (FRPT) reported yesterday that Q4 revenue rose 29% to $84.5 million (meeting expectations) while adjusted EPS of -$0.08 missed by $0.16. Fiscal 2021 revenue guidance is for sales of $430 million, up over 35% and modestly above consensus expectations of $420 million. Management says the momentum in the business is growing and it is raising its 2025 net sales target by 25% to $1.25 billion and is accelerating its capacity expansion plan. It also launched a secondary offering of up to $345 million to help fund growth. Management said supply challenges continue but shouldn’t persist for too long and that there has been a slowdown in growth of installed freezers but that it is tied to supply issues, not demand (key point). When supply is right-sized freezer installations will resume. It was also revealed that there has been a major ecommerce customer signing that is rumored to be Chewy (CHWY) and which will add to revenue in Q2 fiscal 2021 and ramp up to be material in fiscal 2022.

After the report, likely due to the EPS miss and news of the secondary along with a down day in the market, shares of FRPT are now roughly 20% off their recent high. Once pricing for the offering is revealed I expect FRPT can bounce back (market conditions permitting) and trade back near 175 in the not-too-distant future. Keeping at buy. BUY

Kornit Digital (KRNT) reported Q4 2020 results last week with revenue of $72.3 million up 49% and beating by $10.5 million while adjusted EPS of $0.24 beat by $0.02. Management talked about the big shift in the textiles industry to digital printing and how 2020 marked a massive increase in demand from ecommerce. Management sees customers that just started with entry level Kornit systems a year or two ago upgrading/adding high-throughput systems.

The company is also seeing demand grow for its cloud-based software, which, among other things, helps with on-demand production. The team is working on launching proprietary tools to bring simulated embroidery, high-density printing, and vinyl heat transfer effects to market. This is significant, and management expects it could see up to a 30% increase in the size of its addressable market as a result of these innovations.

Shares of KRNT surged 20% after the report and have held relatively steady since. It remains an impressive story and investors can still buy, preferably on weakness. BUY

SolarEdge (SEDG) makes power optimizers (attach to the back of solar panels) and PV inverters (harvest energy from solar panel arrays). The stock is a play on growth in rooftop and distributed solar, and the Q4 report suggests the trends are still working in the company’s favor. Management reported Q4 2020 revenue of $358 million (down 14.4% over Q4 2019 but up 6% over Q3 2020), beating expectations by $2.7 million, and adjusted EPS of $0.98, beating by $0.10.

Residential grew faster than commercial in Q4 owing to higher demand in residential and slower recovery in commercial markets, coupled with still higher than ideal inventory in the commercial channel. Looking into fiscal 2021 guidance was roughly in-line with expectations. Analysts now see 2021 revenue up 25% to $1.82 billion and adjusted EPS of $3.82.

Of note, management discussed its e-Mobility business (DC to AC inverters, batteries, onboard chargers, vehicle control units and software for EVs, etc.) and how it will supply electric powertrain and battery solutions for Fiat’s (now Stellantis) light commercial vehicles. While this business is small today (estimated revenue of $110 million in 2021 is roughly 6% of total revenue) there is clearly growth potential.

Shares of SEDG were solid after last Tuesday’s report but have since pulled back to just below their 50-day line. I attribute the weakness to a pullback for the clean energy group as well as many other growth stocks and not something “wrong” with SEDG. That said, solar stocks have a history of being quite volatile. At 25% off its all-time high this is a significant pullback for SEDG, but not a concerning one (yet). If you’re into buying on a pullback you can nibble on some shares around here, just keep in mind we may shift gears quickly depending on the next few days. BUY

10X Genomics (TXG) management reported Q4 results this week and revenue beat expectations, rising 49% to $112 million. Of that $97 million was consumables and $14 million was instruments. Growth in both areas was consistent at 49%. There was some end-of-year spending in Q4 that boosted results.

In 2021 management sees revenue jumping 61% to 67% ($480 million to $500 million) versus $483 million consensus. I think there’s room to exceed expectations and there are a lot of new product launches coming in 2021 that should keep investors engaged in the story.

The stock has pulled back since reporting but is still trading within 15% of its all-time high. We’ll stick with 10X. HOLD