There has been no big picture change in the market over the last week. As expected, everyone is following earnings reports and trying to make broad assumptions based on what individual companies are reporting.
Our earnings season starts in earnest next week, when we have three companies reporting, including Repligen (RGEN), Goosehead Insurance (GSHD) and AppFolio (APPF). We also have the next Issue of Cabot Small-Cap Confidential due out next Friday.
Then the action really heats up the week after with many more portfolio companies reporting.
I think the recent reports out of Amazon (AMZN) and Microsoft (MSFT) could be somewhat supportive of tech/cloud software stocks in the near-term. Not that there’s any direct read across, but big investors want to own these large companies after their reports (yes, I know Amazon is down today, but I don’t think it will last long), in large part because of what they’re doing in the cloud. And that means they’ll likely start to look at some of these smaller players that have sold off. Especially if they report well, the secular growth drivers remain intact, etc.
As portfolio managers look to what they want to achieve in 2020, I think it will be hard to ignore the best software stocks in the small- and mid-cap asset classes. We own many of them in our portfolio, which is why I’ve been reluctant to completely step aside from these companies, even if they are well off their highs.
We also have a bit of a bounce back in Servicenow (NOW) after a big selloff that likely had more to do with the CEO departure’s than anything dramatically wrong with the company. Again, this just speaks to sentiment toward software stocks, which is hugely important if we’re going to see this group firm up and start to battle back in the last two months of the year.
On average, our portfolio was essentially flat this week. Veracyte (VCYT) detracted from performance. But we had enough stocks that were flat to modestly up that things evened out. Expect a lot of moves over the next two weeks. It’s about to get interesting!
Changes this week
Veracyte (VCYT) moved to hold (via Special Bulletin)
Updates
AppFolio (APPF) reports on Monday. Analysts see revenue up 34% to $67.1 million and EPS dropping 44% to $0.09. Full year EPS should be up 61% to $0.90 so the quarterly blip isn’t a huge deal. Full year 2019 revenue should be up around 32%. The stock was down modestly since last week’s update because of the software stock selloff last Friday. It’s been stable since and had a good day yesterday (up 3%). Hold through earnings. HOLD.
Announced earnings date: Monday, October 28
Arena Pharmaceuticals (ARNA) management presented some fresh data this week on the safety profile of once daily etrasimod in patients with moderately to severely active ulcerative colitis (UC). The punchline is the data shows the drug candidate remains well tolerated, and potentially even better tolerated as time goes on. This isn’t a huge announcement but is another check mark as this high potential drug candidate marches along the path to (hopeful) commercialization. Shares sold off this summer and have come back a little in October, though this week was a small step back. No change in the long-term outlook. BUY.
Estimated earnings date: November 5
Avalara (AVLR) jumped 9% yesterday as the tax software specialist bounced off the 65 level for the second time this month. Earnings come out the week after next, so we’ll have a little time to gauge software stock earnings reactions that pour in next week. In Q3 we’re looking for revenue to jump 34% to $93.1 million and for the EPS loss to decline 29% to -$0.10. This should put Avalara on track to grow revenue by 37% in 2019 and deliver an EPS loss of -$0.22. What could drive shares higher? Continued progress landing new customers and margin expansion, which could tip the scales toward adjusted EPS profitability in 2020 (currently a -$0.02 loss is expected). That said, Avalara is still in investment mode, with an effort to build out its international tax library a high priority. So that could easily add costs that aren’t currently modeled into consensus estimates. HOLD.
Announced earnings date: Tuesday, November 5
Bandwidth (BAND) was cut loose last week after shares fell below the 64 level. There’s no news this week and the stock is still trading around where it was a week ago. I’m keeping it on my radar, but for now it’s still a sell. Earnings come out a week from Wednesday. SOLD.
Announced earnings date: Wednesday, November 6
Cardlytics (CDLX) hasn’t given us anything new to talk about over the past week. An earnings date isn’t announced just yet, but we’re expecting the event sometime in the week after next. Analysts see revenue up 45% to $50.1 million in Q3 while EPS should stay flat at -$0.15. For the full year, revenue is seen rising 27%. Cardlytics is the brainchild of Scott Grimes and Lynne Laube, two Capital One bankers who developed a purchase intelligence platform that blends banking and marketing data, and which is hosted within online banking and mobile banking platforms. I like it. BUY.
Estimated earnings date: November 5
Domo (DOMO) popped yesterday but the bottoming process is still ongoing. Management has been working on forging partnerships with the big boys in tech, as well as some smaller firms. On that note it just announced with Snowflake, a data warehouse for cloud customers. Domo will have an API integration and go-to-market agreement that could help the duo land more customers together. Management also announced a new customer, Sony Bank Ltd., a Japanese bank that will use the platform to help in its digital transformation initiatives. Not huge news but clearly meant to keep investors somewhat engaged. HOLD.
Estimated earnings date: December 6
Everbridge (EVBG) reports a week from Monday. No new news this week and the stock is flat. Revenue is seen rising 32% in Q3 while EPS loss should be chopped in half, to -$0.05. In 2019, revenue is expected to jump 33% and EPS should be -$0.25. HOLD.
Announced earnings date: Monday, November 4
EverQuote (EVER) was up modestly this week but there’s no real change in the trend. Earnings are coming out a week from Monday. Analysts see revenue up 40% in Q3 and up 40% in 2019. The company’s still losing money, in part because of investments in new verticals (renters’ insurance, health insurance, etc.), all of which should drive growth moving forward. EPS should be -$0.47 this year. Expectations are high given the blowout report in Q2. The company just hired a new VP of commercial insurance and special projects to support the expansion efforts. HOLD.
Announced earnings date: Monday, November 4
Goosehead Insurance (GSHD) will deliver the goods next Friday and there’s no new news to dissect this week. The stock is still looking very good and analysts are bullish. On that note, consensus estimates call for revenue to be up 35% in Q3, up 33% in 2019 and up 50% in 2020. Goosehead is profitable. EPS should be around $0.08 in Q3 and $0.40 this year. BUY.
Announced earnings date: Friday, November 1
Inspire (INSP) is down a couple percentage points from when we got in with our first half position. It’s still a buy, and earnings will be out a week from Tuesday. Recall this is a specialist in obstructive sleep apnea (OSA) and has developed an implantable medical device to help patients with the condition. Revenue should be up around 60% this year, with 47% growth (to $19.2 million) expected in Q3. Earnings are negative (EPS of -$1.50 expected in 2019) and will be for a while. BUY A HALF.
Announced earnings date: Tuesday, November 5
Q2 Holdings (QTWO) is a great example of how fickle investor sentiment can be based on what the broad market is doing. The stock exploded to all-time highs in August after a huge quarter. It seemed invincible. It’s been downhill since. And shares broke below 70, where they found support in early October, just this week. That puts them back to where they were this spring. But the big picture hasn’t changed! Q2 continues to invest in its digital banking platform and is going deeper into back office functions with the Precision Lender acquisition. Revenue is seen up almost 30% this year and 23% in 2020, with EPS dipping this year (to -$0.13) before bouncing back to $0.38 in 2020 (up 192%). Of course, details on the Precision Lending deal will likely affect consensus once we get to the Q3 earnings call a week from Wednesday. I like the stock even though the chart looks like garbage right now. BUY.
Announced earnings date: Wednesday, November 6
Quanterix (QTRX) traded in the 19.5 to 26.5 range in April and May, then ran as high as 36 in early July. It’s since slid back into that lower range and has stayed there in October. A break below 19.5 would be an issue that would likely mean we’d step aside from our remaining half position. But for the time being, we’re hanging tight. Earnings are coming out a week from Wednesday and analysts see revenue up 19% and EPS loss of -$0.46. For the full year revenue is seen up 25%, to $50 million, and EPS loss of -$1.78 is expected. That said, this stock is underfollowed, and management sees revenue growing closer to 40% for the next couple of years! That could easily mean this year’s EPS loss is closer to -$1.50. Growth is coming from consumables, plus new instrument sales (new models have been hitting the market). And there should be some efficiency gains from consumables manufacturing. HOLD HALF.
Announced earnings date: Wednesday, November 6
Rapid7 (RPD) was flat this week and will report a week from Tuesday. No new news and the stock is now back into its consolidation range from last May (between 46.5 and 57). In the upcoming quarter analysts see revenue up 29% to $80.2 million and EPS of -$0.02. For 2019 look for revenue to climb 33% and for the first year of positive profits (EPS of $0.05 expected). The company has expanded into a more significant player in the security operations management market with solutions that span vulnerability management, security incident and event management, IT operations and detection/response. We want to see new customer growth to be confident in the near-term trends. HOLD.
Announced earnings date: Tuesday, November 5
Repligen’s (RGEN) has been trying to climb back from its September retreat. Next week’s earnings report on Thursday could be a big help. It’s an extremely attractive asset with scarcity value and growth. Revenue should be up 33% in Q3 and 42% in 2019. EPS should come in around $0.19 in Q2 (down 5%) but be up 40%, to $0.97, in 2019. It’s a little risky given all the unknowns before earnings but I’m keeping at Buy. BUY.
Announced earnings date: Thursday, October 31
Veracyte (VCYT) reported this week and I detailed some of the dense report yesterday, concluding with the statement that if shares can’t bounce back soon, we’ll have to cut the position loose. We’re still on the fence as shares are down as of early this morning. I’m watching VCYT closely and won’t hesitate to sell if things don’t improve soon. HOLD.
Earnings: Done
