Cabot Stock of the Week Issue: February 26, 2024

It’s Nvidia’s market, and we’re all benefitting from it! Stocks had been in a holding pattern through the first three weeks of February before Nvidia (NVDA) reported earnings last Wednesday, and the results didn’t disappoint, sending the S&P 500 to new all-time highs and lifting all boats with ties to artificial intelligence. Fortunately, we have quite a few of those in Stock of the Week, so it was yet another good week for our portfolio. But it’s possible AI plays may run out of steam, at least temporarily, in the coming weeks now that Nvidia’s earnings have come and gone.

With that in mind, today we add a tech name that’s not AI-related. It’s a household name – chances are you’ve used this product, perhaps even in the last 24 hours – and it was a market darling for years before a rough 2022 had some people questioning whether the competition was catching up to it. Last year provided an answer, and it was a resounding no. Now, this company seems to have taken on new life, and while the stock is playing catch-up, it’s still well off its 2021 highs.

It’s a stock hiding in plain sight, as Tyler Laundon writes. It’s why he recommended it to his Cabot Early Opportunities audience last week. Here are his latest thoughts.

Netflix, Inc. (NFLX)

Netflix (NFLX) is a K.I.S.S. (Keep It Simple Stupid) candidate given a multitude of factors suggesting the company has earned – and will retain – the leadership position in content streaming.

Zooming out, the company has the scale, content and growth strategy in place to support several years of double-digit revenue growth, 25% to 30% EPS growth, and free cash flow (FCF) ramp from $6 billion in 2024 to $20 billion in 2026.

That potential already has a good number of analysts pounding the table on shares. The evolution of the story will likely pull in many more.

One of the big catalysts is the paid sharing initiative (current paid users add one shared user for $8/month), which has expanded the company’s addressable market by roughly 25% (from 400 million to 500 million households). It also helped bring in 13.1 million new users in Q4 (the largest Q4 in company history).

Next up is the new advertising business, which has yet to bear fruit but should become meaningful in 2025 and beyond given that 40% of new sign-ups in ad-supported markets are now on the ad tier.

Netflix also has the broadest content library in the business, partly because the company has so many users that it can pay more than competitors. In addition to its own shows/movies (more Oscar nominations than any other studio in January), recent licensing agreements showcase its power position.

Warner Bros., Paramount, NBC Universal and Disney have all inked deals recently. There’s also the nearly global deal with WWE, good for 10 years (with a five-year out).

Lastly, there’s the gaming content, which is new to the platform. It’s not for me, but the kids like to play video games. Netflix is growing its library of content there too.

There is, of course, risk that all of the above makes Netflix a stable, but not particularly exciting, growth story for the next five years or so. But there’s also a compelling argument that the next stage of growth is right in front of the market leader and that a good swath of investors have yet to recognize the opportunity.

As for the stock, NFLX came public in May 2002 at 15 and has split shares twice so the current price is a fraction of what it would be unadjusted. The stock has delivered annualized returns of almost 33% since its IPO. The all-time high (692) was struck during the pandemic (November 2021), and in the six months afterward shares suffered a massive drawdown of over 75%. From the May – June 2022 lows (near 163) NFLX has put together a fine stretch of mostly higher highs and higher lows. The biggest exception is the 100+ point drawdown from 453 from last September and October. But that retreat set up the current rally, which began when Q3 2023 results (October 18) came out and got another boost after Q4 results (January 23) sent NFLX up 10% and into the mid-500 range. Shares have hung out in the 580 – 600 range over the last month. With a few wobbles in large-cap tech lately offsetting some bullishness, I recommend starting with a half-sized position.

Current Recommendations

Changes Since Last Week:
10x Genomics (TXG) Moves from Hold to Sell

Our pattern of “one in, one out” continues, as today’s victim is 10x Genomics (TXG) after the stock fell apart following a disappointing earnings report. So, with the addition of Netflix (NFLX), our portfolio keeps holding at 28 stocks. Most of them are acting quite well – three of them have doubled in the last year, while several others are touching either new 52-week or all-time highs. A handful of our companies still have earnings reports due out in the next week or so, which could always make things interesting. But for now, we’re rolling.

Here’s the latest with all our stocks.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has fallen apart after an underwhelming earnings report, and it’s time to sell. While its top-line numbers were fine (17.8% year-over-year growth), EPS losses (-$0.41 per share) were much wider than they were a year ago (-$0.15) and steeper than the 36-cent per-share loss analysts were anticipating. As a result, the stock has dipped from 49 to 45, well below its 200-day average. After five straight days of selling, it’s time for us to join the crowd and sell too. MOVE FROM HOLD TO SELL

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, is up slightly, to 120 from 119, in the last week. Shares of the life science property REIT have cooled off some after a big run in November and December, but it seems like the worst of the selling is over, with the stock finding support at 112 two weeks ago. And the stock is still cheap, trading at just 16 times forward earnings estimates. As Tom wrote last week, “Holding ARE will prove to be very worthwhile before long.” HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke through overhead resistance, and is hitting new 52-week highs! There was no news, although earnings are due out soon (March 7). Shares of the clothing retailer had been flirting with mid-22 highs for a couple weeks and have now pierced through that ceiling to reach the mid-23s ahead of next week’s report. We now have a 35% gain on the stock in just four months! BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, closed at a new 52-week highs shortly after we last wrote and just kept on rising, topping 11.50 a share for the first time since June 2022. There was no news for this U.K.-based life insurance and investment management firm. The stock still has 21% upside to Bruce’s 14 price target and pays a hefty 6.8% dividend yield to boot. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been up and down along with the market of late, with 130 being the ceiling and 121 being the floor. As long as the bull market remains intact, however, this mega-cap will remain in our portfolio, as a “Bull Market Stock” (Mike’s term) that tends to outperform in strong markets. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is up more than 7% in the last week and is hitting new all-time highs above 1,200 a share. Thanks, Nvidia! Yes, Broadcom is riding the coattails of the artificial intelligence boom, though it has emerged as an AI leader itself. We’ll see how much of an AI bump it’s still getting when the company reports earnings on March 7. With a 48% gain in less than seven months, this is probably a good time to sell anywhere from a quarter to a third of your shares if you got in early after our August 8, 2023, recommendation. That way you can book some profits before next week’s earnings report has a chance to throw cold water on the current hot streak. I’ll officially keep our rating at Buy, however, since betting against this stock has been a fool’s errand of late. If you have not yet started a position, I’d advise waiting until after the earnings report with shares at such elevated levels. BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, held firm at 48 after a modest dip from 50 the previous week following earnings. Revenue slipped 6% thanks to a 12% decline in new orders. Meanwhile, fiscal third-quarter and full-year 2024 earnings guidance was weak. However, the company did raise its quarterly dividend by a penny (to 40 cents a share), its pending acquisition of Splunk is awaiting regulatory approval, and shares have 36% upside to Bruce’s 66 price target. So, this mild retreat looks like a solid buying opportunity. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, had an up-and-down week but appears to be back on the uptick. In his update last Thursday, Mike wrote, “CRWD has been one of the market’s bigger leaders, but it got whacked yesterday after peer Palo Alto Networks reported not just a poor quarter—what spooked investors was that the firm (which does have a good track record fundamentally) actually cut guidance for business and bookings going forward, citing delayed purchasing decisions, which knocked around all cybersecurity players. We’ll see, though—CrowdStrike has some newer-age offerings than Palo Alto and we’re not ruling out that its forensics arm (with the new regulations) is helping, too. As we wrote yesterday, if you have a ‘big’ position (whatever that means to you), we’re OK trimming some here if you haven’t already—for our part, though, we’re holding on and seeing how CRWD reacts to yesterday’s wallop. Earnings are due March 5.” So far, the response has been encouraging, so we’ll keep our rating at Buy, but I’d wait to start any new positions until after the March 5 report. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been on an absolute tear, advancing 62% in the last three months alone to reach new five-year highs! There’s been no news of late. More generally, this is a long-overdue retail turnaround story, as Dave & Buster’s family-friendly sports bar chain is benefitting from a return to normalcy in a post-Covid world. The stock is following suit, and we’ve reaped the rewards, with a 24% gain in just over two months. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, lost another point in the last week as some sellers lingered following an earnings report that was mostly good. Here’s what Mike had to say about the report: “DKNG reported a very solid Q4, with revenues up 44%, earnings well into the black, monthly unique users up 37% and EBITDA of $151 million, up from a loss a year ago—and the top brass said revenues and EBITDA would both have been nicely higher if not for some ‘bad luck’ (good customer betting outcomes) in late November. Indeed, the top brass hiked EBITDA guidance for 2024 (now $460 million, up from $400 million previously), and it also announced some new ventures, with a good-sized purchase of Jackpocket (an official lottery app) and a new deal with Barstool sports. As with most other leaders, the stock has been volatile of late, with some downside this week to the 25-day line since the quarterly report. Overall, though, our view hasn’t changed—DKNG is in a choppy uptrend and business (and cash flow) should continue to surge in the quarters to come.” The dip from 45 to 41 in the wake of a perfectly fine earnings report looks like a buying opportunity in what has been a clear growth leader of the last year. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up 5% ahead of earnings this Thursday, February 29. Here’s what Mike Cintolo, who also recommends the stock to his Cabot Growth Investor audience, had to say about it last Thursday: “ESTC got caught up in the AI-related selloff in recent days, sinking from new highs last Friday to its 50-day line yesterday morning—before bouncing nicely today. If we’re being critical, the relative performance line (not shown on the chart) hasn’t made any net progress since the big gap up in early December, but the weekly chart looks fine and the real tale will likely be told next week. Elastic will report earnings on Leap Day (February 29), with analysts looking for $323 million of revenue (up 18%) and 31 cents of earnings (up 82%), but just as important will be any hubbub or real results relating to clients signing up for its search offerings for AI purposes. We moved to Hold yesterday given the choppiness of late, so we’ll stay there and see what the quarterly report brings.” Given the benefit of a couple extra days of buying since our last issue, we will keep ESTC at Buy for now, though as with a few other stocks in today’s update, I’d wait to start a new position until after earnings are out. We have a 73% gain on the stock in less than four months! BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has quickly recovered most of its losses after a brief mid-February dip. The latest earnings report, out earlier this month, provided further validation for this maker of Mounjaro, one of the revolutionary weight-loss drugs that have become an overnight sensation. Tom provided some color on the earnings: “Lilly again killed on earnings and guided higher for 2024. LLY, like AVGO, surges higher and then levels off for a brief period before the next surge higher. The big pharma superstar crushed expectations on earnings. It’s highly watched, newly approved weight loss drug Zepbound more than doubled sales expectations for the quarter. The mega-blockbuster potential is enormous, and Lilly just opened a $2.5 billion plant in Germany to crank up production to meet soaring demand. The company also has an important Alzheimer’s drug awaiting FDA approval in the next few months.”

We now have a 133% gain on LLY in 11 months! As I wrote last week, those of you who bought shortly after our March 21, 2023, recommendation should sell up to a third of your original position if you have not already done so. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is roughly flat in the last week, briefly hitting new 52-week highs above 14 before retreating back below it this morning. Earnings are due out this Wednesday, February 28. Analysts are looking for modest 4% sales growth, but earnings in the black at 4 cents a share after a 22-cent per-share loss a year ago. The leading cannabis company topped estimates by 25% last quarter. We’ll see what the latest quarterly results bring. BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been holding steady since its sharp earnings decline in late January. In his latest update, Tom wrote, “The red-hot chip maker finally cooled off after earnings guidance disappointed and the stock fell from the recent high. But it has since leveled off and the selling may be over for now. The bounty from the new chips and the foundry business might not come as soon as optimistic investors had been hoping. The future is still bright. There are great days ahead. But the recent spate of good news had investors hungry for more. They didn’t get it from the earnings report. But headline risk favors the upside for this stock in the months ahead.” HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up 2% last week, getting a modest boost from Nvidia’s AI-fueled blowout quarter. The company also boosted its own industry-leading AI portfolio, buying French start-up Mistral to, in part, build applications for governments across Europe. Mistral also becomes the second company to provide commercial language models (which power generative AI) available on Microsoft’s Azure cloud computing platform. We now have a 60% gain on MSFT in just under a year. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has settled in a range between 121 and 125 the last couple weeks after a big run-up from late January through mid-February. The Danish pharmaceutical giant is the other major player in the weight-loss drug boom, along with Eli Lilly (see above), with its Ozempic and Wegovy drugs. Sales of Wegovy alone improved 407% in 2023, while Ozempic’s increased 60%. An $11.5 billion acquisition of drug manufacturer Catalent, with the intent of boosting its Wegovy supply, has also been driving up the share price. There’s no slowing the GLP-1 trend right now, and we have two huge winning stocks as a result. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up to 59 from 56 in the last week and is threatening to break to new all-time highs ahead of earnings this Wednesday. In his latest update, Mike wrote, “NTNX has had a beautiful, persistent run higher, so a pullback was due—and, frankly, so far, we’ve been very encouraged with how the stock has handled itself, with a couple of bad days here and there but remaining nicely above its 50-day line (now near 52). Like many key tech plays, the firm has earnings coming up soon (February 28)—analysts are looking for 13% sales growth (likely faster growth in recurring revenue) and a 45% bump in earnings.” Keeping our rating at Buy, but I’d advise holding tight on new buys until after earnings on Wednesday. BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up a point in its first week in the portfolio, catching a draft from NVDA’s world-beating earnings report. In case you missed it, here’s what Mike wrote about this promising stock in last week’s issue: “Palantir has seemed perfectly positioned for the AI boom for about a year now: The company’s history as a provider of advanced software and analytical/security platforms for government entities (especially U.S. and friendly militaries) means it’s been leveraging various forms of AI and machine learning for years, putting it way ahead of others when it comes to developing a platform that can be mass adopted not just by governments, but by big companies looking to dramatically streamline operations—and do it in a secure, measured way as well, with systems able to take proprietary or public language models and mine through pretty much any type of ‘data’ even including messaging conversations, video, audio and more. The trick was how long it would take for interest in Palantir’s offerings to result in real sales; Palantir quickly went to work holding individual ‘boot camps’ with firms that showcase how its platform can be used with that potential client, with 565 of these meetings in just the past six months or so. And that has been a big factor in the acceleration of demand among the private sector: In Q4, U.S. commercial revenue surged 70% as the customer count lifted 55% and total contract value inked more than doubled (and rose 42% from the prior quarter!), with new clients (including some huge ones) signing up and existing clients expanding their usage. Of course, from a total-company standpoint, U.S. commercial revenues are still just 22% of revenues, but (a) that’s likely to grow in a big way going ahead, and (b) the top brass had positive things to say about its government business (53% of revenue), which did grow 11% in Q4 and should pick up steam as 2024 moves along and more AI adoption occurs there. Of course, expectations are high, but whereas most of the focus now is on AI infrastructure (chips, networking gear, etc.), Palantir looks like the clear early leader in providing a platform that can offer direct, meaningful savings to big companies (and, eventually, governments) around the globe. It’s a huge idea.” BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been chopping around in the 56 to 60 range of late. Recent earnings were fairly mixed: earnings rose 19% to $1.48 per share on an adjusted basis, revenue expanded by 9%, and the company processed over $1.5 trillion in total payment volume, up 13% from the year before. This was offset by lower guidance for all of 2024. Wall Street seems unsure of which numbers to focus on, given the volatility. But looking at the stock from a longer-term perspective, shares are dirt cheap, trading at 11.5 times forward earnings and at a small fraction of their 2021 highs above 300, and yet are in an uptrend, advancing more than 13% since the start of November. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up slightly this week but remains in the 35-36 range as it has been since a sharp earnings-induced dropoff from 41 in the first half of February. Still, the trend in this social media stock is decidedly up, with shares up 32% in the last six months and trading well clear of their 200-day moving average. Keeping at Buy, though a dip below 35 support would likely prompt us to reevaluate things. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding in the 102 to 109 range, though it’s testing the low end of that range. In his latest update, Mike wrote, “PHM has basically rested for a few weeks, which we think is totally normal given the backup in interest rates—and now shares are bouncing off the century mark, thanks in part to a solid earnings report from higher-end peer Toll Brothers (TOL). Our thoughts here haven’t changed much: Obviously, if interest rates really skyrocket all bets are off, but given the strong economy and the fact the Fed is likely to ease sometime in the months ahead, we think housing will surprise on the upside fundamentally, which should help Pulte’s results remain strong—and likely top even the current lofty numbers (earnings of $11.92 per share this year).” BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is hitting new 52-week highs! In his latest update, Tom wrote, “After a strong start to this year, QCOM pulled back after a solid earnings report. The pullback was more about the absence of exciting news rather than bad news. But the stock has since rebounded sharply and is up 45% since late October. It should be a good year. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, rebounded nicely last week, rising 6% to recover the majority of its mid-February losses after hitting new all-time highs. There was no news. We have a 41% gain on this large-cap cloud software stock (also getting an AI bump) since adding it to the portfolio last June. BUY

Soleno Therapeutics (SLNO), originally recommended by Tyler Laundon in Cabot Early Opportunities, is hitting new 52-week highs above 51! There’s been no news. Soleno Therapeutics is a development-stage biotech company that burst onto the scene last September when its lead drug candidate, DCCR (Diazoxide Choline), was found to make a highly significant difference in a long-term study for the treatment of Prader-Willi syndrome (PWS). While approval of DCCR this year is not a given, the odds are massively tilted in SLNO’s favor. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been licking its wounds since another disappointing earnings report but appears to be slowly regaining some of its losses. The 200 level has acted as resistance, but the stock is knocking on the door again; a push above it could be bullish. There’s been no major news, which these days – given two straight underwhelming earnings reports and Elon Musk’s increasing propensity for putting his foot in his mouth – may qualify as a victory. But don’t ever count this stock out. TSLA had a miserable 2022 only to come roaring back and double in 2023. The stock is now well clear of its 181 bottom in early February, so the worst of the selling is likely over. If you don’t own shares, this might be a good place to Buy, for now, I’ll keep it at Hold. A decisive move above 200 could have me moving back to Buy next week. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held its gains at 27 after a big jump from 23 the week before. Strong earnings were the catalyst: The company reported record revenue, and earnings per share ($0.38) blew analyst estimates ($0.22) out of the water. Revenues of $390 million were up 10% from the same quarter a year ago. It all supports Mike’s original thesis here that the U.S. travel boom continues in a post-Covid world, and we are reaping the rewards, with gains of 39% in just over a month! BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, held firm in the 76-to-78 range after pulling back from highs above 81 the previous week. In his latest update, Mike wrote, “UBER remains in fine shape, with not only Q4 results looking great but last week’s super-bullish investor update keeping buyers interested. We’ve written before that Uber quacked like an emerging blue chip, and that seems to be playing out, as there aren’t many dominant firms in growing sectors with stocks that are very liquid that also have a rapid, reliable growth path for years to come. Indeed, management’s view that it can grow EBITDA at a ‘high 30% to 40%’ clip from 2024 to 2026 while free cash flow grows much faster than that was eye-opening, with a big share repurchase plan (up to $7 billion) also helping the cause. Of course, that doesn’t mean the stock can’t pull back, especially if leading stocks don’t find their footing—the 10-week line is near 67 (and rising steadily), so UBER is certainly extended to the upside. Still, this looks like relatively rare merchandise, so while near-term wobbles are possible, we’re thinking the stock will be higher down the road. Hold on if you own some, and if not, we’re OK starting a small position here or (preferably) on dips.” Good advice, though as I wrote last week, if you haven’t already done so, now is a good time to book profits on a few shares if you bought early after our initial recommendation. We have a 128% gain in just over a year! BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, recovered most of its losses from the previous week and is back near its highs around 52. The company got a bump from earnings earlier this month: Both annual recurring revenue (ARR) and free cash flow beat analyst estimates for the quarter, providing evidence that last year’s switch to a Subscription-as-a-Service (SaaS) model is working for this provider of cybersecurity solutions. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com.

Here, too, is the latest episode of Cabot Street Check, the weekly podcast I host with my colleague Brad Simmerman.

The next Cabot Stock of the Week issue will be published on March 4, 2024.

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