Leaders Impress
Current Market Outlook
The top-down view of the market remains just so-so, with the intermediate-term trend effectively on the fence—most indexes are hanging around their 50-day lines and have recouped about half of the recent corrections. Thus, some caution is still in order, especially as further news-driven moves are likely in the days and weeks ahead. However, the leaders (and potential leaders) of the market are very impressive, with more and more flashing constructive action, including some that are rallying on outsized volume, both of which are a sign that big investors are getting comfortable putting money to work. It’s not a wild bull market obviously, with relatively few stocks hitting new highs, but it’s safe to say the evidence has improved, causing us to nudge up our Market Monitor today.
This week’s list has a bunch of good-looking stocks that have seen good-volume buying of late. Our Top Pick is Datadog (DDOG), which has returned to form after a big-volume breakout last week. Start small and add if the stock and market improve from here.
| Stock Name | Price | ||
|---|---|---|---|
| Alibaba (BABA) | 288 | ||
| Datadog (DDOG) | 107 | ||
| Purple Innovation (PRPL) | 25 | ||
| Seres Therapeutics (MCRB) | 30 | ||
| SolarEdge Technologies Inc. (SEDG) | 273 | ||
| STMicroelectronics (STM) | 33 | ||
| Teck Resources Limited (TECK) | 14 | ||
| Twilio (TWLO) | 283 | ||
| Twitter (TWTR) | 47 | ||
| Zendesk (ZEN) | 105 |
Alibaba (BABA)
Why the Strength
There are new reasons to be optimistic on Alibaba (covered in the July 13 issue) following its Investor Day last week. Analysts have been raising price targets for the “Chinese Amazon” after indications that its cloud computing business continues to boom, not to mention strength in its core e-commerce offerings. (In fiscal Q1, the cloud unit grew an eye-opening 59% and accounted for 8% of total revenue.) Last week, management confirmed that the cloud segment would be profitable for the first time ever in the current fiscal year; further, the Cainiao logistics unit (founded in 2013 as a partnership to provide data solutions to third-party shippers) will soon be cash flow positive for the first time. Both pieces of news had analysts hiking estimates and price targets. Of course, there was also plenty of good news in the June quarter, featuring a 30% top-line increase and earnings of $2.10 per share, which trounced estimates. Annual active consumers on its China retail marketplaces reached 742 million (up 16 million sequentially), while daily active buyers on Alibaba.com rose 100% in the month of June alone. Elsewhere, gross merchandise volume for Tmall online physical goods grew 27%, with all major categories growing at a similar or faster rate compared to a year ago. Then there is the firm’s affiliate Ant Group – the world’s most valuable fintech – which is set for the world’s largest IPO. In total, the excellent top- and bottom-line growth (20%-plus) is expected to continue for many quarters to come as Alibaba expands into less-developed areas of China, as increased digital adoption improves its market opportunity and as China rapidly returns to normal following COVID-related shutdowns.
Technical Analysis
We recommended BABA in mid-July after shares had broken out of a two-year consolidation on the second-heaviest weekly volume since late 2018. It’s been tossed around a bit since then, but there have been many positives on the chart, including tight weekly closes in August, a light-volume drop during the market’s recent weakness and last week’s huge-volume rebound after the Investor Day. It won’t be your fastest horse but we think BABA can do well from here.
| Market Cap | $787B | EPS $ Annual (Mar) | |
| Forward P/E | 31 | FY 2019 | 5.71 |
| Current P/E | 37 | FY 2020 | 7.48 |
| Annual Revenue | $77.8B | FY 2021e | 9.52 |
| Profit Margin | 25.7% | FY 2022e | 11.64 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 21.7 | 30% | 2.10 | 15% |
| One qtr ago | 16.1 | 16% | 1.30 | 2% |
| Two qtrs ago | 23.1 | 36% | 2.61 | 47% |
| Three qtrs ago | 16.6 | 35% | 1.84 | 31% |
BABA Weekly Chart
BABA Daily Chart
Datadog (DDOG)
Why the Strength
Datadog remains one of the top stories in the application performance management (APM) sector. Its real-time monitoring and analytics platform connect data from servers, databases and third-party services to help app developers facilitate faster problem solving, optimization and innovation, which is then used to boost efficiency, customer service and more. Q2 was another strong quarter of growth for Datadog, which posted a 68% top-line increase on consensus-beating per-share earnings of 5 cents. As was true in Q1, customer growth in Q2 was helped by cloud migration as it ended the quarter with 12,100 customers (up 37%), including 1,015 customers who spend $100,000 or more (up 71% from a year ago). It also acquired software tool developer Undefined Labs, which extends Datadog’s existing platform into development environments. The big news recently was the announcement of a strategic partnership with Microsoft that made Datadog available in that company’s Azure’s console as a cloud workload monitoring solution. The company plans more product innovations, including the general availability of the Datadog mobile app. Datadog expects Q3 revenue to be in the range of $143 million to $145 million – up 50% at the midpoint. And while management cautioned that growth was uncertain given the unstable macro environment, there was discernible improvement in usage trends this summer that were closer to pre-pandemic historical levels. Beyond the next quarter or two, though, is the fact that the APM market is projected to continue booming for many years, providing Datadog with an ever-expanding addressable market that should keep the growth train moving forward—likely producing the rapid, reliable growth that big investors yearn for.
Technical Analysis
DDOG was one of the early leaders after the March low, zooming to new highs in early May and gapping up on earnings soon after. Shares eventually made it near the century market before beginning a correction; that rest lasted about 12 weeks and took 27% off the stock at the lows, which was reasonable given the prior huge run. Last week’s giant volume clue was very bullish, and while we doubt it’s up and away from here, we think the path of least resistance is now up.
| Market Cap | $31.5B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2018 | -0.04 |
| Current P/E | 941 | FY 2019 | -0.03 |
| Annual Revenue | 796 | FY 2020e | 0.13 |
| Profit Margin | 12.5% | FY 2021e | 0.15 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 140 | 68% | 0.05 | N/A |
| One qtr ago | 131 | 87% | 0.06 | N/A |
| Two qtrs ago | 114 | 84% | 0.01 | N/A |
| Three qtrs ago | 95.9 | 88% | -0.01 | N/A |
DDOG Weekly Chart
DDOG Daily Chart
Purple Innovation (PRPL)
Why the Strength
Bedding supply firms don’t usually make for good growth stories, but Purple Innovation looks like an exception. If you’ve watched much TV lately, you’ve undoubtedly seen the commercials for the Purple mattresses, which the company calls “the world’s first no pressure mattress.” Since its founding in 2010, Purple has offered foam-based mattresses that use a hyperelastic polymer material arranged in a grid-like structure to provide support, pressure relief and cooling properties. Combined with the company’s digital roots, its products have been selling like hotcakes as they take share in this huge industry. In its second quarter, Purple saw revenues surge 60% to $165 million, driven by online sales—wholesale revenue plunged 49% in the quarter due to temporary store closures, but direct-to-consumer sales were up a whopping 128%, which included triple-digit sales gains in mattresses, seat cushions, pillows and sheets. And there’s likely more where that came from as the virus has broken down the barrier for millions of consumers to buy certain products online that they never have before; analysts see revenues up 49% in Q3 and 39% in Q4 (estimated up 28% next year, which is probably conservative), while earnings should rebound sharply from the loss seen in Q2. (The next quarterly report is likely out in early/mid November, though there’s no set date yet.) That’s really the meat of the story: A better product and also a shift in how bedding products are bought, which should shift a ton of business to Purple over time. Encouragingly, a non-dilutive offering of closely held shares actually helped the stock, a sign big investors were building positions.
Technical Analysis
PRPL had a huge run after its lows in March, including an accelerated rally at the end of July to as high as 28. The correction after that was sharp (down to 17), but the rebound has been excellent, with plenty of accumulation following the share offering. With PRPL up near its highs, we’d favor looking for a bit of weakness before grabbing shares.
| Market Cap | $1.41B | EPS $ Annual (Dec) | |
| Forward P/E | 57 | FY 2018 | -0.04 |
| Current P/E | N/A | FY 2019 | 1.76 |
| Annual Revenue | $529M | FY 2020e | 0.46 |
| Profit Margin | N/A | FY 2021e | 0.76 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 165 | 60% | -0.07 | N/A |
| One qtr ago | 122 | 46% | 0.11 | -81% |
| Two qtrs ago | 124 | 58% | -0.29 | N/A |
| Three qtrs ago | 124 | 66% | 0.12 | 271% |
PRPL Weekly Chart
PRPL Daily Chart
Seres Therapeutics (MCRB)
Why the Strength
New discoveries in microbiology have given researchers a fresh understanding of how microorganisms influence the body and how they can be manipulated to improve health. Seres, a leading late-clinical stage biotech, boasts a growing drug development pipeline focused on treating a wide range of diseases by modifying the function of the human microbiome (microbes in the gut). Gut microbiome is now considered a key to influencing inflammatory responses, as well as protecting against potential invaders. Seres’ oral capsules utilize a consortium of bacteria that interact with microbes to treat and prevent disease. Its expanding pipeline includes SER-109, a Phase III oral microbiome therapy designed to prevent the recurrence of irritable bowel syndrome, and SER-287, a Phase III therapeutic in trial for patients with mild-to-moderate ulcerative colitis. Results for its latest SER-109 trial reported statistically significant improvements (data showed the drug was able to lower the recurrence rate to 11% in patients). Management said the data represents the first ever for a targeted microbiome therapy candidate and is preparing marketing efforts for potential launch of the drug. Additionally, Seres is involved in a study (SER-401) with AstraZeneca using gut flora to potentially improve treatment responses for cancer patients. The firm’s cash holdings of $64 million should carry it through Q2 2021, by which time SER-109 approval is expected and revenues should start to pick up in a meaningful way. It’s speculative, but approval for either SER-109 or SER-287 could result in multi-billion-dollar sales down the road.
Technical Analysis
MCRB came public in 2015 at 18 and quickly reached a high of 44 before commencing a four-year slide to 2. Shares spent most of the last year basing before going bananas in August on massive volume thanks to the aforementioned bullish trial results. The stock has behaved well since then, tightening in a narrow range above the 25-day line. If you want in, you could take a stab here, but keep it small and use a loose leash.
| Market Cap | $2.16B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2018 | -2.43 |
| Current P/E | N/A | FY 2019 | -1.21 |
| Annual Revenue | $28.9M | FY 2020e | -1.08 |
| Profit Margin | N/A | FY 2021e | -1.40 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 6 | -52% | -0.28 | N/A |
| One qtr ago | 8.2 | 12% | -0.28 | N/A |
| Two qtrs ago | 7.6 | -28% | -0.33 | N/A |
| Three qtrs ago | 7 | -22% | -0.23 | N/A |
MCRB Weekly Chart
MCRB Daily Chart
SolarEdge Technologies Inc. (SEDG)
Why the Strength
Solar companies are nothing new, but SolarEdge aims to disrupt the entire electricity grid along with traditional power generation. This company offers power optimizers, solar inverters and cloud-based monitoring systems that increase energy output. Its single phase inverters (which convert DC power generated by solar panels into AC power used in homes and businesses) dramatically reduce heavy cooling elements, resulting in a smaller and lighter unit for simplified shipping and storing, not to mention easy one-person installation. The firm also pairs its inverters with DC power optimizers, creating “smart” modules which maximize power generation, providing a significant cost savings over most microinverter systems. Its innovations have allowed it to capture an impressive 61% of the U.S. inverter market last year (up from just 5% in 2013!). The firm’s rapid growth has been accompanied by a doubling of shipments in the last two years, along with gross margins north of 30%. Business was down sequentially in Q2 due to virus-related factors, but the firm beat estimates and reported revenues of $332 million (up 2% from a year ago) along with a 12% bump in net income (to $37 million). Management also guided for Q3 revenues between $325 and $350 million (up 2% at the midpoint) as demand gradually returns. And while inverter and power optimizer unit shipments were lower due to COVID, the firm has increased manufacturing capacity and expects things to get back to normal sooner rather than later. With a combined global market share of 20%, SolarEdge has plenty of room for future expansion. It’s a great story.
Technical Analysis
SEDG was halved during the March panic (from 140 to around 70), but the post-bottom comeback has been nothing short of amazing. Starting in April, shares ramped up and quickly retook the February peak at 140. A quick test of the 50-day line followed, then a rocket ride to 220 by August, followed by another pullback to the 50-day line. Although the latest correction was sharp, buyers returned after a few weeks and SEDG has zoomed to new highs on many days of big volume. We think any pullback will offer a solid entry.
| Market Cap | $12.6B | EPS $ Annual (Dec) | |
| Forward P/E | 81 | FY 2018 | 3.17 |
| Current P/E | 52 | FY 2019 | 4.44 |
| Annual Revenue | $1.59B | FY 2020e | 3.06 |
| Profit Margin | 15.7% | FY 2021e | 4.32 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 332 | 2% | 0.97 | 3% |
| One qtr ago | 431 | 59% | 0.95 | 48% |
| Two qtrs ago | 418 | 59% | 1.65 | 162% |
| Three qtrs ago | 411 | 74% | 1.21 | 41% |
SEDG Weekly Chart
SEDG Daily Chart
STMicroelectronics (STM)
Why the Strength
After a dismal 2019, when semiconductor sales fell 12% to $412 billion, the World Semiconductor Trade Statistics organization predicts that they will rise 3.3% in 2020 and 6.2% in 2021. But STMicroelectronics is doing a lot better than the average chip company. The company just increased its sales projections after a significant rise in demand for its automotive products and microcontrollers. It is now forecasting third quarter revenues of $2.67 billion, up from the $2.45 billion it had predicted in July; the new figure would be 28% higher than Q2 sales. CEO Marc Chery also commented that full year revenues will be more than $9.65 billion, better than the previous range forecast of $9.45 billion. (Earnings for the third quarter will be reported on October 22.) Backing out to the big picture, STMicroelectronics provides more than 100,000 customers around the world with its chips that the company says “enable smarter mobility, more efficient power and energy management, and the wide-scale deployment of the Internet of Things and 5G technology.” It continues to pioneer cutting-edge technologies, including its latest—MasterGaN®, which is expected to speed up the development of next-generation smartphone ultra-fast chargers and wireless chargers, USB-PD compact adapters for PCs and gaming, as well as in industrial applications like solar-energy storage systems, uninterruptible power supplies and high-end OLED TVs and cloud servers. Translation: The firm’s chips play into some of the faster growing end markets out there, which adds to the confidence that, after a virus-related hiccup this year (earnings down 19%), ST Micro will be back on track in 2021 (earnings expected to rise 61%, and up 30% from 2019’s figure).
Technical Analysis
STM has been rebounding with everything else since the March bottom, but it wasn’t particularly powerful, with a two-steps-forward, one-step-back type of advance for many months. After getting back to its pre-pandemic high, shares went sideways for 10 weeks, but last week’s guidance hike brought back the buyers, with STM pushing to new highs on solid volume. We’re OK taking a stab at it here or on minor weakness.
| Market Cap | $29.0B | EPS $ Annual (Dec) | |
| Forward P/E | 38 | FY 2018 | 1.43 |
| Current P/E | 31 | FY 2019 | 1.15 |
| Annual Revenue | $9.63B | FY 2020e | 0.92 |
| Profit Margin | 4.3% | FY 2021e | 1.49 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 2.08 | -4% | 0.10 | -44% |
| One qtr ago | 2.23 | 7% | 0.21 | 5% |
| Two qtrs ago | 2.75 | 4% | 0.43 | -7% |
| Three qtrs ago | 2.55 | 1% | 0.34 | -17% |
STM Weekly Chart
STM Daily Chart
Teck Resources Limited (TECK)
Why the Strength
If you like commodities, you’ll probably like Teck Resources, which is Canada’s largest diversified mining company—all in, the firm owns and has interests in 10 mines in Canada, the U.S., Chile and Peru, making it a big copper producer, the second largest seaborne exporter of metallurgical coal (used to make steel) and one of the globe’s biggest zinc producers, too. It’s been a well-run, profitable operation for years, though factors outside of its control (prices for the commodities it churns out) have dragged down sales and earnings for years—and then the virus hit, disrupting things further and leading to a dreadful Q2. But the market is always focused on the future, and it’s looking like years of industry cutbacks, combined with the economic recovery, mean good times are ahead: Copper prices hit multi-year highs two weeks ago before pulling in, while prices for steelmaking coal are on the rise thanks to the global recovery and low inventories, especially in China. Indeed, it looks like that country’s return to the buy side has put a bid under seaborne coal operators like Teck. (Coal made up 46% of Teck’s Q2 revenues and more than half of its gross profit, so there’s a lot of bottom-line potential there if the industry perks up.) Right now, analysts see earnings beginning to lift soon and really take off in 2021, but we have a hunch even that outlook could prove conservative as central banks continue to floor the accelerator. A strong balance sheet (minimal debt maturities for years) and a modest dividend (1.1%) put a bow on this solid mining story.
Technical Analysis
From a high of 31 in early 2018, TECK declined for more than two years before crashing below 6 earlier this year. The rebound off the lows was decent, and we like the 13-week base the stock etched from June through August. The Chinese coal buying news in early September caused a breakout, with TECK surging six straight days on heavy volume. Now shares have digested that move for a couple of weeks and remain in good shape—we’re OK stepping in here.
| Market Cap | $7.53B | EPS $ Annual (Dec) | |
| Forward P/E | 28 | FY 2018 | 2.98 |
| Current P/E | 15 | FY 2019 | 2.20 |
| Annual Revenue | $9.79B | FY 2020e | 0.66 |
| Profit Margin | 5.2% | FY 2021e | 1.64 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 1.26 | -47% | 0.13 | -81% |
| One qtr ago | 1.69 | -27% | 0.12 | -84% |
| Two qtrs ago | 2.03 | -15% | 0.17 | -73% |
| Three qtrs ago | 2.29 | -8% | 0.54 | -13% |
TECK Weekly Chart
TECK Daily Chart
Twilio (TWLO)
Why the Strength
In our view, Twilio has been one of the handful of liquid leading growth stocks of the post-March market advance, and after a two-month rest, it appears ready to get going again. The company’s communications platform as a service (CPaaS for short) is widely recognized as the best in its class, helping firms automate communications (voice, video, email, messaging, whatever) to customers, suppliers and employees; it also offers a cloud-based call center platform called Flex (184% revenue growth here in the first half of the year!), which has huge potential as most call centers have yet to switch to the cloud. We’ve always loved the fact that the service appeals to every sized firm (Twilio’s 200,000 clients are split nearly evenly between large, medium and small firms), and given that three-quarters of revenues are usage-based, Twilio grows as clients become more reliant on them. (And they are becoming more reliant: Twilio’s same-customer growth rate remains north of 30%!) The stock reemerged late last week after a very bullish Investor Day that relayed many enticing numbers, including the fact that (a) it sees Q3 revenues above estimates and (b) the top brass sees revenues growing 30%-plus annually for the next four years, and that doesn’t include any potential acquisitions going forward—those types of forecasts are like catnip for Wall Street, which craves rapid and reliable growth over many years, especially as the virus makes every company more reliant on the offerings that Twilio is providing. This remains one of the market’s top growth stories.
Technical Analysis
TWLO exploded to new highs in early May after earnings and had a great run-up to early August before finally correcting—the dip totaled 25% or so and lasted more than six weeks before finding support. The initial rally was just OK (decent price action but zero upside volume), but after the higher long-term forecast, shares catapulted to new highs on huge volume last Friday. In this environment, TWLO could easily shake and bake, but starting a small position here or (preferably) on dips should work.
| Market Cap | $43.0B | EPS $ Annual (Dec) | |
| Forward P/E | N/M | FY 2018 | 0.11 |
| Current P/E | N/M | FY 2019 | 0.16 |
| Annual Revenue | $1.39B | FY 2020e | 0.10 |
| Profit Margin | 3.5% | FY 2021e | 0.22 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 401 | 46% | 0.09 | 200% |
| One qtr ago | 365 | 57% | 0.06 | 20% |
| Two qtrs ago | 331 | 62% | 0.04 | 0% |
| Three qtrs ago | 295 | 75% | 0.03 | -57% |
TWLO Weekly Chart
TWLO Daily Chart
Twitter (TWTR)
Why the Strength
Twitter has been a so-so company in recent years, first suffering from lack of user growth, then enjoying great monetization (boosting revenues in a big way) before a slowdown in recent quarters. Even so, the future is looking bright for a few reasons. First, investors applauded the news that Twitter had appointed Rinki Sethi, a former information security executive at IBM, as its chief information security officer, as the company had not had a security chief since last December, and subsequently suffered from a big data breach of high-profile accounts (including Joe Biden and Kim Kardashian) in July. Second, while Q2 saw a typical pandemic-induced drop in results (sales down 19% and a big loss), daily active users were actually up 34% from a year ago to a healthy 186 million. Playing along with that is Twitter’s newly revamped ad tools and marketing initiatives that should help drive ad revenues. Throw in some enticing rumors (including a possible premium subscription service), some small investments (into an Indian content-sharing platform) and a couple of meaningful catalysts (elections next month and 2021 Tokyo Olympics) and Wall Street is relatively bullish—while the rest of this year is likely to be just OK, sales should rebound nicely next year (up 24%) while the bottom line rips back into the black. More importantly, user growth is expected to remain hot; one analyst said that the current news environment (which has been crazy to say the least) and the pandemic should continue to drive more people to the platform. The next quarterly report is due out October 29.
Technical Analysis
Although shares of Twitter have not reached their post-IPO-giddy heights of more than 65, they have definitely been on an upward trajectory since their March lows. Shares did get hit during the market’s downturn, but they held their 10-week line and after a modest bounce came to life in a big way, spiking to new highs on huge volume in late September and nosing higher since then. If you’re game, we suggest aiming for dips.
| Market Cap | $36.4B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2018 | 0.86 |
| Current P/E | N/A | FY 2019 | 2.37 |
| Annual Revenue | $3.32B | FY 2020e | -0.55 |
| Profit Margin | N/A | FY 2021e | 0.72 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 683 | -19% | -1.39 | N/A |
| One qtr ago | 808 | 3% | 0.11 | -70% |
| Two qtrs ago | 1007 | 11% | 0.25 | -19% |
| Three qtrs ago | 824 | 9% | 0.17 | -19% |
TWTR Weekly Chart
TWTR Daily Chart
Zendesk (ZEN)
Why the Strength
Software as a Service (Saas) companies have been among this year’s most pandemic-proof top performers thanks to the expanding everything-from-home economy. Among them is Zendesk, a leader in the engagement software and customer service space. Zendesk Support (which seamlessly integrates customer support interactions in once place) is the flagship product, but demand for its newer Sunshine customer relations management platform is expected to drive post-pandemic growth--Sunshine integrates all of a firm’s customer data collected through Zendesk’s other services, improving the customer experience and making it easier for developers to build and deploy custom apps, giving reps the tools they want and need. Although Zendesk reported slower expansion from its mid-sized customers during Q2, larger customers fared better and the firm was encouraged by healthy growth in new business deals and outperformance in many of its segments. Despite all the headwinds last quarter, Zendesk still posted 27% top-line growth in the quarter (including higher revenue from existing customers), as well as a sizable gross margin improvement. And while free cash flow was below normal in Q2, the firm guided for positive cash flow in the second half of 2020 (based on aggressive expense management efforts). Management also guided for Q3 revenue to be 20% higher at the midpoint, in line with analyst estimates, with low-to-mid 20% top-line growth predicted for the next several quarters. Zendesk’s customer loyalty has been consistent, with subscription revenue showing long-term stability – a feature that should keep the growth story alive. The next quarterly report is due out November 3.
Technical Analysis
ZEN peaked in mid 2019 and was one of many stocks that suffered two big drops after that (one later that year, and one during the crash of this year), resetting its long-term advance. Shares advanced persistently off the bottom, though, and now they’ve etched a couple of brief consolidations (one in August, one in September), each sitting on top of each other. With ZEN perched near new highs, we’re OK starting a position here or on dips.
| Market Cap | $11.9B | EPS $ Annual (Dec) | |
| Forward P/E | 227 | FY 2018 | 0.15 |
| Current P/E | 227 | FY 2019 | 0.31 |
| Annual Revenue | $924M | FY 2020e | 0.46 |
| Profit Margin | 6.6% | FY 2021e | 0.70 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 247 | 27% | 0.14 | 18-% |
| One qtr ago | 238 | 31% | 0.10 | 150% |
| Two qtrs ago | 230 | 33% | 0.10 | 67% |
| Three qtrs ago | 211 | 36% | 0.12 | 140% |
ZEN Weekly Chart
ZEN Daily Chart
Previously Recommended Stocks
Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.
Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.
| HOLD | |||||
| 9/14/20 | 10x Genomics | TXG | 116-120 | 131 | |
| 9/21/20 | AGCO Corp. | AGCO | 68.5-71.5 | 77 | |
| 8/10/20 | Agnico Eagle Mines | AEM | 79.5-82.5 | 81 | |
| 7/13/20 | Alibaba | BABA | ? | 244-254 | 288 |
| 8/31/20 | Anaplan | PLAN | 59.5-62.5 | 63 | |
| 9/8/20 | Boston Beer | SAM | 765-795 | 883 | |
| 9/21/20 | Brinker Int’l | EAT | 42-44.5 | 44 | |
| 8/17/20 | Builders FirstSource | BLDR | 28-29.5 | 33 | |
| 6/8/20 | Carrier Global | CARR | 21.5-23 | 32 | |
| 9/8/20 | Chipotle Mex Grill | CMG | 1230-1270 | 1252 | |
| 9/28/20 | CrowdStrike | CRWD | ? | 133-138 | 145 |
| 11/11/19 | Dexcom | DXCM | 196-205 | 383 | |
| 8/10/20 | Digital Turbine | APPS | 21.5-24 | 36 | |
| 9/28/20 | DraftKings | DKNG | 54-58 | 61 | |
| 8/24/20 | Elastic | ESTC | 99-103 | 114 | |
| 9/21/20 | Exelixis | EXEL | 24.5-26 | 24 | |
| 9/8/20 | Five Below | FIVE | 120-124 | 130 | |
| 7/27/20 | Floor & Décor | FND | 69-72 | 74 | |
| 8/10/20 | Freeport McMoRan | FCX | 13.3-14.5 | 16 | |
| 8/10/20 | Freshpet | FRPT | 99-102.5 | 116 | |
| 9/14/20 | Gap Inc. | GPS | 16.5-17.5 | 19 | |
| 9/14/20 | Guardant Health | GH | 98-102.5 | 111 | |
| 5/26/20 | Horizon Therapeutics | HZNP | ? | 45.5-48 | 82 |
| 8/17/20 | Innovative Ind. Prop. | IIPR | 116-121 | 127 | |
| 8/17/20 | iRhythm Technologies | IRTC | 168-174 | 226 | |
| 6/29/20 | Meritage Homes | MTH | 71.5-74 | 113 | |
| 9/14/20 | Mosaic | MOS | 17.2-18.2 | 19 | |
| 8/24/20 | Natera | NTRA | 60-63 | 71 | |
| 9/21/20 | NIO Inc. | NIO | 17-18 | 22 | |
| 9/14/20 | NovoCure | NVCR | ? | 93-98 | 118 |
| 3/30/20 | Nvidia | NVDA | 250-270 | 546 | |
| 4/6/20 | Peloton | PTON | 27-29 | 111 | |
| 8/3/20 | Penn Nat’l Gaming | PENN | 34-36.5 | 70 | |
| 8/3/20 | PINS | 33.5-37 | 44 | ||
| 7/20/20 | Plug Power | PLUG | ? | 8.0-8.7 | 16 |
| 8/3/20 | Qualcomm | QCOM | 106-110 | 121 | |
| 8/17/20 | Quanta Services | PWR | ? | 48.5-51.5 | 57 |
| 7/13/20 | Roku | ROKU | 147-154 | 204 | |
| 7/27/20 | Sea Ltd | SE | 110-116 | 158 | |
| 9/21/20 | Seattle Genetics | SGEN | ? | 175-180 | 202 |
| 9/14/20 | Snap | SNAP | 22.5-24 | 28 | |
| 9/28/20 | Square | SQ | 157-162 | 181 | |
| 8/10/20 | Taiwan Semi | TSM | 75-78 | 85 | |
| 9/14/20 | Target | TGT | 145-149 | 161 | |
| 9/21/20 | Toll Brothers | TOL | 44.5-47 | 49 | |
| 9/21/20 | TopBuild | BLD | 149-154 | 178 | |
| 8/31/20 | Tupperware | TUP | 14.5-15.5 | 21 | |
| 5/11/20 | Twilio | TWLO | 175-187 | 283 | |
| 8/24/20 | Whirlpool | WHR | 171-176 | 193 | |
| 5/11/20 | Wingstop | WING | 116-122 | 142 | |
| WAIT | |||||
| 9/28/20 | Blueprint Med | BPMC | 84.5-87.5 | 95 | |
| 9/28/20 | Generac | GNRC | 180-185 | 208 | |
| 9/28/20 | Jinkosolar | JKS | 34.5-36.5 | 48 | |
| 9/28/20 | Owens & Minor | OMI | 19.5-20.5 | 24 | |
| SELL RECOMMENDATIONS | |||||
| 8/10/20 | Chart Industries | GTLS | 69-73 | 76 | |
| 8/17/20 | L Brands | LB | 26-28 | 33 | |
| 8/31/20 | Trupanion | TRUP | 60.5-63 | 87 | |
| 8/10/20 | Zillow | Z | ? | 77-80 | 110 |
| DROPPED | |||||
| 9/21/20 | Norfolk Southern | NSC | 204-208 | 215 | |
The next Cabot Top Ten Trader issue will be published on October 12, 2020.