Stock Analyst Notes Uber, DXC, Dropbox, Farfetch, Avnet, Uniti, Synaptics by Morningstar Equity Analysts | 8/9/2019 10:30:00 AM | While demand for  Uber's UBER services remains strong, the firm's second-quarter revenue came in a bit short of consensus expectations and losses were higher than expected due to the restricted stock unit expenses related to its IPO. However, in our view, there are some indications of possibly operating leverage as growth in users and rides was not accompanied by significantly higher operations, support, and marketing costs as a percentage of net revenue. Plus, excluding a one-time IPO-related award to drivers, take rates in the firm's core platform increased sequentially, which we think further displays ride share pri ce stability and a stronger online food delivery market position for Uber Eats. Management now expects net revenue growth to accelerate a bit during the remainder of 2019 driven mainly by growth in gross bookings. Based on second-quarter results, we slightly adjusted our 10-year model and are maintaining the $58 per share Uber fair value estimate. After surging more than 8% during market hours, the stock is down 6% in after-hours. This name requires some patience, but we remain confident that Uber, along with its peer, Lyft, are progressing toward profitability. We continue to recommend investing in this 4-star narrow-moat name.
Ali Mogharabi
DXC Technology DXC reported a weak start to fiscal 2020 with the firm seeing currency headwinds, delays in closing deals, and greater-than-expected pressure in its traditional lines of business. Consequently, management lowered its fiscal 2020 guidance. For the year the firm now expects total revenue of $20.2 billion-$20.7 billion (down from $20.7 billion-$21.2 billion) and non-GAAP EPS of $7.00-$7.75 (down from $7.75-$8.50). DXC's result doesn't instill confidence and follows a tumultuous 12-months where industry rumors have spread about management turnover and general upheaval across the lower and upper ranks of the firm. We think the firm still has plenty of work to do to properly align its services portfolio with the growing digital transformation trends of its end markets . Its convoluted M&A history and grounding in legacy infrastructure services remain areas in need of attention. As a result, we continue to view the firm as the only no-moat IT services provider we cover. With shares falling sharply afterhours and hovering around $43 (implies a forward price to adjusted earnings ratio of 5.7 times), DXC is trading at a significant discount to our revised $88 fair value (down from $91). However, the company remains a high-risk investment. For the quarter, revenue fell 7.4% year over year to $4.9 billion (declined 4.2% in constant currency). For the entire note, click here.
Andrew Lange
Dropbox DBX once again exceeded its revenue guidance, but compression in average revenue per user and a dip in profitability potentially signal longer-term issues for the company, sending shares lower afterhours. Management highlighted its transition to the new Dropbox, moving users from thinking of it as a "magic folder" for cloud storage to a "magic workplace" that changes how knowledge workers interact. We continue to believe that Dropbox is viewed by users as a commodity cloud file storage solution and that users will eventually churn to competitors like Microsoft and Google. We are maintaining our fair value estimate of $13 per share. Despite shares trading down on the report, we still do not view Dropbox's shares as attractive. Dropbox added another 400,000 paid us ers during the second quarter, bringing its total paid user base to 13.6 million. On pricing, average revenue per user decreased by less than 1% sequentially to $120.48. While ARPU is up nearly $4 year over year, our model assumes only a moderate amount of ARPU expansion over the next decade. The company pointed to currency headwinds and the timing of some large customer deals as factors behind weak ARPU. Total revenue for the quarter was $401.5 million, up 18% over the second quarter of 2018. For the entire note, click here.
John Barrett
We are putting Farfetch FTCH shares under review to assess the effect of the acquisition of New Guards Group on Farfetch's financials. We expect to publish our new fair value for shares on Aug. 12.
Jelena Sokolova, CFA
Narrow-moat distributor Avnet AVT announced mixed fourth quarter results as sales were within management's guidance range and adjusted earnings missed the low-end. Like its suppliers and peers, Avnet is the midst of difficult environment and one that we expect to continue for the next few quarters, as was captured in guidance for the upcoming period. As a result, and despite the benefit from time value of money in rolling our model, we are lowering our fair value estimate to $43 from $45. Total revenue in the second quarter was $4.7 billion roughly at the midpoint of prior guidance which represented a year over year decline of 7.5%. Both of Avnet's segments struggled during the quarter. Electronic components revenue declined by 7%, both on a year-over-year ba sis and sequentially, to $4.3 billion as growth in both Americas and Asia regions was offset by headwinds in Europe. At the end of the quarter, the book/bill in both Europe and Asia was below parity, leading to a total book/bill of 0.92. The inventory correction in the broad semiconductor market continues to impact Avnet, like its peer Arrow Electronics, and industrial and automotive demand in Europe and China remain areas of concern. Management did indicate signs of stabilization in Asia but did not go so far as to call the timing of any recovery. Farnell sales were also down during the quarter, sliding 12% year over year to $343 million. For the entire note, click here.
Seth Sherwood
Uniti's UNIT second-quarter results were uneventful, falling in line with our expectations and confirming that Uniti continues pursuing its plan to grow its various infrastructure assets and leases. The reality is that the results and progress currently mean very little, as Uniti continues to collect the full amount of its Windstream lease payments while working to resolve the future of the lease within Windstream's restructuring. With Windstream currently making up nearly 85% of Uniti's EBITDA, quarterly fluctuations in the rest of its business have little impact on our fair value estimate. No news in the quarter affected our long-term view, so we are maintaining our $13 fair value estimate, which implies this very high-risk stock is undervalued. However, investors need to be awa re that our estimate is at the mercy of the Windstream resolution. We estimate the lease payments will be cut by 25% beginning in 2020, but no news has leaked that offers insight into what's most likely, and a wide range of outcomes is possible. The adjusted EBITDA margin contracted 150 basis points from last year's second quarter, and we estimate it would have contracted an additional 200 basis points but for and insurance recovery stemming from Hurricane Michael. Margin contraction is inevitable as Uniti broadens its offerings away from the triple-net leases like the one it has with Windstream. Those leases result in nearly 100% margin, so any mix shift away from those reduces companywide margin. For the entire note, click here.
Matthew Dolgin, CFA
Synaptics SYNA reported mixed results, with profitability roughly on par with expectations and sales falling short of guidance. The firm announced Michael Hurlston as the new president and CEO earlier in the week and now with more stable leadership, we expect Synaptics to be on firmer footing to deliver on the market opportunities available. However, it is also clear that this will take time to be realized with macroeconomic uncertainty, trade bans, and technology transitions continuing to be difficult hazards to negotiate. We are consequently cutting our fair value estimate significantly to $40 per share from $55. Double-digit revenue declines are expected for 2020, and we reiterate our very high fair value uncertainty and no-moat ratings. Sales in the fourth quarter totaled $295 million which represented a decline of 24% year over year. PC sales were down 15% year over year and 9% sequentially to approximately $60 million. Sales into the Internet of Things segment, which includes automotive, smart-home, and other consumer electronics products, were up 21% sequentially to $76 million. While this still represented a year-over-year decline of 21%, design activity across a variety of products bodes well for growth in the end market for the fiscal year.Mobile sales declined by 29% year over year to $158 million, due to a combination of the Huawei ban and broader China headwinds. For the entire note, click here.
Seth Sherwood |
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