Wall Street observers hoped last week’s gains signaled the arrival of blue skies, but the COVID-19 storm is thundering on. Stocks started the week on the back foot as U.S. crude futures landed in the red for the first time in history. The lockdowns across the world have done away with the demand for crude, causing oil supply to surge.
Against this backdrop, investment firm Goldman Sachs is taking stock of the names in its coverage universe, noting that COVID-19-induced social distancing measures have taken a “severe” toll on some of its companies’ end markets. Additionally, the firm argues that the impact on profits could last longer than previously expected.
“We conclude that a number of our companies will be slower to recover with weakness persisting into 2021 even as our economists forecast a return to GDP growth in that year. Specifically, we expect consumer electronics demand to be slow to return and ASP weakness to persist well into 2021 similar to what we have observed in prior downturns,” said Goldman Sachs analyst Rod Hall.
Using TipRanks’ database, we were able to get the full scoop on three tech stock giants that have fallen out of Goldman Sachs’ favor. The platform also revealed what the rest of the Street has to say about each. Let’s take a closer look.
Apple Inc. (AAPL)
Even tech giant Apple won’t be immune to the impacts of COVID-19, and the company could be facing a much longer recovery timeline amid the worldwide shutdowns.
Part of Goldman Sachs’ concern is related to poor unit demand as well as the length of time in which this figure will return to growth. “We are now modeling a deeper reduction in unit demand through mid-2020 and then a shallower recovery into early 2021,” analyst Rod Hall explained.
However, while much of the focus is expected to center around this issue at the beginning, Hall believes an additional headwind should be sounding the alarm bells. The analyst argues average selling price (ASP) weakness could weigh on earnings through 2021. “Handset ASPs downticked to a maximum year-over-year decline of 14% in the [global financial crisis] but, importantly, did not show positive growth until Q3 of 2010 even though unit growth had returned in late 2009,” he stated.
As a result, Apple’s new phones won’t necessarily support the faster type of 5G, millimeter-wave spectrum, as the added expense might not be warranted when there’s less demand for higher quality phones. This could mean the technology might not be included in the devices until 2021.
It also doesn’t help that its services business could be hampered by COVID-19. This appears to be the straw that broke the camel’s back for Hall, and thus he downgraded his call to Sell. Based on his $233 price target, the downside potential lands at 16%. (To watch Hall’s track record, click here)
Looking at the consensus breakdown, other analysts don’t necessarily agree with Hall. 27 Buys, 6 Holds and 3 Sells issued in the last three months give Apple a Moderate Buy consensus rating. With a $308.25 average price target, shares could surge nearly 15% in the next twelve months. (See Apple stock analysis on TipRanks)
Qualcomm Inc. (QCOM)
Qualcomm has cemented its status as one of the top players in the semiconductor space. However, Goldman Sachs believes weakening smartphone demand will be its downfall.
Speaking directly to this issue, Hall argues that decelerating smartphone demand will hamper both its Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL) segments. As a result, the analyst expects earnings to come in below the consensus estimate for not only 2020 but also 2021.
Expounding on this, Hall stated, “We are reducing our calendar year 2020 and calendar year 2021 3G/4G/5G units estimate by 12.5% and 10.0%, respectively, to 1,588 million and 1,758 million, due to the anticipated impacts from COVID-19 and weakening consumer confidence which we believe reduces smartphone replacement rates. We have also reduced our iPhone units expectations by 7% in calendar year 2021 to 177 million.”
It should be noted that Hall believes the 5G category won’t be hit as hard thanks to the high likelihood of faster demand recovery in China, but this won’t make up for weakness in the other categories.
That being said, several factors could strengthen QCOM’s long-term growth narrative. “A sharper recovery in consumer spending on smartphones or a faster adoption of mmWave 5G devices could meaningfully increase our estimates and cause us to become more constructive. On mmWave in particular we would see a higher likelihood of faster adoption if smartphone ASPs did not deteriorate the way that we currently expect them to in our Central case modeling,” Hall explained.
In the meantime, Hall downgraded his rating from Neutral to Sell. In addition, he cut the price target from $77 to $61, implying 18% downside potential.
Turning now to the rest of the Street, other analysts are more optimistic. 12 Buys, 6 Holds and 1 Sell add up to a Moderate Buy analyst consensus. At $91.94, the average price target puts the upside potential at nearly 28%. (See Qualcomm stock analysis on TipRanks)
Nutanix Inc. (NTNX)
Cloud computing company Nutanix offers solutions to modernize datacenters and run applications at any scale, on-premises and in the cloud. Shares are up 7% in the last month, but Goldman Sachs sees overwhelming headwinds on the horizon.
Hall doesn’t dispute the fact that NTNX offers a solid product portfolio. However, the analyst cites its ability to generate revenue growth again while trimming opex/sales to maintain cash on its balance sheet as a significant concern.
Hall added, “We downgrade Nutanix to Sell driven by the ongoing free cash flow burn and high opex. We also expect revenue to be significantly impacted by COVID-19, particularly from medium-sized business customers.” On top of this, since February 2018 when the stock was added to the firm’s Buy list, NTNX shares have declined while the S&P 500 gained.
Based on all of this, Hall wrote, “We reduce our fundamental and M&A multiples due to deteriorating fundamentals and ongoing liquidity concerns given the ongoing cash burn. We now expect a potential takeout multiple closer to the lower end of the M&A comp range in the table below.”
There is something the company can do to drive a turnaround. Hall tells clients that his outlook would be more positive if NTNX can execute on its software transition at a much faster pace. Additionally, evidence of improving cash flow trends along with revenue growth and faster revenue growth combined with lower opex would help paint a prettier picture.
To this end, NTNX gets a thumbs down, with Hall downgrading the name from Buy to Sell. He also gave the price target a haircut, dropping it from $47 to $15. This conveys his belief that a twelve-month loss of 11% is in the cards.
What does the rest of the Street think about NTNX’s long-term growth prospects? It turns out that other analysts have higher hopes than Hall, with its Moderate Buy consensus rating breaking down into 7 Buys, 5 Holds and 1 Sell. Given the $31.42 average price target, shares could climb 93% higher in the next year. (See Nutanix stock analysis on TipRanks)
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