Street calls of the week: Upgrades for Micron, Magnite and GoodRx Holdings

Source Investing
May 26, 2024 08:58

Investing.com -- Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrades for Micron, Magnite and GoodRx Holdings; downgrade for Him Hers Health.

InvestingPro subscribers always get first dibs on market-moving rating changes.

Micron

What happened? On Monday, Morgan Stanley (NYSE:MS) upgraded Micron (NASDAQ:MU) to Equalweight with a $130 price target

What’s the full story? Morgan Stanley acknowledges that maintaining a negative stance on Micron for an extended period was a misstep. While they are not yet optimistic, they concede that they should have anticipated the fundamental and narrative implications of the strength in AI specialty memory.

Three key errors were made by the research team according to their research report. First, they placed too much emphasis on recent losses. When they initially became pessimistic about MU two years ago, they predicted significant cash burn, financial losses, and a substantial erosion of book value. When losses turned out to be quite large - $7.1 billion of GAAP over a five-quarter downturn leading to a 14% reduction in book value - they expected this to have a greater impact on valuation than it did.

Second, Morgan Stanley underestimated the significance of High Bandwidth (NASDAQ:BAND) Memory (HBM) to the narrative. HBM has emerged as a critical technology for AI, and while Micron is just now beginning to reap the benefits of this, having missed the HBM3 phase of the market, they have a robust 3e product that will firmly place them in second place. This was known six months ago, and despite some concerns that current wafer commitments are too high, this still propelled Micron directly into the winners’ camp during a phase when proximity to AI drove most of the alpha generation in the space.

Third, the bank wrote they underestimated the importance of HBM in turning around the base business. While they believe their Total Addressable Market (TAM) analysis of HBM remains reasonable, they are now seeing Trendforce project 15% of wafer starts going to HBM by 4Q24, and Applied Materials (NASDAQ:AMAT) suggesting they are already at 20%. This is too high, at least relative to the consumption suggested by even the NVIDIA (NASDAQ:NVDA) bull case, but the impact on non-HBM is having more of a negative impact on industry supply than they had anticipated.

With these factors driving near-term fundamentals - they could see a positive preannouncement in upcoming conferences - and a positive view on AI semis, Morgan Stanley is moving to Equalweight on MU

Equalweight at Morgan Stanley means “The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. “

How did the stock react? Micron opened the regular session at $127.30 and closed at $129.00, a gain of 2.96% from the prior day regular close.

Penn Entertainment

What happened? On Tuesday (actually Monday after-hours), Raymond James started new coverage on PENN Entertainment (NASDAQ:PENN) at Outperform with a $20 price target.

What’s the full story? The first quarter of this year presented a challenging environment for PENN, characterized by several factors. These include weakness in the land-based business, primarily influenced by weather conditions, higher-than-expected losses in the digital sector, and a significant selloff due to management-related issues.

Despite these setbacks, the core land-based gaming business remains relatively robust. In 2023, PENN achieved record revenue and EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent) levels. Furthermore, there is an anticipated improvement in EBITDAR throughout 2024. However, it’s important to note that the stock’s performance continues to be impacted by the company’s interactive business, which has accumulated significant EBITDA losses.

Raymond James’ positive stance on PENN’s stock is not solely based on the belief that ESPN BET (the interactive business) will capture a significant market share or generate positive EBITDA in the near term. Instead, the brokerage recognizes that PENN stock can still perform well to a certain extent. Specifically, Raymond James believes that the market is undervaluing the digital business, attributing negative equity value to it. Additionally, the fair value for the land-based business is estimated to be north of $20 per share.

It’s worth noting that PENN shares have not traded at this price level since May 2020, a period when all casinos in the United States were closed due to the global COVID-19 pandemic. Despite the challenges posed by PENN’s interactive strategy and an over-leveraged balance sheet, Raymond James identifies value in the land-based operations. The brokerage contends that current market conditions may not fully reflect this underlying value.

Outperform at Raymond James means “The security is expected to appreciate or outperform the S&P 500 over the next 12-18 months.”

How did the stock react? Penn Entertainment opened the regular session at $16.39 and closed at $16.41 a gain of 0.86% from the prior day regular close.

Him Hers Health

What happened? On Wednesday, Citi downgraded Hims Hers Health Inc (NYSE:HIMS) to Neutral with a $20 price target.

What’s the full story? Citi has expressed encouragement by HIMS’ thoughtful approach to their new program, which was initially a cause for concern due to potential regulatory and legal risks. The bank is convinced that HIMS is operating above-board, partnering with a large 340B manufacturer that is directly producing Semaglutide, using API, processes, and expedients very similar to Novo. According to management, the production of Semaglutide is relatively straightforward, and HIMS’ manufacturing partner should be able to produce enough product to meet what is expected to be significant demand, as there seems to be no shortage of API.

However, with the stock up 20% since the announcement, HIMS has effectively added approximately $760M of enterprise value on limited new information, leaving little room for upside, in Citi’s view. As a result, the bank is downgrading HIMS from Buy/High Risk to Neutral/High Risk as they await further detail on GLP-1 economics and durability. Despite the downgrade, Citi remains attentive to HIMS’ future moves and potential in the market.

Neutral at Citi means “For stocks rated Neutral (2), if an analyst believes that there are insufficient valuation drivers and/or investment catalysts to derive a positive or negative investment view, they may elect with the approval of Citi Research management not to assign a target price and, thus, not derive an ETR.”

How did the stock react? Hims & Hims Health opened the regular session at $16.90 and closed at $16.17, a lost of 7.84% from the prior day regular close.

GoodRx Holdings

What happened? On Thursday, RBC Capital upgraded Goodrx Holdings Inc (NASDAQ:GDRX) to Outperform with a $10 price target.

What’s the full story? GDRX’s recent ISP and DC initiatives, along with the continued scaling of its MfgSolns business, provide it with several new and meaningful growth opportunities. These initiatives also enhance the durability of its core Rx transaction business. Much of the required upfront selling/contracting is now complete—GDRX has signed five PBMs and seven top-10 pharmacies. The ramping of these provides GDRX with a good line-of-sight on a 3-year mid-teens EBITDA CAGR.

RBC Capital believes that execution here will help re-rate GDRX’s current 10x '25 EBITDA valuation to something more in line with its growth rate and 14x peer average. The analysts have raised the price target to $10, up from $8.

Outperform at RBC Capital means “Expected to materially outperform sector average over 12 months.”

How did the stock react? GoodRx Holdings opened the regular session at $7.74 and closed at $7.24, a gain of 0.56% from the prior day regular close.

Magnite Inc.

What happened? On Friday, BofA Securities upgraded Magnite (NASDAQ:MGNI) to Buy with a $15 price target.

What’s the full story? RBC’s upgrade of MGNI is bolstered by the firm’s heightened assurance in MGNI’s trajectory to ascend as the premier supply-side technology solution in CTV advertising—a sector anticipated to grow at a mid-teens rate over the medium term. This optimism is rooted in the industry’s shift toward more automated, or programmatic, ad execution—a niche where MGNI excels. The company is increasingly recognized as the preferred ad tech collaborator for both buy-side entities, such as agencies and DSPs, and sell-side participants like publishers. This is largely due to its leading-edge programmatic technology, which has been underscored by its recent exclusive partnerships with industry giants Netflix (NASDAQ:NFLX) and MediaOcean.

The analysts highlight MGNI’s unique product mix that marries an ad server with an SSP, establishing it as a pivotal hub for publishers’ programmatic frameworks regardless of the purchasing pathway. This integration renders MGNI significantly less susceptible to disintermediation compared to standalone SSPs. Furthermore, insights from Disney and Paramount indicate that the move toward programmatic methods is progressing swiftly, with projections of reaching approximately 50% by the end of 2024 within premium streaming services. This trend underpins a narrative of sustained market share growth for MGNI, as viewed by the analysts at RBC Capital.

Buy at BofA means “Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster.”

How did the stock react? Magnite opened the regular session at $12.03 and closed at $12.57, a gain of 13.55% from the prior day regular close.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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