Netflix – Lower Price Target

NFLX : NASDAQ : US$448.59

BUY
Target: US$450.00

COMPANY DESCRIPTION:
Netflix is the world’s leading Internet television network
with over 50 million members in more than 40 countries
enjoying more than one billion hours of TV shows and
movies per month, including original series. For one
monthly price, Netflix members can watch as much as
they want, anytime, anywhere, on nearly any Internet connected device.
Telecommunications
LOWERING ESTIMATES, TARGET ON WEAK ADDS AND GUIDANCE; BUY
Investment recommendation
Netflix reported results after the close with weaker-than-expected
subscriber trends notably in the US. Although financial results were
largely in line with expectations, the company believes that the $1 price
increase – in addition to certain market factors including large-scale
credit card data breaches – contributed to the net addition weakness.
While we believe the shortfall is due to neither intensifying competition
in this nascent category nor penetration maturation, we are nevertheless
reducing our estimates and price target accordingly.

Investment highlights
 Material shortfall on subscribers – While we anticipated domestic
add trends would rebound strongly following dramatic network
improvements during the quarter, the price increase appears to
have dampened the impact. Despite an improved content library,
managing any price increase relative to such improvements remains
a delicate balancing act, in our view.

 Financial metrics remain solid – We note financial metrics for Q3/14
were largely in line with expectations. Adjustments to our forecast
reflect a lower subscriber base, higher marketing and G&A spend.
Continue to play the secular trend – Despite the fact that Q3/14
produced unexpectedly-weak subscriber trends and a weaker-than expected outlook, we continue to believe management will refine
their approach in determining the appropriate mix of pricing
changes to content improvements that will continue to redefine the
programing as we know it. With the changes, however, we are
reducing our estimates and price target to $450 from $550

Twitter, Inc. Initial Review BUY

TWTR : NASDAQ
US$52.91 BUY 
Target: 62.00

COMPANY DESCRIPTION:
Twitter is the world’s leading real-time one-to-many
communication platform for discovering and sharing unique
content. With over 270 million global monthly users, Twitter has a
diverse user base including influential individuals such as world
leaders, celebrities, athletes, and leading organizations such as
sports teams, media outlets, and brands. Each Tweet is limited to
140 characters of text, and can conclude photos, videos, and
applications.

Technology — Internet
ENGAGEMENT & MONETIZATION TRUMP USER GROWTH; INITIATING AT BUY
Investment recommendation
We believe Twitter is early in defining what is possible as the world’s
real-time interest sharing platform. The evolution will likely be bumpy,
but the platform should continue to become more mainstream. Slowing
user growth is a challenge, but we believe the company has levers to
pull to fight back. Meanwhile, our positive stance is based largely on the
engagement and monetization momentum we expect over the next few
quarters. We believe this should lead to upward estimate revisions as
Twitter benefits from engagement and monetization groundwork that
has been laid over the past year.
Investment highlights
 Users & engagement may be mixed – MAU growth may not
accelerate, but logged-out users could tilt the discussion favorably;
engagement metrics should rebound in Q3 & Q4.
 However, monetization holds significant upside – Twitter monetizes
at less than half the level of Facebook, but newer ad products
should help it catch up fast.
Valuation
Our $62 price target is based on 45x our 2018 EPS estimate, discounted
to present at a rate of 10%. We note that our estimates do not include
potential dilution from yesterday’s announced convertible debt offering.
On a growth-adjusted EV / Revs basis, TWTR trades at a significant
discount to peers.
Risks
User growth may disappoint, especially in the U.S. where monetization
is highest; platform shift to voyeurs (away from Tweeters) may impact
advertiser interest; new ad products may fail to gain momentum.

Borderfree

BRDR : NASDAQ : US$13.25
BUY 
Target: US$18.00

Technology — Internet
STRONG Q2 WITH SIGNIFICANT FULFILLMENT EFFICIENCY GAINS
Summary
Borderfree’s second quarter as a public company was another strong
one. eCommerce revenue grew by 34%, accelerating meaningfully from
19% in Q1. The key driver appears to be lower shipping costs as the
company expands local market fulfillment options, which is driving
higher conversion of shoppers into purchasers. We continue to view
Borderfree as a long-term, stable growth opportunity.
Key points
 Bullish: eCommerce revenue accelerated, beat our estimate, and
guidance was raised for the year; EBITDA margin was 4.3%, 370
bps ahead of our estimate driven by stronger mix of eCommerce
revenue; Fulfillment revenue (which represents a pass-through of
the cost of fulfilling an order, so lower is better!) was lower than our
estimate as the company achieved local market fulfillment
efficiency.
 Bearish: The company added only two net new merchants in the
quarter (however, we believe that in H1 ~8 small merchants
accounting for less than 0.3% of GMV were turned off); lower total
revenue guidance may create some noise (although this is a
significant positive operationally and eCommerce guidance was
raised).
 Estimate changes: We are changing our 2014 and 2015 total
revenue non-GAAP EPS to $140M/$0.16 and $168M/$0.20 from
$142M/ $0.10 and $172M/$0.18.
Valuation
Our price target remains unchanged at $18.00 and is based on 2.7x our
2015 revenue estimate of $168M (down from $172M) and 5.3x our 2015
e-commerce revenue estimate of $88M (up from $86M

Pandora Media BUY

 

P : NYSE : US$28.20

BUY 
Target: US$43.00

COMPANY DESCRIPTION:
Pandora radio is the market leader in personalized
Internet-based radio listening in the US. The company
uses its proprietary algorithms as part of the Music
Genome Project to generate playlists for users that are
personalized and cater to the tastes of individual users.

All amounts in US$ unless otherwise noted

Technology — Internet
POSITIVE MANAGEMENT MEETINGS;
FOCUS ON LOCAL SALES CAPACITY
Summary
We hosted a series of investor meetings in Europe with Pandora’s
investor relations team, Dominic Paschel and Palmira Farrow. We exit
the trip with a little jet-lag accompanied by renewed confidence in
Pandora’s ability to exceed our revenue targets over time, especially
when viewed through the lens of future local sales capacity. Pandora
stock is still down sharply from last year’s highs. Meanwhile, we believe
business momentum is strong. Given the stability of Pandora’s model,
we do not expect dramatic revenue upside (or downside) in any given
period. However, we continue to believe Pandora is early in attacking a
large opportunity. We note the European investor base has historically
had limited exposure to Pandora’s U.S.-centric music service (and
therefore the stock), but that interest appears to be growing especially in
the context of a potential listing for Spotify.
Key points
 We check our primary revenue forecast (driven by hours & RPM)
with a “sales capacity” forecast that projects Pandora will grow its
local sales force from 100 in Q1 to ~222 by the end of 2016. We
believe local audio ad revenue should grow by ~167% in 2014 and
68% in 2015. We believe the local sales force is ramping
productivity more quickly.
 We expect a steady but measured path towards profitability, with
management adhering to a philosophy of margin expansion each
year.
Valuation
We maintain our BUY recommendation and $43 price target. Our price
target is based on 45x our FY18 non-GAAP EPS estimate of $1.56,
discounted to present at 10.5%

Broadcom

 

BRCM : NASDAQ : US$38.26

BUY 
Target: US$46.00

Technology — Hardware — Semiconductors and Related Technologies
INCREASINGLY CONFIDENT IN EXPEDITED
CELLULAR BASEBAND EXIT; CONCLUSIONS FROM MANAGEMENT MEETINGS

CEO Scott McGregor at
Broadcom’s HQ. – with stronger conviction that an exit
of the cellular baseband business will happen quickly and therefore are
more confident in our 2015 pro forma estimates excluding the baseband
business. We discuss drivers of solid growth for Broadcom’s retained
businesses and areas for incremental investment with cash recouped
from prior cellular baseband investments. We reiterate our BUY rating
and raise our price target to $46, as we assume our pro forma EPS
estimates post the baseband exit as the basis for our price target.
Investment highlights
 We assume a baseband business exit before the end of 2014. Given
the much lower gross margin of the baseband business likely lost
during this transition and the significant operating cost savings, we
believe gross margin can expand into the mid-50s and operating
margin will expand into the mid-to-high-20s exiting 2015.
 We believe Broadcom’s core Home and Infrastructure businesses are
well positioned for growth and could benefit further from increased
management attention and investment post the baseband exit. In
fact, we believe Broadcom’s Home business should grow in the mid-
to high-single digits with solid mid-20s operating margins. Further,
we believe the Infrastructure business is positioned to exceed 10%
top-line CAGR over the next several years, with operating margins
moving toward 40%.
 With our increasing confidence in an expeditious cellular baseband
exit, we are adopting our 2014/15 pro forma revenue and non-GAAP
EPS estimates of $8.4B/$2.58 and $8.3B/$3.28. Our estimates largely
exclude any additional initiatives that could be funded with
incremental investments from the baseband business exit.
Valuation: Our $46 price target is based on shares trading at roughly 14x
our 2015 pro forma non-GAAP EPS estimate of $3.28.

Numerex BUY Target Price $15

NMRX : NASDAQ : US$10.12
BUY 
Target: US$15.00

COMPANY DESCRIPTION:
Numerex is a leading provider of machine-to-machine
(M2M) business services, technology, wireless network
connectivity, and products used in the development and
support of M2M solutions for enterprise and government
markets worldwide.

Technology — Communications Technology — Wireless Equipment
STRONG Q1/14 RESULTS: INCREASING ADJUSTED
EBITDA ESTIMATES AND UPGRADING TO BUY
Investment recommendation:

Numerex reported Q1/14 results with
adjusted EBITDA of $2.8M, above our $2.2M estimate. Management’s 2014
guidance for recurring revenue of $68M to $70M including the recent
Omnilink acquisition was consistent with to slightly above our $63M estimate
excluding Omnilink. We maintain our belief Numerex’s vertically integrated
Device Network Application (DNA) M2M offering and focus on higher value
managed services deals positions the company for strong long-term growth
trends in leading M2M verticals such as security, supply chain, remote tank
and bin monitoring, emergency response, and asset tracking. We believe an
increasing mix of high-margin recurring services revenue should drive solid
subscription revenue growth, increased ARPU, operating leverage, and
expanding EBITDA margins. While we maintain our $15 price target, we
upgrade to BUY given our belief the shares are undervalued relative to the
company’s growth and expanding adjusted EBITDA margins.
Investment highlights
 Numerex reported Q1/14 recurring and hardware revenue of $13.9M
and $6.9M, respectively, versus our $13.8M/$7.8M estimates. While
hardware revenue tends to be lumpy by quarter, hardware gross margin
of 19.1% was well above our 13% estimate. Total subscribers of 2.26M
exiting Q1/14 were consistent with our expectations.
 With the Omnilink acquisition, Numerex will add roughly 30K
subscribers that generate roughly $25 ARPUs. We believe Omnilink fits
well with Numerex’s managed services strategy and focus to increase
ARPUs and should be modestly accretive to 2014 adjusted EBITDA.
 We believe an expanding deal pipeline for managed services combined
with our expectations for continued healthy subscriber growth trends
position Numerex for strong long-term recurring revenue growth and
expanding margins. We model adjusted EBITDA margins expanding
from 10.7% in 2013 to 12.0% in 2014 to 16.2% in 2015.
 We are maintaining our 2014 adjusted EBIDTA estimate of $11.5M and
increasing our 2015 estimate from $18.5M to $19.7M.
Valuation: Our $15 price target is based on shares trading at roughly 14x
EV/EBITDA, based on our 2015 adjusted EBITDA estimate.

HomeAway

AWAY : NASDAQ : US$36.94

HOLD 
Target: US$41.00

COMPANY DESCRIPTION:
Based in Austin, Texas, HomeAway is the world’s leading online
marketplace for vacation rentals. The company owns and
operates a portfolio of online properties, which includes
HomeAway.com, VRBO.com, Homelidays.com, Abritel.fr, and
FeWo-Direkt.de. The company has 145 countries with vacation
rentals listed on its websites and serves 19 countries with
dedicated websites.

All amounts in US$ unless otherwise noted.

Technology — Internet
SOLID Q1 RESULTS; PPB ON TRACK; MARKETING SPEND ON HORIZON
Summary
HomeAway reported solid Q1 results marked by continued expansion of
the PPB model. How this model rolls out and competes with or is
integrated effectively with the core subscription business at HomeAway
remains the key question for the stock this year, in our opinion. We
believe investors are cautiously optimistic, while also grappling with
how much the company may spend on marketing later this year to fuel
growth in both businesses.
Key Points
 Bullish: strong PPB listings growth, with 35k new listings added in
the quarter; other revenue showed substantial acceleration;
inclusion of European properties on core HomeAway technology
platform should drive expanded European momentum later this
year.
 Bearish: Subscription listings grew by only ~5.6% y/y (10.3%
adjusted); sequential subscription ARPL expansion of $7 was the
lower than other recent quarters; guidance implies slight EBITDA
margin pressure with potentially more marketing spend to come
later in the year.
 Estimate Changes: We are slightly raising our FY14, and FY15
revenue estimates from $434M and $499M to $440M and $508M,
and lowering non-GAAP EPS estimates from $0.72 and $0.95 to
$0.67 and $0.92.
Valuation
We slightly lower our price target to $41.00 (from $43.00). Our new
price target is based on 45x (unchanged) our revised 2015 EPS estimate
of $0.92 (down from $0.95). We maintain our HOLD

 

 

Glu Mobile Buy Target Price $ 5

GLUU : NASDAQ : US$4.05
BUY 
Target: US$5.00

COMPANY DESCRIPTION:
Based out of San Francisco, California, Glu Mobile is a
leading developer of mobile games. The company is
primarily focused on developing original-IP freemium
games for smartphones and tablets. Glu Mobile also
operates a third party game publishing platform.

Technology — Internet
DH14 POINTS TO STRONG Q4;
EXPECT PRUDENT GUIDANCE
Investment recommendation
Glu stock has nearly doubled over the past four months, despite a 20%
mid-course correction after Q4 guidance underwhelmed the most bullish
investors. We are somewhat cautious of another post-earnings
“conservative guidance” letdown, and revenue is a great deal more
concentrated in one game than we would like. However, with the
blockbuster performance of DH14 followed by the solid early success of
EW3 and Robocop, we believe Glu is making continued progress toward
building a platform capable of producing money-making games on a
consistent basis.
Investment highlights
 Deer Hunter 2014 performance has stayed strong during the
quarter and should handily outperform targets for Q4. Other
existing games showed encouraging stability, and new launches
EW3 and RoboCop are showing early success.
 We believe management is likely to prudently reiterate its 15-20%
growth outlook for 2014. We also expect commentary around
EBITDA expectations. We are currently modeling a 2.7% adjusted
EBITDA margin for 2014 and believe this should be achievable.
Valuation
We believe consistency deserves a higher multiple and are raising our
price target to $5.00 (from $4.25). Our new target is based on 3x (up
from 2.5x) our 2014 revenue estimate.

 

Veeco Instruments SELL

VECO : NASDAQ : US$30.59
SELL 
Target: US$22.00

COMPANY DESCRIPTION:
Veeco Instruments manufactures process equipment and instrumentation for the LED, solar, data storage, wireless,
semiconductor and scientific research markets. Veeco’s manufacturing and engineering facilities are located in New York, New Jersey, California, Colorado, Arizona and Minnesota, and sales offices are found globally.

Investment highlights
 Our current rating is in-line with our bearish view that there is limited upside for both MOCVD equipment names.
 Now that the company is current we have seen the expected negative effect on Veeco’s margins due to price competition and lack of a bubble-type spending environment which we do not believe will be repeated. We do not envision that pricing will materially recover over the next investment cycle, continuing to weigh on margins.
 While we are bullish on the SSL secular trend, we believe expectations for both Veeco and AIXTRON are not in-line
with the new normal of a 200-400 annual tool market.
 We see some potential upside from Synos; however, this technology is still nascent and we harbor concerns about the increase in OPEX to support this and other new initiatives.
 We believe that fundamental downside exists in VECO shares, despite investor enthusiasm on the secular trend.
Given the risks of a slower MOCVD cycle and limited earnings power we would advise investors put money downstream for exposure to the LED macro.

Linkedin Target Price Raised to $270

LNKD : NASDAQ : US$247.14
BUY 
Target: US$270.00

COMPANY DESCRIPTION:
LinkedIn is the world’s largest professional network on the Internet with more than 200 million members in over 200
countries and territories. LinkedIn generates revenue through selling Hiring Solutions to corporations, Marketing Solutions to
Advertisers, and Premium Subscription to members and recruiters.
All amounts in US$ unless otherwise noted

SOLID Q3 RESULTS; CONSERVATIVE GUIDANCE
Summary
LinkedIn’s Q3 results were marked by continued strong execution, with revenue growth barely decelerating (from 59% last quarter to 56% this quarter, and strong delivery of revenue upside to the bottom line (EBITDA margin of 56% vs. our est. of 54%). Management issued somewhat muted growth guidance, citing tougher comps and greater Q4 traffic seasonality due to the rapid pace of product rollouts driving very high engagement and a tougher comp in Q4 2012.

With several positives on the horizon, including the continued ramp of Sales Solutions, China expansion, and continued operating leverage, we continue to like the stock despite its super-premium valuation.
Key Points
 Bullish: Member growth re-accelerated to 38% y/y as did Member page views, which grew 72% in Q3; marketing solutions revenue growth accelerated to 38.2% y/y, and this momentum should continue into 2014 as Sponsored Updates are fully rolled out.
 Bearish: Q4 revenue guidance of $415-420 million and EBITDA guidance of $98-100 million is below our estimates of
$448M/$112.4M and consensus of $438M/109.5M.
 Estimates Changes:

We are raising out-year estimates slightly to account for higher growth in all segments. Our EPS estimates for 2013/14/15 go to $1.69, $2.33 and $3.90 from $1.56, $2.32 and $3.88.
Valuation
We are raising our price target to $270 (up from $230) based on 60x our 2017 EPS estimate of $6.81, discounted to present at a rate of 11%. We recognize this is a premium valuation, which we believe is warranted by the company’s large opportunity and strong strategic position.