Tuesday, January 22, 2013

Finisar (NASDAQ:FNSR): Overblown Fears on “Silicon Photonics” Misconstrue Technical Merits and Market Segmentation—Reiterating Buy

Following the scathing downgrade from Jefferies on Friday Finisar (NASDAQ:FNSR) is getting some supportive comments from Needham's Networking team.

- Overreaction to “Silicon Photonics” fears—they think hype and innuendo drive fears more than technical merits do.

It appears that Silicon Photonics advances from Intel are being used to imply co’s CPAK is a threat to Finisar. Needham strongly disagrees.
They do not see CPAK as superior to Finisar’s current or future technology. Firm points out that Intel’s technology is applicable to very short PCI Bus architectures and has tightly constrained distance limitations. The physical limitations of silicon, lasers and composite chips limit Intel’s design to very short distances for connectivity within a single rack where optics are not used. It is replacing copper in a rack, and is not replacing any Finisar offerings.

Cisco’s CPAK CMOS technology cannot scale down—as monolithic designs are shipped they believe Finisar can deliver lower power, tighter density and lower costs than CPAK. First generation CPF LR4 100G devices are not yet monolithic. As the more integrated versions ship, Needham expects them to easily surpass Cisco’s CPAK CMOS Silicon Photonics offerings even before they ship. This is simply not a threat to Finisar, in firm's opinion.

Reiterate Buy—Silicon Photonics not a threat. FUD (fear, uncertainty, doubt) is a problem and the technology is difficult to explain, but it won’t impact revenues and profits, Needham says. Reiterates their Buy rating and $18 price target.

Notablecalls: Just a FYI. Now pick your side.

Friday, January 18, 2013

Finisar (NASDAQ:FNSR): Actionable Call Alert!

Jefferies & Co analyst James Kisner is making a major negative call on Finisar (NASDAQ:FNSR) downgrading the optical module maker to Underperform from Hold with a Street low $7.50 price target (prev. $14.00).

- Checks with Intel suggest the they can now build 100G transceivers at “high volume” and with a “good yield”. Bad news for Finisar.

Investor Summary: Jeffco's checks and a recent public announcement from Intel suggest that the ultimate commercialization of highly deflationary silicon photonics technology in data centers is likely no longer in doubt – bad news for manufacturers of “traditional” MSA-based, manually assembled optical transceivers for the data center such as Finisar. They believe current Street expectations for Finisar in FY14 and FY15 are likely too high as they likely do not contemplate the impact of silicon photonics-based products on the 100G CFP market, of which Finisar may have as much as an 80% share. The business currently trades at 18x firm's new CY14 EPS estimate of $0.95, a premium to industry peer JDSU (which trades at ~14x CY14). Firm arrives at their new $7.50 target price (down from $14.00 previously) by applying an 8x P/E multiple to our CY14 EPS estimate – reasonable in their opinion given Finisar’s relatively lower medium-term growth profile. (They now expect revenue growth in the low to mid-single digits over the medium- to long-term.)

* Cisco and Others Are More Significant Near-Term Threat. While Jeffco suspects it will be a while before we see optical transceivers from Intel, their checks suggest a number of players, including Cisco, are likely to launch silicon photonics-based transceivers for 100G applications in the data center in 2013 and 2014.

* Finisar may now have as much as an 80% share of the 100G CFP market, and Jeffco estimates that 100G CFPs represent around 10% of Finisar’s business today. However, they would note that: 1) CFPs are currently among the highest margin, fastest growing products in Finisar’s Datacom Portfolio; 2) Conversations with industry contacts suggest that silicon photonics technology can scale to higher speeds (400Gbps and beyond) relatively easily – thus the broad adoption of silicon photonics technology puts the long-term growth prospects of Finisar’s datacom business in jeopardy.

* Acknowledge a Lot of Unknowns
Kisner acknowledges there remains significant uncertainty around timing, pricing, and breadth of customer adoption of silicon photonics technology. He also admits there may be lack visibility into various ways Finisar might participate in the deployment of this technology (including potential acquisitions). Nonetheless, on balance, he believes that the threat of silicon photonics is now tangible and skews the risk/reward offered by Finisar shares to the downside.

Notablecalls: This is a big fundamental call that will serve as a overhang for the foreseeable future. Having Intel and Cisco as competitors (with better tech!) simply can't be good. A structural problem that's not going to go away.

Kisner's no stranger to making big negative calls in the space. He downgraded Finisar back in Feb after Cisco announced the $300 mln Lightwire deal sending the stock down ~50% over the next 4-5 months.

With Kisner saying competition is now on the doorstep and slashing his estimates and target way below Consensus, this is going to generate ample fear and selling interest. Don't get me wrong - every FNSR watcher out there has been aware of the looming competition for quite a while but Kisner says it's coming earlier than many expected.

All in all, I suspect FNSR will be down 10%+ today and trade toward recent lows in the coming months. Don't chase it too low, let it come to you.

Actionable Call Alert!

Friday, January 11, 2013

Dendreon (NASDAQ:DNDN): Provenge Doesn't Seem to Be Fading; Could DNDN Be One of 2013's Best Performers? - Porges

Bernstein's uber analyst Geoffrey Porges is making a big biotech call upgrading Dendreon (NASDAQ:DNDN) to Outperform from Market Perform with a $10 target (prev. $7).

- Porges now convinced Provenge is not dead; Raises his estimates significantly; Sees $1+ EPS power by 2016 yielding significant upside for the stock.

The basis for his upgrade is the feedback he and his firm received from urologists in recent months as part of Bernstein's ongoing monitoring of the adoption of Medivation's Xtandi and its positioning against JNJ's Zytiga. That feedback, particularly from community urologists, convinces them that Provenge is not going to disappear, and in fact is more likely to return to modest but steady growth once the turbulence in the market (and the company) stabilizes. When the market (and industry observers) realizes that this is occurring, Porges expects the stock to offer significant upside given current low expectations.

Dendreon has been one of the worst performing stocks in biotech for the past two years, languishing between $4 and $5.50 since mid 2012 compared to prior highs of $40 to $45 in 2011. The last 18 months have seen the progressive disaster of poor forecasting, reimbursement challenges, slowing revenue growth, insider selling, excessive cash burn, shareholder class action suits, changes in management and board membership and finally restructuring. Most traditional healthcare and biotech investors have abandoned the company, and the stock now reflects a significant probability of extinction, in Bernstein's view. Investors have endorsed the dogma that the firm outlined in their coverage initiation a year and a half ago, which suggested that new prostate cancer drugs such as Zytiga and Xtandi will crowd out Provenge and gradually reduce its revenue opportunity, such that Dendreon fails to ever achieve sustained profitability.

- To explore the impact of these competing drugs, and how perceptions of Provenge are evolving, Bernstein recently conducted a series of one-on-one detailed phone interviews with urologists who are current users of Provenge – their thesis was that if Provenge is going to disappear, current users should be reducing their patient numbers now, or expecting to in the future.

When they contacted urologists with significant experience with Provenge, the firm found the opposite of these bleak expectations. The busiest urologist Provenge prescribers have been increasing their use, and recruiting colleagues and peers to use the product as well. These high volume users acknowledge some hiccoughs, but are adamant that they will recommend the drug to a significant and growing minority of advanced PC patients. Not only do they not expect any reduction in the frequency of use, but instead expect a 10-20% increase in the frequency of use in 2013, compared to 2012, and a further increase in 2014. These findings differ from Bernstein's prior research and other opinions about Provenge because they come from current users of Provenge; however, they are consistent with Dendreon's own comments and information (+15-25% sequential growth in urologists' use) from the last three quarterly conference calls.

- Based on these findings they are increasing their revenue forecast for Provenge; They  now forecast peak revenue for Dendreon of $799mm by 2017, compared to $580mm previously with a significant contribution from ex US markets.

- They expect the company's cash expenses to now match revenue by mid 2013, and for the company to report full year positive earnings in 2014. Firm's adjusted EPS estimates are now for pro forma earnings of $0.17 in 2014, then $0.54 in 2015 and $1.14 in 2016. These are all significantly higher than recent consensus;

This call is consistent with Bernstein's more cautious stance about the higher quality mid cap biotech stocks toward the end of 2012. Porges believes there may be more opportunity in the disliked "out of favor" names (of which Dendreon is the poster child) than in chasing new highs for the recent sector leaders.

Given the cost and complexity of Provenge, Porges thinks Dendreon is unlikely to be a free standing company long term.

Notablecalls: There are several reasons why this is a big call and likely to have significant positive impact on the stock:

1) Porges is the probably the most respected analyst in the space; He is the Axe.

2) Dendreon has been left for dead by almost everyone except some die hard cult followers; Short interest stands at 30%.

3) Porges is now saying outright Provenge is going to survive and even thrive; His estimates are now way above Consensus.

4) EPS power of $1+ in '16 will yield in a $20-25/share stock = huge upside.

5) Porges is making a very sensible bet saying out-of-fav names are going to be the place to be in 2013. DNDN is the prime candidate.

6) This call is a huge surprise. I bet there are analysts out there today telling their associates to get on the effin phone and start talking to docs. If the feedback they are going to get is anything similar to what Porges recieved there are going to be more upgrades.

All in all, this call is likely to take the stock above $6/share today and toward $7 in a few weeks.

Tuesday, January 08, 2013

Fusion-io, Inc (NYSE:FIO): Jason Ader downgrades..

William Blair's uber analyst Jason Ader is downgrading Fusion-io, Inc (NYSE:FIO) to Market Perform from Outperform this morning.

- Checks reveal weaker than expected performance and increasing competitive threat from Intel.

Ader is downgrading the shares of FIO from Outperform to Market Perform, based on his belief that Street consensus estimates for the second half of fiscal 2013 (March and June quarters) calling for year‐over‐year growth of 46% are aggressive. His checks point to slower‐than‐expected bookings, specifically on the enterprise side of the business (both for PCIe cards and standalone software), leading him to believe that the company will struggle to meet expectations for the full fiscal year.

Ader notes they continue to strongly believe that enterprise flash is at an inflection point, but demand for server‐attached PCIe cards appears to be developing more slowly than he expected, though he is still expecting FIO to grow its enterprise sales by 53% (down from his previous estimate of 66%) in fiscal 2013 (June). The analyst notes he is struggling to point his finger at why demand has slowed in recent months, but it is evident that macro pressures affecting the larger storage market are impacting the PCIe segment, resulting in less low‐hanging fruit being available. In addition, his checks suggest that Fusion’s software offerings (ioTurbine and ION) and recent OEM partnerships (with Cisco [CSCO $20.29; Market Perform] and NetApp [NTAP $33.24; Market Perform]), both of which he has viewed as key growth catalysts in fiscal 2013, are developing more slowly than he initially anticipated. Lastly, Ader believes that new emerging architectures such as all‐flash arrays may be causing customers to pause as they evaluate alternative approaches to flash and educate themselves on newer offerings.

From a competitive standpoint, while William Blair has not picked a material change in the PCIe flash landscape, firm's checks indicate that Intel (INTC $21.25) is gaining steam with its recently introduced Ramsdale 910 series PCIe card. The 910 is substantially less expensive (30‐40% cheaper by some accounts) than Fusion’s ioDrive 2 product line, and according to their sources performs better than Fusion in write‐intensive environments. They believe Fusion may soon introduce a lower‐priced PCIe card that will be more competitive with the Intel card, but their fear is that this new card could cannibalize ioDrive sales.

Notablecalls: This is a big call from Ader. He is pretty much calling Fusion-io the next Mellanox (MLNX) with the exception Intel is already here with a competing product. What's even worse Intel's Ramsdale 910 series PCIe card is 30-40% cheaper while performing better than Fusion-io's comparable offering. That's going to weigh on margins sooner or later.

We had the perma bulls from Credit Suisse out yesterday touting FIO's ioTurbine software as the main competitive edge. Here's what Ader has to say:

'ioTurbine failing to meet growth expectations. Our checks indicate that FIO’s ioTurbine software designed to accelerate virtualized workloads is ramping more slowly than expected'

Ader is the Axe in the networking and storage space with his calls moving smaller names such as FIO by as much as 6-10%. He is lowering his '13 and '14 estimates below Street. FIO trades 40x '14 EPS.

Below $20 today and toward recent $17.50 lows in a few weeks? I would expect to see continued selling pressure in the name throughout the day.

(Note Ader is also downgrading EMC (NYSE:EMC) this morning)

Monday, January 07, 2013

Cree Inc. (NASDAQ:CREE): Business model shifting; downgrade to Hold - Canccord

Canaccord's Jonathan Dorsheimer is making a very interesting call this morning downgrading Cree Inc. (NASDAQ:CREE) to Hold from Buy with a $32 price target (prev. $38)

- Dorsheimer believes that their thesis of GM expansion from the transition of legacy components to SC3 has largely played out and is reflected in the stock. He thinks Cree’s next phase of growth will be driven by its lighting systems business, not components, which may limit further GM expansion.

Canaccord is downgrading CREE shares on expectations of a slowing rate of GM expansion and lowering their estimates to reflect a more lighting systems-centric business model, which they do not feel is reflected in treet expectations.

With roughly 50% of components comprising SC3 technology, the firm believes the low-hanging fruit of the GM expansion story has been achieved.

They view the CREE story evolving to lighting from components, as evidenced by CREE’s 8-K on December 4, 2012, regarding CEO Chuck Swoboda’s compensation, which is now weighted more toward performance of the lighting segment.

Canaccord sees CREE entering a period of “investment” in order to stimulate the market and capture share, a strategy they agree with over the medium to long term. However, in the near term they feel this may lead to investor frustration, and with a softer demand environment it creates risk to the December and March quarters.

If this was just a seasonality call and a miss on the quarter they would not downgrade the stock, Canaccord notes. However, they see the business model shifting and would prefer a more attractive entry point before recommending the shares during this transition.

Canccord is lowering their price target to $32 from $38 previously, based off of a 15x multiple to their newly introduced C2014 EPS estimate plus cash per share. They have lowered their estimates to reflect lower component growth offset slightly by higher lighting systems growth. Within the segments the firm has tempered their expectations for GM expansion in components, but increased slightly GM assumptions for the lighting systems business.

Notablecalls: Dorsheimer seems to be making a solid out-of-consensus call here. Period of "investment" is probably not what the current holders want to see right now. Lighting systems carry a 30% GM vs. 40% for components.

He is the kind of analyst that is not afraid to make big negative calls and this qualifies as one. He whacked GT Advanced Tech (GTAT) back in Sept.

Dorsheimer is lowering his '13 estimates below consensus and price target below current market price to prove his point.

All in all, this looks like a call that could turn even some long-term holders into sellers. Especially after the stocks' recent strong performance.

I'm guessing below $33/share today and toward $30 level in the coming weeks.

Friday, January 04, 2013

Lululemon Athletica (NASDAQ:LULU): Slowing comps and discounts; Downgrade to Neutral - Credit Suisse

Credit Suisse is downgrading Lululemon Athletica (NASDAQ:LULU) to Neutral from Outperform this morning while lowering their target price to $80 (prev. $86).

- With slowing comp momentum likely and further merchandise margin pressure a distinct risk, they believe the shares are range bound.

Signs of Slowing Momentum in Mature Markets Gives Pause. LULU’s mature store (59% of stores) comp momentum has slowed in Canada over the past several quarters. Credit Suisse believes 3Q12’s low-single-digit comp highlights LULU’s challenges in driving incremental sales in these highly productive mature stores (Canada stores doing ~$3,000/sq ft vs. U.S’s ~$2,000.) With this recent deceleration, their prior thesis for sustained doubledigit comps is at risk, as it was predicated on mature stores comping high single digits.

Elevated Discounting In Stores and On Line, Re-Pricing High Ticket Items
CSFB's analysis of over 2,500 lululemon SKUs offered on the company’s eCommerce site highlights a significant increase in discounted apparel at the end of December. As of December 28, close to 20% of apparel was on sale, compared to 8% in mid- December and average of 10% since the beginning of June. Additionally, the average markdown on sale apparel increased to 38% at the end of December, up from an average of 30% since June. This coincides with what the firm sees in stores, with additional racks of sale merchandise brought onto floors. According to CSFB, this indicates that new and winter product lines have stretched outside of the company’s comfort zone, resulting in re-pricing actions, broader discounting, and higher markdown levels than they have historically seen.

With Additional Focus on Activewear, Increased Long-Term Risk to LULU’s Competitive Positioning and Pricing Power. Credit Suisse believes LULU brand and product positioning has fended off competition due to 1) casual luxury positioning; 2) cross-sports appeal; and 3) brand authenticity. However, CSFB sees long-term risks to its competitive positioning and pricing power as activewear gains shelf space across retail channels (particularly premium department stores) and competitive vendors adjust offerings to compete with lululemon at lower price points.

Adjusting Estimates and Lowering Target Price. Reflecting their  more conservative model for mature store sales, firm's 2013 comps, sales, and EPS estimates are 9.7%, $1.73B, and $2.29 from 12.5%, $1.76B, and $2.40. CSFB's new target price of $80 (from $86 previously) is an equal-weighted average of: 1) comparable multiples ($80); 2) a DCF analysis ($84); and 3) long-term growth scenario ($75).

Notablecalls: Higher than usual discounts is the biggest takeaway from this CSFB call in the short term. It could imply at least two things:

- Consumers unwilling to pay the 25-50% premium for LULU stuff as the hype is starting to subside.

- GPS' Athleta brand with its significantly lower price points starting to take its toll on LULU.

People have been wondering about the discounts over the past week or so and the CSFB comments seem to confirm their worries. Selling 90%+ of their product at full price is still very good but what if it's just the beginning of a trend?

With the stock trading around 30x EPS, this is probably not what investors want to see.

I'm guessing there will be ample selling pressure in the n-t. Thinking $72/share or lower today and possibly below $70 in couple of weeks.