“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, August 20, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

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Option Trade – Marvell Technology Group Ltd. (NASDAQ:MRVL) Calls

Thursday, August 23, 2018

** OPTION TRADE: Buy the MRVL NOV 16 2018 21.000 CALL at approximately $1.10. Place a pre-determined sell at $2.20.

Also include a protective stop loss of $0.45.

Semiconductor stocks have been the subject of unpredictable volatility so far this year, but the underlying business of this industry is growing-and should continue that trend in 2018 and beyond. Throughout the chip-making space, companies have successfully adapted to the changing needs of the consumer, including an increased demand for small, high-powered chips that enable "Internet of Things" (IoT) devices.

As demand for the microchips that power these IoT devices continues to grow, semiconductor manufacturers with a focus on IoT products will continue to benefit. And 2018 promises to be another marquee year for these suppliers, with the number of connected devices worldwide set to continue its rapid growth.

One already-strong stock that is looking to benefit even more from further IoT growth in 2018 is Marvell Technology Group Ltd. (NASDAQ:MRVL).

Marvell Technology Group has just completed a $6 billion acquisition of smaller rival chipmaker Cavium. The purpose behind this purchase is to expand its wireless connectivity business in a rapidly consolidating semiconductor industry.

B.Riley FBR analyst Craig Ellis sees the deal having significant transformational potential. The diversification into data center networking as well as computer processing can accelerate growth and boost gross margins. This “will benefit the two primary historic drivers of sector valuation multiples — growth rate and GM percentage” cheers Ellis.

Ultimately: “As quarterly execution shows progress toward synergies goals in 2H18 and as MRVL returns to active share repurchase in 1H19, we believe shares can move toward our $30 PT with longer-term upside to the mid-to-high 30s.”

He reiterated his Buy rating on MRVL post-deal completion with a $30 price target (48% upside potential).

Wall Street analysts now have a favorable view of Marvell's business.

Moving Forward…..

Marvell Technology Group last issued its quarterly earnings data on Thursday, May 31st. The semiconductor company reported $0.32 EPS for the quarter, topping analysts’ consensus estimates of $0.31 by $0.01. The company had revenue of $604.63 million during the quarter, compared to the consensus estimate of $601.85 million. Marvell Technology Group had a net margin of 22.24% and a return on equity of 13.84%. Marvell Technology Group’s revenue for the quarter was up 5.6% compared to the same quarter last year. During the same quarter in the previous year, the firm posted $0.24 earnings per share.

The next earnings report will be on September 06. Analysts forecast that Marvell Technology Group will post 1.19 EPS for the current fiscal year. Also, brokerages expect Marvell Technology Group to report an EPS of $0.29 on $615.45 million in sales for the current quarter. 

Influencing Factors…..

Marvell gets just over half of its revenue by supplying storage controllers for hard-disk drives (HDDs) and solid-state drives (SSDs), as well as data center storage. Demand for storage products such as SSDs is increasing at a terrific pace as the data boom continues. In the future, data centers will need to read/write data at faster speeds so that they can process the huge amount of information to power applications such as self-driving cars.

The company recently launched a new SSD controller that's capable of enabling future generations of SSDs, including the QLC architecture that's hitting the market now. Marvell counts Micron as a customer, so it won't be surprising if the latter's rapid rise in the SSD market rubs off positively on its supplier.

Connected cars are expected to take off rapidly in the near future. Counterpoint Research estimates that more than 125 million cars with embedded connectivity will be sold over the next five years.

This is too big a market for Marvell to pass up, so the company is busy building a wide portfolio of connectivity chips that target fast-growing automotive applications such as infotainment. Marvell's latest automotive connectivity product is equipped with Wi-Fi and Bluetooth options that allow two independent multimedia streams of data to run at the same time without compromising bandwidth.

The company's connectivity business, which supplied 15% of total revenue last quarter, shot up 19% year over year thanks to its growing traction in the automotive business. Meanwhile, Marvell's second-largest revenue contributor -- the networking business -- could also take off as chip giant NVIDIA has decided to use Marvell's automotive Ethernet switch in the Pegasus self-driving car platform.

Analysts and Hedge Funds Opinions

Marvell Technology Group has received an average rating of “Buy” from the twenty-nine ratings firms that are covering the company. One research analyst has rated the stock with a sell rating, five have issued a hold rating and twenty-two have given a buy rating to the company. The average 12-month target price among brokerages that have issued a report on the stock in the last year is $28.02.

Several equities analysts have recently commented on the company…..

  • Zacks Investment Research upgraded Marvell Technology Group from a “hold” rating to a “buy” rating and set a $25.00 price target on the stock in a report on Tuesday, June 5th.
  • UBS Group lowered their price target on Marvell Technology Group from $38.00 to $33.00 and set a “buy” rating on the stock in a report on Friday, July 6th.
  • TheStreet upgraded Marvell Technology Group from a “c+” rating to a “b-” rating in a report on Monday, April 16th.
  • Argus restated a “buy” rating and issued a $28.00 price target on shares of Marvell Technology Group in a report on Friday, June 29th.
  • Finally, Evercore ISI started coverage on Marvell Technology Group in a report on Tuesday, June 26th. They issued an “outperform” rating and a $27.00 price target on the stock.

Summary

Marvell is pulling the right strings by targeting fast-growing niches. So it isn't surprising that analysts expect its earnings to increase at a compound annual growth rate of nearly 13% for the next five years. By comparison, the chipmaker has seen almost negligible earnings growth in the past half-decade.

Marvell's valuation at 14 times forward earnings is significantly lower than the 25.3 industry average. And with a valuation significantly lower than its five-year average price-to-earnings ratio of nearly 33, now could be a really good time to get into the stock.

Marvell Technology Group has a market capitalization of $9.95 billion, a P/E ratio of 19.65, a price-to-earnings-growth ratio of 1.46 and a beta of 0.98. Marvell Technology Group has a 52 week low of $15.67 and a 52 week high of $25.18.


Option Trade – World Wrestling Entertainment, Inc. (NYSE: WWE) Call

 Tuesday, August 21, 2018

** OPTION TRADE: Buy the WWE OCT 19 2018 85.000 CALL at approximately $2.90. Place a pre-determined sell at $5.80.

Also include a protective stop loss of $1.15.

World Wrestling Entertainment, Inc. (NYSE: WWE) has been charging higher thanks to two new TV deals with Comcast subsidiary NBCUniversal and Twenty-First Century Fox.

Investors received good news last month when World Wrestling Entertainment reported better-than-expected revenue numbers and raised its full-year guidance following a pair of game-changing new TV contracts in the second quarter. Even with WWE stock up 287 percent in the past year, analysts still see plenty of reasons for long-term investors to like the stock.

WWE reported second-quarter diluted earnings per share of 11 cents, missing consensus estimates of 16 cents. However, revenue of $281.6 million was up 31 percent from a year ago and far exceeded analyst expectations of $239.5 million.

In addition, the WWE Network paid subscriber count was up 10 percent in the quarter to 1.8 million, in-line with the company’s previous guidance. WWE also reported a 58 percent increase in digital video views compared to a year ago. Digital content hours consumed rose 71 percent to 509 million hours.

“We’re pleased with our continued success in increasing the monetization of WWE content globally,” CEO Vince McMahon says in a statement.

KeyBanc increased its price target on the stock from $85 to $104 and raised its 2018 top-line estimate.

The results and outlook were heavy on growth from all fronts - OTT, core content rights fees, sponsorship, and consumer products - particularly internationally,” analysts Andy Hargreaves, Tyler Parker and Evan Wingren wrote in a note. “With all core components of its integrated, high incremental margin growth strategy seemingly inflecting over the next 2 years, we believe it can fuel the flywheel and all WWE to step on the gas.”

The analysts attributed the revenue beat to the performance of the Greatest Royal Rumble and increased monetization of media content. They anticipate accelerating growth, expanding margins and long-term opportunities.

Moving Forward…..

The stock has almost tripled in 2018 with virtually zero pauses. Recently, however, there has been some sideways price action. The past month of consolidation has created a few resistance levels to trade off as WWE stock starts to climb again.

The first zone worth watching this week is $81.50. A pop above $81.50 could send WWE back to its recent highs of $86. While it may need some further pausing before resistance gives way, the breakout should be trade worthy.

Influencing Factors…..

The company just reached a new distribution deal with Fox Sports that is worth almost four times its previous agreement with NBCUniversal. The new partnership will give WWE its largest exposure yet, and it shows that management is having no trouble monetizing its deep portfolio of wrestling entertainment content.

The company is also finding success in marketing its direct-to-consumer streaming services. It boosted paying subscribers to 1.8 million in the most recent quarter, for a 10% increase from the prior year. That success helped power a significant improvement in profitability, as operating margin jumped to 8% from 5%.

WWE is seeing far higher user engagement these days, with fans consuming 509 million hours of its programming over the last six months, a 71% uptick from last year. While some of those gains came from free services like social-media platforms, WWE's paid platform is growing too, which should give the company plenty of room to raise prices in the future. Combine that prospect with the company's higher distribution income from its Fox deal, set to lift results beginning in 2019, and investors have many reasons to be optimistic about this business today.

WWE’s has seen its valuation jump which also reflects fundamental improvements in WWE's business, which is translating into higher profitability and strong sales growth in attractive markets. If these powerful trends continue, shareholders could see additional market-beating gains ahead.

Looking ahead…..

Looking ahead, WWE once again raised its guidance for full-year adjusted OIBDA from $150 million to a new range of between $160 million and $170 million. The company also says it expects an average paid WWE Network subscriber count of 1.67 million in the third quarter. WWE projects adjusted OIBDA of between $30 million and $34 million in the third quarter and “meaningful revenue growth” in the fourth quarter of 2018.

Morgan Stanley analyst Benjamin Swinburne says the new TV deals set the stage for major long-term earnings and free cash flow growth for WWE.

Analysts.....

World Wrestling Entertainment had its price target boosted by Morgan Stanley from $100.00 to $105.00 in a research report issued to clients and investors on Friday, July 27th. The brokerage currently has an “overweight” rating on the stock. Morgan Stanley’s target price suggests a potential upside of 30.66% from the company’s current price.

Several other equities analysts have recently commented on the company…..

  • Wells Fargo & Co raised their price objective on shares of World Wrestling Entertainment to $97.00 and gave the stock an “outperform” rating in a report on Friday, July 27th.
  • Needham & Company LLC raised their price objective on shares of World Wrestling Entertainment from $80.00 to $100.00 and gave the stock a “buy” rating in a report on Tuesday, July 24th.
  • JPMorgan Chase & Co. raised their target price on shares of World Wrestling Entertainment from $77.00 to $84.00 and gave the stock a “hold” rating in a research report on Friday, July 27th.
  • Zacks Investment Research upgraded shares of World Wrestling Entertainment from a “hold” rating to a “buy” rating and set an $84.00 target price on the stock in a research report on Monday, July 16th.
  • Finally, BTIG Research raised their target price on shares of World Wrestling Entertainment from $75.00 to $92.00 and gave the stock a “buy” rating in a research report on Friday, July 6th.

Based on 9 analyst ratings, the analyst consensus is Strong Buy with an average price target of $93.44.

Summary

WWE has a quick ratio of 1.31, a current ratio of 1.34 and a debt-to-equity ratio of 0.10. World Wrestling Entertainment has a twelve month low of $20.62 and a twelve month high of $85.93. The stock has a market cap of $6.19 billion, a price-to-earnings ratio of 123.63 and a beta of 1.04.






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