Sometimes, you must look under the hood to find out what brings together disparate stocks. What do an upwardly mobile tech company, a biotech that just held its IPO, and an aftermarket computer memory company have in common? Not too much, at first glance. But the analysts from Needham have spotted a common thread.
These are all value stocks. That is, they all show significant upside from their current price point. Needham’s analysts see them fitting a classic value profile: a low cost now, for a stock that is primed to make strong gains in the mid- to long-term.
We ran the three through TipRanks database to find out what makes each story compelling in its own way – and to find out why Needham sees 30% or more upside for all three.
Smart Global Holdings (SGH)
First up is Smart Global Holdings, a holding company whose subsidiaries inhabit the memory chip niche, manufacturing memory systems for desktop and laptop computers as well as smartphones. The company is involved in DRAM, Flash, and hybrid technologies, and grows through targeted acquisitions.
The most recent of those acquisition was of Cree, a manufacturer of LED chips and components. The merger, completed last week, was worth $300 million, and brings Cree’s product line into Smart’s portfolio.
SGH shows a divergence between share value and fiscal performance during the corona period. Revenues and earnings both gained in 1H20 – with modest growth at the top line and stronger growth in EPS – yet the shares have not regained traction since the mid-winter swoon. SGH stock is down 35% year-to-date.
And that’s the value proposition. The company is selling cheap, and its recent acquisition offers the prospect of new profits going forward, at least according to Needham analyst Rajvindra Gill.
“SGH has a history of acquisitions and with them comes a track record of improving gross margins for the acquired business units (a range of +400-570bps), and ultimately for the firm overall. The most recent acquisition should boost overall gross margins for SGH, in our view, considering the high starting point of the gross margin at Cree’s LED unit,” Gill noted.
Gill gives the stock a $39 price target, suggesting a 59% upside and supporting his Buy rating. (To watch Gill’s track record, click here)
The consensus view on SGH is a Strong Buy, based on 3 Buys and 1 Hold. Shares are selling for $24.56 and have an average price target of $36.25, indicating room for 47% upside growth in the next 12 months. (See SGH stock analysis on TipRanks)
Cerence, Inc. (CRNC)
Next on our list is Cerence, an AI development company with a strong presence in the automotive industry. Cerence is deeply involved in the creation of viable autonomous vehicle technology. The company’s tech builds the ‘brain’ of the system, letting the car learn from and respond to changing road and driving conditions, and putting together an interface to change the way drivers interact with their cars.
While truly autonomous cars are still years away, several of Cerence’s technologies are already becoming commonplace. Voice recognition, for example, is already a feature in some models’ driver interfaces, and Cerence boasts that its tech is found in over 325 million cars on the road today.
It’s a boast, but it’s reflected in both the share price and recent results. Cerence has showed stable revenues for the past four quarters, encompassing the ‘corona half’ that started this year. The top line held steady between $74 million and $86 million for the past year – and the highest and lowest values both came during the corona downturn. Earnings have shown a rising trend during this time.
The share price is also on a strongly positive trend. CRNC is up 180% this year – nearly quadrupling its price over that period. It’s an impressive performance from this mid-cap software tech company.
Analyst Rajvindra Gill, quoted above, is impressed enough to rate the stock a Buy along with an $82 price target. This figure implies a 30% upside from current levels. (To watch Gill’s track record, click here)
In his comments, Gill says, “We view Cerence as the top beneficiary of the integration of AI-based voice assistants and vehicles in the near future. Our top-down market analysis shows over 60% penetration of cloud voice-based technologies (excluding pre-payments and legacy connected) over the next 3-5 years. We believe Cerence is a market share leader in voice AI, which represents an excellent opportunity for top-line expansion. Market leadership, the most comprehensive in-car and in-cloud solution for vehicle OEMs, good revenue visibility, the ability to layer ASPs, and a 5-year management plan to greatly improve operations after its spin-off from Nuance Communications, combine to make Cerence’s shares attractive, in our view.”
Overall, CRNC shares get a Moderate Buy rating from the analyst consensus on Wall Street. The stock has 7 recent reviews, breaking down to 6 Buys and 1 Sell. The average price target here is $59.71, just below the current share price of $63.35. The stock’s recent appreciation has pushed it past the average target; the analysts will have to reevaluate their price targets here. (See CRNC stock analysis on TipRanks)
Graybug Vision (GRAY)
Last on Needham’s value list is Graybug, a biopharmaceutical firm conducting clinical-stage research on medications to treat chronic diseases of the retina and optic nerve. The company focuses on long-term treatments, with drugs to be administered no more than twice per year – and provide relief from vision loss due to age-related macular degeneration and diabetic macular edema.
Graybug’s IPO in September was notably successful; the company started trading at $16 per share, above the $15 originally planned, and sold almost 1 million more shares than first announced.
Biotech firms are famously mercurial as stock investments. They tend to run deep losses for long periods, as medical research is both expensive and impossible to short cut. The rewards, however, are real, as one popular drug, or a treatment that is perceived as essential, can bring in tremendous profits once it goes on the market. That’s the value Needham sees here.
Starting coverage on this stock for Needham is analyst Serge Belanger, who says of GRAY, “Anti-VEGF therapies generate ~$12B in WW sales as the standard of care for retinal diseases despite 40%-50% of patients experiencing inadequate responses and a treatment burden that impacts patient compliance. We believe [the company’s] GB-102 can disrupt the anti-VEGF market with a differentiated mechanism of action and longer-dosing intervals. Upcoming ph 2b trial data in 1H21 represent the most near-term value-driving catalyst.”
In line with his outlook, Belanger rates the stock a Buy. His $30 price target represents an impressive 96% upside potential for the year ahead. (To watch Belanger’s track record, click here)
Wall Street agrees that GRAY is a buying proposition. The stock has 6 recent reviews, and all are Buys, making the Strong Buy consensus rating unanimous. Shares are selling for $15.32, and the $32.50 average price target implies an upside of 115%. (See GRAY stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.