There’s really no use denying the headwinds that are pushing the markets around these days. Persistently high inflation, slowing GDP growth, and a jobs market that, while expanding in absolute terms, is still down from pre-pandemic levels are feeding fears that we’re facing a round of ‘70’s-style stagflation. And these have combined with geopolitical factors – the Russia-Ukraine war, the resumption of severe lockdown policies in China – to ratchet up worries about recession in the near term.
At the same time, there are reasons for hope. Oppenheimer’s chief investment strategist John Stoltzfus points those out, starting with the 1Q22 earnings release season. Stoltzfus reminds us that, as of last week, 87% of the S&P-listed firms have releases their Q1 data, and that 77% of them have surprised to the upside. Overall, earnings are up nearly 8% year-over-year, and revenues are up 14.2%.
Looking ahead, Stoltzfus paints a picture for investors willing to look at the bright side of life. He writes of the path forward, “Over the course of this quarter we’d expect economic data and corporate news to persist in providing enough positive offsets to negative news as efforts by the Federal Reserve, the business community and the consumer to navigate the challenges at hand succeed in climbing the current proverbial wall of worry.”
Navigating the challenges ahead is the chief task for every investor, from the smallest retail trader to the largest hedge fund manager. And to give a head start on that task, Oppenheimer’s equity analysts have picked out two stocks that may have bottomed out after losing heavily in the first part of the year.
We’ve taken the details on both from the TipRanks database, and we’ll present it now, with commentary from some of Oppenheimer’s best stock pros.
RingCentral (RNG)
We’re starting with RingCentral, a communications-as-a-service software company specializing in bringing business communications solutions to the modern office. The company’s products include phone lines and extensions, video calling, screen sharing, and call forwarding, all offered through the cloud and compatible with Google Docs, Outlook, and Salesforce. RingCentral’s computerized telecom can accessed through desktop systems and mobile devices.
As can be imagined, RingCentral’s business saw gains during the corona crisis. With work-from-home expanding, business communications were at a premium – and that’s reflected in RingCentral’s top line, which has grown sequentially every quarter for over two years now.
In the most recent quarter reported, 1Q22, the company’s financial results beat the high-end guidance on all key metrics. Revenue was up 33% year-over-year to reach $468 million, driven by a 35% y/y increase in subscription revenue, which made up $440 million of the total. The company’s annualized recurring revenue came to $1.9 billion, also up 35% y/y.
On a non-GAAP basis, EPS grew from 27 cents in the year-ago quarter to 39 cents in the current period. The company finished Q1 with $302 million in cash and liquid assets available, up 11.5% from the $267 million on hand at the end of 1Q21.
Despite the solid earnings report, RNG shares are down 75% over the past year. Even though RingCentral has a sound business model, the company is facing increased competition from major market names like Microsoft and Cisco, and from niche competitors like Zoom. In addition, RingCentral has seen some churn in upper management recently, and earlier this week announced a new CFO, Sonalee Parekh, and a new President and COO, Mo Katibeh.
Even with these pressures on the company, Oppenheimer’s 5-star analyst Timothy Horan writes of RNG: “The most important takeaways for the quarter is that its high quality service and features are enabling stable pricing/ARPU across the board, it is growing Teams uses very well at 500% YOY, it has 500K partner seats, and this growth is accelerating, while the company emphasizes a renewed focus on profitability.”
At the bottom line, Horan says, “RingCentral should be a beneficiary of our very optimistic outlook on the overall cloud communications sector, which we predict (in a 50-page white paper) will grow fourfold to $100B within six years… The company has the highest quality service in the industry with the best go to market strategy as it has many of the incumbent PBX providers and telcos as partners.”
Based on all of the above, Horan upgraded RNG from Perform (i.e. Neutral) to Outperform (i.e. Buy) and introduced a price target of $100. This would reflect gains of ~45% should the stock ultimately reach this target. (To watch Horan’s track record, click here)
If there’s one certainty in the markets, it’s that tech firms like RingCentral will get plenty of attention from the analysts. RNG shares have 24 recent reviews, breaking down 22 to 2 in favor of Buys over Holds to back the Strong Buy consensus rating. The stock is selling for $68.49 and its $142.57 average price target implies ~100% upside from that level. (See RNG stock forecast on TipRanks)
SVB Financial Group (SIVB)
And now we’ll turn to the California-based Silicon Valley Bank, or SVB Financial Group. This is a commercial bank focused on high-tech venture capital, and has provided funding for over 30,000 startups in the last 40 years. As of the end of 1Q22, SVB boasts $397 billion in total client funds, $220 billion in bank assets, and $69 billion in total loans.
In April, SVB released its 1Q22 results, and beat the forecasts on both revenues and earnings. The top line, at $1.61 billion, came in 12% above estimates, and was up 14% year-over-year. At the bottom line, the diluted EPS of $7.92, while down from $10.03 in the year-ago quarter, beat the forecast of $5.60 by an impressive 41%.
Even though this bank has been reporting strong profits and beating the analyst forecasts, the shares are down 38% from the peak they hit in November of last year. It’s important to note that SVB has a high exposure to the tech sector, and that high tech stocks generally have come under heavy pressure over the past 6 months.
Despite the banks current share price weakness, Chris Kotowski, another of Oppenheimer’s 5-star analysts, believes “investors should take advantage of this weakness.” and he upgrades SIVB from Perform (i.e. Neutral) to Outperform (i.e. Buy). Kotowski also sets a $702 price target on this stock, suggesting a 50% upside potential. (To watch Kotowski’s track record, click here)
Backing his bullish stance, Kotowski writes: “Following recently announced 1Q22 results, we raised our 2023 EPS estimate from $38.94 to $46.75. In addition to the strong underlying growth, SIVB is very asset sensitive and should benefit significantly from rising rates as its business model generates a lot of demand deposits. Depending on what timeframe one looks at, SIVB has historically traded between a 90% and 117% relative P/E to the market, and our price target is based on a 90% relative P/E.”
Silicon Valley denizens can usually count on plenty of attention from the Street, and this bank is no exception. There are 19 recent analyst reviews here, including 16 to Buy and 3 to Hold for a Strong Buy consensus view. The average price target of $721.76 is slightly more bullish than the Oppenheimer view, and implies ~54% upside from the current share price of $469.03. (See SVB stock forecast 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.
