Ticker Reports for August 10th
It's Too Soon to Buy the Dip in Weight Loss Drugmakers
Obesity drugmakers like Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) were not immune to the broad market sell-off sparked by the June CPI report, but investors looking to get into these names should be cheering. The stocks are down 20% or more from their highs, offering big discounts and the opportunity for fat profits over the long term. The caution is that stock valuations are still high, so it may still be too early to buy the dip; lower prices may still come. The primary takeaway from the latest round of results is that the obesity drug market is young, small, and growing fast. However, most growth is priced into the market after the triple-digit rallies posted since 2022.
Obesity stocks are up 200% or more in the last twenty-four months because of the robust outlook for their growth. Morgan Stanley (NYSE: MS) estimates that 9% of the population will be on obesity drugs by 2030. Not only are they effective at treating obesity, but they are also gaining approval for new treatments regularly. Obesity drugs like Wegovy and Ozempic, made by Novo Nordisk, are approved to treat cardiovascular conditions and those at risk for weight-related heart attacks and stroke. According to Morgan Stanley, the growth outlook equates to a market value of $105 billion by 2030, about 1650% growth and a low-ball estimate. The bull case has this pharmaceutical market rising to $144 billion, nearly 660 basis points higher.
High Valuations Are A Concern for Eli Lilly and Novo Nordisk
Eli Lilly and Novo Nordisk are highly valued for pharmaceutical stocks trading above 50X and 30X their current year’s earnings. While the long-term outlook has them undervalued relative to the 2030 forecasts, below 20X earnings, it’ll be a few years until the valuations normalize, meaning much of the growth story is already priced into the market. With this in play, there is a risk that these stocks will become range-bound or even move lower before they set new highs again.
Dividends help to offset the valuation concern to a degree. NVO yields about 1.15% today, paying only 50% of its earnings and growing its distribution at a 15% CAGR over the last four years. LLY pays a lower yield, trading at a higher valuation, but it is equally safe at 45% of the earnings and growing at a 15% CAGR. Both are expected to continue rising at a substantial pace because of the earnings growth outlook and help lift the stock prices over time.
Novo Nordisk Falls On Reduced Guidance; Eli Lilly Reinvigorates the Market
Novo Nordisk’s guidance-induce price decline is an expected reaction to weaker-than-expected news. However, the real takeaway is that the company’s top-line growth accelerated to 25% on a 55% increase in Wegovy sales and a similarly substantial gain in Ozempic. The miss is a concern, but other factors are in play due to the unknown nature of the market than market weakness. The company’s sales are accelerating at a pace it's struggling to meet. The number of new patients is tracking at 35,000 per week and rising, suggesting that results will remain strong indefinitely, if below the optimistic analyst's consensus forecast.
Eli Lilly’s results reinvigorated the market, outperforming expectations and increasing guidance. This company makes Mounjaro and Zepbound for diabetes and weight loss; their sales grew 3X and 45%, respectively, helping to widen the margin with leverage. Mounjaro is already tracking at $3.1 billion in sales and will soon hit quadruple-blockbuster status; Zepbound has reached the blockbuster $1 billion threshold and surpassed it. Each of these drugs, including Wegovy and Ozempic, is expected to reach a range of $15 to $30 billion annually.
Analysts Favor Obesity Drug Makers
The trend analysts' sentiment is bullish for these stocks. They are rated with a consensus of Moderate Buy with uptrending consensus price targets, but the upside is limited. Eli Lilly trades near its consensus with only a 3% upside potential, and the high-end of the range aligns with the recent stock price highs, capping the market. Meanwhile, analysts have begun to trim targets for Novo Nordisk.
Turning to the charts, Eli Lilly looks like the better buy today. Both stocks have retreated to critical levels and show support, but the rebound in LLY is much stronger. LLY shows a trend-following entry signal, while NVO reveals potential for lower prices. It is still below the 30- and 150-day exponential moving averages, showing resistance and set-up to move sideways if not fall.
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Owens-Corning Stock: Good Value or Recession Red Flag?
A quarterly earnings beat hasn’t been enough to reverse the slide in Owens Corning (NYSE: OC) stock. In mid-morning trading the day after the maker of builder and construction materials delivered its second quarter earnings the stock is down just over 10% for the week.
Undoubtedly much of this is due to the sharp, market-wide sell-off to start the week. But is this a case of an oversold stock creating a buying opportunity or a red flag for an industry that is highly susceptible to recession pressures?
Why Revenue May Not Have Blown the Doors Off Expectations
Owens Corning delivered revenue of $2.79 billion. That missed analysts’ expectations of $2.92 billion. But it was higher than the $2.56 billion it reported in the same quarter in 2023.
However, this was the first quarter that Owens Corning realized revenue from its acquisition of Masonite, the manufacturer of “Doors That Do More.” Revenue from Doors accounted for net sales of $311 million. That’s statistically significant because without that revenue the company’s revenue would have been an even larger miss from analysts’ expectations as well aa a YOY miss.
On the one hand, this is like a pointless sports bar debate about what would have happened if something else hadn’t happened. The fact is the company did have those sales and that is likely to be a solid source of revenue and earnings moving forward. As confirmation of that, the company issued a forecast for net sales growth and EBITDA margin in the low 20-percent range for the coming quarter.
However, it’s also a data point that has to be looked at in context of the broader economy. Owens Corning is heavily reliant on a healthy market for new home construction as well as for remodeling activity.
Investors are Weighing the Company's Cautious Guidance
Looking forward, Owens Corning expects to see healthy demand for its non-discretionary items like roofing products and insulation in North America. However, it is projecting discretionary repair and remodeling activity (e.g. Doors) to remain soft in the near term.
This is similar to what investors have been hearing from other construction stocks this earnings season. That is, consumers are prioritizing must-have purchases (i.e. a leaky roof) over cosmetic remodels that they might otherwise do. Those concerns are being heightened when JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon spoke of the likelihood of a h
The Fundamentals Speak to Solid Value
Owens Corning continues to execute a capital allocation strategy that focuses on delivering value to shareholders. In the quarter, the company generated $336 million of free cash flow and returned $52 million of that to shareholders via its dividend.
The company also prioritized paying down the debt it took on as a result of the Masonite acquisition and ended the quarter with a debt-to-adjusted EBITDA ration of 2.2x1 which is at the low end of its target range of 2x to 3x.
And the company’s forward P/E ratio of 9.8x is significantly lower than the average of companies in the Construction Materials sector.
History Suggests That This is Buyable Dip
This isn’t the first time that OC stock has had a sharp sell-off in the last 12 months. For example, from September 1 to October 23, 2023, Owens Corning stock dropped approximately 24% from peak to trough. And in 2024 there have been three separate drops between 8% and 12%. In each case, the stock has recovered to make higher highs.
When it comes to technical analysis, it’s important not to talk in absolute terms. However, it’s also important to follow obvious patterns. In this case, the trend suggests that this could be a buyable dip in OC stock.
And analysts continue to be generally bullish on OC stock since the earnings report. The Owens Corning analyst ratings on MarketBeat have a Moderate Buy rating on the stock with a consensus price target of $184.23. However, The Royal Bank of Canada (NYSE: RY) raised its price target from $211 to $213.
If you’re looking to trade OC stock, be aware that short interest spiked 11% in the last month. While the percentage of the stock being shorted remains very low, a spike like that suggests that many traders will keep pressure on the stock. That's reflected in the Options Chain for OC stock which is showing significantly more interest in Put options as a hedge with strike prices at $170 and $175.
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Datadog Exceeds Q2 Expectations, Solidifies Market Leadership
Datadog (NASDAQ: DDOG) is a leading provider of observability and security solutions for cloud applications. Datadog’s earnings report for the second quarter of 2024 has once again impressed Datadog’s analyst community by demonstrating the company’s strong market position. Datadog’s financial results were driven by robust revenue growth and continued customer adoption. This positive performance propelled Datadog's stock price up over 5% in pre-market trading, indicating strong investor confidence in the company's future.
In the rapidly evolving technology sector, businesses across all industries require cloud computing and digital transformation initiatives. This shift necessitates observability and security solutions to ensure the performance, availability, and security of applications and infrastructure. Datadog addresses this critical need with its comprehensive platform that integrates and automates a wide range of capabilities, including infrastructure monitoring, application performance monitoring, log management, user experience monitoring, and cloud security. This unified approach has enabled Datadog to establish a solid presence in the market, serving a diverse customer base that includes organizations of all sizes across most sectors.
Datadog's Growth Across Key Metrics
Datadog reported revenue of $645 million for the second quarter of 2024, representing a 27% year-over-year increase. This growth was fueled by several factors, including a growing customer base, increased adoption of Datadog's multi-product platform, and success in attracting larger customers. The company's focus on delivering innovative solutions that address the evolving needs of its customers has been a key driver of its success. Datadog's ability to expand within its existing customer base is also evident in the growth of customers with an annual recurring revenue (ARR) of $100,000 or more. This metric increased by 13% year-over-year, reaching approximately 3,390 customers.
Datadog's profitability also improved in the second quarter. The company reported a GAAP operating income of $13 million, translating to a 2% operating margin. On a non-GAAP basis, operating income was $158 million, with a 24% operating margin. This improvement in profitability can be attributed to efficient cost management and increased operating leverage as Datadog scales its operations. Earnings per share (EPS) was $0.12 on a GAAP basis and $0.43 on a non-GAAP basis. These figures comfortably surpassed analyst consensus estimates, further contributing to the positive market reaction.
Datadog's strong financial performance was accompanied by healthy cash flow generation. Operating cash flow for the quarter was $164 million, while free cash flow reached $144 million. This robust cash flow and a strong balance sheet with $3.0 billion in cash and marketable securities provide Datadog with the financial flexibility to invest in future growth initiatives, pursue strategic acquisitions, and return value to shareholders.
Datadog: Driving Growth Through Innovation and Strategic Expansion
Datadog's commitment to innovation is evident in its continuous stream of new product launches and platform enhancements. During the second quarter, the company announced several key updates that further strengthened its platform and addressed customers' evolving needs.
The general availability of large language model (LLM) observability addresses the increasing adoption of LLMs and generative artificial intelligence (AI). This new offering provides AI application developers and machine learning engineers with tools to monitor, improve, and secure their LLM applications effectively. This is a strategic move by Datadog, as LLMs are rapidly transforming industries and creating new opportunities for observability solutions.
Datadog also launched Live Debugger, a tool that allows developers to identify and resolve coding errors in production environments more efficiently. This capability significantly enhances developer productivity and reduces the time required to troubleshoot application issues.
Furthermore, Datadog introduced Log Workspaces, a collaborative environment for data analysis. Log Workspaces empower teams to connect logs with other datasets and perform sophisticated analytics to gain deeper insights into their business, security, and application performance. This feature enhances collaboration and accelerates problem resolution across different teams within an organization.
Other notable product updates include Datadog On-Call, a modern on-call experience with enhanced incident management workflows; Kubernetes Autoscaling, which optimizes resource utilization in Kubernetes environments; and Data Jobs Monitoring, a product designed to help data platform teams detect and resolve issues with their data pipelines. These additions contribute to a more comprehensive and integrated platform, increasing Datadog's customer value proposition.
Beyond product innovation, Datadog is actively expanding its market reach. The company recently released its State of Cloud Costs 2024 report, providing valuable insights into cloud spending trends. The report highlights the increasing usage and cost of graphics processing unit (GPU) instances, signaling a significant growth opportunity for Datadog's observability and optimization solutions in this area.
Datadog also made key additions to its leadership team, appointing Yanbing Li as Chief Product Officer and David Galloreese as Chief People Officer. Li brings extensive experience in product, technology, and engineering, while Galloreese has a strong background in human resources from leading organizations. These strategic hires signify Datadog's commitment to attracting top talent and building a solid leadership team to support its continued growth.
Datadog's Financial Outlook and Investor Perspective
Datadog provided optimistic guidance for the remainder of 2024. The company expects third-quarter revenue to be between $660 million and $664 million, while full-year revenue is projected to be between $2.62 billion and $2.63 billion. These figures suggest continued growth, driven by ongoing demand for observability and cloud security solutions.
Analysts have generally expressed positive views on Datadog's performance and prospects. Many have maintained buy or outperform ratings on the stock, citing the company's strong execution, product innovation, and ample market opportunity. However, it is essential to note that the competitive landscape in the observability market is evolving, with new entrants and existing players vying for market share. Datadog's future success will depend on its ability to maintain its technological edge, expand its platform capabilities, and effectively compete in this dynamic market.
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