What will it take to fuel a stock market recovery? More stimulus. According to Morgan Stanley’s chief U.S. equity strategist Mike Wilson, the passage of another stimulus bill in the near-term is a “critical” component of the market’s recovery. Once the bill, which might reach $2 trillion, is passed, he argues the fiscal package will spur an increase in back-end interest rates, igniting a move to cyclical names.
“The fiscal package ironically could actually stimulate the perception that the economy will be better next year, rates shoot up, and that will affect that rotation back towards these COVID beneficiaries in the recovery stage, the cyclical type stocks that we've been recommending,” Wilson commented. The strategist also expects GDP growth to get a boost next year, with this resulting in a “big move in back-end rates.”
Applying Wilson’s outlook to its recommendations, Morgan Stanley has given two stocks glowing reviews, with the firm’s analysts noting that each could gain more than 30% in the year ahead. To find out how the rest of the Street feels about both tickers, we used TipRanks’ database.
Sonos Inc. (SONO)
Sonos offers the whole package, a complete wireless home sound system based on a whole-house WiFi network, with users able to play music on any of the wireless speakers located throughout a house. Given its strong performance during the pandemic, Morgan Stanley is pounding the table on this name.
Writing for the firm, five-star analyst Katy Huberty calls SONO an “underpriced secular growth story that benefits from consumers spending more time at home.” Expounding on this, she stated, “While investors often compare Sonos to consumer electronics peers like Fitbit and GoPro which face shrinking app downloads and user engagement, we believe Sonos should be compared to companies with loyal customers and growing customer engagement.”
To support this claim, Huberty cites the fact that the company reported a 40% year-over-year gain in listening hours as well as “consistent revenue growth and higher gross margin.” This is more closely aligned to the likes of Apple, Garmin and Logitech, which trade at an average EV/Sales multiple of 4.7x, versus SONO’s valuation of 1.2x EV/Sales.
Additionally, Huberty argues that SONO’s shares could potentially re-rate to more closely resemble these players as “revenue mix shifts to direct-to-consumer channels that carry higher margins and more upsell opportunities, revenue proves durable even during the current recession and IP licensing and Services revenue become more meaningful revenue contributors.” She added, “We see the first two as near-term catalysts with the Services story a longer-term catalyst.”
Looking more closely at direct-to-consumer sales, for Sonos.com, the figure skyrocketed 299% year-over-year in fiscal Q3 2020, after a 4x increase occurred in April amid price promotions and the height of retail store closures. As broader retail store traffic is trending down double-digits because consumers are limiting time spent in public places, Huberty thinks its direct channel will continue to grow at a robust pace.
Its new products have also been performing well, leading to a backlog going into the September quarter. If that wasn’t enough, the $26 million restructuring in Q3 could fuel an improvement in operating leverage, starting with $7.5 million-worth of savings in fiscal Q4, in Huberty’s opinion. Therefore, an improvement in adjusted EBITDA margins could be on tap for FY21.
Based on all of the above, Huberty has high hopes for SONO. To this end, she left her Overweight rating and $20 price target unchanged. Should her thesis play out, a potential twelve-month gain of 38% could be in the cards. (To watch Huberty’s track record, click here)
Looking at the consensus breakdown, 3 Buys and 4 Holds have been issued in the last three months. So, SONO gets a Moderate Buy consensus rating. At $16.91, the average price target indicates 17% upside potential. (See Sonos stock analysis on TipRanks)
Bloom Energy (BE)
Using a distributed, on-site electric power solution designed to change the way power is generated and delivered, Bloom Energy wants to provide clean, reliable and affordable energy. On the heels of its Q2 beat, Morgan Stanley is singing this company’s praises.
The firm’s Stephen Byrd tells clients that BE exceeded both his and the Street’s expectations. Although revenue of $187.9 million reflected a 6.2% year-over-year decline, the four-star analyst and the consensus called for $177 million and $171 million, respectively. Adjusted EBITDA also blew the forecasts out of the water. It should be noted that due to COVID-related uncertainties, management didn’t offer forward guidance.
According to Byrd, BE boasts a solid pipeline of customer orders, and it has “managed to achieve significant installation growth while addressing COVID-related delays.” He added, “The company is also expanding its penetration levels within the existing customer base, indicating that a majority of sales are going to existing customers – given the blue chip customer list and large addressable market opportunity to expand across the global footprints of these customers, we think this is a good proof point that customers see strong value in BE’s products.”
In addition, the company doesn’t think the cost declines associated with the introduction of generation 7.5 fuel cells will be a step function down, but instead will more closely resemble the declines witnessed during the transition from generation 2.5 to generation 5. BE also expects the shift from conventional fuel cells to hydrogen-based fuel cells will be “smooth,” as the servers for both are made of the same materials and operate similarly.
It doesn’t hurt that BE is able to use its current fuel cell manufacturing lines for the electrolyzer product, which is simpler and doesn’t have to handle natural gas or emissions. Byrd points out that the company believes it can deliver a commercial product based on its Carbon Capture technology.
Adding to the good news, given Europe’s aggressive climate goals, there’s an opportunity for BE. “The company added NextEra as a financial provider, joining the likes of Southern and Duke as utilities providing capital to finance Bloom customers – we think this represents an additional vote of confidence in the technology and economic value of Bloom’s fuel cells,” he also mentioned.
With BE evaluating options to improve its capital structure, which might involve refinancing its high-coupon debt, the deal is sealed for Byrd. To this end, he rates the stock as Overweight and keeps the price target at $20. This implies shares could climb 40% higher in the year ahead. (To watch Byrd’s track record, click here)
Turning now to the rest of the Street, opinions are split right down the middle. 3 Buys and 3 Holds add up to a Moderate Buy consensus rating. The $17.50 average price target puts the upside potential at 23%. (See Bloom Energy 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.