Brief TMT & Internet: SEC 47k Rejection Targets Base Case Support and more

In this briefing:

1. SEC 47k Rejection Targets Base Case Support
2. Yunji IPO Preview: Balance Sheet Points to Waning Engagement
3. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.
4. Pinterest IPO Preview
5. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

1. SEC 47k Rejection Targets Base Case Support

Samsung Electronics (005930 KS) met our rally target outlined in 28 January insight SEC and SK Hynix Breakouts at 70.3k. In that insight we outlined the tactical rise would give way to a pullback toward ideal pocket support that would offer a better risk to reward intermediate entry point for SEC.

Multiple rejection at that 47.2-5k barrier call for fresh lows toward preferred pocket and buy support. Only external pressures would adjust our downside bias to lower pattern support that comes in at 35k.

MACD basing support is expected to create a solid support for price on weakness. Risk lies with the MACD slipping back within the pattern range.

2. Yunji IPO Preview: Balance Sheet Points to Waning Engagement

Yunji Inc. (YJ US) is a leading membership-based social e-commerce platform in China which primarily sells merchandise through its Yunji app. Yunji is also referred to as a multi-level revenue sharing platform as the business model is based on providing incentives to members to promote products and invite new members through their social networks. Yunji is seeking to raise $200 million through a Nasdaq IPO.

3. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.

On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.

The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics  and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.

Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.

4. Pinterest IPO Preview

Pinterest Inc (PINS US), a leading digital media platform in the US, is getting ready for an IPO in the next several weeks. In our view, this is one of the most exciting global tech IPOs since the Elastic NV (ESTC US) IPO in October 2018. Pinterest has one of those rare combinations of strong sales growth, leading website brand awareness, loyal users network effect, and a clear path to profitability. Pinterest was most recently valued at $12.3 billion in private market valuation when it raised $150 million in 2017. 

One of the attractive features about Pinterest is the fact that it has a very loyal user base among moms in the US. According to the company,  about two thirds of its total user base are female, mostly in the US. Nearly 8 out of 10 moms (who are often the decision makers for purchasing household goods) and about half of the millennials in the US regularly use Pinterest.  

The company has a very attractive income statement. Its revenue increased 59% CAGR from 2016 to 2018 and its operating losses have been declining nicely. Operating loss as a percentage of sales declined from 62.9% in 2016 to 9.9% in 2018. 

5. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

Roughly nine months ago, as Elon Musk was bizarrely attacking one of the heroes of the Thai rescue mission, we noted in Tesla: As Musk’s Reputation Disintegrates, The Only Positive for the Stock Is Disappearing that

We think it is pertinent to identify the moment when the crowd turns… and we think it just happened.

concluding that

Our main point is that there is now significantly more risk of being long and wrong on Tesla, not just in terms of portfolio performance, but in terms of career risk. With Tesla’s rising profile and increasingly bizarre behaviour the ability to justify being long and wrong is diminishing rapidly.

Since then, the roller-coaster ride has, if anything, been even more volatile and the vehemence of both bulls and bears has not decreased.

With recent developments such as the collapse in unit volumes following the reduction of subsidies for Tesla, the departure of CFO Deepak Ahuja and the underwhelming Model Y reveal, we highlight what we believe are the most important indicators of failure amongst the deluge of bad news, below.