Cody Kiss & Tell: Biotech margins, AMBA buyout potential and why be bullish
Q. I have a position in $BIIB as it has been hit hard the last year and is down 40% or so from its high. I feel it has a great pipeline and felt this would be a good biotech to start a position in while it was being punished. Do you feel Biogen is a decent company to start inching into at this time?
A. I don’t think the outrageously high margins and prices charged in the biotech sector in general are sustainable. I want to quote from Paul Price, “Profit growth and share price increases over the last few years were driven by huge annual hikes in wholesale sticker prices. Now that this practice is under intense scrutiny that source of margin boosting is likely to be curtailed severely. We may even see pressure to roll back previous hikes… Other drug companies will probably suffer margin compression as well now that people are actively researching who has been price gouging.” Look at $BIIB for example — the company has 90% gross margins vs. an$AAPL at 40% gross margins. I think the only way those margins head next is lower and probably much lower over the next ten years.
Q. I have always heard that the costs involved in developing drugs are the reason for the high margins, along with the regulations. Is this bs? BTW, 90% margins are crazy; whose accounting is the truth?
A. I think $BIIB‘s cash flow of a $1BB last quarter and its $67BB market cap says there’s a lot of money being made for investors and not just being spent researching drugs and navigating regulations (said regulations were written by the biotech/health care lobby anyway).
Q. Hypothetically, you have $1000 to invest today that you’d like to see do well in next few months. What stock would you buy?
A. Trying to pick a single stock to bet on over a six month stretch is probably not a sustainably investing/trading strategy. But feet to fire, over the next say, six months, if I’d still probably spread it out over at least two stocks. Maybe some $GOOG and some $TWTR and some $FIT. Sometimes I will see a terrific six month opportunity to buy some call options or otherwise get aggressive in common stock in a certain name here and there, as I’ve done with some of our positions in the past. But right now, I’m just not seeing that as a terrific opportunity.
Q. In the spirit of “learning how to fish, instead of being given a fish”, I’d appreciate an idea of what is behind your call for the market going up to 20,000…even if it goes down to 15,000 first. I’d like to understand your reasoning for the market rising above the top that’s in place.
A. Great question to get us started. I think Main Street’s economy has finally started to improve and the labor market overall is getting stronger as the corporate economy is also net adding jobs. The employment report that just hit was +142,000 new jobs created last month, which underscores the idea that jobs are being created. But the futures and stocks have freaked out about that tanking the $DJIA from +200 to -160 and rates lower across the board because a few media organizations had gone out and surveyed a bunch of random economists who never saw the last crashes or bubbles coming how many jobs were created in a 135 million job US economy over the last 30 days and they guessed it’d be about 200,000. The number came in at 140,000. So “the economy is weaker than expected and not growing jobs as fast as we thought it was!” is what we hear and read since those economists best guesses were collectively off by 60,000. 0% rates force savers and retirees and anyone with money into higher-risk assets. As the Fed now has cover to keep rates at 0% for at least another year or two, that will force yet more savers and retirees to finally bite the bullet and buy growth and/or private companies to try to capture some upside. Finally, I think that most money managers are remembering they missed the 2000-2002 market crash/tech sector depression and the 2008 market crash /financial crisis and are betting that we’re going to crash again.
Q. I know we can’t predict what will happen but there are some rumblings, the latest in CNBC Fast Money yesterday, that with the drop in $AMBA price that $QCOM might be a possible takeover candidate. I know any company can be bought for a price, but do you think there is any reasonable truth to this. I have heard #QCOM is interested in drone technology so maybe this would make sense. I do own some $AMBA stock.
A. I was saying the other day on my podcast that Ambarella would make a good acquisition target for most any large chip company. $INTC, $TXN, $QCOM and others could use the growth that video HD chip market brings. I don’t expect to see a deal get done any time soon and/or at all, but I do think it’s possible at some point any chip company with a market cap measured in tens of billions or more could possibly try to take over $AMBA while it’s worth less then $3 or 4BB (right now its market cap is $1.8BB).
Q. Short term question. $SYNA just popped because of the buyout rumors. I like it long term, but given the market conditions is this a time to unload some of it instead of stoically riding out the storm?
A. If you’re asking about whether it’s time to trim some $SYNA it probably means that it’s a large enough position to have stressed you out while it was down big and before it popped 25% the other day on the news $SYNA had turned down a $108/share offer from a semiconductor company in China. So yeah, maybe sell 1/3 or something and catch your breath if that’s the case.
Q. Any thoughts about Lam research?
A. $LRCX has $12 per share net cash and yields 2% and could earn $7 per share on just 5% topline growth next year. It’s cheap at $63. I don’t own it and did buy some of its competitor $AMAT a few weeks ago near its current levels but I might add some $LRCX at some point too.
Q. Whats your view on $FFIV?
A. $FFIV is my favorite of the security basket mainly because it’s the cheapest stock of the basket, with $7 per share in earnings and already well-established a de facto standard in the app/network/cloud/security optimization industry.
Q. Do you believe there will be any significant impact on earnings for cos like $FB or $GOOGL because of 3rd party ad blockers? I would think there wouldn’t but I’d like to know your thoughts. I would also like to ask about your thoughts on googls restructuring (Alphabet) it seems that this is a “street” friendly and “cost” control move? Do you agree? Do you have any concerns over this move since $GOOGL historically is not concerned with shareholders and that this may in fact increase spending to fund “bets”? Do you think it can have a material impact on GOOGL’s earnings?
A. $GOOG has more exposure to the affects of ad-blocking than $FB does. But with$FB controlling and/imbedding the ads into its Facebook, Instragram and Whatsapp platforms and $GOOG doing the same with its Android platform and YouTube platforms, I think the set up for growth is good for both of them. I don’t think it will have a major impact, I think GOOGL’s model is diversified enough to overcome their exposure to ad blocking risk.
Q. What is the easiest way to get information on cash flow, dividends, gross profit and the really basic things to look for in evaluating a company’s potential? I go too much on instinct.
A. Scutify is a great resource for financials http://www.scutify.com/company… as is Yahoo Finance and others.
Q. I would like a single spot to see market indicators such as advance / decline info, money flow, etc. I seem to have go all over for this information. It is nice to see what is happening underneath the market. Information is powerful and comforting. Perhaps we could find spot for this information either on this site or Scutify?
A. I’ll pass along to @KheangLy, good suggestion.
Q. SOXX barely down–all hell priced in $AMBA, $QVRO, $FIT acting well.
A. Maybe. Not sure I want to read too much into a single morning’s action in any particular stock and/or sector.
