Analysis: LRCX AVGO MSFT PANW

Lam Research

This morning, shares saw several positive mentions as analysts at Deutsche Bank raised their price target "to account for the higher 2020 estimates and modest multiple expansion as (LRCX) enters a more normalized environment," and analysts at JP Morgan reiterated the name as a top pick in the space (along with shares of Broadcom (AVGO) ). In line with our own past commentary, both firms cited an ongoing bottoming process as nearly complete, with expectations for an inflection in chip maker spending to prove a strong tailwind into the end of 2019/beginning of 2020. To this point, and speaking to our desire to initiate the position now, rather than wait and try and time the exact bottom (which is basically impossible without a good deal of luck), the analysts at JP Morgan noted, "In Semicaps and memory, with ALL of the major memory suppliers cutting DRAM and NAND capex by 30%+ this year, history has shown that this magnitude of capex discipline has resulted in improvement in fundamentals 1-3 quarters out...and although the shape of recovery is up for debate, with what we see as upside potential far outweighing downside over the next 12-18 months, longer-term investors are starting to rotate back into these names." Bottom line, while this position may require a bit of patience as the semiconductor capex cycle inflects, we believe shares are at an attractive entry point at ~12.5x forward earnings while ~2.5% yield pays us for our patience.

Microsoft

Also this morning, shares of Microsoft (MSFT) were added to Wedbush's "Best Ideas List," in a note titled "Cloud Opportunity = Major Tailwinds to MSFT in 2019." In line with our own view, the analysts called out, "Microsoft remains in an enviable position heading into the next 12 to 18 months on the heels of its cloud success and is firing on all cylinders around its Office 365 and Azure strategic vision based on our recent checks in the field." Additionally, the analysts noted that the ongoing shift to the cloud represents a "major secular trend" that should show sustained momentum, as they expect the amount of workloads currently in the cloud, to rise from 30% currently to 55% by 2022. As we've called out time and again, the shift makes sense not only because it allows for companies to remove the need for costly server farm build out that require significant lead time, but also because the ability to ramp storage and compute needs up (or down) depending on customer demand allows companies to essentially convert otherwise fixed costs (those associated with the buildout, maintenance and real estate required) to variable ones, allowing for more profitability control throughout the business cycle.

Palo Alto Networks

Lastly, we want to provide some quick thought on shares of (PANW) as we gear up for tomorrow's earnings release. As members know, we've been bullish on Palo Alto for a while now, buying throughout the recent decline, which tested our conviction on more than one occasion. Overall, we expect strong results out of Palo Alto, and given the commentary on Cisco's conference call we have little concern regarding the impact of the government shutdown in the quarter. Additionally according to several sell-side notes we received this morning and throughout the week last week, it appears channel checks have all been highly positive with multiple vendors citing solid demand trends. That said, the biggest concern we have right now, the day before the release, is simply the sheer magnitude of the rally off the December lows. We never like to see a stock come hot into earnings and barring a decent selloff tomorrow ahead of the release, which seems unlikely since analysts at Guggenheim raised their price target today, it seems PANW will be coming in red hot, up ~23% year-to-date. While we could see some profit taking even with a strong quarter, a dynamic that has happened a few times this earnings season, we would likely view any pullback on a solid results with a reiteration (or raise) of guidance as a buying opportunity given our view that cybersecurity is a long-term secular trend and Palo Alto stands to benefit from sustained firewall demand in the near-term and growing demand for cloud security in the longer-term, especially given the cloud shift dynamic called out by Wedbush's analysts (regarding their bullishness on Microsoft) noted above.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long LRCX, MSFT, PANW.