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Street calls of the week: Upgrade for Shopify; downgrades for AMD, Paramount

Published 2024-06-16, 03:46 a/m
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Investing.com -- Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week.

InvestingPro subscribers always get first dibs on market-moving rating changes.

Advanced Micro Devices

What happened? On Monday, Morgan Stanley (NYSE:MS) downgraded Advanced Micro Devices (NASDAQ:AMD) to Equalweight with a $176 price target.

What’s the full story? Morgan Stanley acknowledges AMD’s strengthening position within its core markets. However, the analysts express caution due to the high expectations surrounding AMD’s AI capabilities, which may challenge the company’s justification for a premium valuation. Despite previous discussions by Morgan Stanley regarding these concerns—particularly since the GTC event—the team believes that investor expectations have not fully accounted for the potential effects of Nvidia’s Blackwell launch on its competitors.

As AMD’s stock has experienced a rally post-quarter and is nearing Morgan Stanley’s price target, the firm has decided to adopt a more reserved stance. The research team is shifting its focus towards Broadcom Inc. (NASDAQ:AVGO) as a preferable large-cap AI investment alternative, ranking it second in preference, following a reassessment of AMD’s market position and potential in light of the upcoming industry developments.

Equalweight at Morgan Stanley means “The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. “

How did the stock react? AMD opened the regular session at $162.75 and closed at $160.34, a gain of 4.49% from the prior day's regular close.

Cleveland-Cliffs

What happened? On Tuesday, JPMorgan (NYSE:JPM) downgraded Cleveland-Cliffs Inc (NYSE:CLF) to Neutral with a $17 price target

What’s the full story? JPMorgan moved to the sidelines given the rising capex needs, replenished auto inventories, resulting in less incremental pull-through demand, and no near-term growth projects. The bank appreciates the now cleaned up balance sheet and greater focus on shareholder returns.

Be that as it may, JPMorgan feels most investors would prefer cash accumulation for potential M&A rather than debt-funded buybacks. CLF’s asset mix of blast furnaces and some EAFs (electric arc furnace), combined with its vertical integration into iron ore, scrap, and HBI (Hot-briquetted iron), drives a self-sufficient business model that should largely shield it from scrap tightness ahead relative to peers.

Ultimately, CLF’s leverage to auto with annual fixed contract pricing can help smooth earnings through the cycle."

Neutral at JPMorgan means “over the duration of the price target indicated in this report, we expect this stock will perform in line with the average total return of the stocks in the Research Analyst’s, or the Research Analyst’s team’s, coverage universe.”

How did the stock react? Cleveland-Cliffs opened the regular session at $15.18 and closed at $15.13, a decline of 3.32% from the prior day's regular close.

Paramount Global

What happened? On Wednesday, Wells Fargo (NYSE:WFC) downgraded Paramount Global (NASDAQ:PARA) to Underweight with a $9 price target.

What’s the full story? Wells Fargo analysts report that Paramount Global faces near-term challenges due to potential downward revisions as management re-engages with investors, a lack of medium-term free cash flow, and a weakening digital advertising market. Long-term prospects include the elimination of smaller players in future sports distribution and intense competition for market share in streaming subscriptions and profits.

The Wells analysts believe Paramount’s best opportunities lie in significant asset sales, such as Black Entertainment Television, and a strategic shift from Paramount+ towards licensing its high-quality content externally.

Comparatively, Warner Bros. Discovery (NASDAQ:WBD) trades at a high-5x enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) with similar leverage levels, but boasts a more linear business model and a richer content portfolio, including HBO and a gaming studio.

The analysts have adjusted their valuation of Paramount to 6.2x EV/EBITDA, which is broken down into 4.5x EV/EBITDA for TV Media + Studios and $1.5 billion for Direct-to-Consumer. Despite criticism that this valuation falls short of studio purchase offers and is overly punitive on DTC, the analysts counter that without any mergers and acquisitions, sum-of-the-parts comparisons are irrelevant.

Wells Fargo has set a new target price for Paramount at $9 and 25x price to FCF. They see a potential upside of $14 in the event of a Skydance deal and a downside risk of $6.

Underweight at Wells Fargo means “Total return on stock expected to lag the Overweight- and Equal Weight-rated stocks within the analyst's coverage universe over the next 12 months. “

How did the stock react? Paramount Global opened the regular session at $10.71 and closed at $11.12, a gain of 0.72% from the prior day's regular close.

Mereo BioPharma Group

What happened? On Thursday, well Wednesday after the regular close, Baird initiated coverage on Mereo BioPharma Group PLC ADR (NASDAQ:MREO) at Outperform with a $8 price target

What’s the full story? Baird observes that Mereo has strategically constructed an impressive portfolio of rare diseases through a combination of in- and out-licensing transactions. The company’s two primary assets, setrusumab and alvelestat, originate from large pharmaceutical companies (Novartis/NVS and AstraZeneca/AZN, respectively). In the brokerage’s view, each of these assets individually presents a compelling case in a rare disease area with a high level of unmet need.

Looking forward, Baird anticipates growing excitement about the potential of setrusumab, especially as pivotal data is expected to emerge in late 2024 or early 2025. Additionally, the announcement of a partnership for alvelestat could serve as an unexpected positive catalyst. The analysts remain attentive to these developments and their potential impact on the rare disease market.

Outperform at Baird means “Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months.”

How did the stock react? Mereo BioPharma opened the regular session at $3.90 and closed at $3.99, a gain of 4.18% from the prior day's regular close.

Shopify (TSX:SHOP)

What happened? On Friday, Evercore upgraded Shopify Inc (NYSE:SHOP) to Outperform with a $75 price target

What’s the full story? Evercore has upgraded the rating of SHOP shares to Outperform, setting a price target of $75. This decision comes after a significant drop in the stock’s value, approximately 30% from its 52-week high, presenting a compelling opportunity to invest in a premier ecommerce platform. The firm maintains a robust long-term outlook for SHOP, underpinned by its expansive Total Addressable Market (TAM) estimated at around $850 billion, a formidable competitive stance, and prospects for growth in the upscale market. These factors are supported by recent channel checks, SHOP’s proven ability for innovative product development—as indicated by its increasing Attach Rate—and the forecast for a substantial increase in profitability, with Free Cash Flow margins expected to climb from the current 12% to potentially mid-to-high teens by 2026.

The firm also notes that the recent downward revisions in Operating Margin projections, as reflected in the past two Earnings Per Share reports, have significantly mitigated the risks associated with SHOP shares. The market’s future expectations for Operating and FCF Margins are deemed reasonable by Evercore. Additionally, as observers of internet advertising dynamics, Evercore endorses SHOP’s strategic move to intensify its social media marketing efforts, which is anticipated to expedite its international expansion and aligns well with current marketing trends.

Outperform at Evercore means “the total forecasted return is expected to be greater than the expected total return of the analyst's coverage sector.”

How did the stock react? Shopify opened the regular session at $65.83 and closed at $67.67, a gain of 4.61% from the prior day's regular close.

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