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Will Yahoo Answer Verizon’s Call?

By Jim Pearce and Rob DeFrancesco and Joe Duarte on April 11, 2016

Its no secret that embattled Yahoo (YHOO) CEO Marissa Mayer is under the gun to prove to shareholders that she should remain in her leadership position with the company. However, in this case its not only the CEO that is under the microscope, but the company’s entire board of directors has come under attack by one of its hedge fund shareholders which intends to dump most of the board and replace it with nominees of its own. Their objective is to put a management team in place that will be better able to articulate, and implement, a strategy for future growth.

In response, Mayer has put some of the company’s biggest assets up for sale in an attempt to streamline operations while raising sufficient capital to invest in future growth initiatives. And with the company’s next annual shareholder meeting only two months away, she is under a lot of pressure to close at least one significant transaction that she can use as proof of her effectiveness in executing her strategy. 

That’s good news for Verizon, which raised over $10 billion of cash when it sold off some of its legacy hardware assets to pay down debt and raise capital for future acquisitions to support its internet-focused strategy (that transaction closed earlier this month). It just so happens Yahoo would like to sell its internet business, and Verizon is one of the few companies that has the means to buy it outright. That means each company has the other over a barrel to get this mutually advantageous transaction completed, but Verizon has the upper hand in that it doesn’t necessarily need to do this particular deal right now, whereas Mayer needs some sort of deal to happen very soon or else most likely lose her job.

The stock market also seems to think this would be a good deal for Verizon, whose share price has jumped nearly 20% since bottoming out below $45 in January before Yahoo’s plight, and Verizon’s intentions, became publicly known. Verizon already owns AOL, having bought it last year for $4.4 billion so merging it with Yahoo would give the company enough market share to execute its strategy of vertical integration for its FiOS services.

To be sure, there will be other bidders including Britain’s Daily Mail, possibly Google, and a host of hedge funds and activist investors who view Yahoo’s predicament as a rare opportunity to pay less than full price for a valuable asset. With the exception of Google, I don’t believe any of the other suitors have the means to put as much cash into the transaction as Verizon does, and get it closed quickly. 

We should soon know the outcome; Yahoo has set a deadline of April 18 – one week from today – for potential buyers to submit a bid. Rumor has it that Verizon may agree to buy the other asset Mayer would love to unload – its stake in Yahoo! Japan – as part of its bid, giving it a critical piece of leverage that the other bidders may lack.

Apparently Verizon’s union employees are just as opportunistic as their employer; the company’s FiOS wireline workers have threatened to go on strike this Wednesday if a new labor agreement is not ratified by then. They know the company has cash, and want to get their share of it before the company writes a huge check to Yahoo.

Verizon remains a buy up to $55 in the STI Investments Portfolio.

by Jim Pearce

 

Medical Profits Portfolio Update — Investors Mull Fundamental Issues.

By Joe Duarte on April 11, 2016

In this issue:

  • The Big Picture: What Next for Biotech? 
  • In Depth: New EBIS Pick: WhiteWave Foods (WWAV) – Food. Science. Momentum.
  • Special Situation Trading Portfolio: Opko Recovers After FDA Stumble
  • Long Term Holding EBIS Portfolio:  Cerus Update and Review.  Novo Nordisk (NVO) Increased Buy Range
  • News and Analysis: Why the M & A Rally Tells a Tale of Troubles to Come

The Big Picture: What Next for Biotech?

Is the biotech post Easter miracle over? Or will the sector build on its recent comeback in the next few weeks? The truth is that it’s really anyone’s guess right now with so many crosscurrents exerting pressure on the markets.  Just to be complete, we’ll name a few: earnings season, the election, and the Federal Reserve’s next move.  And over the weekend, there were several important developments which could also affect the financial markets.  Especially interesting will be the effects of the strengthening Japanese Yen, the increasingly troubling financial picture in Puerto Rico as the U.S. territory may default on its debt, reports of social unrest in France as well as news that the International Money Fund (IMF) is likely to decrease its forecast for the global economy yet again.  Normally, the markets would shrug off these types of news events and focus mostly on individual company reports as well as the Fed.  And that may be what happens again, yet it’s important to correlate the market’s current situation and how it responds to news.

Biotech, however, can be in a world of its own, which is why we’ll spend a bit of time on it in this report.  As the chart of the Nasdaq Biotech Index (NBI) shows, the sector has lagged the S&P 500 (SPX) over the last few months.  Two weeks ago we wondered if biotech stocks could ever come back. And so, just because the market likes to make analysts look foolish, biotech bounced back.  But there is more to it than that.  From a charting standpoint, the 2800-2900 trading range is critical.  And a break above or below that range could likely set the tone for prices in the sector for the next several months.

NBI biotech index 2016 04 08

There is a tug of war between two major external influences that is responsible for this price behavior in the biotech sector.  On the one hand are the pricing pressures of the entire health care system.  We’ve said it before, but it’s worth repeating. There isn’t enough money in the system to pay high prices for biotech drugs unless they are home runs.  And even drugs that are home runs are going to find resistance because of the financial limitations in the system.

On the other side, you have the pressure that is building on drug companies to deliver profits combined with the government’s increasing restrictions on tax related company mergers.  The Pfizer-Allergan merger rejection was an important turning point for the pharmaceuticals sector as it created the perception, fueled by comments from Allergan’s CEO, that a buying spree would start as large companies who can no longer escape the U.S. tax burden will instead try to increase their growth prospects by buying other companies.

It’s tough to know how this is going to play out.  Are we going to have a buying frenzy? Or are investors going to decide that no matter what the prospects for growing profits and sales, the U.S. will join the rest of the world where government regulations control drug prices and profits are less than they have been in the U.S?

SPX chart 2016 04 08

The S&P 500 (SPX) isn’t providing too many clues, either. It is also stuck in a consolidation pattern as investors expect the upcoming earnings season to be very disappointing.  SPX closed the week of April 10 with technical signals that a big move is coming. Notice the shrinking Bollinger Bands (green lines above and below prices).  When these lines shrink, volatility has decreased to the point where the market becomes vulnerable to events.  Thus it is quite possible that the next few weeks will see the stock market move significantly to the up or to the down side.

So all we can do is to continue to focus on each individual position and make decisions based on our trading rules.  Our guidelines for individual stocks are as follow:                                

  1. Broaden your horizons while maintaining a biotech focus.   Think in terms of individual holdings and of how companies use science and technology to develop, test and manufacture products.  Monitor each position separately. If they hold their value there is no need to sell.  If they trip their sell stop we recommend selling.
  2. Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Politics may overshadow other fundamentals in the short term.  Be aware of this and follow our price guidelines.
  3. Focus on risk management and on the fundamentals of any open position. Our July 27th, 2015 update has an excellent tutorial on how you may go about doing using this ETF to hedge your portfolio. For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”
  4. Don’t get overconfident and stick with what’s working. Risk is still high in this market but a long term strategy reduces risk because of the time horizon of the expected payoff.

EBIS (Emerging Biotech Investment System) Pick: The WhiteWave Foods Company (WWAV)

Food. Science. Momentum.

In the emerging world of applied science WhiteWave Food Company (WWAV), a spin-off from Dean Foods (DF), is prototypical of an emerging sector; that of applied science without the emphasis on electronic products such as phones and PCs.  The company harnesses the power of nature with its focus on plant based food products.  Heavy on organic and vegan choices, WhiteWave is steadily increasing its market share, deploying an aggressive growth strategy, and steadily taking over the super market shelves in the U.S., China, and Europe through the aggressive use of applied science via automation, software and an emphasis on rapid research and development. 

If you’ve seen Horizon organic milk, Silk almond milk, tried a So Delicious snack or had a Vega protein shake you’ve experienced a WhiteWave product. But what makes this a huge applied science play is the $10 million Louisville, Colorado research and development center where the products are developed and tested.  A recent web search we ran just out of curiosity turned up WhiteWave job listing that were mostly concentrated in software development, IT and supply management as well as machinery and tool repairs.  This confirms two things. The company is expanding, and its focus is on technology in order to speed up its research, development, marketing cycle and its supply chain.   This type of attention to detail and heavy leaning on a scientific process that incorporates multiple disciplines has led the company to rapid growth via organic development (sorry) as well as acquisitions, including the addition of the popular Earthbound Farm products brand.  In fact, its reliance on technology allowed the company to offer fifty new products in 2015 with a goal of another 50 being released in 2015.

The healthy food segment is a pure growth play which is resurging under a different guise.  While the banner for healthy foods was carried by Whole Foods (WFM) in the past, WhiteWave adds a new wrinkle; it’s as much a science company as it is a food company.  The company has also been mentioned as a possible takeover candidate over the last six months, which makes owning the stock interesting as well. 

The only sign of caution is the rising debt that the company has accrued as it expands. This, thus far, has been neutralized by its successful expansion and aggressive sales growth. 

Here are the EBIS details:

The EBIS Score for WhiteWave Food (WWAV) is + 9 (BUY) based on December, 2015 data.  

  • Cash on hand: (+1) WWAV had $38 million in cash on hand in December 2015 compared to $31 million in March 2015.
  • Cash on Hand growth (year over year): (+1) The year over year cash growth was 24%.
  • Revenues (present or not): (+1) WWAV reported $1.03 billion in revenues in its December quarter compared to $911 million a year earlier.
  • Revenue growth (10% or greater): (+1) Revenues grew by 16% year over year in the December 2015 quarter.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (0) CERS has a 4.97% ratio, which means it has a lot of debt.
  • Earnings (Present or Not Present): (+1) WWAV had a $47.58 million gain in net income in its most recent quarter
  • Net Income Growth (Year over Year): (+1) WWAV grew its net income by 47% on a year to year basis
  • Products on the market: (+1) WWAV has major products on the market and is making strides in expanding its market share.
  • Pipeline Strength: (+1): WWAV has a robust and aggressive research and development program
  • Late Stage Clinical Trials and Product Launches: (+1) WWAV has 50 product launches potentially possible for 2016.

The EBIS system consists of ten fundamental criteria that are updated every quarter after the earnings results for each company are published. Each criterion gets a value of +1 or zero. A total of 8 or more points earn a Buy rating. A total of 5-7 points earn a Hold rating. Less than 5 points delivers a Sell or Avoid rating. EBIS was introduced in the June 15, 2015 issue of the Biotech Report. The stocks in this portfolio are companies with long term profits. Our goal for this portfolio is to include stocks which we expect will be held for periods of at least twelve months, but likely longer.

Buy White Wave Food (WWAV) up to $44.

Long Term Holding Portfolio Update

Cerus Corp. (CERS) – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 4/08/16 closing price $6.15

Cerus Corp. is a core long term portfolio holding.  Although the stock is up some 23% since we initially recommended it, it seems as if it’s in a holding pattern, given its $4.80-$6.60 trading range over the last few weeks.  It’s important to remain focused on what this company is all about, which is blood component safety.  Most important, the potential for big gains – if they materialize – will come if the company receives approval from the FDA for use of its Intercept blood component neutralizing system for red blood cells.  So far, the system can be used for plasma and platelets, important blood components. But the big money is in red blood cells, which is why the stock is in a trading range.

The global market for blood transfusions is huge, with over 100 million potential transfusions per year possible. Consider that there is now a huge influx of immigrants from the undeveloped world entering Europe but also increasingly the United States.   This one dynamic, when coupled with normal travel patterns of Americans to global destinations where mosquito borne diseases are not rare, which raises the potential for a resurgence of infectious diseases rarely seen in the U.S., and thus their entering the national blood supply.

The Intercept system is used to test blood components, plasma and platelets, for parasites and viruses and to inactivate them. It detects and neutralizes hepatitis and the HIV viruses, the agent that causes syphilis, and other infectious agents and may be a play on the Zika virus based on case reports and recent data from the company. Cerus has been expanding its market share steadily in the last 6-12 months, having signed key agreements for the use of Intercept with key regional blood supply agencies in the south of the United States and elsewhere. It already has a presence in Europe, Africa, and South America, which may be its most important asset at the moment.   Cerus, in our opinion, may be a focal company as the Zika virus dynamic plays out, due to its the potentially pivotal role in the prevention of blood supply contamination with resurging infectious agents.  It’s important to recognize that Cerus’s potential market is huge, estimated at $2 billion

The company reported its earnings on March 8th after the close coming in with a 15 cent per share loss and $9.7 million in revenues.  Estimates were for $9.72 million in revenues and a loss of $0.16 (16 cents per share) in net income. The stock reacted well, especially in a tough period for the overall biotech sector.  Dr. Duarte owns shares in CERS.

Meridian Biosciences (VIVO) Buy $20-23 – 4/8/16 closing price $20.75. Stock initially recommended on 6/29/15.

Meridian Biosciences delivered an upside breakout on 3/18/16 as the company announced the release of a new component to its EPIK system of miRNA detection and analysis tools from wholly owned subsidiary Bioline.  This addition to the EPIK system will allow research and diagnostics users to figure out what diseases and conditions they may be dealing with via smaller samples and faster response time to results.

We’ve liked Meridian Biosciences for a while and are increasing the Buy Range on the shares to $20-$23. VIVO still has a 3.9% dividend yield and stable earnings. The longer term fundamentals are still positive given the increased likelihood of rising infectious diseases based on immigration and demographic patterns that are emerging in the U.S.

VIVO develops, manufactures, and markets diagnostic testing kits focused on gastrointestinal infections, virus detection, and parasitic illnesses. It also produces reagents and key testing and DNA and RNA amplification and enzyme related materials used in research.

Meridian delivered $47.07 million in revenues and $8.47 million, or 20 cents per share in net income for its December 2015 quarter. This was a 10.58% decrease in earnings on flat revenues. And while this sounds disappointing, it’s actually a pretty good set of results.   The company’s gross margins increased as did the amount of cash on its balance sheet, which are both excellent signs of management that is looking toward the future. Vivo also kept its quarterly dividend at 20 cents per share.   Meridian delivered a mixed earnings report on November 5, 2015, beating on revenues at $47.5 million and missing on its net income by one cent at 20 cents per share. Estimates averaged $46.64 million in revenues and 0.21 cents per share for earnings.   This was a reversal of the previous quarter. The stock paid a 20 cent dividend on 11/12/15 and yields 4.4%. Dr. Duarte owns shares in VIVO.

Novo Nordisk A/S (NVO) – Buy Range Extension to $55-59 (4/7/16).  Raise Sell Stop to $49. Recommended 12/21/15.  Bought at $55 on 12/21/15. 4/8/16 closing price $56.06.

Novo got a nice boost on 4/6/16 when a UN report noted that Diabetes, the focus of the company’s business model, is on the rise around the world.  Novo is all about Diabetes treatments and holds leadership positions in several categories of medications to treat the condition. Novo paid its annual dividend to shareholders on 3/18/16.  The company raised its dividend to $0.7 cents per share this year, up from last year’s $0.53 cents per share. The increase represents a 32% improvement on the payout.  Novo is our stock of the year.  Dr. Duarte owns shares in NVO.

Special Situations: Short Term Trading Recommendations

These are stocks or ETFs that have the potential for trending profits over shorter periods of time, sometimes days, but mostly weeks to perhaps months. The fundamentals are secondary in this portfolio, which is geared for momentum type stocks.

Trading stocks are only recommended as trades based on technical analysis and momentum.   These are not stocks meant for long term holding periods.

  • Special Situation Trading stocks are not EBIS type stocks. This means that they are more volatile and that any moves by these stocks, up or down, can be very fast and treacherous.
  • Follow the trading guidelines and recommendations issued with each stock in detail.
  • Trading guidelines are not applicable to our longer term holdings in the EBIS portfolio.

Updated Recommendation Alert – ProShares UltraPro Nasdaq Biotech ETF (UBIO) – HOLD.  Stop loss at $22.  April 8 closing price $28.20.

Alert – Raise sell stop to $34.  Medidata Solutions Inc. (MDSO) – Buy $36-$39.  Bought on 3/7/16 at $36.  4/8/16 closing price $39.15.  Sell Stop at $34.

The stock rallied nicely on news that China’s Henlius Biotech, an oncology R & D firm, has chosen Medidata’s cloud based big data analytics to help it sort out the results of a major Phase III study in its monoclonal antibody cancer platform.

Medidata provides cloud based big data crunching programs for health care companies at the research level. It not only has apps that help organize and study the research starting from the project stage to the clinical trial stage but it also has an app that allows patient input into the data.  The company also has a financial tracking system that lets its clients keep track of who is getting paid and how much as well as keeping trends and other financial variables in focus.  They are expected to report earnings in late April.  Revenues and earnings have been steadily rising.  MDSO is well positioned in the current environment where money for health care expenses is expected to decrease.  Dr. Duarte owns shares in MDSO.

Rollins Inc. (ROL) – Buy at $27-29. Bought 2/22/16 at $27.38. 4/8/16 closing price $26.96. Sell Stop at $22. Initially recommended on 2/22/16.

Rollins Inc. (ROL) is well positioned for the increasing awareness of how infectious diseases are transmitted.  The stock has been steadily climbing since our recommendation on 2/22/16.  This is a very special situation with a relationship to biotechnology in the current environment. Rollins owns Orkin, the exterminating company, and could be a big beneficiary of the current health concerns regarding Zika virus. It also owns other businesses, including TruTech and Critter Control which focus on wild life control. The company also focuses on bed bug and other pest extermination. This is a highly speculative trading situation which may have a short term lifespan but may also be increasingly powerful given the current potential for the rise in incidence of parasitic and animal vector related diseases. Thus, in the current market it’s an interesting story stock to consider.

Rollins is not a cheap stock trading at 39 times past earnings. Its most recent quarter delivered modest growth in both earnings and revenues, in the 5-6% range, which although not too exciting, is likely sustainable given the nature of the business. The company continues with a steady expansion plan including the addition of several international franchises, focusing on areas with large pest populations. It continues to invest in technology, recently updating support and analysis systems and including communication and software tools to its employees in order to maximize their interaction with customers.  Dr. Duarte owns shares in ROL.

Alert – Close out Trade.  ProShares Ultrashort Biotech ETF (BIS) Bought 2/28/16 at $48. Sell stop triggered at $42 on 4/1/16.

Alert – Opko Health Inc. (OPK) Buy Range $8-$11. Sell Stop raised to $9. Bought on 2/1/16 at $8. 4/8/16 closing price $10.73.

Opko shares tumbled on March 30 as the FDA delayed expanded approval of the company’s Rayaldee drug.  The stock has come back though, providing those will to take a chance a buying opportunity.  To be sure, anything can happen, but barring any more negative news or some type of market related sell off, the stock has worked itself back fairly well.  A good move above the $11 area will likely restore further confidence in the shares.

It’s important to know that the FDA’s issue was not with Opko, but with the company that manufactures the drug for Opko. What that means is that barring the manufacturer’s failure to fix the issues, the FDA may still approve the expansion of the drug. Rayaldee is used to control calcium and vitamin D metabolism in patients with advanced kidney disease.

Note: We still think the market is wrong on this one as management has expanded the company through acquisitions which have already delivered profits and operating capital and that buying it now could prove to be an excellent longer term play. We are also looking to add this company to our EBIS list in the not too distant future.

Opko delivered a well received earnings report in late February that showed that the company is consolidating its recent acquisitions. It has made several advances on its current business lines and products in development as well as ongoing successes and milestone payments from collaborations from other companies.  Dr. Duarte owns shares in OPK.

News Update and Analysis:  Are Mergers All That’s Left for Biotech?

The big news of the week that ended on April 8th was the termination of the merger between Pfizer (PFE) and Allergan (AGN) through the intervention of the U.S. Treasury in order to prevent another high profile tax inversion.  The announcement led to the speculation that there would be a merger and acquisition frenzy in the health care sector, but most pronounced in the biotech sector, where the potential for growth through new drugs is the highest.

The flurry of activity that led to higher prices, especially in smaller biotech names with high potential drugs in late stages of development, seems to last a few days.  And by the end of the week the biotech sector was starting to struggle again.  See the chart of the Nasdaq Biotech Index (NBI) in The Big Picture section of this report.

The action in the biotech stocks tells a grim story.  Think about it; here is an industry with tens of companies involved in ground breaking research to cure major diseases, including cancer and genetic disorders that cripple thousands and often millions of people around the world. And yet, the only thing that can get a rise – albeit a temporary rise in prices of stocks in the sector – is the thought that some big drug company will buy out the smaller companies with promising product candidates.

The clinical trials are ongoing.  The potential for blockbuster drugs is still there. And the real purpose of the whole sector, which is to improve people’s lives, is unchanged.  Yes, companies like Valeant (VRX) make it difficult to stick up for biotech.  And to be sure, nothing is clean and squeaky these days.   But the fact that the only thing that’s getting some investors worked up about biotech is the potential for M & A activity tells you a whole lot about the prospects for the industry as a place to make money in stocks over the next few months, and perhaps years.

2016 EBIS Portfolio Results:

  • Emergent BioSolutions (EBS) (Bought 5/11/15 MPP* 30.63) 1/7/16 Stopped out at $36. Return 17.63%.
  • Cambrex Corp. (CBM) Position Closed – Sell Stop Triggered at $50 on 12/18/15. Bought 10/20/15 at $44. Return 13.6%.
  • Masimo Corporation (MASI) –Buy issued July 20, 2015. MPP: $40.65). Sell Stop triggered at $38 1/6/16. Return -6.5%
  • Sirota Dental Systems (SIRO) Buy Range $104-$108. Bought 1/26/16 at $104. 2/5/16 closing price 106.57. Sell Stop hit at $98 on 2/12/18. Return -5.76%.
  • Vertex Pharmaceuticals (VRTX) Trading Buy Range $96-100. Bought 2/4/16 at $96. 2/5/16 closing price $86.61. Sell stop hit at on 2/5/16 at $86. Return -10.41%.
  • ]Emergent BioSolutions (EBS) Buy Range $36-39. Bought 1/25/16 at $36. 3/4/16 Stopped out at $34 on 2/8/16.  Total return -5.5%.

 2015 EBIS Portfolio Results:

  • DYAX Corp (DYAX) – Position Closed: Company taken over. Originally bought 10/7/15 at 22. 11/6/15 closing price was 34.52. Trade return: 56.9%.
  • Celldex Therapeutics (CLDX) Trading Recommendation Position Closed: Stopped out at 16. Recommended 10/26/15. Buy range entered 10/26/15 at 13.22. Total Return 21%.  
  • Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15. Trading Recommendation Position Closed: Stopped out at 100 on 11/16/15. Total Return 15%.
  • Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10/27/15 at $76.50 (post 2 for 1 split). Trading Position Closed: Sell Stop Triggered at $78. Return 1.96%.

Note to readers:  I am looking forward to meeting you personally at our Las Vegas Summit, May 12-13.  As an added bonus and as a special way to thank you I will be revealing a “summit only” stock recommendation in Las Vegas and as a very special bonus I will be discussing my favorite technical indicators in detail to help you in your personal trading.  Hope to see you all there and thanks for your support. And if you have a copy of “Trading Options for Dummies,” bring it and I’ll be glad to sign it. Joe Duarte

 

Next Wave Portfolio Update—Arista Networks & Zendesk

By Rob DeFrancesco

In a move that significantly expands its total addressable market (TAM), Arista Networks (ANET) late last month debuted its 7500R product, a switching and routing platform aimed at cloud service providers and next-generation enterprise datacenters. The high-speed switch vendor’s newest offering is capable of replacing traditional core routers, representing another competitive advance against Cisco Systems (CSCO), the primary router vendor.

Traditional datacenters include routers connected to the switching layer. The big problem with advanced routers is that they are often expensive proprietary devices. They’re also inflexible when it comes to dealing with adapting to changes in application traffic patterns and demand.

Thanks to Arista’s continued innovation, the 7500R provides resilient and highly available access to applications inside a cloud datacenter. Using new chip technologies, Arista’s 7500R is capable of offering high performance Internet routing at a lower cost compared to actual router appliances. With the 7500R, Arista’s ultimate goal is to collapse the routing layer into the switch layer, creating a more efficient overall datacenter platform.

The new product will appeal to fast-growing cloud providers as well as enterprises with high-bandwidth requirements because of its impressive specifications—including 100 Gigabit Ethernet (100GbE) density and chassis fabric capacity of up to 115 terabits per second (Tbps). Netflix (NFLX), one customer already using the 7500R (the product becomes widely available in the current quarter), is getting 10 times more bandwidth at 10% of the traditional price for a router.

With Arista’s EOS operating system, 7500R users can customize their own preferred paths across any number of the largest networks worldwide, as opposed to relying on older best-effort forwarding via the Internet. The new product’s attractive price/performance balance should enable Arista to quickly start gaining market share in the router segment.

Out of the gate, the 7500R’s main targets are routers used in datacenter interconnect (DCI), which involves moving traffic from one regional cloud datacenter to another. It’s estimated that the DCI TAM will expand to $2.9 billion by 2019 from around $400 million in 2013. Over time, the 7500R will address the $9-billion service provider edge router market.

Well Fargo recently said it has been getting positive feedback from its preliminary Arista first quarter checks with channel partners. The firm found particularly strong momentum for Arista’s core 7500E switches, with certain larger orders even spilling into the second quarter because of the high level of demand. Arista’s switches are selling well into datacenters used for streaming video and online storage applications, says Wells Fargo. Arista’s first quarter consensus revenue estimate of $237.3 million represents growth of 32.6%.

Shares of Zendesk (ZEN) have made it back to the $21 level, rebounding 45% from the 52-week low of $14.39 reached in February. During the big market pullback earlier this year, shares of the provider of cloud-based software used by customer service departments had gotten way oversold, especially for a company expected to deliver 2016 top-line growth of more than 42%.

In late March, Summit Research started coverage of Zendesk at ‘Buy’ with a price target of $25, saying the company has a number of competitive advantages that should enable it to grow at least 30% annually over the next several years. First off, it’s easy to get started with Zendesk’s cloud offering. Plus, the software is simple to use and the company has excellent customer support.

Robust analytics on the platform allow organizations to get updates on how their customer service reps are doing in real time; the stream of open and closed order tickets is constantly being mined for data patterns. The overarching goal is to improve customer satisfaction rates.

The fact that the Zendesk platform is totally open represents another benefit. The company offers one of the largest third-party integrations in cloud-based customer support, with more than 4,500 developers registered to make customized applications on the platform.

Summit Research says Zendesk has a lot of room for growth. For 2016, the company is expected to come in with revenue of around $300 million, representing a small share of the highly fragmented $7.6-billion market for customer engagement.

Zendesk’s customers have high satisfaction rates, meaning many are continuously adding new cloud software seats, transitioning over from legacy on-premise solutions. While most of its customers are still smaller businesses, the company has been gaining traction with larger enterprise accounts, which naturally tend to buy more because of their size, leading to bigger deal sizes.

Arista Networks and Zendesk are both rated ‘Buy’ in the Next Wave Portfolio.

 

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