Name two of the greatest turnarounds in U.S. business history? At the top of the list would have to be Steve Job’s successful return to Apple Inc. (NASDAQ:AAPL) in 1996, more than a decade after the co-founder was shown the door. AAPL stock gained more than 9,000% over the next 14 years.
Next, would have to be Lee Iacocca’s rescue of Fiat Chrysler Automobiles NV (NYSE:FCAU) back in 1979 before it was owned by Fiat. Fresh off the Mustang creator’s firing from the Ford Motor Company (NYSE:F), Iacocca did whatever it took, including creating the now ubiquitous minivan, to revive the fortunes of the Motor City’s No. 3 carmaker.
This is the stuff that legends are made of.
On the brink, down and out, struggling to survive, Jobs and Iacocca will always be viewed as great leaders despite their human failings. At a time when we give thanks, it’s important that we remember their great work. Who are the turnaround messiahs of today? Those CEOs whose companies are losing money, but are one big break away from salvation.
During Thanksgiving week, it’s appropriate that we consider seven feast or famine stocks to buy.
Feast or Famine Stocks to Buy: Pure Storage (PSTG)
It’s been a little more than a year since the data storage company went public, and even though Pure Storage Inc (NYSE:PSTG) proclaimed at the time to have the fastest growth in “storage industry history,” PSTG stock has floundered, down 14.1% since its Oct. 5, 2015, IPO.
Big Data is a huge deal, so it’s certainly playing in a potentially explosive segment of the technology sector. Unfortunately, when you have enterprises continuing to debate how to store all their information, you never know if you’re one hit product away from success or failure.
Since launching its FlashArray product in 2012, Pure Storage has racked up more than $600 million in operating losses over 42 months. Yet, you can’t help but be impressed by its revenues, which have grown tenfold in the past two years alone. In the second quarter of 2016, PSTG increased revenues 93% year-over-year to $163.2 million, growing its customers by 107% year-over-year to more than 2,300.
The big news: It began shipping FlashBlade, its follow-up product to FlashArray. Despite the significant operating losses it’s racked up, PSTG could finally deliver the promise so many believed it had coming to market last October.
With the stock down 13 months after going public, now is the time for it to really break out. FlashBlade could be just the ticket to make that move happen.
Feast or Famine Stocks to Buy: XPO Logistics (XPO)
The serial acquirer of transportation and logistics businesses — more than a dozen acquisitions since 2011 — including Con-way Inc., which it acquired last year for $3 billion — recently sold Con-way’s truckload business to Canadian trucking firm TransForce Inc (OTCMKTS:TFIFF) for $558 million in a move to reduce the $5 billion in debt taken on to make all of these acquisitions.
Not a pivotal piece of Con-way’s business, TransForce’s offer was simply too good to pass up.
If you thought Pure Storage was a big revenue grower, XPO Logistics Inc (NYSE:XPO) is out of this world, having growing its revenues from $177 million in 2011 to a top ten global transportation and logistics company with $10.9 billion in revenue through the first three quarters of fiscal 2016 and estimated full-year revenues of more than $15 billion.
Most importantly, XPO generated free cash flow in Q3 2016 of $65 million and expects to be free cash flow positive for the entire year. Amazingly, it’s got a good chance to reach its adjusted Ebitda goal of $1.6 billion by fiscal 2018. And only seven years after CEO Bradley Jacobs and investors put $150 million into XPO, then called Express-1 Expedited Solutions, to gain majority control. Today, Jacobs Private Equity owns approximately 15% of XPO’s shares and 23% of the votes.
On the precipice of making money, XPO Logistics shareholders can expect more good things to happen with Jacobs at the helm.
Feast or Famine Stocks to Buy: DexCom (DXCM)
How you view DexCom, Inc.‘s (NASDAQ:DXCM) latest quarter depends on whether you’re a glass half-full or glass half empty type of person. The maker of continuous glucose monitoring (CGM) systems announced its Q3 2016 earnings Nov. 1; it lost 22 cents per share on $148.6 million in revenue.
If you’re a half full kind of person, you’ll view its 41% year-over-year increase in revenue and 55% reduction in its quarterly loss to $18.6 million, as real progress towards sustainable profitability. If you’re a half empty person, in the red is in the red, no matter the number. Working on bringing its CGM systems to the diabetes world since 1999, DexCom has yet to make a profit, but whose revenues will likely hit $1 billion within the next five years. If hope were all you needed to make money on a stock, DexCom would be at the top of anyone’s list.
DexCom’s argument when it comes to managing diabetes is that intermittent, finger-stick glucose monitoring isn’t enough. Patients tend to spend a great deal of their day outside a healthy glycemic range between 80 and 140 milligrams of glucose for every deciliter of blood. So, constant monitoring is the better alternative.
There are three million insulin intensive patients in the U.S. — 30 million patients if you include T2 non-insulin and non-intensive patients — and only a small percentage of those patients are using CGM. Despite intense competition from Medtronic PLC (NYSE:MDT), DexCom continues to improve its gross margins and generate free cash flow, a key ingredient to most successful and profitable businesses.
Good things are just around the corner.
Feast or Famine Stocks to Buy: Splunk (SPLK)
Earlier this year, Splunk Inc (NASDAQ:SPLK) stock traded in the low $30s, a level not seen since early 2013. If you were lucky enough to have bought SPLK stock at those prices you’ve done well, because it’s doubled in value since then.
What happened to reignite the analyzer of big data?
Like many software companies, it’s in the middle of transitioning from software licenses to the cloud. That transition’s been anything but smooth in terms of both top- and bottom-line growth. In early February, as some other cloud companies delivered disappointing results, Splunk stock went splat in sympathy with those stocks.
However, the downward trend was short-lived.
Splunk announced Q1 2016 earnings in late February that were much better than analyst expectations. And SPLK stock was off to the races, gaining 12% in March alone. But now analysts fear the move to the cloud has become a big headwind to Splunk’s historical growth — revenues have grown six-fold in past five years — and expect its Q3 2016 results to be a big disappointment leaving SPLK stock to flounder once more.
Splunk Cloud uptake will limit upside and expect “another deceleration relative to historical growth rate,” MKM Partners’ analyst Kevin Buttigieg recently said about Splunk’s upcoming Q3 earnings. “While investors had understood that the transition to the cloud could have a negative effect on margins, they are now grappling with its negative effect on top-line growth as well.”
Still not making money on an annual basis, but generating positive free cash flow, SPLK stock might be expensive at 10 times sales, eventually, the opportunities in Big Data analytics will pay handsomely. Splunk included.
Feast or Famine Stocks to Buy: Autodesk (ADSK)
The maker of 3D modeling software made the decision to transition to a subscription-based business model from a licensed-based one back in 2013. As part of that transition, it’s accepted operating losses, as the price it has to pay to remain competitive.
Since 2013, Autodesk, Inc. (NASDAQ:ADSK) operating profit has disappeared going from $305 million, or $1.32 per share, in fiscal 2013 to a company projected loss of at least $608 million, or $2.74 per share. On a non-GAAP basis, it’s less painful, with an estimated loss of between 55 cents and 70 cents per share. But it’s a loss nonetheless.
The subscription model, when done well, can lead to higher revenue and profits. Adobe Systems Incorporated (NASDAQ:ADBE) migrated to a subscription-based model starting in 2013, operating profits went from $1.2 billion in fiscal 2012 to $413 billion in fiscal 2014 — then the turnaround took hold. Adobe will likely generate operating profits of $1.4 billion or more in fiscal 2017, with operating margins returning to historical norms.
The big problem for Autodesk: It needs to speed up the transition. Adobe’s subscription revenues really took off over the past two fiscal years — $1.1 billion in 2013 to $3.2 billion in 2015 — while maintaining operating expenses at the same level. Over the past two years, Autodesk’s subscription revenues have increased by $200 million or about 20%. It has got to do better.
Keep the faith, ADSK shareholders. A couple of figures in its Q2 2016 report provide hope.
First, new model annualized recurring revenue increased 82% in the second quarter to $371 million. That’s a sign customers are slowly getting on board. The second sign things will get better is deferred revenue — up 23% to $1.5 billion in Q2 — the subscription fees to be paid in future months in order for customers to continue to use the software.
If these two keep going up on a quarterly basis and at a decent clip there’s no reason why it too can’t generate record profits just like Adobe.
Feast or Famine Stocks to Buy: Workday (WDAY)
Are you starting to sense a pattern here? It seems all of these cloud companies are growing revenues at a significant pace without much hope for immediate profits or even those on the horizon. Workday Inc (NYSE:WDAY) definitely fits into that category.
The cloud-based enterprise software company was founded in 2005 and went public in October 2012 at $28 per share. Trading above $80, IPO investors still holding have done well although WDAY stock has traded in a fairly tight range since April 2014. What’s going to get it unstuck?
Continue to grow subscriptions while slowing the amounts spent on marketing and product development which accounted for about 65% of its Q2 2016 operating expenses. Cut both of those by 25% while increasing subscription revenues by 30-40% per quarter and presto, you’ve got significant operating profits, not losses.
Financially, Workday’s business is getting stronger. Its trailing 12-month free cash flow is $178.1 million or about 13% of its revenue over those same 12 months. Adobe’s current trailing 12-month free cash flow is 31% of revenue. Clearly, WDAY has work to do (no pun intended) but it’s getting there.
As it continues to win new customers in both the human capital management and financial segments, many of whom are global powerhouses, WDAY should gain pricing power as its customers become attached at the hip to its cloud-based products.
When that happens, and it will, and Workday continues to maintain control over its expenses, the margins will go through the roof. And so will WDAY stock.
Feast or Famine Stocks to Buy: Tesla (TSLA)
It’s hard to believe but Tesla Motors Inc (NASDAQ:TSLA) actually made a profit in the third quarter, its first in more than three years. More importantly, it generated $176 million in free cash flow from the production of 25,185 vehicles. Its business is getting profitable just in time to begin producing the Model 3, Tesla’s version of the commuter car.
Orders for new Model S and Model X vehicles were up 68% in Q3 while actual production jumped 92% year-over-year. Tesla expects to deliver 50,000 new vehicles from June 2016 through the end of the year with slightly more than half that number in Q4.
So, although Tesla generated its first profit in a long time and business is looking up, it’s still going to lose in the order of $800 million in 2016, a substantial amount. Not to mention its profit only came after a $139 million in California zero emission credits which are almost 100% pure profit.
CEO Elon Musk has rolled the dice merging SolarCity Corp for $2.6 billion figuring the two businesses go together like peanut butter and jelly. It remains to be seen whether his vision will be correct. What we do know is they’ll both require a lot of cash until the potential synergies can be effectively — and profitably — exploited.
Of all the seven feast or famine stocks, Tesla is easily my favorite. Not because I think you’ll make the most amount of money but because Elon Musk is an innovator like no other — except maybe Jeff Bezos.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.