Declaring a stock to be "risky" isn't the same as declaring it to be overvalued or predicting it will soon plunge. It simply means that its story comes with one or more big risks attached that could unravel the hopes and dreams of bulls. For example, one can be quite bullish on a restaurant chain's growth potential, but still consider its shares a "risky" investment due to a high valuation and the potential for food and labor cost hikes to hit its bottom line.
In the rapidly-changing landscapes of tech, a case can be made that quite a few companies merit being described as "risky" investments, including a number that are well-run and have major growth opportunities in front of them. Here are three that I would argue have meaningful risks attached.
For now, business is booming for the Latin America's e-commerce leader: MercadoLibre Inc.'s (MELI) revenue rose 59% annually in Q2, and its gross merchandise volume (GMV) grew 36%. The company is benefiting not just from transaction growth within online retail markets that still have plenty of room to grow, but also from the large-scale adoption of the payment and shipping services it provides sellers on its marketplaces. Investors have certainly noticed: Shares were up 76% on the year before dropping 10% on Oct. 12.
But about that 10% drop: It came after a local media report indicated Amazon.com Inc. (AMZN) will soon expand its tiny Brazilian e-commerce operation -- for now, it's centered around selling books and Kindle e-readers -- to more broadly sell electronics. The report followed one from Bloomberg indicating Amazon is stepping up its Brazilian hiring activity.
With Brazil serving as MercadoLibre's largest market, one in which the company's revenue rose 60% last quarter in local currency and 75% in dollars, it's not surprising that markets reacted the way they did. But Amazon's competitive threat isn't limited to Brazil: The company is just 7 months removed from launching Amazon Prime in Mexico (it costs just $23 there for the first year, and $46 per year afterward), another major MercadoLibre market. And it was reported in September to be prepping the launch of a million-square-foot warehouse near Mexico City.
It's worth keeping in mind here that Amazon's management has signaled that their company's international expansion to date has been limited by the amount of time and attention management can devote to various expansion efforts. With a lot of resources devoted in recent years to expanding in Europe, Japan and India, Latin America has been on the backburner. But it looks as if that's changing, and as it does, a big element of uncertainty is being added to MercadoLibre's story.
The reason why Cirrus Logic Inc. (CRUS) is a risky investment -- at least over the long-term -- is pretty simple: Apple Inc. (AAPL) has long accounted for a solid majority of the audio codec chip developer's revenue (the number was 76% in the June quarter), and Tim Cook's company has grown fond of internally designing more and more of the silicon that goes inside its phones and tablets. Apple's chip design work now covers CPU cores, GPU cores, image processors, fingerprint sensors and flash memory controllers, and the company reportedly has an interest in developing 4G modems, display drivers and touch controllers.
Dialog Semiconductor, a long-time supplier of power management ICs (PMICs) for iDevices, saw its shares tumble in April after an analyst report stated there's "strong evidence" Apple is developing a PMIC that it plans to start using within iPhones "as soon as 2019." Not long before that, GPU core developer Imagination Technologies lost over half its value on news (confirmed by the A11 Bionic chip found in the iPhone 8 and X) Apple won't use its GPU cores in future chip designs.
For now, Apple's relationship with Cirrus looks rock-solid, with Cirrus' smart codecs and amplifier chips remaining iPhone and iPad staples. But something similar could've been said about Dialog and Imagination's offerings going into this year.
Working in Seagate Technology plc's (STX) favor: Its shares are fairly cheap -- they trade for about 9 times a fiscal 2018 (ends in June) EPS consensus of $3.68, a low multiple even after accounting for $2.5 billion in net debt -- and its core business (hard drives) is a near-duopoly with pretty stable pricing. Working against it: That business has high fixed costs and is being steadily cannibalized by solid-state drive (SSD) adoption. Seagate's hard drive shipments fell 11% in fiscal 2017 to 150 million units, and are expected on average by analysts to drop another 7% in fiscal 2018.
Markets definitely aren't oblivious to this trend, as Seagate's valuation shows. And Seagate isn't either, as shown both by its ongoing layoffs and its attempts to expand its SSD product line. But considering how much consumers and businesses are warming to SSDs in the PC and enterprise/cloud storage markets due to their performance, power and reliability advantages, and how much SSD prices are set to drop in the coming years as cheaper 3D NAND flash memory chips proliferate, hard drive cannibalization could happen at a faster pace than many expect.
Moreover, while Seagate is trying to grow its SSD sales, the market is very competitive. And unlike rivals such as Samsung, Western Digital, Toshiba and Intel, all of which have major flash manufacturing operations, the company can't source its flash at cost. All of that could make current analyst expectations for Seagate's sales to drop less than 4% between fiscal 2018 and fiscal 2020 look too generous.
And for Seagate, a sales plunge would not only sting its bottom line but put at risk the company's hefty dividend, which currently delivers a 7.3% yield. Especially with Seagate having just chipped in $1.25 billion to an $18 billion Bain Capital-led deal to buy Toshiba's flash memory unit. If management decides that bottom-line pressures leave it with no choice but to cut the dividend, many of the yield-chasers that have bought Seagate shares in recent years will likely jump ship.
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