Jim Simons is a numbers man who has built a Wall Street fortune on back of his analytical prowess. In 2016, the man earned a monster $1.6 billion- the best in the hedge-fund arena. Keep in mind, this is considering without working each day, having retired 8 years ago from the fiercely lucrative Renaissance Technologies firm he founded in the early 1980s. Yet, Simons still plays a key role and reaps the rewards of a firm that takes Ph.D. math geniuses to task; all to figure out understated patterns in Wall Street data that can be anticipated in advance. How did this quant investing king approach tech stocks QUALCOMM, Inc. (NASDAQ:QCOM) and Arista Networks Inc (NYSE:ANET) in the fourth quarter?
Known as legend in the math universe, Simons’ quant savvy has led him to a fund that manages almost $50 billion and according to Forbes, $20 billion in net worth to his name. In other words, this is a man to trust on the Street. Consider that last year was a year that hedge fund managers did not see their best year- and yet, Simons was one of two sole managers to gain $1 billion plus. Moreover, Simons is matchless, unrivaled in having made Alpha’s Rich List each year.
Algorithms have taken Simons to the start of his thriving career as a budding 17-year-old at M.I.T to Ph.D. from U.C. Berkeley by 23. A code-cracker for other countries while designing his own for Princeton-based Institute for Defense Analyses, the man went on to break codes for the U.S. during the Vietnam War. The same elaborate numbers Simons leaned on to unlock codes he deduced could throw light upon financial patterns in Wall Street. Now, the math genius has landed himself by Forbes’ reckoning as the twenty-fifth-wealthiest person in the United States. Even Marilyn Simons, Simons’ wife, told The New Yorker that her husband is in all intents and purposes an “information processor.” Not only is Simons swimming in billions, he is also a big philanthropist, having contributed over $2 billion to charity- all while chairing for Math for America (to help foster a new line of brilliant math scholars) and supporting key autism research.
Let’s take a closer look to see just how the numbers added up for tech players QCOM and ANET:
Qualcomm Gets Whacked Almost 3 Million Shares
In his latest quarterly play, Simons chose to wash his hands of 2,787,286 Qualcomm shares worth $178,433,577- slicing down 95% of his stake in the chip giant. Now, the founder of Renaissance has 146,758 shares worth $9,395,000 in the company.
Notably, word on the Street has it that QCOM has been involved in trying to gain the upper hand in a deal to buy out NXP Semiconductors- according to CNBC, QCOM’s advisers seem to be circling “the low $120’s” when it comes to shaking hands on a final deal. It’s been around a year and four months from the time QCOM first was raring to shell out $110 per share to take on NXP; but ever since, a lot of shareholders (with a charge from activist hedge fund Elliott Management) have wondered whether NXP may more valuable staying solo. Right now, the cash agreement towers at a monster $44 billion. Meanwhile, QCOM has a rival in AVGO trying to place a bid for $82 per share in a cash-meets-stock agreement. Is QCOM prepared to dish out a higher price to acquire the shares it needs to dot the i’s and cross the t’s in the deal? The chip giant has indicated it has to bite into at least 70% of NXP’s outstanding shares in a tender offer- 10% less than under previous terms.
Top analyst Amit Daryanani at RBC Capital notes, “We note the incremental positive is AVGO’s willingness to agree to certain potential antitrust-related divestitures beyond the terms in the merger agreement (more flexibility about what might get divested). In addition to the bid price, we think QCOM’s major concern about the proposed transaction remains AVGO’s intention for QTL and AVGO’s request for controlling all material decisions regarding QTL during the ~18-month period between signing and a potential closing, which could be disruptive to the licensing business operation. Additionally, QCOM maintains $8B break-up fees are not enough to protect its shareholders from risks of agreeing to a transaction that may not be closed. Net/net: We think the saga continues. The next step will be NXPI approval from MOFCOM, what does QCOM eventually do with its $110 bid and the upcoming QCOM shareholder meeting.”
Bullish on QCOM’s bigger picture, the analyst rates an Outperform rating on QCOM stock with a price target of $80, which suggests a 27% upside potential from current levels.
Amit Daryanani has a very good TipRanks score with an 85% success rate and a high ranking of #11 out of 4,761 analysts. Daryanani yields 29.2% in his annual returns. However, when recommending QCOM, Daryanani forfeits 1.6% in average profits on the stock.
Perhaps the quant king is bearish on the deal; either way, Simons is ducking out in a big way of the chip giant.
TipRanks showcases a largely positive analyst consensus surveying this chip giant. Out of 10 analysts polled in the last 3 months, 7 are bullish on QCOM stock with just 3 playing it safe on the sidelines. With a return potential of 18%, the stock’s consensus target price stands at $75.56.
Arista Networks Gets an Ante Up
Arista must be showing signs of promise to the quant king, as Simons sprung for 150,000 shares in the tech stock as per the recent SEC filing- a 23% boost in the holding. Simons now boasts 826,200 shares worth $194,636,000 in the company.
Last week, ANET shares took a close to 19% crash on the heels of its fourth quarter earnings show and 2018 guide. The real culprit at play? A long-winded “workaround” hurdle from a legal and marketing clash with nemesis CSCO. The patent infringement fight has largely been stewing from a personal grudge between former CSCO CEO John Chambers and a former star exec-Jayshree Ullal, once Chambers’ esteemed colleague. Cisco claims ANET has thieved proprietary technology.
This patent drama has led to revenue gains turning sluggish from cloud customer giants including Microsoft, Amazon, and Facebook. The very companies that CSCO is sore that ANET has taken in recent years. Yet, the fourth quarter print was largely a standout one, so perhaps Simons is seeing the forest through the trees here.
Guidance was not nearly as strong as fourth quarter results for the tech player, however, and negative voices on the Street could read this as rising rivalry from Cisco in the cloud arena.
BMO analyst Tim Long commends what was another “great quarter” from ANET, but worries that growth is “decelerating.”
As such, the analyst reiterates a Market Perform rating on ANET stock while hiking the price target from $205 to $270, which implies an 8% upside from where the shares last closed. (To watch Long’s track record, click here)
This is a tech player that outperformed “on every relevant metric as management continues to execute,” cheers Long.
For the fourth quarter, ANET yielded $468 million in revenues, trouncing the analyst’s expectation of $462 million as well as the Street’s $464 million. The company’s gross margin hit 65.9%, hitting ahead of the analyst’s 64.7% projection thanks to an improved customer mix with operating margins of 36.1% hitting the analyst’s 32.7% estimate out of the park. ANET’s EPS of $1.71 reached meaningfully ahead of the analyst’s $1.38 forecast along with the Street’s $1.42 projection, including roughly $0.15 from a lesser tax rate.
Yet, the guide was less impressive from where Long is standing, with an outlook of $450 to $468 million only more or less aligning with his estimate of $457 million and the Street’s $459 million- which takes under account further delays correlated with workaround testing at cloud customers.
The analyst highlights, “Margin guidance was disappointing as gross margins of 63-65%, and operating margins of 32% are below prior expectations. Management expects 2018 revenue growth to slow to a mid-20s range given tougher compares.”
Meanwhile, “The cloud titan softness continued, driven by further delays in patent workaround testing for some of the more complex use cases,” adds Long.
Overall, “Despite additional cloud delays, Arista posted yet another impressive quarter of strong revenue growth and margin improvement. Workaround testing at certain cloud customers is taking longer than expected, though momentum across other parts of the business remains strong, particularly in the Enterprise, which continues to benefit from adoption of CloudVision. Management’s outlook was mixed, implying sequential revenue declines in Q1, and a deceleration to mid-20% revenue growth for 2018. While we believe guidance may prove conservative, we remain on the sidelines as the risk/reward is less compelling at current levels,” Long contends.
Long takes his 2018 EPS forecast from $6.30 to $7.01 in reaction to the strength of the quarter and sets a new 2019 EPS projection of $8.57.
TipRanks suggests Wall Street is torn between the bullish camp and the analysts who opt to hedge their bets on the computer networking firm. Based on 22 analysts polled in the last 3 months, 12 rate a Buy on ANET stock while 10 maintain a Hold. Yet, is the stock overvalued or undervalued taking under account these analysts’ expectations? Consider that the 12-month average price target of $285.42 boasts a healthy upside potential of 14% from where the shares last closed.