MKS Instruments, Inc

MKS Instruments, Inc. (NASDAQ: MKSI) is a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for its customers.

Key highlights 

• Expanding footprints: With its newest HDI PCB laser production technology, the firm continues to extend its industrial presence in Asia. TTM Technologies, Inc, a key technological leader in the HDI PCB manufacturing industry, recently confirmed an order for the ESI® GeodeTM HDI through drilling system for their plant in Guangzhou, China.

• Improving operating matrix: Despite the turmoiled period in 2020, the Company maintained its pace and witnessed spirited performance across its gross margin, operating margin and net margin. We believe the momentum to continue in the foreseeable future, as the Company is expanding globally to support future growth.
  

• Healthy operating cash flow: Due to excellent operational performance, the business generated robust cash flow from operations, In Q2 2021, the company clocked net cash provided by operating activities of USD 165.2 million compared to USD 139.0 million in the previous corresponding period. It also witnessed a sequential growth in its operating cash flows which is a key positive.
  

• Industry beating margins: The management’s solid determination helped them in leaping the industry median margins on many fronts in Q2 2021. Healthy margins reflect the company’s efficiency over the industry.

Financial overview of Q2 2021 (in millions of USD) 

• In Q2 2021, the company reported healthy sales at USD 749.9 million compared to USD 544.3 million in the previous corresponding period. The increase in revenue was mainly due to higher net product revenues from the semiconductor customers.
• Gross profit in the reported period stood at USD 355.2 million against USD 246.3 million in pcp. The gross margin also increased to 47.4% V/s 45.3%.
• Income from the operations was of USD 186.3 million compared to USD 100.8 million in pcp.
• On the back of higher revenue and healthy volumes, the company clocked elevated net income of USD 146.5 million in the reported period against USD 73.7 million in pcp.
  

Risks associated with investment

The Biden administration recently presented a tax proposal that included a number of corporate tax measures, one of which would boost the corporate income tax rate in the United States from 21% to 28%. The company's income tax expenditure would rise significantly if this tax proposal is approved in its current form. 

Valuation Methodology (Illustrative): EV/Sales 

Stock recommendation

Despite rising supply restrictions for key components, the firm achieved another quarter of record sales and profitability. Its Surround the Chamber® portfolio continues to enjoy strong demand and design win activity across a wide range of applications, while revenue from its Advanced Markets grew by more than 40% year-over-year in the quarter. Photon Control Inc. was recently purchased by the firm. We expect the purchase would further solidify the company's objective to improve the Surround the Chamber® offering. Meanwhile, business levels remain robust, and barring supply limitations, the firm anticipates revenue to rise sequentially in the third quarter, which is a significant positive. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of USD 147.18 on August 31, 2021. We have considered Advanced Energy Industries Inc, Coherent Inc, IPG Photonics Corp etc., as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 31, 2021). Source: REFINITIV, Analysis by Kalkine Group

Fastly, Inc.

Fastly, Inc. (NYSE: FSLY) provides a cloud-based platform which enables customers to create great digital experiences promptly, securely, and serving and securing its customers’ applications as close to their end-users as possible — at the edge of the internet.

Key Highlights:

• Strong Global presence: The company has solid global presence across more than 28 countries and caters to more than 61 markets. At the end of Q2FY21, the group’s global capacity reached over 145 Tera Bits/sec. Additionally, the company has entered three new markets during the quarter, which are in Lima, Munich, and Ghana. The company offers powerful security solutions to detect and defend against cyber-attacks. The company uses accurate Signal Sciences technology coupled with the company’s cloud service, which enhances customer satisfaction, and is a key positive.
• Impressive FY21 Outlook: Over the years, the company reported strong revenue growth, supported by impressive renewal of services. The management believes that the scope of expansion within the edge cloud segments remains high in the coming years, supported by increase customer traction for the above services. For FY21, the company forecasts its revenue in between USD 340 – USD 350 million, higher than USD 290.9 million in FY20.
• Closed above the short-term moving averages: The stock of FSLY closed above its immediate support levels of 20-SMA and 9-SMA, respectively, indicating a positive price action. Moreover, 14-days RSI is hovering at 46.67, with a bullish bias.

Technical Price Chart. Source: REFINITIV, Analysis by Kalkine Group

Q2FY21 Financial Highlights:

• FSLY announces its quarterly result, wherein the company posted Revenue of USD 85.026 million, significantly higher than USD 74.663 million in the previous corresponding period (pcp).
• Gross profit stood at USD 44.706 million, as compared to USD 44.966 million in pcp, thanks to the elevated revenue, partially offset by higher cost of revenue.
• Total operating expenses stood higher at USD 102.174 million, from USD 59.404 million in the previous corresponding period (pcp). The increase was primarily due to a higher Research and development expense, coupled with higher sales & marketing and general & administrative expenses.
• Loss from operations widened to USD 57.468 million, from a loss of USD 14.438 million in pcp.
• The group posted a net loss of USD 58.295 million, as compared to a loss of USD 14.460 million in pcp. The surge was primarily due to higher operating loss, coupled with higher interest expense.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The group has witnessed higher research and development expense and a surge in other input costs due to its expansion across new geographies and across new industries. Continuation of the above trend would affect the cash flow and profitability of the group.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The company is witnessing strong customer interest from several industries, like gaming, education, financial services etc. Notably, the customer count grew from 2,458 in Q1FY21 to 2,581 in Q2FY21, which is a key positive. We expect the above momentum to continue in the coming quarters. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have peers like ServiceNow Inc, Axon Enterprise Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of USD 43.60 on August 31, 2021.

One-Year Technical Price Chart (as on August 31, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.