Wall Street Buzz: DraftKings, Dell, and Cybersecurity Stocks in Focus
Analysts on Wall Street are weighing in on a range of companies this Tuesday, with focus on online gambling, cybersecurity, and media. DraftKings, Dell, Warner Bros. Discovery, and Palo Alto Networks are among the stocks attracting attention from investors and analysts alike. While some companies are facing headwinds, others are showing signs of growth and opportunity.
Key Takeaways:
- DraftKings remains a top pick for Morgan Stanley despite revised performance outlooks. However, the firm has lowered its price target due to concerns about user economics and revenue growth.
- Dell sees less AI-driven demand, leading Barclays to upgrade the stock to equal weight while keeping its price target unchanged.
- Warner Bros. Discovery faces a downgrade from Bernstein after a "disappointing" second quarter, with revenue and EBITDA falling short of expectations.
- Xylem is viewed as a pure-play water company with substantial growth potential, leading UBS to initiate coverage with a buy rating.
- Palo Alto Networks sees a price target bump from Mizuho ahead of its upcoming earnings report, fueled by increased demand and improved channel partnerships.
DraftKings: Maintaining Top Pick Despite Headwinds
Morgan Stanley remains bullish on DraftKings, reiterating its top pick designation and overweight rating. However, the firm has trimmed its price target by $4 to $47, reflecting concerns about the company’s user economics. Despite the reduction, the new target still implies a 57.5% upside from Monday’s closing price.
Analyst Stephen Grambling attributed the price target adjustment to DraftKings’ second-quarter and 2024 EBITDA guidance, which fell below Morgan Stanley’s expectations. The company’s performance diverged significantly from the firm’s forecasts, prompting a deeper examination of its user economics. Consequently, Grambling believes estimates need to be lowered to account for higher revenue with a prolonged EBITDA ramp.
While Grambling acknowledges near-term headwinds from new customer growth, he also foresees long-term upside for DraftKings. He believes future revisions and buyback execution will drive the stock higher.
"While catalysts we focused on played out, the stock has stayed under pressure," Grambling told clients in a Tuesday note. "We see the next leg higher being driven by future revisions & buyback execution."
DraftKings has faced a challenging year, with its shares down more than 15%, a stark contrast to the 200% surge seen in 2023.
Dell’s AI Demand Slowdown Fuels Upgrading
Barclays has become less concerned about the long-term strength of AI demand for Dell in light of its recent share price decline. Analyst Tim Long has upgraded the technology stock to equal weight from underweight, while leaving his price target unchanged at $97. This price target represents a mere 1.8% upside from Monday’s closing price.
Long observed a 34% drop in Dell shares since its earnings report in late May, a period during which the S&P 500 gained roughly 1% and the tech-heavy Nasdaq Composite declined by less than 1%.
While characterizing AI orders and revenues for Dell as "strong", Long cautions investors to anticipate volatility and to monitor the company’s target customer base. He emphasizes that the end market is increasingly competitive, and Dell has not yet demonstrated a significant ability to leverage AI customers to other parts of its business.
"We had been concerned about the durability of AI revenues/orders, the impact on margins, and the lack of pull-through of other products and services," Long noted to clients. "We believe much of the share price contraction has been the market coming to terms with these structural issues surrounding the AI business."
Long believes the previous underweight thesis did not materialize, and the trading multiple has aligned more closely with historical trends. Nonetheless, he highlights continued challenges in the personal computer, server, and storage markets.
Despite its recent dip, Dell’s stock remains up by approximately 24.5% in 2024.
Warner Bros. Discovery: Downgraded After Disappointing Quarter
Bernstein has downgraded Warner Bros. Discovery after what the firm called an "ugly" second quarter. Analyst Laurent Yoon slashed the media stock from outperform to market perform and reduced his price target by $2 to $8. Despite the downgrade, this new target still indicates a 19.2% upside potential from Monday’s close.
Yoon’s downgrade follows the entertainment company’s missed quarterly expectations on adjusted EBITDA and revenue in its second-quarter earnings report released last week. The stock touched its lowest point since the 2022 WarnerMedia-Discovery merger following the earnings release.
"It sounds bad and it is," Yoon wrote to clients. "While there are some nuances, such as comps, the market reaction is reflective of the very little patience investors have for WBD given the ongoing deterioration."
Yoon pointed specifically to the 6% decline in revenue and 16% drop in EBITDA compared to the same period last year. Free cash flow plummeted by a substantial 43% over the same timeframe.
Further adding to the uncertainty is the NBA’s decision to partner with other media companies for its rights deal, ending a decades-long partnership with Warner Bros. Discovery’s Turner Sports. This has prompted a lawsuit from Warner Bros. Discovery against the NBA.
Warner Bros. Discovery shares slipped 0.8% in pre-market trading on Tuesday. The stock has sustained a 41% decline in 2024.
Xylem: Growth Potential Catches UBS’s Attention
UBS sees substantial growth opportunities in Xylem, a pure-play water company. Analyst Damian Karas initiated coverage on the stock with a buy rating and set a price target of $165, suggesting a potential 29.4% rally from Monday’s close.
Karas views Xylem as the leading pure-play water company, citing its "MSD+ growth profile", which is less cyclical than its peers and offers a margin opportunity of approximately 100 basis points annually.
Karas observed that the stock currently only incorporates a compound annual sales growth rate of 2.7% through 2028, which is roughly in line with its historical growth. However, UBS anticipates growth nearer to 6%, potentially exceeding current trader expectations.
The firm anticipates a multi-decade growth cycle for Xylem, driven by urbanization and governmental support for infrastructure upgrades. Karas also highlights the company’s "position of strength" following its recent $7.5 billion acquisition of Evoqua, which further expands its water-focused portfolio.
Xylem shares have gained 11.5% this year.
Palo Alto Networks: Price Target Increased Ahead of Earnings
Investors are encouraged to accumulate shares of Palo Alto Networks ahead of its upcoming earnings release, according to Mizuho. Analyst Gregg Moskowitz raised his price target on the cybersecurity stock to $380 from $350, maintaining his outperform rating. This new forecast implies nearly 15% upside potential.
Moskowitz cites increased demand for Palo Alto Networks, particularly in large deals, as a key driver for the price target bump. He notes that customers are consolidating purchases with Palo Alto Networks, and demand appears healthier across both firewalls and subscriptions.
"Our checks indicate an uptick in PANW demand for the first time in several quarters. More specifically, large deal activity has been stronger, customers have been consolidating more purchases with PANW, and demand has sounded healthier across both firewalls and subscriptions," Moskowitz wrote in a note to clients.
He also points to recent leadership changes that are improving relations with key channel partners.
Palo Alto Networks is scheduled to release its earnings report on August 19. The stock is up more than 12% for the year, but has dipped more than 1% over the past month.
