Oclaro: Ride That Optical Spending Cycle, Says Jefferies

Shares of fiber-optic component supplier Oclaro (OCLR) are up 13 cents, or 1.5%, at $8.68, after Jefferies & Co.’s James Kisner this morning started coverage of the stock with a Buy rating, and an $11.25 price target, writing that the company stands to benefit from three things: Verizon Communications (VZ) using its parts for “100-gig” networks, China, and data center networking.

Kisner highlights a “major turnaround” in the company’s financials in the last two years:

As shown below, OCLR’s financial performance has been significantly improving over the last few years. Operating margin troughed at -27% in September of 2013, and gross margin troughed at 10% in March of 2010. Since then, the company has been transformed through sales of several businesses (see M&A section below) and emphasis on segments where the company has the best ability to differentiate from a technical perspective. Gross margins are now in the 30’s, and operating margin is now double digit.

Here’s Kisner’s infographic on that (click to see it larger):

Tech Today: Twitter, NXP Keep Rising on M&A; Apple’s Tight iPhone 7 Supply

Here are some things going on today in your world of tech:

Shares of Twitter (TWTR) are up 85 cents, or 3.7%, at $23.90, following late Friday’s report from Bloomberg that Google (GOOGL) has hired investment bankers Lazard to help it contemplate a bid for Twitter.

Speaking of M&A, shares of NXP Semiconductors (NXPI) are up $1.69, or 1.7%, at $103.71, following a Bloomberg report late Friday that the company hired Qatalyst Partners “to begin a formal sale process to find a buyer for NXP,” writing that Qualcomm (QCOM) remains among the most likely buyers, but also Broadcom (AVGO), Intel (INTC), and Samsung Electronics (005930KS).

RBC Capital concluded in a note this morning that the highest a Qualcomm bid for the company might go is $120 to $130, given Qualcomm’s own targets for leverage and for accretion from an NXP deal.

Speaking of chips, the supply chain offers some good news today. BlueFin Research Partners report that “our Intel production estimates for September indicate a steady pace month-on-month.”

Cowen & Co.’s Timothy Arcuri writes that the “setup remains overall positive” for chip stocks, as “we continue to talk to a host of new investors every week, many of whom were formerly focused on other areas (like software and internet – which was recently overtaken by semis in terms of stock performance).”

Shares of Intel are up 7 cents at $37.82.

In other chip news, shares of Broadcom are down 43 cents at $172.09 despite a positive feature on the stock in Barron’s print magazine by my colleague Jack Hough. Jack argues the stock could rise 20% thanks in part to more content in Apple‘s (AAPL) iPhone 7.

Speaking of Apple, the supply chain also gets a check this morning. Piper Jaffray checked with 134 Apple Stores in the U.S. and found some improvement in availability of iPhone 7, but that overall supply continues to be “constrained.”

Pacific Crest also looked into the production side of things, in Taiwan, and found a slight uptick in our estimates for iPhone 7/7+ component orders in 2H:C2016.”

Shares of Apple are down 56 cents, or half a percent, at $112.49.

Thinking of Not Buying an iPhone? Try Alcatel’s Idol, Huawei’s P9

Perhaps you don’t like the long wait times for Apple‘s (AAPL) iPhone 7, with the newly introduced “jet black” version not available in the U.S. till November.

Or maybe you’re upset with Apple removing the 3.5-millimeter headphone jack.

Or maybe you just don’t like Apple’s products at all, but your Samsung Electronics (005930KS) “Note 7” is a fire hazard.

You’re in luck, some nice phones are on the market, running Alphabet‘s (GOOGL) Google’s Android software, and more are on the way in coming weeks.

I’ve recently been trying the “Idol 4S,” a flagship phone from Hong Kong-based TCL Communications Tech Holdings (2618HK), offered as an exclusive for the U.S. market.

Twitter Surges 6%: Alphabet Taps Lazard to Ponder a Bid, Says Bloomberg

Capping off a frantic week of speculation about potential buyouts of Twitter (TWTR), Bloomberg’s Alex Sherman and Mark Bergen reported late Friday, after market close, that Alphabet (GOOGL) is has “tapped” Lazard Ltd. to “evaluate” whether to make a bid for Twitter, citing one unnamed source.

The authors note that multiple unnamed sources have said Twitter has hired Goldman Sachs and Allen & Co. to field potential offers.

Twitter shares surged $1.33, or almost 6%, to $24.38, in late trading, and Alphabet stock was up 83 cents at $804.89.

Nvidia: A Brilliantly Cloudy Outlook, Says Global Equities

A couple Street folks today were sounding upbeat about prospects for chip maker Nvidia (NVDA) based on today about two product announcements this week in the world of cloud computing.

One bit of news was Amazon announcing this morning it will rent use of Nvidia’s graphics processing unit (GPU) chips in its Amazon Web Services, as what are called “P2 Instances,” boasting, “With up to 16 NVIDIA Tesla K80 GPUs, P2 instances are the most powerful GPU instances available in the cloud.”

The other bit of news was Microsoft yesterday saying it’s forming a new division, “Microsoft AI and and Research Group,” which will be staffed with more than 5,000 people brought together from across the company. The company also said it will be rolling out some Azure offerings with Nvidia chips.

Maxim, Semtech, Xilinx Among Potential M&A Targets, Says B. Riley

Amidst rumors of a $30 billion or greater buyout of NXP Semiconductors (NXPI) by Qualcomm (QCOM), B. Riley’s chip analyst, Craig Ellis, on Friday offered up his thoughts on what else to expect in semiconductor M&A.

Ellis notes there have been 74 M&A deals, of both public and private companies, since the end of 2012.

After all that action, “targets are meaningfully diminished, but with room left for further consolidation,” he writes.

He’s got a basket to consider, including Maxim Integrated Products (MXIM), Semtech (SMTC), and Xilinx (XLNX):

Fitbit: Raymond James, Morgan Stanley Defend ‘Charge 2′ Demand

In response to yesterday’s downgrade of Fitbit (FIT) by Pacific Crest’s Brad Erickson, a couple of bulls on the stock Friday came to the company’s defense.

Erickson had opined that inventory of the “Fitbit Charge 2,” introduced this month, may already be piling up on retailers’ shelves.

Tavis McCourt with Raymond James, who maintains an Outperform rating on the shares, wrote that “in general we view these concerns as overblown and think a roughly 10% discount is likely a good opportunity leading into a 3Q print that has higher upside risk than downside risk, in our opinion.”

For one thing, his review of things such as “bestseller lists” suggest there’s no drop in actual user demand for the product: “Over the last few weeks, we have seen no meaningful changes in these indicators and believe that interest in and demand for Fitbit’s products is likely very steady.”

Apple: September, December Could See iPhone Upside, Says Morgan Stanley

Contrary to some grumbling about potential fall-off in sales of Apple’s (AAPL) recently released iPhone 7, Morgan Stanley’s Katy Huberty today penned a brief, upbeat item in response to what she notes are investors’ concerns about the trajectory of such sales.

The new gadget may not be selling right now at the levels of two years’ ago’s iPhone 6, writes Huberty, but that’s not necessarily a serious issue, demand is probably still better than iPhone 6S:

Investors are trying to reconcile positive supply chain data points, especially from DigiTimes this week and previously from T-Mobile and Sprint, with negative data points from other suppliers and also Asahi’s report on Japan demand. Our view: Due to supply constraints and a wider distribution this year (28 regions vs. 12 last year), it is not surprising certain carriers or regions are seeing lower initial sell-out than last year. Based on our analysis of Google Trends data for the pre-order (September 4-10) and first weekend sales (11-17) weeks, we believe interest and purchase intention for iPhone 7 is higher than 6s last cycle but lower than the 6 cycle before that. We hold off on raising estimates until we see where supply/demand stabilizes in October post carrier subsidy and negative Note 7 headline catalysts. Increased iPhone 7 production late in the September quarter could translate to slight upside in Apple’s September quarter, with revenue potentially reaching the high-end of Apple’s $45.5-47.5B guidance range. This could imply mid-40M iPhones and/or better ASP than our model at 43M and $630. December quarter could see slightly more upside to our 72M iPhones and $655 ASP if upward production forecasts continue and 7 Plus mix holds up.

Huberty has an Overweight rating on Apple shares, and a $123 price target.

Apple shares today closed up 87 cents, or 0.8%, at $113.05.

Qualcomm: Cowen ‘Would Love to See This Deal Consummated’

As mentioned earlier, price targets and ratings were going up today for Qualcomm (QCOM) after a Wall Street Journal report yesterday said the company is in talks to buy NXP Semiconductors (NXPI).

Qualcomm today closed up $1.05, or 1.6%, at $68.50, while NXP shares ended the session up another $5.89, or 6%, at $102.01, after yesterday’s surge of 17%.

Mizuho Securities USA’s Vijay Rakesh raised his rating on shares of Qualcomm to Buy from Neutral, with a $75 price target, and reiterated his Buy recommendation on NXP shares.

“We believe the potential acquisition of NXPI will give it in-cockpit market share, powertrain, safety, and an automotive processor portfolio from FSL that creates the first end-to-end semiconductor auto supplier of the future,” wrote Rakesh.

It’s all about autos, writes Rakesh:

Universal Display: Relax, Says Cowen, Their OLED Tech Still Needed for iPhone 8

Shares of organic light-emitting diode technology maker Universal Display (OLED) today closed up 25 cents, or half a percent, at $55.51, despite some negative chatter about the company’s standing as a supplier to Apple (AAPL) for the next iPhone, presumably an “iPhone 8.”

The stock dropped sharply at the open, but rose steadily the rest of the session, following a report by publication Electronic Times, which said that Samsung Display has been chosen to supply Apple for the phone. The article does not mention Universal at all.

Another article, by Bloomberg’s Takashi Amano, claims that “Apple is in negotiations with Sharp to secure organic LED displays for the iPhone maker’s next-generation of devices,” citing a single unnamed source.

Cowen & Co.’s Robert Stone, who has an Outperform rating on Universal shares, and a $75 price target, thinks the worrying is all for nothing. “To make a commercially viable product (brightness, lifetime, battery life), UDC’s PHOLED materials are essential,” he writes. “Samsung and LG Display are under contract, and we expect any new suppliers will be also. Investors should buy the weakness.”

He goes on to explain:

Yesterday, an article in Korea IT News, which was principally about a flexible printed circuit board supplier, also mentioned a number of companies that were thought to be competing to supply materials for iPhone AMOLED displays. This list didn’t include OLED (Universal Display). This makes sense, because there isn’t any competition for PHOLEDs. Samsung uses OLED as a sole source. The other companies will be supplying other materials used in the stack recipe. Today, a Bloomberg article indicated that Sharp is in talks to supply AMOLEDs for iPhone starting in 2018. Since Sharp is not yet under a long-term commercial contract with OLED, some investors may misunderstand this as a new competitor. We expect Sharp/Foxconn will sign a long-term contract once they are ready to begin mass production, because this will give them much better pricing for the emitter materials. While in development, panel makers pay a higher price per kg, which includes an embedded royalty.