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Techs Flash Inner Strength; Lam Research, Broadcom Basing

The Nasdaq traded 2.6% higher for the week in afternoon trade Wednesday, easily outpacing the S&P 500 and the Dow and suggesting that beleaguered tech stocks might be regaining their groove. Two of the strongest tech groups over the past five days have been chip equipment makers and fabless chip designers. The chip equipment group is up almost 7% in the past week. The 41-stock fabless group gained more than 5%. That wasn’t enough to lift either group into IBD’s top industry rankings. Chip equipment makers ranked No. 57. Fabless ranked No. 86. Those rankings make them stronger than most of the 197 industries tracked by IBD . But they still have work to do before reaching the top groups, which are known to produce leading stocks in rising markets. Use IBD’s Stock Checkup function to check into this tech stock that broke out Wednesday. But both groups do show some potential fodder for investors seeking stocks to place on watch lists. Among chip equipment makers, Lam Research ( LRCX ) and KLA-Tencor ( KLAC ) are basing amid expected earnings turnarounds. The two agreed to a $10.6 billion merger, sending both stocks abruptly higher in late October. Lam has since gyrated widely, stretching to retest both old lows and highs. It rebounded from 40-week support last week, and retook its 10-week line on Tuesday. It is below an 83.93 buy point. KLA has been behaving better. Two weeks off the bottom of its second shallow base since January, the stock retook its 50-day line Tuesday. Shares have been in a slow uptrend since October and are less than 3% below a 73.69 buy point. The Department of Justice last week requested additional information on the proposed combination of the two companies. The DOJ has been no friend to big mergers of late. But both Lam and KLA are California-based companies, so they don’t trigger the same tax-scheme alarms as cross-border inversion deals. The companies expect to close the deal in the third quarter. Combined, the two companies’ revenue would almost measure up to that of Applied Materials ( AMAT ), which reported $9.6 billion last year. Applied Materials broke out to 52-week highs last week, clearing a 21.77 buy point in heavy trade on Friday. The Santa Clara, Calif.-based outfit sharply raised its EPS and revenue guidance to above consensus expectations after Thursday’s close. Shares ended Wednesday almost 9% past the buy point. The fabless chip group is made up of chip designers that outsource the bulk of their manufacturing. These tend to have lower costs and higher profit margins than full-blown chip manufacturers, and so they are considered a separate group. Within this group, Nvidia ( NVDA ) is soaring. A specialist in high-end video-processing chips, it cleared a cup-with-handle base in March, then spiked after a test of support at its 10-week line early in May. Advanced Micro Devices ( AMD ) has also gone vertical since clearing a cup-with-handle base in massive trade in May. The stock is low-priced, but the company is a leader in microprocessing chips. Also in the group, Silicon Motion ( SIMO ) appears unstoppable, tinkering with new highs after climbing in 17 of 19 recent weeks. MaxLinear ( MXL ) has advanced through as series of bases over the past eight months. It’s near the top of a buy range from a 19.20 buy point in a six-week cup base. It is also edging for the first time into new highs, above its prior zenith set in March 2010 – in the session after its IPO. Broadcom ( AVGO ) is basing; it’s 3% below a 158.02 buy point in a flat base. Cirrus Logic ( CRUS ) is building what may become a base, but has been struggling below a May 2015 high. One wild card in the group is Taiwanese Himax Technologies ( HIMX ). It is rising off a test of its 40-week line in the seventh week of a possible base. Analyst consensus calls for a 100% EPS gain in the current quarter – its first gain in seven quarters. Revenue is projected to jump 19% – its best increase since 2011. For the year, forecasts call for a 128% EPS increase on a 33% gain in sales.

Tesla Faces Model 3 ‘Execution Risk’; Stock Meets Resistance

The complexity and steepness of the Model 3 production ramp planned by Tesla Motors ( TSLA ) is likely to bring big challenges and increased risks, says one analyst who lowered his expectations for the electric car maker. “We are tempering our delivery forecast to account for a slower Model 3 ramp,” wrote RBC Capital Markets analyst Joseph Spak, who lowered his price target on Tesla to 242 from 252. Tesla shares rose 0.8% to 219.58 on the stock market today . But shares met resistance at the 200-day moving average. In February, Tesla hit a nearly two-year low of about 141. Tesla said it plans to deliver 500,000 Model 3 sedans by 2018 and deliver 1 million by 2020. “We are all for setting aggressive internal and supplier goals, but as an investor, we believe these targets should be moderated,” Spak wrote. “We were always below Tesla’s vehicle delivery targets of 500,000 by 2018 and 1 million by 2020, but after speaking with industry contacts and reconsidering our model, we are tempering our delivery forecast to account for a slower Model 3 ramp,” he said. The ramp and scale of Tesla’s Model 3 is significantly larger than those for previous models. The starting price for the all-electric Model 3 is $35,000. “In the interim, the Tesla story is about manufacturing, and execution risk is elevated,” Spak wrote. “For the investor with long-term horizons, the ramp is less of a concern. For others, expect a choppy ride with sentiment a large driving factor.” To help accelerate the production ramp, Tesla raised $1.4 billion in capital in a secondary offering, adding to the $1.44 billion in cash and equivalents on the balance sheet as of March 31. Spak forecast a Tesla cash burn of about $1.8 billion this year and $1.3 billion in 2017. By 2018, he estimates, Tesla will have used up its cash supply, suggesting additional capital raises are likely needed. “For now we put another $1 billion equity raise in 2017,” Spak wrote.

Alibaba Has Worst Day In A Year On SEC Accounting Probe

Alibaba ( BABA ) disclosed Wednesday that the Securities and Exchange Commission has been probing whether its accounting into its Singles Day e-commerce event and various consolidation practices violate U.S. securities laws. Shares of the e-commerce giant fell 8.1% to 74.55 in late afternoon trading on the stock market today , diving below the 50-day moving average where Alibaba had found support in recent days. Alibaba, which hasn’t closed below the 50-day line since March 1, is now threatening to undercut its 200-day line. Alibaba is on track to have its worst one-day percentage loss since Jan. 29, 2015, when shares tumbled 8.8%. IBD’s Take: How healthy is Alibaba’s stock, and how does it compare vs. key rivals such as Amazon? Find out at IBD Stock Checkup Alibaba reported the SEC probe in an SEC filing. Here is the key passage. “Earlier this year, the U.S. Securities and Exchange Commission, or SEC, informed us that it was initiating an investigation into whether there have been any violations of the federal securities laws. The SEC has requested that we voluntarily provide it with documents and information relating to, among other things: our consolidation policies and practices (including our accounting for Cainiao Network as an equity method investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from Singles Day. We are voluntarily disclosing this SEC request for information and cooperating with the SEC and, through our legal counsel, have been providing the SEC with requested documents and information. The SEC advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred. This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.” Singles Day — Nov. 11 — has become the world’s largest e-commerce event, far above Cyber Monday or the new Amazon ( AMZN ) Prime Day last year. Alibaba had $13.7 billion in sales in last year’s event, with JD.com ( JD ) and other Chinese retailers also taking part. JD stock fell 3.8% intraday, perhaps in sympathy with Alibaba. 020 Fuels China Internets Separately, Alibaba, Baidu ( BIDU ), Tencent ( TCEHY ) and other Chinese Internet companies should should see continued strong growth in online-to-offline spending, Moody’s says. Moody’s sees Baidu, Alibaba and Tencent, sometimes referred to as “BAT,” should deliver 15%-30% revenue growth over the next 12-18 months, partly due to O2O efforts that have increased customer engagement and monetization. Alibaba, Baidu and Tencent have spent billions of dollars on O2O-related initiatives in recent years. “For all three companies, we expect that their investments will remain high, as they establish or acquire end-to-end logistics capabilities,” Moody’s said.