Wall Street and investors are always looking toward the future. But, the question that has to be asked from time to time is whether Wall Street and investors have looked too far into the future and overvalued a company relative to its hype.
With this in mind, we asked three of our Foolish contributors to dissect an a highly hyped stock to uncover whether it'll be able to live up to the hoopla that surrounds it. Find out if rare-disease drugmaker Sarepta Therapeutics (SRPT -0.15%), luxury sports-car manufacturer Ferrari (RACE 0.25%), and chipmaker Advanced Micro Devices (AMD -1.65%), can live up to their hype.
Can this rare-disease drugmaker deliver?
Sean Williams (Sarepta Therapeutics): One biotech company that's been potentially overhyped for years is Sarepta Therapeutics, a drug developer aimed at tackling Duchenne muscular dystrophy (DMD), a degenerative muscle disease that attacks children, teens, and young adults.
Sarepta's back and forth with the Food and Drug Administration was the stuff you find on daytime soap operas. On one hand, its phase 2b extension study involving Exondys 51 (which is now a Food and Drug Administration-approved drug for exon 51-skipping DMD) demonstrated a clear benefit via the six-minute walk test (6MWT) over the placebo. On the other hand, the FDA had a hard time making the connection that an increase in dystrophin production and the positive 6MWT benefits were the result of Exondys 51. Eventually, the FDA conceded and approved Exondys 51 with the condition that Sarepta run a phase 3 confirmation study.
Now the big question? Can Sarepta live up to the hype surrounding its DMD drug(s)? I believe it can.
Initial sales, post-launch, of Exondys 51 have been better than expected. The company's first-quarter report featured $16.3 million in revenue, which was $2.5 million more than Wall Street expected, and the company lifted its full-year outlook to at least $95 million in sales. Previously, Sarepta had estimated that it would generate in excess of $80 million in sales for 2017. As the lone DMD product for the exon 51 mutation, and bearing the orphan drug designation that affords exceptional pricing power, Exondys 51 is well on its way to meeting or beating expectations.
But, there's more. Recently, Sarepta provided positive long-term cardiac and pulmonary data on Exondys 51 at the MDA Scientific Conference, and it announced that nearly four in five insurance plans is now covering its only approved drug. With coverage becoming less of an issue and safety concerns firmly in the rearview mirror, Exonyds 51 can shine.
There's also the extrapolation that if Exondys 51 was successful, the company's other developing therapeutics that target about half of the DMD population will succeed, too.
It's possible that Sarepta could be profitable on a recurring basis by 2019 or 2020, and assuming its other DMD programs meet their primary endpoint, Sarepta could easily surpass the hype surrounding its stock.
A stock racing higher
Daniel Miller (Ferrari): Investors and Wall Street have been reluctant to buy into the automotive industry at a time when the U.S. sales cycle is plateauing, and that's understandable to some degree. One company that has been hyped up anyway over the past year is Ferrari, but it might not live up to expectations in the long-term. Over the past twelve months shares of Ferrari have raced 70% higher, much higher than Fiat Chrysler's 33% gain or even Tesla's 30% gain.
There are certainly reasons to be bullish on Ferrari, as it's a unique play within the capital-intensive automotive industry. It has less price volatility as its revenue and sales aren't nearly as negatively impacted as mainstream automakers. Ferrari has gross margins nearing 50% and EBITDA margins above 25%, which are incredible compared to the industry norm. Also, it probably goes unsaid, but Ferrari is certainly a powerful and recognizable global brand with heritage from Formula One racing.
All of those bullish factors have pushed Ferrari to a trailing twelve month price-to-earnings ratio of 33. The problem with paying such a rich valuation for the hyped up Ferrari is long-term growth might go against the company's tradition of remaining an exclusive brand -- it's a fact that Ferrari doesn't want to sell too many cars. Maybe Ferrari can indeed find the right balance between sustainably growing its sales without deteriorating its pricing power and exclusivity, but that limits the company's upside. And a company with limited upside makes it difficult to buy the hype and jump in with its current price-to-earnings ratio.
Has this turnaround story even started yet?
Anders Bylund (Advanced Micro Devices): Few companies entered this earnings season with more buzz than Advanced Micro Devices. The designer of PC-compatible processors and specialized graphics chips released brand new chip architectures in both categories last year. The new products were quickly embraced by enthusiasts and reviewers, driving a much needed surge of revenue growth.
Inspired by the successful introduction of AMD's Polaris graphics and Zen CPU lines, share prices nearly quadrupled in 16 months and soared to nine-year highs. As always, AMD is one of the most talked-about stocks in public forums. Glory days like the original Athlon era must be right around the corner.
Or maybe not.
When AMD reported first-quarter results at the start of May, the results were in line with analyst projections. But guidance for the next quarter pointed to the slowest revenue growth AMD has seen since the spring of 2016, raising doubts about the sustainability of growth powered by Polaris and Ryzen. And the next day, share prices plunged 22% lower.
The second quarter should be an easy layup for AMD, since the year-ago period contained no sales at all of the Ryzen and Polaris chips. Growth slowdowns will come when AMD's quarters start lapping the release of new products, making year-over-year comparisons tougher. But that would be the third quarter, not the second.
Something's amiss here, and AMD richly deserved that guidance-based sell-off. I'm not buying the AMD hype here.