(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Gilead Sciences, Inc. (GILD) has been on a roll recently with shares rising by over 10% since May 7, easily outpacing the sector's rise of 7.5%, as measured by the iShares NASDAQ Biotechnology ETF (IBB). But the technical charts suggest the recent rise may soon fizzle, with shares poised to drop by approximately 7%. (For more, see also: Gilead May Rebound By 12% Short Term.)
The stock plunged following its disappointing quarterly results, which fell short of investor's expectations. The company reported earnings that were 11.25% below estimates coming in at $1.48 per share. Revenue missed estimates by nearly 5.9% at $5.088 billion, as the company's sales of its hepatitis C portfolio of drugs continues to erode due to intense competition.
Weak Technical Pattern
The technical chart shows a gap created when the stock price dropped 8% from its close on May 1. With shares now trading around $72, the stock has recovered nearly all its losses from the post-earnings plunge, refilling the gap—a pattern used in technical analysis. The pattern suggests the price will revert to the stock's previous trend, which in this case is lower. Should shares fail to rise above resistance at $72.20, the stock is likely to revert, falling back to roughly $66.75, a drop of 7%.
Weak Revenue Growth
Analysts are looking for revenue to decline by over 20% this year to $20.80 billion, while earnings are seen dropping by over 30% to $6.15 per share. Analysts are not looking for much growth in 2019 or 2020 either, with revenue expected to rise by only 1.5%, and 3.1%, respectively. But those estimates may be suspect because analysts have been trimming those numbers since the start of the year.
Earnings Look Dim
The situation for earnings is no different with profits seen rising by roughly 5% and 6.8% in 2019 and 2020, respectively. Like the revenue outlook, analysts have been cutting their earnings estimates as well. (For more, see also: Why Overvalued Gilead May Fall 10%.)
Momentum in Gilead is strong, and the bulls, for now, appear to have control. This momentum could very well be enough to carry shares of Gilead above the technical resistance, sending shares higher. But where the stock goes over the longer term may come down to fundamentals and what investors see in store for the business's future.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.