Inphi Stock Looks Prime for a Breakout

Inphi Stock
iStock.com/denphumi

Inphi Is an Undervalued Data Technology Trade with Loads of Prospects

You all know about the vast potential for big data solutions in both the software and hardware sides. In the small-cap space, an intriguing company that is showing stellar growth is Inphi Corporation (NYSE:IPHI).

IPHI stock has the potential to return far superior gains on a risk-adjusted basis than does the S&P 500. The stock underperformed the index over the past 52 weeks, declining close to 11%, and being off about 17% year-to-date.

For the astute trader searching for a decent risk-to-reward trade, Inphi stock may be a ripe opportunity during the current weakness, which I will explain shortly.

Inphi’s business has high growth potential. The company sells analog and mixed-signal high-speed advanced networking technologies used to move digital data within secured networks. The major areas of focus are communications and data centers.

Speed is critical to the success of enterprises, as it’s all about timeliness and effectiveness.

The Bull Case for IPHI Stock

The company’s revenue and earnings picture, both past and future, reflects an emerging technology company with great aspirations and the potential to reward investors.

Revenues contracted 5.8% to $96.14 million in 2014 but followed up with a doubling to $192.71 million in 2015 and a 38.5% increase to $266.28 million in 2016.

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A big plus was the ability of Inphi to expand its gross margins from 2014 to 2016.

Gross Margins
201453%
201562%
201667%

As we move forward, revenues are predicted to grow 30.9% to $348.64 million this year and 17.8% to $410.78 million in 2018. (Source: “Inphi Corporation (IPHI),” Yahoo! Finance, last accessed September 7, 2017.)

Given the gross margin expansion, Inphi reported adjusted profits in 2015 and 2016.

The earnings growth is set to continue to $1.50 per diluted share in 2017 and as high as to $2.20 per diluted share in 2018.

We are seeing rising consensus earnings per share (EPS) revisions for 2017 and 2018, which is a bullish sign, reflecting a potential rise in IPHI stock.

Inphi stock could also receive a lift from the relatively large short position of 9.01 million shares, or 25.14% of the float. A rally in the stock would lead to short-covering support. (Source: “Inphi Corporation (IPHI),” Yahoo! Finance, last accessed September 7, 2017.)

Technical Chart Flashes a Potential Buy

The daily IPHI chart shows the sideways channel that has been in place since the downside trading gap in May, when the stock broke from $41.00 to $34.00 and formed a bearish death cross.

Inphi Stock Chart

Chart courtesy of StockCharts.com

We saw numerous attempts to recover $40.00 to $41.00 thereafter, but, so far, it has evaded the stock.

The weekly chart of IPHI stock shows the breaking of the upward trend line.

IPHI price chart

Chart courtesy of StockCharts.com

The moving average convergence/divergence (MACD) indicator may be setting up to flash a “buy” signal, which could surface in the next few days or weeks.

Chart targets for Inphi stock are $40.00, $45.00, and $50.00.

Analyst Take: 

On a valuation basis, IPHI stock has more room to grow, trading at 17.95-times its 2018 EPS, with a cheap price/earnings to growth (PEG) ratio of 1.04. A move to $50.00 (or even higher) on the chart would be reasonable if you allow for bigger multiple expansions for Inphi stock.