10 Stocks With the Largest Fair Value Estimate Increases After Q1 Earnings

Amid a stock market rally and solid first-quarter earnings results, Morningstar analysts have been bumping up their fair value estimates.

The stocks that saw the largest fair value increases were software company Squarespace SQSP, with a 63% jump, and oil and gas production company ChampionX CHX, with a 44% jump.

Across the 875 US-listed stocks covered by Morningstar, there was a 0.66% average increase in fair value estimates for 2024′s first-quarter earnings season, down from last quarter’s 2.10% average increase.

Among the stocks we scanned for changes, just 5% saw increases of 10% or more to their fair value estimates. Over the past 10 years, 8% of the group had average quarterly fair value estimate increases of 10% or more.

At the sector level, energy and industrials saw fair value estimate increases at the highest rate following first-quarter earnings. Roughly 10% of energy companies had a fair value increase of at least 10%. The average fair value increase across the sector was 2.6%. Among industrials companies, 9% had fair value increases of at least 10%, and the average increase for the sector was 2.9%.

Here are the stocks with the largest percentage increases in their Morningstar fair value estimates.

Stocks With the Largest Valuation Increases

• Squarespace SQSP: $44 from $27
• ChampionX CHX: $46 from $32
• Arista Networks ANET: $270 from $195
• Tencent Music Entertainment TME: $17.20 from $13.00
• Lazard LAZ: $48 from $37.50
• Sea SE: $60 from $47
• TAL Education Group TAL: $9.70 from $7.70
• Seagate Technology STX: $67 from $55
• New Oriental Education & Technology Group EDU: $62 from $51
• Western Digital WDC: $51 from $42

Here’s more of what Morningstar analysts had to say about each stock’s fair value estimate raises:

Squarespace

• Fair Value Estimate: $44
• Fair Value Increase: 63%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Squarespace saw two fair value estimate increases in the quarter. The latest increase—to $44.00 from $29.50—came after Squarespace announced it would be acquired by private equity firm Permira for $44 per share. “We are surprised by the timing of a go-private deal,” says Morningstar equity analyst Emma Williams. “Nevertheless, we view the transaction as a strategic acquisition in which Squarespace can leverage Permira’s portfolio assets and expertise in software and small and midsize business-focused solutions to strengthen existing offerings and execute on growth levers. These growth levers include accelerating adoption of commerce solutions, including converting existing users to the firm’s proprietary payment solution, and upselling add-on products to acquired domain customers, as well as expanding the firm’s international footprint.”

Earlier in the quarter, Morningstar raised Squarespace’s fair value estimate to $29.50 from $27.00 after the company’s strong first-quarter performance. “The firm posted impressive new subscription growth fueled by the expanding domain registration business and an ongoing referral partnership with Google GOOGL,” says Williams. “This strength came alongside healthy momentum in international markets, another record quarter of trial activity for core website design tools, and resilient retention.”

Squarespace is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Take a deeper dive into Williams’ outlook for Squarespace.

ChampionX

• Fair Value Estimate: $46
• Fair Value Increase: 44%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

ChampionX had the second-largest fair value estimate increase, going to $46 from $32, following the announcement that SLB SLB will acquire ChampionX by the end of 2024. “This valuation increase reflects the offer of 0.735 SLB shares for each share of ChampionX, which we consider a good outcome for ChampionX shareholders,” says Morningstar equity strategist Andrew Bischof. “We believe SLB’s expansive global footprint will enable ChampionX to further diversify operations internationally, thereby reducing reliance on the North American market, which makes up two thirds of revenue but tends to be more reactive to changes in oil and gas prices than international markets. Further, we note the potential for a moat to emerge based on scale in the chemicals business of the combined ChampionX and SLB. ChampionX currently controls roughly half of the global production chemicals market together with Baker Hughes BKR. After the merger, the expanded portfolio and aggregated market share will place the firm well ahead of Baker Hughes and bolster its position as the leading provider in the space.”

ChampionX is trading at a 26% discount to its new fair value and has a Morningstar Rating of 4 stars.

Read Bischoff’s full take on ChampionX here.

Arista Networks

• Fair Value Estimate: $270
• Fair Value Increase: 38%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Networking equipment provider Arista Networks saw its fair value estimate bumped to $270 from $195, thanks to a strong artificial intelligence forecast. “We believe Arista will significantly benefit from generative AI spending, resulting from its best-of-breed high-speed Ethernet switches,” says Morningstar equity analyst William Kerwin. “We expect Arista to drive and benefit from a transition toward Ethernet—and away from Nvidia NVDA’s InfiniBand technology—in generative AI networks over the next five years. We forecast generative AI spending to augment growth in high-speed data center switching and for Arista to maintain a strong market share.”

Arista Networks is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

The rest of Kerwin’s take on Arista Networks can be found here.

Tencent Music Entertainment

• Fair Value Estimate: $17.20
• Fair Value Increase: 32%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Chinese online music provider Tencent Music Entertainment saw its fair value estimate raised to $17.20 from $13.00 following strong first-quarter earnings. “A gross margin of 40.9% was comfortably ahead of our and PitchBook’s consensus expectations,” says Morningstar senior equity analyst Ivan Su. “Management expects a continued expansion in margins as its high-margin original content continues to gain traction. Tencent Music’s share price is reacting positively to the results and the first-ever dividend of $0.14 per share. Coupled with the remaining share buyback authorization of $265 million, the company is on track to return at least $475 million to shareholders this year. We remain buyers of Tencent Music despite the runup in share price, as we believe the market has yet to fully appreciate the potential for significant growth in its subscriber base and the opportunities for margin expansion through operating leverage.”

Tencent Music Entertainment is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Read Su’s full take on Tencent Music here.

Lazard

• Fair Value Estimate: $48
• Fair Value Increase: 28%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Asset-management firm Lazard saw its fair value estimate climb to $48.00 from $37.50 in early April. “Of the $10.50 increase in our fair value estimate, approximately $1 was from earnings since our previous valuation update, $5 was from a change in our working capital assumption, $2.50 was from increasing our forecast operating margin by 1 percentage point, and the remainder was due to miscellaneous adjustments, such as higher assets under management after the increase in the stock market,” says Morningstar director of equity research Michael Wong. “New CEO Peter Orszag aims to double revenue by 2030 and deliver average total shareholder returns of 10%-15% per year through 2030. Disclosed plans include hiring more managing directors, increasing employee productivity, improving asset-management distribution, acquiring emerging asset managers, and maintaining its historical operating margin. For the moment, we view these goals as aspirational and forecast Lazard slightly missing on many metrics, such as managing director productivity, normalized operating margin, and absolute revenue. Even if the company misses many of these goals, we still see quite a bit of value in the company from its reputation in the financial-services sector and strong cash flows.”

Lazard is trading at a 14% discount to its new fair value estimate and has a Morningstar Rating of 4 stars.

Wong has more about Lazard’s stock here.

Sea

• Fair Value Estimate: $60
• Fair Value Increase: 28%
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Internet retailer Sea saw its fair value estimate increase to $60 from $47 following strong first-quarter performance. “Our valuation increase is driven by a less gloomy outlook for the gaming business, Garena, as well as slightly higher monetization and lower marketing expense forecasts for the e-commerce business, Shopee,” says Morningstar senior equity analyst Kai Wang. “Despite higher monetization and lower-than-expected marketing expenses, Shopee still saw operating losses of $97 million compared with a profit of $116 million a year ago. This was because marketing expenses still increased 101% year on year as it aggressively incentivized customers—which reinforces our major concern of whether the robust gross merchandise value growth is maintainable without the use of loss-inducing heavy incentives. Management’s guidance was for Shopee to break even in the second half of 2024, and we are assuming that Shopee can be operating-margin-positive by the fourth quarter compared with the previous breakeven forecast in 2025.”

Sea is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Wang has more about Sea’s stock here.

TAL Education Group

• Fair Value Estimate: $9.70
• Fair Value Increase: 26%
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Chinese learning solutions provider TAL Education Group saw its fair value estimate jump to $9.70 from $7.70, following a tripling of revenue in its content solutions segment last quarter. “Overall, TAL remained loss-making in fiscal 2024, but its net loss narrowed to $4 million, and we expect the company to be profitable going forward,” says Morningstar equity analyst Cheng Wang. “We think the market is underestimating incoming competition. The content solutions segment accounted for about 30% of TAL’s revenue in the fourth quarter, and its learning tablet contributed the bulk of segment revenue. However, the learning tablet market is becoming increasingly crowded, so we do not see big potential for market share gains.”

TAL Education is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Take a deeper dive into Wang’s outlook for TAL Education.

Seagate Technology

• Fair Value Estimate: $67
• Fair Value Increase: 22%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Hard disk drive supplier Seagate Technology saw its fair value estimate climb to $67 from $55. “Seagate’s March-quarter results showed a continued recovery for the firm’s hard disk drive, or HDD, sales,” says Morningstar’s Kerwin. “We are now more optimistic about a steeper growth trajectory for Seagate over the next two years as it recovers from a sharp market downturn in calendar 2023. Specifically, we expect Seagate to benefit from more stable prices over the next year as demand for mass-capacity HDD returns. Even at our higher valuation, we continue to view shares as overvalued as we consider the longer-term cyclicality of Seagate’s HDD sales. We believe shares trade on the positive short-term outlook without considering future downturns.”

Seagate is trading at a 40% premium to its new fair value estimate and has a Morningstar Rating of 2 stars.

Investors can find more of Kerwin’s take on Seagate here.

New Oriental Education & Technology Group

• Fair Value Estimate: $62
• Fair Value Increase: 22%
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Chinese private education provider New Oriental Education & Technology Group saw its fair value estimate increase to $62 from $51 because of a bump in analyst Cheng Wang’s revenue growth assumptions. “New Oriental raised its learning center capacity expansion target for fiscal 2024 to 30% year on year from 20% and plans to keep a similar pace of expansion next year, as demand remains robust,” says Wang. “It now only takes six months for new learning centers to break even compared with 12 months a few years ago. The faster expansion should drive higher growth for the education business, which accounted for over 60% of revenue in the quarter. We think the market has been too optimistic about New Oriental’s growth and margin trajectory; the shares fell in reaction to slower growth and flat margin but still look expensive.”

New Oriental is trading at a 29% premium to its fair value estimate and has a Morningstar Rating of 2 stars.

Wang has more about New Oriental’s stock here.

Western Digital

• Fair Value Estimate: $51
• Fair Value Increase: 21%
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Data storage solutions company Western Digital saw its fair value estimate jump to $51 from $42, following excellent profitability last quarter. “Both hard disk drive, or HDD, and solid-state drive, or SSD, businesses grew sequentially, with improvements in nearline HDD shipments and flash,” says Morningstar’s Kerwin. “Western’s profitability was nothing short of impressive in the quarter and is now already back to what we consider midcycle levels, well before our expectations. We now expect higher profitability in the coming quarters along with strong revenue growth as the firm recovers from the steep market downturn in 2023. We continue to view shares as overvalued, however, as we consider longer-term cyclicality for Western’s commodity products.”

Western Digital is trading at a 45% premium to its new fair value estimate and has a Morningstar Rating of 2 stars.

Read Kerwin’s full take on Western Digital here.