Company Background

Keysight Technologies, is an American company that manufactures electronics test and measurement equipment and software. The company works with manufacturers, service providers, and enterprises worldwide providing solutions to help accelerate innovation, connect and secure the world and is also a leader in the industry that it operates in. One of the key distinctive characteristics that makes the company uniquely positioned to generate consistent double-digit annual growth in the coming years is the fact that Keysight Technologies provides a highly-specialized, professional service and products across a wide range of industries and works with the leaders in these respective industries. Keysight’s portfolio of products and solutions is truly impressive as it spans across very attractive and high-growth markets like: 5G, Cloud storage, Internet of Things, Data Center Infrastructure, Design and Automation, Connected Car, Energy Ecosystem, High-Speed Digital System Design, Network Security, RF + Microwave, SDN + NFV +Virtualization, Network Test, Network Visibility, Manufacturing Test, Measurement Fundamentals. This has established Keysight Technologies as a trusted and reliable partner for companies and governments around the world. Technological innovation has been one of the most important aspects of our evolution as a society and civilization in recent years and its importance will only continue to grow in the years to come. From the company standpoint the versatility that Keysight provides to key industries like Aerospace & Defense, Automotive & Energy, Communications, Education, Enterprise, Government, Semiconductor, Service Providers ensures stable ,well-balanced and strongly diversified revenue streams for the foreseeable future.

History – Origins, Acquisitions, Expansion

Prior to its existence as an independent company, the group that became Keysight was the electronic test and measurement division of first Hewlett-Packard, and later Agilent. HP began as a company making electronic test equipment, with the computer and life sciences products coming later. In 1999, HP spun-off all test and measurement products into Agilent and retained the computer and printer businesses. On November 1, 2014, the formal separation of Agilent and Keysight Technologies was completed, with Agilent retaining the life science businesses. The separation was implemented through a spinoff of Keysight’s common stock. Agilent shareholders received one share of Keysight common stock for every two shares of Agilent common stock held October 22, 2014.

The company has been very active on the acquisition front in the last 5 years with successfully closing deals internationally in order to increase the scope of its operations and to further optimize the portfolio of products and services that it provides. Some honorable mentions on the acquisitions list would be UK’s Anite PLC acquisition deal worth £388 million back in June, 2015; the acquisition of the UK’s Electroservices Enterprises UK Ltd comprising Electroservices (Midlands) Ltd. and Micro Movements Ltd back in August, 2015; the pearl in the acquisition crown for Keysight is definitely the deal that it closed on Ixia for about $1.6 billion in cash, back in 2017; in July 2018, Keysight acquired also a subsidiary of Thales Group, Thales Calibration Services in Melbourne Australia. The increased acquisition activity from Keysight has escalated integration risks. Furthermore, we note that the buyouts negatively impacted the company’s balance sheet in the form of high level of goodwill and net intangible assets, which comprised of 24.1% of total assets as of Jan 31, 2020. Acquisitions have also negatively impacted Keysight’s balance sheet, as indebtedness adds to the risk of investing in the company. As of Jan 31, 2020, net debt amounted to $97 million. Moreover, total debt to total capital of 38.4% is up from the prior quarter’s figure of 37.3%.

Thus, the growth-oriented expansion strategy implemented since its separation from Agilent, has come at a certain cost and the company needs to focus on reducing its debt levels in the coming years, as more conservative investors could consider the rather high indebtedness of the company as a risk they would rather not take. However, Keysight maintains a strong cash flow position, with rising earnings and revenues, which we believe will allow the company to pay off some of its debt obligations, which in turn will further make the stock even more attractive.

What is it like to have the (KEYS)ight to the Future – 5G, Internet of Things, Data Centers, Connectivity, Artificial Intelligence, Virtual Reality, Augmented Reality

With an impressive clientele including Alphabet, Amazon, Boeing, Facebook, MediaTek, Microsoft, Nvidia, Samsung, TSMC, and Tesla, to mention just a few the company is indirectly operating on all fronts of technological innovation. Moreover, the company has a strong pipeline of new business bookings for 2020 and beyond, which further shows that Keysight’s products and services are highly sought after. Quite often, we at DowExperts receive questions about which stock is the best Technological, 5G, VR, AR, Internet, AI stock out there and here with Keysight Technologies you have a perfectly balanced access to all of these high-growth markets at an attractive valuation.

What’s more important is that Keysight is operating behind the curtains of innovation as a contractor, rather than a first line innovation builder. Why is that important for you as an investor? Well, because in most instances every new technological era is associated with high fixed starting costs, risk of full-scale adoption etc. which usually makes it rather difficult for those engaged in this initial infrastructure building process. However, Keysight helps these new technologies to be pushed forward by testing different processes, solutions and concepts in the lab following its clients’ needs and then provides them with the ready-to-use solution that the clients were looking for. The important thing to note here is that, Keysight’s revenues and earnings don’t depend on the actual success of the implementation of these new innovative solutions that their clients needed or on the costs and risks associated with that implementation.

In other words, Keysight is sitting in a very favorable position from a risk-reward perspective when it comes to these new technologies and their future development. Let’s look at an example in order to help you visualize this in a better way.

Alphabet could be working on a new piece of a ground-breaking technology that is expected to change the business world entirely in the coming years. Alphabet then decides to higher Keysight Technologies to test and further perfect the functionality of this technology and Keysight receives a hefty compensation for its services. It then provides Alphabet with whatever it is that the company needed and from that point on it is up to Alphabet to find the right applications and build the right infrastructure around this new piece of technology, so that it could have the positive impact that Alphabet initially anticipated. As you can understand, there are many different risks and unknowns that Alphabet would be undertaking in this example, whereas Keysight Technologies would have already received its compensation for its services and would have already shifted its focus on the next project. We at DowExperts believe that this creates a very powerful secular growth trend for the company and puts it in the perfect position to benefit from the increased competition in all of these high-growth industries for the years to come.

We all know that when the mass adoption of a new technology is just around the corner, companies go crazy about solidifying their competitive and possible leading position in the respective industry. As a result of that, we usually see a significant increase in their R&D budgets, which leads to higher revenues and earnings for companies like Keysight Technologies.

We at DowExperts believe that Keysight’s robust 5G portfolio is expected to be a solid growth driver going forward. The company’s 5G product design validation solutions ranging from Layer 1 to 7 enable telecom and semiconductor companies to accelerate their 5G initiatives. Further, Keysight’s 5G network emulation solutions facilitate end-to-end processes from development to deployment, accelerating the 5G device architecture. The solutions offer cost-efficient test methods with high adaptability and control functionality, which in turn reduces time-to-market. Keysight Technologies has seen a CAGR of more than 60% in order growth in 5G domain throughout the last 3 years. Intensive infrastructure investments in 5G deployment and positive trial testing results hold promise. In fact, per ResearchAndMarkets data, global 5G market is expected to reach $277 billion by 2025, witnessing a CAGR of around 111% between 2019 and 2025.

Furthermore, ongoing technical advancement in mobile communications, semiconductors and automotive markets are likely to drive long-term growth. A rising demand for power management applications is considered to also be a key catalyst for the company. Continuous efforts towards the ongoing modification of the Internet infrastructure, evolution of smart cars & autonomous-driving vehicles are other positive growth drivers. Lastly, the medical devices and pharmaceutical markets hold immense potential for a substantial increase in demand for electronics testing of specialized equipment.

Technical Analysis – When would be a good time to buy?

We at DowExperts always focus on approaching every investment idea that we have in a highly critical and objective manner, following the unique and innovative Dow theory 2.0 that we have developed. By using a multitude of over 30 different market correlations we are able to provide our clients with a thorough and detailed view of historical trends, correlations and the current market environment, which in turn helps our clients to optimize their investment portfolios and to generally approach the financial markets in a more educated and successful manner. As a team of professionals with over 100 years of combined market experience we have been in situations where a certain stock looks very appealing when we analyze it individually, but then once we look at the bigger picture we end up seeing that the stock is vulnerable as a result of its participation in a certain ETF or index fund. Thus, we decided to put our favorite 5G stock-pick – Keysight Technologies to the test.
Let’s see what the outcome and final verdict on the stock was.

When we look at the technical chart of the stock we can clearly see that the price action has been all over the place in the last 12 months. The stock enjoyed a very strong bullish run from the $72 lows in the second part of last year, appreciating all the way up to the $110 level at the end of 2019. However, the price failed to break higher there and after 3 unsuccessful breakout attempts in the period December, 2019 – January, 2020 it broke below the key upward sloping diagonal support level of the previously established uptrend (the blue lines) at the $103 level. Then, few days later the price managed to re-test the prior support, which was now a resistance as well as the diagonal downward sloping resistance line (the blue lines) at the $107 level and was violently rejected again. This was a strong indication that the market sentiment had shifted and that the stock was preparing for a substantial move lower.

As we can see what followed was a major decline for the stock, which ended up almost fully retracing and erasing the gains from last year’s strong uptrend. The decline took the price all the way down to the $78 lows reached back at the end of March. Of course, one of the major reasons for the huge drop in the company’s stock price was created by the fundamental development of the COVID-19 pandemic and the global public health crisis that has occurred. However, while the COVID-19 situation has an unquestionable impact on the way the stock has performed recently, it is also important to note that the price action of the stock itself at the end of last year was also indicating that it needed to correct some of last year’s tremendous gains before moving higher again in the future. Thus, the decline was caused by both external and internal factors.

When we look at the price action in April, it is obvious that the overall positivity around the unprecedented monetary and fiscal stimulus packages that were announced last month was behind the strongest bull-run in the US equity markets since 1987. Keysight’s stock also benefited from that as it appreciated with the whooping 29.4% in just 4 weeks. However, as we discussed in our ETF – Correlation Analyses for this month we see the market as being over-extended and way too positive at the moment, which in turn represents a potential risk for the broader market in the coming weeks.

The most recent economic data coming from the US has been more than terrifying as we’ve seen over 33 million people filing for unemployment benefits in the last 7 weeks; the unemployment rate has gone up to over 14% and the Q1 GDP report showed a negative growth of -4.8%. At the same time, we have seen the US equity markets moving higher on the basis of hope, speculation and greed. As we all know these growth drivers are unsustainable when we are facing an unprecedented economic shock in terms of pace and severity of the declines in economic productivity. It seems that the whole US economy has experienced a 180-degree shift in its overall stability and growth trajectory in a little over a month’s time. Thus, even though that we are bullish on Keysight’s stock in the long term and we believe that the stock has the potential of reaching the $130-150 per share level within the next 12-24 months, we remain cautiously bearish in the short-term in the anticipation of a broader market correction throughout May. However, in order for us to confirm our thesis and cross-reference our findings we decided to look at the charts of two of the most commonly traded ETFs out there, SPDR S&P 500 ETF Trust – SPY and Technology Select Sector SPDR Fund -XLK as Keysight Technologies is part of both of them, and potential confirmations about the market vulnerability in these ETFs at the moment could provide essential in picking the best possible levels to buy into Keysight’s stock for the long term. Even though that the percentage participation of KEYS in these two ETFs is relatively low (0.08% – SPY; 0.34% – XLK) it will always be affected by the underlying positivism or negativism in the ETFs that it participates in.

SPY

The SPY technical chart has already issued some worrying signs for all intelligent investors as the price has been rejected twice around the $295-300 strong resistance level, which shows a lack of further upside potential. When such a rejection from a major resistance occurs after a strong uptrend as we see here, it usually serves as a signal for the end of the bullish move, thus investors need to be very cautious in such instances. Additionally, we can also clearly see that the strong uptrend was technically broken when the price dropped below the $290 diagonal support level (the blue line) on May 1st. We see very little to no upside potential from here as not only that the uptrend was broken, but also we have a multitude of strong resistances positioned between the $295-303 levels, which are expected to cap any potential rallies. We see the price initially retracing back down towards the $263 support level with a possible further extension of the downward move towards the $245 mark in the coming weeks. According to our mid to long-term rational analysis following the Dow Theory 2.0 investment philosophy we believe that this upcoming decline would present a great buying opportunity for our followers and that they need to be ready to pull the trigger when the above-mentioned levels are reached.

XLK

The technical chart of the Technology Sector ETF looks a little bit better than the SPY chart, as a result of the fact that last month’s rally was led by the technological stocks out there which were making the biggest gains. However, even though that the most recent uptrend has not been broken yet, the price has approached a critical resistance on a low volume and with a relatively weaker RSI reading, which is an early indication that there are troubles coming for the ETF. Additionally, we should always remember that the SPY and XLK share a very strong 10-year positive correlation of 89%, which following DowExpert’s investment philosophy means that if one of the two ETFs issues a signal there is an 89% probability that the other ETF will follow suit. Thus, we believe that the broad economic weakness in the US and the uncertainty surrounding the process of re-opening the economy, as well as the potential risks of another surge in the number of new infections will be the driving fundamental forces behind the markets next move lower. As a result of that, we expect the XLK to move lower in the coming weeks with initial downside targets at the $83-85 levels. The initial trigger line for us would be the breaking of the diagonal upward sloping uptrend support at around $92 (the blue line), which we expect to happen next week. This will open the door for revisiting some of the lower support levels. In case the price breaks below the $83 support zone, then we could expect a further depreciation towards the $75 mark.

Conclusion

We are long-term buyers of Keysight’s stock as a result of the great fundamental positioning that the company has, as we believe that it is poised to benefit from the new upcoming technological and business trends. However, following our cross-sector, multi-layered confirmation correlation model we have concluded that Keysight Technologies (KEYS) will give our followers a better entry point for them to open their long-term buy positions in the stock, in the next few weeks.

Thus, we would be interested in buying the stock on any pullback towards the $95 support level and will look to further add to our exposure to the stock in case the price revisits the next support zone around the $90. Our mid-term targets will be placed at the $110 and $125 marks respectively, with our extended long-term take profit levels positioned at the $132 and $145 per share.

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