CDXS - Codexis: More Selective Opportunities Elsewhere Reiterate Hold

Summary

• Codexis continues to face downside pressure from investors as we roll through the new year.
• Despite announcing two potential price catalysts, the market's price response was mute, indicating more is required for a reversal.
• The company has affirmed FY22 guidance last year and hence its upcoming earnings might already be priced in.
• Net-net, reiterate CDXS as a hold.

Investment Summary

Since our last 2 publications on Codexis, Inc. ( CDXS ) we've yet to see the stock catch a bid, instead observing its congestion sideways. Despite two major advancements discussed in this analysis the market's response to both has been mute and this suggests far more is needed to grab the attention of buyers and lift demand in its stock. Moreover, since the midpoint of FY22', CDXS has continued to diverge from the benchmark, despite broad indices rallying off lows into the new year [Exhibit 1]. Heading into its FY22' earnings, we'd suggest investors wait until what the company reports before making any major decisions on the long or short side. Hence, without counting the stock completely out just yet, we believe there are more selective opportunities elsewhere, and reiterate CDXS as a hold. I encourage you to read our last 2 publications on CDXS here:

• Codexis : Profitability, Return On Capital Are Persistent Headwinds Looking Ahead
• Codexis : Checking The Potential Of Latest Price Reversal

Exhibit 1. CDXS divergence from benchmark since mid-FY22'

Recent developments for CDXS

Despite two major updates in CDXS growth engine the market's price response has been meagre to each. In that respect, we noted the following since our last publication:

1. As part of its strategic realignment, late last year, CDXS made the decision to terminate investment in certain development initiatives and amplify its investment in more capital efficient programs. It will consequently divert capital away from select internal ventures and redirect said capital towards growth initiatives that offer a greater tail of return potential. This will also result in a reduced headcount of ~18%. The company projects these measures will result in a $15mm decrease in OpEx over in FY23'. CDXS also reiterated its FY22' guidance, but this excludes the estimated impact of the terminations listed above. The company made that announcement in November last year, and the price response has been negligent to date, leading us to believe the market was expecting this kind of a response from CDXS.
2. Next up, it announced it had appointed a new CFO, Sri Ryali, formerly of Eiger BioPharmaceuticals ( EIGR ). Ryali has held previous positions at Jazz Pharmaceuticals ( JAZZ ) and Amgen ( AMGN ) and so the test for the new CFO will be seen in the company's FY23' numbers posted throughout this year.

Both changes are a welcomed response to the underperforming stock price and, consequently, FY23' will be a testing year for the company. This is supported in our CDXS publication from July, where we said: "Quarterly operating results have been lumpy for CDXS on a sequential basis from FY15 to date...[w]hilst it has grown it continues to build top-line volume, but bottom-up income is less appealing. Earnings quality appears to be a headwind looking ahead". Hence, either it turns the picture around, or, the downside pressure continues.

CDXS - the technical picture

It's worth noting CDXS' breakout from 52-week lows in the chart below. It's now poked its head above the long-term resistance line shown, currently testing the 250DMA in the process. Notably, this has occurred several times over the past 12 months, with the stock subsequently pricing lower after each attempt.

Exhibit 2. CDXS breakout above longer-term resistance line.

What does this say about where we sit in the longer-term trend, however? It depends on time horizon when analysing this. Looking at the daily cloud chart, that eyes out price action into the coming weeks, the price line has nudged above the cloud in January. The lagging line has only poked its head above and had a brief look before again testing the cloud top. Ideally, we see both these lines above the cloud in order to confirm a bullish trend over the coming weeks.

Exhibit 3. Not yet bullish above the cloud on daily chart

However, looking at the weekly chart, that helps understand price action into the months ahead, we are still bearish below the cloud. The price and lagging lines have a ways to go until a cloud cross and therefore we are yet to see the case for a longer-term reversal just yet. The company's FY22' earnings will be a key catalyst to watch in relation to this.

Exhibit 4. Weekly chart yet to see price of lagging lines cross above the cloud either

Meanwhile, checking the weekly market profile since December, there's been an upshift in the point of control ("POC") but there's been no real depth of buying or volume in the key buyer zones below the POC. This is especially true over the last 4 weeks of trade. To us, this suggests demand has been weak with each corresponding price move, and that buyers have mainly been active above the POC and yet to claim any unrealized gains. We see scope for CDXS to pull back to December range therefore.

Exhibit 5. Buyers absent in price moves upward with bulk of demand present above the POC each week

Valuation and conclusion

CDXS still trades at more than 60x cash flow and we are yet to see this creep up from the denominator of CFFO. Consequently, Seeking Alpha's quantitative factor grading has the stock rated poorly across all measures. This system uses objective data to provide an unbiased snapshot of a company's outlook; consequently, this is a downside risk for CDXS re-rating to the upside.

Exhibit 6. CDXS rated poorly with quant factor grading

Keeping on objective measures of price visibility, we also have multiple downside targets to $5.25 and below on our point and figure studies. We believe this confirms our thesis to remain neutral on CDXS at this stage.

Exhibit 7. Downside targets to $5.25 and below

Net-net, there's been no major response to the 2 most recent catalysts in CDXS' story. Both could be potentially accretive to its growth curve, however, investors look to have priced in the updates with further downside on the chart. In that vein, we aren't game to go against the trend in CDXS' stock just now. The company's upcoming FY22 numbers could provide a change, however, it has already affirmed previously outlined guidance, so it's likely investors have priced this in already as well. Net-net, we reiterate CDXS as a hold.

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