Oct
30

Irrational After Hours Action In Facebook (FB) After Reporting Blowout Quarter

Facebook (FB) shares jump 15% after easily besting estimates but quickly give up gains

With shares up more than 100% in the last 4 months, expectations were sky-high for Facebook’s (FB) 3rd quarter results. Wall street analysts were looking for earnings of $0.19 per share on $1.9 billion in revenue. The market pulse leading up to their results suggested most investors anticipated even better numbers, with the consensus at Estimize predicting $0.21 EPS and sales of $1.93 billion.

FB easily exceeded the loftiest of expectations, reporting that in the third quarter they earned $0.25 per share on $2 billion in revenue. Non-GAAP net income grew 100% to $621 million with Facebook recording a 60% jump in revenues year-over-year. Monthly active users grew 18% to 1.19 billion, fueled by a 48% increase in the number of mobile MUAs to 874 million. Once a huge question surrounding the company, FB continues to successfully navigate the shift to mobile away from the desktop. Mobile ad sales rose nearly 600% year-over-year and accounted for 49% of the company’s total ad sales in the quarter.

Despite the great numbers, shares of FB are currently trading down after hour afterward after initially gaining over 15%. While investors cheered the quarterly results, comments from management during the conference call quickly soured the mood. Two take aways from CFO David Ebersman’s comments appear to be cause of this reaction. Ebersman stated that while their user base among teens remained stable, Facebook has experienced “a decrease in daily users, specifically among younger teens.” He also suggested that adding more ads to user’s timelines as a way of further increasing ad sales was not an option at this point.

Irrational Concerns For Facebook (FB) Lead to Sell-Off Following Conference Call

While a declining teen user base and an inability to sustain ad sale growth are certainly two issues that would be extremely detrimental to FB, it is necessary to put Ebersman’s comments into perspective, and after doing so the sell-off in shares following the conference call appears to be a significant overreaction. Facebook is far and away the leading social network for teens, with 94% of teenagers in the US using Facebook regularly. Having captured 94% of the potential market already, Facebook is essentially fully penetrated among teens in the US. While a decline in daily usage would suggest that teens are increasingly utilizing other social media platforms in addition to Facebook, with the exception of Twitter (TWTR), Facebook owned Instagram is the next biggest and fastest growing social platform among that age group. Instagram has quickly grown to 150 million users, up from 100 million in February, justifying  Facebook’s $1 billion acquisition of the company last year. Should teens continue to spend more time on other social media platforms, the detriment to Facebook is largely limited by the fact that Instagram would likely be the biggest beneficiary of any further migration away from the site. If retaining users is a concern, then the negative response to Facebook not looking to increase the number of ads users see is quite irrational. Further saturating the user experience with more ads would be the easiest way for Facebook to turn users off to their product, something they can not do if they hope to remain the world’s dominant social network. Increases in advertising prices will drive revenue growth going forward, not an increase in the volume of ads, although volume will naturally increase anyways as Instagram begins rolling out advertisements. Facebook is wise to refuse to sacrifice the user experience in the hopes of appeasing short-sighted investors. With their numbers clearly indicating they are firing on all cylinders, FB simply needs to stay the course and continue executing on their plans, the markets will eventually get it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
30

Take Two Interactive (TTWO) Crushes Q2 Estimates

Take Two Interactive (TTWO): Reports Record Quarter Fueled By Grand Theft Auto V, Raises Guidance For Fiscal 2014

As reported two weeks ago,  wall street analysts were greatly underestimating sales of Take Two Interactive’s (TTWO) Grand Theft Auto V, leading to a blow out second quarter. Despite easily accessible sales figures for GTA V, most analysts failed to adjust their models, and kept earnings predictions for the quarter at levels that would reflect 18-19 million copies sold. Take Two announced that to date, 29 million copies have been shipped less than 40 days since its release, already exceeding the 25 million the street was anticipating during its first 12 months on shelves. This led to TTWO reporting earnings of $2.49 per share on $1.27 billion in revenue, versus consensus estimates of $1.70 per share in earnings and $947 million in sales. Take Two also significantly increased their fiscal year 2014 outlook. The company now expects full year revenue of $2.2- 2.3 billion generating earnings per share between $3.50- $3.75, up from their previous view of $2.25- $2.50 EPS on revenue of $1.78- $1.88 billion.

While management failed to highlight their next major release, they did sound upbeat about their future and their ability to continue producing huge hits…

Take-Two has an extensive development pipeline of groundbreaking new intellectual properties and exciting titles from our proven franchises, along with digitally-delivered offerings to complement our core business. We currently have more than ten unique titles planned for next-generation consoles, including multiple releases slated for fiscal 2015. As a result, I am confident that we will be able to achieve Non-GAAP profitability in fiscal 2015 and every year for the foreseeable future.

Since the quarter’s end, Take Two has released their annual installments of the NBA 2k and WWE 2k series, with NBA 2k14 moving over a million units in its first 12 days. Given the consistent track record of these franchises and the launch of Grand Theft Auto Online this month, revenues throughout the holiday season will remain strong. With a huge cash position and arguably the most valuable portfolio of intellectual property in the industry, shares of Take Two have little downside from current levels and significant room to appreciate. I continue to view TTWO as a strong buy and one of our top picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
26

Remaining Disciplined In Today’s Fast Paced Markets

5th Street Research

Selecting Quality Investments Can Be Difficult, Keep Things as Simple as Possible

Managing one’s own investment portfolio is a daunting task for most people. The amount of information to process and the speed at which it is made available leaves most individual investors feeling overwhelmed, often resulting in frustration and a few losing trades before deciding to leave the job in the hands of a professional. In reality these “professionals” face many of the same challenges you do and commonly fail to outperform the market as well. The individual investor has a few distinct advantages that the typical money manager isn’t afforded, most importantly the ability to focus your investments in a small group of top ideas and being able to maintain a long-term investment thesis without worrying about day-to-day gains to appease clients. By identifying your own strengths and weaknesses, and focusing your efforts selecting investments within your own areas of knowledge, the individual investor can consistently beat the market once developing confidence in a strategy and learning to maintain discipline .

Find an area of expertise and focus your efforts in a specific niche

Self-awareness is a prerequisite of successful investing. While there are countless strategies you can use, tons of unique financial products you can trade, and a vast array of sectors and companies one could analyze; it is only necessary to find a niche that you excel in and concentrate your time there. If you are a momentum trader don’t spend time analyzing a company’s EV/ EBITDA ratios, you should be scouring through charts of the biggest % movers on the day. If you find you have consistent success picking small cap stocks, don’t spend time analyzing the potential impact of Microsoft’s new Surface tablet on their financials, instead scan though all companies listed on the NASDAQ with a market cap less than $400 million. Have an exotic option strategy that consistently nets small wins? Concentrate your efforts on trading that specific strategy until it no longer works. Having tunnel vision in this sense allows you to filter through the vast array of data and commentary thrown at us everyday, focusing on and employing only on that which is pertinent to your investment methodology. There is much more value in being a master in a specific niche than being merely proficient in a wide array of areas. This is the first component of being a disciplined investor.

Have a predetermined plan when entering a position, stick by your investment thesis

The second principle of disciplined investing comes in the form of being prepared for any scenario that could unfold in your positions before entering them. If you are a value investor your investment thesis is dependent upon identifying companies who are being unfairly valued by the market for any given reason at the time. You should enter into a position only after determining a fair valuation range for the equity based on underlying fundamentals that will ultimately prove stronger than the current unjust market sentiment. Without news of anything that would adversely effect the value of the company, day-to-day or even month-to-month swings in the share price are of no importance until the business achieves a fair valuation or the fundamental picture changes and renders your investment thesis invalid. To have any success as a value investor this thought process is imperative if you hope to avoid cutting losses prematurely and to maximize your returns when your ideas pan out, remaining invested until fair value is reached. Conversely, if you base your trades on a technical strategy it is of utmost importance to adhere to a strict set of rules that are reactive solely to price changes, paying no mind to the fundamental picture backing the position. Before entering a trade you must know where you will cut losses and where you will take profit as predetermined by the technical strategy you employ. Knowing how you should react regardless of what scenario unfolds in a position, and adhering to these principles at all times, takes the guesswork out of investing. Through due diligence in your field of expertise, you identify a trade or position to enter for specific reasons relevant to a strategy you know you can deploy successfully. Knowing how you will exit beforehand takes the human elements of fear and greed out of the equation, allowing only rational actions that ensure the integrity of the strategy and investment thesis.

Always Analyze and Look To Refine Your Investment Methods

The third and most important trait of the disciplined investor is the constant need to analyze and improve upon ideas and strategies when possible. Many investors fall victim to early successes, focusing on the positive results of a trade, rather than analyzing what went right and what could have been done different to possibly capture a greater return on investment. It is easy to get caught up in the power of a bull or bear market and either assume that what you are doing is genius if working, or abruptly lose faith in a strategy that may prove to be great in the long-run if the market initially turns against you. Doing so causes one to miss out on future profits unless sufficient time is spent reviewing and critiquing their trades. Technology has afforded us many means by which we can back-test strategies, test new ideas in live market simulations, share and analyze methodologies with our peers, collect historical records of our trades, and visualize all this information in a way that we can derive meaning from a seemingly endless supply of data. If one hopes to have long-term success as an investor, they must constantly look to refine their thought process and become more proficient in their niche. The world of finance is constantly evolving, to stay ahead of the curve you must do so as well. The almost incessant need to analyze your successes and failures and use this knowledge to constantly improve as a trader is the third and most inherent quality of the disciplined investor.

Putting It All Together

Investing is a life-long learning process we must all go through to achieve financial success. There is no right or wrong strategy to adhere to forever, nor is there a universal methodology or thought process that will ensure outperformance. Take the necessary time to understand what you are comfortable trading, figure out where your area of expertise is, and carve out a niche for yourself. Develop the confidence in your ideas necessary to formulate and stick with a plan before ever entering a position, regardless of what scenario unfolds. Last but not least, always look to analyze successes and failures, and seek out ways to use what you discover to improve future returns. Markets get more confusing and complex by the day, and we are constantly presented with new, seemingly irrelevant data and observations. Only by remaining disciplined and focusing on the information pertinent to you and your investment thesis, can you hope to achieve consistent success. When you find your niche stick with it and master, you will be rewarded in the long-run.

Oct
26

Try Foot Locker (FL) On For Size

Foot Locker (FL): The Smarter Way To Invest In Nike (NKE), Adidas (ADDYY) and Under Armour (UA)

Despite the amount of technology companies that have emerged in the 21st century, two of the greatest growth stories of the millennium are those of Nike (NKE) and Adidas (ADDYY).  They had a combined market cap of $19.2 billion on 1/1/2000, today that number has swollen to $92 billion. Under Armor (UA) has also emerged in that time, and sports a $8.5 billion valuation. The athletic apparel industry has been one of the most successful sectors of the past 20 years and continues to grow at a brisk pace. With the world becoming more and more educated everyday on the importance of physical fitness, the popularity of sports rising throughout the world, and the continued emergence of the middle-class consumer in Asia, this is an industry that will continue to outperform for years to come. I expect one could do reasonably well for themselves by simply buying a basket of stock in NKE, ADDYY, UA. However, I believe one can invest in these companies’ continued growth at a better price by simply buying shares of Foot Locker (FL).

Foot Locker dominates the retailing of performance and casual athletic shoes in shopping malls and online in the United States. Outside of Finish Line (FINL), Foot Locker’s portfolio of brands contains nearly every other popular mall-based athletic shoe store, consisting of Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports,  and Footaction Their online operations are composed of the company’s aforementioned stores’ websites and Eastbay. Foot Locker ended Q2 with 3,495 company owned stores, 2,482 in the US and 1013 international locations, reflecting a closing of 42 storefronts in the US and an increase in store count internationally by 202. This is a positive trend for shareholders as the company closes unprofitable stores in the over-saturated US market and expands its presence overseas where there are far greater opportunities to grow revenues and profitability. Foot Locker also recently began franchising their stores in the middle east and South Korea, in the past year the number of such stores has nearly doubled to 69.

Foot Locker’s $600 Million Buyback Plan, Shareholder Friendly Management Team

Foot Locker’s management team, led by CEO Kenneth Hicks, has a strong track record and a history of undertaking share-holder friendly initiatives. In February Foot Locker presented their 2013 Capital Allocation Plans to investors, announcing an 11% dividend increase to $0.20 per quarter and a $600 million buyback program extending through January 2016, replacing their previous $400 million program under which they had spent $129 million since 2012. With a market cap of $5 billion, the new buyback program will the number of shares outstanding by more than 10% , thus increasing FL’s earnings per share. The current program is well ahead of schedule with $100 million worth of shares repurchased during Q2 alone. I believe management will continue to buyback aggressively with FL shares currently trading $1 below the average price paid to repurchase the first $100 million worth of shares under the program. This could lead to a future hike in their buyback plan being announced sooner than later, certainly a potential positive catalyst for shareholders to watch out for. With a net cash position of $700 million and levered free cash flows over $300 million annually, Foot Locker is in an extremely enviable financial position, that gives them the flexibility to keep returning significant amounts of capital after reinvesting for growth.

Foot Locker Is Undervalued Relative to Their Peers in the Athletic Apparel Sector

Despite their strong balance sheet, dominant position in mall-based and online retailing, and efforts to unlock value for shareholders, shares of Foot Locker currently trade at a steep discount to rest of the athletic apparel sector. Using any valuation metric Foot Locker trades at a lower multiple then their peers, fellow retailers and apparel companies alike.

As we can see pretty clearly, Foot Locker has at the lowest sales and profitability multiples of the group and trades at a huge discount to their peers in terms of enterprise value/ free cash flow.

FL Is A Buy At Current Levels

Foot Locker is a long-term buy at today’s closing price of $34.20 per share. This company has numerous things going for it that make it one of our top picks at present. Athletic apparel has been one of the strongest and most consistent growth sectors of the past 20 years. While most clothing designers and retailers are wildly susceptible to changes in fashion and styles, sports never go out of style. Almost anyone playing soccer, basketball, baseball, football, exercising in their local gym, or jogging in their neighborhood, is doing so in sneakers and clothing made by Nike, Adidas, Reebok (owned by Adidas) or Under Armour. As NKE and ADDYY go, so does FL since 1/1/2000, with NKE up 534%, ADDYY up 368%, and FL gaining 416%.

As a believer in the long-term sustainable growth prospects of the athletic apparel industry, therefore a believer in Nike, Adidas, and Under Armour, I view Foot Locker as a way to gain direct exposure to these businesses fortunes at a steep discount to their own valuations.  Management has a proven track record of utilizing capital effectively and is aggressively buying back shares, which should unlock shareholder value long-term. They also pay a not insignificant dividend yielding 2.4% annually. All things considered, Foot Locker should be trading at valuations at least in line with their peers if not in excess of them. The group average EV/ FCF of 32.9 is rather high. Lets assume long-term that a 18-22 would represent a more normalized range. If Foot Locker can grow their free cash flow by 8.5% per year for the next 3 years, a number we think is very reasonably attainable, they will be generating  FCF of $400 million per year by 2016. Based on the low-end of our conservative valuation range (EV/ FCF= 18), I believe Foot Locker will have an enterprise value of at least $7.2 billion within 3 years, representing an upside of 68% from today’s price or $58 per share. Our price target becomes $61 if dividends are taken into account.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
24

Wynn Resorts (WYNN) Follows Las Vegas Sands’ (LVS) Lead And Blows Out Q3 Estimates

Las Vegas Sands (LVS) and Wynn Resorts (WYNN) Continue to Thrive in Macau

The Macau gaming industry continues to remain our favorite sector. The Q3 numbers released by both Las Vegas Sands (LVS) and Wynn Resorts (WYNN) in the past week reaffirm this thesis. Las Vegas Sands kicked off the Macau earnings on the 17th, reporting earnings of $0.78 per share on revenue of $3.57 billion, analysts had predicted $0.75 EPS and $3.46 billion in revenue. Following today’s close WYNN reported revenues of $1.39 billion and $1.84 EPS, easily surpassing the $1.37 billion in revenues and $1.66 earnings per share that the street was looking for.

Wynn’s Growth Solid But Will Remain Limited Until Wynn Palace Opens in 2016

While Wynn’s numbers continue to impress, it is worth noting that their growth prospects are limited until 2016 when they open the Wynn Palace on Macau’s Cotai strip. Until then expect growth rates near 10% as they continue to refine their Macau operations and gross gaming revenues for the region as a whole remain growing nearly 20% annually. The Wynn Palace project sports a $4 billion budget and is expected to be one of the most impressive properties in Macau when construction is completed, featuring one of the biggest casino floors in the region and a 1,700 room hotel.

U.S. operations continued to remain stagnant as the Las Vegas gaming market continues to struggle. Revenues were up 1% year over year for the quarter totaling $392.5 million. Adjusted property EBITDA was $106.5 million, down 3.5% from the past year.

Las Vegas Sands Firing On All Cylinders In Macau and Singapore

CEO Sheldon Adelson reported that their Macau property portfolio attracted over 16 million visitors in the past quarter, generating revenue of $2.34 billion and $784 million of adjusted property EBITDA. The Venetian Macao remained their top property in terms of sales and profitability, generating revenues of $935 billion and $317 million of operating income. Sands Cotai Central, the newest property in the Sands China portfolio, looks poised to overtake The Venetian as their most valuable casino in Macau. After opening their second phase, Sands Cotai Central experienced revenue growth of 149% year over year in the most recent quarter, swelling to $736 million in Q3. A third phase is expected to include a St. Regis hotel and branded residences, which will only drive further profitability. The Four Seasons Hotel Macao also continued to perform for LVS, with revenues up 47% and EBITDA up 107.5%. The only slacker in the Sands China portfolio was the dated Sands Macao, which still grew EBITDA 11% year over year despite revenues falling by 3% to $305 million.

Pictured above, Marina Bay Sands is the most impressive and expensive property in the LVS portfolio, and surprisingly to some resides in Singapore not Macau. Opened in 2011 and carrying a price tag of S$8 billion, Marina Bay Sands’ operating results continue to justify management’s decision to invest so heavily in the project. As one of only two licensed casino operators in Singapore, Las Vegas Sands stands to benefit greatly from the swelling in wages and net worth in the city-state. Revenues at Marina Bay Sands grew 24% during Q3, while adjusted property EBITDA jumped 43% to $373.6 million. Having lived in Singapore this year I can personally attest to the marvel that this casino/ resort is, and have witnessed first hand the huge appetite for gambling that exists in Singapore.

LVS and WYNN Results Bode Well for MGM and MPEL

We now look ahead to MGM Resorts (MGM) reporting on October 31st and Melco Crown Entertainment (MPEL) on November 5th to round out another strong earnings season in Macau. Already displaying great strength throughout the year, look for MGM and MPEL to also exceed consensus estimates this quarter on the heels of gross gaming revenues for Macau as a whole beating expectations the past few months. Initial numbers from Golden Week in Macau also came in ahead of expectations as reported two weeks ago and could lead to upward estimate revisions for Q4. Previously the subject of a feature report, Melco Crown Entertainment remains our top pick in the sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
24

Icahn Sees Apple (AAPL) Shares Worth $1250 In 3 Years

Icahn Reiterates Call For Immediate $150 Billion Buyback From Apple (AAPL)

As promised yesterday, Carl Icahn launched Shareholders’ Square Table with a mission statement reading…

The Shareholders’ Square Table (SST) is a platform from which we can unite and fight for our rights as shareholders and steer towards the goal of real corporate democracy.

As a member of SST, you’ll receive emails with timely information on the movement, and have full access to our website containing:

  • In depth reports about activism and various companies we are involved in
  • Insights on business
  • Commentary and criticism of certain actions by boards and CEOs
  • ‘No-brainers’ and ‘Absurdities’

Most importantly, our periodic posts will discuss what can be done to change our current, dysfunctional system of corporate governance. 

While there are many good CEOs and boards there are far too many ineffectual ones that are strangling shareholders and the economy.

In addition to posts discussing poison pills and executive compensation, Icahn posted his full letter to Tim Cook, CEO of Apple (AAPL). The overall tone was very supportive of Apple’s current business operations, management team, and plans for the future. He discloses that he has increased his stake in AAPL to 4.7 million shares, or about $2.5 billion at current levels. His sole criticism of Apple concerns the speed and size of their current buyback plan, given the availability of cheap money to finance a more sizable and swifter plan than is currently in place. He calls for an immediate tender offer for $150 billion worth of stock. Icahn makes it clear that he believes AAPL shares are vastly undervalued, stating he sees the stock reaching $1250 within 3 years should Apple undertake his proposed plan, basing his price target on an instant 33% jump in earnings that would result from the buyback and more a more normal EBIT multiple of 11x. Shares of AAPL are up just under 1% on the day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
23

Carl Icahn Ramps Up the Pressure on Apple (AAPL)

Carl Icahn Sends Letter to Apple (AAPL)

Just a day after debuting the new ipad Air and next installment of iPad Mini, Carl Icahn is looking to turn up the pressure on Apple (AAPL) some more. Earlier in the year it was announced that Icahn had acquired over $1 billion worth of AAPL stock and wanted the company to allocate $150 billion for a share repurchase. Apple’s current cash hoard is approximately $150 billion, a number that is up 10% in the past year despite spending heavily on share-repurchases under an already outlined buyback plan that Icahn wants increased. The full letter will be available tomorrow, I expect Carl Icahn will call for Apple to return even more money to shareholders than he was already seeking. The market didn’t react much following his tweet, as its been well documented that Icahn is seeking change from management, but historically having him involved is a good thing if you also own shares. His most recent huge score came yesterday when he cashed out half his Netflix (NFLX) position following a 457% gain, booking a profit of $850 million. Check Shareholders’ Square Table tomorrow for the full letter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
16

Apple (AAPL) Cuts Q4 Order of iPhone 5c, Announces Event To Unveil New Products

Apple (AAPL): Cuts Q4 Orders of The iPhone 5c

A source familiar with Apple’s (AAPL) supply chains has indicated that the company has slashed orders of the iPhone 5c with two major manufacturers, in a sign that sales of Apple’s lower cost iPhone 5 are not living up to management’s initial expectations. Orders at Pegatron Corp were reduced by slightly less than 20% for the 4th quarter. Hon Hai Precision Industry has seen their orders reduced by 33% for the same time period. Already facing questions about rising competition and penetration rates in foreign markets, it does not bode well for AAPL to see the 5c struggling, especially with the lingering shortages of the iPhone 5s already dragging on sales. In a glimpse of hope for investors Apple just yesterday announced they are holding a special event on October 22nd. They are expected to unveil the next generation of the iPad, an updated iPad mini with Retina display, and an updated version of the MacBook Pro. The new products unveiled are expected to be available in stores shortly after, the MacBook Pro within a few days and the 5th generation iPad by month’s end.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
16

Amended Alibaba Agreement Makes Yahoo (YHOO) More Attractive

Yahoo (YHOO): Amended Agreement With Alibaba Should Prove Beneficial

Following yesterday’s closing bell, Yahoo (YHOO) reported their Q3 results and perhaps more importantly announced an amendment to their agreement with the Alibaba Group that reduces the maximum amount of shares Yahoo would be required to sell in the event of an Alibaba IPO. Under the original agreement Yahoo could have been forced to sell 261.5 million of their 523.6 million shares when Alibaba goes public, a move that appears imminent. After amending their agreement Yahoo can now only be required to sell 208 million shares. Shares of YHOO have more than doubled this year while operations have floundered, proving that at this point Yahoo is more of an Alibaba story than a Yahoo story per se. Yahoo’s 523.6 million shares of Alibaba represents an approximately 24% stake in the Chinese e-commerce group.

Alibaba is expected to file for a $15 billion IPO in 2014 that will valuing the company over $100 billion, expected by at least four analysts to command a valuation of at least $120 billion. At a valuation of $120 billion, Yahoo’s 24% stake would be worth $28.8 billion. One concern for YHOO shareholders stemming from the original arrangement regarding the IPO, was the notion that Alibaba might intentionally under-price their IPO, not needing to raise funds and force Yahoo to dump their shares at a low valuation. This becomes less likely with YHOO being required to unload 20% less shares. Yahoo also stands to benefit more from further appreciation in Alibaba’s valuation following their highly anticipated IPO. Alibaba’s revenue grew 61% to $1.74 billion in their most recent quarter while net income rose 159% to $707 million. They are by far the largest e-commerce player in China, one of the most lucrative markets you could possibly have a stranglehold on in the world.

YHOO is Undervalued at Current Levels

Given yesterday’s closing price of $33.38 per share, Yahoo currently has an enterprise value of $32.2 billion with about $2 billion in cash on their balance sheet. If Alibaba were to IPO tomorrow for $100 billion, less than many analysts anticipate, Yahoo’s total position would be worth $24 billion. They would be required to sell 40% of that position which would net YHOO $9.6 billion, or $6.25 billion assuming a 35% tax rate on their investment gain. For the purposes of our analysis lets assume they unload all of their shares at the time of the IPO, which would net $15.6 billion after taxes. In addition to their Alibaba stake Yahoo also owns 35% of Yahoo Japan, a position worth about $10.5 billion. If they were to liquidate that position as well and we assumed the same 35% tax rate, Yahoo Japan would carry a liquidation value of $6.8 billion. Subtracting this $22.4 billion in assets from Yahoo’s enterprise value, we can determine that the market is placing a value of about $9.8 billion on Yahoo’s core business. Including  yesterday’s results, Yahoo has generated net income of $1.29 billion over the past year. They have been aggressively acquiring companies this year, most notably Tumblr. While the effort to innovate is admirable, even if only through acquisitions, Yahoo’s core business continues to be stagnant. Revenues actually declined 5% year over year for Q3, so management needs to prove they  can start successfully implementing some of their acquisitions successfully to start fueling some growth before Yahoo can trade at multiples anywhere near its peers in the internet space. Taking this into account we will value Yahoo’s core business at only 12x trailing 12 months earnings, or about $15.5 billion. When taking into account all of Yahoo’s investments and placing a value upon their own operations, I believe YHOO should have an enterprise value of $37-$38 billion, a premium of 15%- 18% over yesterday’s closing price. Shares have the potential for even further upside should Alibaba continue to outperform as we anticipate they will, even more so now that they can retain an extra 10% of their stake following the impending IPO. YHOO is attractively priced at current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
15

GTA V Makes Take Two Interactive (TTWO) A Steal

Take Two Interactive (TTWO): Banking on the success of Grand Theft Auto V

The success of Take Two Interactive’s (TTWO) Grand Theft Auto V, has been well documented and is certainly not taking anyone by surprise at this point. What is a surprise is that just weeks after GTA V shattered just about every record pertaining to an entertainment product release, TTWO appears to be trading at a discount with shares down 12.5% in the past month and a half. With sales of their latest blockbuster easily outpacing analyst expectations, GTA Online not being included in most estimates and the successful launch of NBA 2K14 this month, I expect TTWO’s numbers to come in significantly better than what the street is currently anticipating when their Q2 release comes out on the 29th.

Doug Kreutz of Cowen & Company recently upped his price target on TTWO and called for first-year sales of 25 million copies of Grand Theft Auto V after it was reported that the $1 billion sales mark had been crossed in just three days. In a not released to investors earlier in the year, Sterne Agee’s Arvind Bhatia outlined a hypothetical profitability model for GTA V based on an estimated development cost of $137.5 million for the game and a marketing spend in the range of $69- $109.3 million. Bhatia estimated that if GTA V sold only 15 million copies it would translate to operating profit of $193.6 million for the game and would contribute $2.11 to earnings per share. He went on to estimate that should GTA V sell 25 million copies in its first year, operating profit for the game would be $390.8 million or an earnings per share contribution of $4.26. It is worth noting that GTA Online and its contribution to GTA V’s profitability has not been accounted for in Bhatia’s analysis, a number that I believe will be significant with $200 million in revenue expected to be generating in its first year through microtransactions and a free-to-play model.

25 Million Copies Sold In One Month?

Fortunately for us, it is very easy to get a good idea of just how many copies have sold thus far without waiting for Take Two to put out a press release announcing they’ve reached another sales milestone . VGChartz.com publishes weekly sales analysis covering the entire console gaming market, with their most recent report released yesterday covering sales up to the week ended October 5th. From 9/29- 10/5 1,080,086 copies were sold for PS3 and 951,537 copies on XBox, a total of 2,031,623 units moved for the week. That brings total copies sold as of October 5th, less than 3 full weeks from its release date, up to 22,629,833. Considering 2 million copies were sold in the most recently reported week, and 3 million in the week prior, we expect sales will continue to gradually decline but will remain meaningful. Sales will see a boost this week however as the game was just released in Japan and Brazil on October 10th. It would be reasonable to expect that another 1.5-2 million units have been sold in US/ Europe in the 10 days since the last sales report and 500,000 in Japan/ Brazil, putting Grand Theft Auto 5 at 25 million copies sold in its first month, a number analysts were looking for over the course of its first year on the shelves.

For an idea of how these sales figures will translate to Take Two’s revenue/ earnings numbers, a breakdown for a typical $60 game selling at retail looks like…

  • $60 Retail Price
  • -$20 Retailer Margin
  • -$7 Platform Royalty
  • -$4 Distribution/ Packaging
  • Leaving $25-$26 to the publisher depending on how many returns on sell-in versus sell-through

25 million copies sold would translate to $625- $650 million in revenue for TTWO from Grand Theft Auto V. Its been reported that between production and marketing costs Take Two spent $265 million on GTA V, yielding a profit of $360- $385 million. Even if we assume GTA V has already sold 70% of the total copies it will sell for the year in its first month, a high number to assume with the holiday season upcoming and a PC version reportedly expected in Q1 2014 (not to mention the potential for a release on PS4 and Xbox One to add to sales), 10.7 million more copies sold would account for the remaining 30% over the course of GTA V’s first year. That would bring the total profit contribution from Grand Theft Auto V in its first year to $628-$662 million. To put that number in perspective consider TTWO has an enterprise value of only $1.4 billion. Some analysts have also stated they expect $200 million in digital sales in the first year from the multiplayer component of their blockbuster, GTA Online. The margins on this revenue should be quite high as they are merely selling in-game cash that players can use to purchase cars, weapons, and other items to use while playing online. This number is expected to reach at least $500 million over the lifetime of the game.

Take Two Is More Than Just Grand Theft Auto

The most common criticism of Take Two Interactive and what appears to be the current market sentiment, is that they are too reliant on the Grand Theft Auto franchise. It is true that TTWO is reliant upon producing blockbuster games with installments coming only once every few years, while Electronic Arts (EA) and Activision (ATVI) have annual releases of their key franchises. Yet they don’t shy away from this fact, they believe in building blockbuster franchises, taking their time to ensure the end product is up to their standards, and building out brands/ intellectual property that has long-term value. Just this month they released their annual installment of NBA 2K14 which has been met by stellar reviews. Last year’s edition sold over 5 million units and the franchise is their most reliable annual revenue source. They also picked up the rights to the WWE franchise from THQ, THQ’s version last year sold 2 million copies. BioShock Inifinite, released early this year and selling over 4 million copies thus far, is the third installment in a franchise that has also proven to have staying power and be a consistent seller. Throw in the Borderlands and Max Payne franchises and Red Dead Redemption (13 million copies sold), and it is clear Take Two has built a valuable portfolio of brands that have amassed loyal fans, making this company more than just a Grand Theft Auto story regardless of the outsized returns that is generated from that one source.

It is an exciting time for the video game industry right now. Grand Theft Auto V has shattered nearly every record there is in the industry within a month of being released, the next Call of Duty franchise is coming in a few weeks, and both the Playstation 4 and Xbox One are slated to be released in November. While the dynamics of the industry have certainly changed over the past few years, we have seen the potential of digital distribution, downloadable add-ons, and free to play models with in-game currencies. With an installed base of players sure to exceed 30 million players for Grand Theft Auto V alone, Take Two is positioning themselves to take advantage of the shift to digital distribution and monetization of social worlds in games. Within 3-5 years all distribution in the industry could be digital, while certainly an alarming thought for GameSpot (GME), it could be a windfall for publisher’s and their margins as well as boost revenues through the added ease of purchase created for consumers.

TTWO Is a Buy at Current Levels

I expect Take Two to blow out estimates when they report results on October 29th on the back of Grand Theft Auto sales for the first month meeting their expectations for the year. The consensus estimate is looking for earnings of $1.55 per share for the quarter. With 22.6 million copies sold by October 5th, it seems reasonable to assume 21 million copies were sold in the first two weeks of the games release which were the last two weeks of TTWO’s Q2. This total easily surpasses the consensus estimates, I expect earnings in the range of $2.30-$2.40 per share for Q2 and a rosy outlook for the rest of the year on the continued strength of Grand Theft Auto V through the holiday season and the releases of NBA 2K14 and WWE 2K13. The lack of any future visibility regarding Take Two’s pipeline of games is contributing to their current undervaluation in my opinion, but expect management to offer some sort of plan for the future leveraging the strength of their portfolio of brands and proven franchises. With the windfall of cash that will be added to the company’s coffers through GTA V sales, a share buyback or other means of returning capital to shareholders becomes a distinct possibility. After bidding shares up for months leading up to GTA’s release, investors have taken a pessimistic view of TTWO despite sales of their hit game easily outpacing the street’s already lofty expectations. Look for the Q2 conference call in two weeks to shore up concerns about the pipeline and present numbers far exceeding expectations, with Grand Theft Auto V poised to contribute over $600 million in earnings in its first year. The future is bright for Take Two and the industry as a whole with the next console cycle about to begin, and innovations in digital distribution and online gaming continuously offering new opportunities. I believe fair value for TTWO equity is $24-$26 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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