Ticker Reports for June 1st
Okta, Inc. Stock Falls To Critical Level: What Happens Next?
Okta, Inc. (NASDAQ: OKTA) shares are down more than 5% following its Q1 results and have the market at a critical turning point aligning with prior resistance and current support targets. A move below this level could send the market back to its recent lows, a rebound back to the recent highs. The question is, what is the market more likely to do? The answer is to move lower. The results provided a beat-and-raise scenario that should support the market, but there is a problem.
Demand for software services is tepid, and growth is slowing for this highly-valued name. Trading at 42 times this year’s earnings and 36 times next year’s, the valuation is a headwind the market may not be able to overcome soon. Stocks like Salesforce.com (NYSE: CRM), arguably better tech stocks that trade at lower valuations, have similar problems and are more likely to rebound than Okta. Salesforce, at least, has dividends and share repurchases to sustain investor appetite, but Okta has neither.
Okta Falls After Beat-and-Raise Quarter
Okta had a solid quarter with top-and-bottom-line results that were better than expected, leading to improved guidance. The issue is that growth is slowing and is projected to slow, with internals suggesting slowing will persist through the year’s end. The company reported $617 million in net revenue for a gain of 19.1% compared to last year. The growth outpaced the Marketbeat.com consensus estimate by $12.5 million or 200 basis points on strength in large customers. Customers contributing more than $100K in annual recurring revenue (ARR) grew by 12% to the top 4,500 and contributed to significant margin improvement.
Okta’s margin is strong and strengthening. The company reports a 1500-basis-point improvement in adjusted operating margin and an 1100-basis-point improvement in free cash flow margin. The free cash flow (FCF) margin hit 35% and set a record for the company but is expected to moderate as the year progresses.
The problem with the results is the pace of growth, remaining performance obligations (RPO), and guidance. The pace of growth outperformed expectations but slightly, down more than 500 basis points YOY, and is expected to slow as the year progresses. The RPO, a leading growth indicator, fell to 15%, lagging the top-line advance, and is forecasted to slow again. The guidance was raised above the consensus but not enough to offset the slowdown in growth and weakness in RPO. RPO is expected to grow this year, but only by 13% to 14%, which is insufficient to warrant the high stock valuation.
Analysts' Response is Mixed: Okta Indicated Higher
The analysts' response to Okta’s results is mixed, but the net results indicate higher prices. Several analysts lowered their price targets, offset by reiterated targets, one raised target and an upgrade. The consensus rating held steady at Hold, but the consensus price target increased because most new targets still lead the market. The caveat is that the consensus target implies only a 15% upside and may cap gains because it aligns with the high end of the current trading range. Okta can exceed that level, but it will take time for results to grow into the valuation.
The technical outlook is mixed. The market has reason to move higher but isn’t and shows resistance at a critical level. The market is still above the critical support target at $90, in the middle of the trading range and point of past resistance, but it may cross below it soon. In this scenario, the market could fall to $60 quickly and align the valuation with current results. A rebound is unlikely from this level without a bullish catalyst, and there are no visible catalysts until the next earnings report.
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Hormel: A Potential Buy Despite Post-Earnings Decline
Hormel Foods Corporation (NYSE: HRL) stock investors are living the expression that what goes up must come down. HRL stock is down 8.8% in midday trading after the company posted mixed earnings. This movement is almost exactly opposite to the price movement in HRL stock after the company's previous earnings report in February 2023, when the stock gapped up sharply.
Investors have seen much of their 2024 gains wiped away and may wonder what to do with Hormel stock, which is down 11% in the last 12 months. The answer may be to stay the course. This sharp price movement may be a technology-induced overreaction to a report that wasn't as bad as it may seem.
Hormel's Earnings: Slight Decline but Beating Expectations
Hormel's revenue of $2.89 billion missed analysts' estimates of $2.97 billion, which was the same number the company had reported in the prior year. The company continues to show uneven performance across its multiple categories and brands.
For example, the company reported volume growth in its food-service business but noted that those gains were offset by weakness in its international and retail businesses. The same was true with brands like Skippy, Spam, Planter's, and Hormel Black Label bacon, showing an increase in net sales that was offset by declines in other areas.
However, the bottom line tells a different story. Although earnings were down two cents per share year over year, they did beat analysts' expectations by two cents per share. That makes it two consecutive quarters of better-than-expected earnings and increased operating cash flows.
When it came to guidance, Hormel also had positive news to report. The company reaffirmed its outlook for net sales growth of between 1% and 3%. It also updated its expectations for diluted net earnings per share (EPS) to $1.45 to $1.55 (from $1.43 to $1.57). Plus, it increased its expectations for adjusted diluted EPS to a range between $1.55 and $1.65 (from $1.51 to $1.65).
Is High-Frequency Trading to Blame for Hormel's Stock Volatility?
Investors see price action like what you're seeing in HML stock all the time. Stocks move like this due to high-frequency trading (HFT), which is guided by algorithms that look for keywords in a company's earnings report and can execute buy and sell orders at lightning speed.
That looks to be part of what's happening with Hormel stock after earnings. Analysts have been bearish on Hormel for some time. The Hormel analyst ratings on MarketBeat give the stock a consensus rating of Reduce, which is equivalent to Sell.
The bottom line for investors is that it wasn't going to take much bad news to confirm this negative sentiment.
Why Hormel's High-Yield Dividend Makes It a Solid Buy
Many of the issues surrounding Hormel are common among many consumer staples stocks. That also means they are likely to be temporary and could turn around when economic conditions improve. That doesn't mean there won't be more downside risk to the stock in the short term. However, you should consider that many consumers are choosing to eat at home, and Hormel's high-protein offerings may help make a dollar stretch further.
Even if growth is slow, one of the attractions of HRL stock is its high-yield dividend. Hormel is a dividend king that has increased its dividend for 59 consecutive years and has a 3.58% yield. Despite the headwinds, there's no reason to believe the dividend is in danger.
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Canopy Growth's Earnings: Profitability Despite Industry Shifts
Canopy Growth Corporation (NASDAQ: CGC) is a leading producer and distributor of cannabis and cannabis-derived products. Canopy Growth’s earnings report for the fourth quarter and fiscal year was released, revealing a company actively adapting its strategies to address evolving market dynamics. Canopy Growth’s financial report release provided strategic insights into the opportunities and challenges facing the company and the cannabis sector.
Modest Growth and Segment Shifts
The fourth quarter of fiscal year 2024 saw Canopy Growth achieve a net revenue of $72.8 million, marking a 7% increase compared to the same period in the previous year. However, when examining the full fiscal year 2024, net revenue totaled $297.1 million, reflecting an 11% decrease year-over-year. This top-line discrepancy highlights the impact of strategic decisions made by Canopy Growth to divest certain business units, particularly within the Canadian retail sector. When factoring out the revenue contribution of these divested businesses, the fourth quarter reveals a more robust 16% year-over-year increase.
Examining segment performance provides further insights into the company's evolving operational focus. The Canada Cannabis segment, historically a cornerstone of Canopy Growth's business, generated $37 million in revenue during Q4 FY2024, a 4% increase year-over-year. Notably, this growth stemmed primarily from a 16% surge in Canadian medical cannabis sales, showcasing the segment's resilience despite challenges within the broader adult-use market. However, for the full fiscal year, the Canada Cannabis segment recorded a revenue decline of 18%, reaching $153.7 million. It is crucial to acknowledge the influence of the divested Canadian retail business on this metric. When excluding this divested component, Canada Cannabis segment revenue experienced a modest 2% increase year-over-year in FY2024.
Outside of Canada, Canopy Growth continues cultivating its presence in international markets. During Q4 FY2024, the International Markets Cannabis segment achieved a 32% year-over-year revenue increase, reaching $12 million. This positive trajectory can be attributed to expanding operations in key markets like Germany and Poland and the timing of non-recurring revenue generated by the company's US CBD business. For the full fiscal year, the International Markets Cannabis segment recorded a 6% revenue increase, totaling $41.3 million. This sustained growth further underscores the strategic significance of Canopy Growth's international expansion endeavors.
Beyond its core cannabis operations, Canopy Growth leverages its expertise and brand recognition in adjacent markets. The Storz & Bickel segment, known for its high-quality vaporizers, delivered an impressive performance in Q4 FY2024, with net revenue surging by 43% to $22 million. This growth was largely propelled by the successful introduction and subsequent consumer adoption of the Venty portable vaporizer, showcasing the segment's ability to innovate and capture market share within a competitive landscape. The Storz & Bickel segment achieved a commendable 9% revenue increase, generating $70.7 million on a full-year basis.
A Path Towards Profitability
Canopy Growth's Q4 and FY2024 earnings report reflects a company committed to strengthening its financial health through a combination of improved margins, disciplined expense management, and strategic operational adjustments. The company's gross margin for Q4 FY2024 reached 21%, signifying an improvement of 11,500 basis points compared to the same period in the previous year. Similarly, the full fiscal year 2024 concluded with a gross margin of 27%, marking an increase of 46% year-over-year.
Several contributing factors underpin this positive gross margin trend. Canopy Growth's unwavering commitment to streamlining its operations, optimizing production processes, and strategically managing its supply chain has yielded tangible results in the form of reduced costs. These cost-reduction initiatives, combined with a concerted effort to minimize excess and obsolete inventory accumulation, have played a pivotal role in enhancing the company's overall profitability.
The positive impact of these strategic measures is further evident in the company's operating income and Adjusted EBITDA figures. Despite reporting an operating loss of $107 million in Q4 FY2024, this figure represents a significant 80% improvement compared to the same period in the previous year. Similarly, while the full fiscal year 2024 concluded with an operating loss of $229 million, it is crucial to acknowledge the substantial progress made in reducing this loss compared to the prior year.
Further emphasizing this commitment to fiscal discipline, Canopy Growth's Adjusted EBITDA loss for Q4 FY2024 stood at $15 million, a notable 63% improvement year-over-year. This positive trend continued throughout the fiscal year, with FY2024 concluding with an Adjusted EBITDA loss of $59 million, representing a significant 72% improvement compared to the prior year. This consistent improvement in Adjusted EBITDA underscores the efficacy of the cost reduction programs implemented by Canopy Growth and signifies the company's unwavering commitment to achieving sustainable profitability.
Analyst Sentiment and Future Prospects
Despite the tangible progress achieved in recent quarters, Canopy Growth’s analyst community met the Q4 and FY2024 earnings reports with a cautious tone. While acknowledging the company's efforts to enhance profitability and streamline its operations, analysts remain hesitant to endorse a bullish outlook given the challenging market dynamics and the inherent uncertainties surrounding the timeline for US federal legalization.
This cautious sentiment is reflected in the current consensus rating among analysts, which stands at a "Sell" for Canopy Growth's stock. The consensus price target of $4.87 also represents a significant potential downside from Canopy Growth’s stock price. The analyst’s sentiment underscores the prevailing belief that significant challenges remain on Canopy Growth's path toward achieving consistent profitability and generating shareholder value. This prevailing negative sentiment among analysts, particularly when contrasted with more optimistic projections from prior periods, highlights the evolving perceptions and heightened scrutiny surrounding Canopy Growth's ability to navigate the competitive pressures and regulatory complexities of the global cannabis market.
Canopy Growth's Q4 and FY2024 earnings report reveals a company at a pivotal juncture, actively adapting to a rapidly evolving industry landscape. The company's strategic focus on driving revenue growth within higher-margin segments, such as medical cannabis and premium vaporizers, demonstrates an understanding of shifting consumer preferences and a commitment to pursuing profitability. However, the ongoing challenges posed by regulatory uncertainty, particularly within the US market, and the need to further optimize operations to achieve sustained profitability remain significant factors influencing investor sentiment and the company's long-term prospects.
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