Ticker Reports for September 27th
Can Costco Stock Hit New Highs as Interest Rates Drop?
An apparent tailwind hit yesterday's value stocks, a new development seen in the declining shares of Costco Wholesale Co. (NASDAQ: COST) after the company released its latest set of quarterly earnings this week. Costco stock is now down over 2% after the report, a bearish sentiment that comes despite the Federal Reserve (the Fed) recently cutting interest rates by the most since the 2008 financial crisis.
However, some investors argue these rate cuts might have been priced into stocks like Costco and Walmart Inc. (NYSE: WMT). However, some of this momentum has not worked its way through stocks like Dollar General Co. (NYSE: DG), which supposedly offer more value to the consumer. In today’s economy, value isn’t enough. Markets seem to prefer economies of scale and big enough cash flows to enable management to reinvest in technology and efficiency.
The consumer staples sector could become the main preference for investors during this consumer uncertainty, the question becomes whether Costco can still deliver more upside after pricing in interest rate cuts and trading as high as a 55.0x price-to-earnings (P/E) ratio today. This can be answered by comparing the recent company results to what Wall Street analysts now expect to see out of the company moving forward.
Costco Stock’s Strong Financials Set High Expectations for Future Growth
Starting with the most common driver, the top line. Costco delivered a net increase in revenues of 1.0% over the past 12 months, which may have been enough to lower the stock since inflation over the year was clearly above what Costco managed to push out in revenues.
However, the way revenues grew is more important than the net. Comparable sales rose by 5.4%, a retail sector metric indicating whether growth is coming from opening new locations or from higher demand and traffic in existing stores. Considering that traffic was up 6.4% in the year for Costco stores, investors can assume the latter is the case.
Another interesting metric investors should pay attention to in these wholesale value businesses is whether management is shifting with the times. Costco reports an 18.9% growth in e-commerce sales, meaning they are aware of consumer preferences and trends today and are making suitable investments to position Costco for this wave.
This shift in volume and technology drove the company’s gross margin higher, to 11%, compared to 10.6% last year. This may not seem like much on a percentage basis, but it was enough to drive the bottom-line net income to $2.35 billion, or 9% higher.
Here is what investors can take away from Costco’s trends when in doubt. Membership users grew to 76.2 million this quarter, or 7.3% over last year, driving subscription revenue higher by 6.5% to amplify the stock’s potential for stable and predictable cash flows in the future.
The only negative factor working against Costo is its valuation. Some argue that some stocks are expensive for a reason, and while Costco does have enough quality and growth to justify higher multiples, here’s what Wall Street has to say about it potentially being too high.
Wall Street’s Outlook on Costco Stock and Its Future Growth Potential
The camp is divided, as most Wall Street analysts now have a consensus price target of only $874.6 for Costco stock, which is basically where it trades today, plus or minus 1.5%. Willing to stand out from the pack, those at Goldman Sachs had something else in mind.
These analysts see a $995 share valuation for Costco stock, calling for a further upside of 13.8% from where it trades today. Goldman is not alone in taking a view for further upside in Costco stock, though. Despite the recent price action, bearish traders decided to step away from this name over the past month.
Costco stock’s short interest declined by 2.9% during this period, showing signs of potential bearish capitulation today. More than that, those at Legal & General Group decided to boost their holdings in Costco stock by 2.5% as of August 2024, bringing their net investment up to $3.1 billion today.
All of these new bulls may have been looking at Wall Street’s earnings per share (EPS) growth forecasts, which now point to Costco swinging to $5.58 for next year, up from today’s $5.15, which calls for a 13.6% annual growth rate.
Regarding sentiment, it looks like markets are justified in paying a premium for Costco stock, considering where the company fundamentals have been headed lately. However, recent volatility might shake off a few of the late buyers in Costco stock, an event new buyers might want to watch out for as a potential dip buying opportunity.
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These 3 Stocks Show How to Navigate Declining Consumer Confidence
Historically, investors have bet on the consumer discretionary sector when the Federal Reserve (the Fed) cuts interest rates, as these typically have a positive effect on consumer spending habits through easier and cheaper financing rates. However, this time it’s different, the state of the consumer is not what it used to be before, and that is sending money out of a few stocks in the space and into others.
Stocks in the retail industry, those that are highly dependent on domestic demand and consumer trends, will likely suffer from what’s happening behind the scenes in the economy. Lululemon Athletica Inc. (NASDAQ: LULU) falls into this category, which is why price action and analyst downgrades have been working against the company lately. To avoid this pitfall, investors can look into those with much more international sales exposure.
A bigger brand like Nike Inc. (NYSE: NKE) with a large presence in international markets can help the financials of the business diversify across different trends and cycles. Benefitting from this same trend is Skechers Inc. (NYSE: SKX) with over a third of its sales exposure being concentrated in European markets. Before investors dig deeper into he divergence between these names, they should understand why domestic markets are seeing lower demand.
Key Factors Behind the Recent Decline in Consumer Confidence Readings
Economists can keep thinking in black or white terms when it comes to the consumer, but the reality is that there are many more factors at play, such as psychology. The consumer today has to battle with rising unemployment rates, inflation in items like rent, groceries, and insurance.
The divergence between earning power and inflation has caused one major shift in the financial sector, one that drove Warren Buffett out of consumer credit stocks like Capital One Financial Co. (NYSE: COF) over the past quarter. Credit card delinquencies are on the rise, and so are car repossession rates in their 23% annual spike.
Ultimately, the personal savings rate ended up negative in recent readings, meaning items like clothing and other discretionary items will likely be first to be put out of the monthly spending budget from consumers. Investors can probably guess what happens next to stocks that rely too much on domestic demand for these products, such as Lululemon.
The Trends Are Clear for Lululemon: Here Are the Key Details
Lululemon stock had been an investor favorite since the COVID-19 pandemic, when the Fed cut interest rates to a near historical low, an event that helped Lululemon see better prospects. However, today’s rate cuts come up against the weakening consumer state, which won’t probably have the same effect on the stock as they had a few years ago.
Wall Street analysts know this, and those at Raymond James, Citigroup, Deutsche Bank all downgraded Lululemon stock’s price target over the past month. This shift in sentiment serves as a warning for investors to consider, one that is weighted against these fundamental trends that also work against the stock.
More than that, bearish traders decided to raid the stock recently as well, as Lululemon stock’s short interest rose by as much as 10.8% in the past month, part of a quarterly trend higher. This new sentiment can be seen in the company’s price action lately as well.
Lululemon stock now trades at a low 50% of its 52-week high, meaning a deep bear market in the company’s value perception. The changing sentiment can also be attributed to Wall Street’s earnings per share (EPS) projections for the next 12 months.
Analysts predict that Lululemon will see only $2.85 EPS compared to today’s $3.15, calling for a net decline of 9.5% to bring the bearish thesis home. Despite the sock already trading at a low, investors should consider waiting a bit before forgiving its fall.
Why Nike and Skechers Are the Better Buys Right Now
Counting with a much bigger international presence, both Nike and Skechers are able to stay away from the potentially bigger contractions to be seen from the consumer sector in the United States, which is why Wall Street has treated both of them a bit better.
Not to mention, mega investor Bill Ackman recently took advantage of Nike’s sell-off to buy up a sizeable stake in the company, showing investors that value is in Nike rather than Lululemon stock despite both suffering from similar declines. Here’s what Wall Street had to say about Nike.
The consensus price target lies at $96.5 today, calling for up to 8% upside from where the stock trades right now. This is after the double-digit rally that Ackman’s purchase ignited as well. But that’s not all, the Healthcare of Ontario Pension Plan decided to boost their holdings by 625.4% in Nike, bringing their net investment to $5.8 million today.
All told, Nike stock now trades at 72% of its 52-week high to be significantly above Lululemon.
Skechers brings a similar thesis to the market, as the stock sits at 92% of its 52-week high to show investors bullish momentum in recent months.
Analysts at Bank of America felt comfortable boosting the stock’s price target up to $81 a share, daring it to rally by as much as 17% from where it trades today and also make a new yearly high. Short sellers are also starting to capitulate in front of this trend, as Skechers stock’s short interest declined by 9.2% in the past month.
With declining short interest and increasing analyst confidence, Skechers appears poised for continued strength. If current trends persist, the stock could soon challenge its previous highs, further supported by strong market sentiment.
Fundamentally, these two have much better upside and safety than Lululemon, which is why investors should consider them as potential buys in the middle of a weakening consumer sentiment reading.
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MicroStrategy's Returns Are 3X Higher Than Bitcoin: Time to Buy?
MicroStrategy (NASDAQ: MSTR) has become one way many investors have found to get into Bitcoin (BTC). Looking at the returns of the two over the past three years, investing in MicroStrategy has been far superior to investing in Bitcoin. The total return over that time for each has been 177% versus 51%, respectively. But why is that the case?
Based on the reports of new Bitcoin purchases, the value of the company’s Bitcoin is around $16 billion today. However, the technology company’s market capitalization is $34 billion. Somewhere in MicroStrategy, investors see an extra $18 billion in value over just its cryptocurrency. So, where does this extra value come from?
Breaking Down MicroStrategy’s Lesser-Known Business: Software
Looking at MicroStrategy, there are two big parts of its business: bitcoin purchases and its software. The software business is based on its MicroStrategy ONE data analytics software. It offers business intelligence tools, allowing users to take advantage of machine learning and create custom analytics. Looking at this part of the business, revenues are declining.
From Q1 2023 to Q2 2024, revenue went from $122 million to $111 million, a drop of 9%. The business is unprofitable as well, and that unprofitability is getting worse. In Q1 2023, the software business’s net loss was half a million dollars.
In Q2 2024, that loss has increased exponentially to nearly $19 million. These numbers are on a non-adjusted basis. On an adjusted basis, the business has been profitable over those periods. However, it still only brought in $2 million in adjusted net income last quarter.
Still, no matter how you slice it, the software business is making little to no money. The argument could be made that the business is poised to grow, so the fact that it isn’t making money now doesn’t mean it won’t in the future. The software business’s subscriptions and services revenue did grow by 21% last quarter.
However, over half of the software business revenue comes from the support it provides; so, revenue still fell by 7%. But its subscription billings, an indicator of future revenue, increased by 45%. These increases breathe some life into the argument that the software business could see higher revenue in the future.
But, with only $2 million in adjusted net income last quarter, it's hard to say that the software business is worth $16 billion, even with future revenue in mind.
MicroStrategy’s Main Value Proposition: A Leveraged Bitcoin Investment
The other big value add that MicroStrategy emphasizes, and many have come to know it for, is its ability to issue extremely low-cost debt to buy Bitcoin. Through issuing mostly convertible bonds, the company has over $3.8 billion in debt with an average interest rate of 1.6%.
This is far lower than any individual would be able to borrow funds at, with the effective Fed Funds Rate at nearly 5%. The company recently announced it completed another offering of $1 billion convertible bonds. This will bring the company’s average interest rate down to 1.4%. By investing in MicroStrategy, investors can get leveraged investments in Bitcoin at a far lower rate than they otherwise could.
This is why many who believe in Bitcoin are putting a significant premium on MicroStrategy over Bitcoin itself. However, because convertible debt could be converted into equity, there is a potential for shareholder dilution. This would eliminate significant value from the low-cost debt strategy, especially since nearly 90% of the company’s debt is convertible.
MicroStrategy’s Bitcoin Acquisition Is Adding Value, but Is It Enough at This Price?
The company addresses this idea using its BTC Yield measurement. After accounting for possible dilution, this shows the added value of investing in MicroStrategy over Bitcoin. It achieved a positive BTC Yield of 12% in 2024 and expects it to be between 4% and 8% over the next three years. This shows that the strategy is adding value. However, is it adding enough value to justify the company’s $16 billion valuation over its Bitcoin holdings?
To me, the company's valuation is over double the value of its Bitcoin, while it only provides a 4% to 8% yield compared to paying for Bitcoin itself.
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