Ticker Reports for September 6th
Does GTA VI Make Take-Two Interactive Stock an Irresistible Buy?
Take-Two Interactive (NASDAQ: TTWO) makes some of the most important and best-selling video games on the market, but the company’s return over the past five years would leave investors wanting to play a game other than the stock market.
With a paltry total return of 20%, the company has greatly underperformed in the communication services sector. The Communication Services Select Sector SPDR Fund (NYSEARCA: XLC) has provided a total return of 82% over that span.
Let’s look into Take-Two's operations and get a better understanding of how its business works. We’ll examine how the company is growing, and think about how the upcoming release of the most anticipated game in its history, Grand Theft Auto VI (GTA VI), could affect the share price.
Take-Two Has Ventured Into a New Playing Field
Take-Two breaks down its revenue into several key streams: Mobile, Console, PC, and Other. The mobile division brings in revenue based on in-game purchases and advertisements from mobile phone games. For the company overall, various types of in-game revenue typically account for the majority of total revenue.
However, specific to the console and PC divisions, the company’s revenues are periodically spiked by “full-game” purchases. This timing is based on the release dates of new blockbuster games. It makes these games for the latest PlayStation, Xbox, or Nintendo Switch consoles and PCs.
The company has historically made some of the most sought-after games. Red Dead Redemption 2 (RDR2) and Grand Theft Auto V (GTA V) are ranked as the seventh and third best-selling games of all time, respectively. Revenues spiked by 153% in the quarter when RDR2 was released.
In fiscal 2024, mobile revenue accounted for 51% of total revenue, while console revenue made up 41%. However, this distribution is a relatively new development. In fiscal 2022, console revenue made up 72% of the total. The large jump in mobile revenue is largely due to the firm’s acquisition of Zynga in 2022, which helped to 6x the revenue in that division by March 2023.
Take-Two’s Share Price Remains Stable Despite Profit Losses
An interesting story for Take-Two Interactive is how the shares have performed over the past two years. Since March 2022, the company’s profit has essentially inverted. In that quarter, the company’s last twelve-month normalized net income was $355 million. After the most recent earnings release, the figure sits at—$336 million. Yet, the share price has been nearly flat over that period, falling just over 2%.
With such a massive decline in profits and a shift from making money to losing money, I would expect a more significant decline in the shares. So, what are some factors that might be helping to maintain the share price despite this? Looking at the last twelve months' revenue, we see that since March of 2022, it has grown substantially by around $2 billion.
However, this growth appears largely inorganic, driven predominantly by the acquisition of Zynga. This means the company’s products aren’t seeing rapid demand growth; they simply purchased revenue from another company.
It’s also evident that Take-Two hasn’t been able to do much to grow the Zynga business since the acquisition. Sales in the mobile division have been essentially flat since March 2023. It would be hoped the company could find a way to combine its strong intellectual property and gaming expertise to grow mobile revenues. The fact that it hasn’t been able to do so is not a great sign.
GTA VI Launch: Limited Boost Likely, but Take-Two’s Stock Still Has Growth Potential
A likely reason for the stability in the stock price is the upcoming release of Grand Theft Auto VI in the fall of 2025. Regarded by some as perhaps the “most highly anticipated video game in history," it is possible the market has baked in a good amount of its projected sales into the stock price. Consensus forecasts show revenues increasing by 44% in 2026 because of this, and adjusted earnings more than tripling.
In the 52 weeks after GTA V came out, the company's shares returned 28%. However, the company’s forward price-to-earnings (P/E) ratio at the beginning of that period was around 10% of what it is now, and it increased by five times over that period. With its currently high forward P/E ratio of 59x, it's hard to say shares will get a big boost again based on the release of GTA VI. However, the average Wall Street price target does show an implied upside of 16% in the stock.
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Why HPE's Dip Is a Prime Opportunity for Blue-Chip AI Investors
Hewlett Packard Enterprises (NYSE: HPE) is an attractive, high-yield play for blue-chip investors seeking exposure to AI because of its position in the enterprise industry, cash flow, and capital return. Its enterprise-quality networking and server products are critical for many businesses and are gaining traction with AI, as seen in the Q3 results and guidance.
While share prices are down following the release, the move is a knee-jerk reaction, opening a solid buying opportunity in a quality dividend-paying stock. Simply put, Hewlett Packard Enterprise’s dividend is among the highest in tech and ultra-safe, with no expectation for cuts and every reason to expect increases over time.
Hewlett Packard Enterprise’s dividend is ultra-safe because of its earnings, cash flow, free cash, and balance sheet. The balance sheet is a fortress with assets rising, low leverage, and growing equity. Highlights from Q3 include a cash reduction, but that is offset by increased receivables and inventory, with the net result of a 4% increase in equity.
The dividend is high-yielding at roughly 2.8%, with shares near $17.50, more than double the broad market average at less than half the cost. Trading at 9x earnings with growth resumed and accelerating and guidance raised, HPE stock has a deep value compared to the broad market, let alone the leading cloud technology providers, suggesting a price multiple expansion could unfold over the next year.
HPE: AI and Diversified Business Drive Growth in Q3
Hewlett Packard Enterprises had a solid quarter in Q3, showing robust growth in the Server segment and the strength of its diversified portfolio. The $7.71 billion in net revenue is up 10.1% compared to last year and outpaced the consensus by 50 basis points on strength in demand for its AI-server products, including AI conversions.
Server sales are up 35%, with sales leverage driving a wider margin. This is offset by a 23% decline in the Intelligent Edge segment and a 7% decline in Hybrid Cloud. While troubling, the declines in the IE and HC segments are not as big a problem as they have been because sales are improving sequentially and are expected to return to growth with the turn of the fiscal year.
Margin news is mixed but aligns with an outlook for higher share prices. The company experienced significant deleveraging in the IE and HC segments, partially offset by strength in Servers. The net result is a 410 basis point decline in the adjusted gross margin, which is less than expected. As with sales, the margin is up sequentially in the IE and HC segments and is expected to continue improving as demand builds. Demand in those segments will likely accelerate in 2025 due to increased annual spending on AI business applications, which is expected to quadruple within three years.
Hewlett Guides the Market Higher
HPE guidance is another reason for investors to look past sluggishness in the IE and HC segments. HPE management increased the outlook for Q4 results to align with consensus, putting the full-year estimates above the consensus and leading analysts to revise their targets.
The first revision tracked by MarketBeat.com is from UBS, which maintained its Neutral rating but raised its price target. UBS's new target is $19, which raises the low end of the range and the consensus, implying a 25% upside from the post-release lows. The revision trend ahead of the report is also favorable, including numerous price target increases and at least one upgrade that puts this market at the high end of the target range.
The price action following the release is mixed. Shares are down about 10% at their lows but showing support at a critical level. That level is consistent with a prior resistance point and the bottom of the recent trading range. This level should continue to support the market and potentially lead to a rebound before the year’s end. The risk is a move below $17, which could result in a retest of support at the 30-month EMA near $16.25.
Why Analysts See Big Upside for Occidental Petroleum Despite Lows
Even after one of Wall Street’s best investors, Warren Buffett bought up to 29% of Occidental Petroleum Co. (NYSE: OXY), the stock has been downward and now trades at a new 52-week low. Has the Oracle of Omaha lost his touch? Bears could criticize his timing, but the reality is that the short term doesn’t matter for investors like Buffett, but rather the coming few quarters.
Investors can look to a few economic indicators to determine whether they, too, can get a payoff from the energy sector before 2024. One main concern driving lower oil prices is the weakening business activity in the world’s largest economies, the United States and China. While these concerns are justifiable enough, the short side is no longer an attractive bet, as the risk of upside is now greater than the risk of a further sell-off.
Before discussing the macroeconomic factors that could send the sector higher, investors should first determine where Occidental Petroleum stock stands compared to its peers in the industry. This comparison will show a massive growth difference compared to stocks like Marathon Oil Co. (NYSE: MRO) and even ConocoPhillips (NYSE: COP) and open up a potential recovery path to the upside.
Occidental Petroleum Stock Has a Double-Digit Growth Runway
As the stock now trades at 76% of its 52-week high, an official bear market defined by Wall Street’s 20% or more sell-off from highs, investors have two choices. The first and natural choice for most is to give in to the anxiety and fear and sell to prevent further losses.
The second and better one is to stick to fundamentals and potentially add to positions at a better cost basis. Regarding Occidental Petroleum, the latter choice could be justified by the factors that made Wall Street analysts forecast up to 31.2% earnings per share (EPS) growth in the next 12 months.
Leaning on these outlooks, those at Scotiabank decided to place (and keep) a price target of $80 a share for Occidental Petroleum stock, implying that the company has up to 47.3% upside from the new lows it has made recently. Here’s how the company fares against its peers.
Compared to ConocoPhillips and its 17.3% EPS growth forecast, Occidental Petroleum stays on top of the new cycle in energy. More than that, ConocoPhillips stock’s short interest rocketed by as much as 25.7% in the past month alone. While bears shorted more of Occidental, that stock’s short interest only rose by 8%.
Even though oil has been moving lower, bears had no intention of flocking to Occidental Petroleum. With only 11.2% to show for EPS growth in the next 12 months, Marathon Oil stands at the bottom of this list, leading to a consensus price target of $32.3 today, or roughly 18% upside from today’s price (nearly half of Occidental Petroleum’s).
This doesn’t mean the stock is in the clear, but evidence is starting to stack up, pointing to the bottom being closer today than ever before.
This Key Economic Indicator Signals a Potential Rally in Oil Stocks, Including Occidental Petroleum
The yield curve (ten-year treasury yields minus two-year treasury yields) has returned to positive territory after a couple of years of being inverted (negative). When yield curves invert, the downside to economic conditions could potentially deteriorate.
Now that the curve is steepening back to positive, this has been good for the Energy Select Sector SPDR Fund (NYSEARCA: XLE), which represents up to 100% accuracy. This time is not necessarily going to be the same, but it could rhyme, and here is why.
When the curve steepens, business conditions improve. Oil is typically the center of all this activity and new demand for pretty much all products and basic materials. An event that is only a couple of weeks away is driving the catalyst behind the energy sector recovery.
The Federal Reserve (the Fed) is set to cut interest rates by September 18th, 2024. Once rate cuts are lower, flexible financing and ample liquidity could also help oil prices a bit, but another driver is also looking to strengthen oil prices.
OPEC+ has just halted oil production to tighten supply, and the law of economics suggests that once demand comes back online, prices will soar. Saudi Arabia’s balance sheet also shows that the nation needs oil to trade at least at $95 a barrel to avoid deficits.
So, while Occidental Petroleum could continue lower, the chances that it does are deteriorating, and the reward potential is starting to shift to the upside for investors to consider.
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