Ticker Reports for October 29th
Is McDonald's Stock a Smart Buy After Sell-Off and Earnings?
Some of the market’s biggest blue-chip stocks are not immune to offering discounts to investors; it’s not that often that participants can exploit the short-term nature of these mispricing events, so when they come along, investors need to act fast before others come in to close the gap. Such an opportunity has come recently through one of the biggest household names in the United States today, though it may not last long considering what could be about to happen.
This opportunity can be found in shares of retail giant McDonald’s Co. (NYSE: MCD), especially as the stock recently experienced a sell-off as big as 6.9% after a few locations were reported to have an E. coli outbreak threatened not only the sentiment for the stock but also the safety its underlying financials moving forward. However bearish this event may be, markets have their own opinions.
These opinions are leaning on the bullish side of the equation for reasons investors will soon discover. Discounts are still available for retail investors. Wall Street analysts still think that McDonald’s stock has enough tailwinds and strength behind it to deliver a double-digit rally in the coming months, amplified by the recent sell-offs resulting from the E. coli outbreak that is mostly behind the brand now.
McDonald's: Are Clear Skies Ahead for the Stock?
One reason the stock has found support relatively quickly, compared to the date of the news breakout, is that the company’s items were cleared of contamination after investigations. As of today, the record shows that McDonald’s meat patties have no trace of E. coli, negating the reason for the sell-off in the first place.
These reports suggest that onions are infected with E. coli, though E. coli mostly lives in meat, so that’s another reason to dismiss these concerns and consider buying the stock at these lows. Some would assume that the skies are cleared for McDonald’s stock today, but how high does that clear sky go?
Wall Street analysts and their ratings could be a good place to start looking for answers. McDonald’s stock’s current price target is $318.2 a share, calling for a net upside of only 7.2%. However, this consensus price target reflects old views before the incident, and its price action reiterated the company’s strength in the market.
Noticing the quick recovery in the stock’s price in the face of what could have been a terrible outcome, some analysts decided to break above the consensus for this stock’s valuation. Those at Wells Fargo and Bank of America now see a respective price target of $350 and $322 a share for McDonald’s stock today, calling for 17.7% and 8.3% upside.
Of course, these targets have to be justified by McDonald's future potential growth and historical valuations compared to where the company is trading today. To this point, investors can look at the Wall Street projection for earnings per share (EPS) during the next 12 months.
High Margins, Steady Growth, and Premium Valuations Signal More Upside
Analysts now expect McDonald’s to deliver up to $3.34 in EPS for the same quarter next year, which calls for a net growth in earnings of as much as 12.5%. While impressive by itself, the effect is amplified when investors consider the fact that McDonald’s is a $217.8 billion behemoth.
Now that the company has released its latest quarterly earnings results, investors have a new way to think about the stock's future. While sales were up 3% on a consolidated basis, kept at bay from international weaknesses, cash flows were strong enough to allow for a 6% increase in today's quarterly cash dividend.
A 1% increase in EPS may not sound like much, but it’s enough when considering that the U.S. consumer has been battling higher inflation lately. This trend could drive more demand for affordable McDonald’s meals in the coming quarters.
The stock reacted with a slight 1% advance on the release, not aggressive by any means, but still a good sign of a potential recovery in the making after the E. coli incident is over. More than that, markets are still pushing for further upside through different gauges. When investors want to gauge what the market thinks about a stock, they can look to different valuation metrics compared to those seen in peers within the same niche. In this methodology, an outlier premium would suggest market expectations for outperformance.
On a price-to-sales (P/S) basis, McDonald’s stock trades at a much higher multiple of 8.5x today, compared to the rest of the eating places industry’s average valuation of only 2.6x. This same premium trend can be extrapolated to forward price-to-earnings (P/E) ratios.
A close competitor and peer can be found in Wendy’s Co. (NASDAQ: WEN), which trades at 19.4x forward P/E today and below McDonald’s 23.6x forward P/E multiple. More specifically than valuations, a large institutional buyer was willing to make a bullish view public after the apparent E. coli incident.
Those at Australian Supper Pty decided to boost their stake in McDonald’s stock by 14.5% as of late October 2024, bringing its net investment to a high of $232.1 million today. More than that, investors can see the 3.6% decline in short interest for the stock when the opposite might have been expected.
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At the peak of the dot-com boom, a former hedge fund manager put all $20,000 of his wife's 401k into shares of just ONE stock. Everyone on Wall Street said he was crazy. But a year later, that $20,000 in his wife's account was worth $120,000. Today, he says: "If you thought the dot-com mania was intense, what's about to happen in the coming weeks could be even crazier and could open up a new window of opportunity for 500%-plus gains."
QuantumScape: Solid State EV Batteries Nearing Commercialization
QuantumScape Co. (NYSE: QS) is a battery technology company that has been developing its next-generation solid-state lithium-metal electric vehicle (EV) battery for nearly 15 years. The auto/tires/trucks sector company is in its final stages before commercialization commences in 2025, when they start shipping their commercial batteries to start generating revenue. It’s the third quarter of 2024, and the company lost 23 cents a share, missing consensus estimates by 4 cents, with no revenue since it is still in the pre-revenue stage. However, its update on its path toward commercialization helped prop the stock higher by 25%.
From Proof of Concept to Commercialization
In the past year, QuantumScape has been making believers out of doubters with its solid-state lithium-metal (SSLM) battery technology. The recent performance test with PowerCo, a Volkswagen AG (OTCMKTS: VWAGY) electric battery subsidiary, convinced them to double down on its license. Its studies proved that after 1,000 charges, which is the equivalent of 500,000 kilometers (KM), its 24-later SSLM battery (cell) can still retain 95% of its energy. This will also ease range anxiety as EVs will be able to travel much longer, between 400 to 500 miles in between charges, compared to 200 to 300 miles today with conventional lithium-ion EV batteries.
Compare this to conventional lithium-ion batteries, which degrade to 70% of their initial capacity after 750 charge cycles on average, which is when warranties usually end. This is about seven to eight years of use until a new battery replacement costing upwards of $6,000 to $20,000 is needed.
QuantumScape's proprietary ceramic acts as a separator for its bi-layer cathode stack. The lithium-metal anode-free infrastructure enables a significantly higher density (800 WH/L), allowing for a longer range and the ability to charge and discharge quickly. It can result in delivering a charge of up to 80% in under 15 minutes. It's also safer than traditional lithium-ion batteries because it swaps out flammable liquid electrolytes with its solid ceramic electrolyte. Its commercial batteries are targeted to reach a volumetric energy density of up to 1,000 WH/L.
Taking the Asset-Light Approach Through Licensing Its Technology
The July 11, 2024, licensing deal provides PowerCo with a non-exclusive license to manufacture up to 40 GWh annually of solid-state rechargeable lithium metal EV batteries using QuantumScape’s technology. PowerCo has the option to expand the license to 80 GWh, which provides the potential to outfit a million EVs with solid-state cells. This will help kick off commercialization in 2025 without the high capital costs of manufacturing their batteries, which QuantumScape plans to do eventually.
Once its QSE-5 B-sample batteries are tested and meet all of Volkswagen’s benchmarks, they will undergo C-sample testing before mass production. In exchange for the license to mass-produce battery cells, PowerCo will make a $130 million royalty prepayment.
Low Volume B-Samples In Production
In its Q3 2024 update, QuantumScape stated it had begun small-scale production of its QSE-5 B-sample prototypes, which are being shipped to its automotive partners shortly. These had a density of 844 WH/L with a fast charge under 15 minutes. The evolution of this journey started with testing its 24-layer A0 prototype batteries to OEMs, then QSE-5 Alpha-2 cells, and now onto the B-samples. The rigorous testing will take several months with its automotive customers. The company stated that it will need to improve on yield, cell reliability, and equipment productivity, which will require bringing its advanced Cobra separator process into production in 2025. Cobra is the final stage after the current Raptor stage in the "disruptively fast separator production process."
These will be the C-samples, which are production-ready cells manufactured on a pilot line and will demonstrate high-volume manufacturability. Once C-samples are tested and finalized by customers, full-scale production and commercialization of its QSE-5 battery is targeted. These are the catalyst events that will propel the stock higher.
QS Stock Attempts a Rectangle Breakout
A rectangle is comprised of a flat-top upper trendline resistance and flat-bottom lower trendline support. The breakout occurs when the stock surges through the upper trendline, which becomes a support level.
QS formed a rectangle pattern after peaking at the $6.14 level and bottoming at the $5.30 level. The rectangle trading channel contained the QS trading range for nearly three months heading into its Q3 2024 earnings report. The update on its progress toward commercialization was enough to gap the stock up to $6.14 from the $5.35 close and set the upper and lower gap fill ranges. The daily anchored VWAP resistance is at $6.55. The daily RSI is slipping to the 59-band. Fibonacci (Fib) pullback support levels are at $5.77, $5.35, $4.75, and $4.39.
QuantumScape’s average consensus price target is $6.13, and its highest analyst price target is $8.00. Seven analysts have five Hold ratings and two sell ratings for the stock, with an 11.25% short interest.
Actionable Options Strategies: QS is still in the pre-revenue stage but has many catalysts lined up as they update their progress toward commercialization, targeted in late 2025. Bullish investors with a longer time frame who want to spend less capital can consider buying out-of-the-money (OTM) directional LEAPS call options.
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MicroStrategy: Is This Bitcoin-Powered Stock a Buy or a Gamble?
MicroStrategy (NASDAQ: MSTR) is a business intelligence software company that helps organizations analyze their data to make better business decisions. But in recent years, MicroStrategy’s brand has become synonymous with Bitcoin. The company has been aggressively acquiring the cryptocurrency, which is turning its stock into a high-stakes wager on the future.
The company’s strategy has created a unique situation for investors because you are betting not only on the notoriously volatile Bitcoin market but also on MicroStrategy's ability to navigate the uncharted waters of a Bitcoin-centric business model. With Bitcoin's price surpassing the$69,000 mark and MicroStrategy's stock price hitting record highs, many investors are left to question if MicroStrategy is a wise investment, a risky gamble, or a combination of both.
Bitcoin’s Corporate Whale
MicroStrategy's commitment to Bitcoin is nothing short of unprecedented in terms of business strategy. As of July 31, 2024, the company's Bitcoin treasury had grown to 226,500 BTC, purchased at a cost exceeding $8.3 billion. This bold strategy has thrust MicroStrategy into the spotlight, transforming its stock into a bellwether for Bitcoin's price fluctuations. But does MicroStrategy's aggressive buying influence the cryptocurrency's value, or is the company merely riding the waves of market sentiment?
The company's strategy blends direct purchases using surplus cash with the strategic deployment of debt financing. MicroStrategy has skillfully leveraged favorable market conditions, issuing convertible notes to raise billions, fueling its ongoing Bitcoin accumulation. In a recent example, MicroStrategy announced an offering of convertible notes in September 2024, initially set at $700 million but later upsized and priced at $875 million of 0.625% convertible senior notes due 2028. The offering was ultimately completed at $1.01 billion.
This approach, while introducing leverage, showcases MicroStrategy's unwavering dedication to Bitcoin as a cornerstone asset. The company even tracks its performance with a unique metric: "BTC Yield," which measures the percentage change in the ratio of its Bitcoin holdings to its diluted shares outstanding. Year-to-date, this yield stands at an impressive 12.2%, and the company aims to achieve an annual yield between 4-8% over the next three years. However, the question remains: can such an aggressive strategy, fueled by debt, truly deliver sustained value for MicroStrategy and its investors?
BTC Yield: MicroStrategy's Metric, But Is It Meaningful?
MicroStrategy has championed a new metric, "BTC Yield," to quantify the effectiveness of its Bitcoin strategy. This key performance indicator (KPI) measures the change in the ratio of the company's Bitcoin holdings to its Assumed Diluted Shares Outstanding, revealing the rate of Bitcoin accumulation per share. A positive BTC Yield suggests that the company is effectively growing its Bitcoin holdings faster than it is issuing shares. While MicroStrategy boasts a 12.2% BTC Yield year-to-date, this metric is coming under increasing scrutiny from some analysts.
Critics argue that BTC Yield, while innovative, fails to address the complexities of MicroStrategy's financial strategy fully. The metric doesn't account for the debt incurred through convertible notes, potentially masking the actual cost of amassing this Bitcoin treasury. Additionally, the BTC Yield doesn't reflect the overall market valuation of MicroStrategy compared to Bitcoin. As investors seek alternative options for Bitcoin exposure, such as spot Bitcoin ETFs, the long-term relevance of BTC Yield as a measure of investor value is uncertain.
MicroStrategy Software: The Other Side of the Coin
While MicroStrategy's daring Bitcoin strategy dominates the narrative, it's crucial to assess the health of its core enterprise analytics software business. MicroStrategy’s earnings report for Q3 is due out in just a few days, but the company's Q2 2024 earnings revealed a complex picture, with total revenues reaching $111.4 million, a 7.4% decline year-over-year. While subscription services revenue grew by a respectable 21.1%, reaching $24.1 million, this positive trend couldn't fully offset declines in product licenses, down 5.7% to $33.4 million, and product support, which decreased by 6.6% to $61.7 million. This uneven performance raises questions about the software business's long-term growth trajectory and its strategic relevance within MicroStrategy's overall portfolio.
Examining MicroStrategy's financial health, a few red flags emerge. The company reported a significant net loss of $102.6 million in Q2 2024, driven in part by a $180.1 million impairment charge on its Bitcoin holdings. The company's operating margin for the quarter was a dismal -180%, reflecting both the Bitcoin-related impairment charge and a surge in operating expenses to $280.8 million. MicroStrategy's debt-to-equity ratio (D/E) sits at a concerning 1.31, indicating a substantial reliance on debt financing, which is primarily tied to its Bitcoin acquisition strategy.
These concerning financial metrics stand in contrast to MicroStrategy's stock performance, with shares reaching a 52-week high of $258. This discrepancy between financial fundamentals and stock price, driven by MicroStrategy's Bitcoin holdings, is reflected in the company's negative price-to-earnings ratio (P/E) of over -30, signaling that investors are currently valuing MicroStrategy based on its potential in the Bitcoin market rather than its software business profitability.
While the growth in subscription services offers a glimmer of hope for the software business, investors should carefully consider whether this segment can become a strong enough engine to offset the risks and volatility inherent in MicroStrategy's Bitcoin strategy, especially as its core software business seems to be struggling to generate consistent profitability.
A High-Risk, High-Reward Proposition
MicroStrategy's unconventional approach, essentially transforming itself into a Bitcoin proxy, offers investors a unique opportunity to participate in the cryptocurrency market. However, this strategy is not for the faint of heart. The company's performance is now intricately tied to the notoriously volatile Bitcoin market, and its software business, while showing pockets of growth, needs to generate consistent profits.
Investors enticed by MicroStrategy's potential for substantial gains must also be prepared for significant downsides. The company's heavy reliance on debt financing, coupled with the inherent volatility of Bitcoin, creates a high-risk scenario. MicroStrategy's upcoming Q3 earnings report, scheduled for release on October 30th, will be a crucial event for investors to watch closely. The report could offer valuable insights into the sustainability of the company's Bitcoin-centric strategy and the future direction of its software business.
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