The AllStar Portfolio bought Activision (ATVI) this week just before the company raised its FY (Mar) 2008 revenue outlook on strong sales of Guitar Hero III and Call of Duty 4. The stock had sold down to $19 per share since its earnings release Nov. 5th as both the company and video game retailer Gamestop (GME) on Nov 20th set an overly cautious tone for the holiday season, despite both companies handily beating estimates for the past quarter. Though we made a quick 16% this week on the trade following confirmation of strength during the Black Friday weekend, we are holding ATVI for the long-term as the immense sell-through of its key titles will continue to outpace conservative estimates. Moreover, unlike larger, more diversified video game publishers like Electronic Arts (ERTS), the success of hit titles will further boost the company’s margins to lead profits well past still cautious estimates.
We agree with the growing number of analysts that have projected ATVI to surpass its FY outlook of $0.85 EPS (adjusted) and $2.30 billion in revenue. Call of Duty 4: Modern Warfare is also likely to remain one of the top titles this season on the positive reviews by gaming critics. Spiderman 3 has also seen success, one of the company’s licensed titles. Most importantly, there are no longer concerns that ERTS’s Rockband will sour sales of Guitar Hero III: Legends of Rock. Rockband sells at almost twice the price and was released a month later than Guitar Hero III. Additionally, Electronic Arts president John Riccitiello commented, “We won’t be able to put up enough inventory [of Rockband] to meet the demand of this fiscal or calendar year.” Guitar Hero will not even have to compete with Rockband in Europe, as it will not be released until 2008. Rockband is also limited to the PS3 and Xbox 360, missing out on the still robust sales of the Wii console.
In general, video games are insensitive to weaknesses in consumer spending. With those concerns now out of the way, the only concerns left are that the company has peaked with its key games out this year, and will slow next year on tougher comparisons. Two analysts have downgraded the stock: Janco Partners to market perform from accumulate, and Piper Jaffray to neutral from buy. While there no doubt that game publishers need to constantly innovate, we believe the company still has opportunities in FY 2009 on its licensed franchises, including Tony Hawk and James Bond which is more successful in Europe. ATVI also acquired Bizzare Studios a U.K.-based developer that will allow new expansion into the genre of racing games.
Despite our confidence in the video game software cycle, with a slight premium on its expected forward earnings multiple, we are shorting a smaller position in ERTS as an industry hedge on concerns that its own key titles may not live up to expectations. The company recently cut prices on games including NCAA Football, Madden, NBA Live, Nascar, Medal of Honor, Tiger Woods and FIFA ‘08. Also, despite enthusiasm following the companies recent quarter, Deutsche Bank put a sell rating on the stock noting the premium on shares. We share these concerns for a larger developer like ERTS as the company is not as capable of driving top-line acceleration, especially with most of its hit titles not benefitting from the success of the Wii. Though console cycles are longer today, if we see the usual past trend of gaming stocks collapse in the year following a console release, we expect ERTS to be one of the hardest hit.
Neal Sangani
Disclosures: My comments are for educational purposes only.
Friday, November 30, 2007
Friday, November 2, 2007
Crocs: Buy Panic
Shares of Crocs (CROX) tumbled 36% today after the company's forecast failed to impress jittery Wall Street investors. This was certainly not a move I was expecting having pitched the stock for the AllStar Portfolio just three weeks ago. Yet, at the same time, the magnitude of the move is by no means surprising. Crocs has always been, and will be for the next few years, a momentum stock. A slight disappointment to the market can easily lead to the reaction we saw today.
First, it is worth mentioning that the stock is now trading at lows not seen since... August. The rally in shares ahead of the results makes the sell-off appear more severe than it would be for the long-run investor. The stock has also still more than doubled this year. However, whether the sell-off is severe or not is irrevelant.
I would encourage long-term growth investors to not waste time worrying about near-term momentum-related market reactions and overreactions. Instead, as always, focus on the fundamental drivers relevant to your thesis. Sell-offs like this may offer the best entry points into excellent growth names or opportunities to double-down. As I mentioned in my newsletter rebuttal following my pitch of Blue Nile (up 110% since): a sharp momentum-related sell-off may be the best thing that could happen to your stock.
So the quesition on to ask on Crocs is whether the sell-off was related to deteriorating fundamentals or momentum. In spite of cautious tone set by the retailers for the holiday season, Crocs is still expecting 35%-40% revenue growth for 2008 ($1.11 billion to $1.16 billion) in-line with my prior expectations. Remember, we are still in November 2007 and most management teams selling to the consumer would be prudent to stay conservative for now. Even under the current guidance, the company is now trading at roughly 18x-19x forward earnings. Yes, there are concerning trends given the rise in inventories and the conservative tone for the rest of 2007; but overall, things don't seem to be bad at all, certainly not enough to erode $2 billion in market capitalization. Demand, the most important metric, still remains strong, though seasonality and infrastructure build has somewhat clouded forward visibility. But what do I know; let's see what the experts on the fundamentals have to say.
While market participants were selling all day today, the analysts did not seem fazed by the numbers. Robert W. Baird analyst Mitch Kummetz reitereated his "outperform" rating on the stock and raised his price target from $80 to $87. Analysts at J.P. Morgan, Thomas Weisel, Piper Jaffray, and Wedbush Morgan, each found that the sell-off provides an attractive entry point for the shares.
And, as I am writing, the Crocs Board just authorized the repurchase of $1 million shares. So now we know what they think of the sell-off as well. Regardless, I believe that those that had the stomach to buy into the panic today made the right move. That is not to say that Crocs has bottomed, but focusing on the fundmentals is almost always a win with volatile momentum stocks. Check a 2-year chart of Hansen Natural (up 60% since my newsletter pitch). This stock got crushed nearly 50% when the momentum guys exited the stock a year ago. It has more than recovered those losses since, even as skeptics decried energy drinks are a fad ready to implode. 18 months from now, I believe Crocs's chart will be almost identical.
Skeptics may have won today's round, but time will tell who wins the game. Stay tuned.
Neal Sangani
Disclosure: I own calls on Crocs. My comments are for educational purposes only and are solely my opinions.
First, it is worth mentioning that the stock is now trading at lows not seen since... August. The rally in shares ahead of the results makes the sell-off appear more severe than it would be for the long-run investor. The stock has also still more than doubled this year. However, whether the sell-off is severe or not is irrevelant.
I would encourage long-term growth investors to not waste time worrying about near-term momentum-related market reactions and overreactions. Instead, as always, focus on the fundamental drivers relevant to your thesis. Sell-offs like this may offer the best entry points into excellent growth names or opportunities to double-down. As I mentioned in my newsletter rebuttal following my pitch of Blue Nile (up 110% since): a sharp momentum-related sell-off may be the best thing that could happen to your stock.
So the quesition on to ask on Crocs is whether the sell-off was related to deteriorating fundamentals or momentum. In spite of cautious tone set by the retailers for the holiday season, Crocs is still expecting 35%-40% revenue growth for 2008 ($1.11 billion to $1.16 billion) in-line with my prior expectations. Remember, we are still in November 2007 and most management teams selling to the consumer would be prudent to stay conservative for now. Even under the current guidance, the company is now trading at roughly 18x-19x forward earnings. Yes, there are concerning trends given the rise in inventories and the conservative tone for the rest of 2007; but overall, things don't seem to be bad at all, certainly not enough to erode $2 billion in market capitalization. Demand, the most important metric, still remains strong, though seasonality and infrastructure build has somewhat clouded forward visibility. But what do I know; let's see what the experts on the fundamentals have to say.
While market participants were selling all day today, the analysts did not seem fazed by the numbers. Robert W. Baird analyst Mitch Kummetz reitereated his "outperform" rating on the stock and raised his price target from $80 to $87. Analysts at J.P. Morgan, Thomas Weisel, Piper Jaffray, and Wedbush Morgan, each found that the sell-off provides an attractive entry point for the shares.
And, as I am writing, the Crocs Board just authorized the repurchase of $1 million shares. So now we know what they think of the sell-off as well. Regardless, I believe that those that had the stomach to buy into the panic today made the right move. That is not to say that Crocs has bottomed, but focusing on the fundmentals is almost always a win with volatile momentum stocks. Check a 2-year chart of Hansen Natural (up 60% since my newsletter pitch). This stock got crushed nearly 50% when the momentum guys exited the stock a year ago. It has more than recovered those losses since, even as skeptics decried energy drinks are a fad ready to implode. 18 months from now, I believe Crocs's chart will be almost identical.
Skeptics may have won today's round, but time will tell who wins the game. Stay tuned.
Neal Sangani
Disclosure: I own calls on Crocs. My comments are for educational purposes only and are solely my opinions.
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