Etsy, Inc. (ETSY) | Daily Alert April 23
Following the market close, Etsy provided an update on how COVID-19 has impacted its business. While Ql GMS grew ~32% y/y, broadly in line with our and consensus estimates pre-COVID, Etsy is withdrawing its FY20 guidance and will likely provide a FY outlook during its Q1 earnings call in May. Management also offered a range of GMS growth and profitability scenarios and reaffirmed its focus to deliver positive adj. EBITDA and CF for the year.
Consolidated GMS grew 41% y/y for January and February, before the COVID-19 pandemic started impacting the business in early March, with GMS declining 2% y/y in the third week of March. In the fourth week of March, Etsy saw demand recover; with GMS growth of 27% y/y, although demand remained volatile, with day-to-day changes ranging from -4% y/y to +23% y/y growth. In aggregate, Etsy’s consolidated GMS grew 32% y/y during Q1 to ~ $l.4B. Within the company’s marketplace, categories that would typically be strong in March, such as weddings and jewelry, have faced headwinds while categories that have benefited include self-care, puzzles and games, and bath & beauty. The company’s music marketplace Reverb is also seeing some benefit as many other stores in that industry are closed.
Etsy recently announced it will be spending $5M on Offsite Ads to promote products on behalf of sellers, who will not pay any fees on ads until at least May 1. The company is also giving sellers a one-month grace period to pay their bills and is offering 24/7 member support to address any questions on delivery times and shipping issues. Additionally, Etsy advocated to Congress to make sure its self-employed sellers were included in the relief bill and has provided a guide to sellers on how to navigate through the stimulus package and identify which benefits they are eligible for.
We are leaving our estimates and PT unchanged, with an intention to update both once we have more visibility. Our $72 PT is based on ~7.2x forward (2021E) revenue estimate and is supported by our DCF valuation.
Maria Ripps, CFA, Michael Graham, CFA, and Jason Tilchen, CFA, Max Masucci, Canaccord Genuity Research, www.canaccordgenuity.com, April 3, 2020
Raytheon Technologies Corporation (RTX) | Daily Alert May 4
Raytheon Technologies is the result of the merger of United Technologies’ aerospace and defense businesses (Collins Aerospace and Pratt & Whitney) with Raytheon, a major provider of defense systems. The combined company has annual revenue of approximately $74 billion with some 195,000 employees.
Defense-related companies have been finding decent investor support given that the federal government is expected to maintain a healthy appetite for defense spending. Aerospace business will likely remain under pressure as a result of the massive slowdown in commercial aviation.
I have long felt that United Technologies and Raytheon were both investment-grade stocks and worthwhile portfolio holdings. Thus, once the combined firm gets through its assimilation issues, I suspect the stock will provide, at a minimum, returns in line with the broad market.
Raytheon Technologies’ direct purchase plan has a minimum initial investment of $250. The firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of $50 for five consecutive months. There is a $10 enrollment fee for joining the plan. Partial dividend reinvestment is available. Dividend reinvestment fees are 5% of the amount reinvested (maximum $3) plus $0.03 cents per share. Optional cash purchase fees are $5 ($2.50 for automatic investments) plus $0.03 per share. Selling fees are $15 plus $0.12 per share for a batch sale and $25 plus $0.12 per share for market or limit-order sells.
The plan administrator is Computershare. For enrollment information call (800) 488-9281 or visit www.computershare.com.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, May 2020
ChannelAdvisor Corporation (ECOM) | Daily Alert May 5
ChannelAdvisor operates behind the scenes in the massive e-commerce market. Its software, which tracks inventory, pricing, and order fulfilment, connects retailers to third-party marketplaces run by Amazon, eBay, and Google. The company’s marketing software helps retailers build brand awareness on social media sites like Facebook and Instagram.
ChannelAdvisor is benefiting from a growing footprint that spans some 2,800 clients in more than 75 countries.
The microcap stock is an aggressive holding, partly reflecting a challenging retail environment. Still, ChannelAdvisor looks attractive from several angles. In Quadrix®, it earns an Overall score of 90, reflecting strong ranks for Momentum (97) and Financial Strength (80). The balance sheet has no long-term debt and cash of $52 million, putting net cash at nearly $1.30 per share.
March quarter results should be announced on May 7. Per-share earnings are expected to more than double to $0.09. Per-share profits are projected to advance 13% this year and 35% in 2021. The stock is being started as a Buy.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, May 2020
Electronic Arts Inc. (EA) | Daily Alert May 6
Even before the pandemic, the video game industry was lucrative, growing 7.2% YoY (year-over-year) in 2019. Video games are gradually becoming the preferred form of entertainment. Data from Newzoo and Comscore shows that global video game revenue of $148.8 billion surpassed worldwide movie box office collection of $42.5 billion in 2019.
The significant change in the technology and business models of the gaming industry is driving growth. Video games have expanded beyond consoles to PCs and mobile. Thanks to high-speed internet, game developers have gone digital. Instead of buying video game packages, gamers can download games, subscribe to cloud gaming services, and make in-gaming purchases like new missions and player skins to enhance their gaming experience.
Similar to other physical sports, video games have sporting events called esports, where professional gamers compete in front of millions of viewers. According to Newzoo, 443 million people watched esports in 2019, and this number is expected to reach 495 million in 2020. The secret to succeeding in gaming is developing games that generate a loyal fan base for sequels, prequels, and merchandise goods.
2020 is a good year for gaming stocks. Electronic Arts Inc. (EA) is a video game giant with annual revenue of $5.5 billion and a market cap of $32.8 billion The company offers games and services for consoles, mobile, and PC, and earn ~75% of revenue from digital channels. However, EA is more dominant in game console sales, earning 70% of its revenue from here. It earns 15% revenue each from PC and mobile games, and is witnessing increasing growth in mobile games.
EA has some of the best sports game franchises like Madden NFL, NCAA Football, NBA Live, and FIFA, and it is monetizing these games on esports. It also has an exclusive agreement with Disney for the rights of the Star Wars franchise. The franchisee licenses limit EA’s scope for merchandise sales. Its largest source of revenue is live services like in-game purchases, extra content, subscriptions, and esports. EA plans to monetize its games like Apex Legends and Battlefield through esports.
Ben Reynolds and Harvi Sadhra, Sure Dividend Newsletter, suredividend.com, firstname.lastname@example.org, 800-531-0465, May 20, 2020