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Investors in Take-Two Interactive Software (TTWO 1.65%) just leveled up. The stock jumped in response to the video game developer’s recent earnings report and is trouncing the S&P 500 so far in 2023.
Wall Street is looking past the company’s current losses and management’s prediction for slow growth this fiscal year and focusing on the brighter future. Take-Two is planning for massive improvement over the next several years thanks to a packed pipeline of game releases.
Should investors jump on board with that bullish outlook, or wait for more concrete signs of a growth rebound? Let’s take a closer look.
Take-Two closed out its fiscal year on a positive note. Bookings growth edged past management’s forecast thanks to strong demand for franchises like Grand Theft Auto, Red Dead Redemption, and Zynga’s portfolio of casual games. Executives said big-name titles performed well even as gamers scaled back their overall spending. Sales jumped 53% for the full year thanks to a big assist from the Zynga acquisition.
Investors were also happy to hear that the huge Zynga purchase is surpassing management’s expectations around growth and early returns. “We’re immensely proud of the trajectory of our integration and the strength of our shared culture and values,” CEO Strauss Zelnick said in a conference call.
The news wasn’t as good around profits. Take-Two booked several one-time charges tied to the acquisition this past year. The company took impairment charges around a few games it canceled in the development stage, too, in response to shifting demand. These challenges helped push net losses to over $1 billion, or $7.03 per share, in fiscal 2023. Take-Two posted net earnings of $456 million a year earlier.
Investors can’t count on a quick improvement here, either. Management forecast a second consecutive year of net losses, with red ink amounting to roughly $500 million in fiscal 2024. These losses are being partly driven by more integration challenges, but also by the delay of a few large titles that will now launch in fiscal 2025.
The new fiscal year will bring close to zero growth as bookings land at about the same $5.4 billion that investors saw in fiscal 2023. But Take-Two couldn’t be more optimistic about the long term.
In fact, management is aiming for over $8 billion of bookings in 2025 along with more than $1 billion of operating cash flow. These results will be powered by “several groundbreaking titles” that have already been in development for years, claims Zelnick.
Yet fiscal 2025 is a long way off, and selling conditions could worsen by then. There’s always the potential that a few big releases encounter more delays or sell poorly at launch. And the current fiscal year will almost surely look weak compared to Take-Two’s long-term outlook.
Patient investors might look past those risks and focus on the company’s progress in laying the groundwork for massive growth starting in about one more year. Yet the stock’s price-to-sales valuation doesn’t make it a screaming buy today. Shares are valued at over 4 times sales, up from 3 in late 2022.
Take-Two can earn that valuation and even expand it, but first it will have to start taking firm steps back to positive cash flow. Investors should wait for those signs before jumping into this video game stock.
Procter & Gamble (PG -0.06%) has one of the longest streaks of consecutive annual dividend hikes on the stock market. It’s a track record that leaves little mystery about whether the consumer staples giant will announce another raise each April.
But the level of the hike is often a surprise, and management updates shareholders on its short-term growth forecast at around the same time. Here’s what the company’s April updates might mean for shareholders and prospective buyers of the dividend stock.
P&G’s next quarterly dividend will be $0.94 per share, and the 3% hike brought its string of consecutive annual increases to 67 years. P&G paid dividends before that streak began, too — it has been sending regular payments to shareholders since 1890.
Investors might have been underwhelmed by this year’s increase. Last year’s hike was 5%, after all, and sales trends are still holding up well with organic sales up by 7% in the most recent quarter.
Yet P&G’s earnings are under pressure from inflation and currency exchange rate shifts, among other issues. These two factors will reduce its profits by about $3.5 billion in its fiscal 2023 (which ends June 30), executives estimate. In the context of the fiscal year’s expected flat earnings, the 3% payout increase looks more generous.
There are other good reasons to like the stock. P&G demonstrated its pricing power by boosting average prices by 10% last quarter. True, that helped push sales volumes lower. Yet its overall organic sales trends are solid, and management just increased the 2023 outlook for growth. “We delivered strong results,” CEO Jon Moeller said in the fiscal third-quarter press release published in mid-April.
Wall Street is even happier about the fact that the company’s operating profit margin has stabilized. After falling for most of the past year, this core financial metric ticked higher in fiscal Q3 thanks to the combination of price increases, cost cuts, and slight drops in some raw material prices. P&G’s 21% margin remains well above rivals like Kimberly-Clark (KMB -1.02%).
It’s easy to see how expanding margins and strong sales trends could power excellent annual earnings over the next few years. An investment in P&G doesn’t carry much recession risk, either, given its massive global sales base, its consumer staples focus, and its financial strength. Steadily rising dividend payments will cushion shareholders’ returns in the event of a stock market slump, too.
On the downside, the stock isn’t cheap. Investors are paying nearly 5 times annual sales for P&G shares, a valuation that isn’t far from its pandemic highs. You can purchase Kimberly Clark shares for around half that valuation.
P&G deserves to be priced at a premium, though, due to its industry-leading position and the high likelihood that its earnings will rise at a solid clip over the next few years. Given the attractive balance between risk and potential return, investors should consider putting this stock into their portfolios. With a higher dividend payment on the way, the financial rewards for doing so just became a bit more concrete.
Following a difficult 2022, shares of Pinterest (PINS 0.88%) are enjoying a picture-perfect rebound. The social media platform’s stock rose 13% through mid-April, compared to an 8% rally in the S&P 500.
That broader market rally surely played a role in Pinterest’s positive returns so far in 2023. But investors also have some good reasons to feel optimistic about its business, which recently posted a return to user growth.
With that broader backdrop in mind, let’s look at the short-term prospects for Pinterest shareholders.
There was a lot for investors to like in Pinterest’s February earnings announcement. The company met management’s growth target as sales rose 6% after adjusting for currency-exchange shifts. That increase was powered by a growing base of monthly active users, which now top 450 million.
User growth has returned in part thanks to changes that have made the platform more engaging, such as the algorithm’s serving more personalized and relevant content. Management is planning even bigger improvements here in 2023, including by pushing deeper into video content.
The company still faces challenges for fiscal 2023. The biggest is a sluggish digital-advertising market that’s pressuring sales and profits. Still, Pinterest’s average revenue per user expanded by 10% globally in the past year.
Investors will want to watch this metric for continued progress over the next several quarters. Success here, if paired with continued active user growth, will pave the way for the company to return to net profitability following losses in 2022.
PINS operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Executives said in a conference call with investors that they’re projecting strong cash flow and rising margins this year, with help from a cost-cutting program. “We remain confident in our long-term strategy,” CEO Bill Ready said.
Pinterest in late April will likely announce another period of modest sales growth. The company projected low single-digit revenue growth in the first quarter, along with slowing operating expenses.
Management didn’t issue a wider 2023 outlook, but most Wall Street pros are looking for Pinterest to boost sales by about 9% this year to cross the $3 billion mark.
The stock’s path over this time will depend partly on the wider market, which will swing in response to shifting sentiment around a potential recession developing in 2023. But Pinterest can also improve its prospects by showing more user growth and a steady march back toward profitability. Investors will be watching for signs of progress here in the company’s first-quarter report in the coming weeks.
Meanwhile, the stock’s valuation suggests that shares could continue beating the market if Pinterest’s business remains on a positive trajectory. The stock is priced at about 7 times sales, down from over 20 times sales in mid-2021.
Wall Street isn’t as forgiving about companies posting net losses today as it was in earlier phases of the pandemic. Yet Pinterest is creating a more efficient business, and so investors have good reasons to expect positive returns for the stock over the next year or so.
Growth stock investors tend to ignore consumer staples stocks in favor of more exciting industries like software and entertainment services. Businesses that sell essentials are generally seen as stable and mature but not as sources for market-beating returns.
If you fall in this camp, let me introduce you to PepsiCo (PEP 0.04%). The beverage and snack food giant just closed a second straight year of excellent sales growth despite swinging consumer demand trends. And while Pepsi is expecting a growth slowdown in 2023, there are some great reasons to like the stock today.
Let’s dive right in.
PepsiCo’s headline sales result in 2022 could easily apply to a tech specialist that’s early on in its growth story. Organic sales were up a blistering 15% in the fourth quarter and jumped 14% for the full year.
These gains came on top of a 10% spike in 2021 as consumers spent freely on snacks and beverages. Pepsi has expanded its revenue footprint by 23%, or $16 billion, over the past two years.
Yes, the 2022 gains came mostly from rising prices, and modest volume declines illustrate that there’s a limit to this strategy. But investors should be thrilled to see Pepsi’s ability to pass along higher costs. That pricing power is evidence of competitive assets like customer loyalty and a premium market position. It’s a sign of stronger earnings growth ahead, too.
Pepsi’s management team projects a 6% organic sales increase in 2023, which would put revenue gains at the high end of their long-term growth outlook. Profitability should start rebounding, too, now that price increases are working their way through the portfolio of snacks and beverage products. Executives expect core earnings to rise 8% this year.
Pepsi is excited about attractive niches like energy drinks, sports nutrition, and alcoholic beverages. “We will continue to focus on driving growth and winning in the marketplace,” CEO Ramon Laguarta told investors back in early February.
Investors don’t have to pay too much for these assets, either. Pepsi shares are priced at about 3 times annual sales today. The more profitable McCormick is priced at 3.6 times sales even though it has been posting weaker sales results in recent quarters. Pepsi stock looks attractive on a price-to-earnings (P/E) basis, too, with shares trading for 29 times earnings compared to McCormick’s 35.
Pepsi shares look cheap given the prospects for expanding margins and steady sales growth in 2023 and beyond. Toss in the dividend, which has risen for 51 consecutive years, and you have all the ingredients for solid returns from here.
Sure, growth investors can find higher projected sales gains in smaller companies located in less mature industries. But a strong portfolio shouldn’t focus entirely on higher-risk areas like these.
Owning PepsiCo can add stability and income to your portfolio while still providing exposure to potentially strong sales gains over time. That makes it worth keeping the consumer staples giant on your watchlist for 2023.
Constellation Brands‘ (STZ 0.90%) business is close to firing on all cylinders again. The alcoholic beverage giant, which owns popular imported beer brands like Corona and Modelo, recently announced strong fourth-quarter sales and earnings results that gave the company excellent momentum heading into the new fiscal year. Financial wins also give Constellation Brands flexibility to invest in growth initiatives even while sending cash back to shareholders.
Let’s take a closer look at those results, and why they point to solid returns ahead for patient investors.
Constellation Brands is seeing strong results in both its beer and wine segments, but these divisions are winning in different ways. In the core beer segment, market share growth has been key, with depletions, a measure of consumer sales, rising 6% in Q4.
The company won market share in the broader beer niche and performed especially well among higher-priced import beers. “The momentum of our iconic and next wave beer brands continued our…share gains,” CEO Bill Newlands said in a press release.
That success was tempered by declining profitability as price increases trailed rising costs. Constellation Brands’ margins in beer fell to 34% of sales from 39% a year ago.
The wine segment didn’t grow as quickly but did make progress in management’s turnaround strategy. Overall depletions fell 5% in Q4 and declined by 3% for the full year. But the company’s shift toward the premium end of the industry helped operating profit margin jump to 28% of sales from 22% of sales a year earlier.
STZ Operating Margin (TTM) data by YCharts
These successes contributed to an excellent financial showing by the broader business. Constellation Brands generated $1.7 billion of free cash flow for the year, up 3% from fiscal 2022, and core earnings rose 4%. Management demonstrated their priority of direct cash returns by spending $2.3 billion on dividends and stock buybacks over the past 12 months.
Those cash returns might moderate slightly in the new fiscal year ahead as the company allocates more resources toward its brewery upgrades in Mexico. But there’s still plenty for investors to like about Constellation Brands’ fiscal 2024 outlook.
Specifically, profit margin declines in the beer business will lessen, according to management’s forecast, even as sales growth approaches 10%. The wine and spirits segment will take another step toward sustainably strong earnings as sales decline by less than 1% and operating income rises by between 2% and 4%.
These forecasts could change as consumer spending patterns shift over the year, but Constellation Brands isn’t likely to disappoint patient shareholders. Its hold on large parts of the beer market is growing, and the wine and spirits division is finally ready to start contributing to earnings following its multiyear restructuring process.
The stock isn’t extremely cheap. Shares are trading for nearly 5 times annual sales, or about twice the valuation Wall Street is placing on Anheuser-Busch InBev today. Constellation’s P/S ratio had been as high as almost 6 times sales in earlier phases of the pandemic, though. It’s a good sign for future returns that this valuation has declined in recent months even as the growth stock improved on its sales and profitability trends.
Investors have modest expectations for Microsoft (MSFT -1.28%) in 2023. The tech giant is on track to grow sales and earnings just slightly, according to most Wall Street pros, after big gains over the past two years. Yet the stock is valued at a huge premium compared to many of its tech peers.
Does that premium reflect Microsoft’s strength as a long-term investment, or does it mean shareholders are likely to see sluggish returns over the next several years? Let’s take a closer look at the bullish thesis for the stock.
Microsoft’s latest earnings report demonstrated the power of its diverse business while still showing significant growth challenges. Overall, sales rose 7% to $53 billion through late December after accounting for currency exchange-rate shifts. Revenue was up 16% on that basis in the prior quarter .
Zooming in, shareholders can see big disparities between Microsoft’s major business lines. Growth is strongest in cloud services, which was up 22% in the fiscal second quarter. The company is dealing with a cyclical pullback in PC products and video games, though. These crosscurrents help explain why Wall Street is expecting sales to rise at a single-digit rate in fiscal 2023.
Its financial strength is moderating, but Microsoft still trounces most of its peers in this arena. Operating profit margin shrank by 2 percentage points last quarter yet remains above a blistering 40% of sales. That figure is higher than most rivals, and it’s also holding relatively steady at a time when other software and hardware businesses are struggling.
MSFT Operating Margin (TTM) data by YCharts.
Investors will also find plenty to like about Microsoft’s cash position. The software-as-a-service (SaaS) specialist generated over $11 billion of operating cash flow and $5 billion of free cash flow in the latest quarter. While both figures are down compared to pandemic spikes, they reflect a highly efficient business with competitive moats that span industries like enterprise cloud services, cybersecurity, and business productivity.
Microsoft executives said in a late January conference call that they’re seeing more caution from big customers across enterprise spending. Combined with a continued downturn in areas like PC and video games, these trends point to a second half of fiscal 2023 that looks a lot like the Q2 performance.
That weak short-term outlook clashes with Microsoft’s stock movements lately. Shares are trouncing the S&P 500 and are valued at over 10 times annual revenue today. That valuation has expanded from 8 times sales in late 2022.
The greatest risk with Microsoft stock, then, is in overpaying for this stellar business. Cautious investors might want to watch for a better chance to buy, potentially when markets turn negative again on worries about a potential recession on the way.
But while the stock’s 2023 rally has lowered potential returns from here, Microsoft still looks like a great long-term investment. Holding this business, and the exposure it brings to key growth industries like AI and cloud services, will likely generate strong returns over many years. Investors shouldn’t let an elevated stock valuation keep them away from those positive results.
April is a busy month for investors in Procter & Gamble (PG 0.64%). The consumer staples company will announce third-quarter earnings results on April 21. Management also typically reveals its annual dividend hike around that time.
The earnings update will include P&G’s revised outlook for a fiscal year that’s bringing further demand pressures but easing cost and supply chain challenges. Let’s look at how these factors might set shareholders up for solid returns in 2023 and beyond.
The main worry heading into the earnings report is that consumers are getting more cautious in their spending. Sure, P&G reported a solid 5% increase in organic sales in the most recent quarter. But looking beyond that headline figure reveals sales challenges.
P&G’s sales volumes fell 6%, in fact, through late December. Each of its five main product categories shrank, led by the grooming division’s 8% slump. The company offset that slump with a 10% price increase that allowed overall organic sales to rise. Yet that strategy has limits, and so investors will be watching the upcoming report for signs of a better balance between volume and pricing trends.
P&G stock might get a lift from the company’s improving financial position. A key benefit to raising prices is that it protects the company’s profit margin, after all, which has held roughly steady this fiscal year after accounting for currency exchange swings.
The fact that P&G is beating rivals like Kimberly-Clark on this score reflects its premium market position, pricing power, and economies of scale. These competitive assets should help the company generate strong returns even if a recession develops in key markets like the U.S. and Europe.
PG operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Lastly, shareholders should see a dividend raise that reflects P&G’s modest earnings expansion this year. This increase will mark the company’s 67th consecutive annual increase, extending one of the longest such streaks on the stock market.
The biggest factor influencing the stock’s path will be management’s updated outlook. Heading into the report, P&G is calling for organic sales to rise by 4% to 5% this year, while net earnings rise by 2% to 4%. Positive signs here would include more modest declines in sales volume and a potential letup in cost pressures.
P&G’s last estimate forecast a whopping $3.7 billion hit to earnings this year from rising costs. But that prediction was a slight improvement from the prior quarter, and further good news on this score might point to strong profit gains into the new fiscal year.
The stock’s valuation has remained elevated this year, trading at nearly 5 times sales compared to Kimberly-Clark’s price-to-sales ratio of 2.3. There’s room for that valuation to rise, though, if sales volumes stabilize and profitability starts expanding.
On the other hand, shares could underperform over the next year if consumers become even more cautious in their spending for staples like laundry products.
In any case, P&G’s long-term outlook is bright. The dividend giant should deliver good returns to patient shareholders, even if the next few quarters show unusually sluggish sales trends.
Investors initially put Chewy (CHWY 0.11%) stock in the doghouse after the company’s late-March earnings report. While sales expanded at a decent pace for most of 2022, and earnings trends were strong, the pet supply specialist lost customers in Q4 and for the wider fiscal year. That slump raised fears that growth will be harder to achieve in 2023 and beyond.
But there are good reasons to believe the worries are overblown. Let’s look at a few reasons why Chewy stock still looks attractive right now.
The major concern for the business is that Chewy is losing customers. Its base of active shoppers fell 1% year over year in Q4 and for the full 2022 year. That metric alone was a key reason why share prices fell in the immediate aftermath of management’s earnings announcement. Chewy needs to keep gaining customers if it’s going to dramatically expand its sales footprint.
Look closer and you’ll see cause for optimism, though. Chewy raised prices significantly in 2022 in response to rising costs. This shift contributed to a 15% increase in average annual spending by customers, up to $495 per year. And the company still improved its percentage of sales that come from its subscription service to 73% of sales from 70% a year earlier.
These wins, plus Chewy’s ability to win market share in 2022, suggest the growth thesis is still intact.
Investors don’t have to be concerned about Chewy’s finances, either. Gross profit margin improved to 28% of sales last year from 27% in 2021. The company is profitable, and its $119 million of free cash flow in 2022 marked a roughly 100% increase year over year.
The business is also well positioned to weather a recession, should one develop. Chewy competes in an industry that’s resistant to consumer spending pullbacks, as people tend to shift brands on pet food and supplies only rarely.
And almost all of its sales are in the nondiscretionary categories that include food and healthcare. Chewy already demonstrated in 2022 that it can generate solid profits even during times when spending is declining on discretionary products like toys.
The prospects for long-term growth remain excellent. Chewy is pushing into international markets this year, for example. It is building a bigger presence in healthcare, nutrition, insurance, and advertising, which gives the company a widening share of a huge addressable market. “We continue to see significant whitespace for expansion,” executives told investors in mid-March.
Yet Wall Street’s short-term growth concerns have pushed the stock’s valuation down to below 2 times sales. Chewy was valued at 4 times sales as recently as late 2022.
It is true that economic trends have weakened since then. And enthusiasm on Wall Street has faded for many growth stocks, which look risky as we approach a potential recession. Chewy doesn’t fit well in that risky category, given its positive earnings and cash flow. That’s why investors should take a closer look at the e-commerce specialist and consider adding the stock to their portfolios.
Netflix (NFLX 2.08%) investors are about to get a big update on the streaming video giant’s growth prospects. The company announces fiscal first-quarter results in mid-April in a report that very well could show a clear path toward accelerating sales growth despite the weak global economy.
That economic pressure will be at the top of shareholders’ minds while they evaluate Netflix’s Q1 performance and management’s updated short-term outlook. Let’s look at how these factors might drive stock returns over the next year.
The big question Netflix has to answer on April 18 is whether its positive Q4 momentum carried through into the start of the new year. “2022 was a tough year, with a bumpy start but a brighter finish,” executives said in a shareholder letter. That bright finish included surprisingly strong subscriber gains for a second consecutive quarter after Netflix lost members in each of the previous two quarters.
Investors will want to see another relatively strong outing for Q1, with expectations calling for overall revenue growth to accelerate to 4% from 2% in the prior quarter. If Netflix lands a modest increase in streaming subscribers, along with rising average spending, then it will be on track toward faster overall sales gains this year.
The financial picture is not so cloudy. Netflix is projecting higher profit margins this year as its operating margin lands close to 20%, or roughly on par with the blowout performance in 2021. Management’s goal is to keep that metric at between 19% and 20%, and Netflix is remarkably consistent on this score. Operating margin (after adjusting for currency swings) was 20% in 2022, 22% in 2021, and 20% last year.
NFLX Operating Margin (TTM) data by YCharts
Subscriber growth will be a key pillar of achieving another 20% performance in 2023. But Netflix is increasingly getting contributions from other areas. Rising monthly fees and advertising revenue will help this year, for example. Most Wall Street pros are looking for sales to rise about 9% in 2023, up to $35.5 billion.
The streaming video giant had been growing at more than twice that rate previously, though, and that slowdown is a key reason the stock price has declined so much since late 2021. But what about 2023 and beyond?
On the bright side, Netflix is on pace to double free cash flow to over $3 billion this year, implying much more financial strength ahead. Shareholders can feel reasonably confident that earnings will be solid, too, given Netflix’s proven ability to keep operating margin near 20% of sales. Elite peers such as Disney have struggled here and are currently slashing costs to make their streaming service models more financially sustainable.
Going forward, the main question is whether Netflix can reaccelerate its sales trends to build on the company’s strong end in its fiscal 2022 year. Investors will get more clarity on that potential in Netflix’s upcoming earnings report. But the current growth outlook is bright for the business, and the stock, over the next year given Netflix’s impressive sales, cash flow, and profit trends.
Demitri Kalogeropoulos has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
