Author: Trefis Team

BBY – What To Expect From Best Buy's Stock Post Q2 Release?

Best Buy (NYSE: BBY), a specialty retailer of consumer electronics, is scheduled to report its fiscal second-quarter results on Tuesday, August 24. We expect the retailer’s stock to likely trade higher post Q2 with both revenues and earnings beating expectations. Best Buy benefited from people transitioning to working from home during the pandemic with the growth in sales of products such as batteries, PCs, laptops, LCDs, printers, and refrigerators. Consequently, the retailer was able to drive consumers to purchase electronics online without losing customers to Amazon

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in FY 2021 (year ended Jan 2021). This trend continued into Q1 as well, where Best Buy’s comparable sales metrics jumped 37.2% rather than growing 17.1% for the quarter as the market had expected. The strong housing market-inspired consumers to invest in technology and appliances. We expect this trend to continue into Q2, as well. However, we anticipate customers to step up spending in other areas, such as travel and dining out, in the second half of the year.

Our forecast indicates that Best Buy’s valuation is $118 a share, which is 8% higher than the current market price. Look at our interactive dashboard analysis on Best Buy’s Pre-Earnings: What To Expect in Q2? for more details.

(1) Revenues expected to be marginally ahead of consensus estimates

Trefis estimates Best Buy’s Q2 2022 revenues to be around $11.6 Bil, slightly higher than the consensus estimate. In Q1, the retailer’s revenue of $11.6 billion topped the consensus by 11% and grew 37% year-over-year (y-o-y). While this selling period compared to a depressing prior-year period that included some of the most intense retailing lockdowns of the pandemic, the recent Q1 results also smashed results from the same period in 2019, which saw sales grow to $9.1 billion. The company said it had sales growth across almost all categories, with the largest gains in home theater, computing, and appliances. We expect this growth momentum into the second quarter, as well.

Looking ahead, we also believe that the servicing of electronics will grow, setting up Best Buy’s Geek Squad services for more business down the road. For the full year, Best Buy expects same-store sales to grow 3% to 6% this year. It had previously stated that they would range from a decline of 2% to a growth of 1%.

2) EPS likely to beat consensus estimates

Best Buy’s Q2 2022 earnings per share are expected to be $1.90 per Trefis analysis, 3% higher than the consensus estimate of $1.85. In Q1, the company’s EPS of $2.23 delivered an approximate 60% surprise above analyst average forecasts of $1.39. The company saw a modest gross profit margin uptick y-o-y as it relied less on promotions in Q1. However, this gain was partially offset by rising costs in areas like fulfillment and labor.

For the full year, we expect Best Buy’s adjusted net margin to decline slightly from 4.4% in fiscal 2021 to 4.2% in fiscal 2022. This coupled with a 4% y-o-y decline (due to a strong comparison to the second half of FY 2021) in Best Buy’s revenues, could lead to a fall of $200 million y-o-y in adjusted net income to $1.9 billion in FY 2022.

(3) Stock price estimate higher than the current market price

Going by our Best Buy’s Valuation, with an EPS estimate of around $7.38 and P/E multiple of 16.0x in fiscal 2021, this translates into a price of around $118, which is 8% higher than the current market price of roughly $110.

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LUV – Pick Southwest Airlines Stock To Fly?

After reaching pre-Covid levels in April, the shares of Southwest Airlines (NYSE: LUV) have observed a downtrend in the past two months as booking trends weakened due to the fourth wave of the pandemic. However, the company’s significantly lower debt outstanding and higher operating margin is likely to assist strong cash generation as infections decline. The third round of payroll support program requires airlines to suspend dividends and share repurchases until September 2022. Thus, investors can bet on recovering travel demand to realize capital gains. Considering the demand surge in the second quarter as an indicator for a quick rebound after the fourth wave, Trefis believes that LUV stock is a good value investment. We highlight the historical trends in the company’s revenues, margins, and valuation multiple in an interactive dashboard analysis, Southwest Airlines’ Valuation.

Strong second-quarter performance prompted the management to increase capacity

In Q2 2021, Southwest Airlines reported a 32% contraction in net revenues and a 16% reduction in capacity (available seat miles) over Q2 2019, a sizable improvement over Q1 2021 as travel demand recovered. The company reported $348 million of net income and $2 billion of operating cash. Given the suspension of dividends and share buybacks, the operating cash supported $95 million of capital expenses, certain short-term investments, and enhanced the company’s cash position. On the operational front, occupancy rate increased by 20-percentage-points (q-o-q) to 83% prompting the management to increase capacity during the latter half of the year.

Demand surge in second-quarter indicates a quick rebound after the fourth coronavirus wave

The decline in coronavirus cases in the second quarter led to a surge in air travel demand to the extent that the daily passenger numbers at TSA checkpoints were 20% below 2019 levels. Notably, the daily passenger figures observed a 50% growth in Q2 from 1.3 million in April to 1.9 million in June. Thus, the strong surge indicates growing leisure travel demand also described by many operators as revenge tourism. Given Southwest’s strong balance sheet, a brief period of low demand is unlikely to weigh on finances. Per Q2 filings, the company reported $(5.5 billion) of net debt, which can assist salary expenses for a quarter and still retain balance sheet strength (negative net debt indicates excess cash over long-term debt).

Is there a better investment over Southwest Airlines? Southwest Airlines Stock Comparison With Peers summarizes how LUV compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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MS – Morgan Stanley Stock Is Trading Close To Its Fair Value

[Updated 8/20/2021] Morgan Stanley Update

Morgan Stanley’s stock (NYSE: MS) has gained 53% YTD, and at its current price of $101 per share, it is trading slightly above its fair value of 100 – Trefis’ estimate for Morgan Stanley’s valuation. The bank recently released its second-quarter FY2021 results, beating the earnings and revenues expectations. It reported total revenues of $14.8 billion – up 8% y-o-y, mainly driven by a 92% y-o-y jump in investment management and a 30% increase in wealth management businesses. The growth was partially offset by a 14% drop in the institutional securities segment, primarily due to a 45% decline in FICC (fixed income, currency, and commodity) trading revenues. However, strong growth in equity trading and investment banking businesses was able to somewhat support the segment. Altogether, it translated into a 12% y-o-y increase in the adjusted net income to $3.4 billion.

The company’s revenues of $48.2 billion in 2020 were 16% above the year-ago period. The bank reported a 27% y-o-y growth in the institutional securities segment (sales & trading and investment banking), thanks to the unusually high trading volumes and a jump in underwriting deal volumes. Further, the wealth management unit recorded a 7% growth in the year driven by asset growth – the segment benefited from the acquisition of E*TRADE in the last quarter of 2020. The same trend continued in the first quarter of 2021, also. However, the sales & trading revenues suffered in the second quarter, leading to a decline in the institutional securities revenues. That said, the sales & trading and investment banking revenues are likely to normalize over the subsequent quarters with recovery in the economy. However, the wealth management and investment management businesses are expected to continue their growth trajectory, driven by asset growth. Overall, Morgan Stanley’s revenues are likely to touch $57.8 billion in FY2021 – up 20% y-o-y. Additionally, MS has doubled its common stock dividend to $0.70 (effective from the third quarter), in addition to a share repurchase plan of $12 billion valid for the next four quarters. This coupled with higher revenues will likely enable the firm to report an EPS of $7.38 in the year, which coupled with a P/E multiple of just below 14x, will lead to the valuation of $100.

[Updated 7/06/2021] Morgan Stanley Stock To Increase Quarterly Dividend By 100%

Morgan Stanley’s stock (NYSE: MS) has gained 34% YTD, and at its current price of $92 per share, it is trading slightly above its fair value of 89 – Trefis’ estimate for Morgan Stanley’s valuation. The Federal Reserve released its 2021 Comprehensive Capital Analysis and Review (“CCAR”) stress test results on 24 June. While the Fed imposed restrictions on dividend payout and share buyback by large banks in 2020 to preserve capital in light of the Covid-19 crisis, it has cleared all the 23 participating financial institutions this year. As a result of the positive stress test results, Morgan Stanley has decided to increase its common stock dividend by 100% to $0.70, beginning the third quarter. Further, it announced a share repurchase plan of $12 billion, which will be valid for the next four quarters.

Morgan Stanley reported total net revenues of $48.2 billion for the full year 2020 – up 16% y-o-y. It was primarily due to strong growth in sales & trading investment banking businesses driven by higher trading volumes and a jump in underwriting deals. Further, the wealth management and investment management segments have seen significant growth in client assets – the wealth management division received a big boost from the acquisition of E*TRADE in the last quarter of 2020. The same trend continued in the first quarter of 2020 as well, with the firm reporting 66% y-o-y growth in institutional securities (sales & trading and investment banking) followed by strong asset growth in both wealth management and investment management segments. Moving forward, we expect the trading volumes and underwriting deal volumes to normalize over the subsequent quarters. However, wealth and investment management businesses will likely drive growth for the company, enabling Morgan Stanley’s revenues to touch $54.6 billion in FY2021. Additionally, the firm is likely to report a EPS of $6.89 in the year, which coupled with a P/E multiple of just below 13x, will lead to the valuation of $89.

[Updated 1/29/2021] Morgan Stanley Stock Has More Room For Growth

Having gained close to 150% since the March 23 lows of the last year, Morgan Stanley stock (NYSE: MS) is trading 23% above its pre-Covid peak in February 2020. That said, we believe that it has more scope for growth. Trefis estimates Morgan Stanley’s valuation to be around $78 per share – around 15% above the current market price. Morgan Stanley is one of the top five U.S. investment banks and is a market leader in the equities trading space. Its strength in sales & trading was the primary reason for its positive growth in the year, which was also evident in the recently released fourth-quarter results. The bank reported better than expected results with total revenues of $13.6 billion – up by 26% y-o-y. Sales & Trading revenues jumped by 32% y-o-y coupled with a 46% growth in the investment banking segment. Notably, Wealth Management revenues grew 24% y-o-y in Q4, driven by the E*TRADE acquisition – E*TRADE was integrated with the wealth management segment at the start of October 2020.

Morgan Stanley reported revenues of $48.2 billion for the full year 2020 – up 16% y-o-y. It was primarily driven by 27% y-o-y growth in the Institutional Securities segment, which includes both sales & trading (up by 37%) and investment banking (up by 26%) businesses. The bank has a strong sales & trading arm, which benefited from higher trading volumes in 2020. Similarly, its investment banking segment gained from a jump in underwriting deal volume. However, as the economic condition improves, higher trading and underwriting deal volumes are likely to normalize in the subsequent quarters. This is likely to hurt Institutional Securities revenues in FY2021. Despite this, positive growth in investment management and wealth management revenues are likely to take Morgan Stanley’s revenues to around $49 billion in FY 2021 – slightly above the 2020 figure.

Despite the Covid-19 crisis, the bank reported a 23% y-o-y improvement in its adjusted net income figure in 2020. The growth was partly due to higher revenues and partly driven by lower operating expenses as a % of revenues. This led to an EPS of $6.47 – up 25% as compared to 2019. However, we expect the net income margin to slightly suffer in FY2021, reducing the bank’s EPS figure to $6.06. Additionally, the bank is likely to start its share repurchase program from the first quarter of 2021. Overall, the EPS of $6.06 coupled with the P/E multiple of just below 13x will lead to a valuation of around $78.

[Updated 11/20/2020] After Positive Q3 Results, Morgan Stanley Stock Is Fairly Priced

In view of more than a 100% gain since the March bottom, we believe Morgan Stanley stock (NYSE: MS) has achieved its near-term potential. Trefis estimates Morgan Stanley’s valuation to be around $58 per share – marginally below the current market price. The company has benefited from strength in its sales & trading arm, which has delivered better than expected results over the recent quarters. In its recently released third-quarter 2020 results, Morgan Stanley surpassed the consensus estimates and reported total revenues of $11.66 billion – up 16% y-o-y, mainly driven by a 35% y-o-y jump in sales & trading revenues coupled with an 11% growth in the investment banking segment.

We expect the bank to report $44.3 billion in revenue for FY 2020 – 7% more than the year-ago period. However, its net income is likely to remain around the previous year level due to higher operating expenses, slightly improving the EPS figure to $5.24 for FY 2020. Thereafter, Morgan Stanley’s revenues are expected to decline to $43.8 billion in FY2021, mainly driven by a drop in investment banking and sales & trading business. The investment banking giant has completed the acquisition of E*TRADE on 2nd October 2020 in an all-stock transaction, which will further add to its wealth management business. This is likely to improve the wealth management revenues in the subsequent year, partially offsetting the weakness in other segments. The EPS figure is likely to remain around $5, which coupled with the P/E multiple of just below 12x will lead to a valuation of $58.

[Updated 07/30/2020] Morgan Stanley Stock Gained 83% Over Recent Months, Is It Still Undervalued?

Morgan Stanley stock (NYSE: MS) lost more than 44% – dropping from $50 at the end of 2019 to around $28 in late March – then spiked 83% to around $51 now. This means that the stock has touched the level seen at the end of 2019.

There were two clear reasons for this – The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand dropped. This could cause significant losses for businesses and individuals alike, impacting their loan repayment capability and exposing Morgan Stanley to sizable wealth management loan losses. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.

But this isn’t the end of the story for Morgan Stanley stock

Trefis estimates Morgan Stanley’s valuation to be around $58 per share – about 15% above the current market price – based on an upcoming trigger explained below and one risk factor.

The trigger is an improved trajectory for Morgan Stanley’s revenues over the second half of the year. We expect the company to report $42.4 billion in revenues for 2020 – 2.4% higher than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. Further, as the lockdown restrictions are easing in most of the world, consumer demand is likely to pick up too. The company has derived positive growth in Q1 and Q2 mainly due to strength in its trading arm, followed by higher investment banking revenues. This jump could be attributed to the Fed stimulus, which set the floor for businesses to raise corporate debt, benefiting both underwriting business and the sales & trading division of the bank. This has largely offset the impact of weak revenues in other segments. While the trading income is expected to decline as compared to the first two quarters, it is likely to drive positive growth in the second half as well. Overall, we see the company reporting an EPS in the range of $4.92 for FY2020.

Thereafter, Morgan Stanley’s revenues are expected to slightly drop to $42 billion in FY2021, mainly due to a drop in the sales & trading business. Further, the bank has regularly invested in share repurchases and is likely to buy back stock close to 2019 levels, leading to an EPS of $5.02 for FY2021.

Finally, how much should the market pay per dollar of Morgan Stanley’s earnings? Well, to earn close to $5.02 per year from a bank, you’d have to deposit about $555 in a savings account today, so about 110x the desired earnings. At Morgan Stanley’s current share price of roughly $51, we are talking about a P/E multiple of just above 10x. And we think a figure closer to 12x will be appropriate.

That said, Investment Banks are riding on the wave of higher trading volume and growth in underwriting deals, which is a volatile business. Growth looks less promising, and long-term prospects are less than rosy. What’s behind that?

The economic downturn could cause significant losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for Morgan Stanley, as it has a substantial loan portfolio of wealth management loans. The bank generated around 43% of its revenues from the wealth management business in 2019. Further, as the economy slows down, it will likely become expensive for the bank to attract funding, negatively impacting all its operations. We expect the bank’s net income margin to decline from 20.5% in 2019 to 17.7% by FY 2021.

The same trend is visible across Morgan Stanley’s peer – Citigroup

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. Its revenues are expected to benefit from positive growth in its trading arm and investment banking business in FY2020. However, its margins are likely to suffer due to build-up in provisions for credit losses in anticipation of bad loans. This would explain why Citigroup’s stock currently has a price of just below $53 but looks slated for an EPS of around $6.13 in FY2021.

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CRM – How Will Second Quarter Results Impact Salesforce's Stock?

Salesforce.com (NYSE: CRM) is scheduled to report its fiscal Q2 2022 (ended July 2021) results on Wednesday, August 25. We expect CRM to beat the consensus estimates for revenues and earnings. The company has reported better than expected revenue and earnings figures in each of the last four quarters. CRM’s revenue growth continued in Q1 of FY 2022 as its cloud offerings continued to be in demand as organizations continue their shift toward digitization and remote working. We expect the same to drive the second-quarter FY2022 results, as well.

Our forecast indicates that Salesforce’s valuation is $282 per share, which is 14% above the current market price of $247. Look at our interactive dashboard analysis on Salesforce’s pre-earnings: What To Expect in Q2? for more details.

(1) Revenues expected to be ahead of consensus estimates in Q2

Trefis estimates CRM’s fiscal Q2 2022 (ended July 2021) revenues to be around $6.9 billion, above the $6.24 billion consensus estimate. In Q1 2022, CRM’s revenue was $5.96 billion, up 23% y-o-y. The company’s revenue has grown consistently across the last few quarters. Overall, we expect revenue of around $26.8 billion in FY2022. Our dashboard on Salesforce’s revenues offers more details on the company’s segments.

(2) EPS likely to beat the consensus estimates

CRM’s Q2 2022 (ended July 2021) earnings per share is expected to be $0.50 per Trefis analysis, slightly above the consensus estimate of $0.46. The company’s net income margin rose in 2020 primarily due to a $1.5 billion of tax benefit which increased the diluted EPS figure from $0.15 in FY 2020 to $4.38 in FY 2021. In FY 2022, we expect the company to have net income margin of around 7.4% which would mean an EPS of $2.08 in FY2022.

(3) Stock price estimate 14% above the current market price

Going by our Salesforce’s valuation, with an EPS estimate of $2.08 and a P/E multiple of 136x in fiscal 2022, translates into a price of $282, which is 14% above the current market price of $247.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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ABNB – Is Airbnb The Best Travel Stock As Delta Variant Surges?

Airbnb published a better than expected set of Q2 2021 earnings last week, although the strong results were overshadowed by concerns that surging Covid-19 cases in the U.S. could impact the company’s near-term performance.

Over Q2, Airbnb saw its revenue rise by almost 4x compared to last year to $1.34 billion, with its net loss narrowing considerably to about $68 million for the quarter. The underlying trends for the business were also strong, with average daily rates for bookings rising to $161, up from $160 in Q1, and up by over 40% year-over-year. However, the company struck a cautious tone with its near-term outlook. The highly infectious delta variant of the virus that causes Covid-19 has been spreading in the U.S. and daily cases in the country have surged to levels of around 130,000 cases per day presently, a fourfold increase compared to last month. Although Airbnb expects Q3 revenues to be its strongest ever, it has indicated that the number of bookings for the quarter would be below that of Q2 2021, due to seasonality and concerns over the current Covid-19 surge. The company also said that its Q4 performance would depend on the progress of vaccinations and the containment of new virus variants.

While the current virus surge is concerning, we think that Airbnb is better positioned compared to hotels and other segments of the travel industry to tackle an extended pandemic. More people are likely to opt for driving holidays, possibly to less populated areas, while planning longer stays as companies have delayed return to office plans. For example, over Q2, the company said that 19% of stays booked on its platform were for 28 days or more, with the number standing at 24% in Q1. Airbnb’s inventory is also likely to be more suited to social distancing, compared to hotels that have many common areas and this could also play to the company’s favor.

We value Airbnb stock at about $160 per share, about 18x projected 2021 revenues. This is about 8% ahead of the current market price. Although there are cheaper ways to play the vacation rental business, via the likes of Expedia which also owns Vrbo, a fast-growing vacation rental business, we think Airbnb’s brand and strong growth should make it a top pick in the space. See our interactive analysis on Airbnb’s Valuation: Expensive Or Cheap? for more details on Airbnb’s business and comparison with peers.

[7/1/2021] Buy Airbnb Stock Ahead Of The July Fourth Travel Boom?

Airbnb stock (NASDAQ: ABNB) has gained about 14% from its lows of near $134 per share seen in May, to about $153 per share currently, as investors brace for a big upcycle in the hotel industry.

The upcoming Independence Day weekend is viewed as an inflection point of sorts in the U.S. travel and tourism industry’s recovery from the Covid-19 pandemic. About 46% of Americans are now fully vaccinated against Covid, and mask mandates have also been lifted in multiple tourist destinations, and this could result in significant pent-up demand for travel. For perspective, the American Automobile Association expects that over 47.7 million Americans will be traveling between July 1 and July 5, with travel recovering almost fully to the pre-pandemic levels. It’s very likely that demand will remain elevated through the Labor Day weekend in early September as people make the most of the first summer post the Covid lockdowns.

Now, Airbnb is very well positioned to take advantage of the coming boom, as we believe that more people will opt for driving holidays, possibly to less populated areas, while potentially planning longer stays – a trend that should benefit vacation-sharing companies. The company has also prepared for this surge, carrying out some major upgrades to its platform in May.

That being said, we think Airbnb stock looks a bit expensive at current prices of over $150 per share, trading at over 17x forward revenues. There are cheaper ways to play the travel boom. For example, online travel major Expedia which also owns Vrbo, a fast-growing vacation rental business, is valued at about $25 billion, or under 3x projected 2021 revenue. Expedia’s revenue growth rates are also expected to be comparable to Airbnb’s (about 60% this year) and it is actually likely to turn a profit, unlike Airbnb which remains in the red. We value Airbnb at about $120 per share, or about 15x projected 2021 revenue. See our interactive analysis on Airbnb’s Valuation: Expensive Or Cheap? for more details on Airbnb’s business and comparison with peers.

[5/27/2021] What’s Happening With Airbnb Stock?

Airbnb stock (NASDAQ: ABNB) has declined by about 25% over the last month, trading at about $135 per share currently. Below are a few recent developments for the company and what it means for the stock.

Airbnb posted a strong set of Q1 2021 results earlier this month, with revenues increasing by about 5% year-over-year to $887 million, as growing vaccination rates, particularly in the U.S., led to more travel. Nights and experiences booked on the platform were up 13% versus the last year, while the gross booking value per night rose to about $160, up around 30%. The company is also cutting its losses. Adjusted EBITDA improved to negative $59 million, compared to negative $334 million in Q1 2020, driven by better cost management and the company expects to break even on an EBITDA basis over Q2. Things should improve further through the summer and the rest of the year, driven by pent-up demand for vacations and also due to increasing workplace flexibility, which should make people opt for longer stays. Airbnb, in particular, stands to benefit from an increase in urban travel and cross-border travel, two segments where it has traditionally been very strong.

Earlier this week, Airbnb unveiled some major upgrades to its platform as it prepares for what it calls “the biggest travel rebound in a century.” Core improvements include greater flexibility in searching for booking dates and destinations and a simpler onboarding process, which makes it easier to become a host. These developments should allow the company to better capitalize on recovering demand.

Although we think Airbnb stock is slightly overvalued at current prices of $135 per share, the risk to reward profile for Airbnb has certainly improved, with the stock now down by almost 40% from its all-time highs seen in February. We value the company at about $120 per share, or about 15x projected 2021 revenue. See our interactive analysis on Airbnb’s Valuation: Expensive Or Cheap? for more details on Airbnb’s business and comparison with peers.

[5/10/2021] Is Airbnb Stock A Buy At $150?

We noted that Airbnb stock (NASDAQ: ABNB) was expensive during our last update in early April when it traded at close to $190 per share (see below). The stock has corrected by roughly 20% since then and remains down by about 30% from its all-time highs, trading at about $150 per share currently. So is Airbnb stock attractive at current levels? Although we still believe valuations are rich, the risk to reward profile for Airbnb stock has certainly improved. The stock trades at about 20x consensus 2021 revenues, down from around 24x during our last update. The growth outlook also remains strong, with revenue projected to grow by over 40% this year and by around 35% next year.

Now, the worst of the Covid-19 pandemic appears to be behind the United States, with over a third of the population now fully vaccinated and there is likely to be considerable pent-up demand for travel. While sectors such as airlines and hotels should benefit to an extent, it’s unlikely that they will see demand recover to pre-Covid levels anytime soon, as they are quite dependent on business travel which could remain subdued as the remote working trend persists. Airbnb, on the other hand, should see demand surge as recreational travel picks up, with people opting for driving holidays to less densely populated locations, planning longer stays. This should make Airbnb stock a top pick for investors looking to play the initial reopening.

To be sure, much of the near-term movement in the stock is likely to be influenced by the company’s first quarter earnings, which are due on Thursday. While the company’s gross bookings declined 31% year-over-year during the December quarter due to Covid-19 resurgence and related lockdowns, the year-over-year decline is likely to moderate in Q1. The consensus points to a year-over-year revenue decline of about 15% for Q1. Now if the company is able to deliver a solid revenue beat and a stronger outlook, it’s quite likely that the stock will rally from current levels.

See our interactive dashboard analysis on Airbnb’s Valuation: Expensive Or Cheap? for more details on Airbnb’s business and our price estimate for the company.

[4/6/2021] Why Airbnb Stock Isn’t The Best Travel Recovery Play

Airbnb (NASDAQ: ABNB) stock is down by close to 15% from its all-time highs, trading at about $188 per share, due to the broader sell-off in high-growth technology stocks. However, the outlook for Airbnb’s business is actually very strong. It seems reasonably clear that the worst of the pandemic is now behind us and there is likely to be considerable pent-up demand for travel. Covid-19 vaccination rates in the U.S. have been trending higher, with around 30% of the population having received at least one shot, per the Bloomberg vaccine tracker. Covid-19 cases are also well off their highs. Now, Airbnb could have an edge over hotels, as people opt for less densely populated locations while planning longer-term stays. Airbnb’s revenues are likely to grow by about 40% this year, per consensus estimates. In comparison, Airbnb’s revenue was down only 30% in 2020.

While we think that the long-term outlook for Airbnb is compelling, given the company’s strong growth rates and the fact that its brand is synonymous with vacation rentals, the stock is expensive in our view. Even post the recent correction, the company is valued at over $113 billion, or about 24x consensus 2021 revenues. Airbnb’s sales are likely to grow by about 40% this year and by about 35% next year, per consensus estimates. There are much cheaper ways to play the recovery in the travel industry post-Covid. For example, online travel major Expedia which also owns Vrbo, a fast-growing vacation rental business, is valued at about $25 billion, or just about 3.3x projected 2021 revenue. Expedia growth is actually likely to be stronger than Airbnb’s, with revenue poised to expand by 45% in 2021 and by another 40% in 2022 per consensus estimates.

See our interactive dashboard analysis on Airbnb’s Valuation: Expensive Or Cheap? We break down the company’s revenues and current valuation and compare it with other players in the hotels and online travel space.

[2/12/2021] Is Airbnb’s Rally Justified?

Airbnb (NASDAQ: ABNB) stock has rallied by almost 55% since the beginning of 2021 and currently trades at levels of about $216 per share. The stock is up a solid 3x since its IPO in early December 2020. Although there hasn’t been news from the company to warrant gains of this magnitude, there are a couple of other trends that likely helped to push the stock higher. Firstly, sell-side coverage increased considerably in January, as the quiet period for analysts at banks that underwrote Airbnb’s IPO ended. Over 25 analysts now cover the stock, up from just a couple in December. Although analyst opinion has been mixed, it nevertheless has likely helped increase visibility and drive volumes for Airbnb. Secondly, the Covid-19 vaccine rollout is gathering momentum in the U.S., with upwards of 1.5 million doses being administered per day, and Covid-19 cases in the U.S. are also on the downtrend. This should help the travel industry eventually get back to normal, with companies such as Airbnb seeing significant pent-up demand.

That being said, we don’t think Airbnb’s current valuation is justified. (Related: Airbnb’s Valuation: Expensive Or Cheap?) The company is valued at about $130 billion, or about 31x consensus 2021 revenues. Airbnb’s sales are likely to grow by about 37% this year. In comparison, online travel giant Expedia which also owns Vrbo, a growing vacation rental business, is valued at about $20 billion, or just about 3x projected 2021 revenue. Expedia is likely to grow revenue by over 50% in 2021 and by around 35% in 2022, as its business recovers from the Covid-19 slump.

[12/29/2020] Pick Airbnb Over DoorDash

Earlier this month, online vacation platform Airbnb (NASDAQ: ABNB) – and food delivery startup DoorDash (NYSE: DASH) went public with their stocks seeing big jumps from their IPO prices. Airbnb is currently valued at a whopping $90 billion, while DoorDash is valued at about $50 billion. So how do the two companies compare and which is likely the better pick for investors? Let’s take a look at the recent performance, valuation, and outlook for the two companies in more detail. Airbnb vs. DoorDash: Which Stock Should You Pick?

Covid-19 Helps DoorDash’s Numbers, Hurts Airbnb

Both Airbnb and DoorDash are essentially technology platforms that connect buyers and sellers of vacation rentals and food, respectively. Looking purely at the fundamentals in recent years, DoorDash looks like the more promising bet. While Airbnb trades at about 20x projected 2021 Revenue, DoorDash trades at just about 12.5x. DoorDash’s growth has also been stronger, with Revenue growth averaging about 200% per year between 2018 and 2020 as demand for takeout soared through the Covid-19 pandemic. Airbnb grew Revenue at an average rate of about 40% prior to the pandemic, with Revenue likely to drop this year and recover to close to 2019 levels in 2021. DoorDash is also likely to post positive Operating Margins this year (about 8%), as costs grow more slowly compared to its surging Revenues. While Airbnb’s Operating Margins stood at around break-even levels over the last two years, they will turn negative this year.

The Airbnb Story Still Has Appeal

However, we think the Airbnb story has more appeal compared to DoorDash, for a couple of reasons. Firstly in the near-term, Airbnb stands to gain considerably from the end of Covid-19 with highly effective vaccines already being rolled out. Vacation rentals should rebound nicely, and the company’s margins should also benefit from the recent cost reductions that it made through the pandemic. DoorDash, on the other hand, is likely to see growth moderate considerably, as people start returning to dine in restaurants.

There are a couple of long-term factors as well. Airbnb’s platform scales much more easily into new markets, with the company’s operating in about 220 countries compared to DoorDash, which is a logistics-based business that has thus far been restricted to the U.S alone. While DoorDash has grown to become the largest food delivery player in the U.S., with about 50% share, the competition is intense and players compete primarily on cost. While the barriers to entry to the vacation rental space are also low, Airbnb has significant brand recognition, with the company’s name becoming synonymous with rental holiday homes. Moreover, most hosts also have their listings unique to Airbnb. While rivals such as Expedia are looking to make inroads into the market, they have much lower visibility compared to Airbnb.

Overall, while DoorDash’s financial metrics currently appear stronger, with its valuation also appearing slightly more attractive, things could change post-Covid. Considering this, we believe that Airbnb might be the better bet for long-term investors.

[12/16/2020] Making Sense Of Airbnb Stock’s $75 Billion Valuation

Airbnb (NASDAQ: ABNB), the online vacation rental marketplace, went public last week, with its stock almost doubling from its IPO price of $68 to about $125 currently. This puts the company’s valuation at about $75 billion as of Tuesday. That’s more than Marriott – the largest hotel chain – and Hilton hotels combined. Does Airbnb – which has yet to turn a profit – justify such a valuation? In this analysis, we take a brief look at Airbnb’s business model, and how its Revenues and growth are trending. See our interactive dashboard analysis for more details. In our interactive dashboard analysis on on Airbnb’s Valuation: Expensive Or Cheap? we break down the company’s revenues and current valuation and compare it with other players in the hotels and online travel space. Parts of the analysis are summarized below.

How Have Airbnb’s Revenues Trended In Recent Years?

Airbnb’s business model is simple. The company’s platform connects people who want to rent out their homes or spare rooms with people who are looking for accommodations and makes money primarily by charging the guest as well as the host involved in the booking a separate service fee. The number of Nights and Experiences Booked on Airbnb’s platform has risen from 186 million in 2017 to 327 million in 2019, with Gross Bookings soaring from around $21 billion in 2017 to about $38 billion in 2019. The portion of Gross Bookings that Airbnb recognizes as Revenue rose from $2.6 billion in 2017 to around $4.8 billion in 2019. However, the number is likely to fall sharply in 2020 as Covid-19 has hurt the vacation rental market, with total Revenue likely to fall by about 30% year-over-year. Yet, with vaccines being rolled out in developed markets, things are likely to start returning to normal from 2021. Airbnb’s large inventory and affordable prices should ensure that demand rebounds sharply. We project that Revenues could stand at about $4.5 billion in 2021.

Making Sense Of Airbnb’s $80 Billion Valuation

Airbnb was valued at about $75 billion as of Tuesday’s close, translating into a P/S multiple of about 16.5x our projected 2021 Revenues for the company. For perspective, Booking Holdings – among the most profitable online travel agents – traded at about 6x Revenue in 2019, while Expedia traded at 1.3x and Marriott – the largest hotel chain – was valued at about 2.4x sales prior to the pandemic. Moreover, Airbnb remains deeply loss-making, with Operating Margins standing at -16% in 2019, versus 35% for Booking and 7.5% for Expedia. However, the Airbnb story still has appeal.

Firstly, growth has been and is likely to remain, strong. Airbnb’s Revenue has grown at over 40% each year over the last 3 years, compared to levels of about 12% for Expedia and Booking Holdings. Although Covid-19 has hit the company hard this year, Airbnb should continue to grow at high double-digit growth rates in the coming years as well. The company estimates its total addressable market at about $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.

Secondly, Airbnb’s asset-light model should also help its profitability in the long run. While the company’s variable costs stood at about 25% of Revenue in 2019 (for a 75% gross margin) fixed operating costs such as Sales and marketing (about 34% of Revenues) and product development (20% of Revenue) currently remain high. As Revenues continue to grow post-Covid, fixed cost absorption should improve, helping profitability. Moreover, the company has also trimmed its cost base through Covid-19, as it laid off about a quarter of its staff and shed non-core operations and it’s possible that combined with the possibility of a strong Recovery in 2021, profits should look up.

That said, a 16.5x forward Revenue multiple is high for a company in the online travel business. And there are risks including potential regulatory hurdles in large markets and adverse events in properties booked via its platform. Competition is also mounting. While Airbnb’s brand is strong and generally synonymous with short-term residential rentals, the barriers to entry in the space aren’t too high, with the likes of Booking.com and Agoda launching their own vacation rental platforms. Considering its high valuation and risks, we think Airbnb will need to execute very well to simply justify its current valuation, let alone drive further returns.

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IPAR – After 7% Drop Last Week, Can Inter Parfums Stock Strongly Recover?

The stock price of Inter Parfums reached its 52-week high of $80 earlier this month, and has since dropped from that level. Inter Parfums is a manufacturer, marketer and distributor of fragrances and related products. The stock fell 7% in the past week, to levels of around $74 currently. Inter Parfums reported Q2 2021 earnings last week, with revenue coming in at $208 million, up significantly from $50 million in Q2 2020, as demand for fragrances and perfumes has picked up rapidly. COGS and operating expenses rose at a slower rate, with operating profit coming in at $45 million, against a $6 million loss for the same period last year. This helped EPS rise from -$0.10 to $0.72 over this period.

However, after a 7% fall in a week, will IPAR stock continue its downward trajectory over the coming weeks, or is a recovery in the stock imminent? According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price using ten years of historical data, returns for Inter Parfums stock average 2.1% in the next one-month (twenty-one trading days) period after experiencing a 6.7% drop over the previous week (five trading days).

But how would these numbers change if you are interested in holding Inter Parfums stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Inter Parfums stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

MACHINE LEARNING ENGINE – try it yourself:

IF Inter Parfums stock moved by -5% over five trading days, THEN over the next twenty-one trading days Inter Parfums stock moves an average of 2.6%, with a decent 64.4% probability of a positive return over this period.

Some Fun Scenarios, FAQs & Making Sense of Inter Parfums Stock Movements:

Question 1: Is the average return for Inter Parfums stock higher after a drop?

Answer: Consider two situations,

Case 1: Inter Parfums stock drops by 5% or more in a week

Case 2: Inter Parfums stock rises by 5% or more in a week

Is the average return for Inter Parfums stock higher over the subsequent month after Case 1 or Case 2?

Inter Parfums stock fares better after Case 1, with an average return of 2.6% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 0.5% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Inter Parfums stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Inter Parfums stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For Inter Parfums stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for Inter Parfums after a larger loss over the last week, month, or quarter.

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.

It’s pretty powerful to test the trend for yourself for Inter Parfums stock by changing the inputs in the charts above.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market since 2016.

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MOH – Will Molina Healthcare Stock Rebound After An 8% Fall In A Week?

The stock price of Molina Healthcare, a managed care company best known for its health insurance through Medicaid and Medicare, reached its all-time high of $279 earlier this month, before a recent sell-off in health insurance stocks, led to an 11% fall in MOH stock to levels of around $248 currently. MOH stock is down 8% over the last five trading sessions. While the company raised its full-year guidance for revenue and earnings, there are concerns of rising Covid-19 related costs. The company benefited from lower medical costs in 2020, primarily due to fewer elective surgeries, but that trend has now reversed. With rising vaccination rates, there is a rise in the volume of elective surgeries, primarily due to a backlog that was created last year. This means health insurance companies will need to shell out more money to pay those bills. Molina’s

MOH
medical costs as a percentage of premium income has risen to 88% in Q2 2021, compared to 82% in the prior year quarter, and it is likely to remain high in the near term.

Now, after an 8% fall in a week, will MOH stock continue its downward trajectory over the coming weeks, or is a recovery in the stock imminent? According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for MOH stock average 8% in the next one-month (twenty-one trading days) period after experiencing an 8% drop over the previous week (five trading days). Also, the issue of high medical costs appears to be transient, and the company has raised its full-year outlook. As such, we believe that the MOH stock will likely rebound in the near term. But how would these numbers change if you are interested in holding MOH stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Molina Healthcare stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

MACHINE LEARNING ENGINE – try it yourself:

IF MOH stock moved by -5% over five trading days, THEN over the next twenty-one trading days MOH stock moves an average of 6%, with a 64% probability of a positive return over this period.

Some Fun Scenarios, FAQs & Making Sense of Molina Healthcare Stock Movements:

Question 1: Is the average return for Molina Healthcare stock higher after a drop?

Answer: Consider two situations,

Case 1: Molina Healthcare stock drops by -5% or more in a week

Case 2: Molina Healthcare stock rises by 5% or more in a week

Is the average return for Molina Healthcare stock higher over the subsequent month after Case 1 or Case 2?

MOH stock fares better after Case 1, with an average return of 6% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 1.3% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Molina Healthcare stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Molina Healthcare stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For MOH stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for Molina Healthcare after a larger loss over the last week, month, or quarter.

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks – although MOH stock appears to be an exception to this general observation.

It’s pretty powerful to test the trend for yourself for Molina Healthcare stock by changing the inputs in the charts above.

While MOH stock may rise in the near term, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Cerner vs. Humana.

See all Trefis Featured Analyses and Download Trefis Data here

HWM – Are Investors Too Optimistic On Howmet Aerospace Stock?

The shares of Howmet Aerospace (NYSE: HWM) have surpassed pre-Covid levels in the past few months despite an uncertain travel demand and rising coronavirus cases due to new variants. The company manufactures advanced jet engine components, fastening systems, and structural parts for aerospace and defense applications. Commercial aerospace, defense aerospace, commercial transportation, and power generation are key markets to which the company caters. In 2019, the commercial aerospace and defense aerospace markets contributed 59% and 13% of the total revenues, respectively. Notably, revenue contribution from the commercial aerospace sector declined by 38% (y-o-y) in 2020 and the sluggish demand environment has extended into 2021. Considering the high current P/S multiple and the pandemic’s impact on the travel & tourism sector, we believe that the stock has reached its near-term potential. We highlight the historical trends in revenues, earnings, and valuation multiple in an interactive dashboard analysis, Buy Or Fear Howmet Aerospace Stock?

A quick look at financial and operating metrics

The company’s revenues declined by 26% from $7.1 billion in 2019 to $5.3 billion in 2020, as the demand from commercial aerospace and commercial transportation sectors plummeted with a fall in passenger numbers. Thus, the net margins observed a 1.6% contraction from 6.6% in 2019 to 5% in 2020 – leading to a sizable decline in operating cash flows. Per Q2 2021 filings, the company expects revenues to observe low double-digit growth in the latter half of the year – assisted by improving market conditions. However, the revenue contribution by the commercial aerospace sector fell to 40% in the second quarter, a sizable drop from 59% in 2019.

Stock performance of Howmet Aerospace’s

HWM
key customers

Howmet’s key customers, General Electric Company

GE
, Raytheon

RTX
Technologies Corporation, and The Boeing Company

BA
account for around 11%, 9%, and 8% of the total revenues, respectively. Due to the pandemic’s impact on the travel & tourism industry, demand for commercial jets and associated parts & structures remains low. Thus, the shares of Raytheon and Boeing are trading 11% and 30%, respectively, below pre-Covid levels. Moreover, Spirit AeroSystems

SPR
stock, a Boeing key supplier, remains 38% below its February 2020 level – a contrast to Howmet Aerospace.

Is there a better pick over Boeing? Boeing Stock Comparison With Peers summarizes how BA compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

See all Trefis Featured Analyses and Download Trefis Data here

MU – After 6% Drop In A Week, What's Next For Micron Technology Stock?

The stock price of Micron Technology reached its 52-week high of $97 in April 2021, and has since dropped from that level. Further, the stock fell 6% in the past week, to levels of around $76 currently. Micron reported positive Q3 2021 earnings in early-July, with revenue coming in at $7.4 billion, up from $5.4 billion in Q3 2020. Further, lower COGS and operating expenses boosted operating income, which doubled to $1.8 billion over this period. However, earlier this week a report stated that order-filling time for semiconductor companies (which is the time taken to fulfill a semiconductor order) has risen to a record multi-year high of 20 weeks, and businesses across a variety of industries are suffering due to this.

After a 6% fall in a week, will Micron stock continue its downward trajectory over the coming weeks, or is a recovery in the stock imminent? According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for MU stock average 5.3% in the next one-month (twenty-one trading days) period after experiencing a 6.1% drop over the previous week (five trading days).

But how would these numbers change if you are interested in holding MU stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Micron Technology stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

MACHINE LEARNING ENGINE – try it yourself:

IF MU stock moved by -5% over five trading days, THEN over the next twenty-one trading days MU stock moves an average of 4.7%, with an average 63.8% probability of a positive return over this period.

Some Fun Scenarios, FAQs & Making Sense of Micron Technology Stock Movements:

Question 1: Is the average return for Micron Technology stock higher after a drop?

Answer: Consider two situations,

Case 1: MU stock drops by 5% or more in a week

Case 2: MU stock rises by 5% or more in a week

Is the average return for MU stock higher over the subsequent month after Case 1 or Case 2?

Micron Technology stock fares better after Case 1, with an average return of 4.7% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 2.7% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how MU stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold MU stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For MU stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for MU after a larger loss over the last week, month, or quarter.

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.

It’s pretty powerful to test the trend for yourself for Micron Technology stock by changing the inputs in the charts above.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market since 2016.

See all Trefis Featured Analyses and Download Trefis Data here

ZNGA – Should You Buy Zynga Stock At $8?

[Updated: 8/11/2021] ZNGA Stock Update

Zynga (NASDAQ: ZNGA) recently reported its Q2 results, which were below our estimates. The company reported revenues of $712 million, in-line with the consensus estimate of $713 million but slightly lower than our forecast of $725 million. The company’s adjusted EPS of $0.05 was well below the $0.11 per Trefis and $0.09 consensus estimates. While the company benefited from its recent acquisitions, including Rollic, a slower than expected growth in user pay impacted the company’s overall performance. Note that is was a tough comparison to the prior year quarter, which benefited from Covid-19 related lockdowns, as people were confined to their homes, eschewing more public forms of entertainment. This resulted in higher user-engagement levels for gaming companies, including Zynga.

Looking forward, the company has lowered its outlook for revenues to be around $2.8 billion, 3% lower than its previous guidance. This can primarily be attributed to two factors – 1. reopening of economies resulting in lower user engagement levels, and 2. Apple’s

AAPL
ad-tracking changes resulting in higher player acquisition costs for Zynga. Following a dismal Q2, and lowered guidance, ZNGA stock plummeted 18% in a single trading session on Aug 6.

We have updated our model following the Q2 release. We now forecast sales to be $2.6 billion for the full-year 2021, up 33% y-o-y, compared to our previous estimate of around $2.9 billion, and lower than the company’s guidance. Looking at the bottom line, we now estimate adjusted EPS to be $0.36, compared to our earlier estimate of $0.45. We believe that the impact of Apple’s changes to ad tracking on Zynga’s earnings will likely be higher than earlier estimated. Given the changes to our revenues and earnings forecast, we have revised our Zynga Valuation at a little over $11 per share, based on $0.36 expected EPS and a little under 31x P/E multiple for 2021. Although this marks a 20% discount to our prior estimate, it is still at a premium of around 37% to the current market price of $8, implying that ZNGA is undervalued currently, and investors can use this dip to buy for long-term gains

[Updated: 8/4/2021] Zynga Q2 Earnings Preview

Zynga (NASDAQ: ZNGA) is scheduled to report its Q2 2021 results on Thursday, Aug 5. We expect the company to likely post revenue and earnings above the consensus estimates, primarily led by continued growth in the company’s key franchises – Empires & Puzzles and Merge Dragons. Zynga’s top-line will also be bolstered by contribution from its recent acquisitions. However, the company has cautioned for some pressure on advertising due to changes in the policies related to advertising from Apple. Barring the pressure on advertising, we expect Zynga to navigate well based on these trends over the latest quarter.

Furthermore, our forecast indicates that Zynga’s valuation is $14 per share, which is 40% above the current market price of around $10, implying that ZNGA stock is undervalued at its current levels. Our interactive dashboard analysis on Zynga Pre-Earnings has additional details.

(1) Revenues expected to be slightly above the consensus estimates

Trefis estimates Zynga’s Q2 2021 revenues (total bookings – includes change in deferred revenue along with total revenue) to be around $725 million, slightly above the $713 million consensus estimate, and $710 million per the company’s provided guidance. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has remained on the higher side, compared to the pre-pandemic levels, and Zynga, in particular, has benefited significantly, due to its recently acquired gaming portfolios, which should bolster the overall top-line growth in Q2. Zynga’s Q1 2021 total bookings were up a solid 69% y-o-y to $720 million, primarily driven by higher user engagement levels for its top games, as well as the contribution from acquisitions of games from Rollic. Our dashboard on Zynga Revenues offers more details on the company’s segments.

2) EPS likely to be above the consensus estimates

Zynga’s Q2 2021 adjusted earnings per share is expected to be $0.11 per Trefis analysis, two cents above the consensus estimate of $0.09. The company’s net loss of $23 million in Q1 2021 was much better than a $104 million loss in the prior year quarter. However, on an adjusted basis, the company reported earnings of $84 million or $0.08 on a per share basis. For the full year 2021, we expect the adjusted EPS to be higher at $0.45 compared to $0.35 in 2020, and above the $0.40 consensus estimate.

(3) Stock price estimate a large 40% above the current market price

Going by our Zynga’s Valuation, with an EPS estimate of $0.45 and a P/E multiple of 31x in 2021, this translates into a price of $14, which is 40% above the current market price of around $10. In fact, at the current market price of $10, ZNGA stock is trading at just 22x its 2021 EPS estimate of $0.45. We continue to believe that Zynga deserves a higher P/E multiple given the strong revenue and earnings growth delivered over the recent past, a trend expected to continue going forward, as well.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.

While ZNGA stock looks undervalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for IAC Interactive vs Activision Blizzard

See all Trefis Featured Analyses and Download Trefis Data here