Walmart (WMT) Tackles Inflation: Buy or Sell Move for Investors?

Posted on by The INO.com Team

Inflation accelerated significantly last year, hitting a four-decade high of 9.1% in June 2022, pushing food prices higher. This led to many retailers experiencing consumers pulling back on spending. While inflation has fallen sharply from its peak, it is still higher than the Fed’s target.

According to a Labor Department report, the Consumer Price Index (CPI), a closely followed inflation gauge, grew 0.4% in September and 3.7% year-over-year, beating respective Dow Jones estimates of 0.3% and 3.6%. Food costs were up 0.2% for the third quarter in a row. On a 12-month basis, food costs jumped 3.7%, including a 6% surge for food away from home.

Walmart Cuts Grocery Prices Amid Inflation

With persistent inflation in mind, popular grocery chains are trying to help customers save with new deals. Walmart Inc. (WMT), the country’s largest grocer, recently announced that it would be “removing inflation” on some of its grocery prices starting next month.

“This year, finally, we are able to have the Thanksgiving basket that the prices are coming down versus a year ago -- we are really proud to say that the price of a Thanksgiving meal is going to come down,” Walmart U.S. President and CEO John Furner said during an exclusive interview on “Good Morning America.”

Last year, during a period of historically high inflation, WMT sold Thanksgiving ingredients at the same price as 2021. This year, the Thanksgiving basket from Walmart includes ingredients to make a meal for up to 10 people, which the company will “sell for around $2 less than last year” at just over $70.

Furner added that this move of cutting prices comes on the heels of consumer feedback: About 92% of its shoppers have expressed “some level of concern about inflation and how it will impact holiday celebrations.”

Like Walmart, fast-growing discounter Aldi expressed a similar sentiment about “high food prices” and announced price cuts of up to 50% starting November 1 and running through the year-end on more than 70 Thanksgiving favorites.

With food retailers offering temporary discounts on select items during peak seasons, including the holidays, a high volume of customers would drive into their stores and online for substantial savings. This is an effective way to boost sales, build customer loyalty, and have a competitive edge over peers.

Overall, holiday sales in November and December have averaged approximately 19% of total retail sales over the last five years, and the figure can be higher for some retailers, according to the National Retail Federation. 

Strong sales during the holiday season should give a solid boost to WMT’s stock. Shares of the retailer have gained nearly 6% over the past six months and 17% over the past year.

Let’s look at several other factors that could influence WMT’s performance in the upcoming months.

Robust Financial Performance

For the fiscal 2024 second quarter that ended July 31, 2023, WMT reported revenue of $161.63 billion, beating analysts’ estimates of $160.27 billion. This represents a 5.7% year-over-year increase. Its adjusted operating income rose 8.1% from the prior-year quarter to $7.40 billion. The company’s consolidated net income was $8.05 billion, an increase of 56.5% year-over-year.

Furthermore, the retailer’s adjusted EPS came in at $1.84, compared to $1.77 in the previous year’s period and the $1.71 expected by analysts. Its free cash flow for the six months ended July 31, 2023, was $9 billion, representing an increase of $7.20 billion compared to the same period in 2022.

“We had another strong quarter. Around the world, our customers and members are prioritizing value and convenience. They’re shopping with us across channels — in stores, Sam’s Clubs, and they’re driving eCommerce, which was up 24% globally. Food is a strength, but we’re also encouraged by our results in general merchandise versus our expectations when we started the quarter,” said Doug McMillon, WMT’s President and CEO.

“Our associates helped deliver increases in transaction counts and units sold, and profit is growing faster than sales. We’re in good shape with inventory, and we like our position for the back half of the year,” McMillon added.

Walmart’s CFO, John David Rainey, said he feels better about spending patterns than he did three months earlier, yet he described the consumer as “choiceful or discerning.” He added that seasonal moments like the Fourth of July holiday and back-to-school have helped drive sales during the second quarter.

Upbeat Full-Year Guidance

WMT raised its full-year 2024 forecast as the retailer stays committed to its low-price strategy to draw grocery customers and boost online spending. The big-box retailer now expects full-year consolidated net sales to grow by about 4% to 4.5%, compared with its prior guidance for consolidated net sales gains of 3.5%.

Further, Walmart said that its adjusted EPS for the year will range between $6.36 and $6.46, above its previous guidance of $6.10-$6.20. The company anticipates its consolidated operating income to increase approximately 7% to 7.5%.  

Impressive Historical Growth

Over the past three years, WMT’s revenue and EBIT grew at CAGRs of 5.2% and 4.6%, respectively. The company’s normalized net income increased at a CAGR of 5.8% over the same time frame, while its tangible book value grew at a CAGR of 3.9%.

Favorable Analyst Estimates

Analysts expect WMT’s revenue for the third quarter (ending October 2023) to come in at $158.30 billion, indicating an increase of 4.5% year-over-year. The consensus EPS estimate of $1.51 for the same period reflects a 0.6% year-over-year improvement. Moreover, the company has topped the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

In addition, Street expects WMT’s revenue and EPS for the fiscal year (ending January 2024) to increase 5.5% and 2.9% from the previous year to $639.22 billion and $6.47, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to grow 3.6% and 10% year-over-year to $661.94 billion and $7.11, respectively.

Attractive Dividend

Earlier this year, WMT’s Board of Directors approved an annual cash dividend for fiscal year 2024 of $2.28 per share, up nearly 2% from the $2.24 per share paid for the last year 2023. The final quarterly installment of $0.57 per share would be paid on January 2, 2024, to shareholders as of record on December 8, 2023.

WMT’s annual dividend translates to a yield of 1.40% on the current price level, and its four-year average yield is 1.60%. Its dividend payouts have grown at a 1.8% CAGR over the past three years. The company has raised its dividend for 49 consecutive years.

Bottom Line

WMT’s second-quarter earnings beat analysts’ expectations as more Americans turned to the retailer for groceries and to shop online. Further, the company raised guidance for the fiscal year 2024 to reflect the second quarter upside, confidence in continued business momentum, and ongoing customer response to its value proposition.

As it sticks to its low-price reputation to draw grocery shoppers and boost online spending, the big-box retailer recently announced slashing grocery prices amid elevated inflation and help customers save more money with new deals for the holiday season, starting November.

In the previously reported quarter, seasonal moments such as the Fourth of July holiday and back-to-school have helped drive sales significantly. These sales trends typically signal patterns for the months ahead, including the holiday season.

Given its robust financials, attractive dividends, and promising growth outlook, WMT could be an ideal investment now.  

Is Ford Motor (F) Stock Gearing up to Crash and Burn?

Posted on by The INO.com Team

Ford Motor Company (F) has been dealing with the United Auto Workers (UAW) strikes. Now, another difficulty confronts the automaker — it recently issued two separate recalls, affecting 273,127 vehicles across the United States. The two models impacted are the 2020-22 Ford Explorer and the Ford Mustang Mach-E.

The larger recall applies to 238,364 Ford Explorers produced between 2020 and 2022. According to filings with the National Highway Traffic Safety Administration (NHTSA) from Ford, a defectively manufactured mounting bolt in the rear axle might snap, potentially resulting in vehicle roll-aways even when parked. The issue stems from this bolt enduring constant bending forces during acceleration, resulting from torque transmission.

If the bolt fails after sufficient vehicular launches, the axle might shift, disconnecting the driveshafts or half-shafts from the integrated powertrain system. If complete separation occurs, the transmission becomes unlinked from the car's wheels, paving the way for possible roll-aways as engaging the park gear would no longer prevent wheel spin.

According to a Ford report, 396 customers reported incidents linked to this problem, often signaled by loud clunking or grinding sounds. Less than 5% of these cases resulted in vehicle roll-away or impaired vehicular control. However, as a remedial measure, F will replace the faulty bolt and implement a re-engineered subframe bushing to ensure correct axle positioning.

The second recall targets 34,763 Mustang Mach-E models fitted with extended-range batteries. This rectification is due to an overheating battery contactor potentially causing a loss of motive power when driving. As per F, this can occur when the vehicle has experienced fast DC charging followed by intense acceleration.

This is the second recall to involve battery contactors on the Mustang Mach-E. Last year, a similar complication led the company to recall 48,924 Mach-E models and replace a diagnostic control module with an alternate model capable of monitoring the battery contactor's temperature. Unfortunately, the initiative did not successfully nullify the issue.

Hence, in this latest recall, F will replace the high-voltage battery junction box at no expense to its customers. The car manufacturer has confirmed that the previous recall has adequately addressed power loss issues affecting standard-range Mach-E units; hence, this recall targets only extended-range versions.

The recall follows an investigation initiated by the auto safety regulator, assessing whether F adequately addressed the issues during the June 2022 recall of about 49,000 Mach-E vehicles.

Implications

F is already grappling with UAW strikes, with predicted impacts of $120 million being realized in the upcoming quarter. As per industry experts, F is losing $44 million daily. Additionally, cuts to F’s future product investments could come if the UAW deal turns out unfavorable. Further, potential reductions in F's future product investment could follow if the UAW deal proves less favorable.

A challenge no company wants to find itself dealing with is product recalls. Recalls can significantly reshape a company's financial landscape, have far-reaching effects on its market performance and negatively impact its reputation.

Under consumer protection laws, manufacturing and supplying companies are required to shoulder full responsibility for the cost of recalling products and any associated costs. Though insurance may cover some costs for defective product replacement, many product recalls result in lawsuits. Considering the accumulated costs from lost sales, replacing faulty units, government sanctions, and legal proceedings, a large recall can quickly escalate into a daunting, multi-billion-dollar predicament.

For example, F's recall of 169,000 vehicles in the United States to replace faulty rear-view cameras and perform software upgrades would take a $270 million toll on the company's finances.

Large-scale organizations such as F can recover relatively quickly from such short-term financial loss. However, diminishing confidence among shareholders and consumers could lead to more severe long-term consequences, such as a marked drop in stock prices. Hence, it would be prudent for F to take measured steps swiftly toward addressing vehicular recalls and safeguard their reputation.

Despite the second-quarter earnings surpassing expectations, these unforeseen expenses could affect the upcoming quarter earnings.

During the second quarter, F’s revenues rose 11.9% year-over-year to $44.95 billion, and automotive revenues peaked at $42.43 billion, surpassing the $40.38 billion estimate. The net income almost tripled to $1.92 billion, marking an 187.4% year-over-year increase.

The automaker anticipates its full-year adjusted EBIT guidance between $11 billion and $12 billion, while its adjusted free cash flow is projected to come between $6.5 billion and $7 billion. The company anticipates to hit an 8% EBIT target by 2026.

Investors' apprehension arises from multiple aspects of the company's earnings and projections. The EV segment of the business, recently rebranded as Model E, reported a pre-tax loss of $1.08 billion. The firm anticipates losses for this segment could mount to $4.5 billion in 2023, a staggering 50% surge on prior predictions.

Additionally, the company has publicly acknowledged the sluggish uptake of EVs, which has led to a scaling back of their previously ambitious production objectives for EVs. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026.

Analysts expect F’s revenue and EPS in the fiscal third quarter (ending September 2023) to be $42.51 billion and $0.46, registering 14.3% and 53.8% year-over-year growths, respectively.

Considering these developments, F’s shares have been facing pressures, sending its stock down to May 2023 levels. Over the past year, the stock declined 5% and 8.2% over the past month to close the last trading session at $11.53.

Institutions hold roughly 54.6% of F shares. Of the 1,765 institutional holders, 797 have decreased their positions in the stock. Moreover, 128 institutions have taken new positions (11,202,366 shares), while 132 have sold positions in the stock (10,742,511 shares).

Bottom Line

F has unveiled a bold scheme to invest billions in the advancement of EVs while also returning capital to its shareholders. This plan is predicated on robust revenue streams from its traditional combustion-engine trucks and SUVs portfolio. Given the increasing costs associated with UAW strikes, contract resolutions, and vehicular recalls, these plans seem to be in considerable peril.

To counteract these losses, the automaker could reduce capital spending, delay EV targets, increase cost-sharing initiatives, and make other alterations to its corporate portfolio.

The company experienced negative free cash flow in 2022 and forecasts a similar scenario for this year owing to lofty capital expenditure commitments.

While the company continues offering its shareholders dividends, its history is somewhat mottled. Given the ongoing difficulties, there is an elevated risk of dividend discontinuation or minimization. This eventuality was seen during the pandemic in 2020 and was resumed at the tail-end of 2021. A previous incident occurred before the Green Financial Crisis, with reinstatement happening three years later. This inconsistency may dissuade shareholders from seeking stability in their dividend returns.

Compounding the issues at F is their escalating debt load, which jumped from $105.06 billion in 2012 to nearly $139 billion in 2022. Simultaneously, the firm increased its cash holdings to boost liquidity.

One factor that could entice investors is the relatively low valuation of F. Its forward non-GAAP Price/Earnings of 5.78x is 59.7% lower than the industry average of 14.33%. Also, its forward Price/Sales multiple of 0.28 is 66% lower than the industry average of 0.83.

However, considering the automaker’s tepid price momentum and mixed profitability, it could be wise to wait for a better entry point in the stock.

Bypassing Qualcomm (QCOM) Turmoil: 3 Alternative Stocks to Add to Your Portfolio Now

Posted on by The INO.com Team

QUALCOMM Incorporated (QCOM), valued at over $124 billion, specializes in wireless technology development, licensing, and smartphone chip design. The firm's key patents are focused on CDMA and OFDMA technologies, fundamental to all 3G, 4G, and 5G networks. As the world's principal wireless chips supplier, it furnishes high-end handset manufacturers with cutting-edge processors.

Canalys’ figures indicate the global smartphone market's persistent decline, marking its sixth consecutive quarter of reduction as of June 2023. Even while cautious optimism for a potential market resurgence remains, this downturn has tangible impacts on QCOM, a significant player in smartphone chip supply. The shrinkage, intensified by soaring competition from Chinese chipmakers, has notably impacted the firm’s revenue and profit margins last quarter.

The company experienced its sharpest stock dip in September, consequent to turmoil in China, which disrupted QCOM's sales in a critical market. The company faces manifold risks, amplified by the imminent wave of layoffs that has stirred public apprehension. The timing of this layoff news has coincided with persisting trade tensions between the U.S. and China and Beijing's enactment of a partial ban on using iPhones by government personnel.

According to recent filings with the California Employment Development Department, the semiconductor behemoth will eliminate approximately 1,258 jobs in San Diego and Santa Clara, California, to accommodate dwindling demand for its primary product.

The layoffs are a part of “restructuring actions” aimed at channeling resources towards “investments in key growth and diversification opportunities.” Although the loss of 1,258 employees will be felt, this figure represents less than 2.5% of QCOM's total workforce of 51,000 employees.

Concurrent with these measures, the company anticipates incurring substantial additional restructuring charges, most of which are expected to be borne in the fourth quarter of fiscal 2023. The company forecasts the successful completion of these additional actions by the first half of fiscal 2024.

Impact of the Layoffs

Potential layoffs at QCOM could be a strategic move to mitigate operating costs and bolster profitability and cash flow. This action can amplify the company's earnings per share and future dividend payouts and refocus its direction toward the core business and strategically significant growth sectors such as 5G technology, automotive tech, and IoT.

The latest data suggests that over 750 members of QCOM's workforce facing possible layoffs belong to engineering cadres, with positions ranging from directors to technicians. The remaining reductions will impact various roles, encompassing accounting and internal technical staff.

These substantial reductions in the workforce might slow down QCOM's manufacturing capacity, along with their research and development activities, which could stifle innovation in the long term. This scenario could pave the way for QCOM's competitors in the microchip manufacturing industry to seize a higher market share by providing more competitive products and services.

Given QCOM's ongoing challenges, investors may watch fundamentally sound stocks Apple Inc. (AAPL), Advanced Micro Devices, Inc. (AMD), and Intel Corporation (INTC).

Let’s discuss these stocks in detail.

Apple Inc. (AAPL)

Tech giant AAPL has continuously enhanced its capabilities by designing custom chips for hallmark products such as iPhones, iPads, and iPods over many years. The initiative to design these crucial components in-house significantly boosts the overall device performance and optimizes power efficiency.

To strive for a self-reliant development strategy, AAPL has gilded significant resources to produce its modem chips to reduce dependence on external suppliers like QCOM. However, the mission is yet to be fully accomplished.

AAPL has been integrating QCOM's and home-grown chips in the technology behind its flagship iPhones. Despite intense challenges faced by AAPL's ambitious Sinope project, which has yet to result in a standalone ability to produce a 5G modem chip, the spirit of innovation and the quest for excellence remains unscathed within the company.

This ambivalent situation was recently accentuated when AAPL extended its contract with QCOM to supply '5G modem chips', a deal set to last through 2026.

Indeed, developing a standalone 5G modem chip is arduous, though certainly not beyond the realms of possibility. With resilience and commitment to navigating challenges, it is undoubtedly just a matter of time before AAPL actualizes its dream of rolling out its home-grown 5G modem.

Considering AAPL's staunch determination and its record of technological advancements, realizing this ambitious objective seems attainable. It’s plausible that we might witness the introduction of AAPL’s modem even before the ongoing QCOM deal concludes in 2026.

Shares of AAPL have gained over 35% year-to-date. Wall Street analysts expect the stock to reach $207.51 in the upcoming 12 months, indicating a potential upside of 18.3%. The price target ranges from a low of $167 to a high of $240.

Advanced Micro Devices, Inc. (AMD)

Semiconductor giant AMD, which currently boasts a market cap of over $165 billion, is strategically positioned to meet the potential demands spurred by chip shortages that may result from QCOM’s proactive cost-cutting strategy.

Recovering convincingly from being on the verge of bankruptcy, AMD has seen its stock value increase from a dismal $3 per share. The remarkable turnaround can be attributed to the flourishing success of its Ryzen line of central processing units (CPU), launched in 2017.

Now, AMD sets its sights on the lucrative AI market, unveiling the latest iteration of its MI300 chips, which the company hails as its most powerful GPU. As the market yearns for fiercer competition, the new chip, set to commence shipping in 2024, feeds this demand.

Over the past three and five years, its revenue increased at 42% and 28.2% CAGRs, while its levered free cash flow grew at CAGRs of 83.7% and 103.7% over the same periods. AMD has massive potential over the long term, making its stock worthy to be monitored.

Shares of AMD have gained over 58% year-to-date. Wall Street analysts expect the stock to reach $137.48 in the upcoming 12 months, indicating a potential upside of 34.3%. The price target ranges from a low of $95 to a high of $160.

Intel Corporation (INTC)

QCOM leads in the Android industry but faces stiff competition from chipmaker INTC in the PC market.

With a commendable market cap of over $150 billion, INTC plans to capitalize on the burgeoning AI market and presented a strategic vision last month to position itself as a pivotal architect of AI-integrated personal computers.

INTC recently debuted its glass substrates, designed to give the advanced packaging of chips a significant edge over traditional substrates. The innovation is expected to have positively impacted revenues in the third quarter.

In the same period, a critical alliance was formed between INTC and Tower Semiconductor Ltd., which could significantly impact the broader semiconductor ecosystem. The alliance showcases INTC's unwavering commitment to broadening its foundry services and manufacturing prowess.

Moreover, a significant breakthrough came when Ericsson chose INTC's 18A process and manufacturing technology to advance its next-generation 5G network. INTC was enlisted to produce custom 5G SoCs for Ericsson, projected to have fortified the company's top line in the third quarter.

Shares of INTC have gained over 34% year-to-date. Wall Street analysts expect the stock to reach $36.67 in the upcoming 12 months, indicating a potential upside of 2.8%. The price target ranges from a low of $17 to a high of $56.

 

Microsoft (MSFT) Takes Over Activision Blizzard: What's Next for the Tech Stock?

Posted on by The INO.com Team

Global technology powerhouse Microsoft Corporation (MSFT), worth nearly $2.47 trillion, concluded its $69 billion acquisition of renowned game developer Activision Blizzard, Inc. last week, pulling off history’s most prominent tech deal after two years of regulatory scrutiny and significant resistance from multiple stakeholders in the gaming industry.

The conclusion of this prolonged deal dispels the lingering uncertainty concerning the Microsoft-Activision partnership. However, the key question on everyone's mind is: What follows this grand acquisition?

The Acquisition and Its Potential Impact

MSFT CEO Satya Nadella, who took the helm in 2014, aims to broaden the company’s business beyond its core operating systems and productivity software domains. ATVI, a partner and competitor to MSFT, stands out among large companies for releasing top-rated games with production values reaching the hundreds of millions.

At the peak of the metaverse trend, the announcement of MSFT's acquisition of ATVI in January 2022 signaled the grandest deal in historical records. The strategy behind the acquisition was to bolster MSFT’s presence in gaming and the metaverse and establish itself as the unrivaled leader in cloud gaming.

Yet, its fruition faced hurdles due to antitrust concerns. Regulators globally analyzed whether the acquisition might result in excessive market control for MSFT. Eventually, the deal received official clearance last week following approval from the U.K. regulators, marking it the largest deal in MSFT's 48-year history.

But there is a significant condition accompanying this clearance. For the next 15 years, MSFT has agreed to surrender cloud-streaming rights for all ATVI games outside the European Economic Area (EEA), including 27 European Union member states along with Iceland, Liechtenstein, and Norway.

Ubisoft, a French game publisher, secured exclusive global streaming rights outside the EEA, while within the EEA, it will share these rights with other competitors, including MSFT/ATVI. This marked a pivotal concession from MSFT, which contributed to aligning with UK regulatory standards.

ATVI enjoyed the title of the largest game publisher in North America, hosting various popular games under its belt, ranging from "Call of Duty" to "Diablo" and "World of Warcraft," amongst others.

MSFT’s acquisition will expand the tech giant's ownership to include all developers under the acquired banner, ranging from Activision Publishing to King, the creator of "Candy Crush."  This strategic addition is expected to enhance MSFT's foothold in the booming mobile gaming industry through synergies with its franchises, such as "Halo" and "Forza," which could generate significant revenue in the coming years.

With a vast list of ATVI's titles under MSFT's umbrella and its robust platforms like Xbox, Game Pass, and Xbox Live, the company is poised to become an even greater force in the gaming sphere. With this, few competitors could rival MSFT's arsenal, enriched further by access to ATVI’s renowned studios, including Treyarch and Infinity Ward.

Xbox head Phil Spencer has consistently championed a transformation of Xbox from a console-centric brand to a content-first platform, focusing on player engagement rather than console sales. The self-disruption philosophy is expected to be further cemented post-acquisition, fortifying the strategy to build a prolific portfolio of games and IPs.

This monumental acquisition could propel MSFT to become the third biggest gaming giant globally in revenue, trailing behind Tencent and Sony.

MSFT's leap into the mobile gaming industry could experience a considerable boost from this deal. As of June 30, 2023, ATVI reported a monthly active user base of 356 million. In the second quarter of 2023, the company posted consolidated revenue of $2.21 billion, with an impressive $943 million derived from the mobile gaming segment. ATVI's prominence in mobile gaming will inevitably contribute to MSFT's anticipated growth in this segment.

Projecting ahead, estimated future cash flows pertaining to this deal, when adjusted to their present value, may surpass the acquisition cost of $69 billion, thereby positioning this alliance as an advantageous venture for MSFT.

Moreover, MSFT can potentially accelerate the growth of the acquired assets using its large-scale resources, including AI-driven initiatives – an added advantage. The acquisition is also fiscally beneficial for MSFT, which secured a high-margin business of Activision at 23.55x forward P/E compared to its 30.15x forward P/E.

Moreover, tech behemoth MSFT is on a promising growth trajectory as it branches out across several tech sectors and could present significant potential to investors over the long term.

Institutional investors have recently made changes to their MSFT stock holdings. Institutions hold roughly 70.6% of MSFT shares. Of the 4,862 institutional holders, 2,038 have increased their positions in the stock. Moreover, 197 institutions have taken new positions in the stock with 19,638,556 shares, reflecting signs of bullishness.

MSFT's workspace communication tool, Teams, has seen substantial growth and is expected to contribute significantly on the backs of expanding customer base and features. This has benefited MSFT in winning shares in the enterprise communication industry. Teams' user growth is attributable to the increasing shift towards hybrid and flexible working models. This trend could boost the fiscal first-quarter financial report to be released on October 24.

Furthermore, MSFT broadened the availability of its Microsoft 365 Copilot feature to a larger customer base during this quarter – which is also anticipated to boost revenue growth. The high adoption rates for Dynamics 365 software are additional factors projected to spur top-line growth in the to-be-reported quarter.

For the fiscal first quarter ending September 2023, MSFT’s revenue and EPS are expected to increase 8.8% and 12.7% year-over-year to $54.53 billion and $2.65, respectively.

Moreover, Wall Street analysts expect the stock to reach $398.24 in the next 12 months, indicating a potential upside of 19.9%. The price targets range from a low of $298.10 to a high of $440.

Bottom Line

The global video game market continues to be dynamic and transformative and is expected to reach $583.69 billion, growing at a CAGR of 13.4% by 2030. With the full integration of the two companies, a significant change in the video game industry could be witnessed. The deal will boost MSFT's gaming revenues and offer benefits to consumers.

Prudent investment decisions necessitate strong consideration of a stock's valuation. MSFT’s forward non-GAAP P/E of 30.15x is 36.4% higher than the industry average of 22.10x, while its forward Price/Sales multiple of 10.46 is 310.1% higher than the industry average of 2.55.

Despite trading at a premium over its industry peers, MSFT's robust financial standing, well-strategized acquisitions, compelling growth trajectory, and optimistic analyst projections position it as an attractive investment opportunity. The stock’s upside potential justifies the premium it demands.

Further bolstering this standpoint is MSFT’s impressive history of shareholder returns. In the fourth quarter of fiscal 2023, it paid dividends and repurchased shares worth $9.7 billion. The company has maintained a steady dividend payment trend for 18 years.

Furthermore, the successful execution of a $60 billion share buyback initiated in 2022, typically renewed by MSFT every few years, is projected to extend through 2025. This highlights MSFT’s another pivotal step in continuing to augment shareholder value.

S&P 500 Addition: Analyzing Whether Lululemon Athletica (LULU) Is a Buy Now

Posted on by The INO.com Team

Vancouver, Canada-based athleisure fashion retailer Lululemon Athletica Inc. (LULU) is set to join the S&P 500 index on October 18, replacing video-game company Activision Blizzard Inc., which Microsoft Corp. (MSFT) recently acquired for $68.7 billion after crossing numerous regulatory hurdles. The announcement was greeted with a more than 10% surge in LULU's shares.

Historically, the news of inclusion in the S&P 500 positively impacted stocks, usually driven by increased liquidity and heightened interest from individual and institutional investors.

Let’s look into the investment cases for the activewear giant’s shares.

Boasting a market cap of over $50 billion, LULU continues its stride amid the turbulence rattling the broader apparel industry. The company has leveraged the pandemic-driven trend of home exercising, acquiring smart fitness platform Mirror for $500 million to tap into the flourishing at-home fitness sector. This acquisition was intended to fuel further purchases of LULU clothing.

However, this landmark M&A transaction faced obstacles in its course. As pandemic restrictions eased globally, a rush toward gyms and fitness studios saw Mirror struggling to retain users. Consequently, LULU had to write down the value of Mirror to a mere $58 million, even considering its sale. By year-end, LULU intends to discontinue the sales of Lululemon Studio Mirror, though service and support will continue for existing customers.

The company underwent a branding exercise, re-emphasizing its product as Lululemon Studio, shifting the attention toward Mirror’s subscription app instead of the hardware device. Despite the setbacks faced by Mirror, LULU’s agility in course-correcting failures speaks volumes of its ability to manage risks, propelling itself into becoming not just a top sportswear brand but also making its debut on the Fortune 500 list.

Recognizing a post-pandemic shift in the fitness industry, LULU has forged a strategic five-year partnership with connected exercise bike manufacturer Peloton Interactive (PTON). This alliance positions LULU as Peloton's leading athletic apparel partner, with select PTON instructors serving as LULU’s brand ambassadors.

However, industry analysts voiced skepticism about the potential marketing benefits, indicating that many PTON users may already be buyers of LULU products. Regardless, the partnership presents evident synergies and opportunities for joint promotion, expected to arise from exclusive product offerings and extended services across both brands, and the advantages attributed to increased scale and reach.

In addition to bike sales, PTON has demonstrated prowess in content creation, live streaming, and launching innovative classes, setting itself apart in the industry. The burgeoning collaboration with PTON bodes well for LULU as it continues to invest in its Studio platform.

LULU's reputation as a fashion retailer catering to affluent consumers has been instrumental in fueling its growth, pointing to its contribution to the conception of the “athleisure” trend, combining fit and high-quality fabric. The company’s gradual expansion into menswear and the recent foray into golf and hiking attire is noteworthy.

Moreover, its experimental approach and avoidance of “analysis paralysis” – an issue that has slowed down many retailers' adaptability to new consumer preferences – have significantly contributed to LULU’s success.

Despite industry-wide challenges, LULU experienced robust growth so far. Its home base, Canada, alongside the U.S., accounted for 78% of its revenue in the second quarter of 2023. During this quarter, the company opened 10 new company-operated stores, totaling 672 stores worldwide.

It also anticipates considerable growth opportunities internationally, particularly in the U.K. and China. LULU is poised to quadruple its international sales, buoyed by remarkable growth in the Chinese market. In the second quarter of 2023, LULU saw a 52% year-over-year increase in global sales. As of July 30, 2023, the company operated 126 stores in China, producing 12.6% of total sales, and Chinese sales spiked 61.3% year-over-year, supported by stable demand after relaxed pandemic restrictions.

LULU’s second-quarter results surpassed Wall Street's forecasts, with net revenue and net income climbing 18.2% and 18% year-over-year, respectively.

Growing Institutional Ownership

LULU’s robust financial health and fundamental solidity make it a compelling investment prospect for institutional investors. Notably, several institutions have recently modified their LULU stock holdings.

Institutions hold roughly 87.5% of LULU shares. Of the 1,173 institutional holders, 489 have increased their positions in the stock. Moreover, 124 institutions have taken new positions (972,619 shares).

Outlook

LULU recently said that it was "off to a solid start" as the North American business improved, which led to an upward revision of its annual revenue and profit projections for the second time this year.

The athleisure wear producer is forecasting its revenue for 2023 to be between $9.51 billion and $9.57 billion, up from the previous projection of $9.44 billion and $9.51 billion. Simultaneously, an anticipated increase in profit is forecasted between $12.02 and $12.17 per share for the same fiscal year.

Stepping into the third quarter of 2023, LULU projects its net revenues between $2.17 billion and $2.19 billion, representing 17% to 18% growth. Earnings per share are expected to be between $2.23 to $2.28 for the quarter.

Furthermore, Lululemon unveiled its strategic aspirations under the Power of Three x 2 growth plan. To fortify its position in the global market, the company desires to multiply its business twofold – soaring from the 2021 net revenue of $6.25 billion to $12.5 billion by 2026.

The cornerstones guiding this ambitious growth map comprise product innovation, unprecedented guest experience, and wide-ranging market expansion. A distinct strategy underlining this objective is to double the revenue flow from men's wear and direct-to-consumer sales and to quadruple the international net revenue compared to figures from 2021.

Analysts expect its revenue and EPS for the fiscal third quarter ending October 2023 to increase 17.8% and 14.2% year-over-year to $2.19 billion and $2.28, respectively.

Bottom Line

LULU continues its journey toward becoming a global brand, displaying strong potential to rival industry heavyweights like Nike, Inc. (NKE) in the long run. This could be traced back to its impressive performance in recent quarters, consistently outperforming Wall Street's profit expectations.

This demonstrates solid fundamental business strength, a strong consumer base, and exemplary operational execution across all corporate levels.

Historically, LULU has been an excellent performer in the stock market. However, following a recent upsurge, its shares now command an even steeper premium. Its shares currently trade at a forward non-GAAP P/E of 34.23x, a 144.2% premium to the industry average of 14.02x.

Despite the increasingly challenging business backdrop, LULU maintains sturdy growth, evident in its recent quarterly report. Yet, considering the current circumstances of high inflation, there is the possibility that the sustained pressure on consumer spending will eventually take its toll on LULU.

Procuring stock at such a premium would only be justifiable because LULU's growth will persevere beyond this financial year and into the foreseeable future.

However, given the broader macroeconomic environment, investors may want to exercise caution and wait for a better entry point.