PS4 positions faltering a touch compared to the end of December, but the 2k NBA game is staying strong.
PS4 positions faltering a touch compared to the end of December, but the 2k NBA game is staying strong.
RDR2 continued its dominance on top of the Amazon sales charts through the end of December, which I’m using as a proxy for overall sales. I’ve covered the recent charts of TTWO here. I didn’t buy at the dip today, but I think that is a short term low absent a major market downdraft. Analysts even at the bullish end of the spectrum when at when TTWO was around $130 should be salivating soon.
The middle trade is about as much as I’m willing to risk on the notion of a short term pre-announcement or failing that, analyst upgrade given the numbers I believe I’m seeing.
There are further promising signs (though again hard to measure against expectations) as I’ve seen 2K’s NBA2k19 also strongly on the charts in the last week. NBA season really gets started on Christmas, but I don’t know how this compares to expectations or previous years.
Right now, Amazon game sales leaders on PS4: 2, RDR2; 10 & 11, NBA2k19; 12 RDR2; 19 & 20 GTA5. on Xbox One: #1, RDR2, #3, RDR2, #5: NBA2k19, #9, NBA2k19, #11, GTA5, #14, RDR2, #28 GTA5, #37: RDR2 Ultimate ($89!), #47: WWE2k19.
Two captures of Dec 31:
Take Two has for over a decade been tied to the release cycles of the Grand Theft Auto franchise. You can find a twelve year run of no return, from 2000 to 2012, even after the market bounce. The swoop upwards is from the consistent monetization of Grand Theft Auto online.
The last year was driven by anticipation of Red Dead Redemption 2. Which came out of the gate with roaring sales: 17 million units, far exceeding expectations. A summary from Dean Takahashi of Venturebeat collecting some of the expectations – even those on the high end, at the end of October is here. TTWO went from 120 to 130 quickly, but Take Two was subsequently caught in the market downdraft.
We do know that the old west open world is appealing across the Herring Pond. RDR2 has been the best selling boxed product in the United Kingdom according to Game Industry.biz.
Now RDR2 is a fantastic game, nearly always on top ten lists for the year. Will it monetize online as well as GTA5? To be determined (though I think there is a good possibility of this given the institutional knowledge from the latter.)
What is remarkable however is the dominance the roughly $60 game has shown throughout the most important holiday season.
At this writing December 27th at 3 pm Eastern, in the days after Christmas, the Amazon charts (updated hourly) show for XBox One game sales the following TTWO products in the top 50, as well as RDR2 being the most wished for game.
On the PS4, RDR2 holds the 1st, 10th, 40th, and 57th slots. GTA5 is in 13th and 28th.
Even on the Xbox 360 (the older console), GTA 5 is 3rd and the _original_ Red Dead Redemption is 4th in sales.
GTA5 is on the PC, RDR2 is not. However, GTA5 remained a top seller on Steam this year:
These figures are representative of the ranks the games had prior to Christmas. Though I did no more than spot check the rankings, so it is possible my sampling has all sorts of errors, (Amazon’s rankings change hourly),it was very impressive.
I also didn’t record impressions out of the top 10 – there are plenty of other 2k games floating in and out of the 51-100 slots, and ascertaining how meaningful that is would be hard to measure against expectations.
Was all of this priced into the stock? By investment analysts who haven’t played any of these games, but worried about it going against the fellow open world titles Fallout 76, Assassin’s Creed Odyssey and big budget installments in the Call of Duty and Battlefield franchises? Maybe.
Still I don’t think anyone foresaw this sort of sales dominance. Is Take Two building a moat for immersive open world gaming that has incredibly long monetization? The larger company story is something I’m still immersing myself in, and as a shareholder from $120, I’m down 15% on the trade so far.
This calls for an option trade:
I bought — yesterday, a day early, January 25th expiry 110 calls at $4.20 (I don’t have the confirmation handy, it was very close to that.). This plays with fire: the earnings report that would confirm this thesis comes likely on February 7th. However, a pre-announcement in order would avoid paying for the post-report volatility.
I may also purchase other call options, but haven’t evaluated all of them. The apothesis of this thesis would be to buy something like the January 120 calls, expiring January 11th, now asking $0.70. An earnings pre-announcement would send the stock flying though there remains market risk as well.
NB, another outlier that hangs over this trade: there are also rumors I discount that CBS Board member and Take Two Strauss Zelnick could be the next CEO of CBS. He took himself out of the running, though who knows. That would be a major negative for the stock but an outlier is: could CBS, a $17 billion market cap company, try to acquire a $12 billion market cap company in TTWO? Would not be unheard of.
In the time I wrote this – wrestling to get one of the wonky images up, TTWO has recovered from down $2 to up slightly on the day at $105.
In one of those meh everyone-gets-some-kind-of-award supplements the Wall Street Journal reported the Drucker Institute’s top 250 “best managed” companies.
There are five criteria: customer satisfaction, employee engagement, innovation, social responsibility, and financial strength. The categories are batting only 3-5 out of the gate. “Social responsibility” might be strike against management in some consideration, and Financial Strength can also be read different ways. If you have a good management team and good opportunity, shouldn’t you be levering up? Each of the 250 companies (of 752 reviewed large cap publicly traded firms) got star ratings on a 1-5 scale for each of the five categories: 1,250 total ratings. Grade inflation ran rampant: only 6% of them were a 1 or 2.
Usual tech suspects take the first seven positions. They’re willing to divest from Indiana if not Saudi Arabia which might help their responsibility score, and are throwing off oodles of patents and cash. Since they’re not restaurant chains of course they’re going to invest in their employees.
As one’s eyes’ roam down the printed page, I find it only interesting to pick out the outliers. Who are the unloved runts of the litter?
Of the 1,250 ratings there are only four one star ratings:
DXC Technology (DXC: $66) for Employee Engagement
Phillip Morris International (PM: $83) for Customer Satisfaction
Berkshire Hathaway (BRK-B: $220) for Social Responsibility
Comcast (CMCSA: $39) for Customer Satisfaction: no surprise there.
There are only 75 two star ratings (from my possibly erroneous hand count), highlights:
Amazon (AMZN: $1772) for Social Responsibility
General Electric (GE: $7) for Financial Strength (not 1? This maybe bankrupt once glorious stalwart is the eighteenth best managed company? $10 says their rating on this front was a four or five not very long ago.)
Wal-Mart (WMT: $99), and McDonalds (MCD: $186) for Employee Development. Wal-Mart and McDonalds have probably trained a fifth of America how to work in a corporate job. (I’m pulling that number out of my ### but it probably is enormous.) Wal-Mart openings in depressed areas can have a greater ratio of applicants to positions than Harvard. Training entry level workers to show up on time (and profit share!) is development of a different kind than Google’s and should be on a different scale.
Walt Disney (DIS: $116) for Customer Satisfaction. Wut?? Is there a chemical plant next to a population center also named Walt Disney? Are some people unhappy that ESPN is bundled in the cable plan? Talk to Comcast (see above).
Hewlett-Packard Enterprise (HPE: $15) gets two 2 star ratings (Employee Development, Financial Strength) yet still slides into a tie for 114th
The biggest laugher is Take Two (TTWO: $108) as a 2 star innovator. They’re redefining the cutting edge of open world gaming, providing the analogies for Elon Musk that’s its likely we’re living in a simulated world. This is the same rating given to fast food companies that haven’t changed how they or anyone else does business in many decades.
The Wall Street Journal has a weekly section, The Score, which covers “The Business Week in 7 Stocks.”
This week caught my eye since Target (TGT) was the highlighted stock two weeks in a row. Last week, ending November 24th, TGT was down 11%, “as investors focused on rising shipping and labor costs and mounting supply-chain disruptions.”
This week: “The overall strong start to the holiday shopping season pulled up shares of several big-box retailers, including Target’s 2.8%” The second week didn’t reference the first – an odd omission for the set of readers that may take action on these blurbs.
It telegraphs a possible contrarian strategy – going countertrend to the market. Buy on the open Monday stocks that were down. Short on the open stocks that were up. Here is a spreadsheet where I’m going to test this for a while.
All seven stocks reversed direction Nov 24 to Dec 1 WSJ. So did the market, however. Still, 5 of the 7 trades in this strategy outperformed.
(NB, the 2.8% rise the WSJ has today must have been calculated from the Wednesday close, 69.26, not Friday’s close of 67.35. I’m generally not going to double check the WSJ % reports…and generally there won’t be holiday breaks with unusual trading like the Friday after a Thanksgiving.)
|Nov 24||open Monday||close Friday||% change||reversal?||Outper. S&P?|
|CVX – 3.4%||114.7||118.97||3.7||y||n|
Excluding the news summaries, there have been three table-pounding endorsements of JPMorgan (JPM) in the last few days; first two were in the print edition, the third online.
1: Fund manager Chris Davis’ review of financial stocks recommends JPM, with the quote: “Jamie Dimon may be the greatest financial executive of my time.”
2: The Follow-Up column revisits an earlier recommendation of JPMorgan:
JPMorgan looks as good as it did six months ago at the time of our cover story. Under CEO Jamie Dimon, the bank has invested in key businesses and is a leader in investment banking, credit cards, and asset management. It is also looking to trim expenses.
At the current price, investors get a best-of-breed bank, with a management team that arguably is the industry’s best,”
3: “A Mega-bank selling at a discount price” on October 15 online.
JPM is at 62 now, yielding 2.8%. Great.
This performance almost identically tracks Wells Fargo, which is the other “well managed” money center bank. Heck there are really only four now, and let’s accept as a given that Citi and Bank of America were less well managed.
But I can never get excited about these things. The Jaime Dimon-is-a-superb-manager seems to be one of the very non falsifiable managerial propositions. Maybe it’s not falsifiable because it is true. But a _great_ manager would have steered clear of the financial crisis. A better-than-others just avoids bankruptcy better than others. I’m not excited about this and feel when JPM is so regularly getting the drum beaten at Barron’s (which also had an article enamored of regional banks) my gut says pass.
* * *
Coverage of the Dell buyout of EMC was a bit lazy spread out through the magazine – recommending that one could make 19% on an arbitrage over the deal. Not if VMWare ($69) continues to dive, a possibility only lightly explored in that article but was visited elsewhere.
There was a decent piece on the tower operators for cell phone companies, focusing on AMT ($96), CCI ($81), SBAC ($110): perhaps beneficiaries instead of victims of Google Fi/Fiber rollout (not mentioned in the article) as well as the national emergency system. Central contention from Alexander Eule is AT&T can’t let quality degrade more so fears overblow.
I got an investor deck for a startup that was going to “disrupt” Autodesk. Pfft is my first thought. They have an enormous operational moat I replied and…then thought in the back of my head, why not look at Autodesk (NASDAQ: ADSK) itself. But it slipped my mind. Who thinks of Autodesk these days?
Then Alexander Eule of Barron’s wrote September 26th about Autodesk, which may as well be known as AutoCAD, after their dominant engineering design suite. They are undergoing a pricing change, shifting from boxed-perpetual to cloud-licensed product. Adobe is in the midst of completing their own pricing transition, to much applause from the street. The primary source for the article is Rob Nicoski of Disciplined Growth Investors who sees, if the transition is well executed, “a company with earnings power of more than $4 a share in five years.”
Aside from a pricing transition it’s pretty easy to conceptualize a large growth driver in the coming years: widespread – maybe even consumer adoption of? – 3D printing.
Does the Adobe chart presage anything for Autodesk investors?
Beyond the fashion of cloud applications – though that’s a relevant consideration for investors looking to have multiples expand, the cloud subscriptions can also significantly reduce the piracy rate that afflicts so much high value software. In Autodesk’s case, that’s estimated at 43% (in this investor report, slide 20)
Autodesk like most tech companies has the problem of explaining GAAP to non-GAAP (meaning, huge employee option grants off the books) expenses but assuming market reception to his remains neutral, the product & cash roadmap is intriguing. From the investor presentation at 2015’s investor day in September:
These numbers bear a great deal of similarity to the analyst estimates’ provided for stories in Barron’s so the likelihood of them should be taken with a grain of salt. That said, engineering and design software is awfully sticky, and deeply embedded into business processes that it would be harder for a start up to disrupt.
Autodesk has under-performed, severely, similar design-oriented software firms like Adobe & Ansys: almost no return in the last ten years versus a 300%+ and 150%+ return.
Adobe’s break to new highs in December 2012 at around 36 presaged an enormous run to the low 80s today – though perhaps a bit ahead of itself now, with an unfavorably received earnings report tonight.
After a decade of lackluster performance there’s a lot of execution to prove. Waiting for a new high in ADSK might leave a lot on the table but that’s preferable to dead money for another ten years. With a market generally threatening a downtrend, there is no particular need to jump in now either. This is a classic case of wanting to follow quarterly reports to see when there is a good market response to successful strategy implementation. One is tempted to nibble at it now.
That said, if the product pricing strategy works, and the engineering software market widens or deepens, long dated call options are an interesting play. Open interest is high in the ADSK Jan 2017 60 and 65 calls, with a last ask of $2.11 & $1.39 respectively. Jan 2018 calls are more thinly traded, with a 70 strike at $2.60 ask, $2.20 last. Maybe not bad for the pivot potential in a stock that was at 63 not so long ago this year until cash flow fears materialized.
Tesla Price Targets Pull Away From Profits: a classic example that momentum stocks really trade on fictional earnings reports. They’re irrelevant, til they’re not. $TSLA (218)
Amazon Reveals Just How Profitable the Cloud Can Be: by Tiernan Ray. Ultimate conclusion is that Microsoft’s Azure is doing well too. Which would you rather invest in, $MSFT (47) or $AMZN (445) a cloud provider in a hugely profitable if diminishing cash cow or one “trapped in a retailer.” Unresolved: is Azure a function of that dying business of companies running on Windows? Microsoft got other loving mentions in Barron’s as well from the usual spreadsheet watching crowd.
A Recharge for Qualcomm. Can Jana partners get $QCOM (68) to split off the licensing from the chip business? This is an article very related to the above MSFT & AMZN discussion so far as shareholders are concerned.
Let’s Take a Short Ride, a Heard on the Street Column from April 18-19 suggested the desirability of a strategy as follows:
bet against the 10% of stocks with the highest days-to-cover ratios, and bought the 10% with the lowest…it would have fared from the start of 1988 to the end of 2012. The results: a return of 2,917%–almost double the total return of the [DJIA].
Long anticipated Google Fi is here. Specifically uncovered in regulatory filings last fall, providing a (good) network was a natural extension for a firm whose growth comes from increased internet usage. It turns out to have been considered since at least 2007. On Fi you’re on a, you guessed it, Wi-Fi network first. If none is available you get Sprint and T-Mobile’s Network, whatever is working best at the time. No doubt Google’s wireless network to come to help replace, ahem, compliment them.
This comes on top of — and ultimately related to — Google Fiber. One report a year ago had Google Fiber winning 75% market share…and 30% of low income households where after all the service at 5 megs is free. Who cares if Time Warner and Comcast had merged or not?
Free – or less than free – is tough to beat, and the writing is on the wall. Verzion and AT&T have higher quality networks…for now. As Bill Gurley says in the link regarding the GPS market:
Despite these challenges, it would be a dangerous strategy for any of the many threatened players in these markets to hang on to this “quality” rationalization for very long.
It’s hard to see how the cable and telco stock prices haven’t tanked in anticipation of the forthcoming price war against Google that only Google (or Facebook, or Amazon, or Apple) can win.
End of 4/24/2015 prices of giants that could fall:
T: $34.01 (5.7% dividend yield)
VZ: $50.03 (4.5%)
S: $5.27 (0)
CMCSA: $59.64 (1.7%)
GOOG: $565.06 (0)
* Successfully shorted ZN last few days, lowered the position size for unusual time period. Long March Wheat at 662.75, short Twitter at 41. The wheat has a nice risk-reward and I’ve put in a stop under the lows.
* Really liked Stanley Druckenmiller’s interview on Bloomberg including comments on what great managers are for, and that Japan’s Nov-May seasonal rise is one of the most reliable in the world (including 40k to 7k overall decline, you’d still have made money.) Suggestion of shorting IBM given cloud computing challenge and their use of capital is a compelling idea that deserves more investigation (the low p/e as is makes me wonder about risk-reward versus other short possibilities.) Declining free cash flow argument works even better against NFLX for example. The Amazon comments – that AWS could be half of revenue soon also merit further examination.
* Looking closely at NFLX, HLF, TSLA, P, LNKD on top of TWTR as shorts.