Verizon (NYSE: VZ) is a total package for investors interested in stress-free total returns. The stock trades at a deep value relative to its historical average and the S&P 500; it pays more than 6% in yield and trades with a beta of nearly 0.5x. The factor that seals the deal is the outlook for capital appreciation, which is central to the investment thesis. The telecom stock is poised for a sustained rally that could increase its share price to $48 this year and extend the rally to the $58 level next year, with gains of 10% and 35% from critical support targets.
Verizon Builds Leverage for Growth in 2025
Verizon’s Q3 results are mixed relative to the analysts' estimates but show stable business, solid and free cash flow, and the ability to sustain capital returns indefinitely. Revenue of $33.33 is down -0.1% on an 8% decline in equipment driven by macroeconomic headwinds but expected to revert to growth soon.
The critical detail from Q3 2024 results is that services, the core of the business at 85% of the net, grew by 1.7% on a solid increase in wireless and broadband subscribers. The increase in subscribers is expected to continue in 2025 and may accelerate as the 5G network expands and more use cases become viable. Not only are consumer-oriented 5G apps expected to increase, but business use cases, including AI and IoT applications, will follow suit.
Margin and cash flow are the story in 2024 and are expected to sustain strength in 2025. The company experienced operating margin pressures due to one-offs and non-cash impairments, but adjusted results are much better. The salient detail is that consolidated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are up year-over-year (YOY), and the impact of severance charges and property-related balance sheet write-offs won’t be a factor in future quarters. The takeaway is that free cash flow was stable at $4.5 billion, down only $0.1 despite the severance charges, and sufficient to sustain balance sheet improvement and capital returns.
The company's guidance is favorable to investors. It reaffirmed its guidance for revenue and earnings, suggesting results would be at the high end of the range. The target for adjusted EPS is $4.50 to $4.70 with a mid-point of $4.60, better than the $4.57 forecasted by the analysts' consensus and the whisper figures, which were expected to be worse.
Analysts Provide a Tailwind for Verizon’s Stock Price
The analysts' activity in 2024 provides a tailwind for Verizon’s stock price because it includes rating upgrades and a positive revision trend. The 17 analysts tracked by MarketBeat lifted the sentiment to Buy from Hold and the price target by nearly 10%.
The consensus target implies a move to $46.30, good for a multi-year high, and the revision trend suggests a move into the $48 to the low-$50 range is likely.
The balance sheet and capital return are primary drivers of analysts' interest. The stock yields a safe 6.25% with shares in the low $40s, and the balance sheet can sustain the payment and the growth outlook. Balance sheet highlights at the quarter’s end included positive cash flow, the cash balance doubling, rising assets, and declining liabilities.
The net result was a 4% increase in shareholder equity and a flexible financial position. The company utilizes debt but keeps leverage low, and it is falling, down 15 basis points in Q3 to 1.3x equity. Regarding the distribution growth outlook, Verizon is on track for inclusion in the Dividend Aristocrats in 2029.
Verizon Pulls Back Into a Buying Opportunity
The price action in VZ shares pulled back following the earnings release, presenting an investment opportunity. The pullback aligns the market with a critical support target consistent with market reversal patterns and will likely produce a strong rebound. Assuming the market follows through on the signal, the share price of VZ will confirm a Head & Shoulders reversal and set up for a sustained rally that could last for four to six quarters.
But using a special type of gold trade, I saw a 141% gain in just a week.
It happened again in March. Gold nudged up 1.2%.
This time? A 104% overnight gain.
And in June? A 1% gold move turned into a 74% gain in two weeks.
Granted, there were smaller wins and those that did not work out, but you see, there's a reason I'm telling all my friends to hold off from buying gold or regular gold stocks right now.
There's a more lucrative way to play the gold market as we enter a new breakout period.
Over the last couple of years, one of the biggest stories in the stock market has been around pharmaceutical companies that are thriving due to the proliferation of their weight loss drug treatments. The two firms that most readily come to mind are Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO). These firm’s GLP-1 receptor agonist drugs have seen skyrocketing sales due to their unprecedented ability to help patients lose considerable amounts of body weight in a relatively short amount of time.
This isn't surprising. In 2018, the Centers for Disease Control and Prevention (CDC) found that 73.6% of Americans over 20 are either overweight or obese. The massive increase in sales for these drugs has simultaneously led to eye-watering stock price increases for Lilly and Novo. Due to this, many are paying close attention to which company will be next to develop a new and hopefully improved weight-loss drug that can lead to similar stock price success.
Deutsche Bank Analyst Calls Out Roche
One interesting distinction in the weight loss drug landscape is that of injectable drugs versus oral drugs. Lilly and Novo currently deliver their drugs Zepbound and Wevogy, via self-injections. However, research at these and other firms is working to develop weight loss treatments as a once-daily oral pill. It is believed that this method could expand the market for the drugs, as it provides an easier way to take the drug compared to an injection.
In an interview with Yahoo Finance, Deutsche Bank analyst James Shin singled out Roche’s (OTCMKTS: RHHBY) drug “CT-996” when asked about which oral weight loss drug he sees as the biggest threat to Lilly’s developmental oral treatment. Due to this, it's pertinent to dive further into this drug to better understand what kind of opportunity the firm and the stock have as it relates to CT-996.
CT-996 Shows Promising Efficacy, But It’s Still in Early Innings
Let's examine CT-986's efficacy results. Overall, the actual ability to lose weight still reigns supreme over convenience for patients taking these drugs, assuming they have no serious side effects. In Phase I Food and Drug Administration (FDA) trials, researchers found that CT-986 resulted in an average body weight loss of 6.1% compared to the placebo in just four weeks.
This seems to be a much larger weight loss over the same period than Lilly's oral candidate, orforglipron (Figure 2A). It is also important to note that the drug's safety and tolerability were consistent with those of other oral GLP-1 receptor agonists.
These results are encouraging but also lead to significant questions. First, the company only released data after four weeks. This is a very short time frame; data for orforglipron is available for up to 36 weeks. However, it is from a Phase 2 trial, so that is to be expected. The CT-988 results were reportedly only based on the testing from six patients, a very low sample size.
Still, in four weeks, CT-996 patients, on average, lost almost as much weight as a 12-week trial of a competing drug by Structure Therapeutics (NASDAQ: GPCR). They also lost more than tirzepatide, the formal name for Lilly’s drugs Zepbound and Mounjaro, over four weeks (Figure 1B). However, it is important to take these comparisons with a large grain of salt, as they are not taken from a head-to-head trial. It is possible that the faster titration, or increase in dose size over the period of the trial, helped artificially generate faster four-week weight loss compared to the other trials, which had longer durations. However, the company disputes this idea.
Keeping Eyes on CT-996
At this point, it feels too early to jump in on Roche based on CT-996. The results look good so far, but there is still a huge amount of uncertainty around the treatment. The company is currently completing the final stage of its Phase 1 trial and intends to begin Phase 2 in 2025.
Seeing the results of CT-996 over a longer period will be key to understanding how effective the medicine can truly be and what kind of commercial success it could potentially have. A successful weight-loss drug would greatly benefit a company with unimpressive sales growth in recent quarters. I'll be staying abreast of developments around CT-996 and other weight-loss drugs.
There are very few opportunities in the stock market that offer discounts on great companies that are still not well-known but that grow at massive rates to become household names and Wall Street favorites in the near future. One of these stocks, with the sort of attractive discount investors would enjoy today, is Roblox Co. (NYSE: RBLX), whose stock has suffered a massive sell-off recently.
The stock had been on a tear for most of 2024, reaching a performance of up to 55% over the past 12 months, significantly outperforming the broader S&P 500 index by a margin of over 20% up to the previous quarter. Then, everything changed to bring the stock down to today’s level, a mere 83% of its 52-week high, and enough of a gap for value investors to fill.
However, the reasons for the sell-off should be considered, particularly because they are rooted in a targeted short report from Hindenburg Research. However, investors need to hear both sides of this story and compare the claims being made today against the key performance indicators (KPIs) coming out of Roblox so that an educated decision can be made.
Roblox Stock Drops Nearly 20%: Are the Reasons Behind the Sell-Off Valid?
The short report claims that Roblox is using fraudulent practices to measure the company’s KPIs regarding user growth and profitability. The firm also questioned Roblox’s ability to maintain a friendly and safe environment for the younger audience on the platform.
However, these safety concerns have no real evidence in the report and don’t single out Roblox. Meta Platforms Inc. (NASDAQ: META) is another technology stock that suffered its fair share of accusations from platforms like Facebook and Instagram, so this isn’t new in the industry.
Then, investors can double-check Roblox’s financial results away from the income statement (which can be manipulated with enough creative accounting) and focus on the cash flow statement. Companies that overestimate their earnings usually have a large divergence from their operating cash flow, so here’s Roblox’s.
As of the past quarter, the company’s earnings press release would show up to $151.4 million worth of operating cash flow, which acts as a proxy for operating income. This is a significant jump from last year's quarter, which only saw $28.4 million in operating cash flow, showing investors an increase of 433% during the period.
If Roblox were engaged in fraudulent measures and methods, they wouldn’t be able to fake these sorts of cash flow figures easily and consistently, which is why Wall Street analysts keep a bullish rating on the company.
Especially those at Wells Fargo, recently reiterating their “Overweight” rating on Roblox stock, along with a price target of $54 a share to call for a net upside of as much as 35% from where the stock trades today.
What’s Fueling Roblox Stock’s Growth, and Can the Momentum Continue?
To understand where these higher valuations come from, investors should check the company’s business model to determine what’s driving the company higher and, more importantly, whether this path can continue into the future. This time, investors can look to the company’s earnings presentation for an easier and quicker read.
Starting with daily active users, Roblox reports up to 21% annual growth this quarter, reaching a record 79.5 million users on the platform. Here’s what’s great about the company's demographics: users over 13 years old rose by 26% on the year, compared to only 15% for those over 13.
This means that Roblox is building a greater demographic of users closer to working and earning age, meaning further monetization probabilities beyond parent allowances act as a tailwind in the stock. More than that, it seems that management is doing the right thing regarding content.
Hours engaged rose by 24% on the year to reach a high of 17.4 billion, again seeing most of the growth in users over the age of 13 with 30%, compared to only 18% increases in hours engaged by users under 13. As a result, investors can see a revenue jump of 31% on the year to $893.5 million and a record free cash flow of $112 million.
Investors shouldn’t be surprised to notice a new institutional buyer heavily investing in Roblox stock. Allspring Global Investments Holdings now holds up to $81.9 million worth of Roblox stock after boosting their position by 195.8% as of October 2024.
At today’s prices, especially after a recent sell-off, investors could assume the stock could become one of their best buys for the quarter, if not for the year.
The Night Owl is a financial newsletter that provides in-depth market analysis on stocks of interest to individual investors. Published by MarketBeat and Early Bird Publishing, The Night Owl is delivered around 9:00 PM Eastern Sunday through Thursday. If you give a hoot about the market, The Night Owl is the newsletter for you.
MarketBeat Media, LLC 345 N Reid Place, Suite 620, Sioux Falls, SD 57103. contact@marketbeat.com
No comments:
Post a Comment