Table of Contents
For Immediate Release
Chicago, IL – July 23, 2020 – Zacks Equity Research Shares of Herbalife Nutrition Ltd. HLF as the Bull of the Day, Live Nation Entertainment, Inc. LYV asthe Bear of the Day. In addition, Zacks Equity Research provides analysis onFacebook, Inc. FB, Microsoft Corporation MSFT and Amazon.com, Inc. AMZN
Here is a synopsis of all five stocks:
Bull of the Day:
Today’s Bull of the Day and the Bear of the Day share a common theme. They’ve both been disproportionately affected by the outbreak of Covid-19 and their recent reversals of fortune have caused me to completely change my mind about both of them.
I’ve never been a fan of the “multi-level-marketing” (MLM) sales model. Admittedly, that’s as much because of my personal distaste for the practice of hectoring your friends and relatives to buy products as my belief that the bottom-heavy structure encourages exaggerated boom-and-bust revenue cycles.
MLM giant Herbalife has been a controversial company for decades. There have been several instances in which the company has been accused of misleading claims, both about the efficacy of its health and beauty products as well as the financial success of its independent sales representatives.
Hedge fund titan Bill Ackman of Pershing Square Capital made a famous $1 billion bet against Herbalife shares in 2012 on the grounds that the company was a “pyramid scheme” and that the shares would ultimately go to zero. At the time, I agreed with a lot of Ackman’s logic.
Unfortunately, Ackman ran headlong into the long Herbalife trades of another huge whale of an investor – Carl Icahn.
Their years-long public battle resulted in a popular documentary about short-selling called “Betting on Zero” as well as a book by CNBC’s Scott Wapner titled, “When Wolves Bite: Two Billionaires, One Company and an Epic Wall Street Battle.” (Both are pretty interesting. Check them out if you have the time.)
Ackman ultimately closed his position at a large unspecified loss and Icahn is reported to have booked $1 billion or more in profits.
The Herbalife story has never been boring…
In trading and investing, it’s important to constantly challenge your own beliefs. The more certain you are of any given outcome, the more important it is to seek out opposing opinions to make sure you’re not about to take a hard shot from the blind side. Two good things can happen when you seek out dissenting viewpoints – either you temper your enthusiasm in the presence of new evidence or you get confirmation that the opposition is simply incorrect, bolstering your original hypothesis.
In the case of Herbalife, even though I used to be unconvinced in the staying power of their methods, I have to admit that the company is uniquely suited to survive and thrive in these difficult times. Recent results and improved analyst estimates definitely support this view.
The company started selling weight-loss shakes and supplements in 1980, but has since branched out to exercise snacks and drinks, teas, performance supplements and personal care products. That lineup is sold through a direct sales model in the US and around the world by independent distributors who retain a portion of the profit on their own sales as well as a cut of the sales of other reps they’ve previously recruited.
That model works especially well right now. Representatives can easily contact their families, friends and other contacts via social media channels with no in-person interaction and sell them products that are delivered to their homes by mail.
Herbalife’s product mix uniquely suits the needs and desires of hundreds of millions of people confined mostly to their homes. With consumers intently focused on health and wellness in the face of a deadly pandemic, weight loss and vitamin products have been selling out.
Those same consumers also find themselves unable to access spas and beauty services because those businesses are largely shuttered, but Herbalife’s personal care products allow them to have at least part of those experiences at home.
Not surprisingly, the Zacks Consensus Earnings Estimate for Herbalife in 2020 has been rising rapidly, growing from $2.01/share all the way to $3.40/share in the past 90 days.
Herbalife is currently a Zacks Rank #1 (Strong Buy).
There’s an old cliché that “desperate times call for desperate measures.” In the current situation, it’s appropriate to revise that to, “Unique times call for unique analysis.” The pandemic has thrown many parts of the investing world upside down and a savvy and nimble investor needs to reevaluate what they thought they knew.
Even if you’ve never been attracted to the concept of investing in an MLM company before, it makes sense to take a look at Herbalife. Despite some of its previous shortcomings, you might find that it happens to be the right stock at the right time – right now.
Bear of the Day:
Just like today’s Bull of the Day, the Bear of the Day is a company that has experienced a significant reversal of fortune as a result of the outbreak of Covid-19. Unfortunately, this series of events hasn’t been kind to the field of live entertainment and the shares of Live Nation have seen a significant decline.
On a personal note, I like live music almost as much as I dislike being pressured by family and friends to buy the latest Multi-level marketing goods. Sometimes bristle at the fees I have to pay to see shows that go to the promoter – Live Nation – and/or their wholly owned subsidiary Ticketmaster, but by the time the artists are playing the encore, I’ve forgotten all about those fees and I’m usually mentally planning my next outing.
Originally founded in 1996 as a consolidator of live entertainment promotors and spun off from owner Clear Channel Communications in 2005, Live Nation has been in a unique position to capitalize on recent trends in the music industry. As recorded music increasingly became available in online downloads – both legal and illegal – artists found that the only way to preserve their income stream was to perform live shows for audiences who were willing to pay handsomely for the experience.
As the promotor of events, the owner of venues and the distributor of ticketing services, Live Nation positioned itself in a near-monopoly position as the middleman between artists who wanted to perform and fans who wanted to go see them live.
It was a brilliantly designed ecosystem of divisions that complimented one another, acting as gatekeeper to live entertainment and collecting a toll at multiple steps along the way. Live Nation’s revenues grew to $11.5 billion in 2019 as 98 million fans attended Live Nation’s productions. For the first two months of 2020, the company was on pace to exceed those record numbers.
Then the music stopped. Literally.
When the Covid-19 outbreak necessitated widespread social distancing and shelter-in-place directives, the market for live entertainment dropped off to almost zero. Thousands of planned events were cancelled and refunds had to be offered to fans who had previously purchased tickets. Though a large percentage of those customers have elected to take a “rain-check” instead of a cash refund in the hopes that the shows will be rescheduled in the near future, the recent resurgence of Covid-19 cases in the US puts that possibility in jeopardy.
Live Nation has tried to adapt as well as possible with alternate events like drive-in and online shows, but it’s simply not possible to fill the revenue gap left behind from large-venue events.
A year ago, Live Nation was operating at basically a break even while growing rapidly and acquiring competitors and venue real estate, netting a loss of ($0.02)/share in 2019.
As the pandemic drags on, the Zacks Consensus Estimate for 2020 has declined to a loss of ($5.59/share). Those downward revisions earn Live Nation a Zacks Rank #5 (Strong Sell).
The current outbreak has created countless economic dislocations. While we all hope for a return to normalcy soon – including live entertainment – it’s simply not an industry that looks like a good investment anytime soon.
Buy Facebook (FB) Despite Ad Boycott Worries?
Facebook is set to release its second quarter fiscal 2020 financial results on Wednesday, July 29. The social media giant’s report comes as global advertising spending takes a coronavirus hit. And as is often the case these days, Mark Zuckerberg’s company is surrounded by controversy.
Nonetheless, Facebook shares rest around 5% off their mid-July highs and have outpaced the broader tech sector and the likes of Microsoft and others since the market’s March 23 lows, up over 60%.
Too Big to Fail?
Facebook has eventually overcome all of its attacks since the #DeleteFacebook push following the Cambridge Analytica user data scandal in early 2018. FB already bounced back from its latest controversy that saw many big-name companies temporarily ‘boycott’ advertising. Yet, many firms were already likely to pull back on spending during the economic downturn.
More importantly, roughly 75% of Facebook’s ad spending comes from millions of small and mid-sized businesses, according to Deutsche Bank. These smaller companies can little afford to cut exposure on such a massive and impactful space that reaches about a third of the global population.
Facebook’s daily active users climbed 11% to 1.73 billion in the first quarter, while its MAUs popped 10% to 2.6 billion. Both of these growth rates topped recent periods. Plus, overall engagement across Facebook, Instagram, WhatsApp, and Messenger increased during the stay-at-home push.
Another important factor to consider is the overall momentum in digital ad spending that’s set to benefit Facebook, Amazon and many others. The percentage of total U.S. ad budgets spent on digital channels is projected to expand from 54% in 2019 to 67% by 2023, according to eMarketer.
In the end, Facebook and its various platforms might simply have too many users to ignore in an age where hundreds of millions of consumers pay to avoid ads.
The more legitimate concern seems to be further government intervention in both the U.S. and elsewhere. Investors should remember that Facebook has already paid a historic $5 billion FTC settlement for user privacy issues.
The social media powerhouse announced in May its new “mobile-first shopping experience where businesses can easily create an online store on Facebook and Instagram for free.” The firm is working with Shopify on its new Facebook Shops that deepens its expansion into the booming e-commerce space to challenge Etsy and others.
FB has already found some success with its Marketplace that competes against the likes of eBay and Craigslist, and Shopping directly on Instagram was already growing in popularity. Facebook is also expanding WhatsApp’s business services.
On top of that, Facebook in April said it would pay $5.7 billion for roughly 10% of Indian telecom powerhouse Jio Platforms Ltd. The move is a bet on the massive Indian market (roughly 1.3 billion people), where FB already has over 400 million WhatsApp users.
Overall, FB shares have climbed 150% in the last five years, against the tech sector’s 90%. That said, Facebook is behind all of its FAANG peers aside from GOOGL over that stretch.
Despite sitting near its highs, FB stock is trading at 7.8X forward 12-month Zacks sales estimates. This marks a discount compared to its own one-year high of 8.4X and Microsoft’s current 10.2X.
On top of that, Facebook holds roughly $50 billion in cash and equivalents, even taking into account its Jio investment and its $5 billion FTC settlement that took effect in April 2020 after Q1. This cash position should help FB weather the ongoing pandemic storm and help it invest in new growth areas.
Last quarter, FB sales jumped 18%, with its adjusted Q1 earnings up over 100%. And company executives calmed Wall Street nerves about its ad sales, noting that it saw “signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago.”
With this in mind, Facebook’s second quarter sales are projected to climb 2.5% to $17.31 billion. Meanwhile, its adjusted quarterly earnings are expected to soar 58% to come in at $1.44 a share.
Peeking further ahead, FB’s Q3 revenue is projected to climb 7.2% to help lift its full-year FY20 sales by 10%. And its adjusted fiscal 2020 EPS figure is expected to pop 14.5% to come in at $7.36 per share.
These top-line growth figures don’t jump off the page and mark a slowdown compared to Facebook’s recent and historic sales expansion. However, these are unusual times and FB’s outlook appears far better than even the tech portion of the S&P 500—which is set to come in well ahead of the broader market.
Facebook is currently a Zacks Rank #3 (Hold) that has seen some positive earnings revisions in the last seven days, which means at least some analysts are higher on the stock. FB also earns a “B” Growth and an “A” for Momentum in our Style Scores system.
Some might want to see how its Q2 results shakeout. That said, longer-term investors could consider buying Facebook stock given its massive global reach, e-commerce expansion, and more.
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