“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, April 16, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

Option Trade – Take-Two Interactive Software, Inc. (NASDAQ:TTWO) Calls

Tuesday, April 17, 2018

** OPTION TRADE: Buy the TTWO JUNE 15 2018 105.000 CALL at approximately $3.90. Place a pre-determined sell at $7.80.

Also include a protective stop loss of $1.55.

Take-Two Interactive Software, Inc. (NASDAQ:TTWO), an interactive gaming company that develops, markets and publishes entertainment solutions worldwide, has seen incredible growth in both its earnings and its sales over the last three years.

EPS have grown at an average rate of 25% while sales have grown at an annual rate of 23% during this time period.

Analysts expect earnings to grow at a rate of 29.6% over the next five years with growth in 2018 of 60%.

The company operates very efficiently as evidenced by the return on equity of 30% and the profit margin of 17.2%.

Video games have been a huge business for decades, but the last few years have taken the industry to a new level. Esports has created an entirely new business that was inconceivable just a few years ago. Estimates are that esports will be a $905.6 million business in 2018 and should grow to a $1.5 billion business in 2020.

Take-Two Interactive isn't yet a leader in mobile or esports games, specializing in console games like NBA 2K and Grand Theft Auto. But it's investing in new products that could expand the revenue opportunity. In esports, it has a partnership with the NBA to create an esports league; management said it would begin taking esports more seriously late in 2017. The company also bought Social Point to expand mobile game exposure, which has been largely untapped by traditional Take-Two Interactive games.

There are bigger companies in video games, but Take-Two Interactive may have more upside given its late but notable entry into mobile and esports.

Brokerages expect Take-Two Interactive to post $451.04 million in sales for the current quarter. Six analysts have provided estimates for Take-Two Interactive Software’s earnings, with estimates ranging from $440.00 million to $460.00 million. Take-Two Interactive Software reported sales of $407.13 million in the same quarter last year, which indicates a positive year over year growth rate of 10.8%. The business is expected to announce its next quarterly earnings results on Tuesday, May 22nd.

Influencing Factors

Bullish aspects of Take-Two….

  • Price -- The significant pullback in the short-term stock price for Take Two allows a better entry scene. The RSI for the stock is currently around 40 and was 30 a couple of weeks ago.
  • Fortnite -- has been a phenomenon. It has attracted a wide variety of users. However, it's undoubtedly a game which skews younger — especially boys from 9 years old to 15 years old.
  • Red Dead Redemption 2 -- a Rockstar Studios game. Rockstar knows how to build a visually stunning game — especially when it's a sequel. With Red Dead, you're getting both. The first version of Red Dead Redemption was released in 2010 and sold over 15 million units. They have a chance to significantly increase that number of this sequel this time around.
  • There were rumors just last week of a new secret BioShock in the works.
  • A Borderlands 3 game is due for late 2019.

The company recently raised full-year fiscal 2018 guidance, projecting adjusted earnings per share of $3.23 at the midpoint, up from $2.90 previously. Its fiscal 2018 revenue guidance of $2.02 billion was up from $1.98 billion.

For its fiscal 2019, it looks for revenue to top $2.5 billion.

"They have a lot of positives in their corner," analyst Neil Macker of Morningstar said in an interview.

“The fall 2018 release of Red Dead Redemption 2 — think GTA in the 1800s Wild West — should prove an important indicator of how strong the tailwinds are. If Red Dead can enter the realm of GTA5's online sales performance, Take-Two's favorable outlooks are likely to prove prescient,” Macker said.

Analysts and Hedge Funds Opinions

Wedbush set a $126.00 target price on shares of Take-Two Interactive Software and gave the company a “hold” rating in a research note on Thursday, February 8th. 

Several other equities analysts have recently commented on the company…..

  • TheStreet upgraded Take-Two Interactive from a “c+” rating to a “b” rating in a research report on Wednesday, February 7th.
  • Credit Suisse Group boosted their target price on shares of Take-Two Interactive Software from $125.00 to $128.00 and gave the company a “neutral” rating in a research note on Thursday, February 8th.
  • Hilliard Lyons upgraded Take-Two Interactive from an “underperform” rating to a “neutral” rating in a research report on Friday, February 9th.
  • Finally, Morgan Stanley restated an “overweight” rating and set a $148.00 price target (down from $150.00) on shares of Take-Two Interactive in a research report on Thursday, February 8th.

Take-Two Interactive has been given a consensus recommendation of “Buy” by the twenty-six brokerages that are presently covering the firm. Two equities research analysts have rated the stock with a sell recommendation, five have given a hold recommendation and eighteen have issued a buy recommendation on the company. The average twelve-month price target among analysts that have issued a report on the stock in the last year is $124.45.

Institutional investors that have recently made a change to their positions in the stock….

  • Nisa Investment Advisors LLC boosted its holdings in Take-Two Interactive by 109.0% in the fourth quarter. Nisa Investment Advisors LLC now owns 43,369 shares of the company’s stock valued at $4,761,000 after purchasing an additional 22,620 shares during the period.
  • AMP Capital Investors Ltd purchased a new position in Take-Two Interactive in the fourth quarter valued at $3,794,000.
  • Atlantic Trust Group LLC purchased a new stake in Take-Two Interactive during the 3rd quarter worth about $2,456,000.
  • EMS Capital LP purchased a new stake in Take-Two Interactive during the 4th quarter worth about $19,760,000.
  • Finally, Bank of Montreal Can lifted its holdings in Take-Two Interactive by 0.7% during the 4th quarter. Bank of Montreal Can now owns 343,324 shares of the company’s stock worth $37,689,000 after buying an additional 2,416 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

Video-game publisher Take-Two Interactive's stock has climbed more than 500% over the last five years thanks primarily to the continued success of its 2013 release Grand Theft Auto V.

Grand Theft Auto and sports properties like NBA 2K give Take-Two a strong group of core franchises, and success in building out the rest of its franchise pipeline could kick the business into a new growth phase. The next installment in the company's popular Red Dead Redemption franchise will debut in October.

Other catalysts to look forward to, including, but not limited to, mobile growth, increasing adoption for digital game distribution, and expansion potential in emerging markets.

TTWO has a quick ratio of 1.17, a current ratio of 1.18 and a debt-to-equity ratio of 0.01. The firm has a market cap of $11,192.73, a price-to-earnings ratio of 50.88, a price-to-earnings-growth ratio of 1.54 and a beta of 1.04. Take-Two Interactive has a 52-week low of $57.55 and a 52-week high of $129.25.

Option Trade – Square Inc (NYSE:SQ) Calls

Monday, April 16, 2018

** OPTION TRADE: Buy the SQ JUNE 15 2018 48.000 CALL at approximately $4.00. Place a pre-determined sell at $8.00.

Also include a protective stop loss of $1.60.

Payment processing and point-of-sale upstart Square Inc. (NYSE:SQ) stock is up 30% for the year, and the fundamentals are still intact, despite headlines that have caused volatility in the equity markets to spike. There have been panics over spiking interest rates, the threat of tariff wars, social media data breaches and more recently the airstrikes in the Middle East.

There is a strong trend moving financial transactions to the online realm and that benefits companies like Square.

Mobile point of sale system Square is well known for the credit card readers that have turned smartphones and tablets into payment processors, but the company's real strength is as a platform which small businesses can build on top of. Point of sale may be the visible component for customers, but the company does payroll, inventory management, and even small business loans.

SQ stock fell 20% in February, but it rallied an astonishing 60% into March. It has since given up about half of that rally, but in the process, it has established a couple of pivot points that are important.

Square, Inc. is expected to report earnings on May 02, after market close. The report will be for the fiscal Quarter ending Mar 2018. Based on 8 analysts' forecasts, the consensus EPS forecast for the quarter is $-0.04. The reported EPS for the same quarter last year was $-0.03.

However, equities researchers at Jefferies Group increased their Q4 2018 earnings per share (EPS) estimates for shares of Square in a note issued to investors on Thursday, March 29th. Jefferies Group analyst R. El-Assal now anticipates that the technology company will earn $0.04 per share for the quarter, up from their previous estimate of $0.03. Jefferies Group also issued estimates for Square’s Q1 2019 earnings at $0.01 EPS, Q2 2019 earnings at $0.08 EPS, Q3 2019 earnings at $0.07 EPS and Q4 2019 earnings at $0.12 EPS.

Influencing Factors

The reason Square is potentially a great stock is that its position as a small business platform could allow it to benefit from scale. A growing list of customers allows the company to invest in more capabilities that will make it more attractive for the next small business. Square is even moving upstream, increasing gross payment volume (GPV) from sellers with over $500,000 in annualized GPV from 13% in Q4 2015 to 20% in Q4 2017. The capabilities that Square is building is starting to attract larger (still small) businesses; and  as its scale grows, the company is even moving into peer-to-peer payments in Square Cash, which could allow it to eventually break free of bank and credit card fees that are costly for mobile payments.

Square's Cash App has consistently been #1 in the iTunes App Store finance category with PayPal's Venmo at #2 for several months.

Square's Cash App has some big functionality advantages. With Cash App, every user can get a debit card, and therefore, essentially a bank account, including the ability to receive direct deposit from their jobs and use the debit card at ATMs. This differentiation seems to be enough to drive heavy adoption in areas of the US that are (in CEO Dorsey's words) under-banked. From here, we see Cash App growing in popularity.

Cash App is now available in the UK. (Venmo is still US only). Expect Cash App to expand next into the other markets Square already serves: Canada, Japan, and Australia.

Analysts and Hedge Funds Opinions

Buckingham Research increased their price target on Square from $52.00 to $55.00 and gave the stock a “buy” rating in a research report on Tuesday, April 3rd.

Several other equities analysts have recently commented on the company…..

  • Evercore ISI restated an “outperform” rating and set a $67.00 price target on shares of Square in a research report on Monday, March 26th. 
  • Vetr upgraded Square from a “hold” rating to a “buy” rating and set a $58.39 price target on the stock in a research report on Monday, March 26th. 
  • Deutsche Bank increased their price target on Square from $47.00 to $57.00 and gave the stock a “buy” rating in a research report on Friday, March 23rd.

Two research analysts have rated the stock with a sell rating, eleven have assigned a hold rating and twenty-five have issued a buy rating to the company. Analysts’ stock price target for the company is $48.97, and their median price target for the company is $50.

Institutional investors that have recently made a change to their positions in the stock….

  • Allianz Asset Management GmbH raised its holdings in shares of Square by 31.0% in the 3rd quarter. Allianz Asset Management GmbH now owns 13,302,170 shares of the technology company’s stock valued at $383,235,000 after purchasing an additional 3,147,558 shares in the last quarter.
  • BlackRock Inc. raised its holdings in shares of Square by 18.4% in the 4th quarter. BlackRock Inc. now owns 13,005,859 shares of the technology company’s stock valued at $450,913,000 after purchasing an additional 2,024,019 shares in the last quarter.
  • Sumitomo Mitsui Asset Management Company LTD raised its holdings in shares of Square by 7.4% in the 4th quarter. Sumitomo Mitsui Asset Management Company LTD now owns 4,153,187 shares of the technology company’s stock valued at $143,990,000 after purchasing an additional 284,712 shares in the last quarter.
  • Jennison Associates LLC acquired a new stake in shares of Square in the 4th quarter valued at $86,426,000.
  • Finally, Geode Capital Management LLC raised its holdings in shares of Square by 9.1% in the 4th quarter. Geode Capital Management LLC now owns 2,147,173 shares of the technology company’s stock valued at $74,398,000 after purchasing an additional 179,830 shares in the last quarter.

Harvey’s Options Volatility Indicator

Summary

Enabling small businesses will be a powerful platform for Square and the market potential for this company keeps growing as it builds out capabilities to serve more companies.

SQ has a market capitalization of $19,694.93, a PE ratio of -475.00 and a beta of 4.21. Square has a 1-year low of $16.82 and a 1-year high of $58.46. The company has a debt-to-equity ratio of 0.46, a quick ratio of 1.83 and a current ratio of 1.83.