There's news about six stocks I've covered recently, so let's dive in...
1) On Wednesday, social media giant Meta Platforms (META) agreed to an $18 billion settlement. It resolved claims by 48 attorneys general that its platforms harmed young users. In doing so, Meta agreed to:
- A default two-hour daily combined time limit for Facebook and Instagram that teens can only turn off with a parent's permission
- A block on using the apps between midnight and 6 a.m.
- Muted notifications between 8 a.m. and 3 p.m.
- An option for teens to turn off auto-play and algorithmic feeds
- Concealing the number of likes that teens receive on posts
I think these changes will be good for young people, especially if they're adopted by other social media platforms like YouTube and TikTok. (Though I think a complete ban on all social media for anyone below the age of 16 would be even better.)
And I agree with this Wall Street Journal editorial that Meta was smart to accept this settlement.
In my July 31 e-mail on Meta's latest earnings, I argued that concerns about its soaring capital expenditures ("capex") were overblown:
This reminds me of when investors lost their minds about Meta's big investment in the metaverse, which briefly caused the stock to drop below $100 in late 2022 – just before it took off. CEO Mark Zuckerberg is rational – if Meta's capex isn't paying off, he'll scale it back.
As for its valuation, I concluded:
At yesterday's closing price of $539.03, the stock now trades at a mere 15.3 times next year's estimates of $35.12. That's not quite as low as the 12.9 forward multiple it reached in late 2022, but it's close.
At this price, it's now tied with Amazon as my favorite big-cap tech stock.
Since the end of July, the stock is up 6% to close yesterday at $571.10. And consensus analysts' estimates for next year have come down to $33.92.
So its forward price-to-earnings (P/E) multiple is now 16.8 times. That's still very attractive for one of the world's greatest businesses and a company that grew revenues last quarter by a remarkable 28%.
2) Shares of payment giant PayPal (PYPL) tumbled as much as 14% this morning after Bloomberg reported that rival Stripe and private-equity firm Advent have withdrawn their $50 billion bid for the company.
As the article noted, this could be due to a failed negotiation over the price:
The Wall Street Journal reported this month that PayPal had found Advent and Stripe's initial bid insufficient and the two sides were negotiating a potential higher price.
I took a first look at PayPal's historical financials and valuation on June 3:
PayPal has exceptionally strong historical financials: high margins, growth, and FCF [free cash flow], a strong balance sheet, and smart capital allocation.
Despite this, the stock has been obliterated. At yesterday's closing price of $44.53, it trades at a mere 8.4 times this year's consensus earnings estimates of $5.30 per share.
That's a small fraction of the S&P 500 Index's multiple of 22 times. And it's within a whisker of PayPal's all-time low...
This is a low multiple for such a high-quality business, which has caught the eye of many smart investors.
The next day, I shared two bull cases for the stock and concluded that "PayPal's stock is very attractive at today's depressed price."
I also added it to my "Discarded Dozen" list on June 12. Even after today's drop, the stock is up nearly 30% since then.
Here's what I think is happening with the deal withdrawal...
To pressure PayPal, Advent and Stripe leaked to Bloomberg that they're walking away, which they knew would tank the stock. But I think they really want to buy the company and know it's a steal at their $50 billion offer. As the article noted, "Advent and Stripe could always opt to come back at a later date if the situation changes."
It's likely that they'll come back with a moderately higher offer (maybe $65 to $70 per share – a decent premium to yesterday's closing price of $61.47), PayPal will accept, and the stock will soar.
3) Shares of fast-food restaurant Wendy's (WEN) also plunged nearly 14% yesterday...
The drop came after Reuters reported that activist investor Trian won't be making a bid to take Wendy's private, as was previously believed:
The move comes after the investment firm, a longtime Wendy's shareholder with around 16% of the fast food chain, was earlier this month reported by Reuters and others to be working on preparing a bid with the help of a consortium of investors, including Bugatti-backed BlueFive Capital and Flynn Group, a Wendy's franchisee.
News of a possible take-private sent the stock up 14.7% on August 12, with further momentum since pushing it to around a nine-month high, leaving the company with a market value of around $1.7 billion.
I took a quick look at the company on June 24, the day after the stock hit a 13-year low, and concluded:
Wendy's revenues and profits have been weak. But it generates a consistent $200 million in FCF, which it mainly uses to pay a 9% dividend (before today's surge). The main problem is the balance sheet, which is saddled with around $4 billion of net debt.
At this morning's price around $8, the stock is trading at roughly 14 times this year's earnings estimates. While that's below the 10-year average forward price-to-earnings (P/E) multiple of 25.1 times, it's not cheap in light of the company's struggles.
I think this stock is interesting at $6, not $8. So let's see if today's foolishness fades...
With the stock around $8 today, I'm inclined to stay on the sidelines.
Bob Wright, Wendy's fourth CEO in three years, is trying to engineer a turnaround, as this WSJ article notes:
Since taking the helm as Wendy's chief executive in May, Wright has been unsparing in his assessment of the burger chain's challenges. He has told franchisees and investors that the company has shortchanged ingredient quality for cost savings, that service has become uneven and that Wendy's depends too much on deals.
Those factors contributed to Wendy's losing its No. 2 spot among the biggest burger chains in terms of U.S. sales, Wright said. Burger King recaptured the position after revamping its Whopper sandwich and upgrading restaurants.
Wendy's is rolling out a five-point strategy tackling food quality and value, operations, store upgrades, marketing and digital sales. Wright is remaking his leadership team...
This situation reminds me of this quote by Warren Buffett: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
4) I've said many times that I believe the "SaaSpocalypse" fears are wildly overblown and that AI, rather than displacing legacy software, actually seems to be driving improved demand for many companies. And as I first argued in my March 17 e-mail, "the sell-off in software stocks is creating wonderful investment opportunities."
This week, three software stocks I like reported earnings that support my thesis. So let's start with biotech-industry software provider Veeva Systems (VEEV)...
I took a first look at the stock on August 4 and shared three in-depth pitches on August 10. Then I rebutted the bear case on August 11, concluding that "I think Veeva will outperform going forward."
Sure enough, the stock soared 15% yesterday after the company reported outstanding second-quarter earnings (here's the earnings release and investor presentation).
Revenues, adjusted operating income, and adjusted earnings per share ("EPS") all rose 18% year over year ("YOY"), handily beating expectations. Veeva also raised revenue guidance for the year from $3.5 billion to $3.7 billion. And it raised earnings guidance to $9.21 per share from consensus analysts' estimates of $9.08.
The stock is up 19% since I last wrote about it. So it's not as cheap as it was then, now trading at 30.6 times this year's estimates.
That strikes me as roughly the low end of fair value for such a great company. I'd characterize the stock as a comfortable hold for now and would keep an eye out for any significant pullbacks.
5) Next, I wrote favorably about software giant Salesforce (CRM) on March 18 and concluded:
[T]his is a great business with a bright future. If anything, it will likely benefit from AI. It has one of the most aggressive share repurchase programs I've ever seen. Yet the stock trades at a mere 12 times trailing free cash flow. That's compelling.
The stock has soared by 30% since then. A big part of that came yesterday when it jumped 23% after Salesforce reported blowout earnings (here's the earnings release and investor presentation).
Revenues of $11.3 billion (up 11% YOY) only slightly exceeded expectations. Meanwhile, adjusted EPS soared a stunning 103%, crushing estimates of $3.27. The company also raised the midpoint of EPS guidance for the year to $16.69, far above estimates of $14.67.
CEO Mark Benioff commented:
We just delivered one of our best quarters ever, outperforming across every key metric. AI is delivering value across every layer of our platform. We're seeing incredible demand for our AI and data products, with ARR about to cross $4 billion. And with AIforce, our trusted enterprise harness, we're unlocking the data, workflows, business logic, actions, and governance inside Salesforce and making it available to every agent, model, and interface. This is how we are turning AI into customer success at unprecedented scale.
With the stock closing yesterday at $252.05, it's now trading at 15 times this year's new EPS guidance. That multiple is far too low for a quality company that's growing nicely and buying back tons of stock.
6) Lastly, I took a first look at tax and finance software company Intuit (INTU) in my May 29 e-mail and concluded:
I've rarely seen such strong financials – high margins, rapid and steady growth, and massive FCF...
At yesterday's closing price of $313, Intuit is trading at 13.2 times this year's consensus analysts' earnings estimate of $23.79 per share, and 11.5 times next year's estimate of $27.29.
[T]he stock's forward price-to-earnings (P/E) multiple is close to its all-time low today...
Just based on its historical financials and current valuation, Intuit looks like a huge opportunity.
I also added it to my "Discarded Dozen" list on June 12. The stock is up 26% since then.
On Tuesday, the company reported fiscal fourth-quarter earnings that topped expectations. Revenues jumped 14% to $4.4 billion, above estimates of $4.27 billion. And adjusted EPS soared 47% to $4.03, well above expectations of $3.59.
The company also bought back $5.5 billion of stock in the past year, double the prior year, which reduced the share count by 2%.
But the stock was down 3% on Wednesday because the company appeared to lower earnings guidance for the upcoming year. It projects that adjusted EPS will be between $22.88 and $23.12, up 23% to 24% YOY, but well below estimates of $27.32.
In reality, Intuit raised guidance... In a footnote, it said: "non-GAAP diluted earnings per share guidance includes a $5.81 impact from share-based compensation expense."
In other words, Intuit is now including share-based compensation in its guidance, which analysts weren't. Adding $5.81 back to the $23 midpoint of the company's guidance brings it to $28.81 – well above estimates of $27.32.
With the stock closing at $348 yesterday, it's trading at a mere 15.1 times the forward EPS guidance midpoint – a very attractive price for such a high-quality, growing business.
My team and I at Stansberry's Investment Advisory are closely following all of these stocks. If we decide to recommend one of them, as always, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.