The stock market continues to set new records, despite threats to the economy, because the Federal Reserve has kept its easy-money policies at full throttle. It's one of the reasons the cost of everything is rapidly inflating.
Although Fed Chairman Jerome Powell has signaled that interest rates will need to start rising by 2023, they will still be at historically rock-bottom rates, which suggests there's plenty more upside in stocks for a long time to come.
More than just fun and games
Keith Noonan (Zynga): If you're looking for growth in the entertainment industry, video games are the place to be. More people around the world take up gaming as a hobby every day, and rising access to high-performance mobile devices and internet networks will continue to broaden the global audience for interactive entertainment.
Top games also command levels of engagement and monetization that absolutely trounce other mediums. It's not unusual for dedicated players to sink 100 hours or more into their favorite titles, while an almost burdensome number of repeat viewings would be needed for film and television releases to reach those kinds of numbers. Hit video games can also be easily updated through downloadable content expansions, and the rise of in-game purchases has created a dynamic by which it's often easier and more profitable for companies to deliver content updates than to develop new titles from the ground up.
Zynga is a leading publisher in the mobile gaming space, and it's positioned to benefit from the ongoing rise of the interactive-entertainment industry. Even better, the company is looking cheaply valued at current prices. Shares are trading down roughly 28% from their 52-week high, and I expect the stock will bounce back from the recent pullback and go on to deliver strong performance for shareholders.
The gaming specialist's stock slumped after the company's second-quarter earnings release arrived with mixed results and guidance that underwhelmed the market. However, the business was always going to be facing challenging comparisons this year.
Zynga's player engagement statistics surged in 2020 as pandemic-related conditions prompted people to seek entertainment and socialization through digital channels. With social-distancing and shelter-in-place restrictions now easing in many places, the company is seeing softer player participation on some fronts. Investors shouldn't let near-term trends cause them to overlook Zynga's strong foundations and attractive growth potential. Those who do could wind up missing out on a huge winner.
Making up for lost time
Eric Volkman (Coty): I think beaten-down beauty-goods purveyor Coty is ripe for a turnaround, and I think it has a good chance of happening by the end of the year.
The company, which has a strong presence with well-known brands in both the fragrance and cosmetics segments, is clearly reaping the benefits of an ambitious turnaround plan that has reduced costs and bolstered its leading brands.
In the recently reported Q4 of fiscal 2021, this strategy helped it raise revenue a meaty 90% on a year-over-year basis to $4.63 billion -- which was, by the way, above its guidance range. Even considering that this is from a low, coronavirus-affected basis, it's an impressive figure given that the delta variant started to drive consumers back into home confinement during the quarter.
Coty continues to be loss-making, but there has been much less red ink on the bottom line lately. Again looking at Q4, the non-GAAP shortfall was slightly over $67 million, against the nearly $354 million loss of Q4 2020. Given that the company was struggling with profitability even before the pandemic, that degree of improvement is notable, and it's encouraging.
What's more encouraging is that the growth rate of coronavirus cases across the U.S. is generally on the decline. According to statistics compiled by The New York Times, the 14-day change has fallen to the mid-teen percentage rates, well below the growth levels of recent weeks. While we can't be certain that we're turning the corner on the illness soon, it is a hopeful sign that the situation is improving, perhaps even quickly.
If it does, American consumers won't hesitate to emerge from their homes again and go out to restaurants, bars, shops, and so on. Many have been seen in public rarely, if at all, during the pandemic, and they will want to look good on their re-emergence.
That positions Coty, with its accent on fragrances and cosmetics, for a rebound and maybe even a jump into profitability -- particularly given its brand realignment and cost-cutting moves.
This stock hasn't been a beauty in recent times, but it could very well emerge as quite the belle when we escape our current predicament.
Returning to form
Rich Duprey (Disney): With business returning to normal, or as normal as can be, entertainment giant Disney can resume the growth trajectory it was on before the pandemic knocked it off course.
Where the global health crisis did benefit the House of Mouse was in cementing its streaming video service, Disney+, as a viable alternative to Netflix (NFLX 1.09%). Indeed, after piling on subscribers, it's on track to eventually at least match its rival. It now has 116 million subscribers to Netflix's 209 million.
Equally, if not more, important is that Disney's parks division has returned to profitability. It was only a matter of time before that happened, so long as new COVID-19 outbreaks didn't impede the theme parks' ability to stay open, and now that they have been operational throughout the summer, the results have come in.
With coronavirus cases continuing to decline in Florida, even as it has adopted a less restrictive policy toward masks and vaccines, the Walt Disney World park was open for the entire fiscal third quarter and enjoyed near full capacity attendance across the period.
California finally lifted restrictions at the Disneyland theme park, though the state remains more restrictive with other businesses, and it, too, immediately began seeing increased attendance.
In short, when Disney is able to operate like Disney, it's a growth engine, which is good news for investors because the entertainment company's stock trades at virtually the same price it did to start the year. That means they haven't missed out on the opportunity to benefit alongside the company.
Moreover, my colleague Parkev Tatevosian argues there's a good chance Disney could reinstate its dividend in the near future. Certainly it needs to ensure it has plenty of reserves just in case future outbreaks force its parks and other operations into new restrictions, but with $16 billion in cash in the bank, a return to profitability at its theme park, premier video-streaming services (ESPN+ and Hulu also saw rising subscriber rolls), and a business that's coming together once more, Disney is a great growth stock to buy now.