What Moves the Stock Market This Week?

A new 40-year high read on consumer inflation last week now has Wall Street thinking the Fed might be even more aggressive with rate hikes. At the same time, investors continue to closely monitor the geopolitical headlines involving Russia and Ukraine. From what I’ve heard, there were a lot of diplomatic phone calls over the weekend, including one between Biden and Putin, but nothing seems to have changed in regard to Putin’s “poker face”.

Political tensions

Some military insiders continue to warn that Russia could now invade Ukraine at a moment’s notice. Some are saying it happens this week while others say Russia will invade after the Winter Olympics.

To add even more worry and concern, several geopolitical groups are thinking Russia and China are somewhat collaborating on strategy. This isn’t really anything new but the “buzz” and rumors are starting to get louder.

The big what if… what if Russia was to make a move on Ukraine and China a move on Taiwan in a coordinated effort? I don’t really think that happens but there’s always a possibility. Perhaps a more worrisome theory is Russia and China working together on economic warfare strategies to knock the US dollar out of its leadership role as the world’s currency.

Russia has a good hold on energy supply and China is the world’s biggest influence on the global supply chain. If Russia can withhold energy and China slows the supply chain, theoretically they could create a major wave of inflation. If at the same time, they continued to dump US Treasuries in a big way they could weaken the US dollar enough to bring into question its role as the world’s reserve currency, especially with our debt level so elevated.

The theory continues… if the US dollar was to weaken enough some exporting countries and global businesses might start to question the value of their goods being sold at a discount when the transaction is settled in US dollars.

Hence more longer-term economic concern.

Interest rate hikes

More large Wall Street insiders are talking about perhaps +5 to +7 Fed rate hikes ahead in order to slow domestic inflation. The big questions remain… how fast will the Fed shrink its balance sheet and how long before they will stop raising interest rates? St. Louis Fed President Bullard last week expressed support for a 50-basis points hike, though several other Fed officials have since argued against the idea.

Fed speculation has also brought increased volatility to bond markets with yield on the 10-Treasury topping 2% on Thursday but ending Friday a full 10-basis points lower. The 2-year yield saw its biggest one-day move since 2009, surging 26 basis points at one point on Thursday. Those are pretty dramatic swings for bond markets and highlights the extreme level of uncertainty that is plaguing financial markets.

Just keep in mind however, from the summer of 2016 to the fall of 2018, 10-year Treasury yields jumped from 1.4% to over +3.0% yet the NASDAQ was still able to increase by over +45%.

On the energy front, there continues to be talk of tighter global oil supply and higher prices ahead especially if we see military action between Russia and Ukraine. Remember, increased energy costs can quickly spread through an entire economy as manufacturers pass along higher production and transportation costs in the form of higher consumer prices. Consumers also get dinged at the gas pump as well as with higher heating and cooling costs.

With inflation already smoking hot at +7.6% and Consumer sentiment starting to waiver the market is starting to get more nervous about higher energy costs. Worsening consumer sentiment can be an early warning signal of a decline in consumer spending. However, bulls still largely expect a boost in consumer spending as the Omicron Covid wave continues to fade, pointing to the massive amount of savings and increased asset values that consumers have accumulated over the past couple of years.

Most believe that spending will shift more toward “services” and away from goods, which in turn is expected to help further ease some of the strain on supply chains and start to cool prices. Supply chains have shown slow but steady improvements, especially in the last couple of weeks as Covid cases have plunged, which most economists think will should start slowing the rate of monthly inflation gains.

By March, inflation reads will be up against much higher year-ago data which should also help to bring down the rate of monthly increases, at least in theory. And if inflation starts showing signs of coming down on its own, that would likely decrease pressures on the Federal Reserve to resort to more aggressive tactics to tame inflation.

There is no major economic data today but investors are anxious about the Producer Price Index for January due out tomorrow. The bigger economic headlines this week include inflationary data out of China and US retail sales on Wednesday morning.

The Fed FOMC minutes are also being released Wednesday afternoon. The earnings this week include Airbnb and Roblox on Tuesday; Cisco, Nvidia, and Shopify on Wednesday; Palantir and Walmart on Thursday; and Draft kings and John Deere on Friday.

Wall Street Week Ahead Earnings: Shopify, Baidu, Walmart, Deere and DraftKings in Focus

Investors will focus on December quarter earnings for stocks that are economically sensitive, which should show better profits than technology stocks. Increasing Treasury yields and risk aversion could hit the stock market hard over the coming months. In addition, investors will closely monitor the latest news on the rapidly spread Omicron coronavirus variant to see how it impacts earnings in 2022.

Earnings Calendar For The Week Of February 14

Monday (February 14)

TICKER COMPANY EPS FORECAST
AAP Advance Auto Parts $1.93
ALX Alexander’s $4.29
AMKR Amkor Technology $0.65
ANET Arista Networks $0.6
SRC Spirit Realty Capital $0.81
VNO Vornado Realty Trust $0.76
WEBR Weber $-0.02

Tuesday (February 15)

TICKER COMPANY EPS FORECAST
ABNB Airbnb $0.05
AKAM Akamai Technologies $1.14
DVN Devon Energy $1.24
MAR Marriott International $1.04
RPRX Royalty Pharma $0.79
VIAC ViacomCBS $0.37
WFG West Fraser Timber $3.51

 

Wednesday (February 16)

IN THE SPOTLIGHT: SHOPIFY, BAIDU

SHOPIFY: Canadian multinational e-commerce company is expected to report its fourth-quarter earnings of $0.62 per share, which represents a year-over-year decline of over 46% from $1.15 per share seen in the same period a year ago. But the e-commerce software company would post revenue growth of over 37% to $1.34 billion.

According to Barron’s report, Gary Robinson, investment manager at Baillie Gifford said that Shopify is miles ahead of its competitors in helping merchants all over the world sell their items. He added that the company’s revenue could rise sharply in the next five years.

BAIDU: The Chinese tech giant is expected to report its fourth-quarter earnings of $1.89 per share, which represents a year-over-year decline of nearly 40% from $3.08 per share seen in the same period a year ago.

However, Baidu Inc, a leader in the Chinese search industry in terms of user market share, would post revenue growth of about 9% to $5.04 billion. The company has beaten consensus earnings estimates in most of the quarters in the last two years, at least.

“We maintain a “Buy” rating for Baidu (BIDU) with a target price of RMB 165. Our target price is based on the forward P/E of 18.48x and forward P/S of 0.42x for FY22. Non-GAAP EPS of RMB 56.59 ($8.98) for FY22. This provides an upside potential of 15% over the CMP of RMB 143.80,” noted Shejal Ajmera is founder and head of research at CrispIdea.

“We decrease our estimate for revenue growth to 14.3% from 19% for FY21 due to China’s low GDP growth. We estimate revenue growth of 10% for FY22 and 12% for FY23. We estimate EPS of RMB 56.19 ($8.87) and RMB 56.59 ($8.93) for FY21 and FY22, respectively.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 16

TICKER COMPANY EPS FORECAST
AMAT Applied Materials $1.85
SAM Boston Beer $2.87
H Hyatt Hotels $-0.08
MGY Magnolia Oil & Gas $0.77
MRO Marathon Oil $0.52
NVDA Nvidia $1.0
TRIP TripAdvisor $-0.04

 

Thursday (February 17)

IN THE SPOTLIGHT: WALMART

Bentonville, Arkansas-based retailer Walmart is expected to report its fourth-quarter earnings of $1.49 per share, which represents year-over-year growth of over 7% from $1.39 per share seen in the same period a year ago.

The multinational retail corporation that operates a chain of hypermarkets would post revenue growth of nearly 1% to $150.91 billion. The company has beaten consensus earnings estimates in most of the quarters in the last two years, at least.

“Latest AlphaWise data shows Walmart+ membership continues to increase, with ~15m members total (~12% household penetration) & ~1m net members added in the past quarter. Overlap between Walmart+ & Prime remains high; we’ll monitor if this changes with a Prime fee hike coming,” noted Simeon Gutman, equity analyst at Morgan Stanley.

“We expect Walmart (WMT) to sustain recent momentum in its core business in F’22/F’23 and see a growing ability to balance longer-term investments with near-term returns. Our OW rating and $170 PT are underpinned by a preference for 1) quality players with scale and 2) defensive retailers as the market undergoes a mid-cycle transition.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 17

TICKER COMPANY EPS FORECAST
AN AutoNation $4.96
DBX Dropbox $0.2
ROKU Roku $0.01

 

Friday (February 18)

IN THE SPOTLIGHT: DEERE, DRAFTKINGS

DEERE: The world’s largest maker of farm equipment, is expected to report its fiscal first-quarter earnings of $2.28 per share, which represents a year-over-year decline of over 41% from $3.87 per share seen in the same period a year ago. The agricultural, construction and forestry equipment manufacturer would post revenue growth of about 0.5% to $8.09 billion.

“Higher input and freight costs to affect FY22 margins. We downgrade our rating to “Hold” from “Buy” for Deere & Co. and upgrade our TP to $406 for FY23. We derive TP based on non-GAAP EPS to $22.30 & $25.14 for FY22 & FY23, respectively and P/E of ~16.1x for FY23. This provides an upside potential of 8.6% from CMP of $373.79,” noted Shejal Ajmera, Head of Research at Crispidea.

“Following are the reasons for the above assumptions: 1) Strong demand in farm and construction equipment to aid topline; 2) Focus on automation to ensure long term growth and 3) Short term headwinds to affect profitability.”

DRAFTKINGS: The U.S.-focused gambling operator is expected to report its fourth-quarter loss of $0.78 per share, a dime greater than the loss of $0.68 it recorded in the same period a year ago. But the revenue would grow more than 36% to $439.5 million.

“We forecast legal US sports betting & iGaming to increase from <$1.5B in 2019 to $20.6B in 2025 as more states legalize and spend per capita rises. Forecast DKNG to maintain top tier share, 24% in OSB and 21% in iGaming in 2025. Investors question LT profits, but other developed markets have shown 25-30%+ profits for operators at maturity, esp. those with a customer acq. advantage similar to DKNG’s with its DFS database,” noted Thomas Allen, equity analyst at Morgan Stanley.

“Current valuation of 9x 2025e EBITDA does not reflect long-term margins or growth. Upside drivers include signs of profits in mature states, new product innovation and higher market share. Downside risks include higher losses, greater competition and lagging product innovation.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 18

TICKER COMPANY EPS FORECAST
ABR Arbor Realty Trust $0.39
B Barnes Group $0.49
BLMN Bloomin’ Brands $0.52
DE Deere & Co. $2.28

 

DraftKings Shares Slump on Deep Quarterly Losses, Revenue Miss Estimates

DraftKings shares slumped 10% on Friday after the U.S.-focused online gaming company reported worse-than-expected earnings and revenue in the third quarter but said the online gambling boom during COVID-19 boosted revenue by 60%.

Boston-based sports betting platform posted a quarterly loss of $1.35 a share on revenue of $213 million, worse than the market expectations of $0.98 per share on revenue of $236.9 million.  Following this DraftKings shares slumped about 10% in pre-market trading on Friday.

The company lifted the midpoint of its fiscal year 2021 revenue guidance to $1.26 billion and narrowing the guidance range of $1.21 billion to $1.29 billion to a range of $1.24 billion to $1.28 billion, which equates to year-over-year growth of 93% to 99%.

Analyst Comments

“We forecast legal US sports betting & iGaming to increase from <$1.5B in 2019 to $18B in 2025 with new states legalizing and higher spend per capita. Forecast DraftKings to maintain top tier share, 24% in sports betting and 20% in iGaming in 2025,” noted Thomas Allen, equity analyst at Morgan Stanley.

“Upside drivers include new product development and SBTech integration, though downside risks remain including increasing competition and lagging product innovation relative to peers. Relatively balanced NTM catalyst path.”

DraftKings Stock Price Forecast

Eighteen analysts who offered stock ratings for DraftKings in the last three months forecast the average price in 12 months of $68.44 with a high forecast of $105.00 and a low forecast of $41.00.

The average price target represents a 53.18% change from the last price of $44.68. From those 18 analysts, 11 analysts rated “Buy”, six rated “Hold” while one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $53 with a high of $126 under a bull scenario and $9 under the worst-case scenario. The firm gave an “Equal-weight” rating on the online gaming company’s stock.

Several other analysts have also updated their stock outlook. Citigroup initiated the coverage with buy rating and gave a target price $66. Craig-Hallum lifted the target price to $70 from $60. UBS upped the price objective to $64 from $60.

Technical analysis suggests it is good to sell now as 100-day Moving Average, and 100-200-day MACD Oscillator signals a strong selling opportunity.

Check out FX Empire’s earnings calendar

DraftKings Has Wind at Its Back Amid Peak Sports Season

Shares of DraftKings are off to a strong start this week as the stars align for professional sports. In addition, a Wall Street bank recently touted the sports-betting stock, putting wind in the sails of the company.

Citigroup started coverage on DraftKings with a buy rating with expectations that the stock has more runway for gains. Citi analysts say that as the sports betting market comes into its own, shares of DraftKings could increase close to 40% to $66. So far this year, DraftKings’ stock is up 5%. According to Citi, DraftKings is at the top of the heap in the sports betting arena.

Peak Sports

Citi analysts are not the only ones bullish on the sports betting industry. Widely cited former hedge fund manager Will Meade tweeted that “major sports betting stocks,” including DraftKings, Penn National Gaming and Rush Street Interactive, are currently on sale in his opinion. The reason, Meade says, is because sports betting volume is now in its “peak period,” citing the MLB playoffs and World Series, the NFL and the NCAA as well as the upcoming NHL season.

Sports betting apps are gaining in popularity. Investment advisor Ross Gerber,  who is at the helm of Gerber Kawasaki, said that downloads of U.S. sports betting apps were on the rise last month, with DraftKings snagging most of the market share pie, followed by FanDuel, BetMGM and Barstool Sports.

Deal in the Works

DraftKings recently bid $22 billion to acquire UK-based gaming play Entain, which is becoming an increasingly attractive target. Entain just reported a 12% jump in sports-betting revenue as well as a 4% increase in gaming sales. The British gaming company expects to report 2021 revenue of GBP 850 million-900 million. Its strong performance could mean that DraftKings has to pony up more before its offer is accepted.

Incidentally, Entain’s revenue growth is being fueled by a joint venture it has in place with MGM called BetMGM. Entain previously rebuffed a takeover bid from MGM for its low-ball offer.

If DraftKings wants to put its money where its mouth is, the company will have to formalize its bid for Entain sooner than later. In the meantime, the chances that Entain will decide to go it alone are increasing, analysts say.

DraftKings Pursues UK Acquisition and Catches NFT Fever

Online sports betting platform DraftKings is pursuing an aggressive growth strategy.  The company has made a $20 billion offer to acquire British industry peer Entain in a stock and cash deal, according to a report on CNBC.

In addition to M&A, DraftKings also has the blockchain on its mind and is joining the non-fungible-token (NFT) craze through a digital collectible series featuring Tiger Woods.

Shares of DraftKings were under pressure today, falling 7% to $52. Meanwhile, Entain’s stock advanced 15%, as is typical for the target company in an acquisition.

DraftKings shares are up 20% year-to-date but are trading off their all-time high of $74. Earlier this month, Wells Fargo analysts started coverage on the stock with an overweight rating and a $75 price target.

Gaming

The Entain deal, if successful, would mark an international expansion for DraftKings, whose business has been booming throughout the pandemic. In Q2, the company reported revenues of nearly $300 million and boosted its sales outlook for the full year to $1.29 billion.

In addition to sports betting, DraftKings and Entain both participate in the casino gambling segment. Entain is behind products such as partypoker, PartyCasino, Gala Bingo and many others, while DraftKings similarly has an online casino.

DraftKings is not Entain’s first suitor. The target company recently turned down an $11 billion takeover bid by MGM Resorts, blaming a valuation that was too low. The two companies maintain a partnership.

DraftKings and NFTs

DraftKings is cashing in on the popular NFT phenomenon through a set of digital tokens featuring legendary golfer Tiger Woods. The NFTs are the result of a collaboration between NFT platform Autograph and Woods, while the digital collectibles are being sold on the DraftKings Marketplace.

The Premiere edition of the NFTs, which debuted on Sept. 21, is already sold out, according to the website. A signed edition series will premiere on Sept. 28, and the prices range from $50 to $1,500. There will be thousands of Tiger Woods NFTs but only 300 of them will be signed.

Autograph has had success partnering with other professional athletes for NFT  collectibles including the likes of NFL great Tom Brady, MLB star Derek Jeter and the NHL’s Wayne Gretzky. Fans scooped up those collections in a matter of minutes.

Today’s Market Wrap Up and a Glimpse Into Thursday

Stocks continued their ascent on Wednesday, with all three of the major indices closing in the green. It was a big day for the S&P 500, which saw the 4,500 level for the first time, even if it closed slightly below that milestone while still in record territory. The Dow Jones Industrial Average closed up nearly 40 points while the Nasdaq set its second all-time high in as many days.

The gains were fueled by optimism that the economic recovery is on track with the tailwind of Pfizer’s FDA-approved COVID-19 vaccine.

Stock index futures held their own on Wednesday evening, suggesting that the good times could continue to roll on Thursday.

Stocks to Watch

  • Salesforce shares are up nearly 2% in extended-hours trading on the heels of the company’s quarterly results, which included growing revenues and robust margins. Salesforce also completed its acquisition of messaging platform Slack. The company also raised its earnings and revenue outlook for fiscal year 2022.
  • Shares of sporting goods retailer Dick’s Sporting Goods rallied 13% thanks to record quarterly results. Dick’s also announced a special dividend on top of a higher regular distribution and bolstered its share repurchase program.
  • DraftKings was up more than 6% on the day. The sports-betting platform got a boost after Cathie Wood of ARK Invest became increasingly bullish on the stock. As sports betting becomes legal in more states, DraftKings could be poised to benefit for the long term. ARK’s Wood scooped up more than USD 60 million of DKNG shares. She is also bullish on Tesla, Roku, and cryptocurrency exchange Coinbase, among other stocks.
  • Williams-Sonoma shares are climbing 12% higher in after-hours trading. The retailer’s Q2 earnings surpassed Wall Street estimates and provided an upbeat revenue forecast. Williams-Sonoma also lifted its quarterly dividend by 20% to USD 0.71 per share. The company is facing some supply chain issues but it did not get in the way of the stock’s rally.
  • Delta Air Lines is requiring its employees to be vaccinated or they will face a USD 200 monthly payment for health benefits.

Look Ahead

The Fed’s Jackson Hole meeting will get underway on Friday. Investors are anxiously awaiting a glimpse into Chairman Jerome Powell’s thinking on asset purchases and consumer prices.

DraftKings Set To Acquire Golden Nugget Online Gaming For $1.56 Billion

Gambling giant DraftKings has agreed to acquire Golden Nugget Online Gaming for $1.56 billion, with the mergers and acquisitions in the sector rising.

DraftKings Will Buy Golden Nugget Online Gaming

DraftKings has announced earlier today that it would acquire Golden Nugget Online Gaming. The deal is expected to continue a recent tradition of mergers and acquisitions in the gambling sector. According to the reports, DraftKings would acquire Golden Nuggets for $1.56 billion.

Golden Nugget Online shareholders are expected to receive 0.365 shares of DraftKings stock, 53% higher than Golden Nugget Online shares’ closing price on Friday. The CEO of Golden Nugget Online, Tilman Fertitta, currently owns 47% of the company. He stated that he intends to hold on to the new company’s stock for roughly a year after the deal has been finalized. Fertitta is also set to join the DraftKings board.

Thanks to this latest development, DraftKings would have access to Golden Nugget Online’s 5 million customers. These customers are regular online casino players, and DraftKings said the online casino betting arm would be critical to its future revenue growth. Fertitta, and others, believe that iGaming customers are worth seven times the value of regular sports betting customers.

GNOG stock chart. Source: FXEMPIRE

GNOG And DKNG Rally Following Acquisition News

The shares of Golden Nugget Online Gaming are rallying following the news of the acquisition. GNOG is currently up by 52% after the news, rising from $12 to currently trade at $18 per share. The surge in share price is a recovery for GNOG, after starting the year at $20 per share but dropping to the $11 sub-level earlier this month.

Furthermore, the shares of DraftKings are also performing well today. DKNG is up by 2.2% since the US market opened a few hours ago. At the time of this writing, DKNG is trading at $52.73 per share. Year-to-date, DKNG is up by over 10%.

DKNG stock chart. Source: FXEMPIRE

DraftKings CEO Jason Robins recently stated that iGaming provides an opportunity for the company to diversify its offering beyond sports seasons. Despite that, it has struggled to win customers to its casino play platform over the past few years.

DraftKings In Rally Mode After Gartley Buy Signal

DraftKings Inc. (DKNG) is trading higher by 3% in Monday’s pre-market after announcing the acquisition of Golden Nugget Online Gaming Inc. (GNOG) in an all-stock transaction currently valued at $1.56 billion. The deal, which is expected to close in the first quarter of 2022, will bolster market share in an online sports gaming industry that’s attracted heavy competition since the company came public in its current form in December 2019.

Rapid Growth But No Profits

DraftKings has yet to post a profitable quarter but it beat Q2 2021 estimates in Friday’s release, with revenue surging 319.7% year-over-year to $298 million, more than $50 million higher than expectations. Monthly Unique Players (MUPs) rose 281% compared to the same quarter in 2020, indicating “strong unique player retention and acquisition across DFS, OSB and iGaming, the expansion of our OSB and iGaming product offerings into new states, and the lack of traditional sports for much of the second quarter of 2020 due to the negative impact of COVID-19.”

The Benchmark Company analyst Mike Hickey raised the firm’s target to $70 on Monday, noting that “DraftKings delivered strong Q2 2021 financial results and raised their fiscal year 2021 revenue forecast. Player engagement and monetization have achieved better than expected results and suggests player LTV may be higher than originally expected. DKNG continues to efficiently acquire players at a CAC at or below target.”

Wall Street and Technical Outlook

Wall Street sees a bright future for DraftKings, posting a consensus ‘Overweight’ rating based upon 17 ‘Buy’, 1 ‘Overweight’, and 9 ‘Hold’ recommendations. Price targets currently range from a low of $42.50 to a Street-high $105.00 while the stock is set to open Monday’s session about $19 below the median $72.50 target. This low placement could ignite upside in coming sessions, given the promising quarter and aggressive acquisition.

DraftKings fell to 10.60 in March 2020 and turned sharply higher, breaking out to a new high in April. The rally carved three waves into March 2021’s all-time high at 74.38, ahead of a correction that’s been crisscrossing the 50- and 200-day moving averages for the last three months. Accumulation is now surging, indicating the pullback may have come to an end, setting the stage for a strong uptick that could easily reach and exceed the first quarter peak.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

A Post-Covid Hangover – Should You Worry About Your Portfolio?

Amazon executives noted shifting consumer habits as the pandemic eases and people become more mobile. Amazon forecasted the next quarter’s sales at between $106 billion and $112 billion, compared to Wall Street expectations for right around $119 billion.

Amazon’s projections would still represent growth of +10% to +16%. Keep in mind, bears are also pointing to ongoing fears of supply chain hiccups, higher-trending inflation, and new coronavirus outbreaks. Earnings come at a busy pace again today with results from Caterpillar, Cerner, Chevron, CNH Industrial, Colgate Palmolive, Enbridge, Exxon Mobil, Johnson Control, and Procter & Gamble.

The worry on Wall Street is that this new normal rate of growth will be slower than many analysts and trading firms are forecasting coupled with higher inflation and or supply chain dislocations corporate profits could fall under some pressure or in this case be less than Wall Street is forecasting for the next few quarters. Bulls expect more consumer spending will shift from goods and pandemic-related services (delivery, video games, cloud/collaboration software) but are still betting on pent-up demand for things people missed out on during lockdowns, as well as goods and services that are currently in short supply.

Data to watch

Updated inflation data is also on tap with the ISM Manufacturing Index on Monday and the Services Index on Wednesday.

There will be plenty more earnings next week too, including Simon Properties and Zoom on Monday; Activision Blizzard, Alibaba, Amgen, Clorox, ConocoPhillips, Eli Lilly, Fidelity, Match Group, Monster Beverage, Occidental Petroleum, and Phillips 66 on Tuesday; Allstate, CVS, Etsy, General Motors, Kraft Heinz, Marathon Petroleum, MetLife, MGM Resorts, Rocket Companies, Roku, Trane, and Uber on Wednesday; Adidas, AMC, Carvana, Cigna, Cloudflare, Corteva, Duke Energy, Kellogg, Moderna, Nintendo, Novo Nordisk, Siemens, Square, Wayfair, Zillow, and Zoetis on Thursday; and Dish Network, Dominion Energy, and DraftKings on Friday.

Insider Accumulation

ES ##-## (Daily) 2021_08_01 (19_25_02)

I have mixed feelings about SP500. There are a few signs of weakness. However, it might be the result of low summer activity. Advance-Decline Line is clearly bearish. Insider Accumulation is also not that strong. Moreover, the Volatility Index is very low and potentially it could bring a pullback. In any case, SP500 futures failed to close the week above Gann resistance. And that is also a negative sign.

The Federal Reserve policy is still supportive. But keep in mind, that SP500 has rallied around 100% since the pandemic bottom without any pullback. And the retest of key support zones near 4200 and 4000 is realistic.

On the other hand, the continuation of the rally is also possible but only if price sustains above 4400. If that happens, bulls will target 4500 and 4600 in extension.

What You Need to Know about SPACs – Wall Street’s Hottest Trend

Recently, U.S cryptocurrency exchange “Bullish” announced it is aiming for a $9 billion listing on the New York Stock Exchange via a merger with Far Peak Acquisition Corporation, a special purpose acquisition company (SPAC).

While many were focusing on what this transaction will mean to the crypto industry, others were asking, what is a SPAC and why should I learn about it? Still, others want to know if it’s an investment strategy that’s here to stay or another Wall Street fad.

What is a Special Purpose Acquisition Company (SPAC)?

According to most legal sources, a special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.

SPACs aren’t new. They have been around for decades, but have recently become more popular because low yields have driven investors to seek alternative ways to increase their capital. Not only have they become popular with sophisticated, high-wealth individuals, but they have also drawn the attention of underwriters who envision a big payday in the form of commissions and fees.

SPAC IPOs have seen a resurgent interest since 2014, with increasing amounts of capital flowing to them.

  • 2014:  $1.8 billion across 12 SPAC IPOs
  • 2015:  $3.9 billion across 20 SPAC IPOs
  • 2016:  $3.5 billion across 13 SPAC IPOs
  • 2017:  $10.1 billion across 34 SPAC IPOs
  • 2018:  $10.7 billion across 46 SPAC IPOs
  • 2019:  $13.6 billion across 59 SPAC IPOs
  • 2020:  $83.3 billion across 248 SPAC IPO

How is a SPAC Formed?

A SPAC is created, or sponsored, by a team of institutional investors, Wall Street professionals from the world of private equity or hedge funds. They create this entity that has no commercial operations. It makes no products and does not sell anything. In fact, the SPAC’s only assets are typically the money raised in its own IPO, according to the Security and Exchange Commission (SEC).

What’s interesting about a SPAC is that when it raises money, the investors buying into its IPO do not know what the eventual acquisition target company will be. That’s part of its mystique, however, since institutional investors with track records of success can more easily convince other investors to invest in the unknown. Due to this, a SPAC is also often called a “blank check company.”

How Does a SPAC Operate?

After the SPAC is legally created, it now needs cash to create the capital needed to do the acquiring of another company, for example, in the future. Remember, the SPAC is not going to raise money to buy equipment, computers, software, or even pay rent. It needs the money to buy what is often referred to as the “eventual acquisition target company”.

A SPAC will raise the money it needs through its own IPO. CNBC says that SPAC IPOs are usually priced at $10 a share. Once the initial capital is raised, the money goes into an interest-bearing trust account until the SPAC’s founders or management team finds a private company looking to go public through an acquisition.

Legal experts say that once an acquisition is completed (with SPAC shareholders voting to approve the deal), the SPAC’s investors can either swap their shares for shares of the merged company or redeem their SPAC shares to get back their original investment, plus the interest accrued while that money was in trust. The SPAC sponsors typically get about 20% stake in the final, merged company.

Time is of the Essence

Once SPAC sponsors raise the capital they need to go to work acquiring companies, they can’t sit on the funds forever, even if they are protected by trust and earning interest. SPAC sponsors also have a deadline by which they have to find a suitable deal, typically within about two years of the IPO. Otherwise, the SPAC is liquidated and investors get their money back with interest.

What are the Advantages of a SPAC and Who Benefits?

Owners of smaller companies find selling to a SPAC more profitable because the sale often adds about 20% to the price of the deal compared to a typical private equity deal. Additionally, being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment.

Business owners are often worried about extreme market volatility or the fear that weak investor sentiment could force the postponement of an IPO. By dealing directly with the SPAC, these worries are essentially eliminated.

Furthermore, a deal with a SPAC can be wrapped up in just a few months versus the traditional process of registering an IPO with the SEC, which can take up to six months.

Basically, the key advantage is a business owner can get his money faster and without a lot of government tape.

Are There Any Pitfalls?

Nothing is guaranteed and SPACs are no exception to that rule. Although they are extremely popular in 2021 for large institutional investors and other billionaire backers, this trend can go away quickly if “something better” comes along.

Other factors that could determine its long-term popularity include the fact that target companies run the risk of having their acquisition rejected by SPAC shareholders. Even the rich get cold feet about a deal. Furthermore, investors are literally going blindly into the investment.

SPACs will probably retain their popularity until the major players decide to let the smaller investors into the game. That’s usually when the rules change and the government regulations get tougher in order to protect undercapitalized investors from losing all their money.

What are Some High-Profile Examples of SPACs?

We don’t know yet how the SPAC for Bullish will play out because it was just announced. But since it involves cryptocurrencies, it will probably become a profitable venture since investors looking to get aboard the craze have been throwing money at the asset class.

High-profile SPACs like DraftKings and Virgin Galactic have performed well for investors, but that hasn’t always been the case with average returns from SPAC mergers completed between 2015 and 2020 falling short of the average post-market return for investors from an IPO.

A noted prominent short-seller of SPACs said, “a business model that incentivizes promoters to do something – anything – with other people’s money is bound to lead to significant value destruction on occasion.”

Like any investment, it pays to do your homework before putting money into a SPAC.

Could DraftKings Be the Next Meme Stock?

The WallStreetBets Reddit forum is eyeing another stock for its growing list of the most shorted stocks. Sportsbetting site DraftKings is stumbling in today’s trading with, the stock down almost 5%. The reason for the declines has placed another target on short-sellers.

The sell-off in DKNG was triggered by a short position in the stock announced by Hindenburg Research. DraftKings went public via a SPAC in 2020 before blank-check deals were all the rage. Shares are still up 9% for the year, but investors fled the stock on the heels of Hindenburg’s disclosure.

This piqued the curiosity of the WallStreetBets crowd, who are wondering if there is a short squeeze in the making and profits to be had in the stock. Hindenburg says DraftKings’ tactics are “questionable,” accusations that were not lost on the Reddit investor bunch who could not ignore the irony.

Isn’t It Ironic?

In its report, Hindenburg Research dissected the DraftKings business model, alleging that the company is involved in:

  • “black market gaming”
  • “money laundering”
  • “organized crime”

The activist investor points the finger at tech provider SBTech, which is the entity with which DraftKings merged to go public. Hindenburg’s due diligence involved discussions with company alum, regulatory filings and internet research.

The Reddit crowd is crying foul, saying first that it is no surprise that “the gambling business is shady, to begin with” and calling the hedge funds out for their own unscrupulous trading strategies.

While retail investors may have made DKNG the latest object of their affection, the stock was still under pressure for the day, though it trimmed its 8% declines during pre-market trading by half. If the Reddit crowd is as relentless with DraftKings as they’ve been with GameStop and AMC Entertainment, Hindenburg Research might want to tread lightly.

Meme Stock Update

The selling pressure has spilled over to leading meme stock GameStop, whose shares are down nearly 7% in today’s session. The stock has advanced more than 1,000% year-to-date, so investors might just be taking some profits.

Meanwhile, movie chain AMC has been oscillating around the USD 60 level as investors continue to drive the stock price higher. Today’s gains of nearly 5% are indicative of bullish momentum that has been dominating the stock for the past few sessions as retail investors keep the squeeze on short-sellers.

DraftKings Posts Better-Than-Feared Quarterly Loss; Lifts Full-Year Revenue Outlook

The U.S.-focused gambling operator DraftKings reported better-than-feared loss and higher revenue in the first quarter and raised the 2021 revenue outlook but the strong results failed to lift stocks which have lost over 18% so far this month.

Boston-based sports betting platform said its revenue increased 253% to $312 million from $89 million seen during the same period a year ago. That was above Wall Street’s consensus estimates of $236.2 million. The company reported a loss per share of $0.36, better compared to analysts’ expectations for a loss of $0.42.

DraftKings raised their forecasts for its fiscal year 2021 revenue guidance to $1.05 billion to $1.15 billion, up from a range of $900 million to $1 billion, which equates to year-over-year growth of 63% to 79% and a 16% increase compared to the midpoint of our previous guidance.

The increase reflects solid performance in the first quarter of 2021, continued strong user activation due to the effectiveness of our marketing spend, well-executed launches of mobile sports betting and iGaming in Michigan and mobile sports betting in Virginia, and a modest contribution from our recently completed acquisitions, the company said in the statement.

At the time of writing, DraftKings shares traded about 5% lower at $46.06 on Monday.

Analyst Comments

“1Q revs and updated ’21 rev guidance meaningfully beat, showing how strong the US sports betting / iGaming mkt is and DKNG’s dominant position. However, DKNG suggested higher EBITDA losses and is issuing materially more stock comp than expected. Our price target drops $3 to $63, still attractive, Overweight,” noted Thomas Allen, equity analyst at Morgan Stanley.

DraftKings Stock Price Forecast

Twenty-three analysts who offered stock ratings for DraftKings in the last three months forecast the average price in 12 months of $70.86 with a high forecast of $105.00 and a low forecast of $50.00.

The average price target represents a 53.78% increase from the last price of $46.08. Of those 23 analysts, 17 rated “Buy”, six rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price to $63 with a high of $182 under a bull scenario and $11 under the worst-case scenario. The firm gave an “Overweight” rating on the gambling operator’s stock.

Several other analysts have also updated their stock outlook. Craig-Hallum slashed the target price to $60 from $70. Needham lowered the stock price forecast to $73 from $81. Benchmark trimmed the price objective to $64. JP Morgan cut the target price to $54 from $58. Truist Securities slashed the target price to $54 from $65.

“The continued progression of beat and raise quarters, coupled with strategic substantiveness should draw a positive reaction in the shares and supports our bullish stance on the name. The degree of stock reaction should also lie in commentary from Mgt regarding more recent complex state legalizations and the roll-out of its tech platform through the remainder for the year. Execution and estimate progression are central to our call, rather than valuation,” noted David Katz, equity analyst at Jefferies.

Check out FX Empire’s earnings calendar

DraftKings Having Tough Time Attracting Shareholders

DraftKings Inc. (DKNG) is trading higher by a few cents on Wednesday after the New York State Legislature approved the legalization of mobile sports betting. The consent opens the door to one of America’s largest gambling populations at the same time the competitive landscape for betting sites is growing at a geometric rate. As with streaming-video-on-demand (SVOD), this crowded venue is likely to reward winners and punish losers in coming quarters.

New Venues Driving Growth

The state will whittle down the number of permitted operators, with special consideration to “tribal gaming partnerships”. DraftKings should make the final cut but as many as six companies could ‘go live’ when the law goes into effect in late 2021 or early 2022. Meanwhile, legalized betting in many states as well as recent deals with World Wrestling Entertainment Inc. (WWE) and the UFC should keep quarterly revenue growth on the fast track.

Oppenheimer analyst Jed Kelly posted upbeat comments after the approval, noting “New York approved a hybrid limited-operator online sports betting (OSB) model as part of its 2022 budget. We believe based on the RFP process and the high amount of taxes/fees, that well capitalized players with a strong presence in NJ and large customer data-bases such as DKNG and Fanduel are well positioned to be key operators when the state goes live”.

Wall Street and Technical Outlook

Wall Street consensus is mixed despite rapid state level approvals, with an ‘Overweight’ rating based upon 16 ‘Buy’, 1 ‘Overweight’, 8 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $41 to a Street-high $105 while the stock opened Wednesday’s session more than $10 below the median $75 target. This low placement suggests Main Street investors are avoiding exposure due to growing competition and a long string of quarterly losses.

DraftKings cleared March 2020 resistance in the upper teens in May and took off in a strong uptrend that topped out in the 60s in early October. The stock got cut in half into November and turned higher once again, stalling in the low 70s in March 2021. Price action since that time has carved an aggressive selloff after each rally impulse, setting off a wave of bearish accumulation divergences that could signal lower prices.

For a look at all this week’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.