1 Stock To Buy, 1 To Dump When Markets Open: Activision Blizzard, Robinhood
2022.05.01 15:29
Stocks on Wall Street plunged on Friday, with the tech-heavy NASDAQ Composite suffering its worst month since 2008, as technology shares sank following disappointing earnings and worries over looming Fed rate hikes.
NASDAQ, DOW and SPX Daily Charts
The week ahead is expected to be an eventful, if not volatile one for markets, as the Federal Reserve is expected to raise interest rates for the second time in a row following the conclusion of its widely anticipated policy meeting on Wednesday.
In addition to the Fed, this week’s calendar also includes key economic data, including the U.S. employment report for April as well as the latest ISM PMI surveys.
Earnings from notable companies such as Advanced Micro Devices (NASDAQ:AMD), Shopify (NYSE:SHOP), Uber (NYSE:UBER), Airbnb (NASDAQ:ABNB), Block (NYSE:SQ), DraftKings (NASDAQ:DKNG), Etsy (NASDAQ:ETSY), Starbucks (NASDAQ:SBUX), Pfizer (NYSE:PFE), and Moderna (NASDAQ:MRNA) are also on deck.
Regardless of which direction the market goes, below we highlight one stock likely to be in demand and another which could see further downside.
Remember though, our timeframe is for the upcoming week.
Stock To Buy: Activision Blizzard
Shares of Activision Blizzard (NASDAQ:ATVI) could see increased buying activity in the week ahead, following encouraging news that Warren Buffett’s Berkshire Hathaway (NYSE:BRKa) has amassed a 9.5% stake in the Santa Monica, California-based electronic gaming and multimedia company worth about $5.6 billion. Buffett disclosed the investment at Berkshire’s annual shareholder meeting in Omaha, Nebraska, on Saturday.
Berkshire built most of that stake after Microsoft’s (NASDAQ:MSFT) proposed $95-per-share takeover of Activision in January. The conglomerate initially bought around $1 billion worth of ATVI shares late last year, in a bet the video gaming company was undervalued.
Buffett’s large position is widely viewed as a merger arbitrage bet that Microsoft’s proposed $68.7 billion acquisition will be approved, despite facing tough antitrust scrutiny from the U.S. Department of Justice.
“Occasionally I’ll see an arbitrage deal and do it,” Berkshire’s chairman and CEO said. “If the deal goes through, we make some money,” Buffett added.
Activision shares are currently trading well below Microsoft’s offer, having ended at $75.60 on Friday, which is 20% below the proposed takeover price.
The proposed transaction is expected to close before July 2023.
ATVI Daily Chart
Year-to-date, ATVI is up 13.6%, outperforming the broader market by a wide margin. At current levels, the creator of games like Call of Duty, World of Warcraft, and Candy Crush has a market cap of $59.1 billion.
Not surprisingly, the quantitative models in InvestingPro point to a roughly 36% upside in ATVI stock over the next 12 months, bringing it closer to its fair value of $102.53/share.
ATVI Fair Value Estimates
Stock To Dump: Robinhood Markets
Robinhood Markets’ (NASDAQ:HOOD) stock, which has slumped to a series of record lows in recent sessions, is expected to suffer yet another difficult week as investors fret over the negative impact of several factors plaguing the online brokerage app.
In a sign of how bad Robinhood’s business has fared of late, the struggling trading platform posted horrible first quarter financial results last week, including a wider-than-expected loss, and shrinking revenue, which both fell short of analyst estimates.
Additionally, Robinhood said the number of its monthly active users continued to drop during the quarter, while the average amount that each user spent also declined, in part due to the dramatic slowdown in retail trading activity in both stocks and cryptocurrencies.
The retail brokerage firm also withdrew its revenue guidance and warned that “uncertainty in the market” is causing customers to become more cautious with their portfolios.
Robinhood earns roughly 70% of its revenue from customer transactions, so its financial results tend to suffer when trading activity slows.
HOOD Daily Chart
Shares of HOOD began trading on the New York Stock Exchange at $38 following its IPO in July 2021, closing at a record low of $9.81 on Friday. At current levels, the Menlo Park, California-based fintech company has a market cap of $8.5 billion.
Year-to-date, Robinhood stock is down approximately 45% amid the ongoing selloff in shares of unprofitable technology companies. Even more alarming, HOOD shares are 88% below their all-time peak of $84.12 touched last August.
Berkshire Hathaway’s vice-chairman Charlie Munger said on Saturday that the retail broker was getting its ‘comeuppance.’
With the Fed preparing to tighten monetary policy more aggressively than previously thought, unprofitable technology companies such as Robinhood look set for further losses, as expectations of less dovish monetary policy threaten to erode the value of their longer-term cash flows.
Taking that into account, shares of the beleaguered stock-and-crypto trading app will likely remain vulnerable to sharp swings in the days ahead.
