Part 3

Take Two Interactive Software (TTWO)

Company Background

Based in New York City, Take Two Interactive Software is a leading developer and publisher of video games.

Take Two’s games can be played on a wide range of different devices including video consoles, personal computers, mobile devices and tablets. The company earns the largest portion of its revenues from the sale of disk-based video game products (known as packaged goods) and downloadable contents (DLCs), but usually smaller segments like subscription, micro-transactions and advertising have seen a major growth improvement recently.

Take Two reported net revenues of $3.08 billion for fiscal 2020. The U.S. accounted for 57% of revenues, while the rest came from International operations. Channel-wise, digital online contributed 77% to net revenues, while the rest came from Physical retail and other segment. The main brands and labels that the company uses to develop and publish its games are Rockstar Games, 2K, Private Division and Social Point.

Rockstar Games is probably the real “rockstar” of them all as it publishes Grand Theft Auto (GTA) and Red Dead Redemption among others.

On Feb 7, 2020 Take Two’s Grand Theft Auto V became the best-selling game of the past decade while Red Dead Redemption 2 became the best-selling game in the past four years. Both the games sold more than 150 million units worldwide combined since their launch.

2K’s internally owned and published franchises include BioShock, Mafia, XCOM and Sid Meier’s Civilization. It also publishes externally developed franchises such as Borderlands. Moreover, 2K’s realistic sports simulation titles include NBA 2K series, the WWE 2K series, and the Golf Club.

Take Two’s Private Division is the publisher of Kerbal Space Program.

Social Point develops and publishes popular free-to-play mobile games that include Dragon City and Monster Legends.

The company sells games both physically and digitally through direct relationships with large retail customers and third-party distributors. The most successful customers that Take-Two works with are GameStop, Microsoft, Sony, Steam and Wal-Mart. In fiscal 2020, the five largest customers accounted for 71.5% of net revenues, with Sony and Microsoft each accounting for more than 10% of net revenues.

Current position – Financial Performance and Future Growth Prospects

It is important to note that Take Two’s growth is primarily driven by its popular franchises — Grand Theft Auto (GTA) and Red Dead Redemption. Notably, GTA generated 23% of net revenues in fiscal 2020. However, at the same time this could also prove to be one of the biggest risks for the company, as when you rely to that extent on a single product, you become dependent on the success of that individual product. Sid Meier’s Civilization VI also outperformed management’s expectation owing to its expansion packs and the popularity of the Nintendo Switch skew. The company’s portfolio strength and robust slate of releases, including Borderlands 3, Ancestors: The Humankind Odyssey and The Outer Worlds, are key catalysts for the long haul.

The growing traction in NBA franchise bodes well for the company. Take Two expects NBA 2K net bookings to continue the momentum owing to strong growth in recurrent consumer spending, which increased 29% year over year in fiscal 2020. Meanwhile, NBA 2K Online was the most played PC game in China and the franchise has about 49 million registered users, which is expected to drive recurrent consumer spending. Moreover, the NBA 2K League started its 2020 regular season on May 5, 2020 with at least six weeks of remote gameplay after coronavirus lockdown. This is expected to further boost top-line growth in the near term..

Technical Analysis

From a technical standpoint the stock looks vulnerable at the moment as it has already appreciated substantially in the last 8 weeks moving from the $100 lows up to $150. This represented a 50% increase in less than 2 months for Take-Two’s stock, which we now believe is due for a stronger pullback. As you can see the chart for the stock is almost identical with the chart of SPY and shares a lot of similarities with the XLI – a strong initial rebound, a relatively weaker attempt for overtaking its all-time highs on lower volume indicating general exhaustion. Additionally, the RSI has moved sharply lower and is currently sitting below 60, which is another signal that there might be more weakness ahead for the stock. However, we believe that a bigger decline in the stock would present a tremendous long-term buying opportunity for our followers.

We will be interested in opening our initial BUY positions around the $120 support zone and then in case the price continues to slide we will look to further add to our long Take-Two exposure at the $100 level. On the upside we will be targeting the $140 and $155 levels for collecting our profits from the stock.

Adobe (ADBE)

Company Background

San Jose California-based Adobe Inc. is one of the largest software companies in the world. Adobe generates the largest portion of its revenue from collecting licensing fees from its customers.

The company also offers technical support and education, which have a much smaller contribution for Adobe’s revenues but are still important services as they allow the company to close the whole services circle.

The company generally operates in three segments: Digital Media, Digital Experience, Publishing

The Digital Media solutions segment provides small businesses and enterprises with the opportunity not only to create highly compelling content, but to also deliver it across a variety of different media channels, platforms and devices – smartphones, tablets, e-readers, and other devices, and then optimize it through systematic targeting and measurement.

The two major components of revenue in the Digital Media solutions segment are the Creative family of products and Document Services products. The target customers are traditional content creators, web application developers, digital media professionals and user interface designers/developers, writers, videographers and photographers.

The Digital Experience segment serves as a business optimization tool focusing on providing businesses with insights into the performance of digital marketing initiatives, thus empowering organizations to make informed decisions, and tries to ensure the success of online marketing programs. The target customers are digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers and chief revenue officers.

The Publishing segment supports technical and business publishing through a special printing and imaging page description language and a PDF-based workflow regulation platform. The target customers are professional graphics and content publishers, as well as OEMs offering workflow software, printers and other output devices.

The company has offices in several countries which include the likes of Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan and Mexico, to name a few.

Current Position – Financial Performance and Future Growth Prospects

In fiscal 2019, the company generated $11.17 billion in revenue, which was derived from 3 segments—Digital Media solutions (69% of 2019 revenues), Digital Marketing solutions (28%) and Print and Publishing contributed the remaining 3%. Adobe has a solid balance sheet. As of Feb 29, 2020, the company’s net cash amounted to $58 million compared with $39 million as of Nov 30, 2019. The strong net cash balance will not only help it pursue strategic acquisitions but will also enable it repurchase shares aggressively in the long haul. Moreover, debt-to-total capital was 28.2% as of Feb 29, 2020 which is lower than the industry average of 44.6%.

Adobe continues to be the market leader in the Digital Media space. The broad-based success of the company comes from the fact that it simply provides one of the best solutions in most categories of the digital world including media design, publishing, Internet and video. In fiscal first quarter, total Digital Media ARR (Annualized recurring revenue), the key cloud performance measure, grew to $8.73 billion. This indicates that the company has seen strong growth in the Creative Cloud and Document Cloud businesses. The digitalization of advertising, entertainment and other content-creation markets is a great long-term positive for the company as Adobe is well positioned to benefit from this trend and should enjoy above-average long-term growth. The acquisition of Omniture was considered to be a rather bold step that Adobe took in order to enter the digital marketing space. This is an area where corporate spending is on the rise. A number of trends are supporting this trend, including the increased adoption of cloud computing, social media and mobile devices, as well as the emergence of big data analytics. Adobe’s current success has been built over the last decade through the great visionary leadership by the senior management of the company. A series of successive acquisitions have enabled the company to provide the full-spectrum of services in the specific sub- industry that it operates in like: analytics, experience management, targeting, social relevance and spend optimization. Furthermore, Acrobat is one of the company’s most successful product lines with a huge installed base of satisfied customers. Through, the company offers a set of a cloud-based document and collaboration subscription services which include PDF creation, centralized online file sharing and contract signing solutions.

Technical Analysis

From a technical standpoint the stock looks quite impressive at the moment as it has already broken out above its pre-COVID 19 levels and it’s currently sitting at an all time high. The stock has appreciated substantially in the last 10 weeks moving from the $255 lows up to $418. This represents a 63.9% increase in 2 months for Adobe’s stock, which we now believe is inevitably due for a stronger pullback. As you can see the chart of the stock is slightly different than the chart of XLC and XLK, as the prior all-time highs have already been broken. The main reason for the significantly stronger upward momentum for the stock could be attributed to the fact that in some instances Adobe was created for the current environment – continued digitalization of the business world, increased business volumes as a result of the home-office environment strong initial rebound and a relatively weaker attempt for overtaking its all-time highs on lower volume. Additionally, even though that the RSI is trading above 60 it is also indicating that the most recent strong price appreciation might not be as strong as it seems on a relative basis. The current RSI reading is lower than the one we saw back at the February highs, even though that the actual price is trading roughly around $35 higher today, than back then. This in turn could be an indication for a possible short-term weakness for the stock in the coming days and weeks. However, we believe that a bigger decline in the stock would present a tremendous long-term buying opportunity for our followers.

We will be interested in opening our initial BUY positions around the $380 support zone and then in case the price continues to slide we will look to further add to our long Adobe exposure at the $360 level. On the upside we will be targeting the $420 and $445 levels for collecting our profits from the stock.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the SPY and XLY that have a big impact on the overall performance of the two ETFs.

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