Fed Chair Jerome Powell’s recent indication toward a more aggressive pace of interest rate hikes amid the prevailing volatile macroeconomic backdrop might warrant avoiding expensive stocks, such as Take-Two Interactive Software, Inc. (TTWO) and SVB Financial Group (SIVB), trading at lofty valuation.
Fed Chair Jerome Powell has explicitly stated that the Fed could increase interest rates to a greater extent and pace than previously estimated. He said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
Market projections for the terminal Fed funds rate were approximately 5.1% in December and have steadily increased since then. Following Powell’s testimony, Goldman Sachs (GS) lifted its terminal rate target range prediction to 5.5-5.75%, aligning with CME Group's (CME) present market valuation.
TS Lombard’s Chief Economist, Steven Blitz, contends that the Fed cannot halt its progression of interest rate hikes unless a recession befalls the nation. Moreover, as per the world's largest asset manager, BlackRock, the federal funds rate might cap at 6%.
Given the current uncertain economic backdrop, it might be prudent to steer clear of expensive stocks TTWO and SIVB to avoid risking your portfolio.
Take-Two Interactive Software, Inc. (TTWO)
TTWO creates, publishes, and sells interactive entertainment solutions. It develops and publishes action/adventure products under Grand Theft Auto, Max Payne, Midnight Club, and Red Dead Redemption brands. Also, the company publishes a range of entertainment properties across a broad range of platforms and genres.
In terms of forward non-GAAP P/E, TTWO is trading at 32.66x, 104.1% higher than the industry average of 16x. The stock’s forward EV/Sales of 4.19x is 119.1% higher than the industry average of 1.91x. Also, its forward EV/EBITDA of 23.68x compares with the 8.44x industry average.
For the fiscal 2023 third quarter that ended December 31, 2022, TTWO’s total operating expenses increased 122.9% from the year-ago value to $888.80 billion. Its EBITDA declined 17.8% year-over-year to $147.80 billion. Also, TTWO’s net loss and net loss per share came in at $153.40 billion and $0.91 compared to a net income and EPS of $144.60 billion and $1.24 in the prior year’s period, respectively.
Analysts expect TTWO’s EPS to decline 33.8% year-over-year to $3.58 for the current fiscal year ending March 2023. Also, the company has missed its consensus EPS estimates in three of the trailing four quarters, which is disappointing.
The stock has plunged 25.5% over the past year to close the last trading session at $116.31.
TTWO’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a D grade for Stability, Quality, Growth, and Sentiment. Within the Entertainment - Toys & Video Games industry, it ranks #19 of 20 stocks.
Beyond what we stated above, we also have TTWO’s ratings for Value and Momentum. Get all TTWO ratings here.
SVB Financial Group (SIVB)
SIVB is a diverse financial services business that offers an extensive range of banking and financial products and services. It operates through four segments, Silicon Valley Bank; SVB Private; SVB Capital; and SVB Securities.
Silicon Valley Bank, a division of SIVB, is raising $2.25 billion through a share sale after facing huge losses on its U.S. Treasuries and mortgage-backed securities portfolio due to rising interest rates and cash crunch at start-ups it financed. The bank is now dealing with a VC financing slowdown, cash burn at customers, and losses on investments made at historic low rates.
In terms of forward non-GAAP P/E, the stock is trading at 13.77x, 47.1% higher than the industry average of 9.36x. Furthermore, SIVB’s forward Price/Sales of 2.71x is 9.2% higher than the industry average of 2.48x, while its forward Price/Book of 1.17x compares with the 1.10x industry average.
For the fiscal fourth quarter that ended December 31, 2022, SIVB’s total interest expense increased significantly year-over-year to $718 million, while its total non-interest income decreased 12.7% from the year-ago value to $490 million. The company’s net income available to common stockholders and EPS declined 25.9% and 25.7% year-over-year to $275 million and $4.62, respectively.
Analysts expect SIVB’s revenue to decline 5.9% year-over-year to $5.85 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is projected to worsen by 23.4% from the previous year to $19.42. Shares of SIVB have slumped 17.5% over the past month and 48.2% over the past year to close the last trading session at $267.83.
SIVB’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, equating to Sell in our proprietary rating system.
The stock has a D grade for Stability, Quality, Growth, and Sentiment. Within the D-rated Pacific Regional Banks industry, it is ranked #40 of 41 stocks.
Click here to see the additional ratings of SIVB for Value and Momentum.
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TTWO shares were trading at $115.62 per share on Thursday afternoon, down $0.69 (-0.59%). Year-to-date, TTWO has gained 11.03%, versus a 4.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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