Dave & Buster's, Devon Energy, Amazon, Microsoft and Google highlighted as Zacks Bull and Bear of the Day - Press Releases

For Immediate Release

Chicago, IL – February 25, 2015– Zacks Equity Research highlights Dave & Buster’s (PLAY-Free Report) as the Bull of the Day and Devon Energy (DVN-Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Amazon (AMZN-Free Report), Microsoft (MSFT-Free Report) and Google (GOOGL-Free Report).
 
Here is a synopsis of all five stocks:
 
Bull of the Day:

The restaurant sector has been on fire lately as lower oil prices and a stronger job market have benefited many companies in this space. The outlook is pretty bright too, as the retail-restaurant sector currently has a Zacks Industry Rank in the top 20% overall.

While there are many ways to play this well-positioned sector, one that you might not have considered is the relatively recent IPO of Dave & Buster’s (PLAY-Free Report). The company is pretty unique in the sector thanks to its heavy ‘amusement’ component and it could be a strong outperformer for months to come as well.

Dave & Buster’s is a Dallas-based chain that has about 70 stores across the United States. The company combines a traditional sit-down restaurant with an arcade, allowing customers to purchase food and drinks, or play a wide variety of games on a given visit.

These games are really what sets Dave & Buster’s apart from the competition though, and especially from a stock perspective. That is because the game component of the business is a pretty high profit margin one and it gives PLAY a nice boost in revenues too. In fact, the amusement/game side of the business accounts for slightly over half of the total revenues for PLAY showing just how important this segment is to their business model.

Analysts seem to be fans of the company’s approach too, as we have seen some solid earnings estimate revisions as of late. In the past 30 days, we have seen the current quarter estimate go from $0.21/share to $0.30/share, while the current year estimate has gone from 60 cents a share to 69 cents a share in the same time frame.

At this level, PLAY will be pushing past 56% EPS growth year-over-year for the current year, and then 33% for the following year. So while growth levels are expected to taper off, the company is still expected to charge ahead in the restaurant space.

Bear of the Day:
 
With continued uncertainty over oil prices, energy stocks can’t seem to catch a break lately. Yes, prices for WTI crude have risen from 52 week lows, but their current level—around the $50/bbl. mark—is still well shy of a good price point for many companies.

Take Devon Energy (DVN-Free Report) for example. This Oklahoma-based company is in the volatile exploration and production space with interests in the in-focus shale regions in the middle of the United States.

DVN is much larger (and has remained profitable) when compared to many of its more leveraged or underprepared peers in the space, but it has still seen pain over the past few months. In fact, has seen its share price drop by about 14% in the past six months, though this represents a performance that is well off of the lows for the company’s stock which were seen in December.

Yet while many investors might view the recent positive trading for DVN as a positive, it is best to take a look at some of the fundamentals first. As while DVN might have beaten the S&P 500 over the past month, current and recently updated earnings estimates suggest that DVN’s short-term run might be coming to an end soon.

After all, analysts—those who are arguably the most in the know about the company—haven’t really been believers in the recent DVN rally as they have almost universally been slashing their earnings estimates for DVN lately. For the current and next quarters, we have seen a total of 10 estimates go down in the last seven days compared to zero higher, while for the current and next year time frames, just two estimates have gone higher compared to a total of 13 lower.

Additional content:

Software Speak: Amazon to Spin-off AWS?

Ever since Amazon (AMZN-Free Report) management said it would start breaking out AWS as a segment, I have been wondering about the possible reasons. The SEC doesn’t require a company to separately report a business until it gets to 10% of revenue, operating profits or assets.

We already know that AWS doesn’t qualify on the revenue factor (it contributes around 6% currently). We are in the dark about profit and asset share, although it’s likely that such a small business doesn’t account for a large share of profits or assets either.

A Little Background

AWS is in the business of providing computing infrastructure like a utility so companies don’t need to maintain their own IT infrastructure. It facilitates the movement that we have come to know as cloud computing. Direct benefits for companies taking to the cloud include cost containment, scaling and faster time to market. The strong growth prospects allowed Amazon to grow its “Other” revenue, most of which is AWS, 43% in North America and 3% internationally.

But enterprises don’t usually move to the cloud in one big jump and they may also require to run a hybrid structure: ie, rely partly on the cloud and partly (the confidential part) on their own infrastructure that may be maintained by a cloud provider. This has led to public, private and hybrid clouds.

Recent numbers from Synergy Research indicate that Microsoft (MSFT-Free Report) and Google (GOOGL-Free Report) are growing very fast in the segment. While Amazon still accounts for 30% of Infrastructure-as-a-Service (IaaS) spending, the second largest player, Microsoft, climbed to 10% in 2014. Microsoft also grew the strongest (up 93%), with Google close behind at 87% (its market share is smaller at around 5%).

A recent survey of IT professionals by RightScale confirms that Microsoft in particular is closing the gap on AWS. The research firm found that companies in the survey using AWS increased from 54% in 2014 to 57% so far this year, while companies using Microsoft Azure went from 6% to 12%. Not just that: 29% of respondents not already using Azure IaaS said they were planning on using or testing it this year.

Why the Lead Is Shrinking

The most obvious reason is what the different companies are bringing to the table. Microsoft was the leader in the traditional computing business, so the company already has relationships and clout at customers. There’s also a great deal of comfort in continuing with the legacy provider. The company has also doubled down on opening up. As competition heats up, Microsoft appears to be everywhere with a solution for every problem.

Amazon has enjoyed a first mover advantage so far mainly because it was quick to identify the trend. But the speed at which businesses are moving to the cloud and the amount of innovation in the space is putting pressure on its resources.

Amazon runs every business at rock-bottom prices, but it’s hard to undercut Microsoft and Google on prices since both have very deep pockets and lucrative business models that help them churn out high margins and billions in cash flow. And sure enough, every time Amazon took down prices in the past year, both Google and Microsoft did likewise.

Spin-off Would Solve Problems

First, AWS has a chance of growing faster with more focused attention. Amazon needs to expand its offerings and create synergies for customers if it is to remain serious competition for Microsoft. Its recently-announced email service failed to arouse much interest although it felt like an indication that Amazon was wising up.

Second, building AWS as a business requires more cash. Amazon has already spent billions on infrastructure but a cash infusion would be great. A post spin-off IPO would go well I think and the debt market is also conducive at the moment.

Third, Amazon’s core business is low-margin retail, making it more difficult for the company to scrape out funds to pick up or maintain share in the capital-intensive, highly-competitive, fast-growing cloud business. In the last quarter, management provided supplementary cash flow information that showed how much the company was pumping into assets. And on the call, management said that both AWS and the core business would require continued investment. If this continues too much longer, FCF could head to negative territory.

Fourth, Amazon could maintain a small interest in AWS to benefit from its growth or spin it off entirely without having to pay a cent in capital gains tax.

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