Morgan Stanley has downgraded Udemy Inc (NASDAQ: UDMY) to ‘Underweight’ from ‘Neutral’ and reduced its price target to $7.50 from $10, implying a potential downside of 7% from the current trading price.

The downgrade reflects concerns over Udemy’s strategic shift toward large enterprise customers amid weakening demand, a move that contrasts with prior expectations of near-term acceleration.

Following the announcement, Udemy’s shares fell 4.7% to $7.75 in early trading, extending the stock’s year-to-date decline to approximately 45%.

Morgan Stanley analysts argue that Udemy’s profitability targets, which rely heavily on significant operating leverage, are misaligned with the company’s lower top-line growth projections.

They anticipate continued growth deceleration due to weak web traffic and are cautious about the medium-term risks associated with the strategic pivot.

The analysts also highlight valuation concerns, noting that Udemy trades at a 31% premium in enterprise value to 2025 sales compared to its closest competitor, Coursera (NYSE: COUR), despite Udemy’s slower growth, smaller total addressable market, less differentiation, and higher transactional revenue.

On an enterprise value to 2025 free cash flow basis, Udemy trades at a 50% premium to Coursera.

Analysts cautious on Udemy amid execution concerns

This is not the first time in recent months that Udemy has faced skepticism from analysts.

In August, Bank of America downgraded the stock to “Neutral” from “Buy” and slashed its price target to $8.50 from $14, indicating an 8% downside at that time.

Bank of America cited concerns over execution missteps, ongoing strategic operational changes, and insufficient evidence that revenue trends are stabilizing.

Despite acknowledging Udemy’s potential to benefit from a secular shift toward skills training—especially in artificial intelligence—the analysts remained cautious due to these uncertainties.

Udemy misses EPS, lowers 2024 guidance as growth slows

Udemy’s second-quarter 2024 earnings report did little to assuage these concerns. The company reported a non-GAAP EPS of -$0.04, missing analyst estimates by $0.03.

Revenue reached $194.4 million, a 9.1% year-over-year increase that slightly beat consensus estimates by $0.25 million.

However, the company significantly reduced its full-year 2024 revenue guidance for the second time this year, attributing the cut to challenging macroeconomic conditions, softer marketplace conversions, tight enterprise customer budgets, and ongoing optimization of its go-to-market strategy.

The company’s fundamental performance reveals challenges in both its Consumer and Enterprise segments.

Consumer segment revenue declined by 4% year-over-year to $73.8 million, with monthly average buyers decreasing by 4% to 1.29 million.

This marks the first quarter of negative year-over-year performance and a 10% sequential decline, raising concerns about the weakening of Udemy’s flywheel effect, where a decrease in users could lead to fewer instructors and less content, further diminishing user engagement.

The Enterprise segment, known as Udemy Business (UB), grew revenue by 19% year-over-year to $120.6 million but is experiencing deceleration.

UB’s net dollar retention rate declined from 104% to 101%, and the rate for large customers dropped from 111% to 108%. Annual recurring revenue growth in UB also slowed from 22% in the first quarter to 17% in the second quarter.

Udemy refocuses on large enterprises, announces $25M cost-saving plan

In response to these challenges, Udemy announced a strategic shift to focus on large enterprise customers, aiming to enhance operational efficiency and achieve significant margin expansion.

The company plans to reallocate resources toward enterprises with over 1,000 employees, increase penetration within its existing large customer base, and expand strategic partnerships to strengthen global distribution.

As part of this initiative, Udemy unveiled a restructuring plan affecting approximately 280 global employees, about 19% of its total headcount as of fiscal year-end 2023.

This restructuring is expected to yield annualized cost savings of $25 million but will incur charges of $16 to $19 million spread across the third quarter of 2024 to the first quarter of 2025.

Udemy is targeting adjusted EBITDA in the range of $130 to $150 million for full-year 2026, up from an expected $26 million in 2024.

Despite these cost-saving measures, concerns persist regarding Udemy’s ability to achieve its profitability targets amid slowing revenue growth.

Udemy’s valuation stretched amid slow growth and high costs

The company’s valuation appears stretched when compared to peers. Udemy trades at an enterprise value to sales multiple that is a 31% premium over Coursera, despite exhibiting slower growth and lower margins.

High stock-based compensation expenses, running at approximately $95 million annually, further raise questions about earnings quality and potential shareholder dilution.

The shares currently trade at an EV/Sales multiple of around 1.04x. While this figure may seem low, it is comparable to sector peers like Coursera, suggesting industry-wide multiple compression due to increased competition and macroeconomic headwinds.

Given these developments, investors are closely monitoring how these fundamental challenges might influence Udemy’s stock price in the near term.

To better understand the stock’s potential trajectory, examining technical indicators may provide valuable insights into support and resistance levels, aiding investors in making more informed decisions.

Weak across timeframes

Udemy shares rose to a high of $32.62 a few weeks following the company’s IPO in late 2021. However, they have been in an extended downtrend ever since making their all-time low at $6.67 last month.

Source: TradingView

Despite the recent bounce back that it has seen, the stock remains weak across timeframes. Hence, investors looking to initiate a fresh long position must avoid doing so unless the stock starts trading above its recent swing high of $9.48.

Traders who are bearish on the stock can initiate a short position on a bounce back above $8 levels with a stop loss at $9.55. If the downtrend continues, the stock can fall below $5.8 levels in the coming months.

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Bank of America has downgraded HP Inc. (NYSE: HPQ) from a Buy to a Neutral rating due to concerns over declining margins in the company’s printing division.

Analyst Wamsi Mohan cited that any growth in earnings per share (EPS) is expected to come primarily from share buybacks—estimated at a 4% reduction in share count—rather than operational improvements.

Despite the downgrade, Mohan maintained his price target at $37, which aligns with the current trading price, suggesting limited potential for stock appreciation.

The core issue revolves around HP’s printing segment, where operating margins are projected to revert to 18%, the middle of their historical range. Print revenues are expected to decline by 5% in fiscal 2024, followed by 3% and 2% decreases in 2025 and 2026, respectively.

Mohan expressed that cost reductions and supply chain issues during the COVID-19 pandemic had temporarily inflated print margins, a situation that is not sustainable in the long term.

Any further erosion in print margins could exert additional pressure on HP’s earnings.

Vyopta acquisition

In an effort to diversify and strengthen its portfolio, HP recently acquired Vyopta, an Austin-based software company specializing in collaboration management solutions.

Although the financial terms were not disclosed, this strategic move aims to enhance HP’s offerings in workplace solutions and improve employee experiences.

The acquisition will expand HP’s capabilities in advanced analytics and monitoring for unified communications networks, potentially opening new revenue streams.

Benefits of CHIPS Act

HP is also set to benefit from the CHIPS and Science Act, having signed a tentative agreement to receive up to $50 million in proposed funding.

This aid will support the expansion and modernization of HP’s facility in Corvallis, Oregon.

The investment is expected to bolster the company’s manufacturing capabilities in silicon devices crucial for life sciences research and development.

On the technology front, CEO Enrique Lores emphasized the significant role of artificial intelligence in driving future PC demand.

HP plans to integrate AI into its product lineup to facilitate hybrid work environments and boost employee productivity.

The company anticipates that AI-enabled PCs will become a major growth driver by 2025 and 2026.

Lores projected that within three years, AI PCs could constitute about 50% of market shipments, potentially increasing the average selling price of PCs by 5% to 10%.

HP misses Q3 earnings, lowers full-year guidance

Despite these forward-looking strategies, HP’s recent third-quarter earnings report highlighted some challenges.

The company reported adjusted EPS of $0.83, missing analyst expectations of $0.86. Revenue for the quarter stood at $13.52 billion, slightly surpassing the anticipated $13.36 billion.

However, HP lowered its full-year EPS guidance to a range of $3.35 to $3.45 from the previous $3.30 to $3.60, indicating tempered expectations for the near future.

Analysts divided on HP: price targets range from $30 to $37

Analyst opinions on HP remain mixed. Wells Fargo maintains an Underweight rating with a $30 price target, expressing concerns over ongoing weaknesses in both the PC and printing segments.

Citi Research holds a Buy rating with a $37 price target, focusing on the potential revenue growth from AI-enabled PCs in the coming years.

Barclays has adjusted its price target slightly downward to $32 from $33, maintaining an Equal Weight rating and expressing skepticism about the immediate financial impact of AI PCs.

HP’s undervaluation and strong returns make it a compelling buy

From a valuation standpoint, HP’s forward P/E ratio is approximately 10.3, which is lower than that of competitors like Dell Technologies (12.99) and Lenovo (12.51).

This suggests that HP may be undervalued relative to its peers. The company has been aggressive in returning capital to shareholders, averaging $3 billion per year in stock buybacks since 2016.

With a dividend yield of around 3% and a 12% annual increase in dividends per share since 2016, HP demonstrates a strong commitment to shareholder returns.

While HP faces challenges in its printing division and awaits the anticipated demand for AI PCs, its strategic acquisitions and shareholder-friendly policies offer a nuanced investment case.

The stock’s current valuation reflects both the risks and opportunities ahead.

To gain a clearer picture of HP’s potential trajectory, it’s essential to examine not just the fundamentals but also the technical aspects influencing its stock performance. Now, let’s see what the charts have to say about the stock’s price trajectory.

Strong bounce brings bulls back in control

HP’s stock made its all-time high near $23 in June this year but then crashed to $16 in the next few weeks.

Source: TradingView

However, it has seen a strong bounce back since 10^th September that has brought it back above $20 levels indicating that the medium-term downtrend might have come to an end.

Considering that investors who are bullish on the stock can open fresh long positions at current levels with a stop loss at $15.75. If the upward momentum sustains, we can see the stock making fresh all-time highs soon.

Traders who are bearish on the stock must not short it at current levels given the bullish momentum it is witnessing. A short position must only be considered if the stock falls below its 100-day moving average which is currently at $19.13.

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The Vanguard S&P 500 (VOO) and the Schwab US Dividend Equity (SCHD) ETFs have done well this year and are sitting near their all-time high. The SCHD fund was trading at $83.75, a few points below its all-time high of $84.56, while VOO was at $530. They have risen by 21% and 13%, respectively. Here are three catalysts that could push them higher this year.

Federal Reserve interest rate cuts

The first important catalyst for the VOO and SCHD ETFs is the Federal Reserve, which has started cutting interest rates.

In its decision last week, the bank decided to slash them by 0.50%, bigger than what most analysts were expecting.

The bank has signalled that it will continue cutting rates in the next few meetings because of the weakening labor market. 

Rate cuts have a major impact because the amount of money that have been saved in money market funds as investors took advantage of the 5% interest rates.

Many investors will return to stocks with money market funds no longer generating these returns. In this, they will likely move to the best-in-class funds like those tracking the S&P 500 index and the SCHD fund.

The other implication of lower interest rates is that corporate actions will start bouncing back. Just this week, Blackstone acquired Smartshee, and analysts expect that the trend will continue. M&A deals worth over $1.5 trillion have been announced this year. Stocks often do well when M&A activity is booming, as we saw in 2021. 

The Fed is not the only central bank that is cutting rates. Banks like the Swiss National Bank (SNB), European Central Bank (ECB), Bank of England (BoE), and Riksbank have slashed rates, lowering borrowing costs.

Strong earnings growth

The next important catalyst for the VOO and SCHD ETFs is corporate earnings, which have been relatively strong this year.

Data by FactSet shows that companies in the S&P 500 index had a blended earnings growth of over 10% in the second quarter. 

The company expects third-quarter earnings growth to be 4.6%, which will mark the fifth quarter of earnings growth. While this growth rate will be lower than that in the second quarter, it is still a good number. 

There is also a chance that companies will report stronger results than expected as they have done in the past. As such, stocks will likely do well because of this earnings growth.

US election as a catalyst

The other important catalyst for the SCHD and VOO fund is the US election, which will happen in November. 

Historically, stocks tend to have some volatility ahead of the US general election as the uncertainty on who will be the president rise.

They then surge after the election ends as investors embrace the new normal in the financial market. In this, investors realise that American stocks do well regardless of who is in the White House. The S&P 500 index has always risen to a record high during most presidential terms. 

The S&P 500 and the SCHD also have technical catalysts ahead since they have moved above all moving averages, pointing to more upside. Additionally, analysts from most banks, including Goldman Sachs and Bank of America have boosted their forward guidance for the S&P 500 index.

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Walgreens Boots Alliance (WBA) has become a fallen angel, costing investors billions of dollars in the past few years. Its stock has imploded, falling from $69 in 2014 to $9 today, meaning that a $1000 investment at its top would now be worth just $130. On the other hand, a similar investment in the benchmark S&P 500 index would be worth over $2,600.

Major headwinds remain

Walgreens Boots Alliance, the second-biggest pharmacy chain in the US, has gone through substantial challenges in the last decade. 

A closer look, however, shows that some of its most recent problems have also happened across other speciality companies in the US. 

Discount stores like Dollar General, Dollar Tree, and Family Dollar are some of the worst-performing companies in the S&P 500 index this year.

Similarly, Lululemon, one of the best-known players in athleisure, has crashed, while Ulta Beauty, the market leader in the cosmetics industry, has moved into a bear market.

The main issue is that these companies are competing with other national brands like Amazon, Target, and Kroger which have boosted their investments in their respective verticals. For example, a company like Walmart has worked to become a one-stop shop for all pharmaceutical needs.

Competition is coming from other companies as well. For example, a company like Hims & Hers that focuses on several key verticles has done well, with its stock surging by almost 200% in the last twelve months. 

Similarly, pharmaceutical companies have started to sell some products directly to consumers. Eli Lilly has launched Lilly Direct, while Pfizer will launch PfizerForAll. 

Walgreens has also faced other challenges, like retail theft, which has pushed it to lock some of its items. Also, it has had some self-inflicted issues like its large acquisition of VillageMD, which it had to write off earlier this year. 

Walgreens is not the only pharmaceutical retailer that is in trouble. Rite Aid, then the third-biggest player, went bankrupt, while CVS Health’s stock has dropped by over 22% this year.

WBA is cheap for a reason

Walgreens Boots Alliance has become one of the cheapest companies in Wall Street. It has a non-GAAP P/E ratio of 2.70 and a forward multiple of 3. These numbers are significantly below the industry – consumer staples – median of 18.5 and 18.2. The S&P 500 index has a P/E multiple of 21.

The company also has a trailing and forward EV to EBITDA multiples of 10 and 9, which are lower than the industry medians of 12 and 13. 

Therefore, to some investors, Walgreens is a good and undervalued blue-chip company that has a room to engineer a strong turnaround in the future.

As part of the management’s turnaround efforts, the company has laid off staff, closed some stores, remodelled others, and launched strategic options for its Boots business. It hopes to achieve $1 billion in annual savings and cut stores by 25% over three years.

The most recent financial results showed that Walgreens Boots Alliance’s revenue rose by 2.6% in the last quarter to $36.5 billion, while its adjusted operating income fell by 36.3% to $613 million. 

In the first six months of the year, its revenue rose by 6.2% to $110 billion, while its operating loss was $13 billion because of its VillageMD write-off. 

Most importantly, the company lowered its forward guidance for the year, with its EPS expected to come in at between $2.80 and $2.95. It attributed this cut to the “worse-than-expected consumer environment driving higher promotional activity.”

Walgreens also noted that these challenges would persist in the coming year, which explains why the stock has plunged.

Therefore, buying WBA stock now is a bet that the management will do well and turn around the company as challenges remain. Implementing a good turnaround is possible but is expected to take time, as we’ve seen in other similar companies like General Electric.

Analysts are relatively pessimistic about Walgreens, with those at Bank of America, Morgan Stanley, and Barclays having an underweight rating. Others at UBS, Mizuho, and Truist have a neutral rating.

At the same time, Walgreens’ stock has seen an elevated increase in short interest, which hs moved close to 10%. This is a sign that many investors are pessimistic about the company.

Walgreens stock price analysis

WBA chart by TradingView

The weekly chart shows that the WBA share price has been in a strong downward trend for a long time. It crossed the important support level at $27, its lowest point in 2020, and 2022 in July 2023. By moving below that level, the stock invalidated the forming double-bottom pattern.

Walgreens shares have remained below all moving averages while oscillators like the Stochastic, Relative Strength Index (RSI), and the percentage price oscillator show that it has become highly oversold.

Therefore, the path of the least resistance for the stock is downwards, with the next point to watch being at $8. However, with the stock being oversold, a single positive news can push it much higher quickly. The next potential catalyst will come out on October 15, when the company publishes its financial results.

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GameStop (GME) stock price has moved sideways in the past few weeks as investors reflect on its recent earnings and cash raise. It was trading at $22.48 on Friday, much lower than the year-to-date high of $64.

GME is in a conundrum

GameStop is in a difficult place as its business continues slowing down as more customers move to video games streaming. 

The most recent financial results showed that the company was not doing well, with its revenues continuing to fall.

GameStop’s net sales dropped from over $1.16 billion in the second quarter of 2023 to $798 million in the last quarter.  On the positive side, its quarterly net profit jumped to over $14 million. 

The challenge, however, is that analysts expect that the company’s growth will continue moving in the negative direction in the future since there is no potential catalyst. 

The average estimate is that GameStop’s revenue will come in at $887 million in the third quarter, followed by $1.5 billion in the next quarter. Its Q4 revenue will be a 16% drop from what it made last year.

Analysts also expect that its annual revenues will drop by almost 23% this year to over $4 billion followed by $3.8 billion next year. 

GameStop’s annual revenue has been dropping in the past few years. It stood at $6.45 billion in 2019 followed by $5 billion in 2020 and $6 billion in the following year as the meme stock hype led to higher sales. It then generated $5.2 billion in the last year. 

Therefore, with GameStop, we have a company with almost 3,000 stores in the United States and thousands of employees. If the trend continues, the company will not be in existence in the next decade as customers opt for online game purchases. 

GameStop has a solid balance sheet

On the positive side, GameStop is different from other troubled retailers because of its strong balance sheet. 

It ended the last quarter with over $4.19 billion in cash and cash equivalents, $11 million in marketable securities, and over $560 million in inventories. Its cash hoard has grown recently after raising $400 million by diluting shareholders. 

Most importantly, GameStop does not have any meaningful debt, with its total long-term debt being $12.4 million.

Therefore, the management should work to change its business. Jim Cramer has recommended that it should be a bank while other analysts believe that it should be an investment company.

On the latter, one of the potential approaches would be to simply invest the cash hoard in a low-risk index fund such as one tracking the S&P 500 or the Nasdaq 100. It would then, painfully, do away with its shrinking retail stores.

S&P 500 index has an average annual return of 10.5%, while the Nasdaq 100 index averages about 13%. Therefore, assuming that its annual return is 10%, it means that the company would make a high-margin $400 million in annual revenues a year.

The other approach is to replicate what MicroStrategy has done. With its business slowing, MicroStrategy has become the biggest holder of Bitcoin, with its holdings valued at over $16 billion and its market cap being at $35 billion. 

Investing in Bitcoin makes sense because it is a rare asset that has done well over the years, which explains why Blackrock, the biggest asset manager, has started buying Bitcoin for its balance sheet. 

Analysts believe that GameStop’s management will change the company into an investment holding company, which explains why its market cap of $9 billion is higher than its cash on hand.

GameStop stock analysis

On the weekly chart, we see that the GME share price has been in a tight range in the past few weeks. It has remained at the 50-week moving average. Most importantly, the stock has formed a falling wedge pattern, a popular bullish sign. Therefore, the stock will likely bounce back in the coming weeks as bulls target the next key resistance point at $30.

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