While down nearly 50% this year, Alliance Data Systems’ (NYSE:ADS) stock jumped more than 13% in the last 5 trading days. This loyalty and marketing services company relies on transaction data. As transactions declined amid Covid-19, so did the stock. So what really happened during the last week? Nothing in particular – it’s just that sooner or later, the market had to recognize that the stock is undervalued. That’s what our AI engine as well as the company’s underlying financials suggest. And this means that this is a good time to invest and hold.
Our AI engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period. It suggests nearly a 32% probability of Alliance Data Systems moving up another 5% over the next 21 trading days. Compared to this, the probability of moving down -5% is 23%, implying that the stock is 1.4x more likely to move up than down for this quantum of change. The likelihood of moving up only becomes stronger if we look at a longer time frame – such as 6 months. In this case, there is 44% chance of the stock jumping 10% while the chance of it falling -10% shrinks to just 18%. Our detailed dashboard highlights the chances of Alliance Data Systems’ stock rising after a fall and should help you understand near-term return probabilities for different levels of movements.
But looking at the underlying fundamentals, it is clear that while there is some weakness in growth, the market has pushed the stock down disproportionately this year. This means that Alliance Data Systems could be a good long-term bet. Our dashboard Big Movers: Alliance Data Systems Moved 13.4% – What Next? lays this out.
Alliance Data Systems’ stock price increased 13.4% last week. In comparison, the stock has decreased -54% between 2017 and 2019, and has decreased -77% between 2017 and now. So this move is at odds with the long-term trend. Do the underlying financials support this? Sure there are some weaknesses but the market price trend in recent years, as well as this year, appears to be disproportionately harsh. In fact, Alliance Data Systems’ revenue has increased 1.9% from $5,475 Mil in 2017 to $5,581 Mil in 2019. For the last 12 months, this figure stood at $5,260 Mil, implying a decrease of -5.8% over 2019 numbers, which is much better than a lot of firms can say this year. Margin is where we are slightly concerned. Alliance Data Systems’ net margins have decreased -65% from 14.4% in 2017 to 5% in 2019. For the last 12 months, this figure further shrank to 1.11%. However, we expect margin improvement going forward along with a slight improvement in top line growth.
Taking both perspectives together, we believe that Alliance Data Systems could be a reasonable investment. However, there are other good alternatives in the market, as well. For instance, here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.