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Market Snapshot
briefing.com
| Dow | 31564.29 | -228.54 | (-0.72%) | | Nasdaq | 11828.66 | -54.44 | (-0.46%) | | SP 500 | 3961.24 | -24.99 | (-0.63%) | | 10-yr Note |
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| | NYSE | Adv 928 | Dec 2104 | Vol 1.2 bln | | Nasdaq | Adv 1733 | Dec 2447 | Vol 4.8 bln |
Industry Watch
| Strong: -- |
| | Weak: Materials, Consumer Discretionary, Industrials, Information Technology |
Moving the Market
-- Broad selling interest
-- Pullback in oil prices
-- Mixed price action from earnings and corporate news since yesterday's
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Closing Summary
31-Aug-22 16:30 ET
Dow -280.44 at 31512.39, Nasdaq -66.93 at 11816.17, S&P -31.16 at 3955.07
[BRIEFING.COM] The stock market built on its recent losses during the last trading day of August. The major indices opened somewhat higher before spending most of the morning oscillating around the flat line. Downside momentum picked up in the afternoon with the main indices closing near session lows.
Ahead of the open, market participants digested new hawkish comments from Cleveland Fed President Mester (FOMC voter). She said that she thinks the fed funds rate will be somewhat above 4.00% by early next year and that she does not anticipate a rate cut in 2023. She added, "This will be painful in the near term but so is high inflation."
The market was mixed in the early going, but closed with many stocks down on the day. At midday, decliners led advancers by an 11-to-10 margin at the NYSE and a barely greater than 1-to-1 margin at the Nasdaq. At the close, decliners led advancers by a greater than 2-to-1 margin at the NYSE and a 3-to-2 margin at the Nasdaq.
The Vanguard Mega Cap Growth ETF (MGK) and the Invesco S&P 500 Equal Weight ETF (RSP) both closed down 0.7% while the S&P 500 logged a 0.8% loss.
Ten of the 11 S&P 500 sectors closed in the red while communication services was flat. Meta Platforms (META 162.93, +5.77, +3.7%) boosted sector performance, partly fueled by Snap's (SNAP 10.88, +0.87, +8.7%) better than expected revenue guidance while also benefiting from some month-end buying interest in a beaten-up mega-cap stock.
The information technology sector closed near the bottom of the pack after heavy selling in HP Inc (HPQ 28.71, -2.39, -7.7%) and Seagate Technology (STX 66.96, -2.46, -3.5%). The former issued disappointing EPS guidance with its earnings report while the latter lowered prior Q1 EPS guidance.
Only two S&P 500 sector managed to hold onto gains for the month, utilities with a 0.1% gain and energy with a 2.2% gain.
Separately, energy complex futures settled mixed. WTI crude oil futures fell 2.4% to $89.41/bbl while natural gas futures rose 0.9% to $9.14/mmbtu.
The Treasury market was mixed with the 2-yr note yield falling two basis points to 3.44% while the 10-yr note yield rose two basis points to 3.13%. Treasury yields rose sharply on the month with the 2-yr note yield climbing 54 basis points while the 10-yr note yield rose 49 basis points.
Market participants will receive the following economic data Thursday:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 250,000; prior 243,000), Continuing Claims (prior 1.415 mln), revised Q2 Productivity (Briefing.com consensus -4.6%; prior -4.6%), and revised Q2 Unit Labor Costs (Briefing.com consensus 10.7%; prior 10.8%)
- 9:45 ET: Final August IHS Markit Manufacturing PMI (prior 51.3)
- 10:00 ET: July Construction Spending (Briefing.com consensus -0.1%; prior -1.1%) and August ISM Manufacturing Index (Briefing.com consensus 52.0%; prior 52.8%)
- 10:30 ET: Weekly natural gas inventories (prior +60 bcf)
Ahead of Thursday's open, Hormel Foods (HRL), Campbell Soup (CPB), Signet Jewelers (SIG), and Ollie’s Bargain Outlet (OLLI) are all set to report earnings.
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index showed a 3.7% decline following the prior week's 1.2% decrease
- August ADP Employment Change Report showed an estimated 132,000 employees were added to private sector payrolls versus 270,000 in July based on ADP's revised methodology
- August Chicago PMI reading was 52.2 (Briefing.com consensus 53.1) after the prior reading of 52.1.
- Weekly EIA Crude Oil Inventories showed a draw of 3.33 million barrels after last week's draw of 3.28 million
Dow Jones Industrial Average: -13.9% YTD
S&P 400: -14.5% YTD
S&P 500: -17.0% YTD
Russell 2000: -17.9% YTD
Nasdaq Composite: -24.5% YTD
Market stays in narrow range ahead of close
31-Aug-22 15:30 ET
Dow -181.99 at 31610.84, Nasdaq -17.17 at 11865.93, S&P -17.06 at 3969.17
[BRIEFING.COM] The major indices remain trading in a narrow range into the close.
After the close, Greif (GEF), Cooper (COO), Five Below (FIVE) all reporting earnings.
Ahead of Thursday's open, Hormel Foods (HRL), Campbell Soup (CPB), Signet Jewelers (SIG), and Ollie’s Bargain Outlet (OLLI) are all set to report earnings.
Market participants will receive the following economic data Thursday:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 250,000; prior 243,000), Continuing Claims (prior 1.415 mln), revised Q2 Productivity (Briefing.com consensus -4.6%; prior -4.6%), and revised Q2 Unit Labor Costs (Briefing.com consensus 10.7%; prior 10.8%)
- 9:45 ET: Final August IHS Markit Manufacturing PMI (prior 51.3)
- 10:00 ET: July Construction Spending (Briefing.com consensus -0.1%; prior -1.1%) and August ISM Manufacturing Index (Briefing.com consensus 52.0%; prior 52.8%)
- 10:30 ET: Weekly natural gas inventories (prior +60 bcf)
Market continues descent
31-Aug-22 15:05 ET
Dow -228.54 at 31564.29, Nasdaq -54.44 at 11828.66, S&P -24.99 at 3961.24
[BRIEFING.COM] The major indices are just off their session lows.
Almost every S&P 500 sector trades in negative territory, only communication services (+0.4%) holds onto gains on the day.
The CBOE Volatility Index climbed higher as the market fell lower, currently up 0.3%, or 0.08, to 26.30.
Separately, copper futures fell 0.9% today to $3.52/lbs.
Mosaic dips, stock trading ex-div today; META outperforms
31-Aug-22 14:25 ET
Dow -167.54 at 31625.29, Nasdaq -27.25 at 11855.85, S&P -16.28 at 3969.95
[BRIEFING.COM] The benchmark S&P 500 (-0.41%) is firmly in second place to this point on Wednesday, trading just a hair off session lows.
S&P 500 constituents Mosaic (MOS 54.43, -2.76, -4.83%), Centene (CNC 89.95, -1.24, -1.36%), and Monolithic Power (MPWR 450.10, -13.07, -2.82%) pepper the bottom of the standings. MOS goes ex-dividend today, CNC slips on new Medicaid deal in Iowa which excludes CNC, while MPWR is weaker owing in part to ongoing geopolitical tensions in Taiwan as well as to a lesser extent Seagate's (STX 67.06, -2.36, -3.40%) revenue warning.
Meanwhile, Meta Platforms (META 163.10, +5.94, +3.78%) is today's top performer; reports circulating that Cleveland Research was out positive on the name earlier.
Gold extends monthly losing streak to five, the longest such streak in four years
31-Aug-22 14:00 ET
Dow -148.61 at 31644.22, Nasdaq -34.49 at 11848.61, S&P -14.33 at 3971.90
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (-0.29%) hosts the shallowest declines.
Gold futures settled $10.10 lower (-0.6%) to $1,726.20/oz, down -3.1% on the month to extend its monthly declines to five, its longest such streak in four years.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $108.72.
Seagate Tech slashes its SepQ guidance as enterprise buying behavior grows more cautious (STX)
As buying behavior among global OEMs and some U.S. cloud customers has grown more cautious, Seagate Tech (STX -3%) was forced to slash its prior Q1 (Sep) earnings and revenue forecasts. Slightly over one month ago, STX issued Q1 guidance that already fell well short of analyst expectations, guiding to adjusted EPS of $1.20-1.60 and revs of $2.35-2.65 bln.
The company is now looking at Q1 adjusted earnings to come in meaningfully below its prior guidance and expects revs of just $2.0-2.2 bln, a 32.6% drop yr/yr at the midpoint.
- We are most surprised by how quickly the macroeconomic backdrop shifted from bad to worse in the span of just five weeks. STX was already fairly pessimistic on the near-term during its Q4 (Jun) earnings call in late July, noting that demand for its consumer-facing legacy business deteriorated rapidly at the end of the quarter.
- However, its soft outlook was mainly due to slowing consumer demand, not enterprise/OEM and cloud demand. In fact, STX said that U.S. cloud data center demand remained strong.
- Although, to be fair, it is worth pointing out that STX was somewhat concerned that enterprise demand could wane as companies nervous about the near future reduce their spending.
- STX's competitor, Western Digital (WDC), confirmed that the next few quarters would be challenging after issuing a considerably weak SepQ outlook earlier this month. In fact, WDC may have been more realistic in its quarterly guidance, given that its downbeat forecasts were much worse than STX's from two weeks prior.
- As an aside, due to WDC's already much weaker SepQ outlook than STX's original SepQ guidance, we would be surprised to see WDC reduce its SepQ projections.
- Part of STX's near-term plan is to reduce its production output and moderate FY23 capital investments. Peer Micron (MU) discussed similar plans earlier this month during a forum presentation, noting that it is adjusting supply and doing it quickly due to CY22 demand being below the long-term trend. MU is also reducing capital expenditures. MU will report AugQ earnings on September 29.
There is still some good news. STX commented that long-term demand drivers for mass capacity storage remain intact. Furthermore, WDC expressed bullishness on the long-term growth in cloud storage today, stating that, without question, the cloud is growing, creating ongoing demand for data storage.
Bottom line, STX is in for a difficult next couple of quarters. However, with its shares setting new YTD lows today, perhaps investors are pricing in a worst-case scenario. Nonetheless, we would avoid STX at the moment until macroeconomic conditions begin to turn.
CrowdStrike getting struck down despite issuing beat-and-raise report (CRWD)
Bolstered by enduring demand for cybersecurity products and its strong competitive standing, Crowdstrike (CRWD) once again delivered an impressive beat-and-raise quarterly report. Since going public in June of 2019, CRWD has exceeded analysts' top and bottom-line expectations in every quarter. In a crowded space that offers investors many options, CRWD's consistency and high growth rates have helped separate it from the pack. However, it seems that the company is becoming a victim of its own success as a sense of complacency among investors sets in.
Reminiscent of last quarter, CRWD is succumbing to a sell-the-news reaction after the stock had rallied ahead of its Q2 results. Also similar to last quarter, expectations were ratcheted higher in the wake of upbeat earnings reports from CRWD's competitors. For instance, Palo Alto Networks (PANW) issued a beat-and-raise report last week that featured a 44% increase in billings. Also, a couple weeks prior to PANW, Qualys (QLYS) comfortably beat Q2 expectations, while significantly boosting its FY22 EPS guidance.
When combined with CRWD's meteoric forward P/S, which currently sits at about 19x, the heightened expectations created a challenging set up for the stock. While the company did raise its FY23 guidance, its revised outlook doesn't convey the same bullishness that PANW and QLYS relayed. In fact, PANW's Q3 and FY23 guidance implies that Q4 revenue and EPS will come in at roughly $632 mln and $0.34, respectively, which is just barely above the consensus estimates.
Perhaps analysts are finally catching up to PANW's remarkable run. There is another explanation, though, to account for the declining degree of upside in the guidance. During the earnings conference call, CEO George Kurtz disclosed that the softer macroeconomic environment is causing increased levels of required approvals on some deals. Consequently, deals are taking a little longer to close. Furthermore, he cautioned that new ARR growth in the back half of the year may be less pronounced, given the unseasonal strength achieved in Q1 and Q2.
Still, Kurtz isn't overly concerned since cybersecurity is not a discretionary investment for CIOs and CTOs. This prioritization is evident across CRWD's Q2 metrics.
- The company achieved record net new ARR (annualized recurring revenue) of $218 mln, fueled by robust growth for its emerging products, such as Identity Protection and Humio. With the Q2 increase, ending ARR crossed the $2 bln mark for the first time, reaching $2.14 bln.
- Customers are adopting an increasing number of CRWD's modules, pushing gross retention rates to record highs in Q2. As of July 31, subscription customers that have adopted five or more, six or more and seven or more modules was 59%, 36% and 20%, respectively.
- Net new subscription additions were yet another record, with 1,741 new customers coming on board for a total of 19,686 customers.
Many companies would gladly accept CRWD's high double-digit revenue growth, improving profitability (Q2 EPS up 227% yr/yr), and consistent outperformance relative to expectations. The challenge is that investors have come to expect this high level of performance every quarter. As a result, the stock is priced-to-perfection, so any blemish is put under the microscope and intensely scrutinized. Today, the limited increase to CRWD's FY23 guidance, and the executive's commentary revolving around that guidance, is providing the impetus for a sell-the-news reaction.
HP heads lower on earnings; report was similar to negative results from Dell last week (HPQ)
HP Inc. (HPQ -6.5%) is heading lower today following its Q3 (Jul) earnings report last night. We cautioned in our preview that Dell's (DELL) weak results last week made us nervous about HPQ's report. That turned out to be prescient. HPQ was able to beat slightly on EPS, but missed on revs and guided Q4 (Oct) EPS well below analyst expectations. This has caused the stock to dip below $30 for first time since late October 2021.
- As was the case with Dell, HPQ cited macro headwinds. Specifically, higher inflation led to lower consumer spending for its product categories. Also, demand in Europe worsened from the Russia-Ukraine war.
- HPQ did mention pockets of consumer softness on its Q2 call in May, but the market deteriorated more rapidly than expected late in JulQ. Its commercial business, particularly in the enterprise, helped to partially offset declines in consumer demand, but supply constraints did not allow the company to fully take advantage. All of this is why revenue came up light.
- Personal Systems segment revenue fell 3% yr/yr to $10.1 bln, primarily driven by softening consumer demand and more price competition. Consumer revenue decreased 20% and Commercial revenue increased 7%. Printing segment revenue fell 6% yr/yr to $4.6 bln as consumer softness and supply constraints weighed on results.
- The guidance was probably the most troubling metric as it was well below expectations. Initially, we thought that may have been caused by the recently closed Poly acquisition and maybe analysts had not updated their models. However, HPQ sounded pretty bearish on the call for their core segments.
- Specifically, it expects consumer softness to continue in the near term and does not foresee a near term economic rebound. Also, some companies are taking a more measured approach to their spending. New orders are showing signs of softening demand in commercial categories. Also, while it has made significant progress on supply chain issues, some shortages remain.
- HPQ is responding to the downturn by staying disciplined on pricing and increasing its focus on pockets of profitable growth (premium, peripherals, services). It has also taken steps to improve its supply chain.
Overall, HPQ's report was pretty similar to what we saw from Dell last week. So you might think a weak result was priced in already. However, Dell does not provide specific guidance, and we think the difference here is that HPQ put its guidance into hard numbers and it shocked investors. We would be cautious on HPQ in the near term. We have been fans in the past given its extremely aggressive stock buybacks and cheap valuation. However, we would want to see some stabilization next quarter before going bargain shopping down here.
Ambarella edges past estimates yet again, but quarterly report less than picture perfect (AMBA)
Staying true to form, Ambarella (AMBA) topped EPS and revenue expectations in Q2, continuing a winning streak against quarterly estimates that extends beyond five years. However, this time around, the chip maker barely edged past analysts' forecasts. In fact, this quarter's EPS beat was AMBA's smallest beat during this long stretch of upside performances. While revenue of $80.9 mln and non-GAAP gross margin of 64.5% were both slightly better than AMBA's previous guidance, operating expenses came in $700K higher than the company anticipated due to rising costs for engineering materials.
A more lackluster showing versus the consensus estimates isn't the only issue that's troubling investors.
- There was some hope that the supply chain bottlenecks that caused AMBA to issue downside Q2 revenue guidance last quarter loosened a bit. The COVID-related lockdowns in China seem to be less prevalent than they were in the spring. Unfortunately, though, AMBA didn't experience a meaningful improvement, stating that supply chain issues were the main cause for its sub-seasonal performance.
- Similar to the preceding quarter, kitting challenges across AMBA's customer base -- particularly in the automotive market -- are disrupting orders for its chips. Essentially, the company's customers are having difficulty securing parts and components from other suppliers, causing them to delay orders for AMBA's high definition enabling semiconductors.
- Although the company expects to see some improvement in the supply chain moving forward, a new headwind is now forming from that anticipated development. Specifically, AMBA is seeing some customers reduce the amount of inventory that they're comfortable holding into year-end as component lead times shorten.
- As a result of the points above, AMBA issued cautious guidance for Q3, forecasting revenue of $81-$85 mln. The midpoint of this guidance range is not only below analysts' expectations, but it also equates to a yr/yr decline of 10.5%.
- With the stock trading at about 75x forward earnings, the modest upside results for Q2 and the soft Q3 guidance simply aren't good enough -- especially in these volatile market conditions.
As discouraging as this quarterly report was, the big picture remains bright for AMBA. The company's CV SoCs (computer vision system on chips) are in high demand in the automotive and IoT markets. During the earnings conference call, CEO Fermi Wang disclosed that AMBA's first five nanometer SoC (CV5) entered volume production in Q2 and it already has three IoT customers making large purchases. Additionally, he noted that AMBA provided live demonstrations of its CV3 SoC for leading automotive OEMs and the reception was very positive. The SoC combines all of AMBA's core competencies, including perception processing for cameras, radars, sensor functions, and path planning, into a single unit.
Bolstered by these advancements, AMBA remains on track to achieve its target of CV products representing 45% of total revenue for the year. Ultimately, this revenue mix shift should be favorable for margins and earnings growth, but supply chain issues and macroeconomic factors are dampening this positive transition.
Chewy drifts lower despite its second-straight profitable quarter as guidance comes up light (CHWY)
Despite posting a profitable quarter when analysts expected another round of net losses in Q2 (Jul), shares of Chewy (CHWY -7%) are sliding today. The main culprit is weak Q3 guidance and a slashed FY23 sales forecast. The e-commerce pet supply company expects Q3 revenue growth to decelerate sequentially for the seventh consecutive quarter, forecasting just 10.7% growth yr/yr at the midpoint. Meanwhile, FY23 revs were trimmed to $9.9-10.0 bln, from $10.2-10.4 bln as inflationary pressures continue to weigh on discretionary spending.
Consumers shifting dollars away from discretionary items was a recurring theme across the pet industry recently, highlighted by disappointing quarterly numbers from Petco Health and Wellness (WOOF) and Freshpet (FRPT) earlier this month. Although CHYW's less discretionary consumables category comprised 69% of FY22 revenue, the softness in its hardgoods business is dragging down its more defensive category.
Also hurting CHWY in the short term is muted net active customer growth, which is expected for the remainder of the year, representing a continual slowdown in customer growth. For example, after adding just 2.1% more active customers yr/yr in Q2, CHWY has seen active customer growth slow from +4.2% in Q1 (Apr), +8.0% in 4Q22 (Jan), +14.7% in 3Q22 (Oct), and +21.1% in 2Q22.
- On the plus side, profitability improved considerably in Q2 from the year-ago period, with adjusted EPS expanding to $0.05 from ($0.04). Q2 marked CHWY's second-straight quarter topping earnings estimates and operating in the green even when analysts were calling for net losses. Profitability was assisted by a 60 bp expansion in gross margins in the quarter yr/yr to 28.1% as CHWY's price hikes exceeded rising cost inflation.
- Additionally, CHWY upped its FY23 adjusted EBITDA margin projection to 1.75-2.00%, from its prior range of breakeven to 1%.
- Cost inflation should begin to subside as fuel costs moderate and CHWY continues to improve its supply chain. For example, in July, CHWY launched its third automated fulfillment center (FC). These automated FCs greatly enhance efficiency, with nearly 25% of CHWY's Q2 outbound network volume shipped from its automated FCs coming in at a variable cost per unit 15% lower than its legacy network.
- Another highlight in Q2 was Autoship customer sales growing 17.3% yr/yr to $1.78 bln, reaching a record high of 73.1% of total sales of $2.43 bln, a 280 bp improvement yr/yr and 90 bp improvement sequentially. With Autoship average order values mid to high single digits higher than non-Autoship orders, expanding Autoship sales growth is a significant component of CHWY's long-term health.
Overall, a light revenue forecast for Q3 and trimmed FY23 sales guidance is sending shares lower today. However, CHWY still has positive developments on the horizon. We think its healthy progress on carving out a path toward profitability is being overlooked. Pet sales are also relatively durable during an inflationary period, especially in consumables, which is CHWY's largest category. Therefore, although the near-term may be rocky, CHWY is well-positioned to take share during the current period, setting it up for a solid long-term future.
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