Market Snapshot
| Dow | 35642.82 | +83.38 | (0.23%) | | Nasdaq | 14304.89 | -41.53 | (-0.29%) | | SP 500 | 4581.87 | -8.36 | (-0.18%) | | 10-yr Note | -28/32 | 4.042 |
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| | NYSE | Adv 963 | Dec 1927 | Vol 450 mln | | Nasdaq | Adv 1619 | Dec 2746 | Vol 3.8 bln |
Industry Watch
| Strong: Information Technology, Communication Services |
| | Weak: Energy, Consumer Discretionary, Utilities, Health Care |
Moving the Market
-- Feeling that the market is overdue for a pullback after the stellar first half of the year
-- 10-yr Treasury note yield back above 4.00%, which has stirring some angst about lofty equity valuations and competitive headwinds for stocks
-- Positive reactions to earnings from Caterpillar (CAT), Uber (UBER), and Merck (MRK) providing some support
-- Negative reactions to earnings from the likes of JetBlue (JBLU), Norwegian Cruise Line Holdings (NCLH), and ZoomInfo Technologies (ZI) has acted as a drag
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10-yr note yield settles back above 4.00%
01-Aug-23 15:30 ET
Dow +57.15 at 35616.59, Nasdaq -48.61 at 14297.81, S&P -9.77 at 4580.46
[BRIEFING.COM] The major indices have settled into narrow ranges ahead of the close.
The 10-yr note yield settled back above 4.00%, up nine basis points to 4.05%. The 2-yr note yield rose five basis points 4.05%.
CVS Health (CVS), Humana (HUM), Bunge (BG), Kraft Heinz (KHC), Exelon (EXC), Yum! Brands (YUM), Fidelity Nat'l Info (FIS), and DuPont (DD) are among the more notable names reporting earnings ahead of the open tomorrow.
The economic calendar tomorrow includes:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -1.8%)
- 8:15 a.m. ET: July ADP Employment Change (Briefing.com consensus 185,000; prior 497,000)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior -0.600M)
Earnings after the close; energy complex settles lower
01-Aug-23 15:00 ET
Dow +74.01 at 35633.45, Nasdaq -46.80 at 14299.62, S&P -8.83 at 4581.40
[BRIEFING.COM] Recent price action has the major indices moving mostly sideways.
After the close today, Prudential (PRU), Allstate (ALL), Starbucks (SBUX), Advanced Micro (AMD), Pioneer Natural Resources (PXD), Lumen Technologies (LUMN), Devon Energy (DVN), Caesars Entertainment (CZR), V.F. Corp (VFC), Match (MTCH), and e.l.f Beauty (ELF) are among the more notable companies reporting earnings.
Energy complex futures settled the session with losses. WTI crude oil futures fell 0.5% to $81.36/bbl and natural gas futures fell 3.1% to $2.56/mmbtu.
Global Payments, Leidos outperform in S&P 500 after earnings
01-Aug-23 14:25 ET
Dow +83.38 at 35642.82, Nasdaq -41.53 at 14304.89, S&P -8.36 at 4581.87
[BRIEFING.COM] The S&P 500 (-0.18%) is firmly in second place on Tuesday afternoon, having moved modestly higher over the prior half hour.
S&P 500 constituents Global Payments (GPN 119.52, +9.27, +8.41%), Leidos (LDOS 99.70, +6.17, +6.60%), and Welltower (WELL 85.21, +3.06, +3.72%) dot the top of the index, all following earnings.
Meanwhile, Zimmer Biomet (ZBH 132.01, -6.14, -4.44%) is one of today's worst performers following earnings.
Yield, dollar gains pressure gold
01-Aug-23 14:00 ET
Dow +20.37 at 35579.81, Nasdaq -52.05 at 14294.37, S&P -12.73 at 4577.50
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-0.36%) is the top laggard, down about 52 points.
Gold futures settled $30.20 lower (-1.5%) to $1,979.00/oz, pressured by a rise in treasury yields and the greenback.
Meanwhile, the U.S. Dollar Index is up about +0.5% to $102.39.
Caterpillar, Cisco outperform in DJIA on Tuesday
01-Aug-23 13:30 ET
Dow +16.82 at 35576.26, Nasdaq -52.29 at 14294.13, S&P -13.14 at 4577.09
[BRIEFING.COM] The Dow Jones Industrial Average (+0.05%) is the sole index in positive territory to this point on Tuesday, up about 17 points.
A look inside the DJIA shows that Caterpillar (CAT 285.31, +20.14, +7.60%), Cisco (CSCO 52.56, +0.52, +1.00%), and Microsoft (MSFT 337.64, +1.72, +0.51%) are in the green.
Meanwhile, Verizon (VZ 33.40, -0.68, -2.00%) is underperforming.
The DJIA is now a solid +1% higher off last Thursday's lows.
August set to start on soft note as 10-yr note yield tops 4.00%
It looked as if the major indices were headed for a loss yesterday, albeit a modest one, but in emblematic fashion, there was a surge of buying interest in the closing minutes that left them all with a modest gain for the day. To be sure, it was a fitting end to another month that defied the expectations of short sellers and anyone sticking to the sidelines.
The month of August is now straight ahead and it looks poised to start on a soft note.
Currently, the S&P 500 futures are down 22 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 97 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 116 points and are trading 0.3% below fair value.
The party line coming into the month is much the same: the stock market looks overbought on a short-term basis and is due for a pullback.
That's the party line. It doesn't mean the stock market will get in line with that line, but that's the prevailing driver of the weakness in the equity futures market this morning. Another driver that will be monitored carefully is the behavior of the 10-yr note. At the moment, it is a little unruly.
The 10-yr note yield has moved back above 4.00%, currently up five basis points to 4.01%. The move above 4.00% is stirring some angst about lofty equity valuations and competitive headwinds for stocks, which in turn is providing a rationale to curtail buying efforts for the time being.
Better-than-expected results from Dow components Caterpillar (CAT) and Merck (MRK), though, along with Uber (UBER), which reported the first GAAP profit in company history, have kept some buyers in the mix.
There has been a rush of earnings reporting since yesterday's close. That will be a familiar refrain over the remainder of the week, as we are in the thick of the earnings reporting period that will include results from Apple (AAPL) and Amazon.com (AMZN) after Thursday's close.
The earnings results since yesterday's close have been largely better than expected, yet the reactions have been tempered in the case of companies topping estimates and more punishing for companies that have disappointed with guidance. JetBlue (JBLU), Norwegian Cruise Line Holdings (NCLH), ZoomInfo Technologies (ZI), and Zebra Technologies (ZBRA) are a sampling of the punished.
In other developments, the Reserve Bank of Australia surprised market participants by keeping its key policy rate unchanged at 4.10%. The consensus view was that there would be a 25-basis points rate increase. That news hit overnight along with word that China's Caixin Manufacturing PMI for July fell back into contraction territory with a reading of 49.2 versus the prior month's reading of 50.5.
The final July Manufacturing PMI reading for the eurozone was similarly in contraction territory, but not surprising -- or changed much -- in relation to the flash estimate.
The July ISM Manufacturing Index is the featured report on today's economic calendar along with the June JOLTS Job Openings Report, both of which will be released at 10:00 a.m. ET along with the June Construction Spending Report.
-- Patrick J. O'Hare, Briefing.com
ZoomInfo slashes its FY23 revenue forecast as software firms choose profitability over growth (ZI)
ZoomInfo (ZI -25%) plummets to all-time lows today after delivering an alarming outlook on near-term demand. The SaaS firm, focused on disrupting the traditional customer relationship management (CRM) space by pulling info from unique sources, did deliver decent headline results in Q2. However, management did not have many encouraging remarks about the current state of the economy. ZI discussed that a reduction in customer spending hindered its Q2 numbers. Even worse, the company does not expect challenges to ease over the near term.
As a result, ZI slashed its FY23 revenue outlook, projecting $1.225-1.235 bln, down from $1.275-1.285 bln, translating to just +12% yr/yr growth from +17%, which was already a substantial drop-off from the +47% jump posted in FY22.
- What happened? Because ZI's customers are disproportionately in the software vertical, where spending remains suppressed given the current low-growth environment, the shift toward profitability from growth at all costs weighed considerably on ZI's results.
- ZI pointed to one example of an organization in the $100K cohort that removed 80% of its sales team -- where ZI's software is embedded -- overnight to focus on profitability over new business.
- ZI did not offer up much of a silver lining, stating that after Q2's performance, it no longer believes that current budgetary pressures clipping renewals will ease over the near term. Small and medium-sized businesses (SMBs) are amongst the worst hit, evidenced by a perpetual climb in write-offs for smaller customers
- With software companies putting their growth plans on hold, the percentage of total revenue from the software vertical dropped to 35% from 40% in the year-ago period.
However, there were a few pockets of strength in the quarter. Total revenue still edged 15.5% higher yr/yr to $308.6 mln, driven by some of ZI's most prominent customers, illuminated by a 40% increase in sales from its $1 mln plus cohort. ZI also witnessed a 20% bump in sales from its customer base outside of software, where the company is intentionally seeking to grow given the less negative impact of the current high-interest rate environment.
ZI is also rolling out several initiatives to contend with the numerous headwinds it faces over the near term. Founder and CEO Henry Schuck mentioned that the company would increase its matching and phone number coverage, decrease application load times and search latency, and adjust staffing levels. Generative AI will also become more rooted in its software. As a result, ZI continues to target a 40% margin despite the drop in sales for FY23.
Bottom line, it was a tough three months for ZI. Sales teams are contracting, and growth is stalling, setting the stage for a weak rest of the year. Although there were some bright spots, ZI's shares will likely continue tracking lower unless spending starts to turn around.
Uber rides lower despite swing to profitability as revenue miss sparks sell-the-news reaction (UBER)
Expectations were high heading into Uber's (UBER) 2Q23 earnings report, as reflected by the stock's 60% surge since it last issued quarterly results in early May. While the company delivered solid results that included record highs for gross bookings and trips, and its first GAAP operating profit, revenue did fall a bit short of expectations.
- The top-line miss -- UBER's first since 1Q21 -- may be stirring up some concern that demand has softened a bit, providing enough of an excuse for traders to lock in some gains. Notably, rival Lyft (LYFT), which is set to report earnings on August 8, is trading sharply lower following UBER's revenue miss.
- The momentum underlying UBER's rideshare business is still quite healthy, though. Mobility Gross Bookings climbed by 28% yr/yr on a constant currency basis to $16.7 bln, even as the company lapped strong growth of 58% in the year-earlier quarter.
- During the earnings call, CEO Dara Khosrowshahi characterized the Mobility segment as "firing on all cylinders" as trips grew by 26% with broad-based strength seen across its markets.
- In the U.S. and Canada, trips have returned to pre-pandemic levels for the first time, reaching 2Q19 levels.
- Similar to the commercial airline industry, UBER is benefiting from a swing in consumer spending towards travel and experiences. In fact, airport rides are typically some of the most profitable rides for UBER and LYFT.
- Importantly, there are also plenty of drivers available to make those trips. In Q2, Mobility active drivers were up 33% yr/yr while driver churn continued to be down substantially.
- With rideshare demand and driver supply in balance, UBER is able to keep a lid on costly incentives. Additionally, the investments UBER has recently made to improve the driver experience -- including adding new features such as earnings trends and earnings alerts -- are providing it with a competitive edge.
- As a result, UBER's Mobility take rate is trending higher, reaching 29.3% in Q2 compared to 26.6% in the year-earlier quarter.
- While Mobility's adjusted EBITDA experienced solid growth of 52% to $1.17 bln, the biggest improvement is coming from the Delivery segment. Higher volumes and an increase in high-margin advertising revenue drove a 232% surge in adjusted EBITDA to $329 mln.
- Delivery Gross Bookings growth of 18% is a far cry from the triple-digit growth seen during the height of the pandemic, but demand has held up remarkably well in the face of high inflation and strong interest in dining out.
- Looking ahead, UBER is feeling quite bullish about its prospects for Q3, as reflected in its better-than-expected adjusted EBITDA guidance of $975 mln to $1.025 bln and its Gross Bookings outlook of $34.0-$35.0 bln (+19% yr/yr at the midpoint).
- However, the company also announced that CFO Nelson Chai, who has held that position since 2018, will be stepping down on January 5, 2024. Since Mr. Chai has played such a key role in turning UBER's financials around after years of losses, his departure is seen a significant loss for the company.
Overall, this was another strong quarter for UBER, highlighted by its vastly improved profitability and return to pre-pandemic levels for Mobility trips. With shares rallying to new 52-week highs ahead of the earnings release, a pristine report was needed to avoid a sell-the-news reaction, and the revenue miss made for a less-than-perfect performance.
Western Digital wraps up FY23 on a bit of a down note; SepQ guidance was a bit soft (WDC)
Western Digital (WDC -3%) is heading lower following its Q4 (Jun) results last night. Investors got what they wanted with a narrower than expected loss and upside revenue. However, downside guidance for Q1 (Sep) took some of the shine of the decent JunQ results. The guidance was not entirely a surprise given that peer Seagate (STX) guided lower when it reported last week. This probably explains why WDC is not down further given the weak guidance.
- Let's dig into the quarter. On the HDD side, ongoing cloud weakness drove the overall decline in HDD revenue although demand for both Client and Consumer hard drives has stabilized and exceeded WDC's expectations. Also, WDC says it has now successfully qualified all variants of its 22-terabyte CMR and 26-terabyte Ultra SMR hard drive platforms at all major cloud customers, which sets the stage to improve shipments and profitability.
- On the Flash side, revenue increased sequentially, led by growth in both Client and Consumer. Flash bit shipments exceeded internal expectations with total bit shipments returning to yr/yr growth. The stronger-than-expected bit growth was caused by normalizing PC and consumer demand as well as content growth.
- In terms of end markets, cloud represented 37% of total JunQ revenue at $1 bln, which was down 18% sequentially and 53% yr/yr, driven by ongoing weakness at cloud customers. Client represented 39% of total revenue at $1 bln, up 6% sequentially driven by growth in bit shipments for gaming consoles. However, the segment was down 37% yr/yr due to declines in Flash pricing. Consumer represented 24% of total revs at $0.6 bln up 3% sequentially due to higher retail SSD shipments, but down 19% yr/yr driven by price declines in Flash.
- As we said in our preview, we felt that WDC's qualitative guidance, beyond just the SepQ EPS/revs guidance, would be important so that investors can get a sense for when this downturn may start to ease. WDC expects both HDD and Flash revenue to be relatively stable in Q1 (Sep). Beyond Q1, WDC expects both HDD and Flash revenue will improve through the remainder of FY24, driven by normalizing demand in storage as well as higher average content per-unit in Flash. Also, gross margin is expected to gradually improve.
- Beyond Q1, WDC expects both improving demand and new product ramps in HDD will drive growth in revenue and profitability. In Flash, WDC is encouraged by several indicators signaling improving market dynamics. Specifically, its two largest end-markets, Client and Consumer, are returning to growth. Also, inventories are normalizing, content per-unit is increasing, and price declines have been moderating.
Overall, this report was a bit of a letdown but not entirely surprising. We sort of expected downside guidance following STX's report last week as the two companies tend to behave similarly. It sounds like SepQ will be another weak result, but WDC seemed to indicate conditions will slowly improve after that. It was not certainly the "pounding the table" type of endorsement investors wanted, but it was a modestly hopeful outlook.
Caterpillar constructs a rock-solid Q2 report as end market demand remains healthy (CAT)
Dow component Caterpillar (CAT +7%) constructed a solid Q2 earnings report, crushing EPS estimates on robust top-line growth, sending shares to all-time highs today. The construction equipment manufacturing giant initially witnessed a muted reaction to its upbeat Q2 results, underscoring persistent uneasiness regarding the near-term state of the macroeconomy. As we saw last quarter, despite similar figures, shares experienced selling pressure partly due to investors weighing the potentially harmful effects of rising dealer inventories. Although the market has more visibility into potential interest rate hikes and the impacts of the regional banking crisis, Manufacturing PMI across much of Europe remains in contractionary territory, China's recovery efforts are stalling, and North American residential construction growth has moderated.
Nevertheless, demand across many of CAT's end markets remained healthy, reflected by its rock-solid and consistent Q2 results. CAT was also comfortable with where dealer inventories were and maintained an optimistic view of the global economy going forward, especially after Q2's performance, which led CAT to expect FY23 to be better than it originally forecasted.
- CAT registered its second-straight quarter of better-than-expected earnings, expanding its bottom line by 74.5% yr/yr to $5.55 per share. Adjusted operating margins ballooned to 21.3%, a 750 bp improvement yr/yr. Meanwhile, revenue continued to grow by double-digits, jumping 21.4% to $17.3 bln.
- The massive margin leap was primarily fueled by better-than-expected volume growth and lower-than-expected manufacturing costs, including freight. Encouragingly, CAT does not anticipate these favorable trends to slow over the near term, projecting adjusted operating margins closer to the top of its target range, which varies depending on where FY23 sales land. However, since management expects 2H23 revs to be higher than the $33.16 bln 1H23 revs, margins should be around 20-21% this year.
- Growth was broad-based in the quarter, with CAT's three core segments, Construction Industries (CI), Resource Industries (RI), and Energy & Transportation (E&T), climbing +19%, +20%, and +27% yr/yr, respectively. Geographies were more mixed. North America was the notable star, with each segment experiencing over 30% growth. Conversely, Latin America and Asia Pacific lagged, particularly in CI, where sales fell 11% in LatAm and were flat in Asia Pacific. Meanwhile, Europe saw lower sales to users due to weaker-than-expected market conditions, while the Middle East continued to exhibit robust construction activity.
- Looking ahead, CAT sees upbeat momentum in North America to continue through the rest of the year, especially in nonresidential construction, which is receiving a boost from government-related infrastructure investments. Outside of China, which CAT noted will endure further weakness, CI in the Asia Pacific should see growth in subsequent quarters. Likewise, similar dynamics from Q2 in Europe, the Middle East, and Latin America will carry over through the remainder of 2023.
Bottom line, CAT unearthed excellent Q2 results despite economic unease. CAT has taken off since hitting a YTD low immediately following Q1 numbers in late April, appreciating by around +40%. Despite the tremendous rally, the stock's valuation remains reasonable, at roughly 16x forward earnings. Although macroeconomic uncertainties will likely linger for the foreseeable future, construction activity is looking healthy, especially in North America and the Middle East.
New Relic observing sharply higher prices after agreeing to private equity buyout offer (NEWR)
Observability and app monitoring company New Relic (NEWR) is launching higher after private equity firms Francisco Partners and TPG have agreed to acquire the company for $87/share in cash, representing a 17.5% premium to last Friday's closing price. There has been plenty of speculation that NEWR could be acquired over the past several months, so today's news doesn't come as a complete surprise. The main question was whether NEWR and its suitors could come to an agreement on valuation.
- On that note, in late May Reuters reported that Francisco Partners and TPG walked away from the negotiating table after the firms couldn't reach an agreement with NEWR on a price tag for an acquisition. Securing enough capital to finance the deal was another issue standing in the way.
- With both sides finding a middle ground, NEWR is now poised to become a privately held company again after launching its IPO in December of 2014. Since going public, it's been a rollercoaster ride for NEWR.
- After shares soared to all-times highs in 2021, rising interest rates sparked a nasty tech sell-off, sending NEWR crashing lower in the winter and spring of 2022. Although NEWR's observability tools help companies improve the efficiency of their apps and networks, demand still languished under the difficult macroeconomic conditions and from tough competition from peers like DataDog (DDOG) and Dynatrace (DT).
- NEWR's recent revenue growth rates, for instance, significantly lag behind DDOG's. In 1Q23 and 4Q22, NEWR posted top-line growth of 12% an 18%, respectively, compared to growth of 33% and 44% in those same quarters for DDOG.
- It's fitting, then, that DDOG would also be trading higher today as NEWR's valuation pops to $6.5 bln on the acquisition news. On a P/S basis, though, NEWR is still trading at a steep discount to DDOG at about 5.4x compared to roughly 19.8x.
- Based on the magnitude of that valuation divergence, one could argue that Francisco Partners and TPG scored a bargain on the deal -- especially since NEWR's financials are improving.
- This morning, NEWR also reported better-than-expected Q1 results that featured a vast improvement in margins and profitability. Specifically, non-GAAP operating margin climbed to 15.0% from (7.9)% in the year-earlier quarter as EPS reached $0.43 compared to $(0.26) a year ago.
- Last summer, NEWR implemented a restructuring program that included layoffs as the company continued to transition to a consumption-based model. That transition, which began in 2020, has taken some time to yield better results, but the company seems to be turning a corner with Francisco Partners and TPG taking notice.
Overall, it's good to see some M&A activity finally spring up in the tech sector as it indicates that firms are feeling more comfortable and confident about market conditions. Whether this deal is the forerunner of more M&A activity is highly uncertain, though, especially with tech valuations at rich levels.
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