Market Snapshot
briefing.com
| Dow | 34479.97 | +36.78 | (0.11%) | | Nasdaq | 13747.92 | -124.56 | (-0.90%) | | SP 500 | 4449.47 | -16.01 | (-0.36%) | | 10-yr Note | +2/32 | 4.26 |
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| | NYSE | Adv 1007 | Dec 1849 | Vol 918 mln | | Nasdaq | Adv 1453 | Dec 2847 | Vol 4.3 bln |
Industry Watch
| Strong: Utilities, Communication Services, Consumer Staples, Health Care |
| | Weak: Information Technology, Industrials, Consumer Discretionary, Materials |
Moving the Market
-- Elevated Treasury yields and oil prices are still top of mind for market participants
-- Another sizable loss in Apple (AAPL) weighing on the broader market after reports that China is aiming to broaden iPhone ban to state and federal agencies
-- Digesting this morning's economic data
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Closing Summary
07-Sep-23 16:25 ET
Dow +57.54 at 34500.73, Nasdaq -123.64 at 13748.84, S&P -14.34 at 4451.14
[BRIEFING.COM] Today's trade featured a lack of conviction among buyers. The Dow Jones Industrial Average closed with a slim gain while the S&P 500, Nasdaq Composite, and Russell 2000 declined 0.3%, 0.9%, and 1.0%, respectively.
Apple (AAPL 177.56, -5.35, -2.9%) registered another sizable decline, which hung over the broader market. The ongoing weakness followed a Bloomberg report that China is aiming to broaden its iPhone ban to state and federal agencies. That sent semiconductor stocks lower as well, leading to a 2.0% loss in the PHLX Semiconductor Index.
The news goes beyond Apple and the semiconductor stocks, however. The worry for the market is that, if China purposely chooses to make business difficult for a company like Apple, which has a good and important working relationship in China, then it can do so for a lot of other U.S. companies doing business in China. Interestingly, these restrictions come at a time when The Wall Street Journal reported that Huawei has introduced a new smartphone to compete with Apple.
The S&P 500 information technology sector (-1.6%) saw the largest decline, weighed down by Apple and its semiconductor components. The utilities sector (+1.3%) closed at the top of the leaderboard.
Market participants were focused on action in the Treasury market, which was turbulent today. Yields drifted lower after China reported an 8.8% year-over-year decline in exports and a 7.3% year-over-year decline in imports for August. Rates turned noticeably higher at 8:30 a.m. ET, however, when it was learned that initial jobless claims for the week ending September 2 were just 216,000 -- the lowest since February -- and that Q2 productivity was revised lower (to 3.5% from 3.7%) while unit labor costs were revised higher (to 2.2% from 1.6%).
The combined takeaway from these reports is that they would likely leave the Fed convinced that the policy rate needs to be kept higher for longer. The Treasury market settled down following the initial burst of selling interest after the U.S. data, and as it did, the early selling pressure on stocks relented.
The 2-yr note yield, at 4.99% just before the release, hit 5.05% in the immediate aftermath but settled at 4.96%. The 10-yr note yield was at 4.27% before the data, hit 4.31% immediately after, but settled at 4.26%.
WTI crude oil futures fell 0.7% to $86.97/bbl, breaking a nine-day winning streak.
- Nasdaq Composite: +31.4% YTD
- S&P 500: +15.9% YTD
- S&P Midcap 400: +6.0% YTD
- Russell 2000: +5.4% YTD
- Dow Jones Industrial Average: +4.1% YTD
Reviewing today's economic data:
- Weekly Initial Claims 216K (Briefing.com consensus 233K); Prior was revised to 229K from 228K; Weekly Continuing Claims 1.679 mln; Prior was revised to 1.719 mln from 1.725 mln
- The key takeaway from the report is that initial claims -- a leading indicator -- were at their lowest level since February. That is really good news -- economically speaking -- but it is also news -- monetary policy speaking -- that will likely keep the Fed in a restrictive policy position for longer.
- Q2 Productivity - Rev. 3.5% (Briefing.com consensus 3.7%); Prior 3.7%; Q2 Unit Labor Costs - Rev. 2.2% (Briefing.com consensus 1.6%); Prior 1.6%
- The key takeaway from the report is that unit labor costs weren't as low as previously reported, so they look disappointing at the headline level; however, they still fit the bill of disinflation given that unit labor costs were up 2.5% a year ago.
Friday's economic calendar features:
- 10:00 ET: July Wholesale Inventories (Briefing.com consensus -0.1%; prior -0.5%)
- 15:00 ET: July Consumer Credit (Briefing.com consensus $15.8 bln; prior $17.9 bln)
Treasuries settle with gains
07-Sep-23 15:35 ET
Dow +64.85 at 34508.04, Nasdaq -115.03 at 13757.45, S&P -12.61 at 4452.87
[BRIEFING.COM] The major indices are moving sideways ahead of the close.
Following some knee-jerk action in response to this morning's data, Treasuries settled with gains. The 2-yr note yield fell eight basis points to 4.96% and the 10-yr note yield fell three basis points to 4.26%.
Friday's economic calendar features:
- 10:00 ET: July Wholesale Inventories (Briefing.com consensus -0.1%; prior -0.5%)
- 15:00 ET: July Consumer Credit (Briefing.com consensus $15.8 bln; prior $17.9 bln)
Energy complex settles mixed
07-Sep-23 15:05 ET
Dow +36.78 at 34479.97, Nasdaq -124.56 at 13747.92, S&P -16.01 at 4449.47
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Energy complex futures settled in mixed fashion. WTI crude oil futures fell 0.7% to $86.97/bbl and natural gas futures rose 2.4% to $2.57/mmbtu.
The S&P 500 energy sector sports a modest decline, down 0.1%.
Seagate lower on Barclays downgrade, Centene continues post-guidance rally
07-Sep-23 14:30 ET
Dow +61.92 at 34505.11, Nasdaq -135.10 at 13737.38, S&P -14.71 at 4450.77
[BRIEFING.COM] The S&P 500 (-0.33%) is firmly in second place on Thursday afternoon, having modest slightly lower over the previous half hour.
S&P 500 constituents Seagate (STX 64.02, -7.21, -10.12%), FMC Corp (FMC 75.04, -7.15, -8.70%), and Skyworks (SWKS 98.19, -7.99, -7.52%) dot the bottom of the standings. STX caught a downgrade to Equal Weight out of Barclays this morning, FMC slipped amid a short report from Blue Orca Capital, while SWKS is under pressure amid losses in Apple (AAPL 176.70, -6.21, -3.40%).
Meanwhile, Missouri-based healthcare firm Centene (CNC 66.35, +3.03, +4.79%) is outperforming, continuing yesterday's post-guidance bounce; shares are bumping up against the 50-day MA (65.97).
Gold down for third day in a row
07-Sep-23 14:00 ET
Dow +81.57 at 34524.76, Nasdaq -120.70 at 13751.78, S&P -11.04 at 4454.44
[BRIEFING.COM] With about two hours left to go on Thursday the tech-heavy Nasdaq Composite (-0.87%) remains at the bottom of the standings, though trading now stands at HoDs on losses of 120 points vs losses of about 230 points at today's bottom.
Gold futures settled $1.70 lower (-0.1%) to $1,942.50/oz, falling for a third consecutive session.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.97.
Page One
Last Updated: 07-Sep-23 08:59 ET | Archive
Market dealing with a big problem
The equity market has the biggest problem this morning -- literally. Its most heavily-weighted stock -- Apple (AAPL) -- is down another 3.7% in pre-market trading.
We say "another," because AAPL dropped 3.6% yesterday on a Wall Street Journal report that China is banning iPhone use for officials at central government agencies while working. After the close, Bloomberg reported that China is aiming to broaden that ban to state and federal agencies, saying some agencies are telling employees they can't even bring their phone to work.
News of these restrictions goes beyond the iPhone, however. The worry for the market is that, if China purposely chooses to make business difficult for a company like Apple, which has a good and important working relationship in China, then it can do so for a lot of other U.S. companies doing business in China. Interestingly, these restrictions come at a time when The Wall Street Journal reports that Huawei has introduced a new smartphone to compete with Apple.
For now, Apple investors are understandably worried, knowing that Apple derives about 18% of its revenue from China, according to FactSet. The weakness in Apple, which has a position in the S&P 500, Nasdaq 100, and Dow Jones Industrial Average, is apparent in the futures trade.
Currently, the S&P 500 futures are down 35 points and are trading 0.8% below fair value, the Nasdaq 100 futures are down 199 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 100 points and are trading 0.3% below fair value.
Rising interest rates are another headwind. They were lower in overnight action following a trade balance report from China that was better than expected but still signaling weakness. Exports declined 8.8% year-over-year and imports declined 7.3% year-over-year.
Rates, however, shot northward following the initial jobless claims and revised Q2 Productivity reports.
Initial jobless claims for the week ending September 2 decreased by 13,000 to 216,000 (Briefing.com consensus 233,000). Continuing jobless claims for the week ending August 26 decreased by 40,000 to 1.679 million.
The key takeaway from the report is that initial claims -- a leading indicator -- were at their lowest level since February. That is really good news -- economically speaking -- but it is also news -- monetary policy speaking -- that will likely keep the Fed in a restrictive policy position for longer.
The revised Q2 productivity report featured a downward revision in productivity to 3.5% (Briefing.com consensus 3.7%) from the preliminary estimate of 3.7% and an upward revision in unit labor costs to 2.2% (Briefing.com consensus 1.6%) from the preliminary estimate of 1.6%.
The key takeaway from the report is that unit labor costs weren't as low as previously reported, so they look disappointing at the headline level; however, they still fit the bill of disinflation given that unit labor costs were up 2.5% a year ago.
The 2-yr note yield, at 4.99% just before the releases, jumped to 5.04% in their wake. The 10-yr note yield, at 4.28% just before the releases, hit 4.31% in their wake. Those moves led to further weakness in the equity futures market, with participants anticipating more weakness for growth stocks sporting premium valuations.
Today's open, then, will have a downward tilt. After that, the behavior of Apple and interest rates will be calling the directional shots.
-- Patrick J. O'Hare, Briefing.com
C3.ai sells off after delaying profitability by up to a year due to generative AI investments (AI)
Despite generative AI remaining hot, illuminated by NVIDIA's (NVDA) blowout JulQ results last month, C3.ai (AI -12%), an enterprise AI application firm, is going cold today following its Q1 (Jul) results yesterday after the close. Headline results were solid; C3.ai topped earnings and revenue estimates in the quarter, delivering a minor net loss of $(0.09) per share and revs of $72.36 mln, a 10.8% jump yr/yr.
However, investors were discouraged by the company withdrawing its goal of reaching non-GAAP profitability by 4Q24 (Apr), a quick shift from last quarter when management reiterated its plans for profitability by the end of FY24. C3.ai stated that given the exceptional demand for generative AI, it has decided to invest heavily in its generative AI offerings to become the leader in the technology as multiple companies compete for a slice of the lucrative artificial intelligence market over the next several years. As a result, management commented that profitability may not materialize until closer to Q2-Q4 of FY25.
- On the bright side, C3.ai still anticipates delivering positive free cash flow in 4Q24 and FY25. It also reiterated its FY24 revenue outlook of $295-320 mln.
- Also, it is critical to understand that the company's move to pour capital into its generative AI technology follows extensive demand.
- This demand is assisted by C3.ai's unique ability to deploy all of its generative AI applications within 12 weeks for $250K, after which the customer pays per usage with volume discounts.
- On a side note, because of this model, remaining performance obligation (RPO) and average contract value (ACV) are no longer meaningful gauges of company performance, as these metrics will inevitably start to decline given the smaller deal sizes.
- C3.ai also mentioned how its AI suite has a competitive edge over standard large language models (LLMs) like ChatGPT since the company's AI-generated answers are traceable and deterministic, an issue plaguing many competing chatbots.
Nevertheless, news of no longer achieving profitability this year overshadows these silver linings. Although C3.ai believes the generative AI market could more than double its addressable market, pointing to a Bloomberg Intelligence report predicting the market will reach $1.3 trillion by 2032, the immediate term is still rife with macroeconomic headwinds. As such, investors have liked companies' progress toward reaching and improving profitability. C3.ai's pivot toward aggressive investment at the expense of profitability reminds us of Sea Limited's (SE) decision last month to return focus to growth over profits, which ignited a sell-off.
Bottom line, AI brings substantial upside potential to companies operating at the center of this space, like C3.ai. However, the technology is still in its early stages, meaning it carries a significant risk of either not disrupting the global economy or encountering many obstacles on its way toward ambitious TAM estimates.
American Eagle soars above struggling retailers by keeping inventories lean, product on trend (AEO)
The back-to-school shopping season has been a disappointment for some retailers as consumers rein in spending, but that's not the case for casual wear retailer American Eagle Outfitters (AEO). Following in the footsteps of competitor Abercrombie & Fitch (ANF), which issued an impressive beat-and-raise earnings report on August 23, AEO delivered its own strong Q2 results last night while also guiding Q3 and FY24 revenue above expectations.
- Like ANF, AEO is bucking the softer consumer spending climate by being nimble enough to quickly adapt to emerging trends for casual wear. AEO's merchandise and brand are clearly resonating with shoppers, enabling it to avoid the highly promotional strategy that many other retailers have employed.
- Working hand-in-hand with this ability to stay on top of recent trends is AEO's decision to keep inventory levels low. Since the company's shelves aren't stacked with out-of-favor products, AEO has the flexibility to stock its stores with newer styles. For context, AEO's total ending inventory declined by 7% yr/yr to $637 mln.
- Due to AEO's ability to charge full prices, merchandise margin improved on a yr/yr basis, fueling a 680-bps improvement in gross margin to 37.7%. This, in turn, drove a 366% surge in operating income to $65.3 mln.
- At first glance, AEO's comps don't look overly impressive. Aerie's comps were flat yr/yr, while the American Eagle brand experienced a comp decline of 2%. However, the performance is more encouraging when considering that momentum gained steam throughout the quarter. AEO noted that business began to accelerate late in June and that the strength continued into July as the back-to-school season kicked in. On that note, American Eagle exited July with positive comps, which has been sustained into Q3.
- With this momentum at its back, AEO expects growth to improve in the second half of the fiscal year. Specifically, the company sees revenue growth in the low-single-digits for Q3, topping analysts' estimates and better than the flat growth seen in Q2. For FY24, AEO raised its guidance, forecasting revenue to be up low-single-digits compared to its prior guidance for revenue in the range of flat to down low-single-digits.
The main takeaway is that, along with ANF, AEO is separating itself from the retail pack as it capitalizes on healthier demand for casual wear relative to other product categories. AEO's ability to capitalize is a function of its stronger merchandise assortment and leaner inventories, which is driving higher margins and profits. Encouragingly, these are trends that have continued into Q3.
BlackBerry down sharply on weak AugQ guidance with troubles at both segments (BB)
BlackBerry (BB -15%) is trading sharply lower after providing some pretty weak guidance. The company sees Q2 (Aug) revenue coming in at just $132 mln, well below analyst expectations. In addition, the company made cautious comments about both its major segments.
- The company is still thought of by many as a mobile phone company but it's not. Blackberry phones are no longer designed or made by Blackberry. Instead, BB licensed the Blackberry name to third party manufacturers. Today, BB is primarily focused on IoT (automotive technology) and cybersecurity. BB also recently sold a noncore portion of its patent portfolio to Key Patent Innovations for $170 mln cash up front, which BB has received. Plus the deal value could total as much as $900 mln over time as KPI monetizes the patents.
- Starting with Cybersecurity, BB expects AugQ revs to decline 14% sequentially to $80 mln. That is lower than expected, primarily due to certain large government deals not closing in the quarter. Its Cybersecurity unit is experiencing elongated sales cycles, particularly in its core government vertical, where it has a strong market position. The silver lining here is that BB still expects to close those govt deals this fiscal year and is therefore reiterating its full-year outlook for the Cybersecurity segment.
- The more exciting segment with the higher growth potential is its IoT segment. However, BB expects segment revs to grow just 9% sequentially to $49 mln. BB says it's seeing some automakers shift the start of software development programs, as well as production schedules, and therefore BB has lowered its current year revenue outlook for this segment to $225-240 mln.
- This lowered IoT guidance was a letdown because segment revenue in MayQ was also lower than expected due to some automotive programs getting delayed. BB has cautioned to investors that design-phase revenues will fluctuate quarter-to-quarter depending on the timing of large design awards and when the work begins. However, a MayQ miss, followed by a AugQ shortfall and reduced full year IoT outlook is a bit discouraging for investors.
Overall, this was some disappointing guidance, especially because it followed lackluster results last quarter. We think BlackBerry needs a shakeup. There has been some M&A chatter recently, but it's not clear if anything will materialize. Or maybe separating the businesses makes sense, since there are not a lot of synergies between the two segments. We suspect the IoT business would garner a nice multiple if not weighed down by the Cybersecurity unit. BB has announced previously that it's undergoing a review of strategic alternatives, including a possible separation, so it's a definite possibility.
UiPath stays on a healthy course following a beat-and-raise in Q2; demand remains stable (PATH)
UiPath (PATH +10%), the robotic process automation (RPA) software developer, sustains its current rally today following last night's Q2 (Jul) top and bottom-line beats and raised FY24 sales guidance. PATH also authorized $500 mln for repurchases, signaling that management expects meaningful future appreciation. PATH's buyback program is also the first in its history as a public company.
- Headline numbers were what we have come to expect from PATH, topping EPS forecasts by single digits and maintaining double-digit revenue growth yr/yr, with sales jumping 18.6% yr/yr to $287.31 mln. Annualized recurring revenue (ARR) increased 25% to $1.308 bln.
- PATH observed notable strength in banking and financial services in Q2, industries that can benefit significantly from RPA given the massive data sets these firms work with. Manufacturing and technology verticals also helped fuel overall growth.
- PATH maintained healthy progress toward its 20+% long-term operating margin target through ongoing cost-cutting and productivity improvements. It delivered non-GAAP operating margins of 10%, a 15 pt swing from negative 5% in the year-ago period.
- AI remains a top-of-mind, albeit cooling to some degree as lingering macroeconomic uncertainties creep back into the fold. Being an RPA developer, AI has always been at the roots of PATH's business, giving the company a leg-up infusing the technology into its entire platform.
- Management also acknowledged the noise and skepticism surrounding generative AI, choosing to provide real-world demos of how its usage of AI can act on the vast amount of information gathered from companies' documents and data. As a result, PATH is excited about the long-term positive impact of its AI-infused platform on future financial performance.
- Despite customer interest in AI, as we heard from others in the software space recently, including Asana (ASAN), the low end of the market has diverged from the higher end regarding spending, displaying relative weakness, particularly in new customer acquisition. However, existing customer expansion has remained robust, and PATH noted that it boasts a solid pipeline as it moves into the year's second half.
- As such, PATH was confident hiking its FY24 revenue forecast, projecting $1.273-1.278 bln, a decent increase from $1.267-1.272 bln. PATH also increased its ARR outlook to $1.432-1.437 bln from $1.427-1.432 bln.
PATH's Q2 performance was consistent with recent quarters, underpinning signs of demand stabilization trends we witnessed from several B2B software developers lately. Still, at a 49x forward earnings valuation, PATH could face some turbulence over the near term, particularly given the depressed low end of the market.
Southwest Air faces some turbulence as softening demand and rising fuel costs weigh on shares (LUV)
Southwest Air (LUV) is descending after issuing an updated outlook for Q3 that warned of rising fuel costs and a slowdown in leisure bookings for August, sparking fears that macroeconomic headwinds are finally making a dent in leisure travel demand.
While LUV still expects to achieve record operating revenue in Q3, the airline did ratchet its revenue per available seat mile (RASM) guidance lower, forecasting RASM to decline by 5-7% compared to its prior outlook of a drop of 3-7%.
- LUV's comment that "close-in" leisure bookings for August are trending towards the low-end of expectations is also putting a damper on other airlines with significant exposure to domestic leisure travel demand. For instance, JetBlue Airways (JBLU) and Spirit Airlines (SAVE) are both trading lower today, while those that generate more revenue from pricier, higher-margin international routes are faring better.
- United Airlines (UAL), which also increased its fuel expense guidance, forecasting $2.95-$3.05 per gallon compared to its former projection of $2.50-$2.80, has exhibited relative strength today, along with American Airlines (AAL) and Delta Air Lines (DAL).
- On the positive side, LUV did reaffirm its cost per available seat mile (CASM) guidance of +3.5-6.5%, indicating that the airline is executing well in terms of costs that it can control.
- With LUV bumping its fuel cost guidance higher to $2.70-$2.80 from $2.55-$2.65, at the same time that leisure travel demand cools off a bit, Q3 earnings estimates seem likely to come down. That is the root cause for today's weakness.
The main takeaway is that the lingering concerns that macroeconomic headwinds would eventually create a headwind for leisure travel demand seems to be coming to fruition. With that said, business remains quite healthy for LUV and Q3 is still poised to be a strong quarter for the company and its competitors. However, for LUV and other airlines with substantial domestic exposure, the jump in fuel costs figures to be more impactful to earnings since they can't mitigate those cost pressures through higher-priced international flights.
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