Market Snapshot
briefing.com
| Dow | 38989.83 | -97.55 | (-0.25%) | | Nasdaq | 16207.51 | -67.43 | (-0.41%) | | SP 500 | 5130.95 | -6.13 | (-0.12%) | | 10-yr Note | -3/32 | 4.22 |
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| | NYSE | Adv 1192 | Dec 1592 | Vol 1.0 bln | | Nasdaq | Adv 1799 | Dec 2573 | Vol 5.7 bln |
Industry Watch
| Strong: Utilities, Real Estate, Materials, Financials, Information Technology, Industrials |
| | Weak: Communication Services, Real Estate, Energy, Consumer Discretionary, Health Care |
Moving the Market
-- Hesitation from buyers after S&P 500, Nasdaq Composite set record closing highs on Friday
-- Muted action also related to wait-and-see attitude in front of busy week
-- Weakness in some mega cap stocks
-- Treasury yields moving somewhat higher
| Closing Summary
04-Mar-24 16:30 ET
Dow -97.55 at 38989.83, Nasdaq -67.43 at 16207.51, S&P -6.13 at 5130.95
[BRIEFING.COM] It was a lackluster start to the week for stocks. The S&P 500 only moved about 22 points between its intraday high and low, ultimately settling with a 0.1% decline. The muted action was related to a wait-and-see mentality in front of busy week due to the understanding that stocks are trading near all-time highs.
The S&P 500 and Nasdaq Composite briefly traded above their prior closing levels, but quickly pulled back to session lows, following the price action in mega cap stocks. Meta Platforms (META 498.19, -4.11% -0.8%), Amazon.com (AMZN 177.58, -0.64, -0.4%), and Microsoft (MSFT 414.92, -0.58, -0.1%), for example, had all been trading higher at their best levels of the session, but rolled over and settled lower.
Some other mega cap stocks traded down through the whole session, also having an outsized impact on index performance. Apple (AAPL 175.10, -4.56, -2.5%) shares declined on news that the EU is fining it more than EUR1.8 billion for "abusing its dominant position on the market for the distribution of music streaming apps to iPhone and iPad users (‘iOS users') through its App Store."
A sharp decline in Tesla (TSLA 188.14, -14.50, -7.2%) was related to a Bloomberg report that shipments from its China factory decline 19% year-over-year.
Still, the broader market held up okay despite the aforementioned losses in heavily-weighted constituents. The Invesco S&P 500 Equal Weight ETF (RSP) eked out a 0.2% gain.
Market participants were hesitant on either side of the tape in front of earnings results from retailers like Target (TGT 150.49, -4.80, -3.1%) and Costco (COST 759.18, +9.74, +1.3%), and earnings from Broadcom (AVGO 1402.26, +3.09, +0.2%) this week. The economic calendar is headlined by the February ISM Non-Manufacturing Index on Tuesday and February Jobs Report on Friday.
Also, Fed Chair Powell will deliver his semiannual monetary policy testimony before Congress on Wednesday and Thursday, but this is not expected to produce any surprises. Mr. Powell is largely expected to reiterate the Fed's view that there is no rush to cut rates.
Atlanta Fed President Bostic (FOMC voter) echoed this narrative in a speech today, saying that inflation has decelerated over the past year, but that price pressures are still widespread in his view.
The communication services sector (-1.5%) had a weak showing, weighed down by losses in Alphabet (GOOG 134.20, -3.88, -2.8%) andMeta Platforms.
It was the worst performing S&P 500 sector, followed by the consumer discretionary sector (-1.3%), which felt the pinch of the sharp decline in Tesla. Weakness in shares of Amazon.com also contributed to the sector's performance. These two sectors comprise nearly 20% of the index.
The energy sector was the only other sector that declined more than 1.0% today, sliding 1.1% as WTI crude oil futures fell 1.3% to $78.70/bbl.
There was no US economic data of note today.
- Nasdaq Composite: +8.0% YTD
- S&P 500: +7.6% YTD
- Dow Jones Industrial Average: +3.5% YTD
- S&P Midcap 400: +5.4% YTD
- Russell 2000: +2.3% YTD
Looking ahead, Tuesday's economic calendar features:
- 9:45 ET: Final February S&P Global U.S. Services PMI (prior 52.5)
- 10:00 ET: January Factory Orders (Briefing.com consensus -2.5%; prior 0.2%) and February ISM Non-Manufacturing Index (Briefing.com consensus 52.7%; prior 53.4%)
Treasuries settled with losses in front of busy week
04-Mar-24 15:35 ET
Dow -59.99 at 39027.39, Nasdaq -17.12 at 16257.82, S&P +5.94 at 5143.02
[BRIEFING.COM] The major indices pulled back from session highs with no specific catalyst to account for the move.
The 2-yr note yield rose eight basis points to 4.61% and the 10-yr note yield rose four basis points to 4.22%.
Looking ahead, Tuesday's economic calendar features:
- 9:45 ET: Final February S&P Global U.S. Services PMI (prior 52.5)
- 10:00 ET: January Factory Orders (Briefing.com consensus -2.5%; prior 0.2%) and February ISM Non-Manufacturing Index (Briefing.com consensus 52.7%; prior 53.4%)
Broader market builds up strength
04-Mar-24 15:00 ET
Dow -26.83 at 39060.55, Nasdaq -0.96 at 16273.98, S&P +8.53 at 5145.61
[BRIEFING.COM] The market found some upside momentum recently, propelling the S&P 500 to a 0.2% gain. The Nasdaq Composite (+0.04%) also jumped into positive territory.
The mega caps are still relatively weak compared to the broader market, which has been building up strength. The Vanguard Mega Cap Growth ETF (MGK) is down 0.1%.
Meanwhile, the Invesco S&P 500 Equal Weight ETF (RSP) is up 0.4% near its high of the day.
S&P 500 jostles near flat lines; Packaging Corp, FleetCor ride ratings upgrades higher
04-Mar-24 14:30 ET
Dow -85.30 at 39002.08, Nasdaq -31.43 at 16243.51, S&P -0.48 at 5136.60
[BRIEFING.COM] The S&P 500 (-0.01%) has flirted with flat lines over the prior half hour, trading places between modest gains and losses to now sit narrowly lower.
Elsewhere, S&P 500 constituents Hewlett Packard Enterprise (HPE 17.11, +1.55, +9.96%), Packaging Corp (PKG 186.80, +6.61, +3.67$), and FleetCor (FLT 285.80, +9.20, +3.33%) pepper the top of today's standings. HPE continues recent strength, PKG was upgraded to Buy at BofA Securities, and FLT caught a Baird upgrade to Outperform.
Meanwhile, Paramount Global (PARA 10.21, -0.74, -6.76%) is near the bottom of the S&P, weaker alongside other media stocks.
Gold continues rally
04-Mar-24 14:00 ET
Dow -84.19 at 39003.19, Nasdaq -28.16 at 16246.78, S&P -1.10 at 5135.98
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.17%) is now in second place, albeit little changed over the prior half hour as we approach two hours left of trading on Monday.
Gold futures settled $30.60 higher (+1.5%) to $2,126.30/oz, as the yellow metal continues to react favorably to last week's economic data which fueled speculation that the Fed could cut rates at the June meeting.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $103.81.
Tesla's weak China shipments triggering significant selling pressure today (TSLA)
Tesla's (TSLA -6%) upward momentum toward gap fill was halted today after Bloomberg reported shipments from its factory in China sank to their lowest levels in over a year, declining 19% yr/yr and 16% mo/mo. The report follows a Reuters article last week noting that the EV maker introduced new incentives for China sales. While the Lunar New Year holiday tends to be a lull period for TSLA, it is worth noting that last year, the company grew its shipments in China by 18% mo/mo during January, bucking the industry trend as its price cuts spurred demand. However, much has changed over the past year in TSLA's second-largest market behind the U.S.
- The EV market in China is becoming saturated. China OEMs, including Li Auto (LI), XPeng (XPEV), and NIO (NIO), are aggressively expanding their EV market share across all price points, triggering past price wars that eroded TSLA's margins.
- LI noted last week that its market share grew over 5 pts during 2023 and is confident growth will continue in 2024. Meanwhile, XPEV is launching Smart EV models at price points of around $20,000, widening its customer base. Additionally, NIO remarked in December that it ranked first in China's BEV segment with an over 45% market share.
- Growth is slowing. The main takeaway from TSLA's Q4 report in January was that overall growth was stuck in neutral. The company warned that vehicle volume growth could be notably lower this year compared to 2023, hindered by high-interest rates, lukewarm demand for the Cybertruck, and potential delays in launching a next-gen platform.
- China OEMs are expanding their reach into Western markets. As a result, TSLA is facing further competition alongside established domestic OEMs. CEO Elon Musk stated last quarter that Chinese car companies are the most competitive globally and will likely have significant success outside China. He added that if trade barriers are not established, Chinese OEMs will wipe out most other car companies.
TSLA's disappointing performance in Q4 underscored several headwinds that could keep selling pressure active over the near term. Nevertheless, shares have been steadily rebounding over the past several weeks. However, challenges emanating from China are mounting, spooking investors today. The Chinese economy is struggling, making it difficult for TSLA to move cars in the region despite increased incentives. Still, Mr. Musk has repeatedly commented that market share is more important than margins, which could lead to further price cuts in China, keeping the boot on margins for the foreseeable future.
Spirit Airlines in a tailspin after terminating merger agreement with JetBlue Airways (SAVE)
After a federal judge blocked the proposed merger between JetBlue Airways (JBLU) and Spirit Airlines (SAVE) in January, citing anti-competitive concerns, it became a long shot that the deal would be completed by the July 24 deadline. Although both companies vowed to appeal the ruling, arguing that the combination of JBLU and SAVE would create a formidable competitor to the "big four airlines", it became clear that this deal was unlikely to ever be cleared for takeoff. Consequently, JBLU and SAVE officially terminated the merger, triggering a $69 mln payment from JBLU to SAVE.
- That termination fee is small consolidation for SAVE and its shareholders, many of whom viewed this merger as a lifeline for the struggling discount carrier. Travel demand has remained strong, but low-cost carriers like SAVE and Frontier Group (ULCC) have seen their margins and profits get squeezed as the major airlines, like Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL), ramp up capacity.
- With more seats available across the market, prices are seeing some downward pressure, at the same time that pilot and crew member wages are rising. The big four airlines are better equipped to handle these headwinds due to their more expansive and more profitable international flights. SAVE, on the other hand, isn't as fortunate and that's very apparent in its shaky financials.
- On February 8, SAVE reported a smaller-than-expected Q4 loss of $(1.36)/share and issued upside Q1 revenue guidance of $1.25-$1.28 bln. However, on an absolute basis, SAVE's results and financial health are concerning. For FY23, the company's pre-tax margin was (13.8)% and its operations burned over $520 mln in cash. The balance sheet is equally troubling with $3.06 bln in long-term debt as of December 31, 2023, and just 1.0 bln in cash and short-term investments.
- On that note, SAVE is exploring refinancing options for its 2025 debt maturities, including for the $1.1 bln in senior secured notes that are due next year. In 2026, SAVE has another $500 mln of convertible bonds that will be maturing. Following the unfavorable merger ruling, bankruptcy rumblings have surfaced, although SAVE may be able to extend those maturity dates by working with its creditors.
- For JBLU, the merger termination is probably in the company's best interest as it will no longer by saddled by SAVE's balance sheet woes. Furthermore, JBLU can focus on its own cost-cutting efforts and its resources won't be tied up on integrating and reconfiguring SAVE's fleet to better align with JBLU's
Overall, the merger termination puts SAVE back into a vulnerable position and the next several months will likely be quite turbulent for the airline as it looks to shore up its liquidity and improve its profitability.
Sea Ltd trades flat on Q4 results, not a great quarter but focus remains on profitability (SE)
Sea Limited (SE) is trading relatively flat following its Q4 earnings report. Sea Ltd., often referred to as the "Amazon" of Southeast Asia, reported Q4 revenue growth of 5.7% yr/yr to US$3.62 bln, which was better than expected. The company reported a GAAP loss, which appears to include some unusual items. As such, we are not sure if it is comparable to consensus.
- While the company did report a GAAP loss, it was able to report positive adjusted EBITDA at US126.7 mln, although that was down quite a bit from $496 mln in the year ago period as the company has been facing intensified competition in Southeast Asia. For the full year of 2023, total EBITDA grew significantly to $1.18 bln from an adjusted EBITDA loss of $(878) mln in 2022.
- The standout segment was E-commerce and other services, which saw Q4 revenue jump 24.2% yr/yr to US$2.8 bln. This was primarily driven by GMV growth at its e-commerce business and the growth of its credit business. The main laggard was its Digital Entertainment segment, where revenue fell 46% yr/yr and 14% sequentially to US$510.8 mln, as user monetization moderated yr/yr. However, Sea believes it has been able to stabilize the performance of its digital entertainment segment, which has been falling since its pandemic highs.
- Despite intensified competition in Southeast Asia, Sea believes its Shopee e-commerce platform had a meaningful gain in market share between the start and the end of 2023. Shopee's GMV and orders grew 29% and 46% yr/yr, respectively. It intends to maintain Shopee's market share in 2024 as the company expects Shopee's full-year GMV growth will be in the high teens and its adjusted EBITDA will turn positive in 2H24.
- Turning to Garena, its digital entertainment business, which primarily focuses on offering mobile and PC online games. Revenue fell sharply but there were some bright spots. The company is seeing improved user acquisition and retention trends for Free Fire. In 2023, Free Fire was the most downloaded mobile game globally and these trends are continuing into 2024. It remains one of the largest mobile games in the world.
Overall, investors see some progress with how the company wrapped up 2023. To its credit, the company has been slashing costs as it has shifted its focus to profitability instead of growth only. Also, its gaming business has been a trouble spot, but much of the sales decline is because it is coming off a surge in sales during the pandemic. So it is not entirely unexpected.
Our general take is that this was not a great quarter but better than feared. That is partly because sentiment has been running quite low. The stock gapped lower on a Q2 earnings miss in mid-August and the stock had stayed at depressed levels for months. The stock has been trending higher since mid-January. The company seems to be making progress in terms of its renewed focus on profitability.
Super Micro Computer takes out all-time highs ahead of joining the S&P 500 on March 18 (SMCI)
Super Micro Computer (SMCI +22%) soars above all-time highs today following Friday's announcement it would join the S&P 500 on March 18, replacing Whirlpool (WHR), which will join the S&P MidCap 400. There seems to be no slowing of the high-performance server provider since it blew Q2 (Dec) forecasts out of the water in mid-January. The upbeat guidance triggered a rush of buying, sending the stock over +200% higher before enduring a 30% correction, only to resume its breathtaking rise following impressive quarterly results from NVIDIA (NVDA).
- What does SMCI do? Like big-tech names in the server industry, such as Dell (DELL), Hewlett Packard Enterprise (HPE), and Cisco (CSCO), SMCI designs and provides servers for enterprise data centers, AI, and edge computing. The difference between SMCI and more prominent names is that SMCI does not brand its servers. Instead, it is a white-box server provider, leaning on combining OEM and generic components to build customized servers, giving customers flexibility in how they want their servers designed.
- SMCI's competitive advantage lies in its fluidity when building servers. Outside of DELL, which just saw its shares explode following JanQ results last week, SMCI's main competitors have struggled to produce similar gains despite the surge in AI technology and the accompanying server demand. For example, SMCI's DecQ revs more than doubled yr/yr after delivering a mild 14% increase in SepQ while HPE's JanQ revenue fell for the first time in three years after a 5% jump in OctQ.
- Management commented in late January that the demand for AI inferencing systems is ushering in an accelerating demand phase. Supporting this demand has been an improving supply backdrop for GPU components, primarily those from NVDA. Founder and CEO Charles Liang remarked during SMCI's DecQ call that he felt very confident the current AI boom would persist for many quarters if not years.
Still, with such dependence on AI, SMCI's massive gains are at risk of a swift pullback on any demand slowdown. For example, if Broadcom's (AVGO) upcoming JanQ report this Thursday after the close does not underpin sustained AI demand or guidance just fails to meet expectations, SMCI could endure selling pressure. The stock is also prone to wild swings, falling 20% in one day last month. Competition also remains a threat, especially since most of SMCI's rivals have much longer operating histories and greater resources. DELL noted last week that it is seeing robust demand for its AI-optimized server portfolio, with orders surging by nearly 40% sequentially.
The AI craze has ignited a monumental rally in SMCI, shooting up 1,000% within the past year. SMCI has delivered substantial financial improvements over the past couple of quarters as it prepares to more than double the size of its current AI portfolio with many upcoming NVDA chips, which customers will require for continued AI innovation. Nevertheless, we urge caution trading at such lofty price levels.
NetApp taps into expanded all-flash array product portfolio to deliver strong Q3 report (NTAP)
Data storage and security company NetApp (NTAP) is soaring to multi-decade highs following its strong beat-and-raise Q3 earnings report, indicating that the company has transitioned from turnaround mode to growth mode.
- NTAP notched several records in Q3, including EPS of $1.94 (+42% yr/yr), gross margin of 73%, and all-flash array ARR of $3.4 bln (+21% yr/yr). At least equally important, though, is that billings returned to growth, increasing by 7% to $1.69 bln, following declines of 11% in Q2 and 17% in Q1.
- Operational discipline is part of the story for NTAP -- non-GAAP operating expenses as a percent of revenue were flat yr/yr at 42.5% -- but the brightening demand situation is what really has investors excited.
- In particular, NTAP's strategy to focus on and expand its all-flash product portfolio is really paying off. The company's Hybrid Cloud segment, which accounts for over 90% of its revenue, grew by 6% in Q4 as the all-flash business expanded to approximately 60% of Hybrid Cloud revenue. For a point of comparison, Hybrid Cloud saw revenue drop by 8% last quarter as NTAP experienced notable weakness on the large enterprise side due to increased budget scrutiny and smaller deal sizes.
- Additionally, while NTAP may not be the first name that comes to mind when thinking about AI, it is emerging as a bonified AI play. Investors ears certainly perked up when the company mentioned that it secured several large wins with NVIDIA (NVDA) for SuperPod and BasePod deployments. In CEO George Kurian's words, "[NTAP] delivers the data management capabilities for security, performance and simplicity that enterprises require for their Gen AI workflows. We continue to advance our position with the development of Gen AI-driven cloud and on-premises solutions in partnership with industry leaders."
- The strengthening demand picture is having another positive effect: namely, higher margins. In Q3, product gross margin came in 250 bps higher than the top end of NTAP's guidance at 63%, mainly driven by a favorable mix shift towards all-flash products and pricing discipline.
- It's also important to point out that NTAP's results are not necessarily a function of an improving macro environment. In fact, during the earnings call, Mr. Kurian stated that while the macro climate hasn't worsened, it also has stayed relatively consistent the whole time. In other words, the company's improved results are being driven by its stronger so-to-market execution.
Overall, this was an impressive and encouraging quarterly report from NTAP, signaling that momentum is building and that its turnaround efforts have been a success.
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