Market Snapshot
| Dow | 39512.84 | +125.08 | (0.32%) | | Nasdaq | 16340.87 | -5.40 | (-0.03%) | | SP 500 | 5222.68 | +8.60 | (0.16%) | | 10-yr Note | -25/32 | 4.50 |
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| | NYSE | Adv 1280 | Dec 1477 | Vol 888 mln | | Nasdaq | Adv 1606 | Dec 2612 | Vol 4.4 bln |
Industry Watch
| Strong: Information Technology, Financials, Materials, Health Care, Consumer Staples |
| | Weak: Communication Services, Consumer Discretionary, Real Estate, Energy |
Moving the Market
-- Carryover momentum from recent gains
-- Rollover in some mega cap gains weighing on index performance
-- Gains in chipmakers also boosting index performance after TSMC (TSM) reported a jump in April revs.
-- Digesting the preliminary May University of Michigan Consumer Sentiment report
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Closing Summary
10-May-24 16:25 ET
Dow +125.08 at 39512.84, Nasdaq -5.40 at 16340.87, S&P +8.60 at 5222.68
[BRIEFING.COM] Today's trade was mixed, capping off a winning week. The S&P 500 closed 0.2% higher than yesterday and 1.9% higher than last Friday. The Nasdaq Composite settled fractionally lower than yesterday and 1.1% higher than last Friday.
The major indices were initially trading higher today, but early buyer enthusiasm dissipated after the release of the preliminary University of Michigan Index of Consumer Sentiment for May at 10:00 ET. That report dropped to 67.4 in May (expected 76.5; prior 77.2) and showed a jump in year-ahead inflation expectations to 3.5% from 3.2%.
Treasuries extended starting losses in response to the report. The 10-yr note yield settled six basis points higher today, and unchanged this week, at 4.50%. The 2-yr note yield settled six basis points higher today, and six basis points this week, to 4.87%.
Some mega caps rolled over around the same time, giving back early gains. Apple (AAPL 183.05, -1.52, -0.8%) was a standout in that respect, trading up as much as 0.3% at its high before settling lower.
Many stocks still closed with gains despite the index-level pullback from session highs and negative breadth. Decliners led advancers by an 11-to-10 margin at the NYSE and a 3-to-2 margin at the Nasdaq. The equal-weighted S&P 500 still settled 0.2% higher and six of the 11 S&P 500 sectors registered gains.
The consumer staples (+0.6%), information technology (+0.5%), financials (+0.5%), and health care (+0.2%) sectors were the top performers today. The consumer discretionary sector logged the biggest decline, down 0.6%.
Strength in the semiconductor space after TSMC (TSM 149.26, +6.47, +4.5%) reported a big jump in revenue in April provided a measure support to the broader market. The PHLX Semiconductor Index (SOX) gained 1.0%.
- S&P 500:+9.5% YTD
- Nasdaq Composite: +8.9% YTD
- S&P Midcap 400: +7.6% YTD
- Dow Jones Industrial Average: +4.8% YTD
- Russell 2000: +1.6% YTD
Reviewing today's economic data:
- The preliminary Index of Consumer Sentiment for May sunk to 67.4 (Briefing.com consensus 76.5) from the final reading of 77.2 for April. In the same period a year ago, the index stood at 59.0. The May reading is the lowest in six months.
- The key takeaway is that the downturn in sentiment was driven by decreases across age, income, and education groups, and revolved around worries pertaining to inflation, unemployment, and interest rates.
- The Treasury Budget for April showed a surplus of $209.5 billion compared to a surplus of $176.2 billion in the same period a year ago. The April surplus resulted from receipts ($776.2 billion) exceeding outlays ($566.7 billion). The Treasury Budget data is not seasonally adjusted so the April surplus cannot be compared to the March deficit of $236.5 billion.
- The key takeaway from the report is that individual tax receipts were higher than the prior year, which is a reflection of the stronger economy in 2023. Separately, higher rates accompanied the stronger economy, which in turn drove higher outlays for net interest costs.
Looking ahead, there is no US economic data of note on Monday. Tuesday's calendar features the April Producer Price Index and the April Consumer Price Index will be released on Wednesday.
Treasuries settle with losses
10-May-24 15:35 ET
Dow +141.31 at 39529.07, Nasdaq -7.40 at 16338.87, S&P +8.69 at 5222.77
[BRIEFING.COM] The Nasdaq Composite is flirting with positive territory heading into the close.
The 10-yr note yield settled six basis points higher today, and unchanged this week, at 4.50%. The 2-yr note yield settled six basis points higher today, and six basis points this week, to 4.87%.
Looking ahead, there is no US economic data of note on Monday. Tuesday's calendar features the April Producer Price Index and the April Consumer Price Index will be released on Wednesday.
Stocks move mostly sideways, sitting on solid gains for the week
10-May-24 15:05 ET
Dow +105.07 at 39492.83, Nasdaq -8.12 at 16338.15, S&P +7.02 at 5221.10
[BRIEFING.COM] There hasn't been a lot of up or down movement at the index level over the last half hour.
The major indices are sitting on solid gains for the week. The S&P 500 is up 1.8%, the Nasdaq Composite is 1.1% higher, and the Dow Jones Industrial Average is 2.1% higher than last Friday.
Many stocks have participated in this week's gains. The equal-weighted S&P 500 shows a 2.0% gain since Friday.
Individual tax payments drive budget surplus in April
10-May-24 14:30 ET
Dow +79.55 at 39467.31, Nasdaq -12.06 at 16334.21, S&P +5.13 at 5219.21
[BRIEFING.COM] The Treasury Budget for April showed a surplus of $209.5 billion compared to a surplus of $176.2 billion in the same period a year ago. The April surplus resulted from receipts ($776.2 billion) exceeding outlays ($566.7 billion). The Treasury Budget data is not seasonally adjusted so the April surplus cannot be compared to the March deficit of $236.5 billion.
The key takeaway from the report is that individual tax receipts were higher than the prior year, which is a reflection of the stronger economy in 2023. Separately, higher rates accompanied the stronger economy, which in turn drove higher outlays for net interest costs.
Gold adds to weekly advance, aided by weekly yield losses
10-May-24 14:00 ET
Dow +89.01 at 39476.77, Nasdaq -13.64 at 16332.63, S&P +4.77 at 5218.85
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-0.08%) is still lagging its major counterparts, albeit narrowly off today's lows of -0.32%.
Gold futures settled $34.70 higher (+1.5%) to $2,340.30/oz, about +2.9% higher this week, propelled by falling treasury yields and this week's softer-than-expected jobs data.
Meanwhile, the U.S. Dollar Index is narrowly higher at $105.26.
Unity Software sinks as investors remain in wait-and-see mode over an expected 2H24 recovery (U)
Unity Software (U -8%) turns toward multi-year lows despite exceeding earnings and revenue estimates in Q1 and reaffirming its financial goals for FY24. The software development platform, used widely across the video game industry, kicked off a company-wide reset last year following pricing backlash under former CEO John Riccitiello. While stating that it remains on track to achieve its previously outlined financial aspirations for the year was encouraging, Unity still has a long way to go to recover the lost ground from a sour combination of waning consumer demand and wrong turns by management. Without seeing quicker signs of its reset actions manifesting in the numbers, investors remained turned off, keeping their boot on the stock.
- Alongside Unity's Q1 report was its announcement that former Zynga (TTWO) COO Matt Bromberg would become the permanent CEO next week, replacing interim CEO Jim Whitehurst, who is transitioning to Executive Chair. Mr. Bromberg will likely stay the course, at least for the near term, potentially testing investors' patience as they wait for Unity's turnaround actions to reignite growth.
- Thus far, Unity's focus on what it does best -- Engine, Cloud, and Monetization -- has not moved the needle surrounding revenue. Unity registered an 8.1% drop in revs yr/yr during Q1 to $460 mln. However, this is largely due to Unity's lagging non-core businesses. When focusing purely on its strategic portfolio (comprised of its core businesses), revs ticked 2% higher yr/yr to $426 mln, exceeding its $415-420 mln outlook.
- Divesting its non-core assets and emphasizing profitability has resulted in a decent uptick in adjusted EPS, which expanded to $0.35 in the quarter compared to $0.03 in 1Q23. Profitability remains an important gauge of whether Unity's reset is progressing favorably. In Q1, adjusted EBITDA grew by $50 mln yr/yr, keeping the company on track to achieve its $400-425 target by year's end. Unity also expects to still exit the year with adjusted EBITDA margins of over 25%.
- Hitting its FY24 targets will depend on growth accelerating following a disappointing Q2. Unity anticipates Q2 strategic revenue to slip by 6-7% yr/yr, a sharp U-turn from the minor growth delivered in Q1. After clearing this speed bump, Unity is energetic about 2H24, reaffirming its projection of accelerating growth, culminating in a +2-4% jump in strategic revs yr/yr.
With shares stuck around multi-year lows, the question following Unity's Q1 report is whether the company is doing enough to plug the holes of a sinking ship. We mentioned last quarter that Unity's reset plan could be its ticket out of a lengthy downward trend. However, upbeat commentary surrounding its turnaround plan will not cut it, especially given how long the stock has traded sideways. Progress must show up in Unity's numbers. We believe investors are deploying a wait-and-see attitude at the moment, remaining on the sidelines until the second half of the year, when Unity has repeatedly mentioned will be the beginning of a long-awaited recovery.
Sweetgreen making some "sweet green" for investors today on Q1 results (SG)
This fast food restaurant operator with a focus on salads and bowls is sharply higher for the second quarter in a row following its Q1 report last night. SG reported a larger than expected loss, but beat on revenue. SG also raised FY24 guidance for sales to $660-675 mln from $655-670 mln and for adjusted EBITDA to $10-19 mln from $8-15 mln.
- The company is not yet profitable partly because it's building new locations at a good clip, but adjusted EBITDA turned positive to $0.1 mln from $(6.7) mln a year ago.
- What really stood out were impressive Q1 comps at +5%, nicely above the +3% comp guidance. The comp increase was driven by a 5% benefit from menu prices while traffic was flat. Comps improved sequentially each month within the quarter. Its Q1 traffic was impacted both by January weather and the inclusion of two additional holidays in the quarter. Importantly, SG raised its FY24 comp guidance to +4-6% from +3-5% prior guidance.
- One area where Sweetgeen really excels is digital orders. In 2023, total digital sales represented a whopping 59% of total revenue, with over 60% of that coming from SG's own digital channels. In Q1, 59% of sales were digital, with 56% of those sales coming via its own digital channels. Other than Wingstop (WING), which posted 68% digital sales in Q1, we cannot think of a higher percentage. Sweetgreen deserves credit for this as it really pushes online sales.
- In terms of its menu, Sweetgreen has historically been known as a salad company but it has been aiming to broaden its appeal. In October, it launched protein plates featuring new proteins such as herb roasted chicken and miso glazed salmon. Protein plates continued to over-index at dinner in Q1. In February, SG launched a test of its caramelized garlic steak across the Boston market.
- In terms of building new locations, SG expects to add 23-27 new restaurants in 2024 to its current 225 locations. They will be weighted toward the back half of the year. SG sees tremendous whitespace opportunities across the US in both new and existing markets. Starting next year, it plans to return to a growth rate of 15-20% new unit growth, with 2025 around 15% and 2026 and beyond at 20%. In Q1, SG opened six new restaurants, including two in a new market, Seattle.
Overall, this was another impressive quarter for Sweetgreen. Investors appear to be reacting mostly to the impressive comps, which were strong despite tough January weather. We wish traffic played a bigger role in the comp growth, but they were still good comps. We also like that SG raised full year comps. Sweetgreen generated a lot of excitement when it made its IPO debut in November 2021. The concept is pretty compelling as it's a play on consumers wanting to eat healthier while offering the convenience of a quick meal. Unfortunately, some poor earnings results sent the shares to a low of $6.10 by March 2023. However, the last two quarters has shown that the brand is turning around.
Dropbox drops a better-than-feared Q1 earnings report as paying user growth returns (DBX)
Dropbox's (DBX) Q1 results and guidance may not be spectacular -- revenue growth was a mere 3.3% for the quarter -- but the performance qualifies as "better-than-feared" following a Q4 earnings report that included a 50,000 qtr/qtr drop in paying users. Encouragingly, paying users returned to growth in Q1, increasing by 35,000 qtr/qtr, even as customers remained cautious with their spending. The return to user growth, combined with a 6.8% yr/yr decrease in operating expenses, drove EPS higher by 38% yr/yr to $0.58, comfortably exceeding expectations.
- Expectations were muted heading into this earnings report, as reflected in the stock's lack of recovery after plunging by 23% in the wake of DBX's Q4 results and downside Q1 and FY24 revenue guidance in mid-February. Therefore, the company's Q2 revenue guidance of $628-$631 mln, which is slightly below consensus at the midpoint, may actually be providing some relief to investors who were anticipating an even weaker outlook. That may especially be the case since DBX also reaffirmed its FY24 revenue outlook of $2.535-$2.550 bln.
- With that said, the company is still contending with some of the same headwinds from last quarter. Namely, during the earnings call, CEO Andrew Houston stated that the company continues to see pressure across the self-serve individual and team offerings within the File, Sync, and Share (FSS) business. Furthermore, he reiterated that the macroeconomic environment remains challenging, especially within the SMB market.
- However, the situation doesn't seem as bleak as it did last quarter. For instance, DBX commented during the Q4 earnings call that it was seeing lower top-of-funnel demand and conversion challenges regarding the core FSS business, including with Teams. Last night, Mr. Houston said that Q1 saw some improvement in top-of-funnel demand, due to changes made to reduce friction in the onboarding process and improving the Team admin workflow. As a result of these changes, Team invitations, weekly average usage, and trial starts, all experienced yr/yr increases.
- Additionally, DBX acknowledged last quarter that it was experiencing conversion challenges for its bundles, which includes FSS and limited functionality for products like Dropbox Sign, DocSend, and Replay. To address this issue, the company dropped bundled pricing back to pre-launch levels and it's currently analyzing the impact of the reduced pricing.
The main takeaway is that while business is far from booming for DBX, the company's Q1 earnings report showed that it's still generating healthy earnings growth and that demand has at least stabilized, if not strengthened a bit from last quarter.
Akamai Tech lowers its FY24 outlook after content delivery traffic growth weakens in Q1 (AKAM)
Akamai Tech (AKAM -8%) continues to trek downhill after lowering its FY24 guidance to reflect persistent weakness in its content delivery business during Q1. AKAM now predicts FY24 adjusted EPS of $6.20-6.40, down from $6.63-6.68, and revs of $3.95-4.02 bln, down from $4.04-4.12 bln. The headwinds are being felt immediately, with AKAM also projecting Q2 earnings and revs below consensus.
AKAM is a content delivery network (CDN) provider, meaning that companies lean on AKAM to deliver their online content, leveraging the company's servers nearest to the end-user so pages load quickly and files can be downloaded at higher speeds. Content delivery has been AKAM's core business. However, as it continues transitioning toward higher-growth security and cloud computing services, content delivery represented just a third of its Q1 revs, down several points compared to Q4. Nevertheless, this business still comprises a meaningful chunk of AKAM's overall revs. Furthermore, the company leverages its profits to invest in its security and cloud computing portfolios.
- What happened? The revenue decline in content delivery worsened in Q1, falling by 11% yr/yr compared to a 6% drop in 4Q23 and 4% in 3Q23, primarily as a result of continuously slowing traffic growth across the industry coinciding with a prominent social media customer implementing aggressive cost-cutting actions. This social media customer's measures alone are clipping $40-60 mln off AKAM's FY24 revenue outlook.
- Most of AKAM's delivery woes are related to gaming and video, which is consistent with recent industry reports citing a slowdown in video streaming services. Part of this stems from password-sharing crackdowns, which can ultimately lead to fewer devices streaming content. While this is good news for companies like Netflix (NFLX) and its peers, as they can extract more revenue from additional paying users and lessen bandwidth costs, it hurts AKAM.
- Given how severe the current market headwinds are proving for AKAM, management felt it prudent to assume this weakness will persist for the remainder of 2024, driving its reduced outlook.
AKAM's delivery problems notwithstanding, there were bright spots in Q1. The company's compute and security revs grew 25% and 21% yr/yr, respectively, helping keep overall revenue growth trending positively at 7.8% to $986.97 mln. Additionally, despite lackluster demand in delivery, this business remains highly profitable, pushing AKAM's adjusted EPS of $1.64 ahead of analyst expectations and toward the high end of its $1.59-1.64 forecast. Also worth mentioning was AKAM's new three-year $2.0 bln repurchase program, representing nearly 13% of its market capitalization.
AKAM was coming off a soft quarter for its delivery business, which kicked off an over 20% correction ahead of Q1 results. Given this backdrop, the market sought signs of stabilization in content delivery revenue. Unfortunately, traffic growth continued to slow across the industry, and AKAM conceded that it remains challenging to predict precisely when this business will begin to stabilize. This dynamic may make any road to recovery over the near term challenging.
Arm Holdings plc pulls back as in-line FY25 guidance stokes concerns over slowing AI demand (ARM)
Arm Holdings plc (ARM -2%) could use a hand today even as its shares bounce back after starting the session off down over -7.0% following Q4 (Mar) results. The initial sell-off was triggered by underwhelming FY25 guidance, with the midpoints of ARM's earnings and revenue projections aligning with analyst expectations. Given how explosive AI-related demand has been, with companies in and well outside the technology sector discussing their excitement over large-language models and Generative AI, ARM's outlook was viewed as a weak spot, reflecting a potential cooldown in demand.
However, after the quick pullback today, investors are slowly warming back up to ARM, focusing on the several unwavering positive developments from Q4.
- AI continues to open numerous doors for ARM, supporting its 37% jump in royalty revenue yr/yr and 60% pop in licensing revenue. Accelerating adoption of Armv9, ARM's newest architecture in a decade, constantly fuels its buoyant royalty revenue. In fact, because companies are putting more CPUs inside their chips based on v9, it compounds ARM's royalty revs.
- Meanwhile, AI is propelling licensing revs higher as the software-based technology continues moving faster than the hardware. As a result, companies must rapidly upgrade their hardware designs to capture the needs of AI workloads, benefiting ARM tremendously.
- These trends are accelerating overall revenue growth. ARM delivered total revs of $928 mln in Q4, a 47% improvement yr/yr and well ahead of its $850-900 mln forecast. For the year, ARM generated over 20% revenue growth and expects FY25 to be even better, projecting $3.8-4.1 bln in sales, translating to +22% growth yr/yr at the midpoint.
Even though shares have snapped back from earlier, ARM's in-line FY25 guidance still raises a red flag. While the company does not have much history as a publicly-listed organization, ARM's previous guidance, projecting Q4 numbers so far above and beyond analyst expectations, made its initial FY25 outlook appear quite dull by comparison. It also does not align with management's upbeat tone surrounding AI. ARM has consistently discussed rampant adoption of its architecture, from Google (GOOG) to Microsoft (MSFT) leveraging Arm in their latest data center chips, citing AI as the underlying factor. As such, it was crucial for ARM's guidance to reflect these trends.
Without a more uplifting outlook, ARM is amid a similar dynamic it experienced following its first earnings report as a public company. That is, encouraging developments mean very little when guidance fails to illuminate these tailwinds. While NVIDIA's (NVDA) AprQ report slated for May 22 after the close could ignite a powerful rally for ARM if its guidance illustrates a strengthening in AI-related demand, ARM's outlook still acts as a warning sign that perhaps companies are slowing their AI build-outs, focusing on monetizing or extracting productivity improvements from their existing infrastructure before pouring more capital into it.
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