| | | Market Snapshot
| Dow | 38852.86 | -216.73 | (-0.55%) | | Nasdaq | 17019.89 | +99.09 | (0.59%) | | SP 500 | 5306.04 | +1.32 | (0.02%) | | 10-yr Note | -28/32 | 4.54 |
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| | NYSE | Adv 968 | Dec 1785 | Vol 923 mln | | Nasdaq | Adv 1813 | Dec 2460 | Vol 6.3 bln |
Industry Watch
| Strong: Information Technology, Energy, Communication Services |
| | Weak: Health Care, Consumer Staples, Financials, Industrials, Materials |
Moving the Market
-- Solid gain in NVDA due to expectation that xAI's $6 billion capital raise will benefit the AI chipmaker
-- AAPL trading higher following Bloomberg report that April iPhone shipments in China were up 52%
-- Treasury yields moving higher in response to weak auction results and the stronger-than-expected
-- Lacking conviction after holiday weekend |
Closing Summary
28-May-24 16:25 ET
Dow -216.73 at 38852.86, Nasdaq +99.09 at 17019.89, S&P +1.32 at 5306.04
[BRIEFING.COM] The stock market exhibited mixed action today. There wasn't a lot of conviction from buyers or sellers after the holiday weekend. This led the major indices to trade above and below prior closing levels, reacting to the price action in mega cap stocks and Treasuries.
The Dow Jones Industrial Average closed more than 200 points lower today while the Nasdaq Composite (+0.6%) closed at a fresh record high, above 17,000 for the first time, thanks to a late surge of buying activity in mega cap stocks.
This price action also left the S&P 500 little changed from yesterday, but the index had been down as much as 0.4% earlier.
NVIDIA (NVDA 1139.01, +74.32, +7.0%) provided some support to the broader market today due to the notion that xAI's $6 billion capital raise will benefit the AI chipmaker. Other top performing mega caps that participated in the afternoon move higher included Amazon (AMZN 182.15, +1.40, +0.8%) and Meta Platforms (META 479.92, +1.70, +0.4%).
Apple (AAPL 189.99, +0.01, +0.01%) had been trading up as much as 1.6% at its high, but shares were left out of the late surge.
The information technology sector was one of only three S&P 500 sectors to close with a gain, benefitting from the upside move in NVDA and gains in other mega caps.
The activity in Treasuries kept pressure on equities through the session. The 2-yr note yield settled three basis points higher at 4.98% and the 10-yr note yield rose eight basis points today to 4.54%. This price action was in response to a stronger-than-expected Consumer Confidence report for May, and today's $69 billion 2-yr note and $70 billion 5-yr note sale, which met weak demand.
- Nasdaq Composite: +13.4% YTD
- S&P 500:+11.2% YTD
- S&P Midcap 400: +6.3% YTD
- Dow Jones Industrial Average: +3.1% YTD
- Russell 2000: +2.0% YTD
Reviewing overnight developments:
- March FHFA Housing Price Index 0.1%; Prior 1.2%
- March S&P Case-Shiller Home Price Index 7.4% (Briefing.com consensus 7.0%); Prior 7.3%
- May Consumer Confidence 102.0 (Briefing.com consensus 96.0); Prior was revised to 97.5 from 97.0
- The key takeaway from the report is that consumers are feeling good about labor market conditions, which is important as that typically translates into increased spending activity.
Looking ahead, market participants will receive the weekly MBA Mortgage Applications Index at 7:00 ET tomorrow. Wednesday's calendar also features the release of the Fed's Beige Book at 2:00 ET and the results of a $44 billion 7-yr Treasury note auction will be released at 1:00 ET.
S&P 500 testing the 5,300 level ahead of the close
28-May-24 15:35 ET
Dow -283.51 at 38786.08, Nasdaq +68.89 at 16989.69, S&P -7.82 at 5296.90
[BRIEFING.COM] The S&P 500 is trending toward the 5,300 level, still down 0.2% on the day.
The 2-yr note yield settled three basis points higher at 4.98% and the 10-yr note yield rose eight basis points today to 4.54%.
Looking ahead, market participants will receive the weekly MBA Mortgage Applications Index at 7:00 ET tomorrow. Wednesday's calendar also features the release of the Fed's Beige Book at 2:00 ET and the results of a $44 billion 7-yr Treasury note auction will be released at 1:00 ET.
Treasuries remain near high yields and stocks sit near lows
28-May-24 15:05 ET
Dow -300.99 at 38768.60, Nasdaq +50.40 at 16971.20, S&P -11.90 at 5292.82
[BRIEFING.COM] The S&P 500 is moving off its session low, but still trades 0.2% lower than Friday. The equal-weighted S&P 500 is down 0.9%.
Market breadth was positive shortly after the open. Now, the A-D line favors decliners by a 2-to-1 margin at the NYSE and by a 5-to-3 margin at the Nasdaq.
The wave of selling this afternoon coincided with Treasuries hitting intraday high yields. The 10-yr note yield is up eight basis points to 4.54%.
Moderna slips, Ralph Lauren spikes among S&P 500 performers
28-May-24 14:30 ET
Dow -312.44 at 38757.15, Nasdaq +53.01 at 16973.81, S&P -11.64 at 5293.08
[BRIEFING.COM] The S&P 500 (-0.22%) is at session lows, trimming month-to-date gains to now about +5.1%.
Elsewhere, S&P 500 constituents Moderna (MRNA 150.72, -15.89, -9.54%), Builders FirstSource (BLDR 162.63, -8.47, -4.95%), and Pentair (PNR 78.95, -3.80, -4.59%) dot the bottom of the standings. MRNA is slated to give back a large portion of its recent bird flu-related gains, potentially what has become a double digit -- in terms of sessions -- winning streak, while PNR slides on Barclays analyst comments.
Meanwhile, Ralph Lauren (RL 180.76, +7.31, +4.21%) is near the top of the average.
Gold rebounds to start holiday-shortened week
28-May-24 14:00 ET
Dow -280.42 at 38789.17, Nasdaq +68.52 at 16989.32, S&P -7.27 at 5297.45
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (+0.40%) remains the only major average in positive territory.
Gold futures settled $22 higher (+0.9%) to $2,356.50/oz, despite a pop in treasury yields, recouping a bit of last week's worse than -3% losses.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $104.55.
Riot Platforms looks to become largest publicly traded Bitcoin miner with buyout of Bitfarms (RIOT)
On a busy morning for M&A activity, Riot (RIOT) announced that it has proposed to acquire Bitcoin mining rival Bitfarms (BITF) for $2.30/share, for a total equity value of $950 mln. The acquisition bid comes after RIOT privately delivered an offer on April 22, 2024, that was rejected with the two companies entering into negotiations. While RIOT's Board of Directors has unanimously approved this transaction, it is currently unclear whether BITF will agree to these terms.
- The buyout terms represent a 24% premium to BITF's one-month volume weighted average price and a 20% premium to BITF's share price on April 19, 2024. However, BITF shares are currently trading below that $2.30/share acquisition price, reflecting some uncertainty that this deal will be completed. If the deal does go through, the combination would create the world's largest Bitcoin miner.
- More specifically, the combined company would boast approximately 1 GW of current power capacity and 19.6 EH/s of current self-mining capacity, with up to 1.5 GW of power capacity and 52 EH/s of self-mining capacity by year-end. Furthermore, the merger would diversify the companies from a geographic perspective, with 15 facilities across the U.S. Canada, Paraguay, and Argentina.
- Despite the recent surge in the price of Bitcoin -- up 70% since late January -- shares of BITF have languished, down over 30% on a year-to-date basis, making it an easy target for consolidation. One notable issue hanging over the stock stems from the volatility and uncertainty at the top of the company.
- About two weeks ago, BITF terminated the contract of former CEO Geoffrey Morphy after he filed a lawsuit against the company in Canada. According to BITF, Mr. Morphy filed a $27 mln lawsuit claiming breach of contract, wrongful dismissal, and aggravated and punitive damages. Back in March, the company announced that it planned to seek a replacement for Mr. Morphy, who had been with the company since 2020.
- Currently, Nicolas Bonta, who is Chairman of the Board, is serving as interim CEO and he will lead the company until a permanent replacement is found. With the company in flux at the CEO position, RIOT probably viewed the timing as favorable to make a move.
Given the fact that BITF essentially dismissed RIOT's initial offer out-of-hand, it seems unlikely that it will accept this latest deal, which could make for a contentious takeover effort.
T-Mobile US dials up market share gain with deal to acquire UScellular wireless ops (TMUS)
T-Mobile (TMUS) is dialing up an expansion to its wireless business after announcing a deal with UScellular (USM). T-Mobile has agreed to acquire substantially all of UScellular's wireless operations. This includes UScellular's wireless customers and stores, as well as 30% of spectrum assets across several spectrum bands. The price tag is approximately $4.4 bln via a combination of cash and up to $2 bln of debt to be assumed by T-Mobile. The deal is expected to close in mid-2025.
- UScellular will retain some important assets, including its cell towers which represent one of the largest tower businesses in the US, presumably because USM has high exposure to rural areas. Following the transaction, T-Mobile will be a long-term tenant on a minimum of 2,015 incremental towers owned by UScellular, and the parties will extend the lease term for the approximately 600 towers where T-Mobile is already a tenant.
- Retaining the towers is expected to create a long-term contracted revenue stream from a strong anchor tenant for 15+ years. UScellular also retains its significant equity method investment interests, primarily from its wireless partnerships, that generated $158 mln of equity method income in 2023. Also, USM will retain approximately 70% of its spectrum portfolio across several spectrum bands. USM will seek to monetize these retained assets.
- Telephone and Data Systems (TDS) owns an 83% stake in USM and will receive proceeds in proportion to its ownership, which will help TDS's fiber build-out program and should reduce leverage levels. TDS said it remains committed to its strategy of growing its fiber footprint while increasing broadband penetrations. This includes bringing fiber to small and mid-sized, suburban and rural communities across the US.
- T-Mobile says its 5G network will expand to provide millions of UScellular customers, particularly those in underserved rural areas, a superior connectivity experience. Those customer will move from a roaming experience outside of the UScellular coverage area to full nationwide access on T-Mobile's 5G network. At the same time, T-Mobile customers will get access to UScellular's network in areas where it previously had limited coverage.
Based on the strong initial price reactions we saw (although the stocks have pulled back) in USM and TDS, investors clearly like this deal. In particular, we think USM's retention of valuable assets (70% of spectrum, towers, wireless partnership income) is an attractive component for USM and TDS shareholders. Also, a WSJ report on May 9 said that TMUS and Verizon (VZ) were in talks to purchase portions of USM. But now with just TMUS involved, we wonder if it had to step up its purchase price to close the deal, which is good for USM.
In terms of T-Mobile, the deal makes sense as well and continues its M&A strategy. Over the years it has acquired MetroPCS and Sprint. This deal expands its customer base by 4+ mln, especially in rural areas. Also, there are not many remaining sizeable wireless carriers left to be acquired that would pass regulatory scrutiny. Speaking of which, it will be interesting to see if this deal gets approved. It may be tricky in an election year with inflation at top of mind. There are fears that less competition will lead to higher prices.
Deckers Outdoor steps up in MarQ, delivering expansive top and bottom-line upside (DECK)
A mirror image of last quarter, Deckers Outdoor (DECK +13%) is kicking back today as its shares rocket to all-time highs on impressive Q4 (Mar) results and sufficient FY25 guidance. The footwear maker, known for its Hoka and Ugg brands, has been making all the right moves lately as it pounces on staleness and an accompanied softening of demand at long-established footwear giants, such as NIKE (NKE), Adidas (ADDYY), and Under Armour (UAA). A similar trend has been favoring peer On (ONON), which registered sizeable top and bottom-line beats in Q1 (Mar), leading to its lifted FY24 revenue outlook.
- As has become the norm lately, Hoka and Ugg led DECK's accelerating revenue growth of 21.2% yr/yr to $959.76 mln in Q4, while its Teva and Sanuk brands continued to post sizeable net sales declines. However, with Ugg and Hoka comprising over 93% of this quarter's total revenue, its jumps of 34.0% and 14.9%, respectively, overpowered weakness across DECK's less familiar brands.
- Wide earnings beats have also become typical for DECK, delivering its third consecutive quarter of well over a $1.00 in upside. Direct-to-consumer (DTC) demand has been a major contributor to DECK's buoyant bottom-line performances, a channel NKE has been trying to lean on more to raise its margin profile, only for it to backfire, as its ties with retailers proved more vital to its overall health than management expected. DECK's DTC net sales increased by 21.0% yr/yr in Q4.
- However, strong DTC sales growth has not led to softness in wholesale growth for DECK, delivering a similar 21.4% improvement in wholesale revenue yr/yr in Q4.
- DECK sustained its upward momentum from last quarter across DTC and wholesale. Hoka enjoyed increasing DTC volume growth and reaccelerating wholesale volume, benefitting from product launches and wholesale fill-in activity. Likewise, Ugg saw another healthy increase in DTC growth, overcoming some inventory shortages and wholesale growth.
- Moving through the rest of the year, DECK anticipates Hoka and Ugg to maintain their positive momentum, projecting around 20% and mid-single-digit yr/yr sales growth, respectively. As a result, DECK issued relatively decent FY25 guidance, projecting EPS of $29.50-30.00 and revs of $4.70 bln. DECK's FY25 EPS figure did miss analyst expectations, one of its few blemishes from the quarter. Management noted that margins will get squeezed this year due to a more normalized promotional environment, hindering its ability to pass through full prices.
While the retail demand environment may be plagued by the cumulative effects of inflation, DECK is showcasing its competitive edge, delivering consistently robust sales growth as it takes advantage of some of its rivals' recent woes. There may be some added uncertainty on the horizon as DECK replaces its CEO, Dave Powers, with current CCO Stefano Caroti on August 1. However, we suspect that given the company's success, recording a revenue CAGR of 19% and EPS CAGR of 32% over the past four years, incoming CEO Stefano Caroti will not implement sweeping changes but continue to leverage DECK's core Hoka and Ugg brands to sustain profitable growth.
Workday takes a tumble after lowering subscription revenue outlook as pace of hiring slows (WDAY)
When HR and financial management software company Workday (WDAY) reported solid Q4 results in February, it disappointed investors by only reaffirming its FY25 subscription revenue guidance of $7.725-$7.775 bln, sending shares sharply lower. Today, a reiteration of that guidance would look pretty good because in last night's Q1 earnings press release the company lowered its subscription revenue outlook to $7.700-$7.725 bln, representing yr/yr growth of about 17% at the midpoint.
- The cause for the softer outlook is a familiar one: namely, WDAY is seeing elevated deal scrutiny as enterprises continue to contend with high interest rates and persistent inflation. Due to these macroeconomic headwinds, companies have slowed the pace of their hiring activity, resulting in lower customer headcount growth and fewer large deals for WDAY in Q1. The good news is, when purchase decisions are being made, WDAY says that its win rates remain strong.
- A key component of WDAY's growth strategy is to expand internationally, but the macro-related pressures were especially prevalent in EMEA, where the company closed fewer large deals compared to the year-earlier period. Its customers are committing to lower headcount levels on renewals compared to what it was anticipating. Overall, WDAY's international revenue grew 18% yr/yr to $497 mln, down from last quarter's growth of 21%.
- Despite the reduced subscription revenue guidance, WDAY did nudge its FY25 non-GAAP operating margin guidance higher to 25.0% from its prior forecast of 24.5%. During the earnings call, CFO Zane Rowe credited the WDAY's focus on driving increased efficiencies across the company for the improved margin outlook. Considering that WDAY is ramping up its investments in AI-powered technologies, the improved margin outlook is a notable positive.
- On the topic of new AI capabilities and products, WDAY released its AI-powered Payroll Insights product in Q1, which helps payroll workers to quickly detect anomalies. Furthermore, its new talent optimization tool is experiencing strong attach rates on new deals. In fact, over half of WDAY's core customer base is now licensed for this AI product and the product has significant momentum heading into Q2.
The main takeaway is that macroeconomic headwinds have strengthened, causing enterprises to take a more cautious approach with their IT spending. Therefore, WDAY's softer outlook could be a red flag for other enterprise software companies such as Salesforce (CRM), Oracle (ORCL), ServiceNow (NOW), and Atlassian (TEAM). From a company-specific standpoint, WDAY's expanding AI capabilities and its improving operating margins are two appealing fundamental attributes.
Intuit lower despite EPS beat during tax quarter, but market share on lower end a concern (INTU)
Intuit (INTU -8%) is trading lower despite reporting strong upside for its Q3 (Apr) earnings report last night. INTU focuses on small businesses and consumers (QuickBooks, TurboTax, Mint, Credit Karma, Mailchimp). INTU beat handily on EPS, its ninth consecutive double-digit EPS beat. Revenue grew 11.9% yr/yr to $6.74 bln. The top line upside to consensus was more modest, but still solid. The Q4 (Jul) guidance was mixed with upside revs but downside EPS. As we noted in our preview, Q3 is always an important quarter because tax season is huge for Intuit. As such, Q3 is always its largest revenue quarter of the year.
- The star of the show was again Small Business and Self-Employed Group (SBSE), which is mostly QuickBooks. Segment revs grew 18% to $2.4 bln despite an uncertain macro background. QuickBooks Online Accounting revenue grew 19%, driven primarily by customer growth, higher prices, and mix-shift towards higher end offerings. Online Services revenue grew 20%. Intuit is increasingly targeting the Small Business mid-market as these customers drive a higher ARPC over time, given their more complex needs and higher usage of services on the platform.
- Consumer Group segment (TurboTax, both DIY and assisted) revenue grew 9% yr/yr to $3.7 bln. Intuit sees TurboTax Live, its assisted offering, as a large and durable growth opportunity. Intuit expects TurboTax Live customers to grow 12% and revenue to grow 17% in FY24. TurboTax Live revenue is expected to be $1.4 billion in FY24, representing 30% of segment revenue and growing at a significant scale.
- Maybe the most worrying part is that Intuit expects total TurboTax units to decline 1%, due to share loss with pay-nothing and lower average revenue per return customers. It seems like Intuit wants to focus more on the higher end customer with its assisted service. In fact, Intuit said that, for the first time, is has moved the needle in terms of taking share in assisted. The company is not interested in pursuing customers who want free tax software.
- Its Credit Karma segment has been a laggard in recent quarters with higher rates acting as a headwind. However, revenue rose a healthy 8% yr/yr to $443 mln, driven by strength in Credit Karma Money, credit cards, auto insurance, and personal loans. This was a nice improvement from flat in Q2 and a -5% revenue decline in Q1. While the trend is encouraging, Intuit cited the product integration of TurboTax and Credit Karma as a reason for the growth. So maybe it just got a tax season boost, let's see if the trend continues in JulQ. Intuit also said it continues to see select partners taking a conservative approach to extending credit in both personal loans and credit cards.
Overall, this was a bit of a mixed quarter. Nice upside for Q3, but we think investors were somewhat disappointed in its TurboTax unit sales outlook. Intuit clearly wants to focus on higher end customers, but it does look like it is losing some share among lower end customers. Also, Credit Karma sales improved, but was that just a tax season boost? Intuit also said some lenders remain cautious on extending credit in personal loans and credit cards. Finally, given its rally in recent weeks, we think sentiment was running hot heading into this report, so any chink in the armor was going to lead to a pullback.
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