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Earnings season: Netflix plays the Squid Game, wins subs beat
Netflix leverages a content backlog into millions of new subscribers according to its Q3 2021 earnings report.
Netflix’s headline stats
It’s been a good quarter for Netflix. New subscribers keep flooding in, seemingly attracted by new event TV shows, such as the global smash Squid Game. What’s more, Netflix’s EPS beat estimates too.
The key takeaways from Netflix’s third quarter earnings report are:
- Revenues – $7.48 billion vs $7.48 billion forecast
- Earnings per share (EPS) – $3.19 vs $2.56 estimated
- New global paid subscription additions – 4.4 million vs 3.84 million forecast
The important thing to note here is the growth of new paid subscribers. These are Netflix’s bread and butter. Users may have been attracted to the streaming platform thanks to a large chunk of new shows and movies finally hitting Netflix. The pandemic appears to have created a significant backlog of content which is now making its way onto release schedules.
South Korean dystopian horror series Squid Game is the standout here. The show has been getting rave reviews and may become a significant draw going forward. According to Netflix, 142 million households watched Squid Game in its first four weeks.
“Like some of our other big hits, Squid Game has also pierced the cultural zeitgeist, spawning a Saturday Night Live skit and memes/clips on TikTok with more than 42 billion views,” the company said. Demand for consumer products related to the show is high, it added.
Netflix’s official guidance for subscriber numbers in Q4 is eight million – nearly double that of Q3. Is that overly optimistic? Maybe, but we are approaching winter in the Northern Hemisphere. Shorter days and colder temps may lead to an uptick in subscribers as people stay inside during winter conditions.
There is yet more content to come.
“We’re in uncharted territory,” Netflix co-CEO Reed Hastings said. “We have so much content coming in Q4 like we’ve never had, so we’ll have to feel our way through, and it rolls into a great next year also.”
Netflix share performance
As we can see, Netflix’s earnings per share levels beat expectations in Q3, coming in at $3.19 against $2.56 forecast by Wall Street.
Shares did drop 1% after the bell yesterday, however. It’s interesting. Achieving sustainable subscription growth is one of the cornerstones of Netflix’s business. You would have thought, after posting subscription and EPS beats, the firm’s shares would have grown.
As of Wednesday morning, Netflix shares are back in the green, trading for around $640.88 at the time of writing.
Where next for Netflix?
Netflix’s next frontier is gaming.
The streamer said it has begun testing video game streaming, possibly in a similar way to Microsoft’s cloud-based Game Pass service, in certain countries.
It’s still very early days for this, but Netflix subscribers may soon be able to play some form of video games via their TVs. It’s unlikely Netflix will be launching a console to compete with Sony, Nintendo, or Microsoft.
Personally, I can’t see them making great strides in this sphere. Gaming is already a highly competitive environment as it is, and Microsoft’s Game Pass has been a bit of a major market disruptor.
It would take a lot for Netflix to really make an impact on the gaming world, at least in the form of triple A titles, in my view. Mobile and app-based games are probably the way to go.
But with 200 million subscribers – double Xbox Live’s 100 million – and a competitive price point, some casual gamers might find a home with Netflix.
US Q3 earnings season is in full swing. Stay tuned for more updates. In the meantime, check out our earnings calendar to see which megacaps are reporting and when.
Are these five gas crisis stocks worth a look?
As the European gas crisis threatens to go global, Morgan Stanley eyeballs some stocks that could benefit from the current conditions.
Gas crisis stocks
Gas prices soar in Europe
The EU’s natural gas import prices have skyrocketed 440% in recent weeks, putting massive strain on energy firms across the continent. The same is true in the UK where surging gas prices have caused several small energy suppliers to fold completely.
In the US, prices were up 100% year-on-year midway through September.
Globally, prices are roughly 250% higher than they were in January.
Henry Hub natural gas futures are showing rapid daily gains. At the time of writing, the HH contract is up over 7.2% in trading today. Prices are approaching yearly highs at $5.53.
We’re very rapidly approaching crunch time. The UK, for example, only has enough gas to last four or five winter days. Combine with food and petrol shortages, the winter is looking very cagey for Britain right now.
The US should also be gearing up injection season right about now. Usually lasting up to Halloween, injection season is when natural gas stocks start to build in preparation for high winter demand. The latest Energy Information Administration (EIA) data showed a build-up of 76 billion cubic feet (Bcf) for the week ended September 17th. This was higher than the expected 70 BCf – but stocks remain some 598 Bcf lower than this time last year.
Skyrocketing prices can be explained simply: there isn’t enough to go around.
Cold temperatures around the world last winter led to higher-than-expected drawdowns. Without adequate inventory replenishment, things were always going to escalate.
There is also heightened consumption and competition from Asia to contend with. Wood Mackenzie estimates that Asia, in particular China, will account for 95% of worldwide LNG demand growth by 2022. China’s appetite for LNG is such that even the $400bn, 30-year deal Beijing struck with Russia’s Gazprom in 2014 will not even scratch the surface of China’s gas requirements.
A perfect gas storm has been brewing and we’re seeing the cons
Which stocks can potentially benefit from the gas crisis?
According to Morgan Stanley, the current market conditions are ripe for investors and traders looking to add utility firms to their portfolios.
The five stocks selected by Morgan Stanley include:
“Buy Ørsted (Overweight) and Iberdrola (Overweight) on weakness: We recognise that the recent gas clawback will have a negative impact on 2021 and 2022 earnings for Iberdrola … triggering EPS downgrades. However, this appears well priced in with Iberdrola’s market cap,” Morgan Stanley analysts said in a statement.
For context, the Spanish government has announced a 2.6bn euro tax on energy firms to help protect consumers.
The bank also said Ørsted has an estimated 34% potential upside to its price target, while for Iberdrola the figure is 38.7% (within Morgan Stanley’s 12-18 month price target).
Morgan Stanley also said: “We see RWE (Overweight), EDF (Overweight) and Engie (Overweight) as our preferred names to play the strength in power prices, with limited contagion risk from political intervention.”
Of course, you could also look at trading pure natural gas contracts too away from stocks. Forecasts are calling for this winter to be one of the coldest for years, with the US meteorological department saying February will be the coldest month.
There may also be some overlap in the above for those interest in renewable energy. Ørsted covers 29% of the world’s offshore wind power segment. The Norwegian energy supplier made our list of renewable energy stocks to watch in 2021 as a result of its major market presence and future potential.
How are investors buying September’s dip?
In recent weeks, stock markets around the world dropped to new monthly lows. As ever, eagle-eyed investors were keen to buy the dip. Here are some stocks they were keen to snap up.
The September stock market dip: what caught investors’ eye
Market turmoil has been rocking the bourses in the wake of the Evergrande wobble and a general risky asset sell-off.
Although things have since stabilised, with the S&P 500, Nasdaq, and Dow Jones all up 1% this morning and the FTSE making gains, investors were still keen to take advantage of the dip.
In particular, many stocks on the S&P 500 have been subject of retail investor attention. The index experienced its largest drop since May at the start of the week.
A new report from Vanda Research suggests a $3bn spending spree occurred on Monday and Tuesday as stock buyers looked for some perceived bargains.
According to Vanda Senior Strategist Ben Onatibia, retail investor activity contradicts earlier statements that their appetite for stocks may have been waning. With indices down, this gave them a great opportunity to add to their portfolios.
The stocks investors were buying
Vanda Research shows the below individual stocks were retail customers’ favourites during the recent market downturn.
|Stock||Ticker||Retail purchase volume (last 5 days from September 22nd)|
|Advanced Micro Devices||AMD||$154,5300,000|
|Las Vegas Sands||LVS||$55,350,000|
Let’s start with Apple. The California tech giant is coming hot off announcing a fresh wave of iPad, iPhone and Apple Watch models at last week’s California Streaming event. The company continues to dominate in the smartphone field. As of June, sales of the latest iPhone 12 had already exceeded 100 million units, and Apple’s laptops and tablets continue to post similarly strong sales numbers.
No new AirPod headphones were released, despite markets thinking Apple would launch its next-gen EarPods at its most recent big conference. However, with such strong sales from the iPhone, it probably doesn’t need to launch them just yet. Consumer confidence in the brand is already exceptionally high.
We can see from the list a heavy leaning towards tech stocks. Excluding Apple, investors spent a combined $378.38m on companies within the tech sphere, including Microsoft, Verizon, and chip manufacturers AMD and Nvidia.
Computer chipsets are hot property globally right now. A general shortage means prices are up. Chipsets are used in practically all the modern conveniences of modern life. Everything from the aforementioned iPhone to cars and graphics cards needs these tiny pieces of electrical microengineering to work – hence their sky-high demand, and why investors are eyeing up companies like AMD.
Graphics cards in particular are coveted by cryptocurrency miners. Each powerful mining rig requires stuffing computers to the brim with components to solve the complex equations that result in fresh digital tokens like Bitcoin.
Speaking of Bitcoin, AMC Entertainment, the memestock and cinema chain, recently gave itself a boost. CEO Adam Aron has announced the company will soon start accepting Bitcoin and other cryptos as payment.
Aron also mentioned AMC is flirting with the idea of entering the burgeoning non-fungible token (NFT) market – possibly through offering commemorative digital cinema tickets.
AMC was already a popular stock for the younger breed of traders trying to shake up the traditional system. Its embracing of digital currencies may make it a more attractive prospect amongst new, Millennial investors.
But let’s not get too carried away with the tech-related stocks. Retail buyers also snapped up over $100m in travel-related stocks too. As you can see from the table above, the big winners here were Las Vegas Sands and Wynn Resorts.
The holiday firms will no doubt be bracing for a renewed wave in vacations as we approach the US holiday season. Thanksgiving and Christmas are just around the corner. Also, the US has given the green light to inbound travel for vaccinated EU and UK travellers, which could point towards an uptick in bookings for both firms.
As mentioned above, stocks have started to recover with major European and US bourses making ground in trading today. But retail investor activity goes to show that vigilance is required to spot opportunities in periods of volatility.
Earnings season: Airbnb’s 300% revenue jump
Airbnb is the latest big tech firm to record a Wall Street-beating quarter but see its share price drop.
Airbnb’s headline stats
With revenues totalling $1.34bn in Q2 2021, Airbnb notched up a 300% year-on-year increase. This flew over Wall Street expectations.
Sales were up 175% y-o-y this quarter for a total of $175m. Gross booking value, the key metric Airbnb uses to track host earnings, incorporating taxes and cleaning and service fees, clocked in at $13.4bn. In year-on-year terms, that’s a 320% increase.
83.1 million nights were booked using Airbnb in Q2 2021, measuring 29% growth against the first quarter, and 197% over Q2 2020 when the world entered lockdown. Analysts expected 79.2m nights booked, so again this was another beat.
The key takeaways from Airbnb’s latest earnings report are:
- Revenues – $1.34bn against $1.26bn estimated
- Earnings – -$0.11 per share
While a lot of the main measuring metrics were smashing Wall Street estimates, Airbnb shareholders would have lost money, according to these statistics.
That’s fairly odd, given the fact that Airbnb’s net loss has narrowed, falling from $575.6m to $68m. Everything suggests Airbnb is moving in the right direction – but there is still a huge, COVID-19 shaped shadow looming over the rest of the holiday app’s year.
Airbnb stock price
Airbnb shares slid 4% upon publishing its earnings reports. EPS is down too as seen above.
That means it joins other tech stocks like Apple and Tesla posting bumper quarterly results but seeing their share prices dip.
In a letter to investors, the app’s executives stated Airbnb is bracing for Delta variant volatility. Cases continue to rise in the US and around the wider world, meaning travel restrictions and limits on overnight stays could very well make a return.
If that was the case, then stays and revenues may slide in Q3 and Q4.
The company said that although it expects the third quarter to deliver its strongest quarterly revenue on record, it expects Q3 nights and experiences booked to be below that of Q2 and Q3 2019.
“As we exit Q2 and come into Q3, we have a combination of fewer bookings for the fall, just given the nature of some of the seasonality, and any kind of impact potentially on Covid concerns,” Airbnb CFO Dave Stephenson said on a call with analysts.
Vaccination progress and containment of new COVID-19 variants will be key to Airbnb’s sustainability. Summer is also drawing to a close. New bookings in the Autumn and Winter, not the busiest times of the year for holiday-related businesses, have already started to slip as Dave Stephenson points out.
It’s going to be a long six months for Airbnb.
Earnings season: Coinbase rides crypto volatility all the way to the bank
Cryptocurrency exchange Coinbase sees profits surge this quarter following a period of high volatility in crypto markets.
Coinbase’s headline stats
Q2 was a very solid quarter for Coinbase this earnings season. The current crypto market volatility played into the exchange’s hands as it record Wall Street-beating estimates.
Here are Coinbase’s key stats for this earnings season:
- Revenue -$2.23 billion vs. $1.78 billion expected
- Earnings – $3.45 per share vs. $2.33 expected
Note: the EPS figure excludes stock-based shareholder compensation.
Coinbase profits soared 4,900% year-on-year with net profit totalling $1.6bn. While volatility may not suit traders, it’s certainly paid off big time for Coinbase.
The exchange’s profitability and economic health essentially rely on the price of Bitcoin. The world’s most popular digital token, and the biggest by value, did have a torrid time last quarter. Prices fell 41% in that time.
Despite this, a flurry of trading took place, which explains the hefty revenues Coinbase generated. $1.9bn of its total revenues stemmed from transaction fees last quarter. A further $100m came from subscription-related services.
Bitcoin is still the most popularly traded token on the Coinbase exchange. However, volumes had dropped quarter-on-quarter. In Q1, Bitcoin made up 36% of all transactions. This had dropped to 24% as of Q2 2021.
Other coins, notably Ethereum, have started to eat into Bitcoin’s market share.
Looking to the future, Coinbase offered no formal guidance but did indicate that trading volumes are likely to be smaller in Q3.
Coinbase share price action
At the time of writing, Coinbase shares are up roughly 7%, building on the 2.1% gains made when the exchange posted its results on Tuesday afternoon.
That’s interesting. Even some of the biggest tech-related firms like Apple posted strong quarters, but still their stock price drop after reporting.
The analyst consensus appears strongly in favour of Coinbase. 78.6% give the stock a Buy rating.
In terms of price targets, Coinbase could offer upsides of up to 38%.
Analysts would suggest the stock is undervalued. It’s currently trading at $291.5, though the price target is as high as $370.64.
Coinbase is down about 29% since it went public in April. At that time, Coinbase opened at $381 per share. Its valuation of $100bn was a bit of a landmark in terms of cryptocurrency legitimacy.
Are these tech stocks worth picking up? Jeffries thinks so
Investment bank Jeffries has selected several tech stocks it thinks could energise portfolios across the rest of 2021.
Jeffries tech stocks
As reported by CNBC, analysts at Jeffries have been scouring tech and semiconductor stocks to see which could perform best throughout the year.
Investors are looking for a mixture of growth and value stocks to add to their portfolios. Technology equities, incorporating semiconductors and micro-components manufacturers, could potentially be on their radars.
It should be stressed now, however, that the world is currently experiencing a global chip shortage. The raw materials needed to create chipsets and other nanotechnologies have seen prices skyrocket throughout the year. This has caused long supply chains and even slowed manufacturing output from the likes of Apple and Tesla.
Back to the equities, Jeffries has warned against taking extreme positions on either growth or value stocks. Instead, the tech firms listed below could be used to strike a balance between the two.
The tech stocks
Jeffries has identified an international collection of stocks split over three subsectors as those to watch.
Samsung and its affiliate Samsung SDI are both on Jeffries list. The bank believes these can be snapped up at a reasonable price. Several Taiwanese companies, including Delta Electronics, Unimicron Technologies, and Nan Ya PCB also make it to Jeffries’ shortlist.
As to be expected, a fair number of Chinese stocks have been flagged as potentials by Jeffries. In this category, laptop manufacturer Lenovo and electronic components supplier BOE Technology Group are considered reasonable price stocks.
Away from Asia, Apple makes the list, despite slowing growth warnings the California brand gave during its latest earnings report. Ericcson makes the list too.
Jeffries likes Korean firm SK Hynix, a manufacturer of memory semiconductors, and Taiwan’s TSMC. Both companies have been flagged as growth stocks at a reasonable price. Novatek Microelectronics, another Taiwanese tech firm, makes the list too.
Texas Instruments, Skyworks Solutions, KLA, and Qorvo are the US semiconductor manufacturers that piqued Jeffries analysts’ interest. European manufacturers on the bank’s quality list include STMicroelectronics and BE Semiconductor Industries.
NortonLifeLock, the US IT security specialist, is considered a quality stock by the Jeffries team. China’s Venustech joins NortonLifeLock on the bank’s quality stock screen.
Elsewhere, Indian company Tech Mahindra has been eyeballed as a stock with high growth potential.
Earnings season: A mixed quarter for Alibaba
Alibaba misses earnings estimates but the Chinese eCommerce giant has plans afoot to restore investor confidence after reporting fairly disappointing quarterly results.
For the first time in two years, Alibaba earnings fell below market estimates. The headline is that the Chinese government’s ongoing crackdown on the internet sector has taken its toll on the eCommerce firm. There is still more at play here though.
In its latest quarterly report, Alibaba reported revenues of 205.75 billion yuan ($31.83bn). That’s a 34% increase year-on-year, but still came up shy of the 209bn yuan forecast by market analysts.
Subsequently, net profits slid 8% compared with the previous quarter.
Alibaba also reported 45.1 billion yuan in net income, or about $7 billion, slipped from 47.6 billion yuan
The company swallowed an 18 billion yuan ($2.8bn) antitrust fine earlier this year. Alibaba, like rival Tencent, has recently come under intense scrutiny from Chinese authorities. They believe the pair, which have so far reused to work together, are essentially establishing monopolies in their respective spheres – hence the major fine levelled by the CCP.
But the drop in revenue also comes from investment in an effort to enhance and expand Alibaba’s offer.
“We are investing our excess profits and additional capital to support our merchants and invest in strategic areas to better serve customers and penetrate into new addressable markets,” said Group Chief Financial Officer Maggie Wu in a statement.
However, it goes without saying the fines and shifting regulatory environment in China has caused consternation for Alibaba’s executive team.
“We are in the process of studying the regulatory requirements, evaluating the potential impact on our relevant businesses,” Daniel Zhang, Alibaba’s chairman and chief executive, told analysts on Tuesday. “We will respond with action.”
To reassure investors, Alibaba has revealed it plans to increase its shares buyback plan to $15bn from its current $10bn level.
Alibaba’s investment plan
According to Zhang, Alibaba plans on reinvesting incremental profits into numerous business areas. This includes more cash towards its technology development and ventures, as well as user acquisition, infrastructure, and methods to lower its merchant partners’ operating costs.
For example, instead of funnelling more users through flagship app Taoboa, the eCommerce firm said it plans to take a multi-app approach to grow new business. Alibaba said this would help it reach customers in rural China as well as lower-tier cities outside of the mega metropolises up and down the country.
“We are working on building a more complete app matrix to better serve the different needs of different consumers,” Zhang said.
The newly-launched Taoboa Deals app, built around budget eCommerce for customers with tighter budgets, is a good example of this. Since going live, Taoboa Deals has accrued over 190 million annual active users in just 16 months.
“When we plan our incremental investment, we always focus on value creation,” Zhang said. “We think that for other companies who are continuously loss-making but still try to enlarge their scale by subsidies, at the end of the day, they have to let the market see the real results.”
What does the market think?
Alibaba shares have been sliding in recent weeks as part of the broader fall in Chinese tech stocks. At the time of writing, however, shares were back in the green, tracking 2% upwards.
Market consensus is still positive about Alibaba shares, as per the sentiment tracker on the Markets.com trading platform:
The analyst recommendations tool puts Alibaba as a strong buy:
But all depends on how successful Alibaba’s investment plans are – and how successfully the company can navigate a changing regulatory landscape.
To see which large caps are still due to report on Wall Street this season, make sure you check out our earnings calendar.
Thematic investing: tackling climate change
In our latest thematic investment guide, we look at the wider climate change picture.
How to invest in renewable energy & firms tackling climate change
The wider environmental picture
Our previous thematic investing guide to renewable energy flagged some of the companies specifically fighting the green fight through power generation. Climate change is not just about sustainable energy, though. Lots of moving parts comprise the anti-global warming engine.
Worldwide, masses of time and energy is being poured into combatting global warming. In the first few months of his Presidency, Joe Biden has pledged to increase funding into clean energy sources, reduce the US’ carbon footprint, re-enter the US into international climate accords.
The 2016 Paris Climate agreement, where 197 nations pledged to limit warming temperatures, is rightly seen as a watershed moment in the history of global change. But there is still more to be done.
That’s why, while it’s important to continue to invest in renewable energy, other companies are doing important work outside this sector. Electric vehicles, for example, are one way of tackling rising emissions. Less fossil fuel burned to power vehicles should greatly reduce greenhouse gas volumes in the atmosphere.
Q1 2021 EV sales were up 81% in the US. In China, they are up 239%. The likes of Tesla, NIO and Toyota are real pioneers here, pushing either fully electric or hybrid technology to new areas. Legacy carmakers like Renault, Peugeot, Audi, Ford, and VW are pushing ahead with integrating more EVs into their product lines.
We also see big tech firms doing their bit. Amazon, Alphabet and Facebook have all made strong carbon neutrality commitments. For instance, Amazon head honcho Jeff Bezos launched a $10bn climate change fund and committed the e-commerce behemoth to clean up its supply chains. Alphabet and Facebook are looking for renewable sources to power their energy-hungry data centres and have pledged to continue to invest in renewable energy.
Here are some stocks from firms helping to combat climate change that wouldn’t look out of place in a green-themed investment or trading portfolio.
Thematic investing: climate change focussed stocks to watch
NIO stocks have actually been sliding at the time of writing as part of a wider tech sell-off in response to rising US inflation and bond yields. But there are reasons to be cheerful regarding the Chinese EV manufacturer’s future.
Its Q1 2021 earnings report, released in late April, showed an impressive 19.5% rise in gross margin, beating market estimates, and coming in 3% higher.
Improved sales data shows NIO is on a growth footing too. The company sold 44,000 vehicles in 2020, 108% more than in 2019.
A small unit count initially, especially compared against someone like GM, which sold over 2 million vehicles in the same period, but the growth is the important factor here, not the total number of units sold.
In Q1 2021, NIO had already sold 20,600 vehicles. That’s a 423% increase. The automaker is also launching three new models, including an SUV, this year to gain ground in several market segments.
Factor in estimates that China, already the world’s largest automotive market, is expected 13 million annual EV sales, along with the emergence of China’s middle class, makes NIO an EV stock with plenty of juice left in its batteries.
TPI Composites is a wind energy stock that is looking positively breezy. The firm produces blades for wind farms and other pieces of equipment for wind farm construction and operation.
TPI notched record revenues in its Q1 report, totalling $405 million. This represented a not insubstantial 13% increase against Q1 2020. The company produced 814 sets (a set has three wind blades) this quarter, which was 11% more than the same period last year.
The firm has spent large sums in the past couple of years to improve its manufacturing output. It now has production facilities in the US, Mexico, China, and India, putting it squarely in regional supply chains. TPI is also now looking to reduce its costs going forward, putting it back on the path to profitability.
In sales terms, TPI’s first-quarter net sales had increased by $48 million to $404 million – a 13.5% increase when compared to net sales of $356 million over the same period in 2020. It also recorded a 12.7% increase in turbine blade sales to $42 million.
Of course, TPI is up against some stiff competition in the form of firms like Vestas, but its combination of higher sales and a commitment to reducing operating costs point toward higher profits moving forward. TPI is one of the wind energy stocks to watch.
As stressed earlier, when you’re looking at thematic investing, don’t just stay within renewable energy stocks or wind energy stocks. Think of the wider picture. Companies that have committed to renewable energy may not be suppliers or producers themselves.
Take Google owner Alphabet for instance. The tech giant has long been praised for its sustainability commitments. By 2020, Alphabet claimed it was running on 100% renewable energy. Its data centres are some of the most water-efficient in the world, using 80% less H20 than the typical centre. Alphabet has plans to build more.
Alphabet’s earnings beat estimates in the first quarter of 2021. Revenues grew 34%. YouTube ad revenue was up 50% year-on-year. Earnings per share came in at $26.29 per share against the expected $15.82.
Alphabet’s core business is not related directly to clean power generation. However, it’s a good example of a major corporation with a proven track record of delivering on its emissions-cutting promises. Therefore, it would not be out of place alongside other more-focussed stocks in a climate change combatting portfolio.
Remember the risks of investing in renewable energy & climate change stocks
Whether investing in wind energy stocks, renewable energy, or companies working to fight global warming in general, remember the basic risks. Investing and trading are both inherently risky. Only invest or trade if you can afford to take any potential losses.
Afternoon wrap: Shell loses emissions court case, Amazon inks MGM deal
A bit of a dreich day for European equity markets with nothing moving much at all. All the main bourses have traded flat. US markets are mildly higher as Wall Street’s bank chiefs testify in front of Congress. Oil recovered $66 as inventory data showed a bigger-than-expected draw in inventories as well as stocks of gasoline and distillates. US 10s at 1.55%, gold above $1,900 and Bitcoin is weaker in the afternoon session below $39k again.
The dollar caught a big bid into the London fix. Dovish comments from the ECB’s Panetta – too early to taper bond purchases – had already set the EUR on a downwards trajectory through the session. EURUSD retreated to 1.2210 where it seems to have found some support. GBPUSD has tried several times to breach 1.4120 on the downside today but the level is holding well. The dollar index had a run up to 90 but ran out of steam at 89.95.
Doubling Dutch emissions cuts: A court in the Netherlands has ruled Royal Dutch Shell must cut carbon emissions by more than twice the company’s current target of 20% by 2030. The Dutch ruling compels Shell to reduce emissions by 45% from 2019 levels by 2030. Currently, Shell has a goal of achieving this 45% target five years later in 2035, and to be net neutral by 2050.
Shares had been trading a little higher all day before the ruling saw them turn mildly negative, before turning back above the flatline towards the end of the session. Shell says it will appeal the ruling. It comes as Chevron and Exxon also face their own climate campaign fight in AGMs today. What does the ruling mean for Shell and peers?
It undoubtedly sets an important precedent that ties corporate actions to global and national policy in a way that has not been seen before. It’s acknowledgment that you cannot abstract the likes of Shell and other ‘polluters’ if you like from the legally-binding treaties and obligations nation states have signed up to. Similar judgments may start to emerge that compel polluters to better align their strategy with government policy (eg the Paris treaty). It could also have implications for other sectors (eg Utilities) though that is less clear right now.
It is not yet clear to what extent this really changes whether you want to own Shell stock right now. True it could face fines if it doesn’t meet the targets, rather than just shareholder disapprobation. It may also need to increase the near-term capex for ‘greening’. But really this is speeding up a process already in motion. Indeed, the recent investor vote on setting more ambitious carbon reduction targets highlighted the extent to which investors are fully behind Shell doing more, quicker, not less, slower. Which kind of says most investors will be comfortable with the ruling, in of itself. Worries about higher capex and lower returns are another matter. The quicker Shell moves on this, the sooner fund managers with ESG-criteria to box tick will take a kinder view to the stock. Shell will have to act on this, and it could speed up divestments and potential deal activity if it is looking to use its current scale to swallow up some green energy assets.
Ford shares rallied 7% as it announced a $30bn investment in electric vehicles through to 2025. Investors lapped up the ambition. The company says it expects 40% of its sales globally to be EVs by 2030. It’s the first investor day under new CEO Jim Farley and there seems to be a real buzz about Ford’s EV plans now – watch out Tesla.
Amazon shares were mildly higher as the company confirmed it is acquiring MGM for $8.45bn. Like just about any big Amazon deal, on the face of things this looks like bad news for competitors, all else being equal. It gives Amazon significantly more firepower in terms of its Prime streaming platform. The impressive catalogue from MGM (James Bond etc) will help Amazon drive further up-selling of content in the Prime mix. Owning MGM also allows Amazon to benefit from having more control in the content output from the studio, which puts more squarely in a straight fight for eyeballs with Netflix/Disney. Of course, we cannot like-for-like Netflix subs with Prime membership, but, on the margins, it could make Prime compete more fully for eyeball time, which a) makes it stickier with users and b) reduces consumer propensity to have another streaming service.
Netflix tracked the move in Amazon shares but this could be more about the broad 0.55% rally for NDX today. Disney shares rose 1%. Comcast rallied 3% as it’s not seen in a rush to do any further deals. We are seeing significant consolidation in the streaming space that acknowledges the requirement for scale in order to survive – only last week AT&T spun off Warner Media to merge with Discovery. A major deal but hardly transformational for Amazon.
Finally, meme stocks are back – GameStop shares rose 14% and are now up 35% on the week. AMC added another 12%. Both jumped yesterday as Redditors on /wallstreetbets renew their interest in their old favourites.
Snowflake earnings: what to watch
Snowflake (SNOW) is due to report its first quarter results after the close today (May 26th). Shares in the company are worth about a half of the value they were at their peak in 2020.
The consensus estimate for Q1 is $213.36m in revenue and a $0.16 loss per share. In Q4, Snowflake posted a loss per share of $0.70 on a 117% rise in revenues of $190.5 million.
Goldman Sachs put out a note yesterday on the stock, giving it a buy rating with a 12-month price target of $275. “Following a ~40% correction in the stock since its December 2020 highs, we see a path towards outperformance and believe the durability of growth is not fully reflected in the company’s valuation,” they said.
Snowflake is seen as being well-positioned to capitalize on a “generational shift” in data and analytics to the cloud, and replace incumbent data warehousing solutions “owing to their scalable and elastic cloud native”. GS added: “We continue to expect another strong quarter as the overall demand environment remains resilient.”
Analysts maintain a broadly positive stance on the stock, with 50/50 buy/hold ratings.
Price action has been positive of late although we have seen the momentum just fade a little as it approached the April swing highs around $244. The beak of the trendline from the Dec ‘20, Feb ‘21 and Apr ‘21 peaks suggests bulls are taking charge again. MACD crossover also seen as bullish.