Earnings season: Tesla drives through Q3 with another earnings beat

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Despite supply shortages, Tesla comes out on top with another record-breaking earnings quarter.

Tesla earnings

Tesla’s headline stats

It’s another expectation-beating quarter for Elon Musk’s Tesla.

The electric carmaker was buoyed by record deliveries in Q3. This translated into higher net income and better margins. Tesla appears to have found chipsets no one else can locate, giving it the edge over its rivals as the world experiences a global computer chip shortage.

The key takeaways from Tesla’s Q3 2021 earnings are:

  • Earnings per share – $1.86 vs. $1.59 estimated
  • Revenue – $13.76 billion vs $13.63 billion estimated

In income terms, Tesla reported net income of $1.62bn. This is the second consecutive quarter the auto manufacturer has reached a $1bn income quarter. It only goes to show just how far Tesla has come. Last year, third quarter net income totalled $330m.

It was reported at the start of October that Tesla vehicle deliveries had outstripped Wall Street estimations. According to Tesla, it delivered 20% more vehicles against Q2 for a total of 241,300. Its Model Y and Model 3, more “affordable” cars, were the most popular models. Ultimately, Q3 vehicle deliveries were up 73% year-on-year.

Analysts had forecast that Q3 deliveries would stack up at 229,242 vehicles.

Gross margins improved from 26.6% overall and 30.6% for Tesla’s main automotive business – another record-breaking metric for Elon Musk’s brand.

Tesla also generated $806 million in revenue from its energy business, which combines solar and energy storage products, and $894 million in services and other revenue. Other revenue comprises maintenance, insurance and merchandise.

Tesla insiders show pre-earnings sell off

In a move that may signal something greater (but also maybe not), Tesla insiders began selling shares prior to the company’s third quarter earnings release.

As you can see from the below, Tesla company insiders have been releasing stocks. Over 450m Tesla stocks have been sold over the past 3 months, worth $7.1m. Compare that with buys of just 764,446.

Tesla inside earnings tool results.

Could this be part of a broader trend? Is Musk planning to sell some of his own Tesla holdings? It’s hard to say at this stage, but it’s worth keeping an eye on.

Tesla stock fell 1.5% in after-market trading. As of Thursday morning, the stock was still relatively flat, trading at $866.56. On the whole, Tesla shares are up around 23% across 2021.

According to the Markets.com analyst recommendations tool, Tesla holds a neutral rating.

Tesla analyst recommendations chart.

Contrasting with that is news sentiment which places Tesla in a firmly bullish position.

Tesla news sentiment rating.

Where next for Tesla?

Tesla is in the process of expanding its production capabilities with new factories under construction around the world.

“There’s quite an execution journey ahead of us,” Chief Financial Officer Zachary Kirkhorn said in the brand’s quarterly earnings call.

The centrepiece of its expansion plans is its Berlin “Gigafactory”. The $7 billion project could see cars start rolling off the production line in the next month, but there are still global parts shortages and high commodities prices to contend with.

This didn’t seem to really hold Tesla back in the third quarter. The EV builder seemingly has the ability to pull parts, chipsets, and micro components out of thin air.

“Q4 production will depend heavily on availability of parts, but we are driving for continued growth,” Kirkhorn said.

Also expect to see acceleration of the so called “Full Self-Driving Systems” Tesla is developing. As we reported yesterday, this new tech has its fair share of detractors, not least the National Highway Traffic Safety Administration. The self-driving technology is already under investigation by the NHTSA, and some Tesla fanboys/girls see this as an attack on the brand.

Others just don’t want to see a repeat of several fatal incidents caused by Tesla vehicles on autopilot. It’s imperative Tesla gets this right, otherwise there good be a major clampdown on its autopilot ambitions. But if people are getting hurt, or being killed, by wayward Tesla cars, it’s only right to take a cautious approach.

Let’s mention batteries. Tesla says it is about to make a switch to its standard-range models who currently use a lithium-ion battery with a nickel cathode. Tesla says it will start using a lithium iron phosphate (LFP) mix. Basically, iron is more abundant than nickel. It should make it easier for Tesla to source supplies.

The end goal, says Tesla VP of Powetrain and Energy Engineering Drew Baglino, is to localise battery and car production.

Some supply and critical safety challenges to overcome then for the world’s most valuable car maker.

S 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.

Earnings season: Netflix plays the Squid Game, wins subs beat

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Netflix leverages a content backlog into millions of new subscribers according to its Q3 2021 earnings report.

Netflix earnings

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.

IPO watch: Volvo Cars seeks $23bn valuation on public launch

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IPO

In one of the largest IPOs of 2021, Volvo Cars is going public. Here’s what you need to know about the Gothenburg carmaker’s stock market debut.

Volvo IPO

Volvo Cars hopes to raise $2.9bn in initial public offering

Chinese-owned Volvo Cars will make its public stock market debut on October 28th, 2021.

The company has set its sights on a $23bn valuation when it debuts on the Nasdaq Stockholm stock exchange in ten days.

In its prospectus, Volvo said it would be offering shares priced between 53-68 krona ($6.12-7.86) per share, initially offering $2.9bn worth to investors. Volvo Cars’ offering is made up of 367,647,058–471,698,113 newly issued common class B shares.

The transaction, including expected converted investments by investors AMF and Folksam, was seen resulting in a free float of about 19.5% to 24.0%, Volvo said.

That would give its owners, Geely Motors, a substantial ROI. The Chinese firm picked up Volvo from the ailing Ford back in 2010 for a cool $1.8bn.

Part of Volvo’s potential valuation is the fact it owns 50% of EV spinoff Polestar. Polestar is preparing its own IPO, which is expected to place a $20bn valuation on the premium electric car brand, due to launch in 2022.

Geely and Volvo also jointly own 8.2% of Volvo Trucks.

Volvo enjoys strong brand recognition and sales in key markets, such as China, mainland Europe, the UK, and the US.

The Swedish carmaker sold 770,000 vehicles last year, spearheaded by the popular XC family of SUVs. If it can pull of that $23bn target, Volvo would sit firmly alongside premium contemporaries like Daimler and BMW in terms of market cap, if not cars sold.

BMW shipped 2.3m cars worldwide in 2020. Mercedes-Benz shipped 2.2m.

Volvo’s electric outlook

Raising capital to develop its EV product offer and production capabilities is one of the key reasons behind this IPO. Volvo is aiming for annual car sales of 1.2m per year – an increase of 56% against 2021’s numbers.

“Volvo Cars believes that its unique structure and focused strategy makes it one of the fastest transformers in the global automotive industry, with mid-decade ambitions dedicated to electrification, sustainability and digitisation.” the Swedish company said in a statement.

As with pretty much all legacy car manufacturers, Volvo is looking to electrify its line up away from the Polestar brand. New electric models from Volve Cars will be badged as such. Think of Polestar as the premium of the premium. Volvo Cars are more in line with midrange BMW models, like the 1, 2 and 3 series, although it does offer models that can compete in the saloon and SUV/Crossover classes.

Could Volvo become one of the top EV stocks to watch?

The float, if successful, will help fund Volvo’s electric ambitions.

By 2030, Volvo aims to have removed internal combustion engines from its range. It expects 50% of total sales to come from electric-powered vehicles by 2025. In an interesting move, the auto manufacturer also expects 50% of its sales to come from online via the Volvo website by this time too rather than bricks-and-mortar dealerships.

“There is no long-term future for cars with an internal combustion engine,” Henrik Green, Volvo Cars’ Chief Technology Officer, said earlier in the year. “We are firmly committed to becoming an electric-only car maker and the transition should happen by 2030.”

September saw global Volvo sales fall 30% year-on-year. Supply chain chaos, chipset shortages, and worker COVID-19 breakouts all impacted manufacturing and delivery at this time. Volvo has said all workers have been given vaccines in its Southeast Asia factories, but it will still be hampered by semiconductor supply constraints.

US pre-mkts: Bank earnings strong, Cat upgrade

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Investments

Very strong bank earnings coming through this morning – JPM led the way yesterday and the latest numbers from peers also look strong. Real good signs of improving loan growth in particular is a positive for BAC.

US pre-market key pointers

Bank of America (BAC)

Strong performance from Bank of America.

  • Net income of $7.7bn, EPS of $0.85 vs $0.71 expected
  • Revenues up 12% year-on-year – JPM was just up 2.2%
  • Net interest income up 10% to $11.1bn – most rate-sensitive of the big banks
  • Record M&A activity – Noninterest income up 14% to $11.7bn, driven by record asset management fees, strong investment banking revenue and higher sales and trading revenues
  • Expenses down on the quarter, flat on the year
  • $624m clawback from bad loan provisions – bottom line flattered less than the JPM numbers.
  • Stock up pre-mkt to tune of 2.5%, having fallen 0.92% yesterday in sympathy with JPM, which is trading mildly higher in pre-mkt.

Wells Fargo (WFC)

Wells Fargo results showed:

  • Net income of $5.1bn, EPS $1.17 vs $0.98 expected
  • Net interest income was down 5%, due to lower loan balances that reflect soft demand, also higher prepayments, lower yields
  • Results include $1.7bn decrease in credit loss provisions – equivalent to $0.30 per share.
  • Pre-mkt trades +1%, having slipped 1.3% yesterday.

Meanwhile, ahead of the cash open on Wall Street, US futures indicate all the major averages will open higher. SPX seen opening up 30+pts at just under 4,400, Dow Jones +200pts at 34,610, NDX at 14,900. Risk looking solid.

  • Walgreens Boots Alliance reported earnings $1.17, vs $1.02 expected, revenues $1bn ahead of expectations, cost-cutting programme a year ahead of schedule. US comparable sales up 8.1% from a year before.
  • UnitedHealth shares +2% pre-mkt after reporting earnings beat and raised guidance.
  • Caterpillar +1% pre-mkt, bouncing of its weakest level since Jan, as Cowen advises clients to buy ahead of the first ‘megacycle’ in 14 years, initiates with ‘Outperform’ rating and PT of $241.
  • Tesla shares are up pre-mkt to their best level in 7 months.
  • Boeing down 1% pre-mkt after report says co. dealing with new Dreamliner defect, production problems
  • FTSE 100 at HOD just a whisker under 7,200
  • Dollar continues to struggle. GBPUSD making a fresh 3-week high at 1.37334.
  • Gold also trades at HOD at $1,800, sitting on its 100-day SMA.
  • Treasury yields lower, 10s at 1.532%

Earnings season: five stocks on Goldman’s radar

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Investments

Earnings season is underway. Now’s the time to take a look at some stocks that could provide investors with more than the Wall Street consensus would tell you.

US earnings season Q3 2021

Goldman reviews earnings season stocks

Sometimes investors like to break away from the pack. To dare is to do.

It’s all about spotting opportunities from stocks that may be overlooked by Wall Street.

As reported by CNBC, Goldman Sachs has been scanning Wall Street for stocks it believes hold promise for investors looking for something different this earnings season.

Earnings season began in earnest this week with major US banks leading the charge as always. You can use our earnings season calendar to see which megacaps are reporting this quarter and when.

In a note to investors published on Wednesday, Goldman said it expects stocks to rise 6% this quarter. Its spotlighted stocks, however, could offer upsides of 14%.

The investment bank deployed a fairly complex methodology when analysing Q3 2021 earnings season stocks. 1,000 companies in Goldman Sachs’ coverage universe were scanned at the 25 best opportunities were selected when considering EPS of $5 per share over the next four quarters.

After this, the results were filtered through analysts which were above or below Thomson Reuters’ consensus for the upcoming quarter, and the year ahead, “on a key financial metric.”

“Single stock put-call skew is at its highest level in over a year,” Goldman said, encouraging investors to make out-of-money calls on its out-of-consensus stock picks. “Given investors are well hedged, even modest earnings beats are likely to drive a relief rally in specific stocks (on earnings day) and the broad index (over the next three months).”

The out-of-consensus stocks to pick

Please note these are only Goldman Sachs’ recommendations – not hard and fast must-buys. Only invest if you are comfortable with the risk of potential capital loss.

The top five stocks Goldman has selected to watch this earnings season are:

  • Uber
  • Signature Bank
  • Yeti
  • Bank of America Corp
  • Lowe’s

Let’s start with Uber. The ride-hailing service burst onto the scene several years ago as a taxi industry disruptor. Goldman’s Eric Sheridan thinks the app can deliver a 37% upside over the coming year. Sheridan’s earnings estimates put Uber 20% higher than Wall Street consensus right now too.

The idea is that if Uber can close the supply/demand gap, then this should lead to normalised ride pricing, higher demand in general, and thus pre-pandemic profits.

Outdoor retailers Yeti could offer even better upsides than Uber. Goldman considers Yeti a “growth compounder with best in class authentic brand positioning.” It could deliver upsides of 44% if Goldman is on the money. In terms of EPS, Yeti’s could be 8% higher than analysts think in the third quarter and 3% higher in the next.

Investment banks are usually amongst the first to start reporting on Wall Street come earnings season. It’s certainly true this year. Of these, Goldman flags Bank of America as the one to keep an eye on. Goldman’s analysis puts BoA’s upside at 7% – some 10% higher than consensus.

Bank of America’s potential has been pegged to “significant remixing of cash into securities” by Goldman.

Smaller banks are represented by Signature Bank. Ryan Nash, a Goldman stock analyst, forecasts earnings-per-shares to come it at 7% higher than Wall Street forecasts this quarter and 5% for the next four. Signature is on course for a revenue-beating Q3, driven by an acceleration in loan growth.

Rounding off Goldman’s section of potentially consensus-beating stocks is Lowe’s. The DIY probably benefitted more than most from the pandemic last year, but this quarter it could offer investors an upside of 12%.

Goldman’s Kate McShane said Lowe’s position is stronger now than in the last 6-12 months, thanks to bringing forward its seasonal inventory purchases.

These stocks could help you ride the next crypto surge

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Bank of America has picked out a number of stocks that could help investors get a slice of the cryptocurrency pie. Here they are.

Cryptocurrency stocks

Digital tokens on the rise?

Despite what some objectors and sceptics might say, it looks like cryptocurrency is here to stay.

Bitcoin has recently started heading upwards again. The token, which is the most popular in the world, recently passed the key $57,000 level – the highest levels since May. April’s $65,000 all-time high is still the target for BTC, but the industry is not just Bitcoin.

There are hundreds, thousands, of other digital tokens available. The industry’s collective valuation is currently north of $2 trillion – higher than the GDP of Canada with its bountiful natural resources.

Coins like Ether, Ripple, Cardano and even meme-based internet favourite Dogecoin, all have their own fans, representing billions in capital.

Cryptocurrencies seem like they’re becoming more resilient to outside pressures too. For example, Bitcoin’s current high performance flies in the face of China’s recent crypto ban. Before, such a measure would have sent the token spiralling downward. Now, even a flat out ban from one of the world’s foremost crypto markets isn’t enough to slow it down.

That being said, digital token prices can still show high volatility. Many investors and traders are still unsure if it’s a smart investment. Others prefer to stick with old school wealth stores like gold. But many are finding crypto a worthwhile pursuit. It’s basically down to how much volatility you can stomach.

But coins do not just generate themselves. To operate, the crypto industry requires an extensive ecosystem. It incorporates everything from technology providers, blockchain developers, payment platforms and plenty in between.

For investors to get involved in the next crypto gold rush without committing to coins, there are ways they can get involved. Of course, it goes without saying that any investments carry risk of capital loss. Investing should only be undertaken if you are comfortable taking any losses.

With that in mind, Bank of America analysts have selected several stocks they believe could offer investors value as the crypto industry grows.

Bank of America’s crypto stocks to watch

“A new generation of companies for digital assets trading, offerings and new applications across industries, including finance, supply chain, gaming and social media has been created. And yet we’re still in the early innings,” Bank of America said in a note, as reported by CNBC.

The bank’s digital finance stock selections look at the wider cryptocurrency sector.

Let’s start with power. Cryptocurrency mining, the process of minting fresh coins, is power intensive. Very power intensive. In fact, in 2020, Bitcoin mining alone used as much energy as Sweden.

According to Bank of America, nuclear power firms could be ready to pounce on the crypto sector. Environmental concerns around token mining’s emissions could push miners to look for low-carbon alternatives to their current options. With low emissions and round-the-clock reliability, nuclear could be the ideal fuel source for crypto mining.

With that in mind, BoA suggests Exelon, NRG Energy and Vistra could be energy companies to watch if they move into the crypto space.

Let’s talk data centres. Since China prohibited crypto mining in its territories, there’s been a mass exodus of mining operations. It looks like North America might become mining next hotspot.

“As digital asset mining migrates to North America due to China’s near complete ban of mining activities, public data-centre companies could view this niche market as an opportunity,” BoA analysts said.

A data centre boom may be on the way. To capitalise on this, Bank of America analysts recommend two stocks: Digital Reality and Equinix.

“Greater focus on the energy consumption of digital asset mining could increase demand for data centre operators with greater renewable energy sources,” the analysts said. “Equinix data centres are powered with 37% renewable energy with a target of 100% over the next decade.”

Payment platforms and banks should also be considered.

PayPal in particular is a “must own” for Bank of America.

“We view [Paypal] as a scarce asset with accelerating structural tailwinds, while the company is well on its way to transforming its digital wallet/app into a financial ‘Super App’ for its massive global consumer base,” the bank said.

Analysts flash their headlights at these Tesla-rivalling EV stocks

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More EV stocks to potentially rival Tesla have been flagged by a couple of big investment banks this week. Are they about to put the pedal to the metal?

EV stocks

Are these EV stocks worth watching?

Most of the conversation around electric vehicles includes Tesla in some shape or form – even pieces about its rivals.

But Tesla, despite its reputation and size, is not the only electric car manufacturer in town. Legacy marques are starting to rapidly expand their battery-powered vehicle ranges. VW, Ford, and GM alone are planning to spend in excess of $150bn to develop batteries and cars going forward.

Tesla’s competitors are now a mix of the old and the new. It’s likely the EV space won’t just be dominated by Elon Musk’s brand. It will no doubt remain a big player, for sure, but other companies, both established and up and coming, are revving their engines to get their own share of the EV market.

As such, electric vehicle stocks are quickly driving their way into many investors and traders’ portfolios.

JPMorgan’s electric vehicle stock picks

JPMorgan’s head of European autos equity research, Jose Asumendi, recently said that his two top EV equities to watch are Stellantis and Daimler.

“Stellantis is one of the leaders with electrification in Europe,” Asumendi told CNBC. “What I like about Stellantis’ strategy is not only the product launches but also the battery strategy,”

Stellantis is a joint venture between two of Europe’s most revered car builders: Peugeot and Fiat. A constellation of 14 brands fall under this umbrella. Vauxhall, Opel, Citroen and EV-spin off DS, Chrysler, Dodge, Jeep and Maseratti are just some of the badges Stellantis boasts.

Importantly, the brand is committed to EV development as well as battery research and construction.

In H1 2021, just 14% of Stellantis deliveries were electrified vehicles. In the US, the figure was 4%. With sustained multi-billion-dollar investment, the carmaker expects this to rise to 70% and 40% in these respective territories by 2030.

Key to Stellantis’ stock success will be how the brand copes with a) the global chipset shortage and b) ongoing restructuring of some of its constituent brands.

“We thought all these brands [that Stellantis owns] were going to die at some point and go bust, but it turned out to be different,” Asumendi said. “But now CEO Carlos Teveres is doing the same thing with Alfa Romeo, Maserati and Fiat. So Stellantis offers real opportunity to invest into this European restructuring equity story.”

The company also formed an entity ACC to develop property battery tech alongside Asumendi’s next pick Daimler.

Daimler is Mercedes-Benz’s parent company.

It is planning to split out its truck division away from the Mercedes cars section by the end of the year, creating two separate entities without diluting the brand.

“You will have two companies clearly run under the same hat: Mercedes-Benz Cars and Mercedes-Benz Trucks,” Asumendi said.

Asumendi was also keen to heap praise on Daimler CEO Ola Kallenius and CFO Manish Thakore. Together, the pair have been able to drop the fixed cost base of a Mercedes-Benz car by 20%. That suggests better margins for the prestige brand going forward.

But as this is an EV-focussed piece, we have to mention Daimler’s electric ambitions. In July, the German giant announced its plan to spend $47bn on overhauling its output to fully embrace electric power. No new petrol-powered models will be introduced from 2025 onwards. Bad news if you enjoy the throaty roar of an AMG V12, good news for Mother Earth.

Asumendi set price targets for both Stellaris and Daimler based on their backing of electric transport. For Stellantis, the figure is €28 – quite above the current level of €16.51 (up 3.5% on the day at the time of writing. Asumendi’s Daimler price target sits at €98. Daimler is also currently up around 3.5%, trading for €78.38.

Goldman upgrades NIO

NIO is essentially the Chinese Tesla.

The company’s stock has pulled away somewhat from highs seen at the start of January to the tune of 50%. But, according to Goldman Sachs, the EV brand has high potential.

Goldman recently upgraded NIO from a neutral to a buy with a target price of $56. At the time of writing, NIO was up 6.1% on the day, exchanging hands for $35.81.

As well as launching a collection of SUV models aimed squarely at the domestic market, NIO has also brought the ET7 saloon to market. This has caught Goldman’s eye.

The ET7 itself is a luxury sedan, designed to compete with the Tesla Model S and European rivals like the BMW 7 Series or Mercedes-Benz S-Class. The two German models regularly push $200,000 in China.

That’s why the ET7’s pricing, more in line with the BMW 5 Series or Mercedes E-Class, has attracted Goldman.

“The price point makes ET7 China’s most expensive car model ever launched by domestic manufacturers, strengthening NIO’s brand equity in the premium space,” Goldman explained in a research note.

NIO’s battery as a service model, where users essentially lease their battery from the car maker, is also a plus point for Goldman. It does seem like a rather anti-consumer move, essentially a subscription to power your car on top of tax, insurance, and electricity, but it would present an extra revenue stream for the brand.

Are these five gas crisis stocks worth a look?

Commodities
Equities
Investments

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:

  • Ørsted
  • Iberdrola
  • RWE
  • EDF
  • Engie

“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.”

According to the investment bank, RWE has a potential 35.4% upside to Morgan Stanley’s price target, the analysts estimated. For EDF the figure is 58.1% and for Engie it is 44.5%.

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.

IPO Watch: Warby Parker & Olaplex line up public debuts

Investments
IPO

Two fresh IPOs together worth a projected $13bn come next week as Warby Parker and Olaplex start public trading. 

IPO trading – stocks to watch 

Warby Parker 

First up is Warby Parker which is expected to launch on the New York Stock Exchange on September 29th. 

The direct-to-customer e-commerce eyewear brand is forecast to garner a $3bn valuation when its IPO lands. 

Recent guidance and results for 2021 so far suggest Warby Parker is in rude health. Its first half results saw a 53% year-on-year increase in revenues for a total of $270.5m. The business did incur a $7.5m loss during trading but said this could be attributed to Covid-19 lockdowns at the tail end of 2020. 

Full year projections put revenue growth at 35-36% for 2022. Revenues are forecast to clock in at between $532-537m. Additionally, the business is hoping to expand its bricks-and-mortar offer in order to support its core online business by opening 30-35 new stores. That would bring the total number of locations up to 160. 

According to co-founders and joint CEOs Neil Blumenthal and Dave Gilboa, Warby Parker is targeting 25% revenue growth for 2022. 

In a statement, the pair said: “The outlook we’ve provided underscores our belief that delivering remarkable customer experiences, making a positive impact on all stakeholders, and living our core values will lead to continued long-term sustainable growth.” 

There’s plenty of reasons to be optimistic – but as ever there are lots of reasons to be cautious too.  

The e-commerce format where Warby Parker made its mark is not the most lucrative for eyewear manufacturers against the broader industry. According to Forbes, online sales of eyewear and glasses has grown at a CAGR of 4% against 18% for e-commerce as a whole. 

It seems shoppers may still prefer to purchase their eyewear in person. It is true that Warby Parker is committed to growing its physical store numbers, as mentioned above. There are still question marks over the sustainability of its online business, despite recent successes.  

Is a $3bn valuation an over optimistic target? 

The US eyewear business is notoriously fragmented. As a $35bn a year industry, it’s big fairly big business, but it’s made up of a wildly different variety of independents, mom-and-pops, and smaller firms. No one business has really been able to dominate. Of course, that does present an opportunity for Warby Parker which it is not doubt keen to grasp. 

At the moment, Warby Parker controls 1% of the market space. Vision Source and Luxotica control 8% and 6% of the market respectively.  

Olaplex 

Olaplex, the premium hair products brand, is forecast to launch its own public offer September 30th. 

Despite challenges thrown up by the COVID-19 pandemic, the business reported a 90% increase in sales across 2020 for a total of $282.3m. EBITDA rose 98% over the same period to reach $199.3m. 

In its IPO filing, Olaplex reported first half net sales had reached $270.2m. Things are looking good for the Advent Capital-owned luxury brand. 

The filing also revealed Olaplex’s initial offer plans. 67 million shares priced between $14 and $16 each to retail customers once public. At the top end of the range, Olaplex would raise $1.07 billion in the IPO.  

Olaplex was acquired by Advent International in 2019. The filing shows Advent would control 79.6% of the combined voting power of our common stock, or 78.2% if underwriters exercise their options in full. Prior to the offering, Advent owns 89.3% of shares, followed by 6.8% owned by Mousse Partners. Emily White, the President of Anthos Capital, owns 3.6% of shares. 

Some cannabis stocks are popping. Here’s why.

Equities
Investments

A number of cannabis equities are showing strong movement today as a cohort of pro-marijuana congressmen has taken the chance to potentially push some legalisation legislation through.

Cannabis stocks to watch

Major growers and distributors of cannabis, both medical and recreational, are starting to pop in trading.

Tilray is up 3.6% while Canopy Growth is showing similar numbers at 3.7%. Sundial Growers and Curaleaf had gained 1% and 3.7% respectively yesterday too. Aurora Cannabis joins its coteries in showing growth, clocking in at 3.7%.

Our Cannabis Blend, which groups together five leading growers, is also showing a 3% daily bump.

It’s clear that marijuana stocks are doing well today. The question is why?

Pro-cannabis bill tacking onto Pentagon budget resolution sends stocks upwards

The US military and the worldwide cannabis industry don’t seem like the ideal bedfellows. However, some congressmen have spotted an opportunity to tie the two together – or at least piggyback off the back of Pentagon budget bills.

On Tuesday, the House of Representatives’ version of the SAFE Banking Act was tacked onto the 2022 National Defence Authorisation Act (NDAA). The NDAA basically approves the Pentagon’s budget for the coming year.

For context, the SAFE Banking Act makes it legal for companies to make profit off the sales and marketing of recreational marijuana products. There are billions of dollars at play here, so if it passes into law, the stocks mentioned above could gain massive traction.

Quite cleverly, Rep. Ed Perlmutter of Colorado, one of the SAFE Act’s key exponents, rationalised the bill’s importance on a national security level. It’s an impressive piece of theatre to equate legalised cannabis with a safer, securer United States, but in a military-focussed nation like that, it’s an important piece of rhetoric.

Perlmutter said: “This bill will ill strengthen the security of our financial system in our country by keeping bad actors like foreign cartels out of the cannabis industry. This is a public safety and a national security matter — very germane to the issues at hand, dealing with foreign cartels.”

As the representative for Colorado, Perlmutter will have had first-hand experience with legalised cannabis. As of 2021, over $10bn worth of marijuana products have been legally sold in Colorado – the first state to fully legalise recreational use. Of that, the state government has taken a $1.6bn slice.

But what about crime? Perlmutter’s words are based on public safety. According to a report by the Colorado Department of Justice, between 2012 and 2019, the state reported a 68% drop in cannabis-related arrests. This stands to reason. Makes something legal that was once illegal then the arrest rate will drop.

However, the number of DUI arrests went up by 120% across the same period. Not a great look when making a public health argument.

The SAFE Act’s overall passage will presage a wider debate on whether to just federally legalise marijuana anyway, rather than legislate it piece by piece. It would perhaps be an easier option than a lengthy legal process.

It’s thought that, sooner or later, cannabis will become fully legalised for recreational use in the United States. If that happens, it may be a bellwether for other countries and usher in legalisation on a global scale.

But let’s not get ahead of ourselves. Movement is being made, which is good for cannabis stocks like those mentioned above, but there is still some way to go yet.

The likes of Tilray and Canopy Growth have posted strong growth numbers this year. Canopy’s Q1 revenues 2022, for example, were up 23% year-on-year in August.

Reports show Tilray’s revenue grew by 27% to stand at $513 million. The company also reported an adjusted EBITDA of $40.8 million, representing a massive 598% year-over-year increase.

There are big, big sums coming out of these companies – but everything now hinges on how the US proceeds regarding further Cannabis industry growth prospects and share price performance.

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