Stocks dropped on Friday to end a three-session winning streak after weak earnings reports from Snap (SNAP) and Verizon (VZ) offset a strong numbers from American Express (AXP). The weakness in the tech sector included drops for Alphabet (GOOGL), Microsoft (MSFT), Apple (OTC:APPL) and Meta Platforms (META) ahead of their reports next week and with investors jittery again over the state of the economy. Despite the pullback at the end of the week, the S&P 500 Index and Dow Jones Industrial Average posted their biggest weekly gain in a month, while the Nasdaq notched its largest advance since July 8. In the bond pits, the 10-year Treasury yield ended the week at 2.75% and the 2-year closed at 2.97%. Meanwhile, the fed funds futures market swung around quite a bit all week, but settled at a 80% probability that the Federal Reserve’s policy-making committee lifts the benchmark rate by 0.75 percentage points next week and a close to 20% chance of a full percentage point hike.
There was a lot of positive momentum going into Tuesday’s quarterly report from Netflix (NFLX), as stocks soared in a broad-based rally with earnings season not as worrisome as initially feared. Netflix benefited from the sentiment by climbing 5.6% during the session, and tacked on another 7% AH to firmly trade above the $200 level. There had also been some alarm about a saturated streaming market and price hikes during a period of inflation, but Netflix was able to assuage those concerns with an upbeat outlook of an imminent comeback.
By the numbers: The streaming pioneer saw a net drop in 970K subscribers in the second quarter after warning shareholders of an enormous 2M figure plunge. It’s also forecasting a return to growth in Q3, with guidance of 1M net additions. Netflix further beat profit expectations, reporting EPS of $3.20 per share vs. expectations for $2.95 per share, on revenues that largely came in line with expectations at just under $8B. While forex effects were worse than expected (Netflix makes about 60% of its money outside the U.S.), revenue growth was 9% but would have been 13% on a constant currency basis.
“Losing a million [subscribers] and calling it success is tough, but really, we’re set up very well for the next year,” co-CEO Reed Hastings said on a conference call. “If there was a single thing [that boosted performance], we might say Stranger Things. We’re executing really well on the content side. We’re [also] in a position of strength given our $30B-plus in revenue, $6B in operating profit last year, growing free cash flow and a strong balance sheet.”
Go deeper: Looking to reclaim subscriber growth, Netflix is targeting early 2023 for a cheaper ad-supported version of its service. It’s a big U-turn for a company that has spent years shunning advertisers in favor of a pure subscription model, and even recently inked a partnership with Microsoft (MSFT) to support the placement of such advertisements. The company also plans to earn more by limiting password-sharing, and disclosed some options for Latin America where it will offer new payment plans for users who split an account. (84 comments)
The overheated U.S. housing market is starting to cool down in what some in the industry are calling a real estate shakeout. Sales of previously owned homes fell 5.4% M/M in June to 5.12M units, according to the National Association of Realtors, and were 14.2% lower when compared to the same month a year ago. At those levels, sales fell to their slowest pace since June 2020, when buying activity dropped briefly at the start of coronavirus pandemic.
Snapshot: Surging inflation is hammering potential buyers’ purchasing power and rising interest rates aren’t helping the situation. In fact, mortgage applications fell to a 22-year low last week, with the 30-year mortgage rate rising to 5.82% (compared to 3% at the start of the year). At the same time, the median existing-home price of all housing types climbed to $416K in June, from $407K in May (and surging from $285K just two years ago).
“It is clearly due to the plunging affordability,” explained National Association of Realtors Chief Economist Lawrence Yun. “We have never seen mortgage rates shoot up this fast at this magnitude. Even people who want to buy, they are priced out.”
Future construction: Single-family housing starts came in at a two-year low in June, down nearly 8% for the month and about 16% lower Y/Y. Things didn’t look any better in terms of single-family permits, which were off by similar percentages. That sentiment is being displayed in the markets, with the SPDR Homebuilders ETF (XHB) sliding 28% YTD, as well as a guidance cut from D.R. Horton (DHI) that kicked off the big builder earnings reports.
Tesla (TSLA) weaved in and out of traffic in after-hours trading on Wednesday, ultimately settling up 1.5% at $753/share. The electric vehicle maker posted stronger than expected financials, with adjusted EPS of $2.27 (+57% Y/Y) on revenue of $16.9B (+42% Y/Y). The strong bottom line figure appeared to put to rest some concerns about the “gigantic money furnace” gigafactories in Austin and Berlin, while free cash flow rose above estimates at $619M (vs. consensus forecasts of $500M).
Changing lanes: While prices for Tesla cars are up 25% to 30% from a year ago, the firm’s automotive margins compressed to 27.9% in Q2. The margins also fell below the 32.9% number that impressed in the first quarter, and 28.4% notched in 2021. The EV maker previously reported a disappointing quarterly delivery figure of 254,695 vehicles and is facing headwinds that include higher raw material and logistics costs.
“We’ve raised our prices quite a few times. They’re frankly at embarrassing levels. But we’ve also had a lot of supply chain and production shocks, and we’ve got crazy inflation,” Elon Musk announced on a conference call. Tesla will also have to jack up production by 70% in the second half of 2022 to meet its annual delivery goal of 1.5M vehicles in the face of China’s zero-COVID strategy and supply chain crises impacting all automakers. Musk didn’t give a production forecast for the rest of the year, but he said the company was likely to achieve “record” output.
HODLer? Tesla sold 75% of its Bitcoin (BTC-USD) stake to maximize liquidity given the COVID situation in China, though Musk related that it shouldn’t be taken as “some verdict on crypto.” Total sales of the cryptocurrency amounted to $936M, prompting Bitcoin to retreat below $24K following a big rally earlier in the week. “The Bitcoin losses point out an important part of the Tesla investment case – its eccentric owner,” noted Laura Hoy, analyst at Hargreaves Lansdown. “While Musk’s impressive innovation has served the company well, his personal flair is starting to raise governance questions.” (191 comments)
A big central bank meeting took place in Europe this week as inflation roils the continent and the euro remains on the backfoot. The ECB had been hesitant to get too aggressive on the monetary policy front – especially in comparison to the Federal Reserve – fearing a looming recession that was exacerbated by Russia’s invasion of Ukraine. That stance has changed, however, as the bloc clearly sees Moscow in the driver’s seat in terms of natural gas supplies and even higher energy prices that could put it further behind the inflation curve.
Thought bubble: While the Fed began its latest rate hike cycle back in March, the ECB had yet to raise rates as it sought to prioritize economic growth. A larger-than-expected 50 basis point move on Thursday changed all that around, and was seen as a very hawkish signal by the markets. Note that the last time the central bank increased rates was in 2011 – in the aftermath of the European debt crisis.
Unlike the U.S., which makes up one large jurisdiction, the ECB’s decision will reverberate through 27 different member states and their economies. That could expose more indebted countries like Italy to financial trouble and weigh on peripheral bond yields as a whole. The situation remains even more precarious after Italian Prime Minister Mario Draghi (a former ECB president) announced his resignation, prompting Italy’s 10-year government bond yield to jump above 3.5%, compared to the just over 1% yield on the 10-year German bund.
Anti-fragmentation tool: Seeking to limit the spreads between yields across the eurozone, the ECB unveiled a new product called the Transmission Protection Instrument. “The scale of TPI purchases would depend on the severity of the risks facing monetary policy transmission and purchases are not restricted ex ante,” according to a press release. “TPI purchases would be focused on public sector securities with a remaining maturity of between one and ten years. Purchases of private sector securities could [also] be considered, if appropriate.” (10 comments)
The tech sector rallied broadly on Thursday, with the Nasdaq ending the session up 1.4%, until Snap (SNAP) sharply dented sentiment with its quarterly results. The Snapchat owner posted its weakest-ever quarterly sales growth as a public company, with revenue that increased just 13% in Q2 (7 percentage points below the low end of its April forecast). Net losses swelled by 178% Y/Y to $422M, prompting shares to plunge 27% in extended trading, after losing nearly three-quarters of their value over the past year.
Bigger picture: Macroeconomic conditions and rising inflation are seeing companies pull back on advertising spend, while changes to Apple’s (AAPL) privacy policy have also slammed digital-ad-focused businesses. Snap has tried to search for new sources of revenue, including paid and premium services, but noted that it “was not satisfied with the results we are delivering.” The company also didn’t issue guidance for the current quarter, though it will “substantially” reduce its hiring rate and tightly control operating expenses.
“While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition,” announced CEO Evan Spiegel. “We are evolving our business and strategy to re-accelerate revenue growth, including innovating on our products, investing heavily in our direct response advertising business, and cultivating new sources of revenue to help diversify our top-line growth.”
Outlook: Snap’s results came before disappointing earnings from Twitter (TWTR) on Friday morning. Other heavy hitters in the digital ad market, like Google parent Alphabet (GOOGL) and Meta Platforms (META), will report next week. (128 comments)
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