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Technology Stocks : Semi Equipment Analysis
SOXX 330.08+0.9%3:59 PM EDT

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To: Return to Sender who wrote (88761)7/29/2022 4:35:43 PM
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Market Snapshot

Dow 32847.01 +315.50 (0.97%)
Nasdaq 12390.65 +228.09 (1.88%)
SP 500 4130.36 +57.86 (1.42%)
10-yr Note

NYSE Adv 2212 Dec 871 Vol 1.2 bln
Nasdaq Adv 2501 Dec 1891 Vol 4.8 bln

Industry Watch
Strong: Consumer Discretionary, Energy, Information Technology, Financials, Materials

Weak: Consumer Staples, Health Care

Moving the Market
-- Better-than-feared quarterly results from Apple and

-- Carryover momentum from this week's rally

-- Better-than-expected results from Exxon and Chevron

Closing Summary
29-Jul-22 16:25 ET

Dow +315.50 at 32847.01, Nasdaq +228.09 at 12390.65, S&P +57.86 at 4130.36
[BRIEFING.COM] For the last session in July, the market opened higher mostly thanks to better-than-feared quarterly results from Apple (AAPL 162.51, +5.16, +3.2%) and (AMZN 134.95, +12.67, +10.3%). Each of the main indices lost a little steam and traded sideways through midday before finding upside momentum and climbing to close near fresh highs.

The strong start to the day was thanks to favorable quarterly results, but also carryover momentum from this week's rally. Week-to-date the S&P 500, Dow Jones Industrial Average, and Nasdaq gained 4.3%, 3.0%, and 4.7%, respectively.

Trading up in solidarity with Apple and Amazon, the mega caps were an important upside driver today. The Vanguard Mega Cap Growth ETF (MGK) closed up 2.3% versus a 0.9% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 1.4% gain in the S&P 500.

S&P 500 sector performance was driven by constituents' quarterly results. Consumer discretionary (+4.3%) and information technology (+1.6%) outperformed thanks to Apple and Amazon but the technology sectors' gains were muted due to Intel's (INTC 36.31, -3.40, -8.56%) disappointing results and guidance.

The energy sector (+4.5%) closed at the top of the leaderboard thanks to Exxon (XOM 96.93, +4.29, +4.6%) and Chevron (CVX 163.78,+13.39, +8.9%) after both companies reported better-than-expected results ahead of the open.

The only two sectors to close in negative territory were health care (-0.4%) and consumer staples (-0.7%). The former was dragged down by Dexcom (DXCM 82.08, -4.91, -5.6%) after it reported worse-than-expected earnings and issued downside guidance. The latter had Church & Dwight (CHD 87.97, -8.24, -8.5%) and Procter & Gamble (PG 138.91, -9.15, -6.18%) to thank for its underperformance. Both companies issued downside guidance before the open.

Separately, there was a batch of discouraging economic data today that included the highest PCE Price Index reading (+6.8% yr/yr) since 1982, the second-lowest consumer sentiment number on record (51.5), and the lowest Chicago PMI reading (52.1) since August 2020.

Also, Energy complex futures made upside moves today. WTI crude oil futures rose 2.1% to $98.55/bbl while Natural gas futures rose 2.8% to $8.32/mmbtu.

The Treasury market closed mixed with the 2-yr note yield rising two basis points to 2.90% while the 10-yr note yield fell four basis points to 2.64%.

Looking ahead to Monday, market participants will receive the July IHS Markit Manufacturing PMI Final reading (prior 52.3%) at 9:45 a.m. ET. The July ISM Manufacturing Index ( consensus 52.5%; prior 53.0%) and June Construction Spending ( consensus 0.2%; prior -0.1%) at 10:00 a.m. ET.

Reviewing today's economic data:

  • June Personal Income 0.6% ( consensus 0.5%); Prior was revised to 0.6% from 0.5%;June Personal Spending 1.1% ( consensus 0.8%); Prior was revised to 0.3% from 0.2%; June PCE Prices 1.0% ( consensus 1.0%); Prior 0.6%; June PCE Prices - Core 0.6% ( consensus 0.6%); Prior 0.3%
    • The key takeaway from the report, other than inflation remaining sticky, is that the inflation sapped the consumer's purchasing power. Real personal spending was up a weak 0.1% as real disposable personal income declined 0.3%.
  • Q2 Employment Cost Index 1.3% ( consensus 1.1%); Prior 1.4%
    • The key takeaway from the report is that workers saw a nice increase in wages and salaries in Q2, yet that increase was subsumed by inflation, evidenced by the 7.1% increase in the Q2 PCE Price Index seen in the Advance Q2 GDP report.
  • July Chicago PMI 52.1 ( consensus 56.2); Prior 56.0
  • July Univ. of Michigan Consumer Sentiment - Final 51.5 ( consensus 51.1); Prior 51.1
    • The key takeaway from the report is that consumer sentiment remains near record-low levels amid persistent worries about inflation and growing worries about a softening labor market.
  • Dow Jones Industrial Average: -9.6% YTD
  • S&P 400: -11.6% YTD
  • S&P 500: -13.4% YTD
  • Russell 2000: -16.0% YTD
  • Nasdaq Composite: -20.7% YTD

Market setting new highs ahead of the close
29-Jul-22 15:30 ET

Dow +354.72 at 32886.23, Nasdaq +244.83 at 12407.39, S&P +64.15 at 4136.65
[BRIEFING.COM] Ahead of the close, the market is setting fresh session highs with the Nasdaq up 2.0%.

Energy complex futures made upside moves today. WTI crude oil futures rose 2.1% to $98.55/bbl while Natural gas futures rose 2.8% to $8.32/mmbtu.

Looking ahead to Monday, market participants will receive the July IHS Markit Manufacturing PMI Final reading (prior 52.3%) at 9:45 a.m. ET. The July ISM Manufacturing Index ( consensus 52.5%; prior 53.0%) and June Construction Spending ( consensus 0.2%; prior -0.1%) at 10:00 a.m. ET.

Semiconductors move higher despite Intel's earnings
29-Jul-22 15:05 ET

Dow +340.60 at 32872.11, Nasdaq +229.90 at 12392.46, S&P +60.60 at 4133.10
[BRIEFING.COM] The stock market continues a steady climb. The Dow Jones Industrial Average is in first place, up 1.8%.

Mega cap leadership continues to lift the market higher. The Vanguard Mega Cap Growth ETF (MGK) is up 2.3% versus a 1.5% gain in the S&P 500.

The semiconductors have moved higher despite Intel's (INTC 32.21, -3.50, -8.8%) disappointing quarterly results. The PHLX Semiconductor Index is up 0.7% with nearly every component trading higher.

Separately, the Treasury market is mixed with the 2-yr note yield up three basis points to 2.90% while the 10-yr note yield is down three basis points to 2.65%.

Earnings movers dominate S&P 500 on Friday
29-Jul-22 14:25 ET

Dow +258.27 at 32789.78, Nasdaq +208.29 at 12370.85, S&P +52.77 at 4125.27
[BRIEFING.COM] Session highs continue to be taken out in the major averages, the benchmark S&P 500 (+1.30%) still holds firmly in second place.

S&P 500 constituents Grainger (GWW 536.60, +34.72, +6.92%), United Rentals (URI 324.35, +19.52, +6.40%), and Freeport-McMoRan (FCX 31.50, +1.67, +5.60%) pepper the top of today's standings. GWW hits all-time highs today in light of this morning's Q2 beat and upbeat guidance, while URI continues its earnings-based rally from the past few days, and FCX finds solid gains owing in part to the recent outperformance in commodities, and more specifically, copper.

Meanwhile, California-based medical device firm Edwards Lifesciences (EW 100.80, -6.49, -6.05%) is one of the worst-performing components in the index. The stock slides on Friday owing to last night's earnings miss and downside guidance which prompted a downgrade to Hold at Canaccord Genuity.

Gold trims monthly losses on Friday
29-Jul-22 14:00 ET

Dow +218.24 at 32749.75, Nasdaq +183.79 at 12346.35, S&P +47.05 at 4119.55
[BRIEFING.COM] The major averages managed to eke out another session high in the last 30 minutes, the tech-heavy Nasdaq Composite (+1.51%) still comfortably out front.

Gold futures settled $12.60 higher (+0.7%) to $1,781.80/oz, aided once more by a decline in the dollar and treasury yields; the yellow metal added +3.15% this week, trimming July losses to about -1.41%.

Meanwhile, the U.S. Dollar Index is down about -0.3% to $105.99.

Apple eases concerns about supply chain constraints with solid beat and robust iPhone sales (AAPL)
Updated: 29-Jul-22 15:28 ET

Apple (AAPL +4%) is trading nicely higher after reporting Q3 (Jun) results last night.

  • The headline numbers of a nice EPS beat and in-line revs were quite good, especially in light of FX headwinds. Also, last quarter Apple prepared investors to brace for ugly supply chain constraints in JunQ. As it turns out, the constraints were not as bad as expected, which was a big relief for investors.
  • iPhone was the star of the show with revenue coming in much better than expected. Analysts had been expecting a slight yr/yr sales decline, but revenue grew 3% yr/yr to $40.67 bln. Apple set a JunQ record for both revenue and switchers to iPhone. Customers see iPhone as the gold standard for smartphones and they have been raving about the iPhone 13's camera quality with features like cinematic mode and macro photography.
  • iPad also came in better than expected. However, Mac, Wearables and Services were a bit light (see 16:39 InPlay for specific comparisons). Apple cited supply constraints and FX headwinds for these categories not performing quite as well as expected.
  • Looking ahead to SepQ, Apple chose not to provide revenue guidance, which was a bit of a letdown. However, it did say it expects yr/yr revenue growth will accelerate during SepQ relative to JunQ. More importantly, it expects supply constraints to be lower in SepQ than what it experienced during JunQ. However, gross margin guidance of 41.5-42.5% is a bit below the 43.2% achieved in JunQ.
The key takeaway from this report is that the JunQ supply chain constraints turned out to be less of an issue than the pessimistic view Apple presented on its last call. And SepQ should be even better than JunQ. This is a huge relief for investors as Apple's commentary on the last call was about as bearish we have ever heard them on supply chain issues. The other standout in this report was robust iPhone sales, and that is despite the fact that Apple is likely to launch iPhone 14 in just a few months. Overall, Apple does what it does. It handled a tough supply situation quite well and reminded investors why it is such a great company that cannot be held down for long.

Intel adds execution issues and market share losses to list of headwinds hurting performance (INTC)
Updated: 29-Jul-22 13:41 ET

Heading into Intel's (INTC) lousy Q2 earnings report, many signs were pointing to a difficult quarter for the chip maker, including discouraging commentary from CFO David Zinsner in early June that the macroeconomic climate is weaker than expected. Those comments, which were made at a Bank of America conference, preceded a soft Q4 outlook from Micron (MU) on June 30 that was due to a sharp slowdown in the PC and laptop market. MU's downside guidance didn't necessarily come as a surprise, though, because consumer electronics retailer Best Buy (BBY) previously posted lackluster quarterly results that included an 8.0% decline in comps.

All of this evidence strongly indicated that INTC's Client Computing Group (CCG) will report bleak results this quarter. That indeed was the case as CCG revenue plunged by 25% yr/yr to $7.7 bln. With CCG revenue up by a rather pedestrian 6% in the year-earlier quarter, INTC can't fall on the excuse that it faced an unfavorable yr/yr comp. Instead, the steep downturn is tied to a combination of external and internal issues.

  • It's well-understood that PC and laptop sales have stalled after experiencing a boom during the pandemic as the work-from-home transition unfolded. Relatedly, INTC now projects the PC total addressable market to contract by about 10% this year.
  • However, INTC's troubles run deeper than just a correction in the PC market. It's also clear that the company is losing market share to rivals like Advanced Micro Devices (AMD) and NVIDIA (NVDA). In fact, CEO Pat Gelsinger admitted as much during the earnings conference call, stating that the company's downwardly revised FY22 revenue guidance of $65-$68 bln (from $76 bln) is partly attributable to market share losses in the data center market.
  • On that note, the biggest disappointment from the report is that revenue in the Datacenter and AI Group (DCAI) segment dropped by 16% to $4.6 bln. This is a rather stunning development considering that MU reported Q3 sales growth of 50% in its data center market about a month ago.
    • Demand has certainly slowed since MU's report, but not to the degree that INTC should be reporting a significant yr/yr decline in revenue. According to Gelsinger, delayed server chip releases caused some customers to turn to competitors, hurting INTC's sales.
  • Execution issues and macroeconomic headwinds not only dragged revenue down, but they also applied further pressure on gross margin. The company was already facing severe margin compression due to its strategy to expand manufacturing capacity. Recall that last October, INTC said that it expects non-GAAP gross margin to dip to 51-53% over the next 2-3 years before improving. For some context, FY21 non-GAAP gross margin was 57.7%.
    • After contracting by 5.7 percentage points last quarter to 53.1%, gross margin fell off a cliff this quarter, plummeting by 15 percentage points yr/yr to 44.8%.
    • In addition to cost pressures related to its manufacturing expansion, the decline in higher ASP server chip sales also weighed heavily on margins.
The only thing investors can hang their hats on is the premise that this may be a "kitchen sink" quarter in which INTC aired out all of the bad news. Gelsinger tried to sell analysts on that idea during the earnings call, stating that new products and improved execution will turn the tide for the struggling company. However, based on the stock action, it's apparent that investors are losing their patience with its turnaround efforts.

Roku gets disconnected after posting dismal Q2 report as TV ad spending dries up (ROKU)
Updated: 29-Jul-22 11:14 ET

A tumultuous year for Roku (ROKU) has become even more treacherous after the streaming company reported dismal Q2 results and provided a bleak outlook for Q3. In fact, business has weakened so much that the company withdrew its FY22 outlook, which previously called for revenue growth of 35%.

In the wake of rough earnings reports from Snap (SNAP), Meta Platforms (META), and, to a lesser degree, Alphabet (GOOG), few expected ROKU to impress with its Q2 performance. From those earnings reports, it was clear that advertisers had pulled back sharply on spending. However, ROKU's disastrous quarter is catching even those with a bearish view on the stock off-guard, as evidenced by the stock's nosedive today.

Putting the decline in advertising spending into perspective, ROKU likened the pullback to conditions seen at the start of the pandemic in 2020. The speed at which marketers reined in marketing investments really stands out. In the Q2 Shareholder's Letter, ROKU noted that many marketers "abruptly curtailed or paused advertising spending in the ad scatter market during the latter half of Q2." As a reminder, Platform revenue accounts for roughly 80-90% of ROKU's total revenue. Within the Platform segment, advertising revenue is the largest component.

The impact from this sudden downturn is reflected across a few key metrics.

  • Total revenue of $764 mln badly missed expectations and grew by just 18%, representing ROKU's slowest top-line growth in many years. Even worse, its Q3 revenue guidance of $700 mln came up short of estimates by about $200 mln, a pretty staggering amount. If ROKU's guidance is accurate, the company's Q3 growth rate will dip to a paltry 3%.
  • ROKU shared a survey by Advertiser Perceptions that estimated that 47% of advertisers in the U.S. made in-quarter pauses on ad spending on TV streaming, 44% on digital video, and 42% on legacy pay TV.
  • Platform gross margin eroded by 8.8 percentage points to 56.0%, which is problematic because ROKU relies on the Platform segment to generate most of its profits. The Player segment (connected TVs, hardware) is generally a loss-leader, and that's especially the case recently as ROKU absorbs higher production costs to insulate customers from inflationary pressures.
On that note, ROKU's troubles aren't limited to the advertising business. Player revenue fell by 19% to $91.2 mln due to softening consumer discretionary spending, higher TV inventory levels at major retailers, and ongoing supply chain issues. The company's efforts to protect customers from rising costs compounded the problem with Player gross margin plunging by 18 percentage points to (24.1)%.

There's really no way to sugar coat this quarterly report. It was a mess, and the market is reacting by taking shares to new all-time lows. The only positive we can point to is that the long-term opportunity in TV streaming is still strong and that advertising revenue can swing higher just as quickly as it faded. However, even this observation is clouded by the fact that competition for ROKU is becoming even more fierce with Disney (DIS) and Netflix (NFLX) planning to launch ad-supported plans in the near future.

Amazon is in Prime position with Q2 result, bucking the trend for some ugly reports this week (AMZN)
Updated: 29-Jul-22 10:46 ET

Amazon (AMZN +12%) is surging today following its Q2 earnings report last night. Revenue was above the high end of prior guidance and the mid-point of guidance was above analyst expectations. AMZN did report a GAAP loss, but you can disregard that because it includes an unusual item.

  • The more important metric for profitability is operating income, which at $3.317 bln was above prior guidance of $(1)-3 bln. It is frustrating that AMZN does not provide an adjusted EPS number, but that makes the comparison to operating income all the more important because it is a clean apples-to-apples comparison as the unusual charge is below the operating income line. The one slight negative is that the Q3 operating income guidance of $0-3.5 bln is below analyst expectations.
  • What stands out to us was the robust performance from its online sales segment. With WMT guiding lower, SHOP reporting a miss, and BBY lowering comps this week, we were bracing for weak results. However, AMZN performed well and that was despite Prime Day switching to Q3 this year from Q2 in 2021.
  • AWS was a bright spot, with revenue rising 33% yr/yr to $19.75 bln. The top line growth has certainly moderated in recent quarters, even at constant currency (CC). However, this is not unusual as AWS grows in size. Also, MSFT's Azure is seeing a similar pattern. AWS continues to grow at a fast pace, and AMZN believes it is still in the early stages of enterprise and public sector adoption of the cloud.
  • Advertising Services segment revenue rose 18% yr/yr (+21% CC) to $8.757 bln, a bit below Q1's CC growth of +25%. However, that is quite good relative to Facebook, which posted its first ever drop in revenue. Ad growth at Google also slowed and look at the ugly reports from SNAP and ROKU this week. We think this result is quite impressive in a deteriorating online ad environment.
  • One of the main criticisms with AMZN is that it overexpanded capacity/workers during the pandemic, when it was caught flat-footed. To its credit, AMZN has since slowed its 2022-23 operations expansion plans. This should help offset the inflationary pressures AMZN is facing, namely higher fuel, trucking, air/ocean shipping rates and higher energy costs at its data centers.
Overall, this was a great report. Not so much for the raw numbers blowing us away, but AMZN certainly posted impressive results at every segment. Given all the recent bad news from retailers and ad-related companies this week, we were bracing for a rough result. But we tip our cap to AMZN for a surprisingly good quarter and the stock has nearly closed the April gap lower.

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