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Technology Stocks : Semi Equipment Analysis
SOXX 426.09-2.0%Feb 3 4:00 PM EST

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To: Return to Sender who wrote (88897)8/25/2022 4:32:08 PM
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Market Snapshot

Dow 33091.77 +120.66 (0.37%)
Nasdaq 12556.05 +124.56 (1.00%)
SP 500 4172.01 +31.17 (0.75%)
10-yr Note

NYSE Adv 2481 Dec 625 Vol 729 mln
Nasdaq Adv 2913 Dec 1511 Vol 4.2 bln

Industry Watch
Strong: Materials, Energy, Communication Services, Industrials, Financials

Weak: --

Moving the Market
-- Waiting for Fed Chair Powell to speak tomorrow

-- Mixed earnings reports since yesterday's close

-- Broad buying interest after recent weakness

Closing Summary
25-Aug-22 16:25 ET

Dow +322.55 at 33293.66, Nasdaq +207.74 at 12639.23, S&P +58.35 at 4199.19
[BRIEFING.COM] The stock market had a positive bias for the entirety of today's session but remained in a narrow range until the final 30 minutes of trade, where the major indices pushed to new session highs. Today's buying was fueled by the emerging hope that Fed Chair Powell's comments tomorrow regarding the rate-hike path will align with what market participants want to hear. The 10-yr note yield moving markedly lower was another support factor for today's buying effort.

Mixed earnings results since yesterday's close were met with mixed price action. Salesforce (CRM 173.91, -6.10, -3.4%) was a limiting factor for the Dow today after disappointing guidance while other growth stocks got a boost from the drop in the 10-yr yield and some relatively impressive results from Snowflake (SNOW 196.28, +36.79, +23.1%).

NVIDIA's (NVDA 179.13, +6.91, +4.0%) below-consensus Q3 revenue guidance was met with buying interest as some participants saw the weak guidance as an indication the bottom is near for the semiconductor industry. The PHLX Semiconductor Index closed with a 3.7% gain.

The positive bias today left all 11 S&P 500 sectors in the green with gains ranging from 0.5% (consumer staples) to 2.3% (materials). The risk-on tone had defensive sectors, utilities (+0.6%), consumer staples (+0.5%), and health care (+1.1%), trailing the broader market.

Energy (+0.8%) also fell towards the bottom of the pack amid falling oil prices. WTI crude oil futures fell 1.9% to $93.08/bbl.

The Treasury market was mixed with the 2-yr note yield rising two basis points to 3.39% while the 10-yr note yield fell eight basis points to 3.03%. Notably, several Fed officials commented that the Fed has more work to do in fighting inflation. St. Louis Fed President Bullard (FOMC voter), for one, thinks inflation could be more persistent than many on Wall Street expect and that this risk is underpriced in the markets.

Looking ahead to Friday, market participants will receive the July PCE Price Index ( consensus 0.1%; prior 1.0%) and core PCE Price Index ( consensus 0.3%; prior 0.6%) included in the Personal Income ( consensus 0.6%; prior 0.6%) and Spending Report ( consensus 0.4%; prior 1.1%) at 8:30 a.m. ET. July Advanced Intl. Trade in Goods (prior -$98.2B), Advanced Retail Inventories (prior 2.0%), and Advanced Wholesale Inventories (prior 1.9%) are also out at 8:30 a.m. ET. The August University of Michigan Consumer Sentiment final reading ( consensus 55.1; prior 55.1) is out at 10:00 a.m. ET.

The focal point after the PCE Price Index, though, will be Fed Chair Powell's speech at 10:00 a.m. ET at the Jackson Hole Economic Policy Symposium.

Reviewing today's economic data:

  • Initial jobless claims for the week ending August 20 decreased by 2,000 to 243,000 ( consensus 253,000) while continuing jobless claims for the week ending August 13 decreased by 19,000 to 1.415 million.
    • The key takeaway from this report is the improvement in initial claims. A reading below 250,000 certainly indicates that labor market conditions remain tight, which means the potential for sticky wage-based inflation pressures also remains tight, and that is unlikely to be a comforting indication for Fed officials.
  • The revised Q2 GDP report showed real GDP decreased at an annual rate of 0.6% versus the advance estimate of -0.9%, with an upward revision to consumer spending helping. The Q2 GDP Price Deflator, though, was revised up to 8.9% from 8.7%.
    • The key takeaway from the report is simply in the understanding that it was not as bad as first reported, but given its dated nature (we're almost two-thirds of the way through Q3), it cannot be considered a market-moving report.
  • Weekly EIA Natural Gas Inventories showed a build of 60 bcf after last week's build of 18 bcf.
Dow Jones Industrial Average: -8.4% YTD
S&P 400: -9.3% YTD
S&P 500: -11.9% YTD
Russell 2000: -12.5% YTD
Nasdaq Composite: -19.2% YTD

Market trends higher into the close
25-Aug-22 15:30 ET

Dow +167.56 at 33138.67, Nasdaq +134.96 at 12566.45, S&P +34.65 at 4175.49
[BRIEFING.COM] Major indices are trending somewhat higher into the close.

After the close, Affirm (AFRM), Dell (DELL), Elastic (ESTC), Gap (GPS), Marvell (MRVL), Ulta Beauty (ULTA), VMware (VMW), and Workday (WDAY) all report earnings.

Looking ahead to Friday, market participants will receive the July PCE Price Index ( consensus 0.1%; prior 1.0%) and core PCE Price Index ( consensus 0.3%; prior 0.6%) included in the Personal Income ( consensus 0.6%; prior 0.6%) and Spending Report ( consensus 0.4%; prior 1.1%) at 8:30 a.m. ET. July Advanced Intl. Trade in Goods (prior -$98.2B), Advanced Retail Inventories (prior 2.0%), and Advanced Wholesale Inventories (prior 1.9%) are also out at 8:30 a.m. ET. The August University of Michigan Consumer Sentiment final reading ( consensus 55.1; prior 55.1) is out at 10:00 a.m. ET.

Market remains moving sideways
25-Aug-22 15:00 ET

Dow +120.66 at 33091.77, Nasdaq +124.56 at 12556.05, S&P +31.17 at 4172.01
[BRIEFING.COM] The market hasn't broken out of its narrow trading range today. Notably, every S&P 500 sector remains in positive territory.

Earlier, Saint Louis Fed President Bullard (FOMC voter) said in a CNBC interview he thinks inflation will be more persistent than many on Wall Street expect, adding that risk is underpriced in markets.

WTI crude oil futures are near the lows of the day, down 2.0% to $93.05/bbl. Natural gas futures are up 0.4% to $9.34/mmbtu.

The Treasury market is mixed with the 2-yr note yield up two basis points to 3.39% while the 10-yr note yield is down eight basis points to 3.03%.

NetApp gains following earnings
25-Aug-22 14:30 ET

Dow +136.41 at 33107.52, Nasdaq +143.18 at 12574.67, S&P +34.13 at 4174.97
[BRIEFING.COM] The benchmark S&P 500 (+0.82%) sits firmly in second place on Thursday afternoon.

S&P 500 constituents NetApp (NTAP 77.87, +5.05, +6.93%), DISH Network (DISH 18.33, +0.83, +4.74%), and Micron (MU 60.83, +2.52, +4.32%) dot the top of today's standings. NTAP gains following earnings, while DISH and MU show relative strength related to their moving averages.

Meanwhile, Molson Coors Brewing (TAP 55.65, -0.97, -1.71%) is one of today's worst performers, down alongside other alcoholic bev names like Anheuser-Busch InBev (BUD 51.21, -0.78, -1.50%) and Constellation Brands (STZ 256.44, -1.02, -0.40%).

Gold notches third straight gain on Thursday
25-Aug-22 14:00 ET

Dow +131.63 at 33102.74, Nasdaq +142.14 at 12573.63, S&P +32.24 at 4173.08
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+1.14%) holds the strongest gains.

Gold futures settled $9.90 higher (+0.6%) to $1,771.40/oz as the dollar and treasury yields both retreat.

Meanwhile, the U.S. Dollar Index is down now about -0.2% to $108.42.

Splunk in a funk as downgraded Cloud ARR guidance overshadows upside quarterly results (SPLK)

For the fifth consecutive quarter, big data company Splunk (SPLK) easily surpassed EPS and revenue expectations, demonstrating that its transition to a cloud-based model is taking hold and is yielding solid results. Nowhere is this more evident than in SPLK's cloud revenue growth rate and its cloud dollar-based net retention rate, which came in at +59% and 129%, respectively, for Q2.

As the company's cloud migration progresses, its margins are also improving at a rapid pace, leading to significant strides in profitability. Driven by the increasing scale and elasticity of its cloud platform, along with some expense optimization efforts, SPLK's non-GAAP operating margin swung to a positive 3.6% from (8.5%) in the year-earlier quarter.

Unfortunately, all of this good news is being overshadowed by the company's reduced FY23 outlook for total ARR (annual recurring revenue) and cloud ARR. Arguably, ARR is the most important metric for SPLK since it's a good gauge for the health of its subscription-based business. It's viewed as an accurate predictor of future growth because it measures the amount of revenue that a company expects to be repeatable.

With that in mind, SPLK's downgraded forecast for total ARR and cloud ARR of $3.65 bln and $1.8 bln, respectively, compared to its prior outlook of $3.90 bln and $2.0 bln, is creating angst about its growth prospects for the back half of its fiscal year.

  • In Q2, total ARR grew by 27% yr/yr to $3.33 bln, while cloud ARR was up by 55% to just over $1.5 bln. Both of these figures missed SPLK's internal expectations.
    • During the earnings conference call, CEO Gary Steele explained that the shortfall was due to a slowing number of cloud migrations and expansions as customers tightened their spending. This more cautious stance prompted some customers -- especially late in the quarter -- to opt for shorter-term commitments. In turn, this resulted in lower-than-expected cloud ARR.
  • Similarly, RPO (Remaining Performance Obligations) Bookings increased by just 17% yr/yr versus growth of 32% last quarter. A slowdown in deployments and a two-month decrease in contract duration compared to last year weighed on growth.
  • What's especially disconcerting about the deceleration in growth and weaker outlook is that SPLK also has significant exposure to the robust cybersecurity market. In fact, Steele noted that security is SPLK's primary customer use case.
    • Although Palo Alto Networks (PANW) isn't necessarily a direct competitor of SPLK's, its impressive quarterly report from earlier in the week highlighted the resiliency and strength of cybersecurity.
    • Steel insisted during the earnings call that new customer wins remained healthy and consistent relative to the first half of the year. However, it's likely that concerns about market share losses are creeping into some investors' minds.
    • On that note, Nutanix (NTNX), which is a primary competitor of SPLK's, reports earnings next Wednesday. If NTNX provides an upbeat outlook, then those market share concerns will gain more traction.
SPLK has come a long way over the past couple of years. The company's cloud products are better aligned with customers' needs, it has a more predictable revenue stream, and its margins are moving in the right direction. One disappointing quarter doesn't change that, and the company's longer-term outlook still looks compelling. In this market environment, though, companies aren't afforded the benefit of the doubt, as illustrated by the stock's plunge lower.

Snowflake puts a freeze on growth concerns as it beats sales expectations and lifts guidance (SNOW)

Snowflake (SNOW) is experiencing a flurry of buying activity today after the data analytics company reported much stronger than expected growth in Q2, while also raising its FY23 product revenue guidance. Product revenue, which comprises the majority of SNOW's total revenue, is the key metric that's fallen under the microscope as SNOW's growth rates decelerate. With many companies pulling back on spending lately due to macroeconomic headwinds, there was concern that product revenue growth was bound for an even steeper drop-off than SNOW has recently faced.

That concern quickly turned into astonishment after SNOW's results were released, showing that product revenue growth remained virtually even with the last quarter at 83%. To rewind, Q1 growth came in at 84%, down from 102% in 4Q22, and from 110% in 3Q22. The company itself was anticipating a further slowdown, guiding for Q2 product revenue of $435-$440, equating to yr/yr growth of 71-73%. SNOW ultimately crushed its own forecast, and analysts' estimates, by generating product revenue of $466.3 mln.

During last quarter's earnings conference call, CFO Michael Scarpelli commented that some customers were facing a more challenging environment, causing them to consume less on SNOW's platform than originally anticipated. In particular, he highlighted consumer facing cloud companies as a soft spot. Some of these customers outperformed SNOW's expectations in Q2, including many in the small and medium-sized business space. By vertical, the financial services industry was the strongest and was mainly responsible for the upside results. Advertising, media, entertainment, and technology all performed in line with SNOW's expectations.

Drilling down further on SNOW's earnings report, we find that the news is mostly bullish, although there are a couple blemishes.

  • The company picked up its pace in terms of adding new large customer accounts. After adding 11 new customers with product revenue greater than $1 mln last quarter, SNOW boosted that number by 40 in Q2 for a total of 246. SNOW believes that its success in expanding its large customer base indicates that the largest organizations in the world are prioritizing its platform.
  • Net revenue retention rate remained very robust at 171%, barely budging from last quarter's mark of 174%. SNOW's consumption-based model continued to work in its favor, even as macroeconomic conditions became more volatile.
  • Non-GAAP operating margin continues to move in the right direction, coming in at 4%, compared to flat last quarter and -8% in the year-ago period. Healthy top-line growth is creating operating leverage as expenses become a smaller percentage of total revenue. The company also credits increasing scale in its public cloud data centers as a positive contributor to margins.
  • On a GAAP basis, though, SNOW's performance looks much less impressive. GAAP loss per share widened to $(0.70) from $(0.64) a year earlier, missing analysts' expectations. The primary culprit is stock-based compensation, which totaled over $186 mln in Q2.
  • SNOW's improved product revenue outlook for FY23 alleviated some fears, but it's not as impressive as it may seem. In Q2, SNOW outperformed its product revenue guidance by about $29 mln at the midpoint. However, the company only raised its FY23 product revenue outlook by about $17 mln at the midpoint. Therefore, it can be argued that the company essentially lowered its forecast for 2H23.
The main takeaway is that SNOW's growth rate did not spiral sharply lower as some had feared, demonstrating that businesses are still spending generously on its platform, even as economic conditions waver. SNOW's meteoric valuation, with a forward P/S approaching 16x, still poses a major risk to the stock. For now, though, the story revolves around SNOW's resilient growth and its improving profitability on a Non-GAAP basis.

Salesforce under pressure today on weak guidance and deals taking longer to close (CRM)

Salesforce (CRM -7%) is trading lower and is the notable Dow 30 laggard today despite reporting good size EPS upside for Q2 (Jul) last night and despite a $10 bln share repurchase authorization. The problem is that this is now CRM's fourth consecutive quarter where it has issued downside guidance for the next quarter. While we can write off some of it to CRM's conservative nature, this guidance felt different because it was accompanied by some bearish commentary on the call, which was more pronounced than recent guide downs.

  • On the positive side, CRM got back to its long held pattern of reporting double digit EPS beats after two small beats in Q1 and Q4. Also, its major segments performed well with Sales Cloud revenue growing 15% yr/yr. Service Cloud grew 14%, including customer wins with the US Dept of Veterans Affairs, Workday, and Uber. Its Marketing and Commerce Clouds both grew 17%, including significant expansions with Live Nation, L'Oréal, and Tapestry. Another positive is that CEOs are full steam ahead on digital transformations. They remain their number one priority.
  • On the not so good side, CRM guided Q3 (Oct) and full year EPS and revenue below expectations. Specifically, the company says it started to see more measured buying behavior from customers beginning in July. This resulted in stretched sales cycles, some deals are taking longer to close and deals are being increasingly inspected by higher levels of management. This behavior was most pronounced in North America and major European markets.
  • In addition, CRM saw slowing in its create and close, Slack self-serve, and SMB businesses, which tend to be leading macro indicators. CRM is deeply involved in its customers' sales transactions so it really has its thumb on the pulse of their businesses. So it knows what metrics tend to lead to slowdowns, and CRM is seeing that now.
  • While we never like to see deals slowing, what made this worse was the timing of it. It started to pick up in July, which was the last month of the quarter. So we have to assume that it is just getting started. CRM expects these trends will continue in the near-term and that is reflected in the guidance. In particular, its Marketing and Commerce Clouds are seeing GMV growth decelerate as consumers' online purchasing behavior settles back down to pre-pandemic norms.
Overall, we think investors have become accustomed to CRM low balling guidance for the next quarter, then reporting nice upside. What makes this different is the commentary on the call. We never like to hear about deals taking longer to close. That really spooks investors. The big share repurchase news was great to hear, but the focus is on the underlying business. Finally, cloud computing companies tend to have July quarter ends, so they all report after the usual Q2 cycle. We have not heard a lot about deals slowing. This report stands in contrast to Palo Alto Network's (PANW) robust report this week. We would be cautious on CRM in the near term.

NVIDIA displays strength today as investors hope the worst of its woes will shake out in Q3

NVIDIA's (NVDA +3%) downbeat Q3 (Oct) revenue guidance ignited a slight sell-the-news reaction to start today's trading session as it made clear the issues from Q2 (Jul), notably weak Gaming and Professional Visualization demand, would persist. Recall that the chipmaker already provided Q2 numbers earlier this month, so all eyes were on its Q3 forecast. NVDA expects Q3 revs to fall yr/yr for the first time since 3Q19, guiding to sales of $5.78-6.02 bln, well below consensus.

Although Q3 projections were bleak when stacked against estimates, shares are holding up relatively well today. We think this is largely due to optimism that the worst of NVDA's issues should shake out by the end of Q3.

NVDA's strategy is to reduce Gaming sell-in (sales to distributors) over the next couple of quarters to allow channel inventory to correct ahead of the company's next generation of products. Meanwhile, its Hopper architecture, which is NVDA's next-gen platform for data centers, is in full production and the company expects to ship "substantial" Hoppers in Q4 (Jan). Also, regarding NVDA's Data Center segment, which hit a snag in Q2 due to a slowdown in China, the company mentioned that this deceleration cannot last indefinitely given the sheer number of people utilizing the cloud. NVDA also commented that its Automotive segment hit an inflection point in Q2, with growth to continue into Q3 and Q4.

With investors hopeful that most of NVDA's woes are in the rear-view mirror, the company's Q2 numbers are being mainly overlooked.

  • As expected, revs grew just 3% yr/yr to $6.7 bln. Gaming weighed on overall sales growth as demand softened considerably, sending revs to tumble 33% yr/yr to $2.04 bln. Along those same lines, Professional Visualization also took a spill, falling 4% to $496 mln.
    • Due to NVDA's reduction in the sell-in over the next couple of quarters, the company expects Gaming revenue to remain a weak point in Q3. This echoes thoughts from rival Advanced Micro (AMD), which predicted a challenging gaming market in Q3, but remains focused on executing its GPU road map.
    • NVDA still believes long-term gaming trends remain strong, especially after the pandemic spurred a renewed demand for gaming as a form of entertainment and social connectivity.
  • Data Center sales jumping 61% yr/yr and 2% sequentially to $3.81 bln was a positive development. However, component shortages and a slowdown of investment from Chinese hyperscalers caused growth to be lighter than NVDA expected.
    • NVDA remains confident that demand is still there, affirming what we heard from Taiwan Semi (TSM) last month, which expects high-performance computing (HPC) to be the main engine of its long-term growth.
    • Also, even though Q3 revs are expected to fall yr/yr, Data Center sales will see positive mid-single-digit growth sequentially, a minor acceleration from the qtr/qtr growth seen in Q2.
As expected, Q2 was a challenging quarter, and Q3 is not shaping up to be much better. However, today's price movement indicates that the market is not expecting NVDA's troubles to worsen after Q3 and is mostly applauding its strategy to return to growth in subsequent quarters. We remain bullish on NVDA for the long term and think current price levels offer an attractive entry point. Nevertheless, with a premium valuation of around 39x forward earnings, shares may undergo some turbulence in the near term.

Toll Brothers' earnings report looks like a fixer upper, but closer look reveals some promise (TOL)

After a spate of recent bad news for the housing market, expectations for Toll Brothers' (TOL) Q3 earnings report were subdued, as evidenced by the stock's 7% drop since last week. As anticipated, the luxury home builder encountered a challenging environment as rising mortgage rates, macroeconomic uncertainty, and a volatile stock market weighed on demand. Consequently, deliveries decreased by 7% yr/yr to 2,414, causing TOL to come up short versus Q3 revenue expectations. Perhaps even more troubling, quarterly cancellations as a percentage of signed contracts in the quarter skyrocketed to 13.0% from 3.1% in the year-ago quarter.

That surge in cancellations came even as TOL ramped up its incentives for home buyers. Specifically, the company disclosed that August incentives averaged about $30K, compared to $22K in July, and $15K in June. The more generous incentives had a limited effect on cancellations, though, and they also didn't spark much demand -- at least not initially. Net signed contracted homes in Q3 plunged by 60% yr/yr to 1,266. Furthermore, TOL trimmed its FY22 delivery guidance for the second time this year. After lowering its delivery forecast to 11,000-11,500 from 11,250-12,000 last quarter, TOL is now guiding for deliveries of 10,000-10,300.

Despite the weakening demand and revenue miss, TOL still managed to beat EPS expectations. It's worth noting that the size of the beat was TOL's smallest over the past ten quarters. However, the earnings outperformance is still a positive takeaway because it highlights the company's ability to drive strong margins in a tough market. Even while facing labor shortages, rising raw material costs, and a shift towards a buyer's market, adjusted home sales gross margin expanded by 230 bps yr/yr to 27.9%. Although the company became more promotional later in the quarter, the average price per home in backlog grew by 17.9% yr/yr to $1.04 mln, pushing margins higher.

The improved home sales gross margin, and accompanying EPS beat, seem to be the lone bright spots in an otherwise dismal report. Therefore, it seems strange that TOL is trading higher, but there are a couple explanations for the stock's strength.

  • Most importantly, CEO Douglas Yearley commented that TOL is seeing signs of increased demand in recent weeks as sentiment improves and as buyers return to the market. He added that average weekly deposits during the first three weeks of August were up 25% versus July. This is an encouraging development, indicating that the easing of inflationary pressures is boosting home buyer sentiment.
  • TOL is projecting adjusted home sales gross margin to increase by another 130 bps sequentially to 29.2% in Q4. That bodes well for TOL's earnings expectations, especially if deliveries begin to accelerate.
Like a teardown home that's in need of major renovations, TOL's quarterly report had plenty of blemishes and delinquencies. However, also like a teardown home, there is a promise for better days ahead, thanks to a recent strengthening of demand.
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