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Technology Stocks : Semi Equipment Analysis
SOXX 238.56+2.0%May 24 4:00 PM EDT

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To: Return to Sender who wrote (88939)9/1/2022 11:46:50 PM
From: Return to Sender2 Recommendations

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Market Snapshot

briefing.com

Dow 31539.97 +27.58 (0.09%)
Nasdaq 11698.69 -117.48 (-0.99%)
SP 500 3945.86 -9.21 (-0.23%)
10-yr Note



NYSE Adv 887 Dec 2202 Vol 906 mln
Nasdaq Adv 1463 Dec 2549 Vol 4.7 bln


Industry Watch
Strong: Utilities, Health Care, Consumer Staples, Communication Services

Weak: Energy, Materials, Information Technology


Moving the Market
-- Carryover negative disposition from recent sessions

-- Ability of mega cap stocks to rebound from larger losses

-- Rising Treasury yields

-- Renewed growth concerns from China's new lockdown and global manufacturing PMI readings showing contractions







Closing Summary
01-Sep-22 16:30 ET

Dow +145.99 at 31658.38, Nasdaq -31.08 at 11785.09, S&P +11.85 at 3966.92
[BRIEFING.COM] The stock market opened on a weak note, undercut by rising Treasury yields and continuing growth concerns. The major indices drifter lower through the morning trade but rebounded in the afternoon from a short-term oversold condition.

The sentiment shift was fueled by price action in the S&P 500, which tested its 3,900 level at the intraday low, found support there, and pushed into positive territory by the close. The bounce was driven by a rebound in the mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK), down as much as 1.9% in the morning trade, ended the day up 0.2%.

Despite the afternoon recovery, it was still a relatively weak showing for the market today. At midday, decliners led advancers by a nearly 6-to-1 margin at the NYSE and a greater than 3-to-1 margin at the Nasdaq. The margins came in somewhat by the close, but still show a strong skew towards declining issues. Decliners led advancers by a 5-to-2 margin at the NYSE and a 5-to-3 margin at the Nasdaq.

The S&P 500 sectors were led by utilities (+1.4%) and health care (+1.7%), reflecting the continued risk-off mentality. Energy (-2.3%), materials (-1.4%), and information technology (-0.5%) were the lone laggards in negative territory. Energy was dragged down by oil prices with WTI crude oil futures falling 3.3% to $86.45/bbl; materials fell on demand concerns after China locked down Chengdu (a city of 21.2 million residents) for Covid testing; and information technology was affected by weak semiconductor stocks.

The PHLX Semiconductor Index closed down 1.9%, but it had been down as much as 4.8%. NVIDIA (NVDA 139.37, -11.57, -7.7%) logged the steepest losses after after news broke that the government is imposing a new license requirement for sales of A100 and H100 chips to China and Russia.

Growth stocks were a weak spot today after some disappointing guidance from Okta (OKTA 60.60, -30.80, -33.7%) and MongoDB (MDB 241.11, -81.75, -25.3%) and with the rise in longer dated Treasury yields. The Russell 3000 Growth Index closed with a modest loss while the Russell 3000 Value Index closed up 0.2%.

Treasury yields settled near session highs with the 2-yr note yield pushing above 3.50%, up eight basis points to 3.52%. The 10-yr note yield rose 13 basis points to 3.27%.

Looking ahead to Friday, market participants will receive the closely watched August Jobs Report at 8:30 a.m. ET. That includes Nonfarm Payrolls (Briefing.com consensus 300,000; prior 528,000), Nonfarm Private Payrolls (Briefing.com consensus 280,000; prior 471,000), Average Hourly Earnings (Briefing.com consensus 0.4%; prior 0.5%), Unemployment Rate (Briefing.com consensus 3.5%; prior 3.5%), and Average Workweek (Briefing.com consensus 34.6; prior 34.6). At 10:00 a.m. ET, July Factory Orders (Briefing.com consensus 0.2%; prior 2.0%) will be released.

Reviewing today's economic data:

  • The August ISM Manufacturing Index was unchanged from July at 52.8% (Briefing.com consensus 52.0%), yet that was stronger than expected. A number above 50.0% is indicative of expansion. August marked the 27th consecutive month of expansion in the manufacturing sector, although the July and August readings were the lowest since June 2020.
    • The key takeaway from the report is that it connotes a moderation in manufacturing activity that is coinciding with a welcome, and sharp, improvement in the pace of price increases for raw materials.
  • The IHS Markit Manufacturing PMI rose to 51.5 in the final reading for August from 51.3 in the preliminary reading. July's final reading was 52.2.
  • Initial claims for the week ending August 27 decreased by 5,000 to 232,000 (Briefing.com consensus 250,000) while continuing jobless claims for the week ending August 20 increased by 26,000 to 1.438 million. There were downward revisions for initial claims and continuing claims in the prior week, too.
    • The key takeaway from the report is that the low level of initial claims is indicative of a tight labor market that continues to run afoul of the Fed's effort to induce softer labor market conditions.
  • Q2 productivity decreased 4.1% (Briefing.com consensus -4.6%) with the revised report while unit labor costs increased 10.2% (Briefing.com consensus 10.7%) versus a 10.8% increase seen in the advance report.
    • The key takeaway from the report is that nonfarm productivity decreased 2.4% from the same quarter a year ago, which is the largest decline in a series that began in the first quarter of 1948; meanwhile, unit labor costs saw the largest four-quarter increase (9.3%) since the first quarter of 1982.
  • Total construction spending declined 0.4% month-over-month in July (Briefing.com consensus -0.1%) following an upwardly revised 0.5% decline (from -1.1%) in June. Total private construction was down 0.8% month-over-month while total public construction increased 1.5%. On a year-over-year basis, total construction spending was up 8.5%.]
    • The key takeaway from the report is the continued downturn in residential spending, which featured a 4.0% decline in new single family construction. The latter is consistent with weak homebuilder sentiment, which has deteriorated on the back of higher mortgage rates crimping affordability for prospective buyers.
  • Weekly natural gas inventories increased by 61 bcf after increasing by 60 bcf during the previous week.
Dow Jones Industrial Average: -12.9% YTD
S&P 400: -15.6% YTD
S&P 500: -16.8% YTD
Russell 2000: -18.2% YTD
Nasdaq Composite: -24.7% YTD


Market near highs ahead of the close
01-Sep-22 15:30 ET

Dow -8.70 at 31503.69, Nasdaq -117.98 at 11698.19, S&P -11.49 at 3943.58
[BRIEFING.COM] The major indices are little changed in the last half hour.

Energy complex futures settled mixed with WTI crude oil futures falling 3.3% to $86.45/bbl while natural gas futures rose 1.14% to $9.24/mmbtu.

After the close, Broadcom (AVGO), lululemon athletica (LULU), and JOANN Inc. (JOAN) report earnings.

Looking ahead to Friday, market participants will receive the closely watched August Jobs Report at 8:30 a.m. ET. That includes Nonfarm Payrolls (Briefing.com consensus 300,000; prior 528,000), Nonfarm Private Payrolls (Briefing.com consensus 280,000; prior 471,000), Average Hourly Earnings (Briefing.com consensus 0.4%; prior 0.5%), Unemployment Rate (Briefing.com consensus 3.5%; prior 3.5%), and Average Workweek (Briefing.com consensus 34.6; prior 34.6). At 10:00 a.m. ET, July Factory Orders (Briefing.com consensus 0.2%; prior 2.0%) will be released.


Market remains near session highs
01-Sep-22 15:00 ET

Dow +27.58 at 31539.97, Nasdaq -117.48 at 11698.69, S&P -9.21 at 3945.86
[BRIEFING.COM] The major indices have seen some up and down price action, but remain near session highs.

As the market trended higher, communication services (+0.4%) joined utilities (+1.4%), health care (+1.2%), and consumer staples (+0.4%) in positive territory.

The CBOE Volatility Index drifter lower at the same time, up 0.4% (0.14) to 26.01.

Meanwhile, Treasury yields remain near session highs with the 2-yr note yield up nine basis points to 3.52% while the 10-yr note yield is up 13 basis points to 3.27%.


Hormel underperforms after earnings, FCX slips on copper price dip
01-Sep-22 14:25 ET

Dow +20.17 at 31532.56, Nasdaq -145.41 at 11670.76, S&P -13.19 at 3941.88
[BRIEFING.COM] The Dow Jones Industrial Average (+0.06%) has moved into positive territory in recent action, while the benchmark S&P 500 (-0.33%) is also moving higher.

S&P 500 constituents Hormel Foods (HRL 46.37, -3.91, -7.78%), Freeport-McMoRan (FCX 27.86, -1.74, -5.88%), and Synopsys (SNPS 328.55, -17.47, -5.05%) dot the bottom of the standings. HRL sinks following earnings, FCX mirrors broader weakness in copper miners/commodity names, while SNPS falls despite announcing a new buyback program.

Meanwhile, beaten down IT name DXC Technology (DXC 26.62, +1.84, +7.43%) outperforms the market.


Gold falls as dollar, yields strengthen
01-Sep-22 14:00 ET

Dow -89.09 at 31423.30, Nasdaq -213.76 at 11602.41, S&P -31.78 at 3923.29
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-1.81%) is firmly in last place.

Gold futures settled $16.90 lower (-1.0%) to $1,,709.30/oz as rising yields and a stronger dollar applied pressure.

Meanwhile, the U.S. Dollar Index is up approx. +0.8% to $109.59.



MongoDB beats Q2 expectations, but slowing growth and rich valuation make it an easy target (MDB)


MongoDB (MDB) is experiencing some mega-sized losses today after the cloud database management company posted upside Q2 results but issued mixed guidance for Q3 and FY23. Although MDB's revenue outlook for both periods exceeded analysts' estimates, the company's FY23 guidance actually implies that Q4 revenue will fall short of expectations. In other words, MDB primarily lifted its full year forecast due to its top-line outperformance this quarter, not because it foresees strengthening demand in the back half of the year. In fact, the opposite holds true as MDB's executives warned during the earnings call that unfavorable macroeconomic conditions are weighing on its consumption-based model.

In this way, MDB reminds us of another cloud software company with a rich valuation.

When Snowflake (SNOW) issued a disappointing Q1 earnings report in May, the company commented that some of its customers were spending less on its platform due to macroeconomic uncertainties. Much like MDB, SNOW's consumption-based model allows customers to dial back spending if business conditions worsen. Although SNOW enjoyed a brief rebound rally following its better-than-expected Q2 report on August 24, shares have since tumbled lower. Broader market weakness is partly to blame, but the knee-jerk reaction higher was somewhat surprising in the first place.

Similar to MDB's FY23 revenue guidance, SNOW's improved FY23 product revenue outlook was a function of its upside performance in Q2. Specifically, SNOW outperformed its Q2 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.

The main point is that two substantial cloud software companies that use similar consumption-based models are both expecting a slowdown in the back half of the year. MBD provided some color regarding the specific issues that are hindering its business.

  • Even though MDB issued upside Q2 revenue guidance last quarter, CEO Dev Ittycheria raised a couple red flags surrounding the demand environment. These warnings, including weakness across Europe and softness in the mid-market channel, are coming to fruition.
    • As MDB anticipated, the mid-market deceleration that it experienced in Europe last quarter spread to other geographies around the world. Unfortunately, the decline is even worse than the company expected, and it believes the weakness will continue.
  • MDB offered a reminder that it will begin lapping very challenging yr/yr comparisons for its core Atlas product in Q3 and Q4. In Q3 and Q4 of last year, Atlas generated growth of 84% and 85%, respectively.
  • Despite these headwinds, MDB has no plans of taking its foot off the accelerator, stating that it intends to continue investing for the long-term. This may be causing some frustration for investors who would like to see MDB rein in spending in order to improve profitability. To the contrary, MDB plans to spend generously on sales and marketing, causing it to issue downside EPS guidance for Q3 and FY23.
MDB tried to ease the mounting concerns with Ittycheria stating that the business environment remains robust, while pointing to the fact that direct sales customer accounts increased by a record amount in Q2. He added that there has been no change in deal activity or sales cycles. However, the messaging is falling on deaf ears because the combination of slowing growth and a rich valuation (~15x forward revenue) is a recipe for a steep sell-off in this market.




Disney's reported plan to launch membership program not a Goofy idea, but response is muted (DIS)


When Walt Disney (DIS) launched its ultra-popular Disney+ streaming service in November 2019, it transformed the company into a digital powerhouse, creating a business that parallels its traditional theme parks and merchandise businesses. In fact, the emergence of DIS's streaming and digital assets was so significant that the company realigned its operating segments in October 2020 in a push to accelerate its direct-to-consumer (DTC) strategy. The reorganization placed an emphasis on new content creation for DIS's streaming platforms to not only support subscriber growth, but to also create revenue opportunities across its physical businesses. Until now, there hasn't been a concrete plan to bridge the DTC and theme park/merchandise businesses together in order to optimize cross-selling opportunities.

However, that may be about to change. According to the Wall Street Journal, DIS is evaluating the possibility of offering a membership program that would link its streaming, theme parks, and merchandise products together.

  • The Wall Street Journal likened the proposed program to Amazon (AMZN) Prime, which offers certain perks to members, such as free shipping and access to its streaming service for an annual fee. We can envision a DIS membership including benefits such as discounted toys or character costumes for Disney+ subscribers, or resort discounts/perks for Disney+ members.
  • At this point, nothing is set in stone, including what a potential price tag for a membership would be, or when the program might be rolled out. The concept is compelling, though, especially since competition in the streaming space has become so fierce. By augmenting a Disney+ subscription with some exclusive benefits, DIS could distinguish itself a little more from Netflix (NFLX) or Paramount Global (PARA).
  • A key advantage of offering a membership program is that it encourages brand loyalty and repeat purchases. It also would allow DIS to harvest an immense amount of data from its customers, which could be used for targeted communications and advertising based on customers' preferences.
  • Based on the stock's initial reaction, it's apparent that investors aren't overly enthusiastic about the prospects of a membership program. Perhaps there's some concern that it would dilute Disney+'s subscriber base with users that are only there to gain access to other perks. While a membership program could inflate the subscriber numbers, it could also lead to higher churn, and potentially a lower average revenue per user, if DIS chose to offer discounted subscription prices.
    • With the DTC segment reporting a ($1.1) bln loss in Q3 -- nearly quadrupling the year-earlier figure -- investors are anxious to see some bottom-line improvement for that business. That's why the stock reacted so favorably when DIS also announced a 38% price increase for Disney+ the same day it reported Q3 earnings.
    • Therefore, the idea of DIS potentially becoming more promotional within the DTC segment, even if it leads to more cross-selling opportunities in other areas, is somewhat concerning.
Overall, we like the idea of DIS launching a membership program because of the revenue synergies it would generate. Any initiative that enables DIS to better capitalize on its most prominent assets -- namely, its content and characters -- is probably a worthwhile endeavor, in our view.




Okta reevaluates its FY26 targets as economic woes and Auth0 issues clip sales growth in Q2 (OKTA)


Identity management cybersecurity provider Okta (OKTA -31%) is selling off today despite delivering earnings and revenue upside in Q2 (Jul) and raising its FY23 outlook as multiple headwinds from Q2 culminated in OKTA reevaluating its FY26 financial goals.

  • OKTA conceded that sales growth of 43.2% yr/yr to $451.81 mln was not as good as it had hoped. OKTA tied the lighter-than-expected growth to two main reasons: macroeconomic headwinds and challenges related to integrating the Auth0 and Okta sales teams.
    • OKTA noticed IT budgets tighten and sales cycles lengthen sequentially in Q2 due to the current economic environment. This echoed comments from competitor CrowdStrike (CRWD) yesterday, which noted that the souring economy is showing up in increased levels of required approvals as organizations reevaluate investment priorities. Likewise, Cloudflare (NET) stated earlier this month that during JunQ, its pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills.
      • On a side note, these comments are concerning ahead of Zscaler's (ZS) JulQ earnings report on September 8.
    • Although OKTA closed on its $6.5 bln purchase of Auth0 last year, it had not begun merging the two companies' sales teams until FY23. Heightened attrition within the sales teams as well as confusion in the field started to arise in Q2, leading to missed sales opportunities. OKTA outlined a few strategies to better align the two companies, including simplifying its market approach and targeting executives outside chief information and security officers, such as chief digital, technology, and product officers.
  • Another likely contributing factor to today's sell-off was remarks from other cybersecurity firms, such as Palo Alto Networks (PANW) and CRWD. For example, PANW saw more longer duration deals during JulQ. Meanwhile, CRWD's identity protection lineup achieved a record quarter.
  • The issues from Q2 culminated in OKTA's lost confidence in achieving its FY26 financial targets. Due to the macroeconomic uncertainties, the company declared that it is reevaluating its FY26 goals, which included reaching at least $4 bln in revenue with 20% free cash flow margins.
It was not all bad news. OKTA added 600 customers in Q2, a 26% jump yr/yr. Furthermore, Q2 set a record for new $1 mln average contract value (ACV) customers, representing around 80% of OKTA's total ACV. The company also upped its FY23 adjusted EPS forecast meaningfully to $(0.73)-$(0.70) from $(1.14)-$(1.11) as it began adjusting its original spending assumptions for the year. OKTA also expects to return to positive free cash flow in Q3 (Oct), with Q4 (Jan) being its seasonally strongest quarter after posting free cash flow of $(24) mln in Q2.

Nevertheless, OKTA's numerous rough patches in Q2 greatly overshadow these plusses, especially when viewed through the lens of a relatively pricey forward sales ratio of ~7x.



Five Below gets a high-five from investors despite earnings miss and weak Q3 guidance (FIVE)


Five Below (FIVE +6%) is trading higher despite a pretty lackluster Q2 (Jul) earnings report last night. Frankly, we surprised to see the stock higher, but it makes sense when you dig in a bit deeper.

  • We were nervous heading into FIVE's report, especially in terms of guidance as other dollar stores and off-price retailers guided sharply lower for Q3 (Oct), especially DLTR, BURL and ROST. Higher gas and food prices are impacting this vertical's core customer, which tends to be lower income. And we were especially concerned about FIVE because it focuses so heavily on discretionary categories, whereas DLTR offers food and everyday necessity items.
  • In terms of the numbers, FIVE missed on EPS and revenue. It also missed on same store comps, which came in at -5.8%, below prior guidance of -5% to -2%. It does not get much better in OctQ as FIVE guided EPS and revs below consensus. And it guided to a sequentially lower comp number at -9% to -7% in OctQ despite Halloween being a nice driver of traffic.
  • FIVE cited the usual culprits: it was lapping huge stimulus-fueled results in 2021, higher inflation is changing spending behaviors and it is seeing a much more promotional retail environment than in years past due to the excess inventory across the industry. Also, with COVID restrictions lifted, consumers are spending more on travel and experiences and less on "stuff."
So, why is the stock higher? We think it is a combination of things. First, a lot of bad news was priced in already. FIVE reports late in the retail reporting cycle, so we had a pretty good idea what was going to happen based on its peers. Also, its high exposure to discretionary items made it particularly vulnerable in this downturn and the results could have been even worse.

Second, investors seem to be looking past what we knew would be a rough Q3 and is focusing on the all-important Q4 (Jan) holiday season. And on this topic, the company sounded pretty bullish on the call. FIVE is expecting improved inventory, an expanded assortment, and a higher spend on marketing. Also, FIVE expects customers, more than ever, will be looking for places to save money on holiday shopping. Lots of FIVE's items make good stocking stuffers.

Furthermore, while FIVE did not guide for Q4 comps, the full year comp guidance implies a negative low-single digit comp in Q4. That would be a nice sequential improvement from Q3. FIVE is also assuming yr/yr operating margin expansion in Q4. In addition, management was pretty bullish on 2023, saying it expects to return to positive comps. When you combine that with the steps FIVE took to get leaner in 2022, that sets up some good financials for next year.



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