Market Snapshot
| Dow | 40974.97 | +38.04 | (0.09%) | | Nasdaq | 17084.28 | -52.00 | (-0.30%) | | SP 500 | 5520.07 | -8.86 | (-0.16%) | | 10-yr Note | +6/32 | 3.77 |
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| | NYSE | Adv 1414 | Dec 1323 | Vol 859 mln | | Nasdaq | Adv 1909 | Dec 2308 | Vol 5.0 bln |
Industry Watch
| Strong: Utilities, Financials, Materials, Consumer Staples, Real Estate |
| | Weak: Information Technology, Energy, Health Care |
Moving the Market
-- Losses in mega cap stocks limiting index performance
-- S&P 500 ultimately settled above 50-day moving average (5,506) after briefly falling below
-- Not a lot of conviction after yesterday's sharp declines
-- Growth concerns still in play; oil prices below $70.00/bbl
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Closing Summary
04-Sep-24 16:30 ET
Dow +38.04 at 40974.97, Nasdaq -52.00 at 17084.28, S&P -8.86 at 5520.07
[BRIEFING.COM] The stock market settled little changed from yesterday's close. There wasn't much carryover selling interest after the S&P 500 found support on an early test of its 50-day moving average (5,506). The index dropped below that level in the afternoon, but ultimately settled the day above the key, short-term support level.
Market breadth reflected a lack of conviction on either side of the tape, contributing to the lackluster action at the index level along with choppy movement in some mega cap names. NVIDIA (NVDA 106.21, -1.79, -1.7%) shares were volatile today in response to a report, which the company then denied, that it received a DOJ subpoena.
The market was also digesting the JOLTS report, which showed that job openings fell to 7.673 mln from 7.910 mln in July, reaching their lowest level since early 2021. Tomorrow's calendar also features data on the labor market in the form of weekly jobless claims and the ADP Employment Change for August.
This sent Treasury yields lower, which didn't stir selling in equities due to the notion that weakness in the labor market will drive the Fed to cat rates by 50 basis points this month. The fed funds futures market now sees a 45.0% probability of a 50 basis points rate cut at the September 17-18 FOMC meeting, up from 38.0% yesterday, according to the CME FedWatch Tool.
The 2-yr note yield declined 12 basis points to 3.77% and the 10-yr note yield also settled at 3.77%, down eight basis points from yesterday.
The rate-sensitive real estate (+0.3%) and utilities (+0.9%) sectors were winning standouts today. Meanwhile, energy (-1.4%) was the only sector down more than 0.5% after oil prices dropped below $70.00/bbl. WTI crude oil futures settled 1.8% lower at $69.13/bbl, reflecting lingering concerns about growth prospects impacting demand.
- S&P 500: +15.7% YTD
- Nasdaq Composite: +13.8% YTD
- Dow Jones Industrial Average: +8.7% YTD
- S&P Midcap 400: +8.0% YTD
- Russell 2000: +5.8% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index 1.6%; Prior 0.5%
- July Trade Balance -$78.8 bln (Briefing.com consensus -$78.5 bln); Prior was revised to -$73.0 bln from -$73.1 bln
- The key takeaway from the report is the uptick in imports. While that will act as a drag on Q3 GDP forecasts, the increase in imports will nonetheless be construed as a reassuring demand signal for the U.S. economy.
- July Factory Orders 5.0% (Briefing.com consensus 4.5%); Prior -3.3%
- The key takeaway from the report is that business spending languished in July.
- July JOLTS - Job Openings 7.673 mln; Prior was revised to 7.910 mln from 8.184 mln
Thursday's economic lineup features:
- 8:15 ET: August ADP Employment Change (Briefing.com consensus 150,000; prior 122,000)
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 236,000; prior 231,000), Continuing Claims (prior 1.868 mln), revised Q2 Productivity (Briefing.com consensus 2.3%; prior 2.3%), and revised Q2 Unit Labor Costs (Briefing.com consensus 0.9%; prior 0.9%)
9:45 ET: Final August S&P Global U.S. Services PMI (prior 55.0) - 10:00 ET: August ISM Non-Manufacturing (Briefing.com consensus 51.0%; prior 51.4%)
- 10:30 ET: Weekly natural gas inventories (prior +35 bcf)
- 11:00 ET: Weekly crude oil inventories (prior -0.85 mln)
Market breadth turns negative; Treasuries settle with gains
04-Sep-24 15:30 ET
Dow -27.41 at 40909.52, Nasdaq -58.56 at 17077.72, S&P -14.90 at 5514.03
[BRIEFING.COM] The S&P 500 has moved back above its 50-day moving average (5,506) over the last half hour. Still, the market remains near session lows.
Market breadth was positive earlier, but shows a negative bias now. Decliners have a fractional lead over advancers at the NYSE and a 4-to-3 lead at the Nasdaq.
Treasuries settled the session with gains. The 2-yr note yield declined 12 basis points to 3.77% and the 10-yr note yield also settled at 3.77%, down eight basis points from yesterday.
Energy sector lags amid dropping oil prices
04-Sep-24 15:05 ET
Dow -84.29 at 40852.64, Nasdaq -88.63 at 17047.65, S&P -23.05 at 5505.88
[BRIEFING.COM] The S&P 500 slipped below its 50-day moving average (5,506), which acted as support earlier.
Only two S&P 500 sectors trade higher with the rate-sensitive utilities sector showing the largest gain, up 0.7%, amid dropping market rates. Meanwhile, energy (-1.1%) is the only sector down more than 0.6% as oil prices sit below $70.00/bbl.
The information technology sector is another influential laggard, down 0.5%, due to losses in its mega cap components.
Beige Book shows number of Districts that reported flat or declining activity rose
04-Sep-24 14:30 ET
Dow -26.40 at 40910.53, Nasdaq -19.45 at 17116.83, S&P -7.66 at 5521.27
[BRIEFING.COM] The broader market mostly shrugged off the Fed's September Beige Book, released at the bottom of the hour; the report showed economic activity grew slightly in three Districts, while the number of Districts that reported flat or declining activity rose from five in the prior period to nine in the current period. Currently, the S&P 500 (-0.14%) is in last place among the major averages, down about 8 points.
- Among other notable points from the report, employment levels were steady overall, though there were isolated reports that firms filled only necessary positions, reduced hours and shifts, or lowered overall employment levels through attrition. Still, reports of layoffs remained rare.
- Manufacturing activity declined in most Districts, and two Districts noted that these declines were part of ongoing contractions in the sector.
- On balance, prices increased modestly in the most recent reporting period. However, three Districts reported only slight increases in selling prices.
- District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months, though contacts in three Districts anticipated slight declines.
Currently, the yield on the benchmark 10-yr treasury note is down about six basis points to 3.772%.
Gold modestly higher at midweek
04-Sep-24 13:55 ET
Dow -85.81 at 40851.12, Nasdaq -2.68 at 17133.60, S&P -10.43 at 5518.50
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-0.02%) now sits narrowly lower, trading places between gains and losses a few times over the prior half hour; the Fed's September Beige Book is due out at the top of the hour.
Gold futures settled $3.00 higher (+0.1%) to $2,526.00/oz, modestly higher amid weakness in the dollar, yields, as well as equities.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $101.40.
Hormel Foods gaps lower after previous headwinds prove more severe than initially expected (HRL)
Hormel Foods' (HRL -6%) Q3 (Jul) performance failed to bring home the bacon as unfavorable commodity markets and production disruptions clipped results in the quarter and weighed on FY24 (Oct) guidance. While HRL previously warned of these issues, spurring a significant sell-off last quarter, the headwinds proved worse than the market anticipated, largely because of the extent to which they are seeping into Q4 and the lack of clarity on when they will ease. As such, shares are slipping toward 52-week lows today.
- What is going on with production? An unplanned interruption erupted at HRL's Planters Peanuts facility in Virginia after uncovering a food safety issue in April. While management mentioned last quarter that the food safety problem had already been resolved, they warned it would still hinder Q3 results, albeit to a minor degree -- roughly a $0.03 EPS impact. However, ramping production is not an overnight process. HRL expects the disruption to be primarily resolved by next quarter, underpinning how extensive a production halt can be.
- Why are commodity markets producing such a negative impact? HRL's issue lies within the whole turkey bird commodity market. Approximately three-quarters of its 2.2% drop in revs in Q2 to $2.9 bln -- missing analyst estimates -- was related to lower prices of turkeys. Lower prices often indicate lower demand. Meanwhile, HRL is enjoying robust demand for SPAM, which delivered its second straight quarter of double-digit revenue growth internationally. This dynamic possibly illustrates an inflationary environment shifting consumer tastes.
- HRL's prior remarks compounded the frustration today. The company cautioned in May that the most likely scenario surrounding its headwinds would be hitting the low end of its former FY24 net sales guidance of $12.2-12.5 bln. However, HRL lowered its FY24 revenue outlook today by $400 mln, considerably higher than the size of its Q3 top-line miss, to $11.8-12.1 bln.
There were still several highlights from Q3, including consistently sound results within HRL's Foodservice segment, which posted a 2% jump in volumes and 7% sales growth yr/yr, and recovery dynamics unfolding across parts of the company's International segment. Within Foodservice, HRL grew sales above its peer group. In International, HRL noticed a few encouraging trends as it recovers from a challenging environment last year, including rebounding characteristics in China, which is off to a solid start to Q4. Meanwhile, HRL's investments in the Philippines and Indonesia are producing meaningful benefits.
Nevertheless, investors are discouraged by the extent of HRL's production woes and the persistent softness in turkey prices. On the plus side, production continues to ramp and should be fully up and running by the end of Q4. However, the commodity component, being out of HRL's control, remains fluid and could linger into FY25. With so many moving parts affecting HRL, it may be better to deploy a wait-and-see approach.
Asana seeing weakness in tech vertical, dragging guidance and shares lower (ASAN)
Work management platform provider Asana (ASAN) edged past Q2 EPS and revenue estimates as the company signed a record number of multi-year deals, but its soft guidance for Q3 and FY25 is overshadowing the quarterly results and dragging shares sharply lower. The company's disappointing outlook stands in contrast to Monday.com (MNDY), which delivered an impressive beat-and-raise Q2 earnings report on August 12, signaling that ASAN lost some ground to one of its main competitors.
- During the earnings call, CEO Dustin Moskovitz disclosed that the company saw some deals get pushed out during the quarter but added that they remained in the pipeline. In particular, ASAN is experiencing weakness in the technology sector, where ongoing budget scrutiny and longer sales cycles continue to act as a headwind. To add some context around the impact of these headwinds, ASAN's Q2 revenue growth was in the mid-teens, excluding the technology vertical, compared to its reported revenue growth of 10.3%.
- Another metric that illustrates the negative effects of the weakness in technology is ASAN's dollar-based net retention rate. In Q2, the overall dollar-based net retention rate slipped to 98% from 100% last quarter as the company experienced some large seat adjustments during the quarter. On the positive side, ASAN believes that its dollar-based net retention rate is at a stabilization point and that the worst of the seat adjustment headwinds are now in the rearview mirror.
- However, since trends haven't reaccelerated yet, ASAN slightly adjusted its FY25 revenue guidance to be more conservative in the back half of the year. After previously guiding for revenue of $719-724 mln, the company is now forecasting revenue of $719-$721 mln.
- Looking beyond the current weakness in the technology sector, ASAN's innovations in AI could provide the company with a meaningful growth catalyst in the coming quarters. In October, ASAN plans to launch its Asana AI Studio product, which allows customers to build, deploy, and enhance workflows with AI teammates taking over some of the workload. Additionally, AI will enable ASAN to launch new licensed add-on products, such as Resource Planning, which is currently under development.
The main takeaway is that ASAN's Q2 earnings report didn't meet the high standard set by competitor MNDY a few weeks earlier as the company contends with stiff headwinds in the technology vertical. Although the downward revision to its FY25 revenue guidance was modest, slowing growth concerns are top of mind for investors right now, making ASAN an easy target for selling.
GitLab is surging today after strong Q2 report; big margin expansion (GTLB)
GitLab (GTLB +17%) is surging after reporting strong EPS upside with its Q2 (Jul) report last night. This provider of software development tools, also known as DevOps Platforms, also reported healthy revenue growth of +30.8% yr/yr to $182.6 mln, which was above analyst expectations. Revenue growth was driven by new logos as well as expansion within existing customers. GitLab also guided Q3 (Oct) EPS above consensus.
- The company said that enterprises are looking to integrate AI into all aspects of software development. This requires measurable benefits and improved security, which GitLab says are areas where it excels. AI is also resulting in larger deal sizes. For example, Barclays purchased GitLab Duo seats this quarter coupled with additional ultimate licenses.
- The company said that its customers are excited about the meaningful productivity and security benefits of GitLab Duo. This includes up to 90% reduction in time spent on toolchain operations, 50% faster lead time and 50% faster vulnerability detection.
- The metric that really jumps out at us is adjusted operating margin which jumped to 10%, which GitLab said meaningfully exceeded its expectations. That compares to -3% a year ago and -2% in Q1 (Apr). This metric shows the operating leverage in its business model and was a major reason for the EPS upside.
After a surprise profit in Q1 and now significant margin expansion in Q2, it seems investors are giving GitLab a fresh look. The stock has pulled back quite a bit since early March, but the back-to-back strong earnings results are getting this name on some radar screens again after falling out of favor.
Zscaler's upside Q4 results take a back seat to company's disappointing FY25 billings guidance (ZS)
Zscaler (ZS), a cybersecurity company focused on Zero Trust and Private Access cloud products, beat Q4 estimates across the board and achieved a new milestone with quarterly bookings reaching the $1.0 bln mark. Despite the strong quarterly results, the stock is plunging lower as the company's FY25 EPS and billings guidance failed to impress and reignited growth and competitive concerns.
- During the earnings call, CEO Jay Chaudry painted a bullish picture surrounding the demand environment, commenting that customer adoption of ZS's Zero Trust platform is stronger than ever, as illustrated by new records for both new and upsell business in Q4. Additionally, the rise of GenAI technology is creating greater cybersecurity risks for enterprises, leading to robust demand for ZS's new GenAI security product.
- The healthy business climate is evident across ZS's key metrics. With another top and bottom-line beat in the books for Q4, the company's winning streak against analysts' quarterly EPS and revenue estimates continued, extending beyond five years. Billings, a closely watched metric for ZS, also surpassed expectations, growing by 27% yr/yr to $910.8 mln, while the 12-month trailing dollar-based net retention rate came in at an impressive 115%.
- ZS was able to achieve these solid results even as it works through some significant changes in its go-to-market strategy. Last November, the company expanded its go-to-market executive team, appointing Mike Rich as its Chief Revenue Officer and Joyce Kim as its Chief Marketing Officer. At the core of the new strategy that Mr. Rich and Mr. Joyce is implementing is a shift from opportunity-based to account-centric selling, which should drive higher cross-selling related revenue.
- However, the company's FY25 billings guidance of $3.110-$3.135 bln, equating to estimated growth of 19-20%, suggests that tougher times are on the horizon. That's especially the case for 1H25 as ZS's guidance implies billings growth of just 13% for the first half of the year, followed by growth of 23% in the second half.
- ZS explained that it expects sales productivity to improve in the back half of the year and that its growing pipeline supports a second half acceleration in growth. Furthermore, the company stated that from a timing perspective, its contracted billings from the prior year's active contracts are set to increase by 7% in the first half and by 23% in the second half. Based on the stock's reaction, though, it's clear that this explanation did little to ease investors' growth concerns.
The main takeaway is that ZS performed quite well in Q4, demonstrating the resiliency of its business model in a difficult environment, but the sharp slowdown in billings growth that's expected in 1Q25 is spooking investors. Given the stock's rich valuation -- its P/S is north of 13x on a trailing 12-month basis -- an expected deceleration in growth is bound to hit shares hard.
Ciena dials up a nice beat with solid guidance; results driven by cloud providers (CIEN)
Ciena (CIEN +2%) is trading higher after it reported a solid EPS beat for Q3 (Jul) this morning. Revenue for the telecom equipment company fell 11.8% yr/yr to $942.3 mln, but that was nicely above analyst expectations and above the mid-point of prior guidance of $880-960 mln. The highlight may have been the guidance. Ciena is known for guiding lower on the call, but today it guided Q4 (Oct) revs in-line at $1.06-$1.14 bln.
- Ciena said that order flow in Q3 was strong, largely driven by cloud providers and it finished the quarter with a book to bill ratio above one. Ciena sees this as a positive sign that the market is moving in the right direction with the gap between supply and inventory absorption narrowing. Ciena also noted that bandwidth demand continues to be strong, particularly with the anticipated rise in AI-driven network traffic and increased cloud adoption.
- It is important to understand that Ciena has two main types of customers: cloud companies and service providers (SPs).
- Starting with cloud providers, Ciena says they are clearly leading the charge in building out their networks to support growth in cloud and AI related traffic. They are investing in their network architectures from subsea cables to long haul routes to data center connectivity. In Q3, Ciena secured new wins with major cloud provider customers and is seeing a growing opportunity among an expanding set of cloud players, including data center operators and companies that offer a range of cloud applications and cloud infrastructure services.
- On the service provider side, Ciena said its pipeline continues to increase and it's winning significant deals, including many new logos. In North America, purchasing patterns of SPs are coming back into more of a normal range although the recovery remains gradual and will take several more quarters to play through completely. However, Ciena sees clear evidence of improvement.
- With respect to international SPs, Ciena says cautious spending persists, particularly in Europe, related to macro and geopolitical concerns as well as industry structure issues. As a result, the recovery in order volumes from international SPs are likely to lag that of their North American counterparts.
Bottom line, we think investors are pleased with Ciena's Q3 results and particularly its Q4 guidance. After guide downs in recent quarters, we will take in-line guidance as a win. Also, the commentary on the call was a bit more upbeat than usual. Bigger picture, Ciena has often described FY24 as a transition year following a few years with whipsaw events: the pandemic that led to supply chain challenges and a subsequent snapback resulting in outsized growth in FY23. It sounds like Ciena will get back to longer term +6-8% CAGR revenue growth in FY25 with current consensus at +8%.
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