Weekend Investor: The Week That Was

I hope you had a wonderful week!

It was another rough week for the stock market. The S&P 500 was down 2.5% last week and the Nasdaq Composite fell 2.6%. Earnings are starting to show pressure from higher interest rates and more stretched consumers, but the impact is scattershot, at best. I’ll give some early thoughts below.

In case you missed it

Here’s some of the content I put out this week. Enjoy!

• Spotify Earnings Update: Q3 2023 may be remembered as the quarter Spotify turned the corner. Growth continues, but management has finally found some financial discipline and if growth initiatives in advertising, ticketing, and merchandise take hold this will be a rocket ship.

• Cruise (GM) Earnings Update: One of the companies I’m most bullish on is Cruise, the autonomous driving company owned by GM. Cruise had a terrible week and has temporarily shut down fully autonomous operations. I give some thoughts on what we know here.

• Enphase Energy’s Collapse: Everything you need to know about the most recent quarter from Enphase Energy.

• Verizon’s Turnaround: We could see it coming a mile away, but Verizon is finally generating significant free cash flow and paying down debt on top of a 7%+ dividend yield.

• ESPN’s Financials Tell the Disney Story: Disney broke out ESPN’s financials and it gives a good indication of the value generated by not only the sports network but also other cable channels.

Earnings Season Takeaways (So Far)

Five things have jumped out to me this earnings season.

1. Interest rates are impacting everything. If leverage is involved in buying something, higher interest rates are hurting the business. Cars, homes, and solar installations are three that I’ve noticed impact earnings this week and the list will get much longer than that. Not surprising, but the rubber is hitting the road after over a year of interest rate increases.

2. Like it or not, more price increases are coming. A lot of companies grew unprofitably during the pandemic. As growth slows, they’re turning to price increases to get to profitability. Streaming services, SaaS software, and even telecom giants are turning to higher prices to boost their businesses. I wrote about this a couple of weeks ago, but the companies with some pricing power (Spotify and Disney+, for example) will do well and the companies without pricing power (Peacock) will be exposed.

3. Electric vehicles are facing a painful maturation process. Hertz, of all companies, hammered home the maturation process electric vehicles are going through right now. We knew GM and Ford were slowing their EV investment because they didn’t see as much demand, but Hertz said the problem was that Telsa’s price reductions were leading to lower resale values for used vehicles and EVs had higher maintenance costs than anticipated (this was the big shocker). We have seen EV manufacturers and charging company financials get worse throughout 2023 and I think we will see much more pain before the industry reaches equilibrium.

4. The AI bubble is popping…maybe? There’s generally less talk about AI this quarter. That’s fine, but relatively weak results for the Google Cloud were a surprise given their AI lead and even companies who talked up AI products in Q1 and Q2 have grown more quiet. The hype came on fast and we’re starting to see that hype die down, so beware.

5. High expectations lead to disappointment. Most of the stocks I’ve seen drop significantly during earnings season have done so because they didn’t live up to extremely high expectations. This is one of the reasons the Asymmetric Portfolio focuses on companies with great balance sheets and cash flows that trade at reasonable multiples. Great investments don’t often start with buying a stock that trades for 30.5 times sales (ahem, NVIDIA).

We have two more weeks of earnings season and then the focus will shift to holiday consumer spending. That should tell a lot about how consumers are feeling and what the impact of student loan repayments and higher rates are having on spending.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.