2023-07-25 13:25:00 ET
Summary
- Is there an AI bubble building in stocks or a cash generating machine?
- Verizon maintains its full-year earnings forecast. GE, 3M boost guidance.
- Amazon will now pay $51.75 per share for iRobot, which arranges $200M financing facility.
Listen below or on the go on Apple Podcasts and Spotify
This is an abridged transcript of the podcast.
Our top story in today’s session –
Here come the earnings. While eyes are on Big Tech postmarket, investors got plenty to digest before the bell.
Verizon (VZ) gained as it maintained its full-year earnings forecas t amid worries about lead cable liabilities. Verizon earned $1.21 a share on $32.6 billion in operating revenue, aided in part by a "notable" improvement in postpaid phone gross additions.
GM (GM) stock fell despite the company lifting earnings guidance. The automaker says it will be looking to cut costs by $1 billion and will invest less in new products. GM says it met its target to produce 50,000 EVs in North America in the first half of the year and continues to target production of roughly 100,000 EVs in the second half.
GE (GE) rose after reporting earnings and revenue that beat consensus. The company also raised guidance for the remainder of the year. And 3M (MMM) also rallied on boosting earnings guidance. The company reported a Q2 loss to settle billion-dollar “ forever chemicals ” litigation.
Now a look at today’s trading, stocks are mixed, with growth in the lead ahead of reports from Microsoft (MSFT) and Alphabet (GOOG) (GOOGL). The Nasdaq (COMP.IND) is up more than 0.5%.
The S&P (SP500) is up a little, with Materials (XLB) and Info Tech (XLK) the strongest sectors and Industrials (XLI) the weakest. The Dow (DJI) is slightly lower despite the price gain in 3M.
Rates are higher as the Fed starts its two-day meeting. The 10-year Treasury yield (US10Y) is above 3.90% and the 2-year (US2Y) sits around 4.90%.
On the economic front, the Conference Board’s measure of July consumer confidence jumped to the highest level since July 2021 . The index rose to 117, topping the consensus of 111 as the expectations and present situation components rose.
And the S&P CoreLogic Case-Shiller Home Price Index showed month-over-month price increases across all 20 major metro markets for the third-straight month, but lower than expected. The HPI Composite rose +1% in May, less than the +1.5% consensus and a tick up from the 0.9% pace in April.
Oil (CL1:COM) is flat and gold (XAUUSD:CUR) is slightly higher.
Elsewhere, Amazon (AMZN) and iRobot (NASDAQ:IRBT) agreed to amend the existing terms of their deal to reflect a change to the price per share.
Under the new terms, Amazon will pay $51.75 per share in comparison to the old acquisition price of $61 per share. At the same time, iRobot (IRBT) has entered into a $200 million financing facility to fund its ongoing operations.
For Amazon, the change in price per share is expected to be largely offset by the planned increase in iRobot's net debt under the new facility.
Among other stocks to watch, Atlantic Equities downgraded Disney (DIS) on worries over linear TV advertising and direct-to-consumer subscriber growth. Hamilton Faber cut the stock to Underweight from Neutral and the price target to $76 from $113. He says that it's possible that ad pricing out of the current upfront could fall as much as 5%.
New Street Research upgraded Meta Platforms (META) to Buy from Neutral and raised its price target to $350 from $285 ahead of earnings. Dan Salmon says he is hearing very positive feedback on the company's AI efforts .
Defense company RTX (RTX) revealed its Pratt & Whitney unit found an engine manufacturing defect that will require an accelerated fleet inspection. Management also lowered its full-year guidance for free cash flow to $4.3 billion from around $4.8 billion.
In the Wall Street Research Corner –
Noted Wall Street bear Marko Kolanovic continues to reiterate his pessimistic stance on stocks. He says the rally over the past two months “implies macroeconomic scenarios that are even more positive than a soft landing."
The main reason for that is what he calls “mechanical re-risking” because of AI enthusiasm.
Even though his bearish stance means he’s missed out on the gains this year, he isn’t ready to jump into a market with S&P stock concentration at 60-year highs.
Kolanovic says "This could be indicative of a bubble,” adding that anecdotal evidence points to an AI-driven bubble as well.
The market will zero in on AI post-market today when Alphabet (GOOG) (GOOGL) and Microsoft (MSFT) report results.
He adds that AI will continue to be “a transformative technology,” but the current hype was triggered by chatbots that often fail in basic questions.
Citi is more bullish on AI in the medium term and advises investors to focus on free cash flow.
Citi says "Many profitable AI stocks are already cash generating machines . Incremental benefits of developments like generative AI should accentuate this characteristic."
Wall Street is looking for a “notable acceleration” in EPS growth in the space.
For recommendations, Kolanovic says it may be a good entry point for commodities vs. equities as they “price in by far the highest risk of recession and stand out as under-valued, underowned, and backed by compelling fundamentals and technical."
For further details see:
Wall Street Lunch: Big Bear Spies AI Bubble