Author: The INO.com Team

2024 Outlook: Analyzing RIVN’s Competitive Edge Gained From AT&T Partnership

Posted on by The INO.com Team

The automotive industry is witnessing a major seismic shift toward technological advancements. Electric vehicles (EVs) are becoming mainstream at an unprecedented rate, showing no signs of slowing down in the upcoming decade. The U.S. EV sales surpassed the 300,000 mark for the first time in 2023's third quarter.

Despite the turbulence created by widespread price wars throughout 2023, coupled with inflation and surplus inventory, the EV market continues to ascend. Even though the growth hasn't been as vigorous as initially forecasted, companies like Rivian Automotive, Inc. (RIVN) continue to carry momentum into 2024, recently enhancing its prospects with positive news.

Wireless carrier AT&T Inc. (T) has entered into a partnership agreement with RIVN, announcing its decision to receive a range of pilot electric delivery vans (EDVs), R1T pickup trucks, and R1S sport utility vehicles commencing in 2024. The main objectives of this joint venture are to assess cost-efficiency, amplify safety measures, and reduce the carbon footprint.

For many years, T has been progressively converting its commercial fleet into vehicles operating on alternative fuels, including compressed natural gas and hybrid electric vehicles. To meet its ambitious goal of achieving carbon neutrality by 2035, T is leveraging EVs coupled with route optimization and artificial intelligence (AI). Adding to this initiative, T is the exclusive provider of connectivity for RIVN vehicles, facilitating seamless over-the-air (OTA) software updates.

Considering stringent environmental, social, and corporate governance (ESG) goals and emission reduction targets, companies are fiercely competing to transition toward zero-emission fleets. High interest rates have posed affordability challenges for consumers as they increase the already hefty price tags of EVs compared to traditional gas-powered vehicles, leading to raised concerns over softening demands.

RIVN reported considerable interest and demand for its electric vans. In November, the company announced it was in dialogues with other potential customers, reinforcing speculations of additional EDV partnerships on the horizon for RIVN despite not revealing any specific names.

Last month, RIVN ended its exclusivity deal with Amazon (AMZN) for its EDV. This move provides RIVN with the opportunity to market its EDVs to a broader client base, with T reportedly being its first outside customer. The termination doesn’t impact the previously stated commitment from RIVN to fulfill an order of 100,000 vans for AMZN by the end of this decade. Indicative of progressive momentum, AMZN already had over 10,000 Rivian EDVs in operation as of October.

Moreover, RIVN also outlined its production strategy for the near future. The manufacturing plant in Normal, Illinois, is scheduled to cease operations for a single week at the closing of 2023 in anticipation of a more extended shutdown in mid-2024.

This hiatus aims to facilitate extensive line modifications and advancements, including part design changes, component simplification, and optimizations to elements such as the HVAC system and vehicle body structure. While these temporary production halts are expected to reduce output in the short term, they are deemed necessary to enable cost reductions and augment long-term production capacity.

“The impacts of the shutdown are temporary in nature, but the benefits will be there for the future,” said RIVN’s chief financial officer, Claire McDonough.

Outlook

Last month, Irvine, California-based RIVN raised its production forecast for the full year by 2,000 vehicles to 54,000 units on the back of sustained demand for its trucks and SUVs. Management forecasts 2023 adjusted EBITDA of negative $4 billion.

Analysts expect RIVN’s revenue to surge 164.6% year-over-year to $4.39 billion, while EPS is expected to stay negative at $4.92 for the fiscal year ending December 2023.

Moreover, RIVN’s stock is trading above its 50-, 100-, and 200-day moving averages, indicating an uptrend. Wall Street analysts expect the stock to reach $25.63 in the next 12 months, indicating a potential upside of 8.9%. The price target ranges from a low of $15 to a high of $40.

What are the Bumps in the road for RIVN?

Since its IPO two years ago, the automaker has experienced a tumultuous journey due to overall market conditions and operational challenges. Widespread supply-chain disruptions have further exacerbated conditions for the entire automobile industry, with RIVN facing its unique set of complexities during its launch. Some challenges the company encountered included product recalls and price rises that were subsequently required to be reversed.

RIVN’s products remain strong, even with a relatively limited product line. Moreover, it is expected to begin production in 2026 in Georgia on a lower-cost consumer EV called the R2. Given the steady increase in production, it is not anticipated that RIVN will reach profitability imminently.

The company's quarterly cash expenditure is estimated to be approximately $1 billion. Given its significant distance from attaining mass production levels required for improved cost efficiency, RIVN may face additional challenges in the foreseeable future.

Bottom Line

RIVN's operation has seen decent stability in the past year, although its share value contends with apprehensive investors troubled by unmet production benchmarks, expanding debts, and considerable financial losses. So far this year, RIVN shares have appreciated by roughly 28%. Yet, they currently trade 70% lower than its IPO price of $78.

The earlier-than-expected bond issuance in October took shareholders by surprise, triggering a sell-off that significantly undercut the stock's value. However, market analysts foresee possible improvements as the company extricates itself from supply chain predicaments that have plagued recent quarters.

The automaker's upbeat forecast serves as a glimmer of hope for a sector grappling with the adverse effects of inflated costs, sagging consumer interest, and price reductions aimed at stirring demand. In a departure from the norm, RIVN has opted not to lower prices, choosing instead to manufacture its Enduro powertrains in-house, a decision aimed at decreasing supplier dependence and cost overheads.

Despite delivering vehicles for eight consecutive quarters, the company still posts negative gross margins. RIVN's immediate priority is achieving a positive gross margin, which will place it on the path to operating profit. This feat, however, cannot be accomplished until gross profits outperform rising operating expenditures, currently estimated at an average of about $1 billion per quarter.

Following this, RIVN needs to generate sufficient operational profit and cash flow to fund its CAPEX, consequently transitioning RIVN to cash flow positivity. Achieving this landmark will require a minimum of five years, given that sales of R1 and EDV models alone will not secure profitability or positive cash flow. The successful launch and profitable scaling of the R2 model by 2026 is integral to the realization of this goal.

Its primary challenge is attaining positive free cash flow to sustain growth independent of balance sheet reserves. Although the financial outlook has improved, there are enduring concerns over whether its $7.94 billion cash reserve, as of September 2023, would suffice, considering that RIVN postponed previously anticipated CAPEX this year. An initial CAPEX projection of $2 billion in 2023 has been revised to $1.1 billion.

RIVN can leverage capital markets for additional funding. While debt financing may not be the most attractive approach amid the prevailing high-interest-rate climate, interest rates could potentially decrease by the time RIVN finds a pressing need for such resources, likely not before 2026. Another plausible circumstance suggests that an increased valuation for RIVN could render equity financing a more appealing strategy to accrue funds instead of accumulating debt.

In either case, it's noteworthy to mention the company’s commendable efforts toward curbing its cash burn rate. Investors are advised to keep a vigilant eye on RIVN's financial activities in the coming year to monitor whether this trend sustains. An unforeseen increase in cash burn over a span of a few quarters would not necessarily amount to a significant detriment to the firm, given the time it has before the requirement to inject more capital arises.

Keeping these considerations in mind, investors should wait for a better entry point into the stock.

 

Is Verizon (VZ) Stock a Buy Ahead of January 23 Earnings Release?

Posted on by The INO.com Team

With a market cap of $156.86 billion, Verizon Communications Inc. (VZ) is a leading provider of communications, information technology, and entertainment products and services to consumers, businesses, and governmental entities globally. The company is scheduled to report fourth-quarter 2023 earnings on January 23, 2024.

Analysts expect VZ’s revenue and EPS for the fourth quarter (ending December 2023) to decline 2% and 8.9% year-over-year to $34.55 billion and $1.08, respectively.

For the fiscal year 2023, Street expects the company’s revenue to decrease 2.5% year-over-year to $133.47 billion. The consensus EPS estimate of $4.69 for the current year indicates a decline of 9.4% year-over-year.

Shares of VZ have plunged nearly 1% over the past five days but gained more than 2% over the past six months. On the other hand, the benchmark S&P 500 has surged approximately 1.7% over the past five days and more than 9% over the past six months.

While VZ’s stock has underperformed the S&P 500 lately, the telecom company remains attractive for income-focused investors, given its reliable dividend.

Now, let’s review the key factors that could influence VZ’s performance in the near term:

Mixed Last Reported Financial Results

For the third quarter that ended on September 30, 2023, VZ reported revenue of $33.34 billion, slightly surpassing analysts’ estimate of $33.31 billion. However, this compared to the revenue of $34.24 billion in the same quarter of 2022. The decline was primarily due to reduced wireless equipment revenue and lower postpaid upgrade activity.

But the company’s wireless service revenue came in at $19.30 billion, up 2.9% year-over-year. This increase was mainly driven by targeted pricing actions implemented in recent quarters, the larger allocation of administrative and telco recovery fees from other revenue into wireless service revenue, and growth from fixed wireless offerings.

During the quarter, total broadband net additions were 434,000, representing the fourth straight quarter in which Verizon reported more than 400,000 broadband net additions. Total broadband net additions included 384,000 fixed wireless net additions, an increase of 42,000 fixed wireless net additions from the third quarter of 2022.

The telecom giant currently has nearly 10.3 million total broadband subscribers, including around 2.7 million subscribers on its fixed wireless service. The company reported 72,000 Fios Internet net additions, up from 61,000 Fios Internet net additions in the prior year’s quarter. 

Verizon’s third-quarter operating income declined 5.3% year-over-year to $7.47 billion. Its net income was $4.88 billion, a decrease of 2.8% from the prior year’s quarter. The company posted an adjusted EPS of $1.22, surpassing the consensus estimate of $1.18, but down 7.6% year-over-year.

The company’s adjusted EBITDA for the quarter grew 0.2% year-over-year to $12.20 billion. Its year-to-date cash flow from operations was $28.80 billion, up from $28.20 billion in 2022. Also, free cash flow year-to-date totaled $14.60 billion, an increase from $12.40 billion in the prior year.

VZ’s unsecured debt as of the end of the third quarter decreased by $4.90 billion sequentially to $126.40 billion. At the end of third-quarter 2023, the company’s ratio of unsecured debt to net income (LTM) was nearly 5.9 times, and its net unsecured debt to adjusted EBITDA was approximately 2.6 times.

Raised Free Cash Flow Guidance

“We continued to make steady progress in the third quarter with a clear focus on growing wireless service revenue, delivering healthy consolidated adjusted EBITDA and increasing free cash flow,” said Verizon Chairman and CEO Hans Vestberg. 

After reporting solid third-quarter results momentum, Verizon raised its free cash flow guidance for the full year 2023. The company expects free cash flow above $18 billion, an increase of $1 billion from the previously issued guidance. Cash flow from operations is expected in the range of $36.25 billion to $37.25 billion.

In addition, for 2023, the company expects total wireless service revenue growth of 2.5% to 4.5%. Its adjusted EBITDA and adjusted EPS are projected to be $47-$48.50 billion and $4.55-$4.85, respectively.

Attractive Dividend

On December 7, VZ declared a quarterly dividend of 66.50 cents ($0.665) per outstanding share. The dividend is payable on February 1, 2024, to Verizon shareholders of record at the close of business on January 10, 2024.

“We are committed to delivering value to our customers and shareholders as we execute on our focused network strategy,” said Hans Vestberg. “Our financial discipline and strong cash flow continue to put the company in a position for the Board to declare a quarterly dividend.”

Verizon has around 4.2 billion shares of common stock outstanding. The company made more than $8.2 billion in cash dividend payments in the last three quarters.

VZ pays an annual dividend of $2.66, which translates to a yield of 7.13% at the current share price. Its four-year average dividend yield is 5.42%. The company has raised its dividend for 17 consecutive years, the longest current streak of dividend increases in the U.S. telecom industry.

Progress in 5G Network Buildout

On December 21, Verizon announced the expansion of its reliable 4G and high-speed 5G service throughout Florida, Kennesaw, GA, and Aiken County, SC, among other areas.

This service is part of the company’s massive multi-year network transformation, which has not only brought 5G service to more than 230 million people and 5G home internet service to nearly 40 million households but has also added more capabilities, upgraded the technology in the network, paving the way for personalized customer experiences and offering a platform for enterprises to boost innovation.

According to a report by Grand View Research, the global 5G services market is projected to reach $2.21 trillion by 2030, expanding at a CAGR of 59.4% during the forecast period (2023-2030). Meanwhile, North America 5G services market is expected to grow at a CAGR of 51.6% from 2023 to 2030.

The growing demand for high-speed data connectivity worldwide, rising investments in 5G infrastructure, and rapid integration of advanced technologies like IoT and AI are estimated to propel the adoption of 5G services. Verizon is well-positioned to capitalize on the significant 5G adoption and fixed wireless broadband network momentum.

Fierce Competition

While Verizon continues to accelerate the availability of its 5G ultra-wideband network across the country, the company faces heightened competition from wireless industry players, including AT&T, Inc. (T), T-Mobile US, Inc. (TMUS), Vodafone Group Plc (VOD), and SK Telecom Co., Ltd. (SKM).

Mixed Historical Growth

VZ’s revenue grew at a CAGR of 1.5% over the past three years. But its EBIT decreased at a CAGR of 0.3% over the same period. The company’s net income and EPS improved at CAGRs of 4.5% and 4% over the same time frame, respectively.

Further, the company’s levered free cash flow increased at a CAGR of 20.1% over the same period, and its total assets improved at a CAGR of 9%.

Robust Profitability

VZ’s trailing-12-month gross profit margin and EBIT margin of 58.69% and 22.87% are 20% and 183.1% higher than the industry averages of 48.90% and 8.08%, respectively. Likewise, the stock’s trailing-12-month net income margin of 15.58% is significantly higher than the industry average of 3.21%.

Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 22.56%, 7.04%, and 5.43% are considerably higher than the respective industry averages of 3.41%, 3.55%, and 1.24%. Its trailing-12-month levered FCF margin of 13.31% is 73.9% higher than the industry average of 7.65%.

Mixed Valuation

In terms of forward non-GAAP P/E, VZ is currently trading at 7.95x, 49.1% lower than the industry average of 15.62x. The stock’s forward EV/EBITDA of 6.96x is 20.3% lower than the industry average of 8.73x. Also, its forward Price/Book and Price/Cash Flow of 1.57x and 4.23x compared to the industry averages of 1.99x and 10.03x, respectively.

However, the stock’s forward non-GAAP PEG multiple of 32.47 is significantly higher than the industry average of 1.54. Its forward EV/Sales of 2.49x is 34.7% higher than the industry average of 1.85x.

Analyst Price Targets

On December 19, Oppenheimer analyst Timothy Horan maintained a Buy rating on VZ and set a price target of $43 on the stock. In addition, Verizon received a Buy rating from Citi’s Michael Rollins in a report issued on December 13. However, Well Fargo maintained a Hold rating on VZ’s stock.

Bottom Line

Verizon’s disciplined approach to driving strong cash flow, operating the business, and serving its customers allowed it to raise its dividend for the 17th consecutive year.

However, analysts appear bearish about the telecom company’s near-term prospects. Verizon’s revenue and EPS growth will likely face challenges, and this slowdown is primarily attributed to fierce competition from leading industry players such as AT&T and T-Mobile, which are consistently undergoing significant changes in their operations.

Given slowing revenue and EPS growth, heightened competition, and mixed valuation, it seems prudent to wait for a better entry point in this stock.

NOK's Struggles Unveiled: Analyzing the Impact of AT&T's $14 Billion Snub

Posted on by The INO.com Team

In December, Swedish telecommunications giant Ericsson (ERIC) won a $14 billion contract to revamp AT&T Inc.’s (T) wireless network, outpacing long-time competitor Nokia Oyj (NOK).

Within the agreement, Ericsson is expected to construct an open network capable of obtaining supply from multiple vendors, signifying a pivotal industrial transition. The conditions of the contract permit T to freely select its antenna and infrastructure suppliers going forward, mitigating the inflexibility of a single-vendor lock-in. The allocated budget will span over five years, with the primary aim of enhancing T's 5G technology infrastructure.

Ericsson currently supplies two-thirds of T's network, while NOK caters to the remaining portion. T's choice dealt a significant blow to NOK, whose shares took a harrowing 10% dip on the Helsinki stock exchange following the announcement.

NOK maintains a comprehensive partnership with T, supplying products and services across wireless, wireline, and other network technologies. This mirrors NOK's similar collaborations with other major network operators in North America.

Analysts caution that setbacks faced by NOK could compel the firm to divest sections of its business. These segments might operate more efficiently under local entities that possess superior proficiency in maneuvering through the vast U.S. market. This prediction arises from worries that interpersonal issues undermined NOK's previous bid.

Danske Bank analyst Sami Sarkamies said, "We don't think the decision came down to nitty-gritty product features such as fan-based cooling, rather it has been more about top-level relationships, credibility, and corporate image in the eyes of the customer."

The transition to open-source technology is set to expose NOK to intensified competition from its competitors in the lucrative U.S. marketplace, an area currently recognized as the globe's most valued telecom market. The largest expenditure in this territory is by T.

The contract with T now grants Ericsson a critical early-adopter lead over its adversaries. The Swedish corporation pioneers as the inaugural globally recognized vendor to integrate open RAN with a major operator into an existing network.

Citi analyst Andrew Gardiner said, "Nokia had been the primary share gainer within the RAN market for the past two years, following the decline after it lost significant share at Verizon in 2019. The loss of share at a second North American customer, particularly given Nokia's legacy in that market, is a considerable blow."

In light of T’s plans to undertake an O-RAN deployment, co-working with other vendors for the coming five years, NOK anticipates a decline in revenue generated from T in the Mobile Networks section for the next two to three years. As of 2023, T accounted for approximately 5% to 8% of the net sales within Mobile Networks.

In response to the anticipated change in revenue, NOK aims to reduce its gross cost basis by between €800 million and €1.20 billion by the end of 2026 compared to 2023, assuming consistent variable pay during both periods. This ambitious target equates to a 10% to 15% reduction in personnel expenses.

NOK has put forth an aggressive strategy to implement this program swiftly, with plans in place to save at least €400 million within 2024 and a further €300 million in 2025. The effects of this cost-cutting endeavor could result in a leaner organization consisting of around 72,000 to 77,000 employees, compared to the current strength of 86,000 employees.

The action to reduce the cost base is expected to mitigate the impact of T’s decision partially. NOK expects Mobile Networks to remain profitable over the coming years, but this decision would delay the timeline of achieving a double-digit operating margin by up to two years.

Consequently, by 2026, the Finnish telecom equipment provider NOK anticipates a 13% dip in its overall comparable operating margin target from the prior estimation of at least 14%.

NOK's Mobile Network division is witnessing a declining trend in 2023, expecting the market environment for this segment to remain bearish in the near future. This anticipated weakness in Mobile Networks is predicted to impact NOK’s operating profits negatively.

Challenges also extend to 5G deployment slowdowns in India. While 5G technology boasts transformative potentials like rapid video downloads and high-speed autonomous vehicles, NOK has encountered investment deceleration from mobile network operators this year due to global economic downturns.

NOK had initially envisioned its 5G rollout in India as compensation for North American telecom operators' mitigated spending this year. However, reality fell short of these expectations.

Moreover, in the fiscal third-quarter report, NOK reported a 20.2% year-over-year decline in sales, reaching €4.98 billion ($5.49 billion) and a sharp 69% drop in profits, totaling €133 million ($146.65 million). These weaker-than-expected figures may potentially incite the telecom titan to decrease its workforce by approximately 14,000 personnel.

However, NOK is implementing various strategies to enhance the resilience of its operations and augment profitability. It also aims to capitalize on rapidly growing markets like Cloud RAN, O-RAN, Enterprise, and Defense.

By 2024, NOK projects a modest increase in revenue generated from its Cloud and Network services, which is anticipated to be driven by the stable rollout of 5G core technology and solid performance in the enterprise sector. The company is prioritizing the integration of SaaS and Network as Code solutions to fortify its business model. Its commitment to digital operations, AI, analytics, security, private wireless, and 5G core technologies will likely escalate its prospects.

In addition, NOK also foresees mid-single-digit growth in net sales accompanied by a consistent operating profit in their Infrastructure division for 2024. This positive trajectory is upheld by impressive performance in optical networks and secure enterprise agreements relating to IP networks.

The injection of government funding expected in the latter half of 2024 will likely stimulate a revival in fixed networks. With these favorable conditions, the Network Infrastructure division is projected to achieve an operating margin ranging between 12% and 15% by fiscal 2026.

In Mobile Networks, NOK is confident about outpacing market growth in 2026, with a comparable operating margin expected between 6% and 9%. The company has reaffirmed its revenue guidance, with a forecast indicating growth exceeding the average market rate in 2026. Moreover, the projected free cash flow remains unchanged and is anticipated to convert 55% to 85% from the comparable operating profit.

Analysts expect NOK’s revenue and EPS for the current fiscal year ending December 2023 to decline 6.4% and 21.9% year-over-year to $25.39 billion and $0.37, respectively.

Bottom Line

NOK’s diverse business segments cater to separate customer demographics with specialized research and development needs, susceptibility to market shifts, and variable target profit margins. To foster growth and strategic agility, NOK plans to accord greater autonomy to its business units in terms of investment choices, growth schemas, portfolio supervision, and strategic affiliations.

In addition to refining its operating model, NOK intends to share cash flow and area-specific sales data for every business group. This increased transparency will offer investors a more detailed understanding of the financial performance of each segment.

Despite the recent developments being less than positive, NOK's Mobile Networks sector has achieved notable progression in the past years, expanding its RAN market share and reinforcing technological advantages.

Management remains confident that the company possesses an apt strategy to generate shareholder value in the future through opportunities to increase market share, diversify operations, and enhance profitability.

Mobile Networks play an indispensable role in envisioning a universally connected future. Significant investments are necessary for networks with exponentially improved capacities to realize potential revolutions in cloud computing and artificial intelligence. Undeterred, NOK continues to finance its research and development initiatives and fabricate superior products for its clientele.

Moreover, NOK has garnered a significant advantage by inking several noteworthy contracts. The most significant among these is a contract with Deutsche Telekom, Europe's leading telecommunications operator and the primary stakeholder of T-Mobile USA. This strategic move marks a turning point for NOK, re-establishing its partnership with Deutsche Telekom after a lapse since 2017. As part of this renegotiation, notably, Ericsson failed to secure its participation, positioning NOK as the exclusive contractor.

NOK’s valuation appears reasonable, with the stock trading at 9x consensus 2023 earnings and 8.8x 2024 earnings, which could entice investors to allocate their funds to the stock.

However, investors should take note that NOK shares demonstrated an underwhelming performance throughout 2023, exhibiting a roughly 27% decline year-to-date, in glaring contrast with the broader S&P 500's gain of about 24% within the same period.

The shares, currently trading below their 50-,100-, and 200-day moving averages, have mostly been traded below the $5 mark.

The difficulty beleaguering NOK shares, however, lies in the lack of potential growth, especially as estimates continue to dwindle. This will perpetuate the scenario where shares remain in a value trap, mirroring the trend experienced in 2023.

Considering the overall scenario, it would be wise for investors to wait for a better entry point in the stock.

Navigating the 2023 Santa Claus Rally: 3 Top Stock Picks for Year-End Gains

Posted on by The INO.com Team

Understanding the Santa Claus Rally

The Santa Claus rally refers to the sustained increase in the stock market indices that occurs during the last trading week of December and the first two trading days of the new year. It was first defined in The 1971 Stock Trader’s Almanac by Yale Hirsch.

Historically, major market indices, including the S&P 500, the Dow Jones, and the Nasdaq Composite, witnessed higher gains during these seven days compared to any other seven trading days of the year. Going back to 1950, the S&P 500 has gained nearly 80% times during this period.

In addition to marking a solid trading period, the Santa Claus rally is used as an early indicator by traders for what may happen in the new year. One of Yale Hirsch’s famous lines states: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

Wall Street Awaits Santa Claus Rally This Year with Stocks Nearing Records

As we head into the last few days of 2023, Wall Street investors are counting on the Santa Claus rally to generate solid returns.

The S&P 500 climbed more than 4% in December alone and is up nearly 24% this year, bringing the index within 1% of a new all-time high. Also, the benchmark index is on track for its eighth consecutive positive week. The high optimism in the stock market is buoyed by solid earnings reports, several signs of strength in the economy, and a growing probability that interest rates will come down soon.

Earlier this month, the Federal Reserve left interest rates unchanged, and the central bank chief Jerome Powell said the historic monetary policy tightening is likely over as inflation falls faster than expected and signaled interest rate cuts into 2024.

Data released last Friday supported the trend of easing inflation, showing annual U.S. inflation, measured by the Personal Consumption Expenditures (PCE) price index, further dropped below 3% in November. The PCE index fell by 0.1% between October and November, the first monthly decline in over three and a half years.

Combined with other latest data indicating disposable personal income and consumer sentiment rising, the U.S. economy seems to be heading into the new year on a solid footing.

“The narrative will continue to be about the Fed making a dovish pivot,” stated Angelo Kourkafas, senior investment strategist at Edward Jones. “That provides support on markets and sentiment and that is unlikely to change next week,”

Investors have demonstrated a substantial appetite for stocks lately. BofA clients bought about $6.4 billion of U.S. equities on a net basis in the last week, the largest weekly net inflow since October last year, BofA Global Research said in a December 19 report.

At the same time, there has been a “sharp increase” in buying among retail investors over the past four to six weeks, Vanda Research said in a note last Wednesday.

“After having chased higher yields aggressively in the past months, the FOMC pivot and strengthening soft-landing narrative have had individuals redirecting their purchases toward riskier securities,” Vanda said in a note. “We expect this trend to continue into the new year as yields remain under pressure.”

3 Stocks to Bet on for Year-End Gains

With a market cap of $1.58 trillion, Amazon.com, Inc. (AMZN) is an e-commerce giant that has a history of performing well during the holiday season. It engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally. The company operates in North America; International; and Amazon Web Services (AWS) segments.

According to the National Retail Federal (NRF), the holiday spending during November and December is expected to rise to “record levels” of between 3% and 4% year-over-year to between $957.30 billion and $966.60 billion, respectively. The NRF projects that online and non-stores sales will grow between 7% and 9% to between $273.70 billion and $278.80 billion.

With NRF projected holiday spending to surge to record levels, Amazon is anticipated to witness significant growth in its total sales volume and profit levels. The e-commerce giant held its latest Prime Day sales event on October 10 and 11, featuring two days of epic deals ahead of the holiday season. Also, AMZN announced plans to hire about 250,000 additional workers across its operations globally for the busy year-end sales period.

The company’s biannual Prime Day events help to drive its revenue. Despite persistent inflation rate, Amazon boasted the biggest-ever Prime Day sale in July this year. U.S. online sales during Amazon’s Prime Day event grew 6.1% year-over-year to $12.70 billion, according to data by Adobe Analytics. The first 24 hours of the shopping event were touted as the “single-largest sales day in company history.”

In addition, AMZN gets a considerable lift from the Black Friday and Cyber Monday sales events held at the end of November and tied to Thanksgiving and Christmas.

After all, AMZN’s trailing-12-month gross profit margin of 46.24% is 30.4% higher than the 35.47% industry average. Its trailing-12-month EBITDA margin of 13.35% is 22.4% higher than the 10.91% industry average. Moreover, the stock’s trailing-12-month levered FCF margin of 5.57% is 25.9% higher than the 5.22% industry average.

For the third quarter that ended September 30, 2023, AMZN’s net sales increased 12.6% year-over-year to $143.08 billion. Its operating income rose 348% year-over-year to $11.19 billion. In addition, the company’s net income and EPS came in at $9.88 billion and $0.94, compared to $2.90 billion and $0.28 in the same quarter of 2022, respectively.

Analysts expect Amazon’s revenue and EPS for the fourth quarter (ending December 2023) to increase 11.2% and 2,510% year-over-year to $165.93 billion and $0.78, respectively. Moreover, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

AMZN’s stock is already up nearly 78% year-to-date. Further gains could come with a Santa Claus rally.

Another stock that is primed for a holiday season rally is American Eagle Outfitters, Inc. (AEO). It operates as a specialty retailer that offers clothing, accessories, and personal care products under the American Eagle and Aerie brands worldwide. AEO sells its products through retail stores; digital channels, like www.ae.com, www.toddsnyder.com, and www.unsubscribed.com; and applications.

The solid performance of its key brands, such as American Eagle and Aerie, combined with strategic expansions into premium and activewear segments, indicates considerable potential for AEO’s growth. The company’s store designs, and online enhancements demonstrate its commitment to improving the customer experience.

During the third quarter that ended October 28, 2023, AEO’s net sales increased 4.9% year-over-year to $1.30 billion. Its gross profit was $543.80 million, up 13.3% from the prior year’s quarter. The company’s net income came in at $96.70 million, or $0.49 per share, compared to $81.27 million, or $0.42 per share, in the prior year’s period, respectively.

“I am pleased with our third quarter results which demonstrated the strength of our brands and reflected continued progress on our growth and profit improvement initiatives. Our strategic priorities, underpinned by our customer-first focus and commitment to operational excellence, are propelling us forward,” said Jay Schottenstein, AEO’s Executive Chairman of the Board of Directors and CEO.

“Momentum has continued across the business into the fourth quarter, driven by strong holiday assortments, engaging marketing campaigns and solid execution, supporting our improved outlook for the rest of the year,” Schottenstein added. “Looking ahead, we remain focused on advancing our long-term strategic priorities, as we seek to create consistent growth across our portfolio of brands and generate efficiencies for improved profit flow-through.”

For the full year, AEO’s management forecasts revenue to be up mid-single digits to last year, compared to the previous guidance for revenue up low single digits. Operating income is projected to be in the range of $340 to $350 million, at the high end of prior guidance of $325 to $350 million. This reflects strengthened demand and continued profit improvement. 

For the fourth quarter, the company’s outlook reflects revenue up high-single digits and operating income in the range of $105 to $115 million. The revenue outlook includes a four-point positive contribution from the 53rd week. 

Street expects AEO’s revenue and EPS for the fourth quarter (ending January 2024) to increase 8.5% and 17.8% year-over-year to $1.62 billion and $0.44, respectively. Also, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters.

Shares of AEO have surged more than 25% over the past month and approximately 45% over the past year.

The third stock, JAKKS Pacific, Inc. (JAKK), also tends to shine during the holiday season. With a market cap of $347.33 million, JAKK produces, markets, sells, and distributes toys and related products worldwide. The company operates through the Toys/Consumer Products and Costumes segments.

The company is primarily benefiting from the expansion of product offerings by strategizing business operations, coupled with the growing focus on partnerships. On November 1, JAKK announced entering a long-term agreement with Authentic Brands Group to design and distribute products inspired by iconic brands like Forever 21 and Sports Illustrated, aiming for a global retail debut in 2024.

The partnership aligns with JAKK’s strategy to expand into new product categories, targeting Millennials and Gen Z while leveraging Authentic’s platform to diversify its seasonal offerings and explore additional collaborations.

JAKK’s trailing-12-month net income margin of 12.18% is 169.5% higher than the 4.52% industry average. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 56.52%, 17.03%, and 16.96% are significantly higher than the industry averages of 11.40%, 6.01%, and 3.99%, respectively.

For the third quarter that ended September 30, 2023, JAKK’s reported net sales from the Costumes segment increased 19% year-over-year to $63.70 million. Its gross profit grew 16.4% year-over-year to $106.99 million. The company’s income from operations rose 16.1% from the year-ago value to $62.40 million. Its adjusted EBITDA grew 12.9% year-over-year to $67.07 million.

In addition, the company’s adjusted net income attributable to common stockholders increased 28.4% year-over-year to $50.09 million, and its EPS came in at $4.75, up 25% year-over-year. 

After reporting outstanding fiscal 2023 third-quarter results, Stephen Berman, CEO of JAKKS Pacific, said, “We are looking forward to the holiday season and have recently finished great customer meetings previewing our Fall 2024 product line. We are exceeding our own internal expectations for the full-year and are carefully navigating towards the end of the year given the persistent uncertainty about consumer behavior.”

JAKK’s stock has climbed more than 14% over the past month and is up nearly 100% year-to-date.

Bottom Line

We are heading into the last few days of the year, which typically represents a favorable time for the stock market and investors. Known as the Santa Claus rally, the stock market tends to rise substantially in the last trading week of December and the first two trading days of the new year.

This year, the optimism is high, with the Federal Reserve surprising investors earlier this month by signaling that its historic monetary policy tightening is likely over and projecting interest rate cuts in 2024. Moreover, the latest robust data indicates strength in the U.S. economy.

Of course, year-end holiday shopping offers a considerable sales boost to retailers and other companies, which can help lift stock prices. AMZN, AEO, and JAKK are set to shine in the year-end Santa Claus rally.

While the Santa Claus Rally offers profitable investment opportunities, day traders should approach it with immense caution and implement an effective risk management strategy. Pre-setting position sizes, setting stop-loss orders, diversifying portfolios, and adhering to a well-defined trading plan are essential steps for managing risk during the rally.

Beyond Gaming: Assessing the Ripple Effect of China's Regulatory Actions on BABA and JD

Posted on by The INO.com Team

The Chinese authorities have recently issued a comprehensive draft of rules and regulations to reduce online expenditure and in-game rewards in video games. These impending regulations would prohibit online games from offering incentives to players based on their consecutive logins, first-time purchases, or recurring payments – standard practices typically deployed in online gaming scenarios.

The removal of the incentives could reduce daily active users and in-app revenue. Such a change could ultimately compel publishers to restructure their game design and monetization strategies.

The draft represents the most stringent enforcement to date. It bars games from presenting probability-based draws to underage users and disallows the trading of virtual gaming items. Amid ongoing concerns over user data security, it mandates that game publishers host their servers domestically in China.

The aggressive regulations have slammed the world's largest gaming market. The immediate fallout saw investors retreating in haste, resulting in an approximate loss of $80 billion in market value for China’s two dominant gaming companies, Tencent Holdings and Netease.

Several U.S. and European video game developers saw shares take a hit after Friday’s announcement, but the losses were small when compared with Tencent’s 16% tumble and NetEase’s 25% decline. The regulation news wiped about $54 billion off Tencent’s share value.

The country initiated its major clampdown on the gaming sector in 2021, implementing stringent playtime restrictions for minors and freezing new game approvals for almost eight months, citing increasing concerns over gaming addiction. These regulatory measures led to unprecedented challenges for China's gaming industry in 2021 and 2022, marking the first time the industry witnessed a contraction in total revenues.

While the Chinese authorities resumed approval of new games in the following year, regulators have maintained their focus on managing the duration of gameplay for minors and their overall expenditure within the game.

The recent draft comes as China's domestic game market revenue reached ¥303 billion ($42.6 billion), growing 14% in 2023, reversing a 10% decline from the year before, as per figures from industry association CGIGC. Due to the sheer size and impact of Chinese gaming giants, the global video games market could also be affected in the long run.

The profound impact of China's recent regulations has reverberated beyond the gaming industry and has significantly impacted Chinese tech corporations.

A regulatory storm against big tech firms emerged in late 2020 when Chinese authorities began to express concerns about the extensive influence and growth of the nation's major internet platforms.

This regulatory onslaught against China’s tech giants resulted in the wiping of trillions of dollars in market value, leaving a significant dent in one of the most burgeoning sectors of the world's second-largest economy. This intensified the U.S.-China decoupling, with its effects visibly shrinking those Chinese tech companies that once competed neck-to-neck with their U.S. counterparts.

Alibaba Group Holding Limited (BABA) found itself in the eye of the storm following critical comments made by co-founder Jack Ma against Chinese regulators ahead of the impending IPO of its subsidiary Ant Financial. This fintech affiliate, whose IPO plans in Shanghai and Hong Kong were halted abruptly, created a global tremor among the investment community.

BABA faced a record-breaking fine of $2.8 billion, and Chinese antitrust regulators imposed rigorous restrictions on the company's e-commerce operations. The newly enacted measures – barring BABA from implementing exclusive agreements with merchants, employing loss-leader promotions to attract fresh clientele, and boosting its ecosystem through unauthorized investments – have subsequently weakened BABA's safeguards against market competitors.

Following the censure of BABA, China's regulatory hawks turned their attention toward the online financial service units of 13 other tech titans, including JD.com, Inc. (JD).

It was initially predicted that Chinese policymakers would change their trajectory and prioritize growth stimulation in 2023, with tech firms being key players in this strategy. But with recent gaming regulations eroding consumer faith in tech stocks, it is expected to trigger a domino effect, potentially impacting shares of high-flyers like BABA and JD.

Here, we delve deeper into the ramifications and implications faced by these tech companies.

Alibaba Group Holding Limited (BABA)

BABA, previously regarded as China's best contender for becoming a trillion-dollar entity, currently stands near its lowest trading value of the year, a significant reduction from its 2020 peak. The company is navigating through turbulence on multiple fronts. Weakened economic recovery and burgeoning rivals threaten BABA's once primarily dominant position in the online retail sector.

BABA recently aborted plans to float its cloud division due to uncertainties stirred by the United States' export restrictions on advanced computing chips. The tech giant now looks forward to formulating a robust growth model centered around the increasing demand for networked and highly scalable cloud computing services underpinned by AI. However, it's worth noting that U.S. bans on high-end chip exports to China may hinder China's technological ambitions.

In an endeavor to revive profits, BABA is refocusing on e-commerce, leveraging content creators and competitive pricing to remain relevant amid stiff competition. The e-commerce behemoth is looking at slashing prices and is projected to continue heavy investment in curating content encompassing shopping, consumption, and everyday life.

Stricter regulations enforced in recent years have purportedly placed pressure on Chinese tech firms like BABA. This year, BABA has also witnessed a contraction in its workforce. BABA's stock prices dropped following China's announcement to regulate the online gaming industry with tough measures aimed at reducing excessive spending and controlling online game content.

Alibaba Cloud offers custom solutions for the gaming industry, providing dependable support for game development and distribution, ensuring an excellent experience for players and users. Globally, it remains a top choice for gaming businesses intending to streamline their digital transition journey with flexible game development, secure and swift global distribution, and economical operations.

BABA owns several renowned gaming platforms in China, including Youku Games, Epic Games China, and Perfect World. These platforms boast millions of gamers and generate billions of dollars in revenue each year.

Nonetheless, these platforms will also have to conform to new rules that curtail online gaming time for minors and limit game content featuring violence, gambling, or inappropriate language. These newly imposed rules mandate BABA to modify its game development strategy and content to meet the novel standards and evade potential penalties.

Additionally, it might require extensive resources and effort to supervise and moderate its gaming platforms to maintain regulatory compliance, potentially risking the loss of consumers. Such changes could then detrimentally affect BABA's revenue and profitability derived from the online games that the tech behemoth develops and distributes.

However, analysts expect BABA’s revenue for the fiscal third quarter ending December 2023 to increase 4.9% year-over-year to $37.65 billion. Its EPS is expected to come at $2.79 for the same quarter.

JD.com, Inc. (JD)

JD, China’s leading e-commerce platform, has extended its realm of operations to include online gaming under the name of JD Gaming.

What JD is doing in gaming?

The retail giant's gaming venture has several elements to its approach. Firstly, it harnesses the insights of its extensive consumer base, who contribute an abundance of product feedback collected through the platform's transactions. This data is shared with industry partners to inform and enhance their product development.

One key instance is JD's engagement with influential partners like Lenovo, a noted Chinese PC manufacturer, and the gaming behemoth Tencent. The collaboration resulted in the creation of mobile gaming optimized smartphones. Through this strategy, JD not only participates in product development but also acts as a distributor for these devices, directly catering to its gaming clientele via its shopping app.

Secondly, a significant component of JD's gaming strategy involves its stake in e-sports or competitive video gaming. In 2017, JD unveiled its professional e-sports team, JD Gaming, expanding it later by launching JD Esports, a dedicated mobile gaming team, in 2020.

Considering that global esports revenue is projected to surge to $3.8 billion by 2023, the potential for profit is vast. JD intends to ensure that a part of this profitable domain is its.

However, recent changes in gaming regulation affecting youth in China might cause a shift in consumer preferences and gaming habits. Consequently, online games, accompanying accessories, game consoles, and in-game purchases may see a decrease in demand. These developments have the potential to impact JD's e-commerce operation in ways worth close observation.

Analysts expect JD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to decline 1.1% and 3.8% year-over-year to $41.97 billion and $0.66, respectively.

Bottom Line

The sweeping restrictions unveiled before Christmas elicited reminders of the unceremoniously harsh crackdown on the tech sector in 2021. During that year, Chinese regulatory bodies spontaneously initiated limitations spanning various areas from e-commerce to entertainment, effectively destroying the online education industry through the outlawing of profits.

Some believe that there are traces of a governmental aspiration for an enhanced and diverse gaming environment marked by creativity and exceptional quality. The authorities lean toward a marketplace where publishers gain profits via ethical practices and innovative offerings instead of aggressive monetization tactics or endorsing "pay-to-win" games.

In a surprising turn of events, Chinese officialdom has moderated newly formulated online gaming regulations soon after the proposed constraints resulted in major technology firms losing billions of dollars. They sanctioned 105 domestic games, indicating the Chinese authorities' approval for the evolution of online gaming. This could potentially bolster investor sentiment.

However, analysts remain cautious when considering China's e-commerce titans, like BABA and JD. As it stands, the Chinese consumer is progressively tightening discretionary spending amid a frail economic climate. Additionally, the looming threat of intensified sector rivalry might influence company profitability.

Last week saw Chinese stocks taking a downturn, induced by apprehension over a potential surge in COVID-19 contagions, endangering progress in the world's second-most prosperous economy. This puts the decision to open the country post-lockdown under scrutiny, especially considering the resultant economic deceleration witnessed last year.

Given this backdrop, it could be wise to wait for better entry points in the featured stocks