Is NIO (NIO) Stock a Ticking Time Bomb?

Posted on by The INO.com Team

Nio Inc. (NIO), a leading China-based electric vehicle (EV) manufacturer, has performed poorly over the past few months. Shares of NIO have plunged more than 5.4% over the past month and 17% year-to-date.

But, as per the latest headlines, it may appear that the situation will improve from here for the EV maker. On November 1, NIO announced its October 2023 delivery results. The company delivered 16,074 vehicles in October, growing by 59.8% year-over-year. The deliveries comprised 11,086 premium smart electric SUVs and 4,988 premium smart electric sedans.

Although deliveries surged by a high double-digit figure last month, growth was not as impressive sequentially. In September 2023, NIO delivered 15,641 vehicles. So, October’s deliveries represented a sequential increase of just 2.8%.

The company’s figures are lackluster compared to China-based peers such as Li Auto Inc. (LI) and Xpeng Inc. (XPEV) and past expectations.
LI’s October deliveries totaled 40,422 vehicles, increasing by 302.1% year-over-year and a sequential growth of 12.1% (based on 36,060 vehicle deliveries in September). Further, XPEV’s deliveries came in at 20,000 in October, an increase of 292% year-over-year and up 31% on a sequential basis.

While NIO’s stock did soar after the release of its delivery results, the rise was modest (nearly 2.1%) compared to LI (almost up 3.5%) and XPEV (up 7%). Moreover, the broad market rally on November 1 may have played a larger role than the vehicle deliveries news in NIO's rally.

Although NIO found support in recent trading days, the stock will likely suffer immensely in the upcoming months. So, we maintain a bearish stance on this EV stock.

Now, let’s review in detail what has happened in the past few months and discuss several factors that could impact NIO’s performance in the near term:

Poor Financial Performance

For the second quarter that ended June 30, 2023, NIO reported revenue of $1.21 billion, missing analysts’ estimate of $1.27 billion. The revenue translates to a decline of 14.8% from the second quarter of 2022. Its vehicle sales came in at $990.90 million, down 24.9% from the second quarter of 2022. The company’s gross profit decreased 93.5% from the year-ago value to $12 million.

NIO’s operating expenses grew 47.2% year-over-year to $849.65 million. Its non-GAAP loss from operations was $753.50 million, an increase of 132% year-over-year. The company’s non-GAAP net loss widened by 140.2% from the prior year’s quarter to $751 million. Furthermore, the automaker’s loss per share came in at $0.51 versus the consensus loss per share estimate of $0.24.

Unfavorable Analyst Expectations

Analysts expect NIO’s revenue for the third quarter (ended September 2023) to increase 47.2% year-over-year to $2.66 billion. However, the company is estimated to report a loss per share of $0.23 for the same period. NIO has also missed the consensus revenue estimate in three of the trailing four quarters and the consensus EPS estimates in all four trailing quarters, which is disappointing.

In addition, the Chinese EV maker’s EPS is expected to remain negative for at least two fiscal years.

High Levels of Indebtedness

On September 25, NIO closed its offering of $500 million in aggregate principal amount of convertible senior notes due 2029 and $500 million in aggregate principal amount of convertible senior notes due 2030. The issuance of a $1 billion convertible senior notes sent ripples of concern among investors and led to a significant drop in NIO’s stock price.

A debt offering generally indicates the company’s need for cash. Although issuing shares can be dilutive, a debt offering results in increased scrutiny by investors as excessive debt is often considered to hinder the company’s ability to generate a cash surplus.
Thus, higher levels of indebtedness due to additional debt offerings can be alarming as they potentially undermine the position of common stockholders. This apprehension potentially influences behavior toward NIO, reflecting concerns about the EV maker’s debt strategy and its implications for future financial stability and long-term viability.

NIO’s total liabilities were $9.52 billion as of June 30, 2023.

Struggling to Boost Sales in Europe

The Chinese EV manufacturer NIO is scrambling to drive sales in Europe, its first area of international expansion. The company is considering building a dealer network across Europe to speed up sales growth despite China-based EVs facing potential tariffs in the region.

NIO, an aspiring competitor to a world-class EV brand, Tesla, Inc. (TSLA), launched in Norway in 2021 and entered Germany, Sweden, Denmark, and the Netherlands in October 2022, enabling customers to purchase directly from its stores or online.

However, Nio began assessing dealers in key European markets after the company’s President said sales in Europe were missing expectations.
A source said that dealers were being considered both for Nio-branded cars sold in Europe and for project “Firefly,” a new affordable EV brand that the company plans to export to Europe from 2025.

Another reason to use dealers would be to ease cash pressure on NIO, which is prioritizing spending on research and battery swapping stations in China, that source added.

Job Cuts in the Face of Heightened Competition

Shanghai-based EV company Nio will reduce job positions in November and cut or defer some investment, strategic moves aimed at boosting the company’s viability as it grapples with widening losses and intense competition.

Demand for EVs has dampened in China as consumers prefer more economical plug-in hybrids, sales of which grew nearly 84.5% in the first nine months of 2023, helping automakers LI and BYD Co. Ltd (BYDDY) to gain market share.

Also, a price war started by world EV leader TSLA a year ago is dragging down the profitability of other EV makers, which have also stepped up efforts to cut costs and build partnerships to survive the escalating competition.

According to an internal letter signed by CEO William Li seen by Bloomberg News, NIO will slash its staff by 10% this month.

“Duplicate” and “inefficient” roles will be eliminated, and project investment that won’t contribute to the company’s financial performance within three years will be cut or differed, Li said.

Nio has been in a fight for survival amid fierce competition in the nation’s automotive industry over the past two years. Li wrote that to “qualify for the next round of competition,” the company must reduce costs and ensure resources for critical business areas. Also, he apologized to the colleagues who will be affected by the adjustments, as per the memo.

Price War in the EV Market

A price war instigated by Tesla a year ago increased the pressure in the EV industry, with other companies following by cutting prices in a race to attract customers as their sales showed signs of slowing.

Earlier this year, NIO slashed prices for its cars and announced delaying plans to spend on expansion and research. The Chinese electric car brand cut car prices by the equivalent of $4,200 and ended free battery swaps for new buyers.

Bottom Line

Once considered one of the dominant players in China’s EV market, NIO has poorly fallen short of its sales estimates and continued to post massive losses. The company’s revenue and earnings missed analysts’ expectations in the last reported quarter. Further, analysts and investors appear bearish about its growth prospects.

While its strategic initiatives, including job cuts and lower investment, could boost profitability in the long run, the EV maker continues to face near-term challenges with consumer preferences, fierce competition in the EV market, pricing power, widening losses, and lower margins.
Given its deteriorating financials, declining market share, lower profitability, and short-term uncertain outlook, NIO is best avoided now.

Bank of America (BAC) Just Crossed the 50-Day MA: Bearish Indicator?

Posted on by The INO.com Team

In the wake of regional bank failures earlier this year, the U.S. banking sector has grappled with substantial challenges, which include customer deposit deficits, rising deposit costs, sluggish loan growth, and diminishing profit margins. Yet, it demonstrated resilience later.

This ostensible resurgence became evident as the Federal Reserve propelled benchmark interest rates to the highest in over two decades, a trend expected to reverse in the forthcoming year. Amplified interest rates produce gains for banks due to elevated net interest income.

Despite this, the U.S. banking sector continues to bleed deposits. Throughout the second quarter alone, FDIC-insured banks experienced an almost $100 billion downward deposit shift. The industry's net income was diminished by $9 billion to $70.80 billion in the second quarter, with the average net interest margin contracting by three basis points to 3.28%.

Moreover, Federal Reserve Economic Data reveals a stunning $100 billion diminution in U.S. commercial banking deposits in just three weeks. Deposits plummeted from $17.38 trillion on September 27 to a disconcerting $17.28 trillion by October 18.

Furthermore, according to Moody's assessment, U.S. banks could struggle with at least $650 billion in unrealized losses in their securities portfolios, a 15% increase from the $558 billion losses experienced at the second quarter's end. This comes after expectations of extended higher interest rates led to a bond market collapse in the third quarter.

The share performance of the nation's second-largest financial institution, Bank of America Corporation (BAC), has languished alongside other bank stocks given these circumstances. BAC reported $131.60 billion in unrealized losses in its securities portfolio for the fiscal third quarter that ended September 30, 2023.

BAC continues to weather a period of economic volatility despite a 14% year-to-date decrease in its share values. However, investors are increasingly concerned about the bank's diversified investment portfolio status during long-standing escalated interest rates.

BAC’s early pandemic decision to allot billions into long-term Treasury bonds and mortgage bonds during a time of increased new deposits has now become a significant financial burden.

An influx of deposits accelerated by federal aid significantly outpaced the growth of loans during this period. The acting CFO at the time, Paul Donofrio, divided the surplus funds between long-term fixed-income products, with the remainder placed in short-term and floating-rate debt. This strategy was intended to safeguard the bank's net interest margin if rates stagnated or fell.

Over the years, BAC's CEO, Brian Moynihan, has consistently underscored that the bank stands to make significant gains when interest rates rise, backed by a solid deposit base ready for financial expansion following a strategic pivot by the Fed. However, amid the current high-interest rate climate, BAC has lagged among America's banking heavyweights.

Low-yielding investments and a decrease in the value of holdings upon the Fed's increased rates imply reduced earnings from its investments for BAC. Its investment holdings presently display considerable unrealized losses, missing competitive rates since 2007. As of June 30, 2023, these holdings show paper losses on those debt securities exceeding $109 billion, which increased to $136.22 billion by the third quarter's end.

With approximately $603.37 billion tied up in held-to-maturity securities, the bank's considerable holdings in these low-yield assets restrict its potential to maximize profits from cash investments in money markets or higher-return assets. The bank's comparatively lower overall yields on its securities book are projected to persist for some time. Analysts do not anticipate the bank needing to liquidate these holdings and incur a loss.

BAC’s securities portfolio is the largest and the least-yielding, heavily weighted with debt that matures after a decade. Should the Fed act upon another prospective rate increase, the valuation of these holdings may depreciate further.

Moreover, for the fiscal third quarter of 2023, BAC’s net interest income rose 4.5% year-over-year, surpassing the analyst's estimate, but it remains below its peers. JP Morgan’s NII grew about 30% year-over-year, while Wells Fargo’s NII climbed 8.3% year-over-year.

However, executives remain optimistic that the financial climate could ameliorate each quarter as the portfolio contracts and the remaining bonds decrease in duration. Even if rates stay where they are, interest income is poised to bolster as approximately $10 billion of holdings mature every quarter, the proceeds of which can be reinvested at more favorable rates.

Chief Financial Officer Alastair Borthwick indicates that these funds could go into cash where attractive yields are achievable or possibly for long-term investments, now offering superior coupons. More than a quarter of the bank's reserve remains frozen in debt securities, yielding roughly 2.4% in a market environment offering around 5%. As it stands mid-year, the accounted value of these securities has plummeted by close to $110 billion.

There were also signs from BAC that some of its customers are encountering problems as borrowing costs rise. Its net charge-offs were $931 million, up 79% from the year-ago quarter.

BAC, indeed, pays less than 2% on its significant deposit base. This allows it to maintain profitability through its loan and investment ventures, unlike smaller banks that face financial strain due to their new deposits costing more than what their older assets yield.

A potential shift in investor perspective may also benefit BAC. As investors shift their focus from bond losses and increasing deposit costs to credit and capital, BAC could surpass expectations and enjoy improved performance.

Bottom Line

Recent decisions by financial institutions have underscored the precarity of the contemporary banking landscape. The alarming revelation that the second-largest lending bank in the U.S. has unrealized losses of $131.6 billion on securities is exceedingly concerning, even with government assurances in place.

Prominent lending organizations have experienced setbacks in their bond holdings; however, BAC is particularly notable due to its size and impact. Possessing over $3 trillion in assets and $1.9 trillion in deposits as of September 30, 2023, the bank has considerable fiscal security to endure this turbulent period. It is anticipated that BAC will successfully navigate these rough waters.

CEO Moynihan has long championed a strategy of "responsible growth," which calls for the pursuit of profit without exposing the bank to unnecessary risk – a methodology instituted in 2014. However, some insiders argue that this cautious approach might neglect potential growth opportunities.
While unrealized losses do not generally affect the average bank customer, they may concern investors. This factor, combined with the massive scale of insured consumer deposits, construes BAC as less vulnerable to the type of deposit flight that sank regional banks.

Should interest rates stabilize and gradually decrease, it could trigger a rise in share prices since the long-term securities the bank holds are likely to gain in value.

Moreover, the unrealized losses may bear less significance for long-term investors focused on gaining from the bank's consistently escalating dividend payments. BAC boasts a solid balance sheet underpinned by sturdy profitability, and it currently offers an appealing dividend yield of 3.38% on the current share price. Investors can benefit from this by retaining the shares and waiting for potential capital appreciation.

While BAC's disproportionate portfolio does not create an immediate existential crisis, it significantly affects both the bank's earnings and investor interest. Even though it currently trades slightly above the 50-day moving average, considering prevailing circumstances, it may be prudent for investors to wait for a better entry point in the stock.

Walt Disney (DIS) Pre-Earnings Analysis – What to Expect

Posted on by The INO.com Team

The Walt Disney Company (DIS), a leading media and entertainment company, posted mixed results for its fiscal 2023 third quarter. The company reported third-quarter adjusted EPS of $1.03, beating analysts’ expectations of $0.98. Its revenue came in at $22.33 billion, lower than the consensus estimate of $22.53 billion.

The company is set to report its fourth quarter and fiscal full year 2023 financial results on November 8, 2023, after the market closes. Analysts expect DIS’ revenue and EPS for the fourth quarter (ended September 2023) to increase 6.2% and 137.6% year-over-year to $21.41 billion and $0.71, respectively.
For the fiscal year 2023, the company’s revenue and EPS are expected to grow 7.7% and 4.2% from the prior year to $89.09 billion and $3.68, respectively.
Shares of DIS have plunged more than 18% over the past six months and 5% year-to-date.

Let’s review in detail what has happened over the past few months and discuss the key factors that could influence DIS’ performance in the near term:

Recent Developments to Further Streaming Objectives

On November 1, DIS announced that it would acquire the remaining 33% stake in Hulu, LLC held by Comcast Corp.’s (CMCSA) NBC Universal (NBCU) for at least $8.60 billion, a deal that would give DIS complete control of the streaming service. Disney had run Hulu since 2019, when Comcast gave up its authority to Disney and effectively became a silent partner.

On September 11, DIS and Charter Communications, Inc. (CHTR) announced a transformative, multi-year distribution agreement that maximizes consumer value and supports the linear TV experience as the industry evolves. As part of the agreement, the majority of DIS’ networks and stations will be restored to Spectrum’s video customers.

Under this deal, Disney+ Basic ad-supported offering will be included in Spectrum TV Select Video packages. Also, ESPN+ will be included in the Spectrum TV Select Plus Video package, and ESPN’s flagship direct-to-consumer Service will be made available to Spectrum TV Select subscribers upon launch.
In a joint statement, Robert A. Iger, DIS’ CEO and Chris Winfrey, President and CEO at CHTR, said, “Our collective goal has always been to build an innovative model for the future. This deal recognizes both the continued value of linear television and the growing popularity of streaming services, while addressing the evolving needs of our consumers.”

Also, on August 9, Disney+ announced that an ad-supported offering will be available in select markets across Europe and Canada starting November 1 after the successful ad-tier launch in the U.S.

Plans to Double Investment in Parks and Cruises Business

DIS said in a securities filing it will nearly double its planned investment in its parks segment to more than $60 billion over 10 years. With all other divisions struggling, Disney’s theme parks, experiences and products segment has been a bright spot in the third quarter. The division saw a 13% rise in revenue to $8.30 billion, mainly driven by strength from its international parks.

But the company’s domestic parks, particularly Walt Disney World in Florida, have witnessed a slowdown in attendance and hotel room occupancy.

Bleak Financial Performance in the Last Quarter

For the third quarter that ended July 1, DIS reported revenues of $22.33 billion, up 3.8% year-over-year, primarily driven by growth in its parks, experiences and products division. However, its top-line numbers came short of analysts’ expectations.

Revenues and operating income from the Disney Media and Entertainment Distribution segment dropped 1% and 18% year-over-year to $14 billion and $1.13 billion, respectively.

The company reported $2.65 billion in restructuring and impairment charges, dragging it to a rare quarterly net loss. Most of these charges were what DIS called “content impairments” related to pulling content off its streaming platforms and ending third-party licensing agreements. Disney’s net loss was $460 million, or $0.25 per share, compared to net income of $1.41 billion, or $0.77 per share, in the prior year’s quarter.

Excluding those impairments, the company recorded an adjusted EPS of $1.03, compared to $1.09 during the year-ago period.

Subscriber losses also continued, with the company reporting 146.1 million Disney+ subscribers during the third quarter, a decline of 7.4% from the prior quarter. Most subscriber losses were from Disney+ Hotstar, where Disney witnessed a 24% drop in users after it lost the rights to Indian Premier League cricket matches.

Disappointing Historical Growth

Over the past three years, DIS’ revenue grew at a CAGR of 8.7%. However, the company’s EBITDA and net income declined at CAGRs of 5.7% and 28.5%, respectively. Its EPS decreased at a CAGR of 31.1% over the same period.

Also, the company’s tangible book value and levered free cash flow declined at respective 4.6% and 6.5% CAGRs over the same time frame.

Streaming Division Faces Several Challenges

Global media and entertainment conglomerate DIS’ streaming division lost $512 million in the fiscal 2023 third quarter, compared to $1.06 billion during the same quarter of 2022. It brings its total streaming losses since 2019, when Disney+ was introduced, to more than $11 billion.

To make the streaming business more profitable, DIS’ CEO Bob Iger has shifted the focus at Disney+ from quick subscriber growth, which requires expensive market campaigns, to making more money from the existing Disney+ subscribers. The price for access to an ad-free version of Disney+ increased to $13.99 per month beginning October 12, previously $10.99 per month.

The company also increased the price of Hulu without ads to $17.99 per month, a 20% price hike. However, the monthly price of Disney+ and Hulu’s ad-based tiers and the annual price of ad-based Hulu remained unchanged.

“We’re obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier,” Mr. Iger told analysts on a conference call.
Along with this pricing news, the company announced it will roll out tactics to mitigate password sharing.

A primary challenge Disney faces is heightened competition in the streaming industry. Among various video streaming giants, including Netflix, Amazon Prime Video, and emerging entrants such as HBO Max and Apple TV+, DIS must differentiate itself in terms of content quality and pricing to stand out in this crowded market.

Further, as consumers continue to feel the pressure of increasing prices and persistent inflation, they will cut back on their media and entertainment spending.

Continued Issues in Media Business

The company still relies on old-line channels such as ESPN, its flagship sports brand, and ABC for approximately a third of its operating profits. Cord-cutting, sports programming costs, and a soft advertising market hurt these outlets. DIS’ traditional channels had $1.90 billion in third-quarter operating income, a decline of 23% from a year earlier.

It was the second straight quarter in which Disney’s traditional TV business reported a sharp drop in operating income. The company cited lower ad sales at ABC, partially due to viewership declines, lower payments from ESPN subscribers, and increased sports programming costs.

Bottom Line

While DIS’ turnaround plan, including a mix of price hikes across its streaming operations, increasing ads, cutting costs, and other strategic initiatives, could drive long-term growth, the company grapples with several challenges. In August, Disney’s shares hit a new nine-year low below $84 as investors were unconvinced with CEO Iger’s turnaround plan.

The media and entertainment giant posted mixed financial results in the last reported quarter, plagued by streaming woes and increased restructuring costs resulting from pulling content from its platforms.

Further, DIS’ short-term prospects seem uncertain as the company continues to struggle with making its streaming business profitable, improving the quality of its films, and the slowdown in the traditional media business, which is challenged by declining subscribers and a soft advertising market.
Disney also faces heightened competition. The streaming industry is exceptionally competitive, and Disney must strike a proper balance between content quality and prices to stand out in this crowded market and be profitable.

Given its deteriorating financials, decelerating profitability, and uncertain near-term prospects, it could be wise to avoid this stock now.

SPY: Mapping the Road to Recovery - Strategies for Cautious Investors

Posted on by The INO.com Team

Paradoxically, the season traditionally associated with the supernatural often aligns with a propitious period for Wall Street. This is due to the 'Halloween Effect,' which generally casts a favorable light on financial markets. However, this was not the case in October, which proved somewhat unsettling for investors.

The SPDR S&P 500 ETF Trust (SPY) witnessed a decline in October, marking its third consecutive loss-registering month and the most prolonged losing streak since the beginning of the pandemic in 2020. Given the global upheavals, this decrease was not entirely surprising.
The Russia-Ukraine conflict, geopolitical tension in the Middle East, and rising interest rates have negatively affected financial markets. As October's harsh investment climate subsides, investors should prepare for possible additional volatility in November, known historically as one of the stock market's most fluctuant months.

The U.S. stock market indices rallied nearly 2% intraday amid positive quarterly financial results and expectations that the Federal Reserve has concluded its interest rate hike campaign. The S&P 500 rallied by 79.92 points or 1.89%, reaching 4,317.78.
Let’s look at some key factors that contributed to the recent market downturn and the potential implications they may hold for the near future. These will undoubtedly serve to drive future investment strategies:

Interest Rate Hikes

Nearly 20 months into the Federal Reserve's rigorous monetary policy tightening, it remains ambiguous to officials whether financial conditions are adequately restrictive to control an inflation rate viewed as exceeding the central bank's 2% objective.

The Fed kept the interest rates steady within the 5.25%-5.50% range, as predicted. Chair Jerome Powell has not ruled out further monetary tightening measures. Most investors have interpreted these elevated interest rates as precursors to a significant economic cooldown from a robust rate of 4.9% recorded in the third fiscal quarter of 2023.

Incoming economic indicators will chiefly influence decisions concerning future rate hikes. Depending on inflation trends, there is potential for interest rate cuts to be introduced during the second quarter of 2024 or in subsequent months. If the Fed manages to usher the economy towards a "soft landing," implementing rate cuts while skirting a recession, this could potentially trigger a stock rally. However, should economic growth maintain its current momentum and inflation revive in the ensuing months, investors could face an unforeseen disenchantment.

Bond Rate

The Fed’s interest rate hike measure serves as a tactic to raise borrowing costs, consequently moderating economic activity and curbing inflation. Since inflation remains above its 2% target, it is plausible that interest rates will maintain their elevated status for an extended period.

Growing concerns about the longevity of these heightened interest rates have spurred a persistent rise in the U.S. 10-year yield. Moreover, robust U.S. retail sales, labor market data, and inflation figures exceeding expectations have contributed to this yield surge.

After remaining below 4% for most of the year, 10-year U.S. Treasury note yields crossed 5% – the first in 16 years. The recent escalation in interest rates across multiple bond market segments may be attributed to a combination of factors that have transformed the investment landscape.
As of the beginning of October 2023, yields on short-term debt securities persist at an elevated level, culminating in an unconventional investment climate that prompts investors to consider the optimum positioning of assets within fixed-income portfolios.

Three primary factors underpin the current leap in bond yields — the Fed's assertive approach to quelling inflation, the formidable strength of the U.S. economy so far into 2023, and an increasing supply of U.S. Treasury securities.

However, despite bond rates retreating after breaching the 5% level, the stock market has failed to bounce back as anticipated. There exists a possibility of bond rates recovering once again. Currently, investors are adopting a wait-and-see strategy, interested in discerning what transpires next.

Job Growth

The job market report surfaced amid the pivotal moment in the marketplace following the Fed's recent policy verdict. It exposed a deceleration in job creation across the U.S. economy for October, confirming the prevailing anticipation for a slowdown. This may alleviate pressure on the Fed in their ongoing efforts to combat inflation.

According to the Bureau of Labor Statistics, nonfarm payroll growth totaled 150,000 in October, while the unemployment rate escalated to 3.9%. The unemployment rate has reached its highest since January 2022, as last month's auto strikes negatively impacted the labor market.

Wages, a critical variable for tracking inflation and assessing worker leverage in the labor market, rose at a softer-than-anticipated pace last month. Average hourly earnings increased 0.2%, less than the projected 0.3% increase, whereas the 4.1% year-on-year increment slightly exceeded forecasts. Concurrently, the average working week slightly dipped to 34.3 hours.

ISM Manufacturing

Institute for Supply Management has reported alarming contraction within the manufacturing sector, triggering renewed anxiety about a potential recession. The ISM manufacturing index dropped to 46.7% last month, compared to September's 49% reading. The data was weaker than expected, as economists predicted it to remain stable.

While an index below 50 might be viewed positively by some, indicating a slowing economy that could reduce inflation and potentially hasten Fed rate decreases, others are cultivating fears of an impending recession that could devastate stock value.

ISM Services

Services demand initially surged as American consumers readjusted to pre-COVID-19 life. However, this growth appears to have plateaued, with consumer preference again favoring goods over services. Expenditure on goods drastically exceeded outlays on services in the third quarter.

The services industry, constituting two-thirds of the U.S. economy, experienced its second consecutive month of slowdown in October. However, projections indicate potential momentum recovery in the future attributable to increased growth in new orders.

The ISM non-manufacturing PMI recorded its five-month low, falling to 51.8 from 53.6 in September. The Services PMI has been on a downward trend since experiencing a six-month peak in August.

New orders received by service businesses increased to 55.5 last month, though export orders suffered, reflecting the dollar's increasing potency against the currencies of the U.S.' principal trading partners.

Meanwhile, services inflation persisted, creating challenges for the Fed's efforts to reduce inflation to its 2% target. The prices of services proved less responsive to interest rate increases. The measure of prices paid for services businesses for inputs decreased slightly to 58.6.
Ultimately, the declining services PMI could signal a worrying contraction in the services sector that may deter investors and negatively impact stock prices.

CPI Report

The Consumer Price Index (CPI), a key indicator of economic health, has significantly decreased post its summer 2022 peak, which marked a forty-year record high of 9.1%. The CPI observed a 0.4% month-to-month increase in September and a 3.7% year-over-year increase.

However, the continuous elevation of energy and food commodity prices has triggered concerns regarding potential inflation. A sustained surge in fuel and food costs has the potential to undermine recent advances in mitigating inflation rates. Similarly, the ongoing Israel-Hamas conflict adds another level of uncertainty due to potential disruptions this could cause in the global energy market, particularly if the violence escalates to destabilize the oil-rich Middle East.

Considering these factors, inflation levels may remain elevated over a more extended period than what is currently projected by financial markets. This could necessitate the Fed to increase interest rates and maintain them at these higher levels over an extended duration.

If this circumstance arises, it would indicate that the Fed's battle against inflation is far from over. This could undermine investor confidence in the stability of the financial market.

Q3 Earnings Season

As Wall Street sails into the third quarter's reporting season, investors are keenly anticipating earnings slated for release in November. Analysts' predictions for the quarter have taken a significant upturn, with current projections anticipating a year-over-year earnings growth rate of 2.7% for S&P 500 firms, according to data by FactSet.

Bottom Line

Amid forthcoming U.S. polls, shifting monetary policies, and mounting Middle East tensions, a general air of unease is inescapable in the current climate. Citigroup Inc's Jane Fraser said, “We’re sitting here with a backdrop of the terrorist attack in Israel and the events that have unfolded since, and it’s desperately sad. So, it’s hard not to be a little pessimistic.”

Experts are slowly retreating from their predictions of a soft landing on the economic front, with a growing faction anticipating a significant downturn by 2024. Paul Singer from Elliot Management speculates that such a decline or a noticeable recession might encourage the Fed to reduce interest rates to as low as 1%-3%, a figure considerably lesser than projections for future interest rates. Citing fears of an increasingly volatile global economy, Singer urges investors to tread cautiously.

In addition to deteriorating manufacturing and services PMI, the consumers, accountable for approximately 70% of the economic activity, are under substantial duress. Credit card debt and auto loan balances have reached historical highs while student loan repayments – after more than three years of taxpayer-funded pause – resume for over 40 million Americans. These mounting financial pressures, coupled with high interest rates, are creating formidable economic challenges that could likely impact earnings moving forward.

The rise of U.S. Treasury yields amplifies the allure of bonds over stocks, exacerbating a pre-existing equity sell-off and potentially impacting long-term equity performance. There is very little risk premium in buying the S&P 500 compared to the “risk-free” rate provided by U.S. Treasuries.
Current equity valuation perhaps relies heavily on unrealistically optimistic earnings estimations. If higher interest rates do indeed dampen the economy's pace, as many analysts predict, achieving the desired targets might become an uphill task. The S&P 500 companies, according to LSEG IBES, are projected to escalate their earnings by 12.1% in 2024. Should excessively high interest rates persist, attaining such targets appears challenging.

Troubling Signs for Tesla (TSLA): Is the Era of EVs Coming to an End?

Posted on by The INO.com Team

Hertz, a rental car company, once envisioned itself as the ultimate EV broker, offering battery-powered vehicles to ride-hail drivers, business travelers, and tech newbies in an ambitious plan to capitalize on the EV revolution. The company signed deals with the world’s leading automaker,Tesla, Inc. (TSLA) and the Swedish EV startup Polestar to purchase more than 200,000 EVs.

However, the company’s IEV plans are running into some challenges Last week, Hertz stated that the declining resale value of its EVs and higher repair costs are forcing it to put brakes on its EV rollout.

TSLA has been rapidly slashing its prices to boost sales as it struggles with weakened demand and heightened competition. The price cuts have further lowered the resale value of the EVs in Hertz’s fleet by nearly one-third. Also, repair costs have been higher than anticipated, almost double what the company pays to repair gasoline cars, CEO Stephen Scherr said in an interview with Bloomberg.

A part of the problem concerns Hertz’s plans to rent EVs to ride-hail drivers. Of the 100,000 Tesla vehicles acquired by Hertz, almost half were to be allocated to Uber drivers as part of an agreement with the ride-hail company. As Uber drivers tend to drive their vehicles into the ground, the higher utilization rate can lead to more damage than Hertz expected.

Hertz will slow the pace of buying EVs while it learns how to manage costs, Scherr added.

This news, coupled with several other headwinds, hints at the bearish sentiment surrounding TSLA lately. Shares of the electric vehicle maker have plunged more than 11% over the past month.

Now, let’s review in detail what has happened in the past few months and discuss several factors that could impact TSLA’s performance in the near term:

Deteriorating Financial Performance

For the third quarter that ended September 30, 2023, TSLA reported revenue of $23.35 billion, missing analysts’ expectations of $24.14 billion. The company’s gross profit declined 22.4% from the year-ago value to $4.18 billion. Its operating expenses increased 42.5% year-over-year to $2.41 billion. Its income from operations was $1.76 billion, down 52.2% year-over-year.

Furthermore, the automaker’s adjusted EBITDA decreased 24.4% from the prior year’s quarter to $3.76 billion. Its adjusted net income attributable to common stockholders came in at $2.32 billion, a decline of 36.6% year-over-year. The company posted an adjusted EPS of $0.66, below the consensus estimate of $0.73. This compared to $1.05 a year ago.

TSLA’s net cash provided by operating activities was $3.31 billion, down 35.1% from the previous year’s quarter. Also, the company’s free cash flow declined 74.3% year-over-year to $848 million.

Misses on Quarterly Delivery Expectations

Tesla missed market estimates for third-quarter deliveries due to production constraints caused by planned factory shutdowns. TSLA’s total deliveries dropped 6.7% sequentially and 35.6% year-over-year to 435,059 vehicles in the third quarter. The company’s deliveries missed analysts’ estimate of 461,640.

Further, the company reported total vehicle production of 430,488, compared to $479,700 during the prior quarter and 365,923 in the same period of 2022, respectively.

“A sequential decline in volumes was caused by planned downtimes for factory upgrades, as discussed on the most recent earnings call,” the company said. “Our 2023 volume target of around 1.8 million vehicles remains unchanged.”

Continued Price Cuts

On October 6, TSLA slashed the prices of its top-selling models in the U.S. again after the EV giant reported third-quarter deliveries that missed Wall Street expectations. The starting price for the Model 3 is listed at $38,990 on Tesla’s website, a drop from $40,240. The long-range Model 3 price declined from $47,240 to $45,990.

Also, the price of the Model 3 Performance fell from $53,240 to $50,990. The company’s Model Y Performance sports utility vehicle’s price now starts at $52,490, down from the prior price of $54,490.

Beginning at the end of 2022, TSLA started cutting the prices of its vehicles worldwide to drive demand amid concerns over eroding consumer spending in markets such as the U.S. and China and heightened competition in the EV space.

Elon Musk, CEO of TSLA, has earlier hinted at the company’s desire to chase higher volume over bigger margins this year.

Panasonic Battery Warning

Panasonic Holdings Corp., a longtime partner and supplier to Tesla, announced that it had reduced battery cell production in Japan during the period that ended September 2023. Panasonic cells have been used in TSLA’s older and higher-priced vehicles, including Model X SUVs and Model S sedans.
The recent update from Panasonic stoked investor concerns over softening demand for EVs, especially for high-priced EVs that may not qualify for tax breaks or other incentives from the government in and beyond the U.S.

Tesla Cybertruck Concerns

Elon Musk also mentioned in Tesla’s third-quarter earnings call that the company was facing severe challenges with the production of its long-awaited Cybertruck. He cautioned that Cybertruck won’t deliver considerable positive cashflow for 12 to 18 months after production starts.
The EV maker announced on X (formerly Twitter), now owned by Musk, that “Cybertruck production remains on track for later this year, with first deliveries scheduled for November 30th at Giga Texas.”

On the earnings call, Musk said, “It is going to require immense work to reach volume production and be cashflow positive at a price that people can afford” with the Cybertruck. He added, “I just want to temper expectations for Cybertruck. It’s a great product, but financially, it will take a year to 18 months before it is a significant positive cash flow contributor.”

Growing Risk of Smart Money Exit

An analyst recently warned of potential mass exit by big institutional investors.

GLJ Research’s Gordon Johnson said that the last time (the second quarter of 2022) when Tesla missed analyst estimates was just a fraction of what the company reported for the third quarter of 2023, and over the next six months, the stock dropped nearly 50% as the “smart money” existed.
“It's not weak demand. It's poor results… that are getting worse,” Johnson added.

TSLA exhibits substantial institutional ownership, with institutions owning around a 42.75% stake. Moreover, the total value of these holdings amounts to $295.96 billion. However, disappointing financial results and other factors could result in a mass exodus by smart money.

Unfavorable Analyst Estimates

Analysts expect TSLA’s revenue for the fourth quarter (ending December 2023) to come in at $25.57 billion, indicating an increase of 5.1% year-over-year. However, the consensus EPS estimate of $0.73 for the current quarter reflects an alarming 38.4% year-over-year decline. Moreover, the company has missed the consensus revenue estimates in three of the trailing four quarters.

For the fiscal year 2023, the company’s EPS is expected to decrease 21% year-over-year to $3.22.

Bottom Line

TSLA grapples with high-interest rates pushing up financing costs and discouraging consumers from making discretionary purchases. The company, in response, has aggressively cut prices this year as it aims to grow its user base to battle weakened demand and increased competition.

The company’s third-quarter revenue and earnings missed Wall Street expectations. The company reported a significant drop in earnings and thinner profit margins. Also, due to factory upgrades that led to planned downtimes, it missed vehicle delivery expectations in the last reported quarter.

Further, analysts seem bearish about TSLA’s prospects as the company will continue to face headwinds, including immense challenges in scaling production, lower margins due to price cuts, sharp competition in the EV market, and persistent soft consumer spending amid the rising interest rate environment.
Therefore, avoiding this EV stock for now could be wise.