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.

Is Williams Cos. (WMB) the Ultimate Long-Term Energy Stock Buy for Investors?

Posted on by The INO.com Team

Natural gas company The Williams Companies, Inc. (WMB) , boasting a market cap of over $43 billion, recently outperformed third-quarter estimates, driven by increasing revenues generated from its midstream business.

The inherent qualities of the midstream business model mean that oil and gas pipeline transportation and storage activities are relatively shielded from fluctuations in commodity pricing. WMB generates profit when customers utilize its infrastructure under fee-based and non-cash commodity contracts within its gathering business. To counterbalance specific commodity price risks, the company employs hedging strategies.

Notably, 80% of WMB's customer base are investment-grade companies, which reduces the risk of financial instability during adverse economic climates. Additionally, utilities and power entities constitute 68% of its clientele, further bolstering its low-risk profile.

WMB operates as a crucial intermediary connecting energy producers to consumers, thereby reaping benefits from the surging demand for energy infrastructure and the transition to more environment-friendly energy sources, including natural gas.

The company is proactively contributing to the clean energy transition with heightened efforts toward developing clean hydrogen commercially. WMB asserts that natural gas is pivotal in satiating the escalating energy demands and concurrently reducing pollutant emissions. The Biden administration's support of Mountain Valley Pipeline completion highlights the critical need for robust natural gas infrastructure.

Pipeline operators like WMB stand to gain considerably when natural gas demand surges, enabling these companies to capitalize on service revenue, which makes up most of their sales. With the potential rise in natural gas demand , WMB's commitment to leveraging its expansive natural gas infrastructure for sustainable growth could be lucrative.

WMB continues to uphold its broad operational reach, which extends across 14 strategically vital supply areas. As an energy infrastructure titan, WMB forecasts considerable future growth. In recent developments, the pipeline giant has committed to several acquisitions and authorized additional expansion initiatives, effectively extending its visible growth trajectory through the upcoming years. Moreover, further projects are underway.

Transco's Regional Energy Access project was concluded ahead of the anticipated timeline, with full-rate revenues to commence in late October. It is expected that the signing of the precedent agreements for the Southeast Supply Enhancement project is likely to boost EBITDA.

Bayou Ethane Pipeline system was sold for $348 million in cash, or over 14 times the adjusted EBITDA. The subsequent revenue was allocated toward procuring Cureton Front Range and its joint venture partner's 50% interest in Rocky Mountain Midstream, resulting in complete ownership by WMB. A total of $1.27 billion was spent on these acquisitions, equating to roughly 7x the adjusted EBITDA.

Over the next year, as the new assets are amalgamated into the existing portfolio, the acquisitions are projected to boost the company's cash flow and streamline regional operations.

WMB extends an appealing proposition for investors seeking both growth and steady income. It exhibits a firm growth track, with its net income growing at a 5.2% CAGR over the past five years. The natural gas pipeline giant delivers an impressive 5.1% dividend yield on the current share price, catering to income-driven investors.

The growth has enabled WMB’s dividend to grow at a 6% CAGR over the same period. The solid mix of its consistent dividend income and steadfast growth could generate considerable returns in the forthcoming years.

But what’s driving this growth?

For the nine months that ended September 30, 2023, the company reported generating over $5 billion EBITDA, reflecting an 8.9% year-over-year increase despite the declining natural gas prices. Consequently, the pipeline company is on course to yield $6.7 billion of adjusted EBITDA this year, surpassing its previous guidance range by $100 million.

Further strengthening its financial health, WMB’s Available Funds from Operations (AFFO) have marked a 9.2% year-over-year surge to $3.89 billion. This rise has sufficiently cushioned the firm's cash reserves to cover its dividend by 2.38 times, presenting a 3.9% improvement from the year-ago period, even after incorporating its 5.3% dividend increase this year.

The key propellants stimulating this growth are multi-faceted, encapsulating the robust performance of its underlying business, the fruition of recently finalized expansion projects, and strategic acquisitions.
WMB has an impressive record of paying dividends to its shareholders for 33 consecutive years, growing it for five consecutive years. Given its financial strength, the company is unlikely to cut its dividend in the future. The dividend in 2023 was increased to $1.79 from $1.70 in 2022.

Bottom Line

WMB is projected to sustain steady growth in the upcoming years. Enhanced by recent acquisitions of organic expansion projects and strategic transactions, the company solidifies its already strong growth prospects. These secured projects are expected to fuel an annual earnings growth of 5% to 7%.

The company's commitment to natural gas infrastructure illustrates a comprehensive strategy that recognizes the evolving energy landscape and underscores dedication to sustainability, reliability, and substantial growth. This approach has thus far proven beneficial for the business, demonstrated by its assets that grew at a 6.7% CAGR over the past 10 years.

Strong natural gas demand could significantly boost the company, given the increasing need for electricity generation . Consequently, WMB may encounter heightened demand, offering the potential for significant cash flow returns to shareholders and a robust dividend yield.

WMB's capabilities to deliver cash flows for investors and enhance dividends should be prioritized. Maintaining the company's leverage ratio within a reasonable range will facilitate this sustainability.

A positive development was marked by a dip in WMB’s debt-to-adjusted EBITDA to 3.45x from 3.68x in the year-ago quarter. The strong capital cushion amid high-interest rates could serve them well in the future and boost the share price.

Shareholders are set to benefit from an impressive growth backlog, including completing seven out of nine significant pipeline projects scheduled for the fourth quarter of 2024.

Though dividends may serve as a luring feature when purchasing shares, the existing yield of 5.1% presented by WMB may dishearten investors, given that comparable superior-quality stocks within the sector provide more substantial yields. Even though WMB has capitalized on prevailing industry trends, prospective long-term investors may be inclined towards alternatives boasting greater returns.

Wall Street analysts expect the stock to reach $38.82 in the next 12 months, indicating a potential upside of 10.5% upside of 10.5%. Should there be no change in the dividend rate, falling dividend yields could be expected.

WMB’s robust financial stability, risk-averse customer base, and sustained growth in dividends make it an attractive option for income-oriented investors. Considering its 6% rally in the stock witnessed so far, the dividend yield is not particularly enthusing – especially considering that WMB's contemporaries also boast comparable growth potential.

A possible correction in the future could potentially optimize the risk-reward balance. On these grounds, it would be wise to wait for a better entry point in the stock.

Is NVIDIA (NVDA) Stock at Imminent Risk Due to a New Loophole?

Posted on by The INO.com Team

The Biden Administration has reinforced measures to curb the semiconductor exports of U.S. chipmakers to China, effectively plugging regulatory loopholes identified last year.

This move enhances the stipulations set forth by the U.S. Commerce Department, which unveiled stringent export control rules that were first established in October 2022. The revised regulations will block some AI chips beneath the existing technical parameters. Additionally, companies will now be required to declare shipments of certain other products. These fresh limitations will bolster the effectiveness of American controls and limit ways to circumvent these restrictions further.

This prohibition is part of a broad legal and financial policy strategy to promote U.S. national security, especially considering heightened competition with China. These unprecedented measures are intended to constrain Beijing’s technological and military ambitions. The initiative seeks to halt supplies of critical technology to China that could be utilized across various sectors, including advanced computing and the production of weaponry.

These heightened restrictions on tech exports to China coincide with American efforts to ease strained relations between the two largest global economies. This shift in policy toward China heralds a significant turn in U.S.-China tech diplomacy.

Last year, government restrictions prevented the Santa Clara, California-based chipmaker NVIDIA Corporation (NVDA) from shipping two of its most technologically advanced AI chips to Chinese customers – chips recognized as an industry-standard in developing chatbots and similar AI systems.

However, NVDA quickly adapted by releasing new, less sophisticated variants for the Chinese market that complied with U.S. export controls. They created the H800 semiconductor chip to replace the previously banned H100 for China, along with the development of the A800 to replace the A100 for Chinese firms. The H800 boasts comparable computing power to the company's more potent H100 chip in specific AI capacities, albeit with some performance limitations.

However, according to NVDA’s recent SEC filing , these restrictions apply to several of the company's chips, including the A100, A800, H100, H800, L40, L40S, and RTX 4090. This affects all systems sold with these chips, including their DGX and HGX systems.

Previously, in June, NVDA's CFO Colette Kress downplayed the impact of the potential export restrictions, asserting that they would not yield an “immediate financial impact” but that subsequent limitations, unexpected at the time, “would have an immediate material impact on our financial results .”

The U.S. chipmaker is at risk of losing $5 billion worth of orders from China due to the chip export ban. The orders were placed for 2024 by leading Chinese tech giants such as Alibaba, ByteDance, and Baidu. Before the imposition of the ban, NVDA expected to begin fulfilling some of these orders by November 15, the initial cut-off date for blocking shipments of advanced AI chips to China. Unless the U.S. government issues the required licenses necessary to make the deliveries, NVDA may have to cancel the lucrative orders.

Despite looming challenges, NVDA has consistently exceeded Wall Street's expectations with its strong earnings performance over the previous two quarters. This success is primarily attributed to the surge in demand for computer chips that power the ongoing AI revolution. Analysts had collectively forecasted earnings per share of $2.07 and sales of $11.09 billion for the last reported quarter. However, NVDA surpassed these estimates by posting earnings of $2.70 per share and sales of $13.51 billion.

Strategic collaborations between countries are anticipated to spur AI adoption worldwide. Tech companies of varied sizes are earmarking substantial investments in AI data centers to stay competitive. Latest projections suggest that the market for AI semiconductors will grow at a 30.3% CAGR to reach $165 billion by 2030. This surge in demand could favor NVDA owing to its current dominance in the AI chip industry.

To maintain its competitive edge, NVDA persistently advances its technological offerings like its recent GH200 Grace Hopper Superchip GH200 Grace Hopper Superchip platform. The new chip platform, engineered explicitly for certain AI applications, including LLM and generative AI, could keep the company one step ahead of its rivals in the AI chip market.

Furthermore, NVDA accentuated an already robust quarterly report with a projected revenue of approximately $16 billion for the upcoming quarter, surpassing average analyst forecasts. However, concerns regarding export regulations imposed on China could jeopardize the company's continued streak of success.

For the fiscal third quarter ending October 2023, analysts expect NVDA’s revenue and EPS to increase 169.6% and 481.3% year-over-year to $15.99 billion and $3.37, respectively.

One of the significant contributors to this year's 23% increase in the Nasdaq index is NVDA stock, which is currently experiencing a nearly 16% decline from its record peak closing value of $493.55, achieved on August 31.

Following the recent implementation of U.S. regulations, NVDA's share price saw about a 5% decrease. It trades beneath its 50-day and 100-day moving averages, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $645.53 in the next 12 months, indicating a potential upside of 55.8% . The price target ranges from a low of $560 to a high of $1,100.

Bottom Line

Earlier this year, NVDA earned a coveted spot in the $1 trillion club following an impressive surge in its revenue guidance due to substantial order volume from the burgeoning generative AI industry. Notably, its stock has recorded a remarkable 180% increase year-to-date, an extraordinary achievement for an enterprise of its size.

This soaring valuation can be chiefly attributed to the enthusiasm surrounding NVDA’s high-performance chip technology – currently in high demand due to the growing focus on AI and ML capabilities being deemed essential by several industries.

With NVDA's shares trading at 19 times sales and 38 times earnings, it is certainly priced for perfection, signifying that any stumble could significantly affect it.

Despite the company's previous assertion that restrictions will unlikely cause short-term impact, now they appear to have the potential for long-term consequences. A projected robust quarter suggests NVDA shares could prove a solid long-term investment.

However, given the ongoing market instability, tepid price momentum and varying analyst estimates, it may be prudent to wait for a better entry point in the stock.

NVDA is preparing to announce its financial results for the forthcoming quarter within a few weeks. This report will help better assess the impact of the export restrictions on the company’s financials.

Impact of Lackluster Earnings on XOM and CVX -- What's Next for the Energy Stocks?

Posted on by The INO.com Team

Oil behemoths Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) recently reported third-quarter results, indicating enduring difficulties in accelerating oil production growth. Earnings have significantly dropped from the year-ago quarter, failing to meet the Wall Street projections. Nonetheless, both firms reported an upswing in earnings quarterly.

XOM's oil production has tumbled, while CVX has faced setbacks impacting key growth endeavors in Kazakhstan and the major hubs of oil production, including the Permian Basin in West Texas and New Mexico.

The market reaction to the earnings reports was swift and severe. CVX’s shares plunged about 7%, and a descent of 1.9% in XOM's shares was observed despite rising oil prices due to escalating tensions in the Middle East. This response underscores investor anxieties about these fossil fuel behemoths' long-term viability and fiscal discipline relative to sectors like technology.

Both companies confirmed technical issues in the Permian region, including constraints on wastewater production, high concentrations of carbon dioxide in natural gas, and challenges encountered by production partners during fracking operations. The complications of oil production expansion, coupled with operational problems, are anticipated to influence a surge in industry-wide costs.

However, not all seems grim for the oil corporations. The oil majors are reportedly amplifying their capital investments within the oil and gas sector, undeterred by growing global consensus on a shift towards clean energy alternatives. The acquisitions underscore the enduring interest of the oil companies in profitable oil and gas ventures.

These strategic moves suggest that these corporations do not anticipate a decline in oil demand in the future. Instead, they lean toward believing that oil's role will remain pivotal in the world's energy matrix for the foreseeable future.

The International Energy Agency's (IEA) forecast of oil demand peaking by 2030 amid expanded use of renewable energy sources. The prediction undermines the justification for increased expenditure on fossil fuels and further prompts the question of why cash-rich oil titans are not pivoting toward green energy ventures.

The answer lies partly in the clean energy transition being a long-term, costly process, complicated further by the current economic backdrop of persistent inflation, escalating borrowing expenses, and continual supply chain difficulties.

For the past two years, geopolitical instability – from Russia's military aggression in Ukraine to long-standing conflicts in the Middle East, has fostered unpredictability in energy prices. This has prompted concerns over energy demand, infusing uncertainties in the market. Additionally, easing oil and natural gas prices has exacerbated the profitability challenges of XOM and CVX.

A cautious approach has pervaded the market, with participants adopting a vigilant stance, awaiting the outcomes of pivotal events, including the U.S. Federal Reserve policy meeting and China’s latest manufacturing data.

In its most recent Commodity Markets Outlook, the World Bank projected global oil prices to reach around $90 a barrel during the last quarter of the year before diminishing to an average of $81 a barrel throughout the coming year as global economic growth decelerates. Such a decline could cast a shadow over the financial health of XOM and CVX.

These corporations, heavily vested in the extraction and sale of oil and gas, stand at risk of substantial revenue reductions, which could compromise their net profitability. Dwindling prices could pose formidable challenges for these companies in securing funds for new ventures and investments, jeopardizing their future profitability.

On the flip side, however, OPEC+ and Russia’s prolonged production cuts, in addition to the geopolitical turmoil, could exacerbate supply chain disruptions, propelling oil and gas prices in the future. This development creates a conducive climate for extraction and ensuing production activities.

Let’s see some other factors that have the potential to influence the stocks’ performance in the near term:

Exxon Mobil Corporation (XOM)

With a market cap of over $419 billion, XOM explores and produces crude oil and natural gas in the United States and internationally.

The cash influx enabled XOM to authorize a $60 billion acquisition of Pioneer, which attracted international media attention. Experts predict the strategic maneuver could boost XOM's domestic oil production twofold, catapulting the company into the top tier of American producers. It could stimulate added consolidation within this fragmented sector, strengthening American shale producers' role as the commanding players in the international oil market.

However, XOM's third-quarter profits fell by over half of its record high last year due to a decline in oil and gas price realizations, although the company's refinery throughput rose to 4.2 million barrels a day, the most since XOM merged with Mobil 24 years ago. The energy giant’s revenue slid 19% year-over-year to $90.76 billion, while non-GAAP earnings per share reached $2.27, falling short of analysts' predictions.

The dwindling profits were influenced by an approximately 60% decrease in natural gas price realizations and a 14% reduction in oil price realizations. The company also reported a 69.9% decline in earnings from its chemical products division due to increased feedstock prices and overproduction.

In the quarter, it returned $8.1 billion to the shareholders, comprising $3.7 billion in dividends and $4.4 billion in share buybacks.

Moreover, XOM announced an increase in its fourth-quarter dividend to $0.95 per share, payable on December 11, honoring its excellent history of shareholder returns. A testament to the company's reputation is its consistent record of paying dividends for 40 uninterrupted years.

Its annual dividend rate of $3.80 per share translates to a dividend yield of 3.60% on the current share prices. The company’s dividend payouts have grown at a CAGR of 1.5% over the past three years and 2.7% over the past five years.

The stock trades lower than the 50-, 100-, and 200-day moving averages, indicating a downtrend. However, Wall Street analysts expect the stock to reach $128.32 in the next 12 months, indicating a potential upside of 21.6%. The price target ranges from a low of $105 to a high of $150.

Institutions hold roughly 60.4% of XOM shares. Of the 3,637 institutional holders, 1,589 have increased their positions in the stock. Moreover, 147 institutions have taken new positions (9,154,521 shares).

For the fiscal fourth quarter ending December 2023, analysts expect its revenue and EPS to be $92.28 billion and $2.20, respectively.

Chevron Corporation (CVX)

Boasting a market cap of over $275 billion, CVX offers administrative, financial management, and technology support services for energy and chemical operations.

The firm's recent $53 billion acquisition of Hess, recognized as one of the largest operators in North Dakota's Bakken shale play, substantiates its massive investment amid the global shift towards cleaner energy. Even though this transaction could slightly increase the region's oil production, industry analysts do not anticipate a revival to its peak pre-pandemic boom days.

Bakken oil production is anticipated to drop to 1.15 million bpd from 2026 and remain stagnant until 2030. A slow decay will follow this due to depleting reserves. It is yet to be ascertained if an infusion of new investments or technological advancements can counteract a longer-term decrease in Bakken output.

CVX also emphasizes the importance of consistent dividend distribution, demonstrating an unwavering commitment to operational diversity, having done so for an impressive 35 consecutive years. This reliability is quite remarkable considering the unpredictable nature of the energy sector.

In 2023, the company paid a dividend of $6.04 per share, which translates to a dividend yield of 4.18% on the current share prices. The company’s dividend payouts have grown at a CAGR of 5.6% over the past three years and 6% over the past five years. Although, it is worth noting that the decline in dividend payout rate over time might adversely influence investors seeking a steady source of passive income.

CVX adopts a moderate approach concerning leverage. During periods with low oil prices, the company can incur debt to finance its capital investment needs and maintain dividend payouts. When energy prices rebound, which historically they always have, the company can offset the debt. This prudent strategy offers reassurance to even the most conservative investors about the integrity of the company's dividend capabilities.

For the fiscal third quarter that ended September 30, 2023, CVX's upstream production segment earnings dipped 38.2% year-over-year to $5.76 billion. However, it increased only 16.6% from the second quarter, despite the substantial increase in oil prices.

Profit in CVX's non-U.S. production segment, accounting for about two-thirds of its total output, declined 37.7% year-over-year but increased about 12% quarterly. Its U.S. production earnings increased 26.4% quarterly but declined 39% year-over-year.

The U.S. net oil-equivalent production was up 20% year-over-year and set a new quarterly record, primarily due to the acquisition of PDC Energy, Inc., which supplemented the quarter's output with an additional 179,000 oil-equivalent barrels per day, and net production increases in the Permian Basin.

The stock trades lower than the 50-, 100-, and 200-day moving averages, indicating a downtrend. However, Wall Street analysts expect the stock to reach $189 in the next 12 months, indicating a potential upside of 30.9%. The price target ranges from a low of $166 to a high of $215.

Institutions hold roughly 71.4% of CVX shares. Of the 3,473 institutional holders, 1,718 have increased their positions in the stock. Moreover, 203 institutions have taken new positions (9,253,853 shares).

For the fiscal fourth quarter ending December 2023, analysts expect its revenue and EPS to come at $54.46 billion and $3.68, respectively.

Considering the oil stocks’ tepid price momentum, mixed analyst estimates, and financials, it could be wise to wait for a better entry point in the stocks.