Head of Equity Strategy
Summary: Nike shares are up 12% in pre-market trading as the sports apparel maker blasted earnings expectations last night with 17% revenue growth and good cost discipline. The company's outlook for the current fiscal year was stronger than estimated with Nike expecting low teens growth excluding currency effects suggesting healthy growth adjusted for inflation. Tesla is feeling a different vibe these days declining another 8% yesterday in an otherwise positive equity session as investors are increasingly nervous about Elon Musk's Twitter distraction, lower EV demand due to elevated electricity prices, and stubbornly high battery prices.
Expectations for Nike had steadily been increasing into last night’s earnings release with analysts increasing their price targets and expectations for margins next year. We speculated in yesterday’s podcast that the bar was maybe too high for Nike, but the US sports apparel maker proved that their business is indeed going strong for the FY23 Q2 quarter that ended in November. Nike grew revenue 17% y/y with revenue at $13.3bn est. $12.6bn and delivered EPS of $0.85 vs est. $0.65, and inventories grew 43% y/y to $9.3bn. The fast rising inventories reflect Nike’s positive outlook for the current fiscal year in which it sees revenue growing in the low teens excluding effects from currencies. The big rise in inventories also reflects constrained supply chains a year ago, and on that note, Nike says that supply chains are becoming more smooth and predictable again. While Nike surprised against expectations the sports apparel maker is not immune to the pressures on the economy and is expected gross margin to decline 200-250 basis points in the current fiscal year. Nike shares are up 12% in pre-market trading bringing this year’s decline in the share price to -30% which is significantly worse than the general market.
The biggest story right now in the market evolves around Elon Musk and Tesla. The shares tumbled another 8% yesterday to $137.80 taking this year’s decline to 61% and 55% alone this the high in September. Three months ago Tesla sounded confident on its outlook but since then more and more information is suggesting that the demand for EVs is cooling in both Europe and China amid high electricity prices and weak economies. At the same time prices remain high on the input materials for EV batteries which have forced EV makers to raise prices this year; EV battery costs rose in 2022 for the first time since 2010. If the commodity market does not cool then EV makers including Tesla might be forced to cut prices in 2023 to keep demand up to avoid unused production capacity.
Many investors have also begun questioning Elon Musk’s ability to be a good CEO for Tesla following his acquisition of Twitter which is taking up the majority of his time as the social media company is struggling to become profitable due lost revenue from abandoning advertisers and excessive financing costs due to the debt load that Musk has used in the acquisition. The recent poll of whether he should step down as Twitter CEO, which showed 58% voted yes, seems like a convenient way to take a less time-consuming role at Twitter and get back to Tesla to improve its operations and profitability. One could actually argue that it is a sign that Tesla’s operational performance is deteriorating. Based on trade flows among our client base we would argue that the net sellers are currently institutional investors while private investors are still net buyers of Tesla shares.
While Tesla shares have had a disastrous year the company is still valued at $435bn which is $190bn more than Toyota, the second most valued carmaker in the world. In the event that the share price declines 40% more to $82, Tesla would still be valued at around $261bn making it the most valuable carmaker in the world and thus priced for the biggest market share. Let that sink in. One thing is for sure, the honeymoon of the pandemic and ultra-low interest rates is over for Tesla and the new physical reality is now becoming apparent for investors.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
