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London Quick Take - 5 Things to Know in Markets Today - 21 Oct
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5 things to know in markets today
1.SpaceX AI revenues defy gravity
SpaceX's quarterly earnings answered a lot of near-term questions. Specifically demand for compute seems to remain insatiable, and the 830% rise in AI revenues answered a question investors had about how much contracted computing demand is feeding into recognised revenue. SpaceX also answered a question about how profitable that revenue is after depreciation and financing costs: adjusted EBITDA from the AI business was up 4x to $5.0 billion and net income turned positive $431mn from a net loss of $1.26bn in Q2. Though doubters will always raise questions about what renting out all this capacity means for SpaceX's own AI ambitions, and flag the scale of capex – which at $19.6bn in Q3 for AI exceeded expectations for about $18bn, the results should buy SpaceX plenty of time to execute deeper.
Overall revenues +161% to $14.6bn beat expectations for around $12.8bn and marked steep acceleration from the +92% revenue growth notched in Q2. Net profit at $4.4bn was more than double the expected, driven by sales of cloud computing. Connectivity, which includes Starlink, continued to underpin earnings. Connectivity revenues were $5.2 billion, well ahead of the roughly $4.5bn expected and up 22% sequentially and 69% year-over-year, with subscribers rising by 1.6mn in the quarter from 12mn at the end of Q2. AI revenues were $7.6 billion, up 195% sequentially and 830%(!) year-over-year, primarily driven by the activation of new cloud services agreements. SpaceX continued to scale compute, reaching 1.7 GW by the end of the quarter from 1.4GW in Q2. Space revenues were $1.8 billion, up 84% sequentially and 6% year-over-year.
SpaceX earnings were out of this world and shares rallied 9% in pre-market trade. But the attention is on the rumoured Tesla merger, which Elon Musk says would be a "good idea". Both firms have set up special committees to explore the tie-up, which would create a top-5 company by market cap. There has been speculation about a potential reverse merger between SpaceX and Tesla, which has intensified since the former's recent IPO. Whilst the move makes sense strategically on paper it could be very complex. A merger would see Musk consolidate his ownership and enable vertical integration of AI, robots, energy, transport and space, all backed by the multi-trillion Terafab facility. Operational integration already exists between the companies, eg Terafab, and it could just be a matter of time. SpaceX President Gwynne Shotwell said it "might make Elon's life a little easier" and indeed with huge crossover already a merger simplifies conflict of interest risks.
Overall revenues +161% to $14.6bn beat expectations for around $12.8bn and marked steep acceleration from the +92% revenue growth notched in Q2. Net profit at $4.4bn was more than double the expected, driven by sales of cloud computing. Connectivity, which includes Starlink, continued to underpin earnings. Connectivity revenues were $5.2 billion, well ahead of the roughly $4.5bn expected and up 22% sequentially and 69% year-over-year, with subscribers rising by 1.6mn in the quarter from 12mn at the end of Q2. AI revenues were $7.6 billion, up 195% sequentially and 830%(!) year-over-year, primarily driven by the activation of new cloud services agreements. SpaceX continued to scale compute, reaching 1.7 GW by the end of the quarter from 1.4GW in Q2. Space revenues were $1.8 billion, up 84% sequentially and 6% year-over-year.
SpaceX earnings were out of this world and shares rallied 9% in pre-market trade. But the attention is on the rumoured Tesla merger, which Elon Musk says would be a "good idea". Both firms have set up special committees to explore the tie-up, which would create a top-5 company by market cap. There has been speculation about a potential reverse merger between SpaceX and Tesla, which has intensified since the former's recent IPO. Whilst the move makes sense strategically on paper it could be very complex. A merger would see Musk consolidate his ownership and enable vertical integration of AI, robots, energy, transport and space, all backed by the multi-trillion Terafab facility. Operational integration already exists between the companies, eg Terafab, and it could just be a matter of time. SpaceX President Gwynne Shotwell said it "might make Elon's life a little easier" and indeed with huge crossover already a merger simplifies conflict of interest risks.
2.Tech shares lifted by SpaceX numbers
US shares were mixed yesterday with industrials leading the Dow up 1%, driven by a +5% rally for 3M after it raised full-year guidance. But after opening deeply in the red tech struggled to make a mid-session rally stick, leaving the Nasdaq flat for the session. The S&P 500 rose 0.3%. But earnings from SpaceX and Super Micro Computer have helped ease worries about the AI trade, sending the Kospi up 3% overnight and MSCI Asia Pacific rising 1.2%. US futures looking a bit firmer with tech finding a bit of bid from the SpaceX and SMCI numbers, NDX futs trade +0.8%, with Nvidia +1.8% in pre-market trade this morning.
SMCI jumped 15% after hours after hiking its fiscal Q1 revenue outlook to $18.5–$19.5 billion, far above its prior forecast and the $14.99 billion consensus, on stronger AI platform demand. Content is King: Netflix shares –6% after soft earnings guide...good numbers with profits +44% but slowest revenue growth in three years at 12% and expects further moderation in Q4...slowing engagement and ad revenue guidance weak...stock has come off a lot though and looks to be prepared to do whatever it takes to find the hit factory. The fix lies in the content.
3.Let them eat cake
European stock markets were mixed early Wednesday with the FTSE 100 down around –0.2%, extending its modest loss yesterday, while the DAX and CAC rose with some big swings across individual names.
Let them eat cake: EssilorLuxottica surged 13% in early trading after reporting Q3 revenue up 7.2% beating the 6.3% consensus. At the other end of the retail scale Carrefour shed 15% as it warned unrest in France would hurt its business. There's the K-shaped economy for you. With that in mind, it's instructive that French 10yr OAT yields are backing up 7bps this morning again close to the 5% marker, with Franco-German spreads widening out past 150bps. Ruinous debt from financing the American war against the British was a key cause of the last French revolution - it's not quite got that bad, but France's Fiscal Fragility remains front and centre.
4.UK inflation and borrowing overshoot
UK inflation more than expected last month, giving the Bank of England hawks another reason to shoot for a rate hike in November. CPI inflation rose to 3.5% in September, up from 3.1% in August and ahead of the 3.4% anticipated as surging petrol prices (+8.2%) stoked the headline rate. Core inflation, which excludes food and energy, also ticked up to 2.8% from 2.6%, hinting perhaps at some broadening in price pressures that the BoE is on the lookout for.
Sterling was flat vs the dollar on the news with a rate hike next month well discounted after the wage and employment report yesterday and recent GDP strength. GBPUSD steadied around 1.3370 having yesterday tested the 50-day SMA resistance at just a shade short of 1.34010, with the dollar stabilising somewhat. But the pound trades at its strongest versus the euro in 18 months, with EURGBP testing lows 0.8380, as bets on a stronger UK economy and rising BoE hike bets colliding with unease across the continent due chiefly to the problems in France. This has been quite a big rally for sterling, GBPUSD hitting 1.34 to clear 3 big figs since touching the June lows down at 1.3140 last week. Confidence around the UK seems to be building a bit ahead of the Budget next week after stronger-than-expected growth and labour market data in the last few days.
Inflation 🤝borrowing: Underlining the scale of the challenge facing the Chancellor ahead of the Budget, UK government borrowing rose more than expected in September to £24.5bn, nearly £2bn more than predicted by the OBR. We know the fiscal headroom will be down and Healey doesn't want to plug gaps with unproductive tax hikes - so far the market is prepared to give him the rope with the 10yr gilt yield steady at 5.41%, still 12bps below the cycle high.
Sterling was flat vs the dollar on the news with a rate hike next month well discounted after the wage and employment report yesterday and recent GDP strength. GBPUSD steadied around 1.3370 having yesterday tested the 50-day SMA resistance at just a shade short of 1.34010, with the dollar stabilising somewhat. But the pound trades at its strongest versus the euro in 18 months, with EURGBP testing lows 0.8380, as bets on a stronger UK economy and rising BoE hike bets colliding with unease across the continent due chiefly to the problems in France. This has been quite a big rally for sterling, GBPUSD hitting 1.34 to clear 3 big figs since touching the June lows down at 1.3140 last week. Confidence around the UK seems to be building a bit ahead of the Budget next week after stronger-than-expected growth and labour market data in the last few days.
Inflation 🤝borrowing: Underlining the scale of the challenge facing the Chancellor ahead of the Budget, UK government borrowing rose more than expected in September to £24.5bn, nearly £2bn more than predicted by the OBR. We know the fiscal headroom will be down and Healey doesn't want to plug gaps with unproductive tax hikes - so far the market is prepared to give him the rope with the 10yr gilt yield steady at 5.41%, still 12bps below the cycle high.
5.Jackdaw: No cold turkey
Warmed-up Jackdaw means no cold turkey: How do you help lower inflation and boost Britain's productive capacity to grow? The best lever to pull is to lower the cost of energy. The government's decision to approve the Jackdaw gas field today won't in itself bring down energy prices - Jackdaw may produce about 6% of North Sea gas - and perhaps 2% of total UK demand, pumping by Christmas. But it's a signal the government is prepared to make sensible supply-side decisions. Let's hope for more of them after the Budget. Even the UN admits the world cannot go "cold turkey" on fossil fuels. Shares in Shell, which operates Jackdaw in a 50/50 joint venture with Norway's Equinor, rose about 0.8% in early trade, though this is likely more a factor of a fresh rise in oil prices with BP also trading +2% higher. More pertinently perhaps - shares of Ithaca rose 3.5% on hopes that the approval signals the government will also greenlight its Rosebank project.
Crude oil rose as reports of a possible peace deal between the US and Iran were scotched. Brent traded above $110 for a third consecutive day after swinging within a $6 range on Tuesday, following inaccurate reports of an imminent US-Iran agreement. Instead, Tehran is ramping up attacks on tankers in the Strait of Hormuz and there are little signs of progress on opening it up. Meanwhile traders are worried we could be heading into a difficult maintenance period that will disrupt flows.
Crude oil rose as reports of a possible peace deal between the US and Iran were scotched. Brent traded above $110 for a third consecutive day after swinging within a $6 range on Tuesday, following inaccurate reports of an imminent US-Iran agreement. Instead, Tehran is ramping up attacks on tankers in the Strait of Hormuz and there are little signs of progress on opening it up. Meanwhile traders are worried we could be heading into a difficult maintenance period that will disrupt flows.