Login Open account
Hong Kong S.A.R
Activity bubbles beneath the surface of low volatility Activity bubbles beneath the surface of low volatility Activity bubbles beneath the surface of low volatility

Activity bubbles beneath the surface of low volatility

Equities 6 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Equity markets may be trapped in the doldrums of low volatility but there's plenty of action – and thereby opportunity – among individual companies. We examine three that are in focus for very different reasons: troubled EV maker Tesla, hot newcomer Beyond Meat and and sportswear supremo Adidas.

Equity markets are wrapped in low volatility while investors search for the next catalysts. Low volatility means boring markets and an absence of information. Luckily, beneath the calm surface of equity volatility, company specific events are constantly creating upheaval. There have been three important events in the past 24 hour worth paying attention to, even if you think single stocks are only for Warren Buffett types.

Tesla finally hits real life constraints

After denying it for more than a year and last year boasting that Tesla would be cash flow positive going forward, the CEO Elon Musk had to face reality yesterday filed a mixed offering of equity and debt worth $2.3bn with the SEC. The market reaction was positive, indicating that the market had feared worse from Tesla. The capital injection was almost inevitable as Tesla’s default probability has been soaring since mid-2017, reaching some of the highest levels during its life a publicly listed company. This fresh capital means that Tesla will avoid any funding issues for the rest of the year. But the company lost something far more important than cash the last year: Tesla and Elon Musk have been stripped of integrity and trustworthiness

Bloomberg’s default probability model:
Source: Bloomberg
Tesla has changed strategy multiple times this past year and communication has been erratic, especially around Elon Musk’s tweets, putting him at odds with the SEC. Recent events concerning the distribution of Model 3 has raised questions about Tesla’s ability to make vital decisions. Last year, Elon Musk boasted that production bottlenecks were being solved, which they clearly have not, and also predictions that the company would remain cash flow positive and not need capital.

Before announcing yesterday’s capital increase, Elon Musk staged a show called Autonomy Investor Day (which we covered last month). This seemed like one big sideshow to divert attention away from obvious issues with demand for its cars. It’s now clear why Tesla pivoted its strategy to now pursue being an autonomous-driving technology company that also happens to produce the actual cars (hardware) on top of the self-driving software. Tesla has now announced that it does not expect to be massively cash flow positive until its autonomous fleet of cars is deployed. Meanwhile Tesla is now also shifting strategy in its solar business which it acquired from SolarCity in 2016 for $2.6bn. Since getting into the solar business, Tesla has seen installations going down, losing market share from the biggest player to number four in the industry in the US.

As if all these things were not enough, increasing analyses show that minerals used for Lithium-ion batteries could be massively constrained on supply over the next decade, pushing up production costs. The reason is that every carmaker in the world is launching its own EV production line to compete with Tesla. As we have said many times before, we believe EV will transform the transportation sector but it will take longer than expected. But even more importantly for investors, it will not be the carmakers that make the fat profits but the suppliers further down the supply chain with miners and battery makers taking the largest share of profits. 

Beyond Meat soars 163% on first day of trading

Yesterday’s IPO of Beyond Meat and its first day of trading must be one of the most successful IPOs in recent times. Shares were IPO’ed at $25 per share and opened 84% higher and impressively continued for the rest of the session closing 163% above the IPO price. Turnover was massive at $1.37bn which is a lot for a company that IPO’ed with a market value of $1.46bn. 

What's the big deal with Beyond Meat? The company produces and sells plant-based meat substitute for burgers, sausages and beef crumbles, which puts it right in the middle of a big health trend of lower meat consumption and more plant-based protein intake. Famous individuals such as actor Leonardo DiCaprio and Microsoft's Bill Gates have sprinkled their star dust over the company giving it some celebrity status.

Beyond Meat share price (1-min chart):
Source: Saxo Bank
Another striking difference of this IPO to the many other Silicon Valley IPOs over the past few years is that Beyond Meat actually has accelerating revenue growth figures at IPO and therefore doesn't follow the usual pattern of being past the growth peak when pitching to Wall Street. Revenue rose to $87.9m in 2018, up 170%, accelerating massively from its 2017 growth of around 100%.

2018 also marked the year when the company passed the break-even point on its production (gross profit positive). The next step is obviously to become profitable on the entire operation. We expect the hype to increase around Beyond Meat as it is the first pure play on plant-based meat substitute but also a pure play on a major global health trend which increases the long-term scope for the company in terms of going international. With a current price-to-sales ratio of 44x the stock is among the most expensive in the entire US equity market, only eclipsed by some biotechnology companies.
Source: Beyond Meat S-1 filing
Adidas’ e-commerce gain sparks investor excitement

Adidas is continuing its massive turnaround that started in 2014 with the shares up 27.9% annualised, including reinvestment of dividends. Shares are up 6.5% today on better than expected Q1 results. The key difference in Q1 for Adidas, and offsetting weakness in Europe, was a massive marketing campaign in China using Lionel Messi and Kanye West, which drove strong performance. But the key takeaway for investors is the 40% growth in direct e-commerce revenue which is up 40% y/y taking the e-commerce revenue share to 9% of company revenue. For every percentage point that Adidas can increase its e-commerce share it will expand its margins which will drive return on capital and ultimately the share price. For the valuation conscious investors, Adidas is valued on EV/EBITDA at 15x compared to Nike at 24x.

Adidas weekly share price:
 
Source: Saxo Bank

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 07

Macro: It’s all about elections and keeping status quo

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.

Read article

FX: The rate cut race shifts into high gear

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.

Read article

FX: High yielding currencies will start losing their appeal

Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.

Read article

Commodities: Year of the metals

Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.

Read article

Macro: What happened to the future?

The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?

Read article

The rise of populism: Far-right parties will influence the future

The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

Read article

Investing in China: Navigating Q1 amid economic challenges

Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

Read article

  • Macro: It’s all about elections and keeping status quo

    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.

    Read article

  • FX: The rate cut race shifts into high gear

    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.

    Read article

  • FX: High yielding currencies will start losing their appeal

    Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.

    Read article

  • Commodities: Year of the metals

    Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.

    Read article

  • Macro: What happened to the future?

    The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?

    Read article

  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article

  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R
Products & pricing
Asset Management
Platforms
Accounts & service
General
Other
Legal

Losses can exceed deposits on margin products. Please ensure you understand the risks.

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.