Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of Equity Strategy
Summary: The cyber security industry is still growing fast with revenue up 26% from a year ago, but this week's earnings releases from cyber security firms have been an ugly affair with the outlook disappointing. Our cyber security basket is down 11% over the past week as market expectations have clearly been too high relative to what the industry can deliver in the short-term. In today's equity note we also cover next week's earnings releases which will shift to a lower gear as the Q3 earnings season is fading. The most exciting earnings next week are from Activision Blizzard, Walt Disney, Adidas, and ArcelorMittal.
A nasty week for cyber security stocks as earnings focus fades
The past week has been brutal for cyber security stocks, one of our most popular equity theme baskets, down 11% despite Q3 earnings hitting estimates and maybe a slight hint of growth slowing. Our cyber security basket is down 38% from the peak compared to only 22.5% for the MSCI World as higher equity valuations have made cyber security stocks more vulnerable to higher interest rates, but since 2015 the returns on cyber security stocks have still been much better and we expect the long-term return over 10 years to exceed that of the overall equity market based on high demand for cyber security services and products amid the ongoing war in Ukraine and rising geopolitical tensions.
If we look at our basket we can see that among the big players it was Fortinet that saw the biggest hit down 20% over the past week. The company’s Q3 revenue and EPS were both above estimates while fiscal year billings, the forward looking indicator on sales, were revised down a bit, but even worse the company said that it will stop providing this metric in the future. These decisions are often viewed badly by investors as it indicates that the company’s growth is slowing down. Among the minor players in the industry, Varonis Systems shares were down 37% over the past week as the Q4 outlook on revenue at $139-142mn missed estimates of $156mn. So while industry growth is still high at 26% compared to a year ago market expectations are clearly too high at this point acting as headwinds on price performance.
The Q3 earnings season has been bad relative to expectations with S&P 500 earnings missing estimates (see chart) as margin pressures have been more intense than expected by analysts offsetting the higher revenue growth. The most intense margin pressure has been observed in industries such as media & entertainment, banks, utilities, semiconductors, and real estate, while industries such as energy, insurance, transportation, retailing, and software have all maintained or expanded their operating margin.
Next week’s earnings releases
The Q3 earnings season is shifting into a lower gear now but next week will still offer plenty of interesting earnings releases. On Monday our focus is Activision Blizzard which is struggling with negative top line growth like the rest of the gaming industry as the pandemic boom is over. Analysts are expecting revenue growth of -17% y/y and EPS of $0.50 down 39% y/y. Walt Disney is next week’s biggest earnings release scheduled on Tuesday with analysts expecting Q4 (ending 30 September) revenue growth of 15% y/y but EBITDA at $3bn down from $3.86bn in Q3 highlighting the ongoing margin pressure. Adidas, reporting on Wednesday, is also key due to its size in consumer goods but also because of its costly partnership breakup with Ye; analysts estimate revenue growth up 13% y/y but EPS at €1.24 down 47% y/y due to one-off items. On Thursday, we will focus on ArcelorMittal, because Europe’s largest steelmaker is an important macro driver, and analysts are getting increasingly negative on the steel industry expecting ArcelorMittal to announce a 14% drop in Q3 revenue and 66% drop in EPS. The week ends with Richemont expected to see revenue growth coming down fast to just 7% y/y in Q3.
What happened to the future?
What happened to the future?
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