Top 10 Stocks for Q2 2022 – Part 2

Challenging Environment

The US Stock markets had a poor start to the year, as they grappled with factors such as, surging inflation, supply chain disruptions, geopolitical fears, a boom in energy and commodity prices and more. Furthermore, the US Federal Reserve (Fed) made its first rate hike since 2018 in March, concluded its asset purchases program and expects to begin reducing the balance sheet soon.

This is not a supportive environment for stock markets and even more so, for the tech sector and growth stocks, with the NAS100 (Nasdaq) having erased more around 9% of its value during the first quarter of 2022. However, it was not only US stock markets and corporations that were negatively affected from such factors, since stock markets in Europe and pretty much around the world also struggled.

In this backdrop and as the second quarter gets underway and the new earnings season approaches fast, we take look – in a two part article - at some stocks to watch from the US, the UK, Germany, France, Australia and China. You can read Part 1 here.

Disney

The Walt Disney Company is a leading diversified international family entertainment and media enterprise, which was founded in the 1920s and bears the name of its iconic creator. Its activities span from theme parks to entertainment studios, broadcast networks and more.

The firm launched its own streaming service, Disney+, in late 2019, which has become the crown jewel during the pandemic years that turned people towards Direct to Consumer (DTC) solutions. As of January 1 2022, Disney+ had 129.8 million paid subscribers, having added 11.8 million users in the last reported quarter (ended January 1), which marked a 37% year-over-year growth. ^[1]

Streaming king Netflix (NFLX) for comparison, had 221.84 million users as of the end of 2021, having added only 8.28 million users in Q4 and expects the addition of just 2.5 million in Q1 2022 ^[2]. Disney+ is clearly a growth story, but there are some growing pains, as the firm tries to monetize on it and combine it with its legacy business and more grown-up content with the kids' content.

It is also the owner of Marvel Entertainment and LucasFilms, thus holding the keys to two of the most important franchises in the entertainment industry – the Marvel Cinematic Universe (MCU) and Star Wars.

In last month's 2022 Oscars ceremony, Disney got six awards - along with Searchlight Pictures and Hulu – and ranked second behind Warner Bros. The Disney+ rival AppleTV+ made history, as it became the first streaming platform to win the Best Picture Oscar for CODA. ^[3]

The "traditional" Disney Parks, Experiences and Products business had taken a big hit from the pandemic lockdown measures, but as the world returns to normalcy, it has been recovering. February's earnings release ^[2], revealed operating income of $2.45 billion for the segment, marking the third straight profitable quarter.

DIS.us comes from a poor fourth quarter, with losses of around 8%, with the new year also being bad, as the stock lost more than 10% during the first three months.

Meta (Facebook)

Meta is a social media giant and the parent company of Facebook, Instagram and WhatsApp. Its CEO is Mark Zuckerberg, who co-founded Facebook, which first launched in 2004 and essentially changed the social media landscape. ^[4]

The name change into Meta occurred last October, bringing all apps together under the new brand. The move highlights the firm's focus on bringing the metaverse into life, which "will feel like a hybrid of today's online social experiences, sometimes expanded into three dimensions or projected into the physical world". ^[5]

Further to this, the firm changed the way it reports its financials, now having two operating segments: Family of Apps and Reality Labs - with the latter being the one responsible for delivering the Metaverse. There is a lot of hype around the Metaverse, which may well be the next best thing, but the firm is far from monetizing on it, as Reality Labs (RL) lost $10.193 billion in 2021. ^[6]

The latest earnings report also showed that Meta continues to be troubled by Apple's (AAPL) iOS privacy changes with CEO Zuckerberg commenting, that along new regulation in Europe "there's a clear trend where less data is available to deliver personalized ads". CFO Dave Wehner added that the "the impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion". ^[7]

The Facebook app has been facing increasing competition from "cooler" rivals such as TikTok and Snap and its average Daily Active Users (DAUs), remained stagnant below 2 million. Perhaps the only bright spot was the Revenues, which saw a healthy 20% year-over-year rise, to a $33.671 billion in Q4. However, forward guidance was disappointing, as the firm projected Revenue of just $27-29 billion in Q1 2022. ^[6]

Markets reacted very negatively to the report and FB.us wiped out close to $90 on the first trading day after the results. The stock lost around 35% in the first quarter of the year, managing to post profits in March.

Microsoft

Microsoft (MSFT) is an American multinational technology company, the creator of the Windows operating system and the Office suite of apps. Its offering though, spans to cloud computing, consumer electronics and more.

The company reported solid financial results in January for Q2 FY2022 (period ended December 2021), with 20% Revenue growth year-over-year, to $51.7 billion. The increasingly important Cloud segment, which includes Azure, was responsible for $18.3 billion, up 26% year-over-year. ^[8]

Microsoft also offered upbeat forward guidance for the segment, forecasting Revenue of $18.75 to $19 billion for Q3 FY2022. Total Revenues however are projected to decrease on a quarterly basis, to $48.5 - 49.3 billion.

A few days before the quarterly results, Microsoft had announced a bid to acquire Activision Blizzard, for an eye-watering $68.7 billion price tag. Activision is an established videogame publisher and developer, responsible for iconic franchises such as Warcraft and Call of Duty. ^[9]

The firm's plans extend beyond traditional gaming, as the acquisition will provide building blocks for the metaverse. The deal would make Microsoft the world's third-largest gaming company by revenue, behind Tencent and Sony and is likely to draw regulatory scrutiny.

Around a year ago, Microsoft had announced a $19.7 billion acquisition of Nuance Communications, Inc, which had been probed by regulators in the UK and the EU, but was recently cleared by both. ^[10], ^[11]

MSFT.us had a superb 2021 and a strong fourth quarter which culminated to November's record high (350.01). It was one of last year's hot stocks, although 2022 is lackluster so far, as it has registered a nearly 9% decline in Q1.

Airbus

Airbus is a European conglomerate that designs and manufactures commercial aircrafts, but also has space, defense and helicopters divisions. It employs more than 130,000 people, has 180 locations around the globe and 12,000 direct suppliers. ^[12]

The firm reported strong financial results for full-year 2021, with Revenue of €52.1 billion, up 4% compared to the previous year, "mainly reflecting the higher number of commercial aircraft deliveries". ^[13]

Adjusted Profits (EBIT) registered a staggering 185% rise from the prior year, to €4.865, while the company posted record Net Income of € 4.213 billion, recovering from the Net Loss of € 1.133 billion in 2020 and delivered 611 commercial aircrafts. For 2022, it projects 720 commercial plane deliveries and EBIT Adjusted of € 5.5 billion.

Its troubled US rival Boeing by comparison, delivered just 340 commercial airplanes in the past year, although the figure did mark a 117% year-over-year improvement. ^[14]

The Cargo business has supported the airline industry during the pandemic and Airbus has been enhancing its freight program, with the latest news coming from Etihad's intention to buy seven A350F freighters. ^[15]

AIR.fr had a strong 2021 but the fourth quarter was not that good, despite December's advance, while the first quarter of the current year led to roughly 2% slide.

Qantas

Qantas is an Australian airliner with more than 100 years of history, operating domestically and internationally and is recognizable around the world. Apart from Qantas itself, the Group also includes the low-cost Jetstar Airways.

The Covid-19 lockdowns devastated the industry and Australia's international borders had remained mostly closed, but this changed in late February, as the country welcomed back fully vaccinated visa holders ^[16], providing reason for optimism. The Russia-Ukraine military conflict and the sanctions against Russia however, have sent energy prices soaring, throwing another curveball and undermining the path to recovery.

Qantas has made some moves that may help it cope with this issue. It has a plan to reach net zero emissions by 2050, while in February it said that it had purchased up to 30 million liters of Sustainable Aviation Fuel (SAF) over three years for flights departing Heathrow, London ^[17]. In March, it announced another deal under which, it will use almost 20 million liters of biofuels each year from 2025, for flights from San Francisco and Los Angeles to Australia. ^[18]

In February, the Group had announced its financial results for the half-year ended in December 2021 (H1 FY2022), reporting Underlying EBITDA Loss of A$245 million, from Earnings (EBITDA) of A$86 million a year ago, but the figure was marginally lower than its A$250-A$300 million projection. Revenue losses from Covid-19 amounted to more than A$22 billion since the start of the pandemic. ^[17].

The Freight business was one of the bright spots of the report, helping the International segment register Underlying Earnings (EBITDA) of A$89 million. The Loyalty business was another highlight, producing A$157 million in Underlying Earnings (EBITDA).

Qantas has also announced a plan to renew its domestic narrow-body fleet, with more than 100 new aircrafts by 2034.

QAN.au had shed more than 10% in the fourth quarter, but is off to solid 2022 start, with profits of around 5% in the first quarter.

This was the second part of the Top 10 Stocks for Q2 2022 article. You can read Part 1 here.