Top 10 Stocks for Q3 2022 – Part 1

Unfavorable Backdrop

High inflation has been troubling most major economies around the world, with the US Consumer Price Index having surged to the highest levels since 1981 in May, while the Bank of England expects it to hit double-digits in the UK.

To combat this, many central banks have embarked upon an aggressive and front-loaded monetary tightening path. In June, the US Federal Reserve delivered its third straight and largest rate hike in nearly thirty years, while the Bank of England also raised rates for the fifth time in a row as the European Central Bank now expects rate lift-off in July.

These tightening policies however, along with other factors such as trade disruptions and high energy & commodity prices, impede economic activity, generate fears of stagflation and are creating a challenging environment for stock markets. The tech sector is particularly vulnerable to these conditions and NAS100 has been in a bear market for a quite a while now, while the broader SPX500 also slipped into bear territory in June.

Despite the current doom and gloom, stock markets had managed to rally after the pandemic plunge and have the ability to do so again, although it seems early for such moves.

Against this backdrop in a two-part series, we take a look at some stocks from around the world, which are drawing our attention for the third quarter. In this Part 1, we will focus on US firms that operate in the electric vehicle (EV) market, streaming services, retail commerce and other sectors. You can read Part 2 here.

Netflix

The firm started out in 1997, renting and selling DVDs and subsequently introduced streaming services 15 years ago. Netflix popularized binge-watching and led the streaming revolution, but its reign may be under threat, as it has had a tough year to date.

Back in April, it announced a shocking loss of 200,000 paid users in the first quarter ^[1], which was the company's first loss since 2011 ^[2] and brought total subscribers to 221.64 million. Netflix expects a further reduction of its user base in the second quarter, by two million subscribers.

These abysmal metrics were largely attributed to the suspension of its service in Russia, but the streaming giant also acknowledged the impact of increased competition on its growth, noting that "over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched".

Newcomer AppleTV+ made history earlier in the year, becoming the first streamer to win the Oscar for Best Picture with CODA ^[3], Disney+ has seen a meteoric rise since it launched in late 2019, while other "traditional" entertainment companies such as HBO are also pushing on the streaming front. Netflix has primarily focused on robust content, but this is clearly not enough, as it is no match in this respect, for those legacy firms that have decades worth of content and strong franchises.

April's poor results have forced Netflix to rethink some key aspects of it its strategy, since it announced a plan to monetize password-sharing. Most importantly, it now appears ready to abandon the no-commercials approach it has been clinging onto for so long and is looking into lower-priced, ad-supported subscription plans. ^[4]

As we have commented before, such offerings are probably the future of the industry and could help Netflix, in light of increased competition, streaming saturation and the surge in inflation, which diminishes the disposable income of consumers.

Both the Q4 2021 results in January and the Q1 2022 ones in April led NFLX.us to a free fall, which has wiped-out nearly 70% of its value during the first five months of the year. In May and June it has managed to consolidate and it remains to be seen whether it can recover.

Tesla

The firm was founded in 2003 and has disrupted the auto industry, being the leader of the electric vehicle (EV) market, although its activities span to other sectors, such as the manufacturing of solar panels.

Tesla Motors Inc (TSLA) produced a very strong first quarter, having delivered record 310,048 vehicles and record Operating Margin of 19.2%, up from 14.7% in the previous quarter ^[5], which is quite significant given the surge in commodity prices, global inflation and the rising Interest Rates environment.

Moreover, Elon Musk inaugurated, not just one, but two new factories earlier this year, within a span of only a few weeks. The Giga Berlin in Germany ^[6] and the second US-based factory in Texas ^[7], both of which produce the Model Y.

Tesla seems to have done a better job, compared to other automakers, in navigating the supply chain disruptions but is definitely not immune to them, while its production has also been affected by recent Covid-19 lockdowns is Shanghai.

Furthermore, the firm does not plan to introduce any new models this year, which will be about "scaling up", as per Mr Musk's comments during the Texas Giga Fest. The CEO expects Tesla to be "in production" with the Roadster, the Semi and the long-awaited Cybertruck in 2023. ^[8]

Meanwhile, competition increases, as both EV startups and legacy automakers make progress on the electrification front. Rivian Automotive beat everyone to the EV truck segment with its R1T, while the Ford Motor Company, recently begun deliveries of its highly anticipated F-150 Lightning electric truck.

During a Bloomberg interview in the Qatar Economic Forum on June 21, Mr Musk said that Tesla (Tesla) is reducing its salaried workforce "by roughly 10% over the next probably 3 months or so", adding though that this is "only really a 3-3.5% reduction in total headcount and not super material". ^[9]

Tesla had performed a 5-1 stock split two years ago ^[10], which made the stock cheaper and more accessible to investors. A recent SEC filing showed that Tesla plans another split, of 3-1, pending a vote at the August 4 annual shareholder meeting. ^[11]

TSLA.us has shed nearly 30% during the first five month of the year, following November's record highs as the broader tech sector reels. Furthermore, the Musk-Twitter saga has not benefitted Tesla's stock, since it started in April.

TSLA.us has been trying to form a bottom recently, which could provide the technical impetus for a recovery, but on the other hand it has formed a Death Cross (EMA50 crossing below the EMA200), which could be precursor of further losses.

Apple

Apple (AAPL) is one of the most valuable companies in the world and one of the largest smartphone makers, known for a seamless and design-savvy ecosystem of hardware, operating systems and services.

The last quarterly results (Q2 FY2022) announced in late-April were far from impressive, as its Revenue of $97.3 billion fell short of the record $123.9 billion generated in the previous quarter ^[12]. Apple issued a warning regarding the soon to be reported quarter, with its CFO talking of a "$4 billion to $8 billion" impact from "supply constraints caused by COVID-related disruptions and industrywide silicon shortages". ^[13]

The iPhone is the firm's main revenue generator, but during the first quarter of the year, Apple (AAPL) lost the top spot in global smartphone sales, to Samsung. According to Canalys' research, the firm's shipments dropped to 56.5 million units and its market share shrunk to 18%, as the whole industry registered a decline. ^[14]

The Cupertino-based company however is so much more than hardware and keeps expanding its services to new areas. During June's 2022 Worldwide Developers Conference (WWDC) it unveiled, among other things, the Apple Pay Later service ^[15], its entry into the increasingly popular Buy Now Pay Later (BNPL) business. This will be incorporated in the Wallet app in the upcoming iOS 16 update and will allow US users to spread the cost of Apple Pay purchases into four equal interest-free payments over six weeks.

The tech giant has also made a strong entry into the streaming industry with AppleTV+, which has produced popular and critically acclaimed original content. Back in April, it made history by winning the Oscar for best Picture with CODA ^[3], while last year it had won 10 Emmys, including best Comedy Series for Ted Lasso ^[16]. The 2022 Emmy Awards take place towards the end of the third quarter, while the nominations are announced in July.

AAPL.us has recently slipped into a bear market and at the time of writing was losing more than 20% from its January record high, which is generally considered as the threshold for such designation. Despite the stock's recent demise, Apple is one of the most valuable companies in the world and has also often exhibited safe-haven characteristics.

Amazon

Amazon (AMZN) is a US multinational technology giant, with its business spanning from e-commerce to the increasingly important cloud computing, to streaming services and more. It was founded in 1994 by Jeff Bezos, who stepped down last year as CEO, succeeded by Andy Jassy.

Amazon.com reported its first quarterly loss in seven years, with a hefty Net Loss of $3.844 billion in Q1 2022, compared to profits of $8.107 billion in the same quarter a year ago. This was partly driven by the loss of $7.6 billion from the firm's stake in electric vehicle (EV) startup Rivian Automotive. ^[17]

Operating Margin was also squeezed to 3.2% during the reported period, from 8.2% margin of Q1 2021, but was improved compared to the prior quarter's 2.5%. This is an important metric, given surging inflation and higher interest rates.

The forward guidance for the second quarter was rather disappointing, since Net Revenue is expected to be between $116.0 billion and $121.0 billion and Operating income (loss) is expected to be between $(1.0) billion and $3.0 billion.

The year-over-year comparison will be unfavorable since the Q2 2021 figures included the all-important Prime Day 48-hour sale event, which was hosted in June, whereas this year it is scheduled to take place in July.

Despite the poor quarterly results, Amazon is a tech and retail giant that pushes on multiple fronts. One of the recent services that drew our attention is Buy with Prime, which poses a challenge to shipping firms such as FedEx and could potentially be industry shifting. It expands Amazon's own shipping services outside its online store, since it allows Prime members to shop at collaborating sites, using Fulfillment by Amazon (FBA). .

It will now be interesting to see how Amazon handles the current unfavorable environment, while also keeping an eye on the increasing regulatory scrutiny of the tech sector, which could potentially intensify ahead of this year's mid-term election in the US.

AMZN.us has taken a beating this year and has slumped more than 25% during the first five months. Although it has been trying to form a bottom, a recovery is still elusive.

Target

Target is a general merchandise retailer with more than 1,900 stores across all U.S. states, 51 supply chain facilities and around 400,000 employees. It is headquartered in Minneapolis, Minnesota, where the first Target store opened in 1962. ^[19]

The retail giant's bottom line had taken a massive hit in the first fiscal quarter, in a backdrop of high inflation and supply chain disruptions, which along with similar results from rival Walmart had contributed to the worst day of the SPX500 since the height of the pandemic.

Net Earnings plunged more than 50% year-over to $1.009 billion, while its Operating Margin was squeezed to 5.3%, from 9.8% a year ago and had also issued disappointing forward guidance. ^[20]

This was not the end of it however, since Target lowered its second quarter forecasts in June, now expecting Operating Margin at around 2%, while guidance for the second half is still around 6%.

This is a result of a new action plan for "additional markdowns, removing excess inventory and canceling orders", among other things. CEO Brian Cornell said those initiatives will result in "additional costs in the second quarter", but expressed his confidence that these actions will pay off over time. ^[21]

These results and forward guidance are very disconcerting, since big retailers such as Target are supposed to be able to manage high inflation and trade disruptions better that anybody, whereas if they chose to mitigate their elevated costs via price increases, this could exacerbate inflation pressures and cause more harm to consumers.

TGT.us got hammered in May after the dive in its profitability having erased around 30% in the first five months of the year.