Top 10 Stocks for Q3 2023 – Part 2

Market Optimism

Wall Street and other key stock markets around the world had a very bad 2022, mostly due the massive amount of rate hikes delivered by the Fed and most of its major counterparts. Even though monetary outlook has been uncertain, many central banks have slowed the pace of tightening this year and may have reached the peak as inflation is easing, but it still early to talk about the end. The US Fed paused in June, but kept the door open to further policy firming, while the European Central Bank, which has been more aggressive in 2023, likely has more ground to cover.

Despite the persistently hawkish stance by the ECB and the poor performance of the economy, the German stock market is having a great year. On the other side of the Atlantic, the Fed slowdown has allowed equities to rebound, looking past the banking turmoil sparked by the run on Silicon Valley Bank.

The tech sector is leading the march, driven by the generative Artificial Intelligence (AI) boom, which has emerged as the next big thing. NAS100 is deeply in bull territory and outperforms its peers, with an around 30% rally in the first five months of 2023.

China has been reopening after shifting away for the stringent zero-Covid policies and this has revitalized economic activity. A series of recent poor data though, have created concerns over the recovery of the world's second largest economy, but authorities have stepped up their stimulus efforts. The progress of the economy will be closely watched, since it is important not only for the domestic market, but for corporations and markets around the world.

Concerns around the economic growth in China and other regions, as well as various potential risk factors, could pose headwinds. Equities however, especially in the US, move towards the third quarter and the new earnings season, with optimism and expectations for a less hostile monetary environment.

Against this backdrop, we take a look at some of the stocks that we will be closely following over the coming months. In this Part 2 of a two-part series, we focus on Big Tech companies, firms from the airline industry and more. You can read Part 1 here.

Apple

Apple (AAPL) is one of the most valuable companies in the world and one of the few, with a market cap in the trillions of dollars. It is among the largest smartphone makers, known for a seamless and design-savvy ecosystem of hardware, operating systems and services.

The tech colossus comes from a mixed quarter as total Revenues dropped in Q2 FY2023 (period ended April 1) for second straight time ^[1], with CFO Luca Maestri anticipating "similar" performance in the soon to be reported June quarter ^[2]. More to it, sales of Macs, iPads and wearables disappointed.

On the other hand, iPhone sales rose by around 1.5% y/y defying the broader trend, which has been weighed by chip shortages, saturation, high inflation and other factors. Research by Canalys showed that the smartphone market contracted 13 % y/y in the first three months of 2023, with Apple conceding the top spot to Samsung. ^[3]

The biggest development though came from the firm's June Worldwide Developers Conference (WWDC), where it unveiled its first major new product in around seven years - an augmented/mixed reality headset ^[4]. The market is dominated by Meta Platforms, but the technology is still obscure and has failed to appeal to broader audiences.

With the eye watering $3,499 starting price tag for the device, Apple makes a high-stakes move in a nascent segment, in an effort to innovate again after a long time. Although it is still early to tell, the Vision Pro appears to be ahead of what currently exists out there, especially on the software side. More to it, Apple definitely has an unparalleled ability to establish a market and create consumer-ready polished devices.

What has been absent from the firm's commentary though, is generative Artificial intelligence (AI). This has emerged as the main battlefield for Big Tech, with companies such as Microsoft, making strides. As it throws its weight on the niche AR market, Apple risks missing out on what is potentially the biggest technological breakthrough of recent years.

AAPL.us is running a great year, having registered gains in excess of 35% as of the end of May. Markets reacted positively to the iPhone sales growth and helped the stock to further gains in June and new record highs.

Li Auto

The Chinese new energy vehicle (NEV) maker was founded less than ten years ago and begun trading publicly in the US in 2020 ^[5], while the Hong Kong listing followed in 2021 ^[6]. It started volume production just in late-2019, but has made rapid progress, with notable achievements and ambitious plans.

Li Auto (LI.us) concentrates on the Chinese market and the popular SUV segment, with four hybrid vehicles. A couple of months back, it announced an ambitious roadmap to nearly triple its lineup by 2025, aiming to sell eleven models, with five pure battery electric vehicles (BEVs). ^[7]

The EV startup has been ramping up output this year, having handed over 52,584 vehicles in the first quarter. This made it the seventh selling brand of new energy vehicles in China, with a 4% market share, according to the China Passenger Car Association (CPCA) and as reported by CarnewsChina.com. ^[8]

On monthly basis, Li Auto has been delivering more than 20,000 units since March, reaching 28,277 in May, with its gross sales surpassing RMB10 billion (around 1.4 million USD). The Li 7 flagship SUV was once again its best-selling car, with over 10K units. ^[9]

During the first quarter, Revenues nearly doubled from a year ago, to RMB 18.787 billion (around 2.65 billion USD). Li Auto returned to profits, with Net Income of RMB 405.2 million (around 57 million USD). For the soon to be reported second quarter, it projects Revenues above RMB 24 billion and deliveries between 76,000-81,000 units. ^[10]

We will be looking forward to the latest delivery/production figures and the financials to see if the firm can maintain its recent impressive performance and any updates around the lineup expansion.

You can read The State of the Electric Vehicle Market Ahead of the Summer 2023 Earnings Season, for more insights on the EV industry and more makers such Tesla and BYD.

LI.us gained more than 40% during the first five month of the year. It has a profitable Q2, as investors liked the last quarterly results and guidance, bringing the record highs now in the spotlight.

Lufthansa AG

The German-based airline group is one of the largest in Europe, having carried nearly 102 million passengers last year, in more than 826 million flights. Other than the Lufthansa brand itself, the group includes more high profile carriers, such as SWISS, Austrian Airlines and the popular low-cost firm Eurowings ^[11]. In May, it announced an agreement to acquire 41% if ITA Airways, the offspring of Alitalia, with the option to purchase the remaining stake at a later date. ^[12]

The group posted a Net Loss of almost €500 million in the first quarter of the year, in what is probably just a bump in the pot-pandemic recovery, in overall strong results and upbeat guidance. Revenues grew 40% y/y to €7 billion and passengers increased to 22 million, from 13 million a year ago. ^[13]

Capacity was significantly expanded to 75% of the pre-crisis level in 2019 and Lufthansa projects an increase to 82% in the second quarter. More importantly, its CEO expects a "travel boom" in the important summer period.

The group's performance in the traditionally busy summer months will be crucial for its recovery, but will face stiff competition, with other airlines also anticipating strong traffic. The low cost Ryanair group, which competes with Lufthansa's Eurowings posted strong yearly results in May, already witnessing "robust" summer demand ^[14]. Furthermore, the International Air Transport Association (IATA) said that forward bookings indicate 39.9% growth in Europe this summer travel season. ^[15]

LHA.de made an impressive 2023 start, reaching the highest levels in around two years, having gained nearly 20% as of the end of May. However, it has been facing pressure over recent months, with a losing second quarter, as the first post-pandemic recovery lags compared to some of its rivals.

Warner Bros. Discovery

The global media and entertainment company was formed last year, after telecom giant AT&T sold Warner Media to Discovery. Warner Bros.Discovery is a media powerhouse, spanning from movies and TV shows to sports and news networks, with the inclusion of HBO, CNN, TNT, Eurosport and more. ^[16]

The new company has been pushing on the streaming market and unveiled in May its new flagship service called Max, starting from a very competitive $9.99/month in the US, with inclusion of advertisements ^[17]. Even though it is still far behind the leaders of the industry - Netflix and Disney - the firm's direct-to-consumer business (DTC) grew by 1.6 million subscribers in Q1, reaching 97.6 million. ^[18]

Warner Bros.Discovery (WBD.us) has an impressive content slate, which can stand up to its DTC rivals. It includes superhero movies like Batman and Wonder Woman from the DC Universe, the Harry Potter franchise and of course the TV giant HBO, which is the creator of hit and critically acclaimed shows.

Videogame based "The Last Of Us" averaged 32 million viewers, making it the most watched show on the company's streaming platform in both Europe and Latin America. The finale of the award-winning drama "Succession", drew in 2.9 million users across streaming and linear channels. ^[19]

Legacy entertainment companies such as Warner Bros have struggled at the box office recently. DC's "The Flash" opened at just $55 million in mid-June ^[20], a far cry from the latest Spiderman movie of rival Marvel. Warner is trying to revive the DC Universe, but the first signs are not promising and it will need to do a lot better to catch up to Marvel and Disney.

WBD.us begun 2023 with a strong rebound from its multiyear low, which has helped to a profitable first half. It erased most of the gains though and the stock is having a losing second quarter. This partly reflects the challenging environment for linear networks and the fact that more work is needed on the DTC front.

Nvidia

Nvidia is a US multinational semiconductor heavyweight, which recently joined the coveted Trillion Dollar Club, since its market capitalization reached $1 trillion and also made into the TIME's list for this year's 100 most influential companies ^[21]. The firm is mostly known for its gaming graphics cards, but it is also doing leading work on data centers, artificial intelligence and the metaverse.

Generative Artificial Intelligence (AI) has become the next big thing for Silicon Valley, since OpenAI launched its conversational AI chatbot late last year. Tech giants such as Microsoft, Alphabet and others are racing for AI dominance. Nvidia has enabled this revolution, as it provides the required infrastructure for the development and deployment of such models and applications. It has been doing leading work on the field, with its accelerated computing and now reaps the benefits of the AI boom.

In May, the semiconductor maker announced somewhat mixed results for Q1 FY2024 (quarter ended April 30), but the Data Center business shined with record revenues. This surge was largely a result of AI demand, which also drove the strong overall Revenue guidance for the second quarter. CFO Colette Kress noted that the projected sales growth is driven by Data Center and reflects a "steep increase" in demand for generative AI and large language models. ^[22]

Nvidia is at the pinnacle of the artificial intelligence revolution, offering the necessary GPUs, but competitors are making progress. In June, Advanced Micro Devices Inc (AMD) unveiled a new AI chip, the MI300X, in an effort to challenges its rival's supremacy. ^[23]

NVDA.us is having an amazing year, with an eye-watering 159% rally during the first five months. The stock reached record highs after the latest quarterly results and forward guidance, driven by the AI boom.