Top 10 Stocks for Q4 2023 – Part 1

Uncertain Environment

Wall Street and other key major stock markets around the world had a strong first half to the year, partly helped by a slowdown in the pace of tightening by major central banks. Things turned murkier though during the third quarter, as inflation remains high and rising energy prices add another layer of complication. This keeps further monetary restraint in play, in an uncertain monetary environment.

Furthermore, Sino-Western relations remain at a low point, which has manifested mostly to advanced tech trade and investment restrictions, but has now expanded into an EU-China conflict over electric vehicles (EVs). At the same time, the world's second largest economy faces hardships with a troubled property sector, suppressed consumer demand, weak factory activity and subdued trade, although recent data offered some ray of hope. These problems not only endanger China's post-pandemic recovery, but also create headwinds for key Western corporations with large exposure in the country.

The Artificial Intelligence (AI) revolution - spearheaded by NVIDIA and other tech giants - continues to drive Wall Street and global sentiment, but the third quarter was negative, as the higher-for-longer-prospects by the Fed strengthened. Markets now search for the next success story to the blockbuster IPO of Arm Holdings and the Fed is close to the end, if not already there.

Although the US economy has generally performed very well, the situation is not so optimistic on the other side of the Atlantic. The Euro Area is going through a tough period, with its economic engine – Germany – sputtering. The UK also underperforms and the massive amount of tightening by the Bank of England creates fears for further slowdown and for sparking a mortgage crisis, even though it paused in September.

Against this uncertain backdrop and as the fourth quarter gets underway, we examine some of the stocks that will be in our radar over the coming months. In this first chapter of a two-part series, we focus on Big Tech, the electric vehicle (EV) market, the airline industry and other sectors. you can read Part 2 here, for corporations like Tesla, Nvidia, Burberry and others.

Meta Platforms

Meta is a tech giant and parent of Facebook, which launched in 2004 and changed the way people connect. Its social media empire also includes Instagram, WhatsApp and the recent text-sharing platform Threads. Its activities span into Artificial Intelligence, the Metaverse and augmented reality.

Its CEO Mark Zuckerberg dubbed 2023 as the "Year of Efficiency", implementing a series of changes to turn things around, following the hardships of the previous year and these efforts are already yielding results. Profitability improved in the second quarter and revenues returned to double-digit growth, helped by a more favorable advertising landscape, in overall impressive report. Meta also sees even better days ahead, expecting higher sales in Q3. ^[1]

Its user engagement has been increasing over recent quarters across the Family of Apps (Messenger, Facebook, Instagram, Whatsup) and Meta expanded its social media presence in July. It launched Threads, a Twitter-like text-sharing app, hitting 100 million signups within the first few days. ^[2]

More importantly, Mr Zuckerberg pivoted away from the long-term and costly Metaverse, which markets never really embraced and shifted his focus on Artificial Intelligence. This is crucial, as the technology can improve (and already is) virtually every aspect of its business. Back in July, it released its own large language model (Llama 2) to rival OpenAI's ChatGPT and Alphabet's Bard. ^[3]

It continues work on the Metaverse and on augmented reality hardware, which so far lacks broader consumer appeal. Meta is about to get some competition, since Apple recently unveiled its own AR headset, but its entry could help lift this niche market out of obscurity.

There are still challenges ahead, as Meta has catching up to do on the AI front, while Threads is still far from threatening Twitter's dominance and engagement has fizzled out, according to Similarweb ^[4]. Markets may be less worried about the Metaverse given the overall improved financials, but the segment responsible for this endeavor continues to lose money.

META.us is having a great year, with gains of around 145% during the first eight month, as investors like the turnaround efforts, the better financials and the renewed attention to AI. August's losses snapped the nine-month profitable streak, although the correction has been limited so far.

Ryanair

Ryanair Holdings plc (RYA.ie) is a budget airline group, headquartered in the Republic of Ireland and parent company of Buzz, Lauda, Malta Air, Ryanair & Ryanair UK, connecting over 240 destinations in more than 40 countries.

The aviation industry continues its post-pandemic recovery, with traffic during the busy and important summer period underscoring the momentum. In its latest report, the International Air Transport Association (IATA) noted a 26.2% y/y increase in total traffic in July, which was at 95.6% of pre-COVID levels. ^[5]

Riding on the increased demand for travelling, Ryanair posted strong results for the April-June quarter (Q1 FY24). Revenues jumped 40% to €3.65 billion and profits after tax (PAT) ballooned to €663 million. CEO Michael O'Leary took note of the firm's "largest ever summer schedule" ^[6], while the latest data showed record traffic of 18.9 million in August. ^[7]

We are now in the shoulder season ahead of the winter holidays, but the budget airline already sees high interest for the turn of the year. It announced the addition of 1.6 million extra seats across 660 routes for the period of 15 December – 8 January. ^[8]

Not all is rosy though, since the firm lowered its traffic outlook for the full fiscal 2024, to approximately 183.5 million passengers (from 185m previously), constrained by delays in plane deliveries from Boeing, although this performance would still mark an around 9% y/y increase. For the soon to be reported quarter (Q2 FY24) the firm sees strong bookings, but projects lower fare increases than Q1, which could eat into its revenues and margins. Furthermore, rising fuel costs pose another source of concern, as energy prices have risen substantially, amidst supply cuts by OPEC+.

Even though airlines seem to have handled high demand better, compared to the scenes of airport chaos of last summer, there are still difficulties. These were highlighted by the recent traffic control failure in the UK, which caused 1500 flight cancellations ^[9]. IATA's Director General Willie Walsh said that although carriers were prepared to accommodate the increased traffic, the performance of some key infrastructure providers has been "deeply disappointing". ^[5]

It is also worth noting that the low-cost carrier operates in a highly competitive environment and consolidation trends in the European market could persist in the near future, putting Ryanair in a difficult spot. Underscoring this tendency, is the recent acquisition of 41% of Italy's ITA by industry giant Lufthansa. ^[10]

RYA.ie has gained around 32% from the start of the year until the end of the summer, benefiting from the post-pandemic boost in travelling, but has a difficult third quarter.

Arm Holdings

Arm Holdings plc is a British chip designer founded in 1990 and considered the crown jewel of the UK tech sector. It is owned by Japanese multinational holding company SoftBank, which took it again public in September in the US, in the biggest IPO of the year.

Arm does not make semiconductors itself, but licenses its architecture to other companies, with its designs used in many sectors, from cloud computing to automotive. It has a stronghold on the mobile devices market, as nearly all of the world's smartphones run on Arm-based processors ^[11], including Android devices and Apple's iPhones.

The company is trying to capitalize on the Artificial Intelligence (AI) boom with the timing of its Initial Public Offering (IPO), which has driven this year's tech rally, an area where its designs are essential. In a testament to its importance, the poster child of this revolution – Nvidia - had actually agreed to buy Arm three years ago, but the deal was abandoned due to regulatory hurdles ^[12]. More to it, Nvidia's next next-gen AI superchip is based on Arm's Neoverse. ^[13]

Arm had an impressive first day on the Nasdaq and has the potential to be Wall Street's next success story, given its AI importance and its smartphone imperative. Its total addressable market (TAM) was approximately $202.5 billion in calendar 2022 and the firm expects it to grow to nearly $247 billion by the end of 2025, including growth in sectors like data centers and automotive. ^[14]

On the hand, its sky-high initial valuation creates concerns, as it is more than 100 times its profitability. Arm had net income of just $524 million in Fiscal 2023 (year ended March 31) and its revenue stagnated at around $2.5 billion. The IPO also comes at a period of heightened Sino-US frictions and tech trade restrictions, with nearly 25% of its revenue coming from China. Furthermore, the global smartphone market has facing headwinds over the past several quarters.

ARM made a strong debut on September 14, with gains of 25% in the first day of trading but has been dropping since, amidst broader tech pullback and caution around its valuation.

Source: www.tradingview.com

XPeng

XPeng is a Chinese electric vehicle (EV) startup, with five models in its lineup that also develops an in-house advanced assisted driving system. It was founded less than ten years ago, but its sales network has already expanded outside of China. It began trading publicly on the New York Stock Exchange in 2020 and the Hong Kong listing followed a year later.

XPeng had a rough couple of years amidst broader industry headwinds, with a greater adverse impact on startups. It saw its net loss ballooning to a historic RMB 2.8 billion (around US$ 385 million) in the second quarter and revenues slumped roughly 32% y/y to RMB 5.06 billion (around US$ 700 million), albeit the figure marked the first sequential growth in over a year. ^[15]

Its deliveries have also suffered, but the 23,205 units handed over in Q2 offered some reason for optimism, since they snapped the five-quarter downtrend. Its latest model, the G6 Coupe SUV, has exceeded 10,000 deliveries within just the first 45 days. ^[16]

The EV maker is optimistic about the third quarter, expecting deliveries to rise to 39,000 - 41,000 units and revenues to strengthen between RMB 8.5-89.0 billion. Execs are addressing the hardships and try to turn things around, with a series of initiatives. Auto giant Volkswagen has agreed to invest US$ 700 million in XPeng for a 4.99% stake, as part of a strategic partnership for joint vehicle production, the scale of which could help the profitability of the Chinese startup. ^[17]

XPeng already sells some of its vehicles in certain European countries, but it announced the expansion of its presence into the important German market. It will launch in 2024 with the P7 sports sedan and the G9 SUV, which it showcased during September's IAA Mobility show in Munich. ^[18]

The startup has an appealing offering, but it will need work to gain the trust of European consumers and succeed in the second largest EV market of the world. However, this task will likely become more difficult, after the EU Commission announced an anti-subsidy investigation into electric vehicles coming from China ^[19]. On the domestic front, it faces a highly competitive market, which is dominated by BYD and Tesla.

XPEV.us is having a profitable 2023 and made an impressive start to the third quarter, hitting the highest levels in around a year, but has been losing ground since.

Microsoft

Microsoft is an American multinational technology company, known for the creation of the Windows operating system and the Office suite of apps. Its offering though spans to AI, cloud computing, consumer electronics and more.

Generative Artificial Intelligence (AI) has emerged as the key battlefield in Silicon Valley, with Big Tech racing for supremacy. Microsoft was able to leverage the investment in OpenAI - the creator of ChatGPT that sparked the AI arms race –to quickly launch an AI-powered Bing search engine ^[20] and weave the technology into more products and services, including its advertisement business. ^[21]

This first mover-advantage is crucial and could undermine Google's search engine, but the last quarterly results showed that its dominance is not under immediate threat. Competition is intensifying and its rival is making progress, after the late start. However, Microsoft is already moving into the next phase: AI monetarization. It launched a paid subscription service for enterprises in July, which allows them to use AI tools on products like Excel, Word and Teams. ^[22]

The tech behemoth comes from a strong quarter with record revenues in excess of $56 billion, but its guidance was concerning. It projects lower total sales of $53.8-$54.8 and a decline to the important Intelligent Cloud segment to $23.3-$23.6 billion in the soon to be reported quarter (Q1 FY24) ^[23]. Microsoft is the second largest cloud provider behind Amazon, but its market share dropped sequentially in Q2, based on research by the Synergy Research Group. ^[24]

Big Tech is also facing regulatory headwinds around the world. The EU Commission recently designated Microsoft and others as "gatekeepers", under its new Digital Markets Act, giving them six months to ensure full compliance with the DMA obligations ^[25]. Moreover, the firm unbundled Teams from its Microsoft 365 and Office 365 suites for business customers in the European Economic Area, after EU initiated a probe. ^[26]

MSFT.us gained more than 35% in the January-August period and reached new record highs in July, but runs a losing third quarter as the AI hype subsides.

This was the first installment of a two-part series. You can read Part 2 here, for corporations like Tesla, Nvidia, Burberry and others.