Top 10 Stocks for Q4 2023 – Part 2

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 second chapter of a two-part series, we focus on the streaming market, the luxury fashion industry Big Tech, and other sectors. You can read Part 1 here, for corporations like Meta, Microsoft, Ryanair and others.

Tesla

Tesla was founded in 2003 to disrupt the auto industry, emerging as the leader of the electric vehicle (EV) market, with the prolific Elon Musk serving as CEO since 2008. It also works towards fully autonomous driving, on artificial intelligence and more.

Tesla Motors Inc comes from a mixed second quarter as it reached record delivery and production levels, but the gap between the two persisted ^[1] and Mr Musk warned of a potential "slight decrease" in Q3 output during the earnings call ^[2]. Revenues jumped 47% y/y to a record of nearly $25 billion, but profitability took another hit from lower prices. Operating income slid 3% y/y and margin fell below 10% for the first time in more than a year. The firm has been slashing its prices, chasing market share over margins, which are still enviable by the auto industry.

Tesla has an aging fleet and has not released a new model in years, but this is set to change soon with Cybertruck, after multiple delays. Mr Musk had previously indicated that deliveries would begin in the third quarter, but during the last earnings call he was less specific, placing them in this year. The firm launched a refreshed Model 3 in September and a few months back, execs had outlined a next-gen manufacturing procedure that reduces costs and footprint ^[3]. This could enable the EV king to build an actually cheap electric vehicle, but there are no details around such prospects.

Tesla faces increased competition from legacy auto giants and startups alike, but stays at the forefront of the EV revolution, with a broader vision for a world without fossil fuels. Its charging protocol has been embraced by The Ford Motor Company ^[4], General Motors ^[5] and others, it is entering lithium refinery that is a key component of EV batteries and pushes on solar panels.

It also positions itself on the peak of Artificial Intelligence (AI) development, with its Dojo supercomputer, to improve the autonomous capabilities and achieve full-self driving (FSD). Elon Musk said in July that FSD will be "better than human" by the end of the year and they are making it available to other car companies, although it is not approved by regulators at this stage. However Mr Musk has generally been too optimistic around full autonomy and to his own admission, he is "the boy who cried FSD". ^[2]

TSLA.us more than doubled during the first eight month of the year, as markets seemed to like its push for market share, progress on charging networks and progress on the AI front. However, the stock slid in the third quarter as broader Wall Street sentiment deteriorated.

Disney

The Walt Disney Company is a leading entertainment and media enterprise, which was founded 100 ago and bears the name of its iconic creator. Its activities span from theme parks, to entertainment studios, TV networks, streaming and more.

The media giant is going through a difficult period, with challenges on multiple fronts. It studios business is struggling for success, with just one movie in the top-5 of world box office this year ^[6]. Its cable and broadcast networks underperform amidst soft advertising and cord cutting. Most importantly, streaming is not a growth story anymore, since its services (Disney+, Hulu, ESPN+) have been losing subscribers for the last three quarters and have allowed Netflix to regain the lead.

However, the last quarterly results showed both concern and promise. The user base contraction seems limited, in light of the recent (and upcoming) price hikes, with CEO Bob Iger saying that they "didn't see significant churn or loss" from the increases ^[7]. The financials of the direct-to-consumer (DTC) segment improved, which indicates that Disney has pricing power. Revenues remained robust and losses narrowed in Q3 FY2023, with the firm expecting DTC profitability by the end of fiscal 2024. ^[8]

Furthermore, the ad-supported tier that launched late-last year is doing very well, with 40% of new Disney+ subscribers opting for this option and an expansion to more regions is in the pipeline. Disney also plans to monetize password-sharing, with the CEO calling it a "real priority" ^[6]. This proved beneficial for rival Netflix, helping it to strong Q2 results.

The board brought back its former CEO around a year ago, to address the hardships and reassert Disney's dominance. Mr Iger did not lose any time, with an aggressive restructuring plan and focus on the core businesses (streaming, film studios and parks). Disney has great content and two of the most important franchises in Hollywood – the Marvel Cinematic Universe & Star Wars. It also own sports mainstay ESPN, which it intends to transition to streaming. If executed right, it can unleash its full potential and drive value.

Mr Iger has a difficult and complex task that could require unloading some of its linear assets like ABC. Such move would unlikely result in significant proceeds and definitely entails risks. However, it will allow Disney to focus its efforts on the core segments and send a strong message to markets around its intentions to push forward.

DIS.us is having a difficult year and threatens the pandemic lows (79.09), as markets are concerned about the firm's challenges and have not given any grace period to the reinstated CEO who tries to turn the ship around.

Burberry

Burberry is a major British high-end fashion group, known for the iconic Burberry Check prints. It designs and sells clothes and accessories for men, women and kids around the world. It was established 1856 and the group started trading publicly on the London Stock Exchange in 2002.

Late last year, the company set a strategy to grow its sales to £4 billion in the medium-term and to £5 billion in the longer run. Its last results for the full fiscal 2023 (period ended April 1), showed substantial progress towards this goal, since its revenues grew past £3 billion. ^[9]

The robust results were largely driven by China's reopening, where sales jumped 13% in the first three months of the current year. The group's update for the May-July period was also encouraging, with revenue growth fueled by "ongoing recovery" in Mainland China. ^[10]

However, the country's post-pandemic recovery is faltering, as indicated by a series of disappointing economic data and Sino-Western relations have deteriorated this year. China and the broader Asia-Pacific are a bellwether for luxury brands and Burberry in particular. The region is its top destination, accounting for more than 40% of revenues in FY2023. As such, China's economic performance will be crucial for the group.

Burberry may be one of the most iconic and recognizable fashion brands around the globe, but it is vulnerable in a highly concentrated luxury market, dominated by big conglomerates, such as LVMH, Kering and more. In the most recent manifestation of this consolidation trend, Coach-owner Tapestry, agreed to acquire Capri Holdings, home of Michael Kors, Versace and other high profile designers. ^[11]

BRBY.uk made an impressive start to the year, which culminated to April's record highs (2,655). However, it has since erased the gains with two losing quarter amidst China woes and a tough external environment.

Apple

Apple 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 giant comes from a disappointing quarter (Q3 FY2023), when sales of Macs, iPads and iPhones, all dropped compared to the year ago quarter, leading to a nearly 1.5% y/y revenue decline. CFO Luca Maestri does not expect improvement in the soon to be reported quarter, forecasting "similar" year-over-year revenue performance ^[12]

CEO Tim Cook spoke of a "challenging" smartphone market in the US, but saw "continued strength" in emerging markets, due to "robust" iPhone sales. The firm is turning its attention to India where it opened its fist Apple Stores and so is the Western world, amidst heightened tensions with China. However, the world's second largest economy is a critical for Apple's production and consumption. It accounted for nearly 20% of revenues in the last quarte, with the difficulties and strained relations with the West, posing a source of risk for the tech giant.

Against a soft global smartphone market, the Cupertino company released its newest iPhones in September, which delivered mostly incremental upgrades. The new smartwatches seemed to offer more interesting updates, with the on-device Siri requests and the double tap gesture. Apple has not innovated in a long time, but made a leap forward with an augmented reality headset a few months back.

With the Vision Pro it will enter a niche market, where Meta is currently the biggest player. Its $3,499 price tag is prohibitive for mass adoption though. Furthermore, it won't ship until early-2024 and such devices have failed to gain broad appeal so far, but if any company can change that, it is Apple.

AAPL.us gained around 45% in the first eight months of the year, hitting all-time highs in July (198.35). Its stock has pulled back after that into losing third quarter, threatening key technical levels.

Nvidia

Nvidia is a US chip heavyweight, traditionally know known for its gaming graphics cards, but its biggest business is now Data Centers and does leading work on Artificial Intelligence (AI). It was named as one of this year's 100 most influential companies by TIME magazine ^[13], while its stock valuation recently hit $1 trillion, ushering it to the coveted Trillion Dollar Club.

OpenAI blew the tech world away in late-2022, with ChatGPT, its generative artificial intelligence (AI) chatbot. It sparked an AI arms race, with tech giants like Microsoft and Google-parent Alphabet, competing for supremacy. This revolution would not be possible without Nvidia, whose accelerated computing has enabled the creation and launch of such applications.

Its leading work on the field is already bearing fruits and the firm posted blockbuster quarterly results (Q2 FY2024), fueled by strong demand for its AI infrastructure. Revenues doubled from a year ago to a record of $13.507 billion and profits ballooned to $6.188 billion. More importantly, it dismissed concerns around supply and demand, expecting sales to increase further during the soon to be reported quarter, to $16 billion. ^[14]

Nvidia's GPUs are the standard for handling the complex and demanding AI workloads. It is far ahead than its competitors, but the gap may begin to close, as they make progress and the need for more AI infrastructure increases. Advanced Micro Devices unveiled a new AI chip, the MI300X, to go up against Nvidia ^[15]. Furthermore, trade restrictions on critical chip technology towards China, may create headwinds for the broader industry.

NVDA.us has led this year's tech rally with an eye watering nearly 240% advance in January-August, that led to new record highs above 500.00. As the AI hype subsided in September though, the stock has been losing ground.

This was the second installment of a two-part series. You can read Part 1 here, for corporations like Meta, Microsoft, Ryanair and others.