Mega cap tech giants to report, companies with pricing power prove resilient, and the Fed meets

With the US earnings season well underway, there were quite a few notable companies who reported last week.

The big news was Netflix, with its share price plunging over 20% after announcing measly guidance for the next quarter. They expect to add just 2.5 million subscribers in the first quarter of 2022, well short of Wall Street expectations of 6.93 million.

We expected this to an extent, as we noted last week that Netflix is at the stage where they have to rely more on expanding margins due to a level of saturation and competition. Netflix is losing its first mover advantage in the streaming world, feeling the pressure of heavy competition by the likes of Apple and Disney. Furthermore, much of its growth was frontend during 2020 when lockdowns spurred growth in stay-at-home activities such as watching Netflix.

This result supports our decision in avoiding stay-at-home winners from 2020, where market prices overshot their fundamental value. For stocks like exercise equipment company Peloton, just one year of greatly increased revenue doesn’t justify a 700% increase in valuation. Valuations are based on the lifetime worth of a company. As investors started to realise that consumers were fatigued from stay-at-home activities, the share price has crashed 85% since. You only have to walk past an empty Peloton shop to know this is the case. In fact, 24% of its value was wiped off in just one day last week after Peloton announced they were halting production due to inventory build-up.

In other earnings news, the US banks had mixed results and healthcare giant UnitedHealth Group (NYSE: UNH) beat expectations. As predicted, Procter & Gamble (NYSE: PG) was able to use their superior pricing power to mitigate margin pressures from commodity and freight inflation. This pricing power has been earned from its strong brand names as well as selectively raising prices on more price inelastic goods. This is set to continue with PG raising its guidance to 3% - 4% sales growth.

China’s economy is looking strong, with the Q4 print for GDP coming in at 4%, above forecasts of 3.6%. Industrial production was up 4.3%, beating forecasts of 3.6%. Results such as these which indicate China’s expansion in economic activity should provide support for Australian materials such as iron ore. Speaking of Australia, 64,800 jobs were added here, well above economists’ expectations of just 43,300 additions. This helped push our unemployment rate down to 4.2%, well below predictions of 4.5% and down significantly from pre-pandemic levels.

This coming week is yet another big week in earnings. Here is a quick overview for what Wall Street expects for some of our holdings that report this week.

- Apple: $1.89 EPS and $118.49 billion revenue

- Microsoft: $2.31 EPS and $50.65 billion revenue

- Visa: $1.70 EPS and $6.79 billion revenue

- Mastercard: $2.21 EPS and $5.17 billion revenue

- ServiceNow: $1.43 EPS and $1.6 billion revenue

- Atlassian: $0.39 EPS and $641.29 million

- Northrop Grumman: $5.99 and $9 billion revenue

Investors are focused on how Apple is dealing with near-term logistical challenges and chip shortages, so management guidance will be the key to how the share price reacts. With the recent announcement of Microsoft’s intention to acquire videogame giant Activision Blizzard (who are known for Call of Duty and Worldcraft), many investors are bullish this could power strong levels of growth in their gaming revenue stream. More importantly for now, the focus is on their cloud business and associated services and how that performs in the earnings release.

Other notable companies reporting include Tesla, Boeing, American Express, and McDonald’s. With the soaring popularity of environmentally friendly vehicles, Tesla should continue at high growth levels. You may have noticed on the roads that more and more Teslas are popping up. With Elon Musk saying 2022 will be the year Tesla shows that it is not just an electric vehicle company, we are keenly looking at its solar and storage deployments business line. We are bullish about the renewable energy storage play.

The US will also be releasing Q4 GDP figures, with 5.8% growth expected. This print will escape most of the effects of the Omicron surge, which only really set in from mid-December. Australia’s CPI for Q4 is expected to come in at 0.8%.

The Federal Reserve will be meeting to discuss interest rates this week. Although interest rates are expected to remain the same, we will be analysing the wording released by the Federal Open Market Committee. The US 2 Year Treasury yield is the most relevant market indicator of rates, which is currently at 1.015%. With current interest rates at 0.25%, this prices in between three to four interest rate rises this year.

An interesting statistic for the week

Warren Buffett has made 99.7% of his net worth after the age of 52

Warren Buffett, considered as the world’s most successful investor, was just worth 0.3% of his current value at age 52. While no one expects to have the same level of success as Buffet, it shows that it is never too late to invest, compound, and grow your wealth!

Have a great week,

Sam Waldron - Research Analyst

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