Wall Street Breakfast: More Big Tech – Seeking Alpha

More Big Tech

New Episode Alert! Weekend Bite, a Seeking Alpha original series. This week we’re joined by Will Thomson, Portfolio Manager and Founder at Massif Capital. We dive into the recession (or not?), Europe’s woes, the strong U.S. dollar and where it goes from here, and the undersupply of precious metals. Plus, Kim covers why he is watching AMC earnings like a hawk next week for Catalyst Watch.

Shares of Apple (AAPL) climbed 3% to $162 in extended trading on Thursday after posting FQ3 results that were better-than-expected and saying sales should “accelerate” in the current quarter despite U.S. economic uncertainty. Revenue attributed to the iPhone, which accounted for nearly half of all sales, came in at a whopping $40.7B (+3% Y/Y), while the company saw a “record” number of people switch over from Android during the quarter. That helped boost revenue at Apple’s Services division, which rose to $19.6B (+12% Y/Y) and saw the number of people paying recurring subscription fees climb 23% over the past 12 months to 860M.

Quotes: “There is no obvious evidence in our data that there is macroeconomic effect on iPhone sales… and we’re continuing to hire,” CEO Tim Cook said on an earnings call. “The situation on supply is improving,” added CFO Luca Maestri. “The big question mark, as always, are potential COVID restrictions, but in the current environment, if nothing changes, we expect supply constraints to be less than what we saw in June.”

Investors also bid up shares of Amazon (AMZN), betting that strong AWS cloud computing growth will outweigh weakness at its core retail operations. The stock even soared 13.5% to $138 AH despite a $2B net loss, which was skewed heavily due to a massive writedown on its investment in EV maker Rivian (RIVN). A positive revenue forecast helped counter that sentiment, while advertising revenue reached $8.76B (+18% Y/Y), suggesting that Amazon could be taking market share from its mega-cap tech rivals.

Expenses and drivers: “Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network,” noted CEO Andy Jassy. “We’re also seeing revenue accelerate as we continue to make Prime even better for members, both investing in faster shipping speeds, and adding unique benefits such as free delivery from Grubhub for a year, exclusive access to NFL Thursday Night Football games starting Sept. 15, and releasing the highly anticipated series The Lord of the Rings: The Rings of Power.” (63 comments)

The ‘r’ word

U.S. gross domestic product dropped at a 0.9% annualized rate in the second quarter, driven by a decline in consumer spending and private inventories, as well as weaker housing and business investment. The contraction followed the economy shrinking at a 1.6% pace in Q1, translating into two consecutive quarters of negative growth that are typically defined as a recession (though any official decision is left up to NBER). As mentioned yesterday, the term “recession” is now as charged as the midterm elections in November, and the White House was the latest to weigh in on the matter as it battles other economic headwinds like four-decade high inflation.

President Biden: “Now, there’s no doubt we expect growth to be slower than last year, and for the rapid clip we had. But that’s consistent with a transition to stable, steady growth and lower inflation. Fed Chairman Powell made it clear that he doesn’t think the U.S. is currently in a recession. He said, quote, ‘There are too many areas where the economy [is] performing too well.’ It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation, but even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure.”

Treasury Secretary Janet Yellen: “Even in the face of global headwinds, including a war in Europe and successive variants of the pandemic, our economy remains resilient. Our unemployment rate stands at 3.6%, household finances are strong, and industrial output continues to grow. I think what we can constructively do is talk about what is the state of the economy, and as I’ve tried to describe, the labor market remains exceptionally strong. That is not what we see in past episodes that the NBER has labeled to be a recession. We shouldn’t just get involved in the semantics. Let’s talk about what’s going on.”

Bad news is good news? While it’s not entirely clear whether a recession has begun, investors are now betting on a slightly more dovish Fed, with a more moderate pace of rate hikes. Slower growth expectations were displayed in the bond market on Thursday, with the 10-year Treasury yield falling below 2.7% for the first time since early April as the economy loses momentum. Meanwhile, stocks continued to build on a post-Fed rally that was triggered by Jay Powell saying a 75 bps rate hike for September was not guaranteed as the central bank sizes up “the data on a meeting-to-meeting basis.” (32 comments)

Fifth largest U.S. airline

That didn’t take long. Shortly after Spirit Airlines (SAVE) vetoed a tie-up with Frontier Group (ULCC), JetBlue (JBLU) came to the runway with its own $3.8B merger. It follows a months-long bidding war that would create the fifth-largest U.S. carrier after American Air (AAL), Delta (DAL), United (UAL) and Southwest (LUV). JetBlue also attempted to buy Virgin America in 2016, but lost a contest to Alaska Air Group (ALK).

Backdrop: Both airlines previously accused each other of acting in bad faith, which had held up the discussions. “I have wondered whether blocking our deal with Frontier is, in fact, their goal,” Spirit CEO Ted Christie announced on an earnings call back in April, saying he can’t imagine getting regulatory approval for the deal when JetBlue faces antitrust scrutiny over an agreement with American Airlines, as well as overlaps in cities like Orlando and Fort Lauderdale. In response, JetBlue called the concerns a “smokescreen” and pointed to historical relationships between top brass at Spirit and Frontier Airlines.

While the regulatory hurdle is still high, Spirit now appears to be viewing it as a necessity after failing to garner enough support for the Frontier deal. “Many things were said, but business is business,” Christie added in a statement. Jetblue hasn’t even raised its prior offer of $33.50 per share, though it does include a prepayment of $2.50/share once the agreement has been approved by Spirit shareholders. A so-called ticking fee of $0.10 per month will also be applied from January until the deal officially closes.

Go deeper: Some consumer advocates fear that ticket costs will rise if Spirit disappears, but JetBlue argues that creating a fifth major competitor would provide the best value for travelers by lowering fares and improving customer service. “The best thing that we can do to create a more vibrant, a more competitive industry is to really empower this new larger JetBlue,” said CEO Robin Hayes. The combined fleet of the two airlines would include 458 planes, with annual revenue anticipated to total about $11.9B. (29 comments)

Eye on China

President Biden and Xi Jinping ended a two-hour call on Thursday with plans to arrange their first in-person meeting since Biden took office (Xi also hasn’t left China since the pandemic given the country’s strict zero-COVID strategy). The leaders of the world’s two largest economies discussed areas of potential cooperation like climate change and healthcare, as well as stabilizing supply chains and protecting global food and energy security. Biden also pressed Xi not to support Russia’s war in Ukraine, but didn’t mention a possible rollback of Trump-era tariffs on Chinese imports.

Commentary: “That the call happened is a mild positive and shows both leaders want to maintain a floor under deteriorating bilateral ties,” Eurasia Group analysts wrote in a research note. “Any future cessation of top-level U.S.-China dialogue would be a negative sign for global stability.”

During the conversation, the two leaders also warned each other about rising confrontation over Taiwan, which has been exacerbated by a potential upcoming visit to the island by House Speaker Nancy Pelosi. “Those who play with fire will only get burnt,” Xi told Biden, adding that he’ll “resolutely safeguard China’s national sovereignty and territorial integrity.” In response, Biden reiterated the U.S. ‘One China’ policy – under which Beijing is only recognized as the sole government of China – but strongly opposed “unilateral efforts to change the status quo or undermine peace and stability across the Taiwan Strait.”

China competition bill: Members of the House of Representatives have voted 243-187 to send the $280B Chips and Science Act to President Biden, who is expected to sign it into law in the coming days. The bill, which aims to make the U.S. more competitive with China, will provide $52B in subsidies for domestic chipmakers and more than $100B in technology and sciences investments. Washington has been worried about reliance on microchips made in Taiwan for years, but the dependence became more apparent during the pandemic, when supply chain issues affected everything from cars and electronics to healthcare equipment and advanced weapons systems. (126 comments)

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