Weekly Digest
The market may be down, but U.S. EV sales are up!
U.S. electric car sales climb sharply despite shortages.
Tick, tick, Vroom! Americans are buying electric vehicles at a record pace, undeterred by rising prices and long waits for delivery, a further indication that the twilight of the internal combustion engine is on the horizon.
According to Cox Automotive, an industry consulting firm, vehicles that run on batteries accounted for 5.6 percent of new-car sales from April through June, still a small slice of the market but twice the share a year ago.
Interestingly, however, a quarter of Americans say they’re likely to go electric for their next car.
What’s also more encouraging for the category is that EV carmakers like Tesla (TSLA), Ford (F) and Volkswagen could have delivered more electric cars if they had been able to build them faster.
Manufacturers struggled with shortages of semiconductors, which are even more essential to electric cars than gasoline vehicles, while prices soared for lithium and other raw materials needed for batteries.
Meanwhile, inflation and central bank policy were in the driver’s seat for the broader U.S. market last week. June’s stronger-than-expected rise in consumer prices pushed headline inflation to 9.1%, a 41-year high. This suggests the Fed has work on its hands if it aims to achieve its price stability mandate.
While markets finished lower for the week, June’s inflation surprise elicited a different market response from May’s consumer price index (CPI).
After this past Wednesday’s inflation news, the S&P 500 rose while the 10-year Treasury yield fell, indicating that markets might already be looking past the inflation peak to the likelihood of slower economic growth ahead.
For the week, the S&P 500 ended lower with a marginal fall of 0.9%, the blue-chip Dow by 1.3%, and the tech-heavy Nasdaq Composite slipped the most, by 4.1%.
Top Stories
Amazon delivers its best-ever Prime Day
Despite inflation anxiety and political headwinds, Amazon (AMZN) managed to deliver its best-yet Prime Day with a little help from social media influencers.
Amazon’s live streaming service (where you can shop along with influencers) played a crucial role in making Prime Day 2022 its biggest yet.
During the two-day event, Amazon Live streams clocked over 100 million views while shoppers snapped up over 300 million items — 50 million more than last year – translating to an impressive nearly 100K items a minute.
In an early read of the full 48-hour event, the average order size was $52.26 – up from $44.75 on Prime Day 2021. Nearly two-thirds (62%) of households shopping Prime Day placed over two separate orders, bringing the average household spend to roughly $144.56.
Top sellers of Prime Day 2022 included Amazon Fire Sticks, Apple Watch Series 7, Le Creuset cookware, Pampers diapers, LeapFrog toys, and Levi’s.
Snap Summary
Should you add Amazon stock to your cart?
Last week, Amazon tried to settle a long-pending European antitrust lawsuit (and avoid billions in fines in the bargain) by agreeing to stop collecting private merchant data – on the lines of revenue, shipments, and inventory.
If accepted, Amazon’s settlement would apply only to its EU biz. But it could affect operations elsewhere if the e-commerce major decides to streamline policies for potential data-privacy legislation in the US.
Amazon is no stranger to scandal, from worker-treatment controversies to privacy issues. Moreso, struggles on the e-commerce side have given Amazon one of its cheapest valuations in recent years, but they’re likely temporary.
Also, Amazon’s operations go far beyond e-commerce. The tech giant has a hand in many other industries. Amazon Music is a popular audio-streaming platform, and Prime Video is a big player in the video-streaming space. It also owns Whole Foods, a major grocery chain.
However, the most notable is the company’s cloud computing business, Amazon Web Services (AWS), which is booming.
AWS’ growth runway and juicy margins will help increase the company’s future sales and earnings, especially as this segment accounts for a growing percentage of the company’s total income and just might be worth adding to your stock cart.
Chips are up for the TSMC – the world’s largest chip maker
The world’s largest chipmaker, Taiwan Semiconductor Manufacturing Company (TMS), raked in record quarterly profit as chip demand continued outpacing supply.
TSMC, a major Apple (AAPL) supplier and the world’s largest contract chipmaker, posted a 76.4% leap in profit for the April-June period of 2022, to T$237.0 billion ($7.92 billion).
TSMC shares jumped 3.7% on Friday after the announcement, outperforming the broader market, with analysts buoyant on the firm’s outlook despite some downside concerns. FYI, the Apple supplier plans to curb spending to recession-prep.
The company also said it was “highly confident” about its long-term prospects, though it also signalled cooling demand from consumer electronics customers who it expects to reduce chip stockpiles over the next few quarters into 2023.
Snap Summary
Intel may be the world’s biggest semiconductor company by sales, but it outsources much of its actual manufacturing to TSMC, which makes more than half of global chips.
And Intel isn’t the only one. Qualcomm (QCOM) and Nvidia (NVDA) are too! In fact, Morningstar analysts said they believed Qualcomm Inc and Nvidia’s increased allocation to TSMC would have cushioned the impact of most of the softened demand for the next 12 months.
Morningstar analysts noted that the duo had also contracted TSMC as their primary foundry (if not sole) for most of 2023’s consumer products because of low production yields at Samsung.
TSMC also upgraded its CAPEX for 2022 and revised its medium-term revenue growth target to a range of 15-20%, which are positive signs regarding the business fundamentals.
TSMC stock is trading at 27x forward earnings, which seems undemanding for a company exposed to secular growth trends.
Therefore, TSMC is a good pick in the semiconductor sector right now for long-term investors that want to be exposed to these growth trends over the coming years.
Delta’s post-pandemic profits take-off
Delta (DAL) posted its biggest profit since the pandemic began as the travel apocalypse boosts its bottom line.
Delta, the second largest airline in the U.S., lost a cool $735 million in profits last quarter. It was the airline’s largest since the pandemic began.
Packed planes, ludicrous fares, and Delta’s oil refinery drove sales up 10% from 2019 were factors cited as pre-pandemic levels for the first time.
However, investors weren’t impressed, and Delta shares fell 5% on Wednesday, while shares of rivals United and American also dropped ahead of their reports next week.
Still, things are beginning to take off for the airline. The company’s lucrative US business travel recovered to 80% of pre-pandemic levels, and it expects an even bigger corporate rebound this fall.
Also, more than half of Americans planned to book a summer vacation, even with ticket prices up 35% from last year, which should bode well for the carrier.
It’s been a tumultuous summer for fliers as they took on packed flight schedules to compensate for years of slowing revenue. However, fuel costs and labour have led to more cancelled flights so far this year than all of 2021.
Interestingly, delay and cancellation headaches aren’t necessarily hurting the airlines – they’re just driving up seat prices.
American (the world’s largest airline) predicted a 12% jump in June revenue from three years ago.
Snap Summary
The gradual improvement in air travel demand in the United States is translating to tailwinds for Delta.
The carrier also upped its revenue outlook for second-quarter 2022 and expects the June quarter’s adjusted total revenues to be fully restored to the 2019 level.
The marked improvement in cargo revenues – which is up 37% year-over-year in 2021 – is a positive sign too.
In first-quarter 2022, cargo revenues surged 51% to $289 million. This was the sixth consecutive quarter when cargo revenues increased from the comparable levels in 2019. The cargo unit is expected to continue performing well in the remainder of 2022.
Delta’s sound liquidity position is an added positive. The airline ended the first quarter of 2022 with cash and cash equivalents of $9,955 million, much higher than the current debt of $1,116 million. This implies that DAL has sufficient cash to meet its current debt obligations.
Considering Delta’s unit revenue momentum, strong cash flow, rapidly growing credit card revenue stream, and the cost-benefit of returning to pre-pandemic capacity levels, these targets seem quite achievable.
Nevertheless, Delta Air Lines stock is trading below $30. That’s around 4X its management’s 2024 earnings target. This makes room for a sizable margin of safety and makes Delta shares look like a great buy right now.
