US bellwethers see synchronised positive gains for the week
Stocks ended higher on Friday – extending recent gains.
Wall Street’s bellwether trio ended higher last week as they extended their recent gains. Growth-style stocks again outperformed, a sign that underlying market trends could be moving to support more growth-style stocks in the near term.
Economic news has been relatively light this week, with a notable Fed-minutes release earlier in the week reaffirming the Fed’s strong commitment to tame high inflationary pressures.
The Fed will continue to target supply-demand dynamics, attempting to tame demand through increased rates and lower levels of liquidity.
However, a recent crop of headlines is citing an imminent recession. And while experts are not dismissing the potential for, or the implications of, a recession, reliable fundamental indicators are signalling that a downturn is more probable but not inevitable.
Next week will see key inflationary data released, and investors will be hoping for a sign that inflation can come down quickly, allowing the Fed to avoid extreme levels of financial tightening and enable the economic expansion to continue.
For the week, the S&P 500 fell by 2.2%, the blue-chip Dow by 1.3%, and the tech-heavy Nasdaq Composite slipped the most, by 4.1%.
Virgin and Boeing’s mothership is set to take off
Half a century after Neil Armstrong set foot on the moon, the race to space is seeing more people coming on board – and not just governments and gazillionaires.
While the race for commercial space travel grabbed eyeballs last year, a potentially lucrative industry is now starting to take off.
Virgin Galactic (SPCE) shares jumped 12% after it announced that it is teaming up with Boeing (BA) subsidiary Aurora Flight Sciences to build two space-tourism carrier planes – which it is calling “motherships.”
Virgin’s mothership will fly the spacecraft to its launch point, where the engine will separate and launch the passengers into space.
Virgin’s Delta class motherships will take off weekly once they start flying customers in 2026, so it’ll need more than the one mothership it has now.
It must be noted, though, that Boeing already has a deal with rival SpaceX to build space capsules. However, an alliance with Virgin has the potential to generate billions of additional revenue.
Should you make space for shares of Virgin Galactic?
Virgin Galactic focuses on space tourism. But its suborbital flight technology could also make it an early leader in hypersonic point-to-point travel. This technology involves flying at least 5X the speed of sound at high altitudes, and according to Morgan Stanley analyst Nick Jonas, could generate up to $800 billion in annual sales by 2040,
No doubt, the expertise of Aurora will enable Virgin Galactic to scale operations and build the fleet, which will enable Virgin to have 400 flights per year at Spaceport America. However, while SpaceX has launched four crewed flights since last year — Virgin has just one, and has a game of catch-up to play.
However, Virgin Galactic’s business is far from self-sustaining right now. While first-quarter revenue jumped from zero to $319,000 year over year, that was from transporting research payloads and providing engineering services, not commercial space tourism. Furthermore, the company’s net loss expanded from $81,277 to $91,392 because of increased R&D costs.
Virgin Galactic’s stock is down 90% from records; however, it is not a buy under CANSLIM criteria. and it is not in a buy zone currently.
Europe could take a bite out of Apple’s App Store dominance
Apple’s (AAPL) power is being sliced in Europe. On Tuesday, EU lawmakers passed regulations aiming to halt tech giants from favouring their own products like Apple does with Apple apps on the App Store.
The Digital Markets Act (DMA) covers extensive ground, including banning Amazon (AMZN) from using third-party seller data to inform its own products.
It could force Apple to let European customers download apps directly from developers instead of only through the App Store. Companies violating the DMA could be hit with fines totalling 10% of annual global sales. It’s a move that could potentially break Apple’s App Store monopoly.
FYI, Apple raked in about $86 billion through its App Store last year since it takes a 15 to 30% cut of paid downloads, subscriptions, and in-app purchases.
And that’s not the last of it. The DMA could also disrupt more than just app downloads. The regulation says consumers must be allowed to choose their own digital assistant and mandates that messaging platforms like iMessage and Meta’s (META) WhatsApp be able to communicate with each other.
Don’t count Apple’s dominance out just yet.
Regulation matters, but enforcement is key. The EU’s task force will have 80 officials, but pro-regulation lawmakers say more heads are needed to fight the entire suite of Big Tech’s lawyers.
Apple’s strategy thus far, has helped it become the world’s most valuable company.
Apple’s stock is still up more than double since the pandemic began, while fellow stay-at-home surgers Meta (FB), Zoom (ZM) and Netflix (NFLX) have fallen to pre-pandemic levels.
To be sure, the Apple bulls run strong on Wall Street even on demand-supply concerns. However, any new weakness in Apple’s stock may offer a rare buying opportunity into the iPhone maker.
By its current metrics, Apple’s stock is not cheap — but it’s not expensive either. Considering that Apple has transitioned more of its business to recurring revenue sales that produce higher margins over the last decade, one can argue it justifies a higher price multiple.
Moreover, when measured against one of its main competitors, Microsoft (MSFT), Apple is trading at a discount based on those same metrics.
The company also has multiple tailwinds on hardware and services, such as user growth, average selling price, and increased installed base penetration.
Apple has been an American success story several times over. Despite the high valuation, it could be an expensive but good long-term stock to hold.
Tesla’s slowing down in the delivery race
Tesla’s streak of record quarterly deliveries took a hit recently, with its quarterly deliveries falling behind for the first time in years, attributed to more competition from “new energy” mobility players.
The EV leader delivered 254,695 cars during the quarter that ended in June. This was fewer than expected and down by nearly 60,000 from the previous quarter.
Meanwhile, China’s “new energy” player BYD (Build Your Dreams) raced past Elon Musk’s Tesla as the world’s biggest electric vehicle (EV) producer by sales in the first half of 2022.
Based in Shenzhen City of south China’s Guangdong Province, BYD sold about 641,000 vehicles in the first six months of 2022, with a year-on-year increase of over 300 percent, while around 564,000 vehicles were sold by Tesla during the same period, according to company filings.
Several reasons have been cited for Tesla’s slowdown. For one, China’s zero-tolerance policy has hurt its Shanghai factory output – Tesla had to halt production at its largest factory for weeks because of citywide lockdowns. Tesla is also having trouble ramping up production at its newest factories in Germany and Texas, which Elon has called “gigantic money furnaces”.
Tesla’s new enemy could be “new energy”.
While Tesla’s famous for its battery-only whips, plug-in hybrids have a battery plus a regular engine for longer journeys — but are still considered “zero-emission” under China’s sales rules. That means they get the benefit of less range anxiety but just as much subsidy support. That flexible NEV status helped BYD quadruple deliveries to 641K cars in the first half of the year, compared to Tesla’s 565K.
Some of Tesla’s recent share price drop comes from Tesla investors worrying that Musk is getting sidetracked by his purchase of Twitter, which Musk has now pulled the plug on.
Sure, there could be more share price volatility in the short term. But with Tesla’s early moves in the EV industry already paying off and the company far ahead of younger EV startups, its stock could continue to be a long-term play in the EV space, particularly at today’s bargain price.
However, Tesla missed estimates for second-quarter deliveries. And while the bulls will tell you that these numbers were in line and blame things on the Shanghai shutdown.
Now that Tesla has four factories in operation, the company will need to prove it can ramp production and deliveries significantly. We are going to see a lot of estimates in the 375,000 area or even higher for the current quarter.
It will be interesting to see if Tesla needs to reduce prices or introduce lower-priced model variants to get that kind of sales unit volume that BYD’s grabbing.