Mixed Earnings Reports Send Stocks Spinning

by Louis Navellier

April 23, 2024

The first full week of earnings reports was filled with a mixture of good news, bad news and incomplete guidance, so the market entered what I call a “spin” cycle, but I suspect that this is just a temporary lull, with clearer earnings guidance emerging in the upcoming weeks, guiding the market higher this spring.

Friday’s decline was led by a NASDAQ selloff, which was partially due to the fact that many traders did not want to maintain inventory in case the tension in the Middle East escalated. That didn’t happen, so I expect wave after wave of positive announcements that will propel growth stocks significantly higher.

Here are the highlights from last week – and my “psychoanalysis” of the market’s reaction to the news.

Last Friday, market leader Netflix announced 9.33 million new subscribers in the first quarter, which is almost double the analysts’ estimate of 4.84 million new subscribers. However, Netflix also announced that starting next year it will stop reporting paid membership details, including revenue per subscriber. The stock sold off after announcing this warning of reduced guidance, but I think that was an impulsive overreaction, so I suspect that Netflix will recover due to its much stronger-than-expected results.

Super Micro Computer also went on a wild ride last week after surging on Tuesday, when the analyst community raised their price target, only to be hit with profit taking after SMCI announced its first quarter earnings date while suspending any early “pre-announcement” details. In defense of that decision, the company’s previous pre-announcements contained positive guidance that turned out to be understated relative to their eventual earnings announcements, so I have no problem with their new guidance policies.

For the record, the analyst community is forecasting 258.3% first-quarter operating earnings growth for Super Micro Computer, based on earnings of $5.84 per share, and it could come in higher, since I should add that in the past three months, the analyst community has revised their consensus earnings estimate 35.8% higher. Typically, positive analyst earnings revisions precede future earnings surprises, so Super Micro Computer is on track for another stunning earnings announcement and is a great near-term buy.

Frankly, these two examples tell me that most traders probably need to see a shrink, because they worry too much. When Netflix beats analyst estimates and still gets punished, it is a sign of trader paranoia. Too many traders are overreacting to non-news. Also, profit taking in Super Micro Computer and Nvidia is unfounded, since each has enviable sales and earnings. So, we can either react like Wall Street – like a dog chasing its tail – or we can wait for first quarter sales, earnings and guidance to send stocks higher!

Other Tech Stocks in the News

Beyond any specific earnings releases, some other leading tech stocks may be running into trouble:

Tesla announced layoffs accounting for more than 10% of its workforce as it deals with continued weak sales. In a strange way of announcing these layoffs at their plants in Fremont, California and outside of Reno, Nevada, when your security pass did not work, that was your first clue that you were terminated.

In a blow to the Green New Deal, Tesla also laid off 14% of its workforce in Buffalo, New York, where the company manufactures solar cells and superchargers. In the U.S., electric vehicle (EV) sales are now virtually flat on a year-over-year basis. Although Tesla is unquestionably still the EV leader, it is facing formidable competition from BMW, Ford, Hyundai, Kia, VW Group (Audi, Porsche & VW) in the U.S. Essentially, more EV models are chasing fewer new buyers. The incentives offered by other auto makers are also a problem for Tesla, since special financing and lease deals are available from its competitors.

Apple is also facing a global iPhone sales decline as its first quarter shipments declined 9.6%, to 50.1 million. By comparison, market leader Samsung Electronics’ shipments declined just 0.7%, to 60 million. However, the real competition is coming from Chinese companies Transsion and Xiaomi that saw their first quarter sales rise 85%, to 28.5 million and almost 34%, to 40.8 million, respectively. Just a year ago, during the first quarter of 2023, Apple led the world in smartphone shipments, but China’s deflation is unquestionably hurting U.S. companies that have vast Chinese operations, like Apple and Tesla, since they are systematically being undercut by competitors that have the support of the Chinese government.

Also, ASML announced its sales of chip-making equipment slumped 60% in the first quarter due to weak sales of EVs and smartphones, as Taiwan and South Korea held off buying the company’s most advanced machines designed to manufacture semiconductors. Specifically, Taiwan Semiconductor and Samsung are holding off on new orders as they work through their stockpiles of hardware used in smartphones, computers and automobiles. ASML’s outlook for sales in 2024 remains unchanged, but the company expects second-quarter sales to be weak before picking up in the second half the year.

The IMF Warns of a Stronger Dollar

The International Monetary Fund (IMF) met in New York City last week and its biggest complaint was the strong U.S. dollar. Specifically, the IMF said in its annual World Economic Outlook that “The exceptional recent performance of the United States is certainly impressive and a major driver of global growth,” but they are concerned that our “fiscal stance is out of line with long-term fiscal sustainability.”

Since the Fed telegraphed that it will likely not cut key interest rates in June – like the European Central Bank (ECB) and the Bank of England indicated they would – the U.S. dollar has gotten stronger on the anticipation of high comparative U.S. interest rates. (Currency investors tend to invest in higher yields).

Although a strong U.S. dollar lowers the prices of imported goods, it raises the price of commodities (priced in U.S. dollars) for the rest of the world, so a level of anger is brewing at the IMF as the Fed keeps dragging its heels on cutting interest rates. There is also growing anxiety about the U.S. imposing new tariffs, which President Biden is proposing, and Donald Trump has also discussed on the campaign trail.

Meanwhile, China announced on Tuesday that its first-quarter GDP grew at a phenomenally high 5.3% annual pace, which was higher than the economists’ consensus of a 4.6% annual pace. China’s National Bureau of Statistics said, “Generally speaking, the national economy got off to a good start in the first quarter … laying a good foundation for … the whole year.”  Hmm. Pardon me, but I don’t believe anything near 5% growth is possible, with the overproduction of batteries, EVs and solar panels. Excess inventory should not be counted as GDP growth. In fact, any inventory overhang will likely suppress economic growth in the second quarter. In the meantime, deflation persists in China and is expected to get worse due to overproduction. To me, the economic data from China is becoming increasingly suspicious!

In fact, China might even be in (or near) a recession. The Wall Street Journal reported that Chinese household debt has surged 50% in the past five years and hit $11.31 trillion in January 2024, which is impeding consumer spending. Beijing is cracking down on delinquent debtors by seizing their salaries or restricting them from getting government jobs, as well as curbing their access to high-speed trains and air travel. Additionally, many debtors are forbidden from buying expensive insurance policies and told they are not allowed to go on vacation or stay in nice hotels. Chinese authorities can detain debtors if they don’t comply. The number of people on a government delinquency blacklist has jumped by nearly 50% since late 2019, to 8.3 million citizens. Courts can put people on the blacklist when they do not fulfill judgments against them to pay money back or are deemed to be not cooperating with legal proceedings. Unlike the U.S., Chinese debtors cannot declare bankruptcy, so they are shamed and blacklisted.

Finally, I should add that China has resumed reporting its youth unemployment and said last Thursday that the unemployment rates for 16-to-24-year-olds was 15.3% in March, according to the National Bureau of Statistics. This data series was suspended for a while in an attempt to squelch domestic unrest.

The lesson here is that I would treat most Chinese national economic data with much skepticism.

Navellier & Associates owns Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), and Volkswagen AG Unsponsored ADR (VWAGY), in managed accounts and a few accounts own Apple Computer (AAPL), Netflix (NFLX),   Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM), and Tesla (TSLA), in managed accounts. We do not own Ford (F), or ASML Holdings (ASML). Louis Navellier and his family own Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), and Volkswagen AG Unsponsored ADR (VWAGY), via a Navellier managed account, and Nvidia Corp (NVDA), Apple Computer (AAPL), and Netflix (NFLX), in a personal account. He does not own Tesla (TSLA), Ford (F), or ASML Holdings (ASML) personally.