Weekly Preview: Earnings to Watch This Week 5-28-23 (AI, GME, ZS)

Close-up of the street sign for Wall Street
Credit: Andrew Kelly - Reuters / stock.adobe.com

Stocks rallied on Friday on hopes that a debt ceiling deal will be reached. Reports suggest that Congress and Biden Administration are targeting a deal that would increase the U.S. debt limit for two years. It remains to be seen when lawmakers will actually shake hands on a deal to raise the U.S. debt ceiling, but investors are nonetheless optimistic that U.S. will avoid a default.

Investors have found comfort in the degree of urgency that lawmakers have taken. “We’ve got to make more progress now,” said House Speaker Kevin McCarthy on Thursday night. But not everyone is looking at this with rose-colored glasses. “Once a debt deal is done, markets will have to deal with the harsh reality that the Fed is going to kill this economy,” said Ed Moya, senior market analyst at Oanda, wrote on Friday. “The end of tightening might not occur until the end of summer and that means we will probably get bigger rate cuts next year.”

For now, the market is taking it one headline at a time. The Dow Jones Industrial Average on Friday rose 328.69 points, or 1%, to end Friday’s session at 33,093.34. The S&P 500 gained 54.17 points, or 1.30%, to finish at 4,205.45. The tech heavy Nasdaq Composite, which soared earlier in the week on Nvidia’s (NVDA) earnings results, jumped 277.59 points, or 2.19%, to end at 12,975.69. Nvidia, which surged to all-time highs Thursday, has powered a surge in both chip stocks and artificial intelligence stocks after posting an earnings beat and strong revenue guidance.

For the week, the Nasdaq was the biggest gainer, rising almost 2%. The Dow gave up 1%, while the S&P 500 moved up less than 1%. With Friday’s rally, all three major benchmarks are now firmly above their 200-day moving average which earlier this week they forfeited. While stocks no longer appear cheap, investors are reconciling whether this is still a buying opportunity. The main question remains what the Federal Reserve will do regarding interest rates.

The latest inflation report suggests that the Fed’s rate hikes might not be over as previously expected. Consumer spending in April rose by 0.8% sequentially, and more than expected. Meanwhile, personal income came in at +0.4% which was in-line with forecasts. However, the PCE price index, which is the Fed’s main inflation gauge, increased 0.4% month over month, higher than expected. The latest data has sent the likelihood of a 25 basis point hike in the Fed's June meeting to 57%, up from 52% on Thursday.

Conversely, the likelihood that the Fed will pause the rate hike took a step backwards, falling from 48% to 43%, according to the CME FedWatch Tool. As I’ve said on numerous occasions, regardless of what the Fed might do, staying the invested in the market seems like the safest best. The time to exit the market (during the bear cycle) has come and gone. With the S&P 500 still trading some 8% below its all-time high, there are still some ground to make up.

On the earnings front, here are the stocks I’ll be watching this week.

C3.ai (AI) - Reports after the close, Wednesday, May 31

Wall Street expects C3.ai to post a per-share loss of 17 cents on revenue of $71.32 million. This compares to the year-ago quarter when the loss was 21 cents per share on revenue of $72.32 million.

What to watch: The growing popularity of artificial intelligence, particularly ChatGPT, is more than just hype. It is real. One company that's riding high on the AI wave is C3.ai which has seen its stock more than double as interest from investors surge. But the enterprise artificial intelligence company is also doing what it can to ascend in a leadership position. Aside from recently announcing that its generative AI product suite is now available as a public offer on Alphabet's Google (GOOG , GOOGL) Cloud Marketplace, the company also issued preliminary results that included positive cash flows in FQ4. This suggests that the company’s the $800 million cash currently on its balance sheet will grow. The management has sought to change the company’s business model, shifting the business away from short-term revenues to a transaction-based pricing method, while boosting long-term revenues by growing its customer base. Those initiatives appear to be working with growth rates starting to re-accelerate. Regarding the C3 Generative AI which it announced earlier in the year, CEO Thomas Siebel said, "Since we announced C3 Generative AI, we've had intense interest from current customers and prospects to get these capabilities deployed and in use across their systems.” The product suite features enterprise search, allowing businesses to search across their database to locate and retrieve relevant information. On Wednesday, the company will look to prove that it is here to stay and has a sustainable path towards profitability.

GameStop (GME) - Reports after the close, Wednesday, May 31

Wall Street expects GameStop to post a per-share loss of 12 cents on revenue of $1.36 billion. This compares to the year-ago quarter when the loss was 52 cents per share on revenue of $1.38 billion.

What to watch: Meme stock mania hasn’t taken off as it did a year ago, but GameStop remains one of the most widely-followed stocks on the market. The stock has risen 27% year to date, besting the 8% rise in the S&P 500 index. Most of those gains have come over the past thirty days, with shares rising some 23%. Currently trading at around $23 per share, the stock is off some 52% from its 52-week high of around $48. The video game retailer has shown some solid fundamentals, demonstrating positive cash flow and an overall strong financial standing. The company last quarter reported a surprise profit even as it continues to struggle to grow revenue. What’s more, U.S. video game sales fell year-over-year for the second straight month in April. Overall video game sales fell 5% to $4.12 billion in April, compared to March's sales of $4.32 billion. As it stands, video game sales are down 2% on a year-to-date basis. Modest gains in console sales weren’t enough to offset that decline. This trend, if it continues, is likely to impact GameStop’s performance going forward. The company is projected to generate roughly $6 billion in revenue for the fiscal year. The gross margins, currently at around 25%, will need to move much higher in order to maintain profitability. To date, the management has done a solid job cutting costs. This will need to continue if the video game sales continue to decline. However, the collectibles category has been a bright spot, with revenue rising 14% year over year in the Q4. On Wednesday GameStop will need to build on its Q4 success and show it is playing for keeps.

Zscaler (ZS) - Reports after the close, Thursday, Jun. 1

Wall Street expects Zscaler to earn 42 cents per share on revenue of $417.16 million. This compares to the year-ago quarter when earnings were 17 cents per share on revenue of $286.81 million.

What to watch: Cybersecurity stocks like Zscaler have been on fire over the past several weeks, surging near 40% in one month after the cloud-based web security provider issued preliminary strong third-quarter results and boosted its outlook for fiscal 2023. Despite the strong gains, the shares are still down close to 10% over the past six months, while still being down 4.4% over the past year. In other words, the company still has a lot of ground to make up. In that vein, more gains could be on horizon given the better-than-expected results just released from rival Palo Alto Networks (PANW). Aside from its strong product portfolio, Zscaler’s strength can be displayed within its exceptional gross margins and cash generation capability. The company’s cloud platform enables customers to route data traffic to external data centers where Zscaler houses its software tools. And there continues to be increased demand for better security as companies have now embraced a a hybrid environment work-from-home mindset. This shift have fueled a surge in virtual private networks — those that allow employees to connect to the office remotely. Investors who have waited for a better entry point can do well here, given that cybersecurity will remain one of the hottest sectors in tech in the next five years. On Thursday Zscaler’s earnings could start that five-year climb higher.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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