An important week in the fourth-quarter earnings season just concluded with mega-cap tech behemoths such as Meta Platforms (META) and Apple (AAPL) doing their best to silence many doubters while sparking some energy back into growth stocks. Although the Fed is still in rate-hiking mode, there are now strong cases to be made regarding stock valuations, particularly in areas that were beaten up over the past year.
To be sure, there are still mixed opinions about where stocks are heading in the next several quarters, particularly amid the release of a hotter-than-expected January jobs report on Friday. The January jobs report showed non-farm payrolls increased by 517,000, way ahead of the 187,000 market estimate. The unemployment rate fell to 3.4% compared to the estimate for 3.6% which is the lowest jobless level in more than five decades.
The strong job numbers makes it hard to believe that the U.S. is in a recession. Continued strength in the labor market makes it harder for the Federal Reserve to be less hawkish regarding interest rates, and it explains why stocks sold off on Friday. The Dow Jones Industrial Average on Friday ended slightly lower, falling 127.93 points, or 0.38% to end the session at 33,926.01. The Blue Chip index rebounded slightly after a falling more than 300 points during the session. The S&P 500 index ended 43.28 points lower to close at 4,136.48 with all eleven S&P sectors finishing in negative territory. Among the biggest decliners was Consumer Discretionary which ended the day more than 3% lower. The tech-heavy Nasdaq Composite Index gave up 193.86 points, losing 1.59% to close at 12,006.96. The decline in the Nasdaq snapped a three-session winning streak even as Tesla (TSLA) and Apple ended higher.
Despite the down day on Friday, investors are understandably encouraged by what has been a strong rebound in the first month of the year. The results of the fourth quarter earnings have been “less bad” than expected. What’s more, the forward guidance that have been issued have also been encouraging. Is that optimism well-placed? I suspect that this question will be answered by the end of this earnings season. Here are the stocks I’ll be watching this week, with a particular focus on earnings from Disney, Pepsi, and PayPal.
Disney (DIS) - Reports after the close, Wednesday, Feb. 8
Wall Street expects Disney to earn 79 cents per share on revenue of $23.36 billion. This compares to the year-ago quarter when earnings came to $1.06 per share on revenue of $21.82 billion.
What to watch: Driven by fears over consumer spending weakness and broader macro uncertainties, Disney stock has been a massive under-performer over the past 12 month with its shares falling almost 50% from their 52-week high of $157 to a low of $84. But things have changed in recent months. In fact, 2023 is looking like a magical year for Disney as the stock has already surged 30% year to date, compared with an 8% rise in the S&P 500 index. The company’s streaming platform Disney+ remains a key focus area given the upbeat subscriber results the market has witnessed from Netflix (NFLX). Netflix’s strong Q4 results has sparked optimism within the streaming landscape, suggesting Disney+ may remain a strong growth opportunity for the company in the next few quarters. Disney’s management has targeted Disney+ global subscriber gains to be between 230 million and 260 million by the end of 2024. The market wants to know if these targets are still attainable. While that subscriber goal would be impressive, if achieved, it will require significant investments, which may impact profits. When the company last reported its results, Q4 revenues and EPS missed Street expectations. However, the company’s delivered better-than-expected subscriber growth with the direct-to-consumer business as total subscribers reached 235 million. The company also touted the start of its advertising-supported tier on Disney+, borrowing a strategy from Netflix. At the time, then-CEO Bob Chapek commented it's a "key component to our total property advertising portfolio, and advertiser interest has been strong.” Chapek has since been ousted and Robert Iger returned as CEO for Disney. On Wednesday investors will want additional details about the company’s long-term growth strategy.
PepsiCo (PEP) - Reports before the open, Thursday, Feb. 9
Wall Street expects PepsiCo to deliver EPS of $1.65 per share on revenue of $26.83 billion. This compares to the year-ago quarter when earnings were $1.53 per share on $25.25 billion in revenue.
What to watch: There are many reasons to be optimistic about Pepsi’s revenue and earnings prospects in the next 12 to 18 months. Although macroeconomic headwinds such as high inflation and supply chain disruptions have impacted the company’s margins, the snack and beverage giant has done a solid job navigating the difficulty to assert itself as a “safety and value” play, thanks to its solid execution. This included increasing its prices in some areas, while limiting its output to offset inflationary effects. In the most recent quarter, the management raised earnings guidance for both fiscal 2022 and for 2023. Not only is full-year revenue expected to grow at 12%, versus prior guidance of 10% the company also boosted full year earnings growth to be 10%, up from 8%. The company’s price management has been applauded by Wall Street. The company’s investments in new brands, while adapting to new trends has begun to pay dividends. The still believes that there is plenty of room for growth in its core snacks and beverages business, while it also expects unit volume to continue rising by mid-single digits for beverages for the next few quarters and beyond. On Thursday investors will want to see whether Pepsi will maintain this level of confidence to affirm its initiatives are working.
PayPal (PYPL) - Reports after the close, Thursday, Feb. 10
Wall Street expects PayPal to earn $1.20 per share on revenue of $7.39 billion. This compares to the year-ago quarter when earnings came to $1.11 per share on revenue of $6.92 billion.
What to watch: Has the market become too negative on PayPal? It’s worth asking whether the fintech pioneer can still pay investors to be patient, thanks to slowing growth amid rising competition, which have been the company’s two main obstacles. The market expects the company to have grown 2022 revenues by 8%, which is not the rate of growth investors have come to expect and falls short of PayPal’s historical record of delivering double-digit growth rates. The company is also being hurt not only by weak consumer spending with the U.S. economy, but also global growth slowdown. That said, the valuation has become more appealing. The stock is trading at 12 times EV/EBITDA multiple, which is also well below its historical mean of 22. In other words, it’s possible that all of the bad news and lowered expectations have been priced into the stock. The company is taking steps to right-size its business, recently announcing plans to reduce its headcount by 2,000 employees, or roughly 7% of its global workforce. Investors on Thursday will want to know how much the company's cost-reduction initiatives will create value in the next 12 to 18 months, while not sacrificing growth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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