News and analysis

Wall Street indexes continue to grow in May, yet markets are wary that marginality of retail businesses may be affected by inflationary pressure. U.S. producer prices surprised investors on the upside this week by adding 0.5% MoM, with the so-called core components (excluding volatile energy, food and transportation costs) rising by 3.1% YoY to form the most notable jump for the last 12 months. We feel this is precisely the reason behind a rather cautious attitude to much better-than-feared Q1 numbers provided by North America's major home improvement stores owner Home Depot (HD).

Home Depot's comparable sales showed a 2.8% annual decline, and thus it was a move forward compared to a 3.5% drop as to the end of 2023. The Q1 report as a whole could be called mixed, even though EPS (equity per share) of $3.63 only slightly exceeded expert consensus of $3.60 but was as much as 28% higher than $2.82 in the Christmas quarter, while $36.42 billion of the company's revenue was nearly in line with $36.66 billion of consensus bets, 4.6% better than Q4 2023 sales but 2.4% lower than Q1 2023 sales in the same season of the previous year. Sales are also 28% up from the recent record of Q1 2020, set on peaking pandemic-driven demand, which is clearly a good sign for a bullish outlook, while Home Depot CEOs confirmed their full-year forecast. A delayed start to the spring season, an 1% decrease in transactions and a 1.3% drop in ticket size were cited, keeping intact expectations of at least a 1% surplus versus last year's sales.

Only time will show if this combination may be a catalyst for further dip-buying activity. At the first moment after the quarterly report, shares of Home Depot initially lost nearly 2.3% of its market price, but later recovered to +0.16% at the end of the trading session on May 14. Hopes for margin improvement in nearest months may lead the stock to cover the currently discounting distance from its $396.85 peak of March 21. As for now, the gains are roughly capped below $350 per share.

One very practical consequence is that the next wave of market's attraction to Home Depot may come in one of two technical cases, either on the clear breakthrough of this persisting $350 resistance area or if more attempts to drop the price may lead to testing levels which are 10% to 15% lower at first. A price range between $300 and $315 just looks suitable for extra demand ambitions of those investors who prefer to verify this ground would be more solid than the current levels around $340. Home Depot itself also repurchased $649 million worth of shares, compared to $2.9 billion bought back in the same quarter of 2023, which was probably another factor of the company's drawdown on price charts.

Most investment houses are now reiterating their Outperform ratings for HD, with many of them keeping price targets well above $400 per share. "Trends into the critical spring selling season will be a key focus. Our web traffic tracker and EPS Swoon or Pause preview report better April/May trends in consideration categories (Home, Auto) even if dollar sales remain down YoY," Evercore ISI analysts wrote.

Coin 98 (CNE) is down by 2.4% to $0.2460 this week, having hit a low of $0.2393 on May 15 before recovering slightly. The token is currently testing the support level at $0.2500 for the third time since April. Notably, it has dropped out of the ascending channel that had formed since October 11, 2023. This break from the channel support increases the likelihood of further downside movement.

The absence of fundamental factors to bolster Coin 98’s price adds to the bearish outlook. If the token fails to hold above the critical $0.2500 support level, it could potentially decline by 38%, targeting the next significant support level at $0.1500.

Chinese-rooted e-commerce giant Alibaba Group (BABA) ADRs plummeted by nearly 7.5%, diving into the lower $77.7-$79.5 range on May 14 from the lonely mountain peak at almost $85 per share where the stock price climbed only a day before on hopes for better financial results in the first quarter. The reality was much more severe. Earnings fell short of consensus expectations. Profit per share indicated 10.14 Yuan, that is 0.13 Yuan below the average estimate and 0.57 Yuan lower than it was in Q1 2023, even though the total sales number rose by 7% from 208.2 billion Yuan to 221.87 billion Yuan. Even worse, the holding actually reported an 86% nominal drop in its net profit, which was mostly because of valuation changes from equity investments when it split into six business units to refocus on its core e-commerce segment. As a result, the declared net value amounted to 3.27 billion Yuan, compared to 23.5 billion Yuan in the quarter ended March 31, 2023.

In early April, Alibaba Group announced its second biggest ever share repurchase with equivalent cost of $4.8 billion. It also increased its total buyback plan by another $25 billion, in a supposed attempt to calm the crowd of Wall Street investors who are still worried about the company's growth prospects vs challenging peers from China such as Pinduoduo (PDD) and TikTok owner ByteDance. During the conference call, Alibaba's CEO Eddie Wu said some weaker performance was related to the strategy on more comfortable customer experience. However, the point could be also closely connected with domination of low-cost goods when domestic and international visitors are not ready to pay much. Especially, Chinese buyers were not as active as they used to be before, so that households were spending more carefully after the corona boom faded, when economy is slowing and property balloon is deflating. In particular, the holding's domestic commerce divisions, which are Taobao and Tmall Group, added 4% YoY in profit, despite physical order volume rose by double-digits percentage.

Alibaba's international appetites are greater, yet it needs time and marketing money contribution to go ahead on a global scale. Larger sum should be placed to shorten delivery times as well. Even the hyping cloud business of the group cut prices by 59% for products that are powered by its offshore data centres. This new branch helped AI-related contributions to the company's revenue to grow at triple-digits YoY, yet the return would not be so big because of large discounts.

Therefore, we recommend weighing carefully the balance of pros and cons before making a decision on possible investing into the shares of Alibaba, as investors on Wall Street are inclined to react painfully to any sign of weakness here. It would be no surprise if the stock face new dips below $70 per share before the bullish camp will arise out of stupor.

Meanwhile, another Chinese giant, Tencent Holdings, which provides a domestic analogue of Facebook messenger integrated into WeChat social network published a 6% increase in its sales number, and a 52.5% rise in its earnings per share (EPS) YoY on the same day, mostly due to growing advertising sales. Tencent is also a video game company while many Chinese are fond of gaming. Its EPS of 0.7272 Yuan was also 17% better than 0.62 Yuan in consensus estimates. A 5% price jump on the reporting date was added to a nearly 20% growth which was already achieved for the last three weeks on positive expectations. However, the nearest price target could be at least 20% higher, from a technical point of view, if the stock would use the current bullish momentum in summer. Many investment houses already lifted their target levels for Tencent, citing gaming rebound, which is already happening and additionally anticipated in Q2, and brighter financial outlook. Tencent also may see further ad segment growth by more than 15% during the year. Therefore, we see 450 Hong Kong Dollars (HKD) per share as the first target for Tencent Holdings on HKEX.

Practical experience has vividly shown that making a choice in favour of Netflix rather than Disney stocks in the streaming segment proved itself perfectly, after the House of Mouse wasted nearly 10% of its market value despite the same 10% better-than-expected quarterly profit indications. Disney posted EPS (earnings per share) of $1.21 vs consensus estimate of $1.10. The Wall Street crowd, including reputable traders at big investment houses, are seemingly in no hurry to pick up the troubled asset from its lows around $105 per share, even though some time has passed after the disappointing move. Meanwhile, it took only a couple of trading sessions in late April for an initial and notable bounce for the shares of Netflix in a somewhat similar situation when the stock suddenly dropped from $600+ to below $550. Since that moment, Netflix climbed by more than 12.5% to fully close the price gap, as most investors kept their face in a growing money flow from shared accounts and engaging content on the world's largest commercial movie platform. At the same time, too many observers and shareholders still doubt the Disney Co's ability to maintain positive cash inflows in total from all of its online channels, while its traditional TV business and box office collections in the cinemas showed weakness.

Disney was struggling to adapt its business to the so-called consumer migration process when viewers went from cable TV channels to various formats of streaming entertainment. However, its combined streaming business with Disney+ and ESPN+ is still non-profitable, losing $18 million during the first three months of 2024. This is some improvement compared to the previous year when the streaming division spent $659 million instead of earning money. If so, the market's patience may run out just about now. "We've said all along that our path to profitability will not be linear," Disney CEO Bob Iger admitted last week. After his coming out of retirement to renew the corporate policy at the end of 2022, he faced many challenges from investors, which led to $7.5 billion cost cuts, yet the crowd may feel that saving alone is not enough. Disney would reduce its output of Marvel content, moving to two TV series and three movies in a year to "focus on quality". Iger announced a 10-year, $60 billion investment into Disneyland parks, which may be considered as a bailout plan, but markets prefer to wait and see, being not so sure it is going to be effective.

Disney+ was established only several months before the corona pandemic started to compete with Netflix, which happened to be much more smart in this field to grow financially. Disney+ just managed to attract another 6 million customers in Q1, and its average revenue per user grew to $0.44, yet this was not enough to become profitable, and Disney+ also had to launch a special lower-priced plan for enhancing the number of customers in India. Additional need to stream cricket in this country raised costs to lead to another loss in Q2, as it may "swing back to a profit the following period", Disney's CFO Hugh Johnston commented. The company said that the combined streaming unit should generate a "fiscal fourth-quarter profit" to become a "meaningful future growth driver for the company, with further improvements in profitability for fiscal 2025". Theme parks are classified inside the Disney's Experiences division, which reported operating income of $2.3 billion, a 12% increase from the previous year. Yet, Hugh Johnston mentioned "some evidence" that the trend is beginning to fall from its recent peak.

The company itself sees EPS to grow by 25% during this fiscal year, which is higher than its own prior forecast of a 20% increase, based on possible improvements from the theme parks and the streaming business. Yet, the market was not ready to respond immediately. Coleman, a senior executive vice president and chief human resources officer at Walt Disney Co just sold 4,400 shares of the company's stock on May 9, at a price of $106 per share. The transaction has decreased Coleman's direct holdings in the company to zero. Even though she still indirectly holds 856.76 shares through The Walt Disney Stock Fund. This may be considered as a negative insight into prospects on the company's current valuation.

Perhaps, I will refrain from buying Disney in such situation despite much cheaper price levels, while I intend to keep holding Netflix for as long as possible, as it clearly thrives on this competition. For Netflix, $800 (+30% more to the current price) is the first but not the eventual target in my mind.