US Market Debrief 9th of August 2019

Turbulent week ends on volatile note

The stock market wrapped up a volatile week on lower note, leaving the S&P 500 down 0.7% on Friday. Familiar trade concerns appeared to hinder buying conviction after a three-day advance in the benchmark index.

The Dow Jones Industrial Average lost 0.3%, the Nasdaq Composite lost 1.0%, and the Russell 2000 lost 1.3%. 

President Trump seemingly fed into the nagging trade angst when he told reporters that the U.S. will not be doing business with Huawei and that September trade talks could get canceled. None of these statements really surprised the market, but the prospect of U.S.-China relations further deteriorating kept some buyers sidelined on Friday.

Eight of the 11 S&P 500 sectors finished lower, led by the energy (-1.3%) and information technology (-1.3%) sectors. Energy stocks fell despite the sharp increase in oil prices ($54.61/bbl, +$2.09, +4.0%), while the tech sector was pressured by shares of semiconductor companies, many of which derive substantial revenue from China. The Philadelphia Semiconductor Index fell 1.8%. 

Conversely, the defensive-oriented health care (+0.2%), real estate (+0.1%), and utilities (+0.04%) sectors were the lone sectors that finished higher. 

Uber (UBER 40.05, -2.92) shares fell 6.8% after the company reported a wider-than-expected $5.2 billion quarterly loss. Revenue also came up short of estimates, but today’s decline simply retraced much of yesterday’s 8% rally. 

In other corporate news, Amgen (AMGN 196.25, +11.02) shares spiked 6.0% following a positive ruling regarding its Enbrel business. DXC Technology (DXC 35.91, -15.74, -30.5%) plunged over 30% after it cut its FY20 outlook, while Dropbox (DBX 18.71, -2.75) fell 12.8% despite providing decent results and guidance.

U.S. Treasuries finished slightly lower, pushing yields higher across the curve. The 2-yr yield and the 10-yr yield increased two basis points each to 1.63% and 1.73%, respectively. The U.S. Dollar Index declined 0.1% to 97.54.

Reviewing Friday’s lone economic report, the Producer Price Index for July:

  • The index for final demand increased 0.2% m/m in July (Briefing.com consensus +0.2%) while the index for final demand, excluding food and energy, decreased 0.1% m/m (Briefing.com consensus +0.2%). The m/m readings left the index for final demand up 1.7% yr/yr, unchanged from June. The index remains at its lowest level since January 2017. Core PPI was up 2.1% yr/yr, down from 2.3% in June.
    • The key takeaway from the report is that inflationary pressure remains muted.

Looking ahead, Monday’s economic data will be limited to the Treasury Budget for July. 

  • Nasdaq Composite +20.0% YTD
  • S&P 500 +16.4% YTD
  • Dow Jones Industrial Average +12.7% YTD
  • Russell 2000 +12.2% YTD

Overseas: 

  • Europe: DAX -1.3%, FTSE -0.4%, CAC -1.1%
  • Asia: Nikkei +0.4%, Hang Seng -0.7%, Shanghai -0.7%

Commodities: 

  • Crude Oil +2.09 @ 54.61
  • Nat Gas -0.01 @ 2.12
  • Gold -0.10 @ 1509.80
  • Silver -0.03 @ 16.93
  • Copper -0.01 @ 2.59

Spotlight Issue: Dropbox falls despite decent earnings/guidance

Dropbox (DBX) is dropping pretty hard today after reporting Q2 results last night. The numbers were not that bad: a small EPS beat, revenue in-line and slight upside for Q3 revenue guidance. However, we think a few things are weighing on the stock today, including a decline in operating margins and there are some operating metrics that are slowing.

One of the big concerns we and others have is that DBX operates in a highly competitive environment. Lots of companies offer free cloud storage including Google Drive, OneDrive (Microsoft), Amazon Drive, Tresorit, and Box (BOX). When there are a lot of competitors in an industry that, frankly, strikes us as pretty commodity-like (file sharing in the cloud), there will likely to be pricing pressures.

Oftentimes, that pricing pressure can show up in margins. The non-GAAP operating margin in Q2 was 10.1%. Granted that was slightly above prior guidance of 9-10%, however, it’s well below the 14.1% achieved in the same period last year. Dropbox CFO Ajay Vashee explained on the call last night that the margin compression was caused by “overlapping facilities-related expenses as well as the impact from the integration of HelloSign and the associated purchase accounting write-down of its deferred revenue.” Despite his explanation, we cannot help but think that pricing pressure may also be playing a role as that’s a big drop in one year.

Converting free users to paying users is the lifeblood of the company. Analyzing DBX’s operating metrics is a good way to measure the company’s success on this front. Unfortunately, we have noticed some slippage in terms of some of the metrics.

DBX’s success rate seems to be slowing when you dig into the numbers a bit. In 2Q18 DBX reported that paying users totaled 11.9 mln, up 20% yr/yr. However, in 2Q19, paying users rose just 14% to 13.6 mln and even that was helped by the recent HelloSign acquisition (an eSignature platform, similar to DocuSign). It’s understandable that growth rates tend to slow as a company gets larger, but that’s a pretty big drop off in our view.

Another key operating metric is average revenue per paying user (ARPU). It rose 3% yr/yr to $120.48 from $116.66 for the same period last year. That’s a slowdown from the 5% yr/yr growth achieved in 2Q18. ARPU in 2Q19 also declined sequentially from $121.04 in 1Q19. This may seem like nitpicking, but it is a downward trend and investors look at this.

A final concern we have is DBX’s decision to raise prices on its Plus plan by 20% to $11.99 per month, or $119.88 per year. Moving customers up from its free Basic Plan to its Plus plan and eventually to its Professional Plan ($19.99/m) is not an easy lift. We are skeptical that DBX has this sort of pricing power in an industry that strikes us as commodity-like. This price hike was implemented mid Q2 in May. We’ll have to wait until Q3 to see the full impact of the price hike decision (or possibly its Sep 25 analyst day).

Overall, investors are not too excited about the Q2 results. The EPS upside was smaller than in Q1, margins were lower, and the operating metrics show hints of some slowing. Our main concern with DBX is on the competitive front and we think it’s having an impact.

News Summary:

ForEarnings/Guidance:

Activision Blizzard (ATVI) beats by $0.21, beats on revs; guides Q3 EPS below consensus, revs below consensus; guides FY19 EPS above consensus, reaffirms FY19 revs guidance

Alarm.com (ALRM) beats by $0.08, beats on revs; guides FY19 EPS in-line, revs above consensus

Avnet (AVT) misses by $0.06, beats on revs; guides SepQ EPS below consensus, revs in-line; co seeing margin pressure

Axon (AAXN) misses by $0.02, misses on revs; guides Q3 revs in-line; reaffirms FY19 revs guidance

Callaway Golf (ELY) beats by $0.11, beats on revs; guides Q3 EPS below consensus, revs in-line; guides FY19 EPS in-line, revs in-line

Diplomat Pharmacy (DPLO) misses by $1.94, beats on revs; reaffirms FY19 revs guidance, cuts Adj-EBITDA, GAAP EPS guidance; to review strategic alternatives

Dropbox (DBX) beats by $0.02, reports revs in-line; guides Q3 revs above consensus; increases FY19 rev guidance

DXC Technology (DXC) beats by $0.03, reports revs in-line; cuts FY20 outlook

Farfetch (FTCH) beats by $0.02, beats on revs; tempers FY19 platform GMV guidance; to acquire New Guards Group for $675 mln

Fastly (FSLY) misses by $0.03, beats on revs; guides Q3 EPS in-line, revs in-line; guides FY19 EPS in-line, revs in-line

Puma Biotech. (PBYI) beats by $0.32, reports revs in-line

Revolve Group (RVLV) misses by $0.02, beats on revs; guides FY19 revs in-line

Sientra (SIEN) misses by $0.52, beats on revs; reaffirms FY19 revs guidance

Symantec (SYMC) beats by $0.10, beats on revs; guides Q2 EPS in-line, revs in-line; to sell enterprise security assets, which include the Symantec name, to Broadcom (AVGO) for $10.7 bln in cash; to reduce net global headcount by approximately 7%

The Trade Desk (TTD) beats by $0.27, beats on revs; guides Q3 revs in-line; raises FY19 revenue and adjusted EBITDA guidance

TrueCar (TRUE) misses by $0.02, misses on revs; guides Q3 revs in-line; guides FY19 revs below consensus

Tutor Perini (TPC) misses by $0.28, misses on revs; lowers FY19 EPS guidance to adjust for impairment charge

Uber (UBER) misses by $1.53, misses on revs

ViewRay (VRAY) misses by $0.10, beats on revs; guides FY19 revs below consensus; CFO resigns

Yelp (YELP) reports Q2 results, reports revs in-line, EBITDA upside; guides Q3 revs in-line, reaffirms FY19 revenue guidance; CFO to step down next month

Notable Ratings Changes:

  • Upgrades:
    • STMicroelectronics (STM) upgraded to Buy from Neutral at Goldman
    • Norwegian Cruise Line (NCLH) upgraded to Buy from Neutral at Buckingham Research
    • J&J Snack Foods (JJSF) upgraded to Overweight from Equal Weight at Consumer Edge Research
    • Jack In The Box (JACK) upgraded to Outperform from Neutral at Wedbush; tgt to $105 from $75
    • Green Dot (GDOT) upgraded to Buy from Neutral at Guggenheim
    • Callaway Golf (ELY) upgraded to Overweight from Equal-Weight at Stephens; tgt to $21.50 from $18
    • Bed Bath & Beyond (BBBY) upgraded to In-line from Underperform at Evercore ISI
  • Downgrades:
    • Himax Tech (HIMX) downgraded to Underperform from Neutral at Credit Suisse
    • Synaptics (SYNA) downgraded to Underweight from Neutral at JP Morgan and downgraded to Hold from Buy at Craig Hallum
    • Nektar Therapeutics (NKTR) downgraded to Neutral from Overweight at JP Morgan, downgraded to Hold from Buy at Jefferies, and downgraded to Neutral from Buy at Mizuho
    • Kraft Heinz (KHC) downgraded to Sell from Neutral at Guggenheim; tgt to $25 from $29
    • E*TRADE (ETFC) downgraded to Hold from Buy at Deutsche Bank; tgt to $45 from $52
    • TD Ameritrade (AMTD) downgraded to Hold from Buy at Deutsche Bank; tgt to $47 from $58
  • Others:
    • Activision Blizzard (ATVI) reiterated with an Overweight at Piper Jaffray, reiterated with a Buy at UBS, reiterated with an Overweight at Morgan Stanley, and reiterated with a Neutral at MKM Partners
    • Overstock.com (OSTK) reiterated with a Buy at Maxim Group; tgt to $40 from $34
    • AMC Entertainment (AMC) reiterated with a Buy at B. Riley FBR; tgt to $22 from $19

Upcoming Events:

  • Econ Data (Monday):
    • 14:00 ET: Treasury Budget for July (Briefing.com consensus -$100.0 bln; Prior -$76.9 bln)
  • Earnings:
    • Monday (Aug 12)
      • Pre-Market: GOLD MDP SYY TSG
      • After-Hours: BE TME VFF
    • Tuesday (Aug 13)
      • Pre-Market: AAP AVYA BEST EAT CVET ELAN GDS IIVI JD PSN RUBY
      • After-Hours: ADPT BILI CDK GO HUYA MYGN PSNL TLRY YY
    • Wednesday (Aug 14)
      • Pre-Market: AMCR AIT CAE GOOS CTST CTRA ERJ IHRT LK M PFGC
      • After-Hours: WUBA A CACI CGC CSCO HOLI NTAP PRSP SPTN VIPS
    • Thursday (Aug 15)
      • Pre-Market: BABA BGG CSIQ JCP MSG MSGN NIO TPR WMT
      • After-Hours: CRMT AMAT DDS GLOB NVDA PAGS VIAV ZTO
    • Friday (Aug 16)
      • Pre-Market: DE QD
      • After-Hours: None
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