Alibaba Explains It All; Tesla’s $2 Billion Call
Alibaba Explains It All
The market’s got chills. They’re multiplying. And China’s losing control.
Because the Wuhan virus they’re supplying … is electrifying!
Yesterday’s lull in new, reported coronavirus infections was the calm before the storm. Today, China announced 15,152 new cases and 254 new deaths. The totals now stand at more than 60,0000 confirmed cases and 1,369 dead.
So far, China has remained confident that it can contain the outbreak, and Wall Street has followed happily along. But that narrative changed this morning after an earnings conference call from Alibaba Group Holdings Ltd. (NYSE: BABA).
Now, Alibaba’s most recent quarter was stellar, with earnings surging 58% and revenue climbing 38% year over year. But the company’s guidance was a wake-up call for Wall Street … and not just for Alibaba shareholders.
“The epidemic has negatively impacted the overall China economy, especially the retail and service sectors,” said Chief Financial Officer Maggie Wu. “While demand for goods and services is there, the means of production in the economy has been hampered by the delayed opening of offices, factories and schools after the Lunar New Year’s holiday.”
In short, Chinese workers are either sick and can’t work, or can’t work because of delayed return-to-work dates or quarantines. It’s safe to say that productivity is grinding to a halt in the country.
Alibaba’s quarterly report has, so far, been the most honest take on the situation, and investors across the board should take notice.
So, how’s everybody feeling today? Any sniffles? Fever? Aching outside the norm?
I hope you’re doing well. If you’re outside of China and inside the U.S. (like most of Great Stuff’s readers), you’re probably just wondering when the rain will stop.
Maybe you’ve got your own flu worries to contend with. While the Wuhan virus gets loads of attention, schools are closing due to outbreaks of the regular old flu here in the Greater Cincinnati, Ohio, area.
We went from snow days to flu days here … it’s kind of sad.
You’ve probably heard that the Wuhan virus — officially dubbed COVID-19 — is like a really, really bad flu. That’s not far off the mark.
But that comparison brings with it generalization. Why can’t the Chinese just suck it up and keep working? That’s what we do here, after all.
The Chinese are hard workers, but their health care system (from hospitals all the way down to local drug stores and supermarkets) just isn’t as convenient as ours. We can rag on U.S. health care all we want, but at least we have convenience at our disposal! It’s the price of that convenience that’s a pain…
I think this is the main reason why Wall Street and most regular investors aren’t taking the threat of COVID-19 very seriously. It’s not spreading here, so why worry?
In truth, the virus may never widely spread in a Western country due to improved health care options. But that doesn’t mean that COVID-19’s impact in China won’t affect you or your investments.
Alibaba made that very clear this morning. The company relies on local merchants and businesses to operate and sell goods … and those businesses are struggling under the weight of the outbreak.
This is true for every single company with a significant supply or manufacturing chain running through China — as we’ll see later with Cisco Systems Inc. (Nasdaq: CSCO).
Now, this isn’t the end of any of these companies by any means. For Alibaba and the rest, this latest bout of volatility is just another buying opportunity in disguise.
Great Stuff readers know more drawdowns may follow today’s, and the shrewdest of you may have already taken the chance to scoop up some shares on the cheap. But, if you’re tired of panicking on down days, Banyan Hill expert Jeff Yastine is your guide to buying when the buying’s right.
Over his 15 years of financial news coverage, Jeff’s seen it all — from boom to bust to boom again. No matter what happens in the market’s fickle flights of fright, Jeff Yastine has his eyes out for high-growth stocks trading at bargain prices.
Today, he’s about to reveal a massive investment that he calls “Q Shares.” This may be Wall Street’s best-kept secret — a simple upgrade that could grow your profits up to 27 times faster than holding “normal” shares.
The Good: Winner, Winner, Chicken Dinner
Oh boy … we’ve got another winner here! I hope you’ve been reading Great Stuff, because you might’ve missed this recent opportunity.
I’m talking about Applied Materials Inc. (Nasdaq: AMAT). Shares of the semiconductor equipment-maker are rallying today, after the company put in a solid fiscal first-quarter performance. Applied beat earnings expectations by $0.07 per share, and revenue rose to $4.16 billion. Wall Street was looking for sales of just $4.09 billion.
What’s more, the company issued second-quarter guidance significantly above the consensus target. Applied sees earnings in a range of $0.98 to $1.10 per share and revenue of $4.14 billion to $4.54 billion. The average analyst targets rest at $0.91 per share and $4.05 billion in revenue.
I’ll just take this opportunity to say: I told you so! Back on December 31, I recommended AMAT as one of Great Stuff’s top picks for 2020 and beyond. In less than two months, AMAT is up more than 12%!
And, as the cycle continues to improve for semiconductor stocks, we can expect bigger and brighter returns from AMAT.
Congratulations, Great Stuff investors. You’re on a roll!
The Bad: An Offer You Should Refuse
You know when a company says it’ll sell more shares, and investors get worried about shareholder dilution? Yeah … that didn’t happen with Tesla Inc. (Nasdaq: TSLA).
Today’s trading was quite volatile for TSLA, but the stock still moved broadly higher. Why should Tesla stock have fallen? Because the company announced it was selling $2 billion in new common stock. Yes, $2 billion.
Now, I get that the company can put that money to good use. This is not necessarily a bad thing for Tesla … as a company. In fact, with the shares trading stupidly high right now, it’s a brilliant move by Tesla to raise capital.
But $2 billion in new Tesla shares running around should have some negative impact on the stock’s price. It just should.
You divide the current market capitalization by the new higher number of shares outstanding and the price goes down. That’s how math works.
Well, that’s how math is supposed to work. But, when your stock price is propped up artificially high by speculation and over-the-top bullish sentiment, math tends to take a back seat.
Don’t get me wrong: Great Stuff is still bullish on Tesla over the long term.
But this current craziness in TSLA pricing is still out of hand. If you already own Tesla, you don’t need to sell, but some hedging might be in order to protect your portfolio. If you don’t own TSLA … don’t sweat it. There will be better prices to buy in at down the road.
The Ugly: Down With the Sickness
Earlier, we mentioned Cisco Systems in relation to the COVID-19 outbreak. The stock is getting punished today, and I don’t think it’s because of the company’s earnings report.
In fact, the company’s fiscal second quarter was quite good. Earnings beat expectations by a penny. Revenue came in at $12 billion, also edging past Wall Street’s targets. Third-quarter guidance was relatively tame … but nothing unexpected.
All in all, it was a very vanilla quarterly report with no real surprises.
But there was one little tidbit that Wall Street might’ve seized on. Asia-Pacific orders were down 4% last quarter, with China driving that weakness. In fact, Chinese orders plunged 30%.
When you combine that footnote with Cisco’s heavy reliance on Chinese component suppliers and contract manufacturers … things start to get dicey. Add in Alibaba’s stark admission on just how bad things are getting economically in China, and you can see why CSCO fell roughly 6% today.
That said, Cisco is a well-run company with solid growth opportunities. The COVID-19 outbreak won’t last forever, and CSCO will bounce back, meaning now could be a good time to buy the dip.
I would also like to remind you that now’s an excellent time to choose a ready guide in some celestial voice. You don’t have to rush to take Jeff Yastine’s advice, but, if you’re a working man (or woman), sooner is better.
Welcome back to another edition of Great Stuff’s reader feedback!
In this weekly column, I read your emails and … provide feedback. It’s kind of in the name, huh?
Let’s get started:
They Did the Math
Perhaps the judge is the one who understands the economics of building a network.
All network operators have to build a network that gets you 100% coverage, or you don’t get customers. The most expensive part of all networks is the last mile. So, the cost is the same for all providers. Now, take the mobile population and divide by the number of networks:
100%/1= 100% revenue = monopoly, covers costs and huge profit.
100%/2= 50% revenue each = duopoly, covers costs and nice profits for both.
100%/3= 33% revenue each = oligarchy, covers costs and slim profits for all.
100%/4= 25% revenue each = costs not covered, no profits and fight to kill one.
Based on 30 years working on mobile networks, three competitors provide both competition and money to upgrade to each generation of networks. Having four slows progress down and impedes innovation.
Thanks for writing in Mike! I’m not entirely sure about your math there or how it applies to T-Mobile and Sprint — that last mile is often run by companies like Crown Castle International Corp. (NYSE: CCI) or American Tower Corp. (NYSE: AMT). But you get an “A” for effort, nonetheless.
As for the judge in the case, it seems his decision was based less on the credibility of the 10 witnesses in the case and more on the fact that Sprint just sucks as a company.
There is an extreme determination in the world to justify one’s existence by how much $$$ you have or control. And that equates to Power and with unabjectable Power comes total domination … so it refurbishes that, in our reality, you are undeniably the Most Superior essence in Existence. My relative that came over here on the MayFlower didn’t come here for me to live under that concept!
I have to be honest with you, Brian. I totally appreciate and get your point, but … maybe … lay off the Red Bull occasionally? (Or maybe I need more Red Bull … caffeine is a heck of a drug.)
Remember, the new T-Mobile still has to compete with AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) … as well as a host of other internet companies providing access. We’re not at “total domination” levels just yet … despite how the financial media portrays this merger.
Thanks for reading and writing in!
Happy Wife = Happy Life
Following up on your wholly unsubtle snarky comment, “Please tell me you don’t still have a phone landline,” in today’s Great Stuff, I have to guess that you have never been married, or if you were, you are since divorced. Why do I say that? Because if you had a wife, she probably disliked her cell phone — I know mine only uses hers in a true emergency!
We also have cable TV, since streaming here is still too fragmented for comfort, so I use a much less expensive (Tracfone) cell service for us and do my heavyweight online stuff from home. I figure my extra net landline cost is maybe $30-$50/month — a very small price to pay to have a happy wife.
Yes, I suppose if my wife were under 40 and grew up with wireless, this conflict would not exist, but there you are. I’ll stick with the one I got… :)
I feel you Dave. I’ve been married for more than 20 years. My wife is like a technology black hole. Everything she touches randomly and mysteriously stops working for no reason. It took me years to get her to use a smartphone, and she only switched after I laid out a detailed plan on how cutting the landline would save us lots of money down the road. (One of the benefits of being a financial wag on the internet, ha!)
Now, she’s hooked on the thing and uses it more than her laptop. But those mysterious tech issues pop up more and more frequently, and we argue about those instead of dropping the landline.
It’s a never-ending cycle. So, we did manage to drop the landline … but at what cost? At what cost, Dave?!
If you wrote in and I didn’t get to you, it might be because you cursed too $%*?@#! much. I still really appreciate the feedback, even if they won’t let me publish it.
And if you haven’t written in yet … what’s stopping you? Drop me a line at GreatStuffToday@banyanhill.com, and let me know how you’re doing out there in this crazy bull market.
Until next time, good trading!
Great Stuff Editor, Banyan Hill Publishing