Uncertain Environment

The first quarter of 2023 drew to a close in an explosive manner, due to the collapse of Silicon Valley Bank in the US, with the banking turmoil spilling over into Europe. These developments created worries around the health of the financial system and have sparked renewed recession fears, although authorities on both sides of the Atlantic have taken robust action to contain the fallout.

They also forced the US Federal Reserve to a more conservative approach in March, with a smaller rate increase than previously expected, even though inflation is sticky inflation and the labor market tight. The European Central on the other hand, did not budge and maintained its aggressive stance, pointing to a murky monetary policy environment.

Meanwhile China's reopening has been and will continue to be another focal point, after moving away from the strict zero-Covid policy, which is cheered by markets. However, we have also seen a deterioration in Sino-US relations, while the war in Ukraine is now in its second year and continues to be a source of geopolitical jitters.

Equity markets in the United States and elsewhere started the year with optimism, but recent events have doused the upbeat mood, having created a highly uncertain and fluid environment. As the second quarter gets underway against this volatile backdrop, we take a look at some stocks that will be in our radar over the coming months. In this Part 1 of a two-part series, we focus on companies from the electric vehicle (EV) market, the banking sector, big tech and more. You can read Part 2 here.

Meta Platforms

Meta is a social media giant and the parent company of Facebook, Instagram and WhatsApp. Its CEO is Mark Zuckerberg who co-founded Facebook, which first launched in 2004 changing the entire social media landscape.

The social media giant had a brutal 2022, as its vision for the Metaverse has been a costly undertaking that remains obscure and has not managed to gain broad appeal, despite the initial hype. The segment responsible for delivering on this vision – Reality Labs – lost an eye watering $13.717 billion in 2022. ^[1]

Furthermore, Revenues declined by 4% y/y in the fourth quarter to $32.165 billion, while forward guidance was disappointing, with the firm expecting Revenues of $26-28.5 billion for the soon to be reported Q1. Despite the underwhelming financials, user metrics were more encouraging, with Facebook Daily Active Users (DAUs) for instance, hitting an average of 2 billion, up 4% year-over-year.

Meta Platforms however is trying to turn things around and improve its financial performance, having announced in March a reduction in its workforce by 10,000 people ^[2], on top of the 11,000 layoffs late last year ^[3]. More to it, CEO Mark Zuckerberg communicated his focus on making the organization "stronger and more nimble" and called 2023 the "Year of Efficiency", to which markets have reacted positively. ^[1]

The CEO also jumped on the generative AI bandwagon, announcing the creation of a new product group to leverage the technology for improving its services, by pulling teams from across the firm ^[4]. Given the focus on this projects, Meta may be scaling down its pursuit of the Metaverse, which markets and customers did not seem to be excited about anyways. It will be interesting to see if this indeed the direction on which the troubled social media leader will go on and how its pursuit of efficiency progresses.

META.us collapsed in 2022, but bottomed out in November and has posted a significant recovery since. The stock reacted positively to the cost-cutting efforts, with March being the fifth straight profitable month.

Tesla

The firm was founded in 2003 disrupting the auto industry and is the leader of the electric vehicle (EV) market, although its activities span to other sectors, including the manufacturing of solar panels.

Tesla Motors Inc had a rollercoaster 2022 as it generated record revenues, set all-time highs in delivery and production, but missed the 50% growth goal. It also begun deliveries of its Semi truck, the only model introduced last year. ^[5]

Price cuts to its lineup have continued this year amidst market concerns over demand, which have been dismissed by its CEO. It remains to be seen how these will impact its top and bottom line, but Tesla has far bigger profit margins than its rivals, putting it in an advantageous position.

At the start of March, CEO Elon Musk unveiled his Master Plan 3 that was big on vision, but lacked specifics. Officials touted changes to the manufacturing process that will lead to a 50% reduction in costs and 40% less manufacturing footprint, allowing the company to build factories "faster, with less capex and more output per unit". ^[6]

Based on the above, it looks like Tesla is working towards a cheaper electric vehicle, which was part of Elon Musk's original Master Plan he had laid out all the way back in 2006 ^[7], but nothing concrete was announced. We did not get anything new around the timeline of the long-awaited futuristic Cybertuck either, production of which is expected to start "maybe sometime this summer" according to mr Musk's earlier comments. ^[8]

Mr Musk also announced a new Gigafactory in Mexico - the third outside the US – in pursuit of ramping up production, noting that the move is "about expanding total global output". Tesla is also moving in to the lithium refinery business, which is a key component for electric batteries, having broken ground on a refinery plant in Texas. ^[6]

TSLA.us started the year hitting the lowest levels since late-2022 on fears around demand, but quickly rallied as Mr Musk dismissed such concerns, having a strong first quarter.

ASML

ASML Holding NV is a non-widely popular Dutch-based multinational that was founded in 1984, with more than 39,000 employees in over 60 locations. It is a leading manufacturer of semiconductor-making equipment, with its customers including firms such as TSMC and Intel. ^[9]

It holds a monopoly on the cutting edge EUV lithography method that is required for the production of the most advanced chips, representing another choke point in the complex and strained chip supply chain. Its unique position also exposes it to the recently heightened Sino-Western tensions.

ASML is not allowed to sell the advanced EUV machines to firms in the People's Republic of China (PRC), but is able to provide the less advanced DUV equipment. The deterioration in US-China relations and Washington's effort to reassert its dominance in the semiconductor industry, create fears for potentially more restrictions that could affect the company's business.

In early March, the Trade Minister of Netherlands sent a letter to parliament stating the government's intention to put export controls on advanced semiconductor manufacturing equipment by June, without though naming ASML, China or details on the targeted machinery. ^[10]

The company does not expect these measures to have a "material effect" on its 2023 outlook ^[11], but we will need to wait and see the specifics over the coming months and how the Sino-Western relations progress. In an earlier Reuters interview back in January, CEO Peter Wennink had said that sales to PCR should be about the same this year as in 2022. ^[12]

Last year, ASML generated Net Sales in excess of €21 billion, with the PRC accounting for nearly 15% of that. The firm expects its sales to grow by 25% in the current year, while for Q1 the projection stands at €6.1-6.5 billion, compared to nearly €5.8 billion in the previous quarter. ^[13]

ASML.nl is having a good first quarter due January's strong performance, extending the recovery form the two year-lows of October.

Microsoft

Microsoft is an American multinational technology company, the creator of the Windows operating system and the Office suite of apps. Its offering though, spans to cloud computing, consumer electronics and more.

The tech juggernaut's last financials left much to be desired since Net Income dropped 12% y/y in in the quarter ended December (Q2 FY23) and Revenue of 52.7 billion marked only a marginal 2% increase compared to a year ago ^[14]. Its guidance was also disappointing, forecasting Revenues of $50.5- $51.5 billion for the current quarter. ^[15]

The tech sector has experienced a series of workforce reductions over past several months, with business harmed by high interest rates, elevated inflation, trade disruptions and other headwinds. Microsoft did not escape the trend, as it announced the layoff of 10,000 employees, which accounts for nearly 5% of its staff. ^[16]

Furthermore, the firm has come under regulatory scrutiny on both sides of the Atlantic, mostly due to the agreement to buy gaming publisher and developer Activision Blizzard, for a whopping $68.7 billion ^[17]. It has tried to assuage anti-competition concerns, with deals with rivals such as Nintendo ^[18] and UK's regulator recently narrowed the scope of its probe. ^[19]

All of the above seem trivial though, compared to the new big thing that has taken the world by storm, which is non-other than OpenAI's ChatGPT that was released late-last year. It is an Artificial Intelligence (AI) chatbot, which generates human-like responses to questions, in a conversational way. Microsoft is a backer of OpenAI and quickly harnessed the power of ChatGPT to offer an AI-powered Bing search engine ^[20], beating other tech giants that also get in the action. Since the February announcement, it has expanded the AI capabilities into its Office suite, with the 365 Copilot. ^[21]

The tech sector had a poor 2022 and MSFT.us did not buck the trend, but managed to stabilize in last quarter. The new year started in a constructive way and the stock has a very strong March helped by the progress in generative AI and expectations for a less aggressive Fed.

JP Morgan Chase

JPM is one the world's oldest financial institutions with its history tracing back to the eighteenth century, with presence in over 100 markets. It is the biggest US bank, with total assets in excess of $3.5 trillion last year. ^[22]

The run on Silicon Valley Bank in early March forced regulators to close the bank and guarantee deposits ^[23], while taking further measures to contain the fallout. However, fears spread into regional institutions, such as First Republic, with JP Morgan Chase and 10 other heavyweights throwing a lifeline of 30 billion in unassured deposits. ^[24]

This confidence crisis does not seem to have affected big banks for now, which are subject to stricter oversight and controls. In fact, the latest Fed data revealed that deposits to the 25 biggest commercial banks increased by around $67 billion between March 8 and March 15, while 120 billion were pulled from smaller institutions. ^[25]

The tightening of credit conditions increases chances of an economic downturn, while the already inverted yield curve is often a precursor of such outcome. JP Morgan Chase posted a $2.3 billion provision for credit losses in the fourth quarter, due to the deterioration of its macroeconomic outlook, now expecting a "mild recession". ^[26]

The US Fed was constrained to a small rate hike and made a dovish shift to its guidance due to the recent financial stress, now projecting just one more increase before pausing ^[27]. Higher rates are generally good for banks, although the yield curve inversion and prospects of a recession are not. These developments create a highly uncertain backdrop and we will be waiting to see how they will impact JP Morgan and the banking sector in the US and around the world.

Building on a profitable fourth quarter, JPM.us started 2023 on a strong footing. However, the recent banking rout forced the stock to slump in March and to a losing first quarter.