Top 10 Stocks for Q2 2023 – Part 2

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 second and final part we focus on companies of the streaming business, Chinese tech firms and EV startups and more. You can read Part 1 here.

Ford

Ford is a company founded by Henry Ford and incorporated as the Ford Motor Company in 1903. Only a few years later, in 1908, it introduced the famous Model T, which had sold 15 million units by the time production stopped in 1927. It is headquartered in Dearborn, Michigan and became a publicly traded company in 1956. ^[1]

CEO Jim Farley has been leading the company to an impressive transformation over the last few years, but the ugly fourth quarter and full-year results were concerning. This was mostly due to "execution issues" amidst continued supply chain disruptions. Mr Farley did not like the results and noted that they "left about $2 billion of profit on the table". ^[2]

The CEO however appeared determined to correct the issues, saying he is "excited" about the "pivotal" 2023. Ford Motors Inc has an impressive product line up, pushing hard on the EV front. Its F-150 Lighting electric pickup has sold more than 19,908 units as of the end of March in less than a year since it launched ^[3], ^[4], also getting the coveted 2023 Truck of the Year award by MotorTrend. ^[5]

The Ford Motor Company recently announced a production bump to its Mach-E electric SUV to reduce wait times, underscoring the appeal of its vehicles. It also slashed prices following Tesla's lead, but the financial impact remains to be seen, since its profit margin are nowhere near those of the EV king. ^[6]

The automaker will also change the way it reports its financial results, to cater to its new business structure. A teach-in presentation in March, reaffirmed that the legacy internal combustion segment (Ford Blue) is a cash machine, with nearly $7 billion in operating profit last year. The electric business (Model E) lost $2.1 billion and is projected to lose $3 billion this year, but the firm expects 8% adjusted profit margin by the end of 2026. ^[7]

Ford seems resolute to push forward with its transformation plan and iron out recent problems, but remains to be seen whether it can deliver. It has made impressive strides in the EV market, but it is not alone. Chinese firms make progress, while domestic rival General Motors overtook it at the second place of electric vehicles deliveries, with more than 20,000 units in the first quarter. ^[8]

Last year was bad for F.us, but contained the fall during the second half. Building on that, the stock posted a strong January and ended the first quarter of 2023 in positive territory, despite fizzling out.

NIO

NIO is a Chinese multinational designer and manufacturer of smart electric vehicles (EVs), founded in 2014. It started trading publicly in the New York Stock exchange four years later ^[9] and is also listed in Hong Kong and Singapore.

The EV startup has a robust line-up of seven models across various segments, including the revamped ES8 flagship SUV and the new EC7 flagship coupe SUV. These two were launched in December, with deliveries expected in China later in the current quarter ^[10]. The firm also has presence in Europe, with two models already available in the continent (a third expected imminently), as well as 52 deliveries centers and 37 Service centers as of March 31. ^[11]

NIO Inc has pioneered an impressive battery swap process ^[12], with 1,339 Power Swap facilities as of the end of the first quarter ^[13]. It recently started deploying the third generation Power Swap stations in China, each of which has the capacity of 408 battery changes per day.

During the first quarter, the EV company handed over 31,041 vehicles which was an around 20% increase from a year ago, but the figure was significantly lower than the approximately 40,000 vehicles delivered in Q4 2022. It still easily beat domestic rival XPeng though, which only delivered 8,230 vehicles in the first quarter of the year. ^[14]

The company's latest financials failed to impress, as Revenues rose to RMB 16,063.5 million (US$2,329.0 million) in Q4, but Net Loss widened to RMB 5,786.1 million (US$838.9 million) and Gross Margin was squeezed to just 3.4%. ^[15]

Nio has an impressive vehicle portfolio, making progress on various fronts including its expansion into Europe and China's reopening is expected to be helpful. However, the EV sector is increasingly more competitive and a price war could put smaller unprofitable companies at a disadvantage. Furthermore, NIO's Q1 guidance for Revenues between RMB10,926 million (US$1,584 million) and RMB11,543 million (US$1,674 million) does not inspire much confidence.

NIO.us has managed to consolidates losses over the past several month, but had a mixed first quarter, during which it was unable to avoid 2+ year lows.

Coinbase

Coinbase operates an online crypto exchange platform, with presence in more than 100 countries and trading volume in excess of $800 billion in 2022. It was founded in 2012 and became a publicly traded company just two years ago. ^[16]

The past year has been really bad for the industry, rattled by a series of bankruptcies, like those of Voyager ^[17] and FTX ^[18] and a slump in digital assets such as Bitcoin and Ethereum, which are the most traded on Coinbase's platform.

The crypto winter forced many companies to layoff employees and Coinbase announced a 20% reduction in its workforce in January ^[19] - the second major wave, after having slashed 1,250 jobs back in June of 2022 ^[20]. The firm saw its Net Revenues plunge to a little over $3 billion in the "challenging" 2023, while posting a Net Loss of $2.625 billion. ^[21]

Furthermore, it has faces an increasingly tight regulatory environment, as the US Securities & Exchange Commission (SEC) becomes more aggressive, viewing cryptos as securities. Earlier this year, the Commission forced Kraken to shut down its staking-as-a-service program, which it considers as a security ^[22]. Coinbase CEO Brian Armstrong had criticized the decision as "regulation by enforcement". ^[23]

The dispute with the SEC escalated in late-March, after the crypto exchange received a notice from the commission for potential violations of securities laws, in regards to some of the firm's digital assets and staking service. ^[24]

The crypto industry has shown resilience this year and Coinbase seems to be on a more solid ground compared to some of its competitors. It has not escaped the regulatory crackdown though and it will be critical for the firm to navigate this landscape as successfully as possible.

COIN.us had a brutal H1 2022 and despite finding some calm after that, the new year started with all-time lows. It was able to rebound from that and post one of its few profitable quarters.

Baidu

Baidu is a Chinese multinational technology company, founded in 2000 as a search engine platform. Since then, it has expanded with a diverse portfolio of products and services, such as cloud solutions and intelligent driving, with Artificial Intelligence at the core of its activities. ^[25]

The firm had a "challenging" 2022 according to its CEO, with Revenues having stagnated to around RMB 124 billion (close to 18 billion USD). Mr Li however, sees a "clear path to reaccelerate" growth this year, "poised to capitalize on the imminent inflection point" in Artificial Intelligence (AI). ^[26]

OpenAI took the world by storm late-last year with the launch of its ChatGPT conversational chatbot, with most tech giants racing to provide similar services. Microsoft seems to be ahead of competition, as it harnesses the power of its cooperation with OpenAI, but Baidu has quickly moved into the arena.

Building on its AI expertise, Baidu rolled out ERNIEBot last month ^[27], its ChatGPT rival. Within two days of launch, over 90,000 enterprises had requested API access and more than 600,000 individuals had signed up for testing on the first day ^[28].

Baidu is also pushing on autonomous driving, with its robotaxi service Apollo Go having provided more than 2 million cumulative rides as of the end of January. In March, it got permission to expand its driverless ride-hailing services in China's capital Beijing, achieving another important milestone. ^[29]

Chinese tech companies have reasons to be optimistic, as authorities appear to have shifted form the somewhat hostile stance towards them over the recent years. More to, it Baidu has made a strong entry to the AI chatbot wars, but may have a handicap compared to US tech firms, due to the more controlled environment in which Chinese firms operate.

BIDU.us has staged an impressive recovery from its October multi-year lows. It rallied around 30% during the first quarter of the year, posting its fifth straight profitable month in March.

Disney

The Walt Disney Company is a leading diversified international family entertainment and media enterprise, which was founded 100 ago and bears the name of its iconic creator. Its activities span from theme parks, to entertainment studios, broadcast networks and more.

The firm posted strong results for Q1 FY2023 (period ended December 31), as Revenues roses 8% from a year ago, while operating income was squeezed year-over-year, but nearly doubled over the previous quarter. Furthermore, the Parks, Experiences and Products (DPEP) segment extended its post pandemic recovery into the eight straight profitable quarter. ^[30]

What stood out however was the restructuring plan announced by CEO Bob Iger, who returned to the helm a few months back, after having stepped down in 2020 from a highly successful stint. The new/old CEO spoke of a "significant transformation" aimed to efficiency, with cost cuts of $5.5 billion. The plan includes the slash of 7,000 jobs and a new structure to three divisions: "Entertainment", "Parks, Experiences and Products" and the sports-oriented "ESPN". ^[30]

On the critical streaming front, the increasingly popular Disney+ service relinquished subscribers for the first time in the last reported quarter, to the tune of 2.4 million. ESPN+ and Hulu increased their user base, leading to a combined loss for all three services of 1 million users, but still stayed ahead by rival Netflix which it had dethroned in the summer.

Both companies introduced a new subscription service with the inclusion of advertisements towards the end of 2022, in a potentially significant move, amidst increasing competition in a high inflation environment that squeezes disposable income. During the last earnings call, Disney CFO Christine McCarthy said she was "pleased with the initial response". ^[31]

We will now be looking forward to the latest subscriber figures and how it stacks up against Netflix, more insights on the add-supported offering, as well the progress on the firm's restructuring plan and push towards efficiency.

Following a poor performance last year, DIS.us was off to a flying 2023 start, with January being its best month in around two years. It lost its vigor after that, buts still posted a profitable first quarter.