Top 10 Stocks for Q3 2023 – Part 1

Market Optimism

Wall Street and other key stock markets around the world had a very bad 2022, mostly due the massive amount of rate hikes delivered by the Fed and most of its major counterparts. Even though monetary outlook has been uncertain, many central banks have slowed the pace of tightening this year and may have reached the peak as inflation is easing, but it still early to talk about the end. The US Fed paused in June, but kept the door open to further policy firming, while the European Central Bank, which has been more aggressive in 2023, likely has more ground to cover.

Despite the persistently hawkish stance by the ECB and the poor performance of the economy, the German stock market is having a great year. On the other side of the Atlantic, the Fed slowdown has allowed equities to rebound, looking past the banking turmoil sparked by the run on Silicon Valley Bank.

The tech sector is leading the march, driven by the generative Artificial Intelligence (AI) boom, which has emerged as the next big thing. NAS100 is deeply in bull territory and outperforms its peers, with an around 30% rally in the first five months of 2023.

China has been reopening after shifting away for the stringent zero-Covid policies and this has revitalized economic activity. A series of recent poor data though, have created concerns over the recovery of the world's second largest economy, but authorities have stepped up their stimulus efforts. The progress of the economy will be closely watched, since it is important not only for the domestic market, but for corporations and markets around the world.

Concerns around the economic growth in China and other regions, as well as various potential risk factors, could pose headwinds. Equities however, especially in the US, move towards the third quarter and the new earnings season, with optimism and expectations for a less hostile monetary environment.

Against this backdrop, we take a look at some of the stocks that we will be closely following over the coming months. In this Part 1 of a two-part series, we focus on companies from the electric vehicle (EV) industry, the regional banking sector, big tech and more. You can read Part 2 here.

Tesla

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

Tesla Motors Inc reached new records in Q1, since it manufactured 440,808 cars and handed over 422,875, marking a 44% and 36% y/y growth respectively ^[1]. However, the quarter was overall mixed, with the production/delivery gap persisting and keeping fears over demand in play.

These concerns led the company to a series of price cuts from late-last year, which had a negative impact in its bottom line, as Net income slumped 24% y/y. Its margins though remain industry-leading, allowing it to chase volume over margins.

Tesla has not launched any new passenger cars in years, but this is set to change, since deliveries of the long-awaited Cybertruck are "probably" expected to begin in Q3, according to Elon Musk ^[2]. More to it, Tesla appears to be preparing a refreshed Model 3. The company is also working on a next-gen platform that will lead to a 50% reduction in costs and 40% less manufacturing footprint and could allow it to produce an affordable model. ^[3]

The EV leader is facing increasing competition, with start-ups and legacy auto giants alike, making strides in electrification. However, it stays ahead of competition, with a broader vision for a world without fossil fuel and works on multiple fronts. From autonomous driving, to humanoid robots and refining lithium – a key component for electric batteries. ^[4]

The EV leader also made a big step towards conquering the US charging market, since auto giants Ford ^[5] and General Motors ^[6] both announced their decision to adopt Tesla's North American Charging Standard (NACS). Starting form 2025, their new EVs will have the NACS port built-in, while their customers will be able to access Tesla's Superchargers network from the next year.

We will be now looking on how its production ramping up progresses, any more news around the timeline of the imminent Cybertruck, but also around plans for a cheap entry-level model. Tesla's path definitely relies a lot on its CEO who has to split its time between various endeavors and his popularity, given his often polarizing views and actions.

You can read the The State of the Electric Vehicle Market Ahead of the Summer 2023 Earnings Season, for more insights on the EV industry, Tesla and some of its competitors.

TSLA.us is having a great year, recovering from the January lows, with an around 65% rally as of the end of May. It extended its gains in June, carrying over a record thirteen-day profitable streak, sparked by the news around its supercharging network, but has moved to overbought territory.

Kering

Kering is a French-based multinational luxury group, which owns high-end fashion powerhouses, with Saint Lauren, Balenciaga, Brioni and Alexander McQueen among them. The group's biggest brand though, is the iconic Gucci house – Italy's most valuable brand in 2023 according to Kantar. ^[7]

Kering (KER.fr) had a mixed 2022, which according to the firm was "a year of milestones", but also "short of ambitions and potential". Overall revenues increased beyond €20 billion, but were contained by the 8% decline in Asia-Pacific, the Group's biggest market. ^[8]

China is a bellwether for luxury goods and last year's strict pandemic containment policies created headwinds, but the country has abandoned those measures and its economy has been rebounding. The result for the first quarter of the year reflected that, since Asia-Pacific returned to growth, helped by the "gradual China recovery". ^[9]

UK-based rival Burberry Group (BRBY.uk) posted strong earnings for the full Fiscal 2023 in May, which pointed to the tough China environment, but also the positive impact of its recent reopening. Sales in the country fell in the fiscal year, but jumped 13% in the last quarter (January – March) ^[10]. Updates from other high-end fashion houses, such as Louis Vuitton (MC.fr) and Hermes (RMS.fr), have shown similar momentum over the same period.

Kering releases its financial report for the first-half of the current year in late-July. The progress in Asia-Pacific and more so in China, will be critical and closely watched. Recent indicators from the country have pointed to weak consumer demand and sluggish economic recovery. The numbers of Gucci will also be a focal point, especially after the recent change of the brand's creative director ^[11].

KER.fr made a strong finish to last year and carried over with an impressive 2023 start, due to China optimism. As concerns around the recovery kicked in, the stock faced pressure, running a losing second quarter below the 200Days EMA, despite stabilizing in June.

Netflix

The firm started out in 1997, renting and selling DVDs and subsequently introduced streaming services, fifteen years ago. Netflix popularized binge-watching and led the streaming revolution, but its reign appears to be over.

Netflix conceded the top-spot to entertainment giant Disney nearly a year ago, and is stuck in the second place since. As of the end of the first quarter, Disney's direct-to-consumer segment lost subscribers, but with 231.3 million it stayed ahead of its rival. ^[12].

Back in November 2022, Netflix launched a new tier with the inclusion of advertisements – Basic with Ads - at a monthly cost of $6.99, beating Disney in both timing and pricing. Q1 was the first full quarter for this new plan and the company said it was "pleased" with the progress on "all key dimensions", with "little switching" from the more expensive ad-free plans. ^[13].

The most conspicuous initiative however, is non-other than the password sharing crackdown. This practice had helped the firm grow, but now has an adverse impact on revenue and the company has been trying to contain it and monetize it. Following an initial delay, the streaming giant rolled-out its new sharing policy in the US last month, limiting access to one household. ^[14].

Some churn may be difficult to avoid, as has been the case in other regions where this has been implemented, with Co-CEO Craig Peters speaking of an "initial cancel reaction" ^[15]. Early results from a research conducted by Antenna, suggests the move is paying off. According to the study, Netflix witnessed "the four single largest days of U.S. user acquisition" in more than four years, since it started alerting subscribers of the change. ^[16].

The ad-supported tier is going to be crucial, since it constitutes an additional revenue stream that allows Netflix to shift focus away from the subscriber numbers. The reaction to the new sharing plan is also going to be significant, since the firm does not have the luxury of turning subscribers away, amidst increasing competition.

Disney already has dethroned it with a strong offering, while other legacy entertainment behemoths such as WarnerBros.Discovery (owns HBO) with compelling content, are making strides in the streaming business. Tech giants like Apple and Amazon.com have also managed to establish a strong presence in the direct-to-consumer market. More to it, most of its rivals offer sports content and we will be looking forward to see if Netflix has any concrete plans to enter this segment.

NFLX.us gained around 35% during the first five months of the current year, extending its recovery from the H1 2022 collapse. The return to subscriber growth and most importantly the ad-supported tier and the password sharing changes have led this year's advance.

Western Alliance Bancorporation

Western Alliance is a regional US institution that ranked 37th in the Fed's list of the largest commercial banks, with consolidated assets in excess of $70 billion as of the of the first quarter ^[17]. It has 3,340 employees and 57 banking offices in that period ^[18].

The biggest US lenders like JP Morgan are subject to stricter oversight, with higher and broader capitalization and were able to go largely unscathed from the turmoil sparked by the run on Silicon Valley Bank. Regional institutions though, quickly emerged as the weak links, experiencing significant deposit withdrawals. First Republic was eventually acquired by JPM after massive outflows ^[19], while PacWest had to sell a set of construction loans worth $2.6 billion ^[20].

Western Alliance could not avoid outflows and its deposits dropped to $47.6 billion as of the end of March 31, from $53.6 billion in Q4 2022 ^[21]. However, the bank proved resilient and according to a recent SEC filing, deposits increased by $2 billion in the second quarter as of May 12, to $49.6 billion. This durability was largely due the sizeable amount of insured deposits, which strengthened to 79% based on the same filing, from 68% at the end of Q1. ^[22]

Other that the overall results, we will be looking forward to see if deposits increased further in the second quarter, compared to the last update and if the regional lender has accomplished to move past the recent turmoil.

WAL.us is having a bad year, as it slumped to multi-year lows in March as the banking turmoil begun to unfold. However, it has managed to contain the losses recently, as its deposits have shown growth. It looks like the overall situation has improved, but regional banks may still be in a precarious position.

Alphabet

Alphabet is a tech behemoth that encompasses Google and many widely known products and services, used in everyday life across the world. Gmail, Google Maps, Goggle Search are some of the them, but the company also offers the Chrome web browser, YouTube and the Android operating system for mobile devices.

The firm is also a significant player in the ever important cloud market, with a 10% share in the first quarter and strong year-over-year growth, behind Amazon.com (32%) and Microsoft (23%), according to the Synergy Research Group ^[23]. Its progress was evident in the most recent earnings report, which revealed that Google Cloud turned profitable during that period, for the first time since it started reporting exact figures for the business. ^[24]

Alphabet's (GOOG.us) main revenue generator is Google advertising, which did not perform particularly well in Q1, since it dropped marginally on a yearly comparison and significantly on a sequential basis. YouTube ads disappointed, while Google Search retuned to growth, albeit at a notably slower pace compared to the year-ago quarter. It is also worth noting the potential regulatory headwinds, as the European Commission charged Google with anticompetitive practices in the advertisement technology industry. ^[25]

The whole ballgame though is generative Artificial Intelligence (AI), which has emerged as the next battlefield for Big Tech. Rival Microsoft has the first-mover advantage, since it was able to harness its partnership with OpenAI to quickly launch an AI-powered Bing version ^[26], threatening Google's search engine dominance.

It looks like Alphabet was taken by surprise, as the launch its own AI chatbot named Bard, appeared rushed and disappointed markets. The initial response left much to be desired, but the tech giant seems to be finding its rhythm, based on what we saw on May's I/O event. Its CEO announced the use of AI not only in the search engine, but also in other key products, including Gmail and Maps. ^[27].

The race to AI supremacy race to AI supremacy has heated up and Alphabet has some catching up to do in order to maintain its dominant position on search engines and expand its cloud business.

GOOG.us is running an impressive year, covering more than half of the 2022 losses. It has moved past the initial AI disappointment, heading towards a strong second quarter.