Tesla earnings preview, US shutdown odds increase

Market Catalyst - Transcript Summary (January 29, 2024)

Key Concepts:

• Apple Earnings: Focus on iPhone sales, AI integration, potential price increases, and margin impact.
• Government Shutdown: Rising probability due to events in Minneapolis and political gridlock, potential economic impact.
• Federal Reserve Meeting: Expectations of no rate change, focus on forward guidance and committee sentiment.
• Tesla Earnings: Underperformance, regulatory credit impact, execution of new projects (Cybertruck, Semi, Mega 3).
• GM Earnings: Strong recent performance, concerns about EV exposure and potential market share loss.
• Robotics Industry: Shift from humanoid hype to practical applications in industrial sectors, data gathering, and ROI-focused solutions.
• Healthcare Industry: Congressional scrutiny of insurers, rising premiums, denied care, and executive pay.

1. Market Overview & Economic Context

The broadcast opened with a review of market performance (Dow up ~140 points, S&P up 0.4%, Nasdaq up 0.4%) amidst a busy week including the Federal Reserve meeting, earnings reports from major tech companies (including the “Magnificent Seven”), and the aftermath of a significant winter storm impacting 17 US states. The political situation in Washington, particularly events in Minneapolis, was also highlighted as a potential catalyst for a government shutdown.

2. Apple Earnings Preview

Discussion centered on Apple’s upcoming earnings report (post-market Thursday). Despite a 7% year-to-date decline (following an 8.5% rise last year), expectations remain relatively high. Key areas of focus include:

• iPhone Sales: Consensus estimates project nearly 14% iPhone growth, making it a strong driver for the quarter.
• AI Integration: The market is keenly watching Apple’s AI strategy, particularly following the delayed rollout of “Apple Intelligence” and the partnership with Google (Gemini). The question is how Apple will monetize AI and integrate it deeply with Siri and other applications.
• Pricing & Margins: Rising component costs (specifically memory prices) raise concerns about potential price increases for the iPhone, which could impact demand. Maintaining healthy margins is a key challenge.
• iPhone Air Performance: The new iPhone Air is reportedly not selling well and is not expected to be a significant driver of the quarter’s results.
• Pro/Pro Max Sales: Strong Pro and Pro Max sales are expected to contribute to higher average selling prices (ASPs).

3. Government Shutdown Risk

The probability of a government shutdown has increased to approximately 80% due to recent events in Minneapolis (the killing of Alex Prey). The Senate is considering a bill funding the Department of Homeland Security (DHS), which is facing opposition from Democrats unless there’s an overhaul of the agency.

• Partial Shutdown: This shutdown would be partial, as six of the twelve appropriations bills have already been passed.
• Economic Impact: The impact will be mixed. Government economic data releases could be disrupted (potentially impacting the Bureau of Labor Statistics and the Department of Commerce). SNAP benefits are fully funded until September. Airport operations could be affected by potential TSA and air traffic controller furloughs.

4. Federal Reserve Meeting Outlook

No rate changes are expected at the upcoming Federal Reserve meeting. The focus will be on:

• Forward Guidance: The press conference is expected to be dominated by political questions rather than providing clear signals about future policy.
• Committee Sentiment: Analysts will be closely watching for any dissent within the committee and assessing the overall bias towards future rate cuts.
• Succession Planning: The potential announcement of the next Fed chair will be a key factor. The candidates (Kevin Hasset, Kevin Warsh, Rick Reer, and Governor Waller) are generally aligned on a path towards rate cuts.

5. Tesla & GM Earnings Analysis

• Tesla: Despite a stock rally, concerns remain about earnings trajectory. Tesla has missed earnings estimates in seven of the last nine quarters. The expiration of federal EV tax credits and the decline in regulatory credit sales are expected to negatively impact future earnings. The success of the Cybertruck, Semi, and Mega 3 rollouts in 2024 is crucial.
• GM: GM has had a strong recent performance, but concerns are growing about its EV exposure and potential market share loss. The company’s stock has benefited from its strong performance in 2023.

6. Robotics Industry – Beyond Humanoids

The discussion shifted to the broader robotics industry, highlighting a disconnect between the hype surrounding humanoid robots and the practical applications driving real ROI.

• Data Gathering Focus: Many robotics companies (like Gecko Robotics) are focused on building robots that gather data in industrial settings (energy, manufacturing, defense) to improve efficiency and decision-making.
• Infrastructure & Software: A key challenge is developing the software infrastructure (like Gecko’s “Cantilever” platform) to process and analyze the data collected by robots.
• ROI-Driven Applications: The most impactful robotics applications are those that address specific business challenges and deliver measurable ROI, rather than attempting to replicate human capabilities.
• Humanoid Integration: Humanoid robots will likely integrate with existing data platforms to enhance their functionality, but their immediate impact may be limited.

7. Healthcare Industry Scrutiny

Congressional hearings focused on rising healthcare premiums, denied care, and executive pay at major insurance companies.

• Political Dynamics: Democrats blamed Republicans for the expiration of ACA subsidies, while Republicans criticized the ACA’s sustainability.
• Key Issues: Concerns were raised about cost drivers, medical loss ratios (MLR), vertical integration, PBMs (Pharmacy Benefit Managers), and executive compensation.
• Potential Policy Changes: While breaking up large insurance companies is unlikely, increased regulatory scrutiny of PBMs and potential antitrust investigations are possible.

8. Notable Quotes:

• Brandon Nisbell (Key Bank Capital Markets): “Expectations [for Apple] are actually reasonably high…we’re in line with consensus…iPhone growth of almost 14%.”
• Brandon Nisbell (Key Bank Capital Markets): “Apple’s probably going to be in a position where they’re going to need to take a price increase on the iPhone.”
• Jake Lucarian (Gecko Robotics): “The key is to focus on the kinds of tasks, the kinds of information that can drive the kinds of decisions that weren't possible before and can actually have high ROI.”

9. Data & Statistics:

• Dow Jones Industrial Average: Up ~140 points.
• S&P 500: Up 0.4%.
• Nasdaq Composite: Up 0.4%.
• Apple Stock Performance: Down 7% year-to-date, up 8.5% last year.
• Government Shutdown Probability: 80% (as of the broadcast).
• Tesla Earnings Misses: Missed bottom-line estimates in 7 of the last 9 quarters.
• GM Stock Performance: Up 54% last year.
• Tesla Stock Performance: Up 11% last year.

Conclusion:

The broadcast highlighted a complex interplay of economic factors, political risks, and technological developments. Key takeaways include the cautious optimism surrounding Apple’s earnings, the rising threat of a government shutdown, the importance of focusing on practical applications in the robotics industry, and the ongoing scrutiny of the healthcare sector. The market remains sensitive to economic data, geopolitical events, and policy decisions.