Ticker Reports for June 24th
The Top 3 Sectors Poised For Growth This Summer
The 2nd quarter and first half of 2024 are rapidly coming to a close, setting the market up for its summer adventure. The latest read on earnings expectations is positive and suggests the market will continue to rise. Not only are S&P 500 (NYSEARCA: SPY) earnings expected to accelerate from the prior quarter, but the consensus estimate for Q2 reported by Factset is holding up under revisions, and the forecasts for the year and next year are rising.
In this scenario, the S&P 500 could continue to rise through the end of next year, assuming no change in the trend. This is a look at the three sectors with the hottest growth outlook going into the Q2 earnings reporting season and the stocks set up to drive them higher by year-end.
Communications Services is the Hot-Ticket Item This Quarter
Communications Services (NYSEARCA: XLC) will be the hot-ticket item this quarter and the remainder of the year. The sector is expected to grow by 18.25% in Q2 and 21% for the year, with both estimates rising. Because the bar is set low for many companies within the index, estimates may continue rising this year. However, the bulk of the gains will be posted by only two companies, so targeting them may be better than an index-tracking ETF. Those two companies are Meta Platforms (NASDAQ: META) and Google parent Alphabet (NASDAQ: GOOGL), which account for nearly 50% of the portfolio and are forecast to grow their earnings by 60% and 27%.
Among the differences in their outlooks is that Meta Platforms will see more significant top-line growth and substantially wider margins. Another difference is that Meta Platform’s analysts have been lowering the bar while Alphabet’s has raised its. Both could produce outperformance in this scenario, but it would be more significant for Google. Analysts rate both stocks at Moderate Buy, and price target revisions have led them higher this year. However, Meta Platform's price targets were trimmed over the last quarter and may not rise again without a solid report. Meanwhile, legacy communications companies like Verizon (NYSE: VZ) are expected to post a small single-digit top-line advance and margin contraction.
Technology Sector: AI Is Driving Big Gains for Some Companies
The Technology Sector (NYSEARCA: XLK) is expected to post the 3rd largest earnings gain for the quarter, about 17%, and the 2nd largest for the year, 18.8%, suggesting steady high-teens growth for the remainder of the year. This estimate is rising on revisions for most top-ten holdings, a who’s-who list of today’s leading AI players. The sector is heavily concentrated in Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL), which account for nearly 45% of the index, but all of the top 10 contribute to the outlook.
The #1 pick for earnings growth in this sector is NVIDIA (NASDAQ: NVDA). Analysts are forecasting another 110% top-line growth on top of the 100% growth posted last quarter and margins to widen. Earnings are expected to grow by 130% and substantially improve the balance sheet and cash position. Advanced Micro Devices (NASDAQ: AMD) will also have a good quarter if overshadowed by legacy businesses. Analysts forecast sequential and YoY acceleration to 6.7% top-line growth and wider margins, and the bar may be low due to recent revisions.
Healthcare Has a Healthy Outlook for Growth
The Healthcare Sector (NYSEARCA: XLV) has only a middling outlook for the year but is expected to post the 2nd strongest earnings growth this quarter and for annual earnings growth to double this year to next. The leading stocks in this group are Eli Lilly (NYSE: LLY), UnitedHealth (NYSE: UNH), and Johnson & Johnson (NYSE: JNJ), accounting for roughly 35% of the holdings. The leading driver of the growth is Eli Lilly due to its position in the GLP-1 market. It is expected to post 20% top-line and 30% bottom-line growth this year, with revenue to advance 30% next year and earnings 50%. UNH and JNJ are expected to post growth in the single-digit range this year and accelerated low-double-digit growth next.
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U.S. Steel Stock: Betting on EPS Cut and Merger Uncertainty?
American integrated steel producer United States Steel Co. (NYSE: X) lowered its adjusted Q2 EBITDA guidance on June 17, 2024. However, the stock reaction was minimal, as shares continued to chop around in a tight range. Investors are waiting for the Japanese steel producer Nippon Steel's acquisition of U.S. Steel to close, but the deal has been postponed at the request of the United States Department of Justice (DOJ).
The DOJ is reviewing documentation related to the deal to determine whether to let it go through or block it. Judging by the activity in its underlying stock price, the market appears convinced the deal will be blocked. However, the upside to $55 from its current levels of around $36 presents dramatic upside potential if the deal closes in December 2024. This could be a calculated opportunity for long-term investors.
U.S. Steel operates in the basic materials sector and competes with steel producers, including Nucor Co. (NYSE: NUE), Steel Dynamics Inc. (NASDAQ: STLD), and Cleveland-Cliffs Inc. (NYSE: CLF).
Nippon Steel Offers $14.1 Billion to Acquire U.S. Steel in December 2023
On December 18, 2024, U.S. Steel agreed to be acquired by Nippon Steel Corporation (NSC) for $55.00 per share, a 40% premium, in an all-cash deal valued at $14.1 billion. NSC would honor all collective bargaining agreements in place with the United Steelworkers Union, and U.S. Steel would retain the name and headquarters in Pittsburgh, Pennsylvania. This decision was made after U.S. Steel field buyout offers from several parties, including Cleveland-Cliffs.
Cleveland-Cliffs Has Been Stalking U.S. Steel To Merger and Urges
Competing steel producer Cleveland-Cliffs had made several public offers to merge with U.S. Steel and opposed NSC's acquisition. Cleveland-Cliffs made an initial offer for $31.50, then a 50/50 cash and stock deal, and raised the offer to $35.00 per share at the end of July 2023. Cleveland-Cliffs went public about its attempt to acquire U.S. Steel and provided “compelling” reasons for U.S. Steel to accept the deal.
Nippon Steel Delays the U.S. Steel Acquisition Until the End of 2024
At the request of the U.S. DOJ, Nippon Steel voluntarily postponed the closing of the U.S. Steel deal by three months. While U.S. Steel shareholders have approved the deal, it's facing bipartisan pressure, opposed by the Biden administration and former President Donald Trump. The deal was scheduled to close in September 2024 but was pushed to December 2024.
Rolled Steel Prices Have Tumbled 37% in 2024
Meanwhile, rolled steel prices have tumbled by 37% since the deal was announced in December 2023. This has caused all steel producer stocks to sell off sharply, and the underlying stocks of its competitors reflect the dramatic sell-off. Cleveland-Cliffs stock is trading down 27.5% year-to-date (YTD). Nucor shares are down 9.5% YTD. Olympic Steel Inc. (NASDAQ: ZEUS) stock is down 31% YTD.
X Stock is in a Descending Triangle Pattern
The daily candlestick chart for X shows a descending triangle pattern. The descending trendline commenced at the $48.07 peak on March 6, 2024, as it capped bounces to the flat-bottom lower trendline support at $36.16. X is nearing the apex point as a decision needs to be made to either break out through the upper descending trendline or break down through the flat-bottom lower trendline. The daily relative strength index (RSI) is turning back down at the 41-band. Pullback support levels are at $35.60, $32.47, $29.84, and $28.05.
Nucor’s Lowered Guidance Softened the Blow of U.S. Steel’s Guidance
On June 14, 2024, steel producer Nucor cut its guidance for Q2 2024 earnings. The company cited weaker earnings due to mostly lower average selling prices and softer volumes. The EPS guidance was cut by over 50% to $2.20 and $2.30 versus $5.81 in the year-ago period and $3.00 consensus estimates. Ironically, NUE bounced from a gap down to $149.12 to close up to close at $154.79. The market was apparently expecting an even worse guidance cut. This likely softened the blow for U.S. Steel’s Q2 2024 adjusted EBITDA guidance cut.
U.S. Steel Guidance Had No Reaction
On July 17, 2024, U.S. Steel issued in-line guidance for Q2 2024 of EPS 76 cents to 80 cents versus 77 cents consensus analyst estimates. However, they lowered Q2 adjusted EBITDA to $425 million, down from its previous guidance of $425 to $475 million. U.S. Steel stated that the lowered guidance represents stable demand for flat-rolled steel products used domestically despite volatile steel prices. A European steel producer restarted its temporary idled blast furnace to accommodate improving customer demand. Challenging market conditions are negatively affecting the tubular segment's performance.
U.S. Steel analyst ratings and price targets are at MarketBeat.
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GitLab Stock: Pioneering the AI-Powered DevSecOps Platform
Software development platform provider GitLab Inc. (NASDAQ: GTLB) stock is in a slump, trading down 30% year-to-date (YTD) and nearing 52-week lows. While the artificial intelligence (AI) trend is causing AI-related stocks to surge, GitLab stock has clearly been left out. The company has been a pioneer in the development, security, and operations (DevSecOps) platform segment. GitLab has been implementing more AI features to enhance its platform.
GitLab operates in the computer and technology sector, competing with DevOps platform providers, such as Microsoft Co. (NASDAQ: MSFT), Oracle Co. (NYSE: ORCL), and Atlassian Co. (NASDAQ: TEAM).
What is DevOps?
DevOps are software platforms that help enable collaboration and automation processes between software development and IT operations teams. DevOps enables continuous integration and continuous delivery (CI/CD), as well as infrastructure management and automated testing capabilities to enhance and streamline the software development lifecycle. This helps to speed up software development and delivery, improving quality and maintaining accountability. DevOps platforms help to alleviate silos, reduce operational costs and bolster agility and scalability with software development.
GitLab: Evolving into DevSecOps
Security is usually something that's considered after software is developed and operational. However, this is one of the reasons for the proliferation of security breaches. GitLab took an approach that weaves security into the development process, and thus DevSecOps was born. GitLab integrates AI-powered security testing tools throughout the CI/CD pipeline, enabling security practices throughout the entire software development lifecycle. DevSecOps is an evolution of DevOps that makes security an essential cornerstone of the development process.
GTLB Stock Breaks Down From the Rectangle Channel
The daily candlestick chart on GTLB demonstrates what a rectangle channel breakdown looks like. GTLB was trading in a sideways range between the $59.45 upper trendline resistance and $52.04 lower trendline support for nearly 3 months. The breakdown occurred on May 30, 2024, as shares collapsed through the lower trendline support heading into its fiscal Q1 2025 earnings release. Despite the solid quarterly top and bottom line performance, GTLB continued to sell off after rejecting a bounce attempt at $46.96. The daily relative strength index is attempting to bounce again off the oversold 30-band to form a divergence bottom. This pattern occurs when consecutive bounce attempts occur at higher levels. Pullback support levels are at $41.61, $40.19, $37.40, and $34.74.
GitLab Achieves Top and Bottom Line Beats in Fiscal Q1 2025
GitLab reported fiscal Q1 2025 EPS of 3 cents, beating analyst estimates by 7 cents. Consensus estimates called for an EPS loss of 4 cents. Revenues climbed 33.3% YoY to $169.19 million, beating $165.89 million consensus estimates. Operating cash flow was $38.1 million, and non-GAAP adjusted free cash flow was $37.4 million.
The company raised fiscal Q2 2025 EPS of 9 cents to 10 cents, beating 5 cents consensus analyst estimates. Revenues are expected to be between $176 million to $177 million versus $176.75 million. GitLab raised fiscal full year 2025 EPS to 34 cents to 37 cents, up from previous guidance of 19 cents to 23 cents, versus 21 cents consensus estimates. Full-year revenues were raised from $733 million to $737 million, up from previous estimates of $725 million to $731 million versus $731.42 million consensus estimates.
GitLab CEO Cites the AI Difference with Its Platform
GitLab Co-Founder and CEO Sid Sijbrandij commented, “GitLab continues to differentiate our platform with AI-driven software innovations that are streamlining how customers build, test, secure, and deploy software.”
Sijbrandij added, “Our results show that customers see the value of our end-to-end DevSecOps platform, which enables them to leverage AI throughout the software development lifecycle and enhance productivity while creating better and more secure code.”
GitLab Customer Base Expanded in Double-Digits
GitLab saw its customers with over $5,000 in annual recurring revenue (ARR) grow 21% YoY to 8.976. Customers with over $100,000 ARR grew 35% YoY to $1,025. Dollar-based net retention was an impressive 129%. Total remaining performance obligations (RPO) grew 48% YoY to $681.2 million, while calculated Recognized Potential Obligations (RPO), an estimate for future revenue from customer contracts, rose 34% to $436.1 million.
GitLab'sBusiness Highlights in the Quarter
GitLab had many highlights in the quarter. They announced an integration with Google Console, which helps improve developer experience and lowers context switching across GitLab and Google Cloud. The company was awarded the 2024 Google Cloud Technology Partner of the Year in Application Development. Launched GitLab Duo Chat, enabling customers to integrate AI throughout the software development lifecycle using a single natural language chat interface.
The company released GitLab 17, which features an end-to-end AI add-on called GitLab Duo Enterprise to secure AI capabilities across the development cycle. GitLab also launched the AI Transparency Center so customers can understand how it upholds ethics and transparency in its AI-powered features.
GitLab analyst ratings and price targets are at MarketBeat. With a $67.70 consensus price target, GTLB has a 54.49% upside.
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