Ticker Reports for August 31st
Polestar Lives to Fight Another Day After Q2 Earnings
Polestar Automotive (NASDAQ: PSNY) is an electric vehicle company that has seen a shock to its share price over the past 52 weeks. Prior to its recent earnings release, shares were down 70%. Since going public in June 2022, shares have gone straight down, losing 91% of their value.
The NASDAQ issued a warning that it may delist the shares if they don't turn things around soon. It needs to hold its stock price above $1 for at least 10 business days before Jan. 2, 2025, to prevent this possibility.
Let’s examine the company’s operations and trends in its financials and cover some relevant news about the firm. We’ll look at its Aug. 29 earnings report and consider how the company might pull itself out of its hole.
Polestar Has Floundered in Recent Years, and Tariffs Won’t Help
Polestar is a luxury electric car company, first established by Volvo Cars (OTCMKTS: VLVLY) and the Chinese Geely Group (OTCMKTS: GELYY) conglomerate. Polestar has since spun off as its own entity, but the firms still hold large stakes in the business. The company operates as one reportable segment but breaks down its revenue by type and geography.
In 2023, vehicle sales made up 98% of the firm’s total revenue. Items like software sales and vehicle leasing made up very small portions of revenue. European countries dominate sales geographically. However, the United States is the second largest revenue source by country, behind the United Kingdom.
Polestar has been moving in the wrong direction in terms of revenues and profitability. As of Q1 2024, the last twelve months' revenues were down nearly 15%, the worst reading the company has ever posted on that metric. Revenues for Q1 were down 36% from a year ago. The company has also lost over $1.4 billion over that time.
Gross profit margin has turned negative, an especially concerning sign. The average selling price of one of Polestar’s cars was around $48,000 last quarter. The company’s -9% gross margin means that it spent $52,600 on just the labor and materials to manufacture that vehicle. So, it lost $4,600 on every car it sold, not including things like paying its sales team or research and development.
And it’s not like Polestar is just the victim of a trend in the electric vehicle industry. Nearly every other electric automaker trading in the United States saw revenues grow last quarter. Even traditionally gas-powered car makers like Ford (NYSE: F) and Toyota (NYSE: TM) saw their EV sales spike by 86% last quarter.
To add insult to injury, the United States, the EU, and Canada have all announced tariffs on electric vehicles made in China, like Polestar’s. The United States and Canada will now add tariffs of 100% on these cars, effectively doubling their price. The EU will impose a 20% tariff on Polestar. This would seemingly make Polestar's already expensive cars utterly uncompetitive in the U.S. and Canadian markets.
Q2 Earnings Provide Some Respite for Polestar
Shares rose 15% after Polestar’s Q2 earnings report to above $1. The company saw significant profitability improvement. It beat estimates on its operating loss, which came in at $242 million, compared to $296 million expected. However, revenues fell 17% and were $67 million lower than expected. The most significant improvement was in its gross margin, which improved to -0.7% from -9% last quarter. This is good to see, but sustained improvement is key to having confidence in the company. Its new products might just be what it needs.
Can New SUVs Save Polestar?
A saving grace for Polestar could be its new vehicles. The company began production of the Polestar 3 in South Carolina in August. It plans to begin producing the Polestar 4 in mid-2025 in South Korea. These manufacturing locations will allow the vehicles to avoid those arduous tariffs.
Polestar's range of vehicles also includes SUVs, which typically have higher margins than sedans like the Polestar 2, the firm’s most popular vehicle. The introduction of these new products has been a key part of the company’s long-term strategy for years now.
With the first Polestar 3 delivered last June, the company’s results next quarter should be significant. They will give the first true look at how successful its new vehicle is and whether its sales are actually improving margins.
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Why NVIDIA's Earnings Point to a Bullish Future for Pure Storage
Pure Storage Inc. (NYSE: PSTG) delivered earnings on the same day as NVIDIA Corp. (NASDAQ: NVDA). While the company’s report didn’t garner enough interest for a watch party like that of NVIDIA, there are a couple of points from NVIDIA’s earnings report that can apply to your outlook for Pure Storage.
Pure Storage provides data storage and management technologies, products, and services to a global customer base. Data centers are needed for the growth of artificial intelligence (AI), which is why investors have driven the PSTG stock price up 67.6% in 2024.
At first glance, the report's headline numbers were fine on the top and bottom lines. Revenue of $763.77 million was above estimates and 11% higher year-over-year (YoY). The bottom line was even better, with non-GAAP earnings per share (EPS) of 44 cents coming in 29% higher YoY. The company’s non-GAAP gross margin was flat at 72.8%.
Pure Storage's Earnings Report: Good Is Not the Same as Great
However, like NVIDIA and other technology stocks, Pure Storage stock dropped sharply after the report. As of midday trading the day after earnings, the stock is down 14.5%.
The company reiterated its guidance on the top and bottom lines. However, Pure Storage lowered its guidance for total contract value (TCV) sales for two of its subscription service offerings by $100 million from $600 million to $500 million. That lowers YoY growth estimates in that category from 50% to 25%.
That’s not the kind of guidance that a company can get away with when it has forward price-to-earnings (P/E) of 127x. But once again, if you look at the NVIDIA earnings call, you may have more reason to be bullish on Pure Storage.
Pure Storage May Be Setting the Bar Low
One reason NVDA stock is selling off is the company’s future YoY comparisons, which will be more difficult. Pure Storage has faced difficult comparisons with mixed results in the past four quarters.
One way around that is to lower expectations. This wouldn’t be without merit. Heading into earnings season, a major concern weighing on investors was the extent of CAPEX spending on AI from companies like data centers that need to buy NVIDIA products.
An accurate, albeit simplistic, way to look at this is lower NVIDIA demand would be bearish for Pure Storage. However, that wasn’t what investors heard from NVIDIA chief executive officer Jensen Huang, who made his case for why data centers and hyperscalers will need to continue spending on AI.
The takeaway is that data centers are only just beginning to transition to the accelerated processing required for AI and machine learning (ML). That’s not only bullish for NVIDIA, but for companies like Pure Storage and its Purity storage platform.
On the earnings call, Pure Storage chief executive officer (CEO) Charles Giancarlo highlighted the growing need for GPUs along with specialized storage for enterprise customers while mentioning that the company’s customer base includes approximately 60% of the Fortune 500, including over 100 AI customers. Notably, however, the company has yet to secure its first hyperscaler client. But it does expect to do so by the end of the calendar year.
“Pure is seeing early success in all three of these AI-based opportunities, and we can address them all with our unified Purity platform...The Pure Storage platform strategy provides a unified and integrated data storage and delivery system across customers' various data environments. It facilitates seamless management and data access across data centers and the cloud, with simplified universal policies and management.”
Analysts Are Lowering Their Price Targets
Purely based on its relative strength indicator (RSI), PSTG stock looks oversold. As of this writing, it trades at $50.88 per share, which puts it near a line of support it confirmed in May 2024.
Taking a longer-term view, your decision to buy Pure Storage stock may be influenced by the analysts’ outlook. Since the company reported earnings, the Pure Storage analyst forecasts on MarketBeat show eight analysts lowering their price targets, with several of those targets coming in below the consensus price of $66.40. UBS Group is particularly bearish, with a price target of $45, down from $47.
However, none of those analysts have changed their rating on the stock, which retains its consensus Moderate Buy rating.
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Applied Digital's Stock Recovery: Analysts Forecast Strong Upside
Applied Digital (NASDAQ: APLD) is a high-performance computing (HPC) stock that investors should be aware of. Since going public in April 2022, the company has been a horrid investment. Shares are down 56% since then.
However, the average price target from Wall Street analysts who updated their forecasts after the firm’s Aug. 28 earnings release shows a bullish sentiment. Based on the company’s current stock price, the average updated price target implies an upside of 110%.
Let's break down what this technology company does and how the shares might perform going forward. We’ll do this by diving into the history of the firm and its current annual report. I’ll also review the company’s recent earnings report.
Applied Digital’s Strategic Shift: Crypto to AI
The company designs, builds, and operates data centers. Its business is based on hosting, where it leases out processing capacity in its data centers. Customers buy these hosting resources so that they can take advantage of high-performance computing without having to build their own data centers.
Applied Digital became well-known for its place within the cryptocurrency mining market. In fact, the company initially went public under the name Applied Blockchain.
Blockchain forms the basis of cryptocurrencies. When people send each other cryptocurrency, transactions get grouped together in "blocks." To verify that these transactions are legitimate, “miners” must compete to solve a complex mathematical problem. This difficult requirement ensures that the record of transactions cannot be easily tampered with. The miner who solves the problem is rewarded with cryptocurrency as compensation for their efforts.
Mining can be very profitable if cryptocurrencies are worth a lot of money. However, because the mathematical problems are so complex, they require HPC to solve. This is where Applied Blockchain stepped in.
However, by November 2022, the company changed its name to Applied Digital. This was due to horrible performance and the need to shift away from its cryptocurrency focus. Shares were down 76% since the IPO, driven largely by declining cryptocurrency prices. Bitcoin was down 58% over the same period.
Now, the firm offers a more diverse range of HPC hosting services for AI tasks like natural language processing and machine learning. HPC can be accessed through the cloud or through leasing physical processing space in the firm’s data centers. It also still offers hosting services for crypto miners like Marathon Digital (NASDAQ: MARA).
Energy Costs Plague Margins in Fiscal Q4
In the past quarter, revenue saw a large increase, but so did losses. This caused the company to beat analysts' estimates on revenue and fall short of estimates on earnings. It posted an adjusted loss of $0.36 per share, down from no earnings a year ago and a 12-cent larger loss than the previous quarter. Analysts expected a loss of $0.22 per share.
Revenue was $47.3 million, an increase of nearly 100% from a year ago but essentially unchanged from the prior quarter. Analysts expected revenue of $39.1 million.
One item in the earnings report that really stands out is the company’s gross margin, which was negative for the second straight quarter. The prior quarter marked the first time the gross margin was negative in the company’s history.
It attributed this to higher energy costs used to generate its hosting revenues. Depreciation, amortization, and personnel costs also played a part. This means that the cost of the electricity to run the servers was close to, if not higher than, the amount of revenue that running the servers actually brought in. This is not a good sign.
On the positive side, the company has executed a letter of intent (LOI) agreement with a U.S. hyperscaler customer to provide 400 MW of capacity for its cloud business. However, this wasn’t new information and thus didn’t help the share price. It’s important to note that LOIs are generally non-binding, meaning this customer could easily back out of the deal. Shares fell 10% in after-hours trading.
Uncertainty Around Energy Prices Is Worrisome
Applied Digital's currently negative gross margin may be temporary, due to unusually high electricity prices in regions where its data centers are located. However, it’s difficult to parse out that claim with available data. The company didn’t provide any information on whether it expects lower energy prices going forward.
Even if temporary, the fact that margins are low enough that this is even an issue is unsettling. It’s hard to see shares going on the upswing when the company is unprofitable before you’ve even looked halfway down its income statement.
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