Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

Although less eventful than recent trading weeks, U.S. equity markets continued to express selling pressures as investors trade around macro events and domestic economic data releases. 

September began in true to form as the month tends to be the poorest performing for stocks dating back to the WW2 era. According to Sam Stovall, CIS at CFRA, “...the best September return places it in the bottom quarter of all months, while its deepest one-month decline was among the four worst.” In the first two trading days of September, the S&P 500 index declined 32 bps from the opening trade on Thursday to close on Friday.  

COVID-19 lockdowns in Chengdu, China offered a scare to industries and companies with high exposure to the nation’s manufacturing economy. On Thursday morning, risk assets faced pressure after China put the megacity of Chengu under lockdown. The lockdown affected 21 million residents and official guidelines require them to shelter-in-place for at least four days, sending only one person per day per household out to shop for necessities. The city is where companies like Apple, Foxconn and Intel have major operations.

Turning to domestic economic data releases, employment data offered a case for a stronger jobs market than expected. While the unemployment rate rose 0.20% from 3.5% to 3.7%, the change in nonfarm payrolls registered at 315,000 which was 17,000 more than economists expected. The data from the labor force participation rate showed that 0.20% more individuals joined the labor force month-over-month, which adds (from our perspective) to the thesis for a continued return towards pre-pandemic normalcy. That means that the Fed could continue forward with its abnormal rate hike decision this month, implying that equity markets may still face further liquidity pressure.

MAJOR INDICES - PERFORMANCE THIS WEEK

S&P 500 - Finished down, -2.64%

Nasdaq - Finished down, -3.22%

DJIA - Finished down, -2.43%

Thank you Blue Room Analyst IAN CARTER

ANALYST TAKEAWAYS

We have only recently begun covering the electric vehicle charging industry, but see an opportunity to capitalize on the EV trends that we believe will unfold over the next 3-5 years. The primary catalyst being the Infrastructure Bill which allocates $7.5 billion in direct government investment into the electric vehicle charging market, particularly on the commercial side. 

The company is currently targeting cash flow positive by CY24, which may be accelerated by Federal initiatives, which the company does not include in its forward guidance. 

The quarter came mostly inline with market expectations, and nearly doubled its topline revenue which indicates increased adoption of the EV charging market. Network charging stations installed have grown 69% y/y and overall charging revenue has surged 105%. Near-term headwinds due to product procurement volatility contributed to GM headwinds behind expectations, but the full year outlook remains strong. 

Earnings Call Highlights

• 2Q earnings include a pre-tax loss from special items of approximately $435 million

  • $198 million related to mark-to-market adjustment for pension liabilities

  • $237 million from impact of amortization of intangible assets related to TracFone and other acquisitions

• “As I said in our 1Q earnings call and reiterated since, we are seeing weaker consumer wireless volumes”

• “The inflationary environment is clearly impacting consumer behavior. And we also saw intensified competition for consumer attention”

• “We are updating our financial guidance by lowering our expectation for Service and Other Revenue, Adjusted EBITDA and Adjusted Earnings per Share”

• “We launched our Welcome Unlimited plan for consumer wireless that will meet the needs of budget-conscious consumers without providing device subsidies.”

• “In addition to these new plans, we took pricing actions in both of our business units to mitigate inflationary pressures.”

• “We announced an over $400 million project with FBI to help the Bureau meet its global bandwidth demands”

• “This month we added a multiyear program to enhance our efficiency measures and actuate the cost benefits delivered. This will ensure our balance sheet remains strong for the market ahead.”

• “We reached a tentative deal with our unions to extent our collective bargaining agreement. This extension will provide us with labor stability focused on our customers and opportunities to grow our business over the next four years.”

• “Regarding inflation, we are seeing the pressures within our cost structure, most notably on labor costs, utilities and transportation and logistics expenses.”

• “We expect these pressures to accelerate in the second half of the year and have an impact on profitability and earnings”

• “47% of our customers have a 5G phone. And by year-end, we would probably be near at least 60%”

• “I do expect to see a bubble in…a little bit of a bubble in churn in the third quarter here because of some customer reaction to the pricing actions we have taken”

• When asked “have you seen any stretching out of DSOs or bad debt expense [the way AT&T has]?”: “We haven’t seen any noticeable change in the payment patterns from customers, continues to be very good, very much in line with what we were seeing pre-COVID, in fact, slightly better than that time period.”

BEST BUY SECOND QUARTER FY2023 EARNINGS PRESS RELEASE

• Comparable Sales Deliclined 12.1% Compared to 19.6% Growth in Q2 FY22

• GAAP Diluted EPS of $1.35

• Non-GAAP Diluted EPS of $1.54

FY23 FINANCIAL GUIDANCE

• FY23 planning assumptions for comp sales decline in a range around 11.0%

• non-GAAP operating income rate of approx. 4.0%

3Q23 FINANCIAL GUIDANCE

• Comp sales decline slightly more than 12.1% decline in second quarter

• non-GAAP y/y operating income rate in Q3 FY23 will be similar to or slightly more than Q2 FY23 y/y results

Europe was on edge this week as Russia shut-off the Nord Stream pipeline on Wednesday in its continued effort to exert as much pressure as possible on European support for Ukraine. Gazprom notified Germany of the unexpected shut-off project last week under the guise of “preventative work…at the gas compressor unit.” The pipeline was expected to resume operations early Saturday morning, but Russia announced on Friday that it will suspend flows to Germany until further notice citing a technical problem. Russia has not given any guidance as to the duration of the shut off.

The pipeline was operating at 20% of full capacity and was expected to resume gas flows at that clip. As I layed out in my most recent article, Russia will begin to greatly damage their own natural gas infrastructure by keeping the pipeline shut off as their own storage tanks are nearing full capacity – meaning they will have to shutter wells knowing that it will be extremely difficult to turn them back on. 

ISSAQUAH, Wash., Aug. 31, 2022 (GLOBE NEWSWIRE) -- Costco Wholesale Corporation (“Costco” or the “Company”) (Nasdaq: COST) today reported net sales of $17.55 billion for the retail month of August, the four weeks ended August 28, 2022, an increase of 11.4 percent from $15.75 billion last year.

For the 16-week fourth quarter ended August 28, 2022, the Company reported net sales of $70.8 billion, an increase of 15.3 percent from $61.4 billion during the similar period last year.

For the forty-eight weeks ended July 31,2022, the Company reported net sales of $205.19 billion, an increase of 16.4% from $176.30 billion during the similar period last year.

BLUE ROOM ANALYST TAKEAWAYS

Revenue was in-line with expectations this quarter, despite the Shanghai lockdown and the 14nm manufacturing shortage. Profitability came short of our expectations on a non-GAAP basis, but near-term vol. in earnings is to be expected during a major business transition. The lack of updates in design win activity over the quarter was a concern for us going into the call, but there were a number of wins announced during the call that satisfied our concerns. We are pleased by the design win activity in the CV segment which highlights increased adoption [automotive and IoT]. Ambarella has now shipped over 10 million SoCs, with 20.0% of those being shipped into automotive. The increased mix of CVflow SoC sales has now driven the blended ASP above $10, which is another positive for the CV growth catalyst theory in our mind.

Customers continue to face kitting issues, but as that begins to abate, year-end inventories will come down which will slow Amabrella’s time to recognize revenue. Primary pain-points come from microcontrollers and Wi-Fi chips, among others. There remains a large customer problem with WT Microelectronics (a Taiwanese distributor) comprising about 59.0% of TTM revenues as of last quarter. This has become a concern for us due to geopolitical exposure risks with the increased frequency of military displays by the PLA of China near Taiwanese airspace. Given the size of the company and its reliance on technology in a nascent market, geopolitical risk could have a significant impact on sales potential. We will also need to take into account other China-risk related factors in the semiconductor industry broadly.

Overall, the long term themes are still strong and the CV adoption trends are pleasantly surprising our expectations, but the concern is scalability, timing and market size. We believe that the company is worth taking the bet on, but it is wise to take into account the risk factors that accompany a smaller company entering a growing market against titanous competition. ©2022

The semiconductor industry continued to shed market value with the SOXX ETF declining another -6.78% capping another brutal month. In August the ETF tracking some of the most notable names in the semiconductor industry fell -9.58% and is now down -33.16%.

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