Ticker Reports for October 24th
Why Meta's Pre-Earnings Dip Could Be A Golden Entry Opportunity
Meta Platforms Inc (NASDAQ: META) has been having a good year. Its ongoing rally, which kicked off around this time in 2022, is continuing to go from strength to strength and analysts are calling for even more gains ahead in the coming weeks.
With an eye-watering market cap of $1.4 trillion, the Silicon Valley giant remains one of the most dominant forces in the tech industry and one of its most closely watched stocks. There's a good reason for this: Meta shares have gained more than 500% in value over the past 2 years. Much of this has been thanks to consistently strong earnings, resilient fundamentals, and rapid adoption of its advertising and AI technologies.
Even while experiencing several corrections this year, each dip has seen the stock being rapidly bought up, pointing to sustained investor demand. Indeed, earlier this month saw, Meta shares hit yet another record high.
As we round the corner into the last few weeks of the year, investors should be excited about Meta's potential. Let's take a look.
Fundamental Performance
To start with, it's worth noting Meta's earnings performance has been the bedrock of the current rally. They've established a strong track record of consistently beating earnings expectations, while delivering year-on-year revenue growth figures north of 20%.
This makes next week's earnings report all the more exciting, with the potential for Meta to set a new quarterly record revenue print that could top last year's high of $40 billion. Expectations are high for a large upside surprise as the company has been leveraging its scale and focus on AI in recent months.
Bullish Analyst Upgrades
Backing up this fundamental momentum is the fact that analysts are overwhelmingly bullish on Meta's outlook. Just this week, the team over at Jefferies reiterated its Buy rating, building on similarly bullish stances from the likes of TD Cowen, Mizuho, and Cantor Fitzgerald earlier this month. Jefferies, in their note to clients, set a new price target of $675 on Meta stock, which points to a targeted upside of nearly 20% from current levels.
It's almost impossible to ignore the sheet weight of bullish updates from these teams that suggest Meta's growth story remains very much intact. Every Buy rating this month has come with a price target north of $600, reinforcing the belief that the stock has plenty of room to run. As we head into next week's earnings, this momentum is fueling high expectations for continued growth, especially in the context of a broader stock market that's also trading near record highs.
Potential Concerns
However, it's not all smooth sailing for Meta. In a recent update, both Scotiabank and BMO Capital Markets reiterated their Neutral ratings on the stock, highlighting some caution for investors. They both cited regulatory pressures, increased competitions and high valuation concerns as reasons for their more cautious outlooks.
The stock has also slipped around 6% from its recent highs, which could suggest some investors are taking profit and reducing their exposure ahead of next week's earnings report. It will be interesting to see how shares trade through the end of the week and into Wednesday's release.
It has to be noted though that the number of bullish analyst updates continue to easily outweigh the more cautious ones, and the overall rally remains intact.
Getting Involved
For those of us on the sidelines, the technical setup is another strong argument for considering getting involved in the near-term. The Relative Strength Index is a technical indicator that measures whether a stock is overbought or oversold, with readings above 70 suggesting a stock is overbought, and readings below 30 suggesting the opposite. With an RSI of just 46 right now, Meta's stock has a ton to move higher before it's even close to being called overbought.
If you're a believer in Meta's long-term potential and like the look of some of those analyst price targets, it's hard not to view this pre-earnings dip as an almost perfect entry opportunity. At the very least, it's a stock worth keeping high on your watchlist.
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Spirit Airlines Stock Nearly Doubled: Are Clear Skies Ahead?
Transportation stocks typically indicate the economy's current state, while airline stocks gauge the consumer cycle's direction instead. Recently, shares of Spirit Airlines Inc. (NYSE: SAVE) have nearly doubled after the company struck a new deal to help keep its debt burden flexible ahead of bond maturities in 2025.
The stock market was excited about giving the airline more breathing room. Still, is that pivot in the company's capital structure enough to keep the momentum going and give Spirit Airlines clear skies ahead? While the answer is not that clear, there is one trend and fact investors can lean on moving forward.
The risk-to-reward scale is definitely favoring the bulls and not the bears, especially considering where Spirit Airline's market capitalization sits today compared to peers like Delta Air Lines Inc. (NYSE: DAL) and even regional-focused carrier Southwest Airlines Co. (NYSE: LUV). More than that, the price today doesn't offer much upside for short sellers compared to the massive spike it can have for bulls if they land on the right side of the trade; here's how that could play out.
Could Spirit Airlines Turn into a Pain Trade for the Markets?
A pain trade occurs when too many investors are aligned on one single view, whether that’s bullish or bearish. Then, the market takes a sharp turn in the opposite direction, sending these heavy holders running for the exits all at once. When this happens, retail investors can exploit very sharp moves as long as they land on the right side.
Breaking down the pain trade in Spirit Airlines requires investors to consider a few drivers, specifically sentiment. From Wall Street, all analysts seem to be going for a bearish narrative in Spirit Airlines stock as they shoot for a consensus price target of as low as $2.5 a share.
Today’s perceived valuations by Wall Street analysts suggest that Spirit Airlines stock could see a 10% decline from where it trades at today, giving up a significant portion of its recent gains. More recently, those at Susquehanna placed their targets at an even lower $1.5 a share.
Then there’s the short interest. Short sellers increased their positions by 13% over the past month alone, increasing the risk of a potential pain trade in Spirit Airlines on a big enough catalyst. To begin measuring just how big the upside could be on this pain trade pivot, investors need to put on their banker hats.
Spirit Airlines's market capitalization is only $310 million on a comparable basis, significantly lower than the airline industry’s average size of $20.1 billion. This size discrepancy is also seen in the stock’s price-to-book (P/B) discount, as it trades at only 0.3x compared to the industry’s average of 2.2x.
Investors are facing a near 90% discount to the industry, which is one thing to lean on when considering the next giant time bomb waiting to go off for Spirit Airlines stock.
A New Buyer for Spirit Airlines: What Could the Potential Bid Be?
Surprisingly, Spirit Airlines has a new potential buyer coming from one of its regional carrier peers. Frontier Group Holdings Inc. (NASDAQ: ULCC) is now reportedly in talks with Spirit Airlines to explore a merger, and the buy price will be of the utmost importance for investors considering this pain trade today.
There isn't any news specific to price ranges regarding Frontier's offer. Still, there are a few pointers investors can keep in mind when evaluating its reality. First of all, the debt restructure that just took place, that single pivot, adds some value and quality in the form of more flexible cash flows.
Any severe buyer would consider that change. Still, there's also a discount on book value at Spirit Airlines. Were this a software or technology stock, this book value wouldn't matter much because it would mainly consist of intangibles and brand names.
For airline stocks, the book value is represented by tangible goods and agreements like aircraft and flight path rights. This is why most of the industry trades at higher P/B multiples. Frontier Group trades at 3.1x P/B, so investors could consider that Spirit Airlines' P/B could be at least 0.75x to offer Frontier an attractive buy deal.
Assuming this is true, and by all logical reason, it should be, Spirit Airlines stock could rise by at least threefold, considering the low P/B multiple today. This is not too far from reality, as bold as it sounds, considering Spirit Airlines stock trades at only 16% of its 52-week high price of $16.6 a share when the P/B was roughly 1.2x.
Few in the market agree with this bullish view, and that's where investors can gain an edge in what could turn into a pain trade: a threefold return on Spirit Airlines stock.
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Tesla Stock: Buy the Dips, Sell the Rips
Tesla (NASDAQ: TSLA) is a good company, but that doesn’t mean its stock price will have a significant rally anytime soon. The market for Tesla is valued in many different ways for many reasons, including its status as a vehicle OEM, an EV pure-play, a tech innovator, its energy business, AI, and the Elon Musk factor, to name just a few. The takeaway is that this market has support but also resistance to higher prices that will likely keep it range-bound for the foreseeable future. In this regard, investors and traders may want to target the range low for entry points and be prepared to sell when the price reverts to the top of the range.
Tesla Pops After Q3 Results Are Released, but the Upside is Limited
Tesla had a good quarter, but each positive is offset by a negative, likely limiting its upside potential in 2024. Revenue is up compared to last year, growing 7.8% to $25.18 billion, but it fell short of the consensus as weakness in the core business offsets strengths in others. The growth in Q3 is good and sustains solid cash flow but is slower than the 11% industry pace in 2023 due to increased competition, lower pricing, and loss of market share. Those headwinds are only expected to strengthen over time.
Segmentally, auto sales grew only 2%, accounting for 84% of the revenue. Strength was seen in the energy and services segments, up 50% and 30%, respectively, but this was insufficient to offset the weakness in the core business.
The margin news is good, and that is why the market popped after the release. The company widened the margin at all levels, driving leveraged growth in earnings, cash flow, and free cash flow. The gross margin expanded by 200 basis points, compounded by reduced cost per vehicle, lower operating expenses, leverage in the higher-margin segments, and tax-credit sales. The net result is a 10.8% operating margin, up nearly 400 basis points YOY, adjusted diluted earnings growth of 9%, and a 220% gain in free cash flow. The problem is sustainability, which is questionable given the outlook for lower-price models to sustain production and delivery growth.
Tesla’s Future is a Long Way Off
Among the details grabbing the market’s attention is news about the future, which sustains hope for accelerated revenue growth and profitability, including details about the lower-cost models and cybercab. The company reiterated an expectation for the lower-price model to come out in the first half of 2025 and for the cybercab to ramp in 2026.
However, few specific details were given about the lower-priced Model 2, and the safety of FSD technology isn’t up to par, which is expected to exceed human safety capability by mid-year 2025. The critical takeaway is that a $25,000 model is unlikely; Musk says the Robotaxi will cost that much, and having a competing vehicle isn’t in the plan. The low-price model won’t be a significant growth driver because the company is focused on autonomous; that won’t be viable for at least another year, probably longer. The core business is expected to boom again, but that may not happen until 2026 or later when the cybercab dream becomes a reality.
Optimistic Analysts Lift Price Targets for Tesla: Upside is Limited
The analysts' response to Tesla’s results and outlook is optimistically cautious. No analysts upgraded the stock, but most increased their price targets, lifting the consensus target by nearly 4% overnight. However, the sentiment remains pegged firmly at Hold, with 45% of ratings at Hold or equivalent levels, 22% rating at Sell, and the remainder at Buy. The increase in price target may sustain an upward lift in the market but has already been outrun by market action and remains within the 12-month range and below critical resistance points, a potential headwind for price action.
Tesla stock popped over 15% in premarket action and may continue to rise. However, the move remains below the top of the established range where it will likely remain. The critical resistance point is near $260 and might be tested by the market soon. A sustained rally may form if the market can move above it and sustain the move. The more likely scenario is that the market will provide another show of resistance that keeps it within its range as the debate on how to value Tesla continues. Trading above 60X its earnings, it is a highly-valued company no matter the comparison.
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