Profit Margins Make the Difference on Earnings from Lowe’s and Target Reports

Lowe’s and Target report earnings. Visa falls in premarket trading on Amazon announcement. EV makers rally as Lucid passes Ford and General Motors in market cap. Meta, formerly known as Facebook, is staking a lot on the metaverse.

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5 min read
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Key Takeaways

  • Earnings Announcements from Lowe’s and Target Highlight Profit Margin Issues 

  • EV Makers Continue to Rally with Investor Enthusiasm 

  • Meta is Staking Much of Its Future on the Metaverse, So What is It?  

(Wednesday Market Open) Retailers continue to attract attention from investors with more earnings announcements. Before the Wednesday’s open, Lowe’s (LOW) and Target (TGT) both announced better than expected earnings and revenue. However, Lowe’s rose nearly 4% in premarket trading while Target fell 3.5%. Similar performances occurred on Tuesday when Home Depot (HD) rallied 5.7% on better-than-expected earnings, but Walmart (WMT) fell 2.6% despite beating its earnings estimates.

The difference between Lowe’s and Target appears to be in the profit margins. Lowe’s reported expanding margins because it’s able to pass on price increases to consumers and has also benefitted from falling lumber prices. However, Target is getting pinched on its margins and may have to try and pass on more costs on to consumers.

Online retailer Amazon (AMZN) said it would stop accepting Visa cards issued in the U.K. because of the higher fees. Visa (V) 3% lower before the bell on the news but Amazon’s shares were relatively unchanged.  

In EV news, Lucid (LCID) was up 4.65% in premarket trading building on yesterday’s 23.71%. Investors appeared to welcome Lucid’s 2022 production goals. The company’s market cap has now surpassed both General Motors (GM) and Ford (F) despite only delivering a few hundred cars per year. Canoo (GOEV) was also up 17.5% before the bell adding to its Tuesday rally of 23.67%. Canoo hopes to start delivering cars in 2022 on a limited basis. However, Rivian (RIVN) was down about 8% in premarket trading despite rising more than 15% on Tuesday. After Tuesday’s close, Rivian was up more than 70% from its IPO five days ago.

In other market news, Credit Suisse analysts designated Microsoft (MSFT) and Qualcomm (QCOM) as “outperform” on Tuesday. The high rating helped prompt 1% and 7.9% rallies in the stocks respectively. Cloud growth and semiconductor demand are helping to prompt the higher ratings.

Metaverse

Speaking of the cloud and semiconductors, these are two big elements of the metaverse. After Facebook changed its name to Meta (FB) to reflect its commitment to being a part of the metaverse, many investors have asked themselves, “What is the metaverse?”. The term metaverse comes from a 1992 novel by Neal Stephenson called Snow Crash where the people could safely meet in an electronically shared imaginary place. There are many interpretations off what the metaverse would look like, and some people reject any corporation being a part of it. However, it has become the new buzzword that many companies are latching on to.

Popular books, movies, and video games describe or create versions of the metaverse. Ernest Cline’s bestselling book Ready Player One that was later made into a movie by Steven Spielberg, paints a picture where people spend their time in a virtual reality world. This description is often used to describe the metaverse. The company Roblox (RBLX) is one of the first gaming companies to promote a metaverse. It provides a platform that allows users to create content based on games, entertainment, social media, and toys. Roblox has climbed nearly 70% from its IPO in March.

Before Roblox, Activision Blizzard (ATVI) was among the leading publicly traded companies for metaverse-type games, which includes World of Warcraft. However, there are many popular metaverse platforms like Fortnite, which is held privately by Epic Games, and Minecraft, which is owned by Microsoft.

What Meta hopes to do is create its own virtual reality world where people can own, buy, and sell property and products. The company is investing $10 billion into the metaverse. But it doesn’t want to focus on just games. It hopes to build an entire social system.

If this feels a little “out there” and too conceptual, it’s probably because it is. Meta CEO Mark Zuckerberg told investors that you have to experience the metaverse to know what it is. But it isn’t built so you can’t experience it. Investors and even gamers appear to be mixed on the future success of the metaverse. However, it’s a world that Meta is staking much of its future on. 

Consumer Sentiment
CHART OF THE DAY: FEELING IT. Sharp declines in the Michigan Consumer Sentiment (blue) often precedes recessions (gray), but not every decline results in a recession. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

University of Michigan: Whether it’s the metaverse or the economy, sentiment can be an important indicator. Last week’s University of Michigan Consumer Sentiment report dropped to 2011 levels. In the past, falling consumer sentiment has preceded or coincided with recessions, which is why many investors use it as an indicator for the economy and the overall market. However, it isn’t an effective indicator when used by itself because there are many times consumer sentiment has fallen but the economy kept growing. It may be helpful to use other indicators for timing purposes—if you’re into that.

Center of the Universe: If the metaverse is going to happen, it’s going to need a lot of computing power and that means semiconductors. This is why Meta announced a partnership with Advanced Micro Devices (AMD) earlier this month to create a new high-performance and power-efficient processor called EPYC. But there are a lot of companies at the center of the metaverse like semiconductor maker Nvidia (NVDA), which provides processing for servers, databases, cryptocurrency processing, and so forth. However, Nvidia announced earlier this month that its Omniverse platform will help users connect and create in 3D worlds.

Cloudflare (NET), which announced better-than-expected earnings earlier this month, is a web performance and security company that provides content delivery. Basically, it creates a freeway down the backbone of the internet. According to the company’s website, it provides internet requests for about 19% of Fortune 1,000 companies and processes 28 million HTTP requests per second. 

Of course, metaverse explorers need their gear, and Meta is already a player in this space with its Oculus virtual reality headset. Sony (SONY), Microsoft, Alphabet (GOOGL), Apple (AAPL), and Qualcomm also create virtual reality (VR) headsets and devices. In fact, VR has been around long enough that many analysts wonder why it hasn’t seen greater adoption. The lack of VR interest could be a wrench in the metaverse cogs.

Masters of the Metaverse: In order to create a space in the metaverse, many users will use Unity Software (U). Unity announced better-than-expected earnings last week. It helps create 3D models of objects and buildings. It provides cloud engines for users creating their own avatars and spaces. Along with Unity, Matterport (MTTR) also provides 3D modeling, photography, and digitization. It reported better-than-expected earnings but missed on revenue at the beginning of the month.

Showing that the metaverse isn’t just about games, Microsoft announced plans to integrate its Teams messaging platform into its metaverse and will allow users to create 3D avatars.

Whether the metaverse ends up being the next version of the internet or just a place for techies to hang out is yet to be seen. As with any new product, there will be early adopters and excitement, but there will also be winners and losers. So, explore the metaverse with caution. 

Good Trading, 

JJ

@TDAJJKinahan

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Key Takeaways

  • Earnings Announcements from Lowe’s and Target Highlight Profit Margin Issues 

  • EV Makers Continue to Rally with Investor Enthusiasm 

  • Meta is Staking Much of Its Future on the Metaverse, So What is It?  

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