The Dow Jones Industrial Index stood at 32,944 heading into a new trading week.
That’s down 1.99% in the past week and 9.34% on a year-to-date basis.
Meanwhile, the S&P 500 is off 10.9% year to date; the Nasdaq Composite is down 17.6%; and the Russell 2000 index is of 12.1%.
None of the above is good news for investors, who are dealing with myriad market-related problems right now.
“The U.S. economy has received a double-barreled hit from the Russia-Ukraine war,” notes TheStreet.com’s Dan Weil. “First the surge of commodity prices stemming from the conflict, particularly oil prices, will push inflation higher. Already consumer prices have soared 7.9% in the 12 months through February, a 40-year high.”
In addition, higher prices for gasoline and other goods and services could reduce demand, putting the economic recovery at risk. Consequently, it may be difficult for the Federal Reserve to implement enough interest-rate hikes to quell inflation, but not so many as to cause a recession.
“It’s going to be very tricky,” Mark Zandi, chief economist at Moody’s Analytics, told Bloomberg. “The economic plane is coming into the tarmac at a very high rate of speed, buffeted by severe crosswinds from the pandemic, with a lot of fog created by uncertainty due to geopolitical events.”
That’s not all. In a new research note, Goldman Sachs economists see the U.S. economy at significant risk, estimating the chance of recession in the next year at 20% to 35%, in line with models based on the yield curve’s positioning.
“We are downgrading our U.S. GDP forecast to reflect higher oil prices and other drags on growth related to the war in Ukraine,” Goldman economists, led by Jan Hatzius, wrote in a commentary.
“Our commodity strategists’ near-term crude oil and agricultural commodity forecasts imply an effective 0.7% drag on real disposable income that will weigh on spending in 2022.” Goldman strategists see Brent crude hitting $135 per barrel in three to six months, up from $112.61 recently.
Further tightening of financial conditions, weakening consumer sentiment, and slower growth in Europe also will have a negative effect on the economy, Goldman economists said. And it could get even worse if U.S. production gets hit by shortages of key metals.
“The economists lowered their estimates for full-year 2022 economic growth to 1.75% from their previous estimate of 2%,” Weil noted. “For the first quarter, they see growth of just 0.5%, compared to their prior estimate of 1%.”
With downbeat news shrouding the economy, here are the select stocks that TheStreet’s market experts are focused on this week.
Alphabet (GOOGL) $2,640.45. 5-day performance 0.09%.
Anyone pointing to similarities between high-tech stocks in 1999 and 2022 has to factor in one inarguable truth – large technology stocks are in a different place than they were over 20 years ago.
“While similarities exist between the 1999/2000 Dot-com bubble and the mania that transpired over the last two years, one key difference is that the biggest tech companies weren’t bid up to truly nosebleed multiples this time around,” said TheStreet’s Eric Johnsa.
Following recent declines, there really isn’t anything bubble-like about the big-5 tech giants — Alphabet (GOOGL) – Get Alphabet Inc. Class A Report, Amazon.com (AMZN) – Get Amazon.com, Inc. Report, Apple (AAPL) – Get Apple Inc. Report, Meta Platforms (FB) – Get Meta Platforms Inc. Class A Report and Microsoft (MSFT) – Get Microsoft Corporation Report — right now. “Arguably, valuations for the companies range from very cheap to just slightly expensive,” Johnsa added.
Take Alphabet, for example.
“Alphabet respectively trades for 23 and 19 times its 2022 and 2023 GAAP EPS estimates,” Johnsa noted. “And those multiples would be lower if not for the losses produced by Alphabet’s Other Bets and Google Cloud segments, which in 2021 depressed Alphabet’s operating profit by 11%.”
Past that, there’s a lot to like about Alphabet these days.
“Between its incredible profitability, steady growth and near-monopoly position, Google Search remains one of the finest businesses on the planet,” Johnsa said. “YouTube, which also has a near-monopoly position and benefits from video ad spend shifting to online channels, looks pretty good as well.”
Additionally, the Google Cloud Platform (GCP) continues taking market share, thanks in part to its differentiated services, and could be an important bottom-line contributor in a few years. Other businesses, such as Waymo (part of Other Bets), hardware sales and Google Maps ads, also provide optionality.
“Plus, AI/machine learning investments remain a competitive strength for many Alphabet businesses,” Johnsa added. “The company is now aggressively buying back stock and showing more financial discipline.”
Downside risks should also be added into the mix.
“Antitrust risk exists — even moderate changes imposed on Google Search by regulators could potentially have a meaningful impact on its revenue/profits,” Johnsa noted. “Following increases in recent years, there might not be a lot of room left to boost Search or YouTube’s ad load. If Google Search was to lose its giant Safari integration deal with Apple, it would hurt Alphabet’s bottom line and potentially let a rival become more competitive.”
Johnsa’s conclusion? Alphabet remains a blue-chip, and not a particularly expensive one either.
“Though probably not a high-upside play at current levels, the risk/reward doesn’t look bad,” he said.
Apple (AAPL) $157.29. 5-day performance (-) 3.60%.
Johnsa is also shining a light on another technology heavyweight – Apple.
“Apple trades for 27 times its fiscal 2022 (ends in Sep. 2022) GAAP EPS consensus estimate, and 25 times its fiscal 2023 EPS consensus,” he said.
With the help of a giant ecosystem, strong customer loyalty and best-in-class hardware/chip engineering, the iPhone, iPad and Mac all remain share-gainers, as well. “The Apple Watch and AirPods continue seeing healthy growth, as do various services businesses,” Johnsa said. “Rumored future products — most notably foldable phones, AR/VR headsets and self-driving electric cars — provide optionality. Large buybacks continue like clockwork.”
There are some areas of concern with Apple.
“High-end smartphone demand (currently strong) might cool off in late 2022 or 2023 as the 5G upgrade cycle winds down,” Johnsa noted. “The pandemic’s end could weigh on near-term tablet and notebook demand among consumers. App Store transaction fees might eventually come down due to regulatory pressure in the U.S. and elsewhere.”
To Johnsa, Apple’s stock looks somewhat expensive, but not insanely so given the company’s customer loyalty, new-product possibilities and time-tested ability to cross-sell products/services to its steadily-growing user base.
“But I prefer waiting for a better entry point here, given some of the aforementioned 2022/2023 demand risks, but the stock is likely to keep doing well over the long run,” he said.
Rivian (RIVN) – Get Rivian Automotive, Inc. Class A Report $37.94. 5-day performance (-) 19.87%.
The major takeaway is that Rivian posted a $2.5 billion dollar loss, while warning that supply issues could limit 2022 output.
“Rivian shares fell sharply Friday after the upstart EV maker warned that supply chain issues would halve its 2022 production forecasts following a wider-than-expected fourth quarter loss of $2.5 billion,” reported TheStreet’s Martin Baccardax.
Rivian, which is hoping to ramp-up production in the coming years to challenge established rivals such as Tesla (TSLA) – Get Tesla Inc Report in the global EV market, has only produced 2,425 cars since it began production in September of last year, and forecasts it will roll out 25,000 units this year.
“Meanwhile, Tesla, which began production in 2010, made a record 936,000 vehicles last year,” Baccardax noted.
Amazon-backed Rivian will also remain deeply in the red for the whole of 2022, the company said, even as it works to fulfill 83,000 pre-orders from customers in the U.S. and Canada, adding that supply chain challenges will be a ‘fundamental limiting factor’ in its total output.
“Launching and ramping production of three different vehicles within a few months is an incredibly tough challenge. This production ramp requires the simultaneous ramp of our supply chain, hiring and training of our production workforce, equipment bring-up and rapid iteration through production quality loops,” founder and CEO R.J. Scaringe told investors on a conference call late Thursday. “These challenges have been exacerbated given the state of our global supply chain, tight labor market and of course the complications from COVID.”
“The good news is we do not believe any of our supply chain challenges represent long-term systemic issues,” he added. “While our product development and manufacturing teams have been focused on ramping our normal production facility, our real estate and facilities team have been working diligently to ensure we remain well-positioned to capture and drive the accelerated large-scale adoption of sustainable transportation.”
Rivian currently has a market cap of $42 billion and has reported only $1 million in revenues since its IPO. However, Rivian’s value is based on the demand for its technology in the future, rather than its financial results. The company itself doesn’t expect to be profitable in the near future.
“However, one of the main indicators to follow is the number of orders for Rivian’s models,” Bernard Zambonin noted on TheStreet. “The company said that it has about 71,000 pre-orders, adding its R1T pickup and R1S SUV models.”
Just as important will be the production outlook. Last quarter, the company reported that its 2021 production target would be a few hundred below the expected 1,200 vehicles. In early January of this year, Rivian reported that it had sold 1,015 vehicles in 2021, of which 920 have been delivered.
In February, the company announced that it had been making good progress toward achieving its plans to expand production at its Normal, Illinois, factory from 150,000 to 200,000 vehicles per year. “However, supply-chain issues — due mainly to chip shortages — have been slowing production,” Zambonin added.
According to Zambonin, momentum is not ideal for tech and growth stocks like Rivian.
“High inflation is a fierce enemy of high multiple stocks, and the current geopolitical situation is causing an exponential rise in commodities — especially oil,” he said. “That may make inflationary rates worse for the next few quarters.”
A long-term investment in Rivian is perhaps the best approach right now, Zambonin said.
“The company is very well positioned in the EV market with a solid ecosystem focused on both commercial and consumer models,” he noted. “And its short- to medium-term uncertainty should be due to macro jitters, rather than the demand for its technology.”