Making sense of the markets this week: November 6, 2022

Don’t call Shopify a comeback—it’s been here for years

The Federal Reserve in the U.S. raised interest rates on November 2 by 0.75% to a target range of 3.75% to 4%— the highest level since January 2008. We’re as tired of writing about interest rates as you probably are of reading about them. Long story short: The interest rate increase was exactly what the Fed forecasted, and the markets appeared to take it in stride. So, we’re looking at the news in Canada. As last week’s tech earnings bonanza wrapped up, former software darling Shopify (SHOP/TSX) announced surprising earnings news and bucked the negative trend lines seen by its American tech counterparts.  

Shares of Shopify saw a massive 17% jump after earnings results came in, because losses weren’t as bad as expected. With losses of only USD$0.02 per share—with analyst predictions of a USD$0.07 per share loss—investors breathed a sigh of relief. Given that revenue also slightly beat expectations and was up 22% on a year-over-year basis, it appears that the markets had been pricing in a worst-case scenario. And they were presently surprised. 

It’s worth noting that Shopify CEO and founder Tobias Lutke seems happy enough with the company’s long-term trajectory. He was willing to buy CAD$10 million of company stock on Monday.

Given that SHOP is working hard to integrate its CAD$2.1 billion acquisition of Deliverr in order to boost its ground game, it wasn’t a surprise to hear company president Harley Finkelstein refer to 2022 as an “investment year”.  

The share price spike comes off the heels of an 80% fall from 2021 highs. Investors appeared to be reassured by Finkelstein’s statement: “This is a company that ultimately wants to be profitable.” 

I mean… better than a company that doesn’t want to be profitable. That’s why CEOs get paid the big bucks, I suppose.

In any case, it appears investors see a smoother path to profitability for the former growth stock than they did a week ago. Globe and Mail columnist David Berman put forward a very plausible case that SHOP’s drastic share price move—versus more profitable American tech heavyweights like Alphabet and Microsoft—was likely due to peak pessimism about the Canadian software company already having set in.

Canada’s other tech companies also announced earnings this week (to much less fanfare):

Open Text (OTEX/TSX): Earnings per share of $0.77 (versus $0.76 predicted) and revenues of $852.0 million (versus $852.59 million predicted).

Lightspeed (LSPD/TSX): Earnings per share of -$0.05 (versus -$0.11 predicted) and revenues of $183.7 million (versus $182.93 million predicted).

Shopify doesn’t have a Blackberry-esque fate written in stone. This company isn’t dead, and it is actively trying to diversify in order to offer maximum value to customers and investors. The founder still believes in the company and is helming the ship. Shopify clearly didn’t deserve its brief status as Canada’s largest company by market cap, as the shift to online shopping was not as drastic as some thought it might be. That said, it might still turn out to be a very profitable company in the long term. It’s a classic high-risk high-reward play.  

We recently wrote about Canada’s tech stocks over on MillionDollarJourney.com.

Canada’s oil profits pour in

While Canada’s stock market certainly has not been immune to the widespread drawdowns we’re seeing around the world this year, our large natural resource companies have cushioned the blow to some degree. Here’s a look at how three of Canada’s biggest extractors did this quarter. (All figures in this section in Canadian dollars unless otherwise indicated.)

Canadian Natural Resources (CNQ/TSX): Earnings per share of $3.09 (versus $2.88 predicted) and revenues of $11.04 billion (versus $10.58 billion predicted).

Suncor (SU/TSX): Earnings per share of $1.88 (versus $1.83 predicted) and revenues of $15.06 billion (versus $11.7 billion predicted).

Nutrien (NTR/TSX): Earnings per share of USD$2.51 (versus USD$3.95 predicted) and revenues of USD$7.98 billion (versus $8.7 billion USD predicted). 

Shareholders liked what Canadian Natural Resources had to say the most, as the company announced it was raising its dividend by 13%, making it a 45% increase overall this year. With the stock up a whopping 50% this year, it looks like investors are really digging the commitment to passing profits on immediately.

Suncor decided to take a different path than their oil sands brethren, CNQ. Rather than commit to passing all of their oil profits on to shareholders, management completed a major acquisition of Teck Resource’s oil sands properties. With rumored buyouts of CNOOC and Sinopec’s oil sands assets, it is clearly doubling down on their status as bitumen bulls for the long term. Shareholders appear to respond lukewarmly to the acquisition, and it remains to be seen if the commitment to oil sands production will pay off down the road.

By far the biggest surprise for me personally this earnings season was Nutrien. While the company forecasted that potash demand was edging downward, the market was shocked by its massive earnings miss, and punished the company with a 14% hit to its shareprice on Thursday. That said, the stock is still up over 7% year-to-date and 17% over the last 12 months. 

Technical support issues for U.S. tech shares

U.S. tech stocks continue to see significant volatility, even in the face of solid earnings results. These high-multiple stocks just continue to come back down to Earth, as it looks like higher interest rates might be with us for a while.

Here’s a look at this week’s earnings news. (All figures in this section are in U.S. currency.) 

Airbnb (ABNB/NASDAQ): Earnings per share of $1.79 (versus $1.44 predicted) and revenues of $2.88 billion (versus $2.84 billion predicted).

Uber (UBER/NYSE): Loss per share of $0.61 (versus a loss of $0.22 predicted) and revenues of $8.34 billion (versus $8.12 billion predicted).

eBay (EBAY/NASDAQ): Earnings per share of $1.00 (versus $0.93 predicted) and revenues of $2.4 billion (versus $2.33 billion predicted).

AMD (AMD/NASDAQ): Earnings per share of $0.67 (versus $0.68 predicted) and revenues of $5.57 billion (versus $5.62 billion predicted).

Qualcomm (QCOM/NASDAQ): Earnings per share of $3.13 (versus $3.13 predicted) and revenues of $11.39 billion (versus $11.37 billion predicted).

Paypal (PP/NASDAQ): Earnings per share of $1.08 (versus $0.96 predicted) and revenues of $6.85 billion (versus $6.82 billion predicted).

Good luck trying to make heads or tails out of all this. Uber lost nearly triple the amount it was supposed to lose this quarter… and the market rewards it with an 11% uptick on Tuesday because its management confidently stated better days were in store. 

Meanwhile, hardware stalwarts AMD and Qualcomm continue to make money at a solid clip. The market subsequently punishes them in after-hours trading on Wednesday post-earnings announcements. 

It’s quite clear that the market is still trying to figure out the proper equilibrium share price in regards to these big tech companies as they try to balance massive share price depreciation in 2022 with rocky medium-term forecasts and mostly positive recent earnings news. 

No support needed for non-tech stocks

Meanwhile, “old economy” stocks on the NYSE had a much more consistent earnings season. (All figures in this section are in U.S. dollars.)

AIG (AIG/NYSE): Earnings per share of $0.66 (versus $0.52 predicted) and revenues of $14.6 billion (versus $11.28 billion predicted).

Clorox (CLX/NYSE): Earnings per share of $0.93 (versus $0.73 predicted) and revenues of $1.74 billion (versus $1.68 billion predicted).

Pfizer (PFE/NYSE): Earnings per share of $1.78 (versus $1.36 predicted) and revenues of $22.6 billion (versus $21 billion predicted).

CVS (CVS/NYSE): Earnings per share of $2.09 (versus $1.99 predicted) and revenues of $81.66 billion (versus $76.75 billion predicted).

Under Armour (UAA/NYSE): Earnings per share of $0.20 (versus $0.10 predicted) and revenues of $1.6 billion (versus $1.43 billion predicted).

Starbucks (SBUX/NYSE): Earnings per share of $0.81 (versus $0.72 predicted) and revenues of $8.41 billion (versus $8.31 billion predicted).

Overall, this is another week where we see markets fundamentally re-valuing tech stocks. However, the bottom line for non-tech companies continues to miss that we are supposed to be in a recession. The companies with solid competitive advantages continue to show that they can pass cost increases (and maybe even expanded profit margins) on to willing consumers. Canada’s natural resources and reliance on oligopolies should continue to shield our overall index returns versus the rest of the global markets. If our former tech champion continues to bounce back, that would be a solid bonus!

In a shout out to MSTOM founder Dale Roberts, we thought we’d end the week with a seasonal meme that sums up investors’ feelings right now.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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