That Digital Economy
As regular readers of this newsletter will by now be aware - it's earnings season and the digital economy is coming out on top. This past week provided plenty more proof of this theme as well as a US employment report for the ages:
That Digital Economy
Digitally focussed companies as a group saw positive earnings momentum this week, with a number of stocks climbing double digits on the week following the announcement of growing revenues and earnings in their Q1 2020 earnings reports. At an index level, this outperformance becomes clear when you compare the S&P500 - which is relatively more diversified across all US industries to the NASDAQ - which is relatively concentrated with technology stocks. The S&P500 was up 3.5% on the week while the NASDAQ gained 6%.
To get a little more granular, however, we've picked out some of the winners and their share price performance over this past week below along with brief commentary on the underlying themes driving their performance - we hope this helps you build a clearer picture of what's going on out there in the digital economy:
Fastly (+68%), Fortinet (+31%), Zix (+26%) & Cloudflare (+15%) all soared this past week thanks to growing demand for cloud computing cybersecurity products - which all of these companies provide. This theme was somewhat overlooked in the recent stock market rebound, with all of these companies catching investors off guard and announcing strong revenue + earnings growth for Q1 2020.
Peloton (+33%) saw its shares climb thanks to a COVID-driven bike buying frenzy which helped the company outperform revenue expectations and speed up on its path to profitability. While Peloton is arguably also a real economy name thanks to its hefty bikes, a large part of the company's valuation is predicated on the ability of its digital subscription service being able to deliver recurring revenue and growth.
Paypal (+20%) was carried higher by currently favourable market trends and some good old fashioned reassurance by management. Paypal's Q1 update showed the company underperformed versus earnings and revenue expectations, but it was able to reassure investors as it disclosed key business trends were improved for April while May 1 was its largest transaction day in history. Declines in real world transaction processing seem to be more than offset by the explosion in online buying for this payments provider. This optimism in the payments space also carried Square shares higher this week despite the company recording a loss for the quarter and missing earnings estimates by a significant margin.
Uber (+19%) was up thanks to a lower-than-expected hit to its ride hailing business and better-than-expected delivery from Uber Eats - pun intended. The company's only major US rival - Lyft (+14%) - also gained following its own earnings report thanks to a softer-than-expected blow (although still a meaningful COVID-shaped blow) to its own ride hailing service.
Shopify (+14%) - perhaps unsurprisingly - posted better-than-expected revenue and earnings as locked-down shoppers began flocking online at the end of Q1 2020. Meanwhile in Africa, Jumia (+18%) also gained after the e-commerce company announced a spike in users drove strong revenue growth, helping the company turn its first gross profit - further proof that this pandemic really is driving the whole world online. Whether this behavioural shift is sustainable into the long-term future remains to be seen.
Activision Blizzard (+12%) gained after beating already-elevated expectations. The gaming company - which produces category leading titles such as Call of Duty, World of Warcraft, Overwatch, and Candy Crush - saw strong revenue growth thanks to higher in-game spending from it's increasingly active user base. Electronic Arts, a competitor, saw a share price drop following its better-than-expected earnings release and ended the week roughly unchanged, highlighting the fact that all winners in this space are not being created equally.
Roku (+12%) gained as millions of homebound consumers satisfied their streaming needs via the company's service, helping it to post better-than-expected revenue for the quarter as well as a robust 28% increase in it's average revenue collected per customer.
Dropbox (+12%) gained thanks to the working-from-home theme which has seen demand for cloud computing spike.
We think the digital economy will not only outperform during this recession, but also has the potential to continue delivering growth and subsequent share price appreciation over the medium-to-long term.
That said, we're also seeing the occasional real economy names producing digital economy returns - Beyond Meat was this week's standout stock. The company recorded share price gains of more than 45% over the course of the week following stellar results driven by a shift away from restaurants and into supermarkets.
US April 2020 Employment Report
Yesterday we also saw the monthly employment report come out of the US - this latest meaningful economic datapoint confirmed what we've been seeing with the weekly jobless numbers over the past 4-6 weeks, and it was most definitely one for the history books. We've picked out some of the jaw-dropping numbers and key takeaways for you below:
The US unemployment rate reached 14.7% - its highest level highest since the 1940s, with the overall jobs situation at it's worst since the great depression in the 1930s.
The 14.7% figure excludes people who have been temporarily laid off - if you include them, the unemployment number goes north of 19%.
Non-farm payrolls dropped by 20.5m, slightly better than the 22m decline which was projected by economists.
Average hourly earnings were up 7.9% - this is somewhat counterintuitive but was driven by the fact that low paid workers have been laid off in disproportionately higher numbers. This in turn raises the average hourly wage number with higher skilled people continuing to work from home. In other words, those with less education who are from a lower socioeconomic status or come from ethnic minority groups are feeling the most pain in the US economy right now.
Perhaps the one tiny slice of positivity we can take away from this report is that furloughed workers accounted for roughly 80% of the April unemployment number. This - in theory - means once the economy gets back up and running, unemployment levels should normalise as people switch from being furloughed to employed again.
As we've seen in recent weeks, however, financial markets didn't seem to care too much. Following the report's release, safe haven assets such as US treasuries and the US Dollar were both lower while stocks rounded out the week on a high as the S&P500 gained over the course of the day.
That's all from us for this week - stay safe in the meantime and we'll see you again next week for more!
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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