From iSpend to iSave 🖥️ — Apple TV is cutting back its extravagant Hollywood expenses

Good afternoon! What could possibly top the largest IT outage in history? How about the first sitting president to bow out of a race in nearly six decades? Yesterday, President Joe Biden announced he’s stepping down from the 2024 presidential race and throwing his support behind Vice President Kamala Harris as the Democratic nominee. In a letter posted on X, he wrote, “While I intended to seek reelection, I believe it’s in the best interest of my party and the country for me to step aside.”

MARKETS

• The S&P 500 and Nasdaq bounced back today after last week's steep drop, with tech stocks leading the way. The Dow showed some fluctuations but closed higher.

• Treasury yields edged up as investors gear up for a week packed with crucial economic data, with Friday's PCE report being the main highlight.

• Bitcoin, the only asset trading when President Biden announced he wouldn't seek re-election this weekend, dipped slightly on the news but managed to recover most of its losses today.

STOCKS
Winners & Losers

What’s up 📈

• Mattel ($MAT) rocketed 15.10% after receiving an acquisition proposal from private equity firm L Catterton.

• Iqvia Holdings ($IQV) surged 9.30% following a stellar second-quarter earnings report.

• AMC Entertainment Holdings ($AMC) leapt 5.31% on news of a debt refinancing plan.

• Reddit ($RDDT) jumped 5.30% after securing a deal with five major US sports leagues.

• Tesla ($TSLA) climbed 5.15% ahead of its earnings report due after the bell.

• Nvidia ($NVDA) rose 4.76% on reports of developing China-specific semiconductor chips to bypass US trade restrictions.

What’s down 📉

• Ryanair ($RYAAY) tumbled 15.41% after revealing a 46% drop in earnings post-tax in its latest report.

• Crowdstrike ($CRWD) plunged 13.46% as the aftermath of the largest IT outage in history continues to affect the stock.

• Verizon ($VZ) dropped 6.04% after missing earnings expectations due to customers delaying phone upgrades.

• Starbucks ($SBUX) fell 3.43% following a Wall Street Journal report about activist investor Elliott Investment Management taking a stake in the company.

• Trump Media & Technology Group ($DWAC) dipped 0.83% after President Biden announced he would not seek re-election.

ENTERTAINMENT
From iSpend to iSave — Apple is cutting back its extravagant Hollywood expenses

Apple is putting the brakes on its Hollywood spending spree. After pouring over $20 billion into original TV shows and movies, the iPhone maker is now reining in costs.

Apple's media chief, Eddy Cue, has been in regular meetings with studio heads Zack Van Amburg and Jamie Erlicht to scrutinize budgets and control spending on projects. The message is clear: Apple wants to shake off its reputation as the industry's biggest spender.

Though not the largest buyer of projects (that title goes to Netflix), Apple is known for splurging on individual titles. The company has shelled out more than $500 million on films by directors like Martin Scorsese and Ridley Scott and over $250 million on the WWII miniseries "Masters of the Air." Unfortunately, many of these big-budget endeavors have failed to deliver blockbuster results.

Apple’s Cost-Cutting Strategies

To combat rising costs, Apple is changing its approach:

• Reducing upfront payments: Apple is looking to pay less initially for shows.

• Quick cancellations: Shows that don’t perform are being canceled faster.

• Shared burden: Third-party studios are being asked to shoulder more financial responsibility for budget overruns.

• Licensing content: To reduce dependence on original series, Apple is starting to license more programming from competitors.

Why the Shift?

Hollywood is undergoing a belt-tightening phase. As streaming services like Disney, Paramount, and Warner Bros. Discovery cut back to curb losses, Apple is also looking to make its streaming business more sustainable. The company aims to bring more discipline and strategy to its Hollywood ventures, focusing on quality over quantity.

Apple's early days in Hollywood were marked by lavish spending and high-profile partnerships with stars like Oprah Winfrey and Steven Spielberg. However, this strategy hasn't translated into widespread viewer engagement. Despite critical acclaim and numerous awards, Apple TV+ captures just 0.2% of TV viewing in the US.

Apple’s original programming, like "The Morning Show" and "Severance," has seen ballooning budgets. For instance, "Severance" costs more than $20 million per episode due to production delays and the involvement of high-profile talent.

Looking Ahead

Apple’s more cautious approach is evident in its recent moves. The company is delaying production on expensive series like "Foundation" to keep budgets in check. Discussions are ongoing about future seasons of "Severance," with Apple urging cost reductions.

The tech giant, worth over $3 trillion, can afford to play the long game in Hollywood. However, it’s clear that even Apple is not immune to the industry's current trend of fiscal austerity. The focus is now on sustainable growth, quality content, and strategic investments that can justify the costs.

NEWS
Market Movements

• Warren Buffett trims Bank of America ($BAC) stake for the first time since 2019

• Bitcoin recently took a nosedive due to a flood of new supply from Mt. Gox and the German government. Next up, Britain could release its $5 billion in bitcoin

• The biggest IT outage ever might rack up damages exceeding $1 billion. The pressing issue now is determining who will cover the costs.

• Kamala Harris raised $81 million in the first 24 hours as a new candidate

• Former President Trump will deliver the keynote address at the bitcoin conference, which begins Thursday in Nashville

• Disneyland ($DIS) employees union voted Friday to authorize a strike, and organizers will meet this week to decide if and when the union will hold Disneyland’s first work stoppage in 40 years.

• “Blue screens of death” led to more than 100,000 flight delays this weekend

• Iconic bankrupted Airline Pan Am Returns With $60,000 Tickets starting in 2025, limited to 50 passengers

• McDonald’s ($MCD) extends $5 meal deal into August

STOCKS
Small-Cap Stocks — The New Market Darlings

Forget about President Biden’s election exit shaking up the stock market—for now, at least. The buzz is around investors shifting their focus from tech giants to small-cap stocks, thanks to the so-called “Trump trade.”

We’ve said it before, but it’s worth repeating: A select few tech behemoths have been propelling the S&P 500’s 22% surge over the past year, largely driven by AI enthusiasm. Nvidia, for instance, has been responsible for over a quarter of the S&P 500's 16% year-to-date return. According to Goldman Sachs, Nvidia, along with Microsoft, Apple, Google, Amazon, and Meta, has accounted for more than half of the S&P 500's gains in 2024.

Now, small caps are getting their time in the spotlight. Investors are flocking to these stocks, with the Russell 2000 index outperforming the S&P 500 over the past five days, soaring 9% while the S&P 500 dipped by 1%.

What’s Driving the Shift?

While the “Trump trade” has garnered attention, small-cap stocks are climbing for several reasons beyond this rotation. Here are the four key factors:

1. The Fed is expected to cut rates in September due to decelerating inflation, which is boosting market sentiment.

2. Economic data shows steady growth despite high interest rates.

3. Investors are anticipating a Republican victory in the upcoming elections, which could benefit small-cap stocks and sectors like oil and gas.

4. Concerns are mounting that large-cap growth will slow down, and that AI stocks may face a selloff with any negative earnings news.

Is It Time to Bet on the Little Guys?

This election cycle is proving to be unpredictable even though it seems odds are favorable to one candidate more than the rest. Analysts stress that macroeconomic factors, such as potential rate cuts, have a more significant impact on the market than political developments. The Wells Fargo Investment Institute restated today that the election shakeup doesn’t hold more weight than market fundamentals, using the small-cap rally as an example of investors potentially misinterpreting the factors at play.

In summary, even as the “Trump trade” fades, there are still plenty of reasons for the continued interest in small-cap stocks. Macroeconomic conditions and investor sentiment toward smaller stocks remain favorable for now.

EARNINGS
Dialing Down Expectations — Slow Phone Upgrades Dent Verizon's Revenue

Verizon ($VZ) just got hit with a double whammy: sluggish phone upgrades and missed revenue targets. Despite adding more wireless subscribers, the telecom giant's Q2 revenue fell short of expectations, sending shares down 3.4% before the market opened and closing the day down -6.08%.

Customers Holding On

Price-conscious consumers are hanging on to their old phones longer, which has dented upgrade rates for Verizon. The company reported Q2 revenue of $32.8 billion, slightly below the $33.06 billion analysts expected.

Analysts suggest that this trend might reverse when Apple drops its new AI-powered iPhones later this year. Generative AI smartphones are predicted to be the next big thing, potentially boosting the market in the second half of 2024.

Wireless Wins, But at a Cost

On the bright side, Verizon added 148,000 net monthly bill-paying wireless subscribers, beating the forecast of 127,870 additions. This is a significant rebound from the previous quarter’s loss of 68,000 subscribers.

Verizon's myPlan, launched last May, seems to be paying off by allowing customers to customize their plans, helping it stay competitive against AT&T and T-Mobile.

Strategic Moves

To entice more customers, Verizon has been bundling streaming services like Netflix, Warner Bros Discovery's Max, and Disney's offerings. They even raised prices on some older plans in March to nudge customers toward newer options.

However, the consumer business still saw a net loss of 8,000 wireless retail postpaid phone subscribers this quarter, a stark improvement from the 136,000 lost a year earlier.

Numbers That Matter

• Revenue: $32.8 billion (missed the $33.1 billion estimate)

• Adjusted EPS: $1.15 (met expectations)

• Wireless Service Revenue: $19.8 billion (up 3.5% year-over-year)

• Total Broadband Net Additions: 391,000

• Broadband Subscribers: 11.5 million (up 17.2% year-over-year)

While Verizon’s consumer revenue rose by 1.5% to $24.9 billion, the business segment saw a decline of 2.4%, down to $7.3 billion. The consumer segment’s EBITDA margin improved due to service revenue growth and fewer upgrades, but the business segment’s margin declined due to wireline revenue drops.

Outlook

Despite the hiccup in phone upgrades, Verizon is sticking to its guns for FY24, reiterating a 2.0% – 3.5% wireless service revenue growth and maintaining an adjusted EPS forecast of $4.50 – $4.70. Investors are watching closely to see if the anticipated AI phone wave can give Verizon the boost it needs.

Calendar
On The Horizon

Tomorrow's big economic headline? Existing home sales, and let's just say the forecast isn't looking bright.

Last month, sales dipped 2.8% year-over-year to 4.11 million homes, and with interest rates holding steady, economists are predicting an even steeper decline as high costs keep buyers at bay.

On the topic of costs, the median home price in the US hit a new record last month, jumping 5.8% to $419,300. Potential homebuyers are crossing their fingers that this record won't be broken again.

Pre-Market Highlights

• UPS ($UPS): As a bellwether for the US economy, UPS's report is a must-watch even if it's not on your investment radar. If it is, you're likely drawn by its market dominance, strong dividend yield, and consistent earnings growth. Wall Street's consensus? $2.01 EPS and $22.26 billion in revenue.

• Spotify ($SPOT): Spotify faces the classic subscription company dilemma—balancing subscriber happiness with rising costs. Recent price hikes haven't caused a subscriber exodus, but this quarter will provide more clarity. Wall Street is optimistic, with 21 out of 29 analysts rating it a "buy" and setting a price target 20% above its current trading level. Consensus: $1.18 EPS and $4.09 billion in revenue.

Post-Market Highlights

• Alphabet ($GOOG, $GOOGL): Alphabet has been splashing cash to stay ahead in the AI race, which investors have accepted—so far. But now, there's growing concern about the spending spree. Wall Street is keeping a close eye on costs this quarter but remains confident in revenue growth. Consensus: $1.84 EPS and $84.10 billion in revenue.

• Tesla ($TSLA): Tesla and its headline-grabbing CEO are back in the spotlight as the company prepares to report. Expect questions about the delayed robotaxi event and a close look at production and delivery numbers. Despite Wall Street's average price target being 23% lower than current levels, Tesla often beats expectations. Consensus: $0.60 EPS and $24.19 billion in revenue.