Confidence Restored (Sort Of…)

The banking sector remains the market’s key focus after a weekend of news. 👀

Friday, we gave a brief overview of the second-largest bank failure in the U.S. Today, we’ll build on that by explaining what happened over the weekend and how investors responded today.

As we discussed, the critical issue heading into the weekend was the declining confidence in smaller regional banks and the broader U.S. financial system. So, in an effort to restore confidence, the Federal Deposit Insurance Corporation (FDIC) took steps to make all Silicon Valley Bank depositors whole. 💰

First, it removed management and took control of the bank’s operations. Then, it announced that depositors would have access to all of their money on Monday. And now, it’s in the process of running the operations and figuring out a long-term plan of what to do with the bank.

The FDIC also announced similar measures for crypto-focused Signature Bank, which was closed on Sunday by New York state regulators.

Additionally, it assured Americans that any losses to the Deposit Insurance Fund would be recovered by a special assessment on banks, not by U.S. taxpayer funds. And it introduced a new program that will make additional funding available to banks that need it.

Ultimately, the FDIC did its job of protecting depositors (aka consumers). It did not protect shareholders, creditors, or company management. And that was very clear based on today’s action, where most major bank ETFs extended their declines. 🔻

So if the FDIC insured deposits and Joe Biden came out to reassure Americans that ‘the banking system is safe,’ why is there still turmoil in the markets? 

That’s a loaded question, but we’ll try to cover the main angles briefly below. 👇

First, let’s talk about depositors. Because without depositors and their money, banks cannot operate. So, where does this weekend’s news leave them? 

Well, depositors of Silicon Valley Bank and Signature Bank are feeling fine. Despite the massive scare, they’re getting their funds back and can continue to live, operate their businesses, etc.

However, there is a broad swath of other depositors who have money at other regional banks that were not mentioned as part of the FDIC press release. While many would like to believe other banks would receive similar treatment inherently, that wasn’t explicitly said by the FDIC. And in times of turmoil where governments and other stakeholders act fast, nothing is guaranteed. 😬

As a result, many individuals and businesses are reassessing where they’re holding their money. Some may be thinking about moving their funds to a more diversified, “too big to fail” bank like JPMorgan and Bank of America. And if many people continue to do that, we could see more institutions face similar financial pressure. 🏦

That’s partially why many of these regional banks are coming under pressure in the equity markets. Remember, the government made depositors whole, but equity and debt holders will likely be wiped out completely (or left to fight over scraps).

As a result, investors and traders are hammering these publicly-traded bank stocks. 🔨

The collapse of Silicon Valley Bank, Silvergate Capital, and Signature bank has essentially given market participants a blueprint to find what other stocks might be at risk. Whether these companies are risky because of direct exposure to these failed banks or because of other indirect factors doesn’t matter right now. The market is selling them almost indiscriminately, albeit to various extents.

For example, one name taking people by surprise is Charles Schwab. The stock fell over 40% at its lows over the last three days, and it’s not even a regional bank. Sure, will its business be impacted by the current environment? Absolutely. But is a 40% decline justified? That’s what many investors are trying to figure out, as investors shoot first and ask questions later. But doing that analysis in real-time is very, very difficult. 🤔

Then, you’ve regulators trying to shore up confidence in the short term while figuring out how to prevent more issues in the future. Also, the Federal Reserve is likely rethinking its game plan ahead of next week’s rate decision. Or at least that’s what Goldman Sachs analysts believe.

So as you can see, there are a lot of layers to this onion. The factors that caused these collapses and their ramifications cannot be fixed overnight. And as a result, this “banking boogeyman” is likely to remain a headwind for the market for some time.

As always, we’ll do our best to keep you updated as the situation unfolds. 📝

Mid-cap software company GitLab is gitting wrecked after hours despite beating estimates. 🔮

It reported an adjusted loss per share of $0.03, while analysts expected a $0.14 loss. Revenues of $122.9 million also beat the $119.6 million expected.

So, they beat expectations. Why is it falling after hours? The company’s first-quarter and full-year revenue guidance was well below the consensus view. It now expects revenues of $529 to $533 million, while the consensus view was $586.4 million. 🔻

However, its earnings per share forecasts did beat as its cost-cutting efforts drive results.

The company announced it will raise the price of its premium service tier from $19 to $29 per month in April. But it’s going to need more than that if it’s going to reaccelerate revenue growth.

Overall, the growth slowdown remains the key issue for investors. $GTLB shares have lost a third of their value after hours, trading at a fresh all-time low. 😱

While everyone is focused on the “bigger-picture” risks in the market, there are still plenty of companies reporting earnings. 📝

Let’s recap some of today’s biggest movers (besides Gitlab). 👇

Digital media company Buzzfeed reported weaker-than-expected results and guidance. Its fourth-quarter revenue was down 8% YoY to $134.6 million, driven by a 27% decline in advertising revenue. Its adjusted net loss of $106.2 million included a $102.3 million non-cash goodwill impairment charge, but adjusted EBITDA was still cut in half YoY. Time spent by users also fell 27% YoY to 135 million hours. 🔻

Even accounting for today’s challenging digital media environment, executives’ forecasts surprised investors. They expect first-quarter 2023 revenue of $61 to $67 million, representing a 30% YoY and 50% QoQ decline. Lastly, the company noted it had the majority of its cash at Silicon Valley Bank but assured investors it’s accessing the funds and does not anticipate any operational disruptions. $BZFD shares fell 13% on the news. 😮

Gaming headset maker Turtle Beach also missed Wall Street estimates for its fourth-quarter earnings. It reported an adjusted loss per share of $0.10, while analysts expected $0.20 in earnings. Revenues of $100.9 million were also shy of the $110.8 million expected. The company pulled forward much of its growth during the pandemic and is now dealing with a significant slowdown. The more challenging macro environment and change in consumer spending habits will remain key headwinds for the company. $HEAR shares fell 13% after hours. 🎧

Small-cap AI and machine learning company BigBear.ai Holdings reported weaker-than-expected results. Its loss per share of $0.23 missed the consensus estimate by $0.08, though revenues of $40.4 million topped the $39.96 million expected. Its guidance was also soft, with Q1 2023 revenue of $155 to $170 million, well below the $173.03 consensus view. $BBAI shares were down about 10% after hours. 🤖

United Airlines doesn’t report for another month but issued a first-quarter profit warning. It now expects an adjusted loss of $0.60 to $1.00, with prior guidance of $0.50 to $1.00 in earnings per share. The consensus estimate was $0.65 per share in earnings. Executives also trimmed their unit revenue growth estimate from 25% to 22%-23%. $UAL shares are down about 7% after hours, adding to their 4% regular-session decline. 🛬

Meanwhile, ZIM Integrated Shipping Services delivered some positive results for investors today. The company’s fourth-quarter sales of $2.19 billion fell 37% YoY but beat the consensus estimate of $2.11 billion. Its $3.44 earnings per share also topped the $3.05 expected. A significant drop in freight rates drove the revenue decline, as carried volume of 823 thousand TEUs fell just 4% YoY. Executives expect adjusted EBITDA of $1.8 to $2.2 billion and adjusted EBIT of $100 to $500 million in 2023. The company also declared a cash dividend of $6.40 per share. $ZIM shares were up over 15% initially but closed +6.59%. 🚢