Investors Brace For Impact

It’s tough being part of the U.S. stock market’s largest indexes. With thousands of individual stocks to choose from, if any one component isn’t performing, it’s simply replaced by something else. 🔀

In other words, everyone is replaceable. That’s the harsh truth that Walgreens is facing today after discovering Amazon is replacing it in the Dow Jones Industrial Average. 🔀

The pharmacy-chain stock replaced General Electric in June 2018, being announced on June 19th and taking effect on June 26th. General Electric had been one of the few remaining “original members” of the Dow when it was established in 1896 and a continuous member since 1907.

Unfortunately, Walgreens’ run didn’t last nearly as long, with it being booted less than six years after being added. And it’s being replaced by none other than Amazon on February 26th. Listen, we can’t say we blame the index providers. Undoubtedly, big tech’s reach is massive and represents a significant part of the U.S. economy, probably more than a struggling pharmacy chain.

However, Walgreens shareholders might be surprised to know that being kicked out of the Dow might actually be a good thing. Studies have shown that the stocks replaced in the index tend to have better forward returns than those that replaced them. 📝

For example, look at how General Electric and Walgreens performed after their switch. While both struggled, GE had a marginal edge for much of the period and has recently taken off. It doesn’t always work out this way, but it’s an interesting thesis to ponder as Amazon is added to the mix. 🤔

While we’re on the topic of giant companies, we need to quickly mention today’s mega-merger in the financial services industry. Capital One has agreed to acquire Discover Financial Services in a $35 billion all-stock deal. Shares of Discover surged, but some investors are not getting too ahead of themselves given the Federal Trade Commission’s (FTC) recent antitrust rampage. ❌

Lawmakers like Elizabeth Warren are already calling for regulators to block the deal, which is why skepticism around its ability to close remains higher. With that said, the theme of the market recently has been the big getting bigger. We’ll have to see if that continues tomorrow with Nvidia’s results. 🤷

One of the core themes we’ve been discussing for a long time is the “ad-ification” of everything. No matter where you go or what you do, you’re likely being targeted by some form of advertising. And the reason why is because it’s such a high-margin, profitable business opportunity. 🎯

As a result, it’s no surprise to see America’s largest employer and big-box retailer, Walmart, leaning heavily into that narrative during its earnings call. 

The retailer posted $1.80 per share in adjusted earnings on revenues of $173.39 billion during its holiday quarter. That topped estimates of $1.80 and $170.71 billion, with 6% YoY revenue growth being driven by its global e-commerce sales growing by double digits. 

Notably, customer transactions rose 4.3% YoY, but its average ticket declined by 0.3%. That’s a great sign for the Fed and other inflation watchers but also suggests that spending on higher-priced, higher-margin discretionary items remains soft. 🔺

With customers flocking towards those lower-margin “basics” like private label goods, grocery items, and others, Walmart is leaning heavily into other business segments. It’s making money from packing and shipping online orders for its third-party marketplace of sellers. It’s also selling more ads, with that business jumping 33% YoY globally and 22% in the U.S.

On that front, the company announced it would acquire smart TV maker Vizio to help accelerate growth. It’s acquiring the company for $2.3 billion in cash and plans to use the distribution (and customer data) to help fuel its opportunity in the ad-serving space. 📺

With its share price rising towards $200, the company is splitting 3-for-1 and raising its dividend by 9% to help broaden its investor base. The Stocktwits community pushed into “extremely bullish” territory, and message activity surged on the news. 📈

Palo Alto Networks is getting pounded by sellers after hours, dragging the rest of the sector down with it. Let’s see what happened. 👇

The cybersecurity giant reported adjusted earnings per share of $1.46 on revenues of $1.98 billion. Unfortunately, that’s where the good news ended.

The company said it saw its ten highest-spending customers raise their spending by 36% YoY, but they’re beginning to see fatigue in cybersecurity budgets. The trend started late in the first quarter and continued into the second, with it expected to impact the next two quarters well. Its reliance on U.S. Federal government spending during an election year is proving difficult. 💸

As a result, management now expects full-year total billings of $10.10 to $10.20 billion, down from its previous guide of $10.70 to $10.80 billion. That means its full-year revenue range was also adjusted downward from $8.15 to $8.20 billion to $7.95 to $8.00 billion.

CEO Nikesh Arora said the guidance cut represents a “shift” in strategy, “wanting to accelerate growth, our platform migration, and consolidation and activating AI leadership.” There are a lot of buzzwords there, but not enough to keep shareholders on board, especially as management says they expect a “difficult customer” in the near term. ⚠️

Who knew it could be so challenging to make money in cybersecurity when there’s a hack or data breach seemingly every day? Nonetheless, investors were not happy with what they heard and sent $PANW shares plummeting 20% after the bell. 📉

With the stock pulling back from all-time highs and still in a long-term uptrend, it’ll be interesting to see how eager the bulls are to “buy the dip” in this industry leader. As always, time will tell. 🤷