Goldman Sachs crushes earnings estimates | Fastly, one of the hottest stocks of the year, slumps nearly 26%

MarketBites Investment Newsletter for 10/15/2020

Quote of the Day
“In order to be irreplaceable one must always be different.”
– Coco Chanel

Today’s Top Stories
  1. Goldman Sachs crushes earnings estimates. The bold business transformation is working!
  2. Fastly, one of the hottest stocks of the year, slumps nearly 26%. Let’s explore why.
What is driving markets today?

– U.S stocks declined after Treasury Secretary Steven Mnuchin downplayed the chances of striking a stimulus deal before the election. Covid-19’s resurgence has now reached the vast majority of states, with 46 states reporting an increase in new infections.

– Wells Fargo slid 6% due to a lackluster earnings report that warned of weaker expected interest income in 2021. Bank of America declined 5.3% on news that it failed to match competitors such as J.P.Morgan on trading revenue. Goldman Sachs was the only financial stock that posted positive results on Wednesday.

– Energy stocks joined a rally in oil, with Concho Resources soaring 10% on news that ConocoPhillips is in talks to acquire the company.

Top Story 1: Goldman Sachs Soars, Wells Fargo Slumps

What is Happening?
It seems that not even a global economic slowdown, low-interest rates, and political uncertainty can slow down Goldman Sachs. The prestigious bank nearly doubled its third-quarter profit year-over-year. As a reference, Wells Fargo’s profit plunged 57% in the same period. $GS traded up 0.20%, while $WFC slumped 6.02% on Wednesday.

Why does this Matter?
Goldman is making a bold transformation, and it is working! In previous years the economic slowdown we are experiencing now would have eroded Goldman’s overall earnings, but not this time. It seems that Goldman CEO David Solomon’s plan to rely less on financial-market revenue and increase retail banking and wealth and asset management has paid off in the third quarter. Goldman’s consumer division reached $1 billion in trailing 12-month revenue within 4 years of launching. Asset-management revenue is up a stunning 71% y-o-y, and the company is targeting a $100 billion capital raise meant for distressed credit, private equity, and real estate investments.

The Takeaway:
While Goldman is making big-moves to diversify into consumer banking and wealth management, trading accounts for 42% of its revenue. This is much higher than the 21% peer group average. The high uncertainty and volatility associated with trading revenues remain a risk for Goldman. Still, the bank is on an excellent path to balance that uncertainty with steady cash flows from growing wealth and asset management.

Top Story 2: Not so Fast, Fastly!

What is Happening?
Fastly lost over a quarter of its market value in after-hours trading on Wednesday after the company lowered its revenue guidance because of reduced use from its largest customer, TikTok. Fastly has been one of the hottest stocks of 2020, rising as much as 470% before Wednesday’s drop.

Why does this Matter?
Fastly now projects about $70 – $71 million in revenue for Q3, down from its previous view of $73 – $75.5 million. The company also said investors should disregard its prior financial guidance for the full year. Fastly is slated to report third-quarter results on Oct. 28.

Fastly has been one of the hottest “pandemic stock plays” due to its cloud computing technology. Fastly increases the speed of content delivery over the internet for customers like TikTok, Vimeo, and Pinterest. The company built a network of data centers worldwide to increase the performance of web services by hosting them physically closer to users. Among many benefits, the company’s customers can update their websites almost instantaneously, and they can swiftly identify and solve issues thanks to Fastly’s granular near real-time logging abilities.

Fastly has been growing at a 34% revenue CAGR since 2017, and it managed to grow sales by 62% in Q2 of 2020. Fastly remains small relative to legacy vendors such as Akamai Technologies, which does about 10x more revenue in this business segment.

The Takeaway:
There are two important takeaways here. First, be careful with “hot” stocks that only go up. Often by the time you are thinking about getting into a hot stock, the ship has already sailed, and you are buying at the top. It is probably wise to wait for sharp pullbacks in hot stocks to establish a position. Second, be careful with stocks that are exposed to a select few customers. Fastly derives 12% of its revenue from TikTok.

What else is happening:
Starbucks ties executive pay to diversity targets – (read here)
Two Americans held hostage set free – (read here)
NFL, Amazon, strike deal to stream playoff game this season – (read here)
Why it’s still hard to find a can of corn – (read here)
Earnings Calendar:
United Airlines ($UAL), Charles Schwab ($SCHW), Morgan Stanley ($MS), Truist Financial ($TFC), Walgreens ($WBA)
Citizens Financial Group ($CFG), Bank of New York Mellon ($BK), Ally Financial ($ALLY), State Street ($STT)
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