Friday,
January 29, 2021

Market recap

Dow Jones

30603.36

300.19 (0.99%)

S&P 500

3787.38

36.61 (0.98%)

Nasdaq

13337.16

66.56 (0.50%)

Facebook

$265.00

-$47.14 (-2.62%)

Walmart

$143.75

-$0.09 (-0.06%)

Apple

$137.09

-$4.97 (-3.50%)

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Top Story

Breaking Down the GameStop Headlines

A Quick Review

GameStop, and the retail traders who have caused its stock prices to soar, continue to dominate headlines. Here’s a quick review of what has happened.

Shares of GameStop, a brick-and-mortar video game retailer, have surged by close to 8000% over the past six months. Retail traders, generally meaning people who are not part of the Wall Street establishment, have connected on social media platforms and encouraged one another to buy and hold shares of GameStop and other companies like the movie theater AMC, driving the prices of these stocks sky-high. This phenomenon has caused a number of large hedge funds who bet that GameStop shares would drop in value, to lose money.

“Short Selling,” “Short Squeeze,” and Other Terms Explained

Professional investors often engage in what is called “short selling” when they expect the price of a stock to fall. This means they borrow shares of a company then immediately sell them. The investor bets that the stock price will then fall so they can purchase shares at a lower cost, return them to the original lender, and pocket the difference in price. Traders must have a margin account to open a short position. They pay interest on the value of the borrowed shares while their position is outstanding.

In other words, while many investors follow the “buy low, sell high,” motto, short sellers do it in the reverse order: they borrow and sell stocks when they are high, hoping to make money when they fall. However, if the price of a stock rises when a short seller expects it to fall, they have to buy the stocks at a higher price rather than a lower price in order to return them. This situation is known as a “short squeeze.”

A number of hedge funds trying to short GameStop have found themselves in this position. A recent analysis showed that short sellers have lost $23.6 billion on GameStop just this month.

The Broader Impact of GameStop’s Wild Ride

The recent battle between Redditers and hedge fund managers goes beyond the price of GameStop stock. Some say that this marks an important step in creating a level playing field, where groups of ordinary people, not just the Wall Street establishment, can impact markets. Yesterday, some online trading platforms and clearing firms made the decision to temporarily limit trading of GameStop and other highly volatile stocks. This drew criticism from lawmakers on both sides of the aisle, including Alexandria Ocasio-Cortez and Ted Cruz.

On the other hand, some are concerned about recent trends and argue that there is too much speculation and enthusiasm impacting markets at the moment. These people say the share price of a company should be tied to its fundamentals, not to trends on social media.

At market close yesterday, GameStop was down 44% after hitting an all-time high the previous day. During after-hours trading, though, it was trending up. Traditional investors as well as retail traders will be anxious to see if GameStop’s wild ride continues.

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Apple and Facebook’s Simmering Rivalry, Explained

Earnings Reports Crush Expectations

Facebook (FB) and Apple (AAPL) both exceeded expectations with their earnings reports earlier this week. Apple reported more than $100 billion in sales on Wednesday. Much of that is thanks to the iPhone, which made up almost 59% of Apple’s revenue over the holidays. Sales for Apple were up 17% to $65.6 billion for the quarter. Though Apple no longer provides unit sales data, research firms estimate Apple shipped a record 90.1 million iPhones during the quarter.

Facebook also beat earnings estimates on Wednesday. The world’s largest social media company has made it easier for retailers to market and sell their wares to users on the platform, and that effort paid off during the coronavirus pandemic.Facebook’s revenue has slowed in recent years, but the pandemic sparked a boom in online purchases and a buyer preference for goods over services. Facebook’s revenue rose 33% to just over $28 billion in the fourth quarter. Monthly active users on the platform also surged 12% to 2.8 billion, beating analyst expectations.

Despite their success, a rivalry has been quietly simmering between the two tech giants as privacy concerns impact them both. Apple has announced that over the next few months, it will help iPhone users limit app tracking on their phones. At its earnings announcement on Wednesday, Facebook cautioned investors that Apple’s new privacy policy could hamper revenues as it would make ad targeting more difficult.

Apple’s Updated Privacy Measures Could Impact Facebook

Apple announced it will launch new privacy measures in spite of Facebook’s objections. The new features could come as early as this spring. Once these features are implemented, iPhone and iPad users will be prompted with a dialogue box asking if they would like to opt in to ad tracking. If users opt out of ad tracking, apps like Facebook will no longer be able to track their internet activity across other apps.

Facebook claims that Apple’s new policy is anticompetitive. “Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own,” Facebook Chief Executive Mark Zuckerberg said. Apple has not yet responded to the statement.

The new privacy measures somewhat overshadowed Facebook’s strong earnings announcement. Facebook said it could face “significant ad targeting headwinds in 2021.” The Apple update could cut revenues as early as the first quarter of this year. After an immediate drop in share prices, Facebook stock was flat following the announcement.

Facebook’s Digital Advertising Position at Stake

Facebook has for years been positioning its apps as advertising hubs for large companies, as they provide access to billions of consumers around the world. It has also sought to be recognized as a site for interactions between smaller businesses and their customers. In the most recent quarter, revenues from Facebook Marketplace more than doubled compared to the year before, hitting $885 million.

Facebook’s platform allows advertisers to access users’ Apple ad identifiers. Those numbers are popular tools marketers use to track where individuals go when they are online and target ads to potentially interested customers. The digital ad industry could collapse under falling prices if users opt out of tracking. A survey by Tap Research found that 85% of participants would opt out of ad tracking if offered the choice.

Walmart Stretches Reach Through Ad-Sales Business

Ads to Appear on Self-Checkout Screens

Walmart (WMT) is working on an overhaul of its ad-sales group, Walmart Media Group. The new advertising arm, renamed Walmart Connect, will feature new advertising technology for companies to use, and will offer available targeted ad space on Walmart’s in-store checkout screens.

The move comes as part of Walmart’s larger campaign to diversify its revenue and enter the ranks of the top 10 ad companies. Representatives say Walmart Media Group has doubled its advertising customers and revenue in the past year.

Brands will soon be able to use customer data collected by Walmart to target consumers around the internet. Until now, most advertisers took advantage of Walmart’s data solely to market to consumers on the Walmart website and app.

Retailers Compete with Tech Giants on Ads

Walmart is not alone in its ad diversification efforts. Other retailers like Kroger (KR) and Target (TGT) have also been exploring the digital ad space. The larger strategy is to uncover a new revenue stream by providing advertisers with access to the growing ranks of online shoppers on these retailers’ websites.

Walmart is not yet able to compete with online advertising giants like Alphabet’s Google (GOOGL), Facebook (FB), and Amazon (AMZN). But it does have an angle that these online platforms do not: Walmart has access to both online and in-store shoppers. That expanded data could help the company compete with online-only ad sellers. Walmart eventually plans to let advertisers purchase targeted ad space on display screens in all 4,500 of its stores.

Pandemic Drives Walmart’s Ad Push

The ecommerce boom resulting from the pandemic has accelerated Walmart’s moves into the digital ad space. In the most recent quarter, Walmart’s e-commerce sales jumped by 79%. Those sales made up a heavy portion of the company’s larger gains. Target, Kroger, and many other brick-and-mortar retailers also saw online sales boom in the most recent quarter.

If the pandemic shopping trends continue in a post-pandemic world, Walmart could have a head start in modernizing its ad sales for new types of shoppers. Leaders in the advertising industry as well as the retail space will be eager to see how Walmart’s initiatives take shape.

Not-So-Breaking News

  • McDonald’s (MCD) earnings fell short of analyst expectations despite the company seeing success with menu innovation, takeout, and mobile orders. Wall Street is optimistic about the chain’s ability to recover in the long term.
  • American Airlines (AAL) shares popped 60% in premarket trading after the airline reported less of a quarterly loss than expected and after Reddit users mentioned the company on the WallStreetBets forum.
  • Production of the Tesla (TSLA) “Semi” is paused until the EV company can produce its own battery cells, CEO Elon Musk said on an earnings call this week. The truck’s production is over two years behind schedule.
  • Competition regulators in the United Kingdom launched a probe into Facebook’s (FB) purchase of Giphy, the popular website for GIF creation and sharing. The regulators question whether Facebook acquired Giphy to cut competition in the supply of video clips on the web.
  • Comcast’s earnings report beat Wall Street estimates as the company gained a record number of internet customers while also adding 11 million subscribers to its streaming service, Peacock.
  • To be a good investor, one must have a tight grasp on the idea of risk and know that risk and return are two sides of the same coin. Check out The Difference Between Speculation vs. Investing to learn more.

Financial Planner Tip of the Day

"A stock is essentially a small piece of a company. Investors can buy stock, and in doing so, become shareholders of that specific company. Money can be earned in two ways, through the stocks value growing over time, as well as dividends, if applicable. Investing in stocks can offer the potential to earn a high rate of return in the long term, but that potential comes with some risk. They’re one of the more volatile forms of investing for the short and medium term."

Brian Walsh, CFP® at SoFi

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