Equities update: from ‘spoons to Reddit

Spoons costs ease, profits surge

 
Adam Vettese, analyst at investment platform eToro, said: “Wetherspoons continues to prove that British pub culture is resilient in the face of a crisis with profits soaring a whopping 8 times year on year as cost pressures ease. After having to contend with Covid, the hospitality sector was thrown into chaos again as inflation took hold and costs spiralled, sending Wetherspoons share price on a rollercoaster ride, trading at a little under half its pre-pandemic high. This latest update, building on their strong Christmas trade shows the good times could well be on their way back. The next point to address is margins, which are still not where they were in 2019, but as macro conditions ease throughout the rest of the year, we could see these creep up the few basis points needed to catch up.

“The firm is continuing to open pubs and also acquiring the freehold for those of which they are a tenant, securing their footing for the longer term. There is still no mention of a dividend returning, which has not been paid out since pre-pandemic times, but as performance continues to improve there’s no doubt shareholders will be eyeing a comeback to payouts.”
 

Messages from the Reddit rally

Ben Laidler, eToro, said: “19-year-old social media pioneer Reddit has made a dramatic stock market debut with a huge first-day surge, stoking hopes for a reopening IPO market after a two-year drought. New listings in the US markets, that dominate the world at 60% of market capitalisation, have in the past two years been a quarter of the 400 of the 2021 boom, raising only 10% of the 2021 total of $140 billion.

“Reddit’s 48% first day price surge reflects investor optimism over its growing 73 million daily user base, plans to harness AI to accelerate this, and the perceived value as its $6.4 billion market cap versus its last $10 billion private valuation from 2021. The 48% gain is historically huge versus the longer term 19% (1980-2023) average and the 17% seen in the latest 2021 boom.

“The company has an outsized place in investor consciousness and social media culture, after the core role of its 15 million subreddit r/wallstreetbets in the 2021 meme stock craze. Yet it remains a relatively small loss-making business, with its users, revenues, and market capitalisation still a small fraction of peers like Meta, Snap, and now unlisted X (Twitter).”

Direct Line results make for curious reading

Mark Crouch, analyst at investment platform eToro, said: “Direct Line’s full year results make for curious reading this morning with the UK insurer posting a £190m loss for 2023, while at the same time reintroducing its dividend. Businesses continue to grapple with inflationary pressures driving down their profit margins and this had led insurers across the board to jack up premium costs.

“Eyebrows were raised when reports emerged that European rival Aegeas recently made an acquisition approach for Direct Line, with the share price responding emphatically, jumping 25%. The bid however was swiftly rejected.

“New CEO Adam Winslow has pledged to review and identify opportunities across the value chain in a bid to remove £100m of costs by 2025. This will require fully utilising Direct Line’s large customer base and strong brand, both of which will be fundamental in turning the company’s fortunes around. However, with the share price trading at 10-years lows, it’s not surprising Direct Line is being eyed up as a takeover target.”

Next profits rise showing resilient consumer appetite

Adam Vettese, analyst at investment platform eToro, said: “Next is often considered a barometer of UK consumer sentiment and based on today’s update, consumers are ready to loosen the purse strings. Profits have risen 5% in the face of a tough, but improving, high inflation, high interest rate environment, showing that shoppers are back out there spending despite some uncertainty still lurking around.

“We’ve heard of many retailers having to contend with disruption to shipping due to geopolitical tension but Next has said this will not be a significant factor. This is good news for shareholders but more importantly Next will continue to funnel cash back to them in the form of dividends and share buybacks as they have done consistently in recent years.

“Given that we should see macro factors ease as the year goes on with the first rate cuts approaching and Next already trading at record highs, it’s hard to see anything that could halt the momentum at this point.”

New business ventures paying off for The Pru

Mark Crouch, analyst at investment platform eToro, said: “Prudential posted an encouraging set of earnings this morning – something their shareholders will feel is long overdue.

“The insurance powerhouse recently laid out an ambitious plan setting their sights on new growth opportunities in African and Asian regions. The numbers seem to vindicate that decision with new business profits jumping by an impressive 45%. PGIM, the company’s investment management business, continues to lag despite assets under management increasing, perhaps highlighting an issue with efficiency.

“Despite analyst price forecasts being significantly higher than the current price, it would appear that The Pru still has some work to do in convincing investors that the prolonged downtrend is reversing. Prudential still has significant exposure to China and their share price dropped by a quarter in 2023, currently sitting at a key area of support that also marked the COVID lows. Consequently, investors will be hoping that today’s results will kick start a reversal.”