European stocks edge higher after SAP cites stronger-than-expected recovery


European stocks advanced on Thursday, heading higher after two days of losses as one of the Continent’s biggest technology companies said its recovery was surprisingly strong.

The Stoxx Europe 600
SXXP,
+0.33%

rose 0.2%.

Through Wednesday, the index has gained 31% from its March low.

SAP
SAP,
+7.42%

SAP,
+2.00%

was the standout performer, rising 7% as the German business software giant released its second-quarter results early, saying its adjusted operating profit rose 8%, as the Asia Pacific and Japan region had a strong recovery in software license revenue.

That helped the German DAX
DAX,
+1.19%

to outperform the other regional indexes in Europe, including the French CAC 40
PX1,
+0.17%

and U.K. FTSE 100
UKX,
-0.16%

.

The question confronting markets in the short term is whether another round of U.S. stimulus, as well as the European Union recovery fund, get finalized.

The U.K. on Wednesday rolled out a spending package estimated by the government to be worth £30 billion. “Throw Brexit into the mix (what may be the crucial EU Heads of State meeting is on Oct. 15-16) and a potential spike in business failures as we go through Q3 into Q4, and politically, as well as economically, the odds move even more in favor of a much larger fiscal response later in the year,” said David Owen, European economist at Jefferies.

Troubled engine maker Rolls-Royce
RR,
-8.27%

slumped 6%, as the company took a $1.45 billion hit for closing currency hedges early, citing the deterioration in the medium-term outlook caused by COVID-19. Rolls-Royce says that it may announce non-cash accounting adjustments when its first-half results are announced.

Shares of U.K. home builder Persimmon
PSN,
+4.93%

rose 5% after saying net reservations rose 30% year-on-year in the final six weeks to June 30.

U.S. jobless claims highlights the economics calendar. Germany reported a 9% rise in exports for May that still left them 29.7% below year-ago levels.

Futures on the Dow Jones Industrial Average
YM00,
-0.14%

fell 90 points.



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The ‘work-from-home’ ETF is here. Get ready for some surprises.


For all the weirdness of the past few months — the Zoom fatigue, the challenge of caring for children and pets and aging parents alongside co-workers — the coronavirus pandemic that’s kept millions of white-collar workers in their homes, not their offices, has presented new opportunities.

It seemed only a matter of time before someone launched an ETF for that, and on Thursday, that fund, the Direxion Work From Home exchange-traded fund — sporting the ticker WFH
WFH,
+0.13%

, naturally — will start trading.

As it does, a look at what’s inside the portfolio shows some surprises. For such a clearly delineated theme that squares so neatly with the reality of life for so many right now, one of the biggest ironies is how nuanced the fund’s holdings actually are.

The fund is made up of 40 equally-weighted companies ranging from old standbys like Amazon.com Inc.
AMZN,
+0.40%

and Microsoft Corp
MSFT,
+0.76%

to the lesser-known, like Proofpoint Inc.
PFPT,
-1.36%

and Perficient Inc
PRFT,
-0.75%
.

It has of-the-moment pandemic darlings, like Zoom Video Communications Inc.
ZM,
+1.00%

— and some old guards like Hewlett Packard Enterprise Co
HPE,
-0.10%
.
And its reach stretches from Shenzen, China, with companies like Xunlei Ltd.
XNET,
+2.54%

, to Cincinnati Bell Inc.
CBB,

“This is global in nature, and the benefit of what they’ve done is not just picking the poster children of the working-from-home phenomenon,” said Todd Rosenbluth, head of ETF and mutual-fund research for CFRA. “This fund gives you a mixture of up-and-comers whose business model is being driven by that theme, and some megacaps that will get stock price growth from many things. This is not really a pure-play work-from-home ETF, which I think is positive.”

Direxion says the fund will focus on companies that fall into four buckets representing sub-themes: remote communications, cyber security, project and document management, and cloud technologies.

Rosenbluth also thinks WFH should sit in an investing sweet spot. As an index-based fund, it offers more diversification, and the benefit of stock-picking from an experienced management team, than if investors were to try to select individual stocks themselves.

But it’s a lot less idiosyncratic than many actively-managed funds, most notably some of the ones run by a company like ARK Invest, which represent strong convictions by a small management team about clear winners among innovative technology leaders.

Related: Wall Street’s road warriors have spent the past three months grounded. How’s that working out?

Still, this ETF, like any fund, will have to prove itself. “I don’t think any investors would dispute that we are going to be working from home and thus using the benefits of cloud computing and telecoms,” Rosenbluth said in an interview. Investor interest and flows into the fund will likely be robust because most people agree with that thesis, he noted.

But what will keep people invested is the performance of the individual companies, and thus the fund’s overall returns, Rosenbluth said.

As ARK’s CEO, Cathie Wood, told MarketWatch in early June, even her team struggles to understand how much of a moat some of the early technology winners really have.

WFH will charge a 45-basis point fee, track the Solactive Remote Work Index, and rebalance semiannually.

See:The first — and only — negative-fee ETF didn’t make it. Here’s what that tells us about investing.



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Micron shows how the cloud is saving chip makers


Memory-chip maker Micron Technology Inc. was saved by a boom in data centers, adding to chip makers’ growth as the pandemic forces more companies to expand their cloud computing capabilities.

On Monday, Micron
MU,
+1.35%

reported better-than-expected fiscal second-quarter earnings and had a stronger outlook for the next quarter, despite some issues with the global supply chain due to the COVID-19 pandemic. Micron’s shares jumped nearly 6% in after-hours trading. At Monday’s close, Micron was trading at $49.15, down 8.62% for the year but a huge recovery from its plunge in March, when it hit a low of $31.13 in the early days of the pandemic.

“We continue to see healthy demand trend in cloud in the second half of the year,” Micron Chief Executive Sanjay Mehrotra told analysts on a conference call. “Cloud is still actually in early innings, and long-term trends for cloud are strong.” In the second quarter, the company said that the work-from-home economy, e-commerce and videogame streaming all drove a strong surge in demand for more cloud-computing capabilities.

Micron’s comments echo those that other chip giants, such as Intel Corp.
INTC,
+1.33%

and Nvidia Corp.
NVDA,
+0.49%

NVDA,
+0.49%
,
made last quarter. On Monday, Xilinx Inc.
XLNX,
+1.03%

joined the crowd when it updated its guidance for its fiscal first quarter, noting that strong performance in wireless and data center were offsetting weakness in consumer segments.

In the second half of the year, Micron said that it expects demand for consumer technology products such as PCs and smartphones to improve. That’s in part due to the ongoing rollout of 5G networks, which will drive demand of new smartphones that have more dynamic random access memory (DRAM) chips, compared to 4G-network phones. The company said that average selling prices of both DRAM chips and NAND flash memory were up sequentially from the previous quarter.

One issue hovering over the company, and indeed most chip makers, is the growing rise in inventories, both by Micron and its customers, especially in the smartphone market. When asked by an analyst about the growing inventories, Mehrotra said its customers are trying to prepare for when consumer demand returns.

“Customers want to be prepared to supply the smartphone demand” when it returns, he said. “So, overall, you know, it’s a mixed picture with respect to the inventory on the customer front. Cloud inventories are in decent shape,” while mobile inventories are “somewhat in anticipation of demand.”

NVDA,
+0.49%

The chip industry has been amazingly resilient during the coronavirus pandemic, and most of the demand is due to data centers and the demand for more cloud computing. If the PC and smartphone markets return to growth, there could be even more upside for chip makers such as Micron. But for now, the sure thing is centered around the data center.



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Dell, VMware stocks rally as resolution to ownership ‘soap opera’ gets a new teaser trailer


Shares of Dell Technologies Inc. and VMware Inc. stood out like tiny green islands in a sea of red Wednesday as analysts chimed in on the seemingly neverending ownership “soap opera” between the two companies following a report that a strategic shakeup was in the works.

Late Tuesday, shares of Dell
DELL,
+7.90%

and VMware
VMW,
+2.45%

started rallying in the extended session following a report in The Wall Street Journal that Dell was actively considering strategic options for its 81% stake in VMware, which it gained in its 2016 acquisition of EMC Corp. for $67 billion. VMware provides cloud computing and virtualization software and services. Those options range from a spinoff of VMware to just acquiring the rest of the company outright.

On Wednesday, Dell shares surged as much as 12% while VMware shares were up nearly 9% as the broader market dropped. At last check, Dell shares were up 8.5% at $53.18, and VMware shares were up 3.3% at $154.08, while the S&P 500 index
SPX,
-2.74%

dropped 2.3% and the tech-heavy Nasdaq Composite Index
COMP,
-2.28%

fell 2%.

The desire, or hope, of some other arrangement between Dell and VMware that would give investors more of a sense of closure is not new. Back in 2018, there were rumors of a reverse merger where VMware would acquire Dell.

Tuesday’s report, however, was enough for Stifel analyst Brad Reback to upgraded VMware to a buy from a hold and hike his price target on the stock to $196 from $166.

“We have long believed Dell would ultimately buy-in the ~19% (~$12.5B) of VMware that it does not own in order to gain full control over VMware’s substantial [free cash flow] of about $4B annually and still expect this to be the ultimate outcome,” Reback said.

A spin-off of VMware, on the other hand, would make less sense, Reback said, “given the secular headwinds that Dell’s core hardware business faces.”

Reback, along with several other analysts, were also quick to point out a stipulation in the report that a tax-free spinoff of VMware wouldn’t be possible until September 2021, or the five-year anniversary of Dell’s acquisition of EMC.

Wedbush analyst Daniel Ives, who has an outperform rating on VMware and a $175 price target, questioned whether the talks could be “another head fake for investors” in the “Dell/VMware soap opera,” but made an argument for the spin-off.

“The likely path in our opinion and the one most appetizing to investors would be a tax free spinoff for this stake which is worth roughly $50 billion,” Ives said. “The Dell ownership structure has been an albatross around the VMware story and ultimately causes the stock to trade at a discount, a dynamic that would be removed if Dell (and its Board) ultimately decided to head down this path.”

Ives estimates that if Dell divested it VMware stake “this would add $15 to $20 per share right out of the gates,” but that it is “too early to pop the champagne yet as we have seen many twists and turns in this strategic relationship which could potentially end with no changes to the structure at all.”

Mizuho analyst Gregg Moskowitz, who has a neutral rating on VMware and a $152 price target, said the prospect of Dell and VMware becoming more “traditional” in their relationship would be welcome by many investors.

“However, this review is reportedly at a very early stage and may not result in a desired outcome for VMW holders; as such, we believe that investors should approach this news with some caution,” Moskowitz said.

The Mizuho analyst said he was surprised by the magnitude of the share moves given all the unknowns but the best outcome for VMware shareholders would be an outright sale of VMware to another company but that “the list of potential interested buyers is very short.”

Jefferies analyst Brent Thill, who has a hold rating on VMware and a $160 price target, said a partial or full divestiture of VMware by Dell is the “most likely outcome.”

With a partial divestiture of about half its stake, Dell would be able to pay down a considerable amount of debt and save about $1 billion a year in servicing costs, Thill said. Selling the whole stake would not only double that savings but leave Dell with about $6 billion to $7 billion in net cash “to pursue M&A of complementary software assets,” he said.

Of the 28 analysts who cover VMware, 19 have buy or overweight ratings, eight have hold ratings, and one has a sell rating, along with an average price target of $172.17, according to FactSet data.

Of the 19 analysts who cover Dell, nine have buy or overweight ratings, and 10 have hold ratings, along with an average price target of $54.06.



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Venmo and Square’s Cash App were going gangbusters before the pandemic — now they’re doing even better


Peer-to-peer payment platforms were already seeing explosive growth in the U.S. before the COVID-19 crisis gave them a new surge of momentum.

Services like Square Inc.’s
SQ,
-0.29%

Cash App and PayPal Holdings Inc.’s
PYPL,
-2.19%

Venmo found new uses during the height of the pandemic as people looked for ways to tip service workers, donate to causes, and patronize businesses that had moved to offer digital services during lockdowns.

The services also allowed users to get their stimulus payments direct deposited through their platforms, which helped some people get their money more quickly and drove more users to try the Cash App, Venmo, and PayPal.

“I think we’re going to look back and it’s going to be a really important inflection point” for these services, KeyBanc Capital Markets analyst Josh Beck said of the COVID-19 crisis.

Don’t miss: Square and PayPal finally have a chance to prove they can beat the banks


“I think we’re going to look back and it’s going to be a really important inflection point.”


— Josh Beck, analyst, KeyBanc Capital Markets

Square disclosed on its latest earnings call that direct deposit volumes on its service grew by three times in April as customers moved to store more than $1.3 billion in aggregate balances on the Cash app during the month. PayPal Chief Executive Dan Schulman said on his company’s call that Venmo has “become much more central to people’s management and movement of money instead of just being a social payment [service].”

The digital tailwinds likely gave a further boost to peer-to-peer services that Ark Invest analyst Max Friedrich estimates had already been growing faster than social-media services did in the U.S. back in the late 2000s and early 2010s.


ARK Invest

Like social-media platforms, peer-to-peer payments services benefit from network effects and become more valuable to users as more members of their social circles join. But unlike with “cool” social media sites, younger users actually have an incentive to bring their older relatives on board their payments services, helping to spur user growth, Friedrich told MarketWatch.

Schulman said on PayPal’s earnings call last month that Venmo has become a “cross-generational platform” with “entire families” now using the service to send money to one another.

The network effects of peer-to-peer payments give PayPal and Square a leg-up on traditional banks, as well as challenger banks like Chime and Revolut, Friedrich said, contributing to lower customer acquisition costs because users are helping the companies do their marketing.

Wells Fargo “literally spends $500 million each year on postage and supply costs,” he said. Lower customer-acquisition costs help digital wallets like the Cash App and Venmo pick up unbanked customers, in his view, as these customers are typically viewed as unattractive for mainstream banks from a financial perspective.

PayPal and Square both say their services are popular among unbanked and underbanked customers. While Venmo is viewed as more popular with coastal millennials, the Cash App has caught on in the South and the Midwest. Square announced Monday that it has acquired Verse, a startup from Spain that lets users transfer money to one another.

Sending money to family and friends through peer-to-peer services is generally free, but PayPal and Square increasingly have been adding functions that allow them to make money off their user bases. Venmo and Cash App users can pay a fee to transfer their funds over to their bank accounts instantly or spend their funds with associated debit cards. Venmo users can also use a dedicated Venmo checkout button with some online merchants.

Though both originated as peer-to-peer payment services, Venmo and the Cash App seem to be going in different directions as they build out their functionalities. PayPal is “starting to play more of a commerce angle” with Venmo, in line with its broader strengths, while the Cash App is becoming “much more of a financial services platform,” Beck told MarketWatch.

Square has allowed Cash App users to buy and sell bitcoin on the platform for years, and it recently added equities trading as well. The company’s debit card lets users choose amongst a rotating set of rewards including 10% off DoorDash orders or 10% off a purchase at any grocery store.

“I think they’re likely to retain new users that they’ve gotten from stimulus products or people looking to save money on non-discretionary items like groceries,” Beck said. For underbanked consumers, these perks are “excellent,” he said.

Eventually, the company could branch into adjacent areas, such as deposit accounts, savings accounts, credit cards, or loans, according to Beck. (On the merchant side of the business, Square has obtained conditional approval for a bank charter that will let it more easily distribute loans to sellers.)

A company like Square could also more closely link its merchant and consumer businesses, Friedrich said, using coastal merchants to drive more Cash App users and allowing local businesses to offer targeted discounts to nearby Cash App users.

The Holy Grail for PayPal, Venmo, and the Cash App is convincing users to set up direct deposits of their regular paychecks through these services, but that appears to be a tougher sell than it was for the one-time stimulus payments, said Lisa Ellis, a payments analyst at MoffettNathanson.

“Wherever your paycheck is going, that’s your home base, and banks typically own that,” Ellis told MarketWatch. She said that while some users who tried Venmo or the Cash App for the first time to access their stimulus payments may stick around and try out other features, it’s still an “open question” whether these users will deem the user experience to be so much better that it becomes worthwhile to set up direct deposits of their real paychecks.

Square Chief Financial Officer Amrita Ahuja said on the last earnings call that direct-deposit customers “have generated revenue, which is multiples higher compared to customers who only use peer-to-peer.” They typically carry higher balances and engage with more of the company’s services.

Amassing regular direct-deposit customers could hinge on feature improvements. PayPal, for example, is making a large push into bill payments through a partnership with Paymentus, which aims to help customers more easily manage recurring bills. A better bill-pay experience could prompt more to ship their payments straight to PayPal or Venmo, Ellis said, since many people go to handle their bills shortly after getting paid.

“The idea is that the large banks like Chase are working on something similar, but naturally not everyone banks with large banks and the small banks are nowhere on this,” she said. “Even if Chase rolls it out, there are lots of customers out there who wouldn’t have access.”

Venmo and the Cash App already have an edge on the traditional banks, according to Ark’s Friedrich, who estimates that each service had more active mobile users last year than any mainstream bank.

He projects that there could be 220 million digital wallet customers by 2024 and calculates that if these customers were assigned a “lifetime value” similar to that of traditional bank customers, it would represent a $800 billion opportunity.

Of course, that assumes that Venmo and the Cash App morph into “real banking platforms” that generate “real banking revenues,” which Friedrich admits is a “bull-case scenario,” especially given that PayPal has proceeded more carefully with how it adds features to Venmo.

Still, he said it’s “interesting to think about what scale [the digital wallets] could go to,” given the more optimal margin structures of digital banks.

Investors, for their part, seem to be slowly coming around to the value of digital wallets. Beck said there was “low” investor reception when he suggested back in December a high standalone valuation for the Cash App, but now Wall Street appears to be looking past retail-related challenges for Square’s merchant business, in part due to the potential for a surge in Cash demand.

“I’ve very rarely seen a change in sentiment this quickly on a stock,” Beck said.



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