Key results this week: Unilever, Lloyds, Tesla and Alphabet

This week was a busy one on the stock market, with lots of companies reporting their results. Some impressed, and some left investors underwhelmed. We cover the key movers here.

Unilever charges ahead

A big improvement on margins put a rocket underneath Unilever’s share price, taking the stock to its highest level since November 2020. Key to its success has been shifting greater volumes of products, suggesting that consumer demand for big brands is bouncing back.

It’s a healthy sign when volume growth exceeds pricing growth, as it implies solid underlying demand for the products, rather than simply slapping an extra amount on the unit price to boost revenue.

Dig deeper and Unilever’s success is not universal. Emerging markets account for just under three-fifths of sales and volume growth exceeded price growth. However, higher prices played a bigger role than volume growth in developed markets.

Ice cream was the weakest part of the group, which perhaps explains why the unit doesn’t have a future inside Unilever. Efforts are ongoing to sell or float the division, allowing Unilever to streamline and focus on other divisions that have stronger growth prospects. The ice cream arm was hit by a poor performance from China, where competition is tough, and from Europe, where unfavourable weather conditions dampened sales.

For a company that has faced considerable criticism in recent years for taking its eye off the ball and losing focus, Unilever now seems to be getting its act together. There is a clear plan for how to make the business leaner and keener, and a sharper focus on the best bits of the business make perfect sense.

The tricky part is execution and a big cost-cutting drive including the removal of thousands of jobs won’t be good for morale inside the business. Therefore, while the latest results offer some hope that its new plan is off to a good start, it won’t always be plain sailing from here.

Lloyds fails to impress

The company may have just about squeaked ahead of forecasts with its latest results but a lack of upgrades following a strong run for the share price has put Lloyds on the back foot. The market may also be focusing on a decline in key metrics – including net interest margin, which measures the difference between the amount a bank earns on lending versus what it pays out for deposits.

Given rates have stayed higher for longer, there may have been some expectation that Lloyds would have done rather better on net interest margins. In a competitive market for mortgages and savings products the initial boost provided by the rate hiking cycle may have played out. Whether or not the Bank of England cuts rates at its meeting next month, we are likely at the current peak. That suggests the only way for rates to go is down.

The main driver of Lloyds’ better-than-expected second quarter performance was a lower than anticipated impairment charge. While it is reassuring that the company is not facing a big uptick in bad debts, it does not tell us much about the underlying momentum in the business. 

Ticking over in the background, like an idling taxi waiting for a passenger, is the ongoing motor finance mis-selling scandal, currently subject to an FCA review. The regulator has said it will set out the next steps of its probe by 24 September. Lloyds made no additional provisions for this issue in the first half, beyond what it had previously allocated.

Tesla misses earnings expectations, again

Tesla’s financial performance is more erratic than a learner driver, having now missed earnings expectations for the fourth quarter in a row. The company always seems to be desperate to work on the next initiative rather than making sure the existing business is running smoothly. That raises the risk it is juggling too many things at once and not focusing on the bread and butter, instead preferring to look for another new toy to play with.

There is a lot of talk about robotaxis, humanoid robots and autonomous driving, which provides an exciting narrative for investors but doesn’t get over the fact that these are tomorrow’s potential riches, not today’s. The stark reality is that Tesla’s profits have plummeted and that’s not what investors should expect from a business.

Slashing prices certainly helps to address concerns about affordability, but that has led to lower profit margins. Plans are afoot to launch more affordable models and while that should make Tesla appeal to a broader group of drivers, it may still be a year or more until mass production of these vehicles gets underway.

Tesla needs to find a better way to thrive in a more difficult environment for electric vehicles now rather than later. It’s clear that the pace of adoption is slower than expected – people still have concerns about battery range and whether there are enough experts to fix vehicles when things go wrong. Competition is also increasing, and Telsa’s first mover advantage is fading away.

Alphabet delivers better-than-expected results

Alphabet is having to work harder to stay on top amid unpredictable corporate advertising demand and competition heating up in search and cloud computing. Another robust quarter shows the business has found the right ingredients to stay strong, but it hasn’t all been plain sailing.

Investors were quick to find fault and the spotlight immediately shone on a slowdown in Google’s advertising growth at 11.1% in the second quarter versus a 13% gain in the previous three-month period, year-on-year. YouTube’s advertising revenue was also slightly below forecasts. That triggered volatility in the share price, despite a strong showing from the cloud arm and overall earnings beating expectations.

The fact the stock was initially down one minute, up the next and then down again after the results implies that investors might be losing conviction in Alphabet. There are already lingering concerns about the Magnificent Seven and whether the best days are over for their share prices, at least in this point in the cycle. The past few weeks have shown signs we might be in the early days of a market rotation away from the mega cap tech names towards more value-orientated stocks.

Advertising demand can be cyclical and the slightest bit of uncertainty around the state of the economy, strength of consumer finances or political upheaval can quickly make corporates scale back or pause spending on promotions. That is firmly at play, but Google is well versed in riding the ups and downs.

More importantly, Alphabet needs to show it can deal with the competitive threat of ChatGPT with AI-related search functions and that it has enough muscle to battle Amazon and Microsoft on the cloud side. So far, it is holding up well on both accounts, although a lot can change at the click of a finger, particularly in AI where technological advancements are coming hard and fast.

What’s clear is that Alphabet still has plenty of ideas for how to innovate and the financial strength to try lots of new things. Not everything will work, but its willingness and capacity to have a go is a major advantage. Beating earnings expectations for six quarters in a row also shows the business still has plenty of fuel left in the tank.