The stock market had managed a small gain by Thursday afternoon. An interest rate cut by the Federal Reserve on Wednesday may be helping the cause.
Data source: Yahoo! Finance.
While investors didn’t appear concerned about a recession or trade tensions on Thursday, exceptionally weak guidance from U.S. Steel (NYSE:X) was a foreboding sign. Moving in the opposite direction was cloud software stock Twilio (NYSE:TWLO), which was upgraded thanks to its growth prospects.
U.S. Steel issues terrible guidance
U.S. Steel is the latest steel producer to issue concerning guidance. A combination of factors led the company to predict a per-share adjusted loss of $0.35 for the third quarter, far worse than analyst expectations of $0.07. The stock had tumbled 11.2% by 12:40 p.m. EDT on Thursday.
The company saw positive indicators in the flat-rolled steel market in the early summer, but the situation has deteriorated since then. Prices fell throughout the second quarter following a brief recovery, and an unexpectedly large decline in scrap prices added fuel to the fire. This tough pricing environment will hurt flat-rolled earnings in the second half, and the company expects to keep two blast furnaces idled until 2020.
Image source: U.S. Steel.
Another problem for U.S. Steel is Europe, where the relationship between steel selling prices and raw material costs has led to significant margin compression. A blast furnace already idled in Europe will remain idled this year due to market conditions.
Yet another issue for the company is its tubular segment. Market conditions have turned negative, and import levels remain high, which is putting pressure on demand. Weak demand for oil-related tubular products is also a contributing factor. U.S. Steel expects these issues to have a “significantly negative impact on earnings in the second half of the year.”
Including Thursday’s decline, shares of U.S. Steel are now down about 76% since peaking in early 2018.
Twilio scores an analyst upgrade
Shares of cloud software company Twilio have been routed over the past couple months, crashing from just over $150 per share to around $115 per share. The stock got a small boost on Thursday as analysts at Morgan Stanley took an optimistic position. Shares were up 1.9% at 12:40 p.m. EDT.
Morgan Stanley analyst Meta Marshall upgraded Twilio stock from equal weight to overweight, citing an underappreciated growth runway. Marshall also raised his price target on the stock by $5 to $130, about $15 higher than where it trades today.
Marshall believes that Twilio, which provides a platform for engaging customers with text messages, email, and voice, can outgrow the market for communication software. Twilio has certainly been growing fast — second-quarter revenue was up 86% year over year, and the company is on pace to exceed $1.1 billion of revenue this year.
But even after the drop, shares of Twilio remain very expensive. With a market capitalization above $15 billion, the price-to-sales ratio sits right around 15. And Twilio is nowhere near profitable on a GAAP basis, losing $92.6 million in the second quarter alone.
If Twilio can keep up its growth rate, and if the market continues to ignore the company’s losses, the stock could certainly recover from its recent troubles. But with many high-flying software stocks coming under pressure lately, a return to all-time highs is far from a sure thing.