HOT AIR BALLOON FLIGHT

By Julia Horowitz • Wednesday, October 27

Good morning. In today's newsletter: Robinhood earnings show amateur traders are taking it easy. Plus, Google and Microsoft report almost $40 billion in profit, and Wall Street is getting greedy again.

 

US stock futures are mixed after the S&P 500 and Dow eked out records on Tuesday. Markets in Europe dipped in early trading, following stocks in Asia.

 

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MARKET FLASH

Robinhood's big year is ending in disappointment

The growing clout of everyday investors has shaken up Wall Street, forcing hedge funds and big-time asset managers to start paying attention to armchair traders pumping their extra cash into the market.

 

But after a blockbuster start to the year, when traders coordinating on social media sparked a wild rally in meme stocks like GameStop and AMC Entertainment, activity has settled down.

 

What's happening: Robinhood, the commission-free trading app that helped facilitate the boom, reported disappointing revenue after markets closed on Tuesday. Shares are down 9% in premarket trading.

The company, which went public earlier this year, said that it hauled in $365 million during the third quarter. That's sharply lower than the $565 million in revenue reported during the second quarter. Monthly active users also fell 11% quarter-over-quarter.

 

Driving the decline was a drop-off in cryptocurrency trading. Revenue from crypto was just $51 million between July and September, compared to $233 million between April and June, when bitcoin and other digital coins reached new highs and then plunged.

 

"In [the third quarter], crypto activity came off record highs, leading to fewer new funded accounts and lower revenue as expected," CEO Vlad Tenev told analysts. "Historically, our growth has come in waves. The surges have come during periods of increased volatility or market events."

 

Robinhood thinks the rest of the year will remain muted, assuming nothing dramatic happens. It projected weak fourth quarter revenue of less than $325 million.

 

"As a reminder, our industry sees a typical seasonality curve that shows higher growth in the first quarter of the year versus the last three quarters," said Jason Warnick, the company's chief financial officer.

 

What gives: The VIX, a measure of S&P 500 volatility that's often referred to as Wall Street's fear gauge, has plummeted more than 30% in October and is near a 52-week low.

 

That means that even if Wall Street is increasingly optimistic (more on that below), markets lack the churn that typically draws Robinhood customers into the fold.

 

Could that change? Bitcoin has been hot again, hitting a fresh record earlier this month. Meanwhile, shiba inu coin — a parody cryptocurrency — touched a new high Wednesday, rallying roughly 100% in the past seven days.

 

The dramatic rise coincides with support for a Change.org petition urging Robinhood to list shiba inu coin on its platform, which has now gathered more than 330,000 signatures.

 

Ben Onatibia, an analyst at Vanda Securities who monitors retail trading activity, told me that retail purchases of cryptocurrency stocks "have been pretty large lately."

 

"That's a sign that retail has gotten involved in [the fourth quarter]," he said.

VOICES

Blackstone CEO warns energy crisis will trigger social unrest

"You're going to get very unhappy people around the world. ... This challenges the political system and it's all utterly unnecessary."

 

STEPHEN SCHWARZMAN (AT SAUDI ARABIA'S FUTURE INVESTMENT INITIATIVE)

 

Read more from CNN Business.

EARNINGS MONITOR

Google and Microsoft report almost $40 billion in profit

America's biggest tech companies are minting money as pandemic-era demand for cloud computing and remote work products continues to boom.

 

The latest: Google parent Alphabet and Microsoft both reported earnings after US markets closed on Tuesday. Alphabet disclosed third quarter profits of $18.9 billion, while Microsoft earned $20.5 billion.

 

Microsoft's strong performance was propelled in part by the strength of its cloud business. The company said that its Azure unit and other cloud services revenue grew by 50%.

 

Its collaborative workplace software, Teams, also continues to draw customers even as some firms pare back remote work.

 

"Usage has never been higher," CEO Satya Nadella told analysts. "138 organizations now have more than 100,000 users of Teams, and more than 3,000 have more than 10,000 users."

 

Google benefited from a resurgence in the online advertising market. Revenue for its ad business hit $53 billion — a 43% increase over the same period last year.

 

"Our revenue performance in the third quarter reflects continued broad-based strength in advertiser spend and elevated consumer online activity," said Ruth Porat, Alphabet's chief financial officer.

 

Investor insight: Microsoft shares, which hit a record high earlier this month, are up 1.5% in premarket trading.

 

Shares of Alphabet are down nearly 1%, however — indicating just how high expectations have become. YouTube and cloud revenue came in lower than had been forecast.

 

On the radar: UBS analyst John Hodulik pointed out that unlike tech companies like Snap and Facebook, Google does not appear to be vulnerable to changes to Apple's privacy policies that make it harder to track users.

 

"The biggest highlight of Alphabet's results is that its advertising business looks largely unaffected by the iOS changes," he said, referring to the operating system for Apple's iPhones.

UP NEXT

Boeing, Coca-Cola, General Motors, Harley-Davidson, Hilton, Kraft Heinz, McDonald's and Spotify report results before US markets open. Ford follows after the close.

 

Coming tomorrow: Anheuser-Busch InBev, Caterpillar, Hershey, Mastercard, Royal Dutch Shell, Amazon, Apple and Starbucks earnings.

 

👀 Check it out: This Thursday at 12 p.m. ET, CNN Business presents "Foreseeable Future: Housing Market Madness."

 

Join CNN's Christine Romans for a conversation with Barbara Corcoran, followed by a panel discussion with Redfin CEO Glenn Kelman, Cadre CEO Ryan Williams and Realtor.com CEO David Doctorow. To reserve a spot now, RSVP here.

WHAT WE'RE READING AND WATCHING

▸ Democrats wants to tax billionaires. Here's how (CNN Business)
▸ Twitter avoids revenue hit from Apple privacy changes (Reuters)
▸ Deutsche Bank signals optimism after trading slowdown (Bloomberg)
▸ US consumer confidence rose in October (CNN Business)
▸ 2% of Elon Musk's wealth could solve world hunger (CNN Business)
▸ The big takeaways from the Facebook Papers (CNN Business)

FINAL WORD

Investors are getting very greedy again

In the fast-paced world of trading, a month can feel like a lifetime.

 

Stocks sank in September on worries about inflation, a slowdown in economic growth in China and gridlock in Washington. But as October ends, Wall Street is in a festive mood, my CNN Business colleague Paul R. La Monica reports.

 

The CNN Business Fear & Greed Index, which tracks investor sentiment, is now trading near "extreme greed" territory. Just a month ago, the index was not far from "extreme fear" levels.

 

What changed? Corporate America has impressed Wall Street with third-quarter earnings and, perhaps more importantly, in its guidance for the fourth quarter and 2022. Through the end of last week, 84% of S&P 500 firms reported earnings that topped analysts' forecasts, according to FactSet analyst John Butters.

 

Investors are also increasingly confident that the Federal Reserve has inflation under control and will take only take small, incremental steps to tamp it down and keep the economic recovery on track.

 

But is it complacency? Jim Reid of Deutsche Bank pointed out in a recent note to clients that once you dig into results, it's easy to identify risks.

 

"Even though this has been a good earnings season in aggregate we are starting to see more companies with supply backlogs, hiring difficulties, and rising input prices that are eating into profits," Reid said.