The US market saw a significant fall on 2 August 2023 post the recent downgrade of US debt. The downgrade was seen from the highest AAA rating to AA+ by rating company, Fitch. A major reason given by the US credit rating agency was “a steady deterioration in standards of governance.” After this announcement, there was a major sell-off seen in the technology sector. On that day, Dow Jones fell 348 points or 1% on Wednesday trading. The S&P 500 saw a fall of 1.4%, while Nasdaq dropped 2.2%. This was the worst performance since February.
Fitch Rating downgraded the US’ sovereign credit grade considering the ‘ballooning fiscal deficits’ which led to repeated debt limit emergencies from the previous 2 decades. This rating downgrade was sort of similar move which was made by S&P’s Global Ratings in 2011 because of government’s borrowing limit. Over the time, this lower credit rating can increase the borrowing costs for the United States.
This move surprised the US officials. However, all the 3 giant rating agencies warned the US that its AAA credit grade is at risk. Previously in May, Fitch put the US credit on ‘Rating Watch Negative.’ This exhibits an implicit warning that there can be a downgrade in the offing. Swelled budget deficits stemmed from tax cuts and new spending initiatives along with multiple economic s0hocks. Apart from this, while medium-term challenges associated with increasing entitlement costs are largely unaddressed.
Fitch has also cited that the country’s rapidly swelling debt burden might touch 118% of gross domestic product (GDP) by 2025, over 2.5x higher as compared to the ‘AAA’ median of 39.3%. Apart from this, Fitch stated that debt-to-GDP ratio is expected to increase in longer term. As a result of this, the US will become increasingly vulnerable to economic shocks which might arise in the future.
While there is so much noise in the US stock market, here are the 2 stocks to your rescue.
1. Paycom Software, Inc.
The company is the fast-growing provider of payroll and human capital management software. It continues to mainly target clients having 50-10,000 employees in the US. The company was established in 1998 and it continues to service ~16,000 clients, based on parent company grouping.
The company has launched its latest product, Everyday™. This allows the users to be paid on daily basis without incurring costly fee to get their wages. At the same time, it ensures that employers are compliant and they are not exposed to potential losses because of several things such as early employee departures.
It has reported its 2Q results, with revenues coming at $401 million, exhibiting a rise of 27% on year-over-year basis. In 2Q, its GAAP net income came in at $65 million, making up ~16% of total revenues or $1.11 per diluted share. The company saw a strong quarter, highlighted by healthy revenue growth and margin expansion. This was supported by increase in demand for the company’s differentiated HR and payroll solution. Paycom Software, Inc. strengthened its product suite with innovative developments and it expanded TAM to include larger North American organizations with both domestic and global employees. In 2Q, the company’s recurring revenues came in at $394.5 million, exhibiting a rise of 26.6% on year-over-year basis, and made up 98.4% of the total revenues.
For the quarter ending September 30, 2023, the company expects total revenues of between $410 million – $412 million and adjusted EBITDA in the range of $156 million to $158 million. However, for the year ending December 31, 2023, the company projects total revenues of $1.715 billion to $1.717 billion and adjusted EBITDA of $722 million to $724 million.
2. SolarEdge Technologies, Inc.
The company is in the business of designing, developing, and selling direct current optimized inverter systems for solar photovoltaic installations. Its systems includes power optimizers, inverters, and cloud-based monitoring platform. It addresses broad range of solar market segments i.e., from residential solar installations to commercial and small utility-scale solar installations.
Infineon Technologies AG and SolarEdge Technologies, Inc. announced the signing of multi-year Capacity Reservation Agreement (CRA). Extending the current partnership, Infineon should supply SolarEdge with components for variety of SolarEdge products.
SolarEdge Technologies, Inc. released its results for 2Q ended 30 June 2023. In 2Q23, it has posted record revenues of $991.3 million, with revenues from solar segment coming at $947.4 million. The company’s GAAP gross margin came in at 32% and GAAP operating income was $150.4 million. The company has seen healthy performance in Europe in both residential and commercial solar segments.
Even though the US residential solar market continues to see critical headwinds mainly because of higher interest rates, the company focuses on navigating through this period through leveraging its geographic and multi-segment strengths in solar markets. Apart from this, the company anticipates to benefit from positive long-term outlook for the sector.
For 3Q23, the company expects revenues in the range of $880 million to $920 million and non-GAAP gross margin of between 28% to 31%. Revenues from the solar segment is expected to come between $850 million – $890 million, while gross margin from the solar segment is expected between 30% to 33%.
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