Technology stocks attracted buying after SpaceX’s results, and chip stocks also recovered on Wednesday. While reporting a profit, the company spent more on new investment; today I will also look at how that growth is financed.

Building a data center requires spending money today, while the revenue from its capacity extends into future periods. Reported profit, cash coming in and the cost of new facilities therefore need to be read separately.

Key takeaways

  • Financial analyst Tunç Şatıroğlu (@tuncsatiroglu) expects semiconductor demand to continue, while waiting before making new purchases in the short term. Confidence in a sector’s long-term business and finding today’s price attractive are different decisions; strong demand expectations do not remove the possibility of a near-term decline.
  • Money spent on a data center can create sales opportunities for chip suppliers. But the company building the facility earns its return according to how much capacity customers use and what they pay. Companies exposed to the same investment wave can therefore have different revenue and financing needs.

What happened?

  • According to AP, on October 21 the S&P 500 rose 0.6% and the Nasdaq Composite gained 1.1%. CNBC also reported that the major indexes finished below their session highs. Buying returned, but the close did not retain all of the day’s optimism.
  • SpaceX ($SPCX), whose businesses also include satellite internet and artificial intelligence, reported approximately $4.4 billion in third-quarter net income and $2.8 billion in operating income. Total capital expenditure in the same quarter rose from about $18.4 billion in the previous quarter to $19.6 billion. Net income also reflects interest, other income and taxes; capital expenditure is the cost of the infrastructure being built. Subtracting these figures does not give the company’s free cash flow.
  • In its third-quarter results released after the U.S. session on October 21, Tesla reported that free cash flow fell 62% year over year to approximately $1.5 billion. Capital expenditure rose 110%. Free cash flow is the money left after subtracting capital expenditure from operating cash flow; a company can retain less cash as spending accelerates.
  • The United Kingdom’s maritime trade security unit UKMTO reported in its October 21 warning that a tanker near Oman had been struck by an unknown projectile. The fire was extinguished and the crew is safe; the incident is under investigation. Such incidents can raise shipping and insurance costs even while oil continues to flow.
  • On October 21, the U.S. Treasury announced new sanctions on companies and vessels linked to Iranian oil transportation. Enforcement could affect the ships available for oil trade and transportation costs; the price effect will depend on how actual flows change.

What changed since yesterday?

  • Yesterday I was watching chip weakness separately from the buying that had spread to small companies. On Wednesday, chip-company ETF SMH ($SMH) closed above Tuesday’s high. Another sector thus joined the previous day’s recovery. What matters now is whether it retains that gain in the next session.

Market levels

U.S. indexes and technology

  • SPY ($SPY), which tracks the S&P 500, finished Wednesday at $773.09. The day’s $768.40 low and $774.44 high are nearby support and resistance candidates. A close near the upper boundary is positive; fresh buying above it would extend the advance, while a return to the lower boundary would weaken the latest session’s gain.
  • The first resistance candidate for QQQ ($QQQ), which tracks the Nasdaq 100, is $727.95. Its latest close of $725.20 is below that high, with a support candidate at $719.71. If it cannot clear Wednesday’s upper boundary and heads toward the lower area, the strength of buying in technology will come into question again.
  • SMH closed at $556.70. The latest session’s $549.52 low and $559.19 high are nearby support and resistance candidates. I am looking for chips to retain the ground gained, alongside a rising index. Clearing the upper boundary could recover more of the preceding selloff.
  • IWM, which tracks small U.S. companies, closed at $276.48. The resistance candidate above is $277.70, with a support candidate at $275.30 below. Holding this lower area while technology strengthens would help keep buying from narrowing to a single sector; losing support would reduce my confidence in broader participation.
  • SpaceX finished at $159.31 after reaching $166.18 during the day. That high is a nearby resistance candidate, with the $156.93 low a support candidate. Its retreat from the upper area after a strong earnings report is a reminder that a positive business view does not justify buying at any price. It first needs to regain the upper area to strengthen again.

Metals and crypto

  • Gold ETF GLD ($GLD) closed at $378.95, near Wednesday’s $379.55 high. Clearing that resistance candidate could extend the recovery; the intraday low of $376.20 is a nearby support candidate. Losing the lower boundary would weaken the significance of the latest session’s positive close. These are ETF share prices, on a different scale from gold per ounce.
  • Silver ETF SLV ($SLV) closed at $52.26, very near the day’s $52.29 high. That high is a resistance candidate, with the day’s low of approximately $51.40 a support candidate. Holding above the upper boundary after clearing it matters. If the price quickly returns inside the range, touching the high alone will not be enough.
  • Bitcoin is approximately $82,688 this morning, near Wednesday’s $82,534 low. That completed day’s low is a support candidate, with its $84,853 high a resistance candidate. Holding the lower area comes first; losing it would make it clearer that the recovery in technology stocks is not providing equivalent support to crypto.

Red flags

  • Even with strong demand for new capacity, an investment can take longer than expected to pay back. Lower utilization, lower selling prices or more expensive borrowing can reduce the cash a company retains from the same amount of revenue.
  • Another rise in oil prices could increase companies’ energy and transportation costs. If it also delays the slowdown in inflation, high interest rates could make company borrowing more expensive and reduce the value investors place on future earnings today.

Calendar

  • October 22, 14:00 Turkey time: TCMB interest-rate decision. Alongside the decision, the statement’s message about subsequent meetings matters for borrowing costs and the lira’s outlook.
  • October 27-28: Federal Reserve monetary policy meeting (FOMC). The decision and statements could affect company financing conditions and the appeal of gold and silver relative to interest-bearing assets.

My analysis

The positive development today is that chips joined the recovery. Even so, I distinguish the company making the investment from the company selling it equipment. The supplier can earn revenue from an order; the company building the facility must use that capacity profitably for years. Strong demand does not mean these businesses carry the same risks.

I will first watch whether Wednesday’s gains hold, then how much revenue and operating cash the new capacity generates. If revenue growth continually requires more outside financing, reported profit alone will not be enough. My confidence in the recovery would increase if capacity utilization and cash generation catch up with investment, while the advance spreads to more companies.

Sources

Not investment advice; research and monitoring notes.