Daily market update: Apple, Associated British Foods, Drax, IWG

Investors were sitting uncomfortably as they waited with bated breath for the US midterm elections and digested news of a resurgence in oil prices.

European equities were in the red as Brent crude rebounded after a big drop in recent days amid hopes of new peace talks. Oil jumped 2.1% to just shy of $107 per barrel on talk that the US had resumed strikes on Iran, despite Donald Trump having ruled out launching a new wave of strikes before the midterm elections.

Uncertainty around when energy prices will ease back has added to worries about excessive spending on AI, creating a cocktail of worries that is weighing on financial markets.

It has created the type of environment where the slightest bit of bad news rains on the market, soaking investors’ ability to make positive returns.

The FTSE 100 fell 0.6% to 10,695 as miners and tech stocks went off the boil. The fact healthcare and utilities were the only sectors to be in positive territory summarises the fragile state regarding market confidence. Investors were clearly in a risk-off mood, hiding in sectors that offer some resilience in uncertain times.

Apple

It increasingly takes a miracle to please the market as Apple has found out.

Apple has beaten earnings expectations for the fifteenth quarter in a row and delivered a new all-time high for annual revenue at $479 billion. It has found a way to keep the iPhone relevant 19 years after its initial launch and that is helping to power the business to a new level.

Unfortunately, this simply wasn’t enough for investors, with the shares falling in pre-market trading. Investors have focused on a drop in margins once you exclude tariff refunds, which is blamed on higher memory costs. While the market was already aware of such cost pressures, investors are on edge and are panicking about the slightest bit of bad news.

A broader tech stock sell-off in recent weeks has been driven by fears of excessive spending on AI and no sign of when, or whether, there will be a positive return on this investment. Apple joins a growing list of companies including Alphabet and Intel revealing pockets of bad news related either to AI applications or supply chain issues which are pushing up costs.

Chief executive John Ternus calls the situation with memory pricing ‘unprecedented’ which suggests this isn’t a small blip. He said on the results conference call that memory pricing will continue to increase. That implies Apple products are going to become even more expensive, which is not ideal at a time when the consumer is feeling the pinch from a higher cost of living.

One could argue that Apple products have never been cheap, and that incremental price increases are less of a worry versus an electronics provider at the lower end of the market. However, that doesn’t mean Apple customers will pay whatever is being charged. There is strong competition for smart phones and laptops, and Apple must never be complacent.

Associated British Foods

Associated British Foods’ diversified business structure is proving to be of little benefit as most parts of the group are struggling.

Still primarily known as the owner of Primark, ABF’s discount retail chain is seeing pressure on like-for-like sales and margins. Primark’s key selling point is its bargain basement prices, making it more difficult to pass rising input costs on to its customers.

The UK and Ireland business performed marginally better than mainland Europe but was still sluggish, and management will hope that plans to introduce a home delivery service can breathe some new life into the business.

It would be hard to argue this is a move without risk given management had previously said its operating model was not well suited to the extra complexity and cost around fulfilling web-based orders.

ABF’s grocery business slipped on lower profit from US oils, and the showing of the sugar arm was anything but sweet as bumper inventories kept the pressure on prices and inflationary pressures ramped up.

The group is at an inflexion point as the demerger of Primark moves yet closer. Focus on the performance of its retail business is likely to become increasingly unrelenting as this strategic shift approaches, and the consumer environment does not look like it will get more helpful in the short term.

Drax

The AI story is not just about semiconductors and large language models. The huge energy and infrastructure demand means companies who would have traditionally been seen as relatively old-fashioned are a key part of this technological revolution.

Drax signing up to develop a data centre at one of its power stations with investment group Brookfield and AI infrastructure specialist Radiant is an example of how energy companies are adapting to shifting trends.

Brookfield will provide the billions required to get the project off the ground, Radiant the expertise, and Drax the land, power and access to the grid.

There is an appetite in the UK to speed up the roll-out of domestic data centres to boost AI capacity and ensure that sensitive data can be kept onshore. In that context, it was not a surprise to see other energy utility names like National Grid, SSE and Centrica rise off the back of Drax’s announcement, although that might have also been influenced by investors looking for lower-risk options in a volatile market.

IWG

The owner of Regus and other flexible office space brands, IWG provided a healthy dollop of reassurance with its third-quarter trading update.

Revenue came in better than expected, and earnings guidance for the full year has been narrowed upwards despite the difficult economic backdrop.

The strategic shift towards managed and franchise partnerships, which allow the business to grow without a significant capital burden, is paying off.

Robust utilisation rates and higher revenue per available room demonstrate that the flexibility offered by the company’s solutions are still in demand with businesses.