News of the Week (January 8 - 12)
Big Bank Earnings; Disney; SoFi; Amazon; Match; Progyny; Lots of Layoffs; Lemonade; Uber/DoorDash/Lyft; CrowdStrike; Macro; Market Headlines; Portfolio
Today’s Article is Powered by my Favorite Brians Over at Long Term Mindset:
1. Bank of America (BAC) & J.P. Morgan (JPM) – Big Bank Earnings
The theme of the bank earnings I covered was a resilient consumer and economy. Both are modestly slowing and showing signs of more fragility, but both remain healthy.
a. Bank of America
“We ended 2023 with our economists projecting the Fed has successfully steered the U.S. economy to a soft landing. In regards to the economy, during 2023, we consistently made a few points regarding what we were seeing in our customer data here at Bank of America. First, the year-over-year growth rate and spending from the beginning of '23 started declining. And it went from 9% in early 2023 to 10% growth rate to this quarter's 4% to 5% growth rate. That's where it stands here early in 2024.” – Bank of America CEO Brian Moynihan
“Consumer balance sheets are generally in good shape and while impacted by higher rates.” – Bank of America CEO Brian Moynihan
Missed revenue estimate by 7% or missed by 0.9% *ex-special charges.*
Missed $0.58 GAAP EPS estimate by $0.23; beat by $0.12 *ex-special charges.*
Missed ROA & ROE estimates. ROA was 0.93% for 2023 vs. 0.88% Y/Y ex-FDIC. ROTCE was 15% vs. 15.1% Y/Y ex-FDIC.
Roughly met net interest income guidance.
Notes on the tables:
Revenue and net income were impacted by a Bloomberg Short Term Bank Yield (BSBY) index cessation impact and an FDIC special charge (like for JPM). The FDIC item was to replenish federal insurance reserves. BSBY was based on not receiving the traction needed to justify continuing to offer it.
Net interest income fell 5% Y/Y.
$897 billion in global liquidity; $302 billion in long term debt.
$33.34 book value per share vs. $30.61 Y/Y.
Loans & leases rose 1.1% Y/Y.
Deposits fell slightly Y/Y.
$1.1 billion in credit loss provisions vs. $1.2 billion Q/Q and $1.1 billion Y/Y.
0.59% non-performing loan (NPL) rate on consumer loans vs. 0.61% Q/Q & 0.60% Y/Y.
1.30% consumer net charge off rate vs. 1.16% Q/Q & 0.78% Y/Y.
Total consumer spending in 2023 reached $4.1 trillion vs. $4.0 trillion Y/Y. Consumer spending on BofA’s platform has compounded at a 10% clip since 2020. Stimulus has helped a lot. Consumers are spending more on travel and other services. They’re spending less on retail goods and gas, which is partially due to disinflation.
7.18% consumer credit card risk-adjusted profit margin vs. 7.70% Q/Q & 9.87% Y/Y.
Commercial real estate is driving this segment’s NPL rate higher. Overall, NPL rate rose to 0.47% vs. 0.35% Q/Q and 0.18% Y/Y. Very tough times for the sector. Still, the overall NPL rate across the portfolio is 0.52% vs. 0.36% pre-pandemic. Again… worsening, but not terrible.
b. JP Morgan
"The U.S. economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing. The economy is being fueled by large amounts of government deficit spending & past stimulus. There is also an ongoing need for increased spending. This may lead inflation to be stickier and rates to be higher than markets expect." -- CEO Jamie Dimon
Missed revenue estimate by 2.9% but managed revenue beat by 0.5%.
Missed $3.41 GAAP EPS estimate by $0.37 but beat by $0.37 ex-FDIC.
Missed return on equity (ROE) & return on asset (ROA) estimates.
Notes on the tables:
Q4 2023 net income margin excludes a special FDIC charge across the big banking sector. Net income margin was 24.1% without this exclusion.
Revenue and net interest income growth was 7% and 12% Y/Y respectively when excluding the FRC M&A.
Loans rose 4% Y/Y ex-FRC and deposits fell 3% Y/Y ex-FRC.
$88B in net interest income vs. $89.2B Y/Y; $90B in expense vs. $85.7B Y/Y; < 3.5% net charge off rate for card service vs. ~2.5% Y/Y.
$1.4 trillion in cash & marketable securities; $391 billion in long term debt.
CET1 remains well above its 11.4% regulatory minimum.
$2.76 billion in credit loss provisions vs. $1.38 billion Q/Q & $2.29 billion Y/Y.
Its card services net charge off rate of 2.79% compares to 2.49% Q/Q & 1.62% Y/Y. Its commercial net charge off rate of 0.18% compares to 0.08% Q/Q & 0.06% Y/Y. Like for BofA, this is being driven by deterioration in its commercial real estate portfolio.
2. Disney (DIS) — The ESPN News That I Wanted… Finally
Consistent readers know: I saw Disney selling a stake in ESPN to a powerful partner as vital for the longevity of that network. I have demanded this as a requirement to remain a shareholder. Well? News struck Friday night that put a large smile on my face.
Disney’s ESPN is in advanced talks with the NFL on a deep, new partnership. As part of it, the NFL would own a stake (likely a minority stake) in Disney. In exchange, Disney will assume total control of the NFL’s media properties including the NFL network and RedZone. Disney will gain preferential distribution for NFL games and content such as the immensely popular RedZone product. News outlets shared that the partnership would “streamline distribution of league broadcasts” with control over its media business. That implies Disney will control future game & content bidding as well as ad sales. I eagerly and excitedly await more details. It’s unclear how this will impact Google’s NFL Sunday Ticket rights if this deal closes as expected. That deal will likely have to expire (in 2030) before Disney takes control of it.
Why does this matter? First and foremost, it will give Disney’s planned ESPN streaming service exclusive access to highly valuable content in the USA without having to openly bid against richer competition for the rights. That will inevitably make the service a lot more successful. Incredibly, all 8 of the top viewed titles in the USA in 2022 were NFL games. This is by far the most powerful sports league in North America. We friggen’ love our football, myself included (go Lions). It’s a fan base with perhaps unmatched passion and should allow Disney to focus more on continuing to win lucrative college football, Olympic and March Madness rights as well. This solves the content problem and will guarantee long term NFL content rights for Disney without regular bidding wars.
Now, instead of competing with Amazon and others to see who can spend the most, it has partnered. Disney is David and not Goliath in this equation. How can David win? With powerful friends like the NFL and full control over its content. It’s like legal cheating.
This just leaves Disney’s streaming distribution issue. Disney will lose consolidated traffic sources like Xfinity and Spectrum when cutting the cord on ESPN. So? I would still love for them to sell another stake in the company to mega-cap tech or Verizon. The news that broke clearly depicts that these talks are still ongoing. Partnering with the NFL and a distribution outlet like Amazon is not mutually exclusive here.
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3. SoFi Technologies (SOFI) – Layoffs, Tech Platform & Buckle Up
SoFi conducted a round of layoffs this past week involving under 4% of its total staff. The layoffs were broad-based across most departments. Notably, these layoffs were within SoFi Technologies and not the Galileo tech segment (which now includes Technisys). Speculation swirled about what the news meant, naturally with a wide range of assumed reasoning. The company removed this speculation in a note sent out on Wednesday. In the note, it told investors that it “remains committed to continued strong GAAP profitability and tangible book value (TBV) growth.” My favorite word in that quote is “continued” as it implies Q4 GAAP net income and TBV growth won’t be one-off events, but the beginning of enduring trends. That’s not surprising, but still always nice to hear. Consistent GAAP profitability and TBV growth also rely on continued strong revenue growth to drive leverage and origination volume, meaning this is likely not a response to slowing growth. Especially with headcount still expected to grow in 2024 and ramping investments in financial service growth following its profit inflection, SoFi would have a hard time remaining consistently profitable if growth sharply slows.
This decision is also not being made to reach positive GAAP net income in Q4 2023 or Q1 2024. Q4 2023 is already over, which means this will not impact payroll for the company’s upcoming earnings report; severance payments will also last through Q1 2024. It also told investors that the move was to “double down on the top priorities.”
The explanation from the IR team was candidly somewhat vague. I have a couple of potential explanations for why this news is happening now. First, the Technisys M&A likely created obsolete and redundant roles within SoFi’s base of software engineers and customer service employees. Starting with software engineers, SoFi uses the tech platform’s multi-core banking software to power its app. While the Galileo division is technically separate from SoFi, the firm still readily borrows its software, APIs and engineers to help power and maintain the consumer app. Why wouldn’t it?
When SoFi acquired Technisys, it told us that integration would be a “2-3 year journey.” Well? This quarter marks the 2 year anniversary of the M&A. This news could mean that the integration work is done, and with it done, SoFi can turn to optimizing cost and eliminating unnecessary roles. It can do so without having to worry about any headache created by diminishing continuity in the middle of what is often quite chaotic integration work. This was a large purchase for the company and a large undertaking. Now, with all of the talent and software from integrated Galileo/Technisys at SoFi’s disposal, it doesn’t need to employ as many engineers on the SoFi side. There’s less internal need to build new features and maintain existing tools. Galileo and Technisys can do so for them.
From a customer support angle, the AI-powered Galileo/Technisys Konecta product can be easily used by SoFi to automate customer support interactions. They’ll still need humans at this still early stage of the GenAI wave, but likely fewer. We’ve already seen GenAI lead to diminishing headcount needs at companies like Duolingo and Google. They will be far from the only examples.
Aside from these two factors, which I think will turn out to explain most of this news, there still could be some headcount bloat from the age of free money and stimulus. At this point in the monetary cycle, companies can lay off people without attracting negative publicity. Most companies got ahead of themselves with hiring and now would be a good time to right-size while everyone else is. Section 6 of this article strongly depicts that continued reality. SoFi is not remotely close to the worst offender. It still likely wasn’t perfect in modeling headcount needs during what has been historically chaotic 3-year period.
b. Tech Platform Uncertainty
SoFi received a number of updated analyst notes this week. Deutsche Bank initiated coverage with a hold rating and an $11 price target. While this represents significant upside vs. the share price today, the hold likely stems from the immense volatility associated with the stock (more on this in section c). Barclays raised their target from $8 to $10 and BMO set a hold rating with a $9 price target. I wanted to focus on the DB and the BMO notes specifically, as there was a consistent theme between the two.
Each covered a lack of visibility in tech platform revenue growth. Unlike the KBW note, this tidbit makes a lot of sense and is entirely fair. Galileo leadership embarked on a tech platform transition from chasing all account growth to chasing only high quality, established clients. This meant slowing near term account and revenue growth while tough macro and comps slowed that growth further. Sales cycles are longer with larger clients. Revenue ramps are also faster.
The currently slowing growth (6% Y/Y last quarter) naturally leads to uncertainty in extrapolating a near-term re-acceleration like we’ve been told to expect. Specifically, leadership has told investors that growth will ramp to 10%+ Y/Y in Q4 2023 with further acceleration thereafter. On November 15th, halfway through Q4 2023, CFO Chris Lapointe reiterated this when saying:
“You're going to see a revenue acceleration in our Tech Platform business as a result of the change in strategy to focus on more durable, larger financial institutions and larger customers with large installed bases. We've never been more excited about the demand that we see in the Tech Platform business. We're in conversations with a number of the top financial institutions right now in request for proposals (RFPs).” – CFO Chris LaPointe November 15th Investor Conference
CEO Anthony Noto echoed this sentiment on the firm’s Q3 2023 call:
“The majority of signed clients in Q3 have existing customer bases and portfolios, which drives much faster time to revenue generation compared to a startup… The demand from traditional financial institutions and new categories is the most robust that we've seen. While the lead times for winning RFPs and ensuing integrations are long, measured in many quarters, not months, their transition to modern processing and modern cores is playing out in real time the way we envisioned it would.” – CEO Anthony Noto Q3 call
While there’s a risk to assuming the re-acceleration, I’m somewhat confident in that acceleration coming. Why? Well, first and foremost, when SoFi leadership tells us to expect something, it happens. That has been consistently true since the firm went public in 2020. But we don’t just have to take their reliable word for it. Again, and like Noto said in the quote above, the sales cycle with larger clients is innately longer than with a nimble start-up, which contributed to the temporary slowdown through Q3. The fruits of this transition will begin to pop up in Q4 as newer clients like Experian lead to faster revenue ramps than unestablished companies would. This ramp is already taking place, and the effect should become clearer in a few weeks. So? Leadership isn’t saying growth will accelerate because they’re relying on winning bids for new clients. They’re telling us to expect it because existing clients will begin to generate more revenue for Galileo as they onboard their members.
Two more (unneeded) factors lend confidence that this acceleration will come. First, Galileo’s core payment processing API demand is helped more by rate cuts than perhaps any other product it offers (besides maybe mortgages & student loans). Why? Most of Galileo’s revenue is volume-based. Velocity of money and transaction volume are propped up by easier monetary policy. Monetary policy will almost surely get easier from here. Markets currently expect 7 rate cuts in 2024. Who knows if that will happen, but a peak in the fed funds rate is all but certainly here. Finally, growth comps get much, much easier in 2024 than in 2023.
Large client revenue ramps + easier macro + easier comps = what I view as a low-risk expectation of the tech platform meaningfully re-accelerating.
c. Buckle Up
Breaking news: SoFi the stock is immensely volatile (in case you hadn’t noticed). While the business keeps chugging along, the profit inflection occurs and this disruptor takes market share, the stock will remain volatile. It will jump 20% and sink 20% on a dime… over & over again. I don’t expect that to stop any time soon. It’s a polarizing name and volatility is very stressful for all investors. If owning this choppy stock is keeping you up at night, regardless of what you think of the business, it may not be worth it to own (or it may need to be a smaller holding). Tranquility is priority 1 in the world of investing. That is the only way to stick to our process through thick & thin. There’s nothing wrong with owning mega-cap tech (like I also do) or index funds.
I’ve decided, as a single 26 year old with material disposable income and a stomach for risk, that the volatility is more than worth holding the stock. That is certainly not the right decision for everyone. If, like me, you’ve decided that it’s worth it for you, then buckle up. More aggressive moves to the upside and the downside are likely coming throughout the foreseeable future. As long as the business continues to execute as impressively as it has, I don’t care and will use the sharp downturns to keep building the position. I’m personally looking at the $7-$7.20 range to add more shares.
4. Amazon (AMZN) – TD Cowen Survey & More
a. TD Cowen Survey
TD Cowen shared encouraging data on Amazon’s ad business this past week as part of its survey of 54 large buyers in the U.S. Its data points to continued digital ad market share gains for a 4th straight year. Specifically, its market share is expected to rise from 7% today to 8% in 2025. 1% of the $802 billion market would be needle moving for revenue, but especially impactful for EBIT.
7 out of 10 of its respondents plan to allocate budget dollars to Prime Video in 2024. All in all, the firm sees this momentum driving nearly 17% Y/Y growth for 2024 and compounding at a robust 13% clip through calendar 2029. This is a few points better than what I assumed in the simplistic modeling I did when starting the position. Works for me. All of this led to revenue and EBIT modelling 1% and 19% above expectations, respectively, for Q4 2023.
Consistent readers know exactly why this matters: Ad revenue is among the highest margin revenue businesses that Amazon has. As it proliferates, its growth will be margin accretive. That, along with all of the other tailwinds we often discuss in fulfillment and logistics as well as AWS, should spur continued profit outperformance in the quarters ahead. That is what I expect, with this note showing TD Cowen does too. A lot of sell side notes are somewhat noisy and irrelevant. This was valuable and data-driven. Thank you, TD Cowen.
b. Buy with Prime
Amazon integrated its Buy with Prime offering with Salesforce Commerce Cloud. This adds to a partner list that already includes Shopify and others. This will mean broader access to Amazon’s world-class fulfillment from a merchant’s own storefront. That should lead to better capacity utilization for Amazon and slightly better margins. It’s simply one of many, many tools in its current margin expansion toolkit.
5. Match Group (MTCH) – Activist
It’s no secret: I was very disappointed in Match Group’s most recent quarter. The lengthier journey to fixing top of funnel traffic and the inexplicable pause in a successful marketing campaign powered that opinion. Match Group is a dominant market share leader in an online dating market poised to grow well in excess of global GDP. It owns arguably the two most valuable brands in the space in Tinder and Hinge (Bumble is in that conversation too). It has an unmatched first party dataset to guide product perfection and to borrow insight/tech to debut newer apps (such as Archer) at lower cost. It is battle tested against mega-cap tech (Meta tried and mostly failed to enter the dating space). This is why I’ve been so patient with the name as other exogenous factors like an abnormally strong dollar (until recently) have weighed heavily on its global growth.
Despite all of the secular tailwinds, execution was poor under old leadership and has been inconsistent with the new team. So? This is the perfect candidate for an activist investor. It’s the holding that I think has the most pressing need for an activist to steer the ship. Enter Elliott Management. This week, news of a nearly 10% ($1 billion) stake in the company broke. It’s not yet clear what Elliott wants to see change, but I’m sure they’ll have many requests including board representation. I’d personally love to see a CFO change. Whether that’s changing capital allocation preferences, shifting focus on its app portfolio or even pushing for an outright sale, this is good news for shareholders.
6. Progyny (PGNY) – Refresher & an Investor Conference
This is perhaps the core holding that I talk about the least. That’s mainly because it’s such a wonderfully boring performer. There’s very little drama here aside from short reports from people who don’t understand the industry or the company. I wanted to offer a refresher on the Progyny value proposition and infuse highlights from this week’s investor conference. If you’ve read the deep dive or follow the company very closely, this will be a review.
The Progyny formula continues to work perfectly. Its ability to granularly customize fertility treatment plans combined with its rare integrations with national carriers continue to deliver tangible benefits (higher success rates, quicker time spans, lower costs) vs. the pack. Eliminating dollar maximums (per treatment) and the coinciding mandated step therapies to cut costs and corners is the major key. Progyny rarely cuts a treatment plan short, which is a cliche in the space and forces employees to bear crazy and unrealistic out of pocket costs. Treatment cycles cost about $60,000 on average for context. While elimination and deeper customization often lead to higher per-treatment costs for the employer, the net cost benefit is ~30%. How? Because there is a large difference between perceived and actual cost within fertility.
“While we continue to improve upon our solution each year, national clinical outcomes have been relatively consistent, revealing that carriers either lack the focus or aren't able to overcome the structural limitations in their approach.” – CEO Pete Anevski this week
Its custom plans (which members select with the help of a dedicated patient care advocate/expert) lead to direct and quantified outcome advantages. These edges include a 27% better live birth rate and a 24% better single embryo transfer rate. Better outcomes and shorter time to fertilization often mean forgoing more rounds of treatment. It also means clients can greatly cut Natal ICU (NICU) costs, which can routinely run in the 7 figure range for twins and other birth complications. That’s why twins are known as “million dollar babies.” Progyny minimizes these complications vs. legacy treatment because it crafts plans around individuals, not the entire human race. Needs widely vary across prospective mothers. Legacy treatment doesn’t take that into account.
Progyny creates an even larger cost advantage by paying benefits to members on a pre-tax basis. Again, for plans that generally cost around ~$60,000 per cycle (often more), this saves nearly $15,000 a pop on top of the forgone NICU costs and incremental treatment needs. No other competitor has the needed carrier integrations to achieve these savings. They just can’t match Progyny here. Plain & simple. That’s because no competitor can call firms like Microsoft, Meta, Google, Uber, Exxon, Unilever, Target, Hershey, Amazon etc. their clients. Microsoft and Amazon specifically “went to bat” for Progyny at its inception as they saw how valuable the service was. In essence, they forced the hand of carriers to integrate if the insurers were to keep these chunks of business. Other positive byproducts of this reality include broad single parent and LGBTQ+ coverage, which is also rare in fertility benefits.
It pays to call 17% (85 members) of the Fortune 500 your clients. The remaining 83% are also Progyny’s for the taking as most have legacy coverage or none at all. Kindbody and Carrot (competition) don’t come close in terms of large client adoption. They don’t even come kind of, sort of, remotely close. Different ballpark. Different universe. Walmart is the only mega-cap client between the two, which Progyny didn’t even bid for as it wasn’t willing to offer the limited plan design that Walmart wanted.
Progyny is the king of managed fertility benefits… a dominant share leader in an industry compounding at a double digit clip. Despite all of this, the runway remains very long, with just a 6% penetration rate in its serviceable addressable market. This 6% also assumes just a $15 billion market size, which Progyny thinks will actually be closer to $50-$75 billion with its broader offerings. The growth opportunity also doesn’t include new endeavors like maternity, childcare, menopause or preconception support. Revenue generation from these new areas will begin in 2025 and will morph Progyny from more of a point solution within fertility to a full-service provider.
Some will point to falling birth rates as the reason why rapid growth can’t continue. What they ignore is that birth rates are actually rising for women over the age of 35. Families are delaying childbirth more than they ever have thanks to more equitable economic opportunity. Delays enhance the need for treatment. Per the CDC, 1/5 couples now need treatment vs. 1/8 just 7 years ago.
All of Progyny’s unique advantages and tailwinds mean healthier employers as well as more profitable clients and insurance carriers. That’s the value needle Progyny has threaded for 9 straight years. And its outcome leads continue to consistently grow. As an aside, that paired with Progyny always seeing treatment cycles to their completion is why it’s the only player in the space to offer full outcome data. To be candid, it’s not hard to be transparent when the data is as positive as it is for Progyny. This is also partially why Progyny’s gross client retention has been nearly 100% for 9 straight years with a Net Promoter Score over +80. That’s not normal in healthcare.
“We believe we are in the strongest competitive position we’ve ever been in. Our active pipeline is the largest it has even been at this time of the year.” – CEO Pete Anevski this week
“We had another great sales year [for 2024].” – COO Michael Sturmer this week
Simply put, Progyny provides a boatload of unmatched incremental value. Impressive financial statements are the effect of that impactful cause.
Final Notes from this week’s Conference:
Progyny hinted at existing client headcount growth resuming the positive trend that paused in 2023. This would be a modest growth tailwind for the firm vs. 2023. The slight budget headwind that recession fears caused also seems to be diminishing.
Progyny hired Katie Higgins as its new Chief Commercial Officer. She was previously the Chief Revenue Officer at Crossover Health (very small) and a team leader at Optum. It also added Steven Leist as its new CTO. Steven comes from American Airlines where he was its VP of Customer Technology.
7. Layoffs Galore – Duolingo (DUOL), Meta (META), Citi (C), Uber (UBER), Disney (DIS), Google (GOOGL) and Amazon (AMZN)
Duolingo fired 10% of its contractors this past week. Affected staffers are no longer needed as Duolingo infuses GenAI more deeply into its company and automates more aspects of it like content creation. All else being equal, this raises the long term margin ceiling still further as DUOL delivers “more with less.” This stinks for those impacted, despite it being a great time to seek a job. I’m unfortunately expecting many more headlines like this one coming out due to GenAI’s proliferation.
Meta cut about 60 program managers within Instagram. Citi will cut 20,000 jobs over the next several quarters, which represents 10% of its workforce. Amazon fired 5% of its Audible employees (around 100 people). Its Twitch business will cut 35% of its staff (500 people). Amazon also laid off some people in the Amazon Pay and marketing departments. Disney plans to cut a “significant” number of jobs within its Pixar business. Rumors point to “significant” meaning around 20% as Disney realizes it does not need nearly as many employees in that segment as it has. GenAI’s ability to automate content creation could have a small impact here too. Uber is cutting jobs within its freight segment. Unity Software will cut 25% of its workforce across most departments. All of this comes as Google recently announced its plans to cut 30,000 jobs due to GenAI and dismissed a few hundred more people this week. Any company that needs to downsize headcount will be taking this opportunity to do it while everyone else is.
8. Lemonade (LMND) – Growth Spend Financing Extension
A few months back, I discussed Lemonade’s new “synthetic agent” partnership with General Catalyst. In it, General Catalyst agreed to finance a chunk of Lemonade’s customer acquisition cost in exchange for a share of future premiums. Further details can be found here. This week, Lemonade announced a boost of available funds under this arrangement from $150 million to $290 million through December 2024. I guess General Catalyst is pleased with how returns are shaping up from this unique (and what I view as savvy) relationship.
9. Uber (UBER), Lyft (LYFT) DoorDash (DASH) – Gig Economy Regulation
The gig economy received a bit of good regulatory news this week in the USA. The Biden Administration finalized new rules and regulations on gig worker classification. These classifications were less restrictive than feared. Notably, Uber doesn’t expect any worker reclassifications to full time employees stemming from this news. The rules, as its presser stated, were “intended to address misclassification of workers in traditional industries.” Not industries broadly determined to be entrenched in the gig economy world. Good news for margins and good news for consumer surcharges. I’d also argue that this is good news for workers. The vast majority of its drivers don’t want to be full-time employees and prefer the scheduling flexibility of a gig economy worker.
10. CrowdStrike (CRWD) – Sell-Side Excitement
Sell-siders are lining up to raise price targets and upgrade CrowdStrike’s stock. As always, sentiment follows price, and this share price has been on an absolute tear. Still, the stock is getting very pricy to a point where I’m almost ready to entertain trimming 5%-15% of the position. Its price to EBIT to 3-year EBIT CAGR multiple is quickly approaching 2x, and is one of the most expensive in public markets. It’s not quite to Snowflake or Cloudflare territory, but it is getting there. This company deserves a hefty premium due to its wonderfully rare (1 of 1) mix of growth, scale, margin & sector tailwinds. Still, there could easily come a point in the near future where expensive will get too expensive and I will trim a bit.
I don’t think now is the time to get excited and start a position. Analysts will do whatever they can to justify a higher price target if their previous target has been far surpassed. Even if the business were fundamentally identical to what it is today, but with a lower share price, aggressively higher price targets wouldn’t be coming like they are now. I don’t like to rain on parades (especially for my holdings), but I do think it’s likely that people who want to own this in the future will get a better deal at some point. I could always be wrong, but I don’t think I am.
Consumer Inflation expectations fell from 3.4% last report to 3.0%.
The Consumer Price Index (CPI) for December rose 0.3% M/M for December. This compares to 0.2% expected and 0.1% last month.
The Core CPI for December rose 0.3% M/M as expected. This compares to 0.3% last month.
The CPI for December rose 3.4% Y/Y. This compares to 3.2% expected and 3.1% last month.
The Core CPI for December rose 3.9% Y/Y. This compares to 3.8% expected and 4.0% last month.
The Producer Price Index (PPI) for December rose 0% M/M. This compares to 0.2% expected and 0% growth last month.
The PPI for December rose by -0.1% M/M. This compares to 0.1% expected and -0.1% last month.
One hot M/M CPI print does little to change my view that the fed is done hiking and that multiple cuts are coming this year. Betting markets currently see 175 bps of cuts. I don’t know if that will play out, but the point is that policy will get easier in 2024. That is, unless inflation sharply re-ramps. I don’t see that happening. Real-time rent inflation indicators point to sharp disinflation and the Fed’s time-lagged indicators haven’t yet reflected that. Shelter is 35% of the CPI. Furthermore, high inflation months will readily roll off in the coming months to offer a strong disinflation tailwind in Y/Y comps. The PPI also continues to be ice cold: producer prices are a leading indicator for consumer prices. Finally, more and more companies are citing disinflation for their input costs in their Q3 earnings reports and Q4/2024 outlooks. Whether that’s freight, fuel, chicken etc. it’s a consistent theme. Disinflation won’t be linear, but it is clearly playing out and I still expect us to get close to the Fed’s 2% target in 2024. Policy will ease in tandem if that happens like I think it will.
Initial jobless claims were 202,000 vs. 210,000 expected.
12. More Market Headlines
Tesla cut Model 3 and Model Y pricing in China. It has made a series of price cuts and some raises across markets over the last year.
Costco opened another store in China. The line to get in was hours long.
Boeing saw a mass grounding of its Max 9 planes following a panel blowing off mid-flight during the week. All passengers were thankfully safe. Two things are true: The U.S. government needs a successful Boeing and has a strong incentive to help it thrive. Secondly, this company still has immense headline risk and is candidly poorly run. A full overhaul of leadership is needed. And the new CEO should not come from the existing board like with the last transition.
Docusign put itself up for sale and is enjoying a bidding war between Bain and other funds.
CVS will close a large chunk of the pharmacies that it runs within Target stores.
I haven’t made any transactions in nearly a month. I’m somewhat close to adding to Disney and Lemonade. I’m somewhat close to trimming CrowdStrike. I would love for Mr. Market to give me a Cava sell-off to start a position there. That deep dive (along with Sweetgreen) is coming this month.