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News of the Week (July 24-28)
Visa; Mastercard; ServiceNow; Chipotle; Spotify; Enphase Energy; Shopify; The Trade Desk; Amazon; SoFi; PayPal; CrowdStrike; Powell Press Conference; Portfolio; Next Week
1. Visa (V) & Mastercard (MA) -- Earnings Reviews
As these two card networks represent over $5 trillion in spend volume combined, their performance can be taken as a great indicator of current consumer and economic health.
Results vs. Expectations
Beat revenue estimates by 0.7%.
Roughly met revenue estimates.
Met EBIT estimates.
Beat $2.12 EPS estimate by $0.04.
18.8% 3-yr revenue compounded annual growth rate (CAGR) vs. 11% Q/Q & 9.5% 2 quarters ago.
Foreign exchange neutral (FXN) revenue growth was 12.6% Y/Y.
Service revenue rose 15% Y/Y; data processing revenue rose 15% Y/Y; international transaction revenue rose 14% Y/Y.
The demand headwind from exiting Russia has been officially lapped.
Card growth was 7% Y/Y vs. 7% Y/Y posted last quarter.
GAAP operating expenses (OpEx) fell 1% Y/Y with non-GAAP OpEx rising 10% Y/Y when excluding litigation charges from the Y/Y GAAP comparison.
GAAP EPS rose 25% Y/Y with non-GAAP EPS rising 9% Y/Y (11% FXN).
Year to date free cash flow of $13.1 billion vs. $12.3 billion Y/Y.
Client incentives = 28.1% of gross revenue vs. 26.7% Q/Q & 26.1% Y/Y. Higher is worse.
Visa offered the following commentary and data about the consumer heading into August:
Cross-border travel is quickly recovering and will continue to do so next quarter.
Cross border e-commerce improvement is expected to continue. Great news for firms like PayPal.
Quarter to date, U.S. payments volume is up 6% Y/Y for both credit and debit. This marks stable growth for debit and slight acceleration in credit. International quarter to date growth followed a similar trend.
Fiscal Year Q4 2023 guidance:
10% Y/Y revenue growth which roughly met expectations.
Non-GAAP OpEx to grow by about 7.5% Y/Y.
Client incentives to be 28% of gross revenue vs. 26.9% of gross revenue Y/Y.
Fiscal Year 2023 guidance:
Low double digit net revenue growth was ahead of estimates and led to upward revisions.
Mid teens EPS growth led to a small raise in consensus EPS estimates.
2023 EBIT estimates rose by 1.6% following the release as well.
Client incentives to be 27.5% of gross revenue vs. 26.0% Y/Y.
Dividends up 17% Y/Y.
$9.5 billion in buybacks vs. $9.5 billion Y/Y.
$20.9 billion in cash and equivalents.
$20.6 billion in debt.
Visa added $500 million to a litigation escrow account. This has the same GAAP accounting impact on earnings as buying back shares as it minimizes eventual share count by limiting class B conversions.
Call & Release Highlights
Leadership mimicked the commentary we heard from Mastercard, Bank of America, J.P. Morgan, American Express and others on a surprisingly resilient consumer. This strength drove volume and transaction growth that outpaced internal expectations. Strong cross-border travel demand helped there as well.
Cross-border volume rose 17% Y/Y. This volume is up 49% vs. 2019 levels.
International payment volume rose 12% Y/Y. International volumes are 43% ahead of 2019 levels.
U.S. debit & credit spend rose 6% & 5% Y/Y respectively. Overall payments volume rose 6% Y/Y. The slowing vs. the March quarter was attributed to disinflation across categories like fuel. Great news for everyone else besides the networks.
Ticket size fell 2% Y/Y due to disinflation. Again, great to hear.
U.S. volumes are 54% ahead of 2019 levels.
Card-not-present growth led card present as e-commerce spend re-accelerated.
Outbound travel to the U.S. and Asia travel overall were notable strong points. Inbound travel to the U.S. has been a more sluggish recovery.
Value Add Services (like consulting, fraud protection and data analytics):
Visa’s value-add services continue to lead to key customer wins as they did for Mastercard. It signed Rakuten Group (largest e-commerce player in Japan) as a new customer thanks to these services that Rakuten wanted to bundle into its card network relationship.
Value-add service revenue rose 19% Y/Y FXN.
New agreement with Pay.UK for its RTP Prevent (fraud prevention) tool to score risk for each transaction.
New flows revenue rose 20% Y/Y FX neutral (FXN).
Signed SAP for its Visa Direct (peer-to-peer payments) product. Visa will embed this tool into SAP’s tech stack to allow its employees to transfer money directly in the SAP ecosystem.
Visa Direct revenue rose 20% Y/Y.
Expanded Visa Direct agreement with Revolut to now include 89 markets.
Cash App renewed its agreement with Visa Direct (and a few value-add services).
Visa Direct growth was held back during the quarter by a client churning from the platform. It chose to build an internal ledger system which will slow Visa’s growth here for a few more quarters. The effect on long-term growth potential was called “minimal.”
This was a rock-solid quarter. Consumer spend continues to be surprisingly durable which bodes very well for the soft-landing macro thesis. July data points to that resiliency continuing through Q3. Its value-add services are delivering brisk, asset light, high margin growth. Its new revenue flows provide a foothold into multi-core banking technology and peer-to-peer payments as a top of funnel for new customers. It is heartening to hear how well the cross-border and e-commerce recoveries are going. That should mean companies like PayPal, Airbnb, Shopify and countless others will be enjoying similar tailwinds when they all report in the coming weeks. A fine quarter from an elite team and an iconic, deep-moat company.
b) Mastercard (MA)
“We delivered strong results supported by resilient consumer spending, particularly in travel and experiences, and the continued strength in services.” -- CEO Michael Miebach
Results vs. Expectations
Beat revenue estimates by 1.6% & beat its guidance by 1.8%.
Beat EBIT estimates by 2.4%.
Beat $2.81 GAAP EPS estimates by $0.08.
Just like for Visa and American Express, Travel & Entertainment (T&E) was cited as a category stand-out this quarter and into next quarter. That bodes very well for the sectors involved.
Cross-border travel is 54% above 2019 levels for Mastercard as of now.
Switched Volume rose 6% Y/Y in the USA and 16% Y/Y for Rest of World.
FXN revenue growth was 15% Y/Y.
Payment network revenue rose 13% Y/Y (14% FXN) while value add service revenue rose 16% Y/Y.
Assessment (AKA fee) growth by bucket:
10% Y/Y growth for domestic assessments.
27% Y/Y growth for cross-border assessments. Strong.
16% Y/Y growth for transaction processing assessments.
Online click to pay growth reached 70% Y/Y for the quarter as it launches the feature in more markets.
Operating expenses rose 12% Y/Y on a non-GAAP basis and 5% Y/Y on a GAAP basis when excluding one-time charges like in litigation.
GAAP EPS rose 28.2% Y/Y while non-GAAP EPS rose 12.9% Y/Y when excluding one-time comp tailwinds in the Y/Y period.
This growth was hurt by a 23.2% effective tax rate vs. 18.7% Y/Y.
Incentives and rebates rose 22% Y/Y to outpace demand growth.
Mastercard reiterated its previous guidance calling for low teens Y/Y 2023 revenue growth and high single digit non-GAAP OpEx growth. This was largely as expected.
For the month of July, growth metrics are holding up very well. Overall volume growth is steady at 7% Y/Y in the USA. International growth is 14% FXN quarter to date. Cross-border volume is holding up quite well with 22% Y/Y growth in July vs. 24% Y/Y for Q2.
“As it relates to the first 3 weeks of July, our metrics are holding up well, generally in line with Q2 when indexed to 2019.” -- Mastercard CEO Sachin Mehra
Year to date buybacks of $5.29 billion vs. $4.78 billion Y/Y.
Year to date dividend growth of 13.6% Y/Y.
Call & Release Highlights
Mastercard continues to see a largely neutral macro backdrop. It’s not incredible, but it’s not awful and not worsening either. The overall labor market and elevated wage growth are both fostering resilient consumer sentiment and spend. It also called out the encouraging progress with the Fed’s policy tightening to control inflation.
Customer & Partner Wins Highlighted:
Signed a new deal with UniCredit in Europe covering 20 million cards.
Now has 27 million debit cards in circulation in the U.K. between 3 partnerships with vendors including NatWest and Santander.
Deutsche Bank’s 10 million card migration to Mastercard has begun.
Expanded its Fiserv partnership to all U.S. State and Federal benefits and wage disbursement debit programs.
Canada’s largest federal credit union is converting its card portfolios to Mastercard.
Tim Hortons is launching a new Mastercard-branded credit card and will use its data analytics and fraud services.
HSBC will expand its Mastercard partnership to launch a travel rewards program across APAC.
Inked a new deal with Alipay and WeChat Pay in China to free international inbound travelers to seamlessly link Mastercard cards to the digital wallets. China inbound travel is quickly recovering and still 50% off of 2019 levels. Good timing.
Expanded its relationship with Expedia by integrating its loyalty program with its marketplace.
New Flows & Networks:
Mastercard is debuting the Mastercard Multi-Token Network to deliver a “set of foundational capabilities making digital asset transacting more secure, scalable and interoperable.” It sees this as being a great enabler of central bank digital currencies (CBDCs) which will be a large, large part of digital payments in the future.
Launched Mastercard Receivables Manager with Billtrust to make virtual card processing more efficient. The new offering also “automates the integration of reconciliation data into accounting systems.”
Mastercard’s Consumer Fraud Risk solutions have already led to Trustee Savings Bank (TSB) “dramatically increasing fraud detection.” Barclays was named as another early partner for this tool.
New Open Banking partnership with Freddie Mac to responsibly aggregate relevant consumer data for increased financial inclusion and security.
The quality of this quarter was nearly identical to Visa. The same take there applies here.
2. Earnings Round-Up -- ServiceNow; Chipotle; Spotify; Enphase Energy
Results vs. Expectations
Beat subscription revenue guidance by 1.8% & beat revenue estimates by 0.9%.
Beat 23% Y/Y current remaining performance obligation (cRPO) growth guidance by 200 basis points (bps).
Beat 80.7% gross margin (GPM) estimates by 130 bps.
Beat 23% EBIT margin estimates by 210 bps & beat the margin guidance by 230 bps.
Beat $2.05 EPS estimates by $0.33. EPS rose by 46.3% Y/Y.
Beat FCF estimates by 7.1%.
Raised 2023 subscription revenue guidance by 1%. About 40% of this raise was due to favorable currency exchange impacts.
Reiterated 2023 gross margin & FCF margin guidance.
Raised EBIT margin guidance 50 bps.
For the third quarter, it also guided to $2.19B in subscription revenue, a non-GAAP EBIT margin of 27% and 25.5% Y/Y cRPO growth.
“We see a sustained demand environment and pipeline for all of our product businesses, geographic regions and industry verticals. We're set up very well for a strong second half.” -- CEO Bill McDermott
$7.5B in cash & equivalents.
Share count is expected to rise by 1.5% Y/Y in 2023.
Call & Release Highlights
70 $1 million+ net new transactions vs. 66 Q/Q & 54 Y/Y.
$1 million+ contract customers rose 18% Y/Y to 1,724. These customers have an average contract size of $4.3 million vs. $3.9 million Y/Y.
Renewal rate was 99% vs. 98% Q/Q and 99% Y/Y.
ServiceNow’s ability to consolidate vendors across digital enterprise productivity has been a key selling point for it as clients seek to do more with less. For context, of its 20 largest deals signed this quarter, IT service management was purchased in 16, IT operations management was in 13, security and risk was in 17, customer workflows (which had a “sensational quarter”) was in 16 of them and employee workflows was in 14 of them. It’s signing very few new contracts with just a single offering.
ServiceNow sees itself as in an ideal position to partake in the build-out of company and sector-specific large language models (LLMs). Tools include Now Assist for Virtual Agent to streamline search, Gen AI Controller which lets clients plug into APIs from vendors like OpenAI and text to code. Product releases will remain rapid as it signed a new partnership with Nvidia and Accenture to jointly go-to-market with co-developed offerings.
It will launch the latest platform upgrade later this year called Vancouver. The release will equip a large portion of NOW’s current product offerings with gen-AI augmenters. Interestingly, leadership explicitly spoke on near term opportunities to monetize these proliferating products. It sounds like ServiceNow will embrace more of a Microsoft philosophy towards monetizing vs. Amazon or Meta.
“Based on the immense value our customers will realize from our generative AI innovation, we have a clear strategy for monetization.” -- CEO Bill McDermott
Closed its acquisition of G2K to deepen its workflow automation presence in verticals like retail. It opened two innovation centers in India and Singapore as part of this closing.
Announced a new $1 billion allocation to ServiceNow Ventures through 2026.
The company’s expectations for the second half of the year should have every software investor feeling encouraged. There was zero commentary on sales cycle elongation from McDermott and instead we heard glowing remarks about the pipeline combined with a material raise to guidance. This is a prime vendor consolidator example and strength here could mean positive results coming for other consolidators in other niches like CrowdStrike. Software-land looks to be brightening once more… customers can’t just optimize existing assets forever.
Results vs. Expectations
Missed revenue estimates by 1.2%.
Missed EBIT estimates by 4.2%.
Beat $12.25 GAAP EPS estimates by $0.13.
Met comparable restaurant sales growth guidance of mid to high single digits with 7.4% Y/Y growth.
Reiterated 2023 guidance calling for mid to high single digit comparable sales growth, 270 store openings and a 26% tax rate.
$505 million in cash & equivalents with another $430 million in long-term investments.
Added $100 million to its buyback program with about $300 million in total left on it.
Call & Release Highlights
Comparable sales growth was 7.4% Y/Y vs. 10.9% Y/Y growth last quarter.
In-restaurant sales rose 15.8% Y/Y.
22.5% 3-yr revenue CAGR vs. 18.9% Q/Q and 14.8% 2 quarters ago. Comps were very easy due to the pandemic.
Opened 47 new stores with 40 of them having a Chipotlane for drive-thru. Stores with Chipotlanes continue to deliver better sales, margins and investment returns.
Digital sales represent 38% of total food & beverage revenue vs. 39.3% Q/Q and 39.0% Y/Y.
Easy 3 year comps due to the pandemic.
Food, beverage and packaging costs were 29.4% of sales vs. 30.4% Y/Y. This was helped by previous price hikes and avocado disinflation. Inflation across beef, tortillas, dairy, salsa, beans and rice all were headwinds here despite the Y/Y improvement.
Adjusted earnings per share (EPS) rose 36% Y/Y.
Now that Chipotle’s Project Square One (back to basics) is wrapping up (which is being embedded permanently into its training program), it will turn its attention to throughput optimization. It will do so by ensuring there are always 4 front-line workers during peak hours and by encouraging field managers to work more closely with restaurant managers. In New York City, where it tested this mindset with its field manager, the restaurants raised entree throughput by 5 per 15 minutes Y/Y during peak hours. The changes to its order fulfillment cadence announced last quarter are also helping its stores become more efficient by limiting the pulling of front-line workers to assist with other fulfillment channels.
Finally, new cooking hardware is working wonders for optimizing workflows. Its newer dual-sided grill cuts chicken cooking time from 12 minutes to 4 and steak cooking from 4 minutes to 1. This allows team members to cook smaller batches for better freshness and less food waste. It’s also now cooking rice directly in the serving containers seen on the front line for single-batch preparation. This is having the same impact on quality of operations as the grill. It’s testing the “Autocado” (what a name) robot to cut, peel and de-core avocados.
Freepotle is a newer program offering loyal customers free perks for their continued business. As of the end of Q2, its loyalty programs all in all had over 35 million members.
Restaurant openings in Canada are being welcomed with open arms as revenue briskly ramps in that newer market. Chipotle moved a top U.S. operator to Europe to help manage growth in that new market. Finally, it signed a deal with Alshaya Group to open new stores across the Middle East.
This was a solid quarter for Chipotle. Investors are not used to seeing misses vs. expectations, but the shortfall was very small and full year comp store growth reiteration was key. The company flexed its pricing power throughout our recent bout of rampant inflation. Now, it’s enjoying disinflation within key input costs like avocados with more help to come eventually across other ingredients. It won’t lower prices while this happens and so the margin ceiling should be higher than it was previously thought to be. Pairing that with steady 15% compounding, a rapidly growing loyalty program and ample international expansion ahead gives investors a lot to like. This is on my watch list along with Google (I need a time machine) and Disney.
Results vs. Expectations
Missed revenue estimates by 0.8% & missed guidance by 0.7%.
Beat monthly active user (MAU) guidance by 4%. Both subscriber and ad-supported user metrics were ahead of expectations and guidance.
Met 25.5% GPM estimates & met guidance. Missed GAAP GPM estimates by 150 bps due to restructuring charges discussed below.
Beat EBIT loss guide by 13.2%. Sharply missed GAAP EBIT estimates due to restructuring charges discussed below.
Sharply missed FCF estimates.
Missed -$.70 GAAP EPS estimates by $.46 (again via restructuring).
Missed revenue estimates by 3%.
Beat -$86M EBIT estimates by a robust $41M.
Beat 25.8% GAAP GPM estimates by 20 bps.
$2.83B in cash & equivalents.
Basic share count rose by just 0.7% Y/Y.
Call & Release Highlights
This was Spotify’s 6th straight quarter of MAU outperformance. It marked another quarter of acceleration and its highest ever net adds for a single period. Demand remains strong. Premium subscribers rose 17% Y/Y which handsomely beat guidance. Leadership sees the strong start to the year carrying into the rest of 2023. FXN revenue growth was 14% Y/Y.
GAAP margins were materially impacted by restructuring charges from real estate footprint reduction, podcast business right-sizing and exiting its Soundtrap marketplace project. These moves will be profit tailwinds longer term but held back profits this quarter. That’s why non-GAAP margins were as expected while GAAP margins were worse.
Personal Ad Tools:
Spotify expanded its AI DJ product to the U.K. and Ireland. This is its personal music assistant that learns user tastes and creates playlists from them. It also upgraded its desktop user interface with 11 new languages and launched Spotify ad analytics for buyers to track campaign performance.
This week, Spotify announced price hikes for its subscriptions in 50 markets. This hike will not impact Q3 revenue all that materially, but will lead to increases in Q4. Interestingly, the team “baked some conservatism” into the Q3 guidance pertaining to the impact that price hikes will have. It has hiked prices in the past and enjoyed minimal churn. The added revenue from retained subscribers will be purely margin.
This quarter marked more of the same for Spotify. Promising user growth (still at an impressive 20% in North America) with solid top line compounding and no margin improvement whatsoever. Bulls will argue that the company’s recently announced price hike will be pure margin revenue to feed EBIT and free cash flow. Still, how much pricing power does this service actually have? It competes with not 1… not 2… but 3 mega-cap tech products that are arguably inferior yet similar. The price hike thesis only plays out if that hike is again met with minimal churn.
d) Enphase Energy
Quarter vs. Expectations
Missed revenue estimates by 2.1% & missed guidance by 2%.
Beat GAAP EBIT estimates by 7.6% & beat guidance by 9.6%.
Beat $0.86 GAAP EPS estimates by $.23.
Beat $1.27 EPS estimates by $.20.
Beat FCF estimates by 16.2%.
Next Quarter Guidance
Missed revenue estimate by 22.7%.
Missed GAAP EBIT estimate by nearly 50%.
Diluted shares rose 1% Y/Y.
About $1.8B in cash & equivalents.
$1.3B in debt ($93M is current).
Inventory up 28% Y/Y.
Completed its $500 million buyback program this quarter and added a new $1 billion buyback program.
Call & Release Highlights
Revenue in the USA fell 12% Q/Q due to mounting macro pressures and rose 25% Y/Y in Europe. Microinverter shipments were rocking into 2023 but fell to 80% of Q4 2022 levels over the first half of the year. It did not enjoy the normal Q2 seasonality that it always does and so it’s dealing with a bit of an inventory glut. It will work through this in Q2 which, when taken with soft demand, is the reason for the large quarterly guidance miss.
Solar microinverters (which convert solar panel power generated into usable energy) along with battery storage and charging demand are all cyclical. Demand is tied to interest rates with purchases and installations becoming directly more expensive as those rates rise. Because Enphase caters mainly to residential projects, this macro headwind is more noticeable for it vs. a First Solar which sells a lot more to utility companies.
IQ8 Microinverter (its latest iteration):
The IQ8 Microinverter represented 78% of all shipments during the period. The mix shift to this product was the reason for gross margin improvement while it opened shipments to countries throughout Europe for the first time.
ENPH shipped 82.3 IQ battery megawatt hours vs. 102.4 hours Q/Q. It launched its IQ Battery 5P as its “most powerful to date” in the USA and Australia.
Macro headwinds are greatly holding back this company for now. Its demand is cyclically tied to interest rates and those rates have risen faster in the last year + than ever before. Ugly quarter, but somewhat understandably so.
3. Shopify (SHOP) -- 2023 Editions
Twice a year, Shopify announces a slew of new product updates and introductions via Shopify Editions. The Summer 2023 release dropped this week, and we’ll fully cover the highlights here:
Shopify discussed its previously announced “Sidekick” product. It will debut this year as a conversational assistant to handle tedious merchant tasks. It can be prompted to add a new product and description to a page, can design marketing campaigns for a merchant and can run product promotions when asked to do so. This is not just a fancy piece of software for the sake of entering the field of Gen AI. This is a productivity enhancer and a success augmenter that allows merchants to focus on the most pressing pieces of their operations. Optimal efficiency entails doing more with less, and this new tool should emulate the roles and functions of customer support, product and marketing teams for merchants with typically quite finite resources. Sidekick will make Shopify a better partner for manifesting that needed efficiency.
For Shopify, this should also be an efficiency boost. It’s easy to see how sidekick could handle onboarding issues or general functions. Theoretically, it will replace a lot of the nearly 1,000 customer support staff Shopify unfortunately laid off last year and allow it also to do more with less. With the more balanced focus on growth and profit and added emphasis on free cash flow generation under new CFO Jeff Hoffmeister, this product could help thread that needle.
Beyond Sidekick, Shopify debuted “Shopify Magic” as a new suite of AI-laced tools integrated throughout the platform. It combines the latest models from OpenAI with Shopify’s vast data representing 10% of e-commerce to power some pretty cool, commerce-specific features including:
Settling up discounts for a sale.
Storefront redesign to flexibly match themes to things like seasons and holidays.
Builds email and marketing campaigns with recommended send times based on years of Shopify lookalike split testing to maximize open rates.
Generates recommended responses to customer service inquiries.
b) Shopify Collective
Product expansion is always a risk. You have to set up a supply chain, buy inventory and hope the launch is met positively by your customers. If it isn’t, that likely means cash burn.
Introducing Shopify Collective: A tool allowing merchants to expand into new products and categories with very little risk. Merchants can use it to offer products from other participating Shopify sites on their own page and ship those goods from the collaborating merchant right to a customer. Both participants share in the revenue generation; the product is currently for Shopify Plus merchants only.
This is yet another creative way for Shopify to uniquely take advantage of its large merchant base and provide unmatched merchant value. Whether it’s Collabs allowing merchants to work with influencers on a performance (pay for sales only) basis or this, the company continues to find new ways to stand out.
Along the same business-to-business (B2B) relationship theme, Shopify also debuted volume pricing for its B2B channel and company account requests. These requests allow merchants to control who gets access to what special deals within the enterprise channel.
c) Marketplace Aggregation
As merchants grow, they seek new avenues to source demand. Those avenues are often fragmented marketplaces where businesses routinely run operations in disconnected silos. Today, Shopify Marketplace Connect launched as a single app for merchants to tap into virtually all relevant marketplaces from one place. All of this selling, inventory and marketing data is aggregated and added to the Shopify Admin for a singular birds-eye-view of business performance.
This is yet another way Shopify is solving for cross-channel merchant complexity. The more headaches it alleviates, the more loyal its merchants become.
d) Final Announcements
Added 17 new APIs to enhance the malleability of Shopify Checkout pages for merchants.
Announced a new merchant credit card with zero fees and 3% cash back on eligible purchases. It’s live in the U.S. today.
4. The Trade Desk (TTD) -- Netflix & More
Netflix is tweaking its relationship with Microsoft a few quarters into the new programmatic advertising supply-side partnership. As reported by The Wall Street Journal, Microsoft helped secure this deal by guaranteeing a chunk of ad revenue for Netflix. As part of the partnership’s evolution, Netflix will accept a lower revenue guarantee from Microsoft in exchange for the ability to more openly and directly tap into other buying channels. This will mean that advertisers no longer must buy exclusively through Microsoft and can access that valuable Netflix inventory through other means. Relatedly, Netflix recently held discussions with The Trade Desk on the demand side on how to execute this more open approach.
The Trade Desk already enjoys Netflix’s ad-tier as a demand lever. Microsoft Xandr represents the supply side and fields demand from agency and advertisers bidders. The Trade Desk represents a lot of those bidders. Still, allowing that bidding to happen through more familiar, preferred supply side vendors (that agencies want to work with) would be a clear positive. This also supports TTD CEO Jeff Green’s long-held belief that the only way to fund premium content is with open bidding on ads to maximize CPMs. He’s usually (pretty much always) right about this kind of stuff.
Furthermore, Netflix will lower the cost per 1,000 impressions from ~$50 to ~$42 to spur demand. Both of these moves are to intensify the ad buyer appetite which has been a bit weaker than leadership anticipated in recent quarters.
b) BTIG Upgrade
BTIG released a glowing note on The Trade Desk this week. While it set a $103 price target, we care far less about that than the reason for the optimism. And the reasons are encouraging. While it was once very cautious on The Trade Desk meeting 2023 sell side consensus, it now sees the firm comfortably surpassing those expectations. It finds The Trade Desk in pole position to take advantage of a 20%+ programmatic advertising CAGR. Thanks to its 15% share of CTV advertising and 5% of retail media, The Trade Desk will benefit as much from this rapid industry growth as anyone. Specifically, BTIG sees The Trade Desk’s billings growth outpacing the 20% projected CAGR by a full 700 basis points. That’ll work. Furthermore, the Kokai platform launch is “becoming an increasingly attractive alternative” to Google’s Demand Service Provider (DSP).
None of this is surprising. The Trade Desk has led the open internet programmatic ad world for years and surpasses estimates every single quarter. As a reminder, I did sell roughly 10% of the position between 2 trims in recent weeks as the multiple continued to aggressively expand. Large profit beats would go a long way to re-setting those multiples and I have no plans to trim more at this juncture.
5. Amazon (AMZN) -- Bedrock & More
Bedrock is Amazon’s generative AI foundational model (FM) that developers can build on top of to create new applications and use cases. RyanAir, Travelers and Coda are among the early users of Bedrock’s offerings.
This week, at an AWS event in New York, Amazon announced a few updates for Bedrock. First, it added foundational models from Cohere, Anthropic’s latest releases and Stability AI to greatly bolster the roster of usable models all through a single, intuitive API. AWS fully handles maintenance and storage of the apps and models. Secondly, it announced new task automation tools in the form of AI-powered agents to automate query response and other tasks.
In other Amazon AI news, it debuted healthcare chatbots. These chatbots take a doctor’s notes and turn them into a neatly organized synopsis. They can automate document generation more broadly speaking. The tool is called HealthScribe which is supposedly set to be used by 3M’s Health Information arm. AWS also debuted new business intelligence tools to transform language into graph and slideshow generation. Customers can use these new chatbots and Amazon’s open roster of LLMs to craft custom-built apps most relevant to specific operations.
During the event, the AWS team talked up their gen AI capabilities as being best in class. Microsoft would surely disagree, but the overall takeaway is that AWS is effectively innovating and competing in generative AI. The building narrative on its inability to do so was what opened the door for me starting a position. That narrative was wrong… I was right… *insert evil laugh here.*
Finally, AWS reported that it has thousands of customers in trails on all of these new tools. It’s not directly monetizing them like Microsoft, but is hoping to see stronger existing product up-selling by infusing these capabilities into its existing tools.
b) More News
Dish Network’s Boost Infinite plan will be available on Amazon for $25 per month.
Disclosed a $115 million equity stake in Twilio. This investment includes a deepening of the partnership to work together on AI-based products.
Testing generative AI search functions within its marketplace which will go live soon.
Agreed to cut its iRobot purchase price by 15%.
To ease regulatory pressure in the U.K., Amazon will no longer harvest merchant data on its marketplace and has agreed to more fair treatment on placements for 3rd party merchants vs. its own goods. The associated regulatory body, called the Competition and Markets Authority (CMA), seems to be satisfied with this offer.
Occidental Petroleum will use AWS as its public cloud vendor.
6. SoFi (SOFI) — Data
The Federal Financial Institutions Examination Council (FFIEC) posted its quarterly update on the state of SoFi’s balance sheet. In it, the entity revealed that SoFi deposits reached $13.25 billion. This compares to roughly $10.1 billion when the company reported last quarter and means the firm added roughly $3.2 billion in deposits Q/Q vs. its guide of at least $2 billion. We say roughly because the FFIEC’s last report had SoFi’s deposit base about $200 million above $10.1 billion for whatever reason.
The net interest income and non-interest income figures FFIEC reported point to 14.5% Q/Q and 21.7% Q/Q growth respectively. Also note that the income figures SoFi reported for Q1 vs. what FFIEC reported are a bit off too. Regardless, this would represent continued outperformance, robust sequential growth and more brisk progress towards GAAP profitability when it reports earnings on Monday. Good news.
7. PayPal (PYPL) -- Buy Now, Pay Later (BNPL)
Microsoft will add PayPal’s Pay Later to its store to deepen the integration partnership between the two. This marked continued momentum for PayPal BNPL as this newer offering exploded into a top 3 global share position despite starting out years after other competitors. PayPal’s vast data supply on its consumers means it can underwrite more effectively and bolster authorization rates while boasting best-in-class loss rates. Good combination. Add that to PayPal’s effectiveness in juicing merchant conversion rates, it’s no wonder why Microsoft is doing this.
PayPal’s BNPL proliferation doesn’t only mean more revenue (and higher margins considering the skew to debit funding). This success is the direct result of PYPL’s ability to build out that infrastructure internally and with limited acquisition. It did buy Paidy in Japan which offers BNPL, but most of the development happened organically following PayPal’s multi-year transformation to becoming a more modern and nimble organization. The BNPL launch was evidence of this evolution working. Considering PayPal’s mixed track record with M&A, more confidence in its ability to build rather than solely leaning on buying is a positive.
8. CrowdStrike (CRWD) -- M&A & Amazon
CrowdStrike is reportedly buying Bionic. Bionic offers agentless application security posture management (ASPM) to enable clients to see app vulnerabilities, prioritize risk and secure end products. The company did just under $3 million in 2022 revenue which would make this a very small purchase.
Amazon’s AWS named CrowdStrike as its 2023 U.S. Partner of the Year. The two work very closely together with the AWS marketplace selling channel representing an increasingly important source of CrowdStrike’s growth.
9. Final Market Headlines
Google launched a new AI model called Robotics Transformer 2 to train robots to handle tedious manual labor tasks.
Oppenheimer (not the movie) reiterated Uber as its top pick due to unmatched network effects enjoyed from its leading scale and super app. They must read the newsletter.
Regulators this week raised capital ratio requirements for the banking sector. For example, the regulatory minimums for the all-important common equity tier 1 (CET1) ratio were hiked by 16%. This pertains to banks with over $100 billion in assets.
10. Powell Press Conference Highlights
Raised the Fed Funds rate 25 basis points to 5.25%-5.50%.
Extent of “additional appropriate tightening” based on data & continuous assessment.
“Possible that we raise in September, possible that we hold steady.” – Powell
We at Stock Market Nerd are confident in our forecast that the fed will either raise or not at its next meeting as well.
“June CPI report was welcome, but it was just one month of data.” – Powell
There will be 2 months of new economic data before the next Fed meeting.
The Fed expects no rate cuts in 2023 with most officials expecting multiple cuts in 2024.
Pace of balance sheet shrinkage remains “brisk.” It has “covered a lot of ground here.”
As an aside, QT directly impacts & intensifies the 2-yr to 10-yr yield curve inversion. 2-yr treasuries sold more aggressively means that those yields rise faster -- all else equal.
No change to 2% inflation target.
Reducing inflation likely to require some economic & labor market softening.
Long-term inflation expectations are well anchored.
Key Fed Statement Changes:
Economic activity called “moderate” vs. modest in the previous statement
Consumer spend continues to slow.
Housing activity has recently picked up but is well below 2022 levels.
Labor market supply & demand balance is normalizing but still very supply constrained.
Nominal wage growth is showing signs of easing with vacancies declining.
Rate hikes weighing on output growth & fixed business investment.
Interest rate sensitive sectors seeing significant disinflation.
The Fed is no longer projecting a 2023 recession. It sees growth slowing, but not to a halt.
11. Portfolio & Next Week
Sold 23% of my Upstart stake this week after a more than 5x from the lows.
Next week is going to be a wild one. Every core holding that hasn’t reported yet will do so besides CrowdStrike, Lululemon and The Trade Desk. I’m sure there will be some good and some bad as always. We’ll cover all of those reports and others including Apple, Block and MercadoLibre. For now, have a great weekend.