News of the Week (June 26 - 30)
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News of the Week (June 26 - 30)
Stock Comp Debate; Meta; Snowflake; Amazon; SoFi; Uber; Nike; Airbnb; Lemonade; Progyny; More Headlines; Macro; Portfolio
Today’s Piece is Powered by Aries:
1. Our Take on the Stock Comp Debate
a) When Stock Comp is More Appropriate
Stock compensation accounting is a hot topic on Twitter. We wanted to share our take on the matter, when equity compensation is more palatable, and how we think it’s best to account for it.
Growth companies are typically voracious users of cash to fund operations and future prospects. Especially for this type of company, a cash pile is always finite and access to debt capital is materially more expensive than a company like Apple. So? This is when hefty stock compensation is most understandable. Electing to compensate executives and employees partially via stock is a great way to preserve that cash pile without it becoming a bottleneck. It effectively extends the flexibility of payroll. Furthermore, equity compensation (especially with long-term vesting timelines) is a great way to align shareholder and employee interests. If an employee base’s compensation is tied to company or stock performance, that will motivate the staff to provide optimal performance.
Ask yourself as a shareholder of CrowdStrike, Datadog, Monday or some other growth stock which would you prefer:
More dry powder to fund R&D, marketing, buybacks or M&A with 2-3% annual dilution while being able to attract & retain the talent required to sustain high growth? Or…
Less dry powder restricted growth, marketing or M&A spend with limited ability to attract & retain talent but with 0% annual dilution?
For companies compounding profits well over that 2-3% annual dilution estimate, the answer is clear. We want them to have the talent they need, we want them to have the flexibility to allocate capital and we are ok with accepting a bit of dilution if the firm can deliver rapid profit compounding. Consider an example with two firms (A and B). Both start at $10 in FCF with 100 shares outstanding. Firm A compounds FCF at 30% for 3 years and dilutes shareholders by 3% per year. Firm B, with more liquidity restrictions compounds FCF at 20% for 3 years and dilutes shareholders by 0% per year. At the end of the planning period assuming no capital appreciation, Firm A generates $22 in FCF annually with 109.3 shares outstanding. This represents FCF per share of $0.20. Now consider firm B. At the end of the period, firm B generates $17.30 in FCF with 100 shares outstanding. This represents FCF per share of $0.17. As FCF per share is a key driver of shareholder value and accounts for dilution, Firm A’s strategy is preferred.
With a commitment to stock-based comp for growth, there are 3 important considerations:
First, stock comp intensity must diminish over time as a company matures and growth slows. If that doesn’t happen, 2-3% dilution annually will more materially cut into returns. It’s the recipe of elevated comp, no downward comp trend and slowing growth that makes hefty dilution “icky”. Second, there are limits to how much stock comp is appropriate. That limit rises with faster growth and higher quality re-investment opportunities, but it’s still there. When, for example, we see some firms diluting shareholders by 5% annually while other aggressive equity comp users are closer to 2%-3%, that does spell some concern -- especially if there’s no consistently brisk downward trend in intensity. You’ll notice we used dilution comparisons vs. “stock comp as a % of revenue” comparisons as we think that’s much more relevant and valuable (explained next section).
The third consideration is perhaps the most important. The leadership team must be effective and successful in allocating capital. If you don’t trust a team to do so, you should find another firm to invest in.
b) Stock Comp Accounting Best Practice
There are two ways to account for stock compensation intensity: Avoiding the add-back in our FCF calculation and tracking FCF per share growth. As per the example, we greatly prefer the second method but will walk through both briefly here.
The first method is to ignore the add-back on the cash flow statement. The cash flow statement starts with net income before making a series of non-cash adjustments. Stock comp hits net income but is then added back on the cash flow statement to arrive at operating cash flow (and then subtract CapEx to get FCF). FCF - stock comp can give a decent sense of comp intensity between firms, but it’s not the correct way to account for it. Why? It goes back to the idea of stock comp not being a cash expense. What is the true expense? Dilution. Forgoing the add back completely ignores the dollars actually flowing onto the balance sheet to fund organic growth and M&A.
To us, it makes much more sense to simply track FCF per share growth rather than FCF alone. This fully accounts for all dilution and eliminates the noise from a certain kind of equity type called performance share units (PSUs). PSUs are accounted for under GAAP rules in a somewhat misleading way when looking at “stock comp as a % of revenue.” Why?
If, for example, a company like SoFi issues PSUs at strike prices that don’t hit under the vesting period, those shares are never created. REGARDLESS, this still counts as GAAP stock-based compensation dollars and still impacts net income. This can make stock compensation look more aggressive than it actually is. A company cannot add back that previously incurred stock comp despite it never actually being awarded. That is another reason why tracking the dilutive impact of compensation offers a more accurate, reliable sense of stock comp intensity. Stock comp can be a ridiculous 40% of sales for this reason while dilution remains more reasonable.
c) The Pandemic’s Impact on Stock Comp Intensity
The pandemic was a strange time. A large cohort of growth companies vastly over hired during the period. I can count on two fingers the number of growth companies off the top of my head that didn’t over hire (The Trade Desk & Revolve). Firms assumed pandemic trends would be more durable and revert less abruptly than what actually played out. So? Demand growth slowed while payroll growth continued at a rapid pace throughout 2022 for many. Stock comp intensity as a percent of revenue skyrocketed. The flip side of that has been unfortunate yet necessary layoffs as well as product/geography rationalization across mainly the tech industry to right size workforces. Much of this right-sizing happened throughout 2022 and 2023 which will lead to slowing payroll and compensation growth starting this year and going forward for many of the firms that got too excited.
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2. Meta Platforms (META) -- WhatsApp Show me the Money
a) WhatsApp
WhatsApp has nearly 3 billion users. It’s THE go to messaging platform in key geographies like India and throughout the planet with inroads now being made within North America. The financial potential for this app has been mammoth for years… but now Meta is finally aggressively committing to letting monetization ramp.
WhatsApp is in the process of rolling out a slew of paid features -- some are now available with others in the works. WhatsApp for Business tools like click-to-chat links, shoppable personal links and multi-device customer service have arrived. Amazon uses the customer service tool in India today. Flipkart and BookMyShow (popular Indian ticketing service) also lean on the app to conduct operations; India serves as the app’s most promising geography for now. But it’s not just India. Overall WhatsApp Business accounts have quadrupled to 200 million since 2020 for a CAGR North of 58% during that time.
This week, to more meaningfully extract value from this explosive growth, Meta announced a roster of new paid messaging tools for organizations to more closely and directly connect with their consumers. Messaging is clearly a large part of WhatsApp’s future and we expect releases like this to be frequent. Considering its unparalleled reach, it’s easy to see how businesses like Shein would be eager to line up to use it. There are several levers to pull to turn this app into a monetization juggernaut. That incremental revenue opportunity is nearly entirely ahead of Meta, and the company has decided it wants to take advantage today.
Other monetization examples include:
WhatsApp Pay for money transmittance (which MercadoLibre is currently testing).
Dipping into ad-based monetization.
Potential premium features for a consumer subscription (not announced, just speculating).
There are two immensely exciting growth vectors for Meta beyond Reels. Neither are Virtual Reality -- although that could potentially turn into a 3rd eventually. First, its AI, chatbot and supercomputer investments should continue sharpening its discovery engine to juice engagement and ad targeting to boost return metrics. This should mean more impressions and higher CPMs. Apple’s impact on its business continues to diminish as these investments bear fruit. With Meta’s unique open-source approach to AI models, it’s easy to see how excited developers eager to build on top of models like Meta’s could enhance utility and monetization further. It could also roll out a premium consumer subscription if it wanted to, but that has not been announced or hinted at as of yet. The second opportunity is WhatsApp and inning one of monetization has now begun.
b) European Union (EU)
The Verge published a very interesting article on Meta this week. The article discussed a new ad product that Meta will test in the EU this year with Android developers. The ad product comes with a bit of a different aim vs. what Meta has taken in the past. Interestingly, it will allow Facebook and Instagram users to download apps directly from within the sites.
The EU’s Digital Markets Act (DMA) recently passed is what is opening the door for this release per the article. DMA requires Apple and Google to permit payment and downloading methods aside from solely their own. This enables sidestepping hefty take rates with Meta not planning on charging any in-app fees as part of its new release. Meta thinks its more favorable fee structures along with native app downloading (not bouncing from page to page) will augment developer conversion and could make this a viable alternative to Google and Apple over the long term. Microsoft is planning a similar launch in the EU as app buying competition ramps.
c) More Meta News
The company is debuting a game pass for its Quest headsets. The subscription costs $7.99 per month or $59.99 per year and comes with 2 titles per month. The gamers maintain access to all previous monthly titles as long as they remain active subscribers. This is one way Meta will look to make Quest a slightly smaller drag on profits going forward. It will not try to generate gross profit from hardware sales like its new competition Apple does. It will sell it at cost and monetize elsewhere.
Citi came out with a positive note on Meta platforms. It sees quarter to date ad load for Reels improving (with more improvement in June) and online advertising bottoming. It also sees ad revenue growth of 14% for 2024 which is well ahead of sell side consensus growth around 11%. What was their price target? We don’t care… but also know that some of you do. It was $360.
Meta Verified is launching in Latin America this week and will roll out globally this year. Using Bank of America’s 12 million 2023 subscriber estimate, this should quickly grow to $1 billion in incremental EBIT (nearly 4% of total 2022 EBIT) while continuing to grow thereafter. A nice piece.
3. Snowflake (SNOW) -- Snowflake Summit 2023
a) Snowflake Summit 2023 -- Embracing the Generative AI Opportunity
Microsoft and Nvidia Partnerships:
Snowflake announced an extension of its partnership with Microsoft Azure. The partnership will work to integrate Azure’s AI models and apps into the Snowflake ecosystem to feed those algorithms more data for better seasoning and compliance. It will also include a joint go-to-market approach to drive adoption of these newer Azure use cases and new Snowflake tools discussed below. Snowflake’s cloud agnostic approach helps it to effectively tear down data silos for broader cohesion and more valuable insight gleaning and data querying. These capabilities paired with Azure’s models and compute infrastructure should lead to some exciting application development going forward.
Snowflake also announced a new partnership with Nvidia. The two will work together to create generative AI use cases and applications powered by the unleashed access to a client’s full dataset. As part of the new relationship, Snowflake customers will gain integrated access to Nvidia’s NeMo (its framework for building generative AI models).
In the world of generative AI there are three key ingredients: AI models to create use cases and workflows, chips to power those flows and data to season AI models to a point where they’re actually valuable. Microsoft (and Nvidia too) bring the model expertise to the table, Nvidia brings its chip talents to the fray and Snow completes the equation with complete access to data paired with powerful tools to put that data to work. This news combines some of the best in breed players from all three ingredients.
Snowpark Container Services:
Definitions:
Snowpark: Snowpark is a developer tool allowing for source code creation with a diverse array of languages to pick from. Snowpark allows for usage of these languages from within Snowflake’s environment to utilize all of Snowflake’s available data and tools to sharpen the building, monitoring and other processes. Building apps from within Snowflake allows for lower data transference costs and more simplicity. It also gives developers access to Snowflake’s real-time data cleansing tools to fix quality issues immediately. 30% of all SNOW customers were using the newer product as of last quarter.
Container: In the context of Snowflake, a container is a grouped piece of software. It combines an app or workflow and all of the data and code it uses (AKA its “dependencies") into one package. This allows for disparate source code languages to work cohesively on the platform to power apps. Containers are portable for any platform supporting Docker (a platform allowing for usage and transference of containers) and flexibly scaled up and down.
Snowflake extensively discussed a new tool called Snowpark Container Services. This allows for the operation of software containers natively within Snowpark’s ecosystem for things like data analytics, Gen AI apps and so much more. The big refresh, per leadership, is “bringing apps to the data” and allowing developers to deploy and scale their work from Snowflake’s infrastructure.
This combination is set to accelerate app creation with less time and energy. By conjoining apps and data to one location, things like security posture and compliance are made easier by eliminating data access bottlenecks for programs in operation. Now Snowflake not only tears down data silos with its cohesive, multi-cloud data lake, but it’s eliminating more fragmentation by serving as the single destination for data access and usage as well as app development. This unification is expected to give Snowflake customers a larger cost and complexity edge.
As part of this announcement, the Nvidia partnership will include access to its GPUs and software from Snowpark.
More New Product Highlights:
Snowflake debuted its own language learning model (LLM) built with Applica’s technology (which it bought last year). CEO Frank Slootman discussed an exciting possible use case stemming from this work called “Document AI.” This can take an entirely unstructured document, organize it and scrape insights from it in a fully automated fashion.
The company announced its native app framework as well. This will function very similarly to an open app store like Apple’s or Salesforce’s. It provides processes and guardrails for developers to build apps on top of Snowflake’s ecosystem to enhance utility and create more custom, niche use cases. This should allow the company to emulate custom builds without having to custom build services for an individual client. Cheaper personalization is always good for business and 3rd party developers can help Snowflake provide it. Developers can generate new tools to drive revenue with the full power of Snowflake’s infrastructure. They can also tap into the Snowflake Marketplace to responsibly access a wealth of 3rd party data with the firm’s governance tools directly integrated. 25 apps are now available as part of this debut today.
IL 4 Authorization:
In other news, Snowflake secured the elusive Impact Level 4 Authorization on Amazon’s AWS Government Cloud. For other software names like CrowdStrike and Zscaler, this authorization served as a gateway for new business. The stamp of approval from the Department of Defense frees Snowflake to be used as a vendor by many, many more U.S. agencies. This same imprimatur goes a long way in creating proof of concept and legitimacy to win this public sector business.
4. Amazon (AMZN) -- Amazon Hub Delivery, Investments & AWS AppFabric
a) Amazon Hub Delivery
Part of the margin expansion bull case that drew me to this name was its rationalization, optimization and localization of the fulfillment footprint. Amazon is embarking on an evolution to transform its national delivery infrastructure into several, smaller local centers. The reduction in miles to fulfill and operational streamlining is set to cut costs for this massive revenue bucket. Even a few basis points of margin expansion here would be needle-moving to EBIT generation. Encouragingly, we don’t think analysts have come close to fully modeling cost cutting efforts and high margin revenue streams like advertising in their profit estimates. Much like Meta several months ago, we see significant upside to current consensus.
This week, Amazon announced the rollout of a current pilot project to drive further localization, efficiency and perhaps margin. It’s called Amazon Hub Delivery and was created to “empower local businesses across the U.S.” It started in remote rural areas with a successful trial period and will now expand to major urban centers across the states.
What is it? The program partners with local business owners who boast a “strong understanding of their local neighborhoods” to deliver packages more expeditiously. It saw its fulfillment processes in extremely remote and dense areas lagging the speed in suburban America -- and this is the fix. Business owners can use existing teams with spare hours to deliver packages when they can. They can choose whenever to partake in deliveries and stop on a dime when things get especially busy. The presser used an example of a hair salon owner with a few open hours of time within her daily schedule. She signed up for this pilot project and started raking in the dough. All in all, Amazon thinks this part time gig can earn participants up to $27,000 per year in added income. It set the goal of reaching 2,500 local delivery partners by the end of 2023. Not mentioned, but noteworthy is the variable cost flex capacity this offers at peak periods like Christmas or Prime Days without building fixed delivery overhead.
b) AWS AppFabric
Amazon debuted AWS AppFabric this week. This is a no-code tool to allow cloud customer apps to work and communicate more effectively. It helps these customers extract more value out of their current software investments by lacing in data from all other eligible apps to generate deeper, more impactful insight.
With just a few clicks from the AWS dashboard, customers can handpick which apps and productivity tools to add to AppFabric to create a positive feedback loop of information sharing and uplifted operations. Apps routinely come with disparate APIs, integrations, source code languages and permissions. Per the Amazon release, this makes the uncovering of patterns and insights from existing apps and datasets difficult due to all of the fragmentation. AppFabric addresses this headache. AppFabric automates the unification of security hygiene and data sharing for all apps chosen. This guarantees teams know exactly which datasets they can use to take the guesswork out of task completion. Customers don’t need to manage the integrations as AppFabric serves as a conjoining layer on top of the siloes to make them work together more perfectly.
Unsurprisingly, AppFabric will debut generative AI capabilities in the near future using Amazon’s foundational Bedrock model. This service will work across all selected apps to make data querying less manual and to make tedious tasks like email more automated. Integration partners include Slack, Asana, Zoom, Google Workspace, Microsoft 365 and many others. Initial customers include Bank Leumi (the largest in Israel).
c) Investments
Amazon plans to invest a total of $26 billion in India over the next 7 years. This is vs. under $20 billion before India’s Prime Minister visited the U.S. this month. Nearly half of this total investment will be earmarked for AWS expansion.
AWS is investing $7.8 billion in Ohio over the next 7 years to add more data center capacity.
5. SoFi Technologies (SOFI) -- Student Loans & Mortgages
a) Student Loans
The Supreme Court struck down $10,000 ($20,000 for Pell Grant recipients) in student loan forgiveness. While the moratorium’s end re-motivated about 85% of outstanding credit to potentially refinance, this takes care of the remaining 15%. So? The moratorium was THE big win and this is more icing on the cake for SoFi’s business model. We still like icing. The question after the news was “why did SoFi” fall 2%.” We really don’t care about the short-term price reaction and find it to be noise, not signal. Still, we know that some of you do care. Our best guess is that it’s simply still both digesting a near doubling in its share price in less than 2 months and the prospect of more political forgiveness programs through legislative channels.
Additionally, The Biden Administration seems to be countering this decision with a “plan b.” It’s using the 1965 Higher Education Act to delay the resumption of student loans for another year. While this sounds like another moratorium, it’s not. Interest payments will accrue during this period and borrowers who can afford to make payments (like SoFi’s highly affluent demographic) are being encouraged to do so.
Any borrower (using the delay) who SoFi can offer an interest rate reduction to will still be motivated to seek one to minimize interest expense build-up. Borrowers who would have sought a term extension likely won’t feel as pressing of a need to do so if this plan b holds. But that’s an important if. This plan will inevitably be challenged in courts (probably the Supreme Court again) and could likely be put on hold while those cases are heard, and rulings are made. There’s still a good chance that payments resume in a few months if this scenario plays. We’ll see.
All in all, 15% of outstanding loan volume cancellation being taken off of the table is good news for SoFi’s business. The headline is louder than the actual impact, but it’s still a clear positive. While our sympathy goes out to those who were counting on this relief, our focus is, as always, on the stocks themselves. We apologize if this might seem insensitive.
JP Morgan also came out with an updated note on the company. It reiterated its $6 December 2023 price target but interestingly maintained its neutral rating despite that being about 40% below the current share price. This is related to how aggressively the stock has run over the last several weeks and it viewing the holding of student loans as somewhat un-compelling. SoFi has already concretely spelled out how this holding will generate low risk 20% ROE. Personal loans carry a higher return, but SoFi has room to retain both types of credit origination for now.
Additionally, JP Morgan sees the student loan refinancing opportunity at $90 billion vs. SoFi’s estimates of $200 billion. A few thoughts on this. First, student loan refinancing is the only category where one can make the argument that SoFi knows the product much better than JP Morgan. It has a 60% share of private student loan refi and has been a bellwether in the space for roughly a decade. Secondly, it doesn't really matter (for the next few years at the very least) if the opportunity is $90 billion, $140 billion or $200 billion like SoFi thinks it is. Why? The largest year of student loan refinancing volume was $20 billion in 2019. The pessimistic $90 billion estimate still leaves the company with a multi-year incremental demand runway to enjoy.
b) Veterans Affairs (VA) Loans
A few months back, we covered the SoFi acquisition of Wyndham Capital. Wyndham is an online mortgage originator that SoFi is using to vertically integrate its back office and thus improve customer service and time to fund. SoFi’s mortgage product was underwhelming as leadership will readily tell you. That quality issue prevented it from meaningfully investing into the segment. The timing was fortunate as the impediment occurred as rates were soaring and the mortgage opportunity was less compelling. With integration work well underway however, SoFi seems to be ready to lean into mortgages as rates begin to fall and demand ramps.
SoFi debuted its first mortgage tool post-Wyndham M&A with a Veterans Affairs (VA) Loan product. VA loans are a mortgage product backed by the U.S. Department of Veterans Affairs. They provide perks like easier credit score minimums, no down payment and oftentimes special rate offers. Applicants enjoy guaranteed closing times and up to $1.5 million mortgages. This should be the first of many home loan products launching as rates peak and cuts serve as a demand accelerant for the sector. Good timing. Thank you to Bender9000 on Reddit for finding this news.
6. Uber (UBER) -- California
Proposition 22 is a California referendum that was passed by voters in November 2020. This freed gig-economy companies like Uber to classify drivers as independent contractors vs. employees. The classification meant no benefits, minimum wage requirements or overtime. That inherently makes Uber’s operations more profitable in the state.
A very brief history of Proposition 22 Challenge Highlights:
January 2020: AB5 was passed by California state lawmakers. AB5 creates stricter rules for who is considered an employee vs. an independent contractor. It directly contradicts the eventual passing of Proposition 22.
May 2020: California Attorney General files a complaint with the San Francisco Superior Court specifically against Uber and Lyft claiming both were violating AB5 rules.
August 2020: the same court enforced the prohibition of Uber and Lyft classification practices based on AB5 via injunction.
October 2020: Court of Appeals affirmed the injunction while Uber filed a petition with the California Supreme Court. The petition relied upon the passage of Proposition 22 by voters in November 2020 which eventually passed. It argued the passage of Prop 22 by voters in California and lawmakers should effectively throw out previous court rulings.
California’s Supreme Court declined the petition in February 2021, but in April of that year, California’s AG + Uber and Lyft tried to dissolve the prohibitive ruling. That was permitted by the trial court allowing Prop 22 to be implemented.
March 2023, the California Court of Appeals threw out a junior court’s decision calling Proposition 22 unconstitutional.
There are groups that continue to try to get the California Supreme Court to take up the case of Proposition 22’s legality. Still, Uber and all other involved companies are adamant that most drivers want Proposition 22. The vast majority want the flexible hours that come with the classification as they use Uber as a secondary stream of income. This referendum being thrown out would make that more difficult. This week, California’s supreme court took up the case. This will be another challenge for Proposition 22 to overcome.
What will this mean? We’d hope that the court sides with its voters, but if they don’t then Uber should be better equipped to overcome this headwind than all of its competition. That has to do with the relative health of its balance sheet and margin profile vs. U.S. competitors. This would be a small hit to its profitability, but one that it would be able to weather more gracefully than others can. One could even argue that this would make Uber more difficult to compete with as the low-cost scale leader in the region. Relative insulation should diminish the risk to Uber’s business of Proposition 22 being thrown out. Still, there will be significant headline drama associated with these developments which investors should be aware of.
7. Nike (NKE) -- Fiscal Year Q4 2023 Earnings Snapshot
a) Q4 Results
Beat revenue estimates by 2%. Revenue grew by 5% Y/Y.
Met GAAP gross margin estimates of 43.6%. This compares to 45% Y/Y via higher markdowns and a few other small headwinds. Freight theft hurt too.
Missed GAAP EBIT estimates by about 1%.
Barely missed $0.68 GAAP EPS estimates by a penny. $0.67 in GAAP EPS compares to $0.91 Y/Y. Its effective tax rate was 17.3% vs. -4.7% Y/Y which is why EPS fell sharply Y/Y.
b) Balance Sheet
Basic and diluted share count both shrank by about 2.5% Y/Y as it repurchased another $1.4 billion in stock during the quarter ($174 billion market cap).
Inventory is flat Y/Y at $8.5 billion.
$10.7 billion in cash and equivalents.
Dividend payments rose 9% Y/Y for the quarter and 10% Y/Y for the year.
c) Outlook
Its guide calls for flat or low single digit Y/Y revenue growth next quarter. Analysts were expecting 6% Y/Y growth in what was a material miss. It called its approach to guidance cautious. Analysts also wanted a 44.8% GAAP gross margin vs. Nike’s estimate of roughly 43.7% and 44.7% on an FX neutral basis.
d) Results context
Foreign exchange (FX) hit revenue growth by 300 basis points (bps).
NIKE Direct revenue rose 15% Y/Y (18% FX neutral). NIKE-owned stores revenue rose 24% Y/Y with digital growing 14% Y/Y.
China Revenue rose 16%% Y/Y (25% Y/Y FX neutral).
8. Airbnb (ABNB) -- Noise & Identity
Another viral tweet tore across Twitter this week depicting revenue per listing in some Airbnb markets tanking by 50% in some cases. A few things here:
The data ignores how weak international travel was in 2022 within the Y/Y comp.
The source and methodology of arriving at this data is inherently anecdotal and misleading. There is no overarching source of host data which means this represents a smaller slice of supply.
The data ignores that last year is when Airbnb began most enthusiastically prioritizing host supply growth. This impacts revenue per listing.
Other vendors like AirDNA show low single digit declines in their data vs. this data from a company.
Airbnb responded to this report saying it’s entirely inconsistent with its data and that the health of demand and its marketplace remain very strong… as it told us on its last earnings report.
Noise.
In other Airbnb news, going forward, Airbnb will block any Host listings that have not completed its verification process and will prevent guests from booking on the page. This is the kind of move that regulators will absolutely love. It will be interesting to see if this has any kind of impact on its conversion rates.
9. Lemonade (LMND) -- Creative Financing (in a good way)
Lemonade announced a creative new financing partnership this week with General Catalyst -- an early investor in the company.
Lemonade’s profitable growth opportunities are becoming more abundant and realistic. It wants to pursue all these opportunities, but deep cash burn and a still lengthy runway to profitability is a restrictive reality. Especially in this high cost of capital environment, it is committed to turning profitable before having to raise more money. The cash burn paired with this commitment has forced it to pick and choose between which attractive demand it will go after. Its lifetime value to customer acquisition cost (LTV/CAC) ratio sits at a very strong 3.0x, but the cash collection cycle takes years to harvest. This cash “gap” is a limiting factor for its growth as it intentionally threads the needle of growth and cash preservation. The result has been intentionally slowing growth and losses improving faster than they were supposed to… but now Lemonade thinks it can strike a more attractive balance.
General Catalyst has agreed to finance up to 80% of Lemonade’s CAC. In exchange, they get 16% of procuring cause premiums until they’ve reached a pre-set investment return. Thereafter, Lemonade gets all commissions. This allows Lemonade to emulate a broker-agent structure without giving up perpetual commissions, without conceding a majority of the profits and with less up-front spend as the cash trickles in. It calls this format a “synthetic agent.” The result of this move should be growth accelerating beyond its current targets while profits should not suffer as a result. Good combo. Good decision.
10. Progyny (PGNY) -- Partnership
Progyny and Quantum Health (nearly a billion in 2022 revenue) announced a new partnership with Progyny. Quantum Health, per Google Bard, is a “healthcare navigation and care coordination company that helps members navigate healthcare journeys with better outcomes and lower costs.” Sounds like Progyny’s fertility mission. Progyny’s smart bundles will be used to jump start a new fertility benefit for Quantum Health. The partnership includes an end-to-end integration of Progyny’s clinic and care advocate networks along with its custom treatment design. Quantum Health currently has 500 clients and 3 million members in what could be a needle moving relationship for Progyny and its less than 6 million members.
11. More Brief Headlines
PayPal (PYPL):
In another debut to make it more competitive in mobile, PayPal will launch a tap to pay function for Venmo Business Profiles on Android in the USA. PayPal and Android is arguably the most important relationship for this company considering the operating system’s global share of smartphones and Apple’s compelling, developing product offering.
Microsoft (MSFT):
The company sees $500 billion in 2030 revenue representing an 8-year CAGR of 12%. Incredible at this scale. Fun fact: Reaching that target would make its revenue base equivalent to the 30th largest country in the World.
Tesla (TSLA):
Tesla looks to be in the process of adding 3rd party app support for its cars.
Cresco Labs (CRLBF):
The Cresco Labs and Columbia Care merger will not be close as is. The companies are “amicably” seeking a path to move on. Cresco will need to find another way to gain exposure in states like New Jersey.
12. Macro
a) Stress Test
Every bank passed the Federal Reserve’s Stress test. It simulated tanking asset prices (with equity markets being cut in half), an unemployment rate approaching 10% and GDP contracting Y/Y by nearly 9%. Interestingly, bank run scenarios were not tested, but it’s easy to see how that could be added in the near future. Even under this dystopian scenario, common equity tier 1 (CET1) ratios would stay above the regulatory minimums for all institutions in question. The Fed also introduced new examinations of the durability of asset books in the wake of inflation and soaring rates. The books appear to be safe as of now. Why do tests like this matter? Aside from the confidence it instills in our financial system, it also works to diminish regulatory pressure on financial institutions and FinTechs.
The caveat here is that things like bank runs and issues related to the Silicon Valley Bank debacle don’t gradually strike. They strike as rapidly as a bolt of lightning and can leave yesterday’s liquid banks reeling today. For this reason, it is VITAL to consider things like asset quality, credit quality and quality of deposits along with leverage. As an aside, this is also why SoFi’s real time asset tracking tools under Galileo and Technisys are so compelling.
b) Key Data from the Week
Production/Output Data:
Q1 GDP rose 2% vs. 1.4% expected and 2.6% last quarter.
Durable Goods Orders for May rose 1.7% M/M vs. -1% expected and 1.2% last month.
Core Durable Goods Orders for May rose 0.6% M/M vs. 0.1% expected and -0.6% last month.
Employment/Consumer Data:
Conference Board Consumer Confidence for June was 109.7 vs. 104 expected and 102.5 last month.
New Home Sales for May were 763,000 vs. 675,000 expected and 680,000 last month.
Initial Jobless Claims of 239,000 vs. 266,000 expected and 265,000 last reading.
Pending Home Sales fell 2.7% M/M in May vs. -0.5% expected and -0.4% last month.
Inflation Data:
Personal Consumption Expenditures (PCE) Index for May rose 3.8% Y/Y vs. 4.6% expected and 4.3% last month.
PCE Index for May rose 0.1% M/M vs. 0.5% expected and 0.4% last month.
Core (strips out food and energy PCE Index for May rose 4.6% Y/Y vs. 4.7% expected and 4.7% last month.
Core PCE Index for May rose 0.3% M/M vs. 0.3% expected and 0.4% last month.
The GDP Price Index for Q1 was 4.1% vs. 4.2% expected and 3.9% last quarter.
13. Portfolio
I added to Amazon this week.
News of the Week (June 26 - 30)
Appreciate Airbnb’s moves to be more friendly with regulators. Regulation seems to be its biggest risk