News of the Week (March 25 - 29)
Disney; Amazon; SoFi; PayPal; Visa/Mastercard; Lululemon & Snowflake; Match Group; CrowdStrike; Alphabet, Meta & Apple; Boeing; MercadoLibre & Nu Holdings; Macro; Portfolio
1. Disney (DIS) – Bullish Analysts, Proxy Battles & Legal Settlements
a. UBS
This week, UBS came out with a glowing, thesis-confirming research note on Disney. It set a $140 price target, but as always, the reasoning for the note matters much more to me than the target. UBS sees park outperformance driving shareholder return growth and significant flexibility to reinvest in its highest return businesses (parks & experiences). In my view, that will pair quite nicely with its streaming business, which is rapidly approaching breakeven EBIT. We should be left with a growing cash flow monster (parks) and a budding cash flow monster (streaming), both of which will more than replace the demand erosion within its linear business. This is all review. I’ve been talking about it since I started the position last year in the 80s. What isn’t review is the firm’s quantitative targets provided.
UBS sees Disney compounding earnings at a 25% clip from fiscal year 2023 through 2026 to reach $7.34 in EPS. That’s 20% ahead of consensus. It also sees it reaching $14 billion in free cash by the end of the planning period. That is 36% ahead of consensus and represents a 48% 3-year FCF CAGR. Disney trades for 23x FY 2024 FCF (Free Cash Flow). If it stays right there from today to then, that would represent a 19% return CAGR (2023 period not included in return CAGR is why return CAGR is not equal to FCF CAGR with same multiple). Disney’s 3 & 5 year FCF multiple averages are 43x and 50x, respectively. If we assume its multiple expands to 30x during that time as sentiment improves alongside the financial recovery, we get a 23% return CAGR. That’ll work just fine.
b. Proxy Battles
The proxy battle between Disney and mainly Trian (Nelson Peltz) will play out next week. As I’ve said before, I don’t really care how this goes. If Disney wins, it will continue on its current path with a larger, shareholder-focused microscope hanging over its actions. If Peltz wins, he will get his desired board shake-up and a voice in the room. Why doesn’t this concern me? Because I don’t think Disney has a great board. I think Disney has a great CEO. The board spearheaded the Chapek hiring and Disney’s shift to embracing cultural influence over great content, strong shareholder returns and ramping free cash flow. One of Peltz’s key demands is to control more of the succession plan. The current board has already shown you they struggle with transitions. So? Getting some fresh blood in there to alter the approach to replacing Iger this time is fine with me.
Peltz has also explicitly come out in support of Iger. Hearing that assuaged pretty much all of my concerns. His criticism of the board is well-placed, just like his support of Iger is. This newer item surprised me in a good way. What matters to me is that Bob continues steering this turnaround and sharpening company focus to drive Disney’s next decades of success. There will be significant bark and loud headlines coming from this event. I truly don’t think the coinciding bite will materialize.
c. Florida Legal Battles
A few years ago, Disney leadership criticized Florida’s passing of what was nicknamed the “Don’t Say Gay” bill. As always, I will fully ignore the social and political aspects of this and focus on Disney specifically. In state retribution for this public criticism, Walt Disney World lost special tax exemptions and Disney voluntarily placed a target on its back from what had been a powerful ally. More lawsuits were subsequently filed by Disney for unfair treatment.
This week, disputes were settled as Disney lawsuits against Florida were all dropped. I view this very positively. Walt Disney World is still a cash flow printer and compounder without the tax status. And now? Disney and Florida can work to repair a somewhat fragile relationship. It can now begin to morph this influential state government back into an ally. To me, this is a sign that Disney is serious about re-focusing the company on telling great stories… sharing great experiences… and then being quiet. That’s immensely encouraging for us shareholders.
2. Amazon (AMZN) – Pricing Power & Anthropic
Amazon launched same-day prescription delivery in LA and New York this week. Amazon will utilize a combination of drones and vans for fulfillment and should expand to 10 more cities in 2024. Amazon Prime costs $14.99 per month. With it, consumers enjoy a plethora of expedited and deeply discounted fulfillment, free grocery delivery, discounted prescriptions, Amazon Prime’s streaming service, Amazon’s music streaming service, complementary Audible audiobooks and photo storage. Consumers continue to lean on all of these services more & more; Amazon continues to layer in more utility. Why do I say this?
We have previously reviewed fulfillment regionalization, organizational restructuring, 3rd party selling, advertising, and new supply chain services as powerful margin tailwinds. We don’t talk a lot about Amazon Prime pricing power. Amazon has seamlessly raised its pricing in the past with zero material pushback. Why is that? Because this consumer subscription is arguably the most valuable on the planet. Unique value is what drives pricing power; we have years upon years of evidence for strong pricing power; I fully expect that to continue. Amazon is a margin puppet master that can pull this lever whenever it wants to. It has the most arrows in its quiver for driving margin accretion out of any other company I follow. This is simply yet another item to contemplate.
Amazon completed its previously announced $4 billion investment in Anthropic. Find out more about Anthropic in section 2 of this article.
3. SoFi (SOFI) – Bank Sponsor, SoFi at Work & Fitch
a. Bank Sponsor
SoFi posted job listings this week for roles including “bank sponsorships.” Twitter was all over it, so thank you to the several accounts that called it to my attention. Fintechs without charters must partner with a bank to secure the licensing needed to conduct banking services. These sponsors will share their licensing, their risk management/compliance guardrails and often their technology too – for a fee. SoFi is the only bank in the USA that combines the needed charter with next-gen payment processing and multi-core banking APIs. It’s the only vendor that can provide point solution consolidation as fintechs seek out these sponsorships and tech stack perfection. 1 of 1. This makes it the perfect candidate to thrive in this niche. It has the ability to win here. Why not create another high margin revenue stream from the charter? Why not give yourself more potential to cross-sell Galileo APIs? There was no reason not to pursue it, and now it will.
b. SoFi at Work
SoFi at Work is a program offered to clients like Nvidia, The New York City Bar Association, Tesla & Amazon, Meta, Chipotle etc. It’s an employee benefit, providing education, financial planning help and SoFi’s suite of products. This is a newer program that I haven’t really written about much. SoFi’s primary structural growth bottleneck is brand awareness. How do you turbocharge brand awareness and spread it far and wide more seamlessly? Through programs like this. I don’t think it will directly bolster results materially, but I do think it will ease this bottleneck to help growth indirectly.
Financial education for the millions of employees part of this program will be a SoFi financial education. Want to get your money right, Mr. Brilliant Nvidia Software Engineer? Get it right with SoFi. That potential will now become supremely obvious to a large chunk of employees who still don’t know what SoFi even is. Not everyone watches the NFL or NBA. Most of the country hears “SoFi” and thinks “a popular female name.” This is a more efficient means of building brand awareness among massive employee bases in one foul swoop. It’s a somewhat similar idea to CrowdStrike being a preferred channel partner for AWS, Progyny being a preferred partner for Blue Cross Blue Shield, or Lemonade Pet Insurance being a preferred partner for Chewy.
c. Fitch
Fitch also published some new data on 2024 personal loan vintages for SoFi. On March 8th, it assigned a 5% base case default rate for loan trust 2024-1. On March 18th, it assigned the second 2024 vintage a 5% base case default rate as well. Why does this matter? Considering an average loan term of 18 months, this places the life of loan loss rates for 2024 vintages right at the midpoint of SoFi’s 7%-8% guidance. Notably, the report called out improvements in the most recent loan pools Fitch has observed. That offers a nice piece of evidence, yet it refrained from baking this into its base case. This provides more confidence in 7%-8% truly representing peak life of loan loss rates for this cycle – just like management said (shocker).
d. Mindset
SoFi the stock continues to aggressively chop around. Company metrics are improving on a straight line but the stock isn’t representing that. As I’ve said frequently, I expect that to continue for now – both to the upside and the downside. And I’m entirely fine with that. Sofi has a team that consistently meets or beats targets. That’s what I care about. Despite a loan moratorium, a historic rate hike cycle, and regional banking chaos... They deliver or over-deliver. Even through the SPAC & free money age in which firms offered multi-year targets & failed miserably to meet them... it bucked the trend and delivered. All I care about is that it continues its strong, strong track record of fulfilling all of its promises. Namely, I care about it meeting its 2026 $0.67 GAAP EPS promise (at the midpoint of its range).
I'll squarely focus on the ingredients that will allow that to happen. Strong underwriting, capital market access at healthy gain on sale margin, ramping profits to feed book value & capital ratios, rapid growth & leverage for fin services, and a convincing tech platform revenue growth acceleration. The rest is noise.
Where do I see SoFi stock going if it does continue to execute? I see a range of most likely outcomes (which are inherently uncertain as always):
Meets $0.67 2026 guidance with profit compounding at a 30% multi-year, forward-looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (18x - 30x earnings), which yields a price range of $12.06 - $20.01.
Meets $0.67 2026 guidance with profit compounding at a 40% multi-year, forward-looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (24x - 40x earnings), which yields a price range of $16.08 - $26.80.
Earns $0.80 in 2026 (high end of the guidance range). Profit compounds at a 30% multi-year, forward looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (18x - 30x), which yields a price range of $14.40 - $24.00.
Earns $0.80 in 2026 (high end of guidance range). Profit compounds at a 40% multi-year, forward looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (24x-40x), which yields a price range of $19.20 - $32.00.
I realize that my PEG ratio assumptions are very pessimistic. I’ve used more optimistic PEG assumptions here in the past. For now, I think 0.6x-1.0x is appropriate given SoFi’s material credit risk, the tech platform uncertainty and fair value accounting skeptics. These real risks are why SoFi is roughly 6% of my portfolio today, rather than 10%+ like for Meta, Amazon and Uber. It is objectively more speculative, regardless of how optimistic I am. So? It needs to be a bit smaller today.
And as you can see, the pessimism doesn’t impact robust multi-year returns from now to then. For now? If strong execution continues... if the fundamental ingredients remain tasty... I'll keep adding into volatility. If the fundamental execution worsens for whatever reason... I won't. I won’t stop supporting a company because the stock is now up less over the past year than it had been. That is missing the forest for the trees.
4. PayPal (PYPL) – PayPal Ventures
PayPal Ventures helped lead a $46 million series C funding round for “Qoala.” Qoala is an insurance tech firm domiciled in Southeast Asia. It’s very small. The firm has made several of these announcements in the last few months since CEO Alex Chriss took over. That continues a long term trend of numerous VC investments under old leadership as well.
The different part of Chriss’s approach to asset management is within traditional M&A. He thinks PayPal bought too much, integrated too poorly, and focused too little on its core business under Schulman. A $46 million investment is a much lower risk means of participating in potential upside vs. making big, flashy acquisitions. Not only is Chriss avoiding those flashy acquisitions, but he’s even selling off previously purchased companies like Happy Returns. I would like PayPal Ventures to be the only way in which this firm acquires new stakes in more companies. No M&A is needed. Nurture your existing products more effectively. That’s their plan.
5. Payment Networks – Visa (V) and Mastercard (MC)
Visa and Mastercard resolved a long-standing lawsuit with a large group of merchants this week. The complaints centered around processing fees charged by the networks, which arguably resulted in unnecessary consumer inflation. As part of the settlement, the two card giants will reduce interchange rates and cap those rates for 5 years. The financial impact of this (per the associated law firms) is expected to be $30 billion for both firms through 2030, and so $30 billion in aggregate savings for merchants.
The cap will be set at least 0.07% below December 2023 fee levels. The at least item enables bargaining power from larger merchants to be flexed for greater volume-based discounts. Smaller merchants can also pool resources to emulate that bargaining power. Still, the finite period of capping rates leaves the door open for card networks to revert to old fees once the agreement has expired. This seems like a bandage vs. a permanent fix.
As a separate part of the news, card networks will also create a more open payment ecosystem in which merchants can seamlessly point customers to lower fee transaction methods. I don’t really see this leading to cost disinflation for consumers. Merchants will likely pocket this added margin for themselves, if I had to guess.
6. Lululemon (LULU) & Snowflake (SNOW) – A Note on Insider Buying
Lululemon Board Chairman Martha Morfitt made a $1.4 million open market stock purchase this week. That raised her sizable stake by 4% to $35 million. I couldn’t find a credible source on her net worth, but this is a good piece of news for a company licking its wounds after a slightly underwhelming annual guide. Pleased to see this.
Also this week, Snowflake’s new CEO made a $5 million purchase of company stock. While I frequently say insider buying is always a bullish signal, there’s a caveat. It’s bullish if there are no competing incentives to motivate the purchase. If there are, the news doesn’t become negative; the bullish signal from it just becomes a lot weaker. What were the two incentives aside from stock bullishness here?
First, new CEOs like SNOW’s will routinely make stock purchases at the beginning of their tenures as a sign of faith in the stock. That makes stock bullishness a tad more symbolic in this case. It’s not shady or dishonest or anything remotely similar, it’s just common practice. Match Group’s Bernard Kim did the same thing; it’s routine. Secondly, CEO Sridhar Ramaswamy secured $5 million in restricted stock units (RSUs) in exchange for making this purchase. In my view, the reason for optimism at Snowflake is the prospect of ramping product innovation. Recent news like expanding its data clean rooms across hyper scalers to bolster customer confidence in data security is what to focus on. That, and likely a sandbagged guidance. This specific piece of news is not all that important in this specific case.
With regard to the sandbagged guidance, I do think the firm will crush current expectations. Zero contribution from new products and zero consumption improvement is too pessimistic. Still, that doesn’t make me love the stock at these prices.
Let's assume it outperforms on revenue growth by 5 pts & beats current 2024 EBIT estimates by 50%. You're still paying 150x operating profit for a 27% revenue grower & a 37% EBIT grower.
And there is a bit of fundamental concern for now. The product roadmap had been moving too slowly. It's behind Databricks in key innovation areas like Notebooks, which Snow leadership will explicitly tell you. Finally, as a review, open source Iceberg Tables could erode demand momentum for 10% of its revenue. It could also bolster querying demand, so the actual impact will be smaller than 10%. I really do think Ramaswamy will do a great job. Still, I find myself in no-man’s land here at a still quite elevated valuation. I want (and expect) execution to get better and for the company to get cheaper. That’s not realistic; I know that. I’ll likely keep watching and rooting for the company from the sidelines.
7. Match Group (MTCH) – Elliott Management
While I think Disney leadership has earned the right to carry out its plan without activists, I don’t believe the same to be true for Match. Marketing blunders, top-of-funnel weakness, a vague turnaround plan and consistent financial disappointment all have me close to cutting this holding. It’s a dominant market share leader in a sector growing at a steady clip, yet that would be hard to notice in its performance since 2020. This is why I’m glad that they’re following Elliott Management’s guidance. Elliott has a 10%+ stake in the firm and just got two of its preferred candidates added to Match Group’s board: Laura Jones and Spencer Rascoff. Jones is Instacart’s CMO. Rascoff co-founded Zillow. This is a strong sign that Match is open to the likely value accretive changes. Their presence here makes me more comfortable with continuing to own it. Its track record is strong.
8. CrowdStrike (CRWD) – New Partner
CrowdStrike partnered with HCLTech in India this past week. Together, CrowdStrike will offer its Extended Detection and Response (XDR) endpoint product to HCLTech’s customer base. HCLTech is a large company with $13.1 billion in total 2023 revenue. It “develops, markets and supports software for digital transformation, data, analytics, AI and automation” and now will be doing so with CrowdStrike’s breach protection at its side. India is perhaps the most exciting security market for CrowdStrike outside of the USA. It’s massive, has a growing middle class, is a bit behind in its security revolution and has a business-friendly and U.S.-friendly government. Partners like this can greatly expedite the product education and product trust both needed for CrowdStrike to dominate there like it does here. This may not seem material, but it easily could be. Good news.
9. Apple (AAPL), Alphabet (GOOGL) & Meta (META)– iPhone, VR & Regulation
Apple iPhone shipments to China fell 33% Y/Y in February. That’s an ugly headline, but more context is needed. Apple’s quarterly guidance offered in November directly cited tough iPhone comps related to $5 billion in incremental revenue from supply chain recoveries. Comps are uniquely tough for months including February 2024. So? Headlines like this are not positive. But this one is already baked into guidance and (in my non-shareholder view) is not alarming.
Tencent and Apple are partnering to offer Vision Pro to Chinese consumers. I found this interesting, considering Meta also has a Tencent partnership there to sell lower-priced headsets. Clearly, the Chinese giant sees value in selling one ultra-high end device and one that’s affordable to the masses. More confirmation of two compelling niches existing and a global duopoly forming in VR headsets.
And finally, what’s a News of the Week article without a new investigation from the EU on regulatory compliance. They’ve opened a new investigation into Google, Apple and Meta’s Digital Markets Act (DMA) compliance.
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10. Boeing (BA) – Clean House
Negative Boeing headlines have been frequent lately. One viral hardware issue after another has led to CEO Dave Calhoun stepping down in 2024 and a large board shake-up. For those of you who don’t know, Boeing used to be my largest position back in 2019 before I was doing this full time. I was drawn to the wildly compelling nature of its supply constrained global duopoly, massive backlogs and the U.S. government’s commitment to keeping them afloat and successful. I was enamored by how the odds were stacked in their favor. But you still need to execute. The plane issues are not solely Boeing’s fault. Regardless, when you spin off & outsource work to 3rd party suppliers, it’s on you to make sure those parts are perfect. When you rely on airlines to maintain planes, you are vulnerable to their employees making mistakes and you getting blamed for them. Fair? Maybe not. But there’s plenty of blame to go around.
One blunder after another pushed me out, with Calhoun’s hiring being the last straw. Why? Incredibly, Boeing’s idea of “clearing house” 5 years ago entailed hiring a new CEO from its existing board of directors. That’s not a fresh start… it’s a slap in the face to the public. It makes the current bout of issues somewhat unsurprising. They need to actually clean house this time. They need to pay up for top notch, EXTERNAL talent. They need to skew the focus further towards a quality obsession vs. a cost optimization obsession. And? They likely need to vertically integrate more of the maintenance responsibility to ensure everything is done perfectly. They’ll be blamed regardless, so might as well take that potential risk back into your own control. If that’s too expensive? Then sell/spin-off the defense or government service businesses to get it done. Airbus doesn’t seem to have these issues and their planes are price competitive with Boeing.
Boeing has shown it can’t optimize shareholder value while maintaining a robust, safe and consistent supply chain. Public safety is firmly in their hands and Boeing will need to make some costly decisions to appease regulators and take the large, large target off of their backs. That’s why I have no interest in re-entering.
11. MercadoLibre (MELI) & Nu Holdings (NU) – Meli Pedal to the Medal
MercadoLibre will reportedly increase growth investments in Brazil to $4.6 billion in 2024. That represents 20%+ Y/Y growth following closer to 10% Y/Y growth last year. The funds will be used to expand and improve its logistics network, with new distribution centers (already discussed on previous earnings calls). It will also increase investments in Mercado Pago (fintech arm) with new investing, insurance and credit products. Advertising was the other investment area mentioned. Its overall goal is to continue raising its market share in what is its largest market. Notably, easier macro expectations in Brazil are contributing to confidence in this added aggression.
For MercadoLibre, this is encouraging news. Its most important market is showing strong economic resilience. So? It can sink its teeth back into the masterful playbook that has allowed it to establish dominance there for decades.
For Nu? This is mixed news. MercadoLibre is targeting growth spending within Nu’s bread and butter (in Nu’s largest market). Competition isn’t new for either, and share gains will likely continue to come from slower incumbents. Still, Meli is a more intimidating competitor than any of those incumbents, and is making Nu’s territory a key focus. Conversely, easier macro in Brazil would be fantastic news for Nu. It would greatly diminish any credit resilience concerns and it would likely mean accelerating origination growth too. Brazil (and Colombia) are two of the best nations in the world in terms of high interest rates and low inflation. There’s plenty of room to cut to keep this economic strength humming. I am continuing to work on my Nu investment case. Meli will come after that. Stay tuned.
12. Macro
Inflation Data:
The GDP Price Index for Q4 came in at 1.7%. This compares to 1.6% expected and 3.3% last quarter.
Michigan 1-year and 5-year inflation expectations for March were both a tick cooler than expected and each ticked down 10 bps M/M.
Core Personal Consumption Expenditures (PCE) M/M for February rose 0.3% as expected. This compares to 0.5% last month.
Core PCE Y/Y for February rose 2.8% as expected. This compares to 2.9% last month.
PCE M/M for February was 0.3% vs. 0.4% expected. This compares to 0.4% last month.
On Friday, Powell said the PCE inflation data was “more along the lines of what he’s looking for” vs. January inflation data and February’s CPI and PPI.
Consumption/Employment Data:
Conference Board Consumer Confidence for March came in at 104.7. This compares to 106.9 expected and 104.8 last month.
Continuing Jobless Claims came in at 1,819,000. This is roughly in line and compares to 1,795,000 last month.
Initial Jobless Claims were 210,000. This compares to 212,000 expected and 212,000 last report.
Michigan Consumer Confidence and Sentiment for March were both better than expected and each improved M/M.
Output Data:
Durable Goods Orders M/M for February rose 1.4%. This compares to 1.2% expected and -6.9% growth last month.
The latest GDP reading for Q4 came in at 3.4%. This compares to 3.2% expected and 4.9% last quarter.
The Chicago Purchasing Managers Index (PMI) came in at 41.4 for March. This compares to 45.9 expected and 44.0 last month.
13. Portfolio
I didn’t make any transactions this week (no cash).
Thanks for your as always, valuable sofi insight Brad. One thing i can't get my head around is how they get to 67c eps in 26 from 7c in 24 which is 9X higher eps growth rate than their forecast revenue growth of 22.5% over the same period.
I guess maybe more $ drops straight to the bottom line now they're profitable? but have you been able to deduce a likely pathway for how they might be able to increase eps at 200% compond rate to '26?
I read your email every weekend. Great analysis for novice like me to understand. Thanks Brad!