Nu beat revenue estimates by 8.3%. Revenue grew by 64% Y/Y on a foreign exchange neutral (FXN) basis. Its 77% 2-year revenue compounded annual growth rate (CAGR) compares to 94% Q/Q and 111% 2 quarters go.

Nu’s annualized return on equity (ROE) now sits at 27%, which is already among best-in-class banks in Latin America. This is despite carrying $2.4 billion in excess capital within Nu Holdings and despite heavy up-front investments in Mexico and Colombia. ROE is already over 40% in Brazil, specifically.

The rise in NPL and CLAE intensity was as expected. This is related to a few things. First, Nu is expanding to riskier credit buckets. Additionally, its credit portfolio’s mix shift from credit cards to unsecured personal lending is a headwind for NPL and CLAE. Personal loans are now 23% of the total credit portfolio vs. 15% Y/Y. Finally, Nu always sees a material step up in delinquencies and losses from Q4 to Q1 – just like the industry as a whole. Holiday and Carnival timing are likely contributing factors; considering this isn’t at all specific to Nu, it’s not concerning in my view. It continues to effectively underwrite and deliver delinquencies 10% better than average. I don’t care if NPL and CLAE are rising, IF that rise is more than offset by more revenue. Expanding gross margin, NIM and risk-adjusted NIM serve as direct evidence of that being the case.

These are the metrics to track most closely! Expansion means they are pricing risk effectively. Nu told us that this riskier credit cohort expansion is going “as well or slightly better” than expected. 

For NIM and risk-adjusted NIM, a bit of context on the Q/Q decline is needed. First, rapid Mexico deposit growth contributed, as the cost of deposits there is higher than in Brazil. Next, a federal collections program (that Nu took full advantage of) propped up net interest income by more than $60 million in Q4. Without this impact, risk-adjusted NIM would have been flat Q/Q. The company sees NIM and risk-adjusted NIM rising throughout the year. It doesn’t usually offer any guidance, but leadership did let this slip during the Q&A. 

Also note that Brazil and Mexico are likely going to continue cutting rates throughout the year. It sees NIM and risk-adjusted NIM rising regardless of this. That’s related to the continued rise in loan-to-deposit ratio (LDR). These deposits, before being used to originate credit, earn federal bond-level yields. As LDR rises, net interest income (NII) soars without a similar boost to cost of capital. That means more margin; effective underwriting for broader credit cohorts allows that tailwind to be fully enjoyed. This is not just true for unsecured loans, but its budding secured lending franchise too. Shifting from bond yields to secured lending yields is positive for NIM. Rate cuts will also accelerate the velocity of money and support interchange revenue growth.

Nu Bank has $1.2 billion in excess cash on top of its $2.1 billion capital requirement. The cushion grew considerably Y/Y. Nu Holdings has another $2.4 billion in cash & equivalents that it can allocate to Nu Bank if need be. There is no need. The balance sheet is in great shape.

Fun fact: Entering 2022, sell-side expected Nu to generate $6.7 billion in 2024 revenue. Today, that expectation is $11.2 billion.

Nu trades for 28x 2024 earnings (I think more like 25x). Earnings are expected to compound at a 2-year clip of 50% for the next two years.

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Nu continues to fire on all cylinders. From a top-of-funnel perspective, it maintained a 1.3 million/month pace of customer adds in Brazil. Considering that 54% of Brazilians are already customers, that’s quite notable. It is somehow still delivering 22% Y/Y customer growth. Nu doesn’t really work very hard (i.e. spend much money) for these customers either. The “vast majority” are coming via referrals from happy customers. That’s the beauty of delighting users with better products: They’re motivated to spread the word. This also contributes to Nu’s sizable customer acquisition cost (CAC) advantage vs. the competition.

Even more encouragingly, it netted 1.5 million new customers in Mexico (+106% Y/Y), which is its first quarter with over 1 million adds there. This represents quite a sharp acceleration and shows that the Cuenta Nu high yield savings product is working like a charm there. Nu cannot grow customer count in Brazil forever and Mexico (and Colombia) represent/s a wonderful lever to raise its addressable market size. It now has 900,000 customers in Colombia as it gears up for aggressive expansion in its third market. As an aside, management continues to hint at these three nations simply being the first stage:

“We’re still only operating in 3 countries in Latin America.” – CEO David Velez

Customer growth is wonderful… but more customers with improving levels of engagement is even better. Nu is delivering exactly that. Recent cohorts continue to utilize more products vs. older cohorts (4.1 vs. 4.0 Q/Q) and continue to deliver higher and higher monthly revenue per active account (ARPAC). 59% of Nu customers now use the company for their Primary Bank Account (PBA) vs. 57% Y/Y. This upward trend directly nurtures the positive engagement themes that I just spelled out. PBAs use more products and generate more revenue for Nu.

It’s worth noting that Nu has a stronger balance sheet, higher built-in brand awareness and sharper operating procedures today than it did 6 years ago. It makes perfect sense that things are off to a faster start thus far in Mexico. There was no guarantee that Mexico would embrace this company like Brazil has. It is.

“Nu has been solidified as the unrivaled leader for digital banking in Mexico… We're thrilled with our performance in the early months of 2024 and are well positioned to achieve the goals we have set for ourselves for the year.” – CEO David Velez

The way to win in banking and any other commodity is by finding edges within a cost structure. Nu does stand out with its slick interface and usage convenience, but cost is still the sharpest differentiator in this sector. It always will be. Its CAC is $7 vs. $6.50 Y/Y as it leans into newer markets. That’s lower than its competition. Its cost to serve remains at $0.90 per month or $2.70 per quarter, which is about 85% better than a typical bank. This is largely thanks to Nu’s branch-less business model and digitally-native operations. Its goal is to stay under $1 per month or $3 per quarter. This means a brand new customer costs Nu $9.70 during the first quarter. Considering monthly ARPAC now sits at $11.40, customers are immediately profitable for Nu. The runway for growth here is also massive, considering its most mature cohort boasts a $27 ARPAC (and quickly rising). 

Its cost of risk is also 10% lower than the Brazilian average (as apples-to-apples delinquencies continue to outperform) and its cost of funding is 16% cheaper. Both of these figures worsened Y/Y due to the Mexico expansion, but remain key tools for allowing Nu to stand out from the pack. 

This is how you win in banking. This is how Nu is winning in banking.

The shift to installment-style credit and its overall “interest-earning portfolio” (IEP) remain in full swing. IEP overall is now 26% of its credit portfolio vs. 23% Q/Q and 16% Y/Y. PIX and Boleta financing are the standouts here. PIX is basically a nationalized Venmo in Brazil where Nu customers can use credit card limits to make transactions; Boleta uses a credit card to pay bills in installments. They both feature attractive levels of monetization for Nu and they are both products it can offer with more convenience vs. legacy banks. LDR sits at 40% vs. 34% Y/Y. Most incumbent banks sport LDRs of 100%-110%. Nu doesn't expect to push the envelope that far, but does see significant LDR upside from here.

Deposit growth this quarter needs a bit more context. Seasonality drove Q/Q declines in industry deposit levels in Brazil, which Nu is not immune to. This always happens there (aside from the pandemic-era). Importantly, deposit seasonality, paired with purchase volume seasonality, is why gross margin declined from Q4 to Q1 (we were told it would last quarter). Comparatively speaking, Nu’s sequential declines in debit and credit card volumes comfortably surpassed industry averages.

Rapid Mexican deposit growth helped buffer the inevitable deposit seasonality for the quarter. Since launching its high yield savings product broadly in Mexico, Nu has gone from $200 million in Q3 2023 deposits, to $1.0 billion last quarter and to $2.3 billion this quarter. Again, this market is becoming another promising opportunity for raising deposit levels to cheaply fund more loans. And with Nu’s capital adequacy ratio (CAR) in such excellent shape, it can easily use this liability growth to comfortably use this source of liquidity for originations. As we’ve already covered, that boosts NIM.

It’s worth noting that this balance sheet optimization is juicing net interest income and overall revenue growth for now. When that ends (and there’s still a long way to go), revenue will more closely track customer and product growth. This is why Nu will likely slow to 20%-30% annual growth in the coming years. That is the sell-side expectation and is intuitive to me. Still, that will not happen in the immediate future and 20%+ revenue compounding at the scale it will likely be at in a few years is very impressive. 

Just last year, Nu didn’t do much secured lending at all. It has since debuted several products (deep dive will explore in detail), which seem to be off to a great start. This quarter, secured originations were 13.8% of total vs. 10% Q/Q and 0% Y/Y. This is important for two reasons. First, a broader credit offering caters to broader use cases and should be good for overall demand. Secondly, secured lending comes with significantly lower loss rates vs. unsecured. The actual benefit to NIM is far less pronounced, considering interest rates are lower when there’s an asset to secure or guarantee compensation. Still, lower NPL rates are always a positive for investor and capital market sentiment, and this will help there. Interestingly, the growth bottleneck for secured lending is simply putting the contracts and partnerships in place to drive adoption. It’s not credit risk appetite like on the unsecured side.

Building the partner network was not difficult, considering Nu can promote 30%-40% lower interest payments for consumers. The foundation has now been laid; Nu expects an upward rise in secured as a % of total personal originations to endure.

For now, Nu’s secured portfolio serves 50% of the Brazilian population, including pensioners and federal employees. It expects to push this to 75% by the end of 2024 with the introduction of products for armed forces members.

Nu is quietly hard at work on building a two-sided, merchant and consumer network. That, like for PayPal and Shopify, creates abundant opportunities in commerce, marketing and unique subscription value within Ultravioleta. Amazingly, more than half of the small business owners in Brazil are Nu customers today. With only a few million SME accounts so far, it has a massive opportunity to expand right from within its existing base.

Today, the value proposition is called “basic” by leadership. It has a bank account, a debit card and a credit card. Working capital loans are just now being launched, with more lending products planned in the future. It sees businesses as even more poorly served than consumers in Brazil. This is a large opportunity, and it’s still in the very early innings. I guess that’s true for everything at Nu. Even its most mature Brazilian consumer lending products still boast just 8% market share. That’s despite Nu’s customer base representing 46% of all Brazilian loan originations.

Flawless quarter for what has become a very special company. I love this name as a smaller core holding in the portfolio. There is still geopolitical risk, currency risk, credit risk and overall execution risk. But? For nearly a decade, Nu has faced all that risk with admirable success. That simply continued this quarter. What a team; what a report; what a company. Fantastic.

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Uber announced a slew of products and partnerships at its spring Go-GET event. The show stopper was the new UberEats partnership with Costco. Like Domino’s, these types of deals enhance the breadth of the Eats offering and should be material for overall volumes. Interestingly, like on Costco.com, non-members can also order through UberEats. Costco members can plug their information in to receive discounts.

For increasingly price-sensitive consumers, Uber is debuting a shuttle reserve product. It will partner with local fleets to allow people to more affordably book transportation from concerts, sporting events, conferences, airports etc. Riders can book up to a week in advance and get a seamless QR code ticket to redeem upon arrival. Shuttle location is also trackable and this product is much cheaper than its core UberX offering. Along these same lines, Uber is rolling out student discounts for Uber One. It will cost these students $4.99 per month vs. $9.99 for non-students. Apple Music executed this playbook perfectly to get young consumers into their ecosystem with less friction. It then upsold these consumers after they graduated and likely had more disposable income to pay a higher bill. That’s the parallel in my view.

For back-to-work, Uber is adding UberX Share. This allows users to reserve shared-ride spots in high density cities like New York and LA. A key priority for Uber in the coming years is to become more of a daily use case. That will be executed through things like grocery and retail delivery expansion, but also through initiatives like this one. It’s clear to me how this could become popular as back-to-work returns to style. Sort of an adult version of riding a school bus to class. Finally, Uber announced Uber Caregiver. This gives these caregivers more autonomy in booking appointments and scheduling deliveries for their patients.

There’s a key theme throughout all of this news: Broadening the depth and breadth of its product offering. That is how it stands out from the pack. It’s how it enjoys superior cross-selling levels and a coincidingly superior margin profile. It’s how it motivates stronger retention than its peers. It’s how it gives drivers higher occupancy rates, more earnings and more success. It’s how it turns those happier drivers into shorter wait times and lower surcharge rates for riders. This. Helps. Everywhere. It spins all of the positive flywheels that have made Uber so historically successful to date. This is more of the same. Whatever Uber can do to turn its massive network into another use case simply nurtures this compelling differentiation.

Uber is buying Foodpanda’s Taiwan operations to strengthen its market share in that nation. Foodpanda was its fiercest competition, and now they’re an asset. Uber is paying $950 million in cash. One of the many reasons why I love Uber’s free cash flow (FCF) trends. It gives them significant flexibility to do things like this, while investing in the core business, buying back shares and growing its liquidity position. Foodpanda will be merged into Uber Eats when/if this closes next year. Foodpanda’s merchant roster is arguably better than Uber in that nation.

“In order to build a world-leading service, we have come to the conclusion that we need to focus our resources on other parts of our global footprint, where we feel we can have the largest impact for customers, vendors and riders.” – Delivery Hero Co-Founder/CEO – “Niklas Östberg

Uber will also invest $300 million in Delivery Hero (Foodpanda owner) as part of this news. Delivery Hero is quite large, and this investment represents less than 5% of its overall equity.

Iger was asked what went wrong under Chapek’s tenure that he has had to fix. Some will argue that Iger planted the seeds for this failure and that it’s partially his fault. I think that’s a fair statement, but there were undeniably organizational pivots made under Chapek that cost this company dearly.

The best example was his decision to separate monetization and content creation teams. Iger told investors this decision created a toxic “us vs. them” mentality. It led to bloated budgets with no accountability, worsening sense of how to best distribute titles and a film division that had a very ugly 2020-2023. These teams have since been re-linked, and, if the successful Planet of the Apes sequel is any indication, things are beginning to turn around.

A second example discussed was its over-aggression with Disney+ upon its launch. It tried to “tell too many stories” and focused too little on content quality… you know… the thing that has made this company so successful for 100+ years. That has since changed with Disney cutting low-quality projects on both the film and television sides. The damage, however, had been done in terms of explosive losses mounting for this segment. Encouragingly, it has rapidly addressed this cash incinerator and (as previously discussed) streaming will turn EBIT positive this year. Disney sees it eventually reaching a 10%+ EBIT margin to help address the current linear TV decay.

Engagement for streaming is priority one. Its Disney+ and Hulu bundle is delivering strong engagement and retention benefits, although Iger wouldn’t quantify the uplifts. It will add an “ESPN lite” tile to Disney+ for another bundling option later this year, as well as sports content from Warner Brothers and others to that digital offering. This will launch in the fall under the name “Venue Sports.” I think it’s a mistake that the name is not some variation of ESPN, but it’s not up to me. A larger library with more compelling titles for a broader array of interests is the main piece of optimizing engagement… but not the only piece. Finally, it plans to trim some marketing spend to juice margins here too.

“We are not going to chase subscribers by discounting too much on price.” – CEO Bob Iger

Disney needs to improve its technological foundation for streaming. The firm understandably rushed the Disney+ launch during the free money era when growth at all costs was rewarded. It only had the bandwidth to make sure the interface was usable and the video streaming reliable. No other systems were in place as Disney sprinted before it knew how to walk. 

It needs to get better at matching viewers with compelling, granular content. It needs to copy Netflix’s best-in-class ability to nudge subscribers with content recommendations when they see a user enter the app without finding anything to watch. The Trade Desk will help mightily to unleash Disney’s first and third party data and bring this to fruition (and also to maximize ad impression value). Disney knows that Netflix is the “gold standard.” It thinks it has the content to match any streamer… but it needs to get better in this area. That’s a key focus.

Iger talked about the potential for ESPN as it moves to streaming. The always signed-in nature of CTV means Disney will be able to customize SportsCenter for specific viewers. It will know who you are, and so be in a better position to give you exactly what you want. If you’re a big Detroit and Michigan (Go Blue) sports fan, like yours truly, SportsCenter will know it and prioritize that specific content. Relatedly, Iger is confident in ESPN maintaining a leading market share of sports viewing hours for at least the next decade. The deals are already in place.

When Iger returned to Disney, he closely evaluated selling linear assets like ABC. He decided against it, as the plethora of content from the linear division will be helpful in bolstering its streaming business.

And interestingly, linear and streaming audiences are still quite complementary. Linear skews older and streaming younger. This is still a valuable channel for maximizing distribution, and, considering strict cost controls, should still be a profit driver even as linear dies in the years ahead. The more gradual the financial shock from this death, the better. It gives streaming more time to supplant linear as a Disney cash cow. 

Iger seemed to throw a bit of shade at revenue sharing agreements with Apple and Google app stores. He’s far from alone, and Disney is exploring other ways to distribute its streaming services like Netflix did. Similarly to Match and Spotify and most other companies reliant on paid app subscriptions, any relief from changes or things like the Digital Markets Act (DMA) in Europe would be positive.

In other Disney news, its new Planet of the Apes sequel is performing very well in theaters. The $59 million opening beat expectations and the Mother’s Day drop did too. The Disney brand is just fine. Its struggles stem from making bad movies for the last few years. This shows you that fans will still readily fill the seats for quality content. Give ‘em what they/we want. 

Two big pieces of news came from Netflix’s 2024 upfront presentations. First, Netflix will air two Christmas Day NFL games this year. It’s paying somewhere between $150 million and $300 million for these rights, which represent its first purchase of major live sports content. The NFL was drawn to Netflix’s global reach and its ability to distribute seamlessly to 190 countries. It was also obviously drawn to the money. Netflix has always said it would buy rights like these if it made economic sense.

Well? These titles continue to see brisk price inflation, yet Netflix has seemingly changed its tune. Why? Live sports are a wonderful, wonderful lead generator for new subscribers. 90%+ of the most-watched titles in the USA are NFL games. We’re obsessed. How could I possibly miss Jared Goff slingin’ it for America’s Detroit Lions? Unfathomable. This essentially forces non-subscribers to buy a Netflix account for the month, and hopefully they’ll see other appealing content to stick around thereafter. Live sports can be a powerful loss leader to drive top line growth and retention. That’s why Netflix is so interested in these rights; it’s likely why Amazon, Google and Apple are too.

For other media brands like Fox, Disney, NBC and Warner Brothers, this means more deep-pocketed competition. It makes it even more important to pool assets like ESPN and these other brands are planning to do.

Netflix is building an advertising platform, with the help of some new partners, to rival Amazon and others. Up until this point, Microsoft Xandr was its exclusive buy-side partner. It did not have a named sell-side partner. That has now changed.

On the buy-side, The Trade Desk (TTD) and Alphabet (GOOGL) were added to the roster. TTD already had access to some Netflix inventory, but this will blaze a trail to it getting more of those impressions on its platform. Whether it’s Disney, Comcast, Roku, Warner Brothers or now Netflix, all of the important players are lining up to work with this company (and Google too). This is also great news for Alphabet for the same exact reason. Considering Alphabet’s massive, massive size however, this will be less needle-moving for them.

On the sell-side, Magnite (MGNI) was named as its new partner. This is great news for that company. It’s also somewhat surprising to me. One of the most important sell-side services is advertising yield management. More and more publishers (like Disney) are electing to do their own yield management, and I thought Netflix would do the same thing. They certainly have the resources. I don’t really see why this partnership would happen if MGNI wasn’t in the Netflix yield management plans. This is the smallest of the three firms and the direct financial impact could potentially be the largest.

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SE reiterated high-teens 2024 revenue growth for its Shopee e-commerce platform.

SE trades for 27x 2024 EBITDA and 77x 2024 GAAP EBIT. EBITDA is expected to grow by 25% Y/Y while GAAP EBIT is expected to grow by 130% Y/Y.

Baba trades for 11x 2024 earnings. EPS is expected to fall by 4.3% Y/Y this year before resuming 13.4% growth next year.

Walmart now expects 4.0%+ Y/Y FXN revenue growth vs. 3.5% previously. It expects GAAP EBIT to grow by 6%+ Y/Y vs. roughly 5% Y/Y previously. It raised its adjusted EPS guidance from $2.30 to roughly $2.37+. Really strong showing. 

Walmart trades for 26x 2024 EPS. EPS is expected to grow by 9.0% Y/Y. This is the kind of firm where PEG ratios don’t really work all that well. PEG ratios struggle to reward the high probability and high visibility of longer term growth. It struggles to reward the highest quality blue chips – like Walmart, Apple, Costco etc. This is the only type of firm (mature pristine blue chips) where I don’t think my PEG ratio framework is valuable.

Progyny’s team participated in an investor conference this week. Between the commentary here and a few more days to sit with its quarterly report, I had a change of heart on how to handle the position. I added back a portion of what I sold. Here, I’ll dig into important commentary and unpack why I pivoted.

The key concern surrounding Progyny’s Q1 results was utilization weakness following the Alabama Supreme Court ruling. The decision cast doubt on the legality of IVF, considering IVF does involve discarding embryos. The dip was most pronounced in socially conservative states with stricter laws surrounding abortion (now that Roe v. Wade has been overturned with the decision left to states).

This led to a poor March for the company and a poor Q2 guide, as current utilization trends always instruct its forward guidance. It told us that April showed signs of recovery above 1.03% annualized 2022 levels, but still below its record 1.09% in 2023. It continues to see a positive reversion back to the record 1.09% levels that it saw in January and February. That could ALWAYS change once more, but if March was a blip on the radar, there should be material upside to Q2 guidance. Utilization is the first, second and third most important factor in its results once clients from its previous selling season have been onboarded. It remains confident in a second half revenue acceleration as comps get easier, new members go live and pharmacy mix-shift issues vanish.

At Progny’s first investor day in August, it will dive further into all of the new products it’s working on in women’s health. It also teased that there may be some M&A and/or a boost to its buyback program coming. The firm prints cash and has no debt. That means compelling flexibility.

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I decided to add back a piece of the Progyny position that I trimmed. This is a market share leader and market share taker in a structural growth industry. I am cautiously optimistic that the Q1-Q2 utilization weakness will prove to be short lived (commentary this week helped), and I am very confident in that being the true issue here. This is not a matter of competition. Gross revenue retention remains at an elite 99%+ clip and its selling season goals are fully within reach.

Tailwinds remain in place. Birth rates for women over the age of 34 continue to rise, and this demographic has higher infertility prevalence than younger mothers. Coverage levels across Fortune 500 brands (where Progyny still is only 17% penetrated) continue to rise alongside single mother coverage. Think of any large-cap brand in the United States. They’re either a Progyny client, a legacy carrier client or not a client of anyone’s yet. Walmart is a rare example of that not being the case… and Progyny refused to bid on that contract due to Walmart’s desired structure.

The market power is exceedingly strong and the runway is long. Progyny delivers best-in-class clinical outcomes; it also delivers 20%-30% annual client cost savings. That’s because its custom treatment design lowers expensive and dangerous neonatal intensive care unit (NICU) needs. It’s the only managed provider to directly carve into national carriers… meaning it pays benefits out on a pre-tax and not post-tax basis. The sources of differentiation are strong and the need for its product is growing.

This 20%+ revenue compounder (minus 1H of 2024) trades for 17x 2024 earnings. I am betting on biology not magically changing overnight. I am betting on a company that combines better outcomes, better affordability and happier stakeholders. WITH THAT SAID, the add that I made was smaller than the previous sale. I want to own Progyny, and I want it to be a slightly smaller position.

If you’d like to learn more about this business model, my deep dive can be found here. The financial data is now dated (with updates in earnings reviews) but the qualitative ideas are as true as they were when this was written. Maybe moreso.

Adam Selipsky is stepping down as Head of AWS to become the new CEO of Salesforce’s Tableau. Selipsky was an AWS veteran who had been there basically since inception. Considering this, Selipsky was hired by Jassy (who was the AWS head before him) to drive continuity and an easier transition for the company. And according to Jassy’s letter this week, the plan had always been for Selipsky to do this for a few years before moving on. Salesforce and Amazon are also close companions, which lends a bit of credence to the idea that this was an amicable, unsurprising breakup.

Matt Garman is the new Head of AWS. He has also been with AWS since its very early days, has led AWS elastic compute and created several AWS features. He’s a software developer at heart, which I’m a fan of. Most recently, he was GM of AWS compute and led demand generation for them too. There are very few companies with as deep a talent bench as Amazon’s. I’m happy this was an internal hire and happy that it’s Garman. 

I found the time to dig into the Starbucks quarter that was harshly punished. The results were quite ugly, but we will focus on the future, as markets are inherently forward-looking. A terrible quarter representing the “kitchen sink” means a high likelihood of near future outperformance; this is often rewarded by an “under-promise, over-deliver” obsessed Wall Street. This needs to be the kitchen sink for Starbucks. It cut 18% Y/Y EPS growth guidance to 2.5% Y/Y and slashed its revenue growth guide by a full 500 bps. What happened?

A few things. First, it cited discretionary spending among its more “occasional” customers. It spoke about failing to communicate value and promotions to these customers to get them back in the door. It said macro headwinds were hurting here. Slow service is also costing Starbucks a material chunk of revenue. Consumers are ordering online, growing frustrated with wait times, and canceling before paying. That’s not good. Macro seems like an excuse considering how well Dutch Bros is currently doing, but the other issues do make sense. And if all this is true, it should be temporary. 

Other issues included worse-than-expected China price competition and Middle East weakness. Like Apple and Lulu, Starbucks is a rare consumer-facing brand that has found success in China and effectively worked with that government.

The most pressing issues to me are the first two: poor communication and poor customer service. Some would say its political commentary is weighing on results, but I think that’s a convenient factor to blame when there are other, more structural problems at play. The good news is that leadership is supposedly focused on conveying value and speeding up delivery. If they can do these two things, Starbucks results should theoretically improve. 

So where do we go from here? It’s hard to believe the team didn’t get all of the bad news out for this quarter. If they continue to underperform in the coming quarters, this could easily be placed in a PayPal-like penalty box by the analyst community. I think it’s reasonable to assume some modest outperformance is coming. And that is what patient investors should demand after such a poor showing from this newer team. 

At around 20x next 12-month earnings (and little EPS growth expected), this isn’t that cheap. But? Starbucks is never cheap for similar reasons why Chipotle never is. And it is cheaper than it has been in 5 years. For people confident in this being a blip on the radar, risk/reward does seem compelling. I’m personally on the fence here. Starbucks is not going anywhere, but the degree of weakness this quarter makes me hesitate to go bottom fishing. This is not my favorite or least favorite idea. 

OpenAI announced real-time language translation as part of its product release event this past week. That led to Duolingo falling by a few percent and confident Twitter pundits pronouncing the company dead. They must not see how violently this stock always chops around. Silly is the nicest word I can think of to describe the take. Why am I not concerned? First, this isn’t new. Google has the same product and so does Apple. This is a slightly better version of what already exists in the palms of our hands. Can you see any financial deterioration in the charts below since those products came out? I can’t.

There are surely some who are less motivated to learn a language because of these tools, but that cohort does not seem to be at all material. Learners will still want to learn. Travelers will still want to fully immerse themselves in a new culture. Husband and wife will still want to communicate in an intimate fashion. Job seekers and immigrants will still be at a large advantage in an interview room if they can speak the language. This changes absolutely nothing. That is my opinion.

Graphing calculators didn’t mean people no longer needed to learn math… and I think the exact same thing will be true here. I see GenAI as a tailwind for Duolingo. It’s shrinking content creation time and allowing us to create even more engaging end products. And, oh, by the way… a large part of that is through its preferred partnership with… you guessed it… OpenAI.

One final note here. This is not Chegg. Chegg is used for cheating. Duolingo is used for learning. Duolingo has a world-class team, with resumes that will make your jaws drop. Chegg does not. While I could always be wrong, I see this as unimportant noise to be tuned out. That’s how I am personally managing my Duolingo position. You do what you think is best.

Lulu is buying its retail franchise partner in Mexico and its 15 stores. International growth is a big part of Lulu’s current “Power of Three X 2” multi-year growth targets. It’s tracking at or ahead of these targets as of last quarter.

CrowdStrike is racing back to new highs. I’m sitting on somewhat uncomfortable profits since this firm IPOed in 2018. It’s again near 52-week earnings multiple highs and expectations heading into next month’s report could not be higher. It’s thriving… and everyone knows it. It’s expensive… and everyone knows it.

I do not want to unnecessarily interrupt this special compounding machine. But I do want some insurance here heading into this specific print. I have eyes. I can see all of the 20%+ post earnings stock drops from expensive firms delivering rock-solid reports. I want to protect myself from a blowup without lightening up on shares. So? I plan to purchase puts worth about 4% of the total position. This forgoes a bit of near term upside. I’m fine with that, considering how fun of a stock this has been and the recent multiple expansion. This is a deviation from my normal process, but it is what I have decided to do. We’ll see how it plays out and I may elect to do this again with other holdings going forward.

CrowdStrike should be much, much bigger in the future. CrowdStrike is probably a bit too big today.

The U.S. Department of Education hiked their student loan rates by as large of a delta since the Great Financial Crisis. Thank you to DataDInvesting on X for calling this out. SoFi offers refinancing on these federal loans, and their deals just got a whole lot more compelling.

Many people say SoFi should not hold any student loans because unsecured personal offers a better NIM. That's highly subjective, and I trust this team knows how to maximize NIM in the most responsible way possible. If they can originate a student today for more revenue and profit compared to a federal bond, why shouldn’t they? They should. And if you think the team doesn’t know which item has a more attractive yield… I just disagree. Student loans make more sense as long as the current economics are better than federal bonds. That’s the comparison we should be making today. Not personal vs. student.

Aside from making the wrong comparison, I think the student loan disconnect from skeptics stems from them ignoring SoFi’s overly conservative personal loan stance at the moment. SoFi is intentionally not using the balance sheet cushion to cater to robust unsecured demand. Could more personal loans maybe juice NIM? Sure… or maybe not. And taking that chance on the riskiest bucket of consumer credit does not make sense in today’s environment with rate expectations shifting so violently. Ask yourselves this question:

Would you rather have SoFi forgo a few months of some revenue to ensure it exits this uncertain part of the cycle in excellent shape and ready to rev the origination engine? Or do you want them to assume 2024 will shape up perfectly and to risk blowing up its balance sheet if that doesn’t happen. To me, the choice is utterly clear. You can get frustrated with their conservatism. I’ll applaud it. Perhaps student loans aren’t the way to maximize Q2 revenue. But they are presently a way to responsibly maximize financial results in 2024 and beyond as the rate path becomes more clear. It removes the risk bottleneck that is making them pause on unsecured while still likely giving them more spread than a federal bond.

There was an interesting sell-side note on Iceberg Tables this week from Piper Sandler. These are open-sourced data storage offerings that are becoming popular due to lower storage costs, open-source integration flexibility and more data control. The proliferation here is leading to data storage and duplication revenue headwinds, with storage making up about 10% of Snowflake’s total business. This led to the revenue guidance miss last quarter.

The sell-side analyst attended the Virtual Iceberg Summit this week. He left the event thinking the revenue headwind would be less material than assumed in Snowflake’s guidance.

Between that and its conservative assumption of new products leading to zero calendar 2024 revenue, it should outperform depressed expectations. Data should be better than assumed this quarter. Still, this company trades for 175x 2024 earnings and 150x 2024 EBITDA. Growth for both metrics will be negative Y/Y. I say this to hammer home the idea that this remains as priced for perfection as anything else in the market. So? Data should be good and I have no conviction in how the stock will react to that positivity. Special company… but even more expensive than other special companies like Zscaler, Shopify, CrowdStrike etc.

Snowflake is rumored to be purchasing Reka AI for over $1 billion. This is a 2-year-old GenAI company that creates large language models. Snowflake will readily tell you that it needs to innovate faster in GenAI. This should be a shot in the arm to help that along. This deal has not closed.

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Apple (AAPL) plans to debut a thinner iPhone.

Microsoft (MSFT) and AMD (AMD) are partnering to roll-out high performance GenAI chips.

Rumors are building that Zscaler (ZS) might sell itself to a legacy tech firm. Nothing is at all confirmed. This company competes in network and cloud security. Getting sold to a Cisco, for example, would likely be cheered by fellow disruptors like Cloudflare (NET). VMWare buying Carbon Black is how that disruptor eventually flamed out. That’s a common theme.

The March Producer Price Index (PPI) was revised sharply lower from +0.2% M/M to -0.1% M/M. This led to the 0.5% M/M print in April coming in hotter than 0.3% expectations. With the revision, the last two months of PPI readings came in better than implied April expectations.

I added back to Progyny as previously explained this week. I also added a bit to Nu, Shopify and SentinelOne. Nothing major.