News of the Week (November 18-22)
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News of the Week (November 18-22)
Lemonade; SoFi; PayPal; Progyny; Shopify; CrowdStrike; Meta Platforms; Olo; Penn; Cresco Labs; Ozon; Macro; My Activity
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1. Lemonade (LMND) — Investor Day
Please note that the Lemonade team is quite charismatic. Some of these bold claims spoken about below should be taken with a grain of salt. I’m not at all saying they’re being dishonest, I’m just saying that they’re an excited bunch with every incentive to talk up the value proposition of their own company. Keep it in mind throughout this section.
CEO Daniel Schreiber on the Progression of AI:
CEO Daniel Schreiber took us through the progression of AI and how it relates to Lemonade’s tech stack. The field began with a requirement to feed data into an algorithm and to explicitly tell it what to do with it. Today, Generative AI allows for these AI models to self-train and learn things that “nobody even taught them existed.” This generative AI involves intricate neural networks of data sets and connections intimately working hand in hand with one another. If any of those pieces are disparate, none of it will work in an ideal fashion – just like the human brain.
This is why Lemonade thinks it can win: Incumbent insurance competitors are made up of countless disparate data silos and manual processes. Lemonade has entirely avoided this by building its insurance company from the ground up in this generative AI vision.
“It’s not the amount of data that matters, but the interconnectedness of it all… that’s where traditional insurers falter. They have systems pieced together via acquisitions and decades. Their data lakes are a mile wide but just an inch deep.” – Co-Founder/CEO Daniel Schreiber
Schreiber offered us a tangible example of its customer lifetime value (LTV) home insurance model to show how much better its algorithms have gotten just since 2020. These LTV models 2 years ago offered vague recommendations at the zip code level without nearly enough data on most states to offer any estimates at all. Today, that estimate is done at the single address level with Lemonade able to granularly decipher which individual household is actually worth pursuing. These LTV models now direct 86% of Lemonade’s total marketing spend.
“USAA is best in class, but I can say without hesitation that the tools we’re deploying at Lemonade are simply unmatched in the industry. I don’t see a scenario where incumbents will be able to get here from where they are today. It’s a true structural advantage, and we’re just getting started.” – Lemonade Chief Claims Officer & former USAA Chief Claims Officer Sean Burgess
Some examples of How Lemonade’s Technology Manifests in Operational Advantages:
Customer Delight via using its AI models to automate & expedite manual application & claims processes. Lemonade’s Net Promoter Score (NPS) and Better Business Bureau ratings are in line with Apple and Tesla. No other insurer comes close here.
JD Power ranked Lemonade #1 for customer service.
Forbes named it America’s Best Insurance for 2023.
U.S. News named it the #1 Best Homeowners Insurance for 2022.
As a reminder, Lemonade’s business model closely relies on this customer delight much more than the competition. Why? Because it uses renters insurance as its main customer acquisition vehicle. Premiums within renters are TINY. So, Lemonade must elate its customers and give them absolutely no reason to leave. That’s the only way it will retain these customers as they graduate to higher value plans (which is also when competition begins to want them more).
Its internal AI Bot called “Cooper” automates and runs mundane engineering and code writing tasks to save its developer team an estimated 10,000 hours annually. This makes Lemonade inherently more lean and nimble than others in the space.
Its AI Bot called “Jim” (handles claims) is able to handle first notice of losses at a 98% rate. It can take care of all aspects of an individual claim at a 45% rate with better accuracy and speed than a human agent. This allows Lemonade’s claims team to be quite small relative to its own book vs. competition… and again gives it an efficiency edge.
Its AI “Maya” Bot sells 98% of Lemonade policies which means no perpetual agent commission. Incumbents sell 95% of their policies through agents fetching a mean commission premium of 15%. Lemonade cuts this inefficiency out of the system.
Generally speaking, constant upgrades and new layers of automation have helped Lemonade’s % of premiums going to handle claims fall from 36% in Q4 2020 to what is expected to be under 10% next quarter.
It does this via initiatives like building models to automate the review of 60+ page inspection reports to free underwriting associates to work elsewhere.
On Why this Advantage is Still Coinciding with High Cash Burn & Loss Ratios:
Lemonade disclosed its updated lifetime loss ratio for new business written last quarter. This has fallen from 79.1% to 60.6% YoY. BUT, this is not yet showing up in its bloated gross loss ratio for a few reasons:
Gross loss ratios (GLRs) peak during year 1 of a customer’s policy and improve from there. These GLRs fall below predicted lifetime loss ratios typically between year 2 and 3. Because such a large portion of Lemonade’s book is new business, a large chunk of its business is still year 1 customers with peaking loss ratios.
It continues to launch new products and new geographies rapidly. Like new customers, loss ratios in new countries and with new product lines peak right at the beginning. Loss ratios by individual product continue to improve consistently:
Finally, only 4.5% of Lemonade’s rate change filings in the wake of rampant inflation have been implemented with existing policies. Inflation raises claim values immediately, but not premiums until these filings can be implemented. This is hitting all product line loss ratios today, but especially home insurance where the regulatory process takes a bit longer.
Lemonade also explained (again) why its margins are so poor if it’s supposedly so good at underwriting:
It built out all of the tech, regulatory licensing, underwriting capabilities and full vertical integration from scratch and up-front. Costs were severely front-loaded while the business was much smaller than it is today.
So when combining this with underwriting models that still need some seasoning, margins have stunk… a lot. But the good news is that Lemonade’s dollar losses have now peaked while the business will continue to rapidly grow. So margin expansion is coming with the bulk of these costs now having been incurred. Some small evidence of this began to pop up last quarter as its expense ratio fell from 103% of premiums to 80% YoY (yes I know there’s a long, long way to go here).
“We are on a path to having a fabulous expense ratio, it’s just going to take the business time to grow into all of what we’ve built.” – Co-Founder/CEO Daniel Schreiber
You may be rightfully wondering how a young company that has never been close to profitable knows its losses have peaked? It’s a fair question. But it’s also good to keep in mind Lemonade’s peak loss performance this past quarter was guided to not a few months ago, but a few years ago. This company has been impressively precise in terms of its loss schedule. Those losses are just bloated because of the paragraph above.
On Market Share per a Google Survey – Lemonade has now taken a market share lead of first-time renters under the age of 35. While this is only step one of getting customers in the door, delighting them and thus motivating them to buy higher value home policies, it’s still a CLEAR sign that the model is working. That retention also seems to be going well with more than 22% of Lemonade home policy holders being former renters vs. 11% at its 2020 IPO (and 33% of pet policies vs. 0% at the IPO). Cross-sold policies mean more LTV and no added customer acquisition cost (CAC).
On Cross-Selling Progress:
Lemonade is now up to 3.7% of users with multi-line plans. Encouragingly in Illinois, where it has had a car product for the longest, that rate is 5.9%. Car is the peanut butter to home’s jelly when it comes to insurance bundles. Lemonade finally will be able to offer both pieces of that bundle in all 50 states as its new Lemonade Car product expeditiously rolls out thanks to the Metromile acquisition.
On Product Stat Disclosures:
Renters:
$223M in premiums & 9% total market share.
3.15X LTV/CAC ratio; 65% Q3 2022 loss ratio.
Procured $42 million in cross sale premiums vs. $36M QoQ & $22M YoY.
Pet:
$110M in premiums (up over 100% YoY).
3.8X LTV/CAC.
The strong ratio here is thanks to the innate frequency (and low severity) of pet claims. This seasons the underwriting model far more quickly than for a product line like home.
Home:
$149M in premiums.
1.6X LTV/CAC; 119% Q3 2022 loss ratio.
Unlike Pet, Home claims are infrequent. It will take longer for Lemonade’s underwriting here to be good enough.
Still, there is some progress coming with new customer cohort predicted home loss ratios of 81% in October vs. 93% just 6 months ago. Continued implementation of rate change filings is expected to drop that 81% metric further going forward.
“We are confident that home loss ratio improvements will start to show in the next few quarters.” – Chief Business Officer Maya Proser
Car – 300,000 customers are now on the waitlist. This will slowly roll out to more states throughout 2023.
Life – Lemonade continues to allocate resources elsewhere as it doesn’t feel comfortable enough in its ability to write life policies in this environment.
On 5 Year Scenarios – CFO Tim Bixby laid out the following paths to profitability and reiterated no cash raises until turning profitable:
Please keep in mind that all of the growth assumptions provided by leadership assume the current challenging environment and intentional growth slowdown (via mightily pulling back on OpEx growth) lasts for the next 5 years. I’d call that pretty darn pessimistic, but let’s roll with it.
Scenario 1:
20% 5-Year premiums CAGR.
70% gross loss ratio.
25% of customers are multi-line.
Profitable in 2026 with a minimum unrestricted cash balance of $100M.
Scenario 2:
20% 5-year premiums CAGR.
65% gross loss ratio.
35% of customers are multi-line
Profitable in 2025 with a minimum unrestricted cash balance of $175M.
“In this case, we would likely accelerate growth beyond the 20% with our additional cash cushion.” — CFO Tim Bixby
Scenario 3 — overly pessimistic:
20% 5-year premiums CAGR.
78% gross loss ratio.
20% of customers are multi-line.
This would burn through its cash balance before turning profitable. In this scenario, Lemonade would pull back on spend to an estimated 12% 5-year premiums CAGR to get to profitability in 2026 with a minimum $100M unrestricted cash balance.
“The takeaway to leave you with is that we have ample capital to control our destiny because of what we’ve done to quickly raise capital when the market was conducive.” – CFO Tim Bixby
My Take:
To be candid, I was very close to selling Lemonade earlier in the year. But management has shown a maturity and market sympathy that has been pleasantly surprising to me. They’re doing what they need to do to avoid costly near term dilution, and they continue to take more and more market share while showing clear signs of underwriting improvements. This was a strong showing with a lot to be encouraged by.
2. SoFi Technologies (SOFI) – CEO Anthony Noto Interviews with Citi
On the loan book:
“We’ve been able to manage our unsecured personal life of loan losses below 8% since 2018. We’re below that still today… we expect it to normalize up to that level… if we get into a tough recession next year with our forecasts of (1%)-(3%) GDP we think we can still operate well.”
Noto sees “a few hundred billion” in outstanding loans that a SoFi student refi can create material savings for. He still thinks the moratorium ending January 1st is an if and not a guarantee... But if it does end, there should be a large volume ramp of refinancers next month.
SoFi’s personal loan market share for 680+ FICO users rose from 4.5% in 2021 to 6% this year.
Noto continued to complain about back-end partners for its home loan purchase business and their funding delays. He hinted at wanting to own the back-end and exploring smaller acquisition targets. He sees 2023 as a year of “rebuilding” the product.
On 2023:
“As we go into 2023, we couldn’t be more optimistic about our position in the market and the opportunities ahead. Whether the moratorium continues to be extended or not, we’re going to have really strong growth if we’re in an economy that’s what we expect which is more dour than today but not overly dour.”
Noto expects a 30% incremental EBITDA margin and 35%+ revenue growth (for the next several years) in 2023.
SoFi is debuting more products like SoFi Travel to turn its app into a daily destination. This product offers direct deposit customers material discounts and other perks like rewards points for booking travel plans.
On the Technology platform:
Noto continues to expect the same synergies estimated at the time of the Technisys deal closing.
Noto sees SoFi as being in a “pole position” to win the largest banks in the world as clients thanks to the combination of Technisys and Galileo. He thinks it’s just a “matter of when they decide to make that transition.”
Noto alluded to using the tech platform to expand into small/medium business (SMB) banking eventually.
In other news, the Biden Administration has formally asked the Supreme Court to allow their student loan forgiveness program to continue. I’ve said it before and I’ll say it again: Getting officially past this blip is the most important thing. 86% of federal student loan balances outstanding becoming immediately more incentivized to seek refinancing is more important than if the remaining 14% is forgiven.
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3. PayPal Holdings (PYPL) – Investor Conference & Case Studies
a) Head of Consumer Doug Bland Interviews with Citi
Checkout with Venmo on Amazon has now ramped to all Amazon & Venmo Users:
“We’re already seeing some very positive green shoots occur… we’re really pleased with what we’re seeing with the Venmo population linking their accounts to Amazon.”
On the New Digital Wallet:
Bland reiterated the same 50%+ lift to revenue per account for new app users that management has previously cited. He further added that the app delivers a 60%+ lift to checkout usage rates. That was new.
b) Case Studies
Expedia and PayPal collaborated on a marketing campaign to show PayPal as a checkout option upstream in the Expedia shopping flow. The project delivered a 73X-110X return on ad spend (ROAS) (and 250,000 brand new PayPal users).
SI Tickets (Sports Illustrated Tickets) tested a new program with Venmo. This involved offering ticket buyers a flat fee of $10 when paying with Venmo. As a result, 57% of its total sales were via Venmo with a 34% lift to average order value. Venmo users also returned to the site at a higher clip than others.
“Venmo exceeded our expectations… Venmo is one of the most critical partnerships that we’ve got. When you step into a very mature competitive marketplace like the ticketing market, you need to create differentiators. Venmo is that differentiator for us.” — CEO David Lane
4. Progyny (PGNY) – Investor Conference & Amazon
a) CEO Pete Anevski and CFO Mark Livingston Interview with Credit Suisse
On the Menupur (popular fertility drug) shortage:
Ferring (the manufacturer) stopped shipping the drug out of caution due to supplier issues.
The FDA reviewed everything & concluded there were no safety or efficacy issues.
Progyny assumed a $10 million Q4 2022 revenue hit from this issue. Any resolution before 2023 could provide upside to guidance.
On Competition
Anevski spoke on the lackluster previous efforts of carriers to compete with Progyny halting in 2022. He reminded us that these carriers still receive administrative fees when Progyny is used, meaning it makes no sense for them to embark on the heavy investments needed to actually stand up formidable competition. The size of the fertility market (under $50 billion) vs. healthcare overall (trillions) also makes this less of a focus for these fortune 500 insurers. It doesn’t move the P&L needle for them; it moves that needle drastically for Progyny. The company has certainly carved out a nice little niche to enjoy — without attracting unwanted attention.
b) Amazon
Amazon is Progyny’s largest client by covered lives. Considering recent layoff news from the logistics and cloud computing giant, I wanted to quantify what that actually means for Progyny. Let’s assume a dire scenario in which 50,000 employees are let go by the end of 2023. That would equate to 0.8% of Progyny’s total covered lives and roughly the same revenue hit as well. Furthermore, Progyny’s 2023 guidance assumes no existing client headcount growth while that usually contributes a few points to its revenue expansion. It’s not expecting this to be a contributor — and it looks like that expectation is appropriate.
None of Progyny’s other largest clients have announced large scale layoffs.
Some News:
I made an instagram account where I plan to post all of my earnings snapshots & some other content as well. That can be followed here.
5. Shopify (SHOP) — Happy Returns
PayPal’s in-store and e-commerce returns engine — Happy Returns — announced a new integration with Shopify. Under the new arrangement “Return Shopping” is a new merchant solution that Shopify will offer through PayPal’s Happy Returns.
The software handles all forms of returns, including multi-channel real-time inventory adjustments, credit, re-stocking and more. It even organizes orders & returns into separate transactions so that new item fulfillment can take place immediately. It also taps into the Happy Returns recommendation engine allowing for granular promotions and discounts to attract returning shoppers to other purchases for revenue preservation. This is now available with no installation costs for Shopify merchants through their Shopify Dashboard.
Interestingly, in-store, box-less returns have briskly become the most preferred method for consumers post-pandemic. Most people prefer that over shipping it back via mail. So? I’d love to see Shopify tap into the Happy Returns brick and mortar offering to allow its physical merchants to enjoy seamless returns in-store. It was not clear if that was part of the new partnership as it only discussed Happy Returns being available for “e-commerce sites.” Hopefully that’s in the future plans.
6. CrowdStrike (CRWD) — Palo Alto Networks
Palo Alto Networks (PANW) — a CrowdStrike competitor in endpoint and cloud workloads — posted strong quarterly results this past week. Both demand and margins were ahead of expectations with the guidance mainly as expected on the top line, but ahead of expectations on the bottom line.
During the call, management acknowledged how resilient cybersecurity is, but also that it is beginning to see some minor headwinds. Sales cycles are elongating, but cancellations have not been a problem. It has begun to cut back on some discretionary costs, but also continues to hire key roles even as the negative macro environment plays out. The upbeat forward guidance also points to these small issues not hurting the company too harshly today.
Its commentary on the market and what to expect can be seen as a decent read-through into CrowdStrike’s report coming later in the month. I will say that Palo Alto has blamed macro more readily in previous quarters than CrowdStrike has, but there’s still a correlation in performance between the two names. A largely positive quarter for Palo Alto is a small positive hint for CrowdStrike.
7. Meta Platforms (META) – Miscellaneous
WhatsApp is beta testing payment tools in Brazil for in-app processing through local payment provider partners.
WhatsApp is creating a new commercial product directory to bolster monetization in the region. The directory will serve as a database of eligible businesses to market across various nations.
Zuckerberg told employees this week that WhatsApp was nearing a monetization inflection point. He sees this as the next near-term leg of company growth and what will ease the concerns of heavy metaverse spend.
Bytedance’s Pico 4 sales are running well below expectations. There are two ways to look at this. First — glass half full — is that Oculus is simply the superior device. Second — glass half empty — is that demand for VR headsets just isn’t all that high. I think it’s likely a mixture of the two.
Meta is offering to swap its unregistered notes for registered notes. This would potentially create a liquid market for these notes to be traded.
The Director of the FBI is “extremely concerned” about TikTok. Ban it!
8. Olo (OLO) — Investor Conference & Case Study
a) Founder/CEO Noah Glass and CFO Peter Benevides Interview with RBC
On the Macro Environment:
Benevides reminded us of the elongated sales cycle assumption in Olo’s Q4 guide. Interestingly however, he also talked about his time at this week’s Restaurant Development Conference and how “encouraged” he was with how clients are “thinking about 2023 in terms of digital being a key investment priority.”
Glass discussed that approximately ⅔ of Olo’s brands are in the limited service, lower average ticket category. Considering food is non-discretionary, consumers trade down to these types of brands that Olo serves more often than they stop eating out entirely.
Glass reiterated that he doesn’t expect more brands like Subway to churn from the platform. I would like to keep hearing this over and over and over again.
On Olo Pay and Borderless:
“Olo Pay and Borderless are surpassing our expectations.” — Founder/CEO Noah Glass
Considering Olo Pay adoption 4Xes Olo’s revenue per order, outperformance here matters… a lot.
As a reminder, borderless is its platform level checkout accelerator. Customers make an account with Olo and can then speed through checkout at any of Olo’s 600+ brand clients with just a mobile phone verification needed for completion. Olo’s clients enjoy access to customers of hundreds of other brands to offer more convenient checkout to and more holistic customer data based on higher data opt-in dates.
b) QR Codes
Olo released some internal data on the power of activating QR codes for on-premise dining. Here were the highlights:
+12% average order value as “guests indulge in add-ons without fear of judgment.”
Happier guests tip $1.50 more on average while wait staff is freed up for other tasks.
Better order accuracy & faster table turnover by 15-20 minutes.
A 5Xing of first party data collection rate to better understand ideal, granular marketing approaches and guest LTV.
9. Penn Entertainment — 13F & Barstool
a) Whale?
In new 13F filings, Goldman Sachs reported a new 3% stake in Penn Entertainment. This is leading some to speculate that a large activist (who Goldman is acting on behalf of in its broker role) is taking a stake in the company (not Goldman directly). Some think it’s HG Vora Capital Management — a hedge fund with an existing stake in the firm.
b) Barstool the Juggernaut
Barstool hosted its first ever college basketball tournament this month with teams including Mississippi State (and 3 other mid-majors). It operated in-stadium entertainment, merchandising, announcing and everything else. Despite not having the highest profile schools playing and despite this being Barstool’s very first attempt at a project like this (without a major broadcasting station partner), it excelled. During the Barstool Invitational, games averaged 210,000 unique viewers. That’s more than Fox Sports 1 & Disney’s ESPNU and on par with the Big Ten Network. It trails only ESPN, Fox and CBS. Impressive.
Not to sound redundant, but Barstool enjoys a passionate cult of nearly 100 million fans. This success isn’t surprising, it’s just another confirmation of the power this Penn-owned brand yields. And success like this surely means more revenue generating tournaments (and maybe some network deals?) coming.
10. Cresco Labs Earnings Review
a) Demand
Cresco met revenue expectations.
More context on demand:
Cresco labs does not have a New Jersey presence so is not enjoying the growth from that new rec program there like others. It will begin to enjoy this when the Columbia Care deal closes in Q1 2023.
Cresco maintained its market share leads in Illinois, Pennsylvania and Massachusetts & remained the number 1 branded product portfolio in the nation according to 3rd party data.
It’s #1 for flower and wax, #3 for vapes and #5 for edibles.
Revenue growth would have been +2% YoY excluding the impact of exiting its 3rd party California business in Q4 2021.
Cresco called itself “one of the most efficient retailers” vs. “the most efficient retailer” in previous quarters. Revenue per store will likely keep falling as it rapidly opens new locations and pricing pressures continue.
Conversely, transactions and units sold rose 24% YoY as demand builds. When pricing pressures ease (as they’re expected to soon) that tailwind, plus new store openings, plus new states are all expected to contribute to recovering growth in 2023 and beyond.
b) Profitability
Cresco missed adjusted EBITDA estimates by 12%.
Cresco met EPS estimates of -$0.03.
More Context on Margins:
*I excluded a $290M impairment loss charge from GAAP operating and net income margins for Q3 2021 to make the comps more relevant.*
GAAP margins dramatically improved aside from this.
Adjusted GPM excludes fair value changes in acquired inventory.
During the quarter, Cresco closed underperforming facilities in Arizona and California. Cresco incurred associated closing charges which were allocated to inventory sold during the period — meaning these products carried a higher cost of goods sold. This hit the entire margin profile by 340bps.
This hit won’t recur.
Charlie also said this was to “align cost structure” ahead of the Columbia Care deal closing.
Income tax continued to be LARGER than its total operating income to give you a sense of how much federal prohibition hurts effective tax rates for cannabis growers. What a margin tailwind 280E reform would be.
c) Balance Sheet
Cresco has $130 million in cash and equivalents and $380 million in debt. It sold redundant assets in New York, Illinois and Massachusetts in connection with the Columbia Care deal this month. When that deal closes, the asset sales will add another $180 million in cash to the balance sheet ($110 million immediately) that will be “used to de-lever the company.” Cresco continues to think it will get another $115 million in cash from its remaining planned asset sales to reach $300 million in total proceeds.
Share count has grown by roughly 4% YoY as Cresco has used its equity to fund other M&A deals vs. using expensive debt.
d) Notes from the Call:
On Wholesale:
Charlie talked about competition prioritizing their own products vs. 3rd party wholesalers to preserve margins this year. As the largest wholesaler, this hurts Cresco the most.
The Columbia Care acquisition will more than 2X Cresco’s retail footprint thus “ensuring Cresco products get the share of shelf they deserve.”
The wholesale market is also expected to rebound as new store licenses for independent retailers continue to be handed out & as macro improves.
On Federal and State Level Reform:
Federal reform is “closer than ever.” I’ve heard that before.
Cresco is poised to benefit from Maryland and Missouri voting in favor of recreational cannabis.
Pennsylvania legalization is now “more likely” following midterms. That state approving recreational use would greatly ease the pricing pressures being experienced there.
“I think the more that you learn about this, the more that you understand the importance of achieving some financial regulatory reform before the end of the year as social equity licenses are trying to get operations off the ground. Access to capital is a main gatekeeper to being able to see success in those areas. So I think the likelihood of success there is higher than it was before the midterms and we've been optimistic for the last couple of months that we'll see some change. — Founder/CEO Charlies Bachtell
Next Quarter and More Forward Commentary:
Expect revenue to decline QoQ again in Q4 with growth turning positive and accelerating throughout 2023.
Its long term target of 50% gross margins was reiterated.
Its near term goal is now for EBITDA margins in the “mid 20% range.”
It plans to accelerate store opening pace in Florida and Illinois throughout 2023.
Leadership still thinks New York’s rec program will launch before 2023.
On CapEx:
“We expect we are nearing the end of our substantial CapEx projects as the Columbia Care acquisition effectively replaces most of our future CapEx requirements, leading to significantly improved FCF in the future.” — CFO Dennis Olis
e) My Take
While I can’t call this a good report, it wasn’t shockingly bad. Cresco continues to position itself well for whenever the macro improves and the regulatory tide turns. Wholesale weakness hurts it a lot today, but that will not be permanent. In the meantime, it continues to fetch leading market share in key states and bolster its balance sheet through successful redundant asset sales. Most importantly: Consumer preference will matter most eventually, and that will be advantage Cresco considering the brand affinity it’s building. This wasn’t good, but it was certainly good enough. 2023 should be much kinder to this company and sector.
11. OZON (OZON) – Checking in
Ozon reported another remarkably positive quarter this past week. Its gross merchandise value and revenue both grew by 50% or higher, gross margin expanded over 500 bps YoY and it turned adjusted EBITDA and free cash flow positive for the first time in the third quarter. There is nothing to pick at financially here, but as it’s a Russian ADR so it remains locked on U.S. exchanges.
I’m not quite sure what I would do when this finally does begin trading again. The geopolitical risk is not something I take lightly, but neither are its incredible financial results. And I’m not willing to punish a company because they operate in a nation with a government I don’t particularly like. I’ll keep you all posted whenever that decision finally needs to be made in the future. For now, the answer is “I don’t know”.
12. Macro
a) Key Economic Data from the Week:
Producer Price Index (PPI) Data was very positive:
Month over month (MoM) PPI came in at 0.2% vs. 0.4% expected and 0.2% last month.
MoM Core PPI came in at 0% vs. 0.3% expected and 0.2% last month.
More Inflation data:
Freight and Ocean shipping rates are now both well below pre-pandemic levels.
Manufacturing Data:
NY Empire State’s Manufacturing Index came in at +4.5 vs. -5.0 expected
Philadelphia Fed’s Manufacturing Index for November came in at -19.4 vs. -6.2 expected.
Industrial production shrank 0.1% in October vs. expectations of 0.2% growth.
Consumer Data:
MoM core retail sales rose 1.3% vs. 0.4% expected.
MoM retail sales rose 1.3% vs. 1.0% expected.
Jobless claims slightly beat expectations.
Existing home sales were in line with estimates.
Yield Curves:
The 10-year, 2-month yield curve is more inverted than it has been in 40+ years.
The 10-year, 3-month yield curve (very reliable recession indicator) remains aggressively inverted.
5-year breakeven inflation expectations continued to briskly fall:
High yield option adjusted corporate credit spreads continued to slightly worsen this week:
b) Key Market Data from the Week:
Apple is discounting bulk MacBook pro orders in a rare move to juice demand.
FedEx is furloughing freight workers.
Amazon fired thousands of people with more layoffs coming.
High profile crypto liquidity issues are now a daily occurrence.
c) Level-Setting this Week’s Data:
Between the CPI and PPI this month, inflation data was convincingly more positive than it has been all year. We still need much more progress, but we got more of that needed progress in the last 2 weeks than I was expecting. It seems that peak inflation is behind us. Still, the employment market paired with inflation data being simply too high on an absolute basis means a hawkish pause in 2022 is just not happening.
BUT… the progress we’ve made this month makes me even more convinced that hawkish cadence will slow into the New Year with a pause coming 1H of 2023. As a result, as I’ve been saying I will do for months, I began aggressively deploying my remaining cash pile and will look to December inflation data to deploy the rest of it. If that data is bad, my remaining accumulation will be delayed. I’m NOT saying we’ve found a bottom. I have no clue if we have. I am saying that risk reward has turned for the better as a peak in inflation has now likely come.
In other news, the yield curve inversions do likely mean we’re heading to a recession. But remember, that outcome would force the hand of our Fed to be even easier as long as it coincides with cooling inflation (looking more likely), would lower discount rates and would make structural growth all the more rare. That combination is not something that I fear as a growth stock investor.
What I do fear is a scenario of runaway inflation forcing the Fed to keep hiking into a recession to approach a more severe depression-like outcome. We’ve avoided the scenario of runaway inflation. That gives me confidence that the severity of a probable recession will be something that the best companies will be able to weather while we approach the other side of the storm with easier monetary policy and lower multiples.
A recession is expected considering how rare soft landings truly are. It is not something that will make me overhaul my plans.
13. My Activity
I deployed a large chunk of my remaining cash pile this week to bring my cash position from 15.4% of holdings to 10.0% of holdings. I added to the following positions: Shopify, Revolve, PayPal, The Trade Desk, SoFi, Duolingo, Match Group & Olo.