Tesla delivered 444,000 cars during Q1 compared to 438,000 estimates, representing a 1.4% beat. This is certainly good news for bulls. The auto industry is hyper-cyclical and rate sensitive and there was a risk that analysts had not yet baked enough weakness into their forecasts. This points to demand stability. It’s a piece of data that depicts Tesla enduring these tough times reasonably well. That, paired with some likely short covering, is why the stock responded so positively to this news.

As we head into its earnings report this month, what is left to focus on? Pricing & margins. First is the actual price tag tied to these vehicles. Tesla has slashed prices of some models to help with affordability amid the higher cost of capital environment. It has been able to offset this by pulling some input costs out of its car manufacturing processes, but overall auto gross margin did continue to erode last quarter. Tesla has frequently stated in recent quarters that it’s willing to offer lower upfront prices and rely on more software subscription upsells down the road to “harvest more margin.” 

This approach makes it even more difficult for legacy automakers to build their own EV programs to compete. Remember that Tesla’s EV margins are already best-in-class by a large amount. The debut of a $25,000 mass-market model, which borrows from existing production capacity to cut program costs, will make competing even tougher for incumbents too. Potential market share gains from this debut should happen while the maturation of its Cybertruck manufacturing, 4680 cell battery production, and Model 3 production in Austin all take place. Maturation means more efficient capacity utilization and more margin.

This is the glass half-full view, with bears instead saying these cuts are in response to eroding competitive differentiation, as well as EV fatigue and recent strength in plug-in hybrids. Some simply believe that others are catching up to Tesla’s technological lead – especially in China where Tesla does a ton of business. Continued Y/Y delivery declines and Tesla beating an already sharply lowered delivery estimate are their two centerpieces of evidence. Skeptics also continue to point out how cyclical this industry is, and how the fun part of the cycle (easier monetary policy) has yet to begin.

The quarter should be a fascinating one as always. Expectations are higher vs. last report, as the company’s stock finds itself on stronger footing heading into this month’s event. “Better than feared” won’t cut it like it did three months ago. The firm will need to show real signs of turning a corner and getting back to the fundamental EV king that it has been in recent years. We shall see how they do. My popcorn is ready. It’s hard to bet against Elon… like him or not.

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Brazil’s President Luiz Inácio Lula da Silva certainly doesn’t hold back on his critique of the nation’s central bank chairman Roberto Campos Neto. He’s very public about wanting rates to be lowered, and lowered now. The Brazilian Fed chair is more hesitant to cut rates more quickly, as he understandably fears an inflation reacceleration. That’s absolutely the main risk that any central bank chair needs to guard against. Runaway inflation generally means soaring rates, a weakening economy and rising unemployment. Considering Brazil’s compelling combination of high rates and low inflation, I think the president’s qualm is actually somewhat fair (despite being a bit inappropriate). The current chair will be replaced this year by the president with someone who sees eye to eye with him on policy.

What would rate cuts mean for both of these LatAm titans? While both do some credit origination and operate in financial services, I still see cuts as a net tailwind to overall operations. The main risk is that these cuts facilitate net interest margin compression, which could weigh on financials. For Nu specifically, its shift to deposit-funded credit and continued effective underwriting will, per the team, allow it to expand NIM throughout the year. This is despite expectations for many more rate cuts in 2024. Meli also just secured formal bank licensing in Mexico. This will allow it to optimize its own balance sheet with lower cost of funding its credit book, just like Nu is doing to manufacture more NIM expansion. 

The other risk is currency weakness weighing on company growth rates, although expected cuts in the USA and Europe this year should buffer that. Aside from these factors, easier policy will mean both can get more aggressive on funding personal loan originations, which is a real top and bottom line driver for both. Credit risk is the unsecured loan growth bottleneck for both enterprises, and that bottleneck becomes less pressing as access to capital becomes cheaper and money becomes more readily available.

Cuts will be a tailwind for interchange revenue, a tailwind for Nu’s investing arm and a tailwind for Meli’s e-commerce marketplace. 60% of Meli’s business comes from Brazil, with a much higher portion coming from that nation for Nu. The nation (and many others in Latin America) looks to be entering a more favorable part of its macro cycle for these businesses, and both look poised to capitalize.

Sports and iCasino gambling growth is not slowing down. For the month of April, sports betting rose 33% Y/Y with iGaming rising 23% Y/Y for all states aside from Michigan and Louisiana. Louisiana set new state tax records, while Michigan enjoyed steady month-over-month growth and 28%+ Y/Y growth for sports and iCasino too. 

DraftKings and Fanduel continue to dominate the top of market share rankings, with a powerful duopoly forming before our eyes. DraftKings did just supplant Fanduel as #1 in Ohio, but the overarching theme remains that these two are leading the pack by a mile and a half. No other player (aside from Hardrock in Florida) has a double digit market share in any state besides Draftkings and Flutter. Depending on where you look, estimated CAGRs for the industry through 2027 remain at lofty levels. For example, Vixio sees the market compounding at 19% or higher for the next four years. Many other research firms see even faster growth. 

That CAGR pairs very nicely with the expected margin improvements for both titans (DraftKings currently delivering an explosive FCF inflection) in established states while both deliver breakeven profits in brand new states in far less time than older states. The market is getting much more rational in terms of promotions, the larger legal footprint is enabling a shift from state-level to national-level marketing and the biggest brands in the sector are separating themselves further. The only thing that can stand in the way of these two emerging titans is regulation. We’ve written a lot about the Illinois progressive tax policy change, but it still does not look like any other state will follow suit as of now.

In other news, Oppenheimer lowered near term EBITDA targets for DraftKings amid expectations for higher promotional spend. It sees more promotional spend as actually a positive response to better marketing efficacy and DraftKings is leaning into more and more profitable opportunities. It sees these investments as driving more revenue and profit growth in 2026 and beyond.

Last October, Meta announced that it had reached 100 million monthly active users (MAUs) on its Twitter clone called Threads. As of July, that number has risen to 175 million, representing 75% growth in less than a year and 17% growth since its last earnings report in April. Threads won’t become a financial driver for quite some time, so why should we care at all about this?

None of Meta’s apps have ever rapidly become large financial drivers. This company runs the exact same playbook with every single product launch. It takes its sweet time when it comes to building product-market fit and creating user scale. Then, and only then, will it lean into advertising load, enterprise up-sells and other avenues for driving revenue and profits. Over the last several years, the related investor frustration centered around WhatsApp taking a very long time to even try to monetize. Meta was happy with building a gigantic user base and knowing that it could start generating revenue from this base when the time was right. That time has since come, with a click-to-message revenue explosion commencing. That can be seen in 82% Y/Y “other revenue growth” last quarter for that segment to reach $334 million. Still small… but not for long.

WhatsApp is now gearing up for a several year run of rapid expansion to feed the blended revenue growth rate of the overall company. But? That runway will not last forever. Meta will need new bets, like the smart glasses, Meta AI, Llama and Quest headsets, to continue pushing this growth engine to new heights. Threads is simply another promising project in the incubator biding its time until it too is ready to rev the monetization engine. And that may not take very long. Meta this week announced that it will begin offering ads on Threads, embarking on what will likely be a multi-year (if not multi-decade) journey of constantly tweaking and enhancing ad load to make Threads yet another contributor to its top and bottom lines.

Like Amazon, Meta has been on an absolute tear since it bottomed in the $80s a few years ago. It’s fun to reminisce on the noise and heckling we endured to stay the course and it’s fun to be rewarded. While it’s fine (I think productive) to enjoy these moments, it’s also necessary to force ourselves to look ahead and contemplate if risk/reward remains compelling. As Max subs know, Meta is my largest holding and I have no plans to change that at this juncture. 

Just like for Amazon, price appreciation has coincided with upside to profit estimate revisions that have kept this multiple in very reasonable territory. For context, entering 2022, Meta traded for $336 per share and 39x what it would eventually earn for the year. Profit revision trends were sharply negative, pundits still saw existential threats to this business, and it still had not pulled back on expense growth amid the higher cost of capital environment. Fast forward to today? At $540 per share, it trades for about 26x-27x expected forward earnings, revision trends are stable to positive, and Zuckerberg is posting wake surfing tuxedo videos with a beer in his hand. What a comeback. In my mind, there’s still reason to believe this massive business has a still lengthy runway for shareholders to enjoy and a world class team to capture that growth. The threat of Apple cutting off cross-app signaling to ruin its ad targeting is gone. Meta has effectively leveraged its unmatched first party dataset to plug that hole and deliver elite advertising returns. Reels successfully fended off the TikTok competitive threat and is clearly ramping ad load levels to monetize on par with other content forms. The company is still somehow delivering strong daily active user growth – even in its most mature geographies – as these users become more valuable to Meta over time. WhatsApp monetization has now begun to ramp, with Threads following a few years behind.

Meta has quickly morphed itself into a world-class research organization with its Llama series models setting new heights for key performance indicators. Its work in GenAI (like Meta AI) should lead to significant enterprise subscription up-selling down the road. The Ray Ban smart glasses are turning into the most popular piece of AR hardware to date, with Meta raising production capacity to meet demand. Quest still could turn into something promising and material. And although that remains to be proven, Meta controlling the next computing form factor alongside Apple would surely give it significant incremental flexibility to monetize and build a more powerful app store. And? While Meta has seen some multiple expansion in recent months, that expansion simply got us back to the multiples it enjoyed throughout 2022 before the blowup. Meta the stock could easily cool off in the coming weeks. I expect Meta the company to be significantly larger than it is today in the coming years.

Another week, another high profile Microsoft security breach. This time, state-sponsored hackers from Russia were able to breach employee endpoints and steal email credentials. This impacted the Texas Department of Transportation and several other state-level agencies. These breaches have routinely fed endpoint (and identity) disruptors key customer wins as players deploy their managed breach protection products to clean up messes and expose clients to what good security systems actually look like. 

Microsoft is a world-class entity. It has arguably the stickiest enterprise subscription on the planet. Its leadership is elite. But? Not all of its products in isolation are best-in-class. Microsoft Defender is a key example. Microsoft will not surrender its share and will remain a prominent player in this space. Still, its struggles have paved the way for CrowdStrike to emerge as another giant in endpoint and for SentinelOne and Palo Alto to take strong market share there as well. It’s superior product efficacy that these disruptors offer… and that’s what is required here. It’s not enough to be on par with Microsoft as it can simply cross-sell 30 other compelling solutions to stand out from the pack. Companies need to be convincingly better than Microsoft to win in security, and these breaches continue to flow in to offer evidence that “convincingly better” is what they are.

Visa and Mastercard agreed to extend interchange fee caps for another 5 years in Europe. These caps have been in place since 2019, so this won’t have any incremental impact on the businesses. In other card network regulatory news, if you recall, Visa and Mastercard recently agreed on interchange caps with merchants in the United States. This past week, a District Judge struck down the $30 billion settlement and hinted at wanting these networks to pay a lot more than the estimated $6 billion in annual savings over a 5 year period.

Boeing will repurchase Spirit AeroSystems to try to bolster safety via vertical integration and more hands-on maintenance. 

Oppenheimer lowered earnings estimates for Starbucks in 2024 and 2025 amid a consumer backdrop that has not improved since its last report. It thinks traffic challenges are ongoing, which is likely reflected in the stock that is now nearly 50% off of previous highs and at multi-year lows for profit multiples.

Disney’s Inside Out 2 needed just 3 weeks to become the first film of 2024 to cross $1 billion in box office sales. 

Amazon’s AWS landed a $2 billion deal with the Australian Spy Agency. Amazon’s Jeff Bezos also sold $5 billion in stock out of his roughly $166 billion stake. Launching rockets into space and really big boats are expensive. AWS boss Matt Garman spoke on Amazon’s Bedrock (foundational model) saving Pfizer $1 billion in drug discovery costs to date. These are the kind of anecdotes that make me highly confident in the monetization of the app and software layer of GenAI being inevitable.

Uber is launching Uber Yacht in Ibiza this summer.

Susquehanna’s analyst upgraded PayPal this week due to optimism surrounding its drive for profitable growth.

Snowflake caught a bullish upgrade from Goldman Sachs during the week.

Piper Sandler downgraded CrowdStrike due to valuation concerns.

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