A few subscribers reached out asking for more detail on Nu’s competitive landscape in Brazil and Mexico. Thank you for the suggestion.  I will have a detailed piece on this in next Saturday's article. There were also zero portfolio changes since the last update sent to Max subs.

Raised annual $90 billion net interest income guide to $91 billion; Changed sub 3.5% card service net charge off (NCO) rate to 3.4%.

JP Morgan trades for 12x this year’s EPS. EPS is expected to grow by 3.7% Y/Y this year and by -0.5% Y/Y next year. Here’s how its valuation multiple compares to historical norms:

“While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks.” – CEO Jamie Dimon

“When it comes to card charge-offs and delinquencies, there’s not much to see. It’s still just normalization, not deterioration. It’s in line with expectations… you can see a little bit of spend weakness in lower-income segments as they rotate out of discretionary spend. But those effects are really quite subtle.” – CFO Jeremy Barnum

“The economic environment is very strong and stronger than anyone would have thought given the tightness of monetary conditions. Still, you are seeing slightly higher unemployment and moderating GDP growth… so it's not entirely surprising that you're seeing a tiny bit of weakness in some pockets of spend.” –  CFO Jeremy Barnum

“After a break in progress, inflation now appears back on a downward trajectory… services spending remains in an upward trend, but there are clear signs of a softening labor market and a tightening consumer budget.” – CEO Jane Fraser

“Looking at macro, as we enter the 2nd half of the year, the U.S. is still the world’s most structurally sound economy.” – CEO Jane Fraser

“We believe we’re seeing signs of cresting when you look at U.S. banking delinquencies. We expect losses and loss rates to start to come down… cost of credit was a $32 million benefit driven by a credit allowance release reflecting improving macro.” – CFO Mark Mason

“While we continue to see an overall resilient U.S. consumer, we all see divergence in performance and behavior across FICO scores and income bands. Lower bands are seeing sharper drops in payment rates and borrowing more. That said, we're seeing signs of stabilization and delinquency performance across our cards portfolio.” – CFO Mark Mason

“Overall, the U.S. economy remains strong, driven by a healthy labor market and solid growth However, the economy is slowing and there are continued headwinds from still elevated inflation and elevated interest rates.” – CEO Charlie Scharf

“While losses in the commercial real estate office portfolio increased in the second quarter (which is what is driving overall credit losses) after declining last quarter, they were in line with our expectations.” – CFO Michael Santomassimo

The 30,000 ft. view is that the U.S. economy is stronger than most expected it to be at this point in the cycle. It’s not quite as strong as the robust levels of recent years. Things are gradually slowing in a tranquil, orderly fashion. That does bode well for a soft landing or a very mild recession and for thankfully avoiding a severe recession or depression.

a. Results

b. Guidance & Valuation:

Annual guidance of $3.5B in FCF and $6.50 in EPS was reiterated. This slightly missed expectations looking for a small raise to both metrics.

“Travel remains a top purchase priority and Delta's core customers are in a healthy position. The secular shift in consumer spend to prioritize experiences align perfectly with Delta's strategy and premium focus across our global network. Air travel demand is at record levels, with this past Sunday marking Delta's highest ever summer revenue day. For the September quarter, we expect continued demand strength… we remain confident in our full-year guidance." – CEO Ed Bastian

Delta trades for 7x 2024 EPS. EPS is expected to grow by 5% Y/Y this year and 15% Y/Y next year. Here’s how that current multiple compares to its historical norms:

“Debt reduction remains our top financial priority.” – Presser

Delta leadership cited an acceleration in sector-wide capacity growth. This is impacting pricing power in the main cabin, and is why the company missed revenue per unit guidance and overall revenue guidance. Delta calls itself the most insulated airline from this dynamic as the “carrier of choice with a diversified revenue base.” Non-core passenger revenue is 56% of its total business at this point, lending credence to that idea. It thinks competitors are now effectively capping capacity growth, which should result in “a more constructive backdrop through the back half of the year and into 2025. That’s reflected in the sharp Y/Y profit growth acceleration expected in 2025 (see the guidance & valuation section above).

Delta called out a $100 million revenue decline from the Paris Olympics. The rest of travel demand in Europe remains healthy. Apparently, non-Olympics travel to Paris is a larger headwind than actual Olympic travel is a tailwind. This also contributed to the revenue per unit miss.

This quarter was fine. Annual targets are intact, and industry dynamics should power a profit growth acceleration next year. This is not a long term investment. It sells a commoditized service in a cyclical sector. Still, it is the best run company in its sector and there have certainly been periods for traders to reap strong profits from this name in the past. That will probably be true in the future too. At 7x earnings and the expected 2-year 10% EPS CAGR, a 0.7x PEG is cheap (like Delta usually is).

Broadly speaking, it’s nice to see Delta calling out continued demand strength on both the consumer and cargo side of things. That bodes well for continued economic resilience and demand for the products and services that public companies sell. It’s not a massive piece of good news, but certainly positive.

KBW came out with a bearish note on SoFi this past week. In it, they set a $7 price target, but recommended shorting the stock into this month’s earnings report. Its bearishness stemmed from the assertion that charge offs would rise faster than expected and that there was risk to SoFi’s 7%-8% life of loan loss rate target. I think they’re wrong (and Barclays does too as it issued a note on credit trends “materializing as expected” this week). We have a leadership team that delivers on their promises and has for years. It consistently reiterates (over & over again) that this 7%-8% target is firmly intact. In CFO Chris Lapointe’s latest public appearance, he echoed that yet again while adding how “exceedingly confident” he was. That was new & incrementally upbeat. Loss rates among its newer loan cohorts are well off of the previous cycle peaks that kept them within this target range as well. Its higher loss rate cohorts from late 2022 and into 2023 are maturing as its better performing borrowers make up a larger portion of the current book. KBW’s research was also based solely on SoFi’s personal loan book, and ignored the lower loss rate make-up of its student loan book (home loans are still too new and small to matter).

Short interest is rising, bears are becoming louder and more emboldened… and I’m staying the course. Bears can scream about fair value accounting all they want to. If the stock was at $10 today, they’d be radio silent. I remain steadfast in my belief that SoFi’s accounting is actually MORE transparent than CECL, as it provides more frequent booking of potential losses on the income statement. And if last quarter was any indication, SoFi has significant flexibility to wind down fair value premiums on its loans while still delivering upside to profit forecasts. 

The company continues to march towards its $0.67 2026 GAAP EPS target, which completely forgoes inclusion of any new product (like planned credit cards). It has delivered a needed margin inflection, the beginnings of a tech platform re-acceleration, financial services profitability, balance sheet stability and strong, cross-cycle capital market demand at hefty gain on sale margins. It’s navigating through this nasty period for consumer credit better than any fair assessment would have foreseen.

With all of that said, I’ve added what I want to add to this name. I own the shares that I want to own at my current portfolio’s size. While I don’t agree with this opinion or other bears, I could always be wrong. Their views are still to be considered and some of their minds are certainly bright. I have to guard against being wrong by treating this like the still speculative investment that it is. This cannot be an anchor holding alongside Meta or Amazon just yet. I own enough to enjoy explosive returns if it continues to deliver, but I want the position to become massive on its own. I believe in SoFi for the long term. I believe if it keeps doing exactly what it’s doing then this investment will work fabulously well. But I’d be doing you all a large disservice if I spoke as if these outcomes were certain. There is more to prove and still the hearts and minds of many bears to win over. Just keep compounding profits and I’ll keep holding. Just keep executing and the stock will take care of itself. 

CEO Anthony Noto delivered his annual Sun Valley interview with CNBC this past week. Because we are so close to earnings, he had to be pretty careful with what he actually told us. Still, there were some highly encouraging hints. First, he all but dispelled the concerns outlined above from KBW. Here is what Noto had to say about the firm’s credit health:

“We’re really happy with how our credit has performed in line with our tolerance levels & expectations.” 

This is him telling us (yet again) that the 7%-8% life of loan loss rate target is firmly intact. This probably buys us about 48 hours of tranquility before bears forget this confirmation and again loudly proclaim SoFi’s targets will be breached. They just do not believe in this leadership team, despite years of strong, trustworthy execution to point to. Oh well, profit compounding will trump skepticism eventually.

Furthermore, Noto spoke about more fed funds rate certainty today than SoFi has seen in the past two years. It’s this rate certainty that will allow SoFi to more confidently price loans and lean back into personal loan originations… and it’s rate certainty that is now building in the eyes of leadership. It has been hyper-conservative with funding personal loans as it favors waiting for better macro rather than risk blowing up the balance sheet by originating while rate expectations rapidly swing. As I’ve said before, this is the responsible and correct decision. It means lower revenue today, but a more sustainable grower with a healthier balance sheet tomorrow. Even so, the end of the forgone short term revenue may be near. I know I’ve been bombarded with SoFi personal loan offers for the first time in nearly a year over the last few weeks. Just something to note, as leaning back into origination volume would be the single most impactful driver of revenue and profit upside.

Lastly, SoFi is rooting for cuts. That may seem odd to traditional bank investors. Shouldn’t cuts hurt its net interest margin? Yes and no. The reason cuts hurt NIM is because they pressure the yields a bank can earn on things like deposits. SoFi is not like these banks. It raised its savings yield while the fed funds rate soared to pass most of the added yield back onto its customers. Wells Fargo and Bank of America certainly didn’t. SoFi savings accounts serve as a powerful top-of-funnel for customer acquisition, which makes SoFi more than happy to make this concession. After all, these high yield deposits are still a materially cheaper source of capital than the warehouse debt it had been using to fund loans.

Additionally, rate cuts will help pretty much every other product. They’ll be great for financial services volume; They’ll be a large tailwind for payment processing volume from its tech segment clients. They’ll be great for deal scrutiny, as it pursues more tech clients. They will, per Noto this week, be great for its student loan refinancing business, and will let it get more aggressive on taking advantage of currently pent-up personal loan demand. Cuts will be “great” for SoFi … and cuts are coming.

Pepsi lowered annual organic revenue growth guidance from at least 4% Y/Y to 4% Y/Y. This reflects YTD North American food weakness described below. It reiterated its $8.15+ annual EPS guide and $8.2 billion shareholder return guide.

Pepsi trades for 20x this year’s EPS expectations. EPS is set to grow by 7% Y/Y this year and 8% Y/Y next year. Here’s how that current multiple compares to its historical norms (only marginally higher than the COVID low):

Pepsi cited a moderation in category-wide growth rates as consumers remain “choiceful with their purchases.” It still sees resilient international growth and North American performance brightening. It’s laser-focused on driving more productivity gains and also “investing in the marketplace to stimulate growth.” It’s these investments, which include bolstering its distribution network, marketing and omni-channel presence, that give Pepsi confidence in improving results later this year. It sees inflationary pressures not vanishing this year, but “moderate versus the prior year.” 

Aside from tough macro and also difficult Y/Y growth comps, Quaker Foods recalls hurt Pepsi’s results during the quarter. Revenue relatedly fell 18% Y/Y for this segment and reduced its organic revenue growth rate from 2.5% Y/Y to the 1.9% Y/Y result it posted. The impact from these recalls will moderate in the second half of the year.

Frito Lay has gained more than 2 points of savory snack market share since 2020. The aforementioned consumer weakening is impacting things here as discretionary snack purchases are slowing. Consumers are “becoming more value-conscious with their spending patterns and preferences'' according to Pepsi’s leadership team. Revenue for the category fell by 0.5% Y/Y.

For beverages, revenue rose by 1% Y/Y compared to a lofty 10% Y/Y growth result in Q2 2023. Its EBIT margin rose by 200 bps, which the company thinks will keep expanding over time. Pepsi and Mountain Dew zero sugar products performed well and the Gatorade brands took market share in sports drinks.

Between recalls and tougher macro, Pepsi is experiencing rough times. It did directly cite higher cost of capital weighing on consumer budgets as a reason, so perhaps impending rate cuts will be good for this company going forward. The quarter was a bit underwhelming, but macro won’t be sour forever, comps will get easier and this firm still has a plethora of great brands to drive additional steady growth.

Tesla reportedly delayed the date of its robotaxi event from August to October. Uber stock responded very positively to this piece of news. I don’t think it makes sense that Uber sold off on Tesla robotaxi news in the first place; I don’t think it makes sense for a delay to lift the stock either. Why? Because I think autonomous vehicles will be somewhat positive for Uber’s business.

As I’ve said many times, autonomous fleets will be cash incinerators without plugging into optimal demand aggregators. That is Uber. Uber is ubiquitously associated with ride sharing and commands by far the largest loyal consumer network. I think Tesla will end up integrating with Uber when this product is finally ready for prime time. And I think it makes all the sense in the world for individuals wanting incremental income from their vehicles to plug into the network that can maximize that income. On the commercial fleet side, Uber will absolutely have to pay Tesla, Waymo (Google; current Uber partner), Zoox (Amazon) and other players a handsome take rate for access to their hardware. Still, eliminating driver compensation creates a lot of revenue to share.

Next, the world will not go from driver to driver-less overnight. It will take years and potentially decades for that to fully unfold. Manned fleets will be vital for a long time; they’ll allow commercial players to sidestep building out too much capacity to service peak hours of traffic. Doing so would mean waste and inefficiency during all other parts of the day. Yet another reason why Uber is the perfect partner for all of these players in the autonomous revolution. That is why Uber’s leadership speaks so positively and optimistically about this playing out.

Hong Kong’s government is planning to more tightly regulate ride-sharing. The government plans to establish licensed ride sharing vendors with harsher penalties for violators. To be honest, that sounds like good news for Uber. It could diminish the frequency of under-the-table payments made to drivers servicing consumers.

Amazon debuted the AWS App Studio. This is a GenAI tool that builds apps by simply verbally dictating what to create. It leans on the managed AWS infrastructure and top-notch security to take the headache out of maintaining apps too. This new product will intuitively save developers and entire departments untold hours of time in jump-starting app creation. I’m sure companies will still want some manual touchpoints to steer app use cases and interfaces, but this should absolutely shrink the time to perfection and deployment. Yet another tool that positions Amazon to capture the future software monetization layer of GenAI. It joins other coding companions like Q and CodeWhisperer, its Rufus shopping companion, a planned ChatGPT clone and many other products in its toolkit.

Bezos has been selling a lot of shares recently. He’s done so before… Meta’s Zuckerberg has done so before… Jensen Huang is currently doing so and has done so before… Most founders of fabulously successful companies have cashed out a portion of their proceeds. And who can blame them? Bezos built an empire. Now he wants to fly rockets, pamper his wife, buy really big boats, and live it up. And guess what? He has earned it and then some.

For us shareholders, this doesn’t concern me in the least. There are dozens of reasons to sell stocks (Blue Origin ain't cheap to operate). Overreacting to what is often noisy selling is usually misguided and routinely a mistake. I prefer to consider the pristine fundamentals and demand/margin tailwinds we frequently write about here.  I will rely on those metrics coinciding with a very reasonable multiple and upward estimate revisions… and I will lean on a world class management team. This is noise.

Morgan Stanley came out with a note citing rising Chinese competition for Starbucks. It lowered comp sales estimates in that nation from -5% Y/Y to -10% Y/Y as a result. Most analyst notes on this company have been bad, and understandably so. We’re only a handful of weeks removed from one of the ugliest guidance revisions from an iconic brand like this that I’ve seen.

To Max Subs – this doesn’t deter me from wanting to build out a position.. We knew there were problems and we spelled those out in the investment case article from last month. What this does do is slow my accumulation cadence just a bit. There is no rush.

I think next quarter is going to be bad, and I’d like to see just how bad before using up the remaining firepower I have to add to this name. I plan to keep accumulating, but in smaller-than-typical pieces. I want to leave room to add amid another quarterly blow-up. I want to own more Starbucks and I want to own more at this multiple. Still, estimate revisions are firmly negative, and the team has explicitly told us that its plan of action will take time to show material benefits. I’m thinking that it will take longer than two months to turn around this gigantic brand. 

SentinelOne and Aon announced a new partnership. Aon will use SentinelOne’s threat detection and response tech for its clients. Aon did nearly $14 billion in 2023 revenue, making this a sizable preferred channel partner win for SentinelOne.

Disney, Comcast and Amazon secured an 11-year $76 billion deal for NBA television rights.

Duolingo completed its previously announced purchase of Hobbes Animation Studio.

Meta is partnering with Vodafone in Europe for improvements to its video streaming.

Reuters sees Adidas stealing market share from Nike and posting great results during its next quarterly report. Nike is “off its game” on product and Adidas is clicking.