Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

Despite the 4-day week due to Presidents’ Day, equities traded lower for the worst weekly performance so far in 2023. The release of the January/February FOMC Meeting Minutes on Wednesday did little to calm investors’ fears about the potential for a higher interest rate path following hot January CPI and PPI readings last week. The Minutes revealed some members favored a 50 basis point rate increase at the last meeting and that the Federal Reserve would continue to base interest rate decisions on incoming data — likely requiring further rate increases to achieve the 2% inflation target. Friday’s release of the January PCE data confirmed that inflation has been stickier than expected as the labor market remains tight and consumer demand has remained relatively intact.

In economic data for the week, the PCE deflator and core PCE deflator increased 5.4% and 4.7% year-over-year respectively in January, above economists’ expectations of 5.0% and 4.3%. University of Michigan’s Consumer Sentiment data for February also revealed a rebound in median year-ahead inflation expectations to 4.1%, adding to a number of risks the Federal Reserve will assess for the next interest rate decision.

Key earnings this week included Nvidia, Coinbase, and Moderna. NVDA stock rose 14% on Thursday as the company’s focus on AI computing begins to open the door to a new wave of growth, with increased investor attention following the release of ChatGPT. Coinbase’s earnings revealed strong cryptocurrency trading volumes in January, but management urged caution as risks to crypto remain in the coming year while also placing displaying increased focus on achieving cost savings. MRNA stock struggled post-earnings as demand for COVID-19 vaccines weakened and results from its influenza vaccine trial were mixed, despite a promising pipeline built on the same mRNA foundation that provided the world COVID-19 vaccines.

Friday’s Close (Weekly Performance)

S&P 500 3,970.04 (-2.67%)

Nasdaq 11,394.94 (-3.33%)

Dow Jones 32,816.92 (-2.99%)

Thank you Blue Room Analyst JARED FENLEY.

Dear Newsletter Reader:

The Blue Room Investment Team believes weakening consumer spending will cause negative earnings revisions to accelerate into summer and fall against a backdrop of re-accelerating core inflation. We continue to believe that sticky inflation will keep interest rates higher for longer with 6 percent as a possible terminal rate for Fed Funds.

Chart 1. S&P 500 ETF (“SPY”).

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Consumer sentiment confirmed the preliminary February reading at 67.0, rising a modest 3% above January.

After lifting for the third consecutive month, sentiment is now 17 index points above the all-time low from June 2022 — but remains almost 20 points below its historical average.

Consumers with larger stock holdings exhibited particularly large increases in sentiment. Overall, February’s reading was supported by a 12% improvement in the short-run economic outlook, while all other index components were essentially unchanged.

The median expectation for one-year inflation (blue line) increased to 4.1%.

The median expectation for long-term inflation (green line) remained unchanged at 2.9%.

Year-ahead inflation expectations rebounded to 4.1% this month, from 3.9% in January and 4.4% in December. Much of this increase was concentrated among consumers with less education and those over the age of 65. Consumers continued to exhibit considerable uncertainty over short-run inflation, and thus their expectations may be unstable in the months to come. Long-run inflation expectations remained at 2.9% for the third straight month and stayed within the narrow 2.9-3.1% range for 18 of the last 19 months.

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Blue Room Earnings Analysis:

Overall revenue beat our expectations by $3.0 million, with strength in Professional Visualization and Gaming sales segments leading the upside surprise versus BLUE ROOM expectations (see page 4 for full breakdown of expectations):

Data Center revenue declined sequentially to $3.616 billion against our estimates for sequential growth to $3.933 billion. Our estimates were based on the assumption that a reopening China would aid demand for earlier generation A100 GPUs, while U.S. hyper scaler demand would supplement the loss due to export restrictions. Nvidia noted that hyperscale customers' demand was short of internal expectations, with some CSPs pausing data center CAPEX at the end of the year. The customer mix is currently favoring CSPs as enterprises move to a cloud-first approach.

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Blue Room Earnings Analysis:

Annual revenue for 2022 fell 59% Y/Y, primarily driven by a 65% decrease in the global crypto market capitalization as the industry faced macroeconomic pressures as well as contagion effects from the collapses of large players such as Terra and FTX. Despite the broader decline, however, the company’s subscription and services revenue was up 53% Y/Y as it looks to diversify its revenue and reduce its dependence on trading volume. Within subscription and services, the interest income grew 1200% Y/Y as a result of higher interest rates in combination with Coinbase’s revenue share agreement with Circle on USDC. Looking to 2023, Coinbase has the potential to generate upwards of $1 billion in revenue from interest income alone which could provide some support if trading volumes deteriorate further.

The company has also shifted to an “all-weather” strategy and will be aiming to generate positive EBITDA in all market conditions rather than just breakeven over each crypto cycle. As a result, Coinbase recently announced a reduction in headcount 20% that will reduce operating expenses in Q1 over 30% sequentially.

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Recent Press Releases and Business Updates

February 22, 2023 – Moderna and Merck today announced mRNA-4157, an investigational personalized mRNA cancer vaccine, in combination with KEYTRUDA, has been granted Breakthrough Therapy Designation by the FDA based on positive data from the Phase 2b trial.

February 22, 2023 – Moderna and Life Edit Therapeutics Inc, an ElevateBio company focused on next-generation gene editing technologies and therapeutics, today announced a strategic collaboration to discover and develop in vivo mRNA gene editing therapies.

February 17, 2023 – Moderna today announced that Health Canada has authorized the use of its Omicron-targeting bivalent COVID-19 booster vaccine, mRNA-1273.214 (SpikevaxBivalentOriginal/Omicron) in children 6 to 17 years of age.

February 16, 2023 – Moderna today announced mixed interim results from its Phase 3 study of mRNA-1010, an investigational therapy for influenza. The vaccine showed positive immunogenicity data for Influenza A when compared to currently approved flu vaccines, but failed to do the same for Influenza B.

January 30, 2023 – Moderna today announced mRNA-1345, an investigational mRNA vaccine candidate for respiratory syncytial virus (RSV), has been granted Breakthrough Therapy Designation by the FDA. Moderna intends to submit for regulatory approval in the first half of 2023.

January 17, 2023 – Moderna today announced positive topline data from its ConquerRSV Phase 3 pivotal efficacy trial of mRNA-1345. Following review by an Independent Data and Safety Monitoring Board, the primary efficacy endpoints have been met, including vaccine efficacy.

January 9, 2023 – Moderna today announced updates on its mRNA pipeline. The company announced that vaccine sales amounted to $18.4 billion in 2022, and reiterated that the company expects a minimum of $5.0 billion in COVID-19 vaccine sales in 2023. Moderna also reiterated its expected data readouts for influenza and RSV vaccines.

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Blue Room Earnings Analysis

Exact Sciences’ core Cologuard momentum with 3-year rescreening and the expanded age 45 to 49-year-old age cohort along with multiple key pipeline projects — including Cologuard 2.0, minimum residual disease testing, and a multi-cancer early detection test — continued to drive strong financial performance and guidance in Q4 2022.

Maximizing the momentum of the entire business, Exact’s sales representative productivity continues to increase as the company doubled revenue per sales interaction in 2022 and the business has reached a critical inflection point where existing infrastructure and technological investment is driving operating leverage and cost efficiencies. Combined, these factors drove Exact Sciences to its first quarter of positive adjusted EBITDA in Q4 2022, and management believes the company will achieve positive adjusted EBITDA for the full year in 2023. Alongside this, free cash flow is expected to turn positive in FY 2024.

Structural tailwinds, including a shortage of GIs due to aging doctors in the practice and retirements in the field, will power strong growth for Cologuard into 2023 and beyond as key pipeline projects such as multi-cancer early detection (MCED) will have data presented this year to fuel visibility into the next wave of growth for the company. Cologuard will also have multiple opportunities to increase its penetration and compliance with Cologuard 2.0, increased consumer awareness, and a massive 3-year rescreening opportunity. The precision oncology business as well has a meaningful opportunity to grow internationally in the years ahead.

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Recent Press Releases and Business Updates

January 19, 2023 – Editas Medicine today announced that it has entered into a definitive agreement with Shoreline Biosciences for Shoreline to license Editas’ proprietary SLEEK (SeLection by Essential-gene Exon Knock-in) and AsCas12a gene editing technologies and acquire Editas Medicine’s preclinical gene edited induced pluripotent stem cell (iPSC) derived natural killer cell (iNK) programs and related manufacturing technologies.

January 9, 2023 – Editas Medicine today announced a strategic update, including portfolio reprioritization and research and development realignment. The Company’s R&D efforts will narrow, focusing on hemoglobinopathies and in vivo discovery, as Editas Medicine will pursue and develop programs it believes have maximum probabilities of technical, regulatory and commercial success. As a result of the strategic reprioritization, Editas Medicine’s headcount is being reduced by approximately 20%, which is expected to extend the Company’s cash runway into 2025.

January 4, 2023 – Editas Medicine today announced that the Company’s President and CEO, Gilmore O’Neill, will present at the 41st Annual J.P. Morgan Healthcare Conference on Tuesday, January 10, 2023.

December 6, 2022 – Editas Medicine today announced positive, initial clinical data from the first two patients with sickle cell disease (SCD) treated with EDIT-301 in the Phase 1/2 RUBY trial. EDIT-301 is under development for the treatment of severe sickle cell disease. The clinical data includes safety data from the first two patients and efficacy data from the first patient treated.

November 17, 2022 – Editas Medicine today announced clinical data from the Phase 1/2 BRILLIANCE trial of EDIT-101, an in vivo CRISPR/Cas9 genome editing medicine in a Company-sponsored webinar. Three of the 14 treated subjects met a responder threshold having experienced clinically meaningful improvements in visual acuity. In view of this, Editas will pause enrollment in the BRILLIANCE trial and seek to identify a collaboration partner to continue development of EDIT-101.

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Blue Room Earnings Analysis

On January 9th, Guardant Health released preliminary Q4 2022 results below:

Revenue: $124-127 million
Clinical Tests: 36,000
Biopharma Tests: 8,200

Guardant Health’s Q4 2022 revenue strength was above expectations, as Guardant had previously lowered Q4 guidance due to reimbursement delays and labor shortages affecting health care. Guardant360 and Response reimbursement in Japan had previously been expected in 2022, but this has still not occurred and is now expected at some point in 2023.

Guardant’s outlook for 2023 is a major shift in terms of the magnitude of cost savings they are projecting to achieve. The revenue guidance is below consensus estimates — but probably is a conservative estimate until they achieve reimbursement for Response and Guardant360, as mentioned in the conference call.

Despite the weaker-than-expected revenue guidance, EPS expectations increase due to the absolute decrease in total operating expenses that Guardant is guiding to for 2023. Similarly, free cash flow estimates will also increase meaningfully due to the updated guidance of $(350) million for FY 2023. Guardant is now guiding to over 3 years of cash runway with the current $1 billion in cash and cash equivalents on the balance sheet.

Expenses will have to reaccelerate meaningfully again in the mid-term as Guardant approaches USPSTF guideline inclusion for Shield, expected in 2026.

Guardant Health management’s message to investors this quarter is that the company is shifting operationally in a significant way in order to match the current market macroenvironment conditions.

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These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor.

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Weekend Update #115

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