Weekend Update #136
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.
Earnings season, kicked off by banks this week, is largely providing better-than-expected results and aiding sentiment in equity markets. High interest rates improved margins for banks, despite weakening consumer spending and higher cost of retaining deposits. However, Netflix’s miss on analysts’ consensus revenue estimates cast uncertainty over tech earnings holding up to high expectations fueled by the recent AI excitement. The Nasdaq 100 fell 0.44% this week. Tesla also surpassed consensus revenue and earnings estimates, but investors traded the stock down as fear over the potential impact of a slowing economy on financial results seeped in. In the latest meme stock moves, AMC shares rose as much as 100% in after-hours trading on Friday after a judge blocked its controversial AMC Preferred Equity units from converting into common stock.
In economic news for the week, retail sales rose 0.2% month-over-month in June, below economists’ estimates but with some signals that consumer spending is still holding up. On the other hand, industrial production contracted 0.5% in June, as companies reduce inventory plans in anticipation of a further weakening consumer. Residential housing starts fell 8% in June and building permits fell 4% following unexpectedly high upticks in May, but residential housing activity remains above pre-pandemic trends. Initial jobless claims declined to 228k for the week of July 15, below economists’ forecasts, in a sign that the still-tight labor market is giving employees adequate employment options and supporting low unemployment rates.
In international news, the U.K. consumer price index fell to its lowest level in 15 months at a 7.9% year-over-year increase in June, but strong U.K. retail sales continue to fuel very high and sticky inflation for the country. In a sign of escalating conflict in Ukraine, Russia pulled out of the two countries’ Black Sea grain deal on Monday and began targeting key ports and cargo ships that are essential to Ukraine’s export of grain. On Wednesday, wheat futures surged 9%, the biggest increase since 2012, to the exchange limit after Russia declared all vessels sailing to Ukraine as potential threats and shelled ports Odesa and Chornomork, destroying 60k tons of grain. Combined, Ukraine and Russia account for almost 30% of wheat exports globally, so the move by Russia could have ramifications that impact global food stability.
Friday’s Close (Weekly Performance)
S&P 500 4,536.34 (+0.69%)
Nasdaq 14,032.81 (-0.57%)
Dow Jones 35,227.69 (+2.08%)
Thank you Blue Room Analyst JARED FENLEY
Cash Flow and Capital Structure
Net cash generated by operating activities was $1.4B in Q2’23 (vs. $0.1B in FY21)
Free cash flow for Q2 totaled $1.3B
The company now expects 2023 FCF to be at least $5B in FCF, reflecting lower cash content spend due to the ongoing WGA and SAG-AFTRA strikes
During the quarter, Netflix repurchased 1.8M shares for $645M. The company has $3.4B of capacity remaining under the $5B share buyback authorization, and expects to increase stock repurchase activity in the second half of 2023.
Regional Breakdown
United States and Canada (UCAN)
Revenue: $3.599 B
Paid Memberships: 75.57 M
Paid Net Additions: 1.17 M
Avg. Monthly Revenue Per Membership: $16.00 (+0% change Y/Y)
Europe, Middle East, and Asia (EMEA)
Revenue: $2.562 B
Paid Memberships: 79.81 M
Paid Net Additions: 2.43 M
Avg. Monthly Revenue Per Membership: $10.87 (-3% change Y/Y)
Latin America (LATAM)
Revenue: $1.077 B
Paid Memberships: 42.47 M
Paid Net Additions: 1.22 M
Avg. Monthly Revenue Per Membership: $8.58 (-1% change Y/Y)
Asia-Pacific (APAC)
Revenue: $0.919 B
Paid Memberships: 40.55 M
Paid Net Additions: 1.07 M
Avg. Monthly Revenue Per Membership: $7.66 (-13% change Y/Y)
BLUE ROOM
FINANCIAL MODELING
{ TESLA }
with Blue Room Analyst Nick Peart
Thursday
July 20, 2023
9:00 AM
BLUE ROOM
Thursday, Tesla reported Q2 2023 results after market close, and the stock traded down 10% yesterday. Was it warranted, and how do the fundamental developments around supply chain and unit cost factor into future profitability and the discounted cash flow valuation?
How Is ChatGPT’s Behavior Changing over Time?
Lingjiao Chen, Matei Zaharia, James Zou
Stanford University, UC Berkeley
Abstract:
GPT-3.5 and GPT-4 are the two most widely used large language model (LLM) services. However, when and how these models are updated over time is opaque. Here, we evaluate the Match 2023 and June 2023 version of GPT-3.5 and GPT-4 on four diverse tasks: 1) solving math problems, 2) answering sensitive/dangerous questions, 3) generating code and 4) visual reasoning. We find that the performance and behavior of both GPT-3.5 and GPT-4 can vary greatly over time. For example, GPT-4 (March 2023) was very good at identifying prime numbers (accuracy 97.6%) but GPT-4 (June 2023) was very poor on these same questions (accuracy 2.4%). Interestingly GPT-3.5 (June 2023) was much better than GPT-3.5 (March 2023) in this task. GPT-4 was less willing to answer sensitive questions in June than in March, and both GPT-4 and GPT-3.5 had more formatting mistakes in code generation in June than in March. Overall, our findings show that the behavior of the “same” LLM service can change substantially in a relatively short amount of time, highlighting the need for continuous monitoring of LLM quality.
1 Introduction
Large language models (LLMs) like GPT-3.5 and GPT-4 are being widely used. A LLM like GPT-4 can be updated over time based on data and feedback from users as well as design changes. However, it is currently opaque when and how GPT-3.5 and GPT-4 are updated, and it is unclear how each update affects the behavior of the LLM’s response to a prompt (e.g. its accuracy or formatting) suddenly changes, this might break the downstream pipeline. It also makes it challenging, if not impossible, to reproduce results from the “same” LLM.
Beyond these integration challenges, it is also an interesting question whether an LLM service like GPT4 is consistently getting “better” over time. It’s important to know whether updates to the model aimed at improving some aspects actually hurt its capability in other dimensions.
Eli Lilly’s TRAILBLAZER-ALZ 2 Phase 3 results of donanemab showed a higher magnitude of slowing Alzheimer’s disease progression than Eisai and Biogen’s Clarity AD Phase 3 trial of Lequembi (lecanemab) but with slightly higher serious adverse event rates, driven by ARIA-E (dmab 24.0% vs. lmab 12.6%) and ARIA-H (dmab 31.4% vs. lmab 17.3%) occurrences. To contextualize this, 31.4% of donanemab patients experience ARIA-H, cerebral microhaemorrhages: small, round, low-intensity lesions on the brain that are often accompanied by hemosiderosis. 24.0% of patients also experience ARIA-E, cerebral edema: the breakdown of tight endothelial junctions of the blood-brain barrier and subsequent accumulation of fluid.
As shown in the baseline characteristics table among enrolled patients, Lilly did include patients with higher risk factors than Eisai & Biogen, and throughout the data presentation, Lilly explained how the company plans to build out infrastructure for doctors to be able to identify these patients with these higher risk factors for real-world use. This will be a collective effort to educate doctors and patients among all of the companies releasing Alzheimer’s disease drugs in the space, but it will also take time in order to do so.
ApoE genotype, amyloid burden, and superficial siderosis are all ARIA risk factors that doctors will need tools to screen patients for before deciding donanemab is the right treatment vs. Lequembi. Lilly noted that PET imaging, PFS, and blood-based diagnostics (Amvid & Tauvid FDA approved and P-tau217 and P-tau181 biomarkers being developed by Lilly and Roche, respectively) will all be important tools to bring to market and expand the use of to build the necessary Alzheimer’s infrastructure, in addition to education around the importance of a paradigm-shift toward earlier detection and diagnosis of Alzheimer’s disease.
Lilly highlighted multiple data points showing that donanemab’s efficacy is far higher in patients that are treated early in their disease stage, so infrastructure to help identify patients earlier will also be key to donanemab’s commercial success. Given that these early-identification and risk-identification processes and tools are not yet standard in routine care for Alzheimer’s disease patients, the choice between donanemab and Lequembi, assuming donanemab receives FDA approval, will be akin to a coin-flip in certain instances and doctors’ will attempt to apply the learnings from TRAILBLAZER-ALZ 2 about high-risk patients to make situation-by-situation decisions based on each patient. However, in the long run, Lilly’s donanemab wins at the margin for the better choice for early-stage, normal-risk Alzheimer’s disease patients.
July 20, 2023 BLUE ROOM Meeting #119
Thursday
July 20, 2023
12 PM
BLUE ROOM
MEETING NUMBER 119
Icebreaker QuestionChoose one:
(1) You are a newscaster with editorial control, and you have a large audience this weekend. What is the top story you want to share with your viewers? / Who is your audience? / How will you tell the story?
(2) You are a sports anchor on the same program. What is the top sports story that you would share?
(3) You are the senior human interest contributor and have a feature spot. What is your top story?
From three years ago . . .
BLUE ROOM GLOBAL MEETING #10
Quarter Summary
Tesla posted solid financials for Q2, beating both on topline revenue and EPS as it continues to manage the tougher macro environment. The company indicated that demand is roughly tracking production, and it maintained its full year delivery target of 2023. The company is also planning to undergo multiple factory upgrades in Q3 which may lead to a slight Q/Q decline in production volume. Automotive margins came in-line with expectations, but leadership indicated that they could cut prices further if market conditions worsen. The company has also launched a number of initiatives to boost sales to help with demand including re-starting its referral program, launching advertisements for the first time, entering new geographic markets, as well as allowing FSD transferability (for Q3 only). Tesla also reported that Cybertruck production remains on track for initial deliveries this year, with the company already producing release candidate builds and testing for final certification and validation.
On the COGS side, Tesla realized per unit cost improvements in multiple areas to help reduce its average vehicle cost by 150 bps. The company saw a decrease in materials and commodities, primarily due to a plunge in lithium prices, as well as improvements in manufacturing and logistics. Texas and Berlin Gigafactories increased volume sequentially which helped reduce the cost per unit. However, they are still running above the average build costs in Fremont and Shanghai. Tesla is rapidly growing its 4680 cell production, with an 80% sequential increase, reducing cost per cell 25% from Q1. The company is also preparing to launch a next-gen version of the 4680 cell, dubbed the “cyber cell” which will have a 10% higher energy density for the upcoming Cybertruck. Manufacturing credits earned as part of the Inflation Reduction Act also helped reduce overall COGS as the company receives roughly $150-250 million per quarter.
Energy and Services segments are continuing to be more material to Tesla’s overall business as both continue to expand gross margin, and the company is rolling out a number of new products and services.
The earnings call had much more focus on AI than previous quarters, as the company plans to invest over $1 billion in Dojo and FSD over the next 12 months. The company began Dojo production in July, and is planning to build it into a top 5 supercomputer by end of next year with 100 exa-flops of computing power. For FSD, the company more than doubled the cumulative number of miles driven from last quarter as development accelerates, and the company is already in early discussions with a “major” OEM to potentially license out its software.
The United States economy has proven far more resilient than many economic forecasters anticipated. In what was expected to be one of the most heavily anticipated recessions in recent memory, the U.S. economy continues to stun forecasters by chugging along despite rapid interest rate increases by the Federal Reserve to combat generationally-high inflation. As the economy continues to exhibit greater than expected resilience, proponents of a “soft-landing" are growing more and more confident in their analysis. After the most recent inflation reading showed that headline inflation was the lowest it's been since April 2021 and consumer confidence logged its biggest month-to-month increase since 2006, the general economic and market sentiment has been nothing but peachy. Bloomberg’s Weekend Newsletter for July 15 was titled “Suddenly Everyone is Talking Soft Landing” and detailed how an increasing amount of investors are betting on a “Goldilocks scenario;” Mohomed El-Erian wrote an opinion piece for Bloomberg about the likelihood of a “soft landing;” and the Wall Street Journal wrote a piece about how economists are now dialing back their recession risks, with the percentage of academic economists polled by the Wall Street Journal predicting a recession in the next 12 months fell from 61% to 54%. I cannot remember such a clear and unified change in the macroeconomic and financial zeitgeist. However, headline inflation is not the Federal Reserve’s favored measure of inflation. Both Core CPI and Core PCE continue to hover around 5% – a notable distance from the Federal Reserve’s self-imposed target of 2%. The key question surrounding the current macroeconomic environment is thus what will it take to bring down inflation to that 2% level – and can it be done without greatly damaging the economy?
/// CHANNEL CHECKS ///
Friday
July 21, 2023
9:30 AM
__________
Welcome to the Blue Room 2023 Summer Internship!John Fenley |2:30| leads a fun and inspiring conversation about channel checks. Earlier this morning, Miaoxuan Huang, from China, shared photographs of Tesla and other EVs, which was so cool and additive to our research.The investment team meets each morning to discuss markets, macro and stocks, and our interns participate in these daily meetings as well as a twice weekly check-in.Jared Fenley |25:46| Eli Lilly and Donanemab update. What is the potential for this Alzheimer's drug?Minyoung Sohn |41:00| Look at gasoline prices and explains why Headline CPI will be higher than Core CPI, beginning in August or September.Shreya Ashok |43:45| Illumina is growing its addressable marketAlex Kechriotis |1:06:09| Corteva's product innovations as well as the long term outlook for Chegg in the new world of AI and ChatGPT. Regarding ChatGPT, it is getting dumber?
Say what?
Q3 2023 Guidance:
Net Interest Income: $4.2-4.4 billion (compared to consensus estimate of $4.467 billion)
Total Revenue: $6.9-7.1 billion (compared to consensus estimate of $7.228 billion)
Purchase Accounting Accretion: ~$75 million
Noninterest Expense: ~$4.3 billion (compared to consensus estimate of $4.488 billion)
Core Deposit Intangible Amortization Related to Union Bank: ~$120 million
Tax Rate: ~23-24% (compared to consensus estimate of 23.6%)
Merger & Integration Costs: $150-200 million
FY 2023 Guidance:
Net Interest Income: $17.5-18.0 billion (compared to consensus estimate of $18.033 billion)
Total Revenue: $28.0-29.0 billion (compared to consensus estimate of $28.739 billion)
Purchase Accounting Accretion: ~$330 million
Noninterest Expense: ~$17.0 billion (compared to consensus estimate of $18.176 billion)
Core Deposit Intangible Amortization Related to Union Bank: ~$500 million
Tax Rate: ~23-24% (compared to consensus estimate of 23.0%)
Merger & Integration Costs: $0.9-1.0 billion
—INTERN PROFILE—
ROBERT
MCRAE
III
Dartmouth College Senior
Economics with a focus on Finance
African and African American Studies
What’s up everybody! I am Robert McRae III, a Summer Analyst at Blue Room Investing. I attend Dartmouth College where I serve as Captain of the Men’s Basketball Team and am a member of Alpha Phi Alpha Fraternity Inc.. At Dartmouth, I am a rising senior and I study Economics, with a focus in finance, and African and African American Studies. I was born and raised in Los Angeles, California with my mother, my uncle, two younger sisters and younger brother. I am a family oriented man and come from an extremely competitive household. My family spends a lot of time competing in board games, card games, and video games, and no one is okay with losing. Outside of school and hoops, I love to read books (primarily books that I believe will lead to bettering of myself), I play a lot of chess, I trade on the market myself, and I am a die-hard Lakers fan. Some of my favorite foods are Poké, Buffalo Wings, and Acai Bowls, and I have 1 cat named Scarlett and 1 dog named Zeke.
In my future I aspire to be an investor, both on the stock market and in real estate (specifically rental real estate), and a serial entrepreneur. I am constantly writing down ideas in my notes for profitable business I want to develop in my future. Things like a trucking company, vending machine gigs, and car rental services are some of the simple easy ideas I have that don’t seem to require much effort. While all of my small business ideas are exciting, my bread and butter/foundation lies in investing and real estate. I plan to use my first few jobs as business partners and teachers. I hope to get roles in fields either under stock market investing or real estate development allowing me not only to raise capital that will be used in my investments and real estate, but also learn the tactics and strategies that large companies use, and allow myself to apply them to my future business.
Here at Blue Room I am extremely excited for the opportunity. One of my favorite things to do in the world is gain knowledge and learn new things, and that seems to be exactly what I will be doing here at Blue Room. I will be partnering this summer internship with another internship, as a Research Analyst at Dynex Capital, a REIT based in Florida. While I will be learning a very top-down approach to economics at Dynex, here at Blue Room I am getting to experience first hand a bottoms-up approach. Here at Blue Room I am excited to learn how bigger companies research and approach the market. It will be interesting for me to be surrounded by professionals in the field and see their thought process during different events of the economy.
Right now is one of the most exciting times in economic history as we are experiencing things that have not been seen before. This time period is one that will be taught in college economics courses years after, and I am able to learn about it through actual action on the market. One of the most exciting aspects of this internship is how closely I will be working with CEO Minyoung Sohn. We have thus far been on multiple zoom calls and communicate on a first name basis. I do not know many internships that do this.
After my tenure at Blue Room, I not only hope to gain tons of knowledge of how to research, evaluate, and predict future expectations of companies, but I also hope to leave my footprint on Blue Room Investing as a company. I want to make an impact before I go, whether that is changing an opinion of a position for a company, or sparking a new idea, regardless of how, I want to be positively felt by the company.
I hope you all enjoyed the read! Peace.
— PEPPERING CPI —
Friday
July 27, 2023
9:30 AM
BLUE ROOM
Investment Team Bullpen
Declining gasoline prices contributed to falling headline inflation, but this will reverse by late summer.
—INTERN PROFILE—
ARJUN
MAHESH
Duke University, Sophomore
Computer Science, Statistics, Finance
My name is Arjun Mahesh, and I am from beautiful Seattle, WA. I am a rising sophomore at Duke University, where I am currently studying Computer Science, Statistics, and Finance. Surrounded by the tech world for my whole life, I have grown up knowing that I want to interact with cutting-edge technologies. Thus, I was drawn by the concept of digging deeper into business processes to work with technological innovations and in turn extrapolating that into analyzing the success of companies.
In my free time, I play on Duke Club Squash, I ski and long-distance bike (I’ve completed the annual Seattle to Portland ride twice), I sunset-chase at one of Seattle’s many hidden parks, I play pickup basketball with my friends, and I play the guitar and piano. I also love sports, especially following the Seattle Seahawks, Atlanta Hawks, Seattle Kraken, Texas Longhorns, Duke Sports, and the Seattle Mariners, but I am always trying to learn more about other leagues. In my experience playing sports as well as watching professionals, sports require perseverance, neutral thinking, determination, and teamwork to succeed, skills I try to learn from and incorporate into my everyday life.
I am really looking forward to providing insight and contributing to investment decisions at Blue Room this summer, while learning and growing with my fellow interns. In covering companies in the financial services industry and the semiconductor industry, I am excited to combine my interests in technology and finance towards forecasting growth. In my time so far, I have absorbed so much knowledge from management through unparalleled access to company meetings, and I look forward to the upcoming weeks.
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