Weekend Update #179
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This week, key macroeconomic indicators dominated the headlines, driving the Dow Jones Industrial Average above 40,000 for the first time. The Producer Price Index, Consumer Price Index, and Retail Sales reports, combined with Walmart’s quarterly earnings release, provided a welcome counterpoint to previous concerns about stagflation.
On Tuesday, the Producer Price Index came in higher than expected, but a closer look revealed a more mixed picture. Indeed, speaking at an event held by the Netherlands' Foreign Bankers’ Association only hours following the release, Federal Reserve Chair Jerome Powell helped to quell fears in highlighting the downward revisions to previous reports, which notably brought down the three-month and six-month moving averages of the figure.
On Wednesday, the Consumer Price Index showed slight easing in April, with the headline and core figures coming in at 3.4% and 3.6%, respectively. Both figures were in-line with expectations – marking the first time this year that the reading hasn’t surprised to the upside. Investors responded to the report with ebullience, as all three major U.S. stock indexes advanced to record highs during the trading day. The 10-year and 2-year treasury yields dropped considerably.
The Consumer Price Index was complemented Wednesday morning by the Retail Sales release, which showed a slight pullback in consumption – adding to the narrative that the Federal Reserve could cut interest rates later this year as inflation cools and consumption moderately slows. Retail sales were unchanged from March to April, coming in well below expectations. Excluding the volatile gas and automobile sales categories, retail sales fell 0.1% month-to-month.
Walmart provided further color on the state of the U.S. consumer when it reported earnings on Thursday morning. The retailer topped revenue and earnings expectations as it made significant e-commerce gains and won over more high-income consumers who are searching for bargains. The company’s CEO echoed the sentiments that earlier macroeconomic data had alluded to: inflation was lower than it has been with mid-single digit deflation on general merchandise and low-single digit inflation in food. Nonetheless, customers’ wallets remain stretched as they pull-back on general merchandise while prioritizing food and health-related items. Walmart’s shares closed at a record high following the release.
Looking to next week, while markets will get a reprieve from the larger macroeconomic releases, a heavy schedule of speeches by Federal Reserve officials will help to contextualize those readings that were released this past week and provide further guidance for interest rate policy. Undoubtedly the largest event next week will be the quarterly earnings release by Nvidia on Wednesday, May 22. The earnings reports by members of the “Magnificent Seven” have proved substantial in setting the tone for broader markets, and that is perhaps most true for the artificial intelligence darling Nvidia.
Weekly Performance
S&P 500 5,303.27 +1.34%
Nasdaq 16,686.97 +1.74%
Dow Jones 40,003.59 +1.04%
Thank you Blue Room analyst SPENCER WOOTTEN
With the recent issuance of your monthly statement, we would like to provide insights into the market and Fund-specific movements that have influenced our portfolio performance. Following a 3.2% increase in March, the S&P 500 fell 4.1% in April. The decline came on the back of stronger than expected inflation data and escalating geopolitical tensions in the Middle East. Just as in March, Fund One outperformed the S&P 500 despite also falling into negative territory.Transitioning into May, we have observed a positive market sentiment buoyed by Federal Reserve Chair Powell's confident stance at the latest Federal Open Market Committee (FOMC) press conference. We are pleased to report that Fund One is mirroring this trend with gains for the month. Our portfolio is benefiting from strong performance across various holdings, from stalwarts like Moderna, which saw a 14% increase in May as excitement mounts surrounding its oncology platform and cytomegalovirus vaccine, to newer additions like Sweetgreen, boasting a remarkable 37% surge since surpassing earnings expectations on May 9th.As we approach the conclusion of the first-quarter reporting season, we are gratified by the accuracy of our earnings forecasts and optimistic about the growth potential of our portfolio holdings.
Thank you Blue Room Investing President JOHN FENLEY
OVERVIEW
PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).
Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.
Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.
PPI Final Demand M/M: +0.5% versus expectations for an increase of +0.3%
Core PPI Final Demand M/M: +0.5% versus expectations for an increase of +0.2%
PPI Final Demand Y/Y: +2.2% versus expectations of +2.22%
Core PPI Final Demand Y/Y: +2.4% versus expectations of +2.3%
Overall index (m/m) led by an increase in the services component. Services increased +0.6% in April, compared to -0.1% in March (downwardly revised from +0.3%). The PPI services increased the most in April 2024 since July 2023. Services increases were led by a +3.9% increase in portfolio management services.
After strong acceleration in goods in February and deflation in March, the overall index component accelerated +0.4% m/m. Energy prices led the increase coming in at +5.4% in April. Core goods also accelerated to +0.3% m/m.
Joshua Reilly — Needham
Well, good afternoon and welcome to the Needham Technology and Media Conference. My name is Josh Reilly and I'm an Analyst on the Enterprise Software team here at Needham and I'm excited to have a Chief Product and Technology Officer, Pete Hirsch, for a product focused discussion today. Pete, thanks for coming and making the trip from across the country here. So you came to Zuora about a year ago now.
Can you just highlight what you found attractive about the opportunity at Zuora and some details maybe about your background as well?
Pete Hirsch — Chief Product & Technology Officer
Yeah, absolutely. So yeah, for the last 10 plus years or so I've been around the Chief Financial Officer -- the office of the CFO. I started with Ariba which was a part of SAP at the time in an area called Procure to pay, the Chief Procurement Officer. I then was with Ellie Mae and in Fintech space so I got to know loan origination everything. And then most recently I was with Blackline in the report space around financial close.
And so it was interesting because while I was there I had the opportunity because I also had IT as well as product and technology at the time to be building out the company's quote to cash. And of course we were a customer of Zuora. And so I got to know Zuora really well and this was another space that I was familiar with, but I had not been in before, and I had a chance to interact with my predecessor Sri Srinivasan in that context and Tien Tzuo the Founder, CEO.
And I really fell in love with the space. We got a chance, we had the opportunity to talk about the opportunities. I could personally see the incredible impact that this would have on customers in terms of their monetization, in terms of how they price and package their products, the impact on the internal customers and everything. And so when I got the opportunity to join Zuora, I was just very excited. So there's just a real opportunity there. resonated with me and really sort of dictated how I view finance.
So I often do say, and I can say this unequivocally at Roku is, I do believe finance can be one of the largest, if not the largest, hidden asset in any company if done well. That just means thinking holistically. It means being analytical, it means looking at free cash flow long term, not short term. And it means always anticipating, not just the current quarter, but in the years ahead. So that's always how I have tried to operate, and it's not just from a CFO perspective, that's from a tax perspective, from a treasury perspective, from an FP&A perspective, from an IR perspective, it's everything. So it's really -- I think that's probably the most important conversation that really steered the way I think of financing, and what its impact can be on a company.
— Press Release —
May 13, 2024
The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the April 2024 Survey of Consumer Expectations, which shows that inflation expectations increased at the short-term and longer-term horizons while decreasing at the medium-term horizon.
Home price growth expectations reached the highest level since July 2022.
Spending growth expectations also increased.
The average perceived likelihood of voluntary and involuntary job separation declined, as did the perceived likelihood of finding a job in the event of a job loss.
Executive Summary
Palantir achieved strong quarterly results that beat Street expectations, and raised their outlook for the rest of the 2024 fiscal year. During the period, PLTR saw their total customer count grow to 554 customers versus Street expectations of 527 total customers, an increase of 41.7% y/y and a continued acceleration of growth from Q4 2024. The company's government revenue grew 15.9% y/y to $335 million, besting Street estimates of $323 million. Similarly, the company's commercial revenues beat Street estimates as well, achieving 26.63% y/y growth to $299 million versus Street expectations of $292 million.The company earned a record $106 million in Net Income for the quarter, achieving $0.04 diluted EPS and $0.08 adjusted diluted EPS, both beating analyst estimates.
Palantir announced their Q2 revenue guidance range of $649 - $653 million, higher than Bloomberg's expected Q2 revenue of $641.1 million. The company also raised their full-year revenue guidance to $2.677 - $2.689 billion, in-line at the midpoint with Bloomberg's guidance expectations of $2.681 billion.
Ultimately, this was a tremendously successful quarter for Palantir due to the sequential step-up in customer acquisitions from 44 new customers in Q4 2023 to 57 new customers in Q1 2024. However, the company again seems to have been light on their full-year guidance and did not raise expectations to the extent the market was likely hoping (even as their guidance fell in-line or bested Street estimates).
Executive Summary
Take-Two generated $1.40 billion in revenue and $1.35 billion in net bookings, coming in ahead of consensus estimates by roughly 3% for both metrics. Despite large one-time expenses over $2 billion, the company also produced an adjusted EPS beat of $0.28 versus the consensus estimate of $0.08. The positive results were driven by outperformance of NBA 2K24, Zynga's in-app purchases led by Toon Blast and Match Factory, Red Dead Redemption, and Grand Theft Auto V which has now surpassed 200 million units sold.
For the current fiscal year, the company’s mobile segment will be the primary driver for growth. The company narrowed its highly anticipated GTA 6 release timeline from “calendar 2025” to “fall 2025”, which is farther away than the street estimated. However, the rumors of a delay were reported weeks ago, so the news seemed to be already priced into the stock, while a more concrete release date should limit further downside. Additionally, management was confident in multi-year growth, even in the year following the large expected bookings from GTA 6, which supports the positive long-term outlook in the stock.
Damon Audia — Senior Vice President & Chief Financial Officer
Yes. So I think, Tami, it's important to recognize, as we look at farmer income over the last couple of years, they're coming off of some record levels. Go back a couple of years, it was a record all-time high for farmers, and so not a surprise as we see the numbers coming down last year, and we see the numbers coming down this year.
And so if you look at the forecast for 2024, that's still in line with the 20-year average. So not a horrible year relative to long-term, just down from the last couple of years of the peak. When we look at commodity prices right now for corn right now trading somewhere in that $415 to $430 range. So every different by farmer, but directionally it means they would likely be modestly positive, so the little bit of positive farm that income this year.
When we look at that and we look at the age of the used equipment here of the new equipment, excuse me, the fleet in North America what we said on our fourth quarter calls we expected the age is about the long-term average. And again to have an average, if they have a couple years above and a couple years below.
So we still see opportunities for farmers to increase or improve the age of their fleet and part of that is because of what we went through the last couple years, where the supply chain was challenged. We and the industry as a whole could not supply the farmers everything they wanted, because we couldn't produce enough.
And so what would have been probably bigger years in '21 and '22, directionally probably got shaved off or pushed here into the outer years. And so, as we look at that, we see those as positive opportunities. Again, it won't be as robust as what we saw the last couple of years. But we still see the — expect to see good farmer demand. Our expectations for this year is North America down around 10%.
Executive Summary
Deere performed better than expected in Q2 2024 on sales and earnings, driven by strong seasonal demand in Construction & Forestry and residual demand for ag products, but the strength was not enough to keep Deere from significantly lowering guidance and forecasts for the rest of the year. Ag industry fundamentals continue to deteriorate, and Deere may still be toward the front end of a multi-year decline in sales and earnings.
Deere revised down FY 2024 net income guidance to $7.0 billion from the prior $7.5-7.75 billion range. Effective tax rate guidance also stepped down to a range of 23-25% from the prior 24-26%. Net operating cash flow guidance stepped down from $7.0-7.5 billion to $7.0-7.25 billion. CapEx guidance was unchanged at $1.9 billion, and R&D guidance was unchanged at “up slightly”.
For the ag industry outlook, all geographies are now expected to be down at the low end of Deere’s prior ranges, with South America’s decline expected to exceed the previous expectation at down 15-20% vs. 10% prior.
Executive Summary
Precision BioSciences executed on finding additional operating efficiencies in Q1 2024 while providing a surprise flip to positive net income in the quarter. The changes in financials that led to this positive surprise were 1. A change in partnership upfront payment recognition through the income statement sales line item 2. A $10 million change in fair value of warrant liabilities. $4.5 million in milestone revenue was recognized from both Lilly and Novartis partnerships in the quarter as well as $7 million from TG Therapeutics’ upfront payment. For each quarter over the next 2 years, despite the contract termination from Prevail/Lilly, increases in milestone recognition I’m modeling to beat consensus sales expectations. This path will be mainly driven by Imugene’s progression of azer-cel clinical trials and it’s approach to commercialization over the next few years.
On the operating efficiencies side, even though Precision is spending more on NHP costs for its IND-enabling studies, R&D costs saw a 34 basis point decrease quarter-over-quarter, which bodes well for driving efficiencies through FY 2024. While external development costs on the PMM program are still accelerating at a slight pace, HBV external development costs were the main source of savings throughout the quarter as Precision prepares for IND/CTA submission in 2024.
In the press release, Precision cited that the iECURE OTC program could still see data in late 2024 or early 2025 while PBGENE-PMM is still on track for a 2025 IND/CTA submission. In addition, a portfolio review is underway to help management decide on internal development paths versus partnering those programs immediately for the 3 assets returned to Precision from the Prevail/Lilly collaboration. Precision is still maintaining cash runway guidance into H2 2026.
David Kirn — Co-Founder & Chief Executive Officer
So at 4DMT, we're harnessing the power of directed evolution for targeted next-generation genetic medicines. So we're a leading clinical-stage next generation AAV company.
Our platform is Directed Evolution which is a Nobel Prize-winning technology in which we start with 1 billion synthetic capsids that are proprietary to the company. And then we do serial selections in non-human primates to identify vectors that are highly cost customized for any tissue in the body.
So it's an incredibly robust platform. We do also have a robust product engine. We have strong clinical proof-of-concept across three different therapeutic areas including large market ophthalmology, lung and cardiology, these products all use three different routes administration. So we've shown that directed evolution can allow us to invent vectors that we use by either intravitreal injection, aerosol delivery, or intravenously for the heart.
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