Weekend Update #189
Thank you for your continued support and engagement. 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.
Now in the full swing of earnings season, markets ended the week negative as a selloff in big tech sent the S&P 500 to its worst day since December 2022 and ended the longest streak without a 2% drop since the start of the global financial crisis. Losses were even more pronounced in the Nasdaq 100, which tumbled over 3.5% as Alphabet and Tesla plunged 5% and 12%, respectively, following earnings.
In economic news for the week, Real GDP growth accelerated to 2.8% in 2Q topping consensus forecasts of 2.1%, growing twice as fast as the first quarter’s 1.4%. US core PCE rose 2.6% from a year ago in June, slightly above estimates, but unlikely to alter the Fed’s decision to potentially cut rates in September. Meanwhile, both personal income and inflation-adjusted spending fell short of estimates. Consumer sentiment rebounded slightly to 66.4 in the final July reading, up from 66.0 in the preliminary report. However, current conditions plunged even further in the final report to 62.7, representing a sharp fall from June’s 65.9 figure. Future expectations picked up slightly to 67.2 from the initial 68.8, compared to June’s 69.6. US Existing-Home Sales for June fell to 3.89 million annualized rate, below all estimates, and slumping to one of the slowest paces since 2010 as sellers wait for mortgage rates to fall further and buyers balk at stubbornly high prices.
Other corporate highlights:
Visa Inc. reported quarterly revenue that missed Wall Street estimates — a rarity for the world’s biggest payments network.
Apple Inc. lost ground in China’s smartphone market in the June quarter after local companies like Huawei Technologies Co. surged ahead.
Coca-Cola Co. raised its full-year outlook as higher prices bolstered the soft-drink giant’s performance.
General Motors Co.’s profit surged 60% from a year ago, easily beating Wall Street’s expectations on strong demand for gas-powered trucks in the US.
LVMH sales growth slowed last quarter as wealthy shoppers reined in spending on pricey Louis Vuitton handbags and Christian Dior couture.
OpenAI announced that it’s testing a prototype of its search engine dubbed SearchGPT, which seeks to give users “fast and timely answers with clear and relevant sources.”
Southwest Airlines announced its biggest policy shift in history as the airline is ending open seating policy while also planning to start offering overnight flights.
Friday’s Close
(Weekly Performance)
S&P 500 5,459.10 -0.83%
Nasdaq 17,357.88 -2.08%
Dow Jones 40,589.34 +1.64%
Thank you Blue Room Analyst NICK PEART.
It’s that time, every four years when politics dominates the headlines. We have had back to back weeks where news regarding candidates in the election has created anxiety in the markets. Investors love to know where they’re heading before making decisions and as of now, it is unclear to most who will win the race, what the political and economic agenda will be, and what direction the markets will move based on the outcomes. Meanwhile, stocks of Mega Cap Tech companies continue to suffer with returns down for the week. Politics play a big role in global trade and with any uncertainty, these stocks, which are all priced for perfection, are vulnerable to a sell-off. Our largest short position, ARM Holdings, also finished down for the week. There has been a clear rotation away from these overvalued companies into laggards like value stocks and small-cap companies.
This week, our portfolio reflects these broader market moves. We benefited from short positions in the tech companies that fell like Microsoft, Apple and Amazon although we gave some performance back with bullish positions in a few of these as well, like Nvidia and Meta (Facebook). Despite the volatility and downward pressure in the market, most of our idiosyncratic positions outperformed. Companies like 4D Molecular, Rocket Pharmaceutical, Vimeo, Schrodinger and Precision Biosciences were all up for the week. Whereas, our positions in Mobileye, Lululemon and AMD all detracted from performance.
Overall, recent trades in the portfolio have been working in our favor. We are hopeful that being nimble in this environment will be additive to performance.
Thank you Blue Room Investing President JOHN FENLEY
Executive Summary
For the second quarter of fiscal 2024, Texas Instruments Inc. reported revenue of $3.822 billion, in line with the street’s $3.820 billion estimate and above our $3.790 billion estimate. Net income of $1.127 billion beat consensus estimates for $1.070 billion and our estimates for $1.066 billion. That is equivalent to EPS of $1.30 reported, versus $1.16 consensus expected and $1.15 Blue Room expected.
TI fell modestly short on the third quarter guidance, on both revenue and GAAP EPS. At the midpoint, TI expects $4.100 billion in revenue (implied +7.3% Q/Q and -9.5% Y/Y) and $1.36 in GAAP diluted EPS (implied +11.4% Q/Q and -27.0% Y/Y). The street average revenue estimate was $4.140 billion and $1.38 in EPS, while Blue Room estimated $4.260 billion in revenue and $1.50 in EPS.
The quarterly revenue figure was a mixed bag of puts and takes, that ultimately biased results above the 1Q guidance. On a Q/Q basis, the industrial end market fell “low single digits” while the automotive market declined “mid-single digits”, which was the result of continued inventory adjustment cycles with end-customers. In industrial, there were certain segments of the market that were closer to an inflection point than others, but the general trend continued to be negative. In automotive, TI suggested that they are closer to the end of the downcycle than to its beginning. Given that the company's Embedded reporting segment is primarily composed of automotive and industrial products, that segment was down -31.2%; Analog segment fell -11.0%. TI also noted that its current manufacturing investments are Embedded biased, which also explains the segment’s -300 bps contraction in operating profit in the quarter. Longer-term, the scaling of its 300mm wafer supply should lower cost (40% fixed cost reduction) and should also be augmented by a rebound in the industrial and automotive segment.
Executive Summary
Despite beating revenue estimates for all topline segments, Tesla disappointed investors with misses on margins and EPS. Delivery revenue (ex-leasing and regulatory credits) came in at $18.5 billion (vs. $18.8 billion expected). Energy reached another quarterly record of $3.0 billion, well above analyst estimates of $2.4 billion. Despite the beat on revenue, the automotive gross margins excluding regulatory credits plunged substantially to 14.6%, marking the lowest margin in five years and missing consensus estimates by 160 basis points. Adjusted EPS was $0.52 per share, missing analysts estimates of $0.60. Executives reiterated full-year guidance of “notably lower” growth in its automotive business as EVs continue to face an industry slowdown amid various macro headwinds. The company continues to focus its efforts on AI development and the next-gen platform, which is set to start production in the first half of 2025. TSLA shares are likely to remain pressured as the stock lacks meaningful near-term catalysts, and negative delivery growth and gross margin compression have led to a 43% decline in trailing 12-month adjusted EPS.
Consumer sentiment has remained virtually unchanged in the last three months, falling to 66.4 in June. July’s reading was a statistically insignificant 1.8 index points below June, well under the margin of error.
Sentiment has lifted 33% above the June 2022 historic low, but it remains guarded as high prices continue to drag down attitudes, particularly for those with lower incomes.
Labor market expectations remain relatively stable, providing continued support to consumer spending.
However, continued election uncertainty is likely to generate volatility in economic attitudes in the months ahead.
Alan Greenspan is widely considered to be one of the finest central bankers the world has ever seen. Greenspan served five terms as Chairman of the Board of Governors, taking over the reins from Paul Volker in 1987 until passing the torch to Ben Bernanke in 2006. Greenspan was appointed chairman by four different presidents and ushered in an era of economic prosperity, facilitating the longest official economic expansion in United States history.
Greenspan’s approach to monetary policy was delicate and astute. The Maestro is well known for following nontraditional macroeconomic indicators so as to have a better grasp of true underlying economic activity. His Men's Underwear Index is one such measure of economic strength. Greenspan complemented his eccentric economic analyses with well-calculated and forward-looking monetary policy actions. The rationale behind these forward-looking monetary policy actions was that monetary policy itself works with a lag, so in waiting too long the Committee would risk “falling behind the curve.” It should be noted that while Greenspan embodied the precision of preemptive monetary policy decisions, in doing so, he was following in the steps of those Federal Reserve chairs before him. Since William McChesney Martin, Fed Chairs have often opted for preemptive moves – especially for those with the purpose of cooling an economy that is experiencing an output gap, though the logic behind preemptive strikes goes both ways. If the Federal Reserve is concerned that current conditions allow for inflation to run above trend, they will preemptively hike interest rates; if the Federal Reserve is concerned that current conditions could lead to a deterioration in the labor market and potentially induce a recession, they will employ “insurance” interest rate cuts.
Executive Summary
Pool Corporation delivered Q2 2024 results that showed marginal beats on consensus estimates across key metrics. For the quarter, net sales fell -4.72% year-over-year to $1.770 billion, above Street estimates of $1.745 billion. The result was driven by continued weakness in new pool construction – with sales of building materials falling double digits year-over-year in the quarter – but were aided by relative strength in the company's pool equipment sales and a strong final week of the quarter. That being said, pool equipment units were flat year-over-ear, and net sales for the segment were bolstered by 2-3% price inflation y/y during the period.
Pool Corp. continued to grow their sales center base during Q2, reaching 8 new center openings through the first half of the year – in line with company expectations. This led to heightened SG&A expenses that depressed Operating Profit Margin year-over-ear by 227 bps to 15.34%. Funneling into the bottom line, due to better-than-expected equipment sales, Pool Corp. generated $192 million in Net Income in Q2, leading to Diluted EPS of $4.99 per share. This outpaced Street expectations of $4.90 per share.
On June 24, the company published an update on financial positioning and performance year-to-date, significantly revising down guidance. In the update, management modified new pool construction expectations to down 15-20% and renovation and remodel sales to down 15%, each from originally stated guidance of flat to down 10% for the year. This caused Pool Corp.'s management to lower their full-year EPS expectations to $11.04 - $11.44, from $13.14 - $14.14 published at their Q1 earnings call. The company maintained this updated guidance (modifying the EPS range by $0.01 due to a tax benefit) and committed once again to their planned investments and sales center expansions, which will heighten operating expenses and serve as a headwind on margins for the remainder of 2024.
Earnings Call Content Summary
Alphabet ended Q1 with strength in their Search and Cloud businesses, as well as various margin improvements.
Q2 operating margins reflected an increase in R&D, partially offset by a decline in G&A with sales and marketing essentially flat. All in all, their operating margin saw a ~309 basis point improvement when compared to Q2 ‘23.
Q3 operating margins will reflect the impact of increases in depreciation and expenses associated with higher levels of investment in technical infrastructure, as well as the increase in cost of revenues due to the pull forward of hardware launches into Q3. For the full fiscal year 2024, the company still expects operating margins expansion relative to 2023.
CapEx is expected to stay at or above the $12 billion mark in Q1, and headcount is expected to have a slight increase as the company bring on new graduates.
Quantum computing is an advanced technology that leverages quantum mechanics to provide improved performance for some applications and enable new territories in computing by solving problems faster than classical computers. While classical computers process information in binary form, quantum computers rely on quantum bits known as qubits. Qubits exhibit quantum superposition states, in which they can exist simultaneously as both 0 and 1.
The history of quantum technology began in 1982 with Richard Phillips Feynman, an American theoretical physicist. Despite being unable to directly observe quantum events, Feynman sought a window into the quantum universe through computer simulations. However, upon the realization that classical computers were not up to the task of simulating quantum mechanics, Feynman began experimenting with the idea of designing a tool that would operate according to the laws of quantum physics. Three years later, in 1985, British physicist David Deutsch published the idea of a universal computer based on quantum principles, earning him his reputation as the founding father of quantum computing.
Recent breakthroughs in quantum technology suggest shorter timelines for the arrival of universal resilient quantum computers, including developments in quantum error mitigation, correction proposals, and logical qubit demonstrations by major technology companies.
The possible applications of quantum computing are extensive. Quantum sensors offer exceptional capabilities, as sensors provide more precise measurements of various quantities like gravity, time, and electromagnetism. Additionally, quantum communications refers to the secure transfer of quantum information across space, ensuring the security of communications through quantum cryptography. The collaboration between classical and quantum computing is also expected to yield improvements in the artificial intelligence landscape. While combining powerful AI algorithms using classical computers with quantum algorithms could significantly advance fields like bioengineering, synthetic biology, and nano-engineering, it is important to keep in mind the risks associated with the development of autonomous artificial intelligence and the achievement of artificial super intelligence.
Executive Summary
Enphase reported Q2 revenue of $304 million (vs. $310 million expected), which was a 15% sequential improvement but a 57% decline from the year-ago period. Adjusted EPS also missed analysts’ expectations of $0.49, coming in at $0.43. The company provided guidance of $370-410 million for 3Q24, which implies 29% sequential growth at the midpoint, but misses consensus estimates of $404 million as industry demand remains challenged. Management confirmed that the inventory channel has reached normalization and reiterated its guidance of a stronger rebound in the second half of 2024. ENPH shares will remain range bound for the remainder of 2024 as the resolution of inventory challenges may be offset by slower demand recovery. Additionally, the company remains at risk of pricing pressure and margin compression as increasingly competitive products pose a risk to the company’s leading market share.
10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
WE CAN ACCOMPLISH ANYTHING TOGETHER.
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.
This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.
For more information about us and our general disclosures contact us directly.