Weekend Update #191
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Major indexes whipsawed this week as record levels of volatility rattled markets both domestically and abroad. Despite the S&P 500 finishing almost unchanged for the week ended August 9 compared to the close on August 2, movements this past week were violent. On Monday, August 5, the Nikkei logged its worst day since Black Monday in 1987 as the index fell 12.7%. Almost all of that loss was recovered the following trading day. In the United States, the VIX had its largest one-day rise on record on August 5, rising more than 170%.
The reason for the dramatic increase in volatility is not known and there remains no consensus. While there were surely a confluence of factors that can be pointed to – the Bank of Japan unexpectedly raising interest rates last week, a weaker-than-expected Jobs Report in the United States leading to growing fears of a recession, the rapid unwinding of the carry trade, overcrowding in short-volatility trades, a reversal of momentum in large-cap technology stocks, etc. – the key question now is whether the market selloff was contained or might have sparked a chain reaction that could have created some structural crack in the broader financial system. Analysis surrounding the market events of this past week will surely be studied by market participants and academics alike over the coming months and years.
While there was no major economic release this past week, market participants closely analyzed Thursday’s Initial Jobless Claims data to see if there were signs of further weakening in the labor market. The report proved better-than-feared with initial claims falling 17,000 to 233,000 for the week ended August 3. The data was a welcome reprieve for the market as economists were anticipating 240,000 jobless claims.
In company-specific news, earnings season is slowly drawing to a close with 91% of the S&P 500 components have reported their second quarter earnings. Shares of Eli Lilly traded sharply higher as the company posted better-than-expected sales of its blockbuster GLP-1 medication. The stock ended the week up 17%. Warner Bros. Discovery shares slumped 13% after the company reported a $10 billion loss for the quarter, as the company booked a staggering $9.1 billion impairment charge related to its cable-TV networks. For context, Warner Bros. Discovery has a market capitalization of 17.3 billion as of the time of this writing. Finally, shares of Disney slumped after the company warned of weakness in its profitable Parks division despite topline boosts from blockbuster movies Inside Out: 2 and Deadpool & Wolverine.
Next week, July’s inflation and retail sales data will take center stage as earnings season slowly fades away, with only a handful of major companies reporting second quarter earnings throughout the remainder of August.
Weekly Performance
S&P 500 5,344.16 -0.04%
Nasdaq 16,745.30 -0.18%
Dow Jones 39,497.54 -0.60%
Thank you Blue Room Analyst SPENCER WOOTTEN
The week began with the same fury that overcame the last one, with markets reeling from the unwinding of the yen carry trade and labor market data pointing to potential cracks in the US economy. Fund One declined in tandem with the S&P 500 Index at the start of the week, but with reassuring news coming out of the Bank of Japan in relation to holding rates steady and the latest jobs market reports in the US being more positive, both began to recover by week's end. Our feeling is that the market will continue a cautious path through most of the rest of the election year. We have more confidence that strong earnings from companies will continue to help those perform better than the rest of the pack. On that note, we are generally pleased with the outcome of our portfolio holdings’ earnings reports thus far.
On that note, strong earnings and outlooks helped generate several 20+% gainers for the week in Palantir, Sweetgreen and Shopify. A large earnings beat also propelled Vimeo share over 30% for the week. Large holding Eli Lilly was also a double-digit gainer as sales in its headline grabbing GLP-1 drugs continue to beat expectations. A continued decline in short position Intel contributed to performance once again and we feel that there is more room for Intel shares to drop.
Unfortunately, strong performance in Sweetgreen helped lift shares in its fast-casual competitors, including Cava. We are short Cava so the 12% appreciation this week detracted from Fund performance. Our valuation work indicates that Cava is trading for at least twice as much per store than Sweetgreen, so we are comfortable maintaining our position. Also bringing down performance this week were a few of our biotech and healthcare related companies, Rocket Pharmaceuticals, Precision Biosciences, Schrodinger and 4D Molecular. The market has been generally negative on the group for a while now but we expect that a fed rate cut could reignite interest back into these idiosyncratic names. For now, we are tracking earnings closely and are holding onto those where we are most confident that our projections will outstrip expectations.
Thank you Blue Room Investing President JOHN FENLEY
Executive Summary
Amazon shares are poised to drift lower through the remainder of 2024 as the company experiences softness across all of its businesses with the exception of AWS. Total revenues grew 10.1% to $148.0 billion, decelerating from 12.5% in the prior quarter, and adding $4.7 billion sequentially, compared to $7.0 billion in the prior year period. Momentum in operating income slowed, with $14.7 billion representing an operating margin of 9.9%—a 77 basis point sequential decline—and a guidance beat of only $672 million compared to $3.3 billion in the prior quarter, partly due to rises in fulfillment costs from providing more than 5 billion units the same or next day and growing spend to support AWS infrastructure—something which Amazon said it will continue to do since management believes generative AI is still in its early days and 90% of global IT spend is still on-prem and will likely shift to cloud in the coming years.
Executive Summary
Take-Two grew revenue 4% Y/Y to $1.34 billion (vs. $1.33 billion expected) while bookings grew 1% Y/Y to $1.22 billion (vs. $1.23 billion expected).The company also beat on profit estimates as it generated $63 million in Adj. EBITDA (vs. consensus $58 million) and $0.05 Adj. EPS (vs. consensus $0.03). The positive results were driven by outperformance of Zynga's Toon Blast and Match Factory, Grand Theft Auto Online and GTA+.The company reiterated that its Mobile segment will be the primary driver for growth for the year as gamers await the highly anticipated Fall 2025 release of GTA 6 which will contribute to FY26 results. TTWO shares are likely to remain range bound throughout the year due to the light catalog of new titles, which is expected to have a significant step up in FY26.
Executive Summary
BioNTech shares traded down after the German biotech company posted a larger loss than expected by analysts. The company reported a loss per share for the second quarter of €3.36 compared to consensus estimates of €0.79. The combination of mildly weaker revenue and marginally stronger R&D spend than forecasted by analysts culminated in the quarterly miss. Nonetheless, the company reiterated its financial guidance for FY2024 across all measures: COVID-19 revenue, operating expenses, and capital expenditures.
Executive Summary
CRC Q2 results were somewhat mixed, but the company’s stronger than expected guidance for FY2024 and the announcement of a 25% increase to the dividend should help the stock trend higher over the short-term. Revenue topped estimates and per BOE operating costs came in well below estimates, marking a 10% decline quarter-over-quarter. However, asset impairments, an increase in other operating expenses well-above the long-term trend and increased carbon management expenses contributed to a miss on key measures of profitability such as EBITDAX, Operating Income, Net Income and Adjusted Net Income. Regarding guidance, the company marginally increased the lower-end of its production estimates but kept other metrics such as CapEx and oil mix unchanged.
Executive Summary
Precision BioSciences benefitted in the quarter from the recognition of deferred revenue from Prevail of $48.2 million, which boosted Precision to a second consecutive quarter of positive net income. Offsetting the inflows, Precision stepped up R&D expenses by 29% sequentially into Q2, driven by PBGENE-HBV external development costs as Precision undergoes the final toxicology studies to ready the program for clinical trials and submit an IND/CTA in 2024. Net, Precision still expects cash runway into H2 2026, after they’ll have achieved the first in-human clinical data from both HBV and PMM programs.
Precision had no further updated on planned internal development or external partnerships for any of the 3 assets the company regained from Prevail/Lilly but said it exepcts to provide an update when decisions are finalized. Similarly, there was no new update on iECURE or Novartis partnered programs, and iECURE’s program remains on track for data in late 2024 or 2025. IND/CTAs for HBV and PMM remain on track for 2024 and 2025. Precision now says the company expects to provide an HBV program update later this year, presumably once the IND/CTA is submitted.
Although the revenue sum is big due to Prevail, revenue recognized in the quarter from Novartis was only $0.8 million (vs. $4.5 million in Q1) and was $0 for Imugene. The company states in the Form 10-Q that “As of June 30, 2024, management has constrained all variable consideration related to milestone payments in the Imugene License Agreement given the level of uncertainty associated with achievement of the milestone payments.” This is a deviation from at least Imugene’s prior expectations as they had expected to complete the Phase 1b enrollment for azer-cel by Q2 2024, which would trigger a $8 million milestone payment to Precision. This timeline is likely pushed back. The last update on azer-cel received from Imugene was February 22nd at their “State of the Company Address” where management stated the azer-cel Phase 1b program is ongoing.
Executive Summary
Duolingo shares are poised to drift higher after a beat-and-raise across the board was complemented with impressive jumps in operational leverage. Duolingo DAU growth accelerated in the second quarter, increasing 59.3% year-over-year and 11.64% sequentially. Paid Subscribers was the only user-related KPI that showed a year-over-year slowdown in growth (albeit from 54.2% to 53.8%). Duolingo surpassed all expectations across income statement measures and increased its adjusted EBITDA margin 71 basis points sequentially to 26.98% – this marks a 1,052 basis point increase from the second quarter of 2023. Duolingo increased its full-year guidance, reflecting the company’s ability to sustain its margins through year-end and signaled continued stratospheric growth across revenue, bookings, and adjusted EBITDA.
Executive Summary
Intellia Therapeutics Second Quarter earnings release was highlighted by the company’s release of positive topline results from the Phase 2 study of NTLA-2002 in patients with HAE. The clinical trial met its primary efficacy and all secondary endpoints in the 16-week primary observation period, with a single 25mg or 50mg dose leading to deep reductions in attacks. The company plans to present the data at an upcoming medical conference in the fourth quarter of this year and will initiate the Phase 3 trial in the second half of 2024. Apart from the data readout, Intellia remains on pace to submit a BLA for NTLA-2001 by 2026 and has the required cash pile to continue operations until then.
Executive Summary
EOG shares rose as much as 2.4% in premarket trading following its earnings release as the Texas-based oil and gas producer reported quarterly earnings that met analyst expectations while raising full-year estimates for production and free cash flow generation. EOG’s updated 2024 guidance includes a roughly 11,800 increase in total liquids production coupled with a decrease of $0.15/BOE in cash operating costs, which should come together to increase FY2024 cash flow estimates by roughly $100 million. EOG noted operational and technological efficiencies along with better-than-expected timing to drill new wells. Wall Street reacted positively to the results, with analysts specifically noting the company’s strong execution translating into positive quarterly results and better-than-expected capital returns.
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