Weekend Update #192
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Through the last trading week, major indices bucked the heightened volatility ignited at the start of August and regained their positive trajectory. While dueling economic data continued to leave market participants watchful of recessionary signals, the S&P 500 marched with strength back above the 5,500 level. Since peaking on August 5 following the troubling July Jobs report and the Bank of Japan's policy shift, the VIX has declined over 60% and has returned to more normalized levels.
Although far from painting a universal portrait of economic security, data published this week on producer and consumer prices, consumer sentiment, initial jobless claims, and retail sales provided aid in quelling some of the fears vocalized since the beginning of the month. On Tuesday, the Bureau of Labor Statistics published their report on the July Producer Price Index, showcasing further promising developments in combating further cost-push inflation. In the month of July, headline prices faced by producers rose +0.1% and +0.0% on a core basis, each below expectations of +0.2% rises. When annualized, these results showed that Headline PPI fell to +2.2% year-over-year over the last 12 months, with Core PPI falling to +2.4%, each below consensus estimates as well.
On Wednesday, the BLS released the July Consumer Price Index numbers which showed similar promise as those detailing PPI. In the month of July, the increase in headline and core prices was measured at +0.2%, in-line with expectations. However, when annualized in accordance with the figures over the last 12 months, year-over-year Headline CPI fell to +2.9% and Core CPI fell to +3.2%, the slowest annualized pace in three years. Optimism from the report required some coloration, however, as the housing services segment of CPI advanced with comparative force over the last month. Although Personal Consumption Expenditure, the Federal Reserve's preferred inflation gauge, underweights housing relative to CPI and therefore may see mechanical benefits relative to the July CPI report, the documented pace of shelter inflation this week was a main point of skepticism for an otherwise profoundly positive report.
In the back half of the week, data points profiling consumer trends and unemployment activity helped to reinforce the optimism of earlier inflation data and to further support market advancement. Reporting on Thursday, Walmart published their second quarter earnings results in which the company raised future guidance and suggested consistency of consumer demand year-to-date without noticing purchaser weakness. Compounding this company-specific data, the US Census Bureau published retail sales figures the same day which far outpaced surveyed estimates and further signaled a stable consumer. Finally, the Department of Labor released the weekly data on initial jobless claims which, following the tumultuous Jobs report on August 2, was met with even greater anticipation. Results for the week ended August 10 showed that initial jobless claims measured in at 227,000, materially below economists estimates of 235,000 and breaking from previous trajectories. Combined, this collection of reports reemphasized the pace of consumer spending and countered fears of a collapsing labor market, providing further fuel for indices to continue their rise.
In the upcoming week, as earnings season further winds down and the summer trading period begins to come to a close, the Federal Reserve's annual Jackson Hole Economic Symposium and the Democratic National Convention will hold the attention of market participants, as all look to gain clarity on both the Fed's mindset leading up to their September FOMC meeting – at which many now project rate cuts will be initiated – and on the potential policy implications of a successful Harris-Walz campaign in the November Presidential Election.
Weekly Performance
S&P 500 5,554.25 +4.23%
Nasdaq 17,631.72 +5.51%
Dow Jones 40,659.76 +0.24%
Thank you Blue Room Analyst AIDEN FETTERLY
After navigating choppy waters over the past couple of weeks, the market continued its upward trajectory on the back of mostly upbeat economic data. Broader market concerns, such as uncertainties about the Federal Reserve's interest rate decisions and the impact of a stronger yen on carry trades, had clouded the market outlook. However, the market recovered from last week's dip, driven by better-than-expected consumer sentiment. Fund One mirrored the S&P 500 for the week with both finishing up around 4%.
Core holding Nvidia helped drive Fund performance. The stock was up 18% over the week and outpaced the other Magnificent Seven stocks. This was Nvidia's strongest week in over a year as investors are focused on its upcoming earnings report and the rising demand for its AI-driven chips. This holding has more than doubled in value this year as many companies are signaling a strong commitment to integrating AI into their operations and are investing heavily in the technology. While there are questions about when returns will materialize, tech giants like Google parent Alphabet, Microsoft, Meta Platforms (Facebook’s parent), and Amazon.com are focused on the long-term benefits of AI. They emphasize that the risk lies more in under-investing in AI than in over-investing. This positions Nvidia advantageously, as its products are essential for AI functions and capabilities.
Another semiconductor related holding, Arm Holdings, was a detractor for the week. Arm is a major player in the semiconductor industry, renowned for its ARM architecture that drives 99% of the world’s smartphone CPUs. The company licenses this technology to leading tech firms such as Apple and Qualcomm, generating revenue through royalties and licensing fees.This short position had been working well for the Fund as it fell nearly 60% from mid July through last week. Our thesis was that Arm was overvalued in light of our deteriorating expectations. Unfortunately, this week shares were up 11% after Elliott Management, a prominent activist hedge fund, increased its stake in the company. Other investors believe that Elliott’s increased involvement in ARM Holdings might indicate a favorable outlook for the company. Thankfully we covered a portion of our short position after that dramatic sell-off over the past month.
Thank you Blue Room Investing President JOHN FENLEY
We got cable TV when I was in high school, and I became instantly obsessed with CNBC. I had been buying stocks with earnings from my summer job working at our family’s Chinese restaurant, and I was eager to soak up as much stock market knowledge as possible. My love of watching CNBC grew through college, where I kept the channel on in my dorm room TV, and when I started work at Janus in 1998, the firm approved a TV for me which was installed in my office. By the time that I was working at ArrowMark, I could stream CNBC to my desktop or iPad, and today I access live broadcasts and recorded content from my iOS device.
So when Warren Buffett was interviewed by CNBC reporter Becky Quick on August 30th, 2017, I took a pause to watch. Mr. Buffett, long revered as the greatest investor alive, was making a rare appearance on air to talk about stocks. He explained why “I’ve never sold a share of Apple,” as he viewed the company as an underappreciated global consumer brand whereas Wall Street still valued it as a technology hardware company.
I n 2017, Apple shares traded at less than 13 times forward earnings and the balance sheet was loaded with $268 billion in cash, and only $16 billion in debt . From 2017 to August 2024, Apple generated 489% total return, and grew to dominate Berkshire Hathaway’s portfolio, at half of its portfolio, and has contributed over $100 billion in the value of the Berkshire enterprise. And after taxes, the capital will seed investment in another major opportunity presented by the next market meltdown, which now feels inevitable in the wake of Yen carry trade unwinding after the Bank of Japan decided to tighten policy for the first time that anyone can remember.
Executive Summary
Shopify beat on revenue, GMV, and earnings estimates as a the strong underlying business momentum seen in Q1 2024 continued into Q2. Broadly, this report assuaged fears of a consumer slowdown or at least Shopify’s ability to handle the dynamics of this bifurcated economy through large enterprise merchant success this year. Subscription Solutions was a major source of strength as pricing increases were only expected to flow into Q3 2024. This means demand for the quantity of new users increased, seen in the 10% sequential growth into Q2 for the segment revenue. Why that is especially promising is that pricing increases in H2 2024 should build on top of that underlying user growth. Merchant Solutions revenue and overall GMV growth showcase just how much of an impact Shopify’s innovative product development offerings are having on attracting both merchants and users to the platform. GMV grew to $41.4 billion, up 30% YoY and Shop Pay alone grew to $16 billion, up 45% YoY.
The report also flew in the face of the weak ALTD data of the last 14 days Bloomberg reported, which seems to be broadly tracked by the investment community and was holding down sentiment entering the earnings call. Although, Shopify does seem to be seeing some consumer shifts under the surface. This would be confirmed by Shopify’s lack of guidance on GMV growth for the rest of this year as well. Overall, this was a very strong quarter for Shopify when there was a lot of investor concern about how the macroeconomic environment could be currently weakening or how Shopify could be affected going into later this year. From this angle, the report is also a positive economic indicator in the short term as Shopify is not pointing to a major shift going into the third quarter.
Consumer sentiment was essentially unchanged for the fourth consecutive month at 67.8, inching up 1.4 index points.
This month’s stock market gyrations, led by the largest one-day drop in nearly two years seen on August 5, have had little net effect on consumer sentiment. Only consumers with the greatest portfolio exposure — those in the top tercile of stock holdings — saw substantial declines in sentiment, down 6% from last month. In contrast, consumers with the middle tercile of holdings as well as the approximately 30% of consumers who do not own any stock both saw sizable 7% increases in sentiment since July.
These patterns are consistent with recent periods of financial turbulence, like the failure of Silicon Valley Bank in 2023, which similarly generated little movement in overall sentiment.
Furthermore, expectations for future stock market appreciation increased in August, particularly for consumers in the bottom and middle tercile of stock holdings.
Executive Summary
Rocket Pharmaceuticals reported Q2 2024 earnings that showed an increased expense trajectory, with the company spending more on G&A than expected, driven by commercial preparation — $9.5m pricing analysis, $3.3m legal expenses, and $1.4m stock compensation. The company ended with $278.8 million in cash, which was in line with expectations. The result was no change to the cash runway projection of “into 2026”.
The press release details that the Fanconi Anemia RP-L102 program is still on track for regulatory filings and review, but as of last quarter, Rocket was messaging that FA was on track for a BLA submission to the FDA in H1 2024. The updated language is a little ambiguous to if the submission has already occurred, so without explicit language here, it seems that the Fanconi Anemia program will be delayed at least a little from its prior timeline. The press release also details that the Phase 2 of RP-L301 in PKD is initiated and the Phase 2 enrollment for RP-A501 in Danon Disease is underway.
Rocket did not provide an update on Kresaldi’s review date, other than stating the company is working with the FDA to support the approval. The earnings release could have been an opportunity for Rocket to announce some sort of progress here or to reinforce confidence/positive sentiment, but this seems to be the biggest thing lacking in Rocket’s earnings report today. Overall, the press release doesn’t contain information that would change the near-term outlook on Rocket, which broadly progresses toward its near-term commercialization and data in key programs, but the company will need to present good data in Danon, PKD, and BAG3 as well as get FDA/EMA filings back on track in order to support the share price again.
Executive Summary
Palantir Technologies reported a strong topline beat driven by continued velocity in their Commercial business coupled with a strong acceleration in Government monetization. Palantir reported $678 million in revenue for the second quarter, besting consensus estimates of $653 million, and increasing 27% y/y. Breaking down these revenues, the company earned $371 million from their government business, which saw sales accelerate 23% y/y and 10.6% sequentially. This lift-up in government revenues is driven strongly by sequential gains in the company's international segment, which saw 18.7% growth from Q1 2024, and was highlighted as a point of challenge at the company's most recent earnings call. With regards to the company's commercial business, Palantir grew Commercial sales by 32% y/y, driven by a 55% y/y increase in US Commercial revenue and 83% y/y increase in US Comm. Customers. Palantir closed 123 US commercial deals in the period, representing a 98% increase y/y. Similarly, Palantir closed 27 deals with contract value over $10 million in the quarter.
Additionally, Palantir has continued to extend their successes with regards to margin expansion and customer retention, raising their Rule of 40 score to 64% and their RPO to $1.37 billion (up from $1.30 billion last quarter). This allowed the firm to achieve a record $134.1 million in Net Income for the quarter, leading to $0.06 in Diluted EPS and $0.09 in Adjusted Diluted EPS.
Palantir management set Q3 2024 guidance above consensus expectations, with Q3 Revenue guidance set at $699 million at the midpoint, 2.6% above estimates and representing 25% implied y/y growth. On a full-year basis, the company revised up guidance to $2.74 - $2.75 billion, again above consensus estimates by approximately $50 million. Combined with the Q3 guidance, the implied Q4 revenue would represent 16% y/y growth, signaling conservatism once again by Palantir's management.
Executive Summary
Lilly revised up FY 2024 revenue guidance by $3 billion, to $45.4-46.6 billion, driven by very strong performance of Mounjaro and Zepbound — even on top of the widely tracked prescription data. Once again, strong price realization, which was a 10% increase in Q2, and broad adoption that makes prescription data underestimate tirzepatide’s true usage both contributed to a beat and raise quarter. The report was significant alone but also in relation to peer Novo Nordisk whose shares fell this week after reporting weak semaglutide sales. Thematically, this is another proof point that Mounjaro and Zepbound continue to gain share within the industry as the superior molecule as demonstrated in clinical trials.
Potentially a negative in the short term, the press release details: “While supply and demand have come into better balance, expected increases in demand may result in periodic supply tightness for certain presentations and dose levels.” This is a great signal for demand and confirms a strong future projected ramp of sales, but any supply tightness could enable compounded competitors to stay on the market. Many questions on the Q&A portion of the call focused on the market impact of compounded options, and Lilly reinforced the steps it is taking to protect patients and to protect its own IP with tirzepatide branding as well.
In addition to raising FY revenue guidance, Lilly also raised its (Gross Margin — OpEx)/Revenue ratio guidance, implying they are still seeing economies of scale play out with the rapid expansion of its incretin business. Lilly is exceeding consensus expectations with GAAP EPS guidance of $15.10 to $15.60 and non-GAAP EPS guidance of $16.10 to $16.60, and earnings growth is very strong in this 2024-25 period on the heels of broad tirzepatide adoption.
Executive Summary
4D Molecular Therapeutics reported a slightly better-than-expected Q2 2024 on net loss and ending cash at $541.9 million. The results return some focus to 4D’s overall business that continues to operate efficiently toward clinical trials and commercialization for its pipeline. Importantly, 4D has announced that it will present long-term follow-up data on wet AMD patients treated by 4D-150 as well as host a “Development Day” with KOLs to talk about the recent data in September. This will aim to paint a positive light again on the promise the wet AMD program has for patients as management surely disagrees with the negative market reaction to what they believe is a clean safety profile with best-in-class efficacy. The next key wet AMD data release will be February 2025 with initial data in DME patients to be presented on the 4D-150 asset in Q4 2024.
Looking at the rest of the pipeline, 4D is turning investors' eyes to program updates across 4D-725, 4D-110, 4D-125, 4D-175, and 4D-310 in the near term. These will all serve as opportunities to build confidence around the portfolio in light of negative market reactions to wet AMD and cystic fibrosis data in recent months. The 4D-710 Cystic Fibrosis data update will be important to regain positive sentiment around valuation for that asset, but that will be one of the later catalysts, set to occur in mid-2025. Importantly, all program updates are in line with prior expectations with no negative surprises in this release.
Executive Summary
Instacart beat on revenue and earnings estimates, driven by strength in Transaction which offset some weakness in Advertising spending on the platform in the quarter. GTV was slightly above the consensus expectation, and the Take Rate on Transactions on the platform held almost flat quarter-over-quarter compared to a 66 basis point decline into Q2 2023. Average order value also held up well at +3% YoY growth compared to Bloomberg ALTD data indicating large order value declines in the quarter.
The weak parts of Instacart’s quarter were orders declined sequentially 3%, which is the most in 2 years for the company. It’s clear that Instacart pulled back on consumer promotions a bit in the quarter which led to less platform activity but also a higher take rate. This could be viewed as a negative for advertisers as GTV declined 1.5% sequentially and decelerated to 9.7% YoY growth in Q2, which points to softening user activity. Instacart’s Q3 GTV guide points to growth in a tough consumer environment, so that could point to Instacart deciding to invest more into customer incentives to drive growth next quarter but it doesn’t show up in the adj. EBITDA outlook as a negative. The result is an adjusted EBITDA outlook that is only slightly above consensus for Q3 as Instacart looks to manage operating expenses very tightly.
Instacart management focused on future growth levers of Caper Carts and in-store ads driven by its consumer data. However, these initiatives remain in very small test phases and none have yet proven themselves to be scalable solutions that advertisers are asking for, so investors are hesitant to bake in any future growth driven by those initiatives that Instacart remains the most excited about.
One interesting comment was on the source of strength customer onboarding partnerships like Instacart’s agreement with Chase. Instacart is saying these customers retain Instacart+ memberships after initial annual promotions. While this is confirmed with results and what Instacart is commenting in this quarter (“growth of paid Instacart+ members, which has outpaced the growth of monthly active orderers”), the move toward new user acquisition seems more of a defensive/reactive strategy. If partnerships such as Chase stop being able to reach new members or members target Instacart+ as an easy expense to cut back on, this strategy could backfire sharply.
We know from past calls that cohorts experience declines in orders after a strong 1-2 initial years of usage, so Instacart is highly focused on investing in incentives for new cohorts. Specifically, CFO Emily Reuter declined to comment on specific cohorts, remaining vague in commentary that cohorts have “normalized” and “for that reason, the specifics of any individual cohort really aren’t as important”. Overall, it feels like Instacart is seeing just enough new cohort strength to create a positive spin on the narrative, but under the surface, it still seems certain customers continue to pull back on use of the platform. The bifurcated economy and investment to reach as many new customers as possible are temporary solutions, but any further advertiser/consumer pullback would endanger that narrative.
Executive Summary
Deere reported better-than-expected sales and earnings in Q3 2024 that, despite the continued deterioration of the ag macroenvironment, enabled Deere to maintain its FY 2024 net income outlook of $7 billion (-31% YoY). With the reported Q3 earnings results, where net income was down 42% YoY, full year guidance implies the decline in quarterly earnings will worsen in Q4 2024 down 49% YoY. This compares to the -47% YoY decline in net income that consensus had expected for Q4 2024.
Net, the results point to better-than-expected strength for H2 2024, but an implied quarterly deceleration beyond what consensus was expecting may open the door to more concern about negative momentum of earnings growth heading into 2025 — as opposed to the sharp rebound in earnings that consensus expects throughout next year. As we approach Q4, investor focus is on expectations and ag conditions heading into next year. As Deere’s calendar year starts before AGCO’s, investors’ eyes will be on them to set the tone for those results. On the earnings call, management leaned optimistic about the company’s ability to underproduce demand and drive efficient results in 2025, even despite the continued softening of agricultural conditions. Official 2025 guidance on the next call will be very important for sentiment on the stock, as investors broadly expect relatively flat performance for earnings going into next year.
Another negative to point to in the forecast is, despite Deere maintaining its sales outlook of -20% to -25% for both Production & Precision Ag and Small Ag & Turf for this year, Deere for the first time is lowering its guidance on Construction & Forestry sales to -10% to -15% vs. the prior -5% to -10% expectation. Given the downward revision in sales expectations, the segment operation margin guidance was also revised down to 15% from 17%. In other words, weakness is now broadening beyond core agricultural segments, which may also be a negative for results in the next year.
Overall, Deere is managing expenses well given the ag environment, leading to that beat on quarterly earnings, so this will be the biggest positive of the quarter along with the maintained guidance while peer AGCO had a downward revision. In addition to oversold levels on DE shares, the results were enough to put some positive sentiment back into trading. DE shares ended the week at $377.92 (+9.2% for the week). Despite the deteriorating environment, DE shares have held up valuation-wise as the company executes better than past cycles with expense and inventory management, and following the call, investors are hoping 2025 guidance also leans better-than-feared.
Consumer sentiment was essentially unchanged for the fourth consecutive month at 67.8, inching up 1.4 index points.
This month’s stock market gyrations, led by the largest one-day drop in nearly two years seen on August 5, have had little net effect on consumer sentiment. Only consumers with the greatest portfolio exposure — those in the top tercile of stock holdings — saw substantial declines in sentiment, down 6% from last month. In contrast, consumers with the middle tercile of holdings as well as the approximately 30% of consumers who do not own any stock both saw sizable 7% increases in sentiment since July.
These patterns are consistent with recent periods of financial turbulence, like the failure of Silicon Valley Bank in 2023, which similarly generated little movement in overall sentiment.
Furthermore, expectations for future stock market appreciation increased in August, particularly for consumers in the bottom and middle tercile of stock holdings.
— SUMMER INTERNSHIP CLASS OF 2024—
COMPANY
INVESTMENT
PRESENTATIONS
Nora Weber
TJX: TJX Companies
Stock Price: $113.81
Shares Outstanding; 1,130 Million
Henry Sorbaro
BF: Brown-Forman
Stock Price: $43.92
Shares Outstanding; 305.5 Million Class B + 169.1 Million Class A Shares
Eliana Mazin
HSY: The Hershey Company
Stock Price: $189.97
Shares Outstanding; 147.7 Million
Emma Seneshen
ADI: Analog Devices
Stock Price: $238.99
Shares Outstanding; 496 Million
Andrew Simon
HSY: The Hershey Company
Stock Price: $79.00
Shares Outstanding; 143.7 Million
Sophia Hall
MKC : McCormick
Stock Price: $73.32
Shares Outstanding; 252 Million
William Maffei
KDP: Keurig Dr. Pepper
Stock Price: $33.0
Shares Outstanding; 1,356 Million
Noah Sohn
ULTA: Ulta Beauty
Stock Price: $393.12
Shares Outstanding; 47.7 Million
Fiona Gallagher
LSCC: Lattice Semiconductor
Stock Price: $41.78
Shares Outstanding; 138.7 Million
10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
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