Weekend Update #83
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.
As the second quarter earnings season kicked off amid another hot CPI print, the U.S. stock market had another turbulent trading week but ended on a slight rebound. The S&P 500 closed the week at 3,863.16 (-0.93%), the Dow Jones Industrial Average closed at 31,288.26 (-0.16%), and the Nasdaq Composite closed at 11,452.42 (-1.57%).
In light of the higher-than-expected inflation reading, some Federal Open Market Committee members signaled that the Federal Reserve would still favor a 75 basis point rate hike over 100 basis points this month. Bank earnings from J.P. Morgan, Morgan Stanley, Citigroup, and Wells Fargo showed some impacts from a cooling economy and stock market but offered few signals of a recession. For the first time since 2002, the euro hit parity with the U.S. dollar on Wednesday. Mario Draghi also said he would resign as Prime Minister of Italy on Thursday, creating further risks in European markets.
In economic news for the week, stronger-than-expected Retail Sales growth in June (1.0% month-over-month) and a month-over-month increase in the preliminary July estimate of Consumer Sentiment (51.1) led markets to a rebound on Friday. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) topped estimates for June at 1.3% and 1.1% month-over-month, respectively. With the highest year-over-year headline CPI increase since 1981 at 9.1%, inflation offered little signs of cooling in June and shows that the Federal Reserve still has work to do going forward in order to ensure price stability. The NFIB Small Business Optimism continued to decline to 89.5 in June, the lowest index reading since 2013. Initial Jobless Claims also continued their rise since March, showing 244,000 jobless claims on the week ended July 9th.
Thank you Analyst JARED FENLEY
— BR Highlights —
Over the next decade, the company hopes to generate over $100 billion in revenue annually, as well as 40% gross margin and 20% operating margin while reaching over 1 billion users
The company hosted this Investor Day to clarify their strategy
They reiterated the three core foundations that differentiate Spotify: ubiquity, personalization, and freemium
They are building “the Spotify Machine,” which involves combining and bundling multiple business models with multiple verticals into one user experience
Their strategy is to add adjacent verticals into their existing ecosystem of 422 million monthly active users and 182 million subscribers as opposed to growing its own user base from scratch
This provided podcast creators with scale immediately; Spotify says podcasting has 40-50% gross margin potential
They are now the number one platform that podcast listeners use the most in numerous markets around the world, including the US
The next vertical is audiobooks, and the company hinted at news, sports and education as future verticals they’ll take on within the next 10 years
The investments Spotify has made have resulted in user growth, retention and increased engagement, with overall consumption hours reaching all time highs
Their platform is fueled by subscription, advertising, and creator service models applied to music, podcasts, audiobooks, and more
The infrastructure consists of different back-end teams that support separate verticals with the aim of having a singular, easy-to-use interface on the front-end
Their Machine Learning (ML) models can tell them which combination of user, content and monetization gives the most consumer value and the most creator value at a certain time, enabling them to maximize the total value of the platform at each moment
They can balance ad loads so that the revenue gain from the ads doesn’t come at a cost of a shorter lifetime
They are discovering that the LTV of podcast-activated users is much higher relative to music-only listeners; this translated to increased total company ARPU and margin
OVERVIEW
Business activity increased modestly in New York State, according to firms responding to July 2022 ESMS.
Headline general business conditions index rose twelve points to 11.1.
New orders increased marginally and shipments expanded significantly
Unfilled orders edged lower for a second consecutive month
Delivery times lengthened at the slowest pace in months
Inventories picked up
Labor market indicators pointed to a solid increase in employment and a slightly longer average workweek. While still elevated, both the prices paid and prices received indexes moved significantly lower, pointing to a deceleration in price increases.
Firms turned pessimistic about the six-month outlook, a rare occurrence in the survey’s history.
OVERVIEW
United States Producer Price Index YoY and MoM
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.
Corporate Profile:
Vertex is a biotechnology company that invests in scientific innovation to create transformative medicines for people with serious diseases. The company has multiple approved medicines that treat the underlying cause of cystic fibrosis (CF) — a rare, life-threatening genetic disease — and has several ongoing clinical and research programs in CF. Beyond CF, Vertex has a robust pipeline of investigational small molecule medicines in other serious diseases where it has deep insight into causal human biology, including pain, alpha-1 antitrypsin deficiency and APOL1-mediated kidney diseases. In addition, Vertex has a rapidly expanding pipeline of genetic and cell therapies for diseases such as sickle cell disease, beta thalassemia, Duchenne muscular dystrophy and type 1 diabetes mellitus.
The star of this week’s news cycle was Wednesday’s record inflation report that is causing speculation that the Fed may increase rates by a full percentage point at its next meeting. However, news surrounding oil and gas markets should not be brushed aside, as this week marked significant geopolitical and industry-specific events.
On Monday, the Nord Stream pipeline shut down for regularly-scheduled annual maintenance. The pipeline channels Russian natural gas into Europe. However, there are growing concerns that the pipeline will not resume its flows of natural gas on July 21, as expected. European politicians warned that Vladamir Putin may use this shutdown to stop gas supplies to Europe in an effort to weaken European support for Ukraine as countries are forced to ration energy. In a radio interview on Sunday, Germany’s energy minister Robert Habeck remarked that an end to Russian gas supplies would trigger a gas shortage, resulting in social tensions that could only be kept in check by government subsidies and other interventions in the market.
HEADWINDS:
Per the industry trend, TSMC said that it saw weakness in the consumer market for end markets like smartphones and PCs. The market is overall concerned about the record inventory levels held by TSM customers, and could mean that the demand cycle is waning. TSMC’s CC Wei said he sees inventory levels reducing and that the current industry adjustments being made resembles a “typical cycle” for semiconductors. This trend is evident in the YoY shift in platform revenues; Smartphones decreased from 42.0% of revenue to 38.0% and Digital Consumer Electronics decreased from 4.0% of revenue to 3.0% of revenue.
The company also noted that it intends to decrease its capital expenditures budget, a move that reflects the rolling over of the demand cycle for semiconductors broadly. This comment was slightly offset, however, by the increase in DIOs from 88 days to 95 days due to N5 (advanced technology) wafer prebuilds and an increase in raw materials.
TAILWINDS:
On the other side of things, the data center and automotive business remained steady. TSMC’s advanced technologies (7 nm and smaller) grew from 49% of quarterly revenue in 2Q21 to 51.0% of revenue in 2Q22, with 5nm increasing from 18.0% of revenue to 21.0% or revenues and 7nm slightly decreasing from 31.0% of revenue to 30.0%. The better product mix and increased wafer shipment volumes (+10.1% YoY) likely contributed to the outstanding profitability of the company in the period. Gross margin grew from 50.0% last year to 59.1% in the second quarter this year. Operating profit margin grew from 39.1% last year to 49.1% this year. Net profit margin grew from 36.1% last year to 44.4% this year. On a QoQ basis, all margin ratios increased as well.
USD strength contributed 3.5% in additional gross margin, as the company attributed the increase to more favorable ForEx. rates, cost improvements and value selling. The increase in DIOs from 88 days to 95 days due to N5 (advanced technology) wafer prebuilds and an increase in raw materials leads us to believe that the semiconductor industry is expecting continued growth in the IoT, automotive and HPC segments, despite the slowing growth in smartphones. These segments have been transitioning to 7 and 5 nanometer wafer nodes to support small form factor edge computing technologies that require high compute intensity on lower power consumption. TSMC is about a year to year-and-a-half ahead of competition, with Samsung only recently announcing their successful launch of their 5nm solutions last week.
July 14, 2022 BLUE ROOM Meeting Number 90
Thursday
July 14, 2022
12 PM
BLUE ROOM
GLOBAL MEETING
NUMBER 90
__________ __________
Dear Blue Room,
Last week, we celebrated our Nation's founding and talked about long term goals for our respective communities. It was a great meeting, which you can watch here:
This is the beginning of the third full year as a company.
(We consider our fiscal year end to be June 30).
Question:
+ Please reflect on the ups and downs of the past 2 years
+ How are you tracking on your strategic or tactical goals?
+ Are there new challenges needed to take on?
Hello! My name is Josh Zummach. I am a rising senior at Colorado State University in Fort Collins and have been enjoying my summer as a Blue Room Analyst Intern. I will be graduating in May of 2023 with a Bachelor’s degree in Corporate Finance and Real Estate Finance. I have found that Blue Room’s mission is directly aligned with my core values as an individual. Using investing to create a better society is a unique view of an investment firm. I believe Blue Room's commitment to Togetherism will set a precedent in the financial industry, and will continue to make our communities better places to live and grow. In my free time, I like to explore all that the Colorado Rockies have to offer. I enjoy golfing, fishing, skiing, boating, and camping. Socializing with friends and family is very important to me. I seek to understand the perspectives of others and learn from those perspectives. I am currently covering Union Pacific Corporation, a rail freight transportation company that is headquartered in my hometown of Omaha, Nebraska! Union Pacific operates in 23 states west of the Mississippi River and ships raw materials, finished automobiles, and everything in between. Through my research, I am learning immensely about the rail industry and all the moving components of the supply chain. As e-commerce grows and the global economy becomes more intertwined, companies like Union Pacific play a more integral role in getting products to their destinations. I am more than grateful to be a part of the Blue Room team and an atmosphere where I can grow and learn. I look forward to my time at Blue Room!
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