Happy Sunday, everyone.
Inflation was on everyone’s mind this week as the Consumer Price Index for the month of July was shared on Thursday. The data showed a +3.2% rise in the CPI, below expectations of 3.3%. Core CPI was up +4.7%, below expectations of 4.6%.
This was troubling for some, especially the Federal Reserve, as it was our first month-over-month rise in inflation since May of 2022.
The frustrating part of all of this was that a slew of categories are actually trending lower on both a month-to-month and annual basis — including energy, energy services, new vehicles, used cards, and medical care.
So, why the “rise” if things are trending lower across the board?
The index for shelter — it rose by +7.7% year-over-year and accounted for 90% of the increase. The other 10% was made up of a few various things like motor vehicle insurance, education, and recreation.
Here’s a graphic we found on Twitter (X?) that shows just how much of an impact (or lack thereof) shelter has had on headline inflation across the last few years.
Here’s an interesting tweet explaining the lag in CPI rent data and includes more inflation-related graphics. It’s of our opinion that CPI rent will continue to cool off over the coming months / quarters — aiding inflation in becoming 2.0-2.5% once again.
Portfolio Updates:
We’re back in business! I deployed $3,500 into the stock market this week as we experienced heightened volatility. As always, all of my updated position sizes + P/L can be found in this Portfolio Tracker for paid-subscribers.
I was able to purchase more of nearly every position in my portfolio — which raised my average purchase price for most of them considering when the bulk of these positions were opened.
Unlike last week, I didn’t sell anything. However, I did buy more cryptocurrency — about $8,000 worth. I used this money to purchase both Bitcoin and Ethereum in a 75/25 split in favor of Bitcoin. There are a ton of “near-term” catalysts in favor of cryptocurrency for the coming 12-24 months — and I want to ensure I have a healthy position in both Bitcoin and Ethereum when markets start to run again (as if they haven’t already).
According to this Bloomberg analyst, BlackRock’s Bitcoin ETF is only 4-6 months away — but I guess we’ll have to wait and see. If you haven’t already, I encourage you to learn more about these two cryptocurrencies and consider diversifying 5-15% of your total invested assets into this asset class in a responsible manner.
Looking toward the remainder of the year — all seems to be going according to plan. Our largest bets (Big Tech) reported mixed, but solid earnings. Dividend growth stocks are doing what they do best — paying healthy dividends. And our riskier names are moving with the markets — to be expected.
Week in Review — Too Long, Didn’t Read:
Alibaba beat expectations across the board, Palantir’s business is slowing down, Disney posted their first “net loss” since the pandemic, Jefferies now thinks a recession will happen early next year, UPS has come to an agreement with Teamsters union, Dave Portnoy owns Barstool Sports again, Housing affordability hits multi-decade lows, the Consumer Sentiment Index edged slightly lower, credit card debt hit an all-time high of $1 trillion.
Key Earnings Announcements:
Alibaba beat expectations across the board, Palantir’s business is slowing down, and Disney posted their first “net loss” since the pandemic.
Alibaba (BABA)
Key Metrics
Revenue: $32.3 billion, an increase of +14% YoY
Operating Income: $5.9 billion, an increase of +70% YoY
Profits: $4.7 billion, an increase of +63% YoY
Earnings Release Callout
“Alibaba delivered a solid quarter as we continue to execute our Reorganization, which is beginning to unleash new energy across our businesses.
Due to the strong business momentum and our focus on operating efficiency across businesses, we achieved robust financial performance in the past quarter. Revenue and adjusted EBITA increased 14% and 32% year-on-year, respectively, due to improvements across all business segments.
We repurchased $3.1 billion worth of ADSs this quarter, which is supported by our continuous generation of strong free cash flow. Our strong free cash flow and balance sheet put us in an excellent position to strengthen our competitiveness and capture new opportunities.”
My Takeaway
Boom! As you all might remember from Monday, we saw this outperformance from a mile away. The company has been plagued with regulatory concerns and the general “America vs. China” crossfire — negatively impacting their stock price.
It’s been a while since BABA delivered such an all-around clean quarter — beating consensus expectations on both revenue and profitability by a large margin. More importantly, their operating metrics in user and merchant growth suggest their consumer-centric approach (alluded to above in the callout) is starting to pay off.
Their consumer-centric approach drove daily active user growth higher (+6.5% YoY) thanks to its effective user acquisition and improving retention strategies. Macro uncertainty remains a variable backdrop, don’t get me wrong — but Wall Street seemed to be encouraged to see BABA incrementally getting more competitive.
International retail grew by +60%, Cainiao grew by +34%, and local service grew by +30%. This growth was largely driven by product innovation, monetization improvement, and supply chain enhancement — which are all sustainable in nature.
Looking forward, I’m not sure I’m ready to open a position in BABA. Sure, their growth outlook has improved, as has their free cash flow — but I’m just not convinced this name deserves a spot in my portfolio. Maybe it’ll become a future “risky idea” soon.
Palantir (PLTR)
Key Metrics
Revenue: $533.3 million, an increase of +13% YoY
Operating Income: $10.0 million, compared to -$41.7 million last year
Profits: $27.8 million, compared to -$179.3 million last year
Earnings Call Callout
“Our U.S. commercial business continues to deliver outsized results. With our rapidly growing customer count, we are seeing the beginning of the network effects in the segment, whether at events like AIPCon, through direct customer referrals to their network or by leaders working with us in one organization, taking us with them to their next one. We expect the expansion effect to be multiplicative.”
My Takeaway
Palantir has very much been an artificial intelligence play for many investors over the last several months. However, something I don’t think these investors are taking into account is that Palantir is very much focused on long-term profitability over growth — as displayed in this quarter’s results.
The results were generally underwhelming, with only a small $3M revenue beat above consensus, and a $2M raise in guidance. Commercial revenue decelerated to only +10% growth YoY (compared to +15% last quarter), and government revenue decelerated to only +15% growth YoY (compared to +20% last quarter).
With that being said, the company released their AI platform “AIP” 10 weeks ago and noted immense interest and demand thus far. However, there was no mention of a monetization strategy in the earnings call — just their focus on traction and tracking platform usage.
As all long-term investors know, this is a good thing. Give a revolutionary product away for free, innovate upon it so much that the world depends on it, then raise your prices. It’s a playbook we’ve seen time and time again (Amazon AWS, Netflix, etc.) — I believe investors will be handsomely rewarded by this mindset and strategy by Palantir’s management team. It just comes down to “when.”
The company reported their third consecutive profitable quarter with intentions to continue investing into their products — like AIP — given their strong free cash flow. Speaking of free cash flow, Palantir also announced a $1B stock repurchase plan — reflecting conviction in the trajectory and value of Palantir.
I’ll likely add the company to my “risky ideas” section of the portfolio in the coming weeks as their stock price continues to correct itself out of “bubble” territory — stay tuned.
The Walt Disney Company (DIS)
Key Metrics
Revenue: $22.3 billion, an increase of +4% YoY
Operating Loss: -$134.0 million, compared to $2.1 billion last year
Net Loss: -$460.0 million, compared to $1.4 billion last year
Earnings Release Callout
“In the eight months since my return, these important changes are creating a more costeffective, coordinated, and streamlined approach to our operations that has put us on track to exceed our initial goal of $5.5 billion in savings as well as improved our direct-to-consumer operating income by roughly $1 billion in just three quarters.
While there is still more to do, I’m incredibly confident in Disney’s long-term trajectory because of the work we’ve done, the team we now have in place, and because of Disney’s core foundation of creative excellence and popular brands and franchises.”
My Takeaway
Throughout the last several months, Disney has been going through a transformation. They replaced their CEO, switched up their content slate, began to crackdown on password sharing, and just made a big bet on sports betting — no pun intended.
Disney is focused on a few primary efforts at the moment:
Their Disney+ digital advertising opportunity is staring them in the face. With 3.3M Disney+ subscribers being on their ad-supported tier, and 40% of every new subscriber opting for it — it’s becoming a massive growth lever for the company. Management noted they want to lean into a strong, growing ad market and shift more users to the ad-supported tier due to its attractive unit economics.
We talked about Netflix doing this a few weeks ago. Their ad-supported tier, especially in the USA, should begin to net the company more in profit per user than their original subscription tier. It’s no coincidence Disney announced price increases to their Disney+ and Hulu ad-free tiers starting in October.
Their theme park growth had a hard comparable given last year’s 50th Anniversary celebration and normalization in a post-Covid world. Their parks are also experiencing reduced international visitation due to the sustained strength of the US Dollar, hurting buying power around the world. These international visitors have historically been bigger spenders vs. domestic.
With that being said, Disney continues to invest heavily into international parks and cruises — as these are key growth areas for the company. Zootopia will open in Shanghai in 2H23, Frozen Land in Hong Kong in November, and three more cruise ships will be added to the fleet.
I don’t own stock in Disney — however, that might change. They company reiterated their 2023 guidance, they’re on track to realize the $5.5B in cost savings their restructuring plan alluded to, and they expect to spend $27B on content, and they should be re-instating their dividend any quarter now.
With that being said, I’m still on the sidelines for a few more quarters at least.
Investor Events / Global Affairs:
Jefferies now thinks a recession will happen early next year, UPS has come to an agreement with Teamsters union, and Dave Portnoy owns Barstool Sports again.
Jefferies Views Recession as “Almost Inevitable”