Happy Sunday.
In the last Week in Review⌠we told you âthat a credit event could be the first thing that changes sentiment entirely.â
In the last Investing Week Ahead⌠we told you that you need to âpay attention to Japan.â
OK, so what happened?
1) For the first time since 2011, the rating agency Fitch downgraded the US governmentâs top credit rating. Citing fiscal deterioration over the next three years and repeated âdown-to-the-wireâ debt ceiling negotiations â they deemed it to be appropriate to drop us to AA+.
Is this âthe credit eventâ that we alluded to? Not necessarily â weâd imagine it will be something much bigger (and related to the next point below). However, sentiment changed on a dime.
2) Throughout the week, we saw hundreds of more authors / writers / creators chiming in on our Japan callout. As a reminder, the Bank of Japan (BoJ) loosened its yield curve control (YCC) policy. Their goal is clear â âhow can we phase out our old policies that clearly wonât work for much longer, without causing complete market turmoil?â
âThe BOJ is the worldâs last major anchor of rock-bottom interest rates, and Japanese investors have spent more than $3 trillion offshore in search of higher yields. Economists warn that even a small shift to policy normalization may prompt Japanese cash to flood out of global markets and back home.
In addition to being the biggest foreign holders of US government debt, Japanese funds have massive investments in everything from Brazilian sovereign debt to European power stations and high-risk loans.â â Bloomberg
Whatâs the takeaway?
Weâve been screaming from the rooftops that 1) you must respect the importance of credit and 2) you must understand that all of these interest rate hikes have an unknown, lagged effect.
The credit situation of the United States is extremely troubling + Congress is now on vacation with a debt ceiling issue unresolved + student loan debt is about to re-enter the lives of tens of millions of Americans + Japan has been being used as a âfree money machineâ throughout the global interest rate hikes elsewhere.
This doesnât mean that we know the stock market will go up or down. This doesnât mean you should sprint to buy a bunch of put options on Monday. That is gambling, and we donât know the future.
What we know is that conditions are questionable.
Thanks for reading Rate of Return and we hope you keep monitoring these situations with us!
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Portfolio Updates:
Weâve talked about predicting stock prices for quite sometime now.
No, Iâm not alluding to a crystal ball or some sort of stock market magic â Iâm talking about cash flow. As you all might remember, I continue to believe that if you can predict future cash flows, you can predict future stock prices.
This methodology has proven to be true time and time again â Salesforce, Monday.com, Hims & Hers Health, Google, and countless others.
Last week, we were able to add one more name to this growing list â Amazon. As youâll read below, Amazon reported strong Q2 earnings â including incredibly strong free cash flow. More importantly, they guided to Q3 free cash flow continuing to move in the right direction.
Below is a graphic that illustrates the correlation between Amazonâs stock price (in black) in relation to their operating cash flow (in blue) â itâs nearly one-for-one.
This correlation has been there for several years now, and is also the reason why their stock price traded down over the last 18-24 months (blue line). However, look as to where that blue line is headed over the coming years.
Assuming Amazonâs stock price begins to trade again one-for-one with their operating cash flow â something I could see happening again very soon â their stock price could be headed for $350+ in the coming 2-3 years.
With that being said, Iâve âswitchedâ the weighting between Salesforce and Amazon in my âLong Technologyâ side of the portfolio. Donât get me wrong, Salesforce still has a healthy allocation in my portfolio as theyâre still historically undervalued â Amazon is just now a bigger allocation than before and will continue to grow into thousands upon thousands of dollars.
Iâll be spending some time this week to identify and share the names of other companies whose cash flow is moving in the right direction. A name that immediately comes to mind is Cloudflare (NET), who just reported positive free cash flow for the first time.
You all saw what that did to their stock price last week after earnings.
Also wanted to give you all a heads up â Iâll be adding about $30K to my âinvestable cashâ over the coming week. Iâm thinking about allocating about half of it to my crypto side of the portfolio and the other half to the portfolio shown above.
I still believe that Bitcoin, Ethereum, and Chainlink will see immense price appreciation over the coming 12-18 months and I want to be on the right side of that trade.
Donât forget, if you want to track your portfolio using the BEST platform out there to do so â Stock Unlock is your solution. Click here to sign up!
Week in Review â Too Long, Didnât Read:
Apple hit one billion paid subscribers, Amazon is BACK baby, Uber reported GAAP operating profitability for the first time, T-Bills are getting as much attention as ever, Inflation could surge if Oil keeps ripping higher, the LK-99 superconductor craze caused Korean exchanges to step in, the Jobs Report shows a bit of cooling, and PMI readings still donât look very rosy.
Key Earnings Announcements:
Apple hit 1 billion paid subscribers, Amazon is BACK, and Uber reported GAAP operating profitability for the first time.
Apple (AAPL)
Key Metrics
Revenue: $81.8 billion, compared to $82.9 billion last year
Operating Income: $23.0 billion, flat YoY
Profits: $19.9 billion, an increase of +2% YoY
Earnings Release Callout
âWe are happy to report that we had an all-time revenue record in Services during the June quarter, driven by over 1 billion paid subscriptions, and we saw continued strength in emerging markets thanks to robust sales of iPhone.
During the quarter, we generated very strong operating cash flow of $26 billion, returned over $24 billion to our shareholders, and continued to invest in our long-term growth plans.â
My Takeaway
Apple reported a very strong quarter, with their Services business segment reaching record revenue. This is important because this business segment has the highest gross profit margin on its revenue â which means Appleâs bottom line is continuing to move in the right direction.
They also reported iPhone revenue growth in the double-digits, something I think will continue into 2024. This was mainly driven higher by India-specific revenue hitting all-time-highs. Because of this iPhone growth, paid subscribers of some sort of Apple Service hit an all-time-high â now eclipsing 1 billion.
With that being said, Appleâs revenue has now experience three consecutive quarters of negative / flat growth â something that hasnât ever happened to the company since its stock market debut. Because of this, their stock price sold off moderately during Friday trading.
Iâll continue to dollar cost average into my Apple position. As you all know, itâs one of my smaller âLong Technologyâ positions given itâs prominence in the S&P 500 (something I own a lot of).
Amazon (AMZN)
Key Metrics
Revenue: $134.4 billion, an increase of +11% YoY
Operating Income: $7.6 billion, compared to -$2.7 billion last year
Profits: $6.7 billion, compared to -$2.0 billion last year
Earnings Release Callout
âOur AWS growth stabilized as customers started shifting from cost optimization to new workload deployment, and AWS has continued to add to its meaningful leadership position in the cloud with a slew of generative AI releases that make it much easier and more cost-effective for companies to train and run models (Trainium and Inferentia chips), customize Large Language Models to build generative AI applications and agents (Bedrock), and write code much more efficiently with CodeWhisperer.â
My Takeaway
Amazon is back baby!
For nearly 18-months now, Amazon has been battling with free cash flow âproblemsâ â causing their stock price to either trade sideways (most of 2021) or completely fall off a cliff (most of 2022). However, after reporting an incredible Q2 earnings with operating income beating consensus estimates by +60% â their stock is bouncing back incredibly hard.
Free cash flow came in at $7.9 billion, compared to -$23.4 billion this quarter last year â a massive improvement. Remember, the reason the companyâs free cash flow was negative was their immense investments in next-day delivery, retail stores, etc. all things that will take years upon years to turn a profit.
However, weâre already beginning to see these investments positively impact the companyâs gross profit margins â setting record all-time-highs at 48.4%. Management also noted (as shown above) AWS demand has stabilized â giving investors more clarity as what to expect next quarter.
Itâs finally time to sit back and enjoy the ride with Amazon â AWS growth is stabilizing, there is a strong AI pipeline coming to fruition, steady gross merchandise value growth, and free cash flow guidance of $8 billion next quarter.
Iâm going to aggressively begin buying more shares of this stock over the coming weeks and months. I think Amazon sees $180-200 / share in the next 6-9 months.
Uber Technologies (UBER)