Week in Review: 8/7/22
The inverted yield curve, America's massive debt bubble, and earnings from the likes of Airbnb, Uber, AMD, and more.
Something to keep an eye on… 👀
The “yield curve” is the relationship between short-term and long-term interest rates of government bonds. Generally, short-term (2-year) interest rates are lower than long-term (10-year) rates — because you should theoretically get rewarded more for holding longer-term investments.
Currently, the US yield curve is the most inverted it’s been since August 2000.
So what does it mean when the yield curve is “inverted”? It means that short-term interest rates are higher than long-term rates. Historically, this has been viewed as a major indicator for economic recessions (and market downturns) ensuing.
Of course, there’s no one-size-fits-all indicator for the markets turning red. If there was… this would all be pretty easy. Read this excerpt from Investopedia:
“When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks. Likewise, hedge funds are often forced to take on increased risk in order to achieve their desired level of returns.
In 2019, the yield curve briefly inverted. Signals of inflationary pressure from a tight labor market and a series of interest rate hikes by the Federal Reserve from 2017 to 2019 raised expectations of a recession. Those expectations eventually led the Fed to walk back the interest rate increases. The COVID-19 pandemic, however, in the Spring of 2020, did lead to a brief recession.”
What should you take away from this? That the yield curve is screaming for a substantial market decline (-20-30%). If the Fed continues to raise rates aggressively, history says more downside is ahead. Remember — this is talking about the broader market, that doesn’t mean getting into beat-up names like Block (SQ 0.00), Carvana (CVNA 0.00), Cloudflare (NET 0.00), DraftKings (DKNG 0.00) or Opendoor (OPEN 0.00) hasn’t been awesome lately.
More beat up names we like here.
Did you notice on Friday that despite the economy adding over half a million jobs in July, the market didn’t respond very positively? This positive report now validates the Fed’s continual decision to raise interest rates. Their past actions haven’t negatively impacted the labor market — so they’ll keep raising rates until inflation curbs.
Week in Review — Too Long, Didn’t Read:
Airbnb sinks despite record-breaking bookings and guidance, AMD continues to impress despite lowering guidance, Builders FirstSource remains a strong buy in our book, Uber is finally cash flow positive, Cloudflare smashes estimates, Amazon further invades your home, Walmart expects less profits, Pelosi visits Taiwan, Monkeypox is announced as a public health emergency, rates could continue to increase after unemployment sinks for the first time in 5 months, and the US is in the largest credit / debt bubble in history.
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Key Earnings Announcements:
Airbnb is absolutely printing cash, AMD is doubling down on their data center business segment (for good reason), Builders FirstSource raised their guidance despite housing headwinds, and Uber printed free cash flow for the first time — ever.
Airbnb (ABNB 0.00)
Gross Booking Value (GBV): $17.0 billion, an increase of +34% YoY
Revenue: $2.1 billion, an increase of +64% YoY
Profits: $379 million, up from -$68M last year
Earnings Release Callout
“From a growth perspective, we exceeded 103 million Nights and Experiences Booked, our largest quarterly number ever. From a profitability perspective, we had our most profitable Q2 ever with net income of $379 million—a nearly $700 million improvement from Q2 2019. We generated $795 million of FCF in the quarter—a nearly $1.1 billion improvement from the $(263) million FCF from the depths of the pandemic two years ago.
More importantly, over the last twelve months, we’ve generated $2.9 billion in FCF, bringing our total cash balance to nearly $10 billion.”
What an incredible earnings release by a company we’ve followed closely since their IPO. Three massive callouts in my opinion:
GBV continues to climb in a very aggressive way. This is simply icing on the cake — Airbnb can sustain moderate GBV growth and still print free cash flow, as demonstrated with points two and three.
Revenue growth outpacing GBV growth shows the company is continually increasing their average revenue per user. This is important because not only is Airbnb booking more in value in their app, but more of that value is translating to revenue on the books. The perfect storm.
Free cash flow positive in a meaningful way. Airbnb has printed nearly $3 billion in free cash flow during the last 12 months — bringing their cash position to nearly $10 billion.
In my humble opinion, I believe demand for Airbnb will continue to sustain itself at least through 2022. Airbnb’s demand is the highest it has ever been, they' continue to travel across state borders to their stays, the length of their stays continue to get longer, and supply for locations has hit an all-time-high offering users more selection and variety.
Despite Airbnb’s stock trading down some -6% on the release, the stock has since rallied back and is up +32% in the last month. At a $75B market cap, Airbnb is trading at ~23X forward FCF / share — which in my opinion represents a discount to the ~30-35X it should be trading at. I’m sure macro-economic uncertainty is driving this discount, so once we have more color as to consumer travel demands over the next 12-18 months we’ll see a pick up in Airbnb’s stock price.
Advanced Micro Devices (AMD 0.00)
Revenue: $6.6 billion, an increase of +70% YoY
Operating Income: $526.0 million, down from $831.0 million last year
Profits: $447.0 million, down from $710.0 million last year
Earnings Release Callout
“We delivered our eighth straight quarter of record revenue based on our strong execution and expanded product portfolio. Each of our segments grew significantly year-over-year, led by higher sales of our data center and embedded products. We see continued growth in the back half of the year highlighted by our next generation 5nm product shipments and supported by our diversified business model.”
On the surface, record revenue didn’t translate into record profits this quarter — which would make someone think the stock should trade lower. There’s a lot to unpack here, so these are my three biggest takeaways:
AMD’s data center business segment is insane — with revenue growing by +83% YoY and +15% sequentially to $1.5 billion for the quarter. This is predictable, steady revenue paid to AMD by enterprises who need the technology. AMD closed on their acquisition of Pensando in Q2, further expanding their data center solutions capabilities. Big bets on big data.
Strong guidance toward the rest of 2022. AMD’s CEO said in their earnings call “Despite the current macroeconomic environment, we see continued growth in the back half of the year.” This was aided by a positive comment about continued gross margin expansion.
Increasing free cash flow, despite lower profits. The company reported $906 million in FCF during the quarter, up from $888 last year.
Quick note: as I was reading the company’s earnings call on Seeking Alpha, I noted their Quant Rating System gave AMD’s stock a “Strong Buy” on July 13 at $77 / share. Now three weeks later it’s +40% higher at $103 / share.
Builders FirstSource (BLDR 0.00)
Revenue: $6.9 billion, an increase of +24% YoY
Operating Income: $1.4 billion, an increase of +101% YoY
Profits: $987.2 million, an increase of +99% YoY
Earnings Release Callout
“I remain optimistic on the prospects for our industry over the long term and confident in our ability to outperform the market as we execute our strategy and further invest in margin accretive, value-added products and transformative digital solutions. We also remain fully committed to leveraging our strong cash flow profile to strategically deploy capital toward a combination of high return internal investments, accretive bolt-on M&A and returns to shareholders.”
Despite doom and gloom you’re reading about the housing market, BLDR smashed their Q2 expectations (specifically from a profitability perspective), and raised their guidance for the rest of the year. Mainly, they raised their free cash flow guidance from $2.2B to $2.8B.
Going to continue holding this one, but thinking of trimming my position while the stock is trading back up near all-time-highs to free up cash to deploy into beaten down tech.
Uber Technologies (UBER 0.00)
Gross Bookings: $29.1 billion, an increase of +36% YoY
Revenue: $8.1 billion, an increase of +105% YoY
Adjusted EBITDA: $364 million, up from -$509 million last year
Net Loss: -$2.6 billion, compared to $1.1 billion last year
Earnings Release Callout
“Gross Bookings up 36 percent to a $116 billion run-rate, Adjusted EBITDA significantly above our guidance, and $382 million in free cash flow, all on a platform that’s larger than ever, with the number of consumers and earners using Uber now both at all-time highs.
We became a free cash flow generator in Q2, as we continued to scale our asset-light platform, and we will continue to build on that momentum. This marks a new phase for Uber, self-funding future growth with disciplined capital allocation, while maximizing long-term returns for shareholders.”
You read that right — for the first time ever, Uber has become a self-sustaining business. Remember, every company’s mission in life to become free cash flow positive — which essentially means they cash they receive from selling their product or service offsets their expenses and investments for the future.
This was the first quarter since the company’s inception they were able to achieve this “free cash flow positive” status. However, there is a caveat. When calculating free cash flow you add-back non-cash expenses to the bottom line — one of those non-cash expenses for the quarter was $470 million in stock-based compensation. If you instead pay that compensation to employees as cash, Uber is no longer FCF positive.
Take that as you will, but the market was thrilled to see Uber finally say “we’re printing cash,” sending the stock’s price up some +20% after the report.
Abbreviated Earnings Reactions:
A TON of other earnings happened this week. Here’s the quick takeaways.
📈 PayPal (PYPL) — shares rose +10.62%
💰 Current Price: $95 — Wall Street PT: $116
📈 Activision Blizzard (ATVI) — shares rose +0.60%
💰 Current Price: $81 — Wall Street PT: $94
📈 Starbucks (SBUX) — shares rose +1.93%
💰 Current Price: $86 — Wall Street PT: $93
📈 Pinterest (PINS) — shares rose +18.37%
💰 Current Price: $23 — Wall Street PT: $26
📈 Twilio (TWLO) — shares rose +1.82%%
💰 Current Price: $85 — Wall Street PT: $176
📈 Moderna (MRNA) — shares rose +15.51%
💰 Current Price: $187 — Wall Street PT: $220
📈 Cloudflare (NET) — shares rose +52.04%
💰 Current Price: $74 — Wall Street PT: $92
📈 Carvana (CVNA) — shares rose +64.04%
💰 Current Price: $47 — Wall Street PT: $49
📈 Block (SQ) — shares rose +16.62%
💰 Current Price: $88 — Wall Street PT: $116
📈 DraftKings (DKNG) — shares rose +33.23%
💰 Current Price: $18 — Wall Street PT: $25
📈 Alibaba (BABA) — shares rose +4.41%
💰 Current Price: $93 — Wall Street PT: $152
📈 Robinhood (HOOD) — shares rose +18.59%
💰 Current Price: $10 — Wall Street PT: $11
📈 CVS Health (CVS) — shares rose +7.17%
💰 Current Price: $102 — Wall Street PT: $118
📉 Fortinet (FTNT) — shares rose -9.71%
💰 Current Price: $53 — Wall Street PT: $72
📈 British Petroleum (BP) — shares rose +2.42%
💰 Current Price: $30 — Wall Street PT: $37
📉 Caterpillar (CAT) — shares fell -4.79
💰 Current Price: $185 — Wall Street PT: $217
📈 Gilead (GILD) — shares rose +2.29%
💰 Current Price: $61 — Wall Street PT: $70
📈 CF Industries (CF) — shares rose +5.82%
💰 Current Price: $100 — Wall Street PT: $109
📈 Mosaic (MOS) — shares rose +1.26%
💰 Current Price: $52 — Wall Street PT: $69
Amazon owns more of your house, Walmart lays off staff, Pelosi makes the world hold its breath, and another health crisis.
Amazon Acquires iRobot
On Friday, Amazon announced their acquisition of iRobot IRBT 0.00for $61 / share — or about $1.7 billion, all in cash. iRobot specialized in robots and intelligent home innovations. Its product portfolio features technologies and advanced concepts in cleaning, mapping, and navigation.
Not going to lie — didn’t see this coming. The acquisition of One Medical was sort of obvious, right? Amazon acquired PillPack and has been dabbling in the dark arts of health care for several years.
But, iRobot? I mean it makes sense.. but still surprising. Amazon has several smart home devices on their roster — and if they’re wanting to own the home they need a clear map of everyone’s homes. Amazon just confirmed to all of us they’re spending billions on robotics and home automation. Let’s see how it unfolds.
Walmart Guidance & Employee Slashes
Last week Walmart shared an update to their shareholders regarding their declining margins — this caused their stock price to experience it’s worst single day decline in months.
Now just one week after this business update, Walmart announced they’re cutting company payroll. They’re laying off hundreds of corporate employees at divisions related to merchandising, global technology, and real estate.
If you expand further into the reasoning behind these job cuts — merchandising folks are fired because they screwed up their jobs to begin with by ordering the wrong goods causing markdowns, global technology folks are fired assuming Walmart no longer has the budget to re-invest funds into innovative technology, and real estate folks are fired as Walmart likely no longer has the type of funds needed to continue expanding their brick and mortar stores around the world as aggressively.
The Best Trader in the World
Biden has been tip-toeing carefully around what Pelosi did this last week — being thoughtful not to answer questions re: if the White House agrees with what she did. Remember, China was very clear — if Pelosi visits Taiwan it would be met with an array of very serious consequences.
Now that she actually did, we’re seeing those consequences begin to take shape. These consequences include the cancellation of future phone calls and meetings between Chinese and US defense leaders, the cancellation of annual naval meetings under the China-US military maritime consultation mechanism, and climate talks.
China has been running missile drills, moving tanks toward their closest border with Taiwan, among other war-like actions. Things might get messy soon — tanking the markets.
“U.S. House Speaker Nancy Pelosi insisted on visiting Taiwan in disregard of China's serious concerns and firm opposition, seriously interfering in China's internal affairs, seriously undermining China's sovereignty and territorial integrity, seriously trampling on the one-China principle, and seriously threatening the peace and stability across Taiwan Strait. In response to Pelosi's vicious and provocative actions, China has decided to impose sanctions on Pelosi and her immediate family.”
— China’s Ministry of Foreign Affairs
Gauging Monkeypox as a Threat
US health officials declared monkeypox a public health emergency. Before you freak out — just know that monkeypox spreads primarily through close contact with lesions and so far, 99% of US cases have been in men who have sex with men.
Not nearly as contagious as the airborne COVID virus.
As always, there are biopharmaceutical companies ready to pounce on the opportunity to create drugs in order to help with outbreaks like this. SIGA Technologies SIGA 0.00 is one of them — although their stock is seeing this momentum from this report by Bloomberg around human testing.
Major Economic Updates
Investors fear rate increases as the labor market appears healthy and the US has a serious consumer credit issue.
July Jobs Report + Unemployment Rate
Hiring in July came in much better than expected, with the unemployment rate dropping for the first time in 5 months. Seasonally-adjusted nonfarm payroll rose +528K and the unemployment rate marginally dropped to +3.5%.
While this is positive news for the economy, it’s likely negative news for the market. As mentioned at the beginning of this post, the market initially reacted negatively to the report as traders believe the Federal Reserve will be more emboldened to raise rates going forward. In other words… inflation not good + economy (jobs & wages in this case) doing fine = let’s crush inflation by raising those rates.
Not to mention, consumer wages have increased +5.2% over the last year — yet inflation is rising at nearly +10%.
Should you question these numbers? Here’s an interesting callout from Tom McClellan of The McClellan Market Report. He makes a good point that the primary data reported from the media is seasonally-adjusted.
According to the Bureau of Labor Statistics: “Generally, the U.S. labor force and levels of employment and unemployment are subject to fluctuations due to seasonal changes in weather, major holidays, and the opening and closing of schools. The Bureau of Labor Statistics (BLS) adjusts the data to offset the seasonal effects to show non-seasonal changes: for example, women's participation in the labor force; or a general decline in the number of employees, a possible indication of a downturn in the economy.”
Below are the non-seasonally-adjusted data points, showing a slight decline for nonfarm payroll in July. The main numbers from the media are always ‘adjusted’ — but it’s important to remember that they aren’t pure data points like these… just saying.
US consumer borrowing jumped by more than +$40 billion in June — the second highest jump ever. This crushed through estimates of only a +$27 billion leap in consumer credit.
Revolving credit alone, which is mostly comprised of credit cards & personal lines of credit, increased +$14.8 billion in June. For Q2 (ending in June), borrowing rose an annualized +8.7%.
There’s no two ways about it — this is the biggest credit bubble in American history. We’re bringing back the chart below from last week to show just how great the disparity is between consumer borrowing and personal savings. This chart doesn’t even include the new above-shown data that has consumer loans coming in much higher:
According to the Federal Reserve Bank of NY, total household debt in Q2’22 increased by +$312 billion (+2%) to $16.15 trillion. Mortgage balances rose by +$207 billion in Q2’22 and stood at $11.39 trillion at the end of June.
"The second quarter of 2022 showed robust increases in mortgage, auto loan, and credit card balances, driven in part by rising prices… While household balance sheets overall appear to be in a strong position, we are seeing rising delinquencies among subprime and low-income borrowers with rates approaching pre-pandemic levels."
— Joelle Scally, Administrator of the Center for Microeconomic Data at the NY Fed
Did you catch the end of that quote? What happens when enough subprime / low-income borrowers can’t make payments? Specifically for auto-loans.
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