August 24, 2023 | Peel #529

Silver banana goes to...

In this issue of the Peel:

• Abercrombie & Fitch soared with sales nearly $100mn higher than expectations, while Foot Locker and Peloton plunge on poor earnings.
• Nvidia is a standout, with shares booming after a stellar earnings report. The stock has gained 229.14% this year, driven by high-margin AI chip sales.
• Intrigue in Russia as a plane carrying warlord Yevgeny Prigozhin crashes, fueling speculation.

Market Snapshot

Happy Thursday, apes.

That was an interesting debate last night, huh? The Super Bowl, World Cup, Moon Landing, etc. - I think the real most entertaining content of all time is just a bit more out-of-scope: Republican Presidential Debates.

We’re not sure if Mr. Market watched, but he was definitely hyped up for it leading into the day. Equity markets ripped from sea to shining sea as large caps and tech led the way. Nvidia’s earnings after the bell certainly fueled a large part of that hope, but check below to see how that worked out.

At the same time, treasury yields largely sank on the day alongside the U.S. Dollar, pulling back from recent spikes.

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Macro Monkey Says

Earnings Spotlight: Nvidia

You know something’s a big deal when analysts are debating if it’s more important than a crucial speech from our lord, savior, and (potentially) destroyer, Fed Chair JPow.

And leading into Powell’s Friday morning speech in Jackson Hole, Wyoming, that event that may steal his spotlight this week just happened: everyone’s favorite stock just dropped earnings.

Nvidia, aka the new Tesla, has dazzled the hearts, minds, and, for the lucky ones, portfolios of investors across the world. Shares have already more than tripled this year, gaining 229.14% to a market cap of $1.16tn by yesterday’s close.

Shares now carry a P/E ratio of nearly 250x, and as a reminder, this thing was trading as low as $108.13 last October. So yeah, it’s safe to say expectations were high.

"Shares now carry a P/E ratio of nearly 250x ..."

But not high enough, apparently. Shares boomed in the post-market. We’ll see if that can carry over into today’s action, but first, let’s check the tapes.

For the period ending June 30th, 2023, Nvidia posted:

• EPS of $2.70/sh on $13.51bn in sales vs. estimates for $2.09/sh on $11.22bn
• Net income grew 843% (not a typo) annually to $6.19bn while operating income grew even more to $6,8bn, a 1,263% gain
• Data center revenue grew 141% quarterly and 171% annually
• Gross margins improved by >25% to 71.2% on high-margin AI chip sales
• Revenue guidance for the next quarter of $16bn

Just…wow.

After the firm’s last stellar earnings report earlier this year, the uptick in revenue estimates for this past quarter to $11bn was the primary driver of the stock’s ridiculous gains this year. Not only was that beat, but it was utterly trounced, giving all you apes that bought at $450+ hope to get in on the action.

The problem, similar to an issue faced in the past by companies like Tesla, is supply constraints, not demand. To demonstrate this, CFO Colette Kress made clear that “...we do not anticipate that additional export restrictions…would have an immediate material impact on our financial results.”

Translation: “Even if we can’t sell to China, we have more than enough demand that we could ever hope for at home.”

"Nvidia’s data center business ... is required for running generative AI programs like ChatGPT and accelerated computing programs."

Nvidia’s data center business, which sells high-end AI chip models such as the H100 and A100 (creative), is required for running generative AI programs like ChatGPT and accelerated computing programs.

Meta, Amazon, Alphabet, and just about everyone else with two thumbs and a data center have been snatching these chips up all year if that wasn’t obvious enough. According to the founder, CEO, and inventor of the GPU itself, Jensen Huang, that demand shows no sign of slowing down.

To quote the King of Business in 2023: “The world has something along the lines of about a trillion dollars worth of data centers installed, in the cloud, enterprise and otherwise…that trillion dollars of data centers are in the process of transitioning into accelerated computing and generative AI.”

No spoiler, but it looks like we may have a top candidate for the high-coveted and anticipated Platinum Banana award for CEO of the Year in 2023. Stay tuned.

What's Ripe

Abercrombie & Fitch (ANF) ↑ 23.60% ↑

• Well, I guess the whole “sky is falling” thing impacting retail stocks (*ahem*, check below) isn’t necessarily true. It’s only for the bad ones.
• Because Abercrombie & Fitch annihilated estimates, raised guidance, and sent investors dancing over the moon on this hump day. Okay, maybe I’m a little too excited (no, I don’t own shares, sadly), but the outperformance compared to its sector is astonishing.
• Posting a massive EPS of $1.17 vs. the Street’s guesstimates of $0.17/sh, your middle school self would be really proud of your favorite clothing brand. Sales came in nearly $100mn higher than expectations, too, at $935mn.
• Honestly, the company seems to be killing it. Recent ventures, like the Sloane brand and the revamp of Hollister, seem to be paying off, while cost reductions have expanded margins and allowed more focus on these winning lines.

Netflix (NFLX) ↑ 3.48% ↑

• Maybe it’s time for Netflix to follow its own footsteps and learn how to Netflix and chill. I mean, shares are already up 45% YTD…save some gains for the rest of us.
• Shares in the world’s most popular streaming service ripped on Wednesday as analysts are finding reasons to be bullish long-term. Specifically, Oppenheimer (no, not the bomb guy) analysts believe the firm’s recent crackdown on password and account sharing has legs to drive outperformance.
• Oppenheimer reiterated their $515 price target, largely on the above crackdown, effective monetization through subscriptions and ads, and network effects as (still) the big daddy of streaming.

What's Rotten

Foot Locker (FL) ↓ 28.28% ↓

• Shares in Foot Locker might soon be placed in Foot Jail after yesterday’s performance, or at least, that’s where shareholders will want to see executives go.
• The shoe store retailer that seems perpetually stuck in 2013 delivered an earnings report so garbage they might have to make a horror movie out of it. Sales fell 9.9% for the year, missing expectations, while EPS of $0.04/sh came right in line with the Street’s estimates (thank god). Can’t imagine what would’ve happened if that was a miss, too.
• Shares lost nearly 1/3rd of their value on the above results, along with weak guidance for the coming quarters. Like Dick’s, Macy’s, and others, the firm is citing markdowns (aka, poor inventory management) and “shrink” (aka, theft) for the softness.
• Speaking of softness, that was the exact term used to describe American consumer spending by the firm on this quarter’s call. Maybe it’s time for those referees who work in their stores to throw a flag.

Peloton (PTON) ↓ 22.60% ↓

• Kind of like when you think you’re ready to move from a bike with training wheels and then immediately fall flat on the pavement, exercise bike maker Peloton ate asphalt today after its recent earnings results.
• The only way these numbers could’ve been worse would be if we found out exercise bikes cause C-19. Falling sales for the quarter were only made worse by a wider-than-expected loss per share of $0.68/sh vs. expectations to lose $0.38/sh.
• Yeah, it’s definitely not ideal. Once a pandemic darling, the company’s falling out of favor is only made worse as the bike-buying season comes to a brake.

Thought Banana

Getting Off on Getting Offed

Well, well, well….what a surprise we have here.

At 6:11 pm local time yesterday, an Embraer Legacy 600 carrying Russian warlord and attempted treasonist Yevgeny Prigozhin crashed into the ground en route from Moscow to St. Petersburg. All 10 passengers on board were killed in the…accident?

We don’t really know what’s happened so far, and it doesn’t seem like anyone does. The facts include that:

• A plane went down
• No passengers survived
• Yevgeny Prighozin was listed as a passenger on that plane

"This is the guy who runs the Wagner Group, a mercenary-for-hire organization out of Russia ..."

But considering who Yevgeny is and his…unique…reputation, our suspicions can only go to one logical conclusion.

You remember our boy Yevgeny, right? This is the guy who runs the Wagner Group, a mercenary-for-hire organization out of Russia that runs guns, guns, and likely a whole lot more across the Eastern hemisphere and Latin America.

On June 23rd of this year, Prigozhin and the fellas led a charge towards Moscow after months and months on end of the warlord’s heckling of top Russian military officials for what he saw as a botched war in Ukraine.

Allegedly, 36hrs after the march began, the President/dictator of Belarus, Alexander Lukashenko, had cut a deal with Prigozhin and Putin that allowed 1) Moscow and Putin not to get couped and 2) allowed Prigozhin to keep his life. Well, one of those has already gone bust, so…

"Allegedly, 36hrs after the march began, the President/dictator of Belarus, Alexander Lukashenko, had cut a deal with Prigozhin ..."

Basically, there’s a lot we don’t know right now. But this was an absolutely wild story to see unfold on some random Wednesday, and we can’t wait to find out more if anything else at all. Right now, all eyes are on Putin to have caused an oopsie within the plane leading to the crash, but it’s safe to say he’s not responding to a subpoena anytime soon.

The big question: Did Putin just off his rival Yevgeny Prigozhin? What are the implications here for the War in Ukraine and Russia’s invasion?

Banana Brain Teaser

Yesterday —

It doesn’t hurt to take a hard look at yourself from time to time. This little test should help you get started.

During a visit to a mental asylum, a visitor asked the Director what the criteria are that define if a patient should be institutionalized.

“Well,” said the Director, “we fill up a bathtub. Then we offer a teaspoon, a teacup, and a bucket to the patient and ask the patient to empty the bathtub.” Okay, here’s your test:

• Would you use the spoon?
• Would you use the teacup?
• Would you use the bucket?

“Oh, I understand,” said the visitor. “A normal person would choose the bucket, as it is larger than the spoon.”

What was the Director’s response?

“No,” answered the Director. “A normal person would pull the plug.”

Today —

5 + 5 + 5 = 550

Add one straight line to the above to make the sum correct.

Shoot us your guesses at [email protected].

Wise Investor Says

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” — Peter Lynch

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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