SpongeBob's Wisdom | The Daily Peel | 5/19/2023

May 19, 2023 | Peel #465

Market Snapshot

Happy Friday, apes.

Be honest; that sentence above is your favorite thing you see each week, right? Stop, don’t make me blush!

Speaking of blushing, the only red being created on Wall Street lately is in the blood pouring out of the faces of bears all over Wall Street after two eye-gouging days of bullishness.

That might be a bit hyperbolic, but to have two entire days in a row of high-conviction green trading sessions in 2023 is like if Tom Brady stopped making out with his kids—just never gonna happen. Yesterday, anything with “risk” baked into it seemed to outperform as all major U.S. indices moved higher and accelerators outpaced detractors at a ratio of 5-to-3 within the NYSE composite. For sectors, Tech and Comms led while RE and Cons. Staples slumped.

To get in on the risk trade posted yesterday, investors dumped their treasuries like it was their job. Government debt largely registered its highest yields since mid-March yesterday, with the 2-year approaching 4.3% and the 10-year comfortably above 3.6%.

Let’s get into it.

Learn All About VC in 4 Hours

There’s a reason venture capital is considered the mountaintop of investing. It’s laid back, sexy, and generally just f*cking awesome.

Patagonia vests and Allbirds to work, weekends off, and the potential to make stupid sums of money from just one home run are just some of the reasons why many see it as the best job in the industry.

The hardest part is breaking in. Unless you rub elbows with tech titans or founded a unicorn recently, it’s gonna be a tough slog.

But if you’ve got 4 hours, you can gain an edge on a huge number of other applicants through WSO’s VC Bootcamp. Learn the essentials of the space, including early-stage instruments, term sheet modeling, and due diligence.

Because we’re so confident that Peel readers would love the session, we’re also giving out free access to our Excel Modeling Course for the first 5 Peel readers to sign up for the VC Bootcamp in the next 24 hours. Don’t let this slip your mind—spots are filling up fast.

The next Uber is out there, but you can’t get a piece of it if you’re on the outside looking in. Take the first step towards becoming a Sand Hill Road legend today.

Banana Bits

• In their seemingly endless fight with the state of Florida, Disney pulls plans to pump 2,000 jobs and $900mn into the state and intends to close a Star Wars-themed hotel
• Meanwhile, after letting rumors stew all year, Florida governor Ron Desantis reportedly intends to announce his Presidential candidacy as early as next week
• Alibaba continues to gear up for the big spinoff that investors have been hoping and praying for
• U.S. politicians have allegedly begun a “process” to “create” a “bipartisan” Senate group to “tackle” AI “legislation” (yeah, we’ll f*ckin’ see about that, huh)

Macro Monkey Says

Housing

The critically acclaimed Olympic athlete, bubble-stand owner, fry cook, and much more that goes by the name SpongeBob Squarepants once famously stated, “

While this observation was apt and borderline poetic, pretty soon, there might not be a home for Gary to come to, at least, in the U.S., that is.

Thankfully, we’re fairly sure the paradisal town of Bikini Bottom is outside of the U.S. borders, meaning the amorphous residents of the area don’t have to worry about the collapse in home sales just witnessed across the U.S.

Existing home sales, which make up the vast majority of the housing market, plummeted 3.4% in April from just a month prior and over 23.2% from the year-earlier period. Prices followed suit, with the U.S. market for homes registering its deepest annual price decline in well over a decade.

Prices of those existing homes fell, on average, 1.7% from April 2022. That marks the fattest drop since January 2012, exactly 11 years and 4 months ago.

That means the national median home price has now slipped to $388k, 6% below the all-time highs set in June of $413.8k, according to the WSJ. Given reactions stemming from the chart below, it’s no surprise buyers aren’t exactly in a hurry to grab up homes at record-high prices:

Onlookers frequently opine that JPow and the Fed will “raise until they break something.” By this, they mean the Fed is permanently reactionary—unable to change course until undeniable evidence comes afoot and they are forced to react—and will only step in once sh*t hits the fan.

Some might argue that was the recent/ongoing regional bank hissy fit, but others might say JPow and the gang won’t stop until their rate hikes undeniably slow down you, the beloved consumer.

Still, the record drop in home prices is yet another marker of how outside-the-norm the macro environment has been these past few years, despite how outside-the-norm the norm usually is anyway (what?).

Basically, for housing, homeowners have been more reluctant to sell. After the boom in buying brought on by the pandemic and in the years before, buyers who locked in dirt cheap mortgages are hesitant to abandon their 3% dream in order to more than double that monthly payment or downsize…or move to the West Coast.

Yeah, that’s right. The Western portion of the United States is still seeing an exodus of the pot-smoking, Tesla-driving Californians (for the most part) as apparently no one at all still wants to live there. Existing home sales slipped 6.1% on average in the region from March and over 31% from the same period last year, while prices fell 8% annually.

All good, though, not like houses are important for living or most Americans’ largest financial asset or anything. No big deal, right?

What's Ripe

Netflix ($NFLX) ↑ 9.22% ↑

• People love advertising. There, we said it. You may not feel like that, but your wallet sure does, and as for Netflix and its shareholders, they felt it too.
• Now, you felt it in a completely different way than they did, but the point is it’s clear that the frequently-hyped Netflix ad tier is already making waves after launching late last year.
• As valuations have flipped from purely subscriber growth based to actual dollars earned, anything saving the firm a couple bucks will help. Bringing in dollars from big time advertisers while still charging users of the “Basic with Ads” tier $7/month will help with that.

Nvidia ($NVDA) ↑ 4.97% ↑

• Shaq and Kobe, Lebron and D Wade, and of course, Japan and artificial intelligence—the three biggest recipes we know of.
• At least, that’s what we knew of yesterday. Basically, there were two things on investors’ minds yesterday (double the number of things on their minds traders usually max out at), being AI and Japan. What better way to get exposure to those sectors than through the President of a country begging the manufacturers of AI hardware to invest in their country?
• Micron, Nvidia, and others in the sector power the Philly Semi index to a 3.16% rally as shares set high highs not seen in over a year in some cases. With earnings set to come next week, Nvidia’s 121% YTD rise has a lot to live up to.

What's Rotten

Alibaba ($BABA) ↓ 5.41% ↓

• No one likes to see a breakup, but investors were shook in considering Alibaba’s 6-way ticket to a holding company.
• Through a few different financing structures for each of its separating units, including an IPO and a potential IPO from the grocery and smart logistic arms, respectively, Alibaba will remain involved in each under a new holding company structure.
• It’s kind of a huge deal, yet investors yesterday seemed far less keen on the breakup than back in March when the decision was last truly in focus.
• Oh yeah, and the firm released earnings on Thursday to a giant shrug from analysts, beating on earnings but coming up just short on revenue.

Grab Holdings ($GRAB) ↓ 14.75% ↓

• Food delivery, ride-hailing, payments, chat, travel, tickets, restaurants, bars, yada, yada, yada—Southeast Asia’s first-ever decacorn, going public in 2021, offers a whole lot of services.
• However, none of those services, unfortunately, include “increasing share price,” especially yesterday. Shares in the non-U.S.-nor-China tech giant (rare) slumped, as sales fell 9% last quarter.
• Much of the decline can be attributed to an early Ramadan in 2023, a period in which Muslims take part in a sacrificial fast, and with over 86% of the company’s largest geographic market practicing Muslims, the sales hit could be seen as understandable.
• Even with improving profit margins, investors couldn’t get over the miss on sales. With U.S. tech rebounding the way it did on Thursday, too, it was a tough day to report any kind of flaw. Get ‘em next time.

Thought Banana

The Chips Are On the Table

For Meta, that is. Following in the footsteps of its 4.3x more valuable rival and mortal enemy Apple in its decision to design its very own computer chips for artificial intelligence and data center purchases.

Obviously, Zuck had to make a super cringey Instagram post about it, but no word yet on if he did the same on Facebook (we’re team Gen Z, sorry).

Still, this is a huge step for Meta. When Zuck was coding “The Facebook” in his dorm room in order to more efficiently rate how hot people are, I doubt the kid ever once considered he’d someday be building his very chips. But, in the Year of Efficiency Meta has instituted across silicon valley, investors were vibing with it and sent shares up 1.8%.

In their announcement, Meta pointed to the fact that there simply were no available, on-the-market chips that could handle the 4 billion (and growing) videos per day within the energy usage requirements the firm was targeting. Basically, Zuck said, “Fine, I’ll do it myself.”

Don’t worry, though. Along with another in-house chip line designed for “inference” or use by already-trained AI models to make predictions, Meta will, in fact, power the metaverse with its very own chips soon enough.

Essentially, Zuck wanted to make sure investors knew they weren’t that far behind competitors like Google and OpenAI in the AI arms race. The hardware announcements came with positive updates to Meta’s all-new supercomputer, the Research SuperCluster, made up of over 16,000 GPUs for the firm’s 65bn-parameter LLM, LLaMA 65B, which is still reportedly much smaller than Google’s 340bn-parameter PaLM 2.

The Year of Efficiency may as well be called the Year of Resiliency as Meta proves it can weather a macro storm while still taking big steps towards what investors so far see as the right direction. I guess $20bn in free cash flow will do that.

The big question: How will the in-housing of computer chips change Meta’s position in the AI / big tech competitive set? Will this bet pay off, or do we have another metaverse (so far) and Reality Labs-style investment here?

Banana Brain Teaser

Yesterday —

“H I J K L M N O”
What object does this represent?

Water – H2O (H to O)

Today — It’s 150 bananas off the Venture Capital Course for the first 3 respondents. LFG!

Below are four epitaphs (writing on gravestones). From the writings, can you tell the occupation of each person?

1. Here lies Mortimer Bibbs. He took part of ours and gave it to big brother, but he always had good form.
2. Here lies Dirk McDuff, who toppled giants with weapons of steel. If only he'd heard his partner's shout before the giants found their revenge.
3. Here lies Suzy Smelt. She constructed many a bomb but mostly brought smiles to our faces.
4. Here lies Ethel Grant. She spent her whole life fighting with what she will now become.

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Buy not on optimism, but on arithmetic.” — Benjamin Graham

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Sign up for the WSO Daily Peel here.

ADVERTISE // WSO ALPHA // COURSES // LEGAL