August 4, 2023 | Peel #515

Silver banana goes to...

In this issue of the Peel:

• A comparison between Amazon and Apple's earnings reveals a shift in consumer demand towards online merchants and services. Amazon's strong report is celebrated with expectations of continued growth, while Apple's lackluster iPhone revenue raises concerns.
• Wayfair and MercadoLibre enjoyed significant gains after impressive earnings reports, while PayPal and Robinhood experienced considerable losses despite seemingly positive reports.
• Inflation in the UK is proving stubborn, leading the Bank of England to raise rates to a 15-year high. The UK economy is struggling more than others in managing inflation, raising questions about the effectiveness of rate hikes.

Market Snapshot

Happy Friday, apes.

Hope you’re ready, apes, because pretty much all this week’s macro news has dropped/is dropping between yesterday’s close and today’s open. We got big tech’s big earnings yesterday (more below) as well as a jobs report set to drop at 8:30 am sharp, so I hope you saved up some room for more fun after Thirsty Thursday last night.

At the same time, equities sure were not having much fun…or really any at all. US indices saw red across the board, with industrials, real estate, and utilities pulling the rest of ‘em down. Notably as well, only Tesla, Amazon, and Nvidia saw green within the Magnificent Seven yesterday, an unusual divergence.

Treasuries and the USD bounced around, leading into today’s jobs report, for the most part. The trade was fairly directionless, but given the volatility, it sure looked like traders were having fun. We hope so.

Let’s get into it.

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Macro Monkey Says

The Clutch Gene?

In sports, the “Clutch Gene” is a term used to describe a player that plays at their best under pressure. Think Michael Jordan, Tiger Woods, Tom Brady, etc.

Like speed, this can’t be taught. Players either have it, or they don’t. In corporate America, the quarterly Super Bowl that is earnings szn always brings about a chance for companies to earn the Clutch Gene as well.

And, in a market that’s seen the “Magnificent Seven” carry the vast majority of index gains, those can make or break the clutch conversation with a few key numbers. Coincidentally, two of them happened to drop those numbers yesterday. Let’s take a look:

Amazon: The $1.32tn giant has surged >50% this year alone, and that’s even before factoring in the pop likely to be realized this morning (if after-hours trading can be trusted).

Shares ended the late session up 8.7% on an absolute dream of a report, including:

• EPS of $0.65/sh—almost double the expectations of $0.35/sh
• Return to double-digit sales growth to $134.4bn vs $131.5bn expected
• Handsome beats on AWS and Digital Advertising, key growth drivers

"... it’s confirmation that the cost-cutting drive CEO Andy Jassy ripped off from Mark Zuckerberg is going according to plan."

For the company, it’s confirmation that the cost-cutting drive CEO Andy Jassy ripped off from Mark Zuckerberg is going according to plan. For investors, this confirmation was solidified even further when the firm bumped revenue guidance for Q3—even more reason to celebrate.

Lastly, despite AWS seeing its lowest growth rates since 2015, Amazon’s cloud segment comprised roughly 70% of the firm’s operating profit for the quarter…so, can investors really be that upset? Clutch gene confirmed.

When Amazon does this well, it’s hard for the market to disagree. But then again, if this guy disagrees, we could have a problem on our hands.

Apple: Now, $1.32tn in market cap above is a lot alone, but when the $3.01tn Apple reports on the same day, look out below.

Unlike Amazon, however, the market’s late session reaction was far more Oppenheimer than Barbie. Shares finished 2.11% lower by 8 pm ET…let us all and our portfolios pray that changes before 9:30 am.

Shares sank largely on news that iPhone revenue (usually a funnel for further sales growth) came up short of estimates. Overall, sales slumped for the third straight quarter while Tim Appl—I mean Cook—took services revenue to an all-time high.

"... sales slumped for the third straight quarter while Tim Appl—I mean Cook—took services revenue to an all-time high."

The $81.8bn earned was down just 1.8% annually for Q2, while pretty much everything else (except, of course, iPhone revenue) was basically in line.

Clutch gene…questionable at best.

Between the two, we can see that consumer demand isn’t totally reeding but more continuing its shift towards online merchants as well as from goods to services.

While it may not have been a sign of Chris Traeger-level health among the average American consumer, it further suggests there are few bad signs to be found. Only 5 months of 2023 left to go, so we’ll shortly see how that plays out.

What's Ripe

Wayfair (W) ↑ 16.16% ↑

• Once again, copying Mark Zuckerberg has its perks. Wayfair stock soared on Thursday on the back of a jacked-up earnings report that put a big smile on traders’ faces.
• Adjusted (aka blush*t) earnings per share came in at $0.21/sh vs. expectations for a loss of $0.73/sh. If that’s not enough, sales of $3.17bn beat estimates as did margins and EBITDA.
• Analysts have apparently come to an immediate consensus that the “underweight view had run its course,” meaning investors may want to keep an eye on this one for growth going forward. After all, that would be a nice change of pace from the 75% loss since mid-2021.

MercadoLibre (MELI) ↑ 13.13% ↑

• Despite Amazon’s huge quarter described above, one of their top competitors in this hemisphere managed to flex even harder post-earnings (so far, at least).
• Argentine-based MercadoLibre operates an online e-commerce and digital auction marketplace and is the largest player in the space in Latin America, with $10.5bn in sales in 2022 and a $66bn market cap.
• Anyway, they killed it last quarter. Profits doubled compared to this time last year on a combination of more minor cost-cutting moves (in comparison to those above) as well as stronger-than-expected sales growth.

What's Rotten

PayPal (PYPL) ↓ 12.32% ↓

• Someone call the SEC; it’s time to charge these guys with fraud. This stock was neither Paying nor acting as your Pal on Thursday. A material misstatement if I ever saw one.
• Nonetheless, we’ll fight on in the meantime. Shares in the payment & fintech giant tanked harder than a Blitzkrieg yesterday as investors saw more worry than wonder in PayPal’s quarterly report.
• Despite beating expectations, worries around margins, loan portfolios, guidance, and mobile innovation dominated the discussion.
• Given that shares had been up only 1.27% YTD as of Wednesday’s close, this selloff is more a signal of disgust than any kind of profit-taking. We’re not at new 52-week lows territory yet, but don’t expect to wait too long, either.

Robinhood (HOOD) ↓ 7.23% ↓

• Losing money on Robinhood through Robinhood must just be a “f*ck you” like no other to users and shareholders alike. That said, don’t worry; I’m sure you’re not the only one reading this that it applies to.
• The scumbags over at Robinhood managed to pull in their first quarterly profit ever and, even still, shares tanked. Coincidentally, shares fell just about the same % as transaction revenue due to the platform’s shedding of 1mn users.
• That brings total monthly active user counts down to 10.8mn, a far cry from the glory days of $GME trading at $420.69.
• The beat on earnings that led to profit largely came from execs declining to take stock-based compensation for the quarter, freeing things up for a $0.03/sh day. If only traders had actually cared, however.

Thought Banana

Englandflation

No, I didn’t have a stroke on the keyboard or anything (this time, at least), but what we’re talking about is Englandflation, or inflation in England.

And, even more specifically, how the UK is going about this problem. Similar to most of the Western world, England and the rest of the UK have learned in recent years that a once-in-a-century pandemic combined with massive economic stimulus might be a tad inflationary.

Who’d’ve guessed?? Anyway, the UK has followed others in a rate-hiking escapade for the ages in its battle against inflation, but, much like a Brit arguing “why England is (somehow) still the best country in the world,” it’s being incredibly stubborn.

"... the UK has followed others in a rate-hiking escapade for the ages in its battle against inflation, but ... it’s being incredibly stubborn."

So, on Thursday, it wasn’t exactly a big surprise when the Bank of England, by a 6-3 vote, elevated rates to 5.25%, a 25 bps increase and a 15-year high. Taking it a step further, two of those dissenting votes weren’t done in favor of a pause on hikes but for preference of a 50 bps hike instead.

Safe to say there’s not much confidence in simply “just another hike” getting the job done.

"The good side of the updated projections, however, included the BoE’s withdrawal of a forecast for a recession."

In fact, according to BoE projections, the UK economy isn’t expected to see inflation fall to 3%—the current CPI level in the US—until August 2024. The good side of the updated projections, however, included the BoE’s withdrawal of a forecast for a recession.

Always some kind of a bright side, right? Well, most of the time, but when we’re talking “bright” in a country as cold, wet, ugly, and gray as the UK, it’s a little more challenging to imagine.

The big question: Why is the UK economy having a tougher time than others in quelling inflation? Will this and (potential) additional rate hikes be enough?

Banana Brain Teaser

Yesterday — Which weighs more: a gallon of liquid water or a gallon of ice?

A gallon of liquid water weighs more than a gallon of ice.

Today —

I'm quite a show
And people know;
Spinning threads
For capture of heads.

My limbs are many,
But I may be less than a penny.
One prick of me,
And in pain you will be.

I may fly and float as a baby,
And I swing when I'm older, maybe.
I can live in dark,
And have homes of bark.

I peel and fight,
Some people eat me in a bite.

What am I?

Shoot us your guesses at [email protected].

Wise Investor Says

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” — Warren Buffett

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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