Throwing a Minor Wet Blanket | The Daily Peel | 1/25/23

Jan 25, 2023 | Peel #385

 

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Market Snapshot

Happy Wednesday, apes.

Okay, okay, so somebody accidentally poured water instead of vodka into the punchbowl yesterday. That’s okay, it’s a bit of a vibe killer for our tech-focused, ape-minded portfolios, but at least defensives and the Dow had their day in the sun.

Equity indices were virtually flat, with profit-taking throwing a minor wet blanket over the fire of the past few days. Treasuries gained mildly (boring) while the dollar continued its 4-month fall (less boring). We’ll survive.

Let’s get into it.


Banana Bits

  • Corporate incest survives another day as media titan Rupert Murdoch ditches his plan to merge Fox with News Corp
  • Who gave the intern access to this sh*t? BlockFi accidentally uploads internal financials to the public showing over $1bn in ties to, you guessed it, FTX
  • Let the tanks roll. Germany plans to send Leopards along with the U.S. shipment of Abrams to Ukraine
  • Tesla plans to move part of the fam to the Silver State with plans to unload $3.6bn on Giga Nevada

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Macro Monkey Says

Macrohard

Personally, I think ^that’s a way better name for the U.S.’s second-largest company, but looking at Bill Gates, it’d probably be a stretch even on a good day.

Moving on, Microsoft announced earnings yesterday. Shares popped off out the gate, gaining nearly 5% immediately in after hours trading. As traders do, once they actually started reading the report, shares crashed right back down to Earth.

At the time of writing, shares had moved down about 1% following the quarterly drop. Let’s take a look at why.

Similar to bank earnings providing economic data so good you wanna inject it into your veins, Microsoft gives a phenomenal lens into the spending levels of businesses over a given time period. Here, that consists of September-December 2022, the same quarter the “guaranteed recession” idea came into question. LFG!

First and foremost, the big boi of the tech world did beat on the bottom line. EPS came in at $2.32 vs. the consensus of $2.29. Top line missed by about 0.35%, clocking in at $52.75bn vs. the $52.94bn expected.

That’s all fine and dandy, but slow-reading investors became concerned once they actually started to pay attention to the parts making up the sum.

First and foremost, the most disappointing part of the report was the lackluster revenue guidance the firm gave, projecting ~$1.5bn less than consensus estimates for the firm’s estimates.

The spotlight was on Microsoft’s Intelligent Cloud business, containing units like the Windows and SQL servers, Nuance and Enterprise Services, and most importantly, Azure.

Azure is Microsoft’s most important engine of growth right now. Throughout 2021 and into 2022, that figure averaged around 50%. Last quarter’s growth was posted at 31%, the unit’s slowest growth ever, but still just barely beating expectations. As we all know far too well at this point, coming in line with expectations is basically equivalent to not doing anything at all. Tough look, but it could’ve been a lot worse.

Analysts seem to have anticipated far worse numbers across much of the rest of the business. Growth in units such as Office Commercial, Office 365, and Dynamic products, which include LinkedIn, all hovered around the respectable 7-13% levels. Even goddamn search advertising (that means Bing, btw) accelerated 10% last quarter.

Now, for the tough part. Pretty much anything related to the consumer slumped. PC sales tanked in Q4 from producers like Lenovo and Dell, and as a result, much of Microsoft’s personal computing products fell hardcore. The biggest loser of the quarter was the Windows OEM sector, declining at a rate of 39% YoY.

Video games apparently took a dive as well. Xbox and related services fell 19% over the year, likely stemming from consumers deciding to tighten their belts. This segment fell for the previous two quarters as well, however, so it wasn’t a surprise or anything. Maybe Satya’s tanking to show Lina Khan and the FTC that they need Activision Blizzard to stem the bleeding in the game sector. Good luck.

Taking a broader view, Microsoft’s earnings suggest consumer spending on luxuries like a new laptop is in the absolute gutter while business spending remains resilient but faces challenges. Slowing growth across B2B units suggests a pullback and cost controls across the economy, confirming trends like those observed in tech layoffs and Goldman getting rid of free coffee.

It’s just one company, but it’s a damn big one. We’ll get the rest of big tech’s results starting next week, and man, are we gonna have some fun then.

Stay tuned, apes!


What's Ripe

Bed, Bath, and Beyond ($BBBY) ↑ 15.31% ↑

  • Congrats to anyone that’s profited on this utter nonsense. I hate you out of pure jealousy and rage. Clearly, my tuition money went nowhere.
  • We’ve dodged it for long enough again. Sadly, we have to talk once again about how Bed, Bath, and Bankrupt is mooning on the back of literal mental illness. There was no news, but the stock seems to just rotate between up 30% and down 30% as short sellers and squeezers battle before the bankruptcy.

Raytheon Technologies ($RTX) ↑ 3.36% ↑

  • Shares of defense makers like Raytheon and Lockheed Martin (+1.73%) flew like Javelins yesterday on the back of stellar earnings reports. Hmmm, who would’ve guessed defense stocks would’ve done well last year??
  • Everyone, that’s who. But nonetheless, traders were still as hyped as an 18-year-old showing up to their first darty once the numbers were released. Both firms beat on their bottom lines while missing mildly on top, but who cares? Let’s make some money.
  • Obviously, this was due to the uptick in, well, literal war last year, so should we feel good about it? But hey, if you hold shares, I guess take your victory lap.

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What's Rotten

Silvergate ($SI) ↓ 10.92% ↓

  • In case you forgot, the crypto market is still a bonafide mess. Of epic proportion. Like, tulip-bubble epic. But when your asset class is based almost entirely on available liquidity in the overall economy, that’s to be expected.
  • Shares of crypto bank Silvergate plunged amid the rotation to the risk-off trade yesterday, to basically no one’s surprise.
  • Certainly doesn’t help that BTC and other crypto names fell slightly during the day as well. Get ‘em next time, apes.

3M Company ($MMM) ↓ 6.25% ↓

  • You may not be familiar with 3M as a company, but if you’ve made it through 3rd grade, I personally guarantee you’re all too familiar with their products.
  • The maker of legendary products like Post-It notes, Scotch tape, and Command Strips was down tremendously yesterday after the firm reported its quarterly results. Despite being a card-carrying member of the “defensive” names group, 3M saw profits contract from last year and came in just a bit below expectations.
  • Things didn’t get much better when the firm announced a layoff of 2,500 manufacturing jobs. See, it’s a whole different story when a high-growth tech name lays people off to reduce overhead vs. when a “blue chip” like 3M cuts core producers amid an already-priced-in secular decline. Just put some scotch tape over it; you’ll be fine.

Data Peel

Source


Thought Banana

When Lina Can’t, Merrick Can

The DOJ is calling for a round 2 against Google before the first bell has even rung.

Yesterday, U.S. Attorney General Merrick Garland and a coalition of 8 pretty random states announced the department’s second active civil suit against Google. Blue or Red, doesn’t matter—party lines were irrelevant among the states tagging along with the lawsuit, the clearest sign you can get that it is, in fact, on.

I may not have been alive for the “Rumble in the Jungle” boxing match between Ali and Foreman, but I can imagine that this must be exactly how it felt. With over 900 lawyers on their payroll and nearly $12mn spent in lobbying in 2021, Google could prob found its own DOJ. It’s gonna be a good one.

Compared to the last suit filed in October 2020 under the Trump administration, this case presents a whole new set of allegations. The 2020 suit is broadly focused on the search market, while yesterday’s focuses more on the digital ad—“ad tech,” as boomers like to call it—space. If you ask me, this is where the sh*t could really hit the fan for Sundar.

Sure, Google controls more of the search market than it does the digital ad space, but its actions in the digital ad space are far more open to legal attack under the Sherman Act of 1890, one of only two federal laws on the books seeking to regulate antitrust.

Basically, the DOJ alleges that Google doesn’t just dominate in digital ads, but it controls the market. The image below is a very blurry but convenient mapping of Google’s ad stack provided by the DOJ in their suit. Look it over real quick; it’ll help.

thought banana

To explain a bit, the green part of this chart represents websites like the Charlotte Observer that run ads on their pages, so they get paid for clicks. The blue part of this chart is the companies on the ads, paying the publishers for each click.

Google runs servers for both sides of the market to list their supply or express their demand.

In the middle, Google’s ad exchange is an exchange market matching website publishers with available ad spots to advertisers looking for sites to shill their ads on.

With that in mind, the DOJ’s 4 allegations include:

  • anticompetitive acquisitions
  • forced bundling of their buy- and sell-side ad servers with their exchange
  • unfair ad auctioning practices meant to distort prices, and
  • limiting others from creating their own ad exchanges

That first one is pretty obvious. Merrick and the gang think acquisitions such as DoubleClick were done exclusively to in-house or extinguish rising competition.

The second one gets tough. Basically, the DOJ believes Google forces and locks users into its own ecosystem by forcing advertisers to use its ad server in order to access supply from publishers that gets routed through its exchange. Phew, gotta take a breath after that one.

The third and fourth kinda go hand in hand. That third allegation claims Google will essentially limit publisher ad space in order to keep prices high on a per-unit basis, kind of like OPEC+ limiting the supply of oil (allegedly). The fourth one states that, allegedly, Google would dial up or down all three of these products in response to the demand to either 1) raise prices or 2) elbow out competition…kinda…you get the idea.

Anyway, it doesn’t matter. All four of those are super, mega illegal for a company like Google to engage in. Fines similar to a certain trash-bag company’s slogan would almost assuredly be imposed if convicted. That’s a big if, but one final allegation of the DOJ is that one of Google’s own ad execs likened their ad tech structure to “if Goldman or Citibank owned the NYSE.” Again, allegedly.

The big question: First the DOJ, then ChatGPT, then the DOJ again—Google is coming under heavy attack. Can the company fight off all of these threats and still deliver an answer to any question that pops into your head? What do Google and Alphabet more broadly look like in 2030?


Banana Brain Teaser

Yesterday — No matter how little or how much you use me, you change me every month. What am I?

A calendar.

Today — It’s 100 bananas off the Hedge Fund Interview Course for the first 15 correct respondents. LFG!

Who makes it has no need for it. Who buys it has no use for it. Who uses it can neither see nor feel it. What is it?

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


Wise Investor Says

“Wall Street sells stocks and bonds, but what it really peddles is hope.” — Jason Zweig



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