🔬Dual-Class Shares - an Explainer, GDP Keeps Soaring, and Much More
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."
- Robert G. Allen
"In the business world, the rearview mirror is always clearer than the windshield."
- Warren Buffett
The big US markets kept up the trend of modest days in the win-column, with the S&P 500 +0.53% and Nasdaq +0.18%.
9 of 11 sectors closed up, with Energy (+2.2%) and techy Communication Services (+1.8%) in the lead, while Consumer Discretionary was at the bottom, down -1.0%.
Retro Day on the stock market with IBM +9.5%, Xerox +10.4% and Nokia +11.4%.
After reporting after-hours Wednesday, Tesla shares continued their post-earnings decline, closing down 12.5% on its worst day in over three years.
U.S. Q4 GDP came in well above estimates (+3.3% YoY. vs. Wall Street estimate of 1.7%).
Street Stories
Elon + Dual-class Shares
On January 15th, Elon Musk, in a subtle bid for modesty, stated that he seeks only a mere 25% voting control of Tesla to gently guide its AI and robotics ambitions, downplaying his recent sale of Tesla shares to finance what was then his casual Twitter purchase.
I won’t get get too into the weeds on this, but suffice it to say that getting the Tesla Board to gift him ~$70 billion in shares (Tesla is worth ~$580 billion and Elon currently owns 13% of it) is probably not the most likely thing to have happen.
On the other hand, he has since hinted that he would be amenable to accepting a new class of shares that would jack up his voting stake, and this gave me the idea to break-down dual-class share structures for those unfamiliar. To start, when people talk about dual class shares, what they typically mean is that one of those classes has ‘super voting’ rights. This allows a minority of shareholders to yield disproportionate control of the company by having their shares count for more when it comes to a shareholder vote. For example, if you have majority voting control, you effectively control the company. The Board has to do what you tell them to do (or you call for a shareholder vote and fire them).
As an example, Meta (formerly Facebook) has two classes of shares: Class A, of which there are 2.2 billion and each count for one vote each; and Class B shares, which are only held by founder and CEO Mark Zuckerberg, and there are only 350 million of them. The kicker is that these Class B shares come with 10 votes each, so that even though Robozuck controls only 13.6% of shares, he actually controls 61% of the vote (3.5 billion votes out of 5.7 billion). That means he doesn’t have to be nice to anyone (and often isn’t).
There are some other nuances, but the above is the important bit. Like, for example, you’ll note Zuck’s shares say ‘Convertible’ beside them - basically, no one else is allowed to own these super voting shares. In order to sell them, he has to convert them into normal shares on a 1-for-1 basis. Other types can slice up the economic participation, such has the ratio of dividends received. And while the 10 to 1 voting differential is the most common, there really isn’t a limit to what can be done.
For example, Ford’s B shares guarantee 40% voting rights to the Ford family’s Class B shares, whether they own 200 million or just 1 share. At Aflac, if you hold your shares for more than 4 years, they convert and you get 10 votes instead of 1. Below I highlight some of the large companies that have dual-class share structures.
While I wouldn’t call dual-class structures a dying breed, beyond family controlled organizations they haven’t really been popular for decades. One of the original niches was for industries that had the potential to cause societal damage in the event of corruption or mismanagement; the so-called ‘vice’ industries like alcohol and tobacco being on that list. However, their usage has dramatically increased this century due to their popularity with Tech companies, whereby Founders seek to guarantee control of their babies. Indeed, a majority of companies on the list above went public in the 21st century.
Traditionally, investors haven’t been big fans of dual-class structures. Most investors would agree that if a CEO is doing a bad job, then the shareholders should be at liberty to dismiss them at their leisure. But if they’re holding a pile of shiny Class B shares, they likely aren’t going anywhere.
Forecast Fumble: U.S. Economy Scores a Surprise Win
The U.S. economy exceeded expectations in the fourth quarter, growing GDP at a 3.3% annualized rate (vs. Wall Street estimate of 1.7%) and marking a 2.5% expansion for 2023. This robust economic performance, countering recession predictions, was bolstered by strong job growth and consumer spending, and decreasing inflation.
Et Tu, Big Blue?
IBM (ticker symbol: IBM) popped +9.5% yesterday after reporting a half decent Q4, with the biggest story being robust demand for its AI products and services. The company's successful embrace of AI, alongside its hybrid cloud offerings, led to earnings and revenue surpassing Wall Street estimates modestly, but with a promising free cash flow projection of around $12 billion for this year.
Nice to see a bit of a comeback taking place since IBM has been a basketcase for more than a decade now. While I like to make fun of companies for just saying ‘AI’ a bunch on their earnings calls, trying to get in on the hype, I can’t really say that about Big Blue. They’ve been doing AI longer than everyone. It’s just that they haven’t been any good at it.
Headlines:
- EPS: $3.87 vs. Wall Street consensus of $3.78 [+2.4% Beat]
- Revenue: $17.38 billion vs. Wall Street at $17.3 [+0.5% Beat]
*** If you had trouble following that, ‘Big Blue’ has been IBM’s nickname since the 80s. Likely something to do with their blue logo but I’ve heard explanations relating to the dress code (white shirt, blue suit) to the faint blue tint their PCs use to have. ***
Microsoft, Amazon, Google in AI Limelight: FTC Plays the Watchdog
The Federal Trade Commission has launched an inquiry into the investments by Microsoft, Amazon, and Google in AI startups OpenAI and Anthropic, examining the potential impact on competition and innovation. This move marks a shift in regulatory focus, traditionally centered on outright acquisitions, to scrutinize the influence of tech giants' stakes in smaller companies. The FTC's investigation, led by Chair Lina Khan, seeks to understand the influence of these partnerships on market dynamics and the application of antitrust laws. The probe aligns with global regulatory trends, as other international bodies, like the UK's Competition and Markets Authority and the European Commission, are also assessing the impact of such tech investments on competition. Also, shocker that fun policewoman Lina Khan would go after AI cuz it’s trendy/headline grabbing. (The NY Times has more on the FTC investigation)
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Joke Of The Day
‘What’s your biggest weakness?’
‘I’m really honest’
‘That’s not necessarily a bad thing, you know’
‘I don’t really care what you think’
Hot Headlines
CNBC | Apple takes top spot in China’s smartphone market for the first time. Apple’s market share is sitting at 17.3%, while Huawei spin-off Honor came in second at 16.8%.
The Verge | Microsoft lays off 1,900 Activision Blizzard and Xbox employees. This comes just a few months after the Activision Blizzard deal closed in October. I mean, at least they waited past Christmas.
Bloomberg | LVMH Q4 sales prove resilient amid broader luxury slowdown. Organic sales clocked in at +10%. How? This company is a beast.
Yahoo | Mortgage rates inch up, but experts still predict declines through 2024. Average 30-year mortgage rose to 6.7% from 6.6% last week, but still down 1.1% since peaking at 7.8% in October.
Axios | How Netflix won the streaming wars.
Trivia
This week’s trivia is on technological first.
Which corporation introduced the first ATM?
A. Citibank
B. Barclays Bank
C. Bank of America
D. Wells FargoWho is credited with inventing the World Wide Web?
A) Steve Jobs
B) Bill Gates
C) Tim Berners-Lee
D) Al Gore
Which company created the first successful personal computer?
A) IBM
B) Apple
C) Microsoft
D) Commodore
(answers at bottom)
Market Movers
Winners!
United Rentals (URI) [+12.3%]: Q4 EBITDA exceeded expectations, boosted by used equipment sales. 2024 guidance is mixed, but fleet productivity and ~2% fleet growth are positive.
Nokia (NOK) [+11.6%]: Q4 earnings and revenue surpassed low expectations, with margin improvements across all divisions. Nokia reinstated its share buyback program, thanks to a strong balance sheet, despite a weak sales outlook for 2024.
American Airlines Group (AAL) [+9.3%]: Beat Q4 EPS and revenue estimates, driven by lower costs and significantly higher operating margins. The FY24 outlook is robust, although Q1 TRASMs are projected lower.
IBM (IBM) [+8.7%]: Q4 earnings and revenue outperformed, showing a 4% yearly increase in revenue. Software and consulting were slightly weak, but hardware and gen AI business, which doubled from Q3, were strong, leading to positive analyst views and strong FCF.
Losers!
Tesla (TSLA) [-12.5%]: Q4 earnings and revenue fell short, with better-than-feared gross margins but weaker operating margins. CEO Musk hinted at potentially lower volume growth in 2024 and plans for a next-gen platform launch in late 2024, leading to analyst concerns about capex, pricing trends, and rising competition, especially from China.
Humana (HUM) [-11.4%]: Q4 revenue surpassed expectations and EPS aligned with the January 18 guide; however, higher medical cost ratio (MCR) and increased inpatient/outpatient utilization are concerns. FY24 EPS guidance is significantly below expectations, with persisting higher Medicare Advantage medical costs, and the 2025 EPS target now seen as unattainable.
Northrop Grumman (NOC) [-6.4%]: Q4 saw better revenue across all segments but missed EPS estimates due to a significant charge related to the B-21 program (the sweet new stealth bomber), with expected losses in the initial production lots. FY24 revenue guidance meets consensus, with reaffirmed free cash flow outlook for 2024-2025.
Boeing (BA) [-6.2%]: Faced a setback as the FAA stated it won't approve any requests for 737 MAX production expansion until quality control issues are fully resolved.
Market Update
Trivia Answers
B. Barclays Bank introduced the first ATM in 1967 in the UK.
C) Tim Berners-Lee is credited with inventing the internet.
B) Apple is created the first successful personal computer in 1977.
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