🔬Evergrande Gets Liquidated, Cruise Ships & Market Whips, and Much More

"The most difficult thing is the decision to act, the rest is merely tenacity"
- Amelia Earhart

“It is unfortunate we can't buy many business executives for what they are worth and sell them for what they think they are worth”
- Malcolm Forbes

• The big US markets had a strong start to the week with the S&P 500 +0.76% and the Nasdaq +1.12%.

• 10 of 11 sectors closed in the green led by Consumer Discretionary (+1.4%) and Tech (+1.0%). Energy was the sole loser (-0.2%) and despite the current escalation in the middle-east the price of WTI crude only gained +0.8% (more below).

• Digital financial company SoFi popped +20.1% on strong earnings, adding $2 billion in market cap. While IRobot was down -8.8% after their acquisition by Amazon got cut.

Street Stories

Life’s a Cruise

Yesterday Royal Caribbean launched its latest vessel, Icon of the Seas, which has taken the reigns as the world’s largest cruise ship. Some interesting stats include:

• Capacity: 5,610 passengers (double occupancy), 7,600 passengers (maximum)

• Length: 1,198 (or 3.3 football fields)

• Gross Tonnage: 250.8 (compared to the Titanic at 46.3)

• Decks: 20 including 18 accessible by passengers

• Waterslides: 6

• Pools & Whirlpools: 6 & 9

Icon of the Seas. Source: Royal Caribbean

And while big ships are cool and everything, this got me wondering about the cruise line industry which I thought I’d give a quick update on. For starters, you can imagine what happened during COVID; all cruises were cancelled and those with people on them became floating quantines. While it must have been terrible being on one of those ships, getting stuck holding cruise line stocks was no picnic either, as shares of the big three publicly traded cruise lines saw their shares drop by +80% in a matter of days from the start of the pandemic.

Royal Caribbean, the high growth, industry #2 player (and the proud owner of Icon of the Seas), has bounced back from the pandemic well enough, but Carnival and Norwegian have yet to fully regain their sea legs - still down 69% and 67% respectively from their pre-pandemic levels.

From a revenue perspective, Carnival (which has a November year end so has already reported 2023 earnings) has fully recovered revenue to pre-pandemic levels, while Royal Caribbean and Norwegian are expected to do the same when they report shortly (RC on February 1st and Norwegian expected around February 22nd).

From a valuation perspective, the major cruise lines trade at a pretty significant discount to the market and their peers in the hotel & resorts space.

This discount may be unwarranted as the cruise lines appear to offer a pretty solid growth outlook - if Wall Street can be trusted, and if you don’t see another ‘once-in-a-century’ pandemic coming anytime soon. Fingers crossed.

Debtzilla: Evergrande's Monster Liquidation Saga

It’s over! Almost. The three year Evergrande drama will be coming to end an with a Government-mandated order to liquidate the Chinese property giant. The colossal liquidation process of the $240 billion developer will be no easy task given China's fragile property and capital markets, however, most of the assets have already been sold or seized by creditors. As the recovery rate on the debt is expected to be less than 3%, the equity - which was once worth around $53 billion - will be a wipe out. Time will tell if this will mark the bottom of the Chinese property depression or just act as more selling pressure on the already beleaguered sector.

Clean Break: Amazon's iRobot Deal Swept Under the Rug

After 17 months in limbo, Amazon's planned acquisition of iRobot, the maker of Roomba, has been canceled due to regulatory hurdles in the European Union, leading to a $94 million termination fee paid by Amazon. In response, iRobot is restructuring, laying off about 31% of its workforce and pausing non-core projects, with Colin Angle stepping down as CEO and chair. The failed deal, part of a recent trend of major tech acquisitions facing increased regulatory scrutiny, marks a shift for Amazon which had previously completed similar acquisitions, like security/doorbell companies Blink and Ring, and router company Eero, with much less difficulty. (The Verge has more on this)

Reddit's IPO: Not Just Karma, Now It's About the Cash

Reddit, the digital town square known for its vibrant forums, is eyeing a modest $5 billion valuation for its springtime debutante ball (aka IPO), despite private trades suggesting a valuation that's playing hard to get in the $4.5 to $4.8 billion range. After mulling over the idea of going public for a mere three-plus years, Reddit is poised to hit the market by the end of March, fashionably late after its confidential IPO filing in December 2021. Reddit, once the belle of the private funding ball with a $10 billion valuation, plans to sell around 10% of its shares in the offering.

Red Sea Ripples Fail to Rock Oil's Steady Boat

Despite recent escalations in the Red Sea, including a drone attack by Iran-backed militants that killed three U.S. troops in Jordan, oil prices have proven to be surprisingly resilient. Now with President Biden vowing a response against Iran, things could get heated in the oil markets. This subdued reaction so far stands in stark contrast to previous incidents, notably the 2019 attacks in the Persian Gulf by Iran’s Islamic Revolutionary Guard Corps and Houthi militants, which significantly disrupted the global oil supply and led to a substantial spike in oil prices. (The Guardian has more on the current situation)

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Joke Of The Day

My boss asked me to round up 17 employees pronto. So I said, “20.”

I’ve found a job helping a one armed typist do capital letters. It’s shift work.

Hot Headlines

Reuters | IKEA cuts prices to boost sales as raw material costs ease. Passing on savings to consumers is nice - even if you’re only doing it because sales are down.

Tech Crunch | Instagram confirms test of ‘Flipside,’ a feature that turns ‘finstas’ into an official product. Finstas are separate accounts where users share posts only to their close friends. This feature aims to make that process more streamlined.

Bloomberg | Global Crypto Assets Report $500 Million in Weekly Outflows. Not the smoothest start for Bitcoin ETFs.

Bloomberg | US Corporate Bond Sales Hit $188 Billion in Record January. Companies ar trying to capitalize on recent drop in longer term rates. Still not cheap tho.

Axios | More Millenials are moving back home with their parents. 16% of Millenials are living with their folks, and notably more in high cost of living areas. ‘I DON’T LIVE WITH MY MOM, MY MOM LIVES WITH ME’. Seriously though, my generation is f*****.

Trivia

This week’s trivia is on companies and war.

1. During WWII, which company was famous for producing the Spitfire, a British single-seat fighter that helped win the Battle of Britain?
   A. Hawker Aircraft
   B. Avro
   C. Supermarine
   D. Bristol Aeroplane Company

2. Rolls-Royce, a British company, was primarily involved in the production of what during World War II?
   A. Tanks
   B. Rifles
   C. Aircraft engines
   D. Naval ships

3. IBM's Hollerith machines were controversially used by Nazi Germany for what purpose during World War II?
   A. Calculating artillery trajectories
   B. Designing aircraft
   C. Organizing census data and concentration camp operations
   D. Breaking Allied codes

(answers at bottom)

Market Movers

Winners!

• SoFi Technologies (SOFI) [+20.21%]: Q4 EPS and revenue exceeded expectations with Q1 revenue guidance strong and earnings slightly weaker. Management anticipates 20%-25% compound revenue growth from 2023 to 2026, with significant increases in new members and products.

• McGrath RentCorp (MGRC) [+10.7%]: To be acquired by WSC in a $3.8B cash and stock deal, a 10.1% premium to the previous close. The acquisition is expected to finalize in Q2 of 2024.

• ZoomInfo Technologies (ZI) [+6.1%]: Upgraded to buy from neutral at BofA. The upgrade reflects reaccelerated revenue growth and the introduction of new AI products.

• Archer-Daniels-Midland (ADM) [+5.5%]: FY23 EPS guidance set below expectations but announced a cash dividend. Q4 leverage is expected to remain steady, with intersegment sales review not significantly impacting overall results.

Losers!

• IRobot (IRBT) [-8.8%]: The acquisition deal with AMZN has been terminated following the EU Commission's intention to block it. The company also announced a 31% workforce reduction.

• TKO Group Holdings (TKO) [-4.4%]: The parent company of wrestling’s WWE confirmed the resignation of Vincent McMahon from its board following the sexual assault scandal.

Market Update

Trivia Answers

1. C. Supermarine created the Spitfire.

2. C. Rolls-Royce made aircraft engines, and is still one of the world’s largest producers. The automobile company was spun out in 1973.

3. C. The IBM machines were used for organizing census data and concentration camp operations.

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