Stock Valuations Are Weird, Making Money in EVs is Hard, and Much More
StreetSmarts Morning Note
“The stock market is the only market where things go on sale and all the customers run out of the store”
-Cullen Roche
“If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring”
-George Soros
Table of Contents
A.M. Allocations: Summaries of important news and investing events
Almost Half of All Stocks Got ‘Cheaper’ This Year
Watt’s Up with That? The Bumpy Ride of EV Makers
Autoworker Wages in the Slow Lane
Cheat Codes: How Microsoft Played its Cards Right in the Activision Game
Hot Headlines: Links to some of the top financial stories of the day
A.M. Allocations
Almost Half of All Stocks Got ‘Cheaper’ This Year
I’ve written before about how the S&P 500 has really been a mixed bag this year. The Index is up almost 15% year-to-date, but if you exclude the smallest 490 or so companies in the index, it’s actually down on the year. I even did an analysis of how estimates have been updated throughout 2023 - showing that around 71% of companies are seeing their EPS outlook improved for next year (see below). But how has the latter actually impacted valuation?
As you can see above, again, its a mixed bag. Of the 498 securities I looked at, 269 have experienced an increase in their Price to Earnings multiple (‘multiple expansion’ as us market snobs call it). This is only 54% of companies!
Take-Away: Despite a year where EPS estimates have increased for the majority of companies (71%), valuations have not kept pace, and nearly half of stocks are technically ‘cheaper’ than they were at the start of the year. This may imply a more bearish view for the period beyond next year, or a disconnect between investors and Wall Street analysts.
Watt’s Up with That? The Bumpy Ride of EV Makers
Building cars is a scale game and the EV space is no different - possibly even more so. Rivian has been a bit of a joke lately, since it released its Q3 report posting a loss of $90k per car. Their cars typically sell in the high-$60k to low-$80 range so they clearly have a lot of work to do - if they can manage to survive that long.
Chinese maker Li Auto is one of the few profitable EV makers, along with Tesla. A glimpse at Tesla’s delivery figures (below) really illustrates how much the market has shifted to the more economical vehicles (I can’t really say ‘affordable’, yet) as the premium Model X and Model S only make up a fraction of sales.
Take-Aways: While we’ve yet to see Tesla’s Q3 financials (they report on the 18th), their Q3 deliveries declined quite materially. Tesla blamed this on “scheduled production pauses due to factory modernizations” - and not demand. We’ll see this week if their plan for 1.8 million vehicles in 2023 remains intact: they currently sit at 1,350,996 vehicles produced and 1,324,074 delivered. If Rivian produced that many cars (and didn’t improve its efficiency) that would represent a loss of about $119 billion.
Autoworker Wages in the Slow Lane
The WSJ did a nice deep dive into the wage situation for US autoworkers (Why Being an Auto Worker Isn’t as Lucrative as It Used to Be, in Charts)
Some of the big take-aways are:
Wage Convergence: Auto workers' wages, both union and nonunion, have converged closer to the private-sector average due to job migration and post-recession concessions by unions like UAW.
Limited Union Premium: Union membership no longer guarantees significant wage gains, as multiyear labor contracts often lag in responding to the current labor market dynamics.
Demand for Wage Increase: Amidst rising car prices and inflation, UAW is pushing for wage gains in the mid-30% range to catch up with the increased cost of living and diminished purchasing power.
Take-Aways: It’s hard not to have sympathy for workers’ wages lagging the cost of living increases. However, with median 2022 wages of $80k and $75k at GM and Ford respectively, trying to get the Big Three to find the money for the +30% raises demanded by UAW is a big impasse. The median salary in the US for an individual with a bachelor’s degree is only around $74k.
Cheat Codes: How Microsoft Played its Cards Right in the Activision Game
Acquisition Closure: Microsoft completed its $69 billion acquisition of Activision Blizzard, overcoming regulatory challenges in the U.S. and the UK, marking the largest consumer tech acquisition since the 2000 AOL-Time Warner deal.
FTC Opposition: The Federal Trade Commission (FTC) in the U.S. opposed the deal, citing competition concerns. Although the FTC’s preliminary injunction was denied, an appeal and a pending case in administrative court suggest ongoing legal challenges.
Concessions and Approvals: Microsoft addressed regulatory concerns by licensing Activision’s cloud gaming business to Ubisoft Entertainment, alleviating fears of monopoly and securing the UK Competition and Markets Authority’s approval.
Take-Aways: FTC Chair Lina Khan scared a lot of bankers into thinking the mega mergers were going the way of the dinosaur. This deal - despite the year of hurdles - shows big tech that with enough lawyers, you can still hammer through super acquisitions.
Joke Of The Day
A stockbroker was in the hospital, when the nurse took his temperature he asked “how much it is?” “102, sir.” He replied “Sell it when it gets to 103.”
Hot Headlines
(Reuters) Upcoming US rules on AI chip exports aim to stop workarounds - Nvidia’s been doing the old ‘silicon shuffle’ to get past regs. That might be coming to an end.
(Reuters) Qatar's Sheikh Jassim refuses to exceed a $6 billion Manchester United bidding war - the football club is publicly traded with a market cap of only $3.3 billion. In finance, this is called a ‘control premium’ but might be more accurately be described as a ‘look at me, I own an English football club’ premium.
(Bloomberg) Safe Haven Assets in Focus With Gaza Offensive Looming
(CNBC) Halloween is candy’s biggest holiday. Here’s how Snickers maker Mars prepares for trick-or-treaters - National Retail Federation predicts consumers will spend $3.6 billion on Halloween candy this year.
(CNBC) Novo Nordisk hikes outlook on soaring demand for Wegovy, Ozempic - that’s what I call fat profit teehee. I did a bit of a deep-dive on the financial side of Ozempic a few weeks back.
(Reuters) Oil prices ease as investors assess impact of Israel-Hamas war
(CNN) Secret audio, a star witness, and ‘Thai prostitutes’ complicate Sam Bankman-Fried’s defense - I never thought I could be so captivated by the trial of a nerdy crypto guy, but here we are.
Trivia
Above I mentioned that Microsoft’s Activision deal was the largest in consumer tech since the AOL-Time Warner Deal; a crazy story that encapsulates the Dot-Com frenzy. Here is some trivia about the deal.
How much did AOL pay to acquire Time Warner?
$75 billion
$252 billion
$91 billion
$183 billion
In 2002, how big of a write-down of goodwill did AOL take in relation to the deal?
$99 billion
$16 billion
$29 billion
$37 billion
Before the Time Warner deal, AOL’s market cap peaked at around $222 billion. The company was acquired by Verizon in 2015 for how much?
$4.4 billion
$41 billion
$28 billion
$12.7 billion
(answers at bottom)
Trivia Answers
AOL paid $183 billion for Time Warner. The combined entity had a market cap of $360 billion once completed.
AOL wrote-down $99 billion in goodwill associated with the deal.
AOL was acquired by Verizon for $4.4 billion.
Thank you for reading StreetSmarts. We’re just starting out so it would be great if you could Share and give us a ‘Like’ below.