š¬The Juggernaut That Is Microsoft
Plus: Investment math is weird; more lawsuits; and much more!
āNothing like price to change sentimentā
- Helene Meisler
āIf you donāt know who you are, this is an expensive place to find out.ā
- George Goodman
Positive day for the big US markets after 3 straight red days. The S&P 500 closed +0.4% and Nasdaq had a monster, up +1.26%.
Only 3 of 11 sectors closed higher but 2 of those were heavy weights Tech and Comm. Services (both +1.8%) so that was enough to pull the index green.
June Consumer Confidence came in at 100.4 and beating Wall Streetās consensus for 100.0. That said, itās still below Mayās 101.3 so š¤·āāļø.
Notable companies:
Carnival (CCL) [+8.7%]: Q2 earnings and revenue beat; net yields and cruise costs better than March guide; Q3 EPS guidance above the Street and raised FY EPS guidance.
Spirit AeroSystems (SPR) [-4.0%]: Boeing switched its offer to acquire Spirit mostly with stock rather than cash; values Spirit at ~$35 a share, a 6% premium to Monday's close.
Walmart (WMT) [-2.2%]: CFO said Q2 will be the most challenging from a comp perspective this year; noted not every quarter will be as good as the last.
More below in āMarket Moversā.
Street Stories
The Juggernaut That Is Microsoft
With all the AI and Nvidia hype this year, Microsoft has sorta been on the backburner. Sure, their name comes up in relation to their partnership with OpenAI now and then - or when they get sued by the EU, like they did again yesterday - but for the largest company in the world, they havenāt really gotten the attention they deserve lately.
Hereās a few reasons why they are still one of the most interesting companies in the world. Ready, steady, spaghetti!
To start, despite the fact that Microsoft is (again) the largest company in the world, they have growth rates like a much younger, much less diversified company.
Think about that for a second: Across operating systems, cloud, apps, networking, hardware, etc., the company - despite Bing, yuck - manages double digit revenue growth year after year.
A good contrast is with their largest foe: Nvidia. An amazing company, but if they find themselves five years from now in a much more competitive GPU market, that story loses nearly all of its luster. The odds that Microsoft somehow loses its monopoly on commercial computing, its oligopoly in cloud, its oligopoly in networking, etc., etc. is very unlikely. And if the unimaginable happens to one of those businesses, odds are it can not only can take the punch but also will probably be a market leader in the next big tech category by then anyway.
Like Bane said to Batman, āyou fight like a younger manā. Except in this case, itās like Microsoft is 10 different men/SMID-cap growth stories - plus Bing.
*** I would note that while Personal Computing looks like the weak spot, in FY2024 itās actually on pace for itās best year yet***
Interestingly, the growth that led to them becoming the largest company in the world, surpassing Apple, is actually forecast to accelerate in the coming years. The largest contributor to this growth is associated with its Intelligent Cloud, which houses Azure and itās AI compute business which is experiencing insane levels of growth.
And in typical Microsoft fashion, this is actually translating to the bottom-line, as EPS is expected to grow even faster than revenue.
Moreover, as one of the biggest beneficiaries of the AI boom via their cloud services, we havenāt really seen estimates from the Street tick up much over the last year (Nvidiaās have jumped +100% in the last 12 months alone).
On the reporting side, Microsoft is a well oiled machine that consistently beats Street estimates and rarely has any surprises on earnings day. Iāve found myself crossing my fingers waiting for lots of companies to report but with Microsoft its just business as usual.
Valuation-wise, itās definitely not as sexy as it was back in 2013 at 9.6x forward P/E. The company currently trades at itās highest levels since the Tech Bubble, which isnāt heartening.
That said, the company holds up very well compared to its peers when factoring growth expectations into valuation. The Street sees Microsoft growing revenue at +15% for the next three years, with only peers Nvidia and Service Now expected to do better - at a higher valuation and arguably less de-risked.
As a result, the Street has continued to maintain its positive outlook on the shares. No one on the Street dares to hold a Sell rating on the stock and the average target price sits at a comfy +9% north of the current price.
To conclude, StreetSmarts isnāt meant to be a stock picking newsletter but I canāt pretend that I donāt think Microsoft is probably a great long term place to park some of your portfolio: Double digit growth, oligopolies in some of the leading tech categories and minimal blow-up risk.
Basically, the King is King for a reason.
Investment Math
In yesterdayās āTiming the Marketā, I got into how slight differences in return can end up having a massive impact on your eventual return (over 40 years a 9% return vs. 5% return equates to roughly 4.5x).
This got me thinking about other numerical nuances in investing. The first one to come to mind was the impact of large losses in getting back to break-even. For example, if your portfolio takes a 10% bath then you need to make an 11% return to get this back to flat. Manageable.
Take a 60% haircut? Then you need +150% just to get back to where you were.
Take-aways:
To me, over-diversification is a dirty word but you definitely need enough low-correlation shots on goal to make sure one big blow-up doesnāt put you behind the 8 ball.
Binary s*** like meme-stocks or momentum punts are fun but eventually youāre gunna take a hit. And if youāre over geared then youāre gunna have a lot of work to do to fix it.
Joke Of The Day
A young stockbroker had just parked his BMW. As he opened the door, a car zoomed past ripping the door from his car. A police officer happened to be walking past, and quickly ran over to the driver. āAre you alright?ā, he asked. The stock broker whined, āMy Beemer! Look what he did to my Beemer!ā
Disgusted the officer growled, āYou greedy Wall Street types are all alike. Just worried about your damn status symbols. Youāre so busy whining about your damn BMW that you havenāt even noticed that your whole arm was ripped off by the crash.ā
The stock broker looked down at bleeding shreds of flesh hanging where his left arm once was and screamed, āOh my God! Oh my God! My Rolex!ā
Hot Headlines
Reuters / Boeing offers to buy Spirit Aero for $35 a share. If you got a long memory, youād remember Boeing spun them out 20 years ago so they could squeeze them as a supplier and cut costs. Two crashes later and clearly that wasnāt the brightest move in financial engineering history. GFY.
CNBC / Tesla recalls Cybertruck to fix faulty windshield wipers and loose trim. Like I said when they launchedā¦
Reuters / Europeās richest man and Chairman of LVMH takes personal stake in rival Richemont. The company is the worldās most prolific luxury watch maker, with brands like Cartier, IWC Schaffhausen, and Panerai. Even money this means LVMH is going to buy them in two years, ie: market manipulation.
Reuters / Visa and Mastercardās $30 billion swipe fee settlement rejected by US judge. Many merchants and trade groups including the National Retail Federation opposed the accord, saying card fees would remain too high, while Visa and Mastercard would retain too much control over card transactions. I mean, you canāt blame them for trying. š¤·
Bloomberg / FTX customers to vote on multi billion dollar repayment plan. I still laugh that the liquidators claimed customers would ābreak evenā through their efforts - but didnāt mention it was because the retained crypto tripled since itād been in their custody.
CNBC / EU charges Microsoft with āabusiveā bundling of Teams and Office, breaching antitrust rules. Microsoft engaging in anti-competitive behavior? Iām shocked and dismayed.
Tech Crunch / Redditās upcoming changes attempt to safeguard the platform against AI crawlers. Cuz they arenāt getting paid for that.
Trivia
Some general investing terminology today!
What does 'Alpha' represent in investing?
A) The market return
B) The average stock return
C) Excess return of an investment relative to the return of a benchmark index
D) The dividend payout ratio
What does a 'Duration' measure in bond investing?
A) The bondās time to maturityB) The bond's yield to maturity
C) The weighted average time to receive cash flows
D) The bond's default risk
The 'Capital Asset Pricing Model (CAPM)' is used to:
A) Determine the optimal capital structure
B) Calculate the expected return of an asset
C) Measure the liquidity of a market
D) Estimate the default risk of a bond
(answers at bottom)
Market Movers
Winners!
Enovix (ENVX) [+34.9%]: Signed agreement to deliver high-performance batteries for mixed reality headset to undisclosed leading technology company.
Carnival (CCL) [+8.7%]: Q2 earnings and revenue beat; net yields and cruise costs better than March guide; Q3 EPS guidance above the Street and raised FY EPS guidance; highlighted strong bookings momentum with higher booking prices.
Rivian (RIVN) [+8.6%]: Initiated at buy at Guggenheim; noted ability to attract younger customers to their product over ICEs; financials improving and scalable architecture.
Credo Technology (CRDO) [+8.4%]: Upgraded to buy from hold at TD Cowen; noted revenue acceleration and key programs at Microsoft and Amazon scaling up with a broader customer base.
Core Scientific (CORZ) [+6.2%]: Announced CoreWeave exercised first option for ~70MW in additional infrastructure; expected to add $1.225B in projected cumulative revenue over 12 years.
Cloudflare (NET) [+2.6%]: Upgraded to neutral from sell at UBS; valuation better reflecting growth headwinds; positive on GTM momentum and better SASE checks.
Losers!
SolarEdge Technologies (SEDG) [-20.6%]: Disclosed a customer owing ~$11.4M filed for Chapter 7 bankruptcy; reaffirmed Q2 guidance.
TD SYNNEX (SNX) [-9.6%]: Q2 EPS and revenue missed; Q3 EPS guidance missed consensus; reiterated mid-term FCF ~$1.5B+ annually; noted improving IT spending environment despite the miss.
Pool Corp (POOL) [-8.0%]: Guided Q2 EPS ~16% below consensus and cut FY EPS guidance ~18%; flagged cautious consumer spending on big-ticket items; noted weak pool-permit data; highlighted stable maintenance-related product sales.
Penn Entertainment (PENN) [-5.6%]: Downgraded to market perform from outperform at Raymond James; noted M&A speculation may be overdone; cited uncertainty around digital profitability.
Owens & Minor (OMI) [-4.7%]: Announced CFO Alexander Bruni resigned at the company's request; will remain in transitional capacity through Sep 5; surprise move adds to growth uncertainties.
Birkenstock (BIRK) [-4.0%]: Largest shareholder, L Catterton, along with executives and other employees, filed to sell ~14M shares.
Spirit AeroSystems (SPR) [-4.0%]: Bloomberg reported Boeing (BA) switched its offer to acquire Spirit mostly with stock rather than cash; values Spirit at ~$35 a share, a 6% premium to Monday's close.
Wolfspeed (WOLF) [-3.8%]: Lowered Jun Q margin and earnings guidance due to equipment incident at its 150nm Durham fab; guided Q1 GM to similar level due to underutilization charges; Mohawk Valley fab reached 20% wafer utilization target.
AGCO Corp (AGCO) [-3.4%]: Announced restructuring program due to weakening agriculture demand; initial phase to reduce salaried workforce by ~6%; expected to cost ~$150M-$200M with annual benefits and savings of $100M-$125M.
Enerpac Tool Group (EPAC) [-3.0%]: FQ3 earnings in line with revenue slightly light; noted solid results from Industrial Tools & Services but weakness at Cortland Biomedical; cut FY revenue guidance; flagged organic-growth headwind from new FX assumptions.
Walmart (WMT) [-2.2%]: CFO said Q2 will be the most challenging from a comp perspective this year; noted not every quarter will be as good as the last.
Market Update
Trivia Answers
C) Alpha is the excess return of an investment relative to the return of a benchmark index.
C) Duration is the weighted average time to receive cash flows.
B) CAPM is used to calculate the expected return of an asset.
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