Weekend Update #91
Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
Coming off of Labor Day weekend, stocks managed to rally this week and snapped the three-week slide induced by Fed Chair Powell’s Jackson Hole speech which detailed that the central bank is unlikely to pivot anytime soon. The rally comes despite some mixed news, with the labor market remaining strong as initial jobless claims fall for the fourth straight week, reaching a three-month low. Additionally, Vladimir Putin indicated Russia will not restart the Nord Stream 1 pipeline unless western sanctions are lifted. European countries are working to mitigate a surge in energy prices going to fall and winter, with the UK’s newest prime minister Liz Truss implementing a bill to cap energy bills for citizens.
Contributing to the momentum in risk assets is Ethereum’s highly anticipated transition from proof-of-work to proof-of-stake, dubbed “The Merge,” which is expected to complete sometime around September 15th and has provided renewed optimism within the crypto market.
Overall, markets are expected to be volatile next week with all eyes on incoming CPI data for August, which economists estimate at 8.0% year-over-year. The Fed’s rate hike decision, which will be announced on September 21. Most analysts are pricing in a 75 basis point hike, but the decision may depend on if inflation comes in above or below estimates.
MAJOR INDICES - PERFORMANCE THIS WEEK
S&P 500 - finished up 3.65%
Nasdaq - Finished up 4.14%
DJIA - Finished up 2.66%
Thank you Blue Room Analyst NICK PEART
Leading up to the FY2023 Q2 earnings call, appeared to very much be in a transition phase, and faced challenges on several fronts, including pricing pressure from competitors such as Adobe and BoxSign on their eSignature product, as well as macroeconomic headwinds as potential and existing clients assess their cost structures and determine what they want to add, keep, and get rid of.
DocuSign’s earnings results exceeded almost all expectations, with actual revenues of $622 million and adjusted diluted EPS of $0.44 versus consensus estimates of $603 million and $0.42, respectively.
The following are key takeaways and highlights from the earnings call:
Interim CEO and Chairman of the Board Maggie Wilderotter has helped direct the company following the departure of former CEO Dan Springer. She highlighted her vast previous experience, including her service on 51 corporate boards and as CEO of Frontier Communications, a Fortune 500 company, for 12 years. Her focus is executing on clear strategies and achieving results through clarity of deliverables and accountability
The company is reviewing all categories of expenses and will adjust spending accordingly; the expected expense reduction initiatives will create capacity for the right investments for their expected scale growth
DocuSign has begun to see softness in certain verticals, including real estate and financial services
“We know our results over the previous three quarters did not meet expectations. We got the message. That change was needed and I hope you can see that we are fully committed to build upon our current momentum to deliver for all of our stakeholders.”
“We have seen attrition rates moderate with new leaders now on board, as team settle in with clearly defined priorities and against the backdrop of a changing macro environment. We are encouraged by the improvements we're seeing.”
While DocuSign is reviewing categories poised to undergo reductions, they did not provide further details on what those areas might be
DocuSign is putting out new marketing messaging that shifts the focus from the cloud environment, which implies a repository for things that don’t talk to each other, to a more fully-integrated digital agreement platform
They had have a lot of turnover in the Customer Success organization, which works with existing customers to expand into use cases in other areas of the business. They now have a brand new Chief Customer Officer who has experience scaling and just started this week
They have stabilized employee attrition, making sure they are well taken care of, they have the tools and capabilities to do their jobs, and they understand what’s expected of them from an accountability perspective
The SOXX, Semiconductor ETF, finished higher by +4.66% over this past week as the market adopted a risk on sentiment, despite jobs numbers coming in stronger, indicating a possible continuation of the Fed’s rate hike trends. Semis were dragged upward with momentum despite a calm week for our watchlist.
Although the cryptocurrency market finished down in August, it came off of a nearly 50% rally in July from the June lows of about $815 billion. Ethereum’s highly anticipated Merge is likely a contributor to the higher relative prices for Ethereum and the entire crypto industry. However, crypto continues to be highly correlated with US equities, and the macroenvironment remains the primary driver in price movement. The consumer price index (CPI) for June came in below estimates at 8.5% year-over-year which excited investors with the possibility that inflation could be peaking and the Fed may look to cut rates soon. However, the labor market remains strong and Fed Chair Powell has made it clear that he wants to get inflation under control before pivoting, leading to a plunge in market sentiment in the back half of August. Second quarter GDP also was down sequentially for the second time in a row, increasing the probability of a recession. As a result of rate hikes, the strength in the US Dollar, which has now reached parity with the Euro for the first time in 20 years, continues to add pressure to commodity prices and crypto. Looking ahead, September has historically been the worst month for the stock market which doesn’t bode well for crypto given the overall macroenvironment and tight correlation. There is likely more volatility ahead with many catalysts to watch this month, starting with August CPI data release on September 13, followed up by the Ethereum Merge, estimated to complete around September 15, and the Fed rate hike decision on September 21.
Ramy Farid — President & Chief Executive Officer
The mission, which started 32 years ago in 1990, is to transform the way molecules are discovered using computational methods
There was a lot of excitement back there and many companies tried to create methods to do experiments on a computer
It turned out to be a very difficult problem
Schrödinger designed a platform based on physics-based methods that transforming the way molecules are discovered
For both therapeutics and materials science
Schrödinger licenses software to biopharma companies and academic institutions all around the world
That business generated $113 million in 2021, up 22% from the previous year
They have seen 26% and 24% over the previous quarter in Q1 and Q2 in 2022
The software business is doing well
About 15 years ago, Schrödinger started using the platform to drive drug discovery with many other companies, many of them they’ve co-founded
Nimbus was the first 13-14 years ago that Schrödinger co-founded
More recently, they initiated wholly owned programs
Schrödinger is experiencing an inflection in the drug discovery business
Last year, drug discovery did $25 million in revenue
This year, Schrödinger guided to $35-40 million
Next year, Schrödinger has guided to $100 million — excluding any revenue from potential partnering of internal programs
Jessica Reif Ehrlich — Bank of America
So, with that, what do you see, this is for you Christine, what do you see as the key drivers of growth sitting here today to the 2024 Disney+ subscriber targets you recently
updated?
Christine McCarthy — Chief Financial Officer, Sr. Executive VP
Yes. That's a great question. Disney+ has been around for almost three years. It's done really well. But we look at the growth from where we are today looking forward, really coming in four different areas. One is the content. Both original content, content for the service, content that are in other distribution platforms initially and then will come to the service, but content is one.
The other one and we have upcoming our launch of our Disney+ AVOD tier. What's important about that is we really have been talking a lot about consumer choice. You'll hear more from Josh today about consumer choice in our Parks businesses. But it's been one of the things that Bob Chapek has consistently talked about, give consumers choice. And when you look at an AVOD product, which is at the lower cost end, all the way up to something which is ad-free, we're giving consumers choices. So, we believe that that's good, and we think that the AVOD product will be well received when it's launched, December 8.
We've also got the bundle and we look at our bundle as being a real driver of a value proposition. We'll lean into that as time goes on. And the last one is we have selectively used wholesale distribution agreements for when we either go into markets or are just on a subscriber push. And what's important about that is, it does accelerate subscribers, but it also is a vehicle that gives us a much lower SAC, subscriber acquisition cost. So, you look at those four things and those are really the drivers that we feel confident about continuing to grow Disney+.
Moscow’s decision to cutoff natural gas flows through the Nord Stream Pipeline last Friday has sent shockwaves through the global geopolitical and economic world. Vladimir Putin’s decision to shut off the Nord Stream pipeline – that was set to resume work early on Saturday, September 3 – is one of his most significant moves in the energy war he is waging with the West. Russian flows of natural gas have steadily declined as Nord Stream flows have been continually scaled back due to what Gazprom has referred to as maintenance-related issues, even though it is abundantly clear Russia is attempting to inflict maximum damage on Europe and the West for their continued support of Ukraine.
Maybe we can start high level. Give us a short history of Shopify. How do you view yourself in the eCommerce market?
Going all the way back to Tobi Lutke’s vision in 2004, he had been a software developer
He wanted to sell snowboards online and found it was too complex
So he decided to build the software for his own snowboarding store
Through that process, he fell in love with the software
Shopify’s commercial product was launched in 2006
They went public in 2015
Tobi’s vision has largely remained the same through now
The vision was to develop a commerce system with the merchant in mind, helping entrepreneurs building a business
It started online but quickly became platform agnostic — online, offline, etc.
It became evident there were other things Shopify could help with in Merchant Solutions
That helps merchants become more successful as they develop more GMV
Today, they serve millions of merchants in 175 countries
They never said they could do this alone
The more satisfied merchants are, the more they will stay
The more merchants, the more data
So, now they’re moving into Fulfillment
Audiences helps merchants
For every $1 Shopify made, partners made $38
Shopify generated $44 billion of economic activity
This has a deep moat
Starting on the longer-term vision since the IPO of Shopify being a 100-year company and the central nervous system of eCommerce, what do you view is the core competency or the key competitive advantage of Shopify?
If you view the IPO roadshow deck, they were calling it the retail operating system for merchants/brands
Shopify is as close to that as ever
They want to be the most important piece of software for these businesses
They want to be the first and only view of the entirety of these businesses on Shopify Admin
Whether it’s online, in-person, or pop up
They can do everything from one centralized location to run the business
The core competency is 2 fold
If you’re a brand and want to take advantage of scale, you can go to Amazon and sell across the marketplace
On Amazon, you can have economies of scale
Historically, if you want to build your own business, you have to build your own tech stack
On Shopify, you can take advantage of economies of scale
Right now, Shopify is about 10% of all eCommerce in the U.S.
If Shopify was a retailer, it’d be the second largest online retailer in the U.S.
With that, they get Payments, Capital, shipping rates
You can build your own business and have a direct relationship with your customer
At the same time, you can leverage mass economies of scale
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