Weekend Update #93
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.
Equity markets extended their losses this week following last week’s August CPI print. The S&P 500 closed at 4,110 on September 12 and has been on a decline ever since, closing today (Friday) at 3,693—a 10.1% decline (it even dipped below the June 16, 2022 low of 3,666 during intraday trading).
The Dow and Nasdaq indices have not fared much better, following similar trajectories—the Dow has declined from 32,381 on September 12 to the 29,590 figure it closed at on Friday, September 23—an 8.6% drop. The Nasdaq fell from 12,740 to 11,311 during the same period, representing an 11.2% decline.
All this, of course, comes on the heels of this week’s Federal Open Market Committee decision to raise the Federal Funds Target Range to 3.0%—3.25%—a range not seen since 2008, and is now higher than the upper-bound reached in 2018-2019 during the Fed’s previous tightening cycle.
At Wednesday’s press conference following the release of the FOMC Statement, Federal Reserve Chairman Jerome Powell fielded questions from the media regarding their latest decision and thinking behind current monetary policy (the transcript can be found in this week’s newsletter). Mr. Powell reiterated the Fed’s commitment to its goal of achieving 2% inflation and explained that in order to get there, they would need to maintain “restrictive monetary policy” for “quite some time” until it becomes clear inflation has been brought down meaningfully.
Markets briefly rallied during Mr. Powell’s press conference Wednesday afternoon before resuming their slide downward, apparently accepting the reality of increasingly tight monetary policy for the foreseeable future.
The latest in US monetary policy has had ripple effects elsewhere in financial markets, including contributing to US dollar strength—the index has now reached 113, a level not seen in nearly two decades—its previous high was 119.9 in July of 2001. The latest currencies to slide against the dollar include the Japanese yen, whose government had to step in to prop up the currency earlier this week. It has fallen to 143.31 per 1.00 USD from 115.00 in March, a 20% decline whose origins stem from the Bank of Japan stating it would not raise rates at a time when the Fed had just commenced its own monetary tightening policy.
The British Pound is the most recent currency to fall, dropping to 1.0859 following comments made by Chancellor of the Exchequer Kwasi Kwarteng in which he outlined tax cuts and spending plans that would increase the country’s debt and stoke inflation. The currency is now down 20% year-to-date.
Meanwhile, the CBOE’s Volatility Index (VIX) has been steadily rising. Widely seen as a “fear gauge,” it also indicates the “cost of insurance,” and its level has increased from 19.5 in August to 29.9 as of this Friday’s close. The past three times it has peaked this year include the weeks following the Russian invasion of Ukraine, the Fed increasing the magnitude of its hikes from 50 basis points to 75 basis points in May, and the enactment of another 75-basis-point hike in June.
Thank you Blue Room Team Leader OMAR GUZMAN
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
In an extremely rough week for tech stocks broadly, the SOXX semiconductor ETF (down -5.76% this week) found itself underperforming the Nasdaq by almost a full point. Several factors contributed to this week's dismal performance in semis including the FOMC rate decision on Wednesday, the overhang of potential broadening of export restrictions to China, and the weakening profit outlooks for companies. That is only exacerbated by companies like Nvidia and Micron stating that they intend to decrease their supply into markets due to the decoupling of inventory levels from end demand.
September 12, 2022 at 5:00 PM EDT
Moderator: Eric Sheridan — Goldman Sachs
Speaker: Barry McCarthy — Chief Executive Officer
Question & Answer Session
Taking a step back, give a little perspective on what attracted you to the role at Peloton and what you’ve been most focused on?
He came out of retirement for this
McCarthy was an avid fitness enthusiast
Peloton believed Covid was a new normal, and he thought his expertise could help fix those problems
There’s been a lot of talk about the long-term market opportunity. Now, we find ourselves in the post-pandemic world. How do you think about Peloton in more normalized times?
Say what you want about John Foley
He invented Connected Fitness
The question is how big a business that could become
Today, Peloton is 70% of premium Connected Fitness
Today, the category is shrinking
Will it shrink in the long-run?
McCarthy doesn’t think so
It’s an effect of Covid and the easing economy
How much bigger can Peloton make then TAM than the premium segment?
He thinks a lot bigger by going down market
Parsing it out a little, when you think of good, better, best and segmenting the market, how do you think about the hardware piece vs. the media and software offering? Price vs. quality of product?
In the premium segment, it’s a little like asking Apple about hardware vs. software
It’s perfectly integrated
The hardware is significantly better than anyone else and so is the content
The net promoter scores for the products are off the charts
There is an enthusiasm and commitment among users McCarthy hasn’t seen before
If you don’t get the Peloton experience until you’re on one, how do you communicate that through a marketing campaign?
That’s the challenge
Key Takeaways
Cystic Fibrosis
CF segment poised for long-term growth, primarily driven by approval for lower age groups, as well as a gene therapy for patients who do not produce CFTR protein
VX-121/561/tezacaftor has the potential to have higher efficacy than TRIKAFTA, which would drop the company’s royalty payments from low double digits to low single digits
APOL1-Mediated Kidney Disease
Proteinuria and GFR are closely related, and executives believe early data showing reduction in proteinuria will lead to improved GFR at the one-year interim analysis which may lead to accelerated approval of VX-147
Education and awareness for AMKD is very low among patients and physicians, but both are likely to increase before an approved therapy is available
Vertex is working with a diagnostic testing company to make testing more easily available
Type 1 Diabetes
After positive results with half the targeted dose for VX-880, Vertex will move forward with the full targeted dose
The acquisition of ViaCyte will help Vertex run multiple programs in parallel to expand its target treatable patient population for T1D from the initial 60,000 to 2.5 million
Pain
VX-547 Phase 3 plans for acute pain have been endorsed by the FDA with two days duration which allows Vertex to collect data quickly and potentially file for approval in the near future
Motivations are aligned across patients, physicians, policymakers, and payers to have a non-addictive pain treatment
Sickle-Cell and Beta Thalassemia
Vertex has finished regulatory discussions in the UK and in the EU and is on track to file this year
In the US, Vertex has now completed our pre-BLA discussions and is in the process of finalizing the details of the filing package now. Executives have not provided any detail yet, but expressed satisfaction with the pre-BLA discussions
± INFLATION ±
WITH BLUE ROOM TEAM LEADER
OMAR GUZMAN
Below I discuss last weeks' latest inflation numbers, with headline and core increasing 8.3% and 6.3% year-over-year in August, respectively, surpassing consensus expectations and pressuring the Federal Reserve to hike the Federal Funds Target Rate by 75 basis points to 3.00%–3.25%. Wall Street banks are pricing in another 125 basis points for an end-of-year range of 4.25%–4.50% as the nation's central bank attempts to bring inflation back down to 2.0%.
± COMMENTARY ±
WITH BLUE ROOM FOUNDER AND CIO
MINYOUNG SOHN
After reviewing the components of consumer price inflation, we concluded that inflation is likely to persist with core inflation at risk of further upside pressure from services and housing.
Housing is fully one—third of the consumer basket, and with rent measured to be increasing by six percent per year, how does this category not produce at least two points of CPI each year?
Elsewhere, all forms of regular monthly expenses are pushing through price increases.
Headline Inflation includes Food & Energy:
— FOOD is 13.5% of the consumer basket, and prices increased by 11% versus last year, with grocery inflation hitting 13%. Notable shopping cart items include cereal up 16% and eggs up 40%.
— ENERGY is 8.8% of the consumer basket), and compared to last year, inflation has slowed but still increased 24%. On a related note, our macro research suggest Oil and Energy prices will increase again this winter.
EXCLUDING Food and Energy, all other consumer price inflation ("Core CPI") accelerated to 6.3%. Digging through the numbers, we find:
— Flat panel TV price deflation got a lot of airtime from celebrity commenters, but the entire category is smaller than chicken eggs.
— Transportation is a big category at 15% of the consumer basket: From a goods perspective, both new and used car prices inflated 10% while transportation services also increased by 11%.
— Technology category (0.67) deflated by 8.8% but elsewhere other retail categories, including sporting goods (0.54) +3.8% and pet retail +10.7% saw inflation.
Shopping frequency up 7.2% worldwide and 5.2% in the U.S. during Q4, an indicator of global trends relative to the domestic. Additionally, average tickets increased 6.0% worldwide and 10.0% in the United States. The inflationary environment continues to show its effects, even with value oriented retailers. Anecdotally, Costco said that its Kirkland brand saw less pronounced growth this quarter, despite Walmart and Target noting increased propensity for consumers to spend on the cheaper and higher margin owned brands. Instead of trading down into cheaper products, Costco saw customers trading up or “sideways”.
Memberships were another key insight provided by the earnings call; the company posted a solid +9.0% gain in paid membership revenue, but as a percentage of revenue the figure went from 2.02% in FY2021 to 1.90% in FY2022, highlighting how topline growth continues to grow faster than membership revenue. On a per person basis, that tells us that the average ticket continues to grow at an outsized pace. According to CFO Richard Galanti, the company has no intentions of raising the membership rates in the near-term because (1) we have a few more months left before we lap the five-and-a-half year average membership hike cycle and (2) the strong 90.4% worldwide renewal rate, not necessitating a price increase offset.
Regarding inflation, the company said that it saw higher commodity and wage prices in the quarter and forecast the elevated costs to remain (not necessarily increase). The company estimated that their customers saw about 8.0% product inflation and Costco saw about 7.0% cost inflation. In both the prepared remarks and in the Q&A, CFO Galanti stated that wage inflation was the one thing that continues to trend notably higher. On the logistics end, container shortages were down, container costs were down and delivery times were good. Inventory was up 26.0% y/y, with about 10-11% of that related to goods inflation.
In the Q&A, an analyst from Baird asked what Costco would consider a harbinger of a serious recession, to which Galanti noted that in 2008, the company saw much weaker “big and bulky” seasonal products like grills, lawnmowers, outdoor equipment etc., but also stated that Costco has already worked to mark down those items to clear inventory.
September 12, 2022 at 4:30 PM PT
Moderator: Kasthuri Rangan — Goldman
Speaker: Jeff Lawson — Co-Founder & Chief Executive Officer
Question & Answer Session
Level set us on where you want to be in the next 4-5 years. What are your wildest dreams for the company and how do you plan to get there?
Twilio started as a communications company
Providing leading APIs for voice, messaging, email, etc.
Twilio has 275,000 customers today
That represents companies of all kinds in all types of industries
The common thread is they come to Twilio to build a better relationship with their customer
There are all kinds of internal use cases: PBXs or collaborations
Twilio doesn’t play in that space
When it comes to talking to your customer, using this digital technology to build a digital relationship, to acquire customers, to keep them engaged — that’s a story of communication
That’s how you stay relevant, keep customers pulled in through marketing, service, etc.
The real purpose Twilio serves is to power these customer relationships
Companies told them what gets in the way is having so many unconnected pieces of software
As customers, we feel a disjointed sense of companies we do business with
These are the experiences that either frustrate customers or turn them into raving fans
Communication is a foundation
The other piece is having data on your customers, understanding them
That’s why Twilio bought Segment
They can take all kinds of data coming in about their customers — from website, mobile app, eCommerce system, marketing system, service support system — to stitch it together into one golden profile for a customer
Based on that profile and similar customers, companies can start driving journeys and campaigns
So that every touch point is relevant to where that customer is
Twilio is stitching customer data and communications together to applications of engagement
Contact Center = Flex
Marketing = Engage
Sales = Frontline
ID Verification = Verify
Together, these are the core building blocks for the front of house that customers need to build engagement
Today, in 2022, the conversation Jeff Lawson is having with customers is connecting the dots between how all this technology helps lower CAC and increase LTV
That’s what every company wants to do: Do more with less customers, acquire more customers while targeting is getting worse
Twilio has the antidote to all of those aspects
Volatility is the dominant theme for the oil and gas markets this week. The price of natural gas continues to whipsaw as traders continuously ingest and analyze the relative importance of geopolitical matters across Europe. Indeed, the price of crude continues to move sharply as analysts balance economic uncertainty and a tight supply and demand equation.
First looking at the domestic natural gas market, prices continue to remain elevated – largely because of the global supply shortage made worse by the war in Ukraine. Across the country, prices are expected to remain high in the coming months as fuel is needed to keep lights on and warm homes in the winter. Natural gas prices are roughly 100% more expensive than they were during this period last year. This has had a notable impact on the overall price of energy: the US CPI for electricity in August rose 15.8% year-over-year – the biggest such annual increase since 1981 – according to a report from the US Bureau of Labor Statistics. Furthermore, utility gas services saw a year-over-year increase of 33%. To make matters worse, these elevated natural gas prices – and with them, electricity prices – will accompany record-high gas consumption this winter, according to the EIA. So the impact of natural gas prices on consumers’ wallets will likely not abate this year.
While natural gas prices in the US are set to remain elevated, in Europe, the situation remains far more opaque. While still three times as high as it was a year ago, the price of natural gas in Europe has fallen more than 45% from the record high closing reached on August 26. What’s more, electricity prices in Europe have almost halved from their peak. When assessing the reasons behind this steep decline, analysts point to near-full gas stores in central Europe, the closure of energy-guzzling smelters and fertilizer plants and the installation of import terminals in the Netherlands and elsewhere for liquified natural gas.
KEY TAKEAWAYS
Nvidia has made a clear push in its Data Center business segment with nearly 80% of CEO, Jensen Huang’s keynote focusing on non-gaming AI and Nvidia Omniverse.
Some of the key announcements that we took from the keynote included:
Gaming
Nvidia provided RTX 4080 and 4090 GPU release details. Both hardwares features the Lovelace architecture and offer between 2-4x faster performance than GPUs in the previous generation. The entry price will be $1,199 for the 4080 16GB, $899 for the 4080 12GB and $1,599 for the 4090 16GB. The 4080 will be available in November and the 4090 will be available in October.
We interpret the release of these higher-end GPUs as an attempt to continue on sell-through efforts in their older-gen GPU channels. The move is also a clear effort to remain one step ahead of AMD’s next generation Radeon RX 7000s. The performance and price point are encouraging and relieves some of the pressures from our near term model for Nvidia’s graphics segment.
Nvidia AI and Omniverse
Updates to Nvidia Omniverse including support for next gen GPUs, new neural rendering tools, developer tools, the world’s first sim ready digital asset library and omniverse digital sim replicator softwares.
DRIVE Atlan has been replaced by DRIVE Thor, a recognition by Nvidia’s robotics development team that the new Lovelace hardware could help double the performance. Thor is still slated to release in 2024.
In non-automotive robotics, Nvidia announced innovation design wins with companies like Siemens, Activ Surgical, Proximie and Moon.
New acceleration libraries and the extension of rapids to reach more potential users.
CV-CUDA Open Source Project for an open source GPU accelerator library for computer vision.
Nvidia NEMO BIONEMO LLM services for digitized biology research and development, and a partnership with the BROAD Institute’s Terra Library.
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