Hi Everyone 👋,

Those who sold in May and went away missed some monster developments this summer.

In both financial markets and in exciting new innovations.

This week, the headlines continued rolling: Amazon and Apple reported, the US got downgraded, and there’s a new topic for armchair experts to opine on: superconductors.

In the dog days of summer, investors who opened their emails vs hitting the dock/beach got rewarded.

In this week’s newsletter, we’ll break down what happened this week:

• Earnings 👉 Amazon, Apple

• Downgrading of US Debt👉 Is Fitch’s Downgrading A Big Deal or Irrelevant?

• Superconductors 👉 Scientists Doing Things

Let’s get started!

1. Earnings 👉 Amazon, Apple

Earnings keep chugging along as investors square off multiples with fundamentals. Meta and Google gave Tech investors a look into a recovering ad space, while Microsoft failed to clear a high bar despite stellar profitability metrics.

This week we got Apple and Amazon. Amazon shot the lights out. Apple… not as much.

Amazon

Overview

Amazon put up a stellar quarter on all fronts. On the product marketplace side, the fulfillment channel won MVP. Amazon continues to optimize its fulfillment network and squeeze out operational efficiencies.

Same or next day deliveries have 4X’ed in volume since 2019. Remember - Amazon invested heavily into their fulfillment network over 2020 (chart below)… it’s paying off.

They’ve found success building out smaller and localized same-day facilities that have decreased “touch-points” and travel miles between the product and end destinations.

AWS has been the star of the show for the last few years, but this quarter reminded everyone how brutally efficient the core business is.

Speaking of AWS, Jassy went hard managing growth expectations for AWS last quarter. This quarter, those expectations were met and there was no stir.

While Amazon’s market cap trails the other Tech majors, this quarter gave bulls reason to believe the gap could narrow.

Key Graphics

By The Numbers¹

• Net Sales of $134.4B in Q2 exceeded expectations by 3.4% and they also beat guidance by 2.4% in a text-book beat and raise.

• AWS revenue came in at $22.1B, growing 12.2% YoY, and of course, AI build-out was mentioned on the call.

• On profitability, a solid increase in the mix on 3P channel sales drove stronger retail margin mix back up to 3.9% YoY, with management indicating that these could improve even further.

• Gross margin reached a record high at 48.6% and operating income was a massive beat, 60% above street estimates.

Apple

Overview

Apple was put on the naughty list and lost its $3T market cap crown.

It didn’t take long for people to forget how crazy it is that we HAD a $3T company in the first place.

There are only 4 countries in the world with GDPs bigger than Apple’s market cap (US, China, Japan, and Germany).

Despite strong services growth, declines in iPhones, iPads, and Macs overshadowed. This is the third straight quarter of declining sales.

Apple also guided more softening in hardware units. Expect revenue to be down 1% QoQ (+9% YoY) going forward. iPhone and Services should accelerate, but iPads and Macs may decline double digits.

Are consumers shifting from premium products as savings dry up?

Key Graphic

By The Numbers²

• Revenue of $81.6B vs. estimates of $81.2B, down 1% YoY.

• Segments: Services (+8%), Wearable (+2%), iPhones (-2%), Macs (-7.3%), iPads (-20%).

• EPS of $1.26 vs. estimates at $1.20.

• Gross margin of 44.5% vs estimates of 44.6%.

• Operating Margin 28.1% vs estimates of 27.7%.

2. Downgrading of US Debt👉 Is Fitch’s Downgrading A Big Deal or Irrelevant?

Last week, Fitch downgraded the US credit ratings from AAA to AA+. They are concerned about the country’s finances and debt.

My take? It’s a warning shot across the bow, but doesn’t really matter in the long run.

“A steady deterioration of governance” is what seemed to do it for Fitch. I guess the delayed debt-ceiling decision-making, skyrocketing debt levels and fiscal deterioration finally got to someone.

It seems like they have a point…

However, many were quick to point out that this downgrade doesn’t make sense. Even when you look at it relative to Fitch’s own criteria one year earlier, something doesn’t add up.

Regardless of how or why this happened, the question becomes, “What does this mean?”

For me, this is only a big deal if it leads to the forced selling of treasuries.

My take: No forced selling, so no real long term impact (despite the spike in yields). Here’s why:

This goes back to the article on banking I wrote about for our paid subscribers last week. The major buyers of treasuries are commercial banks because they use them to meet liquidity requirements. Treasuries are high-quality liquid assets. Any forced selling due to a change in classification would be a problem.

However, the Basel regulatory framework introduced around the 2011 debt ceiling drama does not have differentiation around the standards between AAA and AA-, in which the new AA+ credit rating sits. So for banks, this ratings change makes no difference at all, especially since they use their own internal systems of what makes up risk-weighted assets.

The knock-on implications of a jump in yields through, does warrant attention. Higher yields are a barometer of overall stress in the fixed-income markets and in the financial system.

At the end of the day - yes, this matters, but in the long-run… it doesn’t… yet… I’ll leave it with this patriotic video from Jamie Dimon:

3. Superconductors 👉 Scientists Doing Things

Also this week, we had a really cool science project generating headlines.

Two papers by South Korean scientists claimed the discovery of a practical superconductor LK-99. Superconductors are a type of material that can conduct electricity without resistance vs normal conductors that have resistance and lose energy as heat. By having no resistance, a theoretical superconductor would have much less energy waste.

Superconductors exist already, but the problem is they need to operate at extremely low temperatures (-273°C/-460°F). This limits practical use due to the cooling systems required.

However, these new papers are claiming they have found a way where superconductors could operate at room temperature. This would be a game changer for power transmission, electronics, electromagnets, energy storage, and overall reduced energy consumption.

While exciting, I’m putting this one in the “show me” camp. Many are already disputing claims made in the papers.

Cool headline, but no real substance yet.

Wrapping Up…

For those actually opening emails and reading headlines over summer, there’s been a lot of mental gymnastics.

“Sell in May and go away” might have worked for your Grandpa, but you can’t unplug these days!

Lucky for you, you read this newsletter.

Until next time. Always Yours. Incessantly Chasing ROI.

Sources:

1 Amazon IR (August 3, 2023): https://ir.aboutamazon.com/news-release/news-release-details/2023/Amazon.com-Announces-Second-Quarter-Results/

2 Apple IR (August 3, 2023): https://investor.apple.com/investor-relations/default.aspx

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