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Week in Review: 2/6/22

Everything worth commentating on regarding this past week in the markets.

Welcome to this week’s edition of the Week in Review! This post serves as your all-encompassing highlight reel of the last 5 trading days.

These weekly highlight reels are the bread and butter of Rate of Return. If you’re not yet subscribed, consider doing so. You’ll gain access to these “weekly recaps” as well as my personal investment portfolio, my favorite stock ideas, and Sunday night livestreams.

Sit back, relax, and let’s dive in together.

Expected Read Time: 9 minutes

ICYMI - Posts from The Past Week:

Rate of Return Podcast — Episode #1 w/ Betterment CEO:

Week in Review - Too Long; Didn’t Read:

IPO dead period continues — but let’s keep an eye on who may be coming to the markets next, Google cruises with excellent earnings and a 20:1 stock split, Amazon soars from growth in AWS and advertising, Meta’s path forward isn’t looking pretty, AMD surges due to heightened sales projections, PayPal has an epic selloff, Spotify sinks, MicroStrategy officially owns 125K Bitcoin, and employment data sends mixed signals for the rapidly changing US labor market.

IPO Updates:

No notable IPOs to report on this week, as private companies continue to be spooked by uncertainty surrounding the global supply chain, a rapidly evolving labor market, and of course — interest rate hikes.

While this may be a “dead period” for initial public offerings, I’m very interested to see if blockbuster IPOs still take place over the coming months. The most speculation is surrounding the following companies, given their massive reach and valuations:

  • Discord ($15B)

  • FTX ($32B)

  • Klarna ($45B)

  • Reddit ($15B)

  • Stripe ($95B)

Out of every single one of these, Stripe is the one that makes me most excited. If you’re not familiar with the company — they offer payment processing infrastructure to enterprises. They service the payment rails behind Shopify, Wayfair, Google, Peloton, Instacart, Amazon, Notion, and Figma just to name a few.

Feel free to browse their website — you’ll likely recognize a few. Stripe even published case studies as to how specific enterprise customers were able to save time and money using their services.

When we think about companies we want to be heavily invested into, companies with enterprise customers are top of mind. There are an infinite amount of variables that can impact a retail customer’s ability to purchase a product — these don’t exactly exist for enterprises. Shopify needs payment processing to exist, as does Substack, Twilio, Postmates, etc.

Key Earnings Announcements:

Breaking down the major reports from the most chaotic earnings week of 2022.

  • Alphabet (GOOG)

Key Metrics

Revenue: $75.3 billion, an increase of +32% YoY

Operating Income: $21.9 billion, an increase of +29% YoY

Profits: $20.6 billion, an increase of +36% YoY

Google Search Revenue: $43.4 billion, an increase of +36% YoY

YouTube Ad Revenue: $8.6 billion, an increase of +25% YoY

Google Cloud Revenue: $5.5 billion, an increase of +45% YoY

Press Release Callout

“Our fourth quarter revenues of $75 billion, up 32% year over year, reflected broad-based strength in advertiser spend and strong consumer online activity, as well as substantial ongoing revenue growth from Google Cloud.”

My Takeaway

Google Cloud. That’s the memorable callout, right? I spent time this weekend compiling updated thoughts on “cloud businesses,” including Google Cloud Products (GCP) — as well as where I believe they’re headed. Spoiler alert: I’m incredibly excited about Google Cloud Products, Amazon AWS, and Microsoft Azure.

On Google specifically, this is everything we hoped for. Google represents a 4% overall weighting in my portfolio — and for good reason. Looking back to this post, Google was a big bet because of their ability to continually drive growth for their ad business and YouTube. This quarter, their ad business thrived, YouTube kept up, and GCP took everyone by surprise.

As of now, GCP is not a profitable business segment in and of itself — however, the company is narrowing their losses while investing toward their customers’ long-term success on the platform. Plus, the company just confirmed their intentions of conducting a 20-to-1 stock split, so expect retail demand to increase (explained here).

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  • Amazon (AMZN)

Key Metrics

Revenue: $137.4 billion, an increase of +10% YoY

Operating Income: $3.5 billion, a decrease of -49% YoY

Profits: $14.3 billion, an increase of +99% YoY due to Rivian (RIVN) IPO

AWS Revenue: $17.8 billion, an increase of +40% YoY

AWS Operating Income: $5.3 billion, an increase of +48% YoY

Press Release Callout

“As expected over the holidays, we saw higher costs driven by labor supply shortages and inflationary pressures, and these issues persisted into the first quarter due to Omicron. Despite these short-term challenges, we continue to feel optimistic and excited about the business as we emerge from the pandemic. When you combine how we’re staffing and scaling our fulfillment network to bring even faster delivery to more customers, the extraordinary growth of AWS with 40% year-over-year growth (and now a $71 billion revenue run rate), the addition of marquee new entertainment like The Lord of the Rings: The Rings of Power and Thursday Night Football, and a plethora of new capabilities that we’re building in areas like Alexa, Ring, Grocery, Pharmacy, Amazon Care, Kuiper, and Zoox, there’s a lot to look forward to in the months and years ahead.”

My Takeaway

There’s a lot to digest here, so let’s talk through all of that. Starting from the top, revenue increased +10% YoY — great. Next is operating income — we see this number decrease substantially (as well as free cash flow) which might spook some readers, but Jassy does a fantastic job explaining why this happened:

“Despite lapping 2020's extraordinary sales growth, we continue to see an increase in customer demand and sales during the remainder of 2021, even as the economy opened back up. For Q4, Amazon's 2-year annual compounded growth rate was 25%. We've invested significantly to keep pace with this demand, including nearly doubling our operations capacity in the past 2 years, expanding our fulfillment center footprint while adding significant transportation assets to ensure fast on-time delivery. There are now 1.6 million Amazon employees worldwide, also doubling in the 2-year period.”

Amazon had to do a lot to keep up with demand, AKA making massive investments into their business. These investments cost a lot of money, but over the long-term will be the fuel to keep the FCF printing.

Finally, we saw an insane increase in revenue for AWS — up +40% growth, with +48% growth in operating income. Fantastic to see this business segment is now operating at a $70B+ annual run rate, up from $50B just 12 months ago. Amazon will remain the largest holding by weight in my portfolio through 2022.

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  • Facebook (META)

Key Metrics

Revenue: $33.7 billion, an increase of +20% YoY

Operating Income: $12.6 billion, a decrease of -1% YoY

Profits: $10.3 billion, a decrease of -8% YoY

Facebook Daily Active Users: 1.929 billion, the first decrease in history

Press Release Callout

“I'm encouraged by the progress we made this past year in a number of important growth areas like Reels, commerce, and virtual reality, and we'll continue investing in these and other key priorities in 2022 as we work towards building the metaverse.”

My Takeaway

In case you missed my in-depth feedback on Facebook’s earnings results, click this link. So here’s the deal — Facebook is getting their ass kicked by Apple’s new iOS data tracking inhibitor, making it really hard to serve up “intrusive” advertisements to in-app users. This was the secret sauce Facebook relied on for the last decade, and now that they can’t do exactly do this in a manner that’s immensely beneficial for their advertising customers — they’re scrambling.

However, Facebook’s solution to this is to build their own “world,” or “universe,” or.. ~metaverse~. Right now, Facebook is forced to bend the knee to Apple — they own the operating system running all of their apps to their most profitable users (USA). But, if Facebook would build their own “place” in which they own completely, they can do anything and everything they want. Hence their $30B investment in 2022 toward building this.

However, as I stated in the linked article above, I think this is going to take a long time and the market will likely continue to discount Facebook in relation to their peers until this happens and is proven to be successful. I’d rather have this money invested toward other budding Mega-Caps who are still in the first innings of their company baseball game i.e. Tesla.

Not all is bad here — Facebook spending $30B to build the metaverse is someone else making $30B to help them. I identified 4 companies who might be receiving a healthy dose of that $30B to their topline this year.

—

  • Advanced Micro Devices (AMD)

Key Metrics

Revenue: $4.8 billion, an increase of +49% YoY

Operating Income: $1.2 billion, an increase of +112%

Profits: $1.1 billion, an increase of +76% YoY

Computing & Gaming Revenue: $2.6 billion, an increase of +32% YoY

Enterprise, Embedded, and Semi-Custom Revenue: $2.2 billion, up +75% YoY

Press Release Callout

“2021 was an outstanding year for AMD with record annual revenue and profitability. Each of our businesses performed extremely well, with data center revenue doubling year-over-year driven by growing adoption of AMD EPYC processors across cloud and enterprise customers. We expect another year of significant growth in 2022 as we ramp our current portfolio and launch our next generation of PC, gaming and data center products.”

My Takeaway

What an absolute banner year for AMD. Despite everyone worried about a chip shortage impacting their business, AMD still figured out how to post +68% annual growth. This quarter was another demonstration of rockstar leadership paired with secular growth trend tailwinds.

As you all know, I doubled my position in AMD about three weeks ago (link). I’ll continue expanding my position on red days — perhaps hitting 3% weighting by the end of the first quarter.

—

  • PayPal (PYPL)

Key Metrics

Revenue: $6.9 billion, an increase of +13% YoY

Operating Income: $1.1 billion, an increase of +9% YoY

Profits: $801 million, a decrease of -49% YoY

Total Payment Volume (TPV): $339.5 billion, an increase of +23% YoY

Net New Active Accounts (NNA): +9.8 million, with +3.2 million coming from Paidy

Earnings Call Callout

“Exogenous factors also did impact our results. Supply chain issues disproportionately impacted our cross-border volumes and our small business merchants. Inflationary pressures impacted spending within certain segments of our user base. Rising threats from COVID variants cut travel and event bookings, and the elimination of government stimulus had an impact as well.

E-commerce growth rates during the holiday season were lower than industry expectations despite a strong 2-year growth rate of almost 50%. And we are also lapping some of the strongest quarters of growth in our history.”

— Daniel H. Schulman, CEO of PayPal

My Takeaway

It’s no surprise that PayPal fell short this quarter — just look at their stock price. Unfortunately, I fell victim to this negative earnings surprise as well. However, in proper “2022 Portfolio” fashion, PayPal only represented ~1% weighting. I’m not trying to shrug away this -34% monthly loss, but instead I’m trying to show how important proper weighting can be to a portfolio. Sure, PayPal is a global giant, but they’re not a top tier company like Amazon or Google — therefore we kept their weight lighter as we headed into earnings volatility this year.

PayPal is expecting headwinds to their e-commerce spending funnel from a combination of inflation, stimulus expiration, and supply chain pressures. However, PayPal remains the best pure-play stock on e-commerce as a whole given their $1.5 trillion expected total payment volume in 2022. TPV continued to climb in 2021 (+33%), net new accounts climbed (+49M), and transactions per active account (45) climbed +11% as well.

What I’m getting at is that I think the market may be over reacting to these results. Sure, their guidance is ~$1 billion lower than expected, but they’re still guiding toward $6 billion in FCF for 2022. This is about $5 in FCF / share, and with a standard 35X multiple lands us closer to $175 / share by EOY 2022 — which is conveniently the same price target Bank of America, JP Morgan, and Morgan Stanley have on the stock.

All in all, I’m not ready to count them out just yet, especially since they make up so little of my portfolio.

—

  • Spotify (SPOT)

Key Metrics — all amount in Euros

Revenue: $2.7 billion, an increase of +24% YoY

Operating Loss: -$7 million, up from -$69 million this quarter last year

Net Loss: -$44.4 million, up from -$152.7 million this quarter last year

Total Monthly Users: 406 million, an increase of +18% YoY

Premium Subscribers: 236 million, an increase of +16% YoY

Ad-Supported MAUs: 236 million, an increase of +19% YoY

Press Release Callout

“We ended 2021 with strong Q4 results, led by outperformance in MAUs, continued momentum in our subscription business, and meaningful advertising results. Looking back on not just this quarter, but the past few years, we are increasingly excited about the investments we have made and see meaningful progress within a number of our initiatives. As we move into 2022 and beyond, the opportunities in front of us are large and we see a tremendous amount of greenfield on the horizon.”

My Takeaway

Spotify has been in the headlines recently because of Joe Rogan, a podcast host who signed an exclusive $100M deal with the platform a few years back. Somehow, Spotify found a way to piss off both sides of the aisle (red & blue) — which I don’t think will bode too well for them in the near-term.

However, I’d imagine people will get over it.

I’m not an investor in Spotify, but if you are — there’s a lot to look forward to in 2022. Their 418 million MAU guidance was only 1M below expectations, their CFO indicated that 2022 customer activity is expected to be equivalent to 2021 (strong), and the company is raising their prices by about +3%. Another positive is that advertising momentum now represents 15% of total revenue. I’ll be on the sidelines given all of the Joe Rogan controversy.

Investor Events:

Two very different event callouts from the past week – a blockbuster international deal for the world’s best airplane manufacturer and MicroStrategy continues to convince the world that bitcoin isn’t going anywhere.

  • Boeing’s (BA) $34 Billion Deal with Qatar Airways

A bit different from the normal content of this section, but I found it reasonable to call out such a massive order for Boeing. Early in the week, the airplane manufacturer won a record launch order from the US ally in the Gulf states — 34 new 777X freighters and a surprise purchase of 737 MAX passenger jets.

The deal is expected to worth $34 billion. As a result, shares of Boeing rose +8.24% this past week. The average Wall Street price target on Boeing currently sits at $255 / share, representing +23% upside.

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  • MicroStrategy (MSTR) World 2022 Event 

If you’re an average bitcoin follower, it’s very likely you’ve heard of Michael Saylor – CEO of MicroStrategy. The most notable part of the company’s World 2022 Event was a 4+ hour segment called Bitcoin for Corporations. It this segment included a Keynote featuring Block (SQ) CEO Jack Dorsey, a lengthy discussion on Bitcoin Treasury, a debate over Bitcoin Products & Services, and finally Bitcoin’s Outlook going forward.

Saylor & Co. also announced that throughout the month of January, his company had accumulated approximately 660 additional Bitcoin for around $25 million. This brings the Virginia-based company’s grand total to 125,051 bitcoins — valued at nearly $5.2 billion at the time of writing this post.

Simply unbelievable conviction.

Below is a link to Saylor’s discussion with Dorsey, where they deliberated over bitcoin becoming a standard with a brief touch on the Lightning Network.

Major Economic Updates:

Conflicting employment data provides a clouded picture for US employment, the ISM Manufacturing Index hits its lowest mark in 16 months, job openings & job quits remain near record highs, and construction spending slows.

  • ADP Employment Report

According to ADP’s National Employment Report, private sector employment decreased -301K from December to January. Leading the way was a -154K plummet in Leisure & Hospitality, -62K decrease in Trade, Transportation & Utilities, and -21K in Manufacturing.

If you’re not familiar, the report is is derived from ADP’s actual data of those who are on a company’s payroll, measures the change in total non-farm private employment each month on a seasonally-adjusted basis. The report measures over 26 million workers. To put this in perspective, they handle about 20% of all privately-employed individuals in the country. Here’s a link to the publicly traded company’s website.

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  • January Jobs Report

According to the Bureau of Labor Statistics (BLS), non-farm payrolls unexpectedly rose +467K in January – soaring past market expectations of 150K. Notable gains came in leisure & hospitality (151K), food services & drinking places (108K), professional & business services (86K), retail trade (61K), and transportation & warehousing (54K).

This is sort of weird to see — one report derived from the authority in payroll, while the other is derived from the Bureau of Labor Statistics. I do recognize that ADP does not include any government employees, but it’s still weird to see the difference in data between the two reporting entities.

The labor force participation rate rose to 62.2% — the highest it has been since the pandemic began, despite being a full point below pre-pandemic levels. The above data paints a confusing story, but I’m optimistic that the labor market will continue to recover and the next variant isn’t as sweeping as Omicron.

—

  • ISM Manufacturing Index

According to the Institute for Supply Management (ISM), the Purchasing Managers Index (PMI) fell for a second consecutive month to 57.6 in January from 58.8 in December. This marked the weakest growth in factory activity since September of 2020.

"The US manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance. Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labor on factory floors due to the COVID-19 omicron variant. Quits rate and early retirements hinder reliable consumption. Panel sentiment remains strongly optimistic.”

— Timothy Fiore, Chair of the ISM 

—

  • Job Openings

According to the Bureau of Labor Statistics (BLS), the number of US job openings remains near record highs. The most recent mark had job openings rise to 10.93 million in December from 10.78 million the month before – well above market expectations of 10.3 million. 

The largest job opening increases were found in accommodation and food services (+133K), information (+40K), nondurable goods manufacturing (+31K), and state and local government education (+31K).

Job openings decreased in finance and insurance (-89K) and wholesale trade (-48K).

—

  • Job Quits

According to the Bureau of Labor Statistics (BLS), the number of US job quits dropped to 4.3 million in December – following a record 4.5 million quits in November. 

Quits decreased in health care and social assistance (-89K), accommodation and food services (-64K), and construction (-44K). Quits increased in nondurable goods manufacturing (+19K).

Regionally, the number of quits decreased in only the South region.

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  • Construction Spending

According to the US Census Bureau, construction in the US marginally increased +0.2% in December to a seasonally adjusted annual rate of $1.64 trillion – missing market expectations of a +0.6% gain. 

Spending on private construction rose +0.7% – mostly new single family residential construction (+2.1%), amusement and recreation (+3.3%) and lodging (+2.1%). 

Spending on public construction fell -1.6% – brought down by transportation (-3.0%), education (-1.4%), and sewage / waste disposal (-3.9%).

Enjoy the rest of your weekend!

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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