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👉 Week in Review: Bitcoin Reserve?

& Spotify's record free cash flow...

Happy Sunday.

We decided to unlock this week’s piece to everyone — including our 15,000+ free subscribers. These Week in Review posts are usually behind a $13 / month paywall, but it’s fun to let everyone in on the action every once and a while :)

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Let’s jump into the updates from this last week!

Portfolio Updates (Year-to-Date Returns):

After a long 6-weeks, I’m eager to begin deploying net new capital toward the portfolio. A few names I’m specifically excited about over the coming few weeks include Realty Income Corporation and VICI Properties. These REITs have been beaten down relentlessly over the last 12-18 months given high interest rates.

Now that the Fed is signaling rate cuts in September, I’m eager to see these company’s stock prices bounce back aggressively between now and the end of the year.

Additionally, the Bitcoin Conference this weekend caused the price of the cryptocurrency to fluctuate tremendously — we’ll dive into the details of that soon.

I plan to deploy ~$20,000 toward the portfolio during the month of August, with $10K of that in the form of stocks and the other $10K in the form of cryptocurrency (Bitcoin and Ethereum).

Considering the weighting discrepancy with the Long Risky section, the net new capital for the month will likely lean toward them. Specifically Crocs, Costco, Crowdstrike, Cloudflare, and Palo Alto Networks.

Considering the strong earnings experienced from Spotify, I might consider adding that name to my Long Risky section of the portfolio. Stay tuned!

Week in Review — Too Long, Didn’t Read:

Google Cloud eclipsed $10B in quarterly revenue for the first time, Tesla’s energy business segment doubled to $3B, Spotify delivered record free cash flow, Ethereum ETFs performed well in their first few days in the market, Trump went big in his Bitcoin speech, the EV landscape is taking punches left and right, the PCE Index is doing alright, and GDP showed healthy growth.

Key Earnings Announcements:

Google Cloud eclipsed $10B in quarterly revenue for the first time, Tesla’s energy business segment doubled to $3B, and Spotify delivered record free cash flow.

  • Alphabet (GOOG)

Key Metrics

Revenue: $80.5 billion, an increase of +15% YoY

Operating Income: $25.5 billion, an increase of +46% YoY

Profits: $23.7 billion, an increase of +57% YoY

Earnings Release Callout

“Our results in the first quarter reflect strong performance from Search, YouTube and Cloud. We are well under way with our Gemini era and there’s great momentum across the company. Our leadership in AI research and infrastructure, and our global product footprint, position us well for the next wave of AI innovation.”

My Takeaway

Alphabet reported a mixed quarter with outperformance at Search and Cloud, offset by underperformance at YouTube — largely due to tough comps YoY. Generative AI continues to be the special sauce that is driving strength across Search — as well as Cloud.

With that said, despite YouTube benefitting from a budget shift from linear TV to digital, healthy watch time growth, and improved Shorts monetization, more challenging comparables ultimately weighed on growth rates YoY. Their Cloud business continues to benefit from aggressive investment, finally eclipsing $10B in quarterly revenue for the first time in history. 

AI solutions for Cloud customers are being used by over 2 million developers, and importantly, the majority of its top 100 users are already using generative AI products. Both Cloud and Services business segment contributed to operating margin expansion during the quarter.

Looking forward 12-18 months, the company’s ability to advertise against their Generative AI product + continue to grow their Cloud business is what I have my eyes on. Long Google!

  • Tesla (TSLA)

Key Metrics

Revenue: $25.5 billion, an increase of +2% YoY

Operating Income: $1.6 billion, compared to $2.4 billion last year

Profits: $1.5 billion, compared to $2.7 billion last year

Earnings Release Callout

“Overall, our focus remains on company-wide cost reduction, including reducing COGS per vehicle, growing our traditional hardware business and accelerating development of our AI-enabled products and services. Though timing of Robotaxi deployment depends on technological advancement and regulatory approval, we are working vigorously on this opportunity given the outsized potential value.

Concurrently, we are managing our product portfolio with a long-term orientation and focusing on growing sales, maximizing our installed base and generating sufficient cash flow to invest in future growth.”

My Takeaway

Wall Street’s view on Tesla incrementally became more negative after this earnings call. We entered the Q2 earnings call with an interesting set up — the stock rallied +54% in 4 weeks because of their deliveries, but also everyone was excited about Robotaxi Day in August.

Despite the run up in stock price and their healthy energy storage growth, underlying automotive margins shrank by -4%, causing their stock price to nosedive. While the cost to make their vehicles continued to decline (a good thing), their margins ultimately contracted due to their financing incentives, lower production volumes, tariffs, and the ongoing ramp of the Cybertruck. Management also noted expectations for production to increase sequentially from Q2 to Q3, as well as Cybertruck to achieve profitability by the end of the year.

It’s clear that autonomy is a key contributor to the company’s valuation in the eyes of investors (Robotaxi Day, Optimus, etc.) — but unfortunately for us, the timelines on these autonomous products seem to be elongating.

Management also shared Semi factory will begin production by the end of 2025. They also maintained their outlook including “notably” lower growth in 2024 vs. 2023 — as well as their 1H25 timeframe for new, more affordable model launches.

In my opinion, Tesla’s automobile business will bounce back after interest rates begin to come back down. In the beginning, Tesla’s were cheap and so was debt — now that rates have been high for the last 18-months, we’re seeing that negatively impact the demand side of the equation for this company. I’m long Tesla (250 shares) and will continue to hold.

  • Spotify (SPOT)

Key Metrics

Revenue: $3.8 billion, an increase of +20% YoY

Operating Income: $266.0 million, compared to -$247.0 million last year

Profits: $274.0 million, compared to -$302.0 million last year

Earnings Release Callout

“Our business continued to perform well in Q2, led by healthy subscriber gains, improved monetization and record profitability. Although we did see another quarter of MAU variability, funnel conversion remained strong, particularly in developed markets where we recently adjusted pricing.

As a result, Subscriber net additions of 7 million were 1 million ahead of guidance.”

My Takeaway

Spotify delivered $1.3 billion of free cash flow during the quarter. To put that in perspective, the company has only generated $2.6 billion of free cash flow since 2016 — which means in a single quarter they delivered half of 8 year’s worth! Unreal cash flow growth — which is why their stock price is skyrocketing.

Their recent price increases allowed their to expand their gross profit margin to 29.2% — +1.1% higher than Wall Street’s expectations. With clear margin tailwinds, established pricing power, and ongoing expense discipline, there remains a clear runway for ongoing earnings revisions for Spotify. 

However, MAUs missed expectations by 5 million net new adds — coming in at 626 million. Top of funnel weakness, in part driven by a pullback in marketing spend, weighed heavily on emerging markets’ free users. Management expects to more meaningfully add MAUs by 1) increasing the use of partnerships as a customer acquisition funnel, 2) selectively increase marketing spend, and 3) prioritize product development for the free tier with several new products aimed at increasing engagement.

Spotify has been a tear over the last several months, and I’m not sure their stock price will slow down anytime soon.

Investor Events / Global Affairs:

Ethereum ETFs performed well in their first few days in the market, Trump went big in his Bitcoin speech, and the EV landscape is taking punches left and right.

  • The Launch of Ethereum ETFs

On their first day of trading, new spot Ether ETFs attracted +$107 million in net inflows, indicating strong demand.

BlackRock's iShares Ethereum Trust ETF led with $267 million, followed by Bitwise Ethereum ETF with $204 million, and Fidelity Ethereum Fund with $71.3 million. Investors pulled -$484 million from the Grayscale Ethereum Trust, which now charges a 2.5% annual fee, while its smaller fund, charging 0.15%, saw $15 million in inflows.

Collectively, the nine new funds manage over $10 billion in assets. These inflows are closely watched by crypto investors, hoping for a similar boost in Ether's price as seen with spot Bitcoin ETFs.

“I was curious how the Ethereum ETFs would rank in Day One volume vs. all 600 or so new launches in the past 12 months — but excluding the Bitcoin ETFs.

$ETHA would be #1 (by a lot), $FETH #2, $ETHW #5 and $ETH 7th, and $ETHV in 13th spot. And $CETH — which was lowest among group — would still rank in Top 10% vs a normal new launch. Just another way to illustrate how unusual all this is.”

Eric Balchunas, Senior ETF Analyst at Bloomberg 

  • Trump Bitcoin Speech Recap

Trump cites China competition in vowing to create bitcoin 'stockpile' | Reuters

Former President Donald Trump, speaking at the 2024 Nashville Bitcoin Conference, announced plans to establish a strategic bitcoin reserve for the US if re-elected. 

He highlighted that the US government currently holds over 210,000 Bitcoins — worth approximately $14 billion — seized from illegal operations. Trump proposed creating a crypto advisory council and ensuring friendly regulations for crypto mining, aiming to make the US the "crypto capital of the world."

He also pledged to prevent the creation of a Central Bank Digital Currency (CBDC) and to allow self-custody of crypto assets.

Additionally, Trump reiterated his promise to fire SEC chair Gary Gensler and to free Ross Ulbricht, imprisoned for his involvement with Silk Road. Wyoming Senator Cynthia Lummis introduced a bill at the conference to build a strategic bitcoin reserve, with plans to acquire 1 million bitcoins over five years to help reduce national debt.

  • EV Landscape Takes a Hit

 Automakers Ford (F), Tesla (TSLA), and Stellantis (STLA) are facing significant profit pressures in their traditional car businesses, leading to sharp declines in their stock prices despite ongoing transitions to electric vehicles (EVs).

General Motors, despite reporting a record second-quarter pre-tax profit of $4.4 billion and raising its full-year outlook, expects a $1 billion profit hit from increased discounts.

Tesla's second consecutive quarterly profit decline — driven by pricing pressures in China — resulted in a -12% drop in its stock. Stellantis saw a -10% share decrease over two days due to inventory backlog concerns.

Ford missed profit forecasts by $1.5 billion due to safety recall costs, causing an -18% drop in its share price, the largest in over 15 years.

Investors are worried as the strong pricing power from the pandemic era fades, affecting future profitability amidst high interest rates. Auto executives are trying to shift focus to future technological advancements and EV projects to address these concerns.

As I mentioned earlier — I’m still long TSLA :)

Major Economic Events:

The PCE Index is doing alright and GDP showed healthy growth.

  • PCE Index

The central bank's preferred measure of inflation, the personal-consumption expenditures (PCE) price index, indicates that inflation is approaching the central bank's +2% annual target.

In June, the headline PCE price index showed a +0.1% month-over-month increase and a +2.5% year-over-year increase. The core PCE price index, which excludes food and energy, recorded a +0.2% month-over-month increase and a +2.6% year-over-year rise.

“A two-word summary of the report is, ‘good enough’… “Spending is good enough to maintain the expansion, and income is good enough to maintain spending, and the level of PCE inflation is good enough to make the decision to cut rates easy for the Fed.”

Robert Frick, Corporate Economist at Navy Federal Credit Union

  • Gross Domestic Product (GDP)

In Q2 of 2024, real GDP increased at an annual rate of +2.8% — up from +1.4% in the first quarter — according to the U.S. Bureau of Economic Analysis' advance estimate.

  • The growth was driven by rises in consumer spending, private inventory investment, and nonresidential fixed investment, despite an increase in imports.

  • Consumer spending saw notable contributions from health care, housing and utilities, recreation services, motor vehicles, recreational goods, and gasoline.

  • Private inventory investment grew mainly in the wholesale and retail trade sectors, offset by declines in mining, utilities, and construction.

  • Nonresidential fixed investment saw gains in equipment and intellectual property products, though it was partially offset by a decrease in structures.

  • The acceleration in GDP from the first to the second quarter was mainly due to an upturn in private inventory investment and consumer spending, despite a downturn in residential fixed investment.

“The composition of growth was one of the better mixes that we have observed in some time… [The report] tends to support the idea that the American economy is in the midst of a productivity boom which over the medium term will lift living standards across the country via lower inflation, low employment and rising real wages.”

Joseph Brusuelas, Chief Economist at RSM

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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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