Uber Technologies Inc. (NYSE) had an impressive run early this year, becoming a top performer in the Industrials sector upon its inclusion in the S&P 500. However, as the first quarter ended, Uber’s shares declined. Despite these fluctuations, I am upgrading Uber’s stock from ‘hold’ to ‘buy’ due to its potential for growth driven by advertising revenue and new product offerings.
Q1 Performance
In Q1, Uber presented mixed results:
Operating EPS: -$0.32 (missed expectations)
Adjusted EBITDA: $1.38 billion (beat the $1.32 billion consensus)
Revenue: $10.13 billion, up 15% YoY (a modest $40 million beat)
Gross Bookings: Grew 20% YoY to $37.7 billion
Mobility Gross Bookings: Increased 25% YoY
Free Cash Flow: $1.36 billion
EBITDA Margin: Improved to 9.9%
Challenges in Latin America were notable, but other regions performed well. Guidance for Q2 includes Gross Bookings between $38.75 billion and $40.25 billion and adjusted EBITDA between $1.45 billion and $1.53 billion.
Future Growth Drivers
Uber’s growth potential is underpinned by:
Advertising Revenue: Expected to exceed $1 billion this year.
New Product Offerings: Includes Uber Shuttle, scheduled UberX shared rides, discounted Uber One student pricing, and a partnership with Costco.
Stock Buyback Program: Announced a $7 billion stock buyback program.
Positive Free Cash Flow: The company remains free cash flow positive despite a recent dip in stock price.
Risks
Key risks include:
Economic Downturn: Could lead to lower margins and slower user adoption.
Competition: Increased competition from Lyft and potential future self-driving services.
Regulatory Changes: Could negatively impact operations.
Valuation and Growth
Using a PEG ratio approach, Uber appears attractively valued:
PEG Ratio: Assumed normalized EPS growth rate of 25%, with a sector median PEG ratio of 1.65x.
Implied P/E Ratio: In the low 40s.
Intrinsic Value Target: In the mid-$80s based on consensus EPS of $2.10 for FY 2025.
Price-to-Sales Ratio: 3.44x, reasonable given Uber’s growth trajectory.
Technical Analysis
The technical outlook for Uber is positive:
Support: Shares held key support in the mid-$60s during the latest pullback.
Resistance: All-time high is around $80.
Moving Average: Rising long-term 200-day moving average around the mid-$60s.
RSI Momentum: Bullish divergence observed in late May.
Conclusion
Given the solid financial performance, potential for growth through advertising and new products, reasonable valuation, and positive technical indicators, I am upgrading Uber from ‘hold’ to ‘buy’. Despite recent corrections, the overall trend remains bullish, making Uber a compelling investment opportunity.
Yum China (NYSE) represents a high-quality business with a solid competitive advantage in the Chinese dining market, driven primarily by its KFC and Pizza Hut brands. Despite its current negative market sentiment, the company holds strong growth potential, particularly in lower-tier cities with significant untapped opportunities. This positions Yum China for sustained high growth over the long term, making it a compelling investment once market conditions stabilize.
Recent Financial Performance
Growth and Expansion: Since its spin-off from Yum Brands in 2016, Yum China has doubled its store count from 7,500 to approximately 15,000 by the end of FY 2023. This expansion, particularly in lower-tier cities, has driven revenue growth to $11 billion.
Store Growth: In FY 2023, Yum China opened 1,697 new stores, with half in lower-tier cities. The company plans to expand to 20,000 stores by the end of FY 2026, focusing on these lower-tier markets.
Earnings Performance: Despite recent stock underperformance, Yum China exceeded consensus EPS expectations in FY 2023 ($2 vs. $1.92) and Q1 FY24 ($0.72 vs. $0.65), indicating strong operational performance.
Strategic Growth Initiatives
Lower-Tier City Expansion: Lower-tier cities in China represent 70% of the population but have low penetration rates for fast food chains. This market is expected to see significant consumption growth, from $2.3 trillion in 2018 to $6.9 trillion by 2030, driven by the rising middle class.
Market Penetration: Yum China’s strategic focus on these lower-tier cities aligns with historical growth patterns seen in higher-tier cities, suggesting a sustainable growth trajectory.
Valuation and Market Sentiment
Current Valuation: Trading at a forward P/E ratio of approximately 15, Yum China appears undervalued compared to its growth potential. A dividend discount model (DDM) valuation estimates a target price of $37.1 per share, implying an upside of 18.5%.
Dividend Policy and Share Buybacks: Yum China has committed to a $3 billion repurchase/dividend plan within 2024-2026, reflecting management’s confidence in the company’s performance and attractive valuation. The company raised its quarterly dividend by 23% to $0.16 per share and repurchased $680 million in shares in FY24 Q1.
Investment Risks
Foreign Exchange Risk: The devaluation of the Chinese Yuan against the USD poses a risk, affecting revenue growth when converted to USD.
Market Competition: The competitive landscape in China’s restaurant market remains fierce. Emerging brands within Yum China’s portfolio, such as Lavazza, are still being tested.
Macro and Micro Factors: Broader market risks, including economic and political uncertainties in both the US and China, can impact investor sentiment and stock performance.
Conclusion
Yum China holds strong growth potential, particularly in the underpenetrated lower-tier cities of China. Despite its current undervaluation and an 18.5% estimated upside, the prevailing market risks suggest that now may not be the optimal time to invest. Monitoring broader market conditions and waiting for stabilization may provide a more attractive entry point for this fundamentally strong business.
Recommendation: Yum China is a “Hold” at present, with a potential “Buy” rating once broader market risks subside and sentiment improves.
DraftKings Inc. (NASDAQ: DKNG) has faced a challenging period, with its stock declining more than 20% from recent highs. Despite this, I maintain confidence in the stock, believing that the current volatility presents a temporary setback before a significant recovery. Investments often appear bleak before they regain momentum, and I am optimistic that DKNG will reach $65 per share by summer 2025.
Growth Potential and Financial Projections
DraftKings is projected to grow at a 37% CAGR in 2024, with revenue expected to exceed $5 billion. This growth is driven by strategic acquisitions and continuous innovation, enhancing their platform and user engagement. The company’s ability to attract and retain customers is a key factor in its anticipated growth trajectory.
Revenue Growth and Strategic Acquisitions
The company’s revenue growth is impressive, with guidance for more than 35% revenue growth this year. DraftKings has made several acquisitions, such as Jackpocket, which are expected to contribute to its revenue growth once fully integrated. Despite investor wariness about frequent acquisitions, these strategic moves are essential for maintaining rapid growth and scaling the business.
Free Cash Flow and Valuation
DraftKings is expected to generate $500 million in free cash flow by early 2025. This projection places DKNG at 36x forward free cash flow, which, while appearing high, is justified by the company’s rapid growth rate. As the business matures and slows its growth rate, the focus will shift to maximizing free cash flow.
Debt and Balance Sheet Management
DraftKings carries approximately $400 million in net debt, which could increase with potential new acquisitions. However, the company’s ability to generate substantial free cash flow provides a pathway to improve its balance sheet over the next year. Management’s significant ownership stake, with around $1 billion worth of DKNG stock, aligns their interests with shareholders, ensuring a focus on long-term value creation.
Market Position and Management Confidence
DraftKings operates in a growing industry, providing online sports betting and gaming services. The company’s strategy of continuous innovation and customer engagement positions it well for future growth. Management’s commitment to the company’s success is evident in their substantial stock holdings and their efforts to enhance the company’s financial health.
Conclusion: Strong Investment Potential
DraftKings offers a compelling investment opportunity due to its impressive growth prospects and financial outlook. Despite recent market volatility, the company’s projected revenue growth, strategic acquisitions, and potential for substantial free cash flow make it an attractive investment. With a price target of $65 per share by summer 2025, investors who stick with DKNG are likely to be rewarded.
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In May 2024, Airbus demonstrated strong market demand with significant orders and deliveries, despite ongoing supply chain challenges. The company booked 27 orders valued at $2.7 billion and delivered 53 airplanes worth $3.4 billion. However, delivery numbers indicate supply chain strains, with a 16% year-over-year decrease in units delivered. This report evaluates Airbus’s orders, deliveries, and supply chain health, comparing its performance with Boeing and providing insights into the aerospace market dynamics.
2. Order and Delivery Analysis
2.1. Orders Overview
In May 2024, Airbus secured 27 orders, comprising a mix of widebody and single-aisle jets:
20 A330-900 aircraft from an undisclosed customer.
7 A321neo airplanes from Nordic Aviation Capital.
Several changes and mutations occurred in the order book:
Air China converted five A321neo orders to A319neo.
JetSMART took delivery slots for two A320neo from BOC Aviation.
Saudia was identified as the customer for 93 A321neo and 12 A320neo airplanes.
ICBC Leasing was identified as the customer for one A320neo.
Nordic Aviation Capital canceled five A220-100s and seven A220-300s.
Overall, the net orders for the month were 20 units valued at $2.7 billion, highlighting a strong demand environment despite cancellations.
2.2. Deliveries Overview
Airbus delivered 53 airplanes in May, categorized as follows:
6 A220 aircraft.
41 A320neo family aircraft, including 19 A320neo and 22 A321neo.
2 A330-900neo aircraft.
4 A350 aircraft (three A350-900 and one A350-1000).
Compared to the same month last year, deliveries decreased by 10 units or 16%, primarily affecting the A320neo and A330neo families. The year-to-date deliveries stood at 256 airplanes valued at $16.2 billion, indicating modest growth from 244 deliveries valued at $15.3 billion the previous year.
3. Market Comparison: Airbus vs. Boeing
While both Airbus and Boeing face high demand in the commercial airplane market, Boeing’s struggles with finalizing orders have given Airbus an edge. Airbus’s net orders of 237 airplanes valued at $23.1 billion significantly outperform Boeing’s 103 net orders valued at $10 billion.
Despite Boeing’s challenges, Airbus’s delivery figures reveal that supply chain issues are a common industry problem, affecting both major players. The book-to-bill ratio for Airbus was 0.5x in units and 0.8x in value, with a year-to-date ratio of 1x in units and 1.5x in value, underscoring the continued supply chain constraints.
4. Supply Chain Challenges
Airbus’s delivery numbers suggest ongoing supply chain difficulties, with a significant year-over-year decrease in deliveries. The company had previously scaled back its ambitious production ramp-up due to these challenges. While improvements have been noted, a full recovery in the aerospace supply chain appears to be several years away.
5. Conclusion: Investment Considerations
Despite supply chain challenges, Airbus remains a strong contender in the aerospace market, benefiting from robust demand and a well-regarded product portfolio. The company’s strategic positioning and ability to secure significant orders provide a positive outlook, although delivery challenges persist.
Investment Strategy:
Buy: Investors should consider taking positions in Airbus, given its strong market demand and strategic order book, while monitoring supply chain developments.
Monitor: Keep an eye on delivery numbers and supply chain recovery progress to manage potential risks effectively.
In conclusion, Airbus’s performance in May 2024 highlights the company’s resilience amidst supply chain challenges, making it an appealing investment opportunity in the aerospace sector.
With robust travel expected around the 4th of July, building on bullish auto sales trends, automakers like Ford are well-positioned for a strong second half of the year. According to WardsAuto, May US light vehicle sales increased by 0.8% year-over-year, resulting in a seasonally adjusted annualized rate of 15.9 million vehicles. This exceeded estimates, highlighting strong demand for traditional internal combustion engine (ICE) autos and hybrid vehicles despite the challenges faced by the EV market.
2. Optimistic Earnings and Valuation
Ford’s recent earnings report demonstrated resilience and potential for growth:
Q1 Performance: Ford reported a non-GAAP EPS of $0.49, surpassing the Wall Street consensus estimate of $0.44. Revenue for the quarter was $42.8 billion, up 3% from the previous year, exceeding expectations by $1.3 billion. Strong profitability was driven by the Ford Pro segment and lower-than-expected losses in its Model e segment.
Future Projections: Ford’s management revised its free cash flow and capex outlooks but maintained its earnings guidance. Adjusted EBIT is now expected at the high end of the $10 billion to $12 billion range, with free cash flow projected between $6.5 billion and $7.5 billion.
3. Ford’s Strengths and Opportunities
Valuation: Ford’s current valuation is compelling, with a forward P/E ratio of 5.9, significantly lower than its 5-year average of 8.1 and the sector median of around 16x. If we assume $2 of normalized operating EPS and apply the 5-year mean P/E, then shares should be valued close to $16.50, making Ford an attractive investment.
Free Cash Flow and Dividend Yield: With a very high free cash flow yield of around 10% and a dividend yield of approximately 5%, Ford offers strong returns to shareholders. The company’s ability to generate substantial free cash flow provides an opportunity for further dividend payments and potential share buybacks.
Product Mix and Innovation: Ford has been successful in executing its One Ford plan, delivering best-in-class vehicles. The company is also making balanced investments across electrification, autonomy, and mobility services, positioning itself well within the evolving auto industry.
4. Key Risks
Macroeconomic Downturn: A significant economic downturn could negatively impact the auto market, reducing consumer demand for new vehicles.
Input Costs: Higher input costs, similar to those experienced in 2022, could threaten Ford’s margins. The automotive industry is highly sensitive to fluctuations in the prices of raw materials.
Geopolitical Risks: Disruptions in the supply chain due to geopolitical issues could affect production and delivery timelines, impacting Ford’s operations.
Gas Prices: Higher gas prices could be a headwind for Ford’s traditional vehicle sales, potentially shifting consumer preference towards more fuel-efficient or electric vehicles.
5. Technical Analysis
Ford’s stock has experienced a prolonged downtrend since peaking above $25 in early 2022. Key technical levels to watch include:
Resistance: The downtrend line from the $18 high in Q2 2022 comes into play near $13.50 today. Breaking above this level would be a positive signal.
Support: Strong support is evident in the $10.50 to $11 range. A dip below this range would be concerning.
Bullish Signal: The false breakdown last November may have shaken out weak hands, suggesting potential for a reversal. A breakout above $14 would confirm a reversal and improve the technical outlook.
6. Conclusion: A Buy Rating with Caution
Despite the challenges and current technical downtrend, Ford’s strong fundamentals, compelling valuation, and significant free cash flow make it a valuable investment. Investors should consider the following strategy:
Investment Strategy:
Buy: Initiate positions at current levels for long-term gains, especially if the stock breaks above $14. This would signal a technical breakout, aligning with Ford’s growth potential and high yield.
Monitor: Keep an eye on macroeconomic indicators, input costs, and gas prices for potential risks that could impact Ford’s performance.
Overall, Ford’s strategic investments in electrification, autonomy, and mobility services, coupled with its solid financial performance, position it well for future growth. The stock’s undervaluation and high free cash flow yield offer a compelling opportunity for value investors, making it a buy recommendation despite the current market challenges.
Warner Bros. Discovery (NASDAQ) is grappling with market skepticism regarding its growth potential. Despite generating strong free cash flow and significantly reducing debt, the company’s share price has continued to decline.
Current Market Sentiment
Quantitative Factor Grades
According to Seeking Alpha, WBD’s most attractive features are valuation and profitability. However, growth has been downgraded to “D-” from “A” over the past six months, with the stock price dropping approximately 40% during this period.
Contributing Factors to Market Sentiment
Several issues are driving this negative sentiment:
Lackluster Subscriber Growth: The Direct-To-Consumer (DTC) division has shown uninspiring subscriber growth.
Decline in Networks Business: The Networks segment is experiencing a downturn.
Hollywood Writers’ Strike: This has negatively impacted financial performance and market sentiment.
Financial Performance
For FY2023, WBD’s adjusted earnings were approximately $4.7 billion. This figure includes adjustments for restructuring and acquisition-related amortization expenses. The company’s free cash flow was $6.2 billion, boosted by reduced content production during the writers’ strike.
WBD is trading at an adjusted PE ratio of 2.7X and a 30% past-year’s underlying FCF yield, excluding strike impacts. These valuation multiples suggest market expectations of a severe decline, which is uncommon even for leveraged businesses facing structural challenges.
Business Segments Analysis
Networks Division
Overview
The Networks division, which includes cable TV networks like TNT, Discovery, and CNN, is the largest earnings contributor but is facing a decline due to the cord-cutting trend and shifting advertising revenues.
Future Outlook
The division will continue to generate free cash flow despite its decline, due to content spending cuts and network integrations. However, the overall decline in the pay-TV industry will impact its long-term prospects.
Studios Division
Overview
The Studios division produces films and TV content for both owned and third-party platforms. It has faced challenges due to declining linear network audiences but sees growth opportunities through DTC distribution.
Future Outlook
Despite the negative impact of the writers’ strike, the division is expected to recover in FY2025 as content production normalizes.
Direct-To-Consumer Division
Overview
DTC is the primary growth driver for WBD, encompassing HBO, HBO Max, and discovery+. It has approximately 100 million subscribers globally, including linear HBO subscribers with complimentary access to Max.
Future Outlook
DTC growth has been hindered by linear losses, but international expansion is expected to drive subscriber growth and increase ARPU. The launch of Max in Latin America and Europe, leveraging major events like the Summer Olympics, will be critical.
Strategic Initiatives
Deleveraging and Stock Buybacks
WBD is using cash flows from the Networks division to reduce debt. Once leverage targets are met, the company plans to initiate stock buybacks. This strategy could significantly enhance shareholder value, especially at current depressed price levels.
Profitability Targets
The company aims for the DTC division to achieve ~$1 billion EBITDA by FY2025. This target is seen as realistic and conservative, considering potential pricing increases in the US market.
Challenges and Risks
WBD faces significant risks, including:
Structural Decline in Networks: The Networks division’s decline could offset gains from DTC.
Advertising Revenue Volatility: Rapid declines in advertising revenues pose a major risk.
High Leverage: The company’s debt levels add financial risk.
Conclusion
Investment Thesis
Warner Bros. Discovery is currently undervalued, with the market heavily discounting its growth potential. The company’s robust content portfolio and strategic DTC initiatives position it well for future growth. As WBD continues to deleverage and improve profitability, particularly in the DTC segment, there is significant potential for stock price appreciation.
Final Recommendation
Despite the inherent risks, we believe that WBD offers a compelling investment opportunity at its current valuation. We recommend a “Buy” for WBD, while closely monitoring developments in advertising revenues, cost-cutting efforts, and DTC profitability.
Despite a notable 35.5% year-to-date (YTD) decline in SoFi’s stock and continued weak performance following the Q1 FY2024 earnings report, my bullish stance remains firm. I believe the stock decline was primarily due to short-term guidance falling below analyst expectations, not fundamental issues within the company. In this article, I will delve into the reasons behind my optimism, provide a detailed analysis of SoFi’s performance across its segments, and explain why I urge my readers to ignore the market’s pessimism and buy SoFi for the long term.
Recent Stock Performance and Market Sentiment
SoFi’s stock has faced a significant 35.5% YTD drop, exacerbated by the Q1 FY2024 earnings report and weak Q2 guidance. The stock experienced a 6.6% drop following the Q2 guidance, which fell short of analyst expectations despite a robust Q1 earnings beat of almost 196%. Consolidated sales grew by 26% year-over-year (YoY), exceeding consensus by 3.8%. However, mid-range guidance of $560 million for Q2 FY2024 revenue (versus consensus of $590.2 million) and adjusted EBITDA of $120 million (versus consensus of $135.9 million) led to negative sentiment and several earnings revisions. In my opinion, this decline is due to changes in short-term expectations rather than any fundamental problems within the company.
Segment Performance Analysis
Lending Segment
SoFi’s Lending segment had a challenging Q1 2024 with a slight 2% YoY decline in GAAP net revenue to $330.5 million. This decline marked the first QoQ and YoY revenue drop in recent memory, likely contributing to growing negativity towards SoFi, especially since this segment accounts for nearly 57% of the company’s total consolidated revenue. Despite the revenue decline, loan volume grew significantly, reaching $4.37 billion (+22% YoY), driven by an 11% increase in personal loans to $3.28 billion, a 43% increase in student loans to $751.7 million, and a notable 274% increase in home loans to $336.1 million. However, the profit contribution fell by 1% to $207.7 million due to cautious lending strategies amid economic uncertainty.
Technology Platform Segment
The Technology Platform segment performed exceptionally well, with net sales increasing by 21% YoY to $94.4 million, bolstered by strong customer acquisition and successful business in Latin America. The contribution margin more than doubled, increasing by 107% to $30.7 million, resulting in a robust margin of about 33%. SoFi’s number of enabled client accounts in this segment grew by 20% YoY to 151 million, showcasing the company’s ability to leverage its technological capabilities and expand its market presence.
Financial Services Segment
The Financial Services segment was the standout performer in Q1 2024, with net revenue increasing to a record $150.6 million (+86% YoY). This growth was driven by a significant increase in interchange income and net interest income. The segment generated a profit of $37.2 million, a remarkable turnaround from the loss of $24.2 million in the same period last year. Key products such as SoFi Money, SoFi Relay, and SoFi Invest recorded significant growth. The increase in debit transaction volumes and higher deposit growth solidified the segment’s important role in SoFi’s diversified revenue streams.
Management Strategy and Future Outlook
Conservative Lending Approach
The difficulties in the Lending segment during Q1 were primarily due to management’s conservative approach rather than inherent problems. In the face of rising credit costs and interest rate uncertainty, SoFi has opted for a cautious strategy, resulting in flat origination volume compared to the previous quarter and around $1.9 billion in loan sales. In a recent conversation with Mizuho’s Dan Dolev, CFO Chris Lapointe clarified the company’s near-term growth strategies. SoFi plans to strengthen its home loan business, particularly following the acquisition of Wyndham Capital to enhance back-end capabilities. Significant growth is expected in this area despite the current interest rate environment. There’s also potential for growth in student loans, especially in student loan refinancing post-elections and as interest rates fall. Growth in personal loans is being managed conservatively, but given the high credit quality of borrowers, there’s still considerable scope for expansion.
High-Quality Loan Portfolio
SoFi’s loan book is composed of high-yield, short-term loans given to borrowers with excellent credit scores (above 740) and high incomes (average salary over $160,000). This contrasts sharply with the lower-yielding, long-duration mortgage-backed securities (MBS) and commercial real estate (CRE) loans held by many other institutions. Potential investors should focus on SoFi’s long-term strategy rather than short-term performance. The company is deliberately taking a conservative approach to developing its core segment while actively investing in and expanding the other two segments, which are showing solid growth.
FY2024 Expectations
Looking at the end of 2024, SoFi is raising its expectations. The company projects fiscal 2024 adjusted net revenue of $2.41 billion (versus consensus of $2.38 billion) and adjusted EBITDA of $595 million, approximately 1.6% above consensus at the time of publication. Additionally, tangible book value (TBV) is expected to soar, with a total capital ratio exceeding 16%:
“Management now expects growth in tangible book value of approximately $800 million to $1 billion for the year versus previous guidance of $300 to $500 million, given the benefits of the recent convertible debt exchange along with the effects of new convertible issuance. We now expect to end the year with a total capital ratio of over 16%, due to those transactions versus our previous guidance of 14%. We continue to expect to add at least 2.3 million new members in 2024, which represents 30% growth.”
Valuation and Growth Potential
EPS Growth and P/E Multiple
I suggest focusing on EPS and the implied price-to-earnings (P/E) ratio as the primary valuation metrics for SoFi. If management’s approach to business growth continues to yield EPS expansion, the current consensus forecasts may be accurate. According to consensus estimates, SoFi is expected to achieve an EPS of $0.83 for FY2028. Assuming SoFi can trade at a P/E multiple of 20x by the end of 2028, the stock could reach $16.6 in five years, resulting in a potential compound annual growth rate (CAGR) of around 21%. This optimistic outlook is supported by Morningstar’s fair value model, which estimates SoFi’s fair value at $13 per share, significantly above the current stock price.
Peer Comparison
Comparing SoFi to its peers in the fintech industry, it appears to be the fastest-growing company in the sample based on consensus estimates. Moreover, its implied P/E multiple for FY2028 does not indicate overvaluation compared to industry averages. This further supports the potential for SoFi’s stock price to appreciate significantly over the next five years.
Risks and Concerns
Economic Downturn
In a severe economic downturn, SoFi could face significant risks, including the reversal of $607 million in mark-to-market gains and accelerated credit losses, leading to a sharp decline in its stock price. Although SoFi has high FICO scores and a strong Common Equity Tier 1 (CET1) ratio of 17%, these buffers may not be sufficient. Adjusted for accounting treatments and expected credit losses, the CET1 ratio could fall to around 9%, which may be too low given SoFi’s focus on unsecured retail loans. This could result in market or regulatory action, highlighting the importance of being aware of this risk when investing in SoFi stock.
Slowing Growth
There is also a risk that SoFi’s growth may slow faster than consensus estimates suggest, which would disrupt my calculations of the stock’s growth potential. Investors should closely monitor SoFi’s performance and be prepared for potential adjustments in growth projections.
Institutional Selling
It is concerning that some large institutional investors, such as the Qatar Investment Authority, are reducing their stakes in SoFi. This could indicate underlying issues that retail investors are not aware of. Investors should stay informed about such developments and consider the potential implications for SoFi’s stock.
Conclusion
Despite a notable 35.5% YTD drop in SoFi’s stock and continued weak performance following the Q1 FY2024 earnings report, my “Buy” rating remains unchanged. The stock decline was primarily due to short-term guidance falling below analyst expectations, not fundamental issues within the company. SoFi’s Lending segment faced slight revenue declines due to conservative strategies, but loan volumes grew significantly. The Technology Platform and Financial Services segments performed exceptionally well, demonstrating robust growth and profitability. Based on my calculations, SoFi’s projected 5-year EPS growth after 2028 exceeds 12.7%, and it should trade at around 20x P/E by FY2028, resulting in a potential CAGR of around 21% in SoFi’s stock price growth over the next five years. For all these reasons and despite the existing risks, I urge my readers to ignore the market’s pessimism and buy SoFi for the long term.
China’s coffee market is experiencing rapid growth and is likely the world’s largest. In 2023, Luckin Coffee doubled its store count, solidifying its market-leading position ahead of Starbucks and Cotti Coffee. With a gross margin of 55%, Luckin has remained profitable despite high SG&A costs associated with its rapid expansion. Even with a China discount, Luckin’s shares appear extremely inexpensive.
Coffee Culture in China
China’s urban centers, including Shanghai (population 26 million), Hangzhou (10 million), and Suzhou (8 million), are teeming with coffee shops of all kinds. From small, two-seat Manner coffee outlets catering to delivery workers to high-end establishments like Starbucks Roastery in Shanghai, offering premium drinks and spirits, coffee culture is diverse and thriving. Delivery is a significant aspect of this market, with 85% of consumers ordering coffee via delivery at least once a week.
Market Analysis
According to JDE Peet’s 2023 Annual Report, the USA remains the largest coffee market by dollars, and Brazil leads in cups consumed. China’s market, valued at $2.1 billion in 2023, grew by 58% and is now considered the largest market globally. With nearly 20% of total operations consisting of newly opened shops, the market is rapidly expanding.
Key Players
Luckin Coffee Inc. (OTCPK)
Market Leader: With 32% of all coffee shops in China, Luckin leads the market.
Store Count: Over 16,200 stores as of the end of 2023.
Growth Strategy: Aggressive expansion with a focus on profitability, boasting a gross margin of 55%.
Ownership and Corporate Structure: Controlled by Centurium Capital, a Chinese private equity firm.
Starbucks (SBUX)
Second Largest in China: With 7,093 stores, China is Starbucks’ second-largest market.
Growth: Opened 857 new stores in 2023, growing 15%.
Pricing: A Grande Americano is priced at RMB 30 (USD 4.20), with similar prices for other drinks and food items.
Cotti Coffee
Rapid Expansion: Founded in 2022, with over 6,000 outlets opened in 2023 alone.
Competitive Strategy: Opening stores near Luckin outlets, offering aggressive pricing and franchise terms.
Manner Coffee
Niche Player: Founded in 2015, with around 1,000 stores primarily in major cities like Shanghai.
Pricing: Coffee prices range from RMB 20-30 depending on location and type.
Costa Coffee
Global Presence: 459 stores in China, part of The Coca-Cola Company.
Potential Threat: Strong global backing but limited presence compared to Luckin and Starbucks.
Tim Hortons (THCH)
Struggling: With 800 stores, it faces operational inefficiencies and financial losses.
Pricing: Coffee is more expensive in China than in Canada, affecting its competitiveness.
JDE Peet’s N.V.
Slow Growth Strategy: Focused on organic growth with 250 stores in China.
Quality Offering: Known for high-quality coffee.
Financial Overview
Luckin Coffee Inc.
Post-Scandal Resurgence: After a major accounting scandal and restructuring, Luckin has emerged stronger with improved corporate governance.
Strong Financials: Despite high expansion costs, Luckin remains profitable with a low Long-Term Debt to Total Capital Ratio of 21.67%.
Valuation: With a P/E Ratio of 18.48 and a PEG ratio of 0.16, Luckin’s shares are undervalued compared to competitors like Starbucks.
Comparison with Competitors
Starbucks: Higher P/E Ratio of 22.46.
Tim Hortons: Significant market cap loss, struggling with high operational costs.
JDE Peet’s: Slow but steady growth, with less aggressive expansion plans.
Conclusion
Luckin Coffee is well-positioned in the booming Chinese coffee market, with a robust growth strategy and strong financials. Despite past challenges, it has emerged as a market leader with significant potential for future growth. Given its current valuation and market position, Luckin Coffee is rated as a Speculative BUY, considering the usual risks associated with investing in Chinese companies.
Occidental Petroleum (NYSE: OXY) is leveraging the green revolution to diversify and secure its future profitability. The company’s strategic initiatives, including carbon capture and lithium production, align with sustainability trends while promising substantial growth opportunities. Berkshire Hathaway’s increasing investment and a joint venture with Occidental for lithium production underscore confidence in the company’s direction.
Key Highlights
**1. Strategic Diversification:
Carbon Capture: Occidental is investing heavily in carbon capture technology, turning environmental responsibility into a profitable venture. The first major project is expected to be cash-positive by 2025.
Lithium Production: Partnering with Berkshire Hathaway, Occidental is entering the lithium market, crucial for battery production in green technologies.
**2. Natural Gas Exposure:
Occidental’s significant natural gas holdings position the company to benefit from rising natural gas prices, driven by increased export capacity and declining production.
**3. Long-term Growth Prospects:
The company’s focus on low carbon ventures and lithium aligns with global energy trends, ensuring diversified revenue streams.
Traditional energy sources continue to be relevant, with no historical precedent for declining usage, suggesting ongoing demand for oil and gas.
**4. Berkshire Hathaway’s Endorsement:
Warren Buffett’s Berkshire Hathaway continues to increase its stake in Occidental, signaling strong confidence in the company’s strategic direction and future profitability.
Financial Considerations
**1. Price-Earnings Ratio:
Currently high due to lower commodity prices, but historical trends suggest buying when the market is pessimistic about cyclicals can lead to long-term gains.
**2. Dividend and Share Buybacks:
Given the focus on growth projects, substantial dividends are unlikely. However, share buybacks remain a possibility.
Risks and Challenges
**1. New Ventures:
The success of carbon capture and lithium projects is uncertain. New technologies or market changes could impact profitability.
**2. Commodity Price Volatility:
As an upstream company, Occidental is subject to fluctuations in commodity prices, which can significantly affect earnings.
**3. Technological and Market Shifts:
Rapid technological advancements or unforeseen market changes could introduce superior alternatives, challenging Occidental’s investments.
Conclusion
Occidental Petroleum is strategically positioning itself for growth by embracing the green revolution while maintaining its traditional energy business. The company’s initiatives in carbon capture and lithium production are poised to deliver long-term value, supported by Berkshire Hathaway’s continued investment. Despite inherent risks, the diversified approach and focus on sustainability offer a promising outlook for investors willing to navigate the cyclical nature of the energy sector.
Pinterest (NYSE) is a visual search and discovery platform with over 500M Monthly Active Users (MAUs) who use the platform to find and save ideas for various interests, with the purpose of shopping for those interests later. As of my initial “buy” rating on March 15, Pinterest stock has outperformed, rising by 28.4%, significantly outpacing the S&P 500.
In Q1 FY24, Pinterest reported impressive earnings with revenue and Adjusted EBITDA growing 23% and 318% YoY, respectively, and MAUs hitting a record high of 518M. The company continues to leverage AI to deepen user engagement and build a personalized shopping experience, creating greater value for advertisers. Despite uncertainties in monetization outside the U.S., partnerships with Google and local sellers are set to unlock new opportunities. Based on these factors, I maintain a “buy” rating for Pinterest, projecting strong long-term returns over a 3-year investment horizon.
Q1 FY24 Earnings Highlights
Revenue Growth: Revenue increased by 23% YoY to $740M.
MAUs: Reached a record high of 518M, growing 12% YoY.
AI and Engagement: Continued focus on AI to enhance user engagement and shopping experience.
Monetization: Partnerships with Amazon Ads and Google Ads Manager to drive monetization, especially in international markets.
Strategic Initiatives and Performance
1. Accelerating User Growth and Engagement
Pinterest’s strategy focuses on deepening user engagement through AI-driven personalization and human curation, particularly targeting Gen Z users. The platform’s success in attracting Gen Z, who represent 40% of users, is significant. Gen Z users are highly engaged, saving more content and finding value in curated boards and collages. As this cohort gains spending power, Pinterest stands to benefit from increased engagement and monetization.
2. Improving Monetization
Pinterest is enhancing actionability for items on the platform through Mobile Deep Linking, Direct Links, and improved ad measurement capabilities. This strategy drives higher ROI for advertisers and attracts performance budgets. The company is also re-orienting its sales functions to educate advertisers on best practices, fostering deeper adoption and value capture.
3. Expanding Audience Reach and Monetization through Partnerships
Pinterest is scaling demand with Amazon Ads in the U.S. and Google Ads Manager to gain market share in international markets. With 73% of its user base outside the U.S., there is significant potential for monetization growth in Europe and RoW. Current ARPU in these regions is low ($0.86 in Europe, $0.11 in RoW) compared to the U.S. ($6.05), but partnerships aim to unlock this potential.
Challenges and Risks
1. Adjusted EBITDA Margin Contraction
Despite a YoY increase, Adjusted EBITDA margins shrank sequentially due to rising costs and lower ARPU globally. This could be due to seasonal factors and acquiring new MAUs in less monetized regions. Continuous monitoring of international monetization strategies is essential to avoid short-term profitability issues.
2. Macroeconomic Uncertainty
The uncertain U.S. economic landscape poses risks. Tight financial conditions and a weakening labor market could impact consumer spending, MAU growth, user engagement, and ad impressions, leading to declining ARPUs and margin pressures.
Valuation and Long-Term Outlook
Revenue and Profitability Projections
For Q2 FY24, Pinterest expects revenue growth of 18-20% YoY and non-GAAP operating expenses of $500M. Adjusted EBITDA is projected to be $157M, translating to an 18.6% margin, an improvement of 360 basis points YoY. Over 3-5 years, Pinterest aims for mid-high teens revenue growth and Adjusted EBITDA margins in the low 30s.
Valuation Model
Based on consensus estimates, Pinterest is expected to grow its revenue in the high teens in FY24, mid-teens in FY25, and low-teens in FY26, generating $4.75B over this period. With projected Adjusted EPS of $2.21 in FY26, discounted to a present value of $1.83, Pinterest should trade at a PE ratio of 34, higher than its current forward PE of 19.8 for FY26. This results in a price target of $62, representing a 42% upside from current levels.
Conclusion
Pinterest is well-positioned for long-term growth, driven by AI-led user engagement, Gen Z adoption, and strategic partnerships to enhance monetization. Despite short-term challenges, the company’s strong execution under William Ready’s leadership and focus on delivering value for users and advertisers support a “buy” rating. Assessing the potential for long-term upside, Pinterest is expected to continue driving significant returns over a 3-year investment horizon.
