Market Uncertainty, Microsoft, Sony, GE, UPS, Callaway, Topgolf and Airbnb

Rising virus cases and other uncertainties plague the markets, earnings from Microsoft, Sony, GE and UPS, and Callaway buys Topgolf.
(Jirapong Manustrong)
(Jirapong Manustrong)
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Good morning! Today’s word count is 2,005, or a 10-minute read. Let’s get to it:

Market Summary (10:15 A.M. ET): “Elevated infection levels stoked concerns that more lockdown measures may be imperative, potentially dealing another blow to the economic recovery,” WSJ writes.

  • S&P 500: $3,314.55 (-2.25%)
  • Nasdaq: $11,139.84 (-2.27%)
  • Bitcoin: $13,125.68 (-2.04%)
  • Gold: $1,876.40 (-1.85%)
  • U.S. 10-Year: 0.759%

Justin Oh’s Daily Read

We got some more details about Airbnb’s IPO.

Airbnb plans on raising $3 billion in its IPO in December, valuing the company at more than $30 billion. Additionally, Airbnb is enacting a 2-for-1 stock split for privately held shares ahead of the IPO. This would lower the price per share to a more-accessible price in the public markets.

We don’t have their financials yet, since they’ve filed confidentially with the SEC, but we know Airbnb’s saw revenue grow 32% to $1.1 billion in the fourth quarter of 2019 on the back of marketing spend. Through the pandemic, it’s seen a 70% decline in bookings in May but recovered to a 30% decline in June compared to the same months last year. In July, we also know that customers booked more than 1 million nights in a single day for the first time since March 3. 

This thing will probably pop when it IPO’s. Silver Lake is targeting a valuation for Airbnb of $40 billion to $50 billion to hit its one-year return target. (…)


Stocks Open Sharply Lower on Rising Virus Cases

“U.S. stocks fell in early trading Wednesday, as rising coronavirus infections shook investors’ confidence in the global economic recovery and sent them toward the safety of Treasurys and the dollar,” WSJ writes.

The Backdrop: The U.S. reported more than 73,000 new Covid-19 infections Tuesday, according to John Hopkins University. The combination of rising coronavirus trends and the upcoming U.S. presidential election leaves a ton of economic uncertainty.

No Relief Money: Talks between the White House and Democrats have come up short with the election imminent. It’s unclear when new stimulus measures will arrive to prop up the economy.

WSJ’s Early-Trading Look: “The S&P 500 dropped 1.8%, suggesting the broad index will retreat for its third consecutive session. The benchmark has slipped more than 5% from its record closing level in early September. The Dow industrials lost 570 points, while the Nasdaq Composite retreated 1.7%.”

Around The World:

  • With cases surging in Europe and new lockdowns in places like Germany and France, the pan-continental Stoxx Europe 600 fell 2.8%, the French CAC 40 index dropped 3.6% and German’s Dax index was down 4.1%.
  • Asia had mixed results with Japan’s Nikkei 225 dropping 0.3% and China’s Shanghai Composite Index finishing the day up 0.5%.

Justin Oh:

Here it is, folks, another leg of volatility downwards. If you’ve been joining our Live Streams, you know this is precisely why, for those of us employed with savings, I’ve kept our target cash allocation at 20%. Today is probably a good day to start dollar-cost averaging into your favorite stocks. And by that, I mean the strongest long-term businesses with the most reasonable valuations (many of these on the ROIC Big Board). I’ll detail the dollar-cost averaging strategy as a ROIC post today.

Microsoft, Sony, GE and UPS Report Earnings

Microsoft posted an impressive quarter thanks to the pandemic-driven swell in cloud-computing, video gaming and computer demand, and the tech giant expects that trend to continue at least through the end of the year.

  • Sales improved 12% to $37.2 billion, with a net profit of $13.9 billion. Revenue from the Azure cloud platform rose 48%, personal computing 6% and Microsoft’s gaming content business 30%.
  • The company will also release the new Xbox Series X this quarter.

Sony is forecasting an $800 million improvement in its full-year operating profit, “capping a strong run of results by Japanese electronics makers benefiting from China’s revived economy and pandemic technology trends.”

  • The electronics firm withstood a roughly $3 billion dent in its operating profit — U.S. sanctions on Huawei impacted Sony’s relationship with the Chinese firm — but still improved its operating-profit projection for the full fiscal year to around $6.7 billion (ending March 2021).
  • Like Microsoft, Sony’s next-generation console, the PlayStation 5, is coming this quarter.

General Electric’s shares surged after the company “reported a surprise profit and predicted gains in free cash flow late this year and in 2021.”

  • Sales came in at $19.4 billion, exceeding analyst expectations, and “industrial free cash flow, a key gauge of earnings power, will be at least $2.5 billion in the fourth quarter and positive next year.”
  • GE’s shares increased 6.3% to $7.55 after falling around 36% on the year as of Tuesday. Third-quarter industrial free cash flow was $514 million, and analysts had expected GE to burn $968.3 million in cash.

United Parcel Service reported a revenue increase of almost 16% in Q3 as the pandemic continues to drive demand for domestic and international shipping.

  • UPS’ Delivery volumes increased 13.8%, overall profit improved 11.8% and earnings jumped 11.8% to $1.9 billion (on $21.2 billion in revenue).

Justin Oh:

No surprise with $MSFT, this is one of those companies where you can ignore the stock price for five years and keep buying on weakness. Also, no surprise with $UPS, as we’ve seen such a surge in delivery and e-commerce. 

$SNE’s earnings are interesting, but not surprising either, given how strong technology is performing during the pandemic. I anticipate the upcoming Playstation refresh will be healthy as well.

$GE’s earnings were quite a pleasant surprise, as it’s been helped by its power equipment and health-care units. I don’t have an opinion on the stock; it’s such a diversified turnaround story and I’d find it hard to have a strong opinion on the stock, even if I dug it a little deeper.

Golf Giant Callaway Acquires Topgolf in $2 Billion Deal

“Golf giant Callaway acquired the rest of sports entertainment company Topgolf in an all-stock deal Tuesday, with the latter valued at [roughly] $2 billion,” Axios reports.

In case you’re not familiar, Topgolf is a “gamified” driving range. Players get points based on hitting targets, but it has mostly evolved as a social experience.

  • The business was founded in 2000, and Callaway bought-in six years after. Callaway already had an exclusivity deal and is now increasing its stake from 14% to the whole company.

Topgolf posted $1.1 billion in revenue last year and pulled in more than 23 million guests across its 71 U.S. and international locations.

Callaway President and CEO Chip Brewer, according to Golf Channel: “Together, Callaway and Topgolf create an unrivaled golf and entertainment business. We’ve long seen the value in Topgolf and we are confident that together, we can create a larger, higher growth, technology-enabled global golf and entertainment leader.”

  • He also said: “Topgolf is the best thing that happened to golf since Tiger Woods. It’s going to be the largest source of new golfers for our industry.”

Axios’ Takeaway: “This deal will help Topgolf scale its operation and give Callaway access to millions of prospective golfers, all while providing a case study for the industry as it finds new ways to appeal to younger and more casual players.”

Justin Oh:

Topgolf saw $1.1 billion in revenue in 2019, which is assuredly down this year due to the pandemic, although Topgolf is an entertainment venue with one of the most robust recoveries. At least here in Nashville, they very quickly returned to being fully booked. 

If Topgolf carries a mediocre 10% EBITDA margin, a $2 billion purchase would imply an 18x to 20x acquisition valuation. Before the agreement was announced, Callaway ($ELY) traded at 12x EBITDA, so I believe the market thinks the deal is too expensive and dilutive to Callaway.

As an avid golfer, I would challenge the market to find a more-popular entertainment venue than Topgolf. I am also pretty bullish on the number of sales, branding and customer lead synergies Callaway can get with Topgolf. It could be a great long-term purchase for Callaway to modernize the golf business and build a dominant growth pipeline.

Yes, it’s probably dilutive in the short-term, but I’m going to fast track this stock to see if we can buy on weakness. I may even take a flyer today and initiate a small position.

What’s Going On

New Bike Business: “Harley-Davidson has spun out a new business dedicated to electric bicycles and plans to bring its first line of products to market in spring 2021. The new business called Serial 1 Cycle Company started as a project within the motorcycle manufacturer’s product development center. The name comes from “Serial Number One,” the nickname for Harley-Davidson’s oldest known motorcycle. The pedal assist electric bicycle company is being launched amid a booming ebike industry fueled by growing demand in the wake of the COVID-19 pandemic. The global eBicycle market was estimated to be over $15 billion in 2019 and projected to grow at an annual rate of more than 6% from 2020 to 2025, according to Harley-Davidson.”

Streaming Wars: “T-Mobile is jumping into the video streaming market, offering a cut-priced version of the same kind of cable-like service as offered by YouTube, Hulu, AT&T and a few others. The catch? It’s only available to cellphone customers of T-Mobile and Sprint, now both part of the same company. It’s a fascinating move by T-Mobile, which will test whether it can sign up more customers for its cellphone service (or help retain existing ones) with the TV service. The new service offers more than 30 channels, including what it says are live sports and news, for $40. That’s a discount to most other services—YouTube TV is $64 a month while Hulu with Live TV is $55 and AT&T TV is a bit more. But those services all offer many more channels.”

Steel Struggles: “President Trump made good on his 2016 campaign pledge to the steel industry, slapping 25% tariffs on foreign-made steel in an effort to revive an industry that once symbolized American manufacturing might. The tariffs succeeded in pushing down steel imports and—for a short time—resulted in higher prices for domestic steelmakers. They also encouraged newer steel companies to expand operations in the South and Southwest. Yet the tariffs haven’t produced the steelmaking renaissance and robust job growth in America’s industrial heartland that Mr. Trump promised. What’s more, the tariffs have hurt U.S. manufacturers, including those in the automotive and appliance sectors, who say the duties on steel and aluminum continue to keep their metal costs higher than what overseas competitors pay.”

Companies Raising Capital
DoubleVerify$350 MillionAd-Platform for Brand Safety, Ad-Fraud and Ad-Quality
Streetbees$39 MillionApp Tracking Consumer Attitudes
Sidekick$20 MillionGamified Digital Care Platform Targeting Chronic Disease Management
MachEye$4.6 MillionAI-Powered Business Intelligence Platform

Big Tech Answers: “Chief executives of the largest social media companies will testify Wednesday before the Senate Commerce Committee in a hearing examining their platforms’ role in shaping political discourse.”

Sweet Rides: “Fiat Chrysler Automobiles NV posted third-quarter profit that trounced estimates and said full-year earnings will hold up much better than expected, strengthening the prospects for the carmaker’s planned merger with PSA Group.”

Team-Up: “Alphabet’s Waymo subsidiary, which develops autonomous vehicles, said Tuesday it would work on a self-driving semi-trailer truck using a popular Daimler brand called Freightliner.”

Cutting The Cheese: “The U.S. cheese industry is reeling from seven months of chaos as the coronavirus pandemic causes upheaval in prices and demand.”

To Market We Go: “Home-rental startup Airbnb Inc plans to list its shares on the Nasdaq, setting the stage for one of 2020’s most high-profile stock market debuts.”

Satellites Ain’t Cheap: “According to an email shared Tuesday by CNBC, Starlink will initially cost $99 per month. Users will also have to pay $499 for a Starlink Kit that enables the connection, featuring a ground terminal, a tripod, and a wifi router.”

Nordic Expansion: “Amazon launched its online shopping store in Sweden on Wednesday, as the E-commerce giant looks to expand its retail ambitions outward from Western Europe and into the Nordic market.”

A Couple Cents Featured

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