Good morning! Today’s word count is 1,593 words, or an 8-minute read. Let’s get to it:
“Treasury yields briefly climbed to the highest level in about two weeks, signaling investors’ rising confidence in prospects for the U.S. economy,” WSJ writes.
- S&P 500: $3,455.54
- Nasdaq: $11,568.14
- Bitcoin: $11,452
- U.S. 10-Year: 0.714%
Justin Oh’s Quick Read
Peter Thiel’s secretive company Palantir, soon to be $PLTR, filed it’s IPO documents yesterday, showing revenue growth of almost 50 percent with healthy software gross margins. But they also show they’re saddled with heavy sales, marketing, R&D, and administrative costs to sell huge government and corporate contracts, which results in a heavily money-losing company. If they IPO at close to the rumored targeted valuation of $26 billion, that would imply a roughly 30x forward gross profit multiple. Given that this company has high-security risks and relies on a small number of government and corporate customers for growth, I don’t find it particularly attractive. For a similar B2B software play, I would rather buy Salesforce ($CRM), which has grown at 25%+ for the past 5+ years and continues to perform with amazing cash flows, at half the valuation of 14-15x forward gross profit.
U.S. Firms in China Say Trump’s WeChat Ban Will Hit Them Where It Hurts
Following President Trump’s executive order placing an upcoming ban on Tencent Holdings’ WeChat app, the American Chamber of Commerce in Shanghai warned of an “enormous negative impact” on U.S. companies with international business depending on the scope of the order.
Why It Matters
WeChat is facing similar uncertainties as TikTok.
- On Aug. 6, President Trump issued an executive order banning U.S. individuals and firms from transactions involving WeChat due to national security concerns. It’s due to take effect in September.
- The order has reportedly “rattled” American firms, with concerns that the restrictions could extend beyond the U.S. and China.
If the ban extends to China, it could result in some pretty widespread damage.
- AmCham Shanghai, which includes Coca-Cola and JP Morgan among its 1,400 members, surveyed 140 corporates and found that almost nine of 10 companies said the ban would hinder their ability to communicate with staff and local authorities effectively.
- More than half of the companies polled said it would result in a loss of a competitive market, and 42 percent said a WeChat ban in china would cause revenue loss.
It’s hard to say what exactly will happen because the scope of the ban is unclear.
- The Trump administration has yet to clarify how the ban will work.
- More a dozen firms, such as Apple, Walmart and Ford, approached the White House to express concerns about the order disrupting WeChat, which has become a vital business tool.
- Facebook’s messaging app, Instagram and Twitter are blocked in China, and WhatsApp is “sporadically unusable,” leaving no comparable Chinese alternative.
There’s compliance risk.
- Normally, WeChat is used to communicate with government authorities, issue financial directives or window guidance to U.S. banks and provide critical functionality for arranging meetings.
- China’s logistics regulator uses WeChat to mandate daily temperature reporting due to the Covid-19 crisis, and without the app, U.S. logistics companies would be unable to comply.
Numbers to Consider
- More than 1.2 billion people globally use WeChat, and it is the most widely used app in China.
- Tencent’s stock opened at $71.49 Wednesday morning.
Justin Oh’s Two Cents
The China vs. U.S. Technology Cold War continues… In May, I discussed that a possible outcome is that the world is split into two parallel tech regimes (U.S. Tech vs. Chinese Tech), with little interoperability between each other. Be wary of tech companies, or any company for that matter, that heavily rely on vendors or customers from the other side of the conflict.
Read More: (WALL STREET JOURNAL)
Airline Job Cuts Could Pressure Congress and Trump on Stimulus
American Airlines said it’s planning to cut 19,000 jobs — pilots, flight attendants, mechanics and other airline employees — when federal stimulus propping up the U.S. airline industry ends Oct. 1.
Why It Matters
It’s bad, but not the worst-case scenario.
- The 19,000 number falls short of the potential 25,000 cuts American Airlines warned were possible last month.
- In total, the carrier will have 40,000 fewer employees, around a 30 percent reduction from where it was in March once retirements and temporary leaves of absence are factored in.
The entire airline industry is hurting.
- With government funds drying up and a slow summer travel season coming to a close, U.S. airlines have warned that more than 75,000 jobs could be cut this fall.
- United Airlines said it could furlough as many as 36,000 employees in the fall, and Delta Airlines warned it might have to furlough as many as 1,941 pilots in October.
- With demand stalling at around 30 percent of last year’s levels, Delta SVP John Laughter told pilots in a memo Monday: “We are six months into this pandemic, and only 25 percent of our revenues have been recovered.”
Survival depends on the next stimulus package.
- Airlines had previously agreed not to let any workers go as a condition of the $25 billion they received from the economic stimulus package passed in March.
- The economy had seemed to be covering, but hiring is slowing, weekly jobless jumped back up over a million and enhanced unemployment benefits expired, quelling or reversing any progress made.
- Travel is expected to remain below 50 percent of previous levels until a vaccine is widely distributed, which could be around late-2021.
- To offset the multi-year slog, Airlines are pinning their hopes to a renewal of the $25 billion they received in March and seeking to put pressure on Congress and President Trump to get a deal done.
Numbers to Consider
- Domestic travel is down 44 percent, while international flights decreased 75 percent.
- American Airlines received $5.8 billion alone under March’s federal stimulus package.
Justin Oh’s Two Cents:
I hope my videos warning against buying airline and cruise stocks back in March and April resonated with folks because these stocks have bumped along the bottom for good reason. We really won’t see a resurgence of air travel or cruise travel until we have a *widely distributed* vaccine or foolproof therapeutic, which I don’t see being the case for at least nine months. Unless they get more free government funds, airlines are still at risk for Chapter 11 bankruptcy, which will wipe out shareholders to zero.
Read More: (NEW YORK TIMES)
Number Crunch: Online Work Lifts Salesforce’s Full-Year Revenue Outlook
Salesforce posted record quarterly sales and raised its full-year guidance, demonstrating the “the sustained appetite for cloud-computing services during the coronavirus pandemic.”
- Salesforce said sales grew 29 percent to $5.15 billion in the most recent quarter, crushing Wall Street’s expectation of $4.87 billion in revenue.
- Next week, Salesforce will become one of the 30 companies making up the Dow Jones Industrial Average. It’s being added in part to help offset the effects of Apple’s four-to-one stock split.
- Cloud computing was already hot before the pandemic. The resulting interest has lifted the share prices of Amazon and Microsoft — two leaders in the space — by 80 percent and 37 percent, respectively.
- Salesforce stock has risen more than 30 percent this year and expects sales in the current fiscal year to reach between $20.7 billion and $20.8 billion.
- The company expects to generate around $5.25 billion in sales this quarter, well above analysts’ forecast of $5.02 billion.
Justin Oh’s Two Cents
Salesforce ($CRM) continues to kill it and is an enticing long-term holding that I’m kicking myself for not having added earlier. I’ll be waiting for a stock price pull back to buy in size because I don’t like to chase earnings or event-driven reactionary exuberance. I’ll add it to the ROIC Big Board soon when I feel like the entry point is attractive.
Read More: (WALL STREET JOURNAL)
Worth Your Time
Big Time Loss: The Big Ten is staring into a financial black hole. The 14-school conference previously was the highest-earning in the country, posting a 2019 fiscal year revenue of $781.5 million. But with the conference canceling fall sports due to the Covid-19 pandemic, the financial implications will be catastrophic. Member schools are looking at losses of around $100 million each, and non-revenue sports such as swimming, diving, gymnastics and tennis are being slashed to conserve funds. (BLOOMBERG)
Shutdown Shift: “General Motors is taking the unusual step of tapping salaried workers to keep the lines running at its pickup-truck factory near St. Louis as the company continues to struggle with staffing the plant amid pandemic-related absences. The Detroit automaker has asked white-collared employees to voluntarily fill in on jobs that are normally staffed by unionized workers, while it works to make up for production lost this spring during a nearly two-month factory shutdown.” (WALL STREET JOURNAL)
Against The Grain: Palantir is going public later this year. But the “money-losing, data-focused software company, which was once one of the world’s most valuable startups,” has a message for investors: “It has soured on Silicon Valley.” CEO Alex Karp spent “much of an introductory letter lambasting the business models of other software companies and criticizing the tech giants of Silicon Valley for being out of touch with American principles and societal needs.” (WALL STREET JOURNAL)
Preliminary results from Moderna’s late-stage vaccine trial show signs of the shots working in older adults.
The Justice Department has indicted the U.S. business of Teva Pharmaceuticals, alleging the company engaged in anticompetitive conduct — fixing prices on cholesterol medication and other drugs — that resulted in at least $350 million in overcharges to consumers.
While a California federal judge denied Epic Games’ request to override Apple and return to the App Store, the judge did rule Apple cannot block the game developer from accessing the iOS developer tools.
“Grid, a SaaS startup founded in Iceland that lets you turn spreadsheets into visual ‘narratives,’ has closed $12 million in Series A funding.”
“Trove, a startup that sells a suite of internal compensation tools to other startups, has quietly graduated from this summer’s Y Combinator batch with” $16 million in venture capital and a $75 million valuation.
The White House announced a $1 billion investment into artificial intelligence and quantum computing.
Biotech firm Biogen may have the largest pharmaceutical sales opportunity in at least a decade if its new Alzheimer’s disease drug gets FDA approval.
Exxon Mobil’s departure from the Dow Jones Industrial Index highlights the market’s “retreat from energy bets.”