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U.S. Market Analysis & Valuation

UpdatedJul 05, 2022
DataAggregated Company Financials
Companies8462
  • 7D-2.2%
  • 3M-16.8%
  • 1Y-19.1%
  • YTD-22.9%

Over the last 7 days, the market has dropped 2.2%, driven by a loss of 4.2% in the Information Technology sector. On the other hand, the Utilities has risen by 3.0%. In the last 12 months the market is down 19%. Earnings are forecast to grow by 13% annually.

Market Valuation and Performance

Has the U.S. Market valuation changed over the past few years?

DateMarket CapRevenueEarningsPE
Tue, 05 Jul 2022US$41.6tUS$19.4tUS$1.9t14.7x
Thu, 02 Jun 2022US$45.2tUS$19.5tUS$1.9t15.5x
Sat, 30 Apr 2022US$45.4tUS$19.0tUS$1.9t16.1x
Mon, 28 Mar 2022US$50.2tUS$18.7tUS$1.9t16.5x
Wed, 23 Feb 2022US$48.4tUS$18.8tUS$1.9t15.9x
Fri, 21 Jan 2022US$50.4tUS$18.5tUS$1.8t16.7x
Sun, 19 Dec 2021US$52.5tUS$18.2tUS$1.7t16.8x
Tue, 16 Nov 2021US$55.1tUS$18.1tUS$1.8t18.2x
Thu, 14 Oct 2021US$54.7tUS$17.4tUS$1.6t17.9x
Sat, 11 Sep 2021US$51.9tUS$17.5tUS$1.6t16.1x
Mon, 09 Aug 2021US$51.4tUS$17.3tUS$1.6t17.2x
Sun, 02 May 2021US$48.7tUS$16.3tUS$1.2t19x
Wed, 03 Feb 2021US$43.8tUS$15.6tUS$832.6b18.3x
Sat, 07 Nov 2020US$37.1tUS$15.5tUS$845.5b16.4x
Fri, 31 Jul 2020US$35.8tUS$15.4tUS$840.8b17.1x
Mon, 04 May 2020US$30.8tUS$15.9tUS$1.0t14.1x
Thu, 06 Feb 2020US$34.5tUS$15.9tUS$1.3t17.2x
Sun, 10 Nov 2019US$32.4tUS$15.8tUS$1.2t17.1x
Sat, 03 Aug 2019US$32.2tUS$15.7tUS$1.3t16.8x
Median PE Ratio

16.8x


Total Market Cap: US$32.2tTotal Earnings: US$1.3tTotal Revenue: US$15.7tTotal Market Cap vs Earnings and Revenue0%0%0%
U.S. Market Median PE3Y Average 16.9x202020212022
Current Market PE
  • Investors are pessimistic on the market, indicating that they anticipate earnings will not grow as fast as they have historically.
  • The market is trading at a PE ratio of 21.7x which is lower than its 3-year average PE of 33.7x.
Past Earnings Growth
  • The earnings for American listed companies have grown 15% per year over the last three years.
  • Revenues for these companies have grown 7.4% per year.
  • This means that more sales are being generated by these companies overall, and subsequently their profits are increasing too.

Sector Trends

Which sectors have driven the changes within the U.S. Market?

US Market-2.20%
Utilities3.02%
Consumer Staples0.29%
Healthcare-0.23%
Real Estate-0.40%
Industrials-1.12%
Financials-1.21%
Energy-1.73%
Materials-2.78%
Telecom-3.48%
Tech-4.20%
Consumer Discretionary-4.29%
Sector PE
  • Investors are most optimistic about the Real Estate sector even though it's trading below its 3-year average PE ratio of 37.2x.
  • Analysts are expecting annual earnings growth of 9.9%, which is lower than the prior year's growth of 71% per year.
  • This could indicate that the market believes that analysts are underestimating future growth.
  • Investors are most pessimistic about the Consumer Discretionary sector, which is trading below its 3-year average of 17.2x.
Forecasted Growth
  • Analysts are most optimistic on the Consumer Discretionary sector, expecting annual earnings growth of 29% over the next 5 years.
  • However this is lower than its past earnings growth rate of 38% per year.
  • In contrast, the Energy sector is expected to see its earnings decline by 3.2% per year over the next few years.

Top Stock Gainers and Losers

Which companies have driven the market over the last 7 days?

CompanyLast Price7D1YValuationSector
UNH UnitedHealth GroupUS$517.402.3%
+US$11.0b
26.4%PE27.8xHealthcare
PG Procter & GambleUS$146.112.0%
+US$6.9b
7.5%PE24.5xConsumer Staples
KO Coca-ColaUS$64.382.3%
+US$6.4b
18.8%PE27.1xConsumer Staples
NEE NextEra EnergyUS$80.563.4%
+US$5.2b
8.5%PE108.7xUtilities
MCD McDonald'sUS$252.962.4%
+US$4.4b
8.3%PE26.3xConsumer Discretionary
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Market Insights

Latest News

CPNG

US$15.04

Coupang

7D

17.6%

1Y

-62.8%
Jul 05

Coupang: Making A Comeback After Analysts Upgrade The Stock

Coupang's stock is down 65% from its highs. For the stock to return to former highs, it would have to climb up more than 150%. It could be said that Coupang's stock has been left for dead. However, last week analysts have been turning to the stock and issued a bullish report. Coupang's revenue growth rates are rapidly slowing and leave much to be desired. That is a headline risk. All that being said, the core investment thesis will now be focused on its profitability profile. I rate the stock a buy. Investment Thesis Coupang (CPNG) has found some support last week. The stock got crushed to a pulp in the year post-IPO, but lately, analysts have turned a positive eye towards the stock highlighting its positive risk-reward. Coupang had previously declared that it would reach EBITDA profits in late 2022. However, as I previously argued in my bullish analysis, Coupang's core segment, its eCommerce and Fresh offerings, turned EBITDA positive in Q1, meaningfully ahead of schedule. There are two bearish considerations and one bullish aspect to this investment. Coupang's revenues are slowing down is the main headline risk. The other overhang is that Coupang is an eCommerce business with some side growth initiatives that are masking its profitability. That being said, management is very much aware of investors' concerns and has taken its foot off the pedal to focus instead on profitable growth. Revenue Growth Rates Slow Down Coupang revenue growth rates Here's the bear case. Coupang's growth rates are slowing. Not only is 22% paltry for a leading eCommerce player, but this marks a substantial deceleration over the previous 5 quarters. Then, to even further complicate matters, its financials are in USD. This means that its financials have around a further 10% headwind to contend with. Altogether, this is less than great. That being said, the fact that its growth rates have suddenly substantially slowed down, is the reason why the business has now pivoted towards focusing more intently on its underlying profitability. Coupang's Near-Term Prospects CPNG Q4 2021 presentation Coupang is a Korean eCommerce player. Coupang aims to be the fastest e-commerce delivery service in Korea. Coupang has two segments, Product Commerce and Developing Offerings. The Product Commerce segment accounts for more than 96% of the business' revenues. While it's Developing Offering, what used to be called Growth Initiatives holds Coupang Eats (a food delivery service), Video, and International and Fintech initiatives. As we'll touch on soon, Coupang's Developing Offering is masking the profitability of the underlying business. Now, turning back to its Product Commerce opportunity, Coupang estimates that its, [...] oldest active customers are spending on Coupang over 60% of their total estimated online spend today. If you think about the logistics infrastructure required to capture such a high proportion of active customers' online spending, this speaks to the moat around Coupang's operations. Getting this level of consumer wallet share isn't an easy feat. Or perhaps, more importantly, displacing this level of spending on Coupang won't be easy for competitors. Profitability Profile in Focus Before going further, we should keep in mind that Coupang carries approximately $2.5 billion of net cash. This is not a needle mover on the investment thesis. But when the business is burning cash flows, you need to be sure that the business has enough dry powder to come out the other side. And Coupang clearly does. What's more, as I alluded to in my previous article, at the surface level, Coupang is still unprofitable, with its EBITDA margins at negative 1.8%. However, the devil is in the detail. Coupang Q1 2022 results As you can see above, its core Product Commerce segment reported $2.9 million of EBITDA. This was a massive swing from the negative $69.3 million in the same period a year ago. Recent Analysts' Reports And this level of improvement was something that didn't go missing from Credit Suisse's upgrade on Friday. As you can see, both Credit Suisse and Morgan Stanley's reports point out the same things that I'm discussing here. Both houses note a ''bottom line turnaround'' story, with Morgan Stanley's analysts declaring'' [Coupang] narrows its focus on reaching consistent profitability''. This is essentially the same as I'm noting, just doing so more succinctly. Meanwhile, Credit Suisse put more emphasis on Coupang's Growth Initiatives being ''underappreciated by the market''. While I do not believe that is where the needle mover is likely to come from, it nevertheless does not detract from my own bullish analysis here. CPNG Stock Valuation - 1x Sales If we presume that Coupang continues to grow at 20% CAGR this year, this levels the stock priced at 1x sales.

Jul 05

Looking To Buy McDonald's Stock? Now Is As Good A Time As Any

Efficient operations and peer-leading margins make McDonald’s attractive. As the company operates in the value segment of the restaurant industry, it is less prone to adverse effects of an economic slowdown. The company also has some flexibility to pass a part of rising commodity and labor costs on to consumers. Investment Thesis With a presence in 119 countries, McDonald’s (MCD) is surely one of the most recognized QSR brands globally. The company is very efficient in its operations and has peer-leading operating as well as net profit margins. A strong brand and efficient operations have driven the company’s, and its stock’s, growth over decades. McDonald’s has an excellent dividend payment record which makes its stock attractive for income investors. It has good growth prospects with healthy near-term store opening plans. Further, it has some leeway to pass-on rising costs due to inflation to consumers through price increases. Being in the low-priced QSR segment makes the restaurant better insulated from economic slowdowns than dine-in restaurants. So, this is a stock that you can confidently buy, even amidst fears of an impending recession. About McDonald’s operates under a company-owned as well as a franchise model. The majority of its restaurants are franchised (around 93%). The franchise model makes the company asset-light and easier to manage and grow. Under the conventional franchise arrangement, the company generally owns or secures a long-term lease on the land and building for the restaurant. This ownership of real estate enables McDonalds to have performance levels that are among the highest in the industry. I’ll discuss how this happens later in the article. The company has three segments- U.S. - the company’s largest single market International Operated markets - comprising of Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain, and the U.K. International Development licensed Markets & Corporate - Comprised of developmental licensee and affiliate markets. Diversified revenues McDonald’s receives significant revenue from non-U.S. markets for both company-operated as well as franchised restaurants. This reduces its dependence on the domestic U.S economy. Additionally, the company has a healthy mix of franchise and company-operated restaurants revenue split. Company operated restaurants contribute 42.8% whereas franchised restaurants contribute 57.8% of the mix. Franchised margins contribute nearly 85% of the restaurant margin dollar. Even in margins, the non-U.S. region contributes more than the U.S. Thus, the company has well balanced revenue between domestic and international markets. Margin breakdown (McDonald’s) In the first quarter, McDonald’s total revenue grew 10.6% YoY to $5.7 billion, driven by strong performance in France, U.K., and all International Development licensed markets, except China. Net income for the quarter fell 28% YoY, primarily due to a one-off item related to an international tax matter. Global comparable sales increased 11.8%, driven by a 3% increase in the U.S., 20.4% increase in International Operated Markets, and 14.7% increase in International Development Licensed Market. Comparable sales in the U.S. grew due to strategic menu price increases, strong marketing promotions, and growth in digital channels. In International operated markets, reduction in COVID-related restrictions led to positive comparable sales. International Development licensed Markets’ comp sales growth was driven by Japan and Brazil, partially offset by negative comparable sales in China due to continued COVID-19 resurgences and restrictions. Overall, McDonald’s posted a strong performance in the first quarter. Resilient in the face of inflation As per a report by National Restaurants Association, by 2030, “Total employee compensation costs will increase as a percent of sales.” Likewise, commodity price inflation is already hurting restaurants’ margins. However, McDonald’s is relatively resilient to rising costs. McDonald’s increased its menu prices by roughly 8% in the first quarter to pass-on a part of rising costs due to inflation to consumers. While rising prices generally hurt restaurant traffic, that isn’t largely the case for McDonald’s, as it operates in the value segment. The company believes that the impact of inflation on home-cooked meals is probably higher as compared to its menu price increases. So, the price increase may not hurt McDonald’s traffic. At the same time, the company continues to move forward with its growth plans. This year, management aims to open over 1,800 restaurants globally, with a net restaurant addition of around 1,400. This translates to nearly 3.5% increase in store count. This coupled with various initiatives like drive-thrus, tie-ups with delivery partners, and loyalty program roll outs can help the company sustain its revenue growth in the coming years. Massive operations McDonald’s management reviews its performance based on data compiled by Euromonitor International. The company measures itself against the informal eating out, or IEO, segment. This segment includes limited-service restaurants, street stalls or kiosks, cafes, specialist coffee shops, self-service cafeterias, and juice/smoothie bars. Based on Euromonitor data, the global IEO segment has approximately 10 million outlets and generated roughly $1 trillion in annual sales in 2020. McDonald’s’ systemwide restaurant business accounted for 0.4% of those outlets and 9.3% of those sales. McDonald’s seems to be far more efficient in generating revenue than the IEO segment, as its share of sales is significantly higher than the share of outlet count. Based on the entire restaurant industry, including IEO segment defined above and all full-service restaurants, Euromonitor International estimates there are 19 million outlets and they generated $2 trillion in annual sales in 2020. McDonald’s systemwide restaurant business accounted for 0.2% of those outlets and 4.6% of those sales. This shows the massive scale of McDonald’s operations, which account for 4.6% of the total global restaurant sales. There are several things that McDonald’s does to drive its sales. The company expects to complete the roll-out of its loyalty programs across the top six of its markets in the first half of 2022. Having loyalty programs keeps the customers engaged and increases repeat sales to the same customer. The number of restaurants that offer delivery has also grown to over 33,000, which represents roughly 80% of McDonald’s’ restaurants. On the delivery front, the company has also entered long-term partnerships with UberEats and DoorDash. This surely will help boost its delivery capabilities. Finally, the company believes drive thrus will become more critical with customer’s demand for flexibility and choice. Thereby, the majority of new restaurant openings will include a drive thru. The added convenience of drive thru helps people buy at McDonald’s even when they are short of time. This results in added revenue with negligible incremental real estate cost. A solid franchise model The benefits of McDonald’s owning the properties that it rents out to franchisees are well-documented. Let me still take a moment to highlight it for starters. In 2021, McDonald’s’ revenue from franchised restaurants was $13.1 billion. Rents accounted for $8.4 billion, or 64% of this amount while royalties accounted for most of the remaining franchise revenue. McDonald’s conventional franchise arrangements usually include a lease and a license and provide for payment of an initial fee, as well as continuing rent and royalties to the company based on a percent of sales with minimum rent payments. The minimum rent payments are based on McDonald’s investment in owned sites and its underlying leases on properties that are leased. What the above mean is that McDonald’s earns the difference between rent it charges and lease payments it pays irrespective of sales from the underlying restaurant. Additionally, there is a variable rent amount tied to sales, that it gets on top of the minimum rent amount. So, strong sales mean stronger rent revenue for McDonald’s, in addition to higher royalty payments. A focus on returning value to shareholders McDonald’s has a share repurchase program effective January 2020, that authorizes purchase of up to $15 billion of the outstanding stock with no specified expiration date. As of the end of 2021, shares worth $1.7 billion have been repurchased.

Jul 05

Amazon Investors Face Uncertainty

Management overspent on capacity during the pandemic and it is hard for investors to measure the significance of this. Amazon managers themselves don’t know the exact ROI for Subscription services and outside investors have an even murkier view. There were 1,608,000 full-time and part-time employees at Amazon as of December 31st while Alibaba only had a total of 254,941 employees through March 31st. Introduction My thesis is that Amazon (AMZN) investors face uncertainty as details are sparse with respect to the economics of disparate businesses. Looking at the Alibaba (BABA) 4Q22 release, we see the trailing-twelve-month (“TTM”) operating income by segment but Amazon doesn’t break things out the same way. We do see top line sales by segment at Amazon, but little is shared in the way of operating income apart from the AWS segment and a breakdown between North America and International. Opaque Numbers Amazon’s Subscription services segment has similarities to Alibaba’s Digital media and entertainment segment. This Alibaba segment had TTM negative operating income of RMB 7,019 million through March 2022 on revenue of RMB 32,272 million. Costco (COST) is at the other end of the extreme in this area as much of their overall profit comes from membership fees. I believe Amazon is much more like Alibaba than Costco in this area such that it subsidizes commerce sales as opposed to being a direct driver of operating income. Relative to Amazon and JD (JD), Alibaba has an asset-light model with respect to logistics. We see that Alibaba’s Cainiao logistics segment had TTM negative operating income of RMB 3,920 million through March 2022 on revenue of RMB 46,107 million. Amazon shows the overall fulfillment expense line in the income statement, but this is combined for first-party (“1P”) and third-party (“3P”) and they don’t break out fulfillment revenue. This fulfillment expense line jumped from $16.5 billion in 1Q21 to $20.3 billion in 1Q22. The cost of logistics at Amazon is very high and this makes it difficult to determine operating margins for the 1P and 3P segments. Valuation Overview Where the Money Is by Adam Seessel makes long-term non-GAAP operating margin estimates for Amazon’s segments. Seessel came up with 10% for 1P, 5% for physical stores, 0% for subscriptions, 25% for 3P and 50% for other/advertising. The book is packed with good information and these estimates are very helpful. My estimates are somewhat close to the estimates in the book, and both sets of estimates are vastly different from the current GAAP numbers. Viewed through a GAAP accrual lens, Amazon’s commerce numbers are uninspiring as we move down the income statement. Per the 1Q22 release, overall operating income decreased to $3.7 billion for 1Q22, compared with $8.9 billion for 1Q21. These numbers are much worse without the highly profitable AWS segment. In 1Q22, the $3.7 billion overall operating income consisted of $6.5 billion from AWS and negative $2.8 billion from everything else. In 1Q21, the overall $8.9 billion total operating income was $4.2 billion from AWS and $4.7 billion from the other segments. Of course, cash flow is what matters which is why Amazon presents the cash flow statement before the accrual-based income statement. Unfortunately, I don’t see a segment breakdown for cash flow which means it is hard to separate AWS from everything else. Overall operating cash flow was $(2.8) billion for 1Q22, down $7 billion from $4.2 billion in 1Q21. TTM OCF was $39.3 billion and CFO Olsavsky provided a breakdown of the TTM capex and finance leases in the 1Q22 call: First, as a reminder, we look at the combination of CapEx plus finance leases. Capital investments were $61 billion on the trailing 12-month period ended March 31. About 40% of that went to infrastructure, primarily supporting AWS but also supporting our sizable Consumer business. About 30% is fulfillment capacity, primarily fulfillment center warehouses. A little less than 25% is for transportation. So think of that as the middle and the last-mile capacity related to customer shipments. The remaining 5% or so is comprised of things like corporate space and physical stores. Commerce Valuation Taken together, Amazon’s 1P sales plus their physical store sales and 3P GMV are at about the same level as Walmart’s sales. In the quarter through April 2022, Walmart had net sales of $140.3 billion along with membership and other income of $1.3 billion for total revenues of $141.6 billion. Looking at Amazon’s quarter through March 2022, they had $51.1 billion in 1P sales plus $4.6 billion in physical stores sales and $25.3 billion in 3P sales. The 3P figure is just Amazon’s cut and 3P GMV is estimated to be about 3.75 times this amount or $95 billion. As such, Amazon had nearly $151 billion for 1P sales, physical stores sales and 3P GMV compared to Walmart’s $140.3 billion sales. Walmart’s market cap is about $336 billion based on the July 1st share price of $122.63 and the 2,741,150,050 shares outstanding as of June 1st. Walmart’s 10-Q through April 2022 shows long-term debt and lease obligations of $49,809 million such that their EV exceeds their market cap. As a sanity check, I like to think about Walmart’s market cap and enterprise value. Amazon’s commerce segments move about the same amount of volume as Walmart and they’re growing faster; they’re worth significantly more than Walmart when we include advertising in the mix. I believe Amazon’s long-term 1P operating margin is lower than Seessel’s 10% estimate, but he makes some valid points as to why the steady-state margin is higher than what we see on today’s income statements. As he says, Amazon has consistently said that their online retail margins should be 10% to 13% at maturity. Walmart’s margins are lower than this, but Seessel notes that Walmart has to spend troves of money maintaining over 10,000 physical stores. He notes that Walmart has to maintain over physical 10,000 stores. Seessel goes on to explain other ways in which Amazon 1P is advantaged over Walmart: Common sense told me that this segment’s margins should be at least equal to Walmart’s 6%. Several calculations seemed to back that up. Walmart’s depreciation expense, the proxy for how much it must spend to maintain its physical plant, amounts to 2% of its annual sales. Amazon has no physical customer traffic in its virtual store, so it was logical to assume that Amazon’s depreciation expense is de minimis by comparison. Moreover, because it operates online, Amazon does not have to worry about “shrink,” the euphemism retailers use for shoplifting. While Walmart works hard to minimize theft - those “greeters” aren’t at the door just to welcome you - last year Walmart lost roughly $5 billion to sticky fingers. This amounts to one percentage point of margin lost to shrink. If we assume that Amazon’s margins begin at Walmart’s 6%, and then we add two points of depreciation that Amazon doesn’t have to incur and one percentage point for shrink, Amazon’s online retail earnings power becomes 9% of sales. [Kindle Location: 1,927] Again, Amazon moves about $50 billion in 1P GMV and about $100 billion in 3P GMV every quarter. They don’t need physical stores for this but Supply Chain Dive shows that they require more distribution square footage than Walmart and Target combined. Here are the square foot totals: Amazon: 376 million active + 109.8 million future Walmart: 145.5 million active + 17.8 million future Target: 57.7 million active + 4.3 million future Nearly all of Amazon’s square footage is leased and it has climbed rapidly since 2019: Amazon properties (Author's spreadsheet) Image Source: Author’s spreadsheet A May WSJ article by @SebasAHerrera explains that Amazon has expanded their footprint above too quickly: The online retail giant is seeking to sublease a minimum of 10 million square feet of warehouse space and is also exploring options to end or renegotiate leases with outside warehouse owners, according to a person familiar with the matter. The article goes on to say that the amount of space vacated may be 2 to 3 times the number of 10 million square feet mentioned earlier. We can look at Walmart and Target’s operating margins to better understand the steady-state numbers for Amazon. Walmart has a lower operating margin than Target, but they turn inventory over faster. Looking at the 10-K filings for the fiscal year through January 2022, Walmart had inventory turnover of 8.5x or $429,000 million cost of sales/$50,730 million avg. industry while Target had inventory turnover of 6.1x or $74,963 million/$12,278 million. Unlike Walmart and Target who use last-in, first-out (“LIFO”) for U.S. inventory, Amazon uses first-in, first-out (“FIFO”). Also, Amazon seems to show these numbers on a company-wide basis as opposed to a 1P basis. For the fiscal years through January 2020, 2021 and 2022, Walmart had operating margins of 3.9% [$20.6 billion/$524 billion], 4% [$22.5 billion/$559.2 billion] and 4.5% [$25.9 billion/$572.8 billion], respectively. For the fiscal years through January 2020, 2021 and 2022, Target had operating margins of 6% [$4.7 billion/$78.1 billion], 6.9% [$6.5 billion/$93.6 billion] and 8.4% [$8.9 billion/$106 billion], respectively. Amazon has a model of moving inventory quickly like Walmart which often means low margins. However, Amazon doesn’t have to maintain physical stores and they don’t have shrinkage. On balance, I think Amazon’s 1P operating margin is higher than what we see from Walmart, but it is hard for me to see it being too high given all the investments they have to make in technology and logistics. They don’t just make growth investments in these areas; they have to invest heavily in these areas just to tread water and move the same volume. I think the steady-state operating margin for the 1P business is about 7%. Amazon 1P TTM sales through March 2022 were $220,303 million and the implied steady-state operating income is $15.4 billion if we use a 7% margin. Amazon’s 1P growth has slowed but it is remarkable what this segment has done since 2016. In 1Q22, Amazon 1P had sales of $51.1 billion while eBay had GMV of $19.4 billion. Meanwhile, Target had revenue of $25.2 billion through the April 2022 quarter. There was a time not long ago when these numbers were more tightly bound and in a different order. In 1Q16, Amazon 1P had sales of $19.9 billion while eBay’s GMV was $20.5 billion. Back then, Target had revenue of $16.2 billion through the April 2016 quarter. Given Amazon’s 1P growth, I think this business may be worth a higher multiple than what we see for Target or eBay. I think this segment is worth 10x the steady-state operating income which is a little over $150 billion Moving on to the 3P segment, Alibaba is a nice reference point. Bereft of Amazon’s asset-heavy fulfillment architecture, Alibaba has far fewer employees despite the fact that they move double the GMV. There were 1,608,000 full-time and part-time employees at Amazon as of December 31st while Alibaba only had a total of 254,941 employees through March 31st. The extent of wage inflation in the coming years isn’t clear right now but it could be substantial. Alibaba’s China commerce segment had operating margins of 39% and 29% for the fiscal years ending in March 2021 and March 2022, respectively. I think Adam Seessel’s estimate of 25% operating margins for Amazon 3P is a little ambitious given Amazon’s investments in the low-margin logistics business and the coming wage inflation. I think steady-state operating margins for this segment are about 20%. 3P TTM sales are $104,992 million so a steady-state operating income based on a 20% margin is $21 billion. I think this segment deserves a higher multiple than the 1P segment because it isn’t as asset-heavy. I believe a multiple of 14 or 15 times is in order such that this segment is worth about $295 to $315 billion. Seeing as 3P does about twice the dollar volume of 1P, it is reasonable for this segment to be worth twice as much as the $150 billion 1P figure mentioned earlier.

Jul 04

Pepsi Keeps Pouring It On - But Do Not Add Here

A friendly reminder that PepsiCo will be reporting FQ2'22 earnings on 12 July 2022. PEP has had an 821.60% stock price appreciation over the past three decades, indicating its strong defensive position in the stock market. Nonetheless, with the potential recession triggering a resistance level at $175 since January 2022, we may see a market correction soon, similar to the 2008 and 2009 times. Therefore, we advise patience and even more patience for those looking to add this excellent dividend stock now. Investment Thesis PepsiCo, Inc. (PEP) remains a stellar defensive play for the bearish stock market, given its strong uptrend with an 821.60% stock price appreciation over the past three decades. PEP 30Y Stock Price PEP 30Y Stock Price (Seeking Alpha) In addition, PEP continues to report exemplary revenue and net income growth in the past two years, with the projected 79% boost in sales post-reopening cadence, compared to pre-pandemic levels. Nonetheless, investors should be well advised of the potential temporary headwinds in the form of inflation, the Fed's hike on interest rates, and recession moving forward. Therefore, we may expect to see a decoupling of the company's financial and stock performance in the short and intermediate term, as witnessed in 2008. PEP Has Had Impressive Growth In The Past Two Years PEP Revenue, Net Income, Net Income Margin, and Gross Margin (S&P Capital IQ) Prior to the pandemic, PEP reported revenue growth at a CAGR of 2.26%. As one of the "staple products" in the market, it is evident that the company has had excellent sales in the past two years, while recording an impressive revenue CAGR of 8.78% at the same time. In the LTM alone, PEP reported remarkable revenues of $80.85B and gross margins of 53.4%, representing a tremendous sales increase of 20.3% from FY2019 levels. Therefore, it is evident that the pandemic has brought forward its revenue growth by easily three years, if not more. In addition, PEP reported impressive net incomes of $10.17B and net income margins of 12.6% in the LTM, representing an increase of 39.1% and 1.7 percentage points from FY2019 levels. Assuming that PEP is able to sustain its excellent sales moving forward, we expect to see improved bottom-line profitability as well, thereby potentially boosting and/or holding its stock price performance steady over time. PEP Operating Expense (S&P Capital IQ) By the LTM, PEP reported operating expenses of $31.17B, representing an increase of 17.8% from FY2019 levels, with a relatively stable ratio to its growing revenues of 38.55% at the same time. Given its obviously improving net income profitability, it is evident that the company has been relatively prudent in its operating expenses in the past few years. PEP Cash/ Equivalents, FCF, and FCF Margins (S&P Capital IQ) As a result of its increased net income profitability, it made sense that PEP has been able to report decent improvement in its Free Cash Flow ((FCF)) generation in the past few years. In the LTM, the company reported an FCF of $7.49B with an FCF margin of 9.3%, representing a remarkable increase of 38.1% and 1.2 percentage points from FY2019 levels, respectively. Therefore, given the strong consumer demand for PEP's products, we are convinced of its robust FCF generation moving forward, despite the market concerns of inflation and a potential recession. In fact, the company had shown its sales resilience during the past recession in 2008, when it reported revenues of $43.2B, net incomes of over $5B, and FCF of over $4.5B. PEP Long-Term Debt, Interest Expense, Net PPE and Capex (S&P Capital IQ) It is evident that PEP took on more long-term debts in FY2020, though we can also see significant efforts in deleveraging in the past year. The company reported long-term debts of $34.59B and interest expenses of $1.81B, representing an increase of 18.6% and 94.6% from FY2019 levels, respectively, though a notable decrease of long-term debts by 14.3% since FY2020. At the same time, it made sense for PEP to increase its net PPE assets and capital expenditure to meet the massive consumer demand in the past year. By the LTM, the company reported net PPE assets of $22.02B and Capex of $4.68B, representing an increase of 5.6% and 10.6% from FY2019 levels, respectively. Nonetheless, we are not overly concerned, given PEP's continually improving FCF profitability in the LTM. In addition, these would directly contribute to its top and bottom line in the intermediate term. PEP Projected Revenue and Net Income (S&P Capital IQ) Over the next four years, PEP is expected to report revenue and net income at an excellent CAGR of 4.06% and 11.04%, respectively, with improving net income margins of 9.6% in FY2021 to 12.4% in FY2025. For FY2022, consensus estimates that the company will report revenues of $82.6B and net incomes of $9.22B, representing impressive YoY growth of 3.9% and 21%, respectively. Analysts and long-term PEP investors will also be closely watching its performance in FQ2'22, given consensus revenue estimates of $19.48B and EPS of $1.74, representing an increase of 1.39% and 1.05%, respectively. PEP Is Still An Excellent Dividend Stock PEP 10Y Share Price (adj) and Dividend Yield PEP 10Y Share Price (adj) and Dividend Yield (S&P Capital IQ) PEP has had a discernible long-term stock price uptrend over the last ten years. Though the stock had a slight decline in its dividend yield from 3.7% in 2014 to 2.8% in 2022, its dividend payout has been increasing at a CAGR of 8.05% in the past ten years, from $0.53 to $1.15. The fact that the company increased its payout by 20.3% in the past two years also highlights that PEP is a serious dividend stock for a long-term hold. PEP Share Count and Share-Based Compensation (S&P Capital IQ)

TSLA

US$681.79

Tesla

7D

-7.2%

1Y

0.4%
Jul 04

Tesla: 10-K Footnotes And Bears' Arguments

My favorite Charles Munger quote is not to comment on a topic until I can argue against myself better than the people on the other side. Human nature just loves confirmatory evidence. But in investing, especially investing in nonlinear stocks like Tesla, it is more important to look for disconfirming information. Here, I will argue against my own bull thesis and address some potential risks for Tesla that are not often discussed. The goal is not to dismiss these concerns (they are 100% valid), but to provide a full view so both bears and bulls can all make better investment decisions. Thesis I have been a long-term bull on Tesla (TSLA) as you can see from my previous writings. I have published a series of articles arguing for its nonlinear growth potential. In this article, I will switch perspective and address the bears’ counterargument. The point is not to prove them to be wrong. Quite the opposite, their concerns are 100% valid to me. I am analyzing these concerns not to dismiss their concerns, but to provide a full view, so we can all make an informed decision. An open mind that can work with conflicting views is the starting point for investing, especially for nonlinear stocks like TSLA. And this has been a cornerstone of my own investing philosophy. And it is also a philosophy that my writing and market service always promote. We always value disconfirming information more than confirming information. Charlie Munger was once asked for tips for investors who have to work with two opposing views. And his response quoted below, as usual, is so quotable: Charlie Munger: Well, I do have a tip. At times in my life, I have put myself to a standard that I think has helped me: I think I’m not really equipped to comment on this subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time; if you’re looking for disconfirming evidence and putting yourself on a grill, that’s a good way to help remove ignorance. Following this wisdom, let’s play the game of arguing against ourselves. Many of you probably are familiar with the common bears’ view already such as high valuation, competition, carbon credit, et al. So, this article will limit the scope to two concerns (scale of government subsidies and tax incentives) not often discussed, concerns that have to be gleaned mostly from the footnotes or independent disclosures. Government Subsidies First, TSLA’s current financials are dressed up by a multitude of government aids, both from local state, federal, and also overseas. Musk is very vocal against government aid and if you follow his Twitter, you may form the wrong view that TSLA does not benefit from such aid. On the contrary, TSLA benefits extensively from these aids. And given how fickly government policies can change, such aids form a considerable uncertainty for TSLA’s long-term prospects. Take U.S. aid as an example. These aids include federal loans, tax breaks, loan guarantees, bailout assistance, State/Local loans, bond financing, and venture capital. You can see a detailed list of these aids at this link. As of this writing, TSLA receives a total of 110 subsidies with a total face value of more than $2.5B. To put things into perspective, TSLA's 2021 total net income was only $5.6B. These subsidies are not limited to the US alone. They come from overseas markets like Europe and China too, adding a further layer of uncertainties, as elaborated below. Source: Subsidytracker.goodjobsfirst.org Tax Incentives The following chart shows TSLA’s most recent income statement. The taxes are highlighted. And as you can see, it earned $3.6B of pretax income in the quarter ended on March 31, 2022, and reported a provision for income tax of $346M. So this leads to an effective rate of less than 10% (9.6% to be precise). The picture of last year was very similar: $69M of tax provision on a $533M pretax earnings. The reasons for such low tax rates, as indicated in its Form 10-K, are several temporary tax incentives. For example, China has approved a tax reduction for TSLA from the normal rate of 25% to 15%. The reason for singling out China here is twofold.

AAPL

US$138.93

Apple

7D

-1.9%

1Y

-0.7%
Jun 29

Microsoft: Ignore The P/E, Or You Miss A Bargain

Microsoft stock is down approximately to 20% YTD, in line with the broad market. Microsoft stock is currently trading at P/E GAAP (FWD) of x27.5 vs approximately x16 for the S&P. Judging only on the basis of P/E multiples, Microsoft stock appears expensive. However, if we also consider the company's growth outlook, the stock is arguably cheap - not only in comparison with FAAMG but especially in comparison with the S&P 500. Based on a residual earnings framework anchored on analyst EPS estimates, I calculate a fair implied share price of $368.64/share. Thesis Microsoft Corporation (MSFT) stock is down approximately to 20% YTD, in line with the broad market (Reference: S&P 500). With regards to price-earnings multiple, however, the stock is trading at a P/E GAAP ((FWD)) of x27.5 vs approximately x16 for the S&P. Thus, Microsoft stock appears expensive - at first. But this is not how I see it. In my opinion, investors should consider the company's valuation in a richer context, as MSFT undisputedly outperforms the market with regards to: growth expectations/potential (1); profit margin (2); competitive moat (3); R&D investment (4); brand equity (5); and talent attraction (6). That said, if we put things in perspective, the stock appears cheap. Based on a residual earnings framework anchored on analyst EPS estimates, I calculate a fair implied share price of $368.64/share. Is Microsoft cheap? I have been holding MSFT stock for years now. And, every year I debate myself if I should sell the stock given the company's perceived P/E multiple premium. But merely looking at P/E ratios is not the correct way of thinking about equities, as the ratio captures only the present earnings of a company, while the price incorporates the future. That said, investors are advised to look at a company's growth (1), the business' profit margins (2), and the competitive moat to defend growth and margins against competition (3). With regards to these dimensions, Microsoft truly stands out. First, let us look at the company's growth. Analyst consensus expects a 3-year CAGR for Microsoft of approximately 20%, from 2022 until 2025 (Source: Bloomberg Terminal). If we consider nominal GDP growth at slightly below 3%, Microsoft is outpacing the broad market by a factor of x7! Microsoft's profitability is unmatched. Microsoft's operating margin ((EBIT)) margin scores at 42.56%, versus 8.10% being the sector median. Respectively, net-income margin ((TTM)) is 37.63% versus 5.34%. Most notably, not even Apple (AAPL) matches Microsoft's profitability. Despite Apple's brand equity and pricing power, the company "only" achieves 30.93% EBIT margin and 26.41 net-income margin, implying that Microsoft's margins are about 10 percentage points higher! Moreover, Microsoft's expected growth is unlikely to dilute margins, since cloud IaaS (53% of sales) and high-margin PaaS (43% of sales) are expected to achieve 50% and >70% operating margin. Seeking Alpha From a competitive standpoint, Microsoft looks like an impenetrable fortress. There are multiple aspects that support the company's moat, including $210 billion of brand equity, $23.35 billion of R&D investments, intellectual property (including more than 8.500 US patents), and top-league talent attraction. As a side note, if we consider the Metaverse, a 13 trillion market according to Citi research, Microsoft is the only player with leading exposure to infrastructure (hardware, VR, cloud), software ((AI)) and content (games). So, is Microsoft cheap? If we consider the FAAMG universe (I cancel Netflix), then we see that Microsoft's 2023 forward P/E is the second highest at x24.49. Facebook/Meta Platforms (META) looks very cheap at x12.95. However, if we include 3-year CAGR expectations, the picture changes considerably. The PEG is broadly considered as an adequate valuation metric to capture the relative trade-off between the company's current stock price, current earnings and the expected growth. The ratio is calculated as a P/E divided by 3-year CAGR expectation. Microsoft suddenly looks very cheap. Or in other words, considerably cheaper than Facebook, Apple, and Google (GOOG, GOOGL). Analyst Consensus EPS; Author's Calculations Finally, I would like to note that the above metrics are anchored on MSFT's levered valuation (equity). But investors should consider that Microsoft is actually a net creditor, and thus the enterprise value is lower than the company's equity value. As of Q1 2022, Microsoft recorded 104.66 billion of cash and short-term investments and $77.98 billion of total debt. Thus, Microsoft has a net cash position of $26.68 billion How to value MSFT I have shown that Microsoft is actually not expensive on a relative basis vs. FAAMG stocks. And Microsoft appears very cheap when compared to the S&P 500. But on an absolute basis, what could be a fair per-share value for the company's stock? To answer the question, I have constructed a Residual Earnings framework and anchor on the following assumptions: To forecast revenues and EPS, I anchor on consensus analyst forecast as available on the Bloomberg Terminal. The estimate of the cost of capital, I use the WACC framework. I model a three-year regression against the S&P to find the stock's beta. For the risk-free rate, I used the U.S. 10-year treasury yield as of June 24, 2022. My calculation indicates a fair WACC of 7.5%. To derive MSFT's tax rate, I extrapolate the 3-year average effective tax rate from 2019, 2020 and 2021. For the terminal growth rate, I apply expected nominal GDP growth at 3.5%. Although I think that growth equal to the estimated nominal long-term GDP growth is strongly understating MSFT's potential, especially as the company is spending 20% of revenues in R&D, I want to be conservative in my valuation. I do not model any share buyback - further supporting a conservative valuation. Based on the above assumptions, my calculation returns a base-case target price for MSFT of $368.64/share, implying material upside of about 40%. Analyst Consensus EPS; Author's Calculations I understand that investors might have different assumptions with regards to MSFT's required return and terminal business growth. Thus, I also enclose a sensitivity table to test varying assumptions. For reference, red cells imply an overvaluation as compared to the current market price, and green cells imply an undervaluation. The risk/reward looks highly favorable to me. Analyst Consensus EPS; Author's Calculations My base-case target price for MSFT stock is broadly in line with analyst consensus. Analysts see the stock's fair price at around $357.85/share. Seeking Alpha Risks I would like to highlight the following downside risks that could cause MSFT stock to materially differ from my price target of 368.64/share: First, a worsening macro-environment including inflation and supply-chain challenges could negatively impact MSFT's customer base, both enterprise and consumer. If challenges turn out to be more severe and/or last longer than expected, the company's financial outlook should be adjusted accordingly. Second, investors should monitor competitive forces in the cloud industry. Although I highlighted the difference between TikTok and MSFT from a value-proposition perspective, I also highlighted that the company is competing for advertising spending. Thus, if competition increases more than what is modelled by analysts, profitability margins and EPS estimates for MSFT web must be adjusted accordingly.