Too cheap to ignore | Pinterest's overreaction | FOMC, American Families Plan and more
Your Daily KnowHow
In today’s KnowHow…
Too cheap to ignore… the FAAMG opportunity
Overreaction on Pinterest results
Good news as US Consumer Confidence hits 14-month highs...
Job postings are surpassing pre-pandemic levels in the US and the UK
FOMC Preview – three things to expect…
What happened overnight…
Déjà vu anyone!? The reflation trade looks to be coming back over the last two days as investors are eagerly awaiting any comments from the Fed about tapering (thoughts below). Commodities continued to rally with longer-date Treasury yields and the US Dollar continuing to advance in Wednesday trading. Amid Joe Biden’s spending plans that have just been announced and a market at all-time highs, investors will be hoping that there are very few clues from Powell that tapering may come sooner than expected. Onto single stocks and Alphabet is trading up 5% in pre-market… we have more in our write-up below on the FAAMGs. In Europe; Delivery Hero, Deutsche Bank and WPP are helping European markets into positive territory today.
Chart of the Day
So, we’ve been out in the internet wild looking for a clever chart showing the breakout of the American Families Plan spending ahead of President Joe Biden’s speech tonight. It turns out, there isn’t one that we can find. So, we have reverted to Investopedia’s helpful table below. You can also access the full White House release here.
Analysis
Too cheap to ignore
We’re now a couple of weeks into earnings season and if you were to ask us for just one theme that has been very obvious through reporting and conference calls, it is this… UNCERTAINTY.
Uncertainty around inflation and ability to pass on costs. Uncertainty around supply chains and logistics bottle necks. Uncertainty around parts of the globe where the pandemic still rages. Uncertainty around what re-opening means to short-term digital trends. Even businesses that are seeing positive re-opening trends are commenting on the uncertainty of those being sustained. We will write on this themes a lot over the coming days but for now this is just a tee-up into the one area of the market that you can not ignore. The FAAMG or Big 5 or whatever you want to call them these days. What was clear from both Alphabet and Microsoft’s earnings yesterday was the exact same thing that has been clear for the past few years… scale wins.
Alphabet sees advertising surge
Last night’s Q1 results saw a big uplift in margins and surprised the market positively, hence the after-hours reaction. But, margins aren’t really the story. Advertising spend has come back in a big way. The company called out retail as driving a big part of that surge. But, we think there is potentially more than that. Integration with Shopify and Paypal along with shopping through YouTube is driving the next leg of ad spend away from traditional into digital in our view. Google and Facebook may be >50% of digital ad spend, but today a significant chunk of ad spend is still outside of digital channels.
Now, this chart below is what we like most about the Alphabet investment thesis. Estimates do not reflect any upside from an accelerated channel shift. Yesterday’s results will kick-off upgrades but we think analysts remain too conservative on forecasts over the next year.
Expectations high but Microsoft kicking on
The Microsoft thesis is of course very different. We had said earlier this week that we saw a risk going into earnings mainly given the strength of the recent share price and expectations for Azure to deliver >50% growth again in fiscal Q3. The after-hours shake-out is a drop in the ocean really. But, Satya Nadella’s sermon at the start of yesterday’s conference call should give you a sense of how they are feeling about their business. The size and scale of their Cloud infrastructure means they will dominate infrastructure-as-a-service through Azure. In turn, that means along with AWS, they will continue to dominate the overall cloud spent. Importantly also, that spending from corporates is only accelerating post pandemic as you see from this Flexera chart below.
We prefer Amazon and Facebook… but you can buy them all
These trends are clearly a friend when it comes to investing. But, there is more to our FAAMG thesis than that. As we have said over the past few weeks, FAAMG stocks are very good value versus much of tech and a universe of growth stocks where expectations have got out of whack. Their share scale and accelerating post-pandemic trends will mean valuation and earnings revisions will continue to drive the shares higher. We prefer Facebook and Amazon as they are outright cheap in our view. We’ll see over the next two days how they turn out.
Overreaction on Pinterest but H2 is the juice
We are Pinterest bulls but we have been highlighting over the past few weeks the risk going into this set of earnings. Why? A couple of reasons: i) ARPU growth would likely be back end loaded given the product developments the company is focused on, ii) user growth (MAUs) would likely see some impact from re-opening particularly in the US. Put that against some pretty expectations and earnings were always going to be a concern.
ARPU growth is a big positive
The positive from yesterday’s earnings is the chart below. ARPU growth was a lot stronger in Q1 than we expected it to be. Even looking into Q2 and the stellar +105% YoY revenue guidance, it would appear some of the monetisation trends are kicking into gear quicker than both us and market had anticipated.
But MAUs is vanity
The problem however is clearly the MAU guidance in the US. To an extent, this is just vanity. Pinterest is fairly mature in terms of acquiring MAUs in the US. International is the real opportunity where the runway remains huge. But, the market doesn’t want to see a decline in US MAUs which is what the guidance suggests.
We think the shakeout after-hours is an overreaction and an opportunity to step in here. There are a lot of underlying positive trends in the business.
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What we’re reading
Good News as US Consumer Confidence hits 14-month highs...
It’s all good news in the ‘What we’re reading’ section today with a number of positive data points that support the comments we saw from the European banks yesterday on the speed of the recovery. First up, U.S. consumer confidence climbed sharply in April for a second month, reaching a pandemic high, as Americans grew more upbeat about the economy and job market. The Conference Board’s index increased to 121.7, the highest since February last year, from a revised 109 reading in March, according to a Tuesday report. Confidence among most income groups ticked up in the month, a sign that rising prices on some goods has not yet affected consumers’ economic outlook.
Another gauge that assesses how Americans view the next six months —the so-called future expectations index — only rose slightly to 109.8 from 108.3. That’s still the highest level in almost two years, though.
And Job postings are surpassing pre-pandemic levels….
Following on from the above, we are also seeing positive data points around jobs on both sides of the Atlantic. Job postings on Indeed are a real-time measure of labour market activity. On April 23, 2021, they were 22.4% above February 1, 2020 in the US, the pre-pandemic baseline, after adjusting for seasonal variation. While hospitality still lags, goods-related sectors like loading & stocking, construction, and manufacturing are leading the recovery. Within the US, job postings are down most in metro Honolulu, San Jose, and San Francisco. But job postings have improved in nearly all regions of the country.
It is interesting to see the same story playing out in the UK. UK job vacancies have recovered to the level before the first lockdown in April with hiring boosted by the reopening of non-essential shops, pubs and client-facing services such as hairdressers.
FOMC Preview – Three Things To Expect…
We have read a number of FOMC previews this week and we think Sarah Foster summarises the key expectations very well. She cites three things you need to know from the Fed’s April meeting after it concludes its two-day April 27-28 meeting, when officials are all but certain not to touch the benchmark that determines how much you pay to borrow money and how much you’re paid to save.
1. The U.S. economic recovery is making progress: Employers added 916,000 positions in March, the fastest pace in half a year and the number of Americans applying for unemployment benefits also hit new lows in April for two straight weeks. Powell said the US had had “hit an inflection point” in a CBS interview on April 11th so we expect a reiteration of these themes.
2. For Powell, no news is good news: Expect officials to emphasize that the economy still needs work:Officials have also been quick to pair their optimism with a caveat: The U.S. labor market still has a long way to go. Fed officials could make some minor changes to their post-meeting statement reflecting that more upbeat outlook, but Powell will likely emphasize at the press conference that large gaps in the labor market persist.
3. Officials aren’t ‘thinking about thinking about’ tapering, but the process will prove to be tricky when it does come: The biggest challenge will be preparing markets for the eventual taper while avoiding a negative reaction that could threaten business solvency and consumers’ portfolios, from their retirement accounts to their individual investments. There’s no big reason to move any time soon, but the important part is being consistent with the messaging. The big challenge out on the horizon is how to get that messaging out, so we don’t have that taper tantrum. Nothing is expected in this meeting, but a reiteration of the three-part test is expected.