Well, this is less than ideal...
What the Market? - Jan 18, 2022
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What the Market?
Mr. Market is going through some post-holiday withdrawals, and certainly glad about a long weekend to shorten the week. It’s been a rough start, as Mr. Market attempts to figure out what the future looks like for the economy as vaccine’s become ever-more political and critical to business continuity. Furthermore, the Fed’s continued reinforcement of hawkish sentiments, a drop in retail sales (in December of all months) is taking its toll on the market.
What’s driving the market?
Is it really that bad? Well, Joe…the Supreme Court blocked your vaccine mandate, inflation is at its highest in 40 years, retail sales dropped in the most important month of the year (December), and the Fed is feeling good about raising interest rates, oh and yeah COVID cases are still rising amongst stagnant vaccination rates. Top it off - the proposed changes to filibuster rules were shut down by both sides of the aisle. Rick Newman, may have captured the situation as perfectly as can be said, “The Democratic Party is now as inept as the GOP is corrupt.” The inability to drive effective or desired policy with an ongoing health & financial crisis caused by the pandemic is creating a whole lot of the U word (uncertainty). There is nothing that capital markets hate more than uncertainty.
What’s an investor to do?
With tepid earnings reports from banks and lackluster retail sales, 2022 seems to be off to a rocky start. If you haven’t rebalanced your positions and limited your risk-taking to companies you love and understand - this may be the time to do so. Pay attention to earnings!
Keep an eye on the economy
Nothing noteworthy this week! Focus on earnings!!
The Curious Investor
An update on Microsoft (disclosure: WTM is long MSFT)
Last quarter should have been a strong quarter for Microsoft, but this time around we are particularly interested in the long-term narrative to be discussed across a few key development verticals.
New xBox Console: While not Microsoft’s traditional cash cow - the company’s gaming console has been a key growth pillar which has been receiving increased attention in the last semester.
Into the metaverse: Always love to see big incumbents jumping on new tech trends, that’s how they innovate and stay relevant. Always be building on the edge. Microsoft announced several innovations to their corporate metaverse in November. We are hoping to hear some developments regarding Hololens and potential new strategies to get involved in next-gen gaming.
Acquiring Nuance Communications: Microsoft should be confirming the acquisition of Nuance Communications for $19.7 bn. NUAN is a leading AI interface developer strongly tied to the healthcare sector. Nuance’s market share in speech recognition, AI, and natural language processing (NLP) technologies could provide a significant competitive advantage to Microsoft’s AI efforts across numerous verticals.
Going vertical with chips: Microsoft recently hired a key chip engineer from Apple to boost its semiconductor development plans. Microsoft joins Apple and Google in developing their own chips. The play enables tech companies to have more control over the manufacturing process, increased customizability for their own products, and of course, lower costs.
Cloud-computing and competition: Since the arrival of CEO Satya Nadella, Microsoft has had one of the most successful pivots in history from desktop to cloud computing, from a product based company to an infrastructure company. Microsoft still trails behemoth, Amazon web services in the market as both companies have been entangled in legal proceedings for multi-billion dollar contracts. This year, the two will be fighting for a new Pentagon contract called Joint Warfighter Cloud Capability. We likely won’t get any details on the project other than the potential size of the contract (it’s big time mula).
Windows 11: Windows 11 and a subsequent increase in prices across the commercial cloud product series boosted top line revenues in Q3. Q4 results will shed light on the price elasticity, acceptance and attrition of Windows. Hopefully it turns out alright with inflation-related price distortions.
Valuation: Microsoft has been on a roll, last quarter was the fifth consecutive quarter of accelerating sales growth, at a remarkably high level (22% last quarter YoY), and 25% in earnings YoY. Meaning both revenue generation and operational efficiency have continually improved. Those figures are hard to believe in a $2+ Tn company. Analysts expect growth to slow to 17% growth in sales, and 14% in earnings (and with tepid banking figures and retail sales, it shouldn’t be a surprise). However, the valuation around the $300-305 per share territory looks like an absolutely beautiful place to buy. I always find it funny how Microsoft just sits on tons of cash ($131bn to be exact, or about 2x total debt). This company always feels like a combination of the strongest value and growth components out there, oh and did we mention it pays a dividend? At this rate, Satya, is getting an invite to my wedding. Lastly, we’ll be keeping an eye on commentary about the impact of the macro-environment (e.g., inflation, Covid, interest rates, etc.)
Consumer Defensive: Proctor & Gamble (PG)
What we’re vibing:
Dune by Frank Herbert: I haven’t finished this one yet, but the world building, and plays on religion, imperialism, mysticism, environmentalism, class-warfare, and adventure blended in this Sci-Fi is just captivating. I haven’t been able to put this one down.
Spiderman: No Way Home: There are two types of people in this world, Marvel people and non-Marvel people. If you’re a Marvel person - this might be the best Marvel movie made yet, certainly worthy of being in the conversation.
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