In case you missed it, I’ve already sent a Taiwan Semi and Netflix earnings review article and an article outlining my take on the CrowdStrike incident, as well as a new position.

Adobe reported 11% Y/Y growth for Amazon Prime Day for July 16-17. The company reeled in $12.7 billion in sales and set new records across the board. This is good news. Still, just like with Tesla delivery day numbers, we don’t have any margin data associated with this top line number. It’s hard to gauge how intense the promotion levels were, and Amazon has recently cited rising focus on affordability from consumers. Nevertheless, the strong revenue figure was the only piece of good news we could have gotten from the release… and we got it. Thumbs up.

We speak a lot about all of the margin levers that Amazon has to pull and how that should continue leading to more profit upside. Whether it’s robotics, subscription up-sells, 3rd party selling, fulfillment localization etc. this firm has delivered a margin explosion over the last several quarters with no end in sight.

It has done this without perhaps the most powerful margin driver it has: fixed cost leverage. Amazon has a massive fixed cost base between its fulfillment ecosystem for commerce and its data center ecosystem for cloud computing. When industry-wide and Amazon-specific growth slows, Amazon extracts less value from these fixed costs and lower revenue translates to lower profit dollars. While there are certainly variable cost aspects to Amazon’s model (labor, energy etc.), these scale more slowly than potentially outperforming levels of revenue. So? The revenue drivers directly turn into profit drivers to deliver even more impressive results. 11% Y/Y growth for this highly important day points to e-commerce growth bottoming; AWS’s last quarter points to cloud computing growth bottoming too. More profit tailwinds.

Meta is exploring taking a $5 billion stake in RayBan maker EssilorLuxottica. This comes after we’ve heard leadership speak on raising production levels due to strong demand. While heavy Quest or VisionPro headsets just aren’t comfortable or useful enough for broad adoption, this more simple iteration of augmented reality hardware is working. And that tells you exactly what consumers want.

The Quest and VisionPro headsets are big, heavy, sweaty and weird-looking. Go to the Apple Store and try one out for yourself. The RayBan glasses are light, subtle and stylish. They can do significantly less than the full headsets, but consumers don’t seem to mind. They want something they can comfortably wear all day, without getting strange looks from colleagues or strangers. Want more evidence? Apple is probably going to fall 600,000-700,000 units short of its 800,000 unit 2024 VisionPro sales target. That says it all.

To drive ubiquity here and make these headsets the next computing form factor, they’ll need to be as or more powerful as they are today AND as slick as the RayBan glasses. We are several iterations away from miniaturizing the technology enough to bring that reality to life. When it happens, I still think Quest will have the last laugh and turn into a valuable profit driver for Meta. It will give Meta the developer and consumer traction needed to build out a giant app store and monetize that software down the road. That’s how I see this playing out, with plenty of heckling from now to then on how poorly Meta’s (and Apple’s) headsets are translating into financial success. Quest will be an irrelevant cash incinerator until it suddenly isn’t. I think that will be because it finds product market fit rather than because Meta threw in the towel. We shall see.

Bank of America beat revenue estimates by 0.8%. Growth in non-interest fee income helped offset the expected Q2 net interest income (NII) weakness. Specifically, 6% Y/Y fee growth was led by 14% Y/Y growth in asset management fees and 29% Y/Y growth in investment banking fees (very easy comp). NII fell 3% Y/Y to $13.7 billion as higher deposit costs more than offset higher asset yields. (I guess they were only paying me a 0.00000001% savings yield).

Average deposits for the overall corporation rose from $1.875 trillion to $1.910 trillion Y/Y due to global banking deposit growth. This growth offset consumer banking and global wealth management deposit softness. Loans and leases rose ever so slightly Y/Y.

BofA reiterated expectations of Q2 being the low point for NII. It sees NII rising in Q3 and again in Q4. This guide is based on expectations of (still) 3 rate cuts and 5.0% unemployment by the end of the year.

Bank of America continues to successfully shift long-dated held-to-maturity assets to higher-yielding, short-dated assets. This diminishes the risk of pent-up losses stemming from rate volatility like some banks have experienced during this cycle. BofA is earning 160 bps more in yield on cash than it’s paying out in deposits.

Overall provisions for credit losses provide an estimate of future credit losses. Overall net charge-off (NCO) measures the credit losses that Bank of America is actually realizing and accepting as incurred. NCO is more of a lagging indicator compared to provisions and delinquency rates too.

Consumer provisions totaled $1.09 billion vs. $959 million Q/Q and $1.10 billion Y/Y. Consumer NCOs totaled $1.06 billion vs. $1.03 billion Q/Q and $720 million Y/Y. The Y/Y rise was powered by continued credit normalization and worsening macro. The modest Q/Q rise specifically was due to the credit card loss rate rising from 3.62% to 3.88%. 

90+ day delinquent consumer credit totaled $1.47 billion vs. $1.53 billion Q/Q and $1.19 billion Y/Y. Bank of America continues to enjoy credit repayment rates above 2019 levels, a stabilization in consumer 30-and-90-day credit card delinquency rates and no tweaks to its annual macro forecast. This should eventually power a clear peak in NCOs and actual credit losses. That’s what it expects.

“Many of you have asked about consumer NCOs and when they would stabilize. Our expectations there remain unchanged… this quarter [marked] a stabilization of that rate.”

CEO Brian Moynihan

Commercial provisions totaled $414 million vs. $360 million Q/Q and $25 million Y/Y. Commercial NCOs totaled $474 million vs. $470 million Q/Q and $149 million Y/Y. The Y/Y rise was due to rising commercial real estate (CRE) and small business losses (worsening Y/Y macro). For CRE specifically, the firm “continues to aggressively work through loans in this portfolio. It enjoyed falling NPL and NCO rates within the category on a Q/Q basis and continues to see NCOs for CRE falling throughout 2024.

Consumer credit & debit spending overall rose 3% Y/Y. This is a meaningfully structural metric for gauging consumer health given BofA’s massive U.S. scale. While the segment’s revenue did rise a bit Q/Q, that was driven by more credit card borrowing, which is materially less positive than if growth were driven by more disposable income or more optimistic consumers.

The economic and consumer commentary echoed what we’ve heard from other large cap banks this earnings season. The economy is fine and the consumer is too. But? They’re both slightly less fine than they were a year ago. And consumers are combatting this by borrowing more to fund lifestyles. That fosters a fragility that can turn ugly if economic growth halts or unemployment spikes. Neither of those things look very likely at this point. Slightly less fine economic activity works in this environment as we gear up for monetary accommodation and as unemployment continues to show resilience at a still healthy 4.1%. This bodes somewhat well for the economy overall.

Thank you to the subscribers who pointed out that I needed to cover the next-gen competitive landscape in more detail in the Nu deep dive. I’ll do that here for Brazil, with a breakdown of the Mexican competitive landscape coming soon. There are incumbents to mention like Itau and others, but the main competitive threat in my mind comes from other fintechs.

The most intimidating, established and well-funded competitor in all of its markets is Mercado Libre. Nu is ahead in terms of product suite depth and credit scale, but MELI has made financial services a key focus area going forward. It just secured needed licensing in Mexico to profitably match Nu’s thriving high yield savings product and is also quite popular in Brazil too. The market is both highly inefficient and massive. That recipe creates immense potential value. In my view, Nu is doing the best job of this, but Meli is impressive too. I candidly see both companies dominating throughout Latin America and think the market share gains will come from the Itau’s of the world rather than each other. 

I think the largest differentiator for MELI over NU is MELI’s massive, scaled marketplace. There’s a reason why Nu is trying to build one itself. This marketplace means relationships with more merchants and also greater consumer scale to motivate these merchants to offer exclusive discounts. In turn, customers get unique, delightful value. These commerce tools work quite seamlessly with credit cards and other financial services offered by both. Meli can even offer more exclusive rewards for those paying with its credit product. The utility edge in this specific cross-selling and product suite area goes to MELI.

Inter & Co is a formidable, pure-play competitor for Nu in Brazil. They have the same digitally-native footprint that enables the “say yes to everyone” approach that Nu has for its bank accounts. This allows INTR to enjoy a similarly frictionless top of funnel. They’re both trying to build superapps, with Nu being 11 years old and INTR being 30 years old. Both offer shopping, insurance and investing tools to complement the broad banking offerings. Inter & Co also has a compelling rewards program called Loop, which is delivering the same engagement, personalization and monetization uplifts that Nu’s program yields.

Interestingly, INTR also operates in the USA, which does offer a bit of evidence that Nu’s product suite may resonate in this high value market over time. There is a large, large population of Latin Americans in the states who are underserved by their banks. Go serve them.

Despite the 19 year longer operating history, INTR is a lot smaller, with 31.7 million total customers. Nu has over 100 million, and is enjoying faster rates of customer growth as well. Furthermore, Nu’s customers are far more engaged than INTR, with an 83% active customer rate vs. 55% for INTR. Nu’s quarterly revenue base is about twice the size of INTR with a 64% Y/Y growth rate vs. 37% Y/Y growth for INTR. Next to Nu, these numbers look underwhelming, but that’s a byproduct of how special and impressive Nu truly is. It’s less so due to INTR not being a serious player in the region.

Nu’s risk-adjusted net interest margin (NIM) of 9.7% is more than double INTR’s and its return on equity is also much, much higher. Both have very strong liquidity ratios and large input cost leads over incumbents, with INTR actually claiming to have a slightly lower customer acquisition cost than NU. Still, Nu’s efficiency ratio is more than 1000 bps better than INTR’s. 

Both are expanding loan portfolios and PIX financing while delivering strong top line growth with margin expansion. Revenue per customer is similar for both, but when comparing the most mature cohorts for each business, Nu’s is about 50% higher. INTR trades for 17x 2024 earnings with a 2-year forward earnings CAGR of 37% expected. Nu trades for 32x 2024 earnings with a 2-year forward earnings CAGR of 49% expected. Nu’s upward earnings estimate revision trends are sharper than INTR’s.

Pags is another Brazilian competitor with about 31 million customers. It focuses more on payment flows than Nu does and on merchant banking. It also offers bank accounts, credit cards, cross-border service and a plethora of working capital products for small merchants. 

PAGS has a formidable consumer banking division with credit cards, Pix, a loyalty program to rival Nucoin, bank accounts and more. It has a well-rounded consumer investing platform that rivals the asset diversity Nu offers. Its $5 billion deposit base and $500 million consumer credit portfolio are both a small fraction of Nu’s. Deposits grew at a robust 64% Y/Y clip as of last quarter, which actually outpaced Nu (although on a much smaller base).

PAGS has also been more timid on credit origination, with negative growth in 2023 and 0.2% Y/Y growth this past quarter. In its earnings remarks, it cites the pandemic, rising Brazil interest rates and “one of the worst credit cycles in the country” as reasons for this prudence. Going forward, it sounds like it’s going to continue accelerating growth. Nu has also been a bit timid on credit growth, but less so. It’s seemingly more confident in pricing risk across credit cohorts. That confidence means more success if they’re right, but more balance sheet risk if they’re wrong. It’s also interesting to note that the PAGS credit book is 70% secured products vs. 14% for Nu. Despite Nu leaning more heavily on unsecured personal loans, it still was comfortable delivering 50%+ volume growth Y/Y last quarter.

PAGS is 7 years older than Nu, but it would be hard to see that in the scale and profitability of side-by-side results. Nu’s revenue base is more than 4x larger than PAGS as of the most recent quarterly reports. Despite this, Nu’s 69% Y/Y growth compares quite nicely to 15% Y/Y for PAGS. PAGS also sports a 12% non-GAAP net income margin compared to 16% for Nu, while GPM for PAGS sits at 39.5% vs. 43.2% for Nu.

Neon Bank is another Brazilian competitor to keep an eye on. It’s still private, so we have very little information on its operations. This company was born from the same excessive fee and poor customer service issues that led to Nu’s explosion. Neon aims to remove financial service access friction and democratize banking for under-served customers. It offers financial planning tools to help build credit, claims to remove all banking fees and says it offers cheaper access to funding. It’s hard to verify these claims without public filings. It does a lot in payroll loans and calls 4.8 million solo entrepreneurs clients as of mid-2022. That’s a big number. It had 16 million total customers at that time. It doesn’t really pursue the affluent demographic that Nu caters to with its Ultravioleta product, but they do compete in all other client income buckets. It wasn’t profitable as of May 2022 and had raised over $700 million as of that time. Nu’s product suite is a lot broader than Neon’s, while Neon really focuses on improving traditional banking products (and payroll loans). Product diversity gives Nu a steady source of diversified fee income to help diminish reliance on solely credit for growth.

C6 is another interesting competitor. It’s backed by JP Morgan and just reached profitability this quarter on the heels of a very sharp margin inflection. Interestingly, the company has delivered that milestone by significantly pulling back on unsecured and other riskier credit while Nu leans more aggressively into originations and delivers NIM expansion. C6 focuses a bit more heavily on enterprise banking than Nu and the others do to date (although Nu is expanding there quickly). Still, it does have a strong consumer banking branch to go head-to-head with these other firms. It offers traditional banking services and some investing and lending services as well.

When the opportunity is as large, untapped and under-serviced as Brazilian financial services, there will always be competition.  Others will not lay down and quit simply because Nu is winning. Nu is the most attractive company out of this group (aside from maybe MELI) in terms of growth, scale, margins, leverage, product breadth, runway, leadership, customer engagement and service. Some of the other listed firms boast some of the ingredients that make Nu special, but none put together all of the pieces quite like it can. 

American Express reiterated annual guidance calling for 9%-11% revenue growth. It raised its EPS guidance from $12.90 to $13.55, but that was due to a $0.66 gain on sale from its Accertify transaction. This was the entire source of the raise.

AXP trades for 19x 2024 EPS. EPS is expected to grow by 15% this year and 15% next year. Here is how that multiple compares to its historical norms:

“We feel good about where the U.S. consumer is. We’d like to see organic spending growth a bit higher, but this is a slower growth economy… the US consumer has been pretty consistent and we think it's going to be pretty consistent throughout the year… we also feel good about international growth right now.”

CEO Stephen Squeri

“For U.S. small businesses, the organic decline is improving. We’re seeing slight improvement here… And so, what I like about where we're sitting is, as the economy rebounds, whenever that may be, organic growth will pick-up.”

CEO Stephen Squeri

“Stepping back, while spend growth in certain categories was slightly higher or lower versus the prior quarter, overall spend growth was stable… spend is in line with the softer spend environment we've seen in the past few quarters.”

CEO Stephen Squeri

“We continue to see a cautious consumer, evidenced by less card member spend with lower income households being most affected.”

CEO John Greene

These two companies operate on opposite ends of the credit spectrum. American Express skews very affluent and DFS skews less affluent. Bank of America (from section one) is closer to AXP than DFS. Across the board, it is great to see credit metrics uniformly improving Q/Q for both. American Express is also now seeing Y/Y improvements, which is encouraging. This will take longer for DFS considering its demographic, but the Q/Q improvement is a needed step in the right direction. It’s also nice to see this improvement happening while it leans into personal loan origination growth. That’s good news for other unsecured lenders and was something I personally didn’t expect.

Intuitive Surgical raised its 15.5% Y/Y procedure growth guide to 16.3% Y/Y. It also boosted its gross margin target a bit and lowered operating expense guidance. This implies a raise to its EBIT and net income expectations.

ISRG trades for 68x 2024 earnings expectations. Earnings are expected to grow by 16% Y/Y this year and 14% Y/Y next year.

Gitlab is reportedly exploring a sale and Datadog is expected to be an interested bidder. This makes a ton of sense. Datadog operates on the observability side of development, security and operations (DevSecOps). You’ll hear me use the terms further to the left or right. This refers to how early on in the software package deployment process that package actually enters. A software package or app starts as source code. Gitlab provides tools for developers to write and manage this source code. But? Machines like our iPhones cannot run on or read source code. This source code must be converted to binaries (0s and 1s) to be deployed to runtime. JFrog is the big binary repository player. After this, Datadog observes these assets in runtime to ensure they’re safe and running optimally. Those are the three overly simplified buckets of DevSecOps. Gitlab is furthest to the left, JFrog is somewhere in the middle and Datadog is furthest to the right.

Datadog and Gitlab are purely complementary and would arguably combine best-in-class tools on both ends of the spectrum. They would tear down product silos to improve workflows and expedite remediation of any misconfigurations or vulnerabilities. All that would be missing is that binary repository, which Datadog already addresses by closely partnering with JFrog. This would greatly bolster Datadog’s ability to drive vendor consolidation, lower churn and create a more overarching DevSecOps platform. 

I’m somewhat surprised we aren’t hearing about Google being the front-runner to purchase it, considering it owns a large stake. If regulators would actually let that happen, don’t be surprised if we hear its name in the bidding. We’ll see how this news shakes out, but based on recent changes to GitLab’s equity award structure (making stock comp eligible for payout even after a corporate transaction), it seems like a deal will get done with someone.

Famed activist investing firm Elliott Management has taken a stake in Starbucks. The stake was called “large” by multiple news outlets, but the specific amount was not yet publicly disclosed. The position could have been started as early as April, and they could always quickly exit like they did with Paypal. For the last several weeks, Elliott has been “privately engaging” with Starbucks leadership on a plan to turn the stock and the company around.

I think this news should be cheered by all shareholders. Starbucks is a ubiquitous global brand with a still lengthy runway across key markets including North America. It's a powerhouse that dominates preference rankings for both young and old generations, but just has not executed well lately. There is significant low hanging fruit to improve performance and this is the perfect time in the macro cycle for an activist to get involved and enjoy the recovery. Buy when there’s blood in the streets. That’s what Elliott is doing.

There’s so much potential here. Its stores really only service part of the day, with significant opportunity to round out the daypart skew. It’s actively pulling costs out of its model, trimming fulfillment time to improve throughput, improving communication around deals and promotions and beginning to see improvements. Things should begin to look a lot better later in the year, but to me, Elliott materially improves the odds of that actually playing out. This is an adult in the room with a sterling reputation that is to be respected. It’s a firm with countless examples of providing clear roadmaps for improvement, and I truly hope Starbucks listens closely. Great news for this company’s shareholders. Listen to Elliott.

Hims is “voluntarily cooperating” with the Federal Trade Commission about an unnamed probe into the company’s operations. I’m sure we’ll find out more about this in the coming weeks.

Shopify got an upgrade from BofA this week based on optimistic revenue forecasts. Deutsche Bank surveys of Shopify customers, Bloomberg alt-data and app data for this quarter were also strong.

PayPal was downgraded by William Blair due to competitive concerns. I think they’re about 3 years late here.

Trump made comments on wanting the U.S. to control more semiconductor manufacturing. The Biden Administration hinted at more potential chip export restrictions to China.

JMP Securities initiated coverage of Progyny with an outperform rating and a $36 price target.

Lemonade launched “Buildings and Content” insurance in the UK to more deeply expand into home insurance there.

Meta suspended GenAI usage in Brazil and multi-modal model usage in the EU due to data security concerns.

Alphabet is exploring the purchase of a large private cloud security vendor called Wiz.

Wedbush, Rosenblatt and Goldman see little blowback from the CrowdStrike breach I covered yesterday. Wolfe Research isn’t sure. BMO Capital and Citi do see financial risks stemming from this event. I’ve done some more thinking on this position and my overall allocation to the compelling cybersecurity space. Max subs will get an article detailing that thought Sunday night. I’ve evolved my thinking on how best to handle this. Nothing drastic.

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