Happy monday, let’s get cracking – a lot to cover today. M&A over in the UK; ChatGPT’s (not so) existential threat to Alphabet, Dan Loeb jumps into Salesforce, entrenched inflation over in Norway & the US, and Mainfreight signals slowing growth.
M&A & Activism
Our US model portfolio is currently running two “bets” on acquisitions; the first is Activision, which faces a much more uncertain future as to whether it is acquired by Microsoft, but remains fairly valued – its most recent result showed strong growth in bookings, in stark comparison to competitors like EA. The second is Manchester United, which the Glazer’s put up for sale last year and has a deadline for bids fast approaching – the magic number is Feb 17th. The Qataris are said to be finalising a bid, as is INEOS-billionaire Jim Ratcliffe. The stock sits around $23.99 (afterhours) – we think an acquisition price looks like $26-28 per share and retain our buy recommendation. The Glazer’s were originally asking for about £6B for the club – (much needed) redevelopment of Old Trafford will probably cost ~£1B, and a buyer is likely going to ask for that to be shaved off the acquisition price. We think a more likely price is around the £4.5B mark, though the deep-pocketed Qatari’s may up the bidding to a number that makes the Glazer’s happier.
Dan Loeb (last seen making an activist play over at Disney) is the latest hedgie to get involved in Salesforce (Paul Singer’s Elliot Management recently declared a multi-billion-dollar stake). Loeb’s cost basis for DIS is around $120, so he’s not quite as happy as Nelson Peltz will be over at DIS (Peltz has made about 10% on DIS as of writing). Disney, of course, announced about ~$5B in cost cuts and 7,000 in job cuts last week – giving Peltz everything he asked for, more or less.
Salesforce is a bigger question. At ~$167 it’s about 50% off its 2021 highs, though it’s hardly one of the hyped-up profitless growth stocks of the bull market – the company makes money, and CEO/arch-salesman Marc Benioff sits on a fortune of about $7B from his endeavours at the company. He’s already cut 10% of the workforce. What do the activists want? Elliot & Loeb & others haven’t said, yet – perhaps it’s to spin-off Slack, which Salesforce acquired for $28B in 2021. Still – it’s hard to see a spin-off in today’s lacklustre tech market achieving much value. Is it more job cuts? Watch this space. We’ll be publishing our own report on Salesforce later this week, as the company has caught our attention.
ChatGPT Overreaction
ChatGPT’s ~6% shaved off Alphabet (Google)’s market cap. Let’s start with talking about why ChatGPT’s incorporation into Bing isn’t worrying us, yet. Technology always takes a while to be incorporated – Alphabet will need to catch up. As for now, though, Google is “sticky” and pervasive and has a 92% market share worldwide (ex. China, of course). There is a whole lot of habit changing to be done before Bing makes a dent in that share. Even a 2% market share snagged by Bing leaves Alphabet at ~90% share of the global market for search. And there’s a lot of time between now and the advent of true: AI. We wouldn’t rule out Alphabet just yet.
We have written that we expect margins to normalise at Alphabet – it’s unrealistic to expect near-30% net margins from here-to-eternity. AI has created a new “arms” race and investors should expect heavy spend from the tech giants in the next decade. Accordingly, we’ve reduced our assumptions for Alphabet’s normalised operating margin to sit around ~20-22%. A ~$280B a year business with operating margins of 20% is still a very good place to be, especially at Alphabet’s current valuation of 16x fwd earnings. We remain buy-rated on GOOG.
Advertising continues to be a shifting beast – the big winner of this quarter was Amazon’s advertising business, growing +23% in a quarter that ran largely flat for the other big two (Meta and Alphabet). Amazon’s ad business is a relative minnow in a field of goliaths, but its growth highlights Meta’s relative weakness: its technology can’t target as well as it used to. Amazon, and e-commerce advertising in general, has no such issues. We remain buy-rated on Amazon. Trades close to an all-time low at 12x EV/EBITDA. Amazon’s results in general are quite instructive to the larger economic environment in general: N. American sales for the quarter grew 14%. Hardly recessionary. For a wider view, check out the chart below of American credit card spending growth. It surged back in January.
This is pretty bad! The Fed’s stated intention is to reduce inflation via rate hikes. Consumer spending growing at 5% YoY is not quite doing that. We’re more and more of the view we first espoused last week (it isn’t ours alone; JP Morgan and Goldman Sachs have started saying it too): inflation is entrenched because job data and spending remains strong, which means rate hikes for longer. We don’t expect Powell to be backing down this year at all. We don’t see a pivot this year. We haven’t seen the pain yet from i) mortgage rate rollovers and ii) all those tech jobs layoffs (the majority will still have plenty of savings). The Fed will be hoping for more pain mid year, as those factors start to impact upon spending. We’re overweight cash and underweight equities and bonds. One more chart, this one of Norway’s expected CPI vs. actual. Expected was 5.8%, whereas actual was 6.4%. That’s a 60 bps divergence. Annualise that and you suddenly have a +7.2% impact on Norway’s inflation. Pretty serious.
Antipodes
Closer to home, Mainfreight posted a lower half-year trading update than expected, leading to analyst downgrades across the board. We don’t think there is much to be surprised about here – shipping and transport had a Pandemic-fueled moment; now higher costs weigh and a lot of those companies who drove the boom in shipping (i.e. Amazon) are reconsidering the warehouses they opened, wondering if they got a little enthusiastic. The follow-on effect is less shipping. It’s a secular trend, and one where we can see a clear read-through to other NZX-listed transport and transport-adjacent stocks; i.e. Freightways, Napier Port, etc. In a broader sense it’s a much-needed adjustment of some of New Zealand’s “growthiest names”. When it comes to transport, we expect lower volume (we’re curbing our enthusiasm).
What Markets will be Watching this Week (UTC +13)
Monday
Contact Energy Earnings
CSL Earnings
Tuesday
Westpac Consumer Confidence Index
CBA Earnings
FMG Earnings
James Hardie Earnings
Wednesday
US and UK Inflation (CPI) Data for January
Wesfarmers Earnings
Treasury Wines Earnings
Fletcher Building Earnings
SkyCity Earnings
Thursday
Telstra Earnings
QBE Insurance Earnings
Friday
US Building Permits Data