Weekly Brief #29
Salesforces's $54 billion drop in value, Canada’s “Big Five” earnings results, ConocoPhillips acquires Marathon Oil, Donald Trump’s criminal conviction, Elon Musk’s xAI raises $6 billion.
Good morning investors 👋,
Happy Friday and welcome or welcome back to the 29th Weekly Brief (and the final day of May 2024).
It’s not every day that a $200 billion company loses over 20% in a single trading session. It’s also not every day that a former U.S. president is convicted on 34 felony counts for falsifying business records, or that North Korea sends garbage balloons to South Korea. These exciting stories and a few more are what I’ve brewed up for you all this week.
Let’s get into it.
In this issue:
🧑💻 Salesforce’s 21% drop, explained
🏦 Canada’s “Big Five” earnings results
🇺🇸 D.J. Trump’s criminal conviction
FEATURED STORY
🧑💻 Salesforce’s 21% drop, explained
Salesforce (CRM) shares plummeted over 20% on Thursday after fiscal Q1 revenue missed estimates and weak guidance. Revenue for the quarter was $9.13 billion, just barely falling short (0.23%) of the $9.15 billion analysts had anticipated. However, net income was $1.53 billion, surpassing projections. Full-year revenue guidance remained relatively steady at $37.7 billion to $38 billion.
According to Jim Cramer, this was a pretty decent Salesforce quarter. It wasn’t extraordinary, and they only missed revenue by less than a quarter of a percent, but grew free cash flow by over 45%. So what happened? Is this an overreaction? And is Salesforce trading at a cheap price now?
For a little background, Salesforce is a leading provider of customer relationship management (CRM) software and cloud computing services (they control 25% of the CRM market, with the next four competitors together controlling 17%). Their main business is offering other businesses a suite of tools that allows them to manage their interactions with current and potential customers. For example, if you chat with a customer service representative of a major company, they are most likely using Salesforce software to do so. In fact, 90% of Fortune 500 companies use Salesforce CRM.
We now know that Salesforce is a company with a significant competitive advantage. Now let’s take a rough look at the business’s recent quarter to understand this whole mess:
Revenue of $9.13 billion, up 11% Y/Y.
Operating cash flow of $6.25 billion, up 39% Y/Y, and free cash flow of $6.08 billion, up 43% Y/Y.
Q2 revenue guidance of $9.20 billion to $9.25 billion, up 7-8% Y/Y.
Maintains full year FY25 revenue guidance of $37.7 billion to $38.0 billion, up 8-9% Y/Y and lowers full year FY25 subscription & support revenue growth guidance to slightly below 10% Y/Y.
These are the key highlights, and setting aside the lowering of guidance (which is merely alarming) notice how every metric has either grown or is projected to grow at 8-10%. This is not bad organic top-line growth. CEO Marc Benioff himself in an interview said that they are starting to focus more on margins and cash flow to expand profits (and eventually return value to shareholders via dividends and buybacks I assume). If the top line is growing at 8%, and cash flow and margins are increasing more than that, (which will be eventually given back to shareholders), I believe this quarter was not as bad as it was portrayed.
Considering its very wide moat, high historic return on capital, consistently growing top line and expanding margins, higher bottom-line growth, and its $17 billion pile of cash (not like cash matters in this situation, but it’s something to add), I believe Salesforce is being oversold. Sure, Salesforce should have been punished for missing revenue, but not a loss of $54 billion in market value.
But therein lies the question: is it worth it to buy at this price?
Valuation; is Salesforce a ‘buy’?
Assuming a growth rate of just 9%, using Salesforce’s median price-to-free-cash-flow multiple of 40, discounted at a rate of 15% over the next five years with an added 25% margin of safety, we can estimate that Salesforce’s fair value is $236.27 billion, or an 11% discount as of the time of writing.
This means that, according to these metrics, yes, Salesforce is a buy, and by purchasing Salesforce today, you would be safely securing a 15% annual return over the next half decade1. (Don’t believe me? Calculate this yourself using my free template here.)
FINANCE
a. 🏦 “Big Five” earnings results
Canada’s biggest banks reported their second-quarter earnings this week. As of 2022, Canada’s banks paid over $26 billion in dividend income to Canadians and the Canadian financial sector alone accounts for nearly 4% of the country’s $2 trillion GDP. Here’s how the banks performed (by market cap):
Royal Bank of Canada (RBC):
Revenue: $14.15B, up from $12.45B a year ago.
Net income: $3.95B, up from $3.68B a year ago.
EPS: $2.92, up from $2.68 a year ago.
Toronto-Dominion Bank (TD):
Revenue: $13.82B, up from $12.40B a year ago.
Adjusted net income: $7.43B, down from $7.86B a year ago.
Adjusted EPS: $2.04, up from $1.91 a year ago.
Bank of Montréal (BMO):
Revenue: $7.97B, up from $7.79B a year ago.
Adjusted net income: $2.03B, down from $2.19B a year ago.
Adjusted EPS: $2.59, down from $2.89 a year ago.
Scotiabank (BNS):
Revenue: $8.35B, up from $7.91B a year ago.
Adjusted net income: $2.11B, down from $2.16B a year ago
Adjusted EPS: $1.58, down from $1.69 a year ago.
Canadian Imperial Bank (CM):
Revenue: $6.16B, up from $5.70B a year ago.
Adjusted net income: $1.72B, up from $1.63B a year ago
Adjusted EPS: $1.75, up from $1.70 a year ago.
b. 📈 Saudi Aramco’s new share sale
Saudi Arabia filed papers this week to sell a new stake in oil giant Saudi Aramco. The deal could raise $12 billion by offering 1.545 billion Aramco shares, (about 0.64% of the company), at a price range of $7.12 to $7.73 riyals per share2. A greenshoe option could increase the stake to 0.7%.
The sale aims to fund Crown Prince Mohammed bin Salman’s economic diversification from the country’s dependency on oil. Aramco CEO Amin Nasser said the offering will broaden the shareholder base and increase liquidity. Aramco shares closed slightly lower following the announcment, ending the day trading at $7.76, valuing the company at $1.87 trillion, making it the 6th largest in the world by market cap.
BUSINESS
c. 🛢️ ConocoPhillips acquires Marathon Oil
ConocoPhillips is set to acquire Marathon Oil in an all-stock deal valued at about $17 billion, with an enterprise value of $22.5 billion, expanding its presence in U.S. shale fields and Equatorial Guinea. This acquisition comes after other major deals in the oil and gas industry, including Exxon Mobil’s $62 billion acquisition of Pioneer Natural Resources and Chevron’s $53 billion deal to buy Hess Corp.
ConocoPhillips shares fell 2.5%, while Marathon’s rose 6.3%, with the deal, expected to close in the fourth quarter of this year pending regulatory approval. After being approved, the deal will add 2 billion barrels to ConocoPhillips’ reserves and will boost its share buybacks and dividends (per Bloomberg).
d. 👾 Elon Musk’s xAI raises $6 billion
Elon Musk, co-founder of OpenAI and CEO of Tesla and SpaceX (among many other companies), has secured $6 billion for his AI startup, xAI, in a second funding round from investors including Vy Capital and Valor Equity Partners. This is lower than Musk’s effort back in April to raise funds at an $18 billion valuation, but a notable feat nonetheless.
xAI released its ChatGPT rival Grok-1 in November 2023 on X (formerly Twitter) and Grok-1.5 in April of this year, aiming to develop ‘truthful and beneficial AI systems.’ Although, (like all AI chatbots right now), Grok is known to generate false responses. The new funds will be used to build infrastructure, launch products, and speed up R&D. xAI is also exploring partnerships to expand Grok’s user base beyond X.
POLITICS
e. 🇺🇸 Donald Trump’s criminal conviction
This Thursday, Donald Trump became the first U.S. president convicted of a crime when a New York jury found him guilty of falsifying documents to cover up a payment to silence a porn star ahead of the 2016 election. The jury convicted Trump on 34 felony counts after 2 days of deliberation.
The crime carries a maximum sentence of 4 years, but Trump will not be jailed before sentencing. This verdict also does not bar Trump from campaigning or taking office if elected. Sentencing is set for July 11, just before the Republican Party’s presidential nomination. Trump plans to appeal.
f. 🇰🇵 North Korea’s garbage balloons
North Korea this week released at least 260 balloons carrying garbage into South Korea. Residents in border regions received text messages advising them to avoid going outdoors and to report unidentified objects to the military or police. These balloons have been found in eight of South Korea’s nine provinces and carry toilet paper, soil, batteries, and in some cases, a load of crap (literally).
This fiasco follows North Korea’s threat to retaliate against South Korean activists scattering trash across their border. North Korea’s vice-minister of defense warned of “mounds of wastepaper and filth” in South Korea, which is what was provided. South Korea’s military labeled this as a threat to public safety and warned North Korea to stop immediately.
Fun fact: Both Koreas have repeatedly used balloons for propaganda since the Korean War in the 1950s.
📚 Book of the Week
Note: I don’t recommend books that I haven’t read or that I would never read. The books I recommend are books I have already read or that I will eventually read.
Chip War — Chris Miller
Book Description:
You may be surprised to learn that microchips are the new oil—the scarce resource on which the modern world depends. Today, military, economic, and geopolitical power are built on a foundation of computer chips. Virtually everything—from missiles to microwaves—runs on chips, including cars, smartphones, the stock market, even the electric grid.
Until recently, America designed and built the fastest chips and maintained its lead as the #1 superpower, but America’s edge is in danger of slipping, undermined by players in Taiwan, Korea, and Europe taking over manufacturing. Now, as Chip War reveals, China, which spends more on chips than any other product, is pouring billions into a chip-building initiative to catch up to the US. At stake is America’s military superiority and economic prosperity.
Economic historian Chris Miller explains how the semiconductor came to play a critical role in modern life and how the US became dominant in chip design and manufacturing and applied this technology to military systems. America’s victory in the Cold War and its global military dominance stems from its ability to harness computing power more effectively than any other power. Until recently, China had been catching up, aligning its chip-building ambitions with military modernization.
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Thank you for reading today’s Weekly Brief! If you enjoyed or learned anything, please spread the word. An analysis on LULU 0.00%↑ is coming next week, so keep an open eye!
— Jacob
Not financial advice. Invest at own risk. Research before investing.
Converted the share offering to USD from Saudi riyals using the original share offer of 26.70 to 27 Saudi riyals.