Weekly Brief #30
Lululemon Q1'24 earnings and analysis, Nvidia passes Apple in market cap, NYSE stock glitch: BRK.A falls 99%, Bill Ackman raises $1 billion for IPO, India general election results, J&J sued for $260M.
Good morning investors 👋,
Happy Friday and welcome or welcome back to the 30th Weekly Brief.
It’s been consistently 25° daily outside this past week in Ontario, and aside from the weather, the market was also heating up, reaching all-time highs yet again. In other news, the Bank of Canada cut rates for the first time in 4 years by 0.25%, bringing the new policy rate to 4.75%.
On top of that, the New York Stock Exchange experienced a glitch on Monday sending Berkshire Hathaway shares down 99%, and the meme stock craze resurfaced after Roaring Kitty revealed a GameStop position worth $600 million, with a YouTube livestream scheduled for today (June 7, 2024).
Let’s get into it.
In this issue:
⛹️ Lululemon’s 40% drop, explained
📈 Berkshire Hathaway falls 99%
🇮🇳 India general election results
FEATURED STORY
⛹️ Lululemon’s 40% drop, explained
When I say the word “sportswear,” what comes to mind? How about “running shoes?” Most people think of Nike or Adidas. But what about “athleisure” or “yoga pants?” Those familiar with the topic will likely think of Lululemon. (I won’t go into too much detail about Lululemon’s business, as many already know. For those who don’t, Lululemon sells clothing; athleisure clothing, which is a hybrid of casual and athletic clothing.)
Lululemon (NASDAQ: LULU) has been performing terribly since the start of this year, and since being added to the S&P 500 last October, the stock is down 23%, and year-to-date close to 40%. The question from most investors is simple when stocks underperform this badly, “Why has this stock taken such a bad hit, and is now the time to buy?” Let’s look at their Q1 earnings this week (near verbatim):
Net revenue increased 10% to $2.2 billion, or increased 11% on a constant dollar basis.
Americas net revenue increased 3%, or 4% on a constant dollar basis.
International net revenue increased 35%, or 40% on a constant dollar basis.
Gross profit increased 11% to $1.3 billion.
Gross margin increased 20 basis points to 57.7%.
For the second quarter of 2024, Lululemon expects revenue to be around $2.4 billion to $2.42 billion, growing quarter-over-quarter at 9% to 10%. For full-year 2024, Lululemon expects revenue to be in the range of $10.7 billion to $10.8 billion, growing 11% to 12% year-over-year.
According to the earnings report, which isn’t mind blowing, but does not look terrible whatsoever, Lululemon is expecting to grow at 12% in 2024, and is currently growing at 8% quarter-over-quarter. Overall, this was a decent quarter, and zooming out on previous ones, we can put together some mind-blowing details to paint a bigger picture.
Lululemon has, in the past 5 years:
Grown revenue at 24% annually.
Grown net income at 26% annually.
Grown free cash flow at 27% annually.
Compounded its stock at 17.45% annually.
Averaged a ROIC1 of 40%.
Adjusting for full-year guidance, Lululemon currently controls 10%2 of the athleisure market in North America with a small 3%3 of the global market. The athleisure market as a whole is expected to double by 2030 to over $600 billion, and with Lululemon’s focus on growing internaitonally, particulary China and Asia, I personally as an investor in the company can see them becoming a more dominate player in the space.
Valuation: is Lululemon a ‘buy’?
Assuming a growth rate of just 10% (analysts expect 12%), using Lululemon’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 Lululemon’s fair value is $40 billion, or around fair value at the time of writing.
Factoring in the growing athleisure market, (with China being a key play in said market, and Lululemon increasing sales in the Chinese market heavily and a lot of potential growth ahead), stable brand and pricing power, consistent sales growth, and a high (very high) return on capital, Lululemon’s massive fall in value seems to be unjustified leading to a great value for money.
FINANCE
a. 👾 Nvidia passes Apple in market cap
Nvidia surpassed Apple in market cap on Wednesday, becoming the second-most valuable public company on earth after Microsoft. Nvidia hit a $3.02 trillion market cap just barely passing Apple which stood at $3 trillion, and right behind Microsoft’s market cap is $3.15 trillion.
Nvidia shares have surged over 24% since its Q1 earnings report in May and have risen significantly over the last year and extraordinarily over the past five years. The company holds a ~90% share in the AI chips market and announced a 10-for-1 stock split in May effective by the end of this week.
b. 📈 NYSE stock glitch: BRK.A falls 99%
A data glitch on Monday caused the stock price of Berkshire Hathaway (the most expensive stock in the world) to fall from over $620,000 to just $185 per share; a 99% discount. Traders placed orders at this discounted price, but all orders were eventually cancelled by The New York Stock Exchange (NYSE).
The issue was due to a problem with the Consolidated Tape Association (CTA). The glitch is said to have (potentially) been linked to a system update, and has been resolved by reverting to the previous software version. Aside from Berkshire, other stocks affected were Chipotle, Barrick Gold, BMO, and even GameStop which is ironic.
BUSINESS
c. 💰 Bill Ackman raises $1.1 billion for IPO
Billionaire activist investor Bill Ackman’s Pershing Square Capital Management raised $1.05 billion by selling a 10% stake of his firm to institutional investors (and family offices) this week. This move follows potential IPO rumours last week pointing to a date in 2025 or 2026, which would value the firm at $10.5 billion.
About $500 million of these funds will help build-out a new U.S. investment portfolio which will be listed on the NYSE, mimicking Ackman’s already listed fund in Europe, (Pershing Square Holdings), but with lower fees and quicker access to capital. The rest of the money will be used to fund new strategies.
d. 💊 J&J sued for $260 million
A jury awarded a 49-year-old Oregon woman with mesothelioma this week a whopping $260 million against Johnson & Johnson (J&J), the maker of a baby powder she used, which may have been contaminated with asbestos.
Mesothelioma is a cancer caused by asbestos exposure, which can contaminate talc (the mineral used to make baby powder) during mining. The U.S. Food & Drug Administration (FDA) detected asbestos in J&J’s baby powder products in October 2019 with J&J eventually opting to use cornstarch instead. However, this case says otherwise. The jury awarded $200 million in punitive damages and $60 million in compensatory damages. Johnson & Johnson plans to appeal.
POLITICS
e. 🇮🇳 India general election results
Prime Minister Narendra Modi secured a third term in India’s election this week, with his Bharatiya Janata Party (BJP) falling short of a parliamentary majority. Modi’s leadership marks history as the second ever prime minister in Indian history to secure three consecutive terms.
The BJP remains the strongest party in the Lok Sabha (House of Commons equivalent) and will form the next government. The Congress Party, a historic political force, won less than half the seats of the BJP. Cabinet reshuffles are expected as the BJP looks for coalition partners to secure a majority.
f. 🇮🇱 Netanyahu to address U.S. Congress
Israeli Prime Minister Benjamin Netanyahu will address a joint meeting of Congress on July 24. Netanyahu’s last address to Congress was in 2015. House Speaker Mike Johnson and Senate Minority Leader Mitch McConnell stated this event symbolizes the U.S.-Israel relationship, allowing Netanyahu to share his vision.
Netanyahu aims to discuss Israel’s conflict with Hamas following the October 7 terrorist attack, a conflict that has resulted in over 37,000 Palestinian and Israeli deaths, with many Palestinians facing famine.
📚 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.
The Everything War — Dana Mattioli
Book Description:
In 2017, Lina Khan published a paper that accused Amazon of being a monopoly, having grown so large, and embedded in so many industries, it was akin to a modern-day Standard Oil. Unlike Rockefeller’s empire, however, Bezos’s company had grown voraciously without much scrutiny. In fact, for over twenty years, Amazon had emerged as a Wall Street darling and its “customer obsession” approach made it indelibly attractive to consumers across the globe.
But the company was not benevolent; it operated in ways that ensured it stayed on top. Lina Khan’s paper would light a fire in Washington, and in a matter of years, she would become the head of the FTC. In 2023, the FTC filed a monopoly lawsuit against Amazon in what may become one of the largest antitrust cases in the 21st century. With unparalleled access, and having interviewed hundreds of people – from Amazon executives to competitors to small businesses who rely on its marketplace to survive – Mattioli exposes how Amazon was driven by a competitive edge to dominate every industry it entered, bulldozed all who stood in its way, reshaped the retail landscape, transformed how Wall Street evaluates companies, and altered the very nature of the global economy.
Amazon has come to control most of online retail, and uses its own sellers’ data to compete with them through Amazon’s own private label brands. Millions of companies and governmental agencies use AWS, paying hefty fees for the service. And, the company has purposefully avoided collecting taxes for years, exploited partners, and even copied competitors—leveraging its power to extract whatever it can, at any cost. It has continued to gain market share in disparate areas, from media to logistics and beyond. Most companies dominate one or two industries; Amazon now leads in several. And all of this was by design.
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— Jacob
Return on invested capital (ROIC): the amount a business is making annually on the dollar amount you’re investing.
Calculated by dividing Lululemon’s $10 billion in projected revenue by the North American athleisure market of $107.42 billion.
Calculated by dividing Lululemon’s $10 billion in projected revenue by the global athleisure market of $358.08 billion.