Newsletter III

Recap on a Week in the Markets: July 31-Aug 4

Week Recap

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News

U.S. Credit Rating Downgraded

Fitch recently downgraded the United States’ credit rating from AAA to AA+, in a move that has sparked indignation from Janet Yellen and JPMorgan’s own Jamie Dimon. Dimon, commenting on the downgrade, said the U.S. economy is “the most prosperous… the most secure” on the planet, and that it was “ridiculous” that other countries are still rated AAA while the U.S. is being downgraded, given that nations around the world depend on the U.S. military for their market stability.

Fitch made the move to downgrade the country’s credit rating as a result of “expected fiscal deterioration” and growing debt in the world’s largest economy.

The downgrade drew surprise from investors and market experts, who pointed to strong consumer metrics and an overall healthy balance sheet, despite mounting debt. Time will tell whether this means much for the U.S. markets, but Dimon expects the change “doesn’t really matter that much”. He is certainly not alone in his optimistic outlook, but others are taking a gloomier view on things. Bill Ackman announced his short on 30-year treasuries, and equities have taken a dive over worries from investors over the higher cost of borrowing.

A Slew of Earnings… Again

As we are in the midst of earnings season, this is hardly a surprise. This week saw the earnings releases of several companies in the Hourglass portfolio, including Stem, Inc., EQ Bank, Unity Technologies, and others. Here’s a brief overview;

EQB

• Net Income +88% YoY

• EPS of $5.60, +27% YoY

• Customers +31% to 368K

• Raised guidance for FY23

ANET

• Revenue growth +39%

• EPS +65% to $1.55

• Introduced new products for scaling with demands of AI/ML network architecture

• $809m in cash flow, up from $318 for the same period in 2022

• Announced $30m share repurchase at average price of $137.2 /share

SDGR

• Missed revenue estimate - $35m for the quarter, down from $39m in Q2 ‘22

• Beat earnings estimate with ($0.21) per share, compared to ($0.43) estimate.

• Software revenues grew and management raised guidance for this segment of the business - drug discovery revs declined as a result of timing delays on collaborations.

MELI

• Delivered monster Q, beat revs estimates with 31.5% YoY growth

• Active users grew 30% YoY

• Gross profit margin +1% YoY

• Free cash flow of $1.4bn

SOFI

• +584K customers in Q1, a 44% YoY growth, and a decline in customer acquisition cost

• Revenues +37% to $498m, financial services +223%

• Adjusted EBITDA +278% YoY

• Raised FY23 guidance.

• Deposits +26%, with over 90% of deposits coming from members with a median FICO score of 747.

U

• Revenue +80% YoY

• Adjusted EBITDA margins of 18.5%, up from 6.5% last Q and -12.7% Q2’22.

• Free cash flow of $33m

STEM

• Revs +39% YoY

• CARR +88% YoY

• Software growth across all of their service segments

• Awarded Best Predictive Analytics Platform award by Tech Breakthroughs

Overall, it was a fairly good week for our portfolio - SDGR disappointed investors after reporting earnings, but it isn’t wholly surprising given the volatility of revenue generation for the company. SoFi, Unity, Arista Networks, EQ Bank, Stem, and MercadoLibre all posted strong results that showed up in price spikes as the market rewarded them.

Soaring Temperatures Take a Toll on Food Exports

In the first week of July, the world’s global average temperature passed 17 degrees Celsius (that’s around 63 Fahrenheit for our American audience) for the first time in recorded history. Warming temperatures have taken a toll on tourism and general productivity, but now these balmy conditions are marking their impact on various food prices and exports as well. Barley and wheat exports are expected to decline by around 30% in Australia, and the U.S. yields on maize and wheat are down significantly as well. India has been struck even harder, with intense rain conditions damaging rice supply so critically that the country has been forced to ban exports on all non-Basmati species of rice, a move that is expected to diminish global rice exports by 10%.

The Economist produced a fascinating article linking times of reduced food availability to social unrest, which in turn markedly reduces the GDP output of nations for as long as 18 months. In a period of financial concern for many economies, this could spell danger. If GDP is decreased, governments may be more likely to cut spending or raise taxes, in turn increasing the potential for social unrest even more (28% more likely). This creates a vicious feedback loop, and perhaps one that is already making itself felt in certain parts of the world…

Coup in Niger

National insecurity and a declining economy resulted in a coup in Niger earlier this week, with military officials trapping (now former) president Mohamed Bazoum in his home and declaring a power seize. This marks the sixth insurrection in the area over a three-year period, and one that was especially damaging to the West, who saw Niger as one of only a few remaining Western allies in the region and had various military and drone bases in the country.

But nevermind the West. This is a sad day for Niger, which saw itself beginning down a democratic path with the election of President Bazoum in 2021; he sought to promote gender equality, girls’ access to education, and to revive the economy - an area he was finding success in, with a 7% growth in the economy after years of stagnation.

Now, he is trapped. Military personnel have control over the country, and Russian officials, including the now-infamous Wagner group, are moving in to establish relations and potentially exert control. I won’t speak to whether Russia may have played a part in the coup - there’s no confirmation as yet of that, but let’s say I wouldn’t be surprised if that information were to come to light.

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Weekly Read

How To Be Successful - Sam Altman

I remember when Elon Musk took me on a tour of the SpaceX factory many years ago. He talked in detail about manufacturing every part of the rocket, but the thing that sticks in memory was the look of absolute certainty on his face when he talked about sending large rockets to Mars. I left thinking “huh, so that’s the benchmark for what conviction looks like.”

I first heard about this quick write-up by OpenAI’s founder Sam Altman in an episode of the Lex Fridman Podcast. After listening to the nearly 3 hr interview, I knew I needed to check out his post - Altman is a highly nuanced thinker and intelligent guy (no kidding, since he headed up the founding of one of the most complex businesses ever built). While there are certainly lots of different figures who will “teach you to be successful”, I found Altman’s way of thinking was reflected in his writing - his advice is general in nature, not ‘do X and do Y and you can be just like me!’, and offers sound tips that I believe everyone should read, not just investors or entrepreneurs.

There truly is something for everyone in his 13 tips for success, and I can’t recommend it enough. I have often turned back to re-read it, and find I capture a little more insight from it every time I do. You can find the article here.

“You also want to be an exponential curve yourself—you should aim for your life to follow an ever-increasing up-and-to-the-right trajectory… Trust the exponential, be patient, and be pleasantly surprised.”

Investor Spotlight

StockOpine

StockOpine writes two company deep dives every month into some very high-quality businesses that their writers do an incredible job of analyzing. They also offer earnings analysis and provide investment thesis’ for their newer positions. If you follow StockOpine, you are nearly guaranteed to come across some companies you haven’t heard of before, and 100% guaranteed to come away with some insights and investing knowledge.

Their newsletter has been shouted out by some very reputable figures in the investing space, demonstrating the immense value that experienced investors are getting from StockOpine’s service. My favourite piece by them was their article on PayPal, which came out on July 20th and offers some excellent research into the valuation, growth, and story for the beat-down business. Here’s a quick snapshot of the article and what it offers readers;

I won’t reveal anymore here - you’ll have to subscribe to StockOpine’s service to get the full picture, but I can promise you that if you’re interested in any of the companies that they cover, or simply want to get an understanding of how fundamental analysis is done by some highly experienced professionals, then their newsletter is for you!

You can find StockOpine on Commonstock, on Twitter, and subscribe to their newsletter on Substack!

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This Week’s Watchlist

InMode - INMD 0.00%↑

InMode is an Israeli-based company that provides minimally invasive aesthetic and medical treatment solutions. They manufacture and sell radio-frequency devices to physicians and clinics for their use on patients.

Their products are used by a lot of Hollywood figures (I won’t take a stab at naming them, I don’t even know who they are), as some of the services their devices offer are body contouring, skin treatment, hair removal, and other cosmetic applications. The minimally-invasive radio-frequency technology at the root of InMode’s technology is what sets them apart from other companies in the space, allowing them to design new surgical equipment that does little in the way of lasting effects for patients interested in plastic surgery.

Their balance sheet is truly incredible, with strong returns on their invested capital and assets, attractive gross margins, and impressive growth in their income, EBITDA, and revenues. They also have reasonable valuations on earnings and FCF ratios, though their P/E ratio to growth figures looks highly unattractive, with a PEG ratio of 194. My main concern for the stock is that plastic surgery is hardly what you would call ‘necessary spend’ - in periods of macro-economic difficulty, InMode may struggle. There was some evidence of this in 2022, when revenue growth fell of a cliff to 27% from 74%. However, this is still a decent growth figure and may suggest that the high-income nature of the patients interested in plastic surgery provides some buffer on the downside. Either way, InMode seems like a very attractive business and one I will be keeping a close eye on, and will be tossing on the Hourglass Watchlist.

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What’s New at Hourglass

Website Launch

I’m excited to announce we launched our website this week! After a lot of work and assistance on the graphic design front from more talented colleagues, the site is launched and ready to go!

While you can continue to find all our content on Substack, the Hourglass website will serve as an easy location to find all our older work, particularly as our archive builds up. You’ll be able to find specific pages for our research articles, podcasts, and newsletters on the website, plus, (if I am permitted to say) a much sexier look.

Head on over to Hourglass Network and check it out!

Podcast - Episode III

This week’s episode is the first general investing topic - The New Gold Rush.

In the podcast, I briefly discuss the history of commodities and their ability to shape civilizations and enable innovation, and how a new commodity has taken shape as the new economy-altering commodity for the Age of Information - data. And, because it is an investing show, I also take a look at some of the companies that investors can take a look at in the space.

That’s all for this week in the markets; we’ll see you back here next week with more news, investor features, and good reads! Until then, stay curious, stay diligent, and stay tuned! Happy investing folks.