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📝 Focus

• Apple's White Glove Services

📊 In the Markets

• Shorting Banks IS different

• AMD❤️Microsoft

• $ vs € hikes, Ferrari, Bumble, Paramount, Kenvue

📖 MoneyFitt Explains

🎓️ Share Buybacks

📝 Focus

Apple's White Glove Services

Earnings reported by Apple Inc. after market close were flat but still beat highly-paid analysts’ forecast of a 6% fall. Revenues shrank for a second straight quarter (though by half of what the company had been guiding) on steep declines in Mac and iPad sales. iPhone sales rose 1.5% compared to a year ago. While much slower than the 8% growth in the December quarter, it perhaps reflects some shifts in purchase timing after the China supply chain disruptions a few months back. Apple also announced another $90bn in returns boosting 🎓Share Buybacks, adding to the $572bn it's bought over the last decade, cutting the number of shares in issue by 30% since 2013. But it's growth of the services division that's particularly interesting.

..... ▷ Sales rose 5.5% to a new record in services, Apple's fastest-growing and most profitable division, now making up 22% of all sales. It drives customer loyalty and engagement across its ecosystem of devices and platforms and includes Apple Music, Apple TV+, Apple Arcade, Apple News, iCloud, Apple Pay, the new (and immensely popular) Apple high-yield Savings Account and the App Store in general. Growing by 18% since last year, the division now has close to a BILLION paying customers. The premium pricing Apple charges compared to its rivals in hardware, leveraging and promoting an image of exclusivity and quality, carries over to some extent in services as well (though maybe not in streaming.)

..... ▷ The recurring, high-margin nature of the Services division is very important both in driving growth and smoothing revenues and earnings for the whole company. It could potentially eclipse iPhone earnings in just a few years.

..... ▷ Over the long term, the market typically rewards companies with a high percentage of recurrent income with higher valuations. "Recurrent income" can come in the form of long-term contracts, subscriptions or a loyal customer base. These can provide stable and predictable cash flows, which, in reducing uncertainty and risk, is what investors want.

📊 In the Markets

US stock markets fell for the fourth straight day, as did the regional banking sector index, as fears of contagion in that space continued. The widely followed (not by us!) Dow Jones Industrial Average fell just under 1% and turned negative for the year for the first time in 2023.

..... ▷ Helped along by new models and strong sales in the US and China, Ferrari (RACE) reported earnings up by a quarter (matching fellow luxury marque Porsche's first-quarter gain) and is now earning 75% more than it did prior to the pandemic.

..... ▷ Bumble beat forecasts on the increase in paying customers looking to find love and other activities.

..... ▷ Shares in Paramount dropped by almost 30% after reporting a billion-dollar quarterly loss. They slashed its dividend thanks to its expensive pivot to Netflix-style streaming in an ever more competitive market in a slowing economy.

..... ▷ First-day trading of Kenvue, Johnson & Johnson's new consumer arm and the biggest US listing in almost 18 months, saw the price surge almost 20%.

US and Euro hikes: Meanwhile, markets are also digesting 0.25% interest rate hikes by the Fed on Wednesday and by the ECB, the 20 eurozone country central bank, on Thursday.

..... ▷ The messages from the respective chiefs were, however, different, with Jay Powell strongly hinting that after 14 months and 10 consecutive hikes, it was (finally) time for a timeout... an admission that the economy is slowing, despite a still red-hot labour market. Current banking exec jitters leading to less lending are helping to slow things down, too, though the various unintended consequences of that are yet to be clearly seen. Markets continue their shift to fears of a recession from fears of higher interest rates.

..... ▷ On the other hand, Christine Lagarde, Powell's opposite number in Europe, signalled after raising rates for the seventh time running that more tightening would still be needed to tame inflation, which sent European stocks lower. But the ECB also said that aggressive tightening is now making itself felt in the eurozone economy, leading some traders to believe peak rates could arrive sooner rather than later, leading both German bond yields and the euro down on Thursday.

Shorting Bank Shares IS Different

The White House on Thursday said it would monitor "short-selling pressures on healthy banks" while various state and federal bodies, including the Securities and Exchange Commission, are looking at potential "market manipulation" in the crazy midsize bank share price moves of recent days.

..... ▷ PacWest of Beverly Hills tanked more than 50%, while Western Alliance dropped 38% (though it denied seeking "strategic options"), and Zions lost 12%. According to analytics firm Ortex, short sellers made $379mn in paper profits on Thursday alone. The point is that the violent share price swings did not reflect sound fundamentals such as stable deposits, sufficient or strong capital and lower uninsured deposits, or that first-quarter earnings at many regional banks were strong.

..... ▷ Given that trust is a major factor in the whole concept of banking ("my money's safe in the bank, so I won't take it out"... so the bank can lend most of it back out to others), the impact of sharp share price declines is, in a way, more real than in any other sector, hence the interest authorities are taking in short sellers. The danger is that depositors could get spooked by news of their bank's share prices collapsing (not the same as the bank collapsing) and yank their deposits (which could lead to their bank collapsing.)

..... ▷ Short selling, in which traders sell borrow shares, hoping to buy them back later profitably at a lower price, is legal —and generally seen as part of a healthy market— but manipulating their prices (the "intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting" prices) is not.

AMD❤️Microsoft

A Bloomberg report that Microsoft is working with Advanced Micro Devices on new artificial intelligence processors sent the stock up 12% (though it closed up only 6%.)

..... ▷ From the Microsoft angle, the partnership and financial support (if it's confirmed, though it seems quite likely -- since it even has a code name, Athena) helps it to secure the supply of the powerful GPU (graphics processing unit) chips it needs to drive its AI ambitions in the face of surging demand. Microsoft’s cloud infrastructure competitors, Amazon and Alphabet, both have their specialised chips, as has Google, the search giant that Microsoft is trying to humble.

..... ▷ For AMD, GPUs and GPUs for use in AI are not new, but it's a strong, additional stamp of approval to have Microsoft on board as a financial and manufacturing partner. Nvidia has long dominated the GPU market. Both AMD and Nvidia are "fabless" chipmakers (no actual factory, just design) who outsource to specialist "foundries" such as Taiwan Semiconductor Manufacturing Company (TSMC) for actually making the most advanced chips. AMD, in particular, had always been runner-up to Intel in CPUs, but after spinning out its own foundry, it surged against its old rival. (Intel's strategy is to double down on manufacturing.) Both AMD and Nvidia are also led by dynamic Taiwanese-American CEOs. Just saying.

📖 MoneyFitt Explains

🎓️ Share buybacks

• Buybacks, or repurchases, happen when a company uses cash that's not being used to grow the business, pay workers more or paid out as dividends to buy shares in itself in the open market, and then usually cancels (destroys!) those shares.

• The end result is fewer shares in issue, which means that remaining shareholders will own more of the company -a higher percentage- without buying more shares. (Financial return ratios are also improved.)

• This increases the value of each share, which will then be reflected in the market price of each share, though prices often react to the announcement even before the actual buybacks happen, and of course, the very action OF buying the shares in the market will exert upward pressure.

• The alternative use of extra (or borrowed) cash is to pay shareholders higher dividends, though there can be tax implications, and the share price impact may vary.

• (C-Suite management is often rewarded based on share price performance and financial ratios, and they benefit from the effect of buybacks on their share options directly, too)