Weekly TLDR - Keep Your Friends Close and Your Enemies Closer
In this week's TLDR, we go in depth on Intel’s turnaround, Apple’s anti-monopoly proof moat, and a new Will Smith meme cryptocurrency.
The TLDR
In this week's TLDR, we go in depth on Intel’s turnaround, Apple’s anti-monopoly proof moat, and a new Will Smith meme cryptocurrency.
Chart of the Week:
Source: Axios
30 year fixed mortgage rates have skyrocketed to 4.5% and higher in the past few weeks, revisiting rates seen only a few times in the past 10 years. What’s more, Goldman Sachs is seeing 50 basis point increases by the Fed during their May and June meetings instead of the 25 basis points currently expected. Economists seem to agree that the Fed is behind the curve in slowing down inflation and more supply side jitters due to war is making it hard for the Fed to be complacent. In the short-term, we predict low home supply and a last gasp of home buyers trying to get in before rates get even higher driving home prices even higher. Longer-term, current home owners and even investors will be “locked in” as rates go higher so new home supply may depend on home builders, who are still struggling mightily from labor and material disruptions.
Stock Market TLDR
Intel Starting To Turn The Ship
After years of languishing, Intel is finally starting to steer its ship towards a successful direction and building trust with investors. We have written about Intel’s comeback story pretty extensively in previous Weekly TLDRs but recent developments in NVIDIA being interested in being a foundry customer and the release of its first ever GPUs bring more oomph to the comeback story.
NVIDIA being interested in Intel foundry comes at a time when Intel has been asking governments for discounts to build their manufacturing facilities in exchange for reducing reliance on companies like TSMC, who are operating dangerously near geopolitical rivals for the US and Europe. The political will seems to be there with President Biden name dropping Intel in his State of the Union address. Intel’s business model is different from semiconductor companies without manufacturing like NVIDIA or AMD. NVIDIA and AMD are on variable cost models where they roughly pay a % of all sales in production costs. Intel’s business model is a fixed cost business model where Intel is paying billions ahead of time to create manufacturing facilities where they hope to be able to produce revenue generating products. Intel’s model is all about how much revenue they can generate from the tens of billions of capital expenditures (Capex) they spent. Getting a discount on its capex from various governments is a good way to supercharge Intel’s business model and boost its return.
However, even if you build it, customers may not come. That's why NVIDIA openly saying they are considering Intel is a huge sign. NVIDIA is probably the largest and pickiest customer outside of Apple and them publicly saying they are looking at Intel probably means they are at least a few layers deep in testing out that partnership. If NVIDIA is close to being satisfied, Intel’s manufacturing technology is probably good enough for most other chip makers out there. That’s more revenue for the $ / Capex equation.
Intel announcing its first GPUs is also a pretty big deal. While we don’t expect Intel’s GPUs to beat NVIDIA’s or AMD’s offerings in performance, we do expect Intel’s chips to be widely available. This is more than we can say about NVIDIA’s or AMD’s GPUs as of late, with outages and above MSRP listings the norm for PC gaming enthusiasts for the past ~2 years. I expect value branded PC manufacturers to adopt Intel graphics chips and save their AMD/NVIDIA GPUs for more performance SKUs. Intel has already invested the capital expenditures so every extra dollar of revenue GPUs make is just gravy for Intel’s $ / Capex equation.
While trust is still low for Intel and many balls are still in the air (e.g. will Intel successfully obtain government subsidies?), Intel seems to be slowly turning a ship that has been heading straight into an iceberg for years. That's more hope for INTC investors than there has ever been.
Apple’s Expanding, Anti-Monopoly Proof Empire
The forever bear case on Apple has been that smartphone hardware is commoditized and at some point in time, iPhones will go out of style and that Apple will start a downward spiral into HP and Dell territory. It should have happened when Steve Jobs passed away, or when Apple hasn’t announced any major new product lines since the iPad, or when Apple didn’t use all of its cash reserves to buy Tesla. Despite the naysayers, Apple has quietly become the largest company in the world all the while increasing its P/E ratio! What gives, isn't growth and the P/E multiple supposed to decrease as companies reach scale? We think Apple has built the most defensible and stable moat of any company in the world. How much higher can Apple’s stock go? How much does the richest 25% of the world consume?
Despite not launching new product lines, Apple has been able to grow its revenue 11.5% annually for the last 10 years. Apple has been able to achieve this feat through vertical integration of its value chain and by cashing in on its brand value by raising prices. The base model of the original iPhone was $499 while the iPhone 13 base model can be purchased for $799, a 60% price increase since the first iPhone. This is not even including higher cost models like the iPhone 13 Pro max starting at $1099. Despite raising prices, Apple’s demand seems to be higher than ever. This is due to Apple’s control over its value chain and providing a seamless experience that doesn’t really work with other devices. Much has been said about the ethics behind Apple’s vendor lock-in techniques but it is undeniably effective. From hardware components like custom CPUs, specialty glass, advanced display technologies to software components like unique user interfaces, curated app stores, and unique apps; every part of Apple’s ecosystem works closely together because they are all Apple owned and controlled. Android’s ecosystem is more flexible and arguably more feature rich but it certainly doesn’t “just work”. Between healthy bouts of squeezing its supply chain, Apple has also been able to squeeze extra margin by gobbling up its upstream and downstream value chain. This has also provided Apple a stronger brand that has been able to withstand significant price increases over the years.
Apple’s not stopping here as it expands into offering credit services through its acquisition of banking startup Credit Kudos. Apple’s MO has always been small acquisitions focused on technology and strong teams that show up 3-5 years later as a highly integrated Apple offering that immediately scales to hundreds of millions of users. The best example is Apple’s evolution from purchasing P.A. Semi for $278 million in 2008 to designing its own ARM chips in 2010 to the introduction of the M1 processor in 2020, officially “in-sourcing” the most critical processor of all of Apple’s devices, the CPU. Expect something similar with Apple wallet.
Where are the regulators? Apple can’t keep on getting away with this. Oh but it has and it can. The beauty of only targeting high-end consumers (besides being able to charge premium prices), is the fact that Apple’s market share has forever danced around the 25% mark. Monopolistic behavior generally requires some level of “power over market dynamics” that Apple never has due to the pervasive presence of Android and its ~75% market share. While various Android phone manufacturers pick up the scraps, Apple is using them as a cover to feast on the richest 25% of consumers.
This is why we think Apple’s competitive position is so rock solid. Apple has control of its external dependencies (and is a dependency others rely on like Facebook for its advertising data), Apple has a rock solid brand reputation built on a differentiated experience that competitors can’t match, and Apple has an “anti-monopoly proof” market position by only targeting the high-end of the phone market. We fully expect Apple to be the top personal device manufacturer 20 years from now, no matter what shape it takes.
Crypto TLDR
MicroStrategy leverages up to buy Bitcoin, holds 125,000 Bitcoins
MicroStrategy, a multibillion-dollar business intelligence and cloud-based software company, recently secured a $205 million USD loan backed by its Bitcoin holdings from Silvergate Bank. The company plans to use these funds to buy even more Bitcoin. Michael Saylor, the eccentric CEO that runs the company, has been incredibly bullish on Bitcoin and isn’t shy about sharing his sentiment. Saylor has been all over the crypto and financial airwaves to promote Bitcoin as his company continues to buy up huge amounts of this burgeoning asset. It was reported in February this year that the company already has over 125,000 Bitcoin, which is valued at almost $6 billion at current prices. Interestingly, the company itself is worth $5.74 billion, which means that its Bitcoin portfolio is worth more than the combined company’s worth. Does this mean MicroStrategy is more of a Bitcoin-holding company than its headline charter of creating business intelligence and cloud-based software?
Will Smith meme token soars on launch
On Sunday night, Will Smith shocked the world with his on-stage slap of Oscars host Chris Rock after Rock made a joke in poor taste at the expense of Smith’s wife. Social media was instantly abuzz with conversation of Will Smith’s outburst and several memes have sprung up around the incident. One of which is a new cryptocurrency called Will Smith Inu that can be bought on the decentralized exchange Uniswap. At the time of writing, the token has reached a market cap of $1.3 million with $810,000 in volume. This is a more than 17x increase in price since its launch a day ago. The token’s website comes with a roadmap (called “Will Map”), as seen below, where the anonymous team lays out their plans to grow the project.
Ethereum 2.0 staking continues to grow ahead of the pivotal 2.0 launch
Ethereum's pivotal 2.0 upgrade is happening in stages, as some of us already know. The first major phase of the upgrade is the launch of a Beacon Chain that only allows users to deposit (without being able to withdraw) and stake ETH to earn ETH. The Beacon Chain was launched in December 2020 and has been running without issue ever since. Ethereum is expected to complete the full upgrade to Ethereum 2.0 in the summer of this year (popularly known as “The Merge”). As we approach this event, the total amount of ETH being staked in the Beacon Chain has been rising spectacularly. So far, more than 9% of the entire supply of ETH is locked in the Beacon Chain. Once the merge completes, Ethereum will be a proof of stake and sharded blockchain, shedding much of its woes around environmental impact and scalability.
$448 million of crypto leveraged positions were liquidated in the Sunday bull run
On Sunday, Bitcoin’s price surged from about $44,400 to almost $47,000 in one giant bull move. The price of Bitcoin has been turning up since last Tuesday and the Sunday move up was one of the largest in the past week. This caught many crypto traders with leveraged positions offside, and according to the website CoinGlass, $448 million in leveraged positions were liquidated. This includes $350 million in shorts and $98 million in longs with almost 80,000 traders liquidated. Crypto’s high volatility makes leverage very dangerous, which conversely also attracts many traders with outsized risk appetites.
Crypto.com becomes the official sponsor of FIFA 2022
Crypto.com, a top international cryptocurrency exchange based in Singapore, recently became the official sponsor of FIFA 2022. This is yet another major step in crypto’s unyielding march to permeate “mainstream” culture. Crypto.com is evidently flush with marketing cash and has been on a deal-inking spree with sports brands all over the world including renaming Los Angeles-based Staples Center to the Crpyto.com Arena, signing a $25 million deal with the Australia Football League, a $100 million deal with Formula 1, and a $175 million deal with UFC. This strategy seems sound, given the young demographic of sports fans and the popularity of sports betting. It was last reported in late 2021 that Crypto.com has more than 10 million users and 3,000 employees.