Tag: Investing

Are things really bad?

S&P 500 has declined 10% YTD. It dropped as much as 15% till Apr 8, before a tariff pause was announced.

Things have since recovered a bit.

E.g. after Walmart missed guidance on Feb 20, its stock has only dropped 4.1% (Feb 20 to Apr 17). To be fair, the one day drop on earnings is bigger – 6.5%!

Walmart guided 3-4% annual revenue growth, 3.5% to 5.5% adj. operating income growth, flat to 3.6% adj. EPS growth. Considering the 50bps of FX headwind, organic adj. EPS growth is guided at 3.6% at mid-point.

On Apr 9, Walmart pulled Q1 profit guidance, but maintained full year guidance.

 

 

So, investors think tariff is negotiation tool?

Tariff is not an unknown factor.

Trump talked a lot about tariff during campaign and after election.

However, stock market was buoyant until recently.

The most common excuse? Investors thought tariff is just an negotiation tool that won’t be implemented.

That sounds reasonable, but actually it doesn’t make any sense.

Let me explain.

If stock market reflects the common wisdom and it doesn’t go down, then it means everyone assumes tariff threat is not that real.

Then why should the negotiation be effective?

Governments are not fools. Like in poker, if they think Trump is just bluffing, they would call.

The stock market almost sells Trump out if it doesn’t fall.

So, if US wants to be considered serious on the negotiation table, stock market must fall.

Why?

Because you need to let everyone know tariff is real. Every company needs to talk about it. Investors need to be panicking about it. When investors are really worried, they sell, even with losses.

Stock market drop is a manifesto that everybody realizes the tariff can be as real as the losses in their retirement accounts.

That’s when the “negotiation tool” is effective.

US big tech maxed out on capex

Assuming buybacks & dividends are “required”, the unallocated cash flows are matching the capex figure already.

This means additional room to add capex is limited.

Put it in another way, free cash flows after shareholder returns are near 0.

For example, Alphabet got $125bn op. cash flow in 2024, paid $53bn in capex, $62bn in buyback and $7bn in dividend. FCF after shareholder returns is only $3bn, or 2.5% of its operating cash flow.

Meta, with 10% unallocated operating cash flow in 2024, will increase its capex by 50% in 2025. If Meta’s op. cash flow grows 10% in 2025, then FCF after shareholder returns in 2025 is only $3bn, or 3% of its operating cash flow.

Microsoft in calendar year 2024, has $10 billion of unallocated free cash flow. But that should be smaller if looking at its fiscal year 2024.

How amazing is (incremental) profitability at Meta?

For the past 8 quarters (2023 & 2024), incremental gross profit margin is well above 80%, more like 90%.

This is easy to understand, e.g. one more successful ads sale (click etc.) on Instagram won’t cost Meta more.

What’s even more amazing is the incremental operating profit conversion, which on average is like 100% for the past 6 quarters!

What does 100% mean? It means one dollar of additional gross profit earned by Meta was converted into one dollar of operating profit – how amazing is that!

The operating profit margin increased from 20% in 2022 Q4 to 48% in 2024 Q4, growing at 91% CAGR.

Although there were some one-off opex optimization efforts, thus incremental operating margin should definitely fall, it’s still a very very powerful business franchise, demonstrated by this amazing incremental earnings power.

Investing in China: little differentiation != real competition

Sometimes, it does seem that even SOEs in China doesn’t have monopoly. For example, there are 3 telecom companies, and multiple banks.

However, there are also no real market competitions. E.g. you don’t see China telecom operators competing for customers by offering differentiating product offerings.

Consumers didn’t get a wider range of choices via these seemingly “competing” businesses. 

How these businesses “split” profits looks more like a “political” question, rather than a economical one.

Investing in China: common fallacy

A common fallacy, especially in the past, is to find a US asset in the similar industry and use it as a reference for valuation.

Why this is less useful, especially in rmb assets?

To put it simply,

asset value = earnings power (e.g. EPS) x multiple (e.g. P/E)

Then we look at these two components:

1/ Industry dynamics can be vastly different.

Demand side can be very different – e.g. work from home has never been a thing in China vs. only ~24% of workers don’t WFH in 2022 in the US.

Supply sides can also be very different in terms of entry barriers, the level of competition etc.

There are just too many different things, thus the projection based on a US company’s past is usually not a good reference.

2/ valuation can be vastly different.

 

Partially, difference in multiple is reflecting terminal growth,  etc., therefore it’s similar to the first point, which is about fundamentals.

Additionally, If you think about bond prices – US treasury yield vs. China gov bond yield, they are on two diverging roads.

What’s good though? Assets in China can produce less correlated return vs. US assets, therefore providing additional benefits to a portfolio.

If RMB depreciates

One thing that might happen after additional US tariff is a weaker RMB, which can make Chinese export more appealing.

This may diver export from US to other counties, which gives pressure to producers globally.

What to do if you have rmb?

– buy houses in China

especially given that rmb borrowing rate is low, and housing prices have declined for 3 years, if you have confidence in chinese macro, buying a property in good locations is not a bad choice.

– buy overseas companies that are making money overseas

then the earnings power is not priced in rmb, and the value of the company should be rather uncorrelated to rmb.

 

Meta short-term peaked (Trump trade)?

Trump won’t be banning Tiktok in the US, if there is a divestment or other sorts of legal structure change, as he indicated earlier this year. And he has set up an official account on TikTok.

Trump’s main argument is to create competition for Meta, which could be bad for the company (people’s time spent, ads dollar, and tech talents).

Back in 2021, Trump accounts were banned on Facebook and Instagram; the ban was later lifted in 2023 after 2 years, but with “new guardrails”.

Meta said to removed those restriction last week.

On the other side, besides the support for TikTok US, Republican is trying to acquire the stake in TikTok US. Steven Mnuchin is leading a potential buyer group. He served as US Treasury Secretary from 2017 to 2021 for Trump.

Liberty Strategic Capital, is led by Steven Mnuchin, and is invested by SoftBank, which holds a stake in ByteDance.

In short, Meta could be getting a permanent and potent/aggressive competitor in the US.

Earlier this year, Biden has signed a law that would ban Chinese-owned TikTok unless it is sold within a year. The deadline would be January 19, 2025, 1 day before the next US presidential term.

Plus, read this..

Politics matters I guess.