???? On a Lyft to the basement? ?? Also: Buffett ??Apple; Walmart Greedflation? US jobs, Debt Ceiling ?? Free! Cash! Flows!

• US large-cap S&P 500 closed 1.85% UP ▲?
• Tech-heavy Nasdaq Composite closed 2.25% UP ▲▲
• Pan European STOXX Europe 600 closed 1.08% UP ▲?
• HK's Hang Seng Index closed 0.5% UP ▲?
• Japan's broad TOPIX closed 0.12% DOWN ??

?? Focus

• On a Lyft to the basement? (Uber, Dash, Didi, Grab)

?? In the Markets

• Buffett ??Apple
• Walmart: Greedflation good guys?
• US jobs, Unemployment, Debt Ceiling

?? MoneyFitt EXPLAINS

• ?? Free! Cash! Flows!

?? Focus

On a Lyft to the basement?

Ride-hailing company Lyft Inc, a key Uber competitor in the US, collapsed on Friday as it reported first-quarter results that were still loss-making but better than expected by Wall Street's Finest. But the new CEO scared off traders with his earnings forecast and profit-crushing strategy to claw more market share back from archrival Uber.?

..... ? The stock dropped 19% to under $9, taking it to 88% below its $72 Initial Public Offering price in 2019 when it raised $2.3bn and was valued at over $24bn. (An "IPO" is when a company first offers shares to the public on a stock exchange.) At the time, the IPO was a huge success, with demand so strong it priced above the original target range of $62-68 per share. It debuted ahead of category pioneer Uber's own IPO, which was then expected to see a valuation of $120bn. Including the IPO proceeds, Lyft has raised a total of about $7.2bn from investors over 28 rounds, but is now worth a mere $3.3bn based on its market capitalisation (share price X number of shares.)

Investors in the venture capital funds that bought Lyft (and others that bought the hype and the shares at its IPO.)

- Image credit: Our Gang (Little Rascals) / Hal Roach, WBD via Tenor

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..... ? Earlier in the week, Uber CEO Dara Khosrowshahi said he would not start a price war with Lyft, saying "the days of paying for share and essentially using shareholder money to buy share temporarily... are over." Lyft has used this scenario to compete aggressively on price and increase its US market share (partly paid for by firing 1,000 employees, or 26% of its staff.) In other words, Lyft is "using shareholder money to buy share temporarily."

..... ? But the very ride-hailing business model continues to be in question. Uber, with an international footprint and a powerful food delivery service (see below), is losing money, too, based on normalised accounting principles. A key measure of a company's financial performance, Free Cashflow ?? (FCF, operating profits minus capital expenditure), is negative for both Lyft and Uber (and DiDi and Grab, for that matter.) Both were labelled as "tech companies" in the go-go days of 2019 because they used GPS and were funded by the unicorn dreams of greedy venture capitalists --themselves funded by FOMO investors facing 0% interest rates. With that, they had bags of cash to compete with taxi cabs, "influence" legislation and subsidise riders (thank you!) while underpaying suppliers. The result is a copycat-easy business that doesn't easily scale or generate loyalty from price-comparing customers with competitor apps in the same smartphone folder.

Over the last year, ride-hailer + food-deliverer Uber has dramatically outperformed both pure ride-hailer Lyft and food-deliverer DoorDash, and even the S&P500 (ETF, in purple)

- Image credit: Google Finance

...But all have been crushed by the broader market (in purple) since their IPOs. Asian comps DiDi and Grab have performed about the same as Lyft.

- Image credit: Google Finance

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"Uber has (at best) the profitability profile of a capital-intensive taxi company, not a capital-light tech company... Profits much above Uber’s cost of capital, on this argument, seem unlikely to ever materialise." - Ethan Wu, FT Unhedged , 4-May-23

..... ? MEANWHILE, even the food delivery business, which first boomed at the height of the pandemic and provided restaurants with a lifeline, is a challenging business. It's a highly competitive industry globally, with low margins, high costs and highly localised competitors with varying strengths in pricing, service and variety of restaurants (and, increasingly, cloud kitchens, which have no physical space for dine-in and rely entirely on online orders.) Fees to consumers, after endless promos and discounts, often do not cover the expenses of paying drivers and maintaining vehicles and the operating platforms, not to mention negotiating the labyrinth of labour laws, consumer protection laws, tax laws, and health and safety regulations. (DoorDash recently reported revenue up 40% in the first quarter, driven by non-restaurant deliveries, yet still managed to lose $161mn, though it was at least Free Cashflow ?? positive, unlike Lyft and Uber etc, which continue to spend more cash than they generate from operations.)

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?? In the Markets

Stockmarkets in Europe and the US jumped sharply after a week dominated by interest rate hikes and fears surrounding the slow-motion train wreck (maybe) that is the US banking sector. The most under-attack regional banks shot up ahead of the weekend as hedge funds bought back shares they'd sold short during the week. (PacWest and Western Alliance jumped 82% and 49%.) With traders more worried about the depth of the impending recession rather than the risks of more US interest rate hikes, strong US jobs data were greeted with cheers.?

Stock market traders, reacting to the April non-farm payrolls data

- Image credit: Despicable Me / Universal Pictures via Tenor

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..... ? April data showed US employers adding 253,000 new jobs in April, way ahead of experts' forecasts of 160-180,000 and a big pickup from 165,000 seen in March. In a past life (2-3 months ago), this could have been the trigger for a massive selloff, with the still red-hot labour market providing cover for the Fed and other central banks to keep raising interest rates to battle intransigent inflation. Also, the unemployment rate dipped back to 3.4%, lower than the 3.6% expected. As it is, with terrified regional banks looking to cut back on lending, these signs of a resilient economy were seen as a relief, while expectations of an actual rate cut in July receded a little.

..... ? Traders largely ignored the dangers of Congress not raising the debt ceiling, which would lead the Federal government to run out of money by June 1st, "an economic and financial catastrophe that will be of our own making " according to Treasury Secretary, Janet Yellen over the weekend. (See 15-Jan MFM with an Explainer.)

The Apple of Warren's Eye

Shares of Apple surged almost 5% on Friday on upbeat results reported after the market closed on Thursday, almost closing at the highest in a year. The results showed strength in its high-margin Services business as well as slightly positive growth in iPhone sales, tying it more closely to the booming luxury sector than to its global peers in the struggling smartphone and consumer goods sectors. But more goodies were to come for Apple shareholders over the weekend!

..... ? Warren Buffett said at his annual Berkshire Hathaway Shareholder Festival on Saturday that Apple Inc. is a better business than any other of Berkshire Hathaway's holdings. Buffett first revealed a $1bn stake in May 2016 when the share price was about $25 (it's now over $170), but by March 2023, it had been increased to $151bn, now making up 46% of Berkshire's $328bn equity portfolio.

Apple is different than the other businesses we own. It just happens to be a better business," - Warren Buffett, Chairman and CEO of Berkshire Hathaway, speaking in Omaha, Nebraska

..... ? Meanwhile, Berkshire posted a $35.5bn first-quarter profit on Saturday, driven heavily by gains in Apple on top of good investment income elsewhere and a rebound at car insurer Geico. Buffett took pains to steer attention away from volatile short-term stock-price gains (accounting rules require Berkshire to report unrealized gains and losses with the net results), but they are eye-watering at an increase of 544% on the previous year! (Operating profits increased by 13%.)?

..... ? Berkshire also sped up repurchases of its own stock, buying back $4.4bn, while trimming investments elsewhere and boosting its cash holdings by $2bn to $131bn after selling $13bn of stocks and buying just $2.9bn during the quarter.

Walmart: Greedflation good guys?

An analysis of Walmart's pricing strategy by data analytics firm Dataweave for Reuters showed that the company generally hiked its grocery prices far below US inflation rates and, as a result, consistently kept its grocery prices lower than its competitors', such as Amazon, Kroger and Target. Between January 2022 and the end of February 2023, Walmart raised prices by only 3% in 589 name-brand products across 34 categories, including coffee, cereals, batteries, personal care items and pet food, while U.S. inflation averaged 7.5%. Amazon raised prices by 7.5% while Kroger and Target hiked them by 9%. (A basket of 10 products was 4.6% cheaper than Target, 14.8% cheaper than Kroger and 17% cheaper than Amazon.)

..... ? While tempting to think that Sam Walton's billionaire spawn are being the good guys in a sea of cold-hearted, Greedflation -fuelled corporate monsters, it's worth noting that its groceries policies come as part of an overall business strategy. (Walmart is currently facing allegations of using its size to gain an unfair advantage in batteries over its competitors.)

..... ? Groceries are the largest category at Walmart in the US at over half its sales. However, groceries are also the lowest margin category, with an operating margin of about 2% in 2021. Walmart uses groceries as a traffic driver to attract customers to its stores and online platforms, where they can also buy higher margin products, such as health and wellness, general merchandise, and e-commerce, which have operating margins of about 6%, 7%, and 9%, respectively. By offering low prices on essentials like groceries, Walmart increases its customer loyalty and basket size while boosting cross-selling opportunities.

Everyday Low Prices (even for rich people)

- Image credit: Tenor

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..... ? But lower (increases in) grocery prices are lower (increases in) grocery prices, for whatever the underlying profit motive! Back in November last year, the world's largest retailer, with the tagline of "Everyday Low Prices",? was already reporting (see MFM ) that it was seeing an increase in business from wealthier consumers trading down, driving the increase in the company's share of Americans’ grocery budgets.

MoneyFitt EXPLAINS?

?? Free Cash Flow

• Cash flow refers to the actual flow of cash in and out of a company. It is an important measure of a company's financial health and its ability to pay its bills and make payments on its debts.?
• A company can have negative accounting profits but positive cash flow, and vice versa. Accounting profits refer to the amount of money that a company makes according to its financial statements.
• Free Cashflow (FCF) is calculated as operating cash flow minus capital expenditures. Some expenses are not paid in cash, such as depreciation or stock-based compensation, so accounting profits do not always reflect a company's actual cash flow.
• FCF takes into account the cash available to a company after paying expenses while also allowing for capital expenditure spending. This shows its ability to generate enough cash to pay off debts, make dividend payments to shareholders, or invest in new opportunities. A company with a positive FCF is generally considered to be financially healthy.