Sam Altman's Surprise Ousting

In this issue of the Peel:

• Based on 94% of all S&P 500 companies, 82% beat on earnings (bottom line), while only 62% beat on revenue (top line) in this quarter's earnings season.
• Gap and Expedia had an absolutely ripe day, whereas ChargePoint and Applied Materials suffered share price declines for the day.
• On Saturday morning, a barrage of updates was released on X (formerly Twitter), announcing the surprise ouster of OpenAI's ex-CEO Sam Altman.

Market Snapshot

Happy Monday, apes.

Hope you had a nice weekend. Welcome to what is almost certain to be the busiest week in the history of American air travel. Thanksgiving always brings packed planes and loud TSA agents, so if you’re traveling between now and Sunday, best of luck is all I can say.

Best of luck to your portfolio as well, as equity markets are seemingly growing more mixed by the day. Friday was another fairly mid-session where all the major U.S. indices rose, with the Russell 2k leading the way on a 1.37% tear. All the others moved less than 0.13%, with the Dow’s 0.01% “gain” bringing up the rear. As such, the WSO Alpha portfolio earned only 0.32%, which, to be fair, is 32x the Dow’s gain, of course, so maybe they’re actually onto something.

Treasuries were onto something as well, but in this case, it wasn’t any more exciting. Minor movements pulled yields mostly lower to close out the week, with the 10-year dancing around 4.5% as the 2-year and other shorted-dated yields mostly gained on the session.

Let’s get into it.

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Banana Bits

• In case you missed it, everyone on Earth is freaking out about Sam Altman and OpenAI … even more than usual.
• Like when your friends slowly start ghosting you, foreign investors are slowly but surely reducing their holdings in U.S. treasuries.
• Argentina’s shock election winner, Javier Milei, came not only as quite a surprise to onlookers but as a potential boon for the U.S. as well.
• 49th First Lady of the United States, Rosalynn Carter, passed away Sunday night.

Macro Monkey Says

Winter is Coming

We all know which season is the most wonderful time of year… obviously, it’s earnings szn. This week, we’re continuing our slow roll to the end of that most wonderful time of year, so let’s see how we did.

Now, we do still have some big names yet to report. Nvidia drops their numbers tomorrow, for example, and then other (much less cool) names like Deere & Co., Dollar Tree, Splunk, and other heavily followed names are set to release over the coming weeks.

"... not only was it good enough for me, but it turned out to be pretty good for (most) shareholders ..."

But, according to FactSet’s data, we’ve seen the latest reports for 94% of S&P 500 companies, and that’s good enough for me. In fact, not only was it good enough for me, but it turned out to be pretty good for (most) shareholders, too.

With 94% of company data in, some of Q3’s highlights include:

• 82% of companies beat estimates for net income (aka earnings), the highest percentage of beats since Q3’21.
• 62% of companies beat estimates for revenue, the lowest percentage of companies beating revenue since Q1’20.
• So far, we’ve seen a blended annual earnings growth rate of 4.3%, marking the first quarter of aggregate earnings growth since Q3’22.
• Communication Services was the largest contributing sector to that 4.3% growth rate, seeing earnings grow 42.4%, with Meta Platforms as the largest contributor in the group at 167% annually.
• Few companies mentioned both “inflation” and “recession” for the 5th straight quarter.

Add another W in the column for Corporate America. With that performance, the S&P 500 is up 5.27% since September 29th and 4.3% since the “actual start” to earnings szn, being when the largest banks began reporting on October 13th.

So overall, it was a fairly pleasant earnings szn; not too hot, cold, rainy, or anything else like that, but it also wasn’t exactly the sunny and 75 degrees we always love to see.

The biggest takeaway here is probably the spread between companies beating on the top and bottom lines. 82% beat on earnings (bottom line) while only 62% beat on revenue (top line)—what kind of sorcery is this?

"... Zuck came out with his speech/rant where he essentially called for the mass murder of all unnecessary costs."

Mark Zuckerberg’s kind of sorcery, that’s what. At the start of this glorious year that 2023 has obviously been, Zuck came out with his speech/rant where he essentially called for the mass murder of all unnecessary costs. Not only did Meta clearly fall in line with that plan, but it seems like the rest of Corporate America did, too.

The primary reason so many companies beat was mostly because of cost-cutting, not necessarily higher demand or anything like that. And while that’s great and shows the power that these companies have to consistently outperform and drive returns, it's not like there are any phenomenal underlying factors driving this performance.

Ironically enough, because of the cost-cutting through delayed investment, job cuts, and other decisions, these geniuses could be sowing the seeds for the recession they all feared so much.

Adding even more irony to the cake, this quarter saw a continued reduction in executives citing “recession” as a major fear going forward. Can’t wait to see how that plays out.

Now, we’ve got exactly 30 names left to report, and we’ll see if that irony falls on them as well. This is kind of the fun part about economics—companies can literally talk their own future into existence. It just sucks they chose a future of job cuts, reduced investment, and other macro speedbumps. Let’s just hope we don’t hit them too hard.

What's Ripe

Gap (GPS) ↑ 30.58% ↑

• Gap investors saw shares open to a massive gap of their own Friday morning thanks to a solid earnings report, adding to the trend of diverging outcomes for big-name retailers.
• Yeezy is out, but the gains are very much still in despite the recent turnover at the CEO position to Richard Dickson (who we prefer to call Dick Dickson), posting a non-horrific start to his tenure.
• Earnings came in nearly 3x estimates, posting $0.59/sh vs expectations for just $0.20. That’s still down an atrocious 29% annually, but sales fell by only 7% to $3.76bn as well. It was not ideal, but sales still managed to beat, too.
• But the real story was twofold: 1) gross margins and 2) free cash flow. These were the real surprises analysts cared about, as most were anticipating negative cash flows and squeezing margins. Thankfully, they managed to close the gap.

Expedia (EXPE) ↑ 5.05% ↑

• It’s good to be the popular kid at school, huh? Not that I would know what that’s like in the least bit, but Expedia sure found out on Friday (lucky).
• Shares in the travel booking provider have been surging all year as everyone is desperate to travel and finally get away from their family for a while. As great as that trend usually is, the outsized demand for travel left over from that *sshole pandemic is still carrying the team.
• Analysts at Evercore agree. The Wall Street firm I’m sure a ton of you want to work for upgraded their rating for the stock on Thursday and used the esoteric BS of saying it’s at an “inflection point” to drive this new take.
• Maybe they’re onto something, but shares are already up 56% this year. They better hope families keep wanting to get away from each other, or the next 56% should be a lot harder.

What's Rotten

ChargePoint (CHPT) ↓ 31.99% ↓

• Strangely enough, ChargePoint’s statement on Friday might actually increase demand for its products from investors themselves… so they can electrocute themselves.
• After Blink Charging’s surprisingly non-garbage report earlier this week, I guess the main takeaway is that not all charging and even EV stocks are made the same. ChargePoint hasn’t even reported earnings yet, and it’s already this bad…
• Basically, management came out and said, “Remember that $150-$165mn in revenue we were gonna pull? Well, now it’s $108mn-$113mn.” But—probably thankfully to most—they didn’t just say that and wish investors well. They tossed in a brand new CEO, Rick Wilmer, out of nowhere… always a good sign, right?

Applied Materials (AMAT) ↓ 4.02% ↓

• And that didn’t take long. Just a day after U.S. business leaders rolled out the red carpet for Chinese President Xi Jinping, we’re quickly reminded why exactly there’s beef in the first place.
• The unlucky winner caught in the crosshairs this time around was Applied Materials. As much as we all hate getting probed, the worst kind don’t actually come from your doctor—they come from the Department of Justice.
• DoJ announced on Friday an investigation into the semiconductor supplier on suspicions that the firm has been skirting export restrictions on sending their products to China. Needless to say, Mr. Market wasn’t very happy.

Thought Banana

F*ckedAI

Okay, what the hell did we all just wake up to?

If you, like me, had the misfortune of opening X (the app formerly known as Twitter) on Saturday morning, you were treated to an absolute barrage of commentary around OpenAI and its latest developments. The “misfortunate” part comes in when you realize that development isn’t exactly a new update to ChatGPT.

Instead, it was all about the ousting of CEO Sam Altman late Friday night. According to the company’s official statement, Altman was removed from the position for failing to be “consistently candid in his communications.” Basically, the board called him a liar.

And now, at the time of writing (12:14 pm Sunday), OpenAI’s investors are clamoring to get the man, myth, and legend to Wall Street and Silicon Valley that Sam has become back into the CEO chair. A board skirmish drove the ouster and, generally, what the board says goes—but this is one of those rare terms where we recall something we actually learned in Finance 101 class: the board, CEO, and all of a company’s employees ultimately work for the shareholders.

And those shareholders are now flexing their muscles.

It was a completely unexpected ouster of Altman as CEO to just about everyone besides his (former) fellow board members. Co-founder and (former) President Greg Brockman was demoted as well, causing him, along with a bunch of other researchers at the firm, to quit.

"... the board, CEO, and all of a company’s employees ultimately work for the shareholders."

Altman brought OpenAI from a tiny little research non-profit and drove it into the hottest startup in the world, even as a “capped profit” entity. Whether you agree or not with the decision to move away from non-profit status, gotta give credit where credit is due. This guy did one helluva job.

Naturally, Altman is now considering his options as they relate to coming back. Investors, including OpenAI’s largest in Microsoft with the big tech firm’s total investment of $13bn, are scrambling to get him back in charge. Reports allege that Sam is considering taking himself, Brockman, and all others who quit and launching a new AI startup to rival OpenAI.

"... he is demanding a new board and governance structure ..."

Reports also allege that in order for Sam to go back, he is demanding a new board and governance structure, one that may adhere to a more traditional startup structure.

When OpenAI was founded, they intentionally created this weird structure of ownership and control. Most of the time, investors have representatives on the boards of startups to act as an agent for the investor’s interests. At OpenAI, the firm is governed by a non-profit board that allows only a few to actually have financial exposure—even Altman claimed he owned zero equity in the firm.

So, if that board wants to, they have full ability to just fire the CEO, which is exactly what they did. Naturally, Altman doesn’t want that to happen again, so it looks like a change is coming.

At the very least, the ouster of Altman certainly made for an entertaining weekend on X. This is the kind of insanity I guess we get with startups this new, innovative, and powerful. It’s also the kind of insanity you might expect at a startup like Skynet from Terminator, so let’s just all keep our heads on a swivel for a while here.

The big question: What’s gonna happen next at OpenAI? Will Sam return to the CEO chair? If not, what’s next for OpenAI, its investors, and (former) employees?

Banana Brain Teaser

Yesterday —

This year, if you reverse the digits of my age, you will have the age of my son.

Last year, I was twice his age. How old are we both now?

Answer

Father: 73; Son: 37

Today —

Exactly how many minutes is it before eight o'clock if 40 minutes ago, it was three times as many minutes past four o'clock?

Shoot us your guesses at [email protected]

Wise Investor Says

“The key is to wait. Sometimes the hardest thing to do is to do nothing” — David Tepper

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team