?? We Hate Inflation

In this issue of the Peel:

• ?? Growth is slowing, and inflation is still a problem in the U.S.
• ?? Just like their burritos, Chipotle stock just doesn’t disappoint.
• ?? Two AI giants have released earnings… check it out.

Market Snapshot ??

Banana Bits ??

• Day by day, our hopes for a rate cuts fade and fade
• Jamie Dimon explains the economic dance the U.S. is pursuing right now
• Well, looks like I owe someone a kidney as Snap shares boom after hours on a strong earnings report
• Skydance and Paramount get even closer to a merger

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Macro Monkey Says ??

God Damn Prices

Much like the average speed and brainpower of U.S. citizens, our economic growth is slowing dramatically.

Something about having a nation-halting pandemic immediately followed by dumping >$6tn onto the economy has fueled outsized growth since the pandemic f*cked off. Can’t imagine what could’ve caused this…

Anyway, the post-pandemic GDP growth high the U.S. economy has ridden over the past 2 years seems to be fading.?

We’d hate to have JPow’s job any day, especially after this report. Let’s get into it.

The Numbers

Real GDP grew 1.6% in the first quarter, according to the Commerce Department on Thursday.

Source

In two more quarters, we’ll finally have the giant bars from Q2 and Q3 of 2020 off the above chart and be able to see how drastic this change is, but for now, just trust me on this—falling to 1.6% inflation-adjusted growth is a big change of pace.?

We ended last year on a strong note, with real GDP gaining 3.4%, implying that the rate of growth slowed by more than 50% into 2024. Economists guesstimated that there would be a slowdown, but not by this much, expecting a 2.4% real increase.

Nominal GDP still looked solid, accelerating 4.8% and implying a total Q1 GDP of $28.28tn. So, it doesn’t take a genius to figure exactly what’s wrong here…

Inflation is back on the rise, like arrests on college campuses, in 2024. And it doesn’t get better on the Core side. Excluding food and energy, quarterly Core PCE—the Fed’s favorite inflation reading—jumped 3.7% in the first 3 months of this year.

Because making sense is illegal in investing, generally, a slower GDP growth reading gets traders fired up for an interest rate cut. But, strong nominal growth like Q1 saw all but erasing those hopes.

Just a month ago, interest rate futures implied that markets saw a 0.6% chance that rates would hold steady at their current level of 5.25%-5.50% through the end of 2024. Now, markets are calling for a nearly 20% chance of that happening.

Source

Who Cares?

So, real GDP growth slowed, inflation reaccelerated, and UConn won another national championship in Q1—can anything go right in the U.S.?

It turns out yes—looking deeper into the data, we can see that our economic performance wasn’t as bad as the scorecard might imply. Some positive signs include:

• Imports grew 7.2% annualized, and while imports are a detractor from GDP, they show a strong demand for international products from consumers and companies. This alone caused GDP to come up lower by 0.96%
• Residential investment jumped 13.9%, helping boost both supply and confidence in the housing market
• Private inventories fell, accounting for another 0.35% of that GDP growth figure
• Disposable personal incomes grew 4.5%, or 1.1% nominal, maintaining solid growth even after adjusting for inflation

The headline growth and inflation numbers had me calling my mom to come pick me up, but thankfully, I had time to read further before she answered. Bond traders seem to have felt the same way, with the 2-year yield spiking above 5% only to then chill out a bit.

Source

Still, however, that’s the highest yields have gone since late November.

The Takeaway?

Growth is slowing, and inflation is still a problem in the U.S.

That sounds bad, but it’s really not that deep. Mr. Market may have had his very-on-brand schizophrenic episode in response, but as we discussed above, much of the data in this report bodes well for U.S. consumers.

Higher real incomes, more housing, less federal government spending, and increasing purchases of foreign/exotic goods sound like a pretty good quarter to me. If only this inflation bullshit would leave us alone for good…

We’ll get the March PCE data tomorrow morning. This will give us a glimpse into how inflation played out in Q1, but now, everybody and their mother expects the monthly PCE reading to beat estimates like it’s an Nvidia earnings report.

Fingers crossed apes.

What's Ripe ??

Chipotle Mexican Grill (CMG) ??6.3%

• Are burritos a Veblen good? Maybe, but it sure seems like it, as Chipotle keeps rounding up customers despite perpetually increasing prices.
• What’s clear is that no one who went to Chipotle in the past year is allowed to complain about inflation because, after 4 rounds of price hikes in 2 years, they still managed to smoke earnings estimates.
• The company posted EPS of $13.37/sh vs the $11.68/sh expected on a slight revenue beat at $2.7bn, mostly thanks to a 7% jump in same-store sales.

AstraZeneca (AZN) ??5.4%

• Selling drugs is cool as hell, and it’s even cooler when your stock rises because of it. Shares in this $230bn drug dealer boomed thanks to a lot of sick people.
• Reporting earnings of $1.05/sh on $12.7bn in sales, the U.K.’s second-largest stock (after Shell) easily beat expectations.

What's Rotten ??

IBM (IBM) ??8.3%

• What’s the first thing you do after making less money than expected? If you answered “go on a shopping spree” then congrats, you and IBM agree.
• The firm missed yet again on sales, reporting $14.46bn vs the $14.55bn expected. EPS still beat, however, at $1.68/sh vs. $1.60/sh expected.
• The boomer of the tech sector is also throwing $6.4bn (net of cash) to acquire cloud software provider HashiCorp at $35/sh.

Comcast (CMCSA) ??5.8%

• One of the most hated companies in America was one of the most hated stocks on Thursday as Comcast shares dropped almost as much as their wifi does.
• The cable and broadband giant sold off despite beating on sales and EPS, with earnings of $0.97/sh on $30.1bn, or gains of 0.6% and 1.2%, respectively.
• The problem came in the form of too much honesty, with the firm recognizing struggles in the hyper-competitive broadband market.

Thought Banana ??

Earnings Spotlight: AI Powerhouses

Atlas holds up the heaven, but between Google Search and Microsoft Excel, it’s clear who’s holding up the real world.

The combined ~$5tn in market cap that was reported yesterday under these two firms alone somehow still managed to blow past investors’ sky-high-AI expectations.

Nearly all of the charts and data we use in the Peel come from these two companies’ products, so let’s see how they did.?

Microsoft Corp: Shareholders in Microsoft had only one thing to say following the company’s Q1 earnings report: Word.

Revenue of $61.86bn and EPS of $2.94/sh beat expectations, to no one’s surprise. And finally, we get to link to one of our favorite graphics in all of finance once again:

Source

Shoutout to CNBC for the above, showing us that for the third quarter in a row, Microsoft didn’t miss on any single revenue segment. Everything was growing, especially gaming, cloud, and server products.

Clearly, none of Andrew Tate’s followers listened to that dude well enough to get a new wrap for their Bugatti as they’re sitting at home on Xbox. At least if they held shares, their portfolios would be helping out a bit.

Revenue grew 17% annually as CFO Amy Hood highlights that, when it comes to near-term AI demand, the only issue is on the supply side.

Azure revenue—Microsoft’s cloud business and the closest followed revenue segment for the tech giant—surged 31%, its fastest acceleration in more than a year.

Cringe revenue grew 12%, oh sorry, I meant *LinkedIn revenue was humbled & honored to grow 12% for the quarter.

Everything grew and beat expectations just about across the board, to make the long story short. The earnings by this company were clearly macro with strong demand, leaving us all to wonder where the hell it got its name from.?

Alphabet Inc: At least those YouTube ads that make me wish I was churning butter in a 1730s deli are helping someone out.

I used data from this company to make that chart and a product from the previous company to actually put it together. And I’d bet every dollar in my bank account (or, more accurately, every *penny) that you’re reading this on one of them right now.

So, it’s no wonder why Google was able to grow revenue by 15.4% annually last quarter. All told, Google’s parent company delivered $80.54bn for the quarter, keeping $1.89/sh of that against expectations for $78.6bn in sales and EPS of $1.51/sh.

Alphabet’s most watched revenue lines, including Cloud and YouTube ad revenue, both grew healthily for the quarter, registering more than 300% growth in Cloud operating income to over $900mn.

In total, net income grew 57% compared to last year as cost cuts and pivots in strategy to making money rather than protesting seem to be paying off.

The Takeaway?

Yes, the share prices of AI companies have boomed in recent years, but let’s not act like they haven’t been deserved.

If my laptop had a “Screen Time” report like my phone, I’d, well first and foremost, probably get fired, but I can guarantee over 99.9% of that time is spent on either Microsoft products or Googling what I’m doing wrong in MSFT products.

The real good news here is that markets took this beat of expectations well, with both shares up big after-hours. Our professional lives and retirement accounts are largely dependent on these two doing well, so fingers crossed it keeps going that way.

?? The Big Question ??: How will other tech giants like Amazon and Apple compare when they report? If you could only hold one stock over the next decade, which of the above would it be?

Banana Brain Teaser ??

Previous ??

Company Q plans to make a new product next year and sell each unit of this new product at a selling price of $2. The variable costs per unit in each production run are estimated to be 40% of the selling price, and the fixed costs for each production run are estimated to be $5,040. Based on these estimated costs, how many units of the new product will Company Q need to make and sell in order for their revenue to equal their total costs for each production run?

Answer: 4,200

Today ??

A small business invests $9,900 in equipment to produce a product. Each unit of the product costs $0.65 to produce and is sold for $1.20. How many units of the product must be sold before the revenue received equals the total expense of production, including the initial investment in equipment?

Send your guesses to [email protected]

Wise Investor Says ??

“If you were born poor it's not your mistake, but if you die poor it's your mistake” — Bill Gates

How Would You Rate Today's Peel??

??All the bananas? ? ? ? ? ? ? ? ? ? ? ? ???Meh? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ??Rotten AF

Happy Investing,

David, Vyom, Jasper & Patrick