Not Another Quant

Most of the investment loss that hit $GOOGL EPS was $SPCX. SpaceX stock fell in Q3 and the investment loss took $0.55 off EPS. It was the opposite in Q2. SpaceX went public in June and Alphabet’s investment gains added $6.26 to EPS. Most of that was SpaceX and a private company. As long as Alphabet holds that stake their EPS is going to move a lot with SpaceX stock.

The 30% EPS miss from $GOOGL makes the quarter look a lot worse than it was. Most of that came from a loss on their investments. Alphabet’s EPS includes gains and losses on companies they have invested in so it moves around a lot. Those gains made EPS much higher in Q1 and Q2 and this loss made it lower in Q3. Without the investment loss EPS would have been $2.67 so it still missed by about 11%. Operating income leaves the investments out and it was 6% below estimates. That explains about half of the 11%. The rest could be tax. Their tax rate excluding investment gains and losses was about 16% in Q1, 12% in Q2 and 19% in Q3. But we don’t know what tax rate analysts expected. Even with the miss operating income was still up 30% YoY so the business is fine for now. But Search has slowed every quarter this year from 19% growth in Q1 to 12% in Q3. Search is still half of Alphabet’s revenue and AI research and other company costs were up 71% YoY. If Search keeps slowing while those costs keep going up that becomes a problem.

We have the BoC hiking because they are worried about second round effects from the current oil supply shock. They are doing this to the Canadian economy that’s barely grown per person since 2015. Most of the growth we had came from population growth. Productivity is the issue. The BoC targets total CPI inflation at 2%. Headline is 3.1%. Core and ex energy are at about 2%. Without this energy shock we are close to the target. The BoC also says the economy is still running below what it can produce. And that shows up in growth and jobs. Growth is expected to slow to a 0.8% annual pace from October to December as the new tariffs hit. Canada lost 110K jobs in August and September and unemployment is at 6.5%.

🇨🇦BoC has hiked for the first time since 2023. I don’t think this is the right move. They seem to want to get ahead of any pass through that could happen since this supply shock is continuing longer than most thought. It is strange to me because Canada’s core inflation is still low. CPI trim and CPI median actually fell in September to 1.8% and 1.9%. Even the BoC said the case for holding was that the rise in inflation is mostly energy and core is still close to 2%. The suits at Desjardins say the BoC has to act on where inflation is heading and not where it’s been. But that depends on how much of this oil shock gets passed through. The BoC was late to hike in 2022. But CPI trim was 4% when they started hiking and now it’s 1.8%. Businesses saying they plan to raise prices doesn’t mean consumers can afford to pay them. Wages are up 2.3% while prices are up 3.1%. A hike doesn’t fix the oil supply problem. It makes borrowing more expensive while households are already paying more for energy. Canada is only expected to grow 1% this year and lost 110K jobs in August and September. Unemployment is at 6.5%. Most of this year’s growth came before trade talks broke down. Growth is expected to slow to a 0.8% annual pace from October to December as the new tariffs hit. The BoC’s rebound next year counts on exports and business investment picking up while the trade war is still on. So why can the US consider hiking? Their inflation is at 3.7%, growth is expected at a 2.3% annual pace from October to December, they added 162K jobs in August and September and unemployment is at 4.2%. The US has more of an inflation problem than a growth problem. Canada has the opposite. The BoC is acting on where inflation is heading. But what about growth and jobs? I will continue to dig into this.

I don’t think the BoC hike makes sense based on their own report. They are worried businesses will start raising prices to make up for the higher costs they have absorbed so far. But their own report says that hasn’t really happened yet. So how does a hike stop that? It makes it harder for businesses to sell and that doesn’t fix their costs. It just leaves them stuck with those costs while their borrowing costs go up. Most businesses will likely deal with that by cutting hiring. The BoC thinks this hike is small enough that it won’t slow growth much. But we have had a growth issue in Canada since 2015 and businesses and workers are already weak. They are hiking on where they think inflation is going. But their own report says the trade war could make businesses hold off on hiring and expanding.

Why is $MSFT offering about 1/4 of their employees money to leave? Microsoft says the offer is for people who were already thinking about leaving and that it isn’t a sign they need fewer employees. But that doesn’t really line up with what they told investors in April when they said they expect to have fewer employees by June 2027. This seems to be about money. They are spending a massive amount on AI and I think they know they won’t need as much staff as AI makes people more productive. They are already making about 20% more revenue per employee than a year ago but how much of this is due to productivity vs something else is more difficult to say. I don’t think they expect everyone to take the offer. In the spring they offered early retirement to some longtime US employees and ~30% took it. They also said they expect a much smaller percentage to take this offer. So we keep watching and see if Microsoft’s headcount keeps falling while revenue keeps growing? Is AI starting to take the jobs?

$SOFI faithful let's stay out of goblin town. SoFi is back above the 200 week EMA and we really don't want to go below that again. That 50 week going under the 100 week soon is bearish lagging and mostly just explains what has happened. Especially since SoFi has been sideways most of the year.

Looking at the $SOFI chart we need it to clear that Sept $18 level and the 200 day EMA. Then clear $20 and hold to stay away from goblin town we just pumped out of. More SoFi analysis to come! Two recent posts linked in the replies.

$SOFI is making more profit from their revenue but they raised so much new equity that returns on that equity haven’t improved as much. Their CFO said they still have a lot of extra capital to grow with. To reach their ROTCE target of 20% to 30% they need to put it to work and generate much more revenue from the capital they have. ROTCE went up to 9.9% in Q3 which is the highest it has been and most of that came from margins. But after selling about $3.3B of new stock each $1 of equity brings in 56 cents of revenue a year compared to 68 cents before. To hit their target, their margins have to keep going up and that 56 cents has to get a lot closer to $1. They plan to do that by putting the extra capital into more loans. Making more loans for partners also helps because they bring in fees without using much of their capital. But keeping more loans also means more risk from rates. This quarter their loans lost over $800M in value mostly from higher rates and their hedges made back about $734M of it.

$SOFI Q3 earnings are out and about 90% of their revenue comes from lending and banking like it did in Q2. Lending and financial services both grew 13% from Q2 so the split stayed about the same. The biggest change in their fee revenue is origination fees which went from $198.5M to $270.9M. 74% of their fee revenue now comes from loans compared to 72% in Q2. Out of every $100 (adjusted net revenue $1,371.1M): $59 lending ($807.4M) $45 financial services and tech platform ($525.1M + $87.4M = $612.5M) minus $4 corporate items (−$48.7M) That $45 is: $21 net interest income from deposits and credit cards ($281.3M) $11 loans made or referred for other lenders and investors ($151.2M) $13 card fees, brokerage, tech and other ($180.0M) $59 + $21 + $11 = $91 so about $90 of every $100 ($1,239.8M) is lending or banking. Lending share: 51% a year ago ($481.4M of $949.6M), 59% in Q2, 59% now.

The dollar’s rally has stalled at its 200 week MA. The weak euro is what is mainly keeping the dollar up. France has a lot of debt and can’t agree on a plan to cut its deficit. A lot of hedge funds had borrowed to buy French bonds for the extra yield. When the budget news got worse and oil went back above $100 it looks like they got rinsed. When people are worrying about France’s debt they start worrying about the euro. It looks like some of the money coming out of French bonds is leaving the euro completely. The euro is ~58% of DXY so a weak euro helps hold DXY up. Moody’s didn’t cut France’s rating on Friday and the selling has stopped for now. But the euro could stay weak until France shows it can actually cut its deficit. The next vote on France’s budget is November 3.

With Anthropic filing their S1 today it looks even more likely they are the customer behind 1/3 of $SPCX Q3 revenue. In the S1 Anthropic says they’ll spend up to $120.5B with SpaceX into 2029. That’s up from about $45B when SpaceX filed to go public in May and $84.5B in the draft Reuters saw in September. They expect all their capacity to be up and running in December and then pay SpaceX about $3.1B a month. The customer SpaceX didn’t name made up about $5.0B of their Q3 revenue which is about $1.7B a month. That would make sense if Anthropic was still getting more capacity added in Q3. There’s also the $1.11B a month deal SpaceX said would start December 1. They never said who it was with and I think it could be Anthropic since that’s when Anthropic expects to get all their capacity. We can’t confirm Anthropic is the customer yet because the S1 doesn’t show what they paid SpaceX in Q3. But I think the deal makes them too big to be anyone else in SpaceX’s numbers.

$META didn’t wait for the new Class C shares to start selling stock to pay for their AI buildout. They just announced $35B in stock offerings today and plan to sell up to $60B more once the Class C shares start trading next year. Their filing last week said it’s getting harder to raise money because so many other AI companies need it. It looks like they want to get theirs before there is less left. These Class C shares have no votes. I have posted a lot on this and the quote thread is linked below. This first sale can’t be Class C yet but Meta set it up so most of it can end up as Class C later. That helps protect Zuckerberg’s voting power. $NVDA $AMD and $AVGO might buy up to $5B of it between them. Meta buys chips from all three so some of this money could go right back to them.

Quality matters in the neocloud space. I think lumping them all together is a mistake. Neoclouds can still get loans but it’s getting harder and how much they pay comes from how risky they look. Lenders care a lot about how strong customers are and how long those customers are signed up for since that’s the money that is paying back the loan. How new the company is and how much debt it already has are obviously key as well. Musk is arguing lenders have mostly stopped lending to companies that don’t bring in a lot of revenue outside AI data centers and he uses $SPCX as the example. They have Starlink and launch revenue and last week it cost about 2.3% a year to insure their debt against default. $CRWV makes almost all their money from AI data centers and it cost about 11% a year to insure their debt. But it doesn’t look like you need outside revenue to borrow yet. $NBIS makes almost all their money from AI cloud. They have customers like Microsoft and Meta and on Oct 17 during this selloff they got a one year $3.5B loan from Citi starting at about 6.7%. Compare this with Volta which is a new company and got a loan at about 10.5% two days earlier. They had to pay more than first planned to get it sold.

I think Trump’s deal with Russia is about getting Ukraine to stop hitting Russian refineries. Trump keeps pushing for it since Ukraine hitting those refineries is a big part of what’s holding back Russian fuel. If Ukraine stopped Russia could fix them and export more but bigger repairs take months. I don’t think Russia is offering unlimited diesel. Their deputy prime minister said buyers can have as much as they want from what Russia will export. And so far this month Russia is exporting about the same amount as last month. Not sure this does much for diesel prices. The deal is also a big change in US policy. The US is letting Russian diesel in even though Congress banned it. I have seen senators from both parties say this breaks that law so we have to see how this develops.

$META new non voting shares let Zuckerberg keep control while Meta can raise money and he can sell some stock. Looking more into the filing Meta’s board members did push back on the size of the share dividend. Zuckerberg wanted 20 new shares for every share. The board offered 1 for every 9 and they ended up at 1 for 1. More new shares would mean more stock he could sell without giving up votes. But they didn’t get any limits on his control. In 2016 Facebook’s board made him agree that in most cases he would lose control if he left the company. This time he said no to that kind of rule and they approved it anyway. Last week a Delaware court blocked a similar deal at $NET because Cloudflare’s board members likely went along with what their founders wanted. Meta’s board also went along with Zuckerberg on control but nobody has sued yet so we don’t know how a court would rule.