# 692 – 😥 Why Q2 has companies sweating – The Average Joe

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    # 692 – 😥 Why Q2 has companies sweating

    victorlei

    May 10, 2024

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    Good morning. Move over, designer handbags — now you can drop hundreds of dollars on designer fruits. From yellow, peanut-shaped tomatoes to $400 Rubyglow pineapples, produce companies are spending years creating new fruits, then limiting supply and hiking prices. Altogether, these fancy fruits make your morning banana seem rather dull.

    So, if you’re trying to impress your friends at the first summer BBQ, maybe show up with a stylish red pineapple in hand… Just don’t tell them how much you spent on it. Or do, because why else would you pay $400 for a pineapple?


    GAMING

    The Gaming Industry’s Pandemic Revenues Are Gone — With Bookings, Growth, and Headcounts Shrinking

    Sometimes a feller’s gotta eat a fella — The quote from the TV adaptation of the game Fallout perfectly encapsulates the dire state of the gaming industry. Gone are the boom days of the pandemic. And what’s left is a wasteland that has the industry fighting for survival.

    The virtual world is (no longer) your oyster: In the latest pain data point, gaming platform Roblox ($RBLX) reported first-quarter earnings yesterday that sent its stock down 21%. While its revenue surged by 22% yearly and it reached a record of 77M daily active users, slowing growth, sky-high spending, and a weak outlook overshadowed its success.

    • But Roblox is lucky that it’s growing at all — compared to the gaming industry’s overall revenue forecast, which Circana analyst Mat Piscatella expects to drop 2-10% this year.

    • GTA creator Take-Two Interactive ($TTWO) has reported two consecutive quarters of negative sales growth — and is expected to report another decline on May 16.

    No reset button in real life

    Microsoft’s major gaming acquisitions, including Activision for $69B and ZeniMax for $7.5B, aimed to boost its gaming subscription service, Game Pass. Despite these efforts, Microsoft’s gaming revenue would have fallen by 5% in the recent quarter without Activision, per Niko Partners analyst Daniel Ahmad. Rising AAA game costs and consumers returning to reality have led to layoffs and strategic shifts across the industry. Just in the last week:

    • Microsoft’s ($MSFT) Xbox Game Studios shut at least four game studios in a surprise move — compounding a downsizing at Activision-Blizzard.

    • Take-Two also shuttered two studios, with at least 600 staff (5%) laid off — bringing the industry’s 2024 layoffs closer to 2023’s 10K+ job cuts.

    Gaming latency: On top of a weak consumer environment and industry troubles, consoles are also due for a refresh. In the most recent quarter, Xbox’s hardware sales fell 31%, Nintendo saw a 12.6% decline, and Sony lowered its fiscal year 2023 console sales forecasts from 25M to 21M — saying the PS5 is reaching the “latter stages of its life cycle.” Nintendo plans to reveal a new Switch before Mar. 2025, while rumours circulate about new Xbox and PS6 consoles by 2027. Until then, game studios will have to find other ways to get gamers and investors excited. Perhaps they should take a page from LinkedIn — which has apparently built “very fun” games.


    LARGECAP RECAP

    🏠 Leisure giants warn that hotel demand is leaving the country

    Not long ago, Americans were all about the experience economy — but their heavy travel spending is starting to fall off. Yesterday, Airbnb ($ABNB) told investors to brace for lower revenue growth as North American bookings decrease, echoing similar warnings from Intercontinental Hotels ($IHG) and Marriott ($MAR), which also raised concerns this week about the state of domestic hospitality.

    • Although Airbnb’s net income doubled year-over-year (YoY), the company anticipates only an 8-10% YoY increase in sales for the next quarter, lower than analysts’ expectations.

    • Meanwhile, Marriott noted a “cooling” in domestic hotel demand, with revenues per room climbing by just 1.5% — and competitor IHG actually saw sales fall 0.3%.

    There’s always overseas: On the bright side, all three firms reported stronger demand overseas, compensating for the slowdown in American leisure travel. Marriott’s CFO Leeny Oberg expressed optimism about higher global hotel revenues, a sentiment echoed by IHG’s own expansion. Additionally, Airbnb credited its growth to new listings in Asia Pacific and Latin America.

    Read: One major hotel chain is betting big on college campuses

    🇨🇳 China’s stocks riding a bull market wave with government support

    After a three-year slump, the Chinese stock market is finally on a hot streak. In April, the MSCI China index, covering 85% of China’s equity market, surged by 10%. Compare that with the S&P 500, which sank 1.3% during the same period. This 20% rebound has pushed both of China’s stock markets back into bull market territory.

    • Government stimulus is the driving force behind this boom — and restrictions placed on hedge funds’ short-selling have also likely helped.

    • Banks have responded positively to China’s measures, with UBS re-rating China’s stock market as “overweight” and Goldman Sachs boosting their China growth forecast.

    Uphill battle ahead: Not everything is rosy. If China’s unemployment remains as high as it’s been for years, demand could stay low — posing a challenge for the stock market to maintain this rally. So far, interventions by Xi Jinping’s administration have improved other macro indicators, with increased factory activity and exports. To sustain this growth, China might resort to a measure rarely seen in its economy: quantitative easing.


    JOE’S MARKET PULSE

    🔗 Duolingo / Yeti Holdings

    10 best stocks to own in 2024: MarketBeat has released their list of the 10 best stocks to own in 2024 and why they should be in your portfolio. On top of that, you’ll also receive their free daily email newsletter with the latest buy and sell recommendations from Wall Street's top analysts. Get the 10 best stocks here →*

    Markets & Economy

    Biden’s big spending bills — where’s the money going? Less than 17% of the $1.1T earmarked for energy and infrastructure investments has been used — and the urgency to get that money spigot flowing is rising as Biden’s showdown with Trump nears. [Read]

    Robinhood ($HOOD) posts record earnings: The retail brokerage hit a profit of $157M — quite the turnaround from its $511M loss in the first quarter of last year. The difference? Crypto transaction activity was high due to Bitcoin’s rally, as well as a 42% YoY rise in Robinhood Gold subscribers. [Read]

    Googlers take execs to task over low morale: Despite Google’s ($GOOG) monster Q1 earnings pushing its market cap over $2T, staffers asked CEO Sundar Pichai and CFO Ruth Porat about cost-cutting measures — as it takes a toll on “trust, morale, and cohesion.” Leadership acknowledged some responsibility and admitted to over-hiring. [Read]

    Business & Wealth

    Neuralink’s first human implant is largely successful (with a hiccup): Nolan Arbaugh, who experiences quadriplegia, used his implant to play chess during an impressive live demonstration. However, some strands from the implant came loose after surgery, which slightly degraded its speed and accuracy. [Read]

    Spain’s second-largest bank tries hostile takeover of another giant: If combined, BBVA ($BBVA) and Sabadell ($BNDSY) would have a joint balance sheet exceeding $1T. The government has the final say on the deal — and so far, it sounds like officials seem wary of potential job cuts and reduced competition. [Read]

    Top cities for new college grads: Many graduates who endured their early college days amid a pandemic seek opportunities in NYC, where 9.1% are applying for jobs. DC and Salt Lake City are also gaining popularity, while Dallas, Seattle, and Denver saw declining interest. [Read]

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    CHART


    DIGIT OF THE DAY

    Renewable Energy Now Powers A Record 30% of Global Electricity

    Renewable energy investing has felt a lot like pissing in the wind over the past few years. Returns have been atrocious — but renewable energy is still gaining market share. According to Ember’s latest Global Electricity Review, renewable sources like wind, solar, and hydro now generate a record 30% of the world’s electricity, up from just 19% in 2000. Solar and wind have been the major drivers, expanding from 0.2% at the turn of the century to 13.4% of global electricity in 2023.

    • Global electricity demand reached another record in 2023, with half of the gains coming from electric vehicles, data centers, heat pumps, electrolyzers, and air conditioning.

    • Solar has been the fastest-growing electricity source for 19 years straight, overtaking wind as the largest source of new electricity installations for the second consecutive year.

    Get Trumped: High interest rates and soaring inflation have hit capital-intensive solar and wind projects hard — but the renewable sector’s biggest enemy could be sitting in the Oval this November. Trump has been critical of renewable energy, calling it “a scam business.” Some industry analysts like Timothy Fox from ClearView Energy Partners warn that “a Trump administration would be a negative for the offshore wind industry.” With new projects facing hurdles for approvals, the wind sector has seen its value drop by almost a third since 2021, according to the First Trust Global Wind Energy ETF ($FAN).


    EXTRA JOE

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