1. CrowdStrike (CRWD) -- Extended Detection & Response (XDR) Meet Internet of Things (IoT)

Subscribe now

CrowdStrike debuted Falcon Insight for Internet of things (IoT) this week. The release extends CrowdStrike’s threat protection to operational technology (OT) environments to merge with IT-based threat coverage.

OT encompasses tools to monitor and facilitate standard operating procedures for endpoints like fulfillment center robots or some medical devices. IT refers to context-rich data that a business uses and organizes to generate insight and direction. The newfound unification inherently means more relevant data feeding the Falcon platform and so better efficacy for the client. It also allows software-based and physical environments to better communicate and share more precise and productive learnings.

According to the investor materials, “traditional IT-based solutions cannot interoperate with extended Internet of Things (XIoT) assets and lack context needed for effective protection while frequently disrupting OT-based processes.” This is the company’s solution to that headache by conjoining IT and OT-based threat protection with no prohibitive disruptions. The release vastly bolsters the addressable endpoints for Falcon by officially plugging in smart appliances, Programmable Logic Controllers (PLCs) etc. to its central platform. It also brings yet another area of software ecosystem protection under Falcon’s watch to combine with traditional endpoints, cloud workloads and data.

Programmable Logic Controller Definition: Purpose-Built computer used to remotely control and track operational workflows like assembly lines.

Customers of the new use case will be able to tap into the full breadth of CrowdStrike XDR alliance’s 3rd party data sets to offer a more precise, complete and contextualized view of vulnerabilities.

2. JPMorgan Chase (JPM) & Big Banks -- Earnings Summary

JPMorgan Chase offers investors a wonderful view into the health of the American consumer, business landscape and economy overall. This is a key bellwether and one that must be followed. Based on these results, the economy and consumer remain pleasantly resilient but with “storm clouds still on the horizon.”

“Our years of investment and innovation, vigilant risk and controls framework, and fortress balance sheet allow us to produce these returns, act as a pillar of strength in the banking system and stand by our clients during a period of heightened uncertainty.” -- CEO Jamie Dimon

a) Results vs. Expectations

• Beat consensus revenue estimates by 7%
• Beat $3.37 consensus EPS estimates by 21.7% or $0.73.
• Beat return on assets (ROA) estimates of 1.15% by 23 bps.
• Beat return on equity (ROE) estimates of 15.2% by 280 bps.

b) Outlook

The company raised its net interest income guide for 2023 (excluding markets) sharply from $74 billion to $81 billion. This was unsurprisingly called “market dependent” and will vary based on economic scenarios, monetary policy, loan growth and consumer spending health. The guide still assumes Fed rate cuts late in 2023. It still expects a normalized run rate net interest income in the mid-70-billion-dollar range.

It reiterated expense guidance of $81 billion and card net charge-off rate of 2.6% for 2023. This compares to 1.62% in Q4 2022 and 2.07% this quarter as it expects consumer health to continue eroding as economic headwinds persist.

c) Balance Sheet

• Paid out $3 billion in dividends vs. $3 billion QoQ & $3 billion YoY.
• Resumed share repurchases this quarter following improvement in its capital ratios. Specifically, its CET1 target is 13% (and 12.5% regulatory minimum) with its 13.8% result greenlighting it to buy back shares once more. It bought back $1.9 billion in stock vs. $0 QoQ & $1.7 billion YoY. It has north of $26 billion left on its current buyback program.
• Book value per share rose from $86.16 to $94.34 YoY; tangible book value per share rose from $69.57 to $76.69 YoY.
• Its tier 1 leverage ratio was 6.9% vs. 6.6% QoQ & 6.2% YoY.
• It has $412.8 billion in held to maturity (HTM) securities.
• $1.128 trillion in loans outstanding; $3.7 trillion in total assets.

d) Notes from the Call & release

Macro Outlook:

The company sees a “rising probability of a moderate recession.”

Consolidated Demand Context:

• Average deposits fell by 8% YoY. Strength in overall results was driven by higher rates feeding its net interest income. We did not (yet) see much of a drastic impact from regional banking deposits shifting to bigger banks like JP Morgan & Chase.
• Average loans rose 6% YoY.

Return & Margin Context:

• Net interest income of $20.8 billion rose 49% YoY and 78% YoY excluding the volatile markets segment. Rate hikes helped mightily here while lower deposits hurt somewhat.
• $2.3 billion in credit loss provisions via $1.1 billion in charge-offs and $1.1 billion in reserve building due to “deterioration in weighted average economic outlook.” This was related to its consumer community banking segment where charge-offs more than doubled YoY.
  • $2.3 billion in credit loss provisions is flat QoQ and rose from $1.5 billion YoY as part of continued delinquency and credit loss normalization post-stimulus.

Consumer Community Banking Segment:

• Net income here rose 80% YoY to grow from 35% of JP Morgan’s total profits to 41% YoY.
• Explosive growth was driven by higher deposit margins thanks to rate hikes.
• Card and auto net revenue rose 14% YoY due to more net interest income and higher revolving credit balances but was partially offset by lower auto operating lease income. Still, auto assets on its balance sheet rose from a modest $8.4 billion to $9.2 billion YoY as it continues to operate here.
• Home lending fell 38% YoY via tighter loan spreads and lower volumes due to rising mortgage rates.

Corporate and Investment Banking (IB) Segment:

• Wallet share of IB fees rose to 8.7% vs. 8% QoQ and 8% YoY as it took significant share.
• Net income rose 1% YoY here with flat revenue. This segment was comping YoY vs. a large equity investment gain which weighed materially on growth.
• There’s not much IPO activity feeding this segment right now and debt underwriting fees were also challenged due to rising cost of capital. IB fees overall fell 19% YoY.

Asset and Wealth Management Segment:

• Assets under management (AUM) for its wealth and asset management arm rose 2% YoY to $3 trillion.
• Higher deposit margins were a main source of this segment’s robust, outperformance. A $339 million gain on investment for its joint venture in China helped too.

Dimon’s Take on the Consumer & Economy:

• Consumer spending “remained healthy” with debit + credit volume rising 10% YoY. Still, consumers are utilizing more leverage to deliver this robust growth with card loans rising 21% YoY.

“The U.S. economy continues to be on generally healthy footings. Consumers are still spending and have strong balance sheets; businesses are in good shape. However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks. The banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved… Still, we do not know if this will slow consumer spending. We also continue to monitor for potentially higher inflation for longer (and thus higher interest rates), the inflationary impact of continued fiscal stimulus, the unprecedented quantitative tightening, and geopolitical tensions. While we hope these clouds will dissipate, the Firm is prepared for a broad range of outcomes.” -- CEO Jamie Dimon

Dimon’s Take on Silicon Valley bank and Hold to Maturity Securities Regulation:

“We're hoping everyone takes a deep breath and looks at what happened, and the regulations already in place. Obviously, when something happens like this, you should adjust. So I think down the road, there may be some limitations on HTM, maybe more total loss absorbing capacity (TLAC) for certain type size banks and more scrutiny. But it doesn't have to be a revamp of the whole system. It's just recalibrating things. I think it should be done knowing what you want the outcome to be. The outcome you should want is very strong community and regional banks. And certain actions we are taking, which are drastic, could actually make them weaker.” -- CEO Jamie Dimon

e) More Big Bank Earnings

Citigroup (C):

Citi Bank beat revenue expectations by a whopping 6.7%. It destroyed GAAP EPS estimates of $1.69 by $0.50 or nearly 30%. Its ROE came in at 9.5% which was a full 210 basis points ahead of consensus. Book value per share was also 1.3% ahead of consensus. The lone soft spot was a 6% miss on EBIT.

As a notable point of relative strength (even if books of business vary by focus), Citi saw flat YoY deposits while peers endured small contractions.

Similarly to JP Morgan, it built up credit reserves by $241 million vs. releasing $138 million YoY. This was a GAAP net income headwind that it overcame. Still, total costs associated with credit (losses + reserves + other provisions) more than doubled YoY as the economy normalizes.

Its return and liquidity ratios also all improved. ROE rose from 9% to 9.5% YoY. ROTCE was 10.9% vs. 10.5% YoY. CET1 Capital ratio of 13.4% vs. 11.4% YoY jumped back over its required regulatory minimum. This green lights the company to “increase excess capital returned to shareholders over time” per CEO Jane Fraser.

Wells Fargo (WFC):

Wells Fargo’s results were fine as well. It beat revenue estimates by 3.3%. It beat $1.12 GAAP EPS estimates by $0.11. Average deposits fell by 5% YoY and strength was due to rising rates and expanding net interest margin (NIM). Within consumer lending segments, home revenue shrank 42% YoY with rising cost of capital, credit card rose 3% YoY, personal unsecured rose 9% YoY and auto fell by 12% YoY.

Wells Fargo’s CET1 ratio still looks a bit light at 10.8% vs. 10.5% YoY compared to some other consumer banking titans, but it is moving in the right direction. This improvement also helped it to buy back $4 billion in stock during the quarter -- nearly 3% of its total market cap in just 3 months. Aggressive. ROE rose sharply from 8.7% to 11.7% YoY with ROTCE spiking from 10.4% to a respectable 14% YoY.

Its provisions for credit losses hit profits by $1.21 billion vs. aiding profits by $787 million YoY. Still net income rose by over 30% YoY thanks to soaring interest rates and so more lucrative deposits.

3. The Trade Desk (TTD) -- Proxy Statement

As expected, Co-Founder/CEO Jeff Green’s compensation normalized in 2022. This followed an $830 million 2021 salary via a founder package that started vesting in connection with hitting all of his performance targets. His total compensation was $5 million for the year which actually shrank from $16 million in 2020 (the most recent normal period comparison). Grayson (CFO) and Pickles (CTO) got a large raise from roughly $5 million to $7.5 million when including all forms of compensation.

• Baillie Gifford & Co. owns 5.2% of the overall voting power vs. 6% YoY. It has 10.6% ownership of all class A shares.
• Vanguard’s voting power is stable YoY at 4.5% with its class A share ownership rising slightly from 9% to 9.1% YoY.
• Morgan Stanley owns 3.5% of the firm’s voting power vs. 3.2% YoY as it now holds 7% of all class A shares.
• BlackRock is no longer a 5%+ owner of class A shares.
• Co-Founder CEO Jeff Green owns 48.2% of the total voting power vs. 49.3% YoY. This is due to his 94.5% ownership stake in class B shares.
• CTO Dave Pickles saw his stake grow to 5.5% of class B shares and 2.8% of total ownership.
• All 11 executive officers and directors together own 1.7% of class A shares vs. 1.5% YoY and 51.2% of the voting power vs. 51.5% YoY.

4. Uber Technologies (UBER) -- Liquidity Event

Uber sold just over a 50% stake in a segment of its Middle East entity called Careem. The buyer was Emirates Telecommunications Group and the price tag was roughly $400 million in gross proceeds. Uber bought the company for $3+ billion 3 years ago and will use this cash infusion to expand to more markets and product categories with its new partner. Importantly, all 3 Careem co-founders will stay with the newly organized company. Under the new format, Careem will split into two different entities: Careem Rides and Careem Technologies. Uber will continue to entirely own and operate the rides business while it will jointly operate the other segment as a Super App next to its new investor and the founding team. Careem Technologies is the segment involved in the sale. Careem’s CEO, Mudassir Sheikha, will run Careem Technologies.

Uber still has $4 billion in equity investments sitting on its balance sheet as well as another $4.2 billion in cash and equivalents. It has $9.2 billion in total debt and is currently inflecting to consistently positive free cash flow. The balance sheet still cannot be called a strength, but it’s looking healthier than it has in the past.

5. Shopify (SHOP) -- Upgrade & an Initiation

Subscribe now

JMP Securities upgraded Shopify this past week. As always, I don’t care about the price target, but I do care about the reasoning behind the upgrade. The rationale was two-fold. First, JMP channel checks show that Shopify is gaining traction with larger enterprises. The source of this momentum is (I think) likely its brand-new Commerce Components by Shopify (CCS) package and its System Integrator (SI) program which provides consulting firms like EY incentive and resources to sell Shopify’s bundles. Massive enterprises don’t embark on technology system overhauls on their own. They do so with SIs like EY and Accenture. Shopify is finally partnering with and incentivizing all of these major players and it provides a significantly higher probability of winning major, large-enterprise business.

The second source of JMP optimism comes on the cost and margin side. It sees Shopify Fulfillment Network (SFN) expenses being “lower than it feared” following CFO Jeff Hoffmeister’s comments at recent investor events. It also sees several other areas for easy cost cuts and synergies to bolster profit. With the new CFO now in place and his more balanced growth-profit philosophy, I expect aggressive margin expansion going forward to complement near-20% revenue compounding. With Shopify’s current high valuation metrics, that needs to happen for this investment to work.