News of the Week (March 25 - 29)

News of the Week (March 25 - 29)

18 min read

Table of Contents

1. Disney (DIS) – Bullish Analysts, Proxy Battles & Legal Settlements

Subscribe now

a. UBS

This week, UBS came out with a glowing, thesis-confirming research note on Disney. It set a $140 price target, but as always, the reasoning for the note matters much more to me than the target. UBS sees park outperformance driving shareholder return growth and significant flexibility to reinvest in its highest return businesses (parks & experiences). In my view, that will pair quite nicely with its streaming business, which is rapidly approaching breakeven EBIT. We should be left with a growing cash flow monster (parks) and a budding cash flow monster (streaming), both of which will more than replace the  demand erosion within its linear business. This is all review. I’ve been talking about it since I started the position last year in the 80s. What isn’t review is the firm’s quantitative targets provided.

UBS sees Disney compounding earnings at a 25% clip from fiscal year 2023 through 2026 to reach $7.34 in EPS. That’s 20% ahead of consensus. It also sees it reaching $14 billion in free cash by the end of the planning period. That is 36% ahead of consensus and represents a 48% 3-year FCF CAGR. Disney trades for 23x FY 2024 FCF (Free Cash Flow). If it stays right there from today to then, that would represent a 19% return CAGR (2023 period not included in return CAGR is why return CAGR is not equal to FCF CAGR with same multiple). Disney’s 3 & 5 year FCF multiple averages are 43x and 50x, respectively. If we assume its multiple expands to 30x during that time as sentiment improves alongside the financial recovery, we get a 23% return CAGR. That’ll work just fine.

b. Proxy Battles

The proxy battle between Disney and mainly Trian (Nelson Peltz) will play out next week. As I’ve said before, I don’t really care how this goes. If Disney wins, it will continue on its current path with a larger, shareholder-focused microscope hanging over its actions. If Peltz wins, he will get his desired board shake-up and a voice in the room. Why doesn’t this concern me? Because I don’t think Disney has a great board. I think Disney has a great CEO. The board spearheaded the Chapek hiring and Disney’s shift to embracing cultural influence over great content, strong shareholder returns and ramping free cash flow. One of Peltz’s key demands is to control more of the succession plan. The current board has already shown you they struggle with transitions. So? Getting some fresh blood in there to alter the approach to replacing Iger this time is fine with me.

Peltz has also explicitly come out in support of Iger. Hearing that assuaged pretty much all of my concerns. His criticism of the board is well-placed, just like his support of Iger is. This newer item surprised me in a good way. What matters to me is that Bob continues steering this turnaround and sharpening company focus to drive Disney’s next decades of success. There will be significant bark and loud headlines coming from this event. I truly don’t think the coinciding bite will materialize.

A few years ago, Disney leadership criticized Florida’s passing of what was nicknamed the “Don’t Say Gay” bill. As always, I will fully ignore the social and political aspects of this and focus on Disney specifically. In state retribution for this public criticism, Walt Disney World lost special tax exemptions and Disney voluntarily placed a target on its back from what had been a powerful ally. More lawsuits were subsequently filed by Disney for unfair treatment.

This week, disputes were settled as Disney lawsuits against Florida were all dropped. I view this very positively. Walt Disney World is still a cash flow printer and compounder without the tax status. And now? Disney and Florida can work to repair a somewhat fragile relationship. It can now begin to morph this influential state government back into an ally. To me, this is a sign that Disney is serious about re-focusing the company on telling great stories… sharing great experiences… and then being quiet. That’s immensely encouraging for us shareholders.

2. Amazon (AMZN) – Pricing Power & Anthropic

Subscribe now

Amazon launched same-day prescription delivery in LA and New York this week. Amazon will utilize a combination of drones and vans for fulfillment and should expand to 10 more cities in 2024. Amazon Prime costs $14.99 per month. With it, consumers enjoy a plethora of expedited and deeply discounted fulfillment, free grocery delivery, discounted prescriptions, Amazon Prime’s streaming service, Amazon’s music streaming service, complementary Audible audiobooks and photo storage. Consumers continue to lean on all of these services more & more; Amazon continues to layer in more utility. Why do I say this?

We have previously reviewed fulfillment regionalization, organizational restructuring, 3rd party selling, advertising, and new supply chain services as powerful margin tailwinds. We don’t talk a lot about Amazon Prime pricing power. Amazon has seamlessly raised its pricing in the past with zero material pushback. Why is that? Because this consumer subscription is arguably the most valuable on the planet. Unique value is what drives pricing power; we have years upon years of evidence for strong pricing power; I fully expect that to continue. Amazon is a margin puppet master that can pull this lever whenever it wants to. It has the most arrows in its quiver for driving margin accretion out of any other company I follow. This is simply yet another item to contemplate.

Amazon completed its previously announced $4 billion investment in Anthropic. Find out more about Anthropic in section 2 of this article.

3. SoFi (SOFI) – Bank Sponsor, SoFi at Work & Fitch

Subscribe now

a. Bank Sponsor

SoFi posted job listings this week for roles including “bank sponsorships.” Twitter was all over it, so thank you to the several accounts that called it to my attention. Fintechs without charters must partner with a bank to secure the licensing needed to conduct banking services. These sponsors will share their licensing, their risk management/compliance guardrails and often their technology too – for a fee. SoFi is the only bank in the USA that combines the needed charter with next-gen payment processing and multi-core banking APIs. It’s the only vendor that can provide point solution consolidation as fintechs seek out these sponsorships and tech stack perfection. 1 of 1. This makes it the perfect candidate to thrive in this niche. It has the ability to win here. Why not create another high margin revenue stream from the charter? Why not give yourself more potential to cross-sell Galileo APIs? There was no reason not to pursue it, and now it will. 

b. SoFi at Work

SoFi at Work is a program offered to clients like Nvidia, The New York City Bar Association, Tesla & Amazon, Meta, Chipotle etc. It’s an employee benefit, providing education, financial planning help and SoFi’s suite of products. This is a newer program that I haven’t really written about much. SoFi’s primary structural growth bottleneck is brand awareness. How do you turbocharge brand awareness and spread it far and wide more seamlessly? Through programs like this. I don’t think it will directly bolster results materially, but I do think it will ease this bottleneck to help growth indirectly.

Financial education for the millions of employees part of this program will be a SoFi financial education. Want to get your money right, Mr. Brilliant Nvidia Software Engineer? Get it right with SoFi. That potential will now become supremely obvious to a large chunk of employees who still don’t know what SoFi even is. Not everyone watches the NFL or NBA. Most of the country hears “SoFi” and thinks “a popular female name.” This is a more efficient means of building brand awareness among massive employee bases in one foul swoop. It’s a somewhat similar idea to CrowdStrike being a preferred channel partner for AWS, Progyny being a preferred partner for Blue Cross Blue Shield, or Lemonade Pet Insurance being a preferred partner for Chewy. 

c. Fitch

Fitch also published some new data on 2024 personal loan vintages for SoFi. On March 8th, it assigned a 5% base case default rate for loan trust 2024-1. On March 18th, it assigned the second 2024 vintage a 5% base case default rate as well. Why does this matter? Considering an average loan term of 18 months, this places the life of loan loss rates for 2024 vintages right at the midpoint of SoFi’s 7%-8% guidance. Notably, the report called out improvements in the most recent loan pools Fitch has observed. That offers a nice piece of evidence, yet it refrained from baking this into its base case. This provides more confidence in 7%-8% truly representing peak life of loan loss rates for this cycle – just like management said (shocker).

d. Mindset

SoFi the stock continues to aggressively chop around. Company metrics are improving on a straight line but the stock isn’t representing that. As I’ve said frequently, I expect that to continue for now – both to the upside and the downside. And I’m entirely fine with that. Sofi has a team that consistently meets or beats targets. That’s what I care about. Despite a loan moratorium, a historic rate hike cycle, and regional banking chaos... They deliver or over-deliver. Even through the SPAC & free money age in which firms offered multi-year targets & failed miserably to meet them... it bucked the trend and delivered. All I care about is that it continues its strong, strong track record of fulfilling all of its promises. Namely, I care about it meeting its 2026 $0.67 GAAP EPS promise (at the midpoint of its range).

I'll squarely focus on the ingredients that will allow that to happen. Strong underwriting, capital market access at healthy gain on sale margin, ramping profits to feed book value & capital ratios, rapid growth & leverage for fin services, and a convincing tech platform revenue growth acceleration. The rest is noise.

Where do I see SoFi stock going if it does continue to execute? I see a range of most likely outcomes (which are inherently uncertain as always):

  1. Meets $0.67 2026 guidance with profit compounding at a 30% multi-year, forward-looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (18x - 30x earnings), which yields a price range of $12.06 - $20.01.
  2. Meets $0.67 2026 guidance with profit compounding at a 40% multi-year, forward-looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (24x - 40x earnings), which yields a price range of $16.08 - $26.80.
  3. Earns $0.80 in 2026 (high end of the guidance range). Profit compounds at a 30% multi-year, forward looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (18x - 30x), which yields a price range of $14.40 - $24.00.
  4. Earns $0.80 in 2026 (high end of guidance range). Profit compounds at a 40% multi-year, forward looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (24x-40x), which yields a price range of $19.20 - $32.00.

I realize that my PEG ratio assumptions are very pessimistic. I’ve used more optimistic PEG assumptions here in the past. For now, I think 0.6x-1.0x is appropriate given SoFi’s material credit risk, the tech platform uncertainty and fair value accounting skeptics. These real risks are why SoFi is roughly 6% of my portfolio today, rather than 10%+ like for Meta, Amazon and Uber. It is objectively more speculative, regardless of how optimistic I am. So? It needs to be a bit smaller today.

And as you can see, the pessimism doesn’t impact robust multi-year returns from now to then. For now? If strong execution continues... if the fundamental ingredients remain tasty... I'll keep adding into volatility. If the fundamental execution worsens for whatever reason... I won't. I won’t stop supporting a company because the stock is now up less over the past year than it had been. That is missing the forest for the trees.