ResearchThree Things (11/1)

Three Things (11/1)

Nov 1, 2024

Amazon pops, inflation drops

Amazon tops revenue estimates

Expanding empire … Wall Street cheered Amazon’s (AMZN) third-quarter earnings report, and the stock popped as a result. The tech goliath beat expectations overall, with especially strong revenue growth in two key areas: Amazon Web Services (cloud computing) and advertising. AWS posted $27.4 billion in sales—just a hair under estimates, but still showing impressive growth, up 19% compared to 12% last year. Meanwhile, their advertising business brought in $14.3 billion, hitting expectations and outpacing growth in Amazon’s core retail segment. These numbers show Amazon’s cloud and ad businesses are serious powerhouses, driving growth beyond e-commerce.

In all aspects, it feels like Amazon just keeps getting bigger and more ambitious. Their earnings release included an itemized list of 15+ non-financial highlights, covering everything from ditching plastic pillows in their packaging to launching Season 2 of Lord of the Rings: Rings of Power. They’ve teamed up with Databricks on AI chips, introduced an AI assistant for sellers called Project Amelia, and are even expanding same-day delivery for pharmacy orders. And here’s a big one: they’re hiring 250,000 seasonal workers ahead of the holiday rush, paying them $18 an hour.

Not to be outdone, Apple (AAPL) dropped its own earnings last night—with a bit of an asterisk. Q4 earnings slightly missed expectations due to a one-time tax charge, with an adjusted EPS of $1.64. iPhone sales beat forecasts at $46.2 billion, surprising analysts and hinting at strong demand for Apple’s latest models.

Inflation inches toward Fed goal

Flirting with 2% … The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, showed a 2.1% annual increase for September, meeting economists' expectations. This marks a dip from August’s 2.3%, moving inflation closer to the Fed’s 2% target. However, core inflation, which excludes food and energy, remains higher at 2.7%—holding steady from August yet slightly above forecasts.

Quick context: The reason food and energy are segmented out is because these prices can swing wildly with things like weather or global events. Looking at core PCE without them helps us see steadier, long-term inflation trends.

The 0.2% monthly increase in the overall PCE index reflects a decrease in goods prices by 0.1% while services prices climbed 0.3%. Housing prices rose 0.3%, while energy goods and services dropped by 2%, per Yahoo Finance. Despite slowing inflation, elevated prices continue to challenge U.S. consumers, especially as election season highlights concerns over the cost of essential goods and services.

Percent change from preceding period in prices for PCE (Monthly)

The Federal Reserve meets again one week from today, and markets are betting on a 0.25% rate cut. This follows September’s sizable 0.5% cut, an unusual step during an economic expansion. Analysts see gradual rate reductions continuing into mid-2025, depending on inflation and job market trends. The latest PCE data, combined with 2.8% GDP growth in Q3, points to a resilient economy but highlights the Fed's tricky task of controlling inflation without slowing growth.

SBUX Redux

Necessary jolt … Starbucks (SBUX) is pursuing a major turnaround under its new CEO Brian Niccol. He recently shared his strategy with investors in a video address, just two months after stepping into the role. 

Niccol says he wants to restore Starbucks’ appeal by focusing on service speed, in-store experience, and personal touches aimed at reconnecting with core customers. Among his first steps, he’s working to cut order times to under four minutes, reduce menu complexity, and reintroduce personal touches like handwritten names on cups, which will require nearly 200,000 Sharpies across the chain’s 17,000 U.S. stores. Newell Brands (NWL) must love that.

Niccol’s approach comes amid months of sales declines, with a 6% drop in the latest quarter and store visits down 10%. In his address, he emphasized the need to “fundamentally change” Starbucks’ direction to win back customers, who have increasingly gravitated to specialty coffee shops or home brews that offer more control and quality.

Some feel that Starbucks has drifted too far from its roots as a social and community-focused space. To restore that “third place” experience Starbucks once represented, Niccol is bringing back comfortable seating, ceramic mugs, and condiment bars, making cafes better suited for hanging out. Of course, all of this impacts margins. While the company has been successful in its digital transformation and getting consumers to use the app, other brands have caught up and Starbucks has been caught stuck in the middle. As NPR puts it, these days Starbucks is “too basic to be classy and too classy to be basic.”

What’s ex-CEO Howard Shultz been up to? He’s a main investor for an in-home nitro cold brew device, which was recently named one of TIME’s Best Inventions of 2024.

One more thing: Robinhood (HOOD) now allows U.S. users to buy forecast contracts predicting the 2024 presidential election outcome. Critics argue the move could risk election integrity by incentivizing interference. Rival brokerage Public.com, for its part, announced its own election betting feature—which is actually just a redirect to a polling place locator.


Disclosures:

As of writing, AMZN and AAPL are holdings in Titan’s Flagship strategy.

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