Welcome back, In this newsletter, we'll dive into analyses of major corporations like The Boeing Company and Netflix Inc., assessing their current market standings and future prospects. Additionally, we'll delve into the fast-growing sector of anti-obesity drugs, highlighting the significant strides made by companies like Eli Lilly and Novo Nordisk. The recent shake-up in the tech world with Adobe's failed acquisition of Figma and its market implications will also be a key focus. Plus, we'll take a closer look at the global online payment processing landscape, understanding its key players and growth drivers. Keep reading for more information.
ECONOMIC UPDATE
THE RIGHT TIME TO ENTER: IS IT NOW OR NEVER?
In this next sub-section, we'll highlight the effects of mortgage rates on other economic implications from a domestic point of view, including the contingent changes in general interest rates, CPI postings, and the consistency of improvement in Canadian inflation, as a reflection of a previous lack of purchasing power, and thus demand, within the country.
Mortgage Rates
Rates on some fixed mortgages have dropped by a full percentage point over the last couple of months, presenting an opportunity for Canadians eyeing the spring housing market or facing upcoming mortgage renewals. Rates as low as 4.84% are now available at multiple Canadian lenders. This decrease in mortgage rates is attributed to the falling bond yields, as fixed mortgage rates are positively correlated with these yields. While potential home buyers might be tempted to wait for further drops in mortgage rates, this strategy could prove costly. As rates continue to fall, more home buyers are likely to enter the market, ultimately driving home prices up. Often questions posed to financial advisors alike look something like this; “when is the right time to lock in on a rate”. Well, that’s a matter of personal risk tolerance; sacrifice a few basis points of savings, or wait, and potentially fall victim to rates we have seen as high as 6.15% over the last fiscal year due to an impending demand rush.
The Boeing Company (NYSE: BA)
The stock has quickly declined by ~25% since the new year. This is attributed to an incident where a fuselage plug blew off a 737 MAX 9 airplane midflight, resulting in hundreds of flight cancellations and a series of investigations by the FAA and the US Senate Commerce Committee. To restore confidence, Boeing has opened their facilities for airlines to review quality procedures and inspect 737s. However, the significant negative media attention has spooked investors, who have punished the stock by dumping the shares as quickly as they can. Boeing must continue to sooth operational concerns of both customers and institutionalized investors, who appear to be avoiding their business as a measure of dissatisfaction with their ability to meet the main priority with the industry, safe aviation experiences. Although quarterly earnings have not been released, it is safe to say that recall troubles with numerous other lines including the 777’s and 787’s will continue to drive their stock down. Therefore, it is not safe to say that it is a buy stock yet.
Netflix Inc. (NASDAQ: NFLX)
Netflix is expected to see a 22% increase in its stock price, primarily due to the introduction of an ad-supported tier in its subscription service. This new tier offers users access to the company's streaming services at a lower price. The ad-supported tier has recently experienced significant growth, boasting over 23 million global monthly active users. Notably, around 30% of all new signups to the streaming service are opting for this more affordable pricing model. Additionally, Netflix has tightened its rules on password sharing, effectively reducing the number of "free rider" subscribers. Alongside this, the company has increased its subscription prices. These strategic changes are anticipated to bolster subscriber growth and average revenue per membership (ARM), which in turn is expected to lead to higher revenues and an increase in stock price.
MARKET TREND
TRIMMING THE TREND OF ANTI-OBESITY DRUGS
What You Need to Know
Obesity has been a prevalent epidemic that is ranked fifth globally as a primary cause of death, and with obesity rates consistently rising, a World obesity Atlas 2023 forecast estimates that over half of the world’s population will be obese by 2035.
Therefore, it is no surprise that the global market for anti-obesity medications (AOMs) had an annualized value of $6 billion in early 2023 and is on track to reach $100 billion by 2030 according to Goldman Sachs.
This prominent growth in the AOM industry can be attributed to the new “miracle” weight loss drugs produced by companies like Eli Lilly and Novo Nordisk. Their products, Ozempic, Wegovy, and Mounjaro, originally meant to treat diabetes, has recently been found to have an incredible weight loss effect.
Eli Lilly: Revolutionizing Weight Management with Mounjaro
Since the release of Mounjaro, Eli Lilly has seen a notable surge in its stock prices. The market responded positively to the drug's potential, reflecting in increased investor confidence and a significant boost in the company's valuation.
The notable success of Mounjaro has reinforced Eli Lilly's commitment to research and development in metabolic diseases, including obesity and diabetes, driving further innovation in the company's pipeline, creating an optimistic investor outlook.
Novo Nordisk: A Leader in Obesity and Diabetes Care with Ozempic and Wegovy
Novo Nordisk, a long-time leader in diabetes care, has strengthened its market position with the success of Ozempic and Wegovy. The company has capitalized on the overlap between diabetes and obesity treatments, making significant inroads into the weight management market.
The success of these drugs has enabled Novo Nordisk to expand its global footprint and invest in new markets. This expansion is accompanied by increased revenue streams and a robust growth trajectory.
General Industry Trends:
The prevalence of obesity globally has led to a growing demand for effective
treatment options. This trend has positively impacted companies like Eli Lilly and Novo Nordisk, who are at the forefront of providing these solutions.
The success of GLP-1 agonists has prompted increased investment in research and development. Both companies are actively involved in extensive clinical trials to explore further applications of their drugs and to ensure long-term efficacy and safety.
As more countries continue to approve these drugs for obesity treatment, these companies are experiencing an expansion not only domestically but in their international market reach, further boosting their global presence and revenue.
The noticeable weight loss effects of these drugs have garnered significant attention from the public and the medical community, leading to increased prescriptions and a broader acceptance of pharmacological interventions in weight management.
The future for companies like Eli Lilly and Novo Nordisk seems promising in the AOM sector. Their success in this field is likely to spur continued innovation, not only in obesity treatments but also in related metabolic conditions.
Implications & Conclusions
It is apparent that the AOM industry is extremely lucrative, with companies like Eli Lilly and Novo Nordisk now some of the most valuable pharma companies worldwide.
As expected, other pharma companies will likely follow suit, as Eli Lilly and Novo “lead the burgeoning obesity market touted as the next big blockbuster in the pharmaceutical industry.”
These drugs will continue to reduce obesity and increase life expectancy which is beneficial for the Medical Technology industry where more patients will be eligible for procedures that are ill suited for obese patients. For example, many ortho and spine surgeries tend to avoid severely obese patients due to the complications and dangerous risks associated with obesity.
However, one cross-market concern was that people will slim down and eat less which led to some pullback for food companies like Walmart and Nestle. However, the consumption of these AOM drugs will have a larger impact on supermarkets with thin margins. As such many companies are also adapting and creating products to complement these drugs such as Nestle’s supplements to solve “loss of lean muscle mass”
INDUSTRY OVERVIEW
GLOBAL ONLINE PAYMENT PROCESSING
Industry Description:
The online payments market is a dynamic and rapidly growing sector, driven by the increasing adoption of digital and mobile payment solutions worldwide. This market encompasses various methods including credit/debit card payments, bank transfers, e-wallets, and other digital payment platforms.
Who are the Key Players within the Global Online Payments Space?
Some of the prominent players in this market include PayPal, Square (now Block, Inc.), Stripe, Adyen, Google Pay (Alphabet Inc) and traditional financial institutions venturing into digital payments. These companies offer a range of services from payment processing to facilitating peer-to-peer transfers.
What is Driving Growth in the Industry?
1. Strong growth in e-commerce has lifted revenue. Businesses have felt the pressure to integrate online payment platforms as consumers have opted for the convenience of shopping online. Although approval rates for contactless payment in retail stores, post-pandemic, have continuously risen, it is clear online queues are demand frontrunner.
2. Corporate profit has been high. High corporate profit enables businesses to pay for the initial investment into an online payment processing platform, though this boon has waned as inflation has boosted input costs for many industries.
3. Rising purchasing power will bring in revenue. Growing per capita disposable income and consumer spending will boost the number of transactions, generating additional revenue for software developers through transaction fees. Downward pressure on these fees will temper growth, though.
4. Consumers are increasingly paying bills online. Payment processing software developers have benefited from integrating with many utility companies and subscription models.
MERGER AND ACQUISITION
THE ADOBE & FIGMA ROMANCE STORY (AND HEARTBREAK)
Transaction Details (pre-break up):
Adobe has agreed to acquire Figma for $20 bn, comprised of half cash and half equity. In addition, the expectation was that 6 mm additional restricted stock units will be granted to Figma’s CEO and employees. This transaction was expected to close in end of 2023.
Target:
Figma, a multibillion-dollar business with an estimated value of $8-9 bn, design platform that helps teams collaborate visually and make design accessible.
• It was founded in 2012 by Dylan Field and Evan Wallace and attracted millions of designers and developers with loyal student following.
• In 2023, the business had an annual recurrent revenue (ARR) of more than $600 mm
Acquiror:
Adobe is a diversified software company that operates within digital media, digital experience, and publishing & advertising.
• It is currently trading at $596.54 with a total annual revenue of $19.4 bn and an EV/revenue multiple of 13.8x.
• Their latest M&A began in November 2023 with the acquisition of Rephrease Technology Corp.
• It was founded in 1982 and is headquartered in San Jose, California.
Post-Break up details:
Adobe called off the $20 bn acquisition due to regulatory scrutiny. Both companies highly disagreed with the regulatory decision that assumed the merger will harm competition. But it is very unlikely that a court appeal will take place given that Adobe paid the $1bn termination fee.
Interestingly, immediately after the breakup, adobe share price rose by 0.6%. Insight could be drawn that both the adobe family (shareholders) and outside looking investors were in support of this decision.
Personal Thoughts:
Antitrust regulators have become increasingly strict in scrutinizing tech deals (big and small).
• For instance, in May, Meta divested Giphy (photo marketplace business) due to the U.K.’s statement on potential anticompetitive effects by Meta. In addition, Microsoft is being investigated for its investment in Open AI.
• The Federal Trade Commission (FTC) is also proposing changes to the HSR act that would increase transactional data requirements and potentially add months to the filing process for M&A
In conclusion, the barriers within the M&A tech space are becoming increasingly higher, this may be due to the surge of interest in generative AI and global geopolitical pressure within the vertical (such as China and US).
FINANCE CAREER SPOTLIGHT
WHAT IT TAKES TO BECOME A CEO
David M. Solomon, the Chairman and Chief Executive Officer of Goldman Sachs, has had an illustrious career in finance, marked by his ascent through various strategic roles within Goldman Sachs. His educational background includes a political science and government bachelor’s degree from Hamilton College, and to top it all off David holds an MBA from Walden University. Let’s take a look at his career…
• Solomon's career at Goldman Sachs began in 1999 when he joined as a Partner.
• He then progressed to various leadership positions, including Global Head of the Financing Group, Co-Head of the Investment Banking Division, President and Chief or Co-Chief Operating Officer, eventually becoming the CEO in October 2018
• His tenure as CEO has been notable for his advocacy for cultural reform within the firm and handling challenges such as the 1MDB scandal.
Becoming a CEO doesn’t limit you to your invaluable skill set, company or industry, and Solomon has demonstrated that admirably, having a unique presence in the music industry as a disc jockey, performing under the name "David Solomon" and producing electronic dance music.
He founded Payback Records in 2018, a label that contributes its proceeds to charitable causes. His engagement in music is a testament to his multifaceted personality, balancing a high-profile corporate role with creative pursuits.
His leadership roles extend beyond Goldman Sachs, with involvement in educational and philanthropic organizations. He Serves as the Chairman of
the Board of Trustees at Hamilton College and holds positions on the boards of The Robin Hood Foundation and New York-Presbyterian Hospital.
Solomon's career trajectory is a testament to his strategic thinking and deep business expertise, contributing significantly to the growth and leadership of Goldman Sachs. His journey reflects a combination of professional achievements in finance and personal interests, distinguishing him as a dynamic leader in the corporate world, or as we like to say the picture-perfect CEO.
In reflection of David Solomon, here is a more structured layout of what your path to becoming CEO may entail:
1. Initial Position at Goldman Sachs (1999)
• Joined as a Partner.
• This role marked his entry into the firm, setting the stage for his future advancement.
2. Global Head of the Financing Group (1999 - 2006)
• Managed all capital markets and derivative products for the firm's corporate clients.
• This position was his first major leadership role within the firm.
3. Co-Head of the Investment Banking Division (2006 - 2016)
• Oversaw the investment banking division.
• This was a significant step up, reflecting his growing influence and leadership within Goldman Sachs.
4. President and Chief or Co-Chief Operating Officer (January 2017 - September 2018)
• In this role, Solomon was responsible for the day-to-day operation of the company.
• It positioned him as a key decision-maker and second-in-command at Goldman Sachs.
5. Chairman and Chief Executive Officer (October 2018 - Present)
• Solomon took over as CEO in October 2018 and became Chairman in January 2019.
• This position places him at the pinnacle of Goldman Sachs' leadership, responsible for overall strategic direction and performance.
RECRUITING QUESTION
It is commonly known how important a terminal valuation within DCF model is to assess the company at hand. However, being that the terminal value represents all future cash flows beyond the projection period, estimations may sometimes be obscure without a comfortable projection timeline. Therefore, we ask you…
1. How can you check whether or not your Terminal Value estimate is reasonable?
As stated, the terminal value of a company is its value from its last projected year until the end of time, known as the terminal period.
There are two ways to calculate Terminal Value. The Perpetual Growth Method, also known as the Gordon Growth Method, and the Exit Multiple Method.
The Terminal Value calculated using the Perpetual Growth Method can be calculated using the following formula:
Terminal Value = Final Year FCF * (1 + Terminal FCF Growth Rate) / (Discount Rate-Terminal FCF Growth Rate)
Where the Terminal Free Cash Flow Growth Rate should be a low estimation that is slightly below the economy’s expected long-term GDP growth rate. For example, if the GDP growth rate is 3%, then an acceptable Terminal Value growth rate could be 2.3%. For comedic purposes, your valuation will be incorrect if your selected growth rate implies that the company is growing faster than the national economy.
To calculate Terminal Value using the Exit Multiple method, you would multiply a metric from the target year, such as EBITDA, with an estimated Terminal Multiple of EV/EBITDA that makes sense for the company or that is a slightly discounted multiple compared to the multiples of publicly traded peer companies, since multiples decrease over time.
Determining whether your Terminal Value estimate is reasonable requires cross-checking your answer with both methods, and repeatedly adjusting the range of assumptions for either the Terminal Multiple or Terminal FCF Growth Rate until the Terminal Values from each method logically line up.
For example, if you start by picking a 10x EV/EBITA as the Terminal Multiple at a Discount Rate of 12%, it could correspond with a Terminal FCF Growth Rate of 5% from the Gordon Growth Method, which is too high.
If you decrease it to 6x EV/EBITDA, the Implied Terminal FCF Growth Rate decreases to 1%, which is too low.
If you estimate an 8x EV/EBITDA, it will indicate a Terminal FCF Growth Rate of 2.3%, which is more rational because it falls slightly below the anticipated long-term GDP growth rate. The 8x value could be your "Baseline Terminal Multiple," which allows you to explore variations slightly above and below it in sensitivity tables.
