Why didn’t PYPL immediately go back to $270 after refusal of Pinterest news? 

Regarding our decision to buy more PYPL yesterday, our thinking is in line with last week’s update detailing “We would look to buy PayPal on this dip” - the dip being the result of reports that PayPal was contemplating a $39 billion acquisition of Pinterest. In the alert, we theorized on what the next news update could be: either the affirmative – that PayPal would be making a move to acquire Pinterest and then proceeded to lay out why we thought it could make sense - or refusal, that PayPal comes out and says they are not buying Pinterest, which will bring the stock back to the $270 level that it was trading before. 

Yesterday morning we learned that it would be the latter with PayPal putting out a press release stating, “PayPal stated that it is not pursuing an acquisition of Pinterest at this time.” While the resulting price action is as expected (PYPL trading higher), shares remain well off the $270 level they were trading out prior to the report. 

Folks then ask the question, why didn't shares of PYPL go immediately back to the $270 level. We think there may be some overhang resulting from investor speculation as to what “at this time” might mean exactly. Questions include: what is PayPal’s current appetite for M&A given that the rumors pointed to a $39 billion deal which would be nearly 10x the size of the company's largest acquisition to date (Honey at $4 billion).  

Still, we think the stock can work its way back in time, making the current level attractive ahead of what should be a strong 2022. Growth next year should reaccelerate with the help of the soon-to-be-completed eBay migration and the introduction of new revenue streams related to the recently updated PayPal app, which now includes additional online shopping tools and banking services.   

Eli Lilly Reported Results This Morning

Just a quick update here because we need time to dig through the results. We will provide a detailed post tonight. LLY submitted Alzheimer's drug (donanemab) to accelerated approval track. Missed on earnings but not important, the story is Alzheimer's. It's other key pipeline, Trulicity, is doing better. Covid treatment is not that meaningful to earnings, but market already knows. Raised full year earnings per share guidance, which is very optimistic from management. 19% revenue growth. Diabetes franchise continue to present great opportunity - Tirzepatide priority review. 

Advanced Micro Devices Earnings After Hours Today

Shares of AMD hit all time high today, going in very hot to its earnings report for Q3 2021 after hours. We wrote about what to be expected here. To summarize, we expect earnings to continue to be strong, for AMD to beat bottom line estimates and raise guidance. We also expect to hear news about the Xylinx acquisition, which the latest we heard was around August-September and CEO Lisa Su said it would close by the end of this year. However, we think with shares coming in very hot like this, there is little room for error, and it is only prudent to trim some here. It is likely that even though company reports good results, profit-taking will occur; which actually would be the time to buy. No worries, we will write about the results tonight.

Would portfolio look to include names in the foreign market, such as China?

First, we want to tell subscribers to keep sending questions our way, and we will address them either in the daily notes or in the Frequently Asked Questions. We recently got a question: "Why does the portfolio not own any names in the foreign market, such as China, while the portfolio thrives on its diversification?" 

We think the subscriber asked a really interesting question. They are right, in the sense that investing in foreign market would diversify the portfolio to another level that we currently do not have. We want to clarify, there are 2 ways to invest in the foreign market: either buy stocks at those markets directly (i.e open an account in the Hong Kong Exchange and buy stocks) or invest in vehicles that are called American Depositary Shares (ADRs) that foreign companies use to attract funds from the US. If we were to want to invest in foreign companies, we would choose the latter option for the following reasons: 

One, the accounting matches up with US accounting. These companies, to a certain degree, require regular filings with the US, so we get information. The second reason to stray away from international stocks is the trading costs that can be involved (i.e foreign currency exchange, commission, ...). And then the third is we have pretty efficient markets here in the US. More often than not, the bid-ask range is tight, making it easy to get filled with good prices, which is not always the case in some international markets. We can also think about ETFs. There are some ETFs that give good differentiated exposure to international markets, that are also diversified as well. 

Now, back to the reason why we're not doing that right now. Simple, most opportunities are still here in the US. Overall, we have multiple investment themes that are either still at the early innings or have been working so strong that nobody talks about when that growth will stop. We have secular growth stories across multiple industries, including electric vehicles, cloud, software, e-commerce and services (think Ford, AMD, Apple, Salesforce, Amazon, Google, Microsoft). We have stories of recovery from Covid and subsequent expansion of the economy that have yet to fully played out because of lingering Covid concerns here and around the world (think Disney, banks, oil). We have a strong pharmaceutical story that are working on the treatment to Alzheimer, done by the best scientists in the world (think Eli Lilly). As a result, at the moment, there are no reasons to look away from these themes.    

Here're the reason we're not investing in the Chinese market particularly: geopolitical risks. Political tensions between US and China can make the risk for Chinese stocks that trade in the US going to zero. This includes China banning their own companies from issuing shares in the US, or US stopping the trading of Chinese companies. Regulatory concerns regarding what the Chinese government truly wants to do with their private sector also remains a risk that clouds investors. Why try to own Nio - the "Tesla of China" - while you can own Tesla (we did the work and actually like Ford better). Why try to own Alibaba - the "Amazon of China" - while you can own Amazon?  

Setting Automotive Expectations

Sensor solutions company Sensata Tech (ST) reported better than expected September quarter results with revenue that rose 20.6% year over year, besting the consensus forecast, citing what it calls "meaningful return to growth across our automotive, heavy vehicle and industrial markets." However, the company also cut its December quarter outlook to $895 million-$925 million for its top-line vs. the $939.85 million consensus. Inherent in that reduction was its revised outlooks for the China, European, and U.S. auto markets, which it now sees being down 2%, 7% and 5%, respectively in 2021 vs. its July forecast that called for 5%, 5%, and 3% year over year growth.

No real surprise here given the plant shutdowns reported across the industry in recent weeks and comments on global supply chains and auto chip shortages. So why are we pointing this out? Context for what we're likely to hear when General Motors (GM) reports tomorrow morning and Ford Motor (F) after tomorrow's close, that Q3 2021 was borderline bad. We believe market largely knows this, so will not punish on this news. Here are the key details we will be looking for: 

i) Despite chip shortage, decreased production, what does the revenue picture look like? Margin? Was the company able to raise price on existing sales to make up for unit loss? It is likely we won't see revenue/ earnings miss, and that means automakers are able to navigate this environment successfully.

ii) What is the forecast of the chip shortage for next year? This is the time when investors look to position for next year. Automakers have had a year to deal with and think about the solution for this problem. It's time we'd like to hear it.

iii) This is in particular for Ford. Any updates about EV investments? Increase?