Earnings season, GameStop madness, and a female-founded SPAC
Welcome to the ninth edition of In The Money – your weekly newsletter on keeping up with the financial markets. And what a week it has been. I’ll do my best to break down what has been going on in the markets this week. All the craziness has definitely shadowed any other news than news on GameStop and wallstreetbets. For example, did anyone even notice that Apple reported a record quarter? Many other companies reported earnings this week as well. We also take a look at a female-founded SPAC and learn about a woman who is working on closing the gender gap in technology. I hope you enjoy this week’s newsletter.
Earnings season 💸
More than 100 S&P 500 companies reported their earnings this week. Let’s take a look at some of the most anticipated ones.
Microsoft On Tuesday Microsoft reported $43.1 billion in revenues versus $40.2 billion that analysts expected, which corresponded to revenue growth of 17% on a year-over-year basis. Microsoft said LinkedIn’s (which it acquired in 2016 for $26.2 billion), Marketing Solutions division generated revenues from ads, of $2.58 billion in the December quarter, up about 23% on an annualized basis. After the news that Microsoft’s advertising businesses did better than expected shares of Alphabet, Facebook, and other advertising-driven internet companies gained in extended trading.
Apple Apple reported the best quarter in the history of the smartphone. The company had its first quarter with over $100 billion in sales. Every single product line was up despite a global pandemic. Apple is still best known for the iPhone, which accounted for almost 59% of revenues during the holiday quarter. Sales of the iPhone were up 17% year-over-year to a whopping $65.6 billion in a single quarter.
Facebook At the opening remarks of Facebook’s fourth-quarter earnings call CEO Mark Zuckerberg said that Facebook increasingly sees Apple as one of its biggest competitors. He warned that the upcoming changes in Apple’s iOS 14 and a reversal in pandemic trends could hurt its advertising business.
Here are some numbers from Facebook’s report compared with analyst forecasts:
Earnings: $3.88 per share vs $3.22 per share forecast by Refinitiv
Revenue: $28.07 billion vs $26.44 billion forecast by Refinitiv
Daily active users (DAUs): 1.84 billion vs 1.83 billion forecast by FactSet
Monthly active users (MAUs): 2.8 billion vs 2.76 billion forecast by FactSet
Average revenue per user (ARPU): $10.14 vs $9.49 forecast by FactSet
Tesla Tesla reported quarterly results after the markets had closed on Wednesday, missing analysts’ estimates on earnings but notching another profitable quarter for the electric vehicle and solar business. Shares of the electric car maker were down around 5% in after-hours trading.
Tesla also showed off a major redesign to its electric sedan, the Model S. The company shared pictures of the new interior and exterior of the car that’s set to launch later this year.
Will this Game Stop? 🎮
Okay, so you might have noticed the craziness that has been going on in the market this week. I’ll try my best to break it down, day by day what has been happening.
Monday The game started on Monday when shares in gaming retailer GameStop soared without significant corporate news. GameStop jumped as much as 120% and its stock was repeatedly halted to calm volatile trading. At the end of the day, the shares fell back to trade about 18% higher, from a high of $159.18 the day ended at $76.79.
So how did this happen without any significant corporate news? The company is popular among traders who share ideas on the r/wallstreetbets message board on Reddit. These small investors have been buying large amounts of call options (see definition below), which give the user the right but not the obligation to purchase a share later at a fixed price.
In general, this means that brokers such as banks need to buy shares on the open market to hedge themselves against the event that the stock price hits the strike price (see definition of call option below) of the option. The hedging can have an outsized impact on prices. In the first hour of Monday’s trade more than 400,000 options contracts in GameStop had been purchased, which is higher than the total on the full trading day over the past 50 days.
Tuesday The madness continued on Tuesday as GameStop popped again pushing the stock back above $100, but the short-sellers betting against the brick-and-mortar video game retailer were nowhere near letting up.
However, the GameStop stock turned up sharply after Social Capital’s Chamath Palihapitiya said in a tweet that he bought GameStop call options betting the stock will go even higher. Trading was again halted multiple times due to volatility. Even Tesla CEO Elon Musk tweeted “Gamestonk!!” and sent out a link to the wallstreetbets Reddit board that has hyped the stock. Shares of GameStop gained more than 60% in after-hours trading following Musk’s tweet.
At this point, short sellers (short-sellers are essentially betting that the stock price will drop) had already amassed a mark-to-market loss of more than $5 billion year to date in the stock. Despite the massive squeezes, short sellers were still doubling down on their bets.
Wednesday The rally of GameStop continued again on Wednesday, as several high-profile short sellers said they had backed away from their positions.
The shares traded at around $337 when trading was briefly halted, up almost 128% from Tuesday’s close. The stock had traded as high as $380 per share in premarket trading. Shares dropped 15.97% in extended trading, following the more than 130% gain during regular hours.
Thursday GameStop shares fell sharply as word spread that trading platforms Robinhood and Interactive Brokers were restricting trading in GameStop shares. The stock was down 56% at 11:15 am ET after being up over 25% earlier in a session marked by several trading halts. Shares were soaring at one point in premarket trading, topping $500 a share briefly. The stock was worth about $40 just a week ago.
After Robinhood barred traders from buying shares in GameStop, a Robinhood customer filed a class-action lawsuit against the stock-trading app. The lawsuit claims that Robinhood's actions rigged the market against its customers. Shares of GameStop rebounded aggressively in extended trading on Thursday after Robinhood said it will resume limited trading on Friday.
I have a feeling that this game is far from over, and that in next week’s newsletter I will continue reporting on this. For more on what is going on, I’d recommend reading Matt Levine’s recent Bloomberg opinion pieces here, here, and here. Levine writes a newsletter called Money Stuff which is just brilliant.
Definition
Call Option
Call options are financial contracts that give the option buyer the right, but not the obligation, to buy an underlying asset, which can be a stock, bond, commodity, or other asset or financial instrument at a specified price within a specific time period. A call buyer profits when the underlying asset increases in price.
For options on stocks, call options give the holder the right to buy 100 shares of a company at a specific price up until a specified date. The specific price is called the strike price, and the specified date is called the expiration date. The specified time during which a sale is made is its expiration or time to maturity.
Why would you buy a call option? Investors will consider buying call options if they are optimistic or “bullish” (see the definition of a bull market in a previous ITM newsletter) about the prospects of the underlying asset. They may be purchased for speculation or sold for income purposes. They may also be combined for use in spread or combination strategies.
If the market price of the stock rises above the option’s strike price, the option holder can exercise their option, and buy the stock at the strike price and sell it at the higher market price in order to lock in a profit. When the market price is above the strike price it’s said that the option is in the money. Sound familiar? Now you know where the name of this newsletter comes from.
On the other hand, if the market price does not rise above the strike price during the period, the options expire worthless.
Record Trading Volumes
The battle between amateur investors and hedge funds drove trading volumes past a peak set at the height of the financial crisis in 2008. On Wednesday, more than 23 billion shares were traded in the US. The high in October 2008 was exceeded by almost a fifth. Furthermore, Wednesday was the third-biggest day for turnover in dollar terms in over 13 years.
The trading boom is a result of day traders, equipped with commission-free apps, are gaining a growing influence over global financial markets and forcing professional investors including hedge funds to retreat. This has been especially true since the pandemic. At the same time, investors are piling into call options at a record pace on individual names and have been rewarded as the action drives dealers to buy stocks.
To lighten up the mood, here’s a brilliant video of a normal person explaining what’s been happening in the stock market
Female founded SPAC 💄
In a newsletter a couple of weeks ago I wrote about SPACs and what they actually are. What I did not mention was that the SPAC boom that has been raving on Wall Street has largely left out women. Now one group of female founders and investors is looking to change that.
Earlier this month, a special purpose acquisition company, or SPAC, called Powered Brands priced on Nasdaq, under the ticker “POWRU”. Powered Brands has the goal of creating a new kind of global conglomerate of sustainable and digitally focused beauty brands.
Powered Brands was founded by serial entrepreneur Katherine Power, who is the chief executive of Clique Brands, a global media and consumer brands company that she co-founded in 2007, which owns among other things the fashion site called Who What Wear, and Dana Settle, founding partner at venture capital firm Greycroft.
Following the successful public debut, Powered Brands is aiming to acquire between $800 million and $1.5 billion worth of assets. It will compete with some of the biggest beauty conglomerates, including Estee Lauder, L’Oreal, Shiseido, and Coty. The beauty business has been heating up as Target and Kohl’s have partnered with makeup sellers Ulta and LVMH-owned Sephora, respectively. The U.S. prestige beauty industry generated $18.8 billion in sales during 2019.
“Anything in a large addressable market that’s growing quickly; that has native digital expertise built into their DNA. We’re looking for clean ingredients and some level of sustainability. We’re looking for businesses that are built around diversity, inclusion, and transparency,” Dana Settle commented for CNBC.
The first woman Treasury secretary is sworn in by the first woman Vice President 🏛
An update from last week’s newsletter, on the historic firsts of President Joe Biden’s Cabinet. On Tuesday Janet Yellen was sworn in as Treasury secretary by Vice President Kamala Harris, a history-making moment as both women are the first to assume two of the most powerful jobs in the United States government.
Janet Yellen is the 78th Treasury secretary and the first woman to assume that role in the institution’s 232-year history. In addition to that, she is the first woman to have held all three top economic jobs, having served as chair of the Federal Reserve and the Council of Economic Advisers.
Think Big 🔮
I’ve mentioned Cathie Wood and her investment firm ARK Invest in this newsletter before. In 2020 she beat the whole asset management industry by a lot. This week ARK Invest released their annual Big Ideas report. I really recommend having a look at it, here.
Only Black Woman running a Fortune 500 company 👩💼
Rosalind Brewer has been named the next CEO of Walgreens. On March 15, she will take the lead at the nearly $140 billion retailer and pharmacy that ranks as 19 on the Fortune 500. Walgreen’s stock was up nearly 8% in after-hours trading in a strong show of confidence in Brewer from Wall Street. She joins Walgreens from Starbucks where she was the chief operating officer.
When Brewer takes the job, she will be one of 40 women currently running a Fortune 500 company, as well as the only Black woman—and only the third in history.
Brewer grew up in Detroit, where both of her parents worked for General Motors. Neither of her parents graduated from high school but insisted that all five of their children go to college. Brewer’s father worked three jobs to put the kids through school. “I just knew I couldn’t fail,” Brewer told Fortune.
Brewer will take over as CEO at a critical time for Walgreens as the pharmacy chain partners with the US federal government to administer COVID-19 vaccines.
Woman of The Week
Reshma Saujani
Reshma Saujani is the founder and CEO of the tech organization Girls Who Code, a global nonprofit organization that is working to close the gender gap in technology and change the image of what a computer programmer looks like.
Saujani is of Gujarati Indian descent – her parents lived in Uganda, prior to being expelled along with other persons of Indian descent in the early 1970s by Idi Amin. Her parents settled in Chicago and Saujani was born in Illinois, where she attended the University of Illinois at Urbana-Champaign and graduated in 1997 with majors in Political Science and Speech Communication. After that, she attended the John F. Kennedy School of Government at Harvard University, where she received a Master of Public Policy in 1999, and Yale Law School, where she received her Juris Doctor in 2002.
Saujani started her career at the law firm Davis Polk & Wardwell LLP, where she defended securities fraud cases and on a pro bono basis handled asylum cases. In 2005, she joined the investment firm Carret Asset Management and later moved on to Blue Wave Partners Management, a subsidiary of the Carlyle Group.
In 2010, Saujani surged onto the political scene - she was the first Indian-American woman, and the first South Asian American woman to run for Congress. She ran as a Democratic candidate for New York City Public Advocate in 2013, coming third in the primary.
During the race for Congress, Sujani visited local schools and saw the gender gap in computing classes, which led her to found Girls Who Code in 2012.
“Being brave like women is about making choices based on what we want and what makes us happy, not what others expect or want for us.”
Sujani has been recognized on Fortune World’s Greatest Leaders; Fortune 40 Under 40; WSJ Magazine Innovator of the Year; Forbes Most Powerful Women Changing the World; and Fast Company 100 Most Creative People, among others.
She is also the author of the international bestseller Brave, Not Perfect, and the New York Times bestseller Girls Who Code: Learn to Code and Change the World. I also recommend watching Reshma’s TED talk, “Teach girls, bravery not perfection”.
Thank you so much for reading this week’s newsletter. I would love to hear your feedback and please share this with a few friends you think would find this interesting. Have a lovely weekend 💜
I’m Marianne, an early-stage VC based in Stockholm. You can reach me by replying to this email, or find me on Twitter or LinkedIn.