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These past few weeks have been nothing short of ‘eventful’ to say the least. While earnings season typically brings more volatility to single name stock returns, this time around has brought some of the most violent swings in recent memory. Of course, much of this has been exacerbated by the timing of investors broadly reassessing valuation and positioning against tightening financial conditions and waning Omicron headline risk. Unlike last year, the indices are finally reflecting all of the carnage and turbulence beneath the surface. Look no further than the Nasdaq 100, which yesterday recorded its worst daily decline (-4.2%) since September 2020 but still managed to end this week positive (+1.66%). So where does this leave investors and expectations going forwardas we continue to assess fundamentals throughout upcoming earnings prints?
Investors have been eager to ‘get ahead’ of their peers on positioning throughout earnings, seeking out any broad read-across from company-specific results. After Meta (FB) blamed TikTok competition, ad revenue headwinds and supply chain related cost increases for a wide earnings miss, the company fell -26%, erasing a staggering $230bn+ of market cap in one day. Many investors abandoned Snapchat (SNAP) in the same fashion, expecting similar headwinds and competition to lead to an earnings miss the next day for the company. Instead, a -20% WTD decline through Thursday turned into a +28% gain for Snapchat (SNAP) on the week, after the company crushed Street expectations for 4Q21 revenue and 1Q22 guidance. Amazon (AMZN) followed a similar path this week, gaining +13.5% today alone after a similar sell-off following Facebook’s earnings miss. Taken together, these massive price swings throughout the week certainly reflected plenty of overexcitement from investors racing to get ahead of the pack on earnings expectations. Patience will be the ultimate keythroughout the rest of earnings season, as it has been painfully difficult to predict some of these results as well as any commensurate responses from the market.
Following some eye-catching swings in equity prices throughout this week, I would have expected this market to be more friendly to stock pickers as dispersion trends lean toward single names instead of between sectors. Instead, a meaningful jump in volatility across sectors this week washed out much of the dispersion tracked by the MS QDS Team, as it is normalized for volatility. The MS QDS Team estimates single name volatility across the SPX is now in the 93rd %tile over the last 5 years, while the ratio of dispersion between vs. within sectors remains near the median (46th %tile, +3% WoW). This has been a challenge for many investors seeking out more idiosyncratic returns as stocks struggle to break out from broader macro movements. What’s been a meaningful shift in this earnings period vs. Q3 is the heightened focus on sales as investors reassess the price they’re willing to pay for growth. Andrew Pauker and the MS US Equity Strategy team highlight that price reactions to EPS beats with sales misses have underperformed -0.8% relatively. In addition to this, earnings reactions to EPS/Sales misses are also being punished severely (-2.5%) whereas beats on EPS/Sales are only up +0.8% relatively. This focus on growth, in particular a balance of both top-line and underlying earnings has been a key barometer for company-specific sentiment. Furthermore, guidance on sustainability of revenue growth with an eye for profitability by corporate management teams seem to be the key drivers of investors’ potential enthusiasm. Having one without the other does not seem to cut it right now in this environment.
Let’s not lose track of where we stand in the midst of what are unprecedented market conditions. The Fed’s hawkish stance on tapering and raising rates has been well telegraphed yet it remains to be seen whether this timeline could accelerate. A series of ‘hot’ inflation prints and an exceedingly strong jobs report this morning would lead many investors to pound the table on a faster tightening schedule. That said, recovering supply chains and a fragile economic recovery may lead the Fed to be more tactical. Bulls argue that markets have already priced in 5-6 rate hikes in 2022 and remain constructive on fundamentals with YoY earnings growth in Q4 at 26%. On the other hand, bears point out Q4’s earnings beat rate of 6% is the lowest level among the past 7 quarters (albeit in-line with historical levels). What’s more, consumer prices have outpaced wage growth, leading consumer confidence to near recession lows and painting a bleak outlook for consumer demand to absorb lagging supply hitting the market.
Looking ahead, one thing seems abundantly clear to me: markets are far from figuring this out. Bulls and bears are cautious to look too far ahead to the future, as a murky near-term outlook could leave either side ‘out to dry’ given the elevated turbulence in equity prices. That said, I lean more towards being constructive as the market figures out these ‘growing pains’ following a historic period of returns in the US. I would urge investors to have patience throughout these next few weeks of earnings prints, albeit with a heightened awareness around how expectations can set up outsized earnings reactions. There is no dearth of volatility and opportunities outside of the United States, as globally we are presented with valuations and underlying positioning that may serve as an interesting entry point for those who have been more US-centric for quite some time. The below chart says it all, as the US has outperformed international markets in 11 of the last 12 calendar years. While it is quite early in 2022, we have seen a 300+bp outperformance of international markets vs the S&P. I can see the ‘eye rolls’ from here as many know this hasn’t been a sustainable trend looking back over the past decade, but perhaps this time is different?
On a more personal note, as the world debates reopening I did find some solace traveling to Florida this week to see some clients. Experiencing airports and planes fully packed with people may bring anxiety to some (a la Airplane, anyone?) but joy to others as a return to complete normalcy is hopefully on the near horizon. I continue to be grateful for my good health throughout this pandemic and look forward to reconnecting with many of you in-person soon!
I continue, like many of you, to have several observations that crossed my mind this week including…
- The market’s negative response to Facebook (FB) and PayPal (PYPL) earnings prints this week showed how dangerous these waters are this time around. I wonder which ‘captains’ will survive this quarter…The Savone Family Movie of the Week is Pirates of the Caribbean. (Too soon for the ‘Social Network’, considering that for next week…)
- What an emotional week for NFL fans! Joe Burrow and the Bengal’s tied the largest comeback in AFC Championship history after beating the Chiefs in overtime last Sunday. The news that shocked the world came from Tom Brady, who will now focus his energy on other things outside the football field. What a pleasure it’s been to watch him dominate the game over the last 22 years!
- After a stunning -26% decline earlier this week, Facebook lost over $230bn of market cap in an instant… That would be larger than the GDP for Peru, New Zealand and Egypt! On the other hand, Amazon gaining 13.54% today equated to over $180bn of market cap added, which is greater than the GDP of Qatar… Crazy…
- The Super Bowl has been so important to Cincinnati that public schools announced that staff and students will have the day off February 14, the day after the Bengals play the Rams in the big game. Although my Rams-Chiefs Super Bowl prediction was only partially correct, I am going to have to revert back to the saying that defense win championships…I am confident that the Rams will take home the Lombardi Trophy this year!
- As I look around my morning train to work, I see most people with music playing in their ears…While the streaming industry has blossomed over the last few years, it still seems that the ear continues to be under monetized… the recent pullback in Spotify (SPOT) could provide a very attractive entry point into this fast growing sector. Reach out to MS Media Analyst Ben Swinburne for his latest report on Spotify’s outlook for ’22.
- My boys in Italy have a very important 4 days ahead, as A.S. Roma play Genoa on Saturday and a very strong Inter side on Tuesday in the Coppa Italia.
- The stockpile of negative yielding debt has collapsed from 18trn$ to 6trn$, the lowest since 2018…
- Earlier this week, Denmark declared Covid no longer poses a threat to society and will remove all restrictions. Although these smaller countries are more difficult to compare to the United States, it will be interesting to see the results of this decision.
- How do you feel about private company valuations? There seems to be a big debate raging on the durability of private company valuations versus the de-rating in high growth public tech valuations. For more on this, please see here for the full report from MS European Equity Strategist Edward Stanley.
- Does anyone remember when those Bing Search Engine commercials came out many years back? I always wondered who would dare challenge the empire that Google has managed to build. Make sure to read MS Internet Analyst Brian Nowak’s latest report on why Alphabet’s (GOOGL) will continue to march forward this year.
- The winter Olympics start today! Although I am not a fan of skiing myself, I love watching the snowboarders go down the half pipe! Which event is your favorite to watch?
On the latest Covid-19 update, based on the current trajectory, MS Biotech Analyst Matthew Harrison highlights that US cases and hospitalizations have peaked and he expects a clear downward trajectory over the next few weeks. He notes that Rt (or the effective reproduction rate) of US, Italy and France is decelerating, while it is still accelerating in Germany and Norway. Internationally, he believes that Continental Europe should peak in the coming weeks; at this point he thinks we are heading into the endemic phase for COVID and expects policies to start slowly shifting globally in the coming months. The number of administered US vaccines is ~539M as of Jan 18, among which ~250M (~75% of US population) were given as the first dose. He is now also tracking booster vaccinations. The number of daily vaccinations in the US is ~0.46M, of which ~0.24M are booster vaccinations.
As of 2/3, USEquity L/S gross leverage rose 1% WoW to 191% (82nd %ile over the last 10 year basis) and net leverage fell back to 50% which is the lowest level we have seen since July 2020 and in the 40th %ile over the last 5 years.For the year, Noah Bramlage of our PB Strategic Content team points out that hedge funds (all strategies) have added shorts across each North American sector, led by Discretionary. Looking at just this week, he mentioned that hedge funds continued to add shorts across each sector, except for Materials). Moreover, the L/S ratio in North American equities is now down to ~1.8x which represents a ~19-month low, but is still in the 87th %-tile since 2010.
Across other regions, Asia fund gross leverage fell ~4% WoW to 131% and net leverage fell ~2% WoW 66%. Noah highlighted that the net exposure to China remains well-off the peak levels seen in July 2020, as the current level remains more in line with June 2019 levels.Thematically, China Internet is a space where we haven’t seen much re-engagement as HF net exposure to the US-listed China Internet only accounts for ~2.1% of global net exposure (vs. ~6.4% at the peak in April 2020). Regarding Europe, gross leverage for EU L/S funds remained flat WoW to 180% and net leverage rose ~1% WoW 44%. The team notes that that while funds have been sellers of North American equities and broader Asian equities YTD, net exposure to European equities (as a % of global net exposure) has risen to the highest level seen since June 2020, as it is now back to median levels since 2010 (47th %-tile). More specifically, EU Materials and Communication Services have been the most net bought sectors in the region YTD.
Regarding performance thus far in February, the average Americas-based L/S fund is down -1.3% vs the S&P -0.9%. Keep in mind that for the year, the average global fund is down -2.9% vs. the MSCI down 5.1% and the average Americas-based L/S fund is down -5.7% vs the S&P down -6.0%. Internationally, the average Asia-based fund is now down -3.9% YTD vs the MSCI Asia Pacific down -3.5% and EU based funds have outperformed YTD as the average fund is actually up +90bps vs the Euro STOXX 600 being down -3.9%;nonetheless, for the start of February the average Europe- and Asia-based fund are both up in the ~10-20 bps range (through 2/3).
Noah pointed out that since November 17th the crowded longs in North America are down ~22.2% versus the S&P down only ~4.5%, which represents the most challenging crowded long alpha drawdown since 2010, in terms of both duration and magnitude; on the same time horizon, the crowded shorts in North America are down ~23.7% (over that period, on average, clients held ~2.2x more exposure to the crowded longs vs the crowded shorts). He noted that performance had recovered a bit on the back of the short 3-day rally from 1/27 - 2/1, but that the index-level (and growth particularly) underperformance the past 2 days have left the average US L/S fund down ~5.7% YTD – shouldering ~95% of the S&P 500’s downside YTD.
MS Chief US Economist Ellen Zentner highlighted that data last week on GDP, trade, and inventories add to the mounting evidence that, while there is still a long way to go, we have moved past the worst in supply chain disruptions and inventories are meaningfully rebuilding. While the MSCI implies that we are just past the peak in supply chain disruptions and starting to see improvement, she believes that easing in supply chain tensions points to a softening in core goods inflation over the next 6 months. She also points to the advance goods trade report for December which continues to reflect strong domestic consumer and business demand. Regarding commentary for payroll data, nonfarm payrolls surprised substantially to the upside in January, rising 467,000 vs MS expectations for a 215,000 decline. From the data, Ellen asserted that Omicron may have had a very little imprint on the labor market at all in January; gains were broad based across sectors, with especially strong increases in leisure & hospitality, retail trade, professional & business services, and transportation & warehousing. Also noteworthy, she inferred that (1) Underlying wage pressures remain firm, with average hourly earnings up 5.7% on the year and (2) The workweek fell to 34.5 hours (a low for the workweek since April 2020), probably reflecting fewer hours worked by people missing work due to Omicron.
While Ellen set the stage for the supply chain dynamic from a high level, our sector analysts have pointed out their views regarding how companies in their space may be impacted MS US Autos Analyst Adam Jonas highlights there is still a long way to go in ramping up production to meet consumer demand. While December data showed the third consecutive month of inventory rebuild in the US, January 2022 data released by Motor Intelligence shows a reversal, with industry inventory units down ~51k per month. Amongst the D3 (the three largest car manufacturers in North America), only General Motors Company (GM) was able to build inventory m/m, though the build was minimal at only ~14k units. Adam’s Overweight picks for the sector include, but are not limited to, Ferrari NV (RACE), Fisker Inc (FSR), and FREYR Battery SA (FREY). Turning the page, MS IT Hardware Analyst Erik Woodring believes that channel inventory is building in PCs & Consumer Hardware alongside falling lead times, indicating a supply-demand rebalance is underway, while data from other Hardware markets shows supply challenges remain. He believes that a rebalancing of supply and demand allows vendors to work down elevated backlog, fill the channel and ship with shorter lead times. He pointed out that: (1) Logitech International SA (LOGI) reported a stronger than forecasted 12% topline beat vs. consensus in the December quarter, (2) He is cautious on Equalweight-rated HP Inc (HPQ) and Underweight-rated Logitech International SA (LOGI), and (3) OW-rated Dell Technologies Inc (DELL) is another name he is watching and remains more constructive, given better execution and its exposure to higher-end consumer PCs and data center infrastructure.
While last week's FOMC meeting met consensus's expectations on multiple fronts—that the FOMC will likely begin raising rates in March while tapering is scheduled to conclude in mid-March—MS Chief US Equity Strategist Mike Wilson highlights that it also reinforced the notion that markets are heading into a period of greater uncertainty from a forward guidance standpoint. He notes that every meeting is a "live" one from a rate hike standpoint, and while MS economists don't see a 50 bp hike coming in March, it is a possibility at later meetings. His work shows that tighter Fed policy brings lower returns and greater uncertainty for equities. He thinks returns are likely to be even lower during this tightening cycle (i.e., negative) because the Fed is going to be tightening into a macro and earnings growth slowdown that's about more than just omicron, in his view. Specifically Mike is focused on: (1) the spread between ISM manufacturing orders vs. inventories which is pointing to a significant slowdown in the headline PMI; (2) the Industrials sector's relative forward P/E multiple that is also predicting a similar dynamic; (3) an average of manufacturing surveys that have advanced January readings which confirms this trend; (4) MS economists' MS Business Conditions Index which notably weakened in January; and (5) recent relative weakness in earnings revisions breadth for cyclicals/economically-sensitive industries. For 4Q earnings, Mike notes that the aggregate earnings beat rate for the S&P 500 is back down to 5% (the historical norm; and lower than the prior 6 quarters) and guidance is a mixed bag especially for cyclicals where he is seeing weakness in forward looking earnings revisions. His sector recommendations include a constructive view toward Financials, Health Care, and Real Estate, meanwhile his Underweight conviction remains in Discretionary and Tech Hardware. Please consider taking a look at his Fresh Money Buy List, which includes AT&T (T), Exxon Mobil (XOM), Humana (HUM), MasterCard (MA), McDonald’s (MCD) and Mondelez (MDLZ), among others.
With Earnings season largely underway, MS US Strategist Andrew Pauker highlights that an aggregate earnings beat rate of 6% is the lowest of the prior 7 quarters and is back to the historical run rate of 4-6%. Large cap tech stands out from a breadth of beats standpoint with 88% of stocks thus far having beat on earnings, the highest percentage of beats of any sector. Andrew recaps that the high level narrative around stronger sales beat rates vs. history and just in-line EPS beat rates vs. history is that margins are increasingly become an issue. He points out that this is particularly prevalent among cyclical cohorts such as Industrials, Materials, Discretionary, and even Financials where margins took more of a center stage so far this earnings season. More importantly, he notes that revisions breadth over the last few weeks has declined driven by weakness in more cyclical industries - Discretionary, Materials, Semis, and Financials. He thinks the cost pressure dynamics discussed are a factor here for these cyclical groups. In terms of how 4Q21 and 1Q22 estimates are evolving, 4Q numbers are up 2-3% over the past couple of weeks amid more modest but still positive aggregate positive surprises. 1Q numbers are down slightly. Calendar full year ’22 estimates are up slightly and currently stand at $225 or 9% growth on a year-over-year basis
For the names from MS US Research noted with conviction into earnings, one that has reported this week is WW Grainger (GWW US) covered by MS US Electrical Equipment Analyst Josh Pokrzywinski. GWW reported adjusted EPS of $5.44 vs. MSe/Cons of $5.37/$5.24. on high near-term pricing power with inflation rapid enough to support more frequent inventory repricing. As markets progress into 2H22, Josh expects a slower PMI, more moderate inflation, and an improved supply chain which elevates smaller competitors all work against the industry. Josh maintains his Equalweight rating, but sees positive risk/reward and NT catalysts for the stock.
MS US Banks Analyst Betsy Graseck and Brokers & Asset Managers Analyst Mike Cyprys highlight that Banks & Diversified Financials are the only sectors that outperform the SP500 when 10yr yields rise. The team notes that stocks with the highest beta to 10yr yields include: SVB Financial (SIVB), M&B (MTB), Charles Schwab (SCHW), Huntington Bancshares (HBAN), and Bank of America (BAC). If investors are looking to avoid credit risk, the team includes: Charles Schwab (SCHW), State Street (STT), and Raymond James Financial (RJF). If investors are looking to avoid equity market risk, the team includes: M&B (MTB) and Charles Schwab (SCHW). Betsy points out that the highest beta to Fed Funds Futures stocks include: Wells Fargo (WFC)* and American Express (AXP).
Looking across the pond to Europe, MS Chief EU Economic Advisor Reza Moghadam highlights that it is too early for the ECB to conclude that it is behind the curve on its inflation mandate. He points to several factors that could trigger earlier policy tightening: 1) inflation expectations 2) energy prices 3) the diffusion of inflation 4) wage growth and 5) exchange rate. MS Chief European Economist Jacob Nell notes that Euro area growth is diverging, and estimates 1Q22 euro area growth to be at 0.4%. After weak activity throughout the winter, Jacob expects a robust spring rebound, as restrictions fall away, price pressures moderate, and supply issues ease more noticeably. Going into the earnings season, the limited 4Q results tracked so far point to a healthy breadth of EPS beats with a net of 29% of stocks surprising positively. MS European Equity Strategist Ross MacDonald adds Intesa Sanpaolo (ISP IM), Deutsche Post (DPW GR) and Engie (ENGI FP) to the high conviction list of stocks for this earnings season, while Rockwool (ROCKB DC) and TUI (TUI AG) have been added to the list of negative views. Please ask for the full list or to be connected with the teams.
For the names from MS EU Research noted with conviction into earnings, two that have reported thus far include: 1) Intesa (ISP IM) and 2) Hexagon (HEXAB SS). For Intesa, MS Research Analyst Antonio Reale’s main call into the results was on capital distribution with a potential for returning €25bn (c.50% of its market cap) to shareholders, which was well above consensus numbers. Intesa committed to distribute €22bn of capital (c. 42% of its market cap) via dividends and buybacks by 2025e, which translates into one of the highest yields in EU banks. Intesa reported higher revenues, higher distribution, and lower costs than market expectation which allowed it to target an ROTE of 13.9% by 2025e vs. MSe of c.11%. As a result, Intesa remains Antonio’s Top Pick. For Hexagon, MS Research Analyst Adam Wood notes that 4Q revenues grew 7% organically, which was c. 2% below MSe and c.1% below the street's organic growth forecast. He points out that management cited supply chain constraints as the main reason behind weaker top. Adjusted EBIT also came in c. 3% above both MSe and consensus. For those who are more sceptical of the region, Rob Cronin and the MS EU Baskets Team revisit the weak balance sheet basket (MSSTWKBS) as the market is now pricing in one hike from ECB this year. The last 6 times the iTraxx 5Y EUR Xover was these levels, the MSSTWKBS Index (weak balance sheet names) was on average 15-20% lower than today. Please reach out to be connected with Rob and the team.
Looking to Asia, China’s A-share sentiment experienced its largest weekly drop post September 2020, but the northbound momentum stayed strong, with US $3.5 bn net inflow last week. MS China Equity Strategist Laura Wang notes that China continues to roll out policy easing with the PBOC pledging to “open its monetary policy toolbox” after last week’s rate cuts, along with accelerating local government structure. Given the lingering uncertainties of Omicron-led lockdowns, Laura advises patience near-term at the index level and to monitor the following catalysts after the Lunar New Year: 1) sooner and bigger than expected broad policy-easing measure on fiscal and monetary front 2) rapid and sizable earnings estimate reductions at the index level 3) clearer signs of stabilization of the property market and easing of credit lines for developers and 4) fast recovery from Omicron. Laura added China Yangtze Power (600900 CH) and Qi An Xin Technology (688561 CH) and removed Shanghai Putailai New Energy (603659 CH) from the respective focus lists. Please ask for the full list to be connected with the teams.
On Japan, MS Chief Japan Economist Takeshi Yamaguchi highlights risks of lackluster growth in 1Q22, followed by solid rebound again in 2Q22. He thinks Japan has an underlying recovery trend after averaging out quarterly fluctuations, expecting the 20214Q GDP data to show a robust growth of +6.2% QoQ annualize. MS Japan Equity Strategist Daniel Blake updates the likelihood of companies in analysts’ coverage announcing a buyback with/after upcoming quarterly earnings. By sector, candidates are centred in Industrials and Materials. By single names, the list includes SMC (6273 JT), Nidec (6594 JT), Mabuchi Motor (6595 JT) and Nihon Kohden (6849 JT). Please ask for the full list of stocks or to be connected with the teams.
A busy earnings season along with a busy conference season with multiple Morgan Stanley events to highlight including the Global Energy and Power Conference (Feb 28-Mar 2), the Morgan Stanley 2022 Technology, Media, Telecom Conference (Mar 7-10), and the Sustainable Futures Conference (May 24-25) all set to take place in-person. This year’s TMT Conference returns to San Francisco and will feature over 300 companies through fireside chats, panels, and one-one-one/small group meetings. Corporates confirmed in the lineup include Airbnb (ABNB), Coinbase (COIN), Databricks (Private), Microsoft (MFST), PayPal (PYPL), & Uber (UBER)*. These conferences are always in high demand, so be sure to reach out to your sales coverage for more information. Thank you again to the MS Global Corporate Access team for such great work around the world! Please see below for all upcoming MS Conferences & Events.
Nevertheless, please find below a selection of this week's data points, charts and research from each region (Europe, US, LatAm, Asia, Japan, EEMEA) that I believe points to an inflection or material change for individual sectors, companies and/or the macro environment this week. I have tried to avoid the obvious beats and misses and instead highlight what I thought to be the more significant trends and inflection points.
Have a great weekend. Drink lots of fluids, take Vitamin C, and make sure to wash your hands!
#FORZA
Nick
*Included in my 2022 Global Ideas Deck. Please ask for the presentation.
Please see below the list of client webcasts MS is hosting over the next few days. Please note, these are widely attended events open to Morgan Stanley’s Institutional and Corporate Client base, and appropriate Morgan Stanley personnel. Webcast link information should not be forwarded or shared beyond intended recipients.
Source: Morgan Stanley US Alpha Team & Global White Phone Teams
Time (EST)
TOPIC & SPEAKERS
WEBCAST LINK
Monday, February 7, 2022
9:00 AM
Global Macro Forum: Europe - Opportunities With Rates On the Move
MS
Andrew Sheets, Chief Cross-Asset Strategist
Graham Secker, Chief European Equity Strategist
Magdalena Stoklosa, Head of Banks Equity Research, Europe
Reza Moghadam, Chief Economic Advisor
Ben Lewis, Head of Linear Rates Trading, UK and Europe
10:00 AM
Steel Talk - A Chat With Mr. Fernando Espada On EU Steel Markets
RSVP to: Cassie.Kearns@ms.com
Expert
Fernando Espada, Managing Director at Tata Steel Unlimited
MS
Alain Gabriel, Head of Europe Metals and Mining
Ioannis Masvoulas, EU Metals and Mining Analyst
1:00 PM
MS Cross Asset Lending Securitization Call - Current State Of Personal Loans
MS
James Faucette, Head of US Fintech and Payments Equity Research
Betsy Graseck,Global Head of Banks and Diversified Finance Equity Research
Jay Bacow, Co-Head of US Securitized Products
Charlie Wu, Head of US CLO Strategy
Robert Rosener, Senior US Economist
Bharat Chandrasekaran, Head of ABS Secondary Trading
Michael Mullen, Financials/REITs Sector Specialist
Tuesday, February 8, 2022
Morgan Stanley LatAm PropTech Day
10:00 AM
Expert Call On The German Heat Pump Market
RSVP to: Cassie.Kearns@ms.com
Expert
Dr. Martin Sabel, Secretary General of the Germany Heat Pump Association
MS
Pam Liu, EU Building and Construction Analyst
11:00 AM
Europe Vs. US, Why Now?
MS
Reza Moghadam, European Economist
Graham Secker, Chief European Equity Strategist
Ross Montgomery, Quantitative & Data Strategies
Naml Lewis, Head of Asset Owner & Multi-Asset CoverageWednesday, February 9, 2022
Morgan Stanley Virtual Global Insights Day
Thursday, February 10, 2022
9:00 AM
Grains Market Outlook With SLC's Commodity Intelligence
Experts
Gustavo Lunardi, Supply & Seeds Production Director
Guilherme Heiden, Market Intelligence Coordinator
MS
Javier Martinez, LatAM Agribusiness Research
Roberto Browne, LatAm Agribusiness Research
Vincent Andrews, US Chemicals Research
Lisa De Neve, EU ChemicalsFriday, February 11, 2022
11:00 AM
MS Cross Asset Telecom Call - Post 4Q Earnings Download
MS
David Hamburger, US Fixed Income Telecom, Cable, and Media Analyst
Simon Flannery, Head of Telecom and Communications Infrastructure Equity Research
Sean Diffley, Internet, Media, and Telecom Equity Sales Specialist
11:00 AM
State Of CRE Webcast: Retail Real Estate A Broker's Perspective With NMRK
Experts
Geoffrey Millerd, Vice Chairman, Newmark Group
Thomas Dobrowski, Vice Chairman, Newmark Group
MS
Richard Hill, Head of US CRE Research
Thursday,February, 17, 2022
11:00 AM
State Of CRE Webcast: Retail Real Estate Update With Gary Rappaport
Expert
Gary Rappaport, CEO & Founder of Rappaport and Former Chairmanof ICSC
MS
Richard Hill, Head of US CRE Research
Kimberly Greenberger, Specialty Apparel, Footwear, and Department Store AnalystWednesday, February 23, 2022
Morgan Stanley Blockchain Gaming Symposium
Tuesday, March 15, 2022
10:00 PM
Australia Sustainability: Webcast With Katharine Tapley, Head Of Sustainable Finance At ANZ Banking
RSVP to: Sydcorpac@ms.com or contact your MS sales rep
Expert
Katharine Tapley, Head of Sustainable Finance at ANZ Banking
MS
Rob Koh, Australia Sustainability Research
UPCOMING CONFERENCES –
Please reach out to your sales representative if you are interested in attending any of these conferences.
Feb 7 & 10 (New York) I Chemicals, Agriculture & Packaging Corporate Access Days
Feb 28-Mar 1 (London) I EMEA HealthTech Conference
Feb 28-Mar 2 (New York) I Global Energy & Power Conference
Mar 7-10 (San Francisco) I TMT Conference
Mar 15-17 (London) I European Financials Conference
Mar 22-24 (Hong Kong) I Virtual Hong Kong Summit
May 10-12 (London) I Virtual EEMEA Conference
May 17-18 (Global) I 13th Virtual Saudi Arabia Conference
May 17-18 (Global) I 2nd Virtual MENA Conference
May 24-25 (New York) I Sustainable Futures Conference
May 24-26 (China) I 8th China Summit
Jun 1-3 (Tokyo) I 2nd Virtual Japan Summit
Jun 7-9 (India) I Virtual India Summit
Jun 8-9 (Sydney) I 4th Annual Australia Summit
Jun 16 (London) I Europe & EEMEA Property Conference
Jun 24-26 (New York) I China BEST Conference for US & EU Investors
Jun 29-30 (Singapore) I ASEAN Conference
Aug 31-Sep 1 (Beijing) I Asia TMT Conference
Sep 5-6 (London) I Asia BEST Conference for EU
Sep 7-9 (London) I Industrial CEOs Unplugged
Sep 12-15 (Cape Town) I RMB Morgan Stanley Big Five and Off Piste Investor Conferences
Sept 14-16 (New York) I Global Healthcare Conference
Sept 28-30 (Asia) I Virtual North Asia Conference
Nov 16-18 (Singapore) I 21st Asia Pacific Summit
Nov 16-18 (London) I Barcelona TMT Conference
Dec 6-7 (London) I Nasdaq
Nov 16-18 (Singapore) I 21st Asia Pacific Summit
The following comments are a summary of Morgan Stanley Research by Morgan Stanley Equity Sales & Trading:
SELECT COVID VIRUS AND TREND FOR RE-OPENING DATA POINTS
Global – Biotechnology – COVID-19 Outbreak Dynamics
Source: Morgan Stanley Research
Source: Morgan Stanley Research, Our World in Data, Department of Health and Human Services, JHU CSSE
US – Retail – Total Discretionary Retail Traffic
Source: Prodco, Morgan Stanley Research
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìîUS – Indices – US vs International Annual Index Price Performance (Excluding Dividends Since 1980)
Annual index price performance (excluding dividends) since 1980.Highlighted are years when the MSCI World Excluding United States (MXWOU Index) outperformed either the S&P, MXNA, or RAY.
ìUS – Banks & Diversified Financials – Standout Stocks For Rising Rates
Source: Company Data, Morgan Stanley Research estimates
Note: 1) Analysis uses 3Q21 disclosures. 2) We use disclosed instantaneous NII impacts for: BAC, C, JPM, WFC, USB, CFG, SBNY, SIVB, FRC, STT, AXP, COF, DFS, SYF, SC. We use disclosed gradual NII impacts for: TFC, PNC, RF, KEY, MTB, HBAN, FITB, BK, NTRS, and ALLY. 3) Definition of ‘long end’ rates varies by company. 4) We estimate the NII impact from long end rates if not disclosed separately; 5) On their 4Q21 earnings call, Citi highlighted that their rate sensitivity analysis in the 10Q/10K assumes run off, predominantly in the non-US markets. When they run the analysis on a static balance sheet, which is more aligned with how peers disclose this sensitivity, Citi’s rate sensitivity increases by 2.5-3x more than their prior disclosure. We factor this higher sensitivity into the analysis above.MS Research Analysts Betsy Graseck, Mike Cyprys, and the Banks & Retail Brokers team highlight that Banks & Diversified Financials are the only sectors that outperform the SP500 when 10yr yields rise. The team notes that stocks with the highest beta to 10yr yields include: SIVB (OW, $935 PT), MTB (EW, $185 PT), SCHW (OW, $132 PT), HBAN (EW, $18 PT), and BAC (UW, $51 PT). If investors are looking to avoid credit risk, the team includes: SCHW, STT (OW, $128 PT), and RJF (OW, $130 PT). If investors are looking to avoid equity market risk, the teamincludes: MTB and SCHW. Betsy points out that the highest beta to Fed Funds Futures stocks include: WFC (OW, $72 PT) and AXP (OW, $218 PT). Download the Complete Report
îGlobal - Venture Capital Valuations Around the World Are Coming Down
ìUS – Internet – Social Media Engagement Trends And Formula For Monetization
Source: Sensor Tower, Morgan Stanley Research
MS Research Analyst Brian Nowak continues to believe the equation "engagement + investment + innovation = monetization" is an important framework for online platforms. Brian highlights 5 key observations including: 1) Total social media time spent rose 7% Y/Y in '21 even off of the shelter-in surge, 2) Meta (OW, $395 PT) has industry leading users and minutes continue growing even through re-opening as total engagement is now ~23% above '19, 3) TikTok has 48mn DAUs spending ~87 minutes lays the foundation for big monetization ahead, 4) Snapchat’s (OW, $60 PT) total time spent is down ~14% Y/Y and why he remains constructive and what the catalyst is from here, and 5) Pinterest’s (OW, $53 PT) DAUs and time spent both in decline as the company needs to articulate which products will stabilize the base.Download the Complete Report
ìChina – Economics – Possibly Smaller Scale Of "Stay-Home" LNY Than In 2021
Source: Xinhua, Morgan Stanley Research
Robin Xing noted that Chinese policy makers are doubling down on credit easing while fine-tuning tech regulations and COVID strategy before Chinese New Year holiday to restore confidence. In a symposium with big tech firms last Friday, the head of the Cyberspace Administration of China (CAC) - the most powerful regulatory body in China on the internet sector - acknowledged the key role the tech giants have in promoting China’s high-quality development in capital allocation, innovation, and public services, and pledged continued support for the healthy development of the platform economy, signaling an initial change from the official criticism of big tech behavior since Dec. 2020 toward a more supportive tone. Also, the CSRC reportedly told executives of top Western banks that Beijing would focus on "achieving respectable growth" in 2022 ahead of the political reshuffle. This is in line with his view that the regulatory reset is gradually shifting toward a more institutionalized and predictable phase, focusing more on implementation than on introducing aggressive new measures. Also the National Health Commission published clearer rules on Saturday to limit overly aggressive travel restrictions by different levels of local authorities. The scale of “stay-home” LNY is likely smaller than last year, as nationwide passenger traffic has been 47%b higher than in the same period of 2021 since the start of the Spring Festival Travel period on 17 January, though still 65% lower than the pre-COVID level. Download the Complete Report
ìUS – Specialty Pharma – Dental Industry Initiation; Prefer Innovation, Digital, & Specialty
Source: American Dental Association, Morgan Stanley Research
MS Research Analyst Erin Wright initiates coverage of the Dental Industry with an in-line view but a positive bias based on favorable demographic trends and a continuing recovery post-pandemic. Erin estimates the dental products market is worth $26 billion, growing +low to mid-single digits annually, reflecting faster growth across specialty segments (orthodontics and implants) and digital solutions. She expects more modest +low-single digit growth across traditional consumables and equipment with increasing competition in a consolidating customer environment. Her Jan. 2022 survey of 75 US dental practitioners indicates that 4Q patient volume will likely remain subdued (-0.4%) but practitioners expect +4.9% NTM patient visit growth. These results reinforce Erin’s conviction that demand should continue to recover into 2022 as pandemic concerns abate and consumer emphasis on aesthetics increases. Erin is focused on innovation, the rising adoption of digital workflows, and specialty (clear aligners, implants). She believes companies like Align Technologies (OW, $575 PT), Envista (OW, $48 PT), and Denstply Sirona (OW, $62 PT) are best positioned from a product standpoint and can navigate the expanding presence of Dental Service Organizations, while suppliers such as Henry Schein (UW, $67 PT) and Patterson Companies (EW, $30 PT) are inherently more exposed. She notes that dental shares trade at a 10% discount to the S&P 500 vs. a 20% premium historically as lingering caution around new COVID variants and the macro environment has weighed on valuations. She thinks the group deserves to trade at a premium. While Erin believes the industry has largely adapted to the COVID environment, harsher pandemic restrictions or macroeconomic headwinds could curtail demand and would be an impetus to turn more cautious on the industry. Download the Complete Report
ìEurope – Communication Services – Ubisoft, US And Asian Video Games Stocks Have De-Rated By ~25%
Note: US includes Activision Blizzard (covered by Brian Nowak), Take-Two Interactive and Electronic Arts (covered by Matt Cost). Asia includes Tencent (covered by Gary Yu), NetEase (covered by Alex Poon), Nexon, Double U, NC Soft, Konami (covered by Seyon Park), and Nintendo (covered by Masahiro Ono). Source: Refinitiv, Morgan Stanley Research. Forecasts based on consensus.
Multiples for European video games developers have compressed by ~25% since the start of 2021, which MS Research Analyst Omar Sheikh thinks ignores long-term secular growth tailwinds and growing strategic value. Download the Complete Report
ìEurope – Consumer Staples – EU Tobacco Is Trading Near Historical Lows Vs. MSCI EU (~25% on NTM PE)
Source: Thomson Reuters consensus estimates. EU Tobacco is the simple average of BAT, IMB and SWMA valuations
With ESG headwinds unlikely to dissipate any time soon, MS Research Analyst Rashad Kawan favors companies embracing the transition to NGPs, with BAT a key opportunity. He expects buybacks and value rotation to support valuation levels in 2022. Download the Complete Report
ìîUS – Healthcare Services & Distribution – Identifying Opportunities Amidst Increasing Dispersion In HC Service Stocks
Source: Morgan Stanley Research, RefinitivNote: returns are weighted by market cap
MS Research Analysts Ricky Goldwasser and Craig Hettenbach highlight that the playbook for HC Services stocks during this period of heightened volatility is to stick with what's working. Ricky remains positive on key OW stocks identified in the team’s 2022 outlook including Top Pick CVS (OW, $125 PT), UNH (OW, $570 PT), CNC (OW, $109 PT), ANTM (OW, $518 PT), and MCK (OW, $292 PT). While each have idiosyncratic drivers, she notes that a common thread is they screen as value. The team highlights an unusually wide divergence in performance between stocks and sees opportunities to generate alpha within subsectors. Looking at performance between subsectors, the team notes that Pharmacy Retail (+4%) and Distributors (+3%) lead the pack, while HC disruptors have meaningfully underperformed (-32%). The team points out that this aligns with the key overriding theme in the broader market, as value is outperforming unprofitable growth. However, even within subsectors the team notes there is significant variation in stock performance. The team notes that HC Disruptor stocks have underperformed on a combination of weak fundamentals and the broad-based selloff in IPO stocks. To get a better understanding of the influence that market factors are having on stock performance, the team analyzed IPOs of HC disruptors and Software companies since 2020. They note that the correlation between sectors is 59% over this time, but has jumped to 84% since October and 93% in the month of January.Download the Complete Report
ìîUS – Biotechnology – MS Research Analyst Matthew Harrison significantly lowers PTs across his coverage to account for lower market multiples, but also highlights his higher conviction calls and areas where he sees relative value after the recent pull-back. He upgrades Legend ($51 PT) and Seattle Genetics ($175 PT) to OW. For Legend, his recent downgrade was based on a valuation call and with LEGN now 20% lower, he sees a good point to re-enter. He expects robust sales of cilta-cel in 2022 after approval on 2/28 and the potential positive readout of CARTITUDE-4. For Seagen, he expects continued growth in the core business and optionality from the pipeline. He also sees a valuation entry point in the name. While sentiment has tracked the volatility and significant underperformance across the industry, he does see investors positioned in three keyways. First, he notes that there is a flight to safety with large caps being relative performers on the back of the growth to value rotation. Second, he notes that investors are looking for names that are trading near cash, but could have catalysts in the next 12 months. Finally, he thinks that investors are focused on how large companies may use the downturn and their significant cash reserves to augment their pipeline, particularly Ph3 or commercial stage assets which are wholly-owned. Download the Complete Report
Negative
îEurope – Cumulative In/Outflows – >$100bn Of Outflows From Europe Vs. $1.8trn Of Inflows Elsewhere In Last Decade
Sources: EPFR, Morgan Stanley Research
Note: The EPFR data and charts displayed here must not be extracted and republished (whether internally or externally). Such use will violate the terms of Morgan Stanley's contract with EPFR which only covers named users.
îUS – IT Hardware – Supply Rebalance Spreading To More Hardware Segments
Source: IDC, Morgan Stanley Research
MS Research Analyst Erik Woodring and the IT Hardware team highlight that recent data from the MS Alphawise survey indicates supply-demand rebalance is extending beyond just a few pockets of hardware. The team cautions that they expect favorable near-term conditions to be followed by an order deceleration that is likely to catch investors and companies by surprise. To be clear, the team doesn’t yet see a full supply correction and believes supply/demand rebalancing will affect different markets at different times. The team notes that falling lead times and management commentary further support improving supply in technology hardware markets. In the team’s view, macro data, MS Alphawise survey results, and CIO/VAR conversations continue to support their more cautious outlook for PCs & Consumer Hardware. The team notes that early signs of China smartphone semi order cuts could be a potential yellow flag. To be clear, the team thinks a rebalancing of supply and demand is "good" for PC and consumer hardware companies in the near-term, as it allows vendors to work down elevated backlog, fill the channel, and ship with shorter lead times (i.e. lower risk of perishable demand). However, once record backlogs are worked down, channel inventory has been right sized, and accelerated orders are fulfilled, the team sees risk that moderating consumer demand and slowing (though still strong) commercial orders will create a period of weakness that could be more severe than companies currently expect. As a result, Erik is most cautious on HPQ (EW, $34 PT) and LOGI (UW, $74 PT). DELL (OW, $68 PT) is another name that Erik is watching, but he remains more constructive given better execution and its exposure to higher-end consumer PCs and data center infrastructure (where demand remains more durable). Download the Complete Report
îìUS – Biotech – MS Research Analyst Matthew Harrison significantly lowers PTs across his coverage to account for lower market multiples, but also highlights his higher conviction calls and areas where he sees relative value after the recent pull-back. He upgrades Legend ($51 PT) and Seattle Genetics ($175 PT) to OW. For Legend, his recent downgrade was based on a valuation call and with LEGN now 20% lower, he sees a good point to re-enter. He expects robust sales of cilta-cel in 2022 after approval on 2/28 and the potential positive readout of CARTITUDE-4. For Seagen, he expects continued growth in the core business and optionality from the pipeline. He also sees a valuation entry point in the name. While sentiment has tracked the volatility and significant underperformance across the industry, he does see investors positioned in three keyways. First, he notes that there is a flight to safety with large caps being relative performers on the back of the growth to value rotation. He points out that this has been particularly severe in SMID-cap biotech where many growth names also saw their COVID premiums decline. Second, he notes that investors are looking for names that are trading near cash, but could have catalysts in the next 12 months. Finally, he thinks that investors are focused on how large companies may use the downturn and their significant cash reserves to augment their pipeline. In particular, Matthew notes that investors are focused on Ph3 or commercial stage assets which are wholly-owned.Download the Complete Report
îìEurope – Materials –Top Pick Polymetal Is Down 26% Vs 2021 Avg Despite 2022 Spot FCF Being ~90% Above 2021e
Source: Datastream, Morgan Stanley Research estimates (e)
From weak trading updates, to Fed policy, to geopolitical risks, gold equities have had a difficult start to the year. But MS Research Analyst Dan Shaw argues that lowered expectations and poor sentiment leaves risk rewards looking appealing, with stocks discounting a gold price 8-17% below spot. Polymetal top pick. Download the Complete Report
îìLatAm – Economics – BCB Review: Aiming for Re-anchoring, at a Slower Pace
The central bank decided to hike the policy rate by 150bp, bringing it to 10.75%. In Andre Loes’s view, the statement had a neutral tone, and overall it reinforces his call of a terminal rate at 12.25% in May, as the forecast of the authority is above the ceiling of the tolerance zone assuming policy rate at 11.75%, peaking at 12%. Download the Complete Report
îìEurope – Consumer Staples – Russian Retail: Compelling Risk-Reward
MS Research Analyst Henrik Herbst’s analysis suggests Detsky Mir, Magnit, and Fix Price are still cheap, even assuming a fundamental scenario similar to the last Russian financial crisis in 2014-16. X5 could see relative downside. That said, Russia retailer fundamentals are likely to be substantially more resilient vs 2014-16. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – Spotify Technology SA – Unique Elements Show 2022 Could Have GM Expand & Growth Accelerate; Reiterate OW
Source: Sensor Tower, Morgan Stanley Research
MS Research Analyst Ben Swinburne highlights that his OW thesis on SPOT ($300 PT) shares reflects the view that the price is underestimating the size of the global audio market, Spotify's ability to hold a leading global share (~30-35%), grow gross profits 20%+ annually, and turn that position of scale and share into substantial earnings power. Like much of long-duration growth in the market, he notes that SPOT shares have dramatically underperformed the market over the past three months. Across Media & Entertainment (M&E), Ben highlights three drivers of the growth sell-off and how they do or do not apply to SPOT: 1) Rising rates are driving down long-durations assets, 2) There is concern over continued pandemic-related hangover for businesses that benefited in 2020 and are now working through that pull forward, and 3) There is a broad macro view that decelerating fundamental growth is not priced into the market, even here. Ben expects MAU strength in 4Q given the download data which is up modestly in the US YoY and substantially internationally. He notes that the international strength is most pronounced in emerging markets, suggesting the MAU strength may not translate into Premium subscriber upside. He also points out that engagement continues to also be healthy YoY in 4Q and early '22. Ben forecasts overall advertising to grow ~30% at Spotify ex-FX in '22 and podcasting to grow from €200mm in '21 to ~€370mm in '22. He notes that investment areas could include audio books, where Spotify has made two acquisitions of late and he expects it to bring that product to Spotify in 2022. Download the Complete Report
ìUS –Sonos Inc – Market Undervaluing Long-Term Durability Of Ecosystem; Risk/Reward Positive
Source: Factset, Morgan Stanley Research
MS Research Analyst Erik Woodring reiterates his OW rating of SONO, with his new $45 PT (down from $49) marked to market for peer multiple compression and sees December quarter results next week as a near-term catalyst for re-rating. He highlights that concerns about near-term demand weakness are overdone given supply likely remains the gating factor. He notes that while SONO grew revenue 29% Y/Y in FY21, this came off a low FY20 base (of 5% Y/Y growth), and importantly, was constrained by supply chain shortages, which persist to this day. Erik notes that 1) his conversations with smart/connected home product distributors suggest demand KPIs remains strong into year end, and 2) high-end consumer hardware spending still shows signs of sustainability as evidenced by Apple's (OW, $210 PT) recent results. On that point, he thinks it's worth highlighting that nearly 70% of Sonos' monthly active users are iOS users. Erik understands the focus on near-term results, but he sees a need to step back and appreciate the sustainability of Sonos' growth algorithm. He sees evidence that the pandemic actually strengthened Sonos' growth funnel for years to come, and present 3 pieces of evidence to support this view: 1) Sonos has deliberately focused on new household growth to create an intensifying flywheel effect, 2) Repeat purchases drive NPS scores higher, accelerating the flywheel, and 3) Not yet reaching a product per household ceiling. With Sonos' core business undervalued at 9x EV/EBITDA, he believes future growth opportunities such as commercial/enterprise expansion and IP monetization represent even cheaper free call options than 6 months ago. Download the Complete Report
ìîKorea – SK Innovation Co Ltd – SKI: EV Battery Capacity
Source: Company data, Morgan Stanley Research estimates
SK Innovation posted unexpected operating losses of W47bn (vs MSe/cons W450-550bn) driven by chemical operating losses (similar to S-Oil) and widening battery losses (W310bn) in the initial ramp up stages. 2022 guidance was also mixed – positive Refining vs subdued Petchem/lubricants. On the EV battery side, the company raised annual revenue (mid-W6tn), year-end capacity (77Gwh) and capex guidance (W6.5tn) but lowered margin target (positive EBIT margin by 4Q22) in light of chip shortages + input cost inflation. Youngsuk Shin believes SK Inno will have to perform a balancing act between capacity expansion and debt levels/dividend payment. He stays EW. Download the Complete Report
ìîJapan – Sony Group Corp–F3/22 3Q Results: Unexpectedly Good, but Prolonged PS5 Supply Shortages a Concern
Sony share price -6% despite posting a beat and raise as the details paint a mixed picture about the outlook. On the conf call, CEO provided clarity around the recent Bungie acquisition saying that the company’s investment decision in pursuit of IP value creation remains intact and commented that the EV business – though no final decision has been made, will likely be an asset light business model entailing manufacturing partnership. On the flip side though, Sony slashed its F3/22 PS5 hardware sales volume target from 14.8mn+ initially to 11.5mn units, below MSe 13.5mn. CEO spoke of robust demand conditions on par with the previous peak level of 22.6mn units in F3/23e but the commentary around prolonged semiconductor procurement issues and disruption cloud visibility through 2H F3/23e and likely indicate the market expectation will reset toward 20mn level for F3/23e. Hardware sales slowdown theoretically should have little bearing on earnings (given lower GM), how this impacts user engagement and MAU given the high correlation with hardware sales remains to be seen. All in, solid print + guide and the management did a good job explaining the new business ambitions but this is likely offset by downward revision for PS5 sales. Stay OW. Download the Complete Report
ìUS – Under Armour Inc – MS Research Analyst Kimberly Greenberger upgrades UAA to OW ($24 PT) on the stock pullback and attractive 2022 setup vs. peers. She notes that UAA has pulled back 10% YTD and 25% since the November earnings report. In her view, current trading levels suggest the market 1) may have unfairly-penalized UAA’s stock for holiday weakness in specialty retail without considering its differentiated model and product exposure, and 2) may not recognize the opportunity for positive 2022 EPS revisions, which she thinks is unique in the Softlines space. Taken together, she thinks potential 1H22 outperformance vs. peers could be a catalyst for the stock, and sees a valuation re-rating opportunity into the mid- to high teens EV/EBITDA & high-20s P/E range. Download the Complete Report
Negative
îìUS – DraftKings Inc – Investor Pushback To Upgrade – MS Research Thomas Allen highlights there was significant pushback to his DKNG ($31 PT) upgrade to OW. He notes the focus was mainly on margins, with incremental questions around timing, multiples, balance sheet, and relative preference. On margins, he notes that investor concerns around margins centered on tax rate increases, marketing spend dissipating, and cost leverage. On marketing, Thomas expects spend to decrease significantly once the majority of states mature and customer retention becomes more of a focus than acquisition. On cost leverage, Thomas models DKNG's gross profit margins going from 46% in 2021 to 41% in 2022 to 54% in 2025. Thomas points out that there is still a debate in the market on what the best way to value the company is. He believes that using a multiple on 2025 EBITDA using comps' current 2025 multiples while backing it up with two DCFs is the best way. He notes that this reflects the true cash flow of the business, and his upside is driven by having a more bullish view on margins than the market. He notes that he did get investor support for his near-term downside case view that DKNG likely would not fall below 3x forward revenue. Thomas also notes that some investors were concerned about DKNG's balance sheet and the potential need to raise capital near-term. He views DKNG as the pure play on US sports betting / iGaming, with the most negative sentiment, and hence sees a greater opportunity to be a contrarian with it. Download the Complete Report