Give Me Banana

The longshoremen strike has already been worse for my mental health than when I was dropped as a client by my therapist. And it’s only gonna get worse for the U.S. economy. Below, we go deep into exactly how and where all the shareholder value destruction will come from and what to expect for a resolution.

October 04, 2024

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In this issue of the peel:

  • The longshoremen strike has already been worse for my mental health than when I was dropped as a client by my therapist. And it’s only gonna get worse for the U.S. economy. Below, we go deep into exactly how and where all the shareholder value destruction will come from and what to expect for a resolution.

  • EVgo shares were on full batter Thursday, ripping higher on newly received funding from the DOE. Nvidia shares traded higher, thanks to their hypeman CEO, while Levi Strauss’ khaki brand killed an otherwise good quarter. Finally, Hims & Hers just got bodied out of the GLP-1 game.

  • OpenAI somehow just got even weirder. Having that freak Sam Altman as your CEO tends to have that effect, but this funding round and the simultaneous departure of every non-Sam-Altman at the firm creates questions. Not that we have answers, but find out what’s going on below.

Market Snapshot

Banana Bits

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Macro Monkey Says

Give Me Banana

Gas up your cars—we’re heading to the docks. 

It’s time we apes head to the East and Gulf coasts. These dockworkers are trying to destroy our beautiful economy and all the shareholder value we create on a daily basis.

I won’t stand for it. But before we hit the ports and give ’em what for, we should probably understand exactly how this ongoing strike could damage the U.S. economy.

I don’t mean to be alarmist, but even our bananas are at risk. Let’s get into it.

The Numbers

As we speak, 45,000 members of the International Longshoremen Association—the largest dockworkers union in North America—are on strike.

According to JPMorgan, the strike could cost anywhere from $3.8-$4.5bn per day in lost revenue. Oxford Economics pegs (pause) their estimated impact at 0.1% of annualized GDP growth for every week the strike continues. Agricultural products are most at risk.

In 2023, the ports that are currently shut down took in 72% of total waterborne agricultural imports, with roughly half coming in through New York, Philly, and Boston.

Without dockworkers there to load and unload cargo ships, a queue has already started to form. As of yesterday morning, 45 vessels were known to have anchored at East Coast ports while the products in their containers are doing the same thing as dockworkers: jack sh*t.

These containers include electronics, alcohol, auto parts, retail goods, and more, in addition to food. However, agriculture remains the most concerning due to the high reliance on East Coast ports and the perishable nature of these products.

75% of the bananas consumed in the U.S. come through ILA ports. Moreover, 90% of imported cherries, 85% of canned food, 82% of hot peppers, and 80% of chocolate imports all come through currently shut-down ports.

So these lazy b*stard dockworkers want you to have 75% less bananas, making them the true nemesis of potassium fans everywhere.

More than 60% of fruits consumed in the U.S. are imported, with varying reliance on the East Coast. However, 80% of beer, wine, whiskey, and scotch also arrive in the U.S. through currently shut-down ports, which means my Guinness is at risk too.

If that’s not frustrating enough, wait until you hear why they’re on strike.

These dockworkers want your portfolio to crash, your family to starve, and for you to be sober in order to secure an increased pay package. These guys must’ve seen Jaylen Brown’s new contract and thought, “Yeah, I’m worth about the same.”

Specifically, ILA leadership is demanding a 77% increase in wages, bringing the minimum wage among ILA dockworkers from $39/hr to a very nice $69/hr.

But the thing is—these guys already make damn good money.

As the WSJ points out, getting updated wage data on ILA members is challenging because workers get paid through “local shipping associations that represent port employers,” so there’s no central database to ascertain this information.

But, before the Waterfront Commissioner was dissolved in 2023, we had access to 2019-2020 wage data, as seen in the chart above.

Some notable takeaways from the chart include:

  • The wage cohort with the most employees is in the $150-$200k band.

  • Over half earn above $150k, and over three-quarters earn above $100k.

  • Over 82% earn more than the median American salary of $59,436 (BEA data).

Now, some obvious caveats include the fact that this data comes from the New York-New Jersey port, which likely earns the highest pay due to the high cost of living. But then again, this data is from 4-5yrs ago. Wages have only grown since then.

This is almost as annoying and far more consequential than when those actors went on strike because they weren’t making enough millions of dollars.

The Takeaway?

There’s no telling how this could play out, especially given that the Biden Administration has already said they don’t plan to intervene in the strike.

But that means we’re free to speculate wildly. 

One of three things will happen. Employers will succumb to union demands, unions will succumb to employers’, or they’ll meet in the middle.

My guess is that the strike runs for a few more weeks, and the two sides will meet somewhere in the middle. In addition to higher pay, the ILA also wants a ban on the automation of cranes, gates, and trucks.

So, the agreement will either include 1) a 77% pay increase without the full automation ban or 2) a lower wage increase with more robust automation bans.

Keep in mind—this is likely the first of many industry-based strikes against automation. Don’t be surprised if fast food workers, radiologists, truckers, or even junior analysts are next.

Disclaimer: I have no clue what I’m talking about, so take that with a grain of salt. My guess is the ILA will take the first deal listed above, but let me know what you apes think. As always, feel free to hit my line at [email protected].

Career Corner

Question

Is it worth it to try to network and have calls with IB professionals based in Hong Kong if I'm recruiting in the U.S.?

Answer

If you’re still learning about the industry, sure, but beyond that, probably not unless you’re open to locations or struggling to find someone to connect with in the U.S. For example, if the only person at Bank XX who went to your college is based in another country, by all means, reach out, but if you have plenty of options in the U.S., then I would focus time there

Head Mentor, WSO Academy

What's Ripe

EVgo (EVGO) 60.81%

  • Big news for EVgo today as the EV charging network provider secured $1bn to continue making chargers that will inevitably only add to the ocean’s heaping trash piles.

  • The $1.05bn check is coming from the Department of Energy with the goal of allowing EVgo to continue building out its network of fast chargers.

  • The firm was strapped for cash, so this debt investment was a lifesaver. JPMorgan upgraded shares on the news, leading to yesterday’s charge higher.

Nvidia (NVDA) 3.37%

  • At least if his career in business doesn’t work out, Nvidia CEO Jensen Huang can always find a role as a professional-grade hypeman. 

  • Huang’s hype abilities were put on full display during Wednesday’s “Closing Bell” segment on CNBC, where he confirmed that demand for their latest chip remains “insane.”

  • Production is at full scale as well, according to Huang, and ready to go on sale for their planned launch in Q4. TSMC, Nvidia’s contract chip manufacturer, rose too,  while Intel sipped.

What's Rotten

Levi Strauss (LEVI) 7.69%

  • Amid Gen Z’s desperately sad attempt to revive the counter-culture vibe of the 1960s and 70s, denim has become cool again. Unfortunately, Levi Strauss doesn’t just sell jeans.

  • One of the original picks-and-shovels companies, Levi Strauss, beat on earnings but missed on sales due to a 15% YoY decline in khaki sales at the company’s Dockers business.

  • Beyond Yoga, sales surged 19% while the classic blue jean brand grew 5%, its fastest growth in 2yrs. Shares tanked on concerns around the Dockers brand, which Levi is considering selling.

Hims & Hers (HIMS) 9.60%

  • Wow, Ozempic and other obesity drugs really do work wonders. In just a single day, they helped Hims & Hers lose 9.60% of their weight! Thanks, Eli Lilly!

  • Eli Lilly, the world’s most valuable healthcare firm, just got its GLP-1 products removed from the FDA’s shortage list.

  • When the FDA says there’s a shortage of a proprietary medicine, other firms are allowed to make copy versions of those drugs.

  • Hims & Hers hopped all over that train, pumping out as many off-brand GLP-1s as they could to meat ride the industry’s success. Now, doing so is illegal again.

Thought Banana

Management Out, Money In

It’s not hard to understand why investors want a piece of OpenAI.

The most innovative company of the last few decades, OpenAI, effectively created the AI narrative when ChatGPT burst onto the scene in late 2022.

But, it is hard to understand why so many executives want out.

Let’s dive in.

What Happened?

OpenAI just closed a funding round that gives the firm $10.6bn in liquidity.

Equity investors led by Thrive Capital, including Altimieter, Fidelity, Nvidia, Softbank, and, of course, daddy Microsoft, among others, threw $6.6bn at the firm at a $157bn valuation.

That makes the firm roughly the size of CVS and Airbnb combined, in addition to the above reference image.

The firm also received a $4bn line of credit at a rate of SOFR + 1% from a consortium of the largest Western banks, like JPMorgan, Morgan Stanley, UBS, and others.

The investment carries hardcore “this time it’s different” vibes.

OpenAI will generate ~$3.7bn in 2024, according to CNBC, which “confirmed” the AI-consumer creator made $300mn in sales in August. They also expect to lose $5bn this year, ~135% of revenue.

That means OpenAI just got valued at a 42.4x current-year revenue multiple. According to SaaS Capital, the median software-as-a-service (SaaS) firm in 2024 is seeing multiples of 4.1x. The cream of the crop SaaS firms are seeing 6.8x.

Now, there’s a lot that goes into this metric. Annual recurring revenue and net retention rates play a big factor. OpenAI is expecting $11.6bn in sales next year, meaning the firm is valued at a next-year revenue multiple of 13.53x, much more reasonable.

If we assume all of OpenAI’s revenue is recurring (it’s not, but it’s probably above 90%), we get an expected net retention rate of 313.51%, an absolutely astounding figure considering anything above 120% is generally considered GOATed with the sauce.

If we assume 90% ARR, OpenAI’s valuation carries slightly over a 15x revenue multiple, much more in line with the highest growth SaaS companies in the past, making the valuation much more reasonable.

So then, this leaves investors to wonder why the company’s executive team went from the first image below to the second image below in a matter of 4 months:

Plenty of other (formerly) integral members of the OpenAI team have left in recent days too, leaving us all to wonder, what the hell is going on?

The Takeaway?

If getting $10.4bn in liquidity was done at a fair valuation and imminent collapse isn’t on the horizon because of the high return hurdle rate the firm has set for themselves, why the hell would executives leave OpenAI?

Pretty much all of them at least publicly stated their departures were to “explore new areas,” “pursue passions,” or some other saying you’d find on the wall in a sorority house’s kitchen, but if OpenAI was the nexus of the next great technological leap for humanity, what could be a better alternative to work on?

Ilya, OpenAI’s former chief scientist, actually started his own AI firm. I thought it was dangerous at first, but it turns out it’s called “Safe Superintelligence,” so now I have no more concerns.

This has gone on way too long, so we’ll finish it with a one-word summary: weird.

The Big Question: What is going on at OpenAI? Would you buy shares at a $157bn valuation?

Banana Brain Teaser

Previous

On a certain transatlantic crossing, 20% of a ship’s passengers held round-trip tickets and also took their cars aboard the ship. If 60% of the passengers with round-trip tickets did not take their cars aboard the ship, what % of the ship’s passengers held round-trip tickets?

Answer: 50%

Today

A couple decides to have 4 children. If they succeed in having 4 children, and each child is equally likely to be a boy or a girl, what is the probability that they will have exactly 2 girls and 2 boys?

Send your guesses to [email protected]

❝

The only thing worse than starting something and failing..is not starting something.

Sam Altman

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Happy Investing,
David, Vyom, Ankit & Patrick