In this issue of the peel:

• Artificial intelligence has promised us the world and then some. So far, that’s amounted to little more than legal fees and antitrust scrutiny. But is that actually a good sign for the industry?

• Spotify crushed Q2 earnings while Amazon didn’t even have to. Meanwhile, UPS just had its worst trading day ever.

• Tesla shares plummeted after hours on its Q2 earnings figures. I know it might be hard to believe, but could Mr. Market be overreacting?

Market Snapshot

Banana Bits

• Alphabet shares were lower after-hours on earnings (more on this tomorrow)

• Sunday, July 21^st, was officially the hottest day ever on record

• Congress is looking to push a stock trading ban before the election

• Home sellers were cutting prices at record rates in June

Macro Monkey Says

Eddie Haskell of Technology

I’m sure less than 1% of you have seen the 1950s TV show Leave it to Beaver. And to be honest, neither have I.

But, (allegedly) there’s this character named Eddie Haskell who’s the world’s biggest kiss*ss to authority figures but is causing all the trouble right under their noses.

That’s basically what AI has been since the launch of ChatGPT. Promises to automate everything and do our jobs for us have so far turned into never-ending legal challenges.

So, let’s get into it.

What Happened?

The biggest winners of artificial intelligence so far? Lawyers.

It’s a shame they ended Suits in 2019 because Harvey might’ve finally found his match in an AI system, but for the lawyers of firms like Microsoft and the New York Times, they’re not mad about it.

The fact that the New York Times never expensed safe spaces for journalists on their income statement, but they are already creating a whole new line item for “Generative AI Litigation” speaks volumes.

From $0 in 2023, Q1’24 racked up $989k in legal expenses to defend their IP.

As a reminder, the NYT is currently suing OpenAI, their daddy Microsoft, and other affiliates for the alleged “unlawful and unauthorized copying and use of the Company’s journalism and other content.”

Notably, all of the AI lawsuit expenses were categorized under the “NYTG” or New York Times Group segment. That implies that, per the NYT’s knowledge, there hasn’t been any “unlawful” use of content from its recently acquired publication, The Athletic.

That would imply that OpenAI and Microsoft aren’t simply crawling the entire web for training data but that they’re being selective of which media outliers and websites they choose to crawl… perchance.

But Microsoft has its own, much more expensive problems to deal with.

The DOJ and FTC are both running massive investigations into Microsoft’s interactions with key AI players like OpenAI and Nvidia. But, the two agencies are now joined from the other side of the pond as the U.K.’s CMA is looking into the Inflection AI deal.

The above image might suggest that Microsoft has taken a break from buying companies. But, more accurately, the firm is just getting in the habit of disclosing less about those acquisitions.

And that’s exactly what the U.K.’s Competition & Markets Authority is investigating.

The overseas agency launched a probe into the U.S. tech firm to find out if Microsoft structured deals in a way specifically to avoid such antitrust scrutiny.

We know that Microsoft poached nearly all key developers from Inflection AI, including the firm’s founder and CEO, who is now the “CEO” of “Microsoft AI.”

As part of an agreement with Inflection, Microsoft agreed to license the technology behind Pi, Inflection’s ChatGPT competitor, for $650mn.

So… everything about this “agreement” screams “merger” or at least “acquihire.” In that case, Microsoft would’ve had to have sought agency approval, which it did not do.

The Takeaway?

Big Tech is getting bold, and lawyers are getting rich.

Even digital assets and the rise of NFTs didn’t bring nearly this much scrutiny, and paying celebrities to pump sh*tcoins on Twitter seems like a much clearer violation.

However, the drowning levels of AI litigation may, in fact, speak to how big and impactful this space is set to become. If it wasn’t valuable or didn’t show promise of being exceptionally valuable, the NYT would be poking the world’s biggest bear.

Lastly, never forget that the East India Company had a military 2x the size of its home country’s at its peak in 1803. While far less likely in this day and age, reality is often stranger than fiction.

Who wants to get drafted by Microsoft?

What's Ripe

Spotify (SPOT) 12.0%

• This audio streamer’s Q2 earnings report was music to our ears. Sorry for that cringe, but the firm crushed it on strong user and even stronger revenue growth.

• The Stockholm-based firm grew Monthly Active Users by 14% to 626mn, roughly the same as Twitter. Meanwhile, revenue was up 20% to a record $4.12bn.

• Gross margins hit a record high of 29.2%, leading to a beat on the top and bottom of its income statement. It was the opposite of a Murphy’s Law report, with everything going exactly right.

Amazon (AMZN) 2.1%

• While its Mag 7 peers fall after earnings, Amazon continues to rip before its earnings next Thursday. Morgan Stanley is pounding the table.

• The Wall Street bank upped its price target to $220/sh, implying a ~18% gain over the next year and calling it their top pick among Big Tech stocks.

• At the same time, JMP Securities speculated that this year’s Prime Day grew 11%-12.7% annually. The firm also issued a $225/sh price target.

What's Rotten

United Parcel Service (UPS) 12.1%

• Like how I feel when my package gets delayed, UPS shares had their worst day ever. Time to change their ticker to DOWNS, just like their revenue guidance.

• A bad Q2 was just the start. Sales of $1.79bn missed expectations by 10%, while earnings missed by ~12.5% on poor product mix despite a return to U.S. volume growth.

• Sales guidance was cut to $93bn for similar reasons. But UPS expects growth in labor costs to chill, anticipating a return to operating income growth in 2H’24.

General Motors (GM) 6.4%

• Mr. Market’s reaction to GM’s earnings is like when your Hinge date says, “Everything about you is perfect, but I didn’t feel the spark.”

• Investing—and dating—is hard. GM beat across the board and raised guidance, only to get slapped by Morgan Stanley’s view that the “good times won’t last.”

• Huge losses in GM’s China, EV, and self-driving units weighed on results, with analysts expecting billions in investment to get them back on the road.

Thought Banana

Earnings Spotlight: Tesla Inc (TSLA, 7.8%)

With earnings numbers like this, you’d think the CEO was distracted by other business ventures or his family or something.

Oh, wait… their CEO is the CEO of 4 other companies… and has 12 kids… anyways…

Tesla hit a roadblock in Q2, causing investors to slam on the brakes as a result of this flashing red light. Let’s get into it.

The Numbers

Tesla’s update wasn’t that bad. But, missing on earnings and delaying their robotaxi unveiling by 2 months is dragging shares lower.

Total revenue grew a measly 2.3% annually but increased a respectable 19.7% for the quarter.

Total auto revenues fell 6.5% annually despite a 215.6% increase in revenue earned via EV credits. Investors weren’t happy, but on the earnings call, Musk put a positive spin on it, saying growth in auto credits shows how far ahead of other EV makers Tesla is.

But, the prom queen of the report was undoubtedly Tesla’s Energy business. Increasing 99.7% annually, the production capacity of Megapack and Powerwall products is almost close to on par with demand.

Markets threw up after hours primarily because of 1) the earnings miss and 2) declining market share in the U.S. and global battery electric vehicle (BEV) markets.

But, as the first mover that literally created the EV industry, it’s only natural to lose market share as competitors come online.

Growth in energy storage has been underrated so far in reaction to Q2’s numbers because, even if Tesla continues to shed market share in BEVs, the company is diversifying key revenue sources while hitting all-time highs in non-auto gross profits.

The Takeaway?

The market’s eyes were also on Tesla’s 10.2% annual growth in capital expenditures. Usually, CapEx growth gets Tesla investors hyped, but there appears to be outsized anxiety as $600mn of that spend is going to artificial intelligence development.

That could be concerning, given Tesla’s history of using that to jack up production. Plus, delays in the company’s robotaxi launch could signal to investors that investments in AI may not be worth it.

As always, especially with Musk, we’ll see what happens!

The Big Question: Are investors overreacting to short-term downsides? Is Tesla making investments in the best places to drive long-term shareholder value?

Banana Brain Teaser

Previous

For the past n days, the average (arithmetic mean) daily production at a company was 50 units. If today’s production of 90 units raises the average to 55 units per day, what is the value of n?

Answer: 7

Today

If a two-digit positive integer has its digits reversed, the resulting integer differs from the original by 27. By how much do the two digits differ?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Jasper & Patrick

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