Wall Street Breakfast

Author: bmotrader   |   Latest post: Wed, 3 Mar 2021, 9:17 AM


Wall Street Breakfast: Loon Goes Pop

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Alphabet (GOOG, GOOGL) is pulling the pin on Project Loon, a decade-old venture that planned to beam internet to Earth via giant balloons. While it struggled to get off the ground, the experimental business saw some successes over the years, like helping restore cell service in Puerto Rico following Hurricane Maria and getting tens of thousands of Peruvians back online after heavy flooding in 2017. Loon even launched a pilot service in Kenya last summer, sending 4G LTE signals down to an area of 30,000 square miles.

What happened? The price tag was too high. The project "was just too expensive for everyday people," and Loon couldn't "get costs low enough to build a long-term, sustainable business."

Bigger picture: Loon was born out of X - Alphabet's moonshot factory for experimental projects - but was spun out into a separate company in July 2018. Experimental projects from X are accounted for under Alphabet's "Other Bets" division, which generated revenues of $178M last quarter, but recorded an operating loss of $1.1B. In contrast, Google - which provides nearly all of Alphabet's profits - earned $12.6B in operating income on revenue of $46B.

Race for global internet coverage: Facebook (FB) also abandoned plans for Aquila in 2018, which aimed to deliver service via solar-powered drones, prompting companies to increasingly look to space to blanket the globe in connectivity. While those projects face steeper initial costs and take longer to deploy, they might provide more consistency with longer lifetimes. Amazon's (AMZN) Project Kuiper and Facebook's Athena are still mostly on paper, though SpaceX (SPACE) has launched nearly 1,000 internet satellites of its planned Starlink (STRLK) fleet into low Earth orbit.

Earnings - Legacy tech giants

Investors were not impressed with the latest quarterly results from IBM (IBM) and Intel (INTC), as the two heavyweight stocks tumbled nearly 7% and 5%, respectively, after the bell on Thursday. Intel initially gained on a premature release of its earnings, but slumped after the company's new CEO committed to in-house manufacturing. IBM meanwhile signaled its cloud bet will take longer to pay off and posted its fourth straight quarter of revenue declines.

Why did Intel publish results early? "We are investigating reports that non-authorized access may have been obtained to one graphic in our earnings material," a spokesperson declared. "Earlier today, once we became aware of these reports, we made the decision to issue our earnings announcement a brief time before the originally scheduled release time."

Outlook for Intel: The company has been grappling with the loss of leadership in producing ultrafast chips, ceding much of its market share to Taiwan Semiconductor Manufacturing ([[TSM]]) and Samsung Electronics (OTC:SSNLF), whose factory innovations allow computer chips to do more at a lower cost. Incoming chief executive Pat Gelsinger said yesterday that the "majority of our 2023 products will be manufactured internally," countering growing calls from some investors to shed that part of its business. While Intel will "expand use of external foundries for certain technologies," the company doubled down on retaking its position as the "unquestioned leader in process technology."

Outlook for IBM: Challenges lay ahead for CEO Arvind Krishna, who took over during the pandemic, including how to revamp its business in the age of the cloud. Part of the steps Big Blue is taking involves spinning out its managed infrastructure services unit - a roughly $19B a year business - from IT infrastructure division GTS. IBM is focusing its investment on artificial intelligence and the hybrid cloud - betting that users will increasingly operate across multiple clouds, public and private.

Covid - Why is U.S. vaccine rollout taking longer than expected?

Nearly 38M vaccine doses were distributed to U.S. states as of Thursday, according to the CDC, but only about 17.5M have actually been administered. That means over half of the shipped vaccines are sitting on shelves across the country. Of the jabs given, 15M have been for a first dose, while only 2.5M Americans have been given a second round of Pfizer-BioNTech (PFE, BNTX) or Moderna's (MRNA) inoculation.

What's holding up the rollout? "We are working closely with Gen. Gustave Perna (head of logistics in Operation Warp Speed), with the manufacturers, with the states to understand exactly where the supply is," Dr. Rochelle Walensky, the new director of the CDC, told NBC. At least 12 states have reported vaccine shortages, and officials from San Francisco and New York warned that they could be completely out of doses this week. She also said President Biden would also invoke the Defense Production Act if there were supplies that were needed in vaccine production, distribution or administration.

Quote: "We need to make sure we titrate the amount of vaccine that we have, for the people that are eligible (even expand eligibility), so we don't have vaccines on the shelves," added Walensky. "We also need to make sure there are enough vaccinators out there, including the Commissioned Health Corps, medical military, retirees, dentists, veterinarians, and medical and nursing students that are about to graduate. The CDC is also looking at increasing the sites where people can get vaccinated, including community vaccination centers, stadiums, gyms, mobile units, federally qualified healthcare centers and pharmacies."

Thought bubble: Additional FDA-approved jabs can help boost supply at a time when COVID deaths across the U.S. are forecast to pass the half a million milestone by the end of February. Johnson & Johnson (JNJ) will soon send over safety and efficacy data of its Phase 3 trials, which appeared to generate a promising antibody response in earlier assessments. Health officials have high hopes for the one-shot regimen, which simplifies the process of getting it out to the public.

What it means for markets: Wall Street is hedging against possible bumps in the U.S. vaccine rollout, according to Reuters, as the CBOE Volatility Index expiring in March and beyond trades well above the index's current levels. Uncertainty over the rollout has also seen the VIX hover above its long-term average near 20, even as the Dow Jones, S&P 500, Nasdaq and Russell 2000 rally to record highs.

Cryptocurrency - Bitcoin under $30K

Bitcoin (BTC-USD) is set to notch its sharpest weekly drop since September, after slipping as much as 9% to under $30,000 in the Asia session. It was only two weeks ago that the crypto hit $42,000, but it's now down 30% from that record high. Be on the lookout for more outsized moves, as the crypto trade never sleeps - not even nights or weekends.

What happened? Frothy rallies are always reasons for a pullback - especially for an asset that's 700% above its 2020 lows - as well as increasing calls for regulation. At a U.S. Senate hearing this week, Janet Yellen expressed concerns that cryptos could be used to finance illegal activities, while ECB President Christine Lagarde called for global regulation of Bitcoin. There was also a report of so-called Bitcoin "double-spend," where the same token is used by the same person in two transactions, though it turned out to be bogus.

Quote: "You wouldn’t want to rationalize too much into a market that's as inefficient and immature as Bitcoin, but certainly there's a reversal in momentum," said Kyle Rodda, analyst at IG Markets. "The herd has probably looked at this and thought it sounded scary and shocking and it’s now the time to sell."

Go deeper: In a fresh research report, analysts from JPMorgan said Bitcoin is not a hedge against market crashes. In fact, as traders use cryptocurrencies to make even more money, it would mean that it's even more correlated with the rest of the market. Other news? UBS announced cryptos "may never be able to work as actual currencies," given the "fundamental flaw" that supply can't be reduced in most cases when demand is slumping.

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