Weekly Reads
Weekly Reads - July 24, 2023

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The luxury industry generates some of the most attractive margins andreturns in the market due to its undeniable pricing power and difficult toreplicate brand strength.

The long-term sustainability of any fashion brand is often difficult to forecast yet the top luxury brands of the world have existed for over a century and are thriving in a business in which consumer tastes change unpredictably. The secret sauce to these brands has been their ability to create an air of exclusivity around their products through premium pricing and willingness to push fashion forward regardless of current market trends. The affinity around these brands is seen through their resale value in secondhand markets. The top three luxury brands in this report (Hermes, Louis Vuitton, Chanel) on average retain over 90% of their value in the secondary market with Hermes iconic bags retaining 103% of their total value! Even lower-ranked luxury brands like Gucci, Saint Laurent, Dior, and Bottega Veneta still retain over 60% of their value after initial purchase. In the current fast-fashion world in which consumers throw away last year’s products to make room for the next trend, it is impressive to see how these brands have cultivated a loyal fanbase of consumers across different cultures and countries.

Disney’s plan to sell their TV-assets will likely yield disappointingreturns and won’t fix the company’s core issues in transitioning their mediabusiness to streaming.  

Disney CEO Bob Iger publicly announced that he will take an expansive look at the company’s legacy TV assets (ABC, FX, Freedom, and National Geographic) indicating that these assets are on the chopping block. At first glance, it makes sense why Iger is looking to part with these assets since cord-cutting is an undeniable trend, and advertising dollars are moving to other entertainment mediums. The main issue is that linear tv assets are not extremely attractive acquisition targets making it difficult that Disney would find a buyer willing to buy their assets at an attractive valuation. While linear TV may not be growing it remains a profitable business that has subsidized the company’s foray into streaming, which has been rocky. While Disney+ had early success in driving subscriber growth the platform has stagnated over the last few quarters, losing over 6 million subscribers over the last two quarters, and remaining extremely unprofitable. By selling its linear tv assets Disney would be putting all its eggs into the streaming basket and likely using the capital generated by the sale to buy the rest of Hulu from Comcast. Streaming is becoming more competitive with large tech companies like Amazon, Apple, and Alphabet fighting for their piece of market share by creating their own content. These companies can treat streaming as a loss leader to build market share pressuring streaming platforms like Disney to keep pricing stable and ramp up content spending to keep up. Streaming may be the future of entertainment, but competition has never been greater than it is today and Disney selling its declining, yet profitable legacy TV business won’t fix the issues they are facing today.

The frenzy around AI chips may be at all-time highs but the largest chip manufacturers forecasts are showing the market a different story.  

With the hype around AI, many would expect that AI chips would be a considerable portion of the revenue mix for the largest semiconductor foundries in the world. In reality, AI chips remain a miniscule portion of the mix for the largest foundries and the current forecast shows this not changing in the next few years. Taiwan Semiconductor (TSM), the largest semiconductor manufacturer in the world reported in their latest quarterly that AI chips only generate 6% of total revenues today with forecasts of a low-teens revenue mix in the next 5 years. TSM expects AI chips to compound by 50% over the next few years driven by growing demand/backlog, but management is approaching AI cautiously. Capacity for AI chips remains tight as TSM balances today’s demand with its own internal forecast model. AI remains a big area of growth, but it’s not as big of a needle mover as many seem to believe and it won’t save the chip industry from a downcycle if we enter an economic recession. Much of the AI industry remains a black box with very little visibility into potential regulatory, social, and tech issues companies could face as they push the technology forward. As more data points are uncovered around the real-life impact of AI the more likely that this market hysteria will end in disappointment.