Weekly Reads - September 11, 2023
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Luxury demand seems to be heading to negative territory as the low-interest pent-up savings economic environment comes to a close and consumers look to trade down.
The CEO of Richemont had sobering words for the luxury market earlier this month telling shareholders that the company is in a squeeze as luxury demand slowly unwinds due to inflation and a reduction of discretionary income. This sent a shockwave across the market with top luxury stocks selling off as investors are becoming more pessimistic that these companies could continue to deliver attractive growth rates in a worsening economic environment. China accounts for around a fifth of industry revenues and has its own share of struggles which is a headwind for the luxury market as the region has been the growth driver for over the last decade. The sell-side has reacted to these developments by cutting estimates and price targets citing lower growth expectations in the near term. With many luxury companies trading at rich multiples compared to their domestic indexes any further negative news is likely to have an outsized effect on the stock prices of these companies going forward. As consensus growth rates start getting cut, it’s fair to expect that investor interest will wain as it’s not clear when this inflationary environment will end and markets like China will return to normalcy. The last few years were an unusual time for the world with stimulus money and pent-up-savings feeding unsustainable purchasing practices by consumers and its difficult to tell how much many of these discretionary companies were overearning during this time. While there is no doubt the luxury market will return back to full-on growth over time, we could be headed into a rocky period in which luxury purchases are delayed indefinitely until consumer savings can be rebuilt.
The Chinese Government’s ban of iPhones for government employees could kick off a tic-for-tac competition between the U.S. and China that could pressure U.S. companies’ ability to expand in the second largest economy in the world.
Apple lost $200 billion in market capitalization last week as the Chinese government looks to ban iPhones for Chinese State employees. Unnamed sources have said the Chinese government is pushing central government agencies not to use iPhones or other foreign-branded phones as tensions continue to rise between the U.S. and China. According to these unnamed sources, this ban widens earlier restrictions on iPhone usage for work as Beijing looks to reduce its dependence on U.S. technology. It is unlikely this ban will have a significant impact on short-term iPhone sales, but it sets the stage for further bans/restrictions on Apple products going forward. China accounts for 20% of Apple’s revenue making it the company’s most important country outside the U.S. With the U.S. government recently imposing blocks and regulations on U.S. tech investment in China and blocking TikTok on work phones for some government employees it’s difficult to see this recent ban as nothing more than revenge. This is coming at a tough time for Apple, which is getting ready for its launch of the iPhone 15 which is expected to compete against Chinese tech giant Huawei’s new phone the Mate 60 Pro. If the Chinese government meddles in the marketplace, we could see Huawei take market share curbing Apple’s growth ambitions in the country.
The sale of Hulu being pushed forward puts pressure on Disney to pay up for an important strategic asset which could weigh on the company’s already levered balance sheet moving forward.
In a surprise announcement, Comcast and Disney are moving up the date to start the sale of Hulu. Previously both companies would have started negotiations in January 2024, but talks have been rescheduled for September 30. Comcast currently owns one-third of Hulu and is looking to monetize the asset to help fund buybacks with the company looking to bolster their stock price after a tough two years. The Hulu sale will come at a minimum valuation of $27.5 billion but Comcast believes Hulu is far more valuable than that figure which was agreed to five years ago. As the second largest streaming service behind Netflix, Hulu is a unique asset with 48 million users. Disney is now on the hot seat working to get the best price possible price for Hulu so it can continue bundling the service with ESPN+ and Disney+. The bundle package from Disney reduces churn making it an important part of Disney’s streaming strategy going forward. The issue around the Hulu purchase is Disney’s ability to absorb more debt with the company already 3x levered (net debt to EBITDA)while continuing to invest in streaming which remains an unprofitable venture. With both companies expecting to hire appraisers for the asset we can expect a tough negotiation from two companies who have seen their fair share of struggles over the last few years.