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Capital Calls

13 May 2021 By Breakingviews columnists

Concise insights on global finance.


– Disney

It’s a small world after all. When Walt Disney officially launched its flagship streaming product in November 2019 it was on a hot streak. Shortly after its debut, homebound consumers signed up to see Star Wars movies and Marvel superheroes. The market had great expectations, too, which until Thursday Disney had mostly met. Disney’s shares rose 35% since the official debut of Disney+ to date.

But the tide seems to be turning. The company said in its earnings report that it had almost 104 million Disney+ customers for the quarter ending April 3. Analysts were expecting nearly 6 million more, according to FactSet. That sent shares down around 4% in after-hours trading, despite that users almost tripled.

Still, Netflix should have been a bellwether. In April it missed its own estimates, partly because of competition coming from the mouse house. But that cuts two ways. The Magic Kingdom isn’t protected from larger forces that have afflicted rivals. (By Jennifer Saba)

Spring cleaning. Airbnb is tidying up. The home-sharing app said on Thursday that revenue rose by 5% in the first quarter from the same period a year ago. But its net loss nearly quadrupled to $1.2 billion in part because of early debt repayments. The pricey cleanse is worth it.

Airbnb struggled at the beginning of the pandemic. A year ago, it laid off 1,900 employees and slashed marketing as travel abruptly halted. It issued $2 billion in debt with an average interest rate of a whopping 10%.

But the pandemic turned out to be less bad than expected for the company, and it is quickly putting darker days in the past. Paying down debt last quarter resulted in a nearly $700 million hit. But it freed up the company to issue new debt at a lower price now that things have turned around. With $487 million in free cash flow last quarter, that might not even be needed. (By Gina Chon)

Pay the piper. Facebook has faced the music with its digital-currency project. The initiative originally known as Libra drew an outcry by global regulators worried that the $858 billion social network could threaten financial stability and draw illicit activity. To appease them, it said on Wednesday it will set up shop in the United States instead of Switzerland.

Facebook has partly answered its crypto critics. U.S. lawmakers blasted the company in 2019 when it said its plans for several digital currencies would be regulated by Swiss authorities. It looked like a way to avoid American oversight when the social network was under increasing Washington scrutiny. Now it will register with the U.S. Treasury and Californian bank Silvergate will issue the stablecoin.

The problem is it’s still known as a Facebook project, despite rebranding the digital-currency project Diem. Mark Zuckerberg’s firm faces antitrust lawsuits, data leak probes and other regulatory headaches. Moving Diem to the United States will alleviate some watchdog concerns, but Facebook itself might be the bigger obstacle to success. (By Gina Chon)

Black Schwan. Severin Schwan isn’t afraid to make a point. The chief executive of $290 billion Roche lambasted proposals to temporarily waive patent protection on Covid-19 vaccines in a Financial Times interview, arguing that it would be a “catastrophe”, and likening it to the nationalisation of the pharmaceutical sector in East Germany during the 1950s. That comes after U.S. President Joe Biden threw his weight behind the idea to help boost supply of jabs to poorer countries.

Those are bold words, given the current very real virus catastrophe in countries such as India. Still, Schwan isn’t totally wrong. A loss of patents could discourage pharma companies from developing drugs in future. And getting vaccines to poorer economies faces bigger challenges than patent law, namely manufacturing bottlenecks and rich countries hoarding drugs. Still, Schwan’s comments take the debate in a risky direction. Governments played a big role in funding the development of Covid-19 vaccines. Faced with the rising costs of drugs, they might soon wonder whether nationalisation is quite such a disaster. (By Neil Unmack)

Tasty slice. Domino’s Pizza has delivered, and Bill Ackman wants a reorder. The hedge fund manager revealed on Wednesday that his fund, Pershing Square Capital Management, has taken a 6% stake in the Michigan-based pie maker, touting its delivery infrastructure. Breakingviews saw Domino’s potential back in late 2017 and again last year.

Had Ackman invested on the earlier of those two occasions, the holding would have already returned twice as much as the S&P 500 Index and more than the technology-focused Nasdaq Composite Index, too. That’s without the special shareholder-activist sauce he sometimes adds, of course. Over the same period, Chipotle Mexican Grill, another Pershing Square investment, put the performance of Domino’s stock in the shade.

The pizza company’s price-to-forecast earnings multiple, at around 30 times according to Refinitiv, is lower than rival Papa John’s International and far short of Ackman’s burrito joint. Even without much effort, he can probably make a tasty meal out of Domino’s. (By Lauren Silva Laughlin)

Surf’s down. Alphawave IP’s overpriced IPO is leaving investors washed up. Shares in the Canadian chip designer fell 19% on their debut on Thursday morning to 332 pence, a wipeout compared to their 410 pence offer price. That had given it a putative market value of $4.3 billion. Embarrassingly, it now trades below the lower end of the price range indicated by bookrunner JPMorgan.

Solely blaming an inflation-induced tech selloff won’t wash either. Shares in recently listed cybersecurity firm Darktrace jumped 5% on Thursday. And unlike fellow IPO flop Deliveroo, whose attempts to position itself as a state-of-the-art kebab-delivery disruptor stretched credulity, Alphawave’s cutting-edge semiconductors should be selling well given the global chip shortage. Instead, investors appear to have been put off by a foamy valuation. Even after Thursday’s fall, Alphawave trades at 24 times estimated 2023 EBITDA including net cash, according to a Breakingviews calculation, a premium to U.S. rival Synopsys. There may more rough water ahead. (By Christopher Thompson)

Reality check. Burberry is making a financial faux pas. The British luxury brand, known for its iconic “nova check” pattern, on Thursday reported a 10% drop in sales for the year to March 27 to 2.3 billion pounds, worse than analyst forecasts of a 9% drop. Even though adjusted operating profit was a positive surprise, at 396 million pounds rather than the forecast 378 million pounds, shares plunged as much as 10%.

Burberry’s cautious outlook may be to blame. It said its adjusted operating margin, which rose 50 basis points to 16.9% in the year ending March 2021, would be pressured by the return of some costs and increased investment. And while Burberry is trying to sell clothes with fewer markdowns, it has been opening more discount outlets to offload unsold stock. Moreover, Burberry gave little detail on how calls to boycott the brand in China over Xinjiang cotton had affected sales after March. That’s plenty for investors to worry about. (By Dasha Afanasieva)

Schooled. China’s wildly popular private tutoring industry is getting a surprise schooling from officials. Authorities are planning a crackdown on before-and-after school tutoring for kindergarten to pre-college students, according to a Reuters exclusive. The aim is to help boost the country’s birth rate by lowering living costs.

Tougher government regulation has already forced smaller companies out of the market but that has piled pressure onto bigger ones like $23 billion New Oriental Education & Technology, which fell nearly 6% on Thursday, and Tencent-backed Yuanfudao, valued at almost $16 billion in October.

Any formal ban on tutoring, either on or off campus, will force a radical rethink of business models. Valuations for education technology companies in the People’s Republic have tracked higher than those of their global peers. TAL Education, for example trades at 59 times forward earnings. As for anxious parents keen to get their children through the notorious gaokao exams and into top universities, they will simply find ways to skirt the rules. (By Sharon Lam)

Green, no envy. Tata Power is charging up alongside its energy rivals. Long viewed as a problem spot in the wider Indian salt-to-cars conglomerate, the $5 billion company’s net profit was flat-ish in the March quarter. Yet the stock is up 275% in the last twelve months. Boss Praveer Sinha looks to further trim debt by cashing in on a renewable energy business he’s counting on to power growth. Green assets account for about one fifth of the company’s sum-of-the-parts value, per IIFL Securities analysts.

The company was cryptic about next moves on its earnings call, but an initial public offering looks likely after plans to bring outside investors into its renewables business stalled. India’s rapid expansion of clean energy capacity is fuelling corporate activity; Adani Green sold a 20% stake in itself to France’s Total in January, while Goldman Sachs-backed ReNew Power is going public in New York by way of a merger with a blank-cheque firm. Judging by those deals, a listing is more hassle but a decent plan B – and may help Tata retain more upside in a hot sector. (By Una Galani)


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