Wall Street's Friday tumble (-1.71%) isn't just another red day – it's raising alarm bells across trading desks. The S&P 500's dance with its 50-day moving average (6,010) coincides with systematic funds' trigger points, threatening $8B in potential selling. With options expiration stripping away half the market's gamma cushion, every move could pack extra punch.
Smart Money Sounds the Alarm: Hedge funds are voting with their feet, driving their Magnificent Seven exposure to April 2023 lows. Their $2.5B tech exodus ranks in the 99th percentile of five-year selling waves.
Warning Signs Flash Red:
· Services PMI slumps to 49.7 – a 25-month low suggesting economic cracks
· Long-term inflation expectations tick up ominously
· Fresh pandemic murmurs from Wuhan add to market jitters
· 20x+ forward earnings leave zero margin for error
Next week's gauntlet – PCE data, GDP figures, and NVIDIA's verdict – will test investors' mettle. With cushions thin and risks mounting, defense might be the best offense.
After years of regulatory winter, Chinese markets are thawing fast. The Hang Seng's surge signals more than a dead cat bounce – it's breathing fire into a potential secular turn.
Why This Time Could Be Different:
· January retail sales soared 8.5%, crushing 7% forecasts
· Industrial production steady at 6% confirms broad momentum
· Tech giants emerge stronger from regulatory reset
· Valuations at half global peers suggest asymmetric upside
Government's pivot from stick to carrot sweetens the pot. While US-China tensions and property woes linger, current prices already discount worst-case scenarios. With global investors chronically underweight, any positive catalyst could ignite a meaningful rally.
The Chinese e-commerce giant's latest results suggest patience is finally being rewarded. While headline revenue growth of just 0.5% might ordinarily sound alarm bells, beneath the bonnet Alibaba's engine is revving up in all the right places.
Take cloud computing. For six straight quarters, AI-related revenues have posted doube-digit growth. This matters. As Chinese companies seek domestic alternatives to western cloud providers — partly by choice, partly by decree — Alibaba stands to become the AWS of the China. The comparison is not hyperbolic; like its American counterpart, Alibaba can cross-subsidise cloud investment with profits from its e-commerce cash cow.
That traditional business is showing signs of fresh vigour too. Customer management revenue at Taobao and Tmall rose 9%, vindicating management's controversial decision to sacrifice margins for market share. Operating margins across the group have actually expanded, from 13.7% to 14.8% over nine months.
International expansion remains a money pit, with AliExpress and Trendyol burning cash in pursuit of growth. But with $5bn in quarterly free cash flow, Alibaba can afford to play the long game. Share buybacks, already trimming the float by 7% annually, provide a floor for the stock.
At 14 times forward earnings, Alibaba trades at a steep discount to western peers. With Chinese regulators pivot to benevolence – regulatory risk recede, the valuation suggests excessive pessimism. As AI and cloud services grow from footnotes to headlines, a re-rating looks overdue. Sometimes the best investment cases are hiding in plain sight.
Travel's biggest online platform is checking in to the AI revolution with measured confidence. Booking Holdings' latest results suggest the $166bn group has good reason for its sangfroid about generative AI's impact on its business model.
The company's fourth quarter numbers beat expectations across the board. Revenue rose 14 per cent to $5.47bn while adjusted earnings per share jumped 30 per cent to $41.55. More telling is the acceleration in alternative accommodation bookings to 19 per cent growth, outpacing its largest rival for the fourteenth time in fifteen quarters.
Bears worry that AI agents will disintermediate online travel agencies, sending consumers directly to hotels. They should look at history. Booking has survived multiple predicted disruptions, from hotel direct booking engines to Google's travel ambitions. The company's merchant mix shift - now 59% of bookings, up 9% year-on-year - provides a powerful moat through payment infrastructure and customer relationships.
Monetization will be key for cash-burning AI platforms. Booking's combination of trusted brand, payment rails and deep travel expertise makes it an attractive partner rather than target. Early partnerships with AI players like Operator support this thesis.
The group trades at 18 times forward earnings, below its five-year average. A new $20bn buyback authorization signals management confidence. While a transformation programme targeting $400-450m in savings suggests acknowledgment of margin pressures, reinvestment in AI capabilities and the "connected trip" vision shows offensive rather than defensive positioning.
Booking's scale advantages in data and economics look sustainable. For investors worried about AI disruption, this booking may be worth keeping. The market appears overly focused on theoretical threats while undervaluing concrete evidence of execution and adaptation.
The numbers are in for Latin America's answer to Amazon and they tell a compelling story. Mercado Libre's fourth-quarter results showcase a business firing on all cylinders, even as regional economies face headwinds. The e-commerce and fintech powerhouse beat analyst expectations across most metrics, with GAAP earnings per share of $12.60 crushing estimates of $8.05.
What's particularly striking is the company's ability to maintain momentum while navigating Argentina's economic turbulence. Despite rampant inflation, items sold in Argentina grew 18% YoY, accelerating from 10% in the previous quarter. The shift to lower-priced consumer staples may be crimping average basket sizes, but it's driving higher purchase frequency - a long-term win for customer retention.
The financial services arm, Mercado Pago, is proving to be more than just a side bet. Assets under management swelled 129 percent to $10.6 billion, providing ample funding for credit operations. The credit card business, crucial to the company's digital banking ambitions, is showing promising signs. It briefly became the most-used card on the marketplace in Brazil during the holiday season, despite macro concerns in the region.
But rapid growth comes at a cost. Credit loss provisions jumped 77% year-on-year as the company aggressively expanded its card business. The share of credit cards in the loan book increased from 32 to 40 percent. Management argues this is a natural consequence of front-loading provisions for new customers. Still, investors should watch this metric carefully.
Trading at 50 times estimated 2025 earnings - likely to settle around 45 times after revisions - the stock isn't cheap. But with e-commerce penetration in Latin America lagging the US by a decade, the growth runway remains substantial. The company's logistics network - its "infrastructure moat" - makes the premium easier to stomach.
The shift from early-stage growth to profitable scale is often treacherous. Mercado Libre is navigating it with aplomb. While the valuation demands continued execution, the company's dominant market position and expanding financial services make it a compelling bet on Latin America's digital transformation.
Currency headwinds have a way of obscuring underlying performance. For Nu Holdings, Latin America's digital banking disruptor, a 26-percentage point foreign exchange hit - the largest in over two years - masked what was otherwise robust operational execution.
The fintech now serves as Brazil's third-largest financial institution by customer count, with 58% of the adult population. More telling is its expansion beyond its home market. In Mexico, Nu has captured 12% of the population just six years after launch. Colombia, its newest market, already ranks among the top five deposit-takers.
Yet this rapid geographic expansion comes at a cost. Net interest margins face pressure as Nu pays above interbank rates to attract deposits in new markets. The shift toward secured lending - now 15% of originations - also weighs on yields, though improved credit quality partially offsets this through lower loss provisions.
The strategy makes sense. Trading near-term margin optimization for market share in a region ripe for digital banking penetration could prove prescient. Nu's cost-to-serve remains remarkably low at $0.80 per customer monthly, allowing it to offer better rates than incumbents while maintaining a 46 percent gross margin.
Trading at 22 times forward earnings with 33% growth expected this year, the valuation appears undemanding for a company with Nu's market position and expansion runway. The key question is whether it can replicate its Brazilian success across Latin America while managing credit quality through potential macro headwinds.
Investors in Southeast Asian super-app Grab have endured a wild ride since its 2021 Nasdaq debut. The latest quarterly results suggest more turbulence ahead. Shares dropped 10 percent after the Singapore-based company reported fourth-quarter earnings that met, rather than beat, expectations. The market's reaction betrays deeper concerns about Grab's path to profitability.
Grab's ambitions stretch far beyond its ride-hailing roots. The company has transformed itself into a regional powerhouse spanning mobility, food delivery, and financial services across eight countries. Its "everything app" strategy mirrors successful Chinese platforms. Yet unlike its profitable Chinese counterparts, Grab continues to sacrifice margins for growth.
The numbers tell a story of expansion at a cost. While revenue growth accelerated and beat guidance by 4.1%, both partner and consumer incentives ran higher than expected. The latter exceeded estimates by 11%. Management frames this as temporary investment in new products. Skeptics see it as evidence of persistent competitive pressure, particularly in Indonesia where rivals Gojek and Sea Limited maintain aggressive postures.
Grab's financial services ambition adds another layer of complexity. The company is shifting from partner-funded loans to balance sheet lending through its digital banking ventures. While this could enhance profitability — Grab claims its underwriting benefits from superior customer data — it also increases risk exposure just as Southeast Asian central banks begin to diverge on monetary policy.
The bull case rests on Grab's dominant market position and broad product suite. Its GrabUnlimited subscription program, which drives four times higher order frequency, demonstrates the platform's sticky potential. With only 5% monthly penetration in Southeast Asia, runway for growth appears substantial.
Trading at 37 times forward earnings, Grab's valuation suggests investors still believe in the super-app vision. But the company's conservative 2025 guidance — missing consensus estimates for both revenue and EBITDA — indicates a bumpier path ahead. Until Grab can demonstrate sustained profitability without heavy subsidies, the stock may continue to sputter.
The restaurant technology platform once famed for breakneck growth is now serving a more balanced meal. Toast's fourth-quarter results confirm what investors have hungered for: the company can make money while maintaining momentum.
Toast shares have fallen 5 per cent after hours, but this reflects an earnings per share miss ($0.05 versus $0.17 expected) rather than fundamental weakness. The company reported record location growth, with 7,000 net additions in the quarter bringing the total to 134,000, a 26 per cent year-on-year increase. More significantly, Toast achieved its first full year of GAAP profitability.
The numbers tell the story of a company that has successfully evolved from a growth-at-all-costs model to a sustainable business. Recurring gross profit streams — the metric Toast prefers — increased 39 per cent year-on-year. Gross payment volume hit $42bn, up 25 per cent, despite a slight decline in per-location spending. Adjusted ebitda reached $111m with margins expanding to 28 per cent, an 18 percentage point improvement from the previous year.
This marks a major transition for a business that spent years convincing investors that massive losses were the price of market leadership in restaurant technology. The pandemic accelerated adoption of Toast's platform, which combines payments, point-of-sale, and back-office functions. Now the company has proven it can convert scale into profits.
The guidance for 2025 suggests confidence in continued balanced growth: 23-25 per cent increase in recurring gross profit and adjusted ebitda of $510m-$530m, representing a 30 per cent margin. This puts Toast at the lower end of its long-term margin target range ahead of schedule.
Toast trades at roughly 7 times this year's expected revenue, significantly below the 15-20 times multiples it commanded in 2021. Yet the company has demonstrated impressive unit economics, with customer acquisition payback periods in the mid-teens months, and is rapidly expanding beyond its core small and medium-sized restaurant segment into enterprise clients, international markets, and adjacent retail verticals.
For investors, the question is whether Toast's vertical focus provides sufficient defensibility in an increasingly crowded payments and software market. The company's leadership transition, with co-founder Aman Narang replacing Chris Comparato as CEO, has been seamless. But modest SaaS ARPU growth (5 per cent year-on-year) suggests extracting more value from existing customers remains challenging.
Toast shares may look fairly priced given current growth rates, but the company has garnered something more valuable than a premium multiple: credibility. Having delivered on profitability promises while maintaining solid growth, management has earned the right to be taken seriously when it speaks of expanding its total addressable market. That's a recipe worth savoring.
· Microsoft CEO prioritizes 10% global economic growth through AI over achieving artificial general intelligence (AGI), rejecting the winner-takes-all narrative in AI markets.
· Company announces "transistor moment" breakthrough in quantum computing with stable topological qubit, targeting million-qubit computer by 2027-2029.
· Focus shifts from speculative AGI development to practical AI deployment with governance frameworks, exemplified by "Muse" world model for generating responsive environments.
Podcast link (https://www.youtube.com/watch?v=4GLSzuYXh6w)
· AI model development is becoming commoditized - with sufficient compute and expertise, new entrants like xAI can quickly reach state-of-the-art performance
· Distribution and product quality remain critical differentiators, as shown by ChatGPT's success despite increasing model competition
· Major companies continue massive investments in AI development and compute infrastructure, indicating strong belief in potential superintelligent AI breakthrough despite proliferating competition
Link: (https://stratechery.com/2025/grok-3-the-nvidia-shortcut-competitive-implications/)
Next week's data deluge and NVIDIA's earnings set the stage for a pivotal market moment. With technical support wavering and macro clouds gathering, investors face a high-stakes test of conviction. China's resurgence offers a potential hedge, but selectivity remains paramount.
This newsletter is for informational purposes only and should not be considered as investment advice.
By
Kristal Advisors
February 22, 2025
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