Shaul Koral

Personal blog on investing and financial musings.

Amazon Ads and generative AI

In a March 2023 survey, Amazon found that among advertisers who were unable to build successful campaigns, nearly 75% cited building ad creatives and choosing a creative format as their biggest challenges. To tackle this Amazon Ads rolled out AI-powered features such as image generation and product descriptions.

Image generation is a generative AI solution designed to remove creative barriers and enable brands to produce lifestyle imagery that helps improve their ads’ performance. For example, an advertiser may have standalone images of their product against a white background, like a toaster. When that same toaster is placed in a lifestyle context – on a kitchen counter, next to a croissant – in a mobile Sponsored Brands ad, click-through rates can be 40% higher compared to ads with standard product images.

Coatue on AI: the coming revolution

Coatue released a 115 page presentation on the state of artificial intelligence. I’m including some of my favorite slides from the presentation, the full deck can be found here.

Current investment plan

The current consensus in the markets is that rates are “higher for longer”, which is a change from just a few months ago when the market was sure rates will start declining in Q4 of 2023. Bond yields are now up to historical levels not seen in over a decade.

The questions we need to ask ourselves are: will the fed continue raising rates or will it pause? Are we finally at peak rates and have multiples adjusted to these higher rates?

As far as I can see we pretty much have two scenarios for 2024/2025:

  • Rates stay “higher for longer”.
  • Something breaks and rates start coming down.

So what’s the investment plan?

  • If rates stay at these level and assuming multiples have already adjusted to higher rates, than stock prices of individual companies should track earnings per share growth.
  • If rates start coming down than we may even see some extra upside from multiples going up.

I do believe that the fed is finished raising rates for this cycle and so my investment plan is to be long cash flow generating tech companies and add some duration on top.

O’Reilly Automotive EPS history

O’Reilly Automotive released their 2023 Q3 results and I have to say that I’m in love with this company. I took a look at their diluted earnings per share growth over the years and it has been breath taking. Here are the numbers:

Amazon Sponsored Products

On August 16, 2023 Amazon announced that sponsored product ads will now start showing in premium apps and websites, including Pinterest, BuzzFeed, Hearst Newspapers, Raptive, and Ziff Davis brands like Lifehacker and Mashable to name a few.

Pinterest explained how this will work on their last investor day:

When a Pinterest user expresses commercial intent, say, searching for something as specific as green dresses or broader like hiking guides. We send a request to Amazon for relevant ads. Amazon gets that request and sends ad candidates back to us. We then decide which ads to show based on relevance and price blended with our first-party auction. And when an ad is engaged, Pinterest and Amazon share the revenue. So that’s how it works. But what makes this partnership especially exciting is that because these sponsored product ads are designed for search on Amazon, they’re well suited to perform on Pinterest, where we see similar behavior. So now brands and retailers who buy sponsored product ads on Amazon can expand their reach to capture similar commercial intent on Pinterest.

Amazon is pushing it’s Prime delivery hard. In the partnership announcement Amazon said that:

Sponsored Products only appear when advertised items are in-stock, and include trusted Amazon shopping attributes such as Prime delivery promise, ratings, and accurate pricing information

Amazon ads did $12 billion in revenue in as of 2023 Q3. Ads are becoming a huge business.

Heico (HEI, HEI.A) Management Quotes

I went over some of the companies quarterly earnings calls and wrote down some quotes from management that I found to be interesting. I really like how they view the company as owners.

“This management is really compensated because of our stock ownership, just like every shareholder out there. And we are completely aligned with every shareholder, if we selfishly make a good acquisition or we generate cash and it goes to the bottom line. If the stock price goes up, yes, we benefit because we’re the largest group of shareholders.

However, every shareholder benefits pari-passu with what we have. In other companies, many companies, I believe that the motivation is bifurcating. The management generally owns little equity and therefore, the management wants to grow the company top line, even if the operating margins are 8% or 10%, the top line can double. That requires the use of a lot of cash.

But the management who is generally there for 3 to 7 years, sees his or her compensation double. If they grow the top line from $2 billion to $5 billion, the managers’ compensation goes from $3 million to $6 million, whatever the number is. In our case, we own a large number of shares. So if the stock goes up 10 points, and I’ll define it for you. It’s public. If we own 12 million or 14 million (shares), and I don’t know the exact number, but if you include the 401(k) because we’re very concerned about the success and the financial stability of our people, our team members. If that goes up 10 points, we make $140 million or $200 million in equity value. Now do I care if my salary goes up $3 million, of course, not.”

Useful life of servers and network assets at tech companies

All the big tech companies extended the useful lives of their servers and network assets in 2022. This will result in a lower annual depreciation on their fixed assets. Here’s a summary:

Microsoft Q2’23 10-Q

In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate was effective beginning fiscal year 2023.

Texas Instruments (TXN) 2023 capital management update

Every year TXN has a capital management call where they update shareholders on their capital management long term targets and for the current year, they also look back at how they performed the previous year. I love that they do this and wish more companies would follow.

Link to the full deck and the webcast.

Here’s how they did in 2022:

Real Estate Investment Trust (REIT)

A Real Estate Investment Trust (REIT) is a type of investment vehicle that specializes in investing in real estate assets such as properties, mortgages, and real estate-related securities. REITs allow investors to pool their money to purchase and manage real estate properties, offering them the opportunity to invest in real estate without having to own physical properties.

Investment Checklist

This checklist is based on mistakes great investors such as Warren Buffett, Seth Klarman, Peter Lynch, and many more have made. The checklist focuses on four key elements:

1. Industry and business 2. Management 3. Financials 4. Risk factors

You don’t need to invest in any specific company. Your goal is to maximize the odds in your favor so that the potential upside is multiples bigger than the downside.

Always remember that if you lose 50% you will now need to earn 100% just to get back to what you already had.

The full checklist can be downloaded in a pdf format from here.

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