Profitability, price-stickiness, and crypto-flows in the era of [no]-tightening
goodish news on the margin front, baddish news on the auto-front, a portfolio update, and there is no tightening, crypto-edition
By the time you read this, it will be Friday, so FREE POST [Update: I accidentally scheduled the post for Saturday, but I just fixed it, so it’s still Friday, but later than I intended!]
of profitability (and hooray for smallcaps)
of unprofitability (and an even better time to go public)
Random Walk portfolio update, an interlude
price-stickiness and underwater equity (auto loans, edition)
crypto flows, a sign of excess of liquidity (reinforcing an excess liquidity hedge?)
👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. 👋👋👋Random Walk has been piloting some other initiatives and now would like to hear from broader universe of you:
(1) 🛎️ Schedule a time to chat with me. I want to know what would be valuable to you.
(2) 💡 Find out more about Random Walk Idea Dinners. High-Signal Serendipity.Profitability, price-stickiness, and crypto-flows
Semi-related musings on profitability (and unprofitability), sticky auto-prices (and underwater equity), a portfolio update, and crypto flows
Of profitability (reprise)
Profit-margins are pretty important right now.
Just a quick recap for some context. Profits are always important, but they’re more importantly recently because:
very expensive stocks are expensive because they’re priced to earnings growth, and if earnings growth were to slow, then stock prices should come down (maybe);
plus, margin expansion is really the only growth lever left to pull, given that customer growth (in the aggregate) isn’t growing much, and income growth has slowed, as well. If you can’t get more customers and/or sell more stuff to the ones you got, then the only ‘up-and-to-the-right’ move to make is do more with less, or at least, do the same with less (or do less with the same, i.e. shrinkflation);
at the same time as margin-expansion takes center-stage, it’s increasingly an uphill battle, given the aforementioned slowing income growth, plus the fact that the low-hanging fruit has already been picked, but also throw-in the recent bottom-line expense pressure coming from tariffs, reshoring, and the big one: AI Capex;
that last one is especially important because the ‘promise’ of AI (which justifies all that Capex) is that it makes firms more productive and efficient, which should (at some point) translate into fatter margins.
Anyways, Random Walk isn’t the only one to expect some margin-contraction, but the data and anecdata have been a mixed bag.
Plus, necessity is the mother of invention, and bet against private enterprise at your peril—recall that American firms got way leaner, meaner and more profitable the last time they were supposed to rollover and die, so who’s to say they can’t do it again.
Throat-clearing aside, this was an illustrative chart on the current state of margins, for the largest companies, at least:
Two things jump out:
one is the serial incline in tech margins, which we already knew, but really can’t be emphasized enough. AI capex will bring free cash flow and operating margins down (or at least flat), but the core goods and services are incredibly profitable;
the only two sectors that appear to have broken trend are (1) healthcare (much less profitable); and (2) consumer discretionary (much more profitable).
Healthcare’s declining profitability likely has to do with the price controls Random Walk wrote about last week (and here), so query whether mean-reversion (to the upside) is on its way. That’d be my bet.
Consumer discretionary’s increasing profitability likely has to do with all the low-hanging fruit-picking that happened during the recession-that-wasn’t, i.e. 2024 reaped what 2023 hath sewn. That too should experience some mean-reversion (to the downside).1
Here’s another big-picture cut, and perhaps some reason for cautious optimism:
Earnings growth from the ‘rest of the field’ is accelerating (even if it’s half of what the slowing Mag 7 deliver).
Small caps are experiencing a mini-renaissance (even if Mid-Caps are not), which is good because small caps is generally the land of the less- or un-profitable.
Also, lol Europe.
Again, nothing earth-shattering here, so much as confirming what we already knew and/or suspected.
ICYMI
Mini portfolio update (interlude)
Just to chart a throughline from the observations above . . .
From my perspective, Random Walk stays long $UNH, is avoiding consumer discretionary like the plague (except at the cheaper/value-end), and is curious/optimistic about the prospects of (certain) smaller companies.
As an aside, Random Walk has been very delinquent in delivering a portfolio update, but my three smallcap plays are working nicely.
AROC 0.00%↑ is up 10% (40% annualized) ;
$TASE (Tel Aviv Stock Exchange) is up 25% (100% annualized); and
LQDT 0.00%↑ (Liquidity Services), my most recent position, is a fun little business I’ve been meaning to write up, is up ~5% (60% annualized).
1 and 3 are my ideas, while #2 I lifted from the Sohn Conference.
Good times.
Of unprofitability
Back to the show.
On the subject of profitability, it’s true that investors are putting an historically high premium on earnings growth, which is part of why it’s an amazing time to go public, if you’ve got something to go public with . . .
But this too was amusing:
Unprofitable tech has been on a 2 month bull-run, relative to profitable tech.
See, it’s an even better time to go public than I thought!
Notable winners include OpenDoor Technologies Inc., a so-called meme stock championed by Canadian hedge-fund manager Eric Jackson, which has soared by more than 280% since the end of July. IonQ Inc., a quantum-computing company, is up more than 80% over the same period, while SoundHound AI, Xometry Inc. and Lemonade Inc. have gained more than 50%.
There’s no real rhyme or reason to this list.
OPEN 0.00%↑ is a meme-stonk (with a cool company at the core, but not at this price), Xometry is a skilled labor play, and Lemonade is just insurance.
Idk. But, if you want to be worried about frothiness in the stock market, then worry away. I was one thing when profitable companies were ripping, but loss-makers? Run for the hills.
Well, don’t worry too much, though, because compared to frothiness prior, we ain’t seen nothing yet:
Goldman’s unprofitable tech basket ripped ~2.5X as high when pandemania broke out for real.
Make of it what you will.
Of price stickiness, and underwater equity
The used-car marketplace CarMax KMX 0.00%↑ caused a stir this week when it reported this:
A big ooo-pah all around.
The auto industry is flashing warning lights on the state of the U.S. economy. Automakers’ profits are getting squeezed by tariffs. A subprime auto lender recently collapsed, and some car retailers are warning that consumers are pulling back.
CarMax, the biggest seller of used cars, said Thursday that its sales and profits plunged in the latest quarter. The company’s results, which sent its stock tumbling as much as 25%, is the latest in a series of unsettling developments in an industry under strain from President Trump’s tariffs and carmakers’ recalibration of expensive electrification strategies.
“The consumer has been distressed for a little while. I think there’s some angst,” CarMax Chief Executive Bill Nash told analysts on a call Thursday. Consumers with better credit profiles “seem to be sitting on the sidelines,” Nash said . . .
CarMax, which operates about 250 dealerships nationwide, said it was hurt in part because some shoppers rushed to buy earlier in the year because of uncertainty about tariffs, reducing demand in the most recent quarter.
Profits at the company’s finance arm were also down, as the performance of loans originated in 2022 and 2023 deteriorated and the company increased its provision for losses. CarMax said it would cut $150 million from selling, general and administrative expenses.
A big drop-off in sales, a headfake from front-running, and growing losses on ‘22-’23 vintage loans.
Is that a flashing warning sign for the economy?
Random Walk doesn’t think so, but it may be a flashing warning sign for big, expensive, heavily financed durables.
Or maybe Carmax is just bad at life. Idk.
I do know that the “subprime default” problem is more of an LTV issue than a credit issue—that was true then, and it’s most likely true now:
Lease equity continues to decline since the peak of the chip shortage zirp-driven run on prices.
Car prices peaked in ‘22, but as rates came down, the price of a new car (net of incentives) came down with them, meaning those leases are increasingly underwater. Lease equity hit $0 in January ‘25 (according to Cox). Little wonder that people are walking away from their autoloans.
Anyways, none of that was really the point.
The point was this chart on the average monthly transaction price (excluding incentives) for new cars:
The price of new cars has been remarkably stable after hitting its 2022 peak, right?
Sure, there’s been some shimmies and shakes, but dealers have kept the “transaction price” for a new car at- or around $49K for ~3 years now.2
So sticky!
I’m sure someone with more specific knowledge of the auto industry could explain why specifically it’s so important to have sticky car prices, but man, that’s sticky.
Crypto flows
And finally, for no other reason than I liked the charts, Bitcoin had a bit of a sell-off earlier this week:
At ~$110K, BTC is back to where it was in July, which still ain’t bad.
Random Walk isn’t exactly a true $btc bear, but I’m not exactly a bull, either. Mostly, I see $BTC as some combination of contraband, a speculative risk-asset, and an apocalypse hedge, that also happens to attract some very smart, talented people, who have built and executed some very clever things.
But I’m also not a hater, so I see no reason to dwell on it one way or another, and hey, vice has often been at the avant-garde of important technological and economic change.
That said, to thematically close the loop, Bitcoin’s price ascent is also almost surely a sign that there’s “too much money out there,” (which, ironically, is the basis for the apocalypse hedge that’s ‘rationally’ driving BTC’s value up).
Take a look at these visualizations of BTC inflows of “Realized Cap” (which I understand to be fresh capital to buy preexisting supply of BTC):
BTC experienced massive net flows during (1) Pandemania; and (2) 2024 to the present.
Viewed another way, those two ascents look like this:
The 2024 climb far-exceeded the 2021 climb (which far exceeded the earlier climbs).
Glassnode estimates that the most recent cycle includes $678B in net-inflows. Combine that with the historic run on Gold, and it seems hard to conclude that conditions have been remotely “tight” for the past year or so.
If anything, it’s an indication that there’s been so much money sloshing around, that people feel compelled to stuff it somewhere other than dollars . . . out of fear that there are too many dollars.
Other interesting reads
Three questions from Neel Kashkari (Minneapolis Fed President). Nice effort at ‘thinking in public’ by Kashkari, and mostly focused on the right things. He does ignore the herd of elephants in the room, which is the Federal Government’s terminally rising capital needs, and spends a bit too much time on tariffs.
Shift from coal to LNG hurt West Virginians and, rather than leave, they moved even less than before. Even if net-gains are positive, there can still be net-losers. Also, we need more pioneering. It should be easier to migrate. No, it’s not the housing costs.
Cosmetic procedures that offer big results and minimal downtime. Gosh, there’s an awful lot of results-driven innovation in elective healthcare, and cosmetic surgeries are becoming cheaper and more various, to meet the patient’s needs. I wonder if there some way we could replicate that. Such a mystery.
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
Random Walk is an idea company dedicated to the discovery of idea alpha. Find differentiated data, perspectives and people, and keep your information mix lively. A foolish consistency is the hobgoblin of small minds. Fight the Great Idea Stagnation. Join Random Walk. Follow me on twitter. Follow me on substack:
Although, I suppose, discretionary could go “K-shaped” by training its fire upmarket (i.e. sell less stuff to the very wealthy), while diverting the rest of its attention even further downmarket (i.e. Almighty Cautious Consumer reigns even more supreme).
Like homebuilders, car dealers have managed the price declines using discounts:
Discounts as a % of “transaction price” have been running ~7% for the past year.