🗞 Why This Small-Cap Grocery Stock Is Up 6X in 5 Years

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• ☢️ Big Tech Goes Nuclear

• 📺️ Netflix Reports Record Profits

• 🥬 A Peek at the Most Profitable Grocer in America

And much more, let’s dive in!

News of the week

• ☢️ Big Tech Goes Nuclear: On Wednesday, e-commerce and cloud computing giant Amazon announced that it had signed 3 agreements with a consortium of public utilities to support the development of several nuclear energy projects, including the construction of several new Small Modular Reactors. This announcement comes amidst heightened AI-driven customer demand for Amazon’s data center business.

  However, Amazon isn’t the only “hyperscaler” exploring nuclear as a potential energy source. Last month, Microsoft announced a deal with Constellation Energy to help rebuild the reactor at the Three Mile Island nuclear plant in Pennsylvania. And on Monday, search giant Alphabet announced that it will be buying power from nuclear energy company Kairos Power to help meet its growing data center demand.

  Google’s Senior Director of Energy and Climate stated “We believe that nuclear energy has a critical role to play in supporting our clean growth and helping to deliver on the progress of AI.”

  VanEck’s Uranium and Nuclear ETF is up 26% in the last month.

• 🛫 Boeing Raises Much Needed Capital: Boeing has been dealing with a Union strike for a little more than a month now. Despite furloughs, limited employee travel, and other cost saving efforts, it’s estimated that Boeing has lost several billion dollars in aggregate over the last month.

  Unfortunately for Boeing employees and shareholders, it doesn’t appear that the struggles will be stopping any time soon. According to S&P Global estimates, every week that this strike endures, Boeing loses roughly $1 billion. This has led to more drastic steps as of late.

  Last Friday, Boeing announced that it will be laying off 10% of its workforce or ~17,000 jobs. But it doesn’t stop there. This Wednesday, the company announced plans to raise $15 billion through a combination of equity sales and a convertible bond issuance.

  Boeing’s stock rose 4% on the news.

Earnings Roundup

• 📺️ Netflix: The global leader in video streaming reported earnings on Thursday that came in ahead of expectations. Netflix added 5.1 million new memberships during the quarter, helping propel revenue to $9.8 billion, a 15% increase compared to a year prior. Subscriber growth came from all geographies except Latin America where price increases impacted net adds during the quarter.

  On top of the strong subscriber growth, Netflix reported record operating margins of 29.6% compared to just 22.4% a year ago. In fact, profit margins were actually slightly ahead of where management wants them in the medium term.

  On the company’s press release, Netflix management stated “after delivering outsized margin improvement in 2024, we want to balance near term margin

  growth with investing appropriately in our business.”

  Netflix’s stock closed up 11% after earnings.

• 🧑‍💻 Taiwan Semiconductor: The global leader in advanced semiconductor manufacturing reported better than expected earnings this week. The company delivered 36% growth in revenue coupled with expanding profit margins.

  Since TSMC manufactures microchips on behalf of some of the world’s most advanced technology companies like Nvidia, AMD, Apple, and others, they’ve unsurprisingly been one of the major beneficiaries of the recent boom in AI-related demand. And that demand doesn’t seem to be slowing down either. On their quarterly conference call, Taiwan Semiconductor’s CEO stated “We continue to observe extremely robust AI-related demand from our customers throughout H1 2024”.

  Taiwan Semiconductor’s stock closed up 5% this week.

• 👜 LVMH: The largest luxury company in the world by market cap reported underwhelming earnings on Wednesday that sent the stock dropping by more than 4%.

  The conglomerate which is home to brands like Louis Vuitton, Dior, Bulgari, and others reported a 3% drop in organic sales driven primarily by weakness in China, which accounts for more than a quarter of their sales.

  LVMH management gave cautious guidance amidst a “uncertain economic and geopolitical environment” but expressed some optimism on the earnings call. CFO Jean-Jacques Guiony stated “The only thing we know that when the business is bad, usually, it's good thereafter.”

  LVMH stock currently trades at a Forward P/E of ~21x. 

The Most Profitable Grocery Stock in America

Sprouts Farmers Market (SFM) is up 530% over the last 5 years, making it the best performing grocery stock in North America throughout the last half decade. But with just over 400 stores located primarily throughout the Southwestern US, what is it that makes this relatively niche concept so special?

When looking at Sprouts compared to peers, there’s one number that really stands out:

The grocery industry is intensely competitive. Product differentiation is minimal, suppliers tend to have the bargaining power, and most customers are price sensitive. Yet, last quarter, Sprouts generated a whopping 38% gross profit margin and ~6% operating margins, which is almost double most of its publicly traded grocery peers. So why the big discrepancy?

For starters, Sprouts Farmers Market operates significantly smaller stores than big-box grocers like Kroger. According to FinChat, the average Sprouts store comes in at just under 28,000 square feet, whereas Kroger stores average upwards of 100,000 square feet. So Sprouts is able to generate significantly higher sales per square foot than most of its competitors.

But perhaps more importantly, Sprouts targets what it calls “health enthusiasts”. Roughly 70% of the items that Sprouts sells are attribute-based — meaning gluten-free, vegan, organic, etc. So healthiness is shoppers primary concern, cost comes second. This allows Sprouts to order from a network of local farmers and suppliers instead of negotiating with the big name brands, thus giving Sprouts a greater cut of most of the items it sells.

This unique, health-focused concept has really resonated in most of Sprouts core markets.

Additionally, under Sprouts’ new management team, the company has been reducing share count at an accelerated pace. At the same time, the company has drastically improved its same-store sales growth from its post-pandemic lows.

This has forced investors to reconsider what Sprouts should trade for. Over the last 3 years, Sprouts valuation has more than tripled.

Meme of the week

A Short Thesis in One Image