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- [00:02]
John Grotteau
Hear that? That's me in Tokyo learning to make sushi from a master. How did I get here? I invested wisely. Now the only thing I worry about is using too much wasabi. Get where you're going with spy, the world's most traded etf. Getting there starts here with State Street Investment Management.
- [00:18]
State Street Investment Management Announcer
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- [00:32]
Anne Barry
Robinhood, the OG retail trading platform is looking to diversify. But will Wall street go all in on a financial super app? Mickey D's Squares off with GLPS we look at how the fast food giant is prepping for the super sized adoption of weight loss, drugs and Meta. I dig into the company's SEC filings and financial engineering that's kept a $27 billion data off its balance sheet and what this may mean for a bubble Fizz. For Thursday, February 12, it's Blue Markets Daily and I'm Ann Barry. More market details to come. But first, meta A fascinating 24 hours for the company with one headline grabber. That's hedge fund manager Bill ackman revealing a $2 billion stake in the social media giant as of the end of December representing a whopping 10% of his fund, Pershing Square Capital. I mean, that really is a lot of concentration. That's a vote of confidence in the stock that he thinks is undervalued and is still about flattish versus the end of 2025. But it was a different and more nuanced story that caught my eye, a pretty short article in the Wall Street Journal that prompted me to ned out and go pull Meta's annual filing with the SEC called its 10k and here's why I'm raising it. It's a real example with a bit more flash on it as to why some in the market are worried that all this AI capex could be bubblicious. Well, according to this Journal article, Meta's auditor, that's Ernst and Young, raised a question mark over financial engineering that Meta used to keep a $27 billion data center project off its balance sheet. Stick with me as I go through some of the details on this. I'm going to try to bring it to life as enthusiastically as I can, but it is worth sticking this out. The way this project called HYP was structured. Meta owns 20% of it so not a huge amount. Meanwhile, funds of private credit giant Blue Owl owns the rest. And then an entity that's connected to Blue Owl sold $27 billion of debt against it to bond investors. So here's why the auditor slagged it. The way this has been accounted for keeps that $27 billion of debt of Meta's balance sheet, because technically it isn't the borrower. It just holds 20% ownership in the entity. And that is. Now there's a test of whether that's too cute for accurate financial reporting. And that is whether Meta is the, quote, primary beneficiary of the borrowing entity and whether it controls it in practice, even if the majority ownership sits elsewhere. Well, According to that SEC filing, that's the 10K I pulled. Hyperion is booked in Meta's financials as something called a variable interest entity, or vie, meaning it is technically, technically not the primary beneficiary here. So all that debt, debt and the assets too, in that project don't have to be consolidated and show up on Meta's balance sheet. But Ernst and Young's audit letter, which does get published in that filing, states, quote, and I read it, determination of the primary beneficiary of the VIE was especially challenging due to the significant judgment required in determining the activities that most significantly affect the VIE's economic performance, and goes on to say it had it was challenging to assess whether the company has the power to direct those activities. Now, when you see the word judgment, it means it's up to someone to decide. And there aren't hard and fast or black and white rules. So while I have no doubt that the contracts surrounding the operations of Hyperion, the rights to it, where the risk of it sits, were all very meticulously and carefully crafted to ensure that Meta does not trip the VIE language so it doesn't have to consolidate all of this debt. I get it. But from a common sense perspective, Meta benefits from the data center. Of course, Meta knows how to run it because it has its hyperscaler expertise. Blue Owl and the lenders and the other owners almost certainly do not. And it's this tension between smart, technical, totally allowable financial engineering and intuitive concern about a possible debt fueled AI capex bubble that's going to create louder and louder voices pointing this all out, this is just one example that's bringing to life the concerns in the market. The market, including, by the way, some of the sell off we've been seeing over the course of today. The devil is in the details. It sits in the footnotes and it's lurking there in the weeds. We are going to keep nerding out and we're going to keep watching. Well, coming up, we go inside the latest earnings for Robinhood and survey how investors are reacting to record revenue amidst a crypto slump. Plus the CEO's vision for the platform's future. But first, a word from our sponsor, Charles Schwab. Trading at Schwab is powered by Ameritrade. Unlocking the power of thinkorswim, the award winning trading platforms loaded with features that let you dive deeper into the market. You can visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools all while you.
- [05:42]
John Grotteau
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- [05:59]
Anne Barry
OG retail investment app that has had some very public rises and some pretty dramatic falls. Now we all remember this during the pandemic we were homebound and we saw cash flush retail investors flocking to the app, which was soon in the spotlight. Of course, when GameStop and other meme stocks overwhelmed, at least at points Robinhood's system, there were temporary trading halts we saw associated with this, just showing the influx of enthusiasm for use of the retail innovator and this led to lawsuits and government fines subsequently. Well, now the company is flooding the zone with new financial products like prediction markets and tokenization trading and Wall street is figuring out what exactly to make of it all. Well, we're going to go through some of those new products in a moment. But John, let's start with the company's earnings out this week because the reaction to it, which is really at the heart of this is really fascinating.
- [06:51]
John Grotteau
Yeah, we're going to get to that in a minute. We just found out that there was a big investment by a investment group that just came over the wire into Robinhood ticker hood on the NASDAQ market cap of $67 billion. And so for the most recent quarter, record revenue, as you mentioned, $1.3 billion, up 27% year over year, but missed Wall street expectations. Earnings per share of $0.66 beat expectations, but by just by $0.02. An adjusted EBITDA of $761 million again up 23% year over year, but missing expectations. The theme here being that expectations were very high on this Earnings report. And one of the drags was crypto. With the price of bitcoin crashing today, it's just near about 65,000. And Robinhood reported a 38% year over year drop in crypto revenue in the quarter and a 57% decrease in crypto trading volume in January alone. So the quarterly results sent the share price down 9% on Wednesday and then another 9% today. So it's down nearly 15%.
- [07:54]
Anne Barry
Well, this one is so interesting because. And I'll just sort of share some of my own perspectives on Robinhood and how I've evolved in my thinking on this. But back during the pandemic when I saw the meme stock activity to be and like I got this wrong, right? I was a bit of a Robin Hood skeptic. I could totally see the value proposition. I could see why people loved it. But I thought that this payment for order flow issue, which is basically what got it into trouble, was going to have regulators really clamp down on it and it would sort of stymie the growth of Robin Hood. And instead what it has done to its credit in terms of staying in the game, continuing to be beloved by not only it's sort of core user who want to show the man, right? It was sort of a bit of a rebels app. But then really Robinhood took the brand awareness that came with all of this, rode that wave and then expanded really aggressively into other products. And I think now the sort of typical Robinhood user isn't typical in the sense of attitude to investing. I think it's been able to really get such a huge amount of breadth behind it and lots of different income demographics as well. So this idea that it's democratized access to at least trading interest, I think is to me has been very impressive. And again, I was a bit of a skeptic at the beginning. Now, there's a different kind of skepticism we're seeing in the market at the moment because there's no denying that Robinhood is a major player. Let's just talk about that adjusted EBITDA. That's a measure of profit again. 761 million. Right. The most recent quarter. This is a big company. It's a real player record. Revenue up 27 year over year for the most recent quarter. That's real growth off of a big base. So here's what's fascinating. The share price really had been riding the wave. It'd been doing incredibly well. But even after the stock drops that we've seen, this is still trading at over 35 times trailing price to earnings per share ratio. Which means if you think the growth of this business is going to slow down, it's looking pretty expensive as a stock right now. And that, John, is at the heart, at least to me, of why we saw some of this drop off. Expectations were super high. Hope is even higher. Hope and expectations not the same thing. And you know, just Robinhood, despite pretty solid earnings, didn't deliver against that. Now what's really interesting is where does it go from here? And just to go back a little bit again, Robinhood was one of the first fintech apps to offer zero commission cryptocurrency trading to retail investors. They're continuing to add products and diversifying and you know, you kind of said it, but let's hear it from the CEO, Vlad Tenevil.
- [10:21]
John Grotteau
Yeah, that's right. He said the first line in the earnings report was a quote from him. Our vision hasn't changed. We are building the financial super app. He said it right there.
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Anne Barry
And there's a laundry list of products that goes into building a super app, which is where you're trying to be all things to all people. Right? There are 11 different businesses listing listed in their earnings report. Equities trading commission, free trading of US stocks and ETFs, options trading, crypto trading, not just Bitcoin, but also Solana xrp. There's Robinhood Gold as well, a premium subscription service offering margin lending and higher interest on cash and advanced research tools. So that's not trading Gold, it's actually the name of a product which is giving more access to tools with which to think about juicing some of the the money you're putting to work. There's Robinhood Cortex, which is an AI driven investment assistant. There's a cash sweep function, the securities lending so that you can lend your securities retirement accounts, IRAs, for example, margin lending, tokenization trading for European customers and of course prediction markets. So it's now listing out 11 business line, some of which are related. But for the most part it really does seem to be trying to sort of grow in lots of different directions all at the same time.
- [11:32]
John Grotteau
And I agree with your assessment of it looking like the renegade platform that it was. And I read an article from November in the Wall Street Journal and it profiled Robinhood and its 38 year old CEO who I believe turns 39 tomorrow according to the Internet. And it points out that riskier products tailored to day traders make the most money for Robinhood. And that's something that Robinhood had to learn to Lean into initially with prediction markets. They had a Super bowl bet on there earlier in the year and they took it down. They were feeling a little bit risky. But the CEO is quoted as saying, these are our most engaged customers. They generate the lion's share of our revenue.
- [12:09]
Anne Barry
Yeah, most engaged speak for trading the most often. Because every time the money moves and there's volatility, Robinhood's taking a little bit of big from somewhere, right? From somewhere. Well, we've been covering the growing popularity of prediction markets, which Robinhood introduced to its app last year. And in the earnings, they actually explicitly called out what was going on there, reporting that in the last quarter, the number of event contracts traded, which is the sign of volume of activity in prediction markets, hit a record eight and a half billion to Nev. Saying this week that we are, quote, at the start of a prediction market super cycle. And then just a few months ago, John, we had Stephanie Guild, Robinhood's chief investment officer, on our sister podcast after earnings. And I talked to her about it. And I will tell you, I was very curious to ask her a couple of questions. I asked her if she thought that prediction markets were susceptible to insider trading.
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John Grotteau
Right.
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Anne Barry
She said she didn't think so. There are different sort of perspectives on that. And let's listen in her own words to what she said about the rollout of prediction markets on the Robinhood's app up.
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Stephanie Guild
First of all, it's fun. I mean, you can bet on, maybe that's the wrong term, but you can.
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Anne Barry
You can bet a very weighty time and fish.
- [13:28]
Stephanie Guild
But it's, you know, you can kind of make a prediction on what you think is going to happen in so many things that just didn't exist before. Those parts are the things that I think are so interesting because you can actually use it to hedge your exposure.
- [13:40]
Anne Barry
Oh, talk about that. Because there is a preconception that it's not investing and it's not an investment.
- [13:44]
Stephanie Guild
That's why I think, like, okay, maybe if you're betting on, like, who's going to win an Oscar, that's not necessarily investing. Although, I mean, maybe if you're in the industry, maybe that is a way. So I think you have to think about your exposures holistically.
- [13:58]
John Grotteau
And in that clip, I find that clip fascinating. It's so telling. She talks about fun, she uses the word betting. And it seems like that's the message that Robinhood is putting out there. Earlier this year, a competing trading platform public issued an ad saying, quote, wealth is not one in a Bet they're pushing back against the Robin Hood, saying, if you're looking for a broker that's not also a bookie come to us was the sense of it. But we just saw the prediction markets for the Super Bowl. She's talking about the Oscars coming up. I mean, that is a hedge. If you work in that industry and you know who's going to win best makeup or something. Put. Put the money.
- [14:35]
Anne Barry
But that's not a hedge. Right. That what you just said is inside the trend. That was why I asked that, since, you know, insider trading is where you have information that nobody else has access to. And if you know who's going to win best makeup artist and you go on to Kalshi or poly market and you put on a bunch of money saying, this person's going to win, you stand to gain from other people not having that information and those individuals betting that somebody else is going to win the prize. That is different from hedging, which is where you don't know who is going to win best makeup artists. But you do work in the industry and you say, you know, I know all of the players equally. I don't know who's going to win, but my judgment is going to be that outside in, I think that person's got a good shot. So there is a difference. I understand what she was saying. And here is what's so interesting. This is one where choosing words carefully.
- [15:24]
John Grotteau
Yes.
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Anne Barry
Is really going to matter. And things that we say in everyday parlance, like, I'm going to make a bet on this suddenly is literally about making a bet. And I'm really, really curious to see how regulators start to hone in, not just on the product itself, but on the language that can be used to describe the activities that it's engaging in. That's just one person's view.
- [15:46]
John Grotteau
Did you see the story that came out of the super bowl that there was a bet on one of the polymarket Kalshees, and it said the bet is, will someone streak at the Super Bowl?
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Anne Barry
Oh, I didn't see that.
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John Grotteau
And so one individual put down a lot of money on, yes, there will be some of the streaks at the Super Bowl. And that person struck the Super Bowl. He was, I don't know, arrested, he was detained. He had to pay $1,000 fine, but he won the bet and was paid handsomely for it. So he affected the outcome of the wager.
- [16:18]
Anne Barry
Well, that, to me is insider trading.
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Stephanie Guild
Right.
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Anne Barry
That is the epitome of insider trading. When you yourself are the perpetrator of the insider trade. So that has got to be clamped on. And do you remember people like UFC who are rolling out, having prediction markets? They're actually, you know, the counter to this is they would say we think that this is actually helpful to have prediction markets because it's going to make it so much more obvious when people are cheating the system because you've got more data to work with and over time it will help us actually.
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John Grotteau
It's actually fresh air.
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Anne Barry
Exactly. And it prevent it. So it's really fascinating. There's going to be so much more continuing on on this. We talked actually earlier this week, John, you, you and I, about sports betting. Right. And how DraftKings and FanDuel are trying to deal with the onslaught of prediction markets as well. And sports betting, when that first started, had to deal with this idea of insider trading or people using information unfairly. So this is going to continue, continue to play out well again. Quarterly results sent the share price down over 15. The stock though is still up 30. This is Robin Hood in the last 12 months just reinforcing this idea. There are believers out there. It's still trading at a pretty healthy premium. Analysts at Piper Sandler wrote in a Wednesday morning note, quote, if you can stomach the volatility, hood is the best way to play secular growth in retail trading and the closest fintech platform we've ever seen to achieving super app status. They view today's dip as an attractive entry point for long term investors. So different schools of thought on this.
- [17:45]
John Grotteau
John and I just saw a headline that Cathie Wood's ark invest put $30 million into Robinhood last night after the 9% diploma.
- [17:55]
Anne Barry
Yeah, that's pretty interesting. Just as a thought there, you know, $34 million in the grand scheme of things, it's a drop in the ocean compared to the size of Robinhood's market cap, which is $67 billion. But Cathie Wood's very interesting because she's been such an open supporter of what Robinhood represents and she's also been a big voice on crypto. And we've seen this volatility in bitcoin. We've seen bitcoin now at below $70,000 in price for quite a while. And to me this is much her way of saying I think bitcoin's undervalued as it's her way of saying she believes Robin undervalued. So I think there's a correlation there. Well, let's take a break and when we come back, we take a spin through the headlines that have been moving the markets, Vaneck believes gold is evolving beyond a short term hedge into a more durable part of a portfolio. With strong central bank demand and ongoing global uncertainty, the case for gold remains compelling.
- [18:44]
John Grotteau
Gold miners can offer greater sensitivity to a rising gold price. As gold rises, miners revenues may grow faster than many of their operating costs. Potential potentially expanding margins.
- [18:53]
Anne Barry
To capture that, check out GDX, the VanEck Gold Miners ETF. VanEck has been at this for a long time. They launched the very first gold equity fund back in 1968. Now GDX has an impressive 20 year track record and is a simple way to get diversified exposure to the world's top miners.
- [19:09]
John Grotteau
Learn more@vaneck.com brewgdx that's vaneck.com brewgdx Full fun disclosures in podcast description.
- [19:19]
Anne Barry
Well, it's 4pm on the east Coast. There it is, the closing bell. The markets wrapping up for the day. John, what caught your eye?
- [19:26]
John Grotteau
Well, in the midst of today's broader sell off, shares in McDonald's ticker MCD were up over 2 and a half percent after quarterly earnings that highlighted global same store sales rising 5.7% and US same source sales jumping 6.8%. The Golden Arches reported quarterly earnings and sales that beat analysts estimates. And it's returning MC Value menu brought customers back. People love those snack wraps.
- [19:51]
Anne Barry
Okay, you did that on purpose. You call it MC Value. So here's. Can we just have a moment on this because I'm very concerned that I've been getting this embarrassingly wrong all this time and I'm going to plead the grew up overseas hard on this. You just said it's Mickey D's. So when I kept calling it Mackie D's all this time and I was thinking McDonald's, but do you say McDonald's? Yeah, you're right.
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John Grotteau
It doesn't make any sense. It's. It's McDonald's. But people. But it's a Big Mac.
- [20:19]
Anne Barry
Right?
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John Grotteau
So it's, it doesn't make. Makes sense.
- [20:21]
Anne Barry
So what. But where does it come from? Do we know it? Why is it Mickey D's?
- [20:24]
John Grotteau
I bet it was an ad campaign. We should look it up.
- [20:26]
Anne Barry
Okay.
- [20:27]
John Grotteau
Because. Yeah, I can't think of an ad campaign that says there has to be one.
- [20:32]
Anne Barry
We need to, we need to dig in. We need to go find this. This is a very important point. Well, should we. Let's talk about GLP ones because McDonald's or Mickey D CEO Chris Kempczinski was asked if the company is seeing any impact from GLP1 weight loss drugs. He said it hasn't yet had a material impact on the business, but he did say, quote, as adoption grows, we know consumers behavior changes, right?
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John Grotteau
And he said that GLP1 customers are very interested in protein offerings. And he pointed out that McDonald's has plenty of protein on its menu.
- [21:04]
Anne Barry
Well, as a final thought tomorrow to gear up for Valentine's Day, we were trying to figure out who to bring on the show. We thought about 1-800-Flowers, we thought about talking to folks in retail, and we decided to go with online dating. So we're joined tomorrow by the chief financial officer of Match Group. We're going to go beyond the numbers, we're going to talk about product, and we're going to talk about what on earth AI could be doing to change the world of dating. That's it for today's Brew Markets Daily.
- [21:31]
John Grotteau
Brew Markets Daily is hosted by Anne Barry and produced by John Grotteau, Tarkab Delatif and Emily Milliron. Our technical director is Uchenawa Ogu, Jim Orzo is our audio engineer, and the president of Morning Brew Inc. Is Devin Emery. If you have any feedback or a company you'd like us to COVID leave a comment or send an email to.
- [21:46]
Anne Barry
Brewmarketshoworningbrew.Com Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow. Same time, same place.
- [22:02]
State Street Investment Management Announcer
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- [22:20]
John Grotteau
Second.
- [22:20]
State Street Investment Management Announcer
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