Meta’s Gambit

Bull & Bear

Hi, The Investor’s Podcast Network Community!

One way to resolve business conflict? Team up 🤝

That’s precisely what Peloton and Lululemon did last week, ending their feud with a partnership. Peloton, which tried to sell its own apparel, will now sell co-branded Lululemon apparel. And Lululemon will discontinue its Studio Mirror home fitness device.

💭 Time will tell whether the partnership can jolt Peloton from a lengthy sales slump. As for Lululemon? As you’ll see below, they’re doing just fine.

— Matthew, Shawn, and Weronika

Here’s today’s rundown:

Oct 3 chart

POP QUIZ

What’s the biggest corporate loss for a single year in history? (Read to the end to find out!)

Today, we’ll discuss the three biggest stories in markets:

  • Russia’s dark fleet of sanctions-avoiding oil tankers
  • Inside Rivian’s quest to build an elite truck
  • Meta plans to add a paid, ad-free tier for European users

All this, and more, in just 5 minutes to read.

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CHART OF THE DAY

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QUICK POLL

 

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We’ll show the answers in tomorrow’s newsletter!

 

IN THE NEWS

🚢 Governments Struggle to Enforce Russian Oil Cap

Oct 3 In the news image 1

Photo by Mateusz Suski on Unsplash

The U.S. and its allies have faced a conundrum: The world needs Russian oil to keep flowing; otherwise, the supply dropoff could spawn a shortage that pushes energy prices dramatically higher (offsetting efforts to control inflation.)
  • But governments want to punish Russia for its invasion of Ukraine, and fossil fuel sales directly fund Russia’s war effort.
The solution? Major global economies implemented a “price cap” on Russian oil, limiting how much Russia can earn from fuel sales without cutting off oil supplies entirely.
  • Months later, the cap has had limited success. As Michelle Wiese Bockmann, a senior analyst at Lloyd’s List Intelligence, writes in the Financial Times, “The cap’s design was always compromised.”
  • While oil prices lingered closer to the cap of $60 per barrel earlier this year, the cap’s effectiveness was unclear. After oil prices have surged higher, efforts to prevent Russia from selling oil at market prices above the cap are struggling.
Bockman adds, “More Russian oil than ever before is being transported on sanctions-circumventing tankers that exploit loopholes in international maritime regulations.”
  • How? By using a network of outdated ships that are harder to track and sailing without insurance, forming a “dark fleet” of some 500 Russian oil tankers.
  • These ships frequently turn off their location transponders, which, among other purposes, inform other vessels of their location to avoid collisions.
Why it matters:
Oct 3 In the news image 2
 

Russian crude oil is currently priced, on average, about 30% higher than the cap set by the U.S. and its allies.
Subtle workaround: Russian oil may technically trade at the price cap, but shipping costs have been “inflated” to bring the total purchase costs of Russian oil in line with market prices, particularly for ships sailing to India from Russian ports.
This workaround is estimated to have generated extra revenue worth billions of dollars for Russia.
  • “To deal with the dark fleet, the enforcement of the price cap needs more teeth,” says Bockman.
Read more

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🚚 Rivian’s Quest to Build the Ultimate Truck Burns Through Billions

Oct 3 In the news image 3

Photo by Wes Hicks on Unsplash

Tesla aside, Rivian is the hottest name in the EV space. But its attempt to build the top electric truck costs billions of dollars, even as its trucks dazzle drivers with dozens of features and an ability to go from zero to 60 in three seconds.
  • While it sells its trucks for about $80,000 apiece, the EV maker has struggled to keep costs down. They’re losing about $33,000 on every sale, Rivian says — roughly the starting price of a Ford F-150, Rivian’s combustion-engine rival and the top-selling truck in America for the past 46 years.
  • Rivian became the “Tesla of trucks” after its splashy market debut in 2021, when it became one of the biggest IPOs in years. Rivian was briefly valued at more than Ford and General Motors.
  • But that didn’t last very long as its share price has since cratered more than 80%. Rivian has blown half its $18 billion in cash in two years amid manufacturing issues and mounting costs.
Even today, Rivian loses money on every sale. It pays too much for parts, and it’s only sold 65,000 total vehicles, a tiny fraction of what bigger car companies make in a single factory in a year.
To fix the problems, Rivian’s founder and CEO is trying to cut expenses and trim operations. He wants to pay suppliers less for parts, simplify the truck’s design, and boost production volumes to inch closer to profitability. Still, it’s burning $1 billion of cash per quarter.
Will it pay off? Executives say Rivian will make a profit on its vehicles in a year and that burning all that cash has been necessary to grow.
  • Here’s the CEO to the Wall Street Journal: “We’re competing to build something that’s truly better than all the alternatives, and to try to do that on a limited budget would be detrimental to us achieving our mission.”
Oct 3 In the news image 4
Why it matters:
Rivian’s dilemma is an age-old question of how much to invest in growth before you’re profitable. It’s a tough needle to thread, and it can be the difference between long-term success and falling into irrelevance.
  • For every auto success story like Tesla, there are many failures, given the auto industry has high barriers to entry, low margins, and — no pun intended — many moving parts on the supply-chain side of things.
  • Companies need years to design, engineer, and manufacture new vehicles. But usually, they reach full production at their factories faster than Rivian.
As one auto industry analyst put it, “You should be able to start to make money after three to six months. By the time you’re ramped up and running at rate, you’re making pretty good money.”
  • Of course, that’s easier said than done, especially with Americans used to buying trucks from Ford and Chevrolet. And Rivian’s execs say it “must be” the best-driving truck, “because if it’s not, why would somebody pick us over a Ford or over a BMW?”
Read more

MORE HEADLINES

🏈 Taylor Swift propels NFL to record ratings

☕️ Starbucks scientists are developing a “climate-proof” coffee

🪧 Americans support strikes until they affect their daily lives

💪 The job market stayed strong through August, with more than 9.6 million job openings

⛹️ Mr. Beast’s snack company to be the Charlotte Hornet’s official jersey patch sponsor

🤑 Meta Plans To Charge $14 A Month For Ad-Free Instagram Or Facebook

Oct 3 In the news image 5

Photo by Mariia Shalabaieva on Unsplash

How about another subscription service?

Would you consider spending about $14 a month for ad-free Instagram? Europeans might.

Meta is exploring ad-free subscriptions for its European Union (EU) users. The company proposes to regulators that European users might have the choice to opt for a paid subscription or consent to personalized advertisements.

  • In September, Meta discussed the plan in sessions with privacy regulators in Ireland and digital competition authorities in Brussels.

What gives? Meta has informed regulators about its intention to launch a plan, “SNA” (Subscription No Ads), for European users in the upcoming months.

  • The proposal would give users a choice: continue using Instagram and Facebook for free with personalized ads or opt for paid versions of the ad-free platforms.

Charging extra: Meta has proposed to regulators a plan to charge users about $10.50 per month for ad-free desktop access to Facebook or Instagram and around $6 for each additional linked account. Mobile access would cost about $14 per month, reflecting commissions from Apple’s and Google’s app stores on in-app payments.

  • Notably, Meta has counted 258 million monthly Facebook users and 257 million Instagram during the first half of this year in the EU.

Why it matters:

CEO Mark Zuckerberg has emphasized that his primary platforms should stay free and ad-supported to remain accessible to individuals across all income brackets.

  • “You don’t need thousands of dollars to connect with people who use our services,” Zuckerberg said at a 2018 conference.

Keeping a close eye: Investors might closely watch the financial outcomes of Meta’s new fee model, especially considering the Meta stock’s sharp drop in 2022 and swift recovery in 2023. Shares are up about 146% year-to-date.

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A guinea pig: Currently, the switch seems aimed at European consumers. U.S. users, particularly those mindful of privacy, may not see an option to subscribe to ad-free Instagram or Facebook anytime soon. But this could change if the new fee model proves to be successful.

  • Meta has distinctly pitched its proposals to adhere to EU regulators’ demands for obtaining consent before processing user data for precise ad targeting.

Mimicking others: Meta, advocating for its plan, has highlighted how certain companies, like Spotify, offer users an option between a free, ad-supported service and an ad-free subscription service.

  • The proposed mobile pricing from Meta aligns with what YouTube charges for its ad-free premium service in Europe.

Read more

TRIVIA ANSWER

In 2002, AOL Time Warner reported a net loss for the year of $98.7 billion, which is considered the worst annual loss in modern corporate history. On an inflation-adjusted basis, that’s a loss of almost $170 billion today — yikes. AIG’s $99.3 billion loss in 2008 is the highest nominal loss (but is lower after inflation adjustments.)

See you next time!

That’s it for today on We Study Markets!

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