If you're looking to take your investing knowledge to the next level, make sure to check out our latest free courses offered on mainstreetwolf.com!

Market News and Short-Term Predictions

The big macro news this past week was Fitch downgrading the US credit rating from AAA to AA+. It is primarily due to concerns about fiscal deterioration and governance erosion. This downgrade could lead to higher interest rates as the risk of default is perceived to be higher. However, the impact on the stock market is expected to be limited.

The U.S. dollar's status as a safe haven could mitigate the risk. While there may be short-term profit-taking, the downgrade is not expected to affect the current bull market.

However, it's important to note that the downgrade could have a psychological impact on the market, leading to increased volatility. Defensive sectors and dividend stocks could be attractive in this environment.

We are already seeing that with the VIX getting a spike closer to 17 this week.

Overall, while the downgrade is a significant event, the strength of the U.S. economy and the resilience of the stock market suggest that the impact will be manageable.

We had two big names in the portfolio announce earnings this week AMZN and AAPL. I wanted to dig into their Q2 reports and give my take on current valuations.

Amazon (AMZN): reported stronger than expected Q2 2023 revenue of $134.4 billion (+11% YoY). CEO Andy Jassy highlighted cost reductions in the store's business and improved customer experiences. The faster delivery speeds of Amazon Prime have resulted in increased purchases and customer loyalty.

The AWS segment saw 12% YoY revenue growth ($22.1 billion), as cost optimization efforts stabilized and more customers focused on innovation and cloud workloads. They also announced new AWS technologies and capabilities that help customers of all sizes take advantage of generative AI, improve productivity, and enhance their security posture.

The Amazon Business offering is aiming to become a $100 billion-plus business, with a current annual run rate of $35 billion. Amazon Business allows businesses, municipalities, and organizations to procure products like office supplies and other bulk items easily and at discounted prices.

The biggest takeaway for me is the focus that Amazon has had to return back to being a free cash flow machine generating close to $8 billion in Q2.

While they were pouring an insane amount of money into infrastructure the last year, they are starting to see the benefits flow through to their operating cash flow.

Overall, I think Amazon's AWS business along with a focus on efficiency will prove to be great for their free cash flow to continue to grow in the future. After the run, we have seen in after-hours (up 9% closing in on $140/share) I would say the stock is fairly valued again and will continue to hold.

Apple (AAPL): Apple reported better-than-expected third-quarter results, with earnings per share of $1.26 on revenue of $81.8 billion, surpassing estimates. The company's all-important iPhone sales fell 2.4% to $39.7 billion, missing analysts' expectations of $40.2 billion in iPhone revenue.

This is the 3rd quarter in a row where iPhone sales have dropped which is a bit concerning, but then again the numbers they have to put up to beat are insane.

Apple's Services revenue rose by 8.2% in Q3 2023 due to a surge in paid subscriptions, while iPhone, Mac, and iPad revenues declined. Revenue from wearables, such as the Apple Watch and AirPods, increased by 2.5%.

Mac sales exceeded expectations, but iPhone and iPad revenues fell slightly short. The gross margin was 44.52%. Apple's active devices reached a record high, and over $24 billion was returned to shareholders.

Apple reported a 1% decline in quarterly revenue compared to the previous year, but earnings per share increased by 5%. The company achieved record revenue in its Services sector and had strong iPhone sales in emerging markets. The nice thing about services is they are seen as stickier and would have higher margins, therefore service revenue growth is definitely great to see as a long-term investor!

Apple also saw an increase in its active device user base and generated strong operating cash flow. The company declared a cash dividend of $0.24 per share of common stock.

Analysts expect cautious guidance for the next quarter due to the upcoming iPhone launch.

All in all, I would say the earnings out of Apple were in-line but slightly disappointing only because the stock is valued more like a growth stock, and with only a small increase in profits YoY with flat sales, it seems the stock's valuation is being given the benefit of the doubt based on Apple's amazing brand.

Of the larger tech companies, I own the smallest percentage in AAPL. I think it is a bit overvalued but have already trimmed down the position as a % of my portfolio.

Lessons to Be Learned

I ended up selling my positions in growth companies the past couple of weeks that I felt don't have the best long-term moat and that are dealing with a lot of competition. These names include ETSY/PYPL/SQ and let me explain why I am starting to view moat as a more important aspect in my long-term horizon thesis for new purchases.

All these companies I believe have potential, but they all have one thing in common. They are middlemen companies that are dealing with immense competition in their space of payment processing and online retail.

PYPL and SQ have to compete with every large bank (and even companies like Apple) that is catching up to their tech along with the threat of crypto in the future hindering their ability to be part of online/business transactions altogether. While I don't think these companies are in trouble any time soon, their valuations assume growth and keeping current margins while in reality their exponential growth period may be behind them and their valuations may start to reflect that.

A similar story with ETSY is once they bring on a maximum amount of sellers, the only way to grow the business is to squeeze their sellers on the website or to increase the fees that consumers end up paying. They have to compete with the likes of Amazon, and if they can't keep that branding of unique items, they could end up being the next WISH.

Again at the right valuation, these names make sense to invest in for the medium term. For the long term, I feel like the ability for new online marketplaces or payment solutions to pop up is more abundant.

The great investor Warren Buffett agrees too! He values a strong moat as it allows for pricing power and higher profit margins. He focuses on businesses with durable advantages that do not require significant reinvestment. Buffett evaluates the strength and longevity of the moat and management quality before making investments. He identifies two types of moats: being a low-cost producer and having a powerful brand or product franchise.

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, LLY, CHDN, ROK, ADSK, PTLO

Options: SPLG, PLTR, BAC, MPW, F, AAL, T, DISH

See premium membership for details on interested entry points/strike prices/current wheel positions.

Options Trading Portfolio

Closing Trades

I was able to close 2 winning trades this week with PLTR (+$20) and T (+$23). Selling into the fear driven by possible lead cables worked out with AT&T in the short term and PLTR has been riding that AI hype higher while still sporting a higher IVR with earnings coming up. I also got paid $23 for the cash in the account from fidelity in July as it is being used as collateral for my cash-secured puts, but since I haven't had the options exercised and forced to buy stocks I get the benefits of their higher money market rates on the cash in the account.

If you don't want to miss out on the following: weekly buy/sell activity in the stock/option portfolios (Excel Spreadsheet with full details), real-time alerts through Discord, and access to premium courses & tools check out the premium membership. Start your 7-day free trial today!

If you want to score 1 FREE month of premium membership, refer 3 friends/family/coworkers who would enjoy the weekly investing newsletter!

U.S Credit Rating Downgraded :( While AMZN Is Back to Printing Money!