🎥 YouTube is Rivalling Netflix

MARKET UPDATE

Good Morning Investor! Shares of Swedish car manufacturer Volvo ($VOLV-B) surged almost 6% despite slashing its sales forecast more brutally than a Viking with an axe. The company pointed the finger at EU tariffs. Meanwhile, in the land of homebuilding, where dreams are constructed one 2x4 at a time, D.R. Horton ($DHI) surged over 11% after the company topped third-quarter expectations on the top and bottom lines.

TODAY’S BIG HEADLINES

YouTube is Rivalling Netflix

Small Caps are Outperforming Large Cap Returns

Adidas is Turning the Ship Around

MEDIA & STREAMING

YouTube is Rivalling Netflix🎥

YouTube's Blockbuster Evolution: Google's ($GOOG) prized streaming asset, YouTube, has grown into far more than just a video hosting site. It's like the Godzilla of the internet world, stomping its way through the entertainment landscape. The platform's free videos, live sports, and movies have made it a go-to source for the world's entertainment needs, while YouTube Red is turning into a subscription service that rivals even Netflix ($NFLX).

From Small Screens to Silver Screens: Despite YouTube's market historically being mobile devices such as smartphones and tablets, along with laptops and PCs (basically anything you can hold while pretending to work), the company is now making a big push towards being the mainstay on big screens. In May, YouTube accounted for a record 9.7% of TV viewing time among households tracked by Nielsen, surpassing Netflix ($NFLX) and Hulu. It's like the little engine that could, except this engine is powered by cat videos and DIY tutorials.

• Needham & Co. estimates that YouTube would be worth $455B as a standalone company — over 50% of Netflix’s market cap and more than Disney ($DIS) and Comcast ($CMCSA) combined.

• While YouTube generates most of its revenue from advertising (because who doesn't love a good mid-video interruption about beard oil?), it has also expanded its paid YouTube Premium and Music tiers to over 100M subscribers in recent months.

The Golden Goose of Silicon Valley: YouTube's dominance in TV streaming, extensive reach, and diverse content offerings have drawn more advertisers to the platform than bees to a flower garden. YouTube's commitment to paying out $70 billion to creators over three years has cemented its status as a key advertising hub which not only attracts content creators but retains them.

• YouTube's second-quarter advertising revenue represented 10% of Alphabet's total revenue, surpassing $7.7 billion — and is on track for $42 billion in 2025.

EQUITY MARKETS

Small Caps are Outperforming Large Cap Returns📈

Small but Mighty: For the first time since the ancient era of 2020, the Russell 2000 index, which contains 2000 "small-cap" companies, has rallied a whopping 7.6% in just five days, leaving the large caps in the dust. It's like watching a group of Chihuahuas outrun a pack of Great Danes in the stock market dog park.

When David Decides to Take on Goliath: Prior to this rally, the index - which contains companies with a market cap of between $300 million and $2 billion had been flatter than a pancake all year. But why has the index suddenly started rallying? Earlier this week, an inflation report showed US consumer prices rising a lot less than expected in June.

• This kicked off traders to begin betting that the Federal Reserve is now more likely to cut interest rates sooner. In fact, traders are currently pricing in a 100% chance that we'll see a rate cut by September.

• Typically, smaller firms take on significantly more risk when borrowing money due to their lowered ability to pay this money back. This means small caps are disproportionately impacted when borrowing costs go up thanks to interest rates. Hence, these stocks have shot up over the prospect of lowered costs faster than a teenager's allowance at a video game store.

Bargains in Plain Sight: Small-cap stocks have been underperforming their more sizable siblings since 2014. That's left them trading cheap, really cheap. So naturally, they've become prime targets for bargain-hunting investors looking for a bit of risky business.

• And these investors just might be looking in the right place, with small caps largely expected to begin growing earnings at a faster pace than their large cap siblings. It's the financial equivalent of the tortoise finally outrunning the hare.

• Analysts see them raking in 27% more profit this quarter compared to a year ago – and 67% next quarter. That's significantly faster growth than what the large cap firms are expected to see.

CONSUMER DISCRETIONARIES

Adidas is Turning the Ship Around🚢

Adidas' Cinderella Story: After a 2023 that was about as comfortable as wearing cleats to a black-tie event, German apparel company Adidas ($ADS) finally appears to be making a comeback. And the source of this recovery might surprise you. This positive turnaround sent shares of the stock up 5% on Wednesday, proving that in the world of fashion, what goes out of style can come back.

• Ahead of the company's earnings, Adidas has pre-announced second-quarter results that are more impressive than your friend's vacation photos. They're reporting an 11% rise on a constant currency basis against the prior year, up 16% excluding Yeezy sales.

• Management then went on to raise its full year guidance, with revenues rising at a high-single-digit percentage rate this year, with profit reaching around €1 billion ($1.09 billion) from a previous forecast of €700 million ($765 million).

Samba for Success: The driver of this turnaround has largely been the success of the company's terrace shoes, specifically the Samba and Spezial Light shoes. The retro-style shoe has been hugely popular in regions such as Spain and France, particularly Paris where it's beloved by stylists more than baguettes and berets combined.

• This now marks the second consecutive sales forecast increase, which has led to Bryan Garnier raising its rating for the company to a buy.

MORE NEWS

Additional market-moving events🌎

Supreme Purchase: Ray-Ban maker EssilorLuxottica said it’d buy streetwear icon Supreme for $1.5B from VF Corp (which paid $2.1B for the brand in 2020). (Reuters)

Battery Storage Boom: Wall Street is funding large-scale battery projects to profit from stabilizing the power grid. Intersect Power secured $837M for three Texas battery installations, highlighting the sector’s growth potential. (WSJ)

GitLab Explores Potential Sale: The Google-backed software developer is working with investment bankers, attracting acquisition interest from peers like Datadog ($DDOG). GitLab ($GTLB) is valued at around $8 billion. (YF)

Geopolitical Steam Room: TSMC slid 8% after Trump said Taiwan should pay for defense. (Reuters)

OUR PICKS

Our selections performance👾

On Monday the 11th of March, we released our “two superperformers” stock picks which we believe will provide significant outperformance compared to the S&P 500. Then on the 12th of June we released our next stock selection.

Here’s how the three stocks have performed since:

• Evolution AB: 1,162.50 SEK (📉-11.40%)

• Hims & Hers Health: $20.88 (📈+44.30%)

• PayPal: $60.78 (📉-4.15%)

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