Offshore
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The Kobeissi Letter
Auto tariffs are HERE:
President Trump's "Liberation Day" will now include 25% tariffs on cars not made in the US.
This is set to add up to +$12,500 to the price of the average new car SOLD, but not MADE, in the US.
So, why are US automakers crashing?
(a thread) https://t.co/WzBjulVZF7
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Auto tariffs are HERE:
President Trump's "Liberation Day" will now include 25% tariffs on cars not made in the US.
This is set to add up to +$12,500 to the price of the average new car SOLD, but not MADE, in the US.
So, why are US automakers crashing?
(a thread) https://t.co/WzBjulVZF7
tweet
Offshore
Photo
The Kobeissi Letter
Is the used car bubble returning?
As President Trump's 25% auto tariffs go live, the average new car will see $3,000 to $12,500 in new costs.
This is set to pushed used car prices higher just as they started falling following the post-pandemic run.
Your used car may actually start appreciating again.
tweet
Is the used car bubble returning?
As President Trump's 25% auto tariffs go live, the average new car will see $3,000 to $12,500 in new costs.
This is set to pushed used car prices higher just as they started falling following the post-pandemic run.
Your used car may actually start appreciating again.
Auto tariffs are HERE:
President Trump's "Liberation Day" will now include 25% tariffs on cars not made in the US.
This is set to add up to +$12,500 to the price of the average new car SOLD, but not MADE, in the US.
So, why are US automakers crashing?
(a thread) https://t.co/WzBjulVZF7 tweet
Offshore
Photo
The Kobeissi Letter
BREAKING: General Motors stock, $GM, extends decline to -8.5% on the day as markets react to 25% auto tariffs. https://t.co/X7tqhZzz2V
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BREAKING: General Motors stock, $GM, extends decline to -8.5% on the day as markets react to 25% auto tariffs. https://t.co/X7tqhZzz2V
Auto tariffs are HERE:
President Trump's "Liberation Day" will now include 25% tariffs on cars not made in the US.
This is set to add up to +$12,500 to the price of the average new car SOLD, but not MADE, in the US.
So, why are US automakers crashing?
(a thread) https://t.co/WzBjulVZF7 tweet
Offshore
Photo
The Kobeissi Letter
BREAKING: Mexico’s president says “we are going to give an integral response to tariffs after April 2nd.”
Reciprocal tariffs on the reciprocal tariffs are coming.
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BREAKING: Mexico’s president says “we are going to give an integral response to tariffs after April 2nd.”
Reciprocal tariffs on the reciprocal tariffs are coming.
The trade war is back:
Markets are expecting Trump's April 2nd reciprocal tariffs day to be the "end of uncertainty."
But, we believe it will be the exact OPPOSITE, which is why tech stocks are down over -$400 billion this week.
Here's what's coming next.
(a thread) https://t.co/UPfm1lF7dh tweet
Offshore
Photo
The Kobeissi Letter
BREAKING: Copper prices in New York hit a record $11,600 per ton on Wednesday.
Prices have risen ~28% over the last 3 months driven by rising tariff uncertainty.
At the same time, copper prices in London have increased 15% and hit ~$10,000 per ton, the highest since June.
As a result, prices in New York are now ~$1,600 higher than in London, the largest difference on record.
This has created an arbitrage opportunity where traders buy cheaper international cargoes and ship them to the US before tariffs are imposed.
However, they risk significant losses if their copper cargoes arrive after tariffs are implemented.
Truly unprecedented times.
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BREAKING: Copper prices in New York hit a record $11,600 per ton on Wednesday.
Prices have risen ~28% over the last 3 months driven by rising tariff uncertainty.
At the same time, copper prices in London have increased 15% and hit ~$10,000 per ton, the highest since June.
As a result, prices in New York are now ~$1,600 higher than in London, the largest difference on record.
This has created an arbitrage opportunity where traders buy cheaper international cargoes and ship them to the US before tariffs are imposed.
However, they risk significant losses if their copper cargoes arrive after tariffs are implemented.
Truly unprecedented times.
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Offshore
Photo
Dimitry Nakhla | Babylon Capital®
A quality valuation analysis on $ANET 🧘🏽♂️
•NTM P/E Ratio: 32.74x
•10-Year Mean: 31.71x
•NTM FCF Yield: 3.13%
•10-Year Mean: 3.42%
As you can see, $ANET appears to be trading near fair value
Going forward, investors can expect to receive ~3% LESS in earnings per share & ~8% LESS in FCF per share🧠***
Before we get into valuation, let’s take a look at why $ANET is a quality business
BALANCE SHEET✅
•Cash & Equivalents: $8.30B
•Long-Term Debt: $0
$ANET has an excellent balance sheet
RETURN ON CAPITAL✅
•2019: 24.8%
•2020: 19.3%
•2021: 22.1%
•2022: 30.9%
•2023: 31.0%
•2024: 29.3%
RETURN ON EQUITY✅
•2019: 34.1%
•2020: 20.4%
•2021: 23.0%
•2022: 30.5%
•2023: 34.5%
•2024: 33.1%
$ANET has great return metrics, highlighting the financial efficiency of the business
REVENUES✅
•2019: $2.41B
•2024: $7.00B
•CAGR: 23.77%
FREE CASH FLOW✅
•2019: $0.95B
•2024: $3.68B
•CAGR: 31.10%
NORMALIZED EPS✅
•2019: $0.61
•2024: $2.27
•CAGR: 30.05%
SHARE BUYBACKS🆗
•2019 Shares Outstanding: 1.29B
•LTM Shares Outstanding: 1.28B
MARGINS✅
•LTM Gross Margins: 64.1%
•LTM Operating Margins: 42.0%
•LTM Net Income Margins: 40.7%
***NOW TO VALUATION 🧠
As stated above, investors can expect to receive ~3% LESS in EPS & ~8% LESS in FCF per share
Using Benjamin Graham’s 2G rule of thumb, $ANET has to grow earnings at a 16.37% CAGR over the next several years to justify its valuation
Today, analysts anticipate 2025 - 2027 EPS growth over the next few years to be slightly less than the (16.37%) required growth rate:
2025E: $2.49 (9.9% YoY) *FY Dec
2026E: $2.96 (18.7% YoY)
2027E: $3.61 (22.0% YoY)
$ANET has a great track record of meeting analyst estimates ~2 years out, but let’s assume $ANET ends 2027 with $3.61 in EPS & see its CAGR potential assuming different multiples
32x P/E: $115.52💵 … ~14.2% CAGR
30x P/E: $108.30💵 … ~11.6% CAGR
29x P/E: $101.08💵 … ~8.8% CAGR
28x P/E: $93.86💵 … ~6.0% CAGR
As you can see, we’d have to assume >30x multiple for $ANET to have attractive return potential
At 29x earnings $ANET has decent CAGR potential
However, we must be aware of the risk that if data center demand cools, we could see downward revisions in already aggressive growth estimates that could lead to a 10% - 15% multiple contraction
While $ANET is an excellent business, it may not have the same level of predictability as other quality compounders, so we should require a greater margin of safety
If I want to own $ANET, I’d likely consider buying in tranches, 1/3 at $80, 1/3 at $70 & 1/3 at $60
___
𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.
𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.
𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲.
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A quality valuation analysis on $ANET 🧘🏽♂️
•NTM P/E Ratio: 32.74x
•10-Year Mean: 31.71x
•NTM FCF Yield: 3.13%
•10-Year Mean: 3.42%
As you can see, $ANET appears to be trading near fair value
Going forward, investors can expect to receive ~3% LESS in earnings per share & ~8% LESS in FCF per share🧠***
Before we get into valuation, let’s take a look at why $ANET is a quality business
BALANCE SHEET✅
•Cash & Equivalents: $8.30B
•Long-Term Debt: $0
$ANET has an excellent balance sheet
RETURN ON CAPITAL✅
•2019: 24.8%
•2020: 19.3%
•2021: 22.1%
•2022: 30.9%
•2023: 31.0%
•2024: 29.3%
RETURN ON EQUITY✅
•2019: 34.1%
•2020: 20.4%
•2021: 23.0%
•2022: 30.5%
•2023: 34.5%
•2024: 33.1%
$ANET has great return metrics, highlighting the financial efficiency of the business
REVENUES✅
•2019: $2.41B
•2024: $7.00B
•CAGR: 23.77%
FREE CASH FLOW✅
•2019: $0.95B
•2024: $3.68B
•CAGR: 31.10%
NORMALIZED EPS✅
•2019: $0.61
•2024: $2.27
•CAGR: 30.05%
SHARE BUYBACKS🆗
•2019 Shares Outstanding: 1.29B
•LTM Shares Outstanding: 1.28B
MARGINS✅
•LTM Gross Margins: 64.1%
•LTM Operating Margins: 42.0%
•LTM Net Income Margins: 40.7%
***NOW TO VALUATION 🧠
As stated above, investors can expect to receive ~3% LESS in EPS & ~8% LESS in FCF per share
Using Benjamin Graham’s 2G rule of thumb, $ANET has to grow earnings at a 16.37% CAGR over the next several years to justify its valuation
Today, analysts anticipate 2025 - 2027 EPS growth over the next few years to be slightly less than the (16.37%) required growth rate:
2025E: $2.49 (9.9% YoY) *FY Dec
2026E: $2.96 (18.7% YoY)
2027E: $3.61 (22.0% YoY)
$ANET has a great track record of meeting analyst estimates ~2 years out, but let’s assume $ANET ends 2027 with $3.61 in EPS & see its CAGR potential assuming different multiples
32x P/E: $115.52💵 … ~14.2% CAGR
30x P/E: $108.30💵 … ~11.6% CAGR
29x P/E: $101.08💵 … ~8.8% CAGR
28x P/E: $93.86💵 … ~6.0% CAGR
As you can see, we’d have to assume >30x multiple for $ANET to have attractive return potential
At 29x earnings $ANET has decent CAGR potential
However, we must be aware of the risk that if data center demand cools, we could see downward revisions in already aggressive growth estimates that could lead to a 10% - 15% multiple contraction
While $ANET is an excellent business, it may not have the same level of predictability as other quality compounders, so we should require a greater margin of safety
If I want to own $ANET, I’d likely consider buying in tranches, 1/3 at $80, 1/3 at $70 & 1/3 at $60
___
𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.
𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.
𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲.
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