A daily market update from FS Insight — what you need to know ahead of opening bell

“The best bargain is an expensive CEO… You cannot overpay a good CEO and you can’t underpay a bad one… If his compensation is not tied to the shareholders’ returns, everyone’s playing a fool’s game.” — HBR

Overnight

Biden set to meet with “Big Four” House and Senate leaders to discuss government funding and stalled aid package to Ukraine, Israel

Sweden will finally join NATO after Hungary’s parliament approved the country’s accession

China’s homegrown C919 jet, aspiring to compete with Airbus A320neo and Boeing’s 737 Max, stars in Singapore air show, but is not yet certified internationally

AI-powered video startup Genmo, a putative Sora rival, is set to raise at least $30 million in funding from New Enterprise Associates (NEA)

The European Investment Bank, the world’s largest multilateral lender, plans to invest in more nuclear and defense projects

Treasury Sec. Janet Yellen holds press conference in São Paulo today ahead of meetings with G20 finance ministers and central bank governors

Commerce Sec. Gina Raimondo: leading advanced semiconductor companies have asked for $70 billion in U.S. funding – double the amount passed through the CHIPS Act

The Pentagon struck targets in the Middle East with the help of artificial intelligence

French President Emmanuel Macron said that sending Western troops to defend Ukraine “could not be ruled out”

U.S. and Thai troops lead the annual Cobra Gold drills, the Indo-Pacific region’s largest multinational joint exercises

Nvidia makes up 25% of U.S. equity options bets

Microsoft partners with young French AI startup Mistral in push beyond OpenAI

JPMorgan named Filippo Gori and Doug Petno as co-heads of global IB

Citigroup hired Viswas Raghavan from JPMorgan as new head of IB

Alibaba leads record deal to create $2.5 billion China AI player

KKR to buy Broadcom’s end-user computing division for $4 billion

Apollo considers merger for job-search website CareerBuilder

eToro CEO considers IPO after scrapped SPAC deal

Shein Mulls London IPO after U.S. resistance to listing

Harvard floats $1.65 billion upcoming debt sale

Horizon Capital closes its Ukraine Fund IV at $350m – $100m above target

Record $127 billion of coupon debt sold at two auctions of two- and five-year Treasury notes; another $42 billion of seven-year notes under the hammer today

New York City preps $1.5B sale as rating agencies affirm its GOs

British banker Jacob Rothschild dead at 87.

First news

• At half its original size, the upcoming Reddit IPO is small on company financials, expectations, big on individual investor enthusiasm, executive compensation.

Charts of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

Jan. PCE this Thursday is key macro. There seems to be some increased momentum in inflation shown in Jan. CPI, and the key is whether Feb. CPI (in 3 weeks) shows this.

Buy the dipm coming back strong. Ex: PANW selloff last week.

Click HERE for more.

TECHNICAL

Fractional losses yesterday in U.S. Equities, though most of the weakness had a distinct defensive bias, with huge underperformance by Utilities and REITS (down 2% and 1%, respectively, based on Equal-weighted Sector ETF performance) while Healthcare also dipped -0.50%. With 90 min til the closing bell, Technology was the overwhelming sector winner among the 11, and was even stronger in Equal-weighted terms +0.76% than in Cap-weighted +0.46%. Treasury yields were fractionally higher, and Small-cap outperformance was fairly substantial (+0.55% in IWM gains vs. -0.16% loss in SPY). SPX had firm support near 4946 in SPX and we are skeptical that this will be broken during the final few days of February. Dips should be buyable.

CRYPTO

See key slides from our report RealFi: A Data-Driven Private Credit Marketplace, HERE.

FIRST NEWS

Reddit, Loved It, Hated It. Set to be listed under the ticker symbol RDDT, Reddit has filed for an initial public offering on the New York Stock Exchange. The social-media platform with a maverick’s reputation disclosed that it had generated $804M in revenue in 2023, up ~21% from a year ago, while its net loss narrowed to $90.8M, from $158.6M in 2022. In the last three months of 2023, Reddit even posted a net income of ~$18.5 million.

Ahead of the IPO, a small number of shares in which will be reserved for Reddit’s most active community members (which will bypass traditional lockup periods), the company invested its excess cash into Bitcoin and Ethereum, which has generated much good will from the crypto community on social media. Reddit is also branching out into data licensing, expanding its partnership with Google to make it easier to discover and access the communities and conversations people are looking for on the Reddit platform.

^{Source: Reddit}

Google, which previously featured in Reddit-related announcements as ‘an undisclosed AI firm’, has agreed to pay Reddit $60+ million a year to use its data to train AI models; specifically, to access the vast corpus of existing content on Reddit in an efficient and structured way in order to improve its products and services. Content on Reddit, which had over 73M daily active users as of Dec. 31, is seen as particularly valuable for training artificial-intelligence models, and the platform has projected its total addressable market globally from advertising, excluding China and Russia, to be $1.4T by 2027.

The company is expected to launch its official roadshow pitch to investors next month, at which time it will announce at what price it hopes to sell stock. The target of a $5 billion value is roughly half the valuation at which it last raised funds. Plenty of questions remain for investors to pick through over the coming months, as much of Reddit’s user growth is coming from less valuable logged-out users – i.e. those who haven’t signed up for an account – arriving via Google searches, which may be one of the reasons Google is interested in Reddit’s data. In any case, that deal will likely represent only a single-digit revenue boost.

As we’ve written before, Reddit may have lucked out that, just as it was preparing to go public a few years ago, the IPO door had closed; the wilderness it had found itself in allowed the company to get itself in better financial shape while it was still private, away from the scrutiny of public investors, who tend to apply a magnifying glass not just to the balance sheet, but to all sorts of pesky details, such as the state of the C-suite.

For example, Reddit’s prospectus shows that CEO Steve Huffman received a $193 million stock grant package last year – a larger estimated grant size than Airbnb’s Brian Chesky, Coinbase’s Brian Armstrong, or Dropbox’s Drew Houston got at IPO time, even though their companies were larger. (Reddit COO Jennifer Wong was paid an additional $93 million in 2023, including stock and option awards, with the value accruing over several years, and the current cash value substantially lower).

Huffman would need to steadily grow Reddit’s market cap from $5 billion to $25 billion over the next several years to come into much of the grant, but the board clearly wants to reward Huffman, who co-founded the company 19 years ago before leaving and then returning in 2015. (Reddit’s largest shareholder, Condé Nast owner Advance Publications, has agreed to cede its voting rights to Huffman, increasing his voting power from 3.5% to 37%).

Those potential investors who are less willing to give Reddit a pass on luxury-level executive compensation as little to no profit is forthcoming may point to a changing mood in Silicon Valley, i.e. a growing willingness to acknowledge that stock compensation is a very real expense. For instance, on Monday, Snap said it was cutting 10% of its global workforce, with CEO Evan Spiegel – who received a stock grant worth $638 million in 2017, the year Snap went public – also telling employees the cuts would help Snap “address our elevated rate of dilution from stock-based compensation.”

Tech companies habitually steer investors’ attention toward their adjusted earnings; at the same time, that metric excludes the cost of compensating employees using newly-issued stock, which tends to dilute the value of existing shares. In Snap’s case, the stock-compensation expense for Q1-Q3 of last year equaled ~31% of its revenue. To compare, stock compensation at Pinterest, a roughly size-equivalent company, and the last major social-media firm to go public before the upcoming Reddit IPO, accounted for 23% of revenue.

In the first nine months of last year, Snap reported an operating loss of $1.1 billion after taking into account roughly $1 billion in stock comp expense. In other words, without stock comp, Snap’s operating loss would have been around $100 million. While it may be to Spiegel’s credit that he is not trying to steer the ship of investor scrutiny in the opposite direction, the long-term investors, who tend to be most hurt by the share-count dilution that results from excessive stock compensation, have already made their dislike of egregious stock compensation manifest.

Snap’s stock price has been languishing well under $17 for close to two years. Given that Snap went public in 2017 at $17 a share, and that it continues to be a loss-making enterprise with a history of wantonly generous stock-compensation grants, there is a lesson in its predicament for Reddit. Seeking Alpha, The Information, WSJ, Reuters, Daily Beast, Reuters