🥊 Microsoft vs IRS

Happy Friday!

The September CPI report revealed a 0.4% inflation from the previous month and a 3.7% year-over-year rise, slightly surpassing economists' predictions, while core inflation saw a 4.1% annual and 0.3% monthly climb. Today, major banks such as JPMorgan, Citigroup, and Wells Fargo all reported relatively strong earnings, demonstrating their resilience in handling the current interest rate policy.

In today’s newsletter:

• 👜 How Louis Vuitton Makes Money

• 🍕 Domino’s Earnings Visualized

• 🚨 IRS Knocks On Microsoft’s Door

Let’s dive right in!

👜 How Louis Vuitton Makes Money

Louis Vuitton Moët Hennessy experienced a notable deceleration in sales growth, particularly in the vital Chinese market, following the easing of the country's pandemic restrictions. Various factors, such as China's economic challenges, a shift in consumer spending post-pandemic, and the country's previously booming luxury market showing signs of moderation, have contributed to this slowdown.

LVMH, which owns prominent brands like Louis Vuitton and Dior, also witnessed subdued sales growth in other regions, with a mere 2% rise in the U.S. and 7% in Europe. The company’s overall third-quarter sales amounted to €19.96B, marking a 9% organic rise compared to the same period in the previous year.

The company now trades at 20 times its expected 2023 earnings, cheaper relative to its 10-year median of 23 times earnings. LVMH reached a $500B market capitalization in April, but has since dropped to around $365B.

🍕 Domino’s Earnings Visualized

Domino's Pizza reported Q3 earnings of $4.18 per share, exceeding analyst estimates of $3.31, although the earnings included a one-off tax boost from its investment in China-based DPC Dash. Despite this, the company witnessed a 4% drop in total revenue to $1.03B, attributed to a 0.6% downturn in U.S. same-store sales. However, international same-store sales saw a 3.3% increase, excluding currency impact.

CEO Russell Weiner emphasized initiatives aimed at fostering U.S. growth, such as a partnership with Uber Eats and an ”Emergency Pizza” program through the Domino’s app, which allows customers to receive a free medium two-topping pizza by joining the brand's new loyalty program. These are designed to amplify the Domino’s reward loyalty program, despite potential implications for gross margins.

🚨 IRS Knocks On Microsoft’s Door

This week, the Internal Revenue Service (IRS) slapped Microsoft with a staggering $28.9B tax bill, covering additional taxes, interest, and penalties for the years 2004 to 2013, related to "intercompany transfer pricing" issues. Microsoft, who intends to robustly challenge the bill, emphasized their adherence to tax rules and noted that they have paid over $67B in US taxes since 2004.

The IRS targeted Microsoft due to allegations of extensive tax avoidance, where the tech giant shifted billions in profits to Puerto Rico, benefiting from a nearly 0% tax rate through a complex arrangement involving selling its intellectual property to a subsidiary. The IRS, believing this to be a blatant tax dodge, engaged in a rigorous and unprecedented audit, uncovering evidence that suggested Microsoft was engaging in a "pure tax play." The resolution of this tax dispute is anticipated to unfold over several years.

Should Microsoft investors be worried? Let’s take a back and define free cash flow. Free cash flow represents the leftover cash a company has after covering its operating expenses and capital investments, which can be used for activities like paying dividends, buying back shares, or paying down debt. It’s cash the company can essentially do whatever they’d like with.

In fiscal year 2023, Microsoft generated $59.5B in free cash flow. Furthermore, Microsoft’s 5 year average free cash flow is roughly $53B. This means that Microsoft could pay off their tax bill in a single year using the free cash flow they typically generate, and still have tons of cash left over. This also doesn’t include the $111.3B Microsoft has in total cash, cash equivalents, and short-term investments.

Notable Companies Reporting Earnings Next Week:

• Monday:

  • Charles Schwab ($SCHW)

• Tuesday:

  • Johnson & Johnson ($JNJ), Bank of America ($BAC), Lockheed Martin ($LMT), Prologis ($PLD), Goldman Sachs ($GS)

• Wednesday:

  • Tesla ($TSLA), Procter & Gamble ($PG), Netflix ($NFLX), Abbott Laboratories ($ABT), Morgan Stanley ($MS)

• Thursday:

  • Taiwan Semi ($TSM), Philip Morris ($PM), AT&T($T), Blackstone ($BX)

• Friday:

  • American Express ($AXP), Schlumberger ($SLB)

All of the companies that are reporting earnings this week can be viewed here.

Buys

• Carnival Corp. ($CCL)

  • Insider: Randall Weisenburger (Director)

    • # of Shares Purchased: 700,000

    • $ Amount: $9,089,570

    • SEC Forms: [1], [2]

• Howard Hughes ($HHC)

  • Insider: Pershing Square Capital Management (Director)

    • # of Shares Purchased: 93,390

    • $ Amount: $6,470,941

    • SEC Forms: [1], [2], [3]

• Asana ($ASAN)

  • Insider: Dustin Moskovitz (CEO)

    • # of Shares Purchased: 283,204

    • $ Amount: $5,116,888

    • SEC Forms: [1]

Sells

• Docusign ($DOCU)

  • Insider: Daniel Springer (Director)

    • # of Shares Sold: 579,333

    • $ Amount: $24,512,379

    • SEC Forms: [1], [2]

• DoorDash ($DASH)

  • Insider: Tony Xu (CEO)

    • # of Shares Sold: 132,300

    • $ Amount: $10,471,039

    • SEC Forms: [1]

• Apple ($AAPL)

  • Insider: Luca Maestri (CFO)

    • # of Shares Sold: 31,685

    • $ Amount: $5,661,923

    • SEC Forms: [1]

• CrowdStrike ($CRWD)

  • Insider: Godfrey Sullivan (Director)

    • # of Shares Sold: 25,000

    • $ Amount: $4,460,035

    • SEC Forms: [1]