🎤 How to Play the Rise of K-Pop

Happy Sunday to everyone on The Street.

Without a doubt, the biggest story of the week was the Syrian immigrant who came to the US with $14K, opened a gas station, and became a millionaire after selling the winning $2B Powerball ticket.

Kidding, of course, although that is an awesome story. No, as you all know, the biggest story of the week was the implosion of FTX and the downfall of Sam Bankman-Fried. We're not going to pretend to know what's happening because the whole thing is still unraveling, but here are some thoughts:

1) FOMO is a hell of a drug. When a founder plays League of Legends during a pitch, it might be a good time for investors to ramp up the due diligence. We've seen this herd mentality a few times now (Elizabeth Holmes, Adam Neumann, etc). What's sad is that there will undoubtedly be more names to add to this list.

2) Where is the US government? The lack of regulation is mindblowing. This is a black eye for firms like Sequoia Capital and Blackrock, which both had exposure to FTX. But what about groups like the Ontario Teachers Pension Plan which invested almost $100 million into FTX? Without a regulatory framework in place, stuff like this will keep happening and it will largely impact the little guys.

3) What's the contagion risk look like? TBD. Genesis and Multicoin Capital have confirmed they have large sums of money trapped on FTX. Crypto bank BlockFi, halted customer withdrawals on Friday. Bitcoin also fell below $16k at the end of the week.

4) Is it time to buy? Tough question to ask yourself during frustrating times like this. But, if you still believe in the space, is now the time to zig when everyone else zags? Only you can answer that, but it's been brought up on a few calls we had this week.

For now, let's get on with it. Here are the polls from last week.

• Are you bullish or bearish on the AgTech sector? 75% of you said BULLISH, 25% of you said bearish.

• Which stock will outperform over the next 12 months? A majority of you said Dick's Sporting Goods. Nike and Lulu Lemon were tied.

• How much would you pay for a blue checkmark on Twitter? 67% of you said $0/month, 17% of you said $8/month, and 16% of you said $5/month.

Review

US stocks were mixed but ultimately finished higher Friday as investors reacted to the cooler-than-expected October inflation report, as well as encouraging news from overseas. Big picture, the market is hoping that the Fed will look to slow its rate-hike campaign at next month’s meeting after price growth moderated last month.

Wall Street received another boost to close out the week after Beijing officials announced they will in fact ease COVID-19 restrictions. Mass testing will be curtailed and travelers will be required to spend less time in quarantine upon arrival in China. The Asian nation’s zero-COVID policy has been a significant financial headwind for the entire global economy. Oil prices rose in response to the news, as it’s expected demand for energy will increase as a result.

In cryptocurrency, the values of digital tokens continued to tumble as we noted above. This is related to the collapse of crypto exchange FTX, which declared bankruptcy as its founder Sam Bankman-Fried stepped down as CEO. Industry experts say the situation has the ability to keep dragging down values within the entire sector, as, after FTX filed for Chapter 11, bitcoin’s price briefly hit a two-year low.

Checking economic data, the University of Michigan released the preliminary results of its consumer sentiment and inflation expectations surveys for November. Inflation expectations ticked upward while consumer sentiment fell.

For the week as a whole, the S&P 500 rose 5.9%, its best week since June 24 of this year. The Nasdaq Composite advanced 1.9% as investors scooped up tech shares on hopes interest rates would level off. The Dow Jones Industrial Average underperformed, gaining 0.1%.

Preview

Tomorrow, the New York Fed releases its 1-, 3-, and 5-year inflation expectations for October. This metric is important because consumers’ perceptions of rising prices are arguably just as important as inflation itself.

Tuesday, we’ll get a look at the October PPI, or Producer Price Index. In September, this key measure of wholesale prices rose 0.4% month-over-month and 8.5% on an annual basis. Also, watch for the November Empire State Manufacturing Index, as well as real household and mortgage debt for the third quarter. In Q2, household debt sat at $16.15 trillion, with mortgage, auto loans, and credit card balances all increasing year-over-year.

Wednesday will be a hectic day, with seven noteworthy economic reports due, including October’s retail sales, September’s business inventories, and the NAHB housing market index for November. In October, this survey of home builders’ sentiment signaled that builder confidence in the single-family home market is the lowest it has been in a decade.

On Thursday, the Philadelphia Fed manufacturing index for November, as well as October’s building permits and housing starts, will be released. The Labor Department will also publish initial and continuing jobless claims. With many major US companies announcing layoffs, it will be interesting to see which way official jobless claims are trending.

On Friday, October’s existing home sales will be published, clueing investors in as to whether or not we are entering a buyer’s real estate market. Also, watch for the Conference Board’s leading economic indicators report for October.

Earnings

Starting off the earnings week is Tyson Foods (TSN), one of the world’s largest meat processors. The company has been in the headlines recently after its CFO John Tyson was arrested for allegedly falling asleep in the wrong home while intoxicated.

Tuesday, two heavy hitters in the retail space, Walmart (WMT) and Home Depot (HD), will provide insight into Americans’ spending habits. Investors will be watching Walmart in particular, as the world’s biggest retailer, for further insight amid an economic downturn.

Wednesday is the busiest day of the week, with reports due from NVIDIA (NVDA), Cisco (CSCO), Lowe’s (LOW), the TJX Companies (TJX), Target (TGT), and Advance Auto Parts (AAP). Target and TJX, the owner of TJ Maxx, will continue to help expand investors’ understanding of current trends in consumer spending.

On Thursday, Alibaba (BABA), BJ’s Wholesale Club (BJ), and Gap (GPS) are all scheduled to release reports. Alibaba, China’s biggest ecommerce company, will provide the market with a snapshot view of commercial activity from a global perspective.

On Friday, fellow Chinese ecommerce giant JD.com (JD) will release its Q3 earnings report. Following the recent Singles’ Day sales event, both JD.com and Alibaba will be in focus, as the two-week period is roughly comparable to our Black Friday.

Diversity Meets the Fintech Industry

The fintech industry isn’t exactly known for its diversity. WTF is up with that?

Nicole Casperson is a reporter-turned-creator who’s quickly becoming one of the most important new voices in fintech. Each week, Nicole writes the WTFintech? newsletter with informative stories on startups, new technologies, and emerging female leaders.

Be the change you want to see. Subscribe to WTFintech? today.

A "Hidden Beneficiary"

Call it a Truce?

Do you use PayPal and Venmo debit cards? Do you have an iPhone? If you answered yes to both of these questions, you may have noticed that you can’t access the aforementioned cards in your Apple Wallet. Well, that’s about to change starting next year. The two tech giants recently came to an agreement to integrate each other’s products into their respective payment systems.

Buy Apple and PayPal stock, right? Well, maybe. There’s another name worth considering that may also benefit from this partnership, and it’s flying largely under the radar. Synchrony Financial (SYF) is the issuer of both the PayPal and Venmo cards. According to one analyst it stands to benefit if the tie-up results in more credit card usage.

Purchase Volume Boost

As it stands, PayPal and Venmo credit and debit cards account for about 10% of Synchrony’s interest and fees, according to Bank of America analyst Mihir Bhatia, who rates Synchrony a buy. That figure should increase if PayPal’s deal with Apple drives increased credit card usage and purchase volume.

“Assuming the combined PayPal and Venmo portfolio comprises about 15% of total purchase volume, 5% of users make it top-of-wallet and these users get a 30% lift in spending, we estimate the change could provide a 20-25bps boost to SYF’s total purchase volumes,” Bhatia said in a recent research report.

Bhatia expects Synchrony to launch marketing campaigns to encourage customers to use these two credit cards as their default payment options at tap-and-go checkout stations.

The Stock Looks Cheap

In addition to being a “hidden beneficiary” of the PayPal/Apple deal, Synchrony’s stock also appears to be relatively cheap at current prices. Shares are trading at less than seven times the 2023 consensus earnings per share estimate.

Synchrony Financial may not be as sexy as PayPal and Apple, but it's also not as expensive. For investors looking to capitalize on the newfound partnership or digital payments in general, this credit card issuer could prove to be a discounted way to get exposure.

Waistlines and Bottom lines

Weight Loss Drugs Are Having a Moment

More than 40% of American adults were considered obese from 2019 to 2020. That figure is up from roughly 30.5% of the population between 2000 to 2009, according to the Centers for Disease Control. This is not ideal. Obesity is a serious issue that can lead to other costly conditions such as heart disease and certain types of cancer.

What’s encouraging, however, is that obesity drugs are actually having a moment. Most importantly, they’re working better. This means more doctors feel comfortable prescribing them to patients. Additionally, weight loss drugs like Novo Nordisk’s (NVO) Wegovy and Eli Lilly’s (LLY) Mounjaro are receiving increased coverage. This is according to Bank of America analyst Geoff Meacham. In a recent research report, he wrote that 80% of weight-loss drugs are now covered by health insurers.

Supply Side Issue

The insurance part of the equation is a big deal. It’ll help grow the overall market and related companies’ share prices. These drugs can be extremely pricey without insurance subsidies which has hurt adoption rates in the past. For example, Wegovy runs at about $1,350 a month while Mounjaro has a list price of about $975 per prescription.

Both drugs helped Novo Nordisk and Eli Lilly beat Wall Street earnings and revenue estimates in the third quarter. The companies said more doctors are prescribing their medicines for obesity and diabetes but further upside was limited by supply issues.

Novo Nordisk is predicting it can meet the demand for Wegovy by year-end. Meanwhile, Mounjaro was fast-tracked by the FDA in October to treat obesity and is already in use for diabetes.

Eli Lilly a Serious Contender

Another catalyst for these obesity drugs came in the form of new guidance from the American Gastroenterological Association. On November 1st, the group recommended people with obesity take prescription weight-loss medication. Diet changes and increased exercise are also highly recommended.

At the moment, Novo Nordisk is leading the pack, controlling 56% of the market for its class of drug. Eli Lilly is expected to be a serious contender as well once its drug is on the market. In phase-three clinical trials patients lost 16% to 22.5% of their body weight, which is on par with rates achieved with bariatric surgery. Bank of America’s Meacham thinks Mounjaro sales will hit $100 billion by 2035 if it gets approved to treat obesity and other illnesses.

Nova Nordisk and Eli Lilly are ushering in a new era for weight-loss drugs making them cheaper and more effective. That’s good news for the companies' bottom lines and Americans’ waistlines. It also presents a potential opportunity for investors.

Diversity Meets the Fintech Industry

The fintech industry isn’t exactly known for its diversity. WTF is up with that?

Nicole Casperson is a reporter-turned-creator who’s quickly becoming one of the most important new voices in fintech. Each week, Nicole writes the WTFintech? newsletter with informative stories on startups, new technologies, and emerging female leaders.

Be the change you want to see. Subscribe to WTFintech? today.

How to Play the Rise of K-Pop

BTS is Down, But the Industry Isn’t Out

It’s a murky macro environment right now, which means looking abroad for investment ideas needs to be done with a dose of caution. With that said, there are interesting trends shaping up overseas that are worth paying attention to. One is the rise of K-Pop, which is short for Korean popular music. It isn’t just about the music, however. There’s been an increasing obsession globally with South Korean culture, drama, and film.

According to an estimate released by the Korea Foundation, there were roughly 105 million of these fans spread throughout 109 countries excluding South Korea in September 2020. This represents a 43% increase from four years ago, when around 73 million people were K-pop fans.

BTS, a popular boy band, is one of the most well-known manifestations of this trend. However, they need to perform their mandatory military service so they will be out of commission for a little while. That said, there are other ways to get exposure to the space.

Enter the KPOP Ticker

With COVID restrictions lifting in South Korea and Japan, residents are ready to venture out again. Artists are releasing new albums to coincide with reopenings and beginning to tour, all of which spells big bucks for the industry. It particularly benefits the companies behind the talent including YG Entertainment, Hybe, and JYB Entertainment.

At the end of September, a new exchange-traded fund was launched in order to capture the upswing of the booming industry. The ticker is KPOP and comprises South Korean companies in entertainment or interactive media and services.

“K-pop fan engagement across the globe is materially higher than that of other genres across metrics, such as social media engagement and merchandise sales including physical album sales,” Jangwon Lee, creator of the KPOP and Korean entertainment ETF told CNBC in a recent interview. “We believe there could be a high conversion among fans becoming shareholders in companies that their favorite artists are affiliated with.”

Not Off to a Great Start

Since launching, the ETF is down about 23%, falling alongside the Kospi index, which is off about 20% in 2022.

Despite the bloodletting, Lee says the ETF will improve as the underlying companies gain more traction. He is optimistic a combination of pent-up demand and mainstreaming of K-pop will benefit the industry.

Global music industry sales are poised to hit $131 billion by 2030, more than double the $62 billion six years ago, according to a Goldman Sachs (GS) estimate. K-pop is certainly poised to capture a piece of that growing pie.

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