A number of Club holdings were in the news Wednesday. Here’s a breakdown of four headlines and our take on what they mean for our investment thesis in the five companies mentioned. Amazon agrees to food-delivery deal with Grubhub U.K. regulator probes Microsoft-Activision Blizzard deal RBC downgrades Pioneer Natural Resources Goldman looks at online ad market for Meta, Alphabet Amazon agrees to food-delivery deal with Grubhub The news: Amazon (AMZN) is adding another perk to its Prime program after reaching a deal with Grubhub, giving Prime members access to the food-delivery company’s own premium service. Amazon Prime members in the U.S. will be able to sign up for a free one-year membership to Grubub+, entitling them to free deliveries on orders from certain restaurants and other “members-only perks and rewards.” As part of the agreement between Amazon and Grubhub’s parent company, Amsterdam-based Just Eat Takeaway , Amazon has the option to take a 2% stake in Grubhub. If certain performance conditions are met, in particular the number of new customers added, Amazon could increase its stake in Grubhub to as much as 15%. Shares of Just Eat Takeaway soared 15% in European trading. The Club’s take: We view this Amazon-Grubhub deal through the lens of Amazon Prime and how this new perk impacts the perceived value of a membership. For the first time since May 2018 , Amazon earlier this year raised the annual price of a Prime subscription. The cost increased by nearly 17% to $139. Before the price hike four years ago, Prime was $99. Amazon has taken a host of steps in the intervening years to make Prime more valuable and try to reduce churn. Those added benefits in recent years include free one-day shipping , more content on Prime Video and national discounts at Whole Foods, which Amazon purchased in 2017 . Being able to access Grubhub+ free, even if it’s just for a year to start, theoretically adds further value to Prime. The more valuable members believe Prime to be, the more likely they are to keep subscribing even if the cost of it goes up again in the future. That is what investors want to happen. In our minds, a Prime subscription is well worth its current price. U.K. regulator probes Microsoft-Activision Blizzard deal The news: Microsoft ‘s (MSFT) blockbuster planned acquisition of video-game publisher Activision Blizzard (ATVI) is being investigated by U.K.’s Competition and Markets Authority . It represents yet another regulatory review for the $68.7 billion all-cash deal, which was announced in January. The U.S. Federal Trade Commission already is probing the proposed acquisition, as is Australia’s competition watchdog . In a statement, Microsoft’s corporate vice president and general counsel, Lisa Tanzi, said the tech giant is cooperating with the U.K. inquiry and still expects it will receive the necessary approvals from regulators around the world. “We remain confident the deal will close in fiscal year 2023 as initially anticipated,” she said. Microsoft’s fiscal 2023 began in July. The Club’s take: The core of our investment thesis revolves around Microsoft’s hybrid cloud business Azure and the secular trends that favor years of strong growth. With that said, we do like Microsoft’s Xbox gaming business and believe that bringing in-house Activision, which publishes the Call of Duty, World of Warcraft and other popular franchises, makes sense for its buildout of a subscription gaming service. Given the size of the potential tie-up, we fully expected there to be numerous investigations into the Activision acquisition. If completed, it would be the largest tech acquisition in U.S. history . It’s hard to predict how regulators in the U.S., U.K. and elsewhere will come down on this Microsoft-Activision deal because there’s generally been a more aggressive posture toward Big Tech in recent years. However, we liked Microsoft over the long term before this planned tie-up was announced and continue to believe it is one of the best run technology companies in the world. RBC downgrades Pioneer Natural Resources The news: RBC Capital Markets analysts on Wednesday downgraded Club holding Pioneer Natural Resources (PXD) to sector perform from outperform (in English, that roughly means to hold from buy). While Pioneer has delivered “a strong total return” over the past year to 18 months, the analysts wrote in a note to clients that they expect “peers to increasingly generate a similar total return” through 2023 based on their updated industry outlook. “We think PXD shares can remain a core holding in most portfolios, but we see more total return potential in other coverage US E & P [exploration and production] equities, at this time,” the note said. RBC kept its $290 per share price target on PXD, which represents around 48% upside from its Tuesday close. RBC remains optimistic on the energy sector more broadly, arguing that after the recent pullback, “a strong fundamental underpinning for oil prices provides investors a backdrop for an attractive entry point.” The analysts are, however, expressing a preference for small/mid-cap stocks because large-cap peers have outperformed over the past year or so. The Club’s take: Our confidence in Pioneer remains firm, despite the energy sector’s weakness since roughly early June. We recognize crude prices have retreated as of late, due in part to recession fears. However, as we called out in a piece Tuesday , our oil stocks including Pioneer can continue to make a lot of money and return a chunk of it shareholders via dividends and buybacks at the levels oil currently trades — in the $95 per barrel to $100 range — and even a bit lower than here. It is our view that the recent decline in many commodities including crude does not, automatically, signal we’re heading for a recession. As for oil, in particular, we believe prices can remain elevated for longer even if there’s an economic slowdown due to how mismatched the supply-and-demand picture is right now. After another tough day for energy stocks, we were encouraged by how the group was able to rebound from its afternoon lows and finish the day near its highs of the session. While we wish we booked some profits when PXD was higher, we still think this stock is right for this market based on how much shareholders like us are being paid to hold it through dividends. Goldman looks at online ad market for Meta, Alphabet The news: Goldman Sachs analysts completed a round of channel checks in the digital advertising market and came away saying in a note to clients Wednesday they see “the widest disconnect in terms of risk/reward skew” in shares of Meta Platforms (META), the parent company of Facebook, Instagram and WhatsApp. They think META should be higher. “We continue to see solid growth for Instagram, a rising optimism in terms of engagement and potential monetization for Reels in 2023 and beyond and a compelling valuation … when measured against growth expectations,” they wrote. The analysts also called attention to another Club holding in Google parent Alphabet (GOOGL). They said that while investors generally expect YouTube ad revenue weakness, their research indicates “continued strong Search trends,” referring to Google Search ads. They also think GOOGL should be higher. The Club’s take: Goldman rates both Meta and Alphabet as buys here, and so do we as evidenced by our 1 ratings on the stocks. Another thing, in particular, we wanted to highlight from the note is Goldman’s reaction to a n internal Meta memo that leaked to the press last week. Our view was that the comments from chief product officer Chris Cox weren’t materially different than what CEO and co-founder Mark Zuckerberg has said before regarding the company’s outlook for the next few months. Goldman analysts offered a similar reaction, adding that Meta’s second-half growth estimates may be conservative and operating expenses may also come in lower than guidance. (Jim Cramer’s Charitable Trust is long AMZN, MSFT, PXD, META and GOOGL. See here for a full list of the stocks.) 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Amazon trucks are seen on April 25, 2022 in New York City.
Michael M. Santiago | Getty Images
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