Quo Vadis Capital May & June 2026 Investing Letter
It’s an interesting contrast; a satellite and rocket company just filed for the largest-ever IPO in history and Walmart says customers are reducing the number of gallons of gas per fill-up at the pump. Another contrast, sales of high-priced Yeti coolers and drinkware did well in the first quarter, but fewer people signed up for low-cost gym memberships at Planet Fitness. The number of families enjoying steak dinners at Texas Roadhouse reached an all-time high, but Domino’s saw softening demand for pizza delivery. Higher year-over-year tax refund amounts (due to changes in legislation) may explain the Yeti coolers and steak dinners, which have masked, in my opinion, incremental weakness in spending. Unfortunately, the tax refund boost is now in the past, leaving us to live with the unmitigated impact of higher gas prices for the foreseeable future. In a market of contrasts, the XRT (an ETF that tracks retail and consumer companies) is down 3% YTD while the SPX (the S&P500, but perhaps better known as the mega cap stock index & ~490 companies that don’t matter) is up 9%.
A negative attitude towards retail and consumer companies can be seen in reactions to recent earnings. Companies that have beaten analyst estimates or raised forecasts have barely advanced, and in some cases have sold off. Meanwhile, I saw consumer names that disappointed experience declines of 20%-30%. The asymmetric reactions are telling me: investors think things will get worse for the sector. From my perspective, the blanket pessimism seems overdone. Jobs are still plentiful, and higher income cohorts can easily absorb paying more for gas (along with higher costs for many other things). That said, one large retailer I spoke to this week whose customer is generally higher income and owns a home had nothing good to say about its outlook.
The more salient question for most individual investors: can the market and tech rally continue if the consumer, which accounts for 2/3 of U.S. economic activity does not come along for the ride? They can’t diverge forever, but until I see more meaningful job cuts, I think we’re still okay.
We recently bought shares of audio-content streamer Spotify (SPOT)* which appeared to be a casualty of the shoot-first-and-ask-questions-later approach to investing in the age of AI.
As discussed in an earlier letter, the market has decided that software producers are doomed, but what about the music industry? Yes, AI can apparently make films, write poetry and novels, and whisper sweet nothings. It can also make songs. Concern about this has apparently been weighing on shares of subscription audio-content provider SPOT which before last week had dropped nearly 50% from its highs of last year.
But is AI-made music really a risk to Spotify? I asked a friend who is a former partner in a San Francsico recording studio who retorted that pop music has been formulaic and algo-driven for decades. Just consider boy bands, whose principal talents consist of the copious application of hair gel and coordinated dance moves. None of them can play a musical instrument. What about Muzak? Muzak has been pumping out watered-down versions of hits since the 1970s (that’s 50 years!) or even longer. I once was astonished to recognize a Muzak flute and light percussion version of Blue Oyster Cult’s Don’t Fear the Reaper. In an elevator! Can AI really make this situation worse? I think not.
But Swedes running Spotify are no slouches. Rather than wait around to see if they’ll be disintermediated, they have gone ahead created a feature to allow users to make their own AI-generated covers of select songs under licenses. This news was a factor in the stock jumping $100 per share (or about 25%) over Thursday and Friday last week. I think the other boost was just a reinforcement that SPOT has an excellent business model. When I looked at it several years ago, SPOT was losing money and I thought the model wouldn’t scale to profitability. Boy was I wrong. The company reported an operating profit margin of nearly 13% in 2025. This week it set a goal of 20% for by 2030. On a subscriber basis, SPOT currently has nearly 300 million paying listeners. Why stop there? Management just set a long-term goal of one billion subscribers and 100 million euros in revenue with even higher profit levels. Can they get there? Shares are still down 10% for the year. I am going along for the ride.
Travel Update
I just got back from Denmark, where I attended the Nordic Value investing conference. At the conference I gave a presentation on Yum China (YUMC), the largest restaurant operator in China. Please email me if you’d like a copy of the deck. I also enjoyed a nice jog around a castle and moat complex (photo below) designed to scare off invaders, like those who might like to have a piece of Greenland.
In late June, I will travel to Vail, Colorado to attend another value investing conference, get in some fly fishing and also get in some downhill runs on the mountain bike. I’ll spend the 4th of July weekend with my family in Southampton, NY. Please let me know if you’ll be around. Thanks!
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