News of the Week (February 5 - 9)
Cloudflare; Spotify; Enphase; Chipotle; Fortinet; Pinterest; Bill.com; PayPal; Shopify; Amazon; Duolingo; Macro; Portfolio
Today’s Piece is Powered By My Friends at BBAE:
1. Cloudflare (NET) – Introduction & Earnings Review
In essence, Cloudflare makes the internet faster and more secure. They have a massive global Content Delivery Network (CDN) to move traffic closer to the end user, which cuts web latency. They actively assist clients in optimizing traffic speed and consistency as well. It also has a suite of security tools (firmly within network security like Zscaler) to protect customer websites from Distributed Denial of Service (DDoS) attacks, which aim to inundate and overwhelm networks with traffic. They don’t sell physical firewall hardware, but instead they offer a virtual, cloud-native “Magic Firewall” to supplant these hardware needs. It offers web application firewalls too for application-level security, while Magic Firewall is for network-level security.
A Few Key Product Categories to Know Aside from DDoS and its Next-Gen Firewall Products:
Workers Platform is its serverless (so fully managed by Cloudflare) product suite for developers to build, maintain, secure and deploy applications. This allows for caching of content and applications across Cloudflare’s global network for faster delivery. Its newer Workers AI product allows developers to access models and infuse GenAI tools like sentiment analysis into the apps and networks run on Cloudflare. Workers AI works seamlessly with its “Vectorize,” (and other vector databases). Vector refers to a style of data querying that allows for visualization of data patterns. Another key example of Cloudflare’s GenAI tools is its R2 product. This allows cloud workloads and data to be freely moved among public clouds with no tax. This use case is popular for GenAI model building and implementation as models are voracious users of data and GenAI work often spans multiple clouds.
Cloudflare Access is its Zero Trust Network Access (ZTNA) program. Zero trust means that a user or device must be constantly verified (or never trusted). Cloudflare does this in a seamless manner to minimize user friction. It considers device type, location, usage patterns (or signatures) and other contextual clues to better authorize permission requests and to know when to block those requests or request more information. It then deploys a minimal privilege approach to ensure only the necessary permissions are granted to workers. Nothing more, nothing less. This uplifts environment security vs. legacy identifiers to ensure an adversary can’t breach the most vulnerable part of a tech stack and move freely throughout it thereafter.
Secure Access Service Edge (SASE) platform is a term for how Cloudflare conjoins web performance and security use cases (such as ZTNA). This drives vendor consolidation, controls costs and augments performance. Cloudflare One is its overarching platform and product bundle subscription combining its performance and security use cases.
Cloudflare beat revenue estimates by 2.7% and beat its guidance by 2.9%. Its 40.9% 3-year revenue compounded annual growth rate (CAGR) compares to 43.2% as of last quarter & 45.7% 2 quarters ago.
This was also its 2nd best quarter of $100,000 annual recurring revenue (ARR) customer additions in nearly 2 years.
Remaining performance obligations (RPO) (a forward-looking demand indicator) rose by 37% Y/Y to $1.25 billion.
“We continue to believe that our DBNRR is stabilizing near these levels.” – CFO Thomas Seifert
Beat EBIT estimates & beat its same EBIT guidance by 40%.
Beat $0.12 earnings per share (EPS) estimates & beat its same guidance by $0.03.
Beat free cash flow (FCF) estimates by 32.3%.
Note that its target gross profit margin (GPM) is 75%-77%. It’s already above that.
c. Balance Sheet
$1.7 billion in cash & equivalents.
$1.3 billion in senior notes.
Share count rose by 2.5% Y/Y.
d. Annual Guidance & Valuation
Cloudflare’s annual revenue guidance met expectations. Its EBIT guidance was 1.3% ahead of expectations and its EPS guidance was $0.025 ahead of $0.56 expectations. Like Meta, Google, Amazon and many others have done, Cloudflare is extending the useful life of some infrastructure from 4 years to 5 years. That means less depreciation and so more operating income. This added $20 million to the 2024 EBIT and net income guides. Without this help, EBIT would have been about 10% light and EPS would have been $0.03 light. There is nothing shady about this accounting maneuver. It’s entirely legitimate and entirely by the book. Still, this is important context to consider. It also guided to $156 million in 2024 FCF, which is 5% light. It expects to hire at a gradual pace in 2024.
“Mixed macroeconomic data points serve as a reminder that we are operating in a business environment that is showing signs of improvement, but continues to be challenging to predict. As a result, we remain prudent in our outlook for 2024.” – CFO Thomas Seifert
Cloudflare trades for 192x its 2024 EBIT guidance and 187x 2024 EPS guidance. EBIT is set to grow by 28% Y/Y and EPS is set to grow by 19.4% Y/Y. This is among the most expensive names in the market; it has been for years.
e. Call & Release Highlights
The Platform Play:
Cloudflare’s ability to combine app performance and security, network hygiene and Zero Trust all into one interface and platform is resonating. Like other software platform plays, offering more to clients means vendor consolidation, cost savings and better product efficacy. That’s the formula Cloudflare is delivering, and it’s working. It signed a record number of new $500,000+ and $1,000,000+ customers as well as its largest new and renewal deals ever. Average contract value (ACV) booked rose above 40% Y/Y for the first time since 2021. Pipeline closure rates, average deal size and productivity all improved sequentially. All of this is even as “macro remains choppy.” Cloudflare One, defined above, was relatedly called out by CFO Thomas Seifert as a key driver of the strong quarter. Revenue from its largest cohort of clients rose from 63% of total to 66% of total Y/Y.
Cloudflare’s vendor consolidation was cited as the reason for winning a 3-year, $33 million contract win with the U.S. Department of Commerce.
It won a $7 million contract due to its simplified delivery of zero trust, easier integrations and a stronger strategic vision than competitors. This client also enjoyed a sharp boost to web performance.
It won a large contract to displace a hyperscaler that couldn’t protect the client from DDoS attacks.
It won a UK government agency despite being a late entrant into the bidding process due to tech superiority.
Two quarters ago, CEO Matthew Prince made some harsh remarks about his sales team’s underperformance. He spoke about Cloudflare not doing enough in the world of performance management and how sales team momentum needed to greatly improve. Two quarters later, that improvement has already come. Pipeline generated from its new sales cohort is over 100% larger than the year ago hires. Account engagement also rose 350% Y/Y as the new sales team made its mark. Truly an impressive and rapid turnaround here after the Q2 2023 drama.
Cloudflare announced a change in its go-to-market team. Over the last 15 months, Marc Broditisky has been running these efforts. Per CEO Matt Prince, he did a fantastic job. He “operationalized the landing of large clients” and revamped performance management with the “discipline needed to have a world-class sales department.” This quarter, Cloudflare announced that Mark Anderson will take over Boroditsky’s responsibilities as the firm’s new President of Revenue. Anderson comes over from Alteryx (which was taken private) where he was the firm’s CEO. Prince told us that Cloudflare has wanted him in this role for years, but the timing was never right until now. He’s been a Cloudflare board member for a while, which means this should be a very seamless transition. Boroditsky will stay with Cloudflare as an advisor for a few months to avoid any operational disruption.
“I wanted to take this time to reaffirm that Michelle (COO) and I (Matt Prince) aren't going anywhere or changing our roles in any way. I wake up every morning more excited about the opportunities now to fulfill our mission of helping build a better internet. If you study iconic technology companies, they are often mission-driven, founder-led, and include a dynamic, experienced and evolving leadership team to surround the founders.” – CEO Matt Prince
Cloudflare wanted to have inference tuned Graphics Processing Units (GPUs) in 100 cities by this quarter. It reached 120 cities and reiterated plans to have these GPUs in its entire global network by the end of this year. That is a prerequisite for running GenAI use cases like Workers AI through Net’s platform. 6 years ago, Cloudflare began leaving empty slots in its servers around the world. It did this in anticipation of Worker AI GPU demand. This means it can simply plug Worker AI GPUs into its existing server infrastructure. So? GenAI proliferation will not entail hefty boosts to capital expenditures. Impressive foresight.
Since the firm’s Workers AI launched in September, usage requests are up 900%. Notably, 33% of all Workers AI requests are from clients new to the Workers Platform. This tells leadership that GenAI will not only create new demand streams, but accelerate existing ones too. While Workers AI brings a bevy of model building and usage options, Vectorize allows these models to be visually enriched with a client’s custom first party data to drive more relevant use cases. Worker AI is driving strong, complementary demand for Vectorize thus far.
f. Take – Nothing but Net
Cloudflare is a fantastic company and this quarter made that clear once more. Its platform is clearly clicking with large clients and its margin path is impressive to say the least. The report wasn’t incredible or jaw-dropping, but it was rock-solid across the board. I continue to find the firm too pricey to personally own despite the compelling value proposition. Regardless, congratulations shareholders on nearly 200% returns from the lows less than a year ago. Take a bow.
2. Spotify (SPOT) – Earnings Review
“While I'm pleased with the level of growth we saw in 2023, perhaps what is even more gratifying is that it also marked a very different year for Spotify, a true evolution in how we operate our company. A year where we started to prove that we're not just a company that has an amazing product, but one that also is building a great business.” – Founder/CEO Daniel Ek
Missed revenue estimates by 1.2% & missed guidance by 0.8%.
Constant currency revenue growth was 20% Y/Y vs. 17% Y/Y last quarter due mainly to price hikes. Premium revenue rose by 21% Y/Y on an FX neutral (FXN) basis. Ad-supported revenue rose by 17% Y/Y on an FXN basis.
Its 19.1% 3-year revenue CAGR compares to 19.3% last quarter and 18.9% 2 quarters ago.
Slightly beat monthly active user (MAU) guidance & estimates.
Beat premium subscriber estimates by 0.5% and slightly beat its guidance.
Beat non-GAAP EBIT guidance by 84%. This excludes €143M in severance charges incurred during the period.
Missed -€0.26 GAAP EPS estimates by €0.10 & met GAAP EBIT estimates. €143M in severance charges hit GAAP margins this quarter.
Crushed FCF (non-GAAP metric) estimates by about 150%.
GAAP GPM of 26.7% was 10 bps ahead of expectations.
c. Balance Sheet
€4.3B in cash & equivalents. €1.2 billion in long term investments.
€1.2 billion in convertible notes.
Basic shares +0.5% Y/Y; diluted shares -1% Y/Y (layoffs).
d. Next Quarter Guidance & Valuation
Missed revenue estimates by 0.8%.
Met GAAP GPM estimates of 26.4%. This implies the smallest Q4 to Q1 GPM decline in years, which is related to the core business and not any one-time benefits.
Beat EBIT estimate by 124%. Commentary on the call hinted at EBIT outperformance continuing through 2024.
It also guided to 618 million MAUs (+16 million Q/Q) and 239 premium subscribers (+3 million Q/Q).
For 2024, leadership also told us that revenue growth would accelerate vs. 2023 while user growth remains roughly consistent with 2023. Both items were as anticipated. Margins are expected to expand throughout 2024 as well.
Spotify trades for 50x expected 2024 EBIT and 58x expected 2024 FCF. EBIT is set to grow by 283% Y/Y while FCF is set to grow by 98% Y/Y.
e. Call & Letter Highlights
Advertising, The Spotify Audience Network (SPAN) & Spotify Wrapped:
SPAN is a conduit between ad buyers and content publishers across most podcasting apps. It allows creators to juice traffic and advertising revenue while giving advertisers greater control over advertising segmentation, targeting and impression selection. Ad placement is done programmatically with the dynamic ability to bid on ads on a by-episode, by-impression basis. This quarter, SPAN expanded from 9 to 14 countries, with entrances into India, Japan and Mexico among others. It also enjoyed double-digit sequential growth in participating publishers on the supply side and advertisers on the demand side. Steady growth for both cohorts is vital for maintaining a healthy marketplace with fair pricing and strong returns.
Interestingly, it’s re-thinking exclusive podcast deals as a driver of advertising revenue. The deals have helped drive premium subscriptions, but not advertising revenue. Non-exclusive publishing and SPAN will be two focus areas going forward to try to reaccelerate podcast advertising performance.
Spotify Wrapped, its annual end-of-year campaign, enjoyed 40% Y/Y engagement growth, with 225 million MAUs interacting with it.
Music advertising revenue rose over 10% Y/Y thanks, in part, to stable pricing. That’s wonderful to hear and meshes very well with other digital advertising players like Meta. Podcasting advertising revenue rose over 10% Y/Y as well. This, conversely, was driven by strong impression growth, with the pricing backdrop still somewhat “soft.” Overall advertising demand was called “choppy.”
Gross margin tailwinds for the quarter included better podcasting and music profits as well as price hikes. Podcasting gross margin is now nearing breakeven through more partnership scrutiny and continued engagement growth. Gross margin headwinds for the quarter included audiobook start-up costs and a small severance charge in the cost of revenue bucket.
Operating expenses rose 2% Y/Y via severance charges. Without these charges, OpEx would have fallen by 11% Y/Y. Still, OpEx was lower than expected due to “lower marketing spend and personnel costs.”
Audiobooks & Other New Bets:
Spotify added 200,000 audiobook titles to its U.S. content library for premium subscribers in November. It’s already the #2 audiobook publisher and is already accelerating industry-wide revenue growth on its own. It’s very pleased with the start and excited about data pointing to many of these audiobook listeners being brand new to the sector. It’s expanding the pie. This is still a gross margin and overall margin drag for the company as it scales this business to broaden engagement and improve retention.
To continue juicing engagement, Shopify also debuted its very first merchandise tab on the app with personalized recommendations for purchases.
Last month, Ek published a scathing letter criticizing Apple’s proposed app store changes to comply with Europe’s Digital Markets Act (DMA). He criticized the new fees charged to larger merchants and how it would lead to Spotify paying as much or more than it did before. He doesn’t see this negatively impacting the business as Spotify can elect to stick with the old policy. Still, this makes DMA creating material profit tailwinds for Spotify less likely. He’s hopeful that the EU will force Apple to actually comply with the purpose of the new laws, but is obviously unsure.
Long Term Targets:
“With revenue and profitability trends both inflecting favorably heading into 2024, we view the business as well positioned to deliver improving growth and profitability as we progress towards delivering against our Investor Day goals.” – Founder/CEO Daniel Ek
As a reminder, investor day goals include 1 billion users by 2030 and $100 billion in revenue for 2033. That represents an 8% MAU CAGR and a 22% revenue CAGR over the respective periods. It also set a target of staying above a 25% GAAP gross margin and to deliver robust FCF compounding.
During the call, Ek spoke about balancing growth and profitability. He told us that “Spotify’s value is in solving problems at the intersection of creators and consumers.” It sees delivering scale within this intersection as vital and so continued revenue growth as vital to support its business and bottom line. Still, the “hurdle rate for new investments has increased” as it scrutinizes every dollar spent as much as it should. Spotify is fixated on profit compounding to appease investors and it is investing more aggressively against its long runway.
Q4 Y/Y user growth set a 5 year record in Latin America and its “Rest of World” region at 32% and 22% respectively. North American MAUs rose by 19% Y/Y while Europe MAUs rose by 28% Y/Y. This was its second best Q4 ever for MAU additions, which came in at 28 million.
I found this quarter to be very strong. The FX neutral growth acceleration, strong audiobook start and continued margin outperformance make up a wonderful recipe for success. Explosive profit inflections generally create compelling opportunities, and Spotify is delivering that inflection as we speak. I was a bit skeptical that it could cut costs and maintain strong market share as it competes with Apple, Google and Amazon on music streaming. But here we are. The commentary on music ad pricing stability is encouraging from a macro perspective, with the Q1 results and guide being encouraging across-the-board from a company-specific perspective.
The last two Spotify quarters have both been wildly impressive to me. I have added this name to my watch list – along with Cava, Sweetgreen and Jfrog – and will track it more closely going forward.
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3. Earnings Round-Up
a. Enphase (ENPH)
Enphase competes in the solar energy space and collects a bit less than half of its revenue from residential demand. Solar demand, and especially residential solar demand, is immensely cyclical. Demand is tightly negatively correlated with interest rates. As rates rise, financial installations get more expensive and demand suffers. As rates fall, the opposite plays out. Considering we just wrapped up a historically rapid and aggressive rate hike cycle, this space is presently challenged.
If you’re wondering how the data below was rewarded so sharply by investors, consider that markets are forward-looking. This could be a matter of investors exhaling about the expected worst being over and looking ahead to a demand trough with 2024 rate cuts coming. The commentary about bottoming demand in Europe was probably loved by the analyst community as well.
Missed revenue estimates by 7.6% & missed guidance by 6.8%.
Its 4.6% 3-year revenue CAGR compares to 45.5% last quarter & 78.2% as of 2 quarters ago.
Missed GAAP EBIT estimates by 23%; missed EBIT guidance by 11.5%.
Met EPS estimates.
Sharply missed FCF estimates.
$1.7 billion in cash & equivalents.
$1.3 billion in debt.
Share count fell nearly 3% Y/Y.
Next Quarter Guidance & Valuation:
Revenue missed by 11.4%.
Missed $16M GAAP EBIT estimate by $40M.
Enphase trades for 73x expected 2024 EPS and 35x expected 2024 FCF. EPS and FCF are both expected to shrink Y/Y.
b. Chipotle (CMG)
Beat revenue estimate by 1.2%.
Chipotle’s 16.1% 3-year revenue CAGR compares to 15.6% as of last quarter and 22.6% 2 quarters ago.
Beat GAAP EBIT estimate by 6.3%.
Beat $9.72 GAAP EPS estimate by $0.49.
$560M in cash.
$1.3B in investments.
Share count fell slightly Y/Y. Added $200M to its buyback program.
Guidance & Valuation:
Chipotle expects to add 300 new stores and see mid-single digital Y/Y same store sales growth.
Chipotle trades for 49x expected 2024 EPS and 48x expected 2024 FCF. EPS is expected to grow by 19% Y/Y while FCF is expected to grow by 23% Y/Y.
c. Fortinet (FTNT)
Slightly beat revenue guidance & identical estimates.
Beat billings guidance by 13%.
Beat EBIT estimates by 15.2% & beat guidance by 15%.
Beat $0.43 EPS estimates & beat the same guidance by $0.08.
$2.4 billion in cash & equivalents.
$1 billion in debt.
Share count fell 2.5% Y/Y.
Annual Guidance & Valuation:
Missed annual revenue estimate by 3%.
Roughly met billings estimates.
Slightly missed annual EBIT estimates
Met annual EPS estimates.
Fortinet trades for 40x expected 2024 EPS and 30x expected 2024 FCF. EPS is expected to grow by 5% Y/Y while FCF is expected to grow by -1.1% Y/Y.
d. Pinterest (PINS)
Missed revenue estimates by 0.9% & roughly met guidance.
Beat EBITDA estimates by 1.8%.
Beat GAAP EBIT estimates by 11.9%.
Beat $0.51 EPS estimates by $0.02. EPS rose 83% Y/Y.
Guidance & Valuation:
Pins guided to 16.0% Y/Y revenue growth next quarter vs. expectations of 16.6% Y/Y growth.
The firm trades for 33x 2024 EPS estimates while EPS is expected to grow by 25% Y/Y.
$2.5 billion in cash & equivalents.
Share count was roughly flat Y/Y.
e. Bill.com (BILL)
Beat revenue estimates by 6.8% & beat guidance by 7.0%.
Nearly doubled EBIT estimates.
Beat $0.40 EPS estimates & beat same guidance by $0.23.
$2.6 billion in cash & equivalents.
$1.7 billion in convertible notes.
Share count is flat Y/Y.
Guidance & Valuation:
Bill raised its revenue guidance by 1.1% for the year, which beat estimates by 1.2%. It also raised $1.86 EPS guidance by $0.34 to $2.20, which beat estimates by $0.28.
Bill trades for 51x next 12 month (NTM) EBIT and 32x NTM FCF. EBIT is expected to grow by 42% Y/Y during this fiscal year while FCF is expected to grow by 15% Y/Y.
4. PayPal (PYPL) – Reflecting on a Tough Quarter
This was a tough PayPal quarter. Its messaging confused investors about the impact of its stock comp accounting change on 2024 EPS guidance. It also set a goal for flat Y/Y transaction margin (similar to gross margin) dollar growth, which is disappointing to say the least. I was patiently waiting for a transaction margin bottom to get aggressive once more on building out the position. That came this quarter, but did not motivate me to add more shares. Why the change of heart? Flat transaction margin dollar growth in 2024 means the margin trough will be a one-off event rather than a permanent, convincing inflection. It needs to be the latter.
I was candidly disheartened to the point of selling 8% of my PayPal stake to make it my smallest holding – just behind Lemonade. This was not supposed to be as speculative of an investment as it has become. While the risks associated with Lemonade and PayPal are apples and oranges, the level of speculation needed to justify holding this investment is starting to approach Lemonade’s.
Despite this, I still am holding 92% of what I held as of last week and I don’t plan on selling any more for now. Why? I’ve said repeatedly that this turnaround will take time. I’ve said over and over again that there was too much excitement surrounding Q4. Broken record alert: This is not Meta 2.0. There’s much more to fix, steeper competition, and a bigger mess left behind by the poor decision-making of prior leadership.
A branded checkout re-acceleration cannot happen overnight; small business private label traction can’t be built overnight; Braintree can’t deliver a margin explosion overnight; PayPal cannot rapidly accelerate active user growth overnight. The company under-invested in key initiatives like checkout modernization, ignored the mobile commerce revolution, disregarded its massive data edge, chased cash burning, lower value account growth, dawdled on innovation and improperly integrated M&A for years. All of these things will take time to fix. And all of these things are the fault of Dan Schulman and his old team.
This quarter was not Alex Chriss’s fault and it was never going to be amazing. He has been at the company for 3 months. Give him at least a few quarters. Some pointed to his sober tone on the call as being negative, but these were the same folks criticizing him for being overzealous in previous interviews. Pick a lane.
At the same time, I’ve also said many times that my PayPal expectations will ramp throughout 2024. That’s no longer an opinion, but a prerequisite for me to stay invested in this business. Q4-2023 must represent the kitchen sink quarter, and I think that it will. On the call, leadership explicitly told us that the guide leaves out any assumed value creation from new initiatives. It wants to “put points on the board” before assuming those points will come and wants to “rebuild a reputation” for delivering on promises. Reading through the tea leaves, the tone makes me think that management is sandbagging to set a new CEO up for an easy year of over-delivering (like it should). And again, that must be the case. These initiatives need to start bearing fruit because that’s the only way transaction margin dollar growth can resume steady multi-year compounding. Without that resumption, profits cannot grow for much longer.
I think PayPal will deliver a turnaround. But? My patience and confidence levels are dwindling. I want to see Chriss and company prove that the foundation for a turnaround has been laid. I’d much rather resume adding at $70 per share with a clear investment case than to do so today with all of the uncertainty.
The only thing I’d pick on Chriss for is reinvesting all of the cost savings into more product enhancements. I would have loved for him to earmark a portion of those savings for net income growth in 2024. Especially considering it already has the balance sheet and then some to fund any R&D. Still, I loved the accounting change, the new disclosures, the call dialogue and what I view as a guide that will turn out to materially under-promise. I also love that PayPal rolled out product releases in a microscopic fraction of the time it took the old team to do so. They’re doing the right things. They need to keep doing the right things. They need these things to deliver tangible financial value. We’ll see.
As an aside, I’ve reached out to my contacts at PayPal about the 2024 EPS guide confusion. The $5.10 guide can be translated in two ways. First, that it excludes $1.6 billion in stock comp add-backs, which were added back in 2023. This would make the $5.10 2024 guide a little more than $1 higher vs. 2023 on an apples to apples basis. The other way to translate is that the add-back was still in the 2024 guide and will be excluded later on. That would make the $5.10 2024 guide a little more than $1 lower vs. 2023 on an apples to apples basis. I think the former is true, but I’ll keep you posted.
5. Shopify (SHOP) & Briefly CrowdStrike (CRWD) – Price Hikes
Shopify is raising Shopify Plus subscription plans by 25% from $2,000 per month to $2,500 per month. Last time it hiked pricing, the increases were met with “zero pushback.” Shopify provides far more value than its competition. Many, many companies offer pieces of what Shopify does like web building or business banking. Nobody else does it all. Nobody else combines a pre-built, massive base of shoppers, sophisticated marketing tools, merchant credit products, end-to-end supply chain help (through partners), ubiquitous channel integrations and (so much) more neatly tied into a single merchant dashboard. Nobody gives merchants as overarching of a view of their operations as Shopify does because nobody touches as many parts of it as Shopify does. It will continue to periodically raise pricing as it introduces more value into its bundles – always with a goal to underprice vs. the utility it delivers.
What does unmatched utility mean? Pricing power. This news is Shopify flexing that pricing power. The financial impact could be quite material. There are about 20,000 Shopify Plus merchants. Some have a few standalone stores, so let’s assume there are 26,000 total subscriptions and that 1,000 will churn (pessimistic, but go with it). This hike means $6,000 in added annual revenue per merchant for the 25,000 remaining subscriptions. That’s $150 million in added annual revenue, or a 2% boost to 2024 revenue. The $150 million will be purely profit, meaning it could prop up earnings per share by a full 11% in 2024. That would take its 2024 earnings multiple from 83x to 75x, with earnings growing at a 2-year forward CAGR of about 45%. Expensive, which is why I trimmed 6% of the position on Friday, but certainly not ridiculous or bubblicious. And a best-in-class player in a massive, massive industry with briskly rising market share, accelerating growth and explosive operating leverage deserves a premium.
I really don’t see much near-term share price upside coming from next week’s earnings report. I do see a lot of long term upside and expect the upcoming results to reiterate that opinion. What could lead to more explosive short-term upside for a red hot stock? Its suite of GenAI products (Shopify Magic) realizing significant traction and leading to a large beat and raise vs. consensus. It would need to have a Palantir moment where analysts suddenly grow wildly more bullish on 2024 GenAI monetization potential. As an aside, I think the exact same thing is true for CrowdStrike, which is why I also trimmed 8% of that position on Friday. If Shopify (and CrowdStrike) deliver shockingly good quarters and see the stocks pop, great. If they don’t, I selfishly hope the data is still as good as it should be and that the sell-off is sharp enough to allow me to add more shares.
6. Amazon (AMZN) – Cost Cuts
Amazon will cut about $100 million in payroll within its healthcare unit amid another series of layoffs. As always, layoffs suck from a human perspective. I hope all of those impacted find great jobs in what is still a fantastic job-seeker market. From an Amazon perspective, this merely adds another operating income tailwind into the fold. Whether it’s ads, fulfillment localization, new fulfillment services from its existing cost base, 3rd party selling or Prime pricing power, Amazon is enjoying strong wind at its back as it pushes for more leverage.
With GenAI use cases exploding, Amazon is finding new ways to automate developer coding, AWS maintenance and also customer service. So? Like Google has told us to expect throughout 2024, I unfortunately think more roles will become unneeded and more layoffs will occur for Amazon.
7. Duolingo (DUOL) – GenAI Risk
Duolingo has masterfully executed in every sense of the imagination since going public. The effect of this perfection? 2024 revenue estimates are a full 45% higher than they were when it went public; 2023 (wraps up when it reports Q4) EPS estimates now call for $2.29 in EPS vs. -$0.20 originally. That’s not a typo. It has been absolutely perfect.
But what’s the main risk I see involving this business model? GenAI. Google and many others are working on real-time language translators, which leaves many wondering if Duolingo will be displaced in the years ahead. I think that’s the most pressing bear case surrounding this name. And yet I’m confident in holding shares today. Why? A few reasons.
I see Google’s real-time translator as more of a complement to Duolingo rather than a replacement. Duolingo users are learners. They are trying to master a language to more closely relate to a given culture or a spouse. Ask yourselves… Do you think it’s more attractive for a British husband to talk to his Spanish wife through an AI translator, or on his own? Which husband gets more brownie points? Then ask yourself if a job applicant who is fluent and conversational in English would be more preferred over one who must talk to their boss and customers through a machine. I think the answers to these questions are clear; there’s a natural need for human connection, which AI does not supplant. Google’s product will be popular for pressing, real-time use cases (i.e. business contract translations). Duolingo’s product will remain popular for the learning and entertainment use cases it has always aimed to provide. For evidence, consider Chegg’s putrid results over the last few quarters due to GenAI proliferation, and then see Duolingo’s flawless financial execution during the same period. Chegg is for cheating; Duolingo is for learning.
Finally, while Duolingo is today’s language learning app, tomorrow it will need to simply be the language learning app to drive continued explosive shareholder returns. Morphing from language education to education vastly expands its target market and also insulates it from the GenAI language risk if my opinion turns out to be wrong. Its literature and math courses are off to great starts with its music course coming soon. There will be many, many more subjects on the app. While GenAI is a risk, it’s not one that has held back Duolingo’s results thus far and is one that I view the company as being well-equipped to combat.
Services Purchasing Managers Index (PMI) for January was 52.5. This compares to 52.9 expected and 51.4 last month.
Institute of Supply Management (ISM) Non-Manufacturing PMI for January was 53.4. This compares to 52.0 expected and 50.5 last month.
ISM Non-Manufacturing Prices for January came in at 64.0. This compares to 56.5 expected and 57.4 last month.
Initial Jobless Claims were 218,000. This compares to 221,000 expected and 227,000 last month.
As already mentioned, I trimmed 8% of my CrowdStrike position, trimmed 6% of my Shopify position and trimmed 8% of my PayPal position during the week.