News of the Week (Jan 29 - Feb 2)
Apple; Mastercard; Match; AMD; Supermicro; Shopify; PayPal; Disney; SoFi; CrowdStrike; Macro; Portfolio
Today’s Piece is Powered by My Personal Friends at The One Read:
During the week, we published:
1. Apple (AAPL) — Earnings Review
a. Results
Apple beat overall revenue estimates by 1.4% and its guidance by 2.0%. Its 7.4% 3-year revenue compounded annual growth rate (CAGR) compares to 11.4% last quarter and 11.0% 2 quarters ago.
Iphone beat expectations by 4%. Wearables beat expectations by 4.4%. Mac slightly missed expectations. iPad missed expectations by 4.2%.
China revenue (key focus area for Apple) was 11.5% worse than expectations.
Services revenue missed expectations by 0.9%. Product revenue beat expectations by 2.0%.
Apple also beat 45.5% gross profit margin (GPM) estimates and its identical guide by 40 basis points (bps; 1 bps = 0.01%). It beat earnings before interest and tax (EBIT) estimates by 3.2% and beat $2.11 GAAP earnings per share (EPS) estimates by $0.07. EPS rose 16% Y/Y during the quarter.
b. Balance Sheet
$173 billion in cash & equivalents.
$108 billion in total debt.
Share count fell 2.4% Y/Y.
It remains committed to bringing its net cash position from $65 billion to $0. The buyback machine will continue to hum.
c. Guidance & Valuation
Apple expects to maintain 11% Y/Y services growth next quarter (13% FX neutral growth). This implies $23.2 billion in services revenue. In last year’s March quarter, it enjoyed the end of supply chain disruptions and the fulfillment of pent-up iPhone demand. This added $5 billion to iPhone and overall product revenue. It expects Y/Y product revenue to be flat excluding this $5 billion. This implies $68.9 billion in product revenue.
All in all, its revenue guidance is $92.1 billion. This missed expectations by about 1%. This also implies about $46.3 billion in next quarter iPhone revenue, which is 7.4% below expectations. Apple also expects a 46.5% GPM, which is 50 bps better than expected. Finally, its EBIT guidance missed expectations by 1.1%.
Apple trades for 23x 2024 EPS and 26x 2024 free cash flow (FCF). EPS is expected to grow by 7.4% Y/Y and FCF is expected to grow by 9.3% Y/Y.
d. Call & Release Highlights
Segment & Geographic Performance:
There are two strange comp items to note for this quarter. First, the prior-year quarter had one extra week. Second, pandemic-related shutdowns in the Y/Y period hit demand and made iPhone and product revenue comparisons easier this quarter. Taken together, the net impact was -200bps on its Y/Y revenue growth rate.
By product segment:
iPhone revenue rose 6% Y/Y. The new iPhone 15 lineup has a 99% satisfaction rate, per 451 Research. Per Kantar research, Apple has 4 of the 5 top models in the USA and Japan, the top 5 in Australia and 4 of the top 6 in China. Mac revenue rose slightly Y/Y. The new Macs are equipped with Apple’s latest line of semiconductors and are receiving a 97% satisfaction rate in the USA, per 451 Research.
Wearables, Home and Accessories shrank 11.4% Y/Y. Note that this quarter is comping vs. a period in which it launched its new line of AirPods and watches. Notably, 2/3 of all new watch customers this quarter were brand new to the product; these watches have a 96% satisfaction rate per 451 Research. iPad revenue fell 12.8% Y/Y. Similarly to the wearables category, this was related to launching its new model in the prior year period. For both segments and all others, losing the extra week hurt too. iPad’s satisfaction rate sits at a lofty 98%.
By Geography:
Americas revenue rose 2.3% Y/Y.
EBIT margin was 40.4% vs. 36.3% Y/Y.
Europe revenue rose 9.8% Y/Y.
EBIT margin was 41.8% vs. 36.2% Y/Y.
Great China revenue fell 13% Y/Y.
EBIT margin was 41.4% vs. 43.6% Y/Y.
Japan revenue rose 15% Y/Y.
EBIT margin was 49.2% vs. 47.9% Y/Y.
Rest of Asia Pacific rose 6.5% Y/Y.
EBIT margin was 45.1% vs. 40.4% Y/Y.
Revenue rose “double digits” across most emerging markets.
Revenue set new all-time highs in Europe and December quarter records in India and Mexico as well as a few other emerging markets.
“We've been in China for 30 years. I remain very optimistic about China over the long term.” – CEO Tim Cook
Services, Subscriptions & the Install Base:
Paid subscriptions rose double digits Y/Y to grow further beyond 1 billion total paid subscribers. Growth here has compounded at about 20% CAGR over the last 4 years. Transacting and paid accounts reached new highs with paid accounts also up 10%+ Y/Y. Overall, its install base reached 2.2 billion active devices. This leaves significantly more opportunity for continued subscription up-sells. For the quarter, advertising, cloud, payments and video revenue set new records. This isn’t a surprise, considering these are supposed to be the growth products at Apple.
Vision Pro & AI:
Apple never shows its cards about product innovation or releases. It is the master of keeping a tight lid on everything it’s doing. Leadership told us the Vision Pro is “years ahead of anything else,” which I’m sure Meta would disagree with, and that they’re excited about the opportunity. We learned that Walmart, Nike, Vanguard and SAP are among the first enterprises building apps for this device. Similarly, on AI, it told us that it will host an event on the topic later in 2024. Nothing else was mentioned. They tell us what they have to… nothing more, nothing less.
“Our MO, if you will, has always been to do work and then talk about work and not to get out in front of ourselves.” – CEO Tim Cook
Margins:
December is its best revenue quarter, which naturally drives operating leverage and improving margins Q/Q. Still, that doesn’t explain the strong Y/Y margin expansion. That’s being driven by services growth and strong demand for the iPhone 15’s higher-priced models.
Enterprise Customers:
Target added MacBook Pros for thousands of its corporate staffers.
Zoho in India gave its 15,000 employees a choice of laptop models. 2 out of 3 chose Mac.
e. Take
This was a fine, but somewhat messy quarter. Concerns stemming from the report centered around China regulation and competition; the light revenue guidance added to the anxiety. With that said, Apple is an iconic company. It has a fortress ecosystem, a fiercely loyal user base and arguably the best corporate balance sheet on the planet. There remains ample opportunity to sell more services to juice margins. Was this quarter perfect? No it was not. That doesn’t change the fact that it’s Apple’s world and North America is just living in it. Something about that blue text bubble is just so comforting…
I continue to deeply admire this company. At the same time, I don’t find the valuation compelling based on the expected multi-year profit growth. Regardless of what I think, the stock is up almost 400% in 5 years and the brand remains world-class.
2. Mastercard (MA) – Earnings Review
“Healthy consumer spending drove strong results for 2023.” – CEO Michael Miebach
a. Results
It beat revenue estimates by 1.1% & met its “low double-digit growth” guidance. Its 16.7% 3-year revenue CAGR compares to 19.4% Q/Q & 23.4% 2 quarters ago.
FX neutral revenue growth was about 11% Y/Y.
Cross-border revenue growth was 18% Y/Y.
Payment network revenue rose 9% Y/Y (7% FX neutral growth)
Value-add services rose 19% Y/Y (17% FX neutral growth). Cyber, authentication and intelligence solutions continue to be the standouts.
Gross dollar volume growth of 10% overall was powered by 13% Y/Y rest of world growth. U.S. volume growth was 4% Y/Y.
It beat EBIT estimates by 1.7%. It roughly met adjusted operating expense growth of 7%-9% Y/Y on a currency neutral basis. It also beat $3.08 EPS estimates by $0.10. A 16% tax rate vs. 18.3% Y/Y helped 13% Y/Y GAAP EPS growth a tad. Non-GAAP EPS growth was 20% Y/Y. EPS growth led net income growth due to $1.8 billion in buybacks for the quarter.
b. Balance Sheet
$8.6 billion in cash & equivalents.
$15.7 billion in total debt.
Dividends rose 13.4% Y/Y.
Diluted share count fell 2.5% Y/Y via $9 billion in 2023 buybacks.
c. Guidance & Valuation
Annual guidance was about in line on revenue and roughly in line (slightly, slightly weak) on EBIT. Revenue estimates ticked slightly higher and EBIT estimates ticked slightly lower after the report. Very small revisions. Growth will be slower in Q1 than the rest of the year due to lapping strong FX volatility revenue and tougher value-add service comps.
Quarter-to-date (QTD), switched volume growth in the USA slowed from 5% to 4% and from 15% to 14% for the rest of the world. Overall switched volume growth went from 12% to 11% Y/Y. Cross-border growth remained stable QTD at 18% Y/Y growth. Like for Visa, growth slowing was due to severe weather; growth in the USA moved back to 5% Y/Y for the last week of the month that had no severe weather.
“We continue to grow through a combination of healthy consumer spending, new and renewed customer agreements, a continued secular shift from cash to card and strong growth across our service offerings… Our base case scenario for 2024 reflects healthy consumer spending and recent spending dynamics.” – CFO Sachin Mehra
d. Call & Release Highlights
Macro:
Like Visa, Mastercard is among the very best gauges of consumer spending growth. It doesn’t take credit risk, but the volume data is still very important. The company sees a mix of headwinds and tailwinds currently playing out in macro land. The labor market remains strong with robust wage growth. That’s a positive. Conversely, delinquency rates are rising for its credit partners, liquidity is drying up and inflation hasn’t fully normalized. Those are headwinds. Overall, it “remains fairly positive about the outlook, but is monitoring the environment closely.”
Deal Momentum:
CEO Michael Miebach’s prepared remarks were dedicated to highlighting Mastercard’s strong deal momentum. Here’s a list of partnerships and deals mentioned:
BOK Financial is moving its U.S. debit portfolio to Mastercard. Its fraud value-add service and virtual card capabilities helped it win this business. This is the third major U.S. debit portfolio to flip to Mastercard this year. BOK joins Webster Bank and Citizens.
Internationally, it inked a long-term deal with Shinhan Card, which is the largest Korean issuer. It won BNP Paribas Fortis’s credit portfolio in Belgium. It secured BPER Banca’s (among the largest Italian banks) debit portfolio. It received formal approval for domestic bank card clearing in China. It also added cross-border services to its existing AliPay partnership. UBS added Mastercard’s cross-border services too. This should help cross-border momentum remain strong, which likely helped QTD growth remain stable Q/Q at 18%.
From a FinTech perspective, Mastercard enjoys 80% of the largest digital Neobanks as customers per CNBC. It won more business with Square this past quarter and renewed its large partnership with Starling Bank (massive in the U.K.).
For the public sector, it won an exclusive Fiserv partnership to help with government benefits and wage disbursement. Like Visa, it also partnered with Clearing House, which operates the Fed’s new Real-Time Payments (RTP) network.
Its value-add services prowess led to a deepening of its Bank of America partnership to include “test and learn product management and supplier enablement solutions.” Worldpay is also now using its fraud services for dispute resolution, while Citi added Mastercard’s consumer clarity product to uplift consumer data and profile transparency.
More Payments News:
Tap to pay with mobile phones is live in 18 markets. Smaller merchants can now accept payments “by simply downloading an app.”
Apple Pay is expanding across the globe with Mastercard as a partner.
Open-loop transit momentum remains strong. Open vs. closed loop simply means payment collection lets consumers use their choice of card or digital wallet vs. forcing a specific option. Using open-loop transit has been shown to juice the average consumer’s Mastercard engagement.
Click-to-pay transaction growth was 60% in 2023. Klarna will add this tool in Europe in 2024.
Tokenization is reducing fraud and juicing approval rates by 3%-6%.
Partnered with Nippon Electric Company (NEC) to expand its biometric payments to Asia to “pay with a smile or a wave.”
GenAI:
Mastercard is working on “Small Business AI” and a conversational shopping assistant. It didn’t say much about either tool aside from both being set for beta testing in 2024.
e. Take
This quarter was basically the same as Visa. It was solid all-around. Consumer spending resilience is encouraging, and that’s the most important macro read-through we have from this company.
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3. Match (MTCH) – Earnings Review
“As a company, we completed a great deal of foundational work in 2023 and now, with the right team and strategy set in place, we’re confident in our ability to accelerate momentum in the coming quarters.” – Shareholder Letter
a. Demand
Match beat revenue estimates by 0.6% & beat its guidance by 0.7%. It met Tinder revenue growth guidance. Note that negative payer growth is being driven by large price hikes that finished rolling out out during Q1 2024. The hikes are still in the Y/Y comp. This will lead to negative payer growth through Q2 and an expected bottoming in Q3 before growth is set to resume in Q4. That’s paramount for this investment to work. It’s the only way profit can compound via revenue improvement and not solely cost cuts. Cost cuts are a temporary Band-Aid in a quest to compound profits at a compelling clip for several years.
b. Margins
EBITDA came in 17% ahead of estimates and 17.7% ahead of guidance. GAAP EBIT was a 17.6% beat. It also crushed $0.49 GAAP EPS estimates by $0.32 or 65%. This was its 3rd straight quarter of record-setting EBITDA margins.
c. Balance Sheet
$870 million in cash & equivalents; $3.84 billion in debt.
Basic share count fell 3.2% Y/Y; diluted share count fell 0.6% Y/Y.
Match added a new $1 billion buyback and now has $1.57 billion in available buyback capacity. That represents 15.1% of its total market cap. It plans to return more than 50% of its expected $1.1 billion in 2024 FCF to shareholders through buybacks. Its net leverage ratio is comfortably below its 3.0x target and it has no plans to buy any companies. More buybacks.
d. Guidance
Annual EBITDA and revenue guidance were in line with expectations. Better yet, its EBITDA guidance was an “at least” guide, meaning it met this expectation from a worst case perspective. Match has been struggling with meeting sell-side expectations when it comes to forward guidance. This was a small, yet material step in reversing that trend. Now it needs to deliver on these promises without negative revisions throughout the year.
Other annual guidance items:
7% Y/Y Tinder growth.
Hinge to grow by 36% Y/Y.
$1.1 billion in 2024 free cash flow beat expectations by 14.8%.
Next quarter guidance was 1.4% light on revenue and 9.6% light on EBITDA. This doesn’t bother me as long as the full year guide is met. It also told us to expect a material rise in Y/Y marketing spend at Tinder and Hinge.
Based on guidance and analyst estimates, it trades for 9x 2024 free cash flow, 10x EBITDA and 12x price to earnings (P/E). As always, I use market cap for firm free cash flow and earnings while using enterprise value for EBITDA.
Enterprise value (EV) is market cap + debt - cash. If a profit metric is pre-interest expense, EV is the correct numerator to use.
e. Call & Release Highlights
Demand Metrics:
Tinder revenue rose 11% Y/Y.
Hinge revenue rose 50% Y/Y.
Match Group Asia revenue fell 1% Y/Y, but rose 6% Y/Y foreign exchange (FX) neutral. That’s its best result in nearly 2 years.
Evergreen and emerging brand revenue fell 4% Y/Y.
Costs:
Cost of revenue fell 12% Y/Y as it recouped the $40 million placed in an escrow fund from the Google litigation settlement.
Sales and marketing rose by roughly 200 bps as a % of revenue Y/Y to roughly 18%.
General and administrative fell 200 bps as a % of revenue Y/Y to roughly 12%.
R&D rose 100 bps as a % of revenue Y/Y to roughly 11%.
Tinder:
Tinder finally announced a new CEO in Faye Losotaluno. She had been Tinder’s COO. Not sure why an internal promotion took so long here. Her main objective will be to drive better innovation and to evolve the product to better satisfy women and the next generation of daters. This is still the first app used by most new entrants and Tinder needs to do a better job serving those consumers.
Tinder enjoyed “ongoing momentum” in weekly subscribers and pricing optimizations. This helped it deliver its 2nd straight quarter of double-digit Y/Y growth. It now thinks the impact of 2023 price hikes are in the rear-view and is “confident the hikes created a healthier payer base.” Still, top-of-funnel weakness continues to be the key issue here and the firm cannot blame price hikes for it as comps normalize in Q3 2024. That’s why payer growth is expected to turn positive then. For this current quarter, daily new users fell by a mid-single-digit % Y/Y. Not at all ideal.
From a product perspective, Tinder is adding new discovery and profile customization tools to “better reflect the wants of newer daters.” This is the first step in Tinder’s product evolution. Other steps for 2024 will include testing new discovery tools and revamping the explore page to allow users to find matches outside of swiping.
Tinder will roll-out weekly subscriptions to the markets where it hasn’t yet done so this year. That should lead to a nice payer tailwind next quarter, but elevated churn from weekly vs. monthly subscribers will lead to that boost being somewhat short-lived – more like a sugar high than a permanent growth aid. It will also optimize new à la carte items for variables like duration, pricing and geographic localization.
Again, all of this work should lead to Q/Q Tinder Payer growth turning positive in Q3 with Y/Y growth turning positive in Q4. It should also mean daily new user trends resume growth in the back half of 2024. These are prerequisites for me to stay invested.
Hinge:
Hinge continues to be the shining star of this company. It’s “well on its way to being a billion dollar business” as download growth remains at 40% Y/Y and payer growth is over 30% Y/Y. Last quarter, it was #1 in the UK, Australia, Ireland and Sweden. In January, it maintained those positions while moving from #3 to #1 in Canada and to #1 in all of the Nordic countries. It also moved from #5 to #3 in France. To maintain the momentum, Hinge will meaningfully invest in global marketing in 2024 and will “address matching efficacy” for those receiving too few and too many matches. Notably, Hinge saw new download weakness in the month of December. Encouragingly, that sharply bounced back in January, with the quarter off to a “great start” for the important app.
Match Group Asia:
The TV marketing launch in Japan is showing signs of renewing user growth and “turning the tide.” It’s been a massive struggle in that country since 2020. Continued marketing and other initiatives like local government partnerships will remain key focuses in 2024. The Korean Azar App, which is known for 1-on-1 video chatting) will expand to the U.S. and Europe in 2024. It delivered another quarter of solidly double-digit Y/Y growth.
Emerging and Evergreen Brands:
Match continues to progress towards consolidating the tech stack for all brands under this category. Not much detail was given on the new Archer app aside from calling momentum “strong” as it rolls out across the U.S. Emerging brands in this bucket grew by 30% Y/Y while Evergreen fell by 10% Y/Y due to intentional marketing cuts and a shift in focus to operational efficiency.
AI:
Like for everyone else in 2024, AI will be an area where Match looks to drive rapid innovation. 50% of all online dates are sourced through Match. It has far more data than any other competitor and needs to do a better job capitalizing on that edge. That’s the plan. There are a few areas where this will be most noticeable. First is profile creation with AI tools like automated photo selectors to make the tedious process easier and less intimidating. It will also create new programs to drive better, more relevant matching and ChatGPT-like assistance on how to craft a conversation. These new products will debut throughout the year.
f. Take
This quarter did just enough to keep me around for another 3 months (and hopefully a lot longer). It wasn’t amazing, but importantly, it avoided an annual guide that would have driven more downward estimate revisions. It also avoided executional blunders like the marketing campaign pause that unnecessarily weighed on results last quarter. This is still the dominant online dating player and online dating is still a secular growth story.
So what do I want to see in 2024? I want payer trends to recover like they’ve forecasted. I want guidance to remain at least where it is right now and I want Match to keep shrinking the share count like they plan to do. I’m also eager to see what Elliott Management (activist investor) will want from the current team. As I’ve said in the past, this company is perfect for activist intervention. It has the brands, balance sheet and market share to win for years to come. It needs to execute better. This quarter marked yet another beginning of a better execution trend. I don’t want to see any more premature ends to that needed trend. I’m swiping right on this quarter, but still think an exit is somewhat likely this year. Turnarounds are never easy.
4. AI-Themed Earnings Round-Up – AMD (AMD) & Supermicro (SMCI)
a. AMD (AMD) – Earnings Review
Results:
Beat revenue estimates by 0.5% & beat guidance by 1.1%. Its 24% 3-year revenue CAGR compares to 27.5% Q/Q & 40.6% 2 quarters ago.
Missed GPM guide & identical estimates by 70 bps.
Met $0.77 EPS estimates.
Missed EBIT estimates by 1.4%.
Balance Sheet:
$5.77 billion in cash & equivalents.
$2.47 billion in total debt.
Inventory rose 15% Y/Y, but fell 2% Q/Q.
Share count is flat Y/Y.
Next Quarter Guidance & Valuation:
Revenue was 6.1% light.
GPM was in line with expectations at 52%.
EBIT was 1.4% light.
AMD trades for 40x next 12-month EBIT and 47x next 12-month EPS. EBIT is expected to grow by 39% Y/Y in 2024 while EPS is expected to grow by 38%.
Quick Highlights:
Segment Performance:
Data center revenue rose 38% Y/Y in Q4 vs. 7% Y/Y growth in 2023 as a whole. The Q4 acceleration was thanks to its data center GPUs and embedded high-performance computing CPUs. EBIT fell 31% Y/Y for 2023.
GPU: Graphics Processing Unit. This is an electronic circuit to display screen images.
Client revenue rose 62% Y/Y thanks to strength from its high-performance desktop CPUs. For 2023, revenue fell by 25% Y/Y due to PC market weakness. EBIT fell 104% Y/Y for 2023 (turned negative).
CPU: Central Processing Unit. This is a different type of electronic circuit that carries out tasks/assignments and data processing from applications.
Gaming revenue fell 17% Y/Y in Q4 vs. -9% Y/Y growth for 2023 as a whole. This was related to semi-custom revenue weakness. Its gaming GPUs helped offset this weakness. EBIT rose 2% Y/Y for 2023.
Embedded revenue fell 24% Y/Y in Q4 due to inventory reductions. It rose 17% Y/Y in 2023 due to enjoying the first full year of Xilinx revenue post-acquisition. EBIT rose 17% Y/Y for 2023.
Thoughts:
I don’t cover the semiconductor space. Candidly, the science behind the actual efficacy of one chip vs. another is over my head. I think it’s over most investor heads too, which is why I think those wanting exposure should take the thematic ETF route. I put the sector in my too hard pile along with Pharma. Still, I know many of you follow this name closely, so I did want to offer thoughts and value where I actually can here – financials. I will leave commentary on the actual chips to others.
In my view, AMD is racing to catch Nvidia GenAI training & inference chips. The absolutely insane ramp in demand Nvidia enjoyed throughout 2023 leaves many to wonder: Will the entire market be theirs forever? The answer is probably not; AMD is already starting to collect some notable customers in the space like Meta and Tesla. Still, it’s unclear how quickly AMD’s GenAI-related revenue will ramp in 2024. It has released its GPU for AI and “expects a strong ramp” to come this year.
I wouldn’t bet against Lisa Su delivering on her promises… but I certainly wouldn’t bet against Nvidia either. In reality, the pie is massive and any meaningful traction within it should be very material for AMD. That’s why it’s receiving one of the steepest multiples that it ever has despite what appear to be lackluster results. I just don’t think its results for Q4 2023 matter all that much. The results are backward-looking. They don’t reflect the anticipated ramp for what are inherently forward-looking markets. Investors are looking ahead to 2024 and gawking at the potential for AMD to even sort of, kind of come close to mimicking Nvidia’s rise. We shall see if that happens.
b. Supermicro (SMCI) — Earnings Snapshot
Results:
SMCI already pre-announced results, so these numbers aren’t a surprise. What is a very positive surprise? The robust forward guidance that it gave.
Guidance & Valuation:
SMCI raised its annual revenue guidance by 26.1% to $14.5 billion. That is not a typo. Next quarter revenue guidance was a whopping 44% ahead of estimates. GAAP net income guidance was 38% ahead of estimates. Net income guidance was 20% ahead of estimates. Strong.
Even following explosively positive price action, SMCI trades for 17x 2024 EBIT and 22x 2024 net income. EBIT is set to grow by 94% Y/Y and net income is set to grow by 90% Y/Y.
Balance Sheet:
$726 million in cash & equivalents.
$376 million in debt.
Diluted share count rose 3.4% Y/Y. Basic share count rose 1.8% Y/Y.
Thoughts:
This quarter was simply incredible. If you own this name, take a bow and enjoy your incredible returns. It is time for you to take the victory lap. You have earned it. I’m unfortunately watching from the sidelines. The only thing that I’ll say is that it’s likely not realistic to expect this rate of growth to continue for the long haul. The GenAI boom is real, and SMCI is among the best positioned to take early advantage. Nvidia and Microsoft are the only others in that same conversation in terms of direct financial impact today.
Does it matter if SMCI’s growth slows? Not really. 2025 revenue growth estimates of 29% Y/Y will do just fine considering the firm trades at valuation growth multiples well below 1x. From this point of view, it’s still somehow one of the cheapest names in growth land.
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5. Shopify (SHOP) – Editions 2024 & RBC
Shopify published its biannual “Editions” product update this past week. The report guides investors and merchants through all of the product innovation Shopify has been delivering over the last several months. We’ve spoken about a lot of these as the announcements have come out throughout 2023. Here are the highlights.
From a store building perspective, Shopify made a few announcements. It added more flexibility for product descriptions, with product variant limits rising from 100 to 2,000. This should make product presentations for highly complex SKUs a lot neater and more organized. Importantly, product pages remember and auto-apply standard variables to all variants so you don’t have to tediously do so one at a time. Furthermore, it created a new product upload flow to make listings all the more seamless. Shopify added 14 new APIs to enhance checkout customization and 90 new apps, including conversion tracking to better support its stakeholders. Conversion tracking will be a highly valuable tool for merchant split-testing to observe exactly what works and relatedly tweak storefronts with confidence. No more guesswork.
To track the utility of these tools and performance of stores overall, it debuted a new Web Performance Dashboard with more key performance indicators (KPIs) like store latency to maximize search engine optimization and conversion. It upgraded its back-end infrastructure to make stores 35% faster. A 10% improvement to load times boosts merchant conversion by 7%. To offer even more value, it also moved from 3-page to 1-page checkout to reduce time to completion by 4 seconds. Again… Time is money. These optimizations will be ongoing to ensure Shopify is providing its merchants with far more value than anyone else.
“ButcherBox recently migrated to Shopify and has seen increased conversion rates on their store, even though they kept the UX the exact same.” – From the Release
Shopify is also infusing AI into its shopping and discovery flows for consumers via “Semantic Search.” This goes beyond keyword matching to leverage AI inference and understand what a consumer is looking for. If you search “I want to run” it will take you to shoes & clothing appropriate for that activity. I love to run.
For brick and mortar, Shopify debuted the ability for merchants to ship goods from their stores with its point of sale (POS) technology. This will morph physical real estate into distribution center space to cut shipping costs, inventory needs and headache. This was a big ask from merchants, and now it’s a reality.
For marketing, Shopify Audiences (automated and highly relevant/targeted customer lists for merchants to use in campaign creation) updated its retargeting algorithm to double the size of potential buyers. Shopify Cash (cash back rewards for shopping at a Shopify merchant) is now called Shop Campaigns. As part of the re-brand, Shopify added the ability to intelligently estimate ad returns to maximize success.
“In November 2023, we saw a 143% month-over-month increase in new customers acquired on Shop. The campaign effectively and effortlessly helped us acquire new customers.” – Kitsch’s VP of Growth Yingying Kuang.”
In AI land, Shopify Magic (its suite of AI-enabled services) is working on a few things. “Media Editor” is a GenAI tool to automate product and marketing content creation. This allows merchants to shed the costs of outsourcing and storing professional-grade content by allowing them to easily do so themselves. “No design skills needed.” It also rolled out Sidekick (AI shopping assistant to help merchants with all walks of their business) in beta testing. This is a big part of Shopify becoming an even better partner by allowing merchants to focus on building and growing rather than maintaining. RBC sees all of this work in AI creating accelerating merchant, volume and revenue growth beyond currently brisk rates. This isn’t a stretch. Azure is already seeing GenAI prop up its growth with AWS following closely behind. GenAI is here and is making real financial impacts right now.
In conclusion, none of this is new. Consistent readers have been hearing about these announcements one at a time over the last several months. Still, I think it’s good to track the pace of innovation at this company and this offers an aggregated review of that pace over the past half year.
6. PayPal (PYPL) – Layoffs
PayPal will reportedly fire 9% of its employees. I’ve said this needs to happen many times, but it still stinks. These are still real human beings being materially and negatively impacted. I hope they all expeditiously find great jobs in what is a robust job seeker market.
This was a necessary move for PayPal. The mistake was hiring way too many people through the pandemic. This is the unfortunate right-sizing. For context, as of its last update, PayPal earned about $80,900 in net income per employee. Google, for example, earns $400,000 in net income per employee.
I realize that this comp isn’t apples-to-apples at all. Still, Google represents a strict trend, not an anomaly. And I intentionally used Google due to its widely publicized headcount bloat. PayPal’s is 5x worse. PayPal can do much more with much less. This news and Chriss telling us it will exit speculative, less profitable businesses are great signs that it will do just that. There is so much cost-cutting left to be done here. That can allow EBIT and net income to keep briskly growing while transaction margin is expected to bottom and become another needed profit lever.
7. Disney (DIS) – Activists and Hulu
Trian and Nelson Peltz want Disney to partner with Netflix to bundle its planned ESPN streaming service with theirs. I can’t stand this idea. ESPN is a key differentiator for Disney in the increasingly competitive world of streaming. Why share that differentiation with your fiercest competition? What is a better idea? Doing what Disney is already doing and what the other activists involved support. Partner with the NFL to diminish the risk of bidding intensity. Partner with a mega-cap tech firm like Apple to help with distribution and bidding too. That should be the playbook and that is the playbook. The more I hear from Peltz on this one, the more I think he is a Disney distraction. This is just a bad idea.
In other Disney news, Hulu is cracking down on password sharing. This represented a strong, multi-year tailwind for Netflix subscriber growth. Hulu doesn’t have the same degree of loyalty with its customer base compared to Netflix’s and will likely deal with more churn from this decision. It still should be a nice revenue driver in 2024 for what’s its most profitable streaming asset.
8. SoFi (SOFI) – Board of Directors & Perspective
SoFi will add Dana Green to its board as the 11th member. She was a Senior VP and Senior Bank Supervisor at the Federal Reserve Bank of New York for 32 years and retired in 2023. She was in charge of oversight for Systemically Important Financial Institutions (SIFI) with “complex risk profiles.” She has served on several Federal Reserve committees and brings incremental, deeply relevant experience to an already strong board. SoFi aspires to grow into SIFI status. Bringing on the former top regulator is not the action of a company with anything to fear or hide about its accounting practices.
Quick note on SoFi giving back all of its gains post earnings. I’ve well documented how I think the stock will remain immensely volatile as analysts bicker about items like discount rates. I’d point those analysts to the transcript where SoFi told you the discount rate benefit was fully hedged and had no impact on results. I’d then point them to a financial valuation textbook and how falling benchmark rates mean falling discount rates, which supports fair value. It raised the discount rate as benchmark rates rose through 2023; it cut the discount rate as that trend reversed. Alert the presses!
What makes me so comfortable with the polarization and volatility? A constantly trustworthy management team that just set 3 year targets 50% ahead of consensus on EPS and 500 bps ahead of consensus on revenue growth. That’s what matters. If they hit those targets like they have all other targets, despite the loan moratorium, a historic hike cycle and a pandemic, then the rest is loud, distracting noise to be ignored. My mind is wide open to being wrong here, but I’d have to actually see data-driven evidence of that being the case. Hasn’t happened.
I’ll continue to use overly negative noise and price action to slowly add more shares like I did late this week. Social media ~analysts~ can keep complaining about every single detail while SoFi just keeps executing. As long as that remains the case, they will keep deserving my time energy and attention. They have conditionally earned my support. Keep fundamentally thriving and ignore the haters, SoFi.
9. CrowdStrike (CRWD) — Forrester Research
Forrester, a widely respected 3rd party research firm, published its Q1 2024 report on Cloud Workload Security. CrowdStrike ranked #1 in strategy and #3 behind Palo Alto and Wiz (SentinelOne partner) on current offering. CrowdStrike also ranked first in vision and innovation with its technical talent also ahead of the pack. It does want to see CrowdStrike round out its product roadmap here, but that’s coming.
What does this mean? CrowdStrike’s growth potentially increases mightily as it moves from an endpoint security firm to a cloud, identity, app, forensics, log management AND endpoint security firm — all tied neatly together into one Falcon agent and interface. Not only does this position it for more revenue, but even better margins too. Why? CrowdStrike incurs pretty much all OpEx from a new client when onboarding its first module. Incrementally cross-sold modules are pure profit. This traction gives it many more modules to sell and success early on has been fantastic. Specifically, the segment is over $300 million in annual revenue on its own and is growing at a nearly 50% Y/Y clip.
10. Macro
Powell’s press conference was especially market-moving this week:
No change to rates. Stays at 5.25%-5.50%.
He talked about needing more confidence in inflation returning to 2% to say they’re ready to cut.
He talked about gaining that confidence this year as very likely.
He spoke on the mean projection of 3 rate cuts in 2024.
The Fed statement removed commentary on potential future policy tightening.
He told us the committee began to flirt with the idea of slowing down QT, with no definitive plans to do so yet.
He told us inflation progress is encouraging and the labor market supply/demand balance is improving with wage inflation cooling. He also acknowledged strong progress in the employment cost index (ECI).
And he said a rate cut in March is not likely.
March rate cut probabilities fell from 60% to below 40% following the event.
Powell is a fantastic Fed Chair and a master of jawboning. He knows exactly how his words influence market expectations and carefully uses those words like a pro. I’m a fan of his. Still, I think this presser was exactly that: jawboning. If the Fed is data-dependent like it wants us to think, it has no clue what it’ll do next month. It has no clue how many times it will cut this year. There is much more data to come, and the Fed doesn’t have a crystal ball. So? That meeting functioned to make somewhat overly excited markets second guess a March rate cut and future dovish policy. I still think they cut in March because I still see inflation rapidly racing to 2%. The Fed uses backward-looking housing metrics in its key inflation indicators. That’s about 30% of the CPI. And? Real-time rent indicators are pointing to continued rapid disinflation towards 2%.
This expected move, paired with normalizing economic growth, should lead to cuts sooner than later. That normalizing economic growth is all but inevitable, as the benefits of recovering supply chains are now in the rear-view. Still, he had absolutely no reason to show his cards and tell us a cut was coming, so he didn’t.
With all of this said, I don’t really care if the first cut comes in March or June. The disinflation trend is crystal clear to me and so I’ll use market fits in response to the jawboning as a signal to deploy cash. That happened this week following his press conference.
Employment/Consumer Data from the week:
Conference Board Consumer Confidence for January was 114.8. This compares to 114.2 expected and 108 last month.
JOLTs Job Openings for December were 9.026 million. This compares to 8.750 million expected and 8.925 million last month.
ADP Non-farm Employment Change for January came in at 107,000. This compares to 145,000 expected and 158,000 last month.
Initial Jobless Claims were 224,000. This compares to 213,000 expected and 215,000 last month.
Non-farm Payrolls for January were 353,000. This compares to 187,000 expected and 333,000 last month.
The labor force participation rate was 62.5% vs. 62.6% expected.
The unemployment rate for January was 3.7%. This compares to 3.8% expected and 3.7% last month.
Michigan Consumer Sentiment and Expectations were both better than expected and improved sharply M/M.
Output Data from the week:
Chicago Purchasing Managers Index (PMI) was 46 for January. This compares to 48 expected and 47.2 last month.
Non-farm Productivity for Q4 rose by 3.2%. This compares to 2.4% expected and 4.9% last quarter.
Manufacturing PMI came in at 50.7. This compares to 50.3 expected and 47.9 last month.
The Institute of Supply Management (ISM) PMI for January was 49.1. This compares to 47 expected and 47.5 last month.
Inflation Data from the week:
The Employment Cost Index for Q4 rose by 0.9%. This compares to 1.0% expected and 1.1% last month.
Unit Labor Costs for Q4 rose by 0.5%. This compares to 1.3% expected and -1.1% last quarter.
The ISM Manufacturing Prices for January came in at 52.9. This compares to 46 expected and 45.2 last month.
Average Hourly Earnings in January rose 0.6%. This compares to 0.3% growth expected and 0.4% growth last month.
Michigan 1 year inflation expectations for January were 2.9%. This is as expected and compares to 3.1% last month.
Michigan 5 year inflation expectations for January were 2.9%. This compares to 2.8% expected and 2.9% last month.
11. Portfolio
I increased my SoFi position by 5%, my Uber position by 8% and my Lemonade position by 13% during the week.
I look forward to the news of the week! Thanks for sharing
🙏 thank you