News of the Week (January 22 - 26)
Visa; American Express; Capital One; ServiceNow; Intuitive Surgical; PayPal; Intel; Apple; Macro; My Portfolio
1. Credit Earnings — Visa; American Express; Capital One
a. Visa (V)
Results:
Beat revenue estimates by 1%.
Beat earnings before interest & tax (EBIT or AKA operating income) estimates by 1.1%.
The 14.9% 3-year revenue compounded annual growth rate (CAGR) compares to 19.1% as of last quarter & 18.8% 2 quarters ago.
Beat $2.31 GAAP earnings per share (EPS) estimate by $0.08.
Non-GAAP EPS, which excludes litigation provisions, mark-to-market equity investment fluctuations and amortization of acquired intangible assets, rose by 11% Y/Y. Non-GAAP net income rose by 8% Y/Y with buybacks the source of the faster EPS growth. These items are also why GAAP operating expense (OpEx) fell by 6% Y/Y while non-GAAP OpEx rose by 7% Y/Y.
Balance Sheet:
About $21.4 billion in total cash & equivalents.
$20.7 billion in total debt.
$3.58 billion in buybacks vs. $3.12 billion Y/Y.
Share count fell by 2.7% Y/Y.
Dividend payments rose 12.2% Y/Y for the quarter.
Guidance:
Q2:
“Upper mid to high single digit Y/Y revenue growth” roughly met expectations of 8.6% Y/Y growth.
“High teens” non-GAAP EPS growth beat expectations of 14.2% Y/Y growth.
2024:
“Low double digit Y/Y revenue growth” beat expectations of 10.1% Y/Y growth. Strong.
“Low teens non-GAAP EPS growth” roughly met expectations of 13.2% Y/Y growth. Strong again.
This represented a reiteration of previous guidance which assumes no recession. Analysts were clearly expecting modest downward revisions.
Quarter to date, U.S. spend slowed from 5% Y/Y to 4%. This was not due to a weakening consumer, but instead “severe weather conditions.”
Visa trades for 22x next 12 month (NTM) EBIT and 27x NTM EPS. EBIT is expected to grow by 16.0% this year while EPS is expected to grow by 18.2%.
Call & Release Highlights:
The Consumer Entering 2024 & Quarterly Results Context:
Visa’s fiscal year 2024 is “off to a solid start.” It told us last quarter that U.S. volume growth had slowed from 6% Y/Y to 5% Y/Y quarter-to-date. The slowing was “largely due to less favorable mix of weekends and weekdays” rather than a more fragile consumer. That’s where the overall quarter ended up. Debit spend growth specifically slowed from 7% to 5% while credit spend stayed at 6% Y/Y. The 6% credit growth actually represents an intra-quarter acceleration; the team told us credit growth had slowed to 5% Y/Y for the quarter-to-date on its last call. October was its quietest month, November was the busiest and December was roughly between the first two.
Internationally, Y/Y volume growth was steady compared to last quarter at 12%. Per CEO Ryan Mclnerney, consumer spending “remains resilient.” That’s great to hear from a card network representing trillions in quarterly volume.
Acceptance locations rose 17% Y/Y. Notable wins include Brazil’s Caixi which hosts 10,000 lottery locations for things like bill pay and payment vouchers. Lowe’s also added tap-to-pay acceptance during the quarter. The list of renewal and new customer highlights across the globe was quite long. One of the most notable wins was adding Visa’s loyalty program service to Bank of America's product suite. Value-add services continue to be a key growth lever. The other juiciest highlight was a newer Visa Direct partnership with Meta. Visa Direct is its peer-to-peer money transfer product, which competes with Venmo, Zelle and Cash App.
Cross-border growth of 16% Y/Y was a notable standout. It inked a new deal with Western Union to turbocharge traction here.
Service revenue rose 11% Y/Y.
Data processing revenue rose 14% Y/Y.
"Consumer spend across all segments has remained stable. Our data does not indicate any meaningful behavior change across consumers." – CFO Christopher Suh
Holiday Season:
U.S. spend for the holiday was right around 5% Y/Y. Consumer retail spending growth was stable Y/Y, but accelerated during Black Friday-Cyber Monday.
M&A:
Visa plans to buy Prosa to expand further into Mexican payment processing. It also completed its aforementioned Pismo M&A. Pismo is a cloud native issuer and a multi-core banking platform. It competes with players like SoFi’s Galileo/Technisys. With Pismo, Visa will provide cloud-native processing APIs and support for more emerging payment methods.
Take:
The upbeat commentary about the global consumer put a subtle grin on my face. I trust non-anecdotal data representing a large chunk of the U.S. GDP much more than random data points from anonymous accounts on social media. Let them talk and bicker amongst themselves. Visa sees continued consumer resilience; Visa has a far better pulse on consumer health than you or I do. Good quarter.
b. American Express (AXP)
Results:
The firm missed revenue estimates by about 0.9%. It met GAAP EBT (not EBIT) estimates and also met GAAP EPS estimates.
Guidance:
Annual 2024 revenue guidance was 1% ahead of expectations. Annual 2024 EPS guidance of $2.90 was $0.58, or 4.7%, ahead of expectations. This, paired with solid Visa guidance, is great news for what the largest consumer credit players in the world are currently seeing. This quote is great news too:
“Going forward, we expect to see delinquency and write-off rates remain strong with modest increases in 2024.” – CEO Stephen Squeri
Credit Health & Balance Sheet:
Notably, its net write-off rate was 2.0% vs. 1.8% Q/Q & 1.2% Y/Y as its credit performance (like everyone else’s) continues to normalize. Encouragingly, this performance is still right in line with pre-pandemic levels, which hovered right around 1.8%-2.2%. And as the quote above indicates, no incrementally sharp worsening from here is expected.
Furthermore, its 30+ day past due credit rate of 1.3% still compares favorably to the 1.4%-1.6% rates it experienced in 2019. Its credit has not deteriorated beyond pre-pandemic levels like we’ve seen for lower credit quality originators like Discover and Capital One. These metrics (and credit provisions rising by a modest $400 million Y/Y and $210 million Q/Q) offer evidence.
AmEx is the highest credit quality name in my coverage network. Its average borrower quality is more similar to the SoFi’s of the world than Capital One or Discover. Visa is right in the middle (but it doesn’t take credit risk).
$49B in cash & equivalents.
$49B in total debt ($1b is current).
Dividend rose 15.4% Y/Y.
Share count fell by 2.7% Y/Y.
c. Capital One (COF)
While Capital One’s results weren’t awful (small beat on revenue and misses on profit across the board), the deterioration in its credit metrics was notable. Its 30+ day delinquency rate rose to 3.99% vs. 3.71% Q/Q and 3.21% Y/Y. Unlike AmEx, 3.99% is above the 3.84% peak that it saw in the quarters before the pandemic. It’s not significantly worse, but it is worse. Net charge-off rate also rose to 3.21% vs. 2.56% Q/Q and 1.86% Y/Y. That’s the concern here as its peak rate in the quarters before the pandemic was 2.67%. Its credit loss allowance is also 4.77% of loans vs. 4.75% Q/Q and 4.24% Y/Y. The modest sequential rise is a silver lining as it points to a lack of abrupt and incremental worsening in future credit performance expectations. Provision allowance is the leading indicator here. Delinquency rate is more of a real-time indicator, while charge-off rate is more of a trailing indicator.
“Based on the stability we've seen in our delinquencies since August and extrapolating from our current delinquency inventories and flow rates, we believe the charge-off rate is stabilizing now and settling out to about 15% above 2019 levels.” – CFO Richard Fairbank
As macro becomes more fragile, like it did in 2023, the poorest consumers are always the least insulated. This is the reality for a credit card issuer with lower average consumer credit quality. Worsening was entirely expected. The rate of worsening was a bit sharper than I was personally hoping for. Conversely, expectations of stabilization are also better and earlier than I was hoping for.
All in all… the higher end consumers continue to do well while the middle/lower end seems a bit more fragile.
2. ServiceNow (NOW) – Earnings Review
ServiceNow is one of the largest enterprise software firms in the world. It automates workflows, tech stacks and projects to augment efficiency and service of customers. For this reason, it calls itself the “leading digital workflow company.” Buckets of workflow automation include: service management, operations, asset management, security, customer management, employee management and creator management. These are further grouped into workflow buckets like “customer workflows” and “creative workflows.”
All products and services are neatly tied into its “ServiceNow Platform.” To bolster automation capabilities, ServiceNow recently debuted its GenAI “Vancouver Platform.” This consolidates all of the model and app work it’s been doing in the space directly into its existing products. A key example is “Now Assist.” It’s monetizing this new GenAI-infused platform directly just like Microsoft with its copilot suite.
a. Demand
Beat revenue estimate by 1.7%.
Its 25% 3-yr revenue CAGR compares to 25.8% as of last quarter & 26.2% 2 quarters ago.
Beat foreign exchange neutral (FXN) subscription revenue growth guide by about 200 bps. Beat subscription revenue estimates by 2.2%.
Beat 21% Y/Y current remaining performance obligations (cRPO) growth guide by about 300 bps.
Closed 168 $1 million+ net new transactions vs. 83 Q/Q and 126 Y/Y.
b. Margins
Beat EBIT estimates by 8.1%.
Beat free cash flow (FCF) estimates by 2.3%.
Beat $2.78 earnings per share (EPS) estimates by $0.36.
c. Balance Sheet
$8.1 billion in cash, equivalents & investments.
$1.5 billion in debt.
Share count rose by 2% Y/Y as buybacks offset some of its dilution.
d. Guidance
First Quarter:
24.25% Y/Y subscription revenue growth.
20% Y/Y cRPO growth.
29% EBIT margin vs. expectations of 26.8%.
Full Year:
21.75% Y/Y subscription revenue growth. This is roughly in line with expectations and led to a modest upward revision in annual overall revenue estimates from analysts.
29% EBIT margin vs. expectations of 28.2%.
31% FCF margin, which met expectations.
The upbeat full year guide “reflects the early success ServiceNow has seen with its GenAI products.”
“The accelerating pace of investments in workflow automation and GenAI positions us well for another strong year.” – CEO Bill McDermott
As of today, NOW trades for 49x NTM EBIT, 59x NTM net income and 47x NTM FCF. EBIT is expected to grow by 27% Y/Y in 2024; net income is expected to grow by 24% Y/Y in 2024; FCF is expected to grow by 24% Y/Y in 2024.
e. Call & Release Highlights
The Platform Play:
Platform plays are thriving in this environment. This was a key theme last earnings season and is looking like a key theme this time around too. Within enterprise software and workflow automation, ServiceNow is the end-to-end platform. It allows for broad maintenance, optimization and expansion of a client’s asset base to ensure that asset base is best-positioned for success. It also offers seamless processes for 3rd party developers to build custom apps on top of its platform to better cater to local needs. What does this all mean? Better workflow automation efficacy and value harvesting paired with lower cost. That’s always a popular combination; it is especially popular when money isn’t free and macro isn’t as historically easy – like today. All of this offers clear evidence as to why “new logo growth is accelerating” and clients are lining up to work with ServiceNow. New logo growth has now accelerated for 4 straight quarters.
ServiceNow closed 168 $1 million+ transactions this quarter for 33% Y/Y growth.
It also enjoyed 15% Y/Y growth in $1 million+ customers to reach 1,897.
Customers aren’t just landing… they’re staying. ServiceNow’s renewal rate remains at a sky-high 99%.
One quarter after its creative workflows product bucket crossed $1 billion in contract value, its customer workflows bucket became its 3rd product category to do just that. It now has 11 different individual product lines with over $250 million in annual contract value (ACV); virtually all of the product groups closed more than 10 $1 million+ deals for the quarter. Again, the platform play.
“The core business is rock solid and growing. Our perimeter is growing. Platform adoption is growing.” – CEO Bill McDermott
GenerativeAI News:
Now Assist, one of its GenAI add-ons, enjoyed more business in a first quarter vs. any other product release in its history. This is one of ServiceNow’s products in its “Plus SKUs” subscription bundle. This includes software add-ons (like its newer GenAI tools) to bolster value for clients with deeper needs. Plus SKU describes the type of subscription bundle while Now Assist describes the product category. Further, Now Assist is the GenAI product suite to automate and bolster work under the broader Vancouver Platform umbrella.
The company expanded the use cases for its Now Assist GenAI suite. New tools include a virtual agent or assistant for conversational querying and faster issue resolution and workflow generation. It takes a client 15 minutes to onboard this set of new tools.
McDermott shared some interesting Gartner research to frame the software and GenAI opportunity through 2027. Gartner expects tech spending to rise from $5 trillion in 2024 to north of $6 trillion in 2026. The two years it will take to add another trillion in “tech spending” compare to the ten years it took that spend to move from $4 trillion to $5 trillion. AI is a big piece of this, with $3 trillion in spend expected to take place from 2023 to 2027. ServiceNow is taking the direct monetization approach to GenAI just like Microsoft. Any traction here, which is clearly already coming, should bear material, near-term fruit.
“What we have here is a strong, durable market being supercharged by a once-in-a-generation secular trend.” – CEO Bill McDermott
ServiceNow is also using its GenAI work internally to drive outcomes like a 52% boost to innovation speed for its developers via text to code tools.
Partnerships & M&A:
Added a new partnership with DXC. ServiceNow will integrate its data analytics and GenAI tools into DXC’s own platform.
New 5 year collaboration with Amazon Web Services (AWS) to provide its products on Amazon’s marketplace and to work together on or “co-develop” new AI applications.
Deepened its EY partnership to “empower responsible AI usage and to bring AI experiences to EY’s employees and clients with Now Assist.
New 5 year strategic alliance with Visa to “transform payment service experiences” starting with dispute management.
Joined the AI Alliance (started by Meta and IBM among others) to “advance open, safe and responsible AI usage.”
f. Take
This was yet another rock-solid quarter. The margin trends are great while it posted its fastest Y/Y revenue growth rate in over a year as well. New product launches are clearly working alongside its value proposition as a whole. There’s really nothing to pick at here… at all… so I won’t pick.
3. Intuitive Surgical (ISRG) — Earnings Review
ISRG makes robotic surgical systems to assist surgeons. It trains hospitals on the hardware itself, offers powerful data analytics on key performance indicators (like outcomes), and routinely allows for less invasive surgery overall. It dominates within this niche. Its largest revenue driver is the “da Vinci” system with “Ion” being its newer, faster growth hardware.
Definitions:
Single port & multi-port refer to single or multi-incision procedures.
a. Demand
As it often does, Intuitive Surgical pre-announced demand metrics for the fourth quarter. For this reason, revenue, hardware placements and procedure growth were all about as expected. da Vinci procedure growth was 21% Y/Y, it placed 415 new da Vinci systems vs. 369 Y/Y and grew its overall da Vinci base to 8,606. Procedures have compounded at a 4-year clip of 17% compared to the 21% growth it delivered this year. That acceleration was due to the unleashing of pent-up demand from global pandemic variants. Recurring revenue is 83% of total sales vs. 79% Y/Y.
b. Margins
Missed EBIT estimates by 2.0%.
Missed 68.6% non-GAAP GPM estimates by 60 bps.
Beat $1.49 EPS estimates by $0.11. EPS grew by 30.1% Y/Y.
c. Balance Sheet
$7.3 billion in cash & equivalents.
No debt.
Inventory rose by 37% Y/Y.
Share count rose by 0.3% Y/Y. It repurchased $416 million in stock in 2023 with $1.1 billion left on its current plan.
d. 2024 Guidance
For 2024, ISRG expects 13%-16% procedure growth. The slowing is related to tough comps from demand unleashing throughout 2023. At the low end, it assumes negative bariatric (weight loss surgery) growth and more China challenges. At the high end, it assumes stable bariatric growth and no new China challenges. It also sees a 67%-68% GPM for 2024. This was essentially in line with expectations. Over the longer term, it sees GPM getting back over 70% as Ion and da Vinci 5 both scale. Furthermore, with supply chain headaches now largely gone, it can and will re-focus on cost optimization vs. ensuring appropriate supply. Growing into extra manufacturing capacity will trim deadweight loss and further help GPM get back to 70%+ over time. That’s the path.
Based on current 2024 estimates, ISRG trades for 47x 2024 EBIT, 59x 2024 net income and 66x 2024 FCF. EBIT and net income are expected to grow by 9.3% and 8.9% respectively for next year.
e. Call & Release Highlights
Demand Context:
Utilization of its systems continues to rise. For multi-port, single-port and Ion, it saw 9% Y/Y, 15% Y/Y and 6% Y/Y growth respectively. This powered 2023 procedure growth of 22% Y/Y. Procedure growth for the newer Ion platform was the most rapid at 129% Y/Y. General surgery in the United States as well as general strength in Japan were both called out as highlights. Its mix of offering better patient outcomes, better care team experiences/training, and lower cost per treatment continues to work quite well.
Multi-port system placements for 2023 rose 5.8% Y/Y to reach 1,313.
Single-port system placements for 2023 rose by 148% Y/Y to reach 57.
Ion placements for 2023 rose by 10.9% Y/Y to reach 213. Ion procedure growth reached 108% Y/Y for the quarter. It has 534 total Ion systems placed today.
Placement growth is not being driven by price cuts as the average selling price of $1.42 million was flat Y/Y.
Notably, weight loss (bariatric) surgery growth continued to decelerate. This is directly related to GLP-1 drugs like Ozempic. Bariatric surgery is a little less than 5% of its total volume today.
Demand for flexible leases and financing was “substantial” during the quarter. Clients are looking to build their portfolios of ISRG’s hardware while minimizing up-front cost and creating a more seamless ability to trade up to newer systems. Leasing was 48% of Q4 placements vs. 42% Y/Y. ISRG gets less revenue upfront from leasing vs. an outright sale, but lifetime value of a leased system is similar to selling it.
Ion Platform:
Ion growth was held back by supply issues. It slowed down deployments to “ensure placements went well.” Demand is strong, the backlog is growing and it’s working to quickly resolve these issues. For Q4, this led to Ion system placement falling from 67 to 44 Y/Y.
Costs and Margin Context:
Both capital and operating expenses came in around the high end of its annual 2023 guidance. It continued to invest heavily in R&D to support platform and digital tool growth. Product gross margin also worsened Y/Y due to a mix shift towards newer platforms like Ion. ISRG’s margin profile on robotics hardware always starts low with new products and builds from there. Finally, a build in inventory reserves weighed on margins Y/Y as well.
New da Vinci Model:
ISRG submitted a 510(K) (FDA clearance application) for its new da Vinci 5 platform. This is set to expand minimally invasive surgical use cases, although the team won’t tell us which use cases will be added. They will after it’s cleared. The new platform has 4x the computer processing power vs. its predecessor along with several other upgrades to systems and materials. It submitted the application in August 2023 following the completion of trials. It did receive a request for more information and is currently responding to inquiries. It’s also working on approval in Korea and Japan.
The launch of this platform will be intentionally slow. It takes time for ISRG to assemble its supply chain and ramp capacity for new hardware. It’s not willing to rush that process and will go only as fast as its supply chain can effectively mature.
International:
Like in Q3, anti-corruption efforts and ramping competition in China are weighing on growth there. It expects this to last at least until the second half of this year. The unwinding of its demand backlog there (following Q4 2022 pandemic outbreaks) helped to offset this headwind in 2023. In other China news, it started its da Vinci Xi production. By law, this must be assembled in that nation if it’s to be sold there.
Through 2025, it plans to open new factories for its da Vinci 5 and more capacity for Ion as well across California and Mexico.
In India, it continues to see explosive growth off of a small base.
In Europe, its da Vinci single-port system secured a key CE mark certification for more use cases. Deployments will begin for these new use cases in 2024.
f. Take
If any of you closely follow my Progyny coverage, this company reminds me of them. A dominant player within a niche small enough to avoid unwanted attention, but large enough to support long term growth. They lead in their industry, continue to build more traction and continue to innovate. This is a boring company in the best of ways. The quarter was very good and the 2024 guidance was roughly as expected. Procedure guidance was a bit light, but ISRG loves to set targets that can be consistently raised throughout the year.
4. PayPal (PYPL) – Innovation Day
PayPal’s new CEO Alex Chriss took to the stage this week to talk through PayPal product innovation. The chat was organized into 6 announcements. I posted this to Twitter this week, so if you read it feel free to skip the section. It will sound repetitive. Here were the highlights:
New PayPal Checkout:
PayPal is accelerating efforts to go password-less. It’s pushing harder to remove as much friction and as many clicks as it can from checkout. That’s the only way to stand out within the commoditized sector. Data entry requirements and latency mean lower conversion. PayPal’s new checkout flow allows for profiles to log-in with just a face or a fingerprint. After that, they can enjoy one-click checkout and 50% lower time to completion. This brings PayPal’s checkout ease up to par with others in the space. It needed to get to single click. Now that it’s in line with others, its large brand trust advantage over the pack can actually be more effectively enjoyed. I don’t care if I trust you more if you make me jump through hoops to checkout. If you don’t make me jump through those hoops, brand trust suddenly becomes the deciding factor.
The old PayPal team took years to implement new checkout flows. They structured the flows in ways that required manual, painful, custom builds for all large merchants. It rolled out these builds a few at a time each quarter. That’s just way too slow, and the speed of this news is a sign that the dawdling is over.
Fastlane by PayPal:
PayPal is also revamping guest checkout through a new product called “Fastlane.” To me, this sounds like an iteration of Single Sign On (SSO). When a customer uses PayPal, the company will be able to recognize the buyer upon returning to ANY of its other tens of millions of merchants. Info can now be saved for future usage at any other PayPal merchant with a single click of a button to opt in.
It will not require another log-in or verification as it will know who you are. This will remove manual data entry requirements for guest checkout and eliminate the need to maintain disparate merchant accounts. It will reduce the costly 50% abandoned cart rate that e-commerce as a whole deals with. This is the company finally leveraging the unique benefits of its massive merchant network. It can allow this network to offer the convenience of rapid checkout without needing to already have that customer in their ecosystem. That matters especially for the little guys and gives PayPal a sizable edge in guest checkout convenience (Shopify has the same product). Notably, Fastlane is cutting guest checkout time for PayPal customers by 40%. BigCommerce is now using Fastlane and is enjoying significant conversion advantages early on. It calls this product the best on the market.
Smart Receipts & The Advanced Offers Platform:
Why not turn receipts into a marketing engine? That’s the plan for PayPal. PayPal’s customer receipts now come with compelling cash back offers for customers. Importantly, PayPal uses its deep customer data profiles (and dataset representing 25% of e-commerce) to ensure these offers are hyper-relevant. Merchants only pay for conversion, not impressions, to allow businesses to turn first time shoppers into fiercely loyal customers. This also means that merchants don’t need large marketing budgets to enjoy the powerful customer acquisition lever. They pay as they earn. Early on, these “smart receipts” have a 45% email open rate, which is quite good.
Along the lines of using its vast 1st party dataset offering unique value (noticing a theme?), it will roll out the “PayPal Advanced Offers Platform” in the coming months. This will allow merchants to openly utilize PayPal’s massive customer base to target promotions and offers more precisely. Importantly, only customers who have opted into data sharing are eligible for data usage. That’s pretty much required at this point in Europe. Anything PayPal can do to create value from its scale is good news for shareholders. It not only means happier customers, but more differentiation vs. smaller competition. Milk the scale advantage… then milk it some more.
New Consumer App:
PayPal is leaning heavily into customer savings amid the high inflation environment.
It’s adding access to hundreds of cash back offers from large brands (some pictured below). These offers can be accessed with a single click and auto-implemented on a merchant’s site when checking out through PayPal. This program is called the “PayPal Cash Pass.” The service intelligently surfaces deals based on broad customer data profiles (like with the other announcements) to bolster relevance. This can be used in tandem with its 3% cashback debit card for even more customer value; those rewards can also be easily placed in its high yield savings account for 4.3% annual yield.
Venmo Business Profile Upgrade:
Venmo is by far the most active social feed in financial services. PayPal has not been taking advantage of the easy, hyper-targeted marketing lever that this gigantic, engaged user base should represent. It allows merchants to use business profiles to make payment easier, but hasn’t done much else to harvest the app’s value. It’s upgrading Venmo Business Profiles to do just that. These profiles now have an easier subscription process. Friends can see what merchant you shopped at (with your permission) and can actually subscribe to any merchant that looks interesting from that page. It’s one thing to tell someone that “this business is cool;” voting with a wallet is more powerful. This makes that wallet voting more visible on Venmo.
PayPal is also allowing Business Profiles to use Venmo for the growth engine it should have always been. They can use PayPal’s vast dataset (again… key theme) to identify local, highly relevant customers to tailor promotions to. This can happen on a customer-by-customer basis. So? Better merchant visibility paired with a more actionable means to incentivize customer purchasing. That combo should morph Venmo into the local commerce player that it needs to become… finally. Venmo is vastly under-monetized and this should help.
30,000 Ft view:
Some are going to poke fun at this event. They’re going to say it doesn’t “shock the world” like CEO Alex Chriss told us to expect (he didn’t). I’d respond by telling them to actually listen to Chriss’s CNBC interview from last week. While shock the world was aggressive language, it was in reference to the years ahead… not today.
Today represents step one. It represents a foundation and a depiction of focus for PayPal’s future roadmap. While nothing in here is all that sexy, it’s all needed. It finally mines the value that PayPal’s gigantic two-sided network can provide. It effectively fills large product gaps on the branded side and leverages the ability to offer network-level innovation that smaller players cannot possibly match. It focuses on what PayPal does best and rightfully ignores all of the other product distractions from the free money era. Today is a baby step… but it is a baby step in the right direction. Now go execute.
5. Intel (INTC) – Earnings Snapshot
Results:
Beat revenue estimate by 1.5% & beat guide by 2.0%.
GAAP & non-GAAP gross margins beat guidance & beat estimates.
Beat $.45 EPS estimate by $.09 & beat EPS guide by $.10.
Q1 Guidance:
Missed Q1 revenue estimate by about 10%.
Missed $.32 EPS estimate by $.19.
Missed 45% GPM estimate by 50 bps.
Balance Sheet:
$24B in cash & equivalents.
Inventory fell about 8% Y/Y.
$47B in debt.
Share count rose 3% Y/Y.
A quick note on Intel: I don’t really think results matter very much right now. This is a story about how large a piece of Taiwan Semi’s foundry business Intel can take. It has morphed into the type of company that I would place in Boeing’s category. I’m not saying its team is irresponsible or its headline and execution risks are massive. I am saying that this is becoming a mission critical company in the eyes of the U.S. government. Between incentives and credits to motivate factory building, Intel is approaching vital status in terms of national security. Do we want to have all the GPUs that we need to lead in GenAI in the decades to come? Yes we do. Do we want to be overly reliant on Taiwan and all of its geopolitical risk? No we don’t. Enter Intel.
6. Apple (AAPL); Match (MTCH); Duolingo (DUOL); PayPal (PYPL) & app-based businesses in Europe – Half-Hearted App Store Reform
Apple’s app store is gearing up for some big changes in Europe. This is in response to the Digital Markets Act, which will go live in March. This legislation designated all mega-cap players as “gatekeepers” who are prohibited from doing things like unfairly promoting their own products vs. competition, blocking competitors or using customer data without permission.
For the first time ever, in the EU, Apple will allow users to download iOS apps through 3rd party app stores (called sideloading). These app stores must be approved by Apple, but after approval, customers can download whatever they want with them. That includes apps currently banned by Apple. This news also frees 3rd party developers to utilize 3rd party payment processors rather than solely Apple’s ecosystem.
With these new changes, Apple’s take rate of 30% would fall to 17% for those using other processors, and 20% for those using Apple’s. Still, there’s a very important caveat. Apple will also charge half a euro per download after the millionth download for any app. According to Spotify, which does compete with Apple, 17% paired with the new fee leaves the company no better off or worse off than before. Match and Duolingo would likely be in the same boat.
There’s another interesting aspect to this news. Apple will open its near field communication (NFC) tech to other apps besides Apple Pay. This will free players like PayPal, Square, Shopify and many others to more directly offer mobile tap-to-pay. They’ve been able to stitch together integrations to indirectly offer this to date. That will no longer be necessary and should bolster ease of use (and so conversion rates).
7. Market Headlines:
Google Cloud is partnering with Hugging Face to try to win over more developer talent. Hugging Face is a very popular open-source model provider. If Anthropic and OpenAI are the most well-known purely GenAI players, this is the 3rd. Google also ended its partnership with another AI first called Appen. In related news, the FTC has begun investigations into Google’s, Microsoft’s and Amazon’s investments in Hugging Face, Anthropic and OpenAI. What else is new?
Amazon continues to announce more investments in new regions to expand its cloud footprint. This week, it announced a new $10 billion budget for Mississippi expansion.
Another week, another Microsoft breach. This week, Russian state-sponsored adversaries hacked into Microsoft employee emails. Microsoft does many things extremely well. The firm’s enterprise bundle is perhaps the best in the world. Still, cybersecurity is just not its strength.
Disney rolled out some new tech this week. It’s called a Holotile floor and allows for free movement with the floor keeping you in a fixed location. This will surely be relevant for the metaverse and AR/VR. Still, I can’t help but see this and think “oh great, another distraction from the core business.” This is not the type of thing Disney should be creating internally. It should create elite content, and let the Apples of the world build the Holotiles. Save your money; cut this cost; sell the tech. In other potential Disney news, the NFL playoffs continue to set viewership records. The NFL ESPN partnership needs to happen.
Paramount will conduct a series of layoffs next month. This is as M&A pressure builds and the need for cost-rightsizing does too. Netflix sees a lot of streaming consolidation taking place this year.
Third Point sees Shopify results coming in roughly in line with consensus when it reports earnings next month.
8. Macro
Output and Consumption Data:
The Manufacturing Purchasing Managers Index (PMI) for January was 50.3. This compares to 47.9 expected and 47.9 last month.
The Services PMI for January was 52.9. This compares to 51.0 expected and 51.4 last month.
Core Durable Goods Orders M/M for December rose by 0.6%. This compares to 0.2% growth expected and 0.5% growth last month.
Durable Goods Orders M/M for December rose by 0%. This compares to 1.1% growth expected and 5.5% growth last month.
Q4 GDP reading currently sits at 3.3% vs. 2.0% expected and 4.9% last quarter.
Employment Data:
Initial Jobless Claims were 214,000. This compares to 200,000 expected and 189,000 last report.
Inflation Data:
Personal Consumption Expenditures (PCE) Index Y/Y for December came in at 2.6%. This was as expected and vs. 2.6% last month.
Core (excludes food & energy) PCE Y/Y for December came in at 2.9%. This compares to 3.0% expected and 3.2% last month.
PCE M/M for December came in at 0.2% as expected. This compares to -0.1% last month.
Core PCE M/M came in at 0.2% as expected. This compares to 0.1% last month.
The GDP Price Index Q/Q for Q4 rose by 1.5%. This is better than the 2.3% growth expected and 3.3% growth last quarter.
9. Portfolio
I did not make any transactions this week.
Thank you Brad 🙂👍
Thanks for the write up on PayPal. Really seems to be putting in a solid base. their data alone is worth $66b imo. Gonna start to nibble down here.