More content from this week:

More earnings reviews from the last three weeks:

I plan on including the remaining Cloudflare earnings coverage and a full Sea Limited Earnings Review in my Nvidia and Snowflake Earnings Review article coming this week.

Read my Cava (and Sweetgreen) deep dive here.

Food, beverage & packaging costs were 29.9% of revenue vs. 29.4% Y/Y. This was related to its steak launch (just like last quarter and as expected). Labor was 25.4% of revenue vs. 25.3% Y/Y despite 8% Y/Y wage inflation. Part of that wage inflation was from new California labor laws, which it didn’t offset with price hikes. Sales outperformance offset most of this headwind. Top-line strength also drove G&A leverage and 69% Y/Y growth in adjusted EBITDA. There is considerable fixed cost in this model with room to grow overall volume per store without expenses growing in tandem.

Quick accounting note for Q4. The company’s tax loss benefit allowance will likely be released as it durably inflects to profitability. This will lead to a large GAAP EPS benefit.

It offered some early comments for 2025. It sees at least 17% Y/Y store growth vs. its previous guidance of 15% Y/Y growth. It also sees stable Y/Y restaurant level margin from a strong starting point. That’s notable. When a quick-service company accelerates new store growth from a larger base, one may expect restaurant-level margin to temporarily suffer. It takes time for volumes to ramp and for fixed cost leverage to unfold. Considering this, the 17%+ unit growth guidance for 2025 paired with expectations of stable Y/Y restaurant-level margin is notably impressive. It’s the result of these recent new stores doing way better than they were supposed to.

Cava EPS is expected to compound at a 28% clip through 2025 and 2026. EBITDA is expected to compound at a 30% clip during that time. This gives it a net income PEG of nearly 10x and an EBITDA PEG of over 3x. This is one of the most expensive names in markets.

Cava is determined to use AI to augment its workforce, rather than supplant it. The company is adamant that the personal, human touch in restaurants is a “contrarian” differentiator. These strong results tell me that they’re right. Its new in-store “AI video technology” tracks ingredient depletion to nudge employees to replenish needed items. Following an intricate and successful testing process, it’s in 4 restaurants and will expand from there. This technology will be used for its in-store food prep lines, as well as the digital order make-line.

It also debuted a new model for labor allocation. This creates more concrete rules on where employees are placed during its busy hours; it also shifts some non-peak labor hours to peak. This was up and running ahead of schedule like everything else Cava releases is. It called the impact so far “promising,” while the program has also uncovered new potential to “strategically invest in lower-volume restaurants to drive increased revenue.” It is noticing a strong positive correlation between giving these stores more support and the locations generating more volume. It’s a small part of the overall portfolio, so the AUV benefit will be limited. Never the less, it will be yet another tailwind.

The revamped loyalty initiative has already boosted percent of sales coming from the program by 200 basis points. Right now, it’s a bankable points model; in the future, the company plans to use this growing customer database to personalize experiences further. It’s worth noting that the microservice-based architecture that Cava was built on (and the deep dive covers in detail) is what enables all of this rapid learning. It’s the malleable set-up that allows it to collect and utilize this data for its loyalty program, app, in-store experience etc. in one cohesive manner. That drives agility and informed decisions. Microservices represent the building blocks that form a singular, organized unit of insight-gleaning.

The launch of its garlic ranch pita chip (I’m hungry) is off to a great start. That’s not at all surprising, considering the slow, stage-gate process it follows when debuting any new menu item. That’s also why its steak launch was such a hit success. This is not random… It's data-driven. This launch was cited as a large piece of the 8 point brand awareness boost that Cava has enjoyed since the IPO.

Cava called its 2024 store openings its “strongest class yet,” with significant outperformance vs. expectations. This further emboldened conviction in its growth opportunity and the number of stores per market possible. Next year, as part of its impressive 17%+ unit growth guide, it plans to enter South Florida and 2 new Midwestern markets (hopefully Detroit). To make store outperformance even more impressive, the success is not external marketing-driven. It’s actually despite cutting marketing in places like Chicago because the stores were getting too busy. Bonkers.

Let’s just take a minute to appreciate these numbers. The raise comes after two other large raises earlier in the year. Cava’s execution is exceedingly impressive and has been since its IPO and founding. The opportunity is large and they’re taking advantage. I don’t generally talk like this about companies… but the consistently massive beats-and-raises paired with that gaudy same store sales growth is not normal. So what’s the secret sauce (couldn’t resist) here? 

They sell Mediterranean food, and while that is a growth story within U.S. cuisine, can’t anyone sell Mediterranean food? Yes. But not everyone has this world-class team and systems to deliver consistent quality and value. The company resembles Duolingo in this way. They both operate in different sectors that are quite difficult to win in at scale. And yet? They both shatter expectations at every turn. Both are obsessively data-driven and fixated on thoroughly testing every single piece of their business. There is no guessing here on what works and what doesn’t. When Cava releases a new food item, an app feature, a loyalty program perk or anything else, it knows that item will work because it has structural evidence to support it. Compare that to the old Starbucks team rushing new menu items with their fingers crossed. One final note on this elite team. When they set a schedule, they beat it. Whether it’s a rip-and-replace overhaul of their app, the introduction of their new loyalty program, the entrance into new markets or anything else… they beat it. In my mind, Brett Schulman is on Brian Niccol’s level.

Now… for the elephant in the room. The valuation is crazy. It has been crazy since the company has gone public and has merely gotten more stretched since then. I think it’s safe to assume some level of outperformance vs. estimates going forward, but that wouldn’t change this being one of the most expensive names in markets. It sports the kind of valuation where a slightly-better-than-expected or in-line quarter will likely be severely punished. It needs to be perfect and then some. I can’t own it at the price, but I’d love to own it at a more reasonable level in the future. If that opportunity doesn’t come then, oh well.

SoFi announced a revamped Robo Advisor platform to deepen its existing, award-winning automated investing suite. It offers three new portfolios:

The was built in partnership with BlackRock to “expose investors without significant financial resources, or a wealth manager, to new strategies and funds.” Not only does SoFi offer financial planners within its low cost Plus subscription, but now this launch significantly augments Robo-access with alternative assets like real estate to eliminate the need for massive pre-existing wealth to responsibly participate in that industry. 

Most people aren’t like you and me. They don’t want to read about companies and spend their time building investment case puzzles. I was shocked when I heard that news for the first time, but I digress. Most people want to use financial markets to build wealth on auto pilot, as they prioritize other things. Specifically, 80% of SoFi survey respondents were interested in auto-investing in alternative investments like this new tool offers.

Premium revenue growth was powered by 12% subscriber growth and 9% ARPU growth. Price hikes helped a bit. Advertising revenue growth was driven by impression growth. The pricing environment remained weak across music and podcasting. It’s a “volatile environment for brand-related marketing spend.”

Spotify remains on track or ahead of schedule for all targets offered at its 2022 investor day. It’s already at the low end of its margin target range.

Spotify trades for 52x forward earnings. EPS is expected to compound at a 39% clip through 2025 and 2026. It hasn’t been profitable for long enough to use anything but gross profit in the chart below.

MAU growth was the only disappointing part of Spotify’s last quarter. This quarter, trends recovered as expected. It capitalized on product enhancements and “reversing” previously unpopular product decisions. It also enjoyed improving marketing efficiency to justify incremental spend.

Y/Y MAU Growth

Q3-24

Q2-24

Q1-24

Q4-23

Q3-23

Latin America

22%

22%

21%

22%

21%

North America

18%

18%

20%

22%

19%

Europe

27%

28%

29%

32%

28%

Rest of World

33%

33%

30%

24%

31%

Premium GPM expansion was powered by music and audiobooks. That’s the first time audiobooks have been cited as anything but a large margin drag. This indicates that the newer offering’s aggressive, front-loaded investment phase is winding down as revenue scales. Cost of goods sold (COGS) efficiencies like content cost relief also helped things. For its ad-supported business, music and podcasting drove the leverage. Similarly to premium, content cost relief aided this segment’s GPM. In the years ahead, it sees “substantial runway to grow margins.”

2024 was the year of monetization and efficiency for Spotify. It was the year of prioritizing its current FCF explosion over maximizing top-line growth. While this approach will not be abandoned in 2025, the balance is modestly shifting back to a growth mindset, with slower margin expansion expected in 2025. For context, Spotify was a bloated company throughout the pandemic, which left a lot of low-hanging efficiency work to be done. A lot of that is now complete, which makes a slower (but still strong) pace of 2025 leverage understandable. It will also now invest from a point of strength to capture more user and engagement growth through newer items such as GenAI work.

Operating expenses (OpEx) fell by 8% Y/Y or 6% Y/Y FXN. Elevated social charges added 8 points to Y/Y OpEx growth, meaning normalized OpEx would have fallen by 14% Y/Y, thanks to lower personnel and marketing expenses. Steady compounding… falling costs… good combo.

The premium side of the business is thriving, but this segment still has a bit of work to do. The Spotify Ad Network (SPAN) is Spotify’s way of serving as a conduit between buyers and platform publishers across most podcasting apps. This enjoyed nearly 10% Q/Q publisher growth vs. 10% Q/Q growth last quarter. And while this project remains interesting, the new Spotify Ad Exchange (SAX) announcement is the real story here. This is a dedicated supply-side platform to unlock fully biddable programmatic demand. And to gauge how impactful that programmatic upgrade will be, consider the linear-to-streaming revolution for TV. That change meant real-time, data-driven auctions for impressions, rather than purchasing millions of those impressions in advance on a whim. 

Programmatic auctions for audio will similarly and dramatically enhance targeting precision by ensuring needed context is infused right into each buying decision. Meaning? Ad spend returns rise and impressions suddenly become worth a lot more. This will be a welcomed offset to the weak ad pricing environment and is Spotify’s main part of its plan to reaccelerate somewhat underwhelming growth here. Furthermore, this will make Spotify less reliant on direct advertising sale initiatives, which could be positive for more cost efficiencies. 

It’s working with The Trade Desk to test this product as we read and will take a slow, methodical, calculated approach here. Still, it was hard for them to mask their excitement about this arrangement on the call. For now, advertising fell from 14% of revenue to 12% Y/Y and grew materially slower than MAUs.

Spotify launched its AI DJ tool in 18 Spanish-speaking markets during the quarter. This brings GenAI sophistication to music shuffle. It’s also beta testing its AI Playlist tool in the USA, Canada and a few other markets. This unlocks the creation of new playlists with conversational prompts to explain tastes. Spotify is constantly focused on finding engagement gains through product improvement wherever it can. As Founder/CEO Daniel Ek explained on the call, most of these changes impact small portions of the overall user base. With GenAI thus far, the impacts have been far more widely ranging. Keep in mind that Spotify’s GenAI costs are based on usage of 3rd party apps and models. It is not building custom models and does not expect the AI initiatives to coincide with a large rise in CapEx.

“We are not here to merely optimize for today. I am energized about what's unfolding in AI... Moments like this don't come often. They're inflection points where you can either let the opportunity slip by or you can seize it and press forward with conviction. We're choosing the latter, fully committed, heads down, and building for a future full of possibility.”

Founder/CEO Daniel Ek

Notably, leadership was asked about rumored ultra-premium subscription offerings from record labels and if it had any updates on its own plans to debut a similar service. It didn’t offer much new detail aside from assuring investors that this is in the works. Its “higher-priced” music tier will include things like exclusive artist access, events, better sound quality etc. 

During the quarter, it added music videos to 85 new markets. It’s in 97 total now, and has consistently delivered large engagement gains wherever introduced.

It added 200,000 new audiobooks across European markets. This is yielding strong adoption gains “across the board” with the segment now boosting consumption per user by 5 hours. Notably, audiobooks are expected to remain a new gross margin tailwind throughout 2025. For podcasting, it debuted listener comments during the quarter to create a more engaging experience.

Later in the week, Spotify hosted a creator event to unveil new podcasting products. These announcements include ad-free video podcast episodes, video clips to enhance discoverability and more flexible listening/watching options. Notably, it also debuted the Spotify Partner Program. This is a new monetization initiative for these podcasters. Going forward, creators will earn a revenue share based on time spent by premium subscribers on their video episodes. It will also offer ad-based monetization to plug publishers into advertising demand and organize payouts.

Spotify has continued to enjoy “very low levels of churn” in response to price hikes across 6 markets. It was asked if there are more hikes coming. There inevitably are, and it didn’t shy away from this notion. Still, it will maintain its fixation of delivering far more value than it charges for and will prioritize maintaining its status as one of the best consumer subscription deals out there.

Good results overall. The Q4 revenue guidance is the lone weak spot amid an otherwise very positive report. Spotify keeps delivering the rare combination of steady top-line growth with more cost cutting. The margin boom is the byproduct. It continues to make its platform stickier through new product categories, continues to enhance existing offers through technology like GenAI and continues to win. It’s not common for a smaller company to overcome competition from multiple mega-cap companies with competitive offerings. That is what Spotify has done for years and continued to do this quarter.

The company remains highly confident in its 2026 targets calling for 3.55B CHF in revenue (26% CAGR) , a 60%+ GPM and an 18% EBITDA margin. It’s ahead of schedule on all 3 metrics (already there for GPM).

EPS is expected to grow by 142% this year and by 15% next year.

Last quarter, On’s leadership was critical of itself. According to them, automation projects at its large Atlanta warehouse led to disruption, delays and “missing DTC opportunities.” It felt like it left a lot of incremental revenue on the table. It quickly worked around these issues throughout Q3, which yielded the large DTC revenue upside. It shifted capacity to its LA facility and temporarily leaned into air freight utilization as these Atlanta challenges persisted. This helped customer service levels improve Q/Q. Notably, it still generated fantastic operating leverage despite this more expensive fulfillment method. Meaning? As Atlanta is fixed (by spring 2025), there should be more near-term margin upside to enjoy. That’s especially impressive considering it’s already at its 2026 margin goals.

Brand awareness is surging for On. Specifically in the USA, aided brand awareness is up 2x Y/Y to reach 20%. It also tripled Y/Y in Paris, with significant help from the Olympic games. And while that event did contribute to success, there were other, more structural factors that helped too. First, its partnerships with celebrities like Zendaya and iconic athletes like Roger Federer are working well. Both relationships, especially with Zendaya, are also especially helping to attract younger customers and first-time buyers to the brand. Many more activations to come here.

LightSpray is also working quite well to build buzz. As a reminder, this is a new manufacturing process and combines the upper and lower parts of shoes with a robotic arm and thermal fusing rather than typically used adhesives. This means cheaper, more rapid manufacturing and fewer harsh chemicals in the creation of shoes. For now, this is mainly a marketing ploy and to showcase On’s innovative approach to design. The first shoe that it will be used for is its Cloudboom Strike LightSpray. While this is already in “ultra-limited production” that’s mainly for its sponsor athletes like Hellen Obiri. Notably, she won the Boston Marathon and finished second at the NYC marathon with these lace-less shoes on. That, and accolades like it being named as one of the Times 200 best 2024 inventions are meaningful awareness builders. But still broad-scaled production across several On franchises will not take place until 2027. I think the innovation-first mindset of this founder-led company is embodied in the following quote:

“We view innovation and excellence as the two foundational pillars that fundamentally guidance the way we work. Innovation is at the heart of what we do. It fuels our dreams and allows us to explore different paths and find new solutions. Groundbreaking technologies like LightSpray are a great example of what the culture of innovation can achieve.”

CFO & CO-CEO Martin Hoffmann

During On’s Investor Day a year ago, the company cited Asia Pacific (APAC) as perhaps the most compelling geographic growth opportunity. So far it is “ahead of the plan there” thanks to continued rapid FXN growth. This quarter also marked the first in which APAC represented more than 10% of its overall sales. China is a big reason for this. All store openings there are performing well and prompting it to accelerate plans in that important nation. Two openings there next year will incorporate its larger global flagship format to offer more evidence of growing confidence. During China’s Double 11 shopping event, it set a new all-time high for sales in a single day while maintaining a strict full price philosophy. This growth was not captured via discounting. Japan is the other core APAC market and is also performing extremely well. Looking ahead, Korea is the next priority market as it plans to be ready for scaled distribution there next year.

Across Europe, the Middle East and Africa (EMEA) performance was excellent as successful marketing campaigns and word-of-mouth both drove demand from young customers. It opened a new store in Milan, while overall revenue in the region rose 15.2% Y/Y FXN. In the Americas, it opened its 3rd store in NYC, its first in Austin and its first in Chicago too. Canada and Brazil were cited as highlights, but currency weakness across Latin America did hold back growth. On an FXN basis, revenue rose by 34.5% Y/Y.

The wholesale strategy remains unchanged. It’s focused on deepening existing partner presence instead of maximizing new door growth. The team expects that this will help to preserve its pristine brand reputation and support its intentional shift towards DTC revenue. Most growth this quarter was driven by those expanding relationships rather than new ones. Specifically, new store wholesale growth was 6.6% Y/Y compared to 8.7% Y/Y growth in Q3 2023.

On has now reached its goal of having 7+ shoe franchises contributing 5% or more to its overall revenue. It’s not just running shoes contributing, but also trainers and tennis shoes too. But across core Cloudmonster, Cloudrunner and Cloudsurfer franchises, demand is excellent and new launches are exceeding expectations. Cloud 6, for example, is its new lifestyle shoe with a price that is $10 higher than the previous model. These are flying off the shelves despite the higher cost. All of this led to 32.1% Y/Y FXN growth for the segment vs. 28.2% growth last quarter. It will launch its Cloud Zone shoe on March 20th, which will come with a “futuristic and performance-inspired” design.

The focus this quarter was on fixing footwear distribution issues. As apparel is a much smaller business (just 26.8 million CHF in revenue this quarter), that rightfully took a back seat in prioritization. Supply bottlenecks for apparel lasted for most of the quarter and materially held back segment growth. Looking ahead, it sees a reacceleration in growth next quarter as it mitigates issues. A record October for the category offers strong evidence of this goal being attainable. Spring and summer 2025 order books point to continued strong performance next year as well.

I continue to be extremely impressed with this company. Consumer discretionary brands storm onto the scene and flame out constantly. But? As this company proves to be capable of rapid, margin-accretive compounding across different macro environments, it becomes more & more real by the quarter. I am likely going to make this the topic of my next deep dive after I get Coupang published. Great quarter, with several reasons to believe strong results will get even better in the months ahead.

If you listen to Amazon leadership speak, it should come as no surprise that it’s expanding more deeply into healthcare. This week it announced low cost coverage for men’s hair loss, anti-aging skin care and erectile dysfunction (ED). This is part of its consistently broadening One Medical Telehealth platform. Hair and ED are among the largest revenue contributors for Hims today.

I’ve made my Hims skepticism very clear in multiple recent articles. And I think the “take” section of this article and this post both sum it up well. This is a story of elite financials and wonderful execution that I don’t think can be sustained. In short, I don’t see a defensible moat and think Amazon’s fulfillment footprint and consumer subscription bundles will be tough to compete with. I think their inevitably deepening presence will likely pressure long-term growth rates, pricing power and customer acquisition costs. I don’t see personalization (adding vitamins or another subscription to a pill or different doses) as a differentiator. Personalization is just data and algorithms. Amazon has more data, can buy the hyper-relevant data and has a world-class suite of large language models in Bedrock to utilize. For Amazon, this will be yet another piece of value for its Prime subscription. 

For Hims, I think this is an existential threat to the business. While the management team is far better than anything Teladoc has ever had, and while Hims is more profitable than Teladoc has ever been, there are several similarities between these business models. The other relevant comparison here is brick-and-mortar pharmacy, which has struggled mightily since Amazon’s entrance. This doesn’t even begin to cover immense regulatory uncertainty surrounding its ability to sell GLP1s (its most promising growth vector).

I think Hims probably will deliver another few quarters of wonderful outperformance and results before this new risk begins to catch up with them. There is significant potential upside if Hims fends off the Amazon threat (especially at its current valuation). I just don’t think that outcome is all that likely. I do hope that I’m wrong and that bulls can tell me I told you so in a few years.

Ryan Butler, shared an interesting nugget this week. DraftKings is hiring a Government Affairs Specialist to join 2025 Texas legislative lobbying efforts. DraftKings will join FanDuel and several other online sportsbooks in an effort to push for legalization in that massive state. For context, this would potentially boost DKNG’s state footprint from 49% to 57%. If we assume Texans gamble at the same rate as other states, this could easily represent 300,000 incremental payers for the company. There’s support from the public there, but some skepticism on how supportive the State Senate will be. These companies have their work cut out for them. Aside from California sports gambling legalization and a lot more iCasino legalization (only 11% of the population at this point), this is the largest regulatory prize remaining for all players involved.

As Max readers know, I sold my stake in Progyny following its Q2 results this past summer at a loss. Can’t win ‘em all, and it was time to move on. This week’s earnings report made that even more clear. The numbers are so bad that they’re not worth covering beyond some brief commentary. It’s now flirting with negative Y/Y revenue growth and seeing margins briskly fall.

My sale was despite the company’s compelling value proposition in a secular growth industry and despite the multiple being at record lows. My decision had everything to do with losing trust in the team. Anomalies are supposed to happen once in a very long while. They’re not supposed to be recurring. So? When Progyny leadership cites one utilization or trend anomaly after another… quarter after quarter… It forces me to reassess the team and the business model. This quarter, the company cited more ~anomalies~ to explain yet another awful showing and a 4th consecutive guidance cut. They followed that up with the typical “selling season is going amazingly well” despite the numbers going very… um… not well. The same selling season that was going “well” last year translated into this year’s putrid results.

And one more note on just not having any faith or trust in this team. They had very little to add beyond the previous 8K about losing Amazon as a client despite that being a large chunk of its business. And? Sell-siders forced them to acknowledge that they lost 5 additional clients this year as well. That led to more member and covered life disappointment.

Cheap is often cheap for a reason, and that is the case here. I’d expect them to sell to private equity or have an activist come in to replace the entire leadership team in the not-too-distant future. I have absolutely zero interest in buying back into the company amid this most recent dip. There will always be losers, and it’s vital to keep our minds wide open to a thesis being wrong. Mine was here. As John Maynard Keynes famously said, “when the facts change, I change my mind.” Stocks never deserve our unconditional loyalty. They earn our time, attention and money through consistent, honest execution.

Ads are coming to Meta’s Threads app. With 300 million MAUs, this user base is already more than 10% the size of Instagram. Still, the company will go slowly with ad load growth as it always does and engagement on Threads is not remotely close to time spent by a typical Instagram users. Still… another ad revenue tailwind to look forward to.

Happy 52-week high Lemonade shareholders. It has been quite the bumpy ride. Lemonade’s Investor Day is on Tuesday. In it, it will outline its path to grow from $1 billion in premiums to $10 billion. As long as that isn’t by the year 2050, that should be positively received. The team has shown a consistent ability to meet or exceed their multi-year targets. Its new board director also bought $1 million in shares. That’s common practice, but still good news.

Nu’s largest legacy rival in Brazil downgraded the company from outperform to market perform. I’m sure they’re 100% objective.

The Trade Desk is reincorporating in Nevada.

PayPal debuted a new “money pooling tool” to make combining funds for large expenses easier in the Paypal app.

Deutsche Bank upgraded SentinelOne to buy based on strong observed platform momentum. Important quarter coming up for the company. The stars for its success have aligned. Time to deliver.

RBC thinks Niccol is going to fix the issues at Starbucks and drive “meaningful acceleration.” I agree, RBC.

Alphabet’s Waymo is live in Los Angeles.