Most of this week’s content has already been sent. In case you missed it:

EPS is expected to grow by 95% this year and by 27% next year.

Axon trades for 109x forward EPS and 66x forward FCF. EPS is expected to grow by 23% Y/Y this year, 18% next year and 25% the following year. FCF is expected to fall 28% Y/Y this year, rise by 60% next year and rise by 117% the following year.

CrowdStrike is buying Adaptive Shield to expand its identity security suite. Falcon is  comprehensive in on-premise identity-based security, but perhaps a bit less advanced in SaaS-level identity security. This gives them that SaaS muscle to provide what it calls the “only platform to unify Cloud & ID security with integrated SaaS protection. Specifically, Adaptive Shield provides SaaS Security Posture Management (SSPM) to identify improper hygiene and misconfigurations for cloud-based software. It also beefs up CRWD’s 

Adaptive Shield is an Israel-based company that just finished raising $10 million in fresh funding. Revenue for 2024 is somewhere around $15 million and roughly doubling Y/Y. CrowdStrike is paying 20x sales for this, with a $300 price tag. That’s expensive, but so was Humio when CRWD bought it for 50x sales. Today, that purchase looks like a grand slam as its Security Information and Event Management (SIEM) product thrives and grows well beyond the price tag. That’s the power of integrating great tools into the overarching, single-agent Falcon platform and gaining access to its large roster of clients to sell to. This offers broad visibility into user trends to augment identity security and ensure traffic isn’t gaining improper permissions. It also has ID-based Threat Detection and Response, to augment CRWD’s existing offering.

I like the purchase because of this team’s flawless track record and the expanding opportunities it brings. To me, CrowdStrike’s willingness to shell out $300 million in cash indicates confidence that the residual liability of the July outage is manageable. This offers evidence that its extended free trials and credits response is enough. That’s great news. Furthermore, Adaptive Shield has a phenomenal reputation among security disruptors. This company being willing to join CRWD a few months after its blunder is also encouraging.

In other news, CrowdStrike is bringing more of its world-class threat hunting services across the pond as it launches an “AI Red Team” service in Europe. This will help “proactively identify and help mitigate AI system vulnerabilities, including Large Language Model (LLM)” protection. GenAI means exploding data processing volumes, infrastructure footprints and app opportunities. All of that will need protecting. Enter Falcon.

We write a lot about Shopify’s Point of Sale (POS) suite and how it blends order management, inventory maintenance and all other administrative work… across all customer channels… online, social and offline… into a unified, lightning-fast, readily malleable system. That’s purely qualitative, and I love when these ideas are backed up with quantitative data. This is especially true when that data comes from a 3rd party rather than internally. This week, EY published a report detailing the impact of Shopify (POS). Here were the findings:

There’s no reason not to go with this product, which is why tiny companies and Fortune 500 enterprises are going all in here. We’ve heard a lot of anecdotes about Shopify taking an accelerated amount of market share from the commerce offering at Salesforce. This is one of the many reasons why.

Guidance was the main theme of the prepared remarks & Q&A; a lot to unpack here. It’s strange to see the sharp EBITDA cut for 2024, paired with outperforming 2025 guidance. This is 100% related to the most unfavorable customer outcomes that DKNG has ever witnessed early in Q4. Specifically, of the $120 million reduction, there was a -$175 million impact from this alone. It would have raised 2024 guidance without this. This is not structural, so not overly concerning. Still, it does highlight the risk of outcome luck volatility on short-term DraftKings results. 

This volatility will be sharpest right now, as its EBITDA base just turned positive and is quite small. The outsized impact will shrink as it gets larger & larger. For now, there’s risk of profit misses here and there because of this. It does have other levers to pull, like OpEx efficiency gain and promotional efficiency improvements across states. These promotional efficiency improvements include the beginnings of it offsetting higher tax rates in Illinois. Still, it does show us that DraftKings doesn’t have control of outcomes, which impact results. It’s tempting to be seduced by this noise, but I think it is important to focus on multi-year trends and the cost lines that it can control… efficient marketing… product enhancements… stock comp control… etc.

We also got a plethora of commentary surrounding 2025 guidance indicating an overly cautious/conservative stance. Aside from not including any Missouri legalization impact (2% of the population), its internal goals for hold rate are above 11%. It stated that explicitly. It’s assuming flat Y/Y market share and is not relying heavily on new customer cohorts to ramp betting volume to reach its goals. That is despite an expected ramp based on older cohort data. In its EBITDA guidance, it’s baking in continued strong new customer growth, which is a large short-term profit headwind as these customers enjoy incentives to use the app. If that environment slows, EBITDA will outperform as it pulls back on its flexible marketing spend. It also leaned pessimistic on its ability to recoup EBITDA losses from Illinois’s new tax policy through promotional cuts. Lots and lots of intentional pessimism…

While talking down expectations on one hand, Founder/CEO Jason Robbins added that things look “maybe even a bit better than expected.” He explicitly said we “could see some EBITDA upside” but wasn’t ready to commit to it. Smart. Under-promise, over-deliver. While this all probably means targets will rise throughout the year, I actually think this is a win even if they don’t. Why? Because that will mean customer acquisition was better than expected, which then means a higher long-term profit ceiling. I’d rather have more EBITDA in 2026-2030 than more EBITDA in 2025. 

DKNG trades for 37x forward earnings and is turning profitable this year. EPS is expected to grow by 139% next year and 60% the following year.

In a sector of very similar competing products, DraftKings continues to show clear signs of standing out in terms of promotion effectiveness. Net new customers added rose 14% Y/Y while customer acquisition cost fell by another 20% Y/Y and promotions as a percentage of revenue fell 3 points Y/Y. It’s also getting far more efficient in uncovering high lifetime value users, and avoiding less profitable customers. Its increasingly national marketing footprint is naturally making advertising more efficient, while, to help further, #1 user experience and product offering awards across sporting betting and iCasino from research firms like Eilers & Krejcik Gaming. 

DraftKings continues to add more same-game parlay options to grow overall take rate. This is what Fanduel has done so successfully… DraftKings is following that  playbook. This quarter, NFL parlay mix as a percent of total bets rose 5 points Y/Y. It added in-house same-game parlay in 50 new NBA betting markets across the nation. Sticking with the NBA for a moment, its “King of the Court” marketing campaign was highlighted as a fantastic success. And that matters a lot. DKNG kills it in football, but lags others more noticeably in basketball. There’s no reason for that, aside from better execution and focus. Addressing that has become a priority and the season is off to a great start. New “game storyline” exclusive NBA bets should augment this momentum. 

On the micro-betting side of things (player props), it’s adding more parlay menu items and broadening its overall offering. Its integration of Simplebet and in-house real-time score, stats and viewing capabilities should help it stand out among a sea of competitors.

“That’s definitely something we're looking at for the next presidential election and potentially for something sooner. It is a different framework. It's not licensed as a betting product, it's licensed as a financial market. So it's definitely a very different thing. So we'll have to see where it fits in the priority list.” – Founder/CEO Jason Robbins

The Seminole tribe and Hard Rock in Florida control the entire market. There were comments made from leadership there that hinted at it becoming more open to partnerships. Good news, but Robbins told us that these conversations are very preliminary.

I thought this was a great quarter. The large 2023 guidance cuts are related to once-in-a-decade bad luck that statistically should not recur. The long term trends are simply phenomenal. This thing trades for 30x forward FCF, with 30% revenue growth, 200% 2025 FCF growth and 45%+ 2026-2027 FCF compounding expected. Fundamentally thriving and very cheap. Good combination. I plan to deposit funds to boost my DKNG stake by 10% on Monday Morning.

Coupang is to Korea as MercadoLibre (MELI) is to Latin America. That’s the best way to put it, as I know you’re all familiar with MELI. This is my newest holding. The review will give a sense of where my bullishness comes from, with far more detail coming in my next planned deep dive.

Also please note that its earnings calls are very short and its earnings materials are quite brief. That’s why this review is shorter than others.

Coupang EBITDA is expected to grow by 5% this year, 129% next year and 39% the following year.

Coupang already has a sizable portion of the Korean adult population, with 22 million active customers in total. So? The growth engine is going to increasingly depend on selling more products & services to existing users. Fortunately, that’s going extremely well. Every single customer cohort delivered Y/Y growth in average spend, while still just 25% of them use 9 or more of its 20 categories. Average revenue per user rose 8% Y/Y FXN. In terms of an ARPU ceiling here, that isn’t currently known. Per the team, they’re “still in the process of discovering potential spend.” That’s positive, especially considering it will eventually offer many more than 20 categories.

Its membership program, called “WOW,” is adding fuel to this fire. Whether it’s free shipping, returns, streaming content, food delivery and more, WOW members concretely show us just how long the engagement runway still is. These members spend 9x more than non-members, with the oldest subscription cohorts spending 2.5x more than the newest members.

“Strong growth and expanding margins are the result of years of investment. It’s the result of a relentless drive to break trade-offs. We do the hard things that deliver an ever-improving experience for our customers and operational excellence, not one at the expense of the other.”

CEO Bom Kim

CapEx is growing for CPNG. While it is exploring options to build fulfillment capacity in more asset-light ways, it will need more Fulfillment and Logistics by Coupang (FLC) capacity to fuel more growth. At the same time, FLC capacity gains also bring items closer to customers and so boosts the assortment it can provide rapid delivery for (through its aptly named Rocket Delivery). Specifically for this quarter, FLC units, 3rd party sellers and volume rose by 130% or faster Y/Y. Like Amazon has done with Supply Chain by Amazon, Coupang is mining its elite traffic and fulfillment network to generate more revenue from other merchants.

Most recently, FLC proliferation unlocked a new offering called R.LUX for Rocket Delivery customers. This is another luxury slice of its overall marketplace, with a focus on “in-demand beauty brands.” 

“We continue to represent just a small percentage of the massive commerce opportunity in the markets we serve. We believe the growth opportunity in the years to come is still largely untapped, with much of it yet to be realized.”

CEO Bom Kim

In Taiwan, a key expansion market, supply growth is leading to “dramatic” demand growth. Clearly, customers there are yearning for this product and CPNG is happy to oblige. 

“We're fortunate to be able to leverage a lot of what we've built in Korea over many years there. That's certainly helping us scale. And we believe it will also help us generate operational efficiencies more quickly than we did in Korea. As always, we'll be very disciplined with any increased levels of spend, investing more only when we are convinced about the returns we can generate.”

CEO Bom Kim

The ads business remains small, less penetrated than similar peers and rapidly growing. This will be a big piece of margin expansion over time on its mission to reach a 10% EBITDA margin.

And in Korea, while consumer spending was flat Y/Y, Coupang delivered 16% Y/Y growth. It consistently demonstrates that it does not need to preside in a high growth economy to steadily compound the top line.

As the deep dive will explore, this is an elite company from my view. Its core business leaves miles of room for growth and cross-selling, with cohort data offering strong evidence of customers wanting more from them. All of its new bets continue to work, which should merely feed these positive trends.

It’s still delivering solid new customer growth at large scale, its fulfillment network is unmatched among peers, its elite customer service is difficult to emulate for sub-scale competition and its loyalty program continues to get more valuable. I think the writing is on the wall that this thing will profitably compound for a very long time, and I’m excited to finally be a shareholder. Much more to come.

Well… I ran out of hours in the week here. Covering 16 earnings reports (11 in intricate detail) will do that. Consider this part one of the earnings review. I’ll finish reading this transcript and covering this (along with the Block catch-up earnings review) as part of the Shopify Earnings Review coming Tuesday.

Here, I’ll introduce Cloudflare’s product suite and niche. This will be partially review for consistent readers and for those who are well-versed in its product suite:

In essence, Cloudflare makes the internet faster and more secure. They have a massive global Content Delivery Network (CDN) to move traffic closer to the end user, which cuts web latency. They actively assist clients in optimizing traffic speed and consistency as well. It also has a suite of security tools to protect customers from Distributed Denial of Service (DDoS) attacks. This form of hacking aims to inundate and overwhelm networks with traffic. NET doesn’t sell physical firewall hardware, but instead a virtual, cloud-native “Magic Firewall” to supplant these hardware needs. It offers web application firewalls too for app-level security, while Magic Firewall is for network-level security. Magic WAN is Magic Firewall’s partner in crime. Magic WAN connects networks while Magic Firewall protects them. The closest cybersecurity competitor in public markets is Zscaler.

A Few Key Products to Know Aside from Those Already Mentioned:

Workers Platform is its server-less (so fully managed by Cloudflare) product suite for developers to build, maintain, secure and deploy applications. This allows for caching of content and apps across Cloudflare’s global network for faster delivery. Its newer Workers AI product allows developers to access models and infuse GenAI tools (like sentiment analysis) into Cloudflare-hosted apps and networks. Workers AI pairs seamlessly with its “Vectorize.” Vectorize offers a style of data querying that allows for visualization of patterns. Another key example of Cloudflare’s GenAI tools is its R2 product. This allows cloud workloads and data to be freely moved among public clouds with no tax. Key in a multi-cloud world. This is popular for model building and implementation as models are voracious users of data and data is routinely hosted in many clouds.

Cloudflare Access is its Zero Trust Network Access (ZTNA) program. This directly competes with Zscaler. Zero trust means that a user or device must be constantly verified (or never trusted). Cloudflare does this in a seamless manner so as to minimize user friction. It considers device type, location, usage patterns (or signatures) and other contextual clues to better authorize permission requests. This way, it knows when to block those requests or when to require more information. It then deploys a minimal privilege approach to ensure only the necessary permissions are granted to workers. Nothing more, nothing less. Zero Trust ensures an adversary can’t breach the most vulnerable part of a tech stack and move freely throughout it thereafter.

Secure Access Service Edge (SASE) platform is a term for how Cloudflare conjoins web performance and security use cases. This drives vendor consolidation, controls costs and augments performance. Cloudflare One is its overarching product bundle subscription combining its suite.

Cloud Access Security Broker (CASB) is a security tool to provide firms with a birds-eye-view of application usage. It hosts and secures client data and uncovers suspicious activity or deviations in typical usage patterns to flag threats. It plugs into NET’s Secure Web Gateway (SWG), which is essentially a digital security guard ensuring protection from a firm’s secure network and assets and the open internet. It ties closely to NET’s data loss prevention (DLP) tool and URL filtering tool.

Browser Isolation is Net’s managed service for providing users with a purely secluded environment to search and scrape the web. This will be an increasingly important tool for its GenAI inference products that are now building steam. That’s where Cloudflare expects to realize the bulk of GenAI’s potential financial value. Models are trained once and periodically updated with new data. After that, the value of those models lies in their ability to connect dots and drive insights (or inferences). That’s where Cloudflare presides. It provides a managed cloud platform to do all of that app and model work in a secure and compliant fashion.

Cloudflare trades for 117x forward EPS. EPS is expected to grow by 49% this year, by 18% next year and by 26% the following year.

Go-To-Market:

It has been a year since Founder/CEO Matthew Prince tore into his external sales team and vowed to overhaul the team’s go-to-market. He did so by hiring Mark Anderson as its new President and Chief Revenue Officer. Mark came from Alteryx, where he was the CEO until it was purchased for $4.4 billion. To Prince, Cloudflare is now reaching a “critical inflection point in its go-to-market reset.

“Mark Anderson has lived up to being a world-class sales leader. He's hired stage appropriate talent across our go-to-market organization, been fair but relentless with performance management and brought discipline and focus to our team.”

Founder/CEO Matthew Prince

Sales productivity for the company continued to climb and is now back to peak 2022 levels. Per the team, there’s a lot more room for that to rise, as it shifts focus away from “batting average” (or number of sales conversions) to “slugging percentage” (size of wins). 70% of its salesforce added this quarter was for enterprise accounts vs. 40% Y/Y, and that should remain a trend as it gears up to re-accelerate headcount growth with proper systems now in place. It has long been world-class on the technology side. Its ability to combine a network security suite with its elite network connectivity suite provides a powerful platform for vendor consolidation, better products and lower costs. That should be easy to sell with the right approach. And? Now it thinks it’s world-class in its ability to sell.

While all of this is positive, it understandably created some disruption. There was a lot of turnover, a lot of change and a lot of learning. For this quarter, that all led to some large deal closure delays. No deals were lost to competitors. It still beat revenue estimates but the extended sales cycles led to light Q4 revenue guidance. It leaned cautious in assuming it could quickly close all of these deals. 

Pool of Funds contracts allow customers to purchase products in more of an á la carte manner. This “changes the shape of revenue recognition” by allowing for more specific product purchases. More of these deals impact net revenue retention in the near term, and during the quarter, they represented 10% of bookings vs. 1% Y/Y. Aside from this, slower expansion with larger customer cohorts and mix-shift to new customers powering its growth likely persisted. Those factors were called out last quarter and Cloudflare called the demand environment stable in its remarks. The decline should reverse during the coming quarters.

I’m going to talk about the election outcome for a moment. I’m going to frame that from a market point of view as always. I have no political opinions to offer, only investing and macro opinions. With that said, Lina Khan has been probably the most strict FTC Chair we’ve ever had and I don’t really think it’s all that close. Whether that’s good or not is up to you. But? Anyone else who replaces her will likely be more friendly for M&A. I think that’s safe to say. That could lead to a shopping spree by large cap names. Maybe not for the magnificent 7 (and they’ll just invest in Anthropic and OpenAI anyway) but I think pretty much for everyone else. When combining that with falling cost of capital, M&A is likely about to come back with vengeance.

Palantir, Amazon & Anthropic (private OpenAI competitor) formed a partnership for military & government AI services. Agencies will gain access to Anthopic’s latest models through Amazon Bedrock. Palantir will provide the app-layer muscle.

The Brazilian central bank raised interest rates to 11.25% from 10.75% this week as inflation readings began to heat up again. This is good news for net interest margin dynamics for Nu and Mercado Libre, but will be a velocity of money and overall interchange volume headwind.

Lemonade introduced its car insurance application programming interface (API) this week. This will facilitate easy product integrations with partners, such as Chewy on the pet insurance side of things. The debut of this product offers more evidence of this company unleashing car growth in 2025. That’s its stated plan.

Amazon is entertaining another large investment in Anthropic. Do it.

Meta has made its Llama foundational models available to “U.S. Defense Agencies and Contractors,” per the company.

Disney struck a deal with Simon Kinberg to write and develop 3 new Star Wars films. He was involved in writing a few X-man movies, Mr. & Mrs. Smith, Jumper, Sherlock Holmes, Fantastic Four, The Martian and several other popular movies.

The Fed cut its benchmark rate by another 25 bps. Quantitative tightening will continue. Consumer spending was again called resilient while Powell also cited easing labor markets and weak housing. It continues to feel the risks to its dual mandate are well balanced. This was a very uneventful press conference.