News of the Week (September 4 - 8)

SoFi; Uber; Match; PayPal; Shopify; Airbnb; Earnings Roundup; Meta; Disney; Macro; Portfolio

1. SoFi Technologies (SOFI) – CEO Interview

Owning the Tech Stack:

As a review, SoFi brought its tech stack in house by acquiring Galileo and later Technisys. Not only has this allowed more rapid product iteration, but two other key benefits as well. First, owning its tech stack means being the low cost digital financial service provider by eliminating 3rd party fees. Secondly, SoFi can take these two businesses and license the technology to other financial and non-financial entities looking for white label services for their existing client bases. That last point will become a larger portion of the SoFi bull case as it transitions from chasing smaller clients to prioritizing client quality, as the Technisys contribution margin drag eases and as revenue growth for the bucket re-accelerates into 2024. Management thinks it will. We shall see.

The Quarter, 2023 & Beyond:

The quarter is going as well as SoFi expected it to go and Noto “couldn’t be more excited” about continued member and product growth. It’s on track to add more than $2 billion in deposits sequentially and is enjoying the student loan volume ramp that commenced with the end of the payment moratorium. All of this led to Noto reiterating his confidence in SoFi’s annual guidance.

Noto further reviewed some basic math for SoFi’s plans to reach 20%-30% return on equity (ROE). Its EBITDA margin needs to be 30% with a 20% GAAP net income margin to get there. Well? Its incremental EBITDA margin has been over 40% for most of the year, depicting that the business is well positioned to reach that goal. He expressed confidence in the lending segment achieving and maintaining a 70% contribution margin run rate with the segment’s ROE already at 30%.

Financial service margin expansion has been a key pillar of Sofi’s progress. Interestingly, its older tools within the bucket like Money are already contribution-profit positive. SoFi is losing about $150 million annually in newer verticals like its credit card which shows it can still deliver robust incremental margins while aggressively investing in more growth.

SoFi Invest:

Noto was not asked about Wednesday’s SoFi invest outage but I wanted to discuss it here anyway. Brokerage outings are an occasional reality for all providers. Still, SoFi needs to be better than all other products and target 100% up-time to deliver on that objective. The outage is not acceptable but is in no way a red or even yellow flag for my investment case.

It also has more work to do on improving the product set within the still small offering… but that was by design. SoFi wanted to roll-out an Invest product that catered to beginners as novices make up the vast majority of its client base. So it intentionally debuted a bare bones offering to focus on the ease-of-use and minimize friction. That is now complete and the company will look to roll-out advanced tools for experienced investors as well. It will also release alternative asset investing in 2024. He didn’t say what this would include, but Fine Art, Private Equity, Crowdfunding and annuities are likely good guesses.

Student Loans:

Noto sees student loan volumes getting near 50% of 2019 levels by Q4. He thinks it will take several quarters (maybe a couple years) to get back to 2019 levels, but all improvement from here will be purely incremental to SoFi’s current financials. He reiterated the $200 billion opportunity for borrowers within its credit band which it can offer lower rates to. This doesn’t include borrowers looking to extend the timelines of their loan to lower principal payments.

Final Note:

Noto reiterated that SoFi’s APY sustainability will be better than all other Fintech’s due to its bank charter and ability to connect the deposit product with its credit originations. He sees SoFi’s deposit market share gains accelerating in a falling rate environment as competition will likely feel more pressured to cut their rates earlier and more often.

2. Uber Technologies (UBER) – CEO Interview

Winning:

Uber’s ability to tie more products and utility into a single platform continues to stand-out vs. its mobility and delivery competition. That’s why it continues to take share in most markets with rapidly expanding margins. More bundling means more unique value delivered to consumers, more long-term value delivered to Uber, less churn and lower customer acquisition cost vs. everyone else. Here’s a stat to illustrate this in crystal clear fashion: delivery enjoys double the new customers from existing mobility users vs. all other paid channels combined (and with 75% lower acquisition cost). Lyft & DoorDash can’t enjoy this same benefit. Only Uber, with its massive network effect and full product suite, can be the low cost operator in a competitive and low margin transportation space. That’s the formula and it’s working like a charm.

Uber’s “New Bets” category is where this transportation super-app vision is being rounded out. These buckets represent 12% of total mobility volume but a whopping 30% of new customers to further feed its cross-selling engine.

Dara called the company’s supply positioning very strong in absolute numbers “and vs. the competition.” That may have something to do with $35 per hour in driver earnings and its ability to provide those drivers more demand than others can. Uber will soon debut tablet and car-top ads to bolster driver earnings even more. For a larger supply injection, Uber continues to work on plugging all taxis into the network. That ambition has also allowed it to seamlessly craft unique business models in important geographies like Japan while appeasing regulators seeking to protect taxi drivers.

He also called current demand trends strong with Uber’s consumer remaining resilient and hinted at another quarter of outperformance vs. the company’s guidance soon to come. Dara explicitly said “this is the best I’ve ever felt about Uber demand and bottom line” and it’s obvious why that’s the case.

Enterprise Partnerships:

Uber continues to see business to business (B2B) partnerships as a lucrative growth lever for its business. For example, it works with Tesla to offer Uber credits to drivers having issues with a car.

Delivery:

Dara reiterated his commentary from last quarter that constant currency delivery volume growth will remain at 14% or better through the end of the year. Grocery delivery growth also continues to accelerate. 13% of Uber Eats customers now use Grocery Delivery vs. 10% Y/Y. That should continue to rise as it wraps up its internal work to fully integrate the two products and make cross-buying more intuitive on the app.

Uber One:

Similarly to the cross-selling platform theme, Uber One (its loyalty program) continues to thrive. This offers special promotions on Uber’s products as well as some perks with Uber’s partners to provide best in class subscriber value. These members deliver 4x engagement frequency, higher retention and higher lifetime value vs. non-members. Uber is now leaning into establishing more merchant relationships to tuck more discounts and special perks into this product. As a subscriber, I can’t wait.

Advertising:

Uber will exceed its goal of $1 billion in advertising revenue by the end of 2024. It’s already 65% of the way there. Impressively, it has gotten to this point by catering mainly to smaller businesses. How? Because its return on ad spend is a robust 700%. It’s now building out the needed customer segmentation, identity and targeting tools needed to better unlock larger buyers and brands.

Buybacks:

Dara again told investors to expect buybacks in the next couple of years as its free cash flow generation explodes higher.

An Aside:

Uber signed a 4 year extension with the NFL that will make it the organization’s official delivery and mobility partner.

3. Match Group (MTCH) – CEO & CFO Interviews

Change in Mindset:

When new CEO Bernard Kim took over, he saw an opportunity to drive more cohesive teamwork. All apps were operating essentially as silos and not sharing best practices with one another. Tinder and the others were entirely resistant to embracing the deep bench of tech, AI and innovation talent Match acquired as part of the Hyperconnect purchase. That has now changed. Hinge borrowed the weekly subscription idea from Chispa and BLK after it worked wonders there. Meetic leaned on Hyperconnect to add an AI-infused portfolio optimization tool. Tinder used Hyperconnect engineers to build an AI-powered photo selection tool which scrapes your smartphone library for the best pictures. It also added generative AI-created text response suggestions. AI will be key to creating modern dating app experiences that stay relevant for the long term. It will be imperative for optimal profile matching, easier account creation, safer verification and so much more.

As an important AI aside, 50% of eligible consumers still don’t use dating apps. A large reason for that is onboarding friction and just not knowing what to say to a potential special someone. AI should address this and incrementally push holdouts to finally enter the market.

Tinder:

Leadership this week told us to expect 10%+ Tinder growth in Q3 and thereafter vs. previously saying that wouldn’t come until Q4. Great news. Kim called continued Tinder momentum “tremendous.” He wasn’t explicitly asked about August revenue trends after the team recently told us how well July went. Still, his tone and dialogue were entirely optimistic. Tinder spent the first half of the year rebuilding momentum, shifting priorities, perfecting pricing and accelerating product release cadence. Now it sees much of this product and financial repair work as complete and is ready to lean into product upgrades and ecosystem improvements. Match also has more work to do with mending lost top of funnel momentum, but green shoots in its last earnings report showed new user growth vastly improving in all markets where it didn’t hike prices. It turned double digit declines in top of funnel to flat Y/Y growth in a matter of months and has its sights set on returning to material growth after price hikes finish working their way through the system in early 2024.

Tinder will launch a refreshed user interface later in the year to enhance profile customization. It has been hard at work on balancing that granularity with the easy swipe feature users know and love. In terms of ecosystem improvements, the focus is on banning self-promoters and bots while catering its currently successful marketing campaign directly to Gen Z women for better app gender balance.

“And so the revenue is there, and the revenue momentum is there which should carry well into 2024.” – CFO Gary Swidler

• The planned high-end subscription was just submitted to Apple’s app store.

Archer:

While Archer is still only live in New York City and LA, Match is enjoying meaningful demand from customers in other geographies wanting access to the service. So? It’s pulling forward the launch timeline. Good sign.

As an important aside, Archer was built using Match’s existing apps and talent. That’s the luxury of having globally successful apps and 50% of the market. And for this reason, the app has been cost neutral when excluding very modest marketing spend.

Asia:

• Pairs TV marketing campaign just launched in Japan. This had previously been illegal in the country and Match sees this as a meaningful demand and sentiment unlock.

• It’s completely pivoting Hyperconnect’s Hakuna app to a “creator focused platform.” Initial indicators for the change are good and show the company “finally heading in the right direction.”

• Hyperconnect’s Azar app is back to brisk growth following a successful debut of a new AI matching algorithm to drive conversation and monetization.

• Hyperconnect will soon power Match’s entire live streaming business to shed the third-party hosting fees.

Final Notes:

• Match has repurchased $300 million in stock quarter to date vs. $33 million total last quarter.

• Swidler hinted at next year’s financial goals being minimum 10% revenue growth and flat or better operating margin.

4. PayPal (PYPL) – Outgoing CEO Dan Schulman’s Last Investor Conference

His view on the Consumer & Macro:

Dan Schulman called the consumer resilient, but still fragile. Inflation easing is helping with discretionary spending, but the economy is “not out of the woods quite yet.” This weakness is more noticeable in Europe where PayPal does a ton of business and dominates in markets like Germany. That has been a notable headwind for this company throughout 2023. Improvement across the pond will take longer than here in the United States.

Branded & Unbranded Complements:

PayPal Commerce Platform (PPCP) (basically Braintree for smaller merchants) is “gaining tremendous early traction” per Schulman. As a reminder, these contractual wins for both PPCP and Braintree give PayPal a golden opportunity on the branded side. How? Because PayPal routinely secures better placement for both PayPal Checkout and Venmo. Furthermore, these contracts allow it to bring merchants on to its latest and greatest branded checkout flow for both buttons. Across all merchants with this most modern flow, PayPal branded share is rising or stable.

Schulman threw a bit of fire at both Stripe and Adyen. He explicitly said the PPCP offering is going directly after Stripe’s business. He also added that the unbranded segment’s success is coming at the expense of competitors “which you can see from their results.” Why is this happening? Adyen seemed to tell the world it was all price undercutting related. Schulman told us on this call that its pricing is similar to all others on the market. Braintree wins are via “authorization and loss rates that are just better than the competition.” It also helps to offer native integrations with Venmo as its checkout starts to take off with 70% Y/Y volume growth last quarter.

5. Shopify (SHOP) – CFO Interview

Buy with Prime Partnership:

The “Buy with Prime” Partnership will not impact Flexport being Shopify’s preferred logistics partner. Like with Payments, where it allows merchants to work with Stripe, Adyen and Braintree, Buy with Prime is about maximizing merchant choice and flexibility. That flexibility was diminished by merchants being forced to hardcode manual integrations from the Admin just to use the product. Now, they simply need to download an app. CFO Jeff Hoffmeister called the initial response from merchants “good.”

The Demand Environment:

Some of Shopify’s direct competition continues to call out headwinds with some even saying new challenges are popping up. Shopify isn’t seeing those same issues and instead continues to see strength across all of its core markets. The e-commerce penetration trend seems to have now fully normalized for Shopify and the up and to the right pattern as no end in sight. Hoffmeister added that Shopify’s merchant base is performing “very well.”

Brick and Mortar:

Shopify’s physical retail momentum remains strong. Its winning merchants and displacing incumbents at a torrid pace and isn’t doing so by competing on price. Its superior technology, ease of use, vast integrations and complete cross-channel interoperability have been the main success factors.

6. Airbnb (ABNB) – The Big Apple is a Little Pain in the Neck

I posted this on Twitter yesterday. If you read it already, please feel free to skip.

What’s Changing?

New York City’s restrictive short-term home rental laws took effect this past week. This isn’t new or surprising and had been coming for a long time, but financial media still understandably ran with the juicy headline.

Going forward, short-term rental hosts must be present alongside Airbnb guests with no more than 2 guests allowed in a short-term rental. Furthermore, New York City added a strict verification/approval system for hosts with just 300 applications approved to date (less than 10% of total). Airbnb calls this legislation an "effective ban" on the company’s business model. This all sounds very intimidating at first glance, but what does it actually mean for Airbnb financially speaking?

What’s the Impact?

New York City represents roughly 1% of Airbnb’s total revenue. Of that proportion, about half is for longer term (30+ day) stays for which this legislation does not apply to. Many short term listings have been shifting to long term in the city for this reason.

From that remaining 0.5% of total revenue, hotel listings and special exemptions on Airbnb will continue to be allowed. That diminishes the revenue hit a little further.

But wait… there’s more. Airbnb explicitly and intentionally released a newer product called "Airbnb Rooms" earlier in the year. This allows hosts to rent out single rooms from within their own permanent homes which makes complying with the new law a lot more feasible than it would have been. The tool also caters to smaller group reservations which is perfect for the new two guest maximum.

When taking all of this into account, the revenue impact should be very minimal.

Will There Even Be Any Hit?

To actually impact the tiny % of Airbnb revenue, the rules would actually have to be enforced. But how could they be? Is it truly rational to expect city employees to constantly check on all approved Airbnb listings to ensure hosts are present? Will they be Ubering around the city and knocking on doors 24/7?  I think not.

And even if they do (they won't), couldn’t a host just say they were out to dinner and were soon heading back?

The initial response to this legislation will almost surely be broad-based compliance from hosts. In the wake of uncertainty, they'll likely follow rules & watch how things evolve. Over time however, it’s very easy to see some becoming a tad bolder & more adventurous in sidestepping the “host must be present” or even guest maximum rules.

The Real Risk

The real risk is that NYC will represent a domino with similar legislation across other key cities. That does not seem to be happening with all regulatory momentum elsewhere entailing significantly less aggressive proposals. Even in Barcelona, one of the most tightly regulated short-term rental cities, the rules are looser than in NYC.

Regulatory risk is not new and has been real since the company was founded in 2008.  Now here we are... 15 years and nearly $100 billion in market cap later with "To Airbnb" a broadly understood verb.

As it scales across the globe & becomes a more irreplaceable partner for boosting economic activity & a host’s income, it becomes less vulnerable to developments like this. I would further argue that its deep pockets & its proactive commitment to verification, working with regulators and insurance all put it in a position of relative strength vs. the field as dynamic rules continue to evolve.

7. Earnings Roundup – Zscaler & GitLab

a) Zscaler (ZS)

Results vs. Expectations:

• Beat revenue estimates by 5.7% & beat guidance by 5.8%.

  • 53.5% 3-yr revenue CAGR vs. 55.9% Q/Q & 56.4% 2 quarters ago.

• Beat EBIT estimates & beat same guidance by 23.6%.

• Beat $0.49 EPS estimates & beat same guidance by $0.15.

• Beat FCF estimates by 5.5%;.

• Beat 80.2% GPM estimates by 50 basis points (bps).

Initial Fiscal Year 2024 Guidance:

• Revenue guidance 0.5% ahead of estimates.

• EBIT guide 3.8% ahead of estimates.

• Earnings per Share (EPS) guidance $0.11 ahead of estimates.

• Next quarter guidance was similarly ahead across the board.

Balance Sheet:

• $2.1B in cash & equivalents.

• $1.1B in convertible senior notes.

• Share count up 2% Y/Y.

b) GitLab (GTLB)

Results vs. Expectations:

• Beat revenue estimates by 7.6% & beat guidance by 7.8%.

  • 55% 2-yr revenue CAGR vs. 59.5% Q/Q & 63.2% 2 quarters ago.

  • 124% net revenue retention vs. 128% Q/Q.

• Beat -$10.5 million EBIT estimates & beat same guidance by $6.2 million.

• Beat -$0.03 EPS estimates & beat same guidance by $0.04.

  • Interest income is why net income > EBIT.

Annual Guidance Updates:

• Raised revenue guidance by 2.4% & beat estimates by 2.2%.

  • 449 $1 million+ Annual Recurring Revenue customers vs. 400 Q/Q and 327 Y/Y.

  • 121% dollar based net revenue retention rate vs. 125%+ Q/Q & 125%+ Y/Y.

• Raised EBIT guidance by 30% & beat estimates by 29.1%.

• Raised -$0.16 EPS guidance by $0.09 & beat estimates by $0.07.

• Next quarter was similarly ahead across the board.

Balance Sheet:

• Nearly $1B in cash & equivalents.

• 3.9% Y/Y share count growth.

8. Meta Platforms (META) – Domino Effect & More

a) Domino Effect

China announced plans to ban iPhones for government-associated organizations. This is a wildly important market for Apple and countless other companies. The news follows U.S. developments to possibly punish Huawei and Semiconductor International Manufacturing Corp for violating intellectual property protections and trade laws. This feud has been going on for years and will likely continue.  In this section, I wanted to focus on Meta.

Meta finds itself in an ideal spot here. Its family of apps have long been banned in the country and so the financial ripple effects of this will be zero for the company. If things were to continue heating up, momentum to ban TikTok in the United States could reaccelerate. Legislation has already been passed to ban it in several states for government devices and in Montana altogether. A TikTok ban would eliminate by far the most formidable Meta social media competition and would represent yet another tailwind for this business that has already rediscovered its groove.

b) More

• Meta will partner with LG to launch a new headset in 2025.

• Meta is toying with the idea of making its apps paid subscription-based in the EU as the country continues to contemplate the full ban of personalized ads. Whether it’s this or encryption restriction developments for WhatsApp, EU legislation remains quite fluid.

9. Disney (DIS) Various News

• In a conciliatory move, Disney is throwing out part of its lawsuit against the Florida government. It’s maintaining the portion accusing the government of weaponizing its power to target Disney. I would love for this lawsuit to be entirely thrown out. Companies have a vested interest in playing nice with both sides of the aisle and not alienating powerful individuals or consumers.

• Disney is offering a $1.99 per month special for ad supported Disney+ tier in efforts to push more people to this format. Its customer lifetime value and revenue per user is higher for ad-supported vs. non ad-supported which is another reason why it keeps hiking ad-free tiers.

• Disney launched a more central streaming bundle tier that infuses a plethora of Hulu’s General Entertainment right within Disney+ (with its own dedicated tab).

10. Macro

Output data:

• Factory Orders M/M for July fell 2.1% vs. -2.5% expectations and +2.3% last month.

• S&P Global Composite Purchasing Managers Index (PMI) for August was 50.2 vs. 50.4 expected and 52 last month.

• Services PMI for August was 50.5 vs. 51 expected and 52.3 last month.

• Institute of Supply Management Non-Manufacturing PMI for August was 54.5 vs 52.5 expected and 52.7 last month.

• Non-farm Productivity Q/Q for Q2 was 3.5% vs. 3.7% expected and -2.1% last month.

Initial Jobless Claims were 216,000 vs. 234,000 expected and 229,000 last month.

11. My Portfolio

I added to my Disney stake this week as part of a planned, slow build out of the new position.