What a difference 2 weeks can make. I hope you’re all breathing more easily and patting yourselves on the back for staying the course. I’m glad we responded to market turmoil the right way. How? By leaning into executing, fairly-priced companies that were swept up in the indiscriminate selling. If history is any indication at all, market fits drumming up this indiscriminate selling have always been opportunities. And this time? We’ve seen several names in the coverage network rally 50% from lows in the blink of an eye. Years were made by tuning out the noise and doing what felt incredibly uncomfortable, yet right at the time.

I was not trying to time a bottom when buying so aggressively early last week. Who knows if I did — stocks will remain volatile and things could always go lower. And while the QQQ was still just 15% off of recent highs, many key names had already fallen much more. As I said in the alerts, I’m not in the business of bottom-timing. I just know that I want to own more shares of the right companies as multiples contract and risk-reward improves. It’s amazing how sticking to that plan can consistently yield such good results.

Cling to this feeling the next time Mr. Market inevitably pukes; remember this when it's again time to ignore how uncomfortable it is to be "greedy when others are fearful.” During every correction, “there will be brighter days ahead” has always been the right mindset. And if that ever becomes untrue, we probably will be focused on other dystopian things rather than our stocks.

During the week, I sent Nu, Sea Limited & Block Earnings Reviews. I also sent coverage of Progyny’s investor day, DraftKings tax news, the new Starbucks CEO and the rumored Alphabet breakup. Read that all here.

Global-E trades for 45x 2024 EPS. EPS is expected to grow by 30% Y/Y in each of the next two years.

Adyen reiterated roughly 25% revenue compounding and a 50%+ EBITDA margin by 2026. It trades for 40x forward EPS, with profit expected to grow by 26% in each of the next two years. 

AMAT trades for 25x forward EPS. EPS is expected to grow by 5% this year and by 15% next year.

Datadog’s CFO sat down for an interview with Oppenheimer this past week. As DDOG’s earnings report was last week, there wasn’t much newness in the report. Here’s what we did learn:

CFO David Obstler sees vendor consolidation within DDOG’s industry as in the third inning. It expects to continue gaining market share in software development, security and operations (DevSecOps) as this trend keeps playing out. Whether it’s experience monitoring, large language model (LLM) observability or DDOG’s cloud service provider entrance, it continues to add to its use cases and ability to displace more point solutions.

Obstler was asked how its small, medium business (SMB) category has fared so well amid hectic macro uncertainty. He thinks this stems from two things. First, Datadog’s SMB clients skew heavily to the “M” rather than the “S.” They’re at the larger end of this category. Secondly, he thinks this shows how mission critical DDOG’s products are.

Datadog guided to stable Y/Y usage growth next quarter vs. this past quarter. Q3 2023 is when Datadog’s clients practiced their sharpest workload optimization, which weighed on its growth. For this reason, many expected usage growth to accelerate Q/Q for the firm. Obstler was asked if the stable usage growth implies an expected deceleration as comps get tougher starting in Q4 2023. He said no. This is because DDOG’s new client momentum remains strong as of this past week. That new revenue source is more than making up for the very modest weakness in usage growth.

Security is arguably the best way for Datadog to drive the all-important vendor consolidation for clients. Observability, monitoring and security are all perfectly complementary. Still, Datadog has struggled a bit with product delivery within security. For example, it had to retool its Security Information and Event Management (SIEM) cloud security product to get it to work better with its log management products. It remains “optimistic about the potential attach rate for SIEM to its monitoring tools… but also remains in “build mode.”

Walmart trades for 30x forward earnings. EPS is expected to grow by 10% in each of the next two years.

Revenue rose 4.1% Y/Y for Walmart’s domestic business. Walmart’s 4.2% Y/Y comparable store sales growth slowed considerably from 6.4% last year. This was driven by lower basket size inflation of 0.6% this year vs. 3.4% last year. On the transaction side, growth of 3.6% actually accelerated compared to 2.9% last year.

Interestingly, Walmart is seeing its continued market share gains be “driven by upper-income households.” Its unique “value is resonating.” As economic cracks form, consumers routinely trade down within their consumption habits. That benefits Walmart, and is why this company’s outperformance isn’t strong evidence for the consumer being overly healthy. If anything, it says the opposite. 

It’s interesting to note we’ve heard other firms like Visa and Mastercard talking up consumer resilience while others like Starbucks and Nike don’t. I think that indicates a shift in consumer purchase behavior, rather than a sharp slowing beyond cooling inflation rates. Visa and Mastercard represent overall spend volume and both spoke about durable growth. Consumers are buying more of what they need and less of what they want. Par for the economic cycle course.

Walmart kept delivering strong, margin accretive e-commerce and advertising growth. E-commerce sales rose 22% Y/Y while delivery cost per order fell 40% Y/Y. This powered considerable operating leverage for the segment and Walmart U.S.’s GPM expansion overall. On the advertising front, Walmart Connect USA (its ad platform built in tandem with The Trade Desk) delivered 30% Y/Y growth, with robust advertiser and spend per advertiser growth.

Sticking with margins for a moment, aside from advertising and e-commerce, membership was the other source of leverage. Still, product mix away from general merchandise was a gross and EBIT margin headwind. Furthermore, operating expenses as a % of revenue did de-lever slightly Y/Y via higher marketing and depreciation costs as well. All in all, Walmart U.S. gross margin expanded by 50 basis points while EBIT margin expanded by 40 bps due to operating expense growth.

Walmart continued to aggressively expand WalMex’s footprint in Mexico. It opened 25 new stores (165 in the past year) and also continued to invest in employee wages there. This is why 40 bps of GPM expansion for the segment only coincided with 10 bps of EBIT margin leverage. Operating expenses grew to support these new programs. In China, Sam’s Club traffic was positive across all formats. This was great to hear, considering sharp weakness across some other consumer (more discretionary) brands.

In the U.S., advertising, increasing e-commerce efficiency and general store optimizations powered continued GPM improvements. Walmex and Flipkart (e-commerce marketplace in India that it purchased), facilitated strong 23% Y/Y advertising and 18% Y/Y e-commerce growth for the segment. 

Transaction growth at Sam’s Club USA accelerated from 2.9% to 6.1% Y/Y while ticket size growth slowed from 2.5% to -0.8% Y/Y. It thinks it gained market share across all major categories, while the bucket delivered 14.4% Y/Y high margin membership revenue growth. Membership and Plus membership levels set new records while Plus penetration rose 320 bps as a % of total.

GPM for the segment fell slightly Y/Y as it prioritizes “pricing investments to raise value.” This also led to a falling Sam’s Club EBIT margin too. Contraction is as expected.

Walmart continues to see its consumers be a bit more price conscious and fragile than during more robust economic growth times. Still, that has not deteriorated since last quarter and Walmart is extremely well-positioned to cater to these shifting preferences.

“And while we have not seen any additional fraying of consumer health in our business, other economic data out there, as well as the state of affairs globally, would suggest that it's prudent to remain appropriately cautious with our outlook.”

CFO John Rainey

Walmart continues to automate more of its supply chain to create more efficient operations. More efficient means more profit for Walmart and more savings for consumers.

It’s also using its massive supply of data and GenAI partners to improve customer service and experience. It infused GenAI into its product catalog to vastly accelerate data organization and unleash more potential value creation. For easier shopper discovery, like every other marketplace, it’s using LLMs to improve marketplace search with conversational querying.

Fine performance with a slightly disappointing guide. Still, to be fair, estimates were zooming higher and higher. It still raised guidance across the board; sell-side just wanted a slightly larger raise. All in all, I would call results moderately strong while this iconic retailer keeps on chugging along. Ads and e-commerce execution has been fantastic (thanks Trade Desk) and market share gains continue. This is one of the most recession-proof retailers in the world that doesn't focus solely on groceries. Regardless of how macro unfolds over the coming quarters, they should do well.

On Holdings reiterated expectations for 30%+ FXN Y/Y revenue growth. Based on current FX headwinds, that led to its revenue guidance falling slightly from CHF 2.29 billion to CHF 2.26 billion. This slightly missed estimates. It reiterated 60% GPM and 16.25% EBITDA margin expectations, respectively. This led to very slight reductions in 2024 EBITDA estimates.

It also still sees DTC rising 2 points as a % of total revenue this year.

ONON trades for 44x forward EPS. EPS is expected to rise by 140% Y/Y this year and by 16% Y/Y next year.

On is founder-led and fixated on forgoing the temptations of short-term value maximization to optimize for the long term. The team seems to embody Shopify’s “building a 100 year company” mantra and other firms in that bucket.

The design is assembled using a robotic arm and adhesive to essentially glue the shoe together. The shoe shapes the foot and does not come with any laces. It’s one piece and “ultra-light.” The process is expected to considerably cut manufacturing costs and time to produce a shoe down to 3 minutes. The new process will soon be used in its new Cloudboom Strike racing shoe. Marathon star Hellen Obiri was introduced to the shoe and was “skeptical” considering it looks so different from a normal running shoe. After trying it out, she was hooked and won the Boston Marathon while wearing them.

Product innovation is the central focus, and Lightspray is perhaps the most exciting long term project to discuss. This technology will be used across several other On shoe models over time. Phase one of this slow launch will be “moving from OpEx-led production model to a CapEx model” and using this affordable robotics tech to “move shoes closer to the consumer with fewer parts.” Easier, cheaper assembly paired with shorter distance to fulfillment is a powerful recipe for cost edges. Maybe it could even license this technology to other shoe companies over time.

“LightSpray offers a clear message that we will always be there to take bold bets on our mission towards achieving long-term innovation-led success.”

Co-Founder/Co-CEO David Allemann

LightSpray is the main character in On’s long term growth story. Still, near term innovation to drive 2024 and 2025 sales growth is not slowing down. It has a new Cloudboom racing shoe set to debut next month. For casual runners, the Cloudsurfer Next shoe launch is performing well.

On struck a new partnership with Zendaya to drive more global brand awareness. She played against famous On athlete Roger Federer in a game of air tennis during the quarter. Many more activations to come.

In Paris, On had 6 athletes from 25 different countries who were well represented on the podium. To nurture this opportunity in perfectly-timed fashion, On rolled out a pop-up shop right in Paris for the event and also just opened its first store there (largest to date).

ONON’s strong quarter was despite continued supply chain bottlenecks in the U.S. It’s shifting the large Atlanta warehouse to a new model that can fully automate the picking, packing fulfillment and re-fulfillment too. Issues here led to the DTC and North America revenue misses; this was not a matter of soft demand. The automation project will cut human labor needs and build on the manufacturing efficiency gains that LightSpray is set to provide over time. For now, the shift is leading to product availability and delivery timing issues within key franchises like its lineup of Cloud shoes.

“While we build our brand by relying on a certain level of scarcity, we are not fully and consistently delivering to our own high expectations from an operational perspective.”

Co-CEO/CFO Martin Hoffmann

“We clearly missed opportunities in the DTC channel.”

Co-Founder/Co-CEO David Allemann

On has “implemented a lot of measures” like shifting some fulfillment to west coast facilities. That has resulted in the reacceleration for DTC, which “continued into the first weeks of the new quarter.” 

In wholesale, On continues to focus on existing distribution partners and raising shelf and market share with those partners. It’s pulling back on growth in wholesale doors, likely in a bid to preserve its highly premium brand reputation, as well as to support direct-to-consumer initiatives. It was very pleased with full price demand levels with these wholesale partners, which helped lead to continued GPM expansion.

For e-commerce DTC, the softer demand it saw at the very beginning of the period abruptly improved, with growth accelerating throughout the rest of the quarter. The launch of its first app is yielding download and transaction levels “well ahead of expectations” and is enjoying a heavier apparel skew than its other channels. Apparel is a key growth level for ONON, so this is positive.

Stores will remain an imperative piece of its revenue growth and DTC revenue growth engines. It opened 12 new stores ex-China (37 total) and is seeing strong engagement levels at these locations. It will launch a 2nd New York City store in Manhattan this summer; its new Hong Kong store is doubling initial volume projections.

On’s primary focus within shoes is maximizing performance running traction. The Cloudmonster, Cloudsurfer and Cloudrunner all maintained “strong growth” as part of this pursuit. The Cloudrunner 2 launch is outperforming expectations and the Cloudsurfer next is poised to extend its addressable market at a lower price point. It launched this month. In all day shoes, the Cloudtilt is “flying off of the shelves.”

In tennis shoes, its market share gains are accelerating. Tennis customers also purchase apparel at a much higher clip than runners, which means success here directly supports its other growth vector. Its collaborations and customer exclusives within apparel netted more China customers on a day one product launch than what it expects to add in 2 weeks. Changes to apparel sizing over the last few quarters have already yielded stronger traction for that segment.

“When it comes to the U.S., we confirmed strong guidance. We wouldn't do that if we didn't have confidence in the consumer. We’ve seen very positive signs over the last couple of weeks… this gives us U.S. consumer confidence for the rest of the year.”

Co-Founder/Co-CEO David Allemann

This was a great quarter amid a highly challenged macro backdrop. It’s faring better than any of its public counterparts and maintaining impressive 30%+ FXN Y/Y growth targets along with margin goals. New products are all working, new innovation could provide manufacturing cost advantages, and its opportunity is still entirely untapped in everything aside from performance shoes. The runway is very long… the team seems capable of executing.

All I’ll say is that hot consumer brands routinely come and go. The cliche is these brands fizzling out… while becoming the next Nike is the exception. I’d need to see this company thrive across fashion cycles to communicate to me there’s something here beyond creating currently in-style products. Regardless, another great quarter. Congrats shareholders.

Adyen and Stripe are the market share leaders in white label payment processing. Braintree is the third largest player here. Under new CEO Alex Chriss, PayPal has aggressively pivoted Braintree’s focus away from growth at any cost, to profitable expansion. It has cut cash burning contracts, renegotiated other deals, pushed to layer on software products to enhance value and worked to drive awareness of its best-in-class authorization rates. 

Braintree is no longer indiscriminately adding business regardless of margin, which catalyzed transaction margin dollar growth last quarter for the first time in years. Still, if Stripe and Adyen want to race to the bottom on pricing, there’s little PayPal can do to overcome that. Luckily, Adyen isn’t playing this game. On the firm’s earnings call this past week, it spoke positively about PayPal’s change and how it continues to “price-to-value.” It’s not trying to undercut anyone… and that’s great news for the overall white label processing sector margin and PayPal’s too.

We got a bit more information on the PayPal Fastlane product launch currently in process. As a reminder, Fastlane is PayPal’s guest checkout profile that allows customers to enjoy the convenience of checkout accelerators. PayPal’s vast database allows it to identify a large proportion of online shoppers and expedite sign in and check out. That’s the luxury of having 400+ million accounts. Once a customer opts into a Fastlane profile, they can enjoy lightning-fast checkout at any opted-in PayPal merchant. It doesn’t matter if a consumer shops with that merchant weekly or hasn’t even entered its site – Fastlane delivers the same seamless checkout experience. Considering 80%+ of consumers at some point have abandoned a cart due to checkout friction and that guest checkout struggles to check a 50% shopper conversion rate, this is a massive issue… and a massive opportunity. That’s all review. So what did we learn this past week?

Fastlane is yielding a conversion rate between 75% and 90% for several highlighted merchants and is powering 32% faster guest checkout. PayPal is orienting Fastlane to focus on the merchant. It isn’t trying to build this product into some ubiquitous brand like PayPal or Venmo. It’s merely using the product to support its merchant base’s success. That, in turn, drives more transaction volume and PayPal growth. It’s carrying out this aim in two ways. First, it’s not showcasing the Fastlane profile option up-steam (before checkout) across a merchant’s site. Secondly, it is not charging any incremental service fees for Fastlane access through the end of this year. It will still profit from any incremental volume the product delivers and it sounds like PayPal will eventually treat this as an upcharge, like it does for Hyperwallet.

I am excited by the prospects of this product bending the growth curve upward for PayPal. The impact won’t be immediate, but it can be powerful heading into 2025. Between this, Braintree’s profitable growth, Venmo monetization, fixing Xoom and now tap-to-pay on iPhone opening up in Europe… there are tailwinds galore here.

I think Lulu has officially entered “all bad news is priced in” territory. I remain disappointed in the failed leggings launch I wrote about earlier in the season. I’m still frustrated that out-of-stock inventory issues have cost them material growth.

Still, I also maintain confidence in this brand – after surviving multiple macro and fashion cycles – figuring things out this time as well. Alo and Vuori can continue to find great success while Lululemon does too. Lulu will fix inventory issues and its newly reorganized product team should drive more needed innovation to refresh its product assortment.

Anecdotally, I can’t help but notice how packed my local Lululemon stores are with people of all ages or the several pictures of various packed stores I’ve seen across the internet lately. Again, anecdotal… but not irrelevant. Macro won’t suck forever for this brand… comps will soon get much easier… and through all of this, it has maintained 2024 guidance. Analyst expectations for 2025 and beyond have plummeted and its forward earnings multiple is two turns lower than previous decade lows. Sentiment could not be worse, we’re now a few months closer to easier monetary policy and I think that’s exactly when it’s time to lean back in.

I plan to put my 0.6% cash position on Monday morning into Lululemon. That will bring it from 2.4% of holdings to 3.0%. This is also back on the accumulate list when future deposits come.

Sell-side research for CrowdStrike is going to be especially important over the coming months. These analysts have great access to CrowdStrike’s customers and the folks actually making the software buying decisions. This will be great evidence to gauge how sharp the recovery can be for CrowdStrike.

Citi sees CrowdStrike needing to discount its products and offer more credits to impacted clients. It sees the long term impact as far more moderate and thinks CrowdStrike will move through headwinds over the next year. It thinks the more noticeable impact will understandably be slower net new ARR growth, as competition gains a leg up in bids for new business. Beyond next year, Citi thinks it should be relatively clear sailing.

DA Davidson’s customer surveys were “solidly negative,” but it still thinks CrowdStrike will post “better than feared” results later in the month. It thinks this issue will materially hurt growth for the rest of this year and next year. It sees CRWD able to “quickly regain footing” after that.

Morgan Stanley thinks there’s limited legal risk. It cited some risk to new business momentum, but thinks the main impact will be more credits and discounts offered to impacted clients.

I remain convinced that this company will recover and equally convinced that there will still be more fallout. This situation remains highly fluid and was unprecedented in scale. I’m being patient on any purchases here for now.

Duolingo is partnering with Sony Music to add more content to its music learning product.

Starbucks will pay Brain Niccol a $113 million pay package, which includes $75 million in equity. That represents less than 1% of the current market cap.

Google debuted its AI-enabled Pixel Phones.

Disney unveiled park expansion plans that will feature new Cars, Monsters Inc, Encanto, Avatar, new Avengers exhibits and expansions and Lion King through 2027. It will also open 4 new cruise lines from 2027-2031, which offers a good hint for how bookings trends are shaping up for current launches. This is Disney’s highest return investment category and it has already telegraphed elevated park investment levels.

Berkshire Hathaway exited Snow and started a position in Ulta.

Uber Eats and Serve Robotics will offer autonomous deliveries for Shake Shack. 

Mastercard will lay off 3% of its workforce.

Mars announced a $30 billion mega-deal to acquire Kellanova (K). 

Next week’s coverage menu will include: Palo Alto, Snowflake, Cava, Workday, Bill.com and Intuit Earnings, as well as so much more. Have a great weekend.

This week’s data again bodes extremely well for a soft landing or a very mild recession being the two most likely cycle outcomes. The data has been saying that (as I’ve talked about) for weeks. Markets are finally figuring it out. Easier monetary policy + economic resilience is a wonderful combination.