1. Meta Platforms (META) – Earnings Review

a. Demand

• Beat revenue estimates by 2% & beat guidance by 3.4%. Its 10.3% 3-year revenue compounded annual growth rate (CAGR) compares to 11.7% last quarter and 12.6% two quarters ago.

  • Revenue rose 23% Y/Y on a foreign exchange neutral (FXN) basis.

• Beat total daily active user (DAU) estimates by 1.6%.

• Ad impressions rose by 10% Y/Y vs. 20% Y/Y last quarter.

• Price per impression rose by 10% Y/Y vs. 6% Y/Y last quarter. That represents its fastest price per impression growth in over 3 years. Strength was powered by robust ad demand and improving ad performance.

More Advertising Context:

• e-commerce, gaming, entertainment and media were the sectors with the strongest ad spending.

• Europe ad revenue rose 26% Y/Y vs. 33% Y/Y last quarter; Asia Pacific (APAC) ad revenue rose 20% Y/Y vs. 24% Y/Y growth last quarter; North American (UCAN) ad revenue rose 17% Y/Y vs. 22% Y/Y last quarter.

• It sees more opportunity to grow ad load on Reels and other lower monetizing areas.

• It sees real performance gains continuing. This is enabling more advertising revenue growth without solely raising ad load.

b. Profits & Margins

• Beat EBIT estimates by 3.1%.

• Beat $4.76 GAAP EPS estimates by $0.40. EPS rose by 73% Y/Y. This was partially helped by an 11% tax rate vs. 16% Y/Y. If tax rate was again 16%, EPS growth would have been 60% Y/Y.

Total costs and expenses rose by 5.6% Y/Y (+4% for the Family of Apps; +21% for Reality Labs). Cost of revenue rose 23% Y/Y via more infrastructure spend and Reality Labs inventory. R&D rose 13% Y/Y due to the same factors and also more headcount expenses. Sales & marketing fell 14% Y/ due to lower restructuring changes. G&A fell 12% Y/Y due to lower legal changes. These are all GAAP expenses.

c. Balance Sheet

• $58.1B in cash & equivalents.

• $6.2B in equity investments.

• $18.4B in long term debt.

• Diluted share count was flat Y/Y.

d. Guidance & Valuation

For the third quarter, Meta’s Q3 revenue guidance beat by 1.4%. It also reiterated its 2024 operating expense (OpEx) and capital expenditure (CapEx) guidance. This should lead to upward profit revisions for 2024. Finally, it sees “significant CapEx growth” in 2025. It told us to expect that last quarter too.

Trades for 23x this year’s earnings. Analysts currently expect EPS to rise by 35% Y/Y this year and by 14% Y/Y next year. Here’s how that multiple compares to its historical norms:

e. Call & Release

WhatsApp & Threads:

WhatsApp continues to blossom as a key cog in the Meta monetization machine. As Zuck shared a few weeks ago, Meta now has 100 million monthly active users (MAUs) in the states. It certainly took several years, but the app is beginning to thrive from a financial point of view. Paid messaging tools there powered 73% Y/Y growth to push its “other revenue” segment to $389 million for the period. That’s still tiny compared to Meta’s overall revenue base, but that won’t be true for long if this pace of progress endures. Like last quarter, the USA was highlighted as a standout for WhatsApp engagement and user growth. Considering Apple’s messaging dominance here, that’s quite notable.

Threads is now at 200 million monthly active users (MAUs) vs. 150 million last quarter and 30 million 6 months ago. Pace of sequential user growth is accelerating and Zuckerberg is convinced that this will evolve into another powerhouse app over time. Engagement trends are strong… retention trends are strong… it’s all strong.

Facebook Reaching Young Adults:

Based on the dinosaur label that legacy Facebook now has, one may be surprised to learn that 18-29 year-olds in the USA are the app’s most promising age cohort for growth. Reels is helping a lot here, but other tools like group messaging and also its thriving Facebook Marketplace are creating a resurgence in young adult interest.

Core AI:

Meta splits its AI work into two groups: Core AI and Gen AI. Core AI encompasses the near term financial opportunities here; it refers to using AI to augment its existing products. That can be further segmented into two categories that are tightly related: engagement and advertising. For engagement, increasingly precise models trained on Meta’s world-class datasets are leading to better content recommendations and matching. Its unified video rec engine, which now combines reels, long video and live video into one algorithm, is increasing Facebook engagement more than the large gains it got from first introducing accelerated compute GPUs. Infusion of short-form into the core Facebook experience is also leading to ad impression growth; Meta’s work to close the Reels monetization gap over the last few years ensures this impression growth features strong financial potential.

For advertisers, GenAI is pushing Meta to a point of simply needing an objective and a budget from advertisers. From there, it plans to use GenAI to know which customer segments to target (even better than the direct buyer does), exactly how to reach them and when to do so. It will handle creative content generation, ad return optimization, reporting and everything else.

Its Lattice tool is getting better and better at ranking placements to drive better performance. Its Advantage + campaign building and automation tool is driving a 22% return on ad spend (ROAS) boost for its U.S. advertisers. Generally speaking, it’s hard at work on debuting new products to make things easier for buyers. One example is its Flexible Format for Advantage Plus shopping. This lets advertisers add several pieces of campaign content, which Meta analyzes and selects based on highest ROAS expectations. Its Background Generation, Image Expansion and Text Generation tools have been popular for advertisers early on. 1 million of these buyers now use at least one of these tools on a monthly basis.

Gen AI:

GenAI is the other, longer term, and more speculative AI bucket. Meta AI is the product to focus on here. Zuckerberg set a goal to make this conversational GenAI assistant the most used free tool of its kind by year’s end. One quarter into its debut, he’s confident in that happening. Like every other Meta product, it will take its time on product market fit and scale. It will take its time on monetization for this and every other GenAI product and doesn’t expect a material revenue contribution this year.

The AI studio launched this week. This makes it easier to build GenAI characters (Meta built a Snoop Dogg AI for example) to use across its apps. This should enhance the personal feel of the products, which should be positive for the overall user experience.

Business AI use cases (which are directly related to the overarching Meta AI product) are also exciting. Excellent customer service is a difference maker in competitive sectors. Businesses need to service their customers in the best way possible, and budgets to do that are finite. That’s where business messaging and business AIs can come into play. They can allow enterprise clients to emulate high quality customer service gaps at a small fraction of the cost of doing so on their own. This is in very early testing with a select group of merchants. Zuck thinks every business with a website or a social media account will eventually find this valuable and I think this will be a centerpiece of its GenAI monetization down the road.

As announced earlier in the month. Llama 3.1 is the first open-source frontier (world-class) model on the planet. It offers better cost performance than closed models, which is an edge that should merely grow with more developer traffic. Why does this matter? GenAI models are racing to commoditization. The only two differentiators among high quality alternatives will be access to data and cost of service. Having half of the planet on its apps takes care of the data need. Open sourcing takes care of cost of service. It allows developers to freely utilize these models on any public cloud to build whatever they want. That will invariably entail apps that upgrade Llama’s efficiency, performance and utility. Open sourcing essentially invites the world to do your work for you. And? Open sourcing with great models and hefty potential consumer traffic is extremely compelling for developers. It has a very strong track record of driving vast cost savings from taking this approach. Zuck reminded us about how the Open Compute Project — which invited partners to standardize on its own infrastructure — has led to better interoperability and savings.

As an important aside, Meta is open sourcing Llama while also keeping some proprietary subsections of models for itself. I see this as the best approach and Meta now sees Llama 3.1 as on par with the best closed-source models out there. Llama 4 is coming next year.

On the call, Zuck acknowledged that GenAI work will take years to turn into material financial contributors. But just like for its apps, it’s seeing early signs that give it confidence in these projects being powerful needle-movers in the years ahead. Everything that could be going well here (strong traffic & its models being ranked highly) is.

Capacity Usage Flexibility:

Susan Li again told investors that CapEx will rise materially in 2025 to support AI infrastructure needs. Like with Google and Tesla, it sees more risk to under-spending here vs. adding too much capacity. Why? Because these assets depreciate rather slowly and it has several areas where any excess compute can be utilized. For example, if it has the training capacity it needs, it can shift Nvidia Hopper and Blackwell GPUs to inferencing. If GenAI doesn’t require as much infrastructure as it thinks, it can simply add general compute to these GPUs for Core AI use cases. It has real flexibility to allocate these resources wherever it needs on short notice. These dollars will not go to waste and Meta will continue to fixate on GenAI workload and other operating efficiencies to ensure costs don’t spiral out of control. This will not be another 2022 for the firm.

Hardware:

• The Ray Ban smart glasses remain supply-constrained as demand continues to outperform all expectations.

• Quest 3 headset sales are also above expectations.

f. Take

This was a flawless quarter. Asia Pacific ad growth of 20% wildly impressive to me. Its young adult resurgence on Facebook is too. That’s especially considering this quarter lapped 40%+ Y/Y growth there and the initial surge in Shein and Temu demand. Meta AI is well on its way to ubiquity and avoiding another annual CapEx guidance raise was important for profit estimate trends. Reality Labs continues to incinerate cash, yet margins remain elite. Just imagine what this can look like if that segment starts to see peak losses. More compounding, more cash printing, more new product traction and more leverage. More of the same for this elite company. Great quarter.

2. Lemonade (LMND) – Earnings Review

a. Demand

• Slightly missed In-Force Premium (IFP) guidance by 0.1%. Its 56.2% 2 year revenue CAGR compares to 64% last quarter and 68% 2 quarters ago.

• Beat Gross Earned Premium (GEP) guidance by 1.0%.

• Slightly beat revenue estimate by 0.5% & beat revenue guidance by 2.5%.

• Premium per customer rose 8% Y/Y due to premium hikes.

b. Profits & Margins

• Beat -$48 million EBITDA estimates & its same guidance by $5 million or 10.4%.

• Beat -$0.86 GAAP EPS estimates by $0.05.

c. Balance Sheet

• $931M in cash & equivalents vs. $927M Q/Q.

• No debt.

• Diluted share count rose 1.7% Y/Y.

d. Guidance & Valuation

Annual Guidance:

• Reiterated revenue guidance, which slightly missed estimates.

• Reiterated IFP & GEP guidance.

• Reiterated EBITDA guide, which slightly beat estimates.

• It will spend about $105 million this year on growth.

Q3 was a miss across the board, which implies Q4 guidance beat by a similar margin across the board, given the annual reiterations.

At a $491 million enterprise value when netting out its regulatory surplus, it trades for about 3x 2024 gross profit. Gross profit should grow rapidly this year, and by somewhere between 30%-40% Y/Y next year. The charting services that I use don’t have Lemonade in their databases, but 3x gross profit compares to a sales multiple that was over 50x during the ridiculous 2021 bubble. 50x sales wasn’t at all rational, but I think 3x gross profit represents a material overcorrection. An average S&P firm (with slower growth but better net margins) gets about a 7x-8x gross profit multiple.

e. Call & Release

Net Cash Flow Inflection:

Lemonade now expects to be net cash flow positive going forward, aside from Q4 2023. It sees its $931 million cash pile falling by 1%-2% during that quarter, before climbing consistently thereafter. This is not free cash flow (FCF). Net cash flow benefits from its synthetic agent program financing 80% of its growth spend. This cost is incurred on the income statement, but not on the cash flow statement, as there’s no actual cash outlay. NCF positive is step one, with a free cash flow inflection coming next year and an EBITDA inflection shortly thereafter. All of this stems from Lemonade’s tech and AI native infrastructure, which is enabling it to keep every OpEx bucket besides intentional growth spend flat Y/Y while its top line keeps compounding. That means leverage.

Cash flow coming before positive EBITDA is the luxury of this program, and insurance’s working capital dynamic where premiums are collected before claims are made. And while this seems like a very minor milestone, it matters. The start of a cash build essentially greenlights this team to lean more aggressively into growth spend. The $12 million rise in Y/Y growth spend is its reaction to this progress, along with its plans to keep ramping growth spend from here. Several quarters ago, the team committed to not raising cash again until they were profitable and could raise from a point of strength. They kept their promise, and have consistently moved up the path to profitability since the promise was made. I continue to be impressed by how much control this team seems to have over its growth and margin profile for such a young and speculative enterprise. They’ve earned the right to lean back into growth marketing, and that’s the plan.

Loss Ratio & Leverage:

Lemonade continues to see trailing 12 month and quarterly loss ratios fall. This quarter, that happened despite what was a historically challenging quarter for catastrophic events (CAT). The obstacle greatly impacted incumbents, but tiny little Lemonade was able to show underwriting resilience. Part of that is thanks to its proactive, intentional move to minimize CAT exposure. It’s doing that mainly through home insurance; that’s where it hasn’t been able to secure needed premium hike approvals from regulators to make a large chunk of the book rational to service. And so that’s where loss ratios have been the most stubbornly elevated. It’s forgoing the renewal of CAT-exposed policies that its new underwriting models would reject today, focusing on renters and pet insurance, and shifting its pursuit of home growth to a smaller group of states and Europe where regulation is more favorable. If I had to guess, I’d confidently assume they’re exiting large chunks of the California home insurance markets, like others have.

Intentionally not renewing some home policies will cost Lemonade $20 to $25 million in premiums through the end of this year. It reiterated guidance despite this, which tells you they were gearing up for a large raise if this decision hadn’t been made. Furthermore, the premiums being cut were underwritten by much older underwriting models. They carry a lifetime value of -$50 million to -$60 million, which means removing them will actually be a profit tailwind.

• Gross loss ratio ex-CAT was 62% vs. 73% Y/Y. I realize that CAT is part of insurance and shouldn’t be removed. I think removing it for another view actually now makes sense based on its pivot away from home (where almost all of its CAT losses are incurred).

• Gross loss ratio fell materially Y/Y despite a 17 point unfavorable CAT impact vs. a 2 point unfavorable CAT impact in the Y/Y period.

• GLT improved by 5-30 points across every single product.

Beyond better underwriting, Lemonade is finding significant fixed cost leverage throughout operating expense buckets. Its premiums have compounded at a 35% clip for the last two years, while OpEx compounded at an 11% clip. All operating expense buckets were flat Y/Y aside from an intentional resumption in growth spend. Growth spend also isn’t a large cash expense for this company, as its synthetic agent program finances about 80% of the cost. So? While income statement leverage has and will be rapid, cash flow statement leverage may be even more so. It thinks revenue and premium growth will continue to convincingly lead cost growth in the years ahead, thanks to the AI and tech-based foundation it has built from inception. Automation means costs don’t scale nearly as quickly as new business will; it also continues to obsessively seek out more areas for incremental automation. For example, in one year, it has rolled out Gen AI tools to fully automate 30% of all customer communications.

As an aside, new business will simply mean better algorithm training to constantly improve underwriting and customer service. Incumbents aren’t set up to take advantage of their scale, but Lemonade is.

Car Insurance:

Lemonade is nearing readiness to rev the car insurance growth engine. It will continue to expand its state footprint throughout this year and next, with a focus on states with favorable rate change environments and with large bases of Lemonade renters ripe to cross-sell. And along those lines, the regulatory environment is actually improving, with regulators now allowing premiums to catch up to inflation. This is playing out while Lemonade underwriting models are seasoning and it’s gearing up to heavily pursue this opportunity. Nice setup.

The team continues to see this as a promising growth lever and also thinks growth for the segment will accelerate in the “near future.” It sees this product as leading the category in service, underwriting precision and consumer cost and told us that GLR improvements for this product amounted to nearly 30 points Y/Y.

Cost Leader?

SoFi and Nu investors will find this section familiar. Insurance is a commodity. Carriers can stand out with a better interface and customer experience (which Lemonade does), but at the end of the day, price is the best way to stand out. Lemonade’s superior operating efficiency potential (no massive base of agents or national real estate footprint), gives it a lot of flexibility to profitably compete on cost. It plans to do this. In Lemonade’s IPO prospectus a few years ago, it talked up this ability a lot, and included charts of how much cheaper its renters product was vs. others. It has been competing more heavily on price, while still delivering the rapid loss ratio and margin gains already cited. And? While lower pricing may be a margin drag, it also means lower marketing intensity (thanks to broader differentiation) to offset that headwind.

Other News:

Lemonade will host an investor day in November. I expect them to raise 20% compounded IFP growth targets during that event, which they’ve already hinted at doing.

Lemonade is working on its next-generation tech platform and interface called L2. This will drive more cost savings, but will also “reimagine how insurance companies should operate in the AI era. This will be unveiled at the November investor day.

There’s still about $100 million in Lemonade premiums awaiting regulatory premium hike approvals.

f. Take

I’m personally pleased with this quarter. The stock is going to continue to violently fluctuate… this remains highly speculative… but all of the investment case ingredients point to this being a long term winner. Strong growth, leverage, easy product expansion and now a pristine balance sheet.

Growth will accelerate into 2025 and thereafter as we get through this historical dose of inflation and it gets more premium hike approvals. That will happen while rapid operating leverage and its inherent fixed cost edges persist. It will use these edges to profitably undercut competition, which will mean more scale and algorithm seasoning to keep this flywheel spinning.

I see Lemonade as a long term profit compounder and the most promising disruptor in insurance. Shareholders will need to remain patient. But as long as they keep executing, I’ll stay the course.

3. Mastercard (MA) – Earnings Summary

a. Results

• Beat revenue estimate by 1.6%.

• Beat EBIT estimate by 2.8%.

• Beat $3.51 EPS estimate by $0.08.

b. Balance Sheet

• $7B in cash & equivalents.

• $15.6B in long term debt.

c. Annual Guidance & Valuation

• Raised revenue growth guide from low end of low double digits to low double digits. I think this can technically be called a beat compared to 10.9% Y/Y growth expectations.

• Raised GAAP OpEx growth from mid single digits to about 9%.

• Reiterated non-GAAP OpEx growth in the low end of the low double digits. This keeps sell-side expectations of slight Y/Y EBIT leverage firmly on the table.

For Q3, it sees low double digit revenue growth vs. 10.8% Y/Y growth expected. It also sees low double digit GAAP & non-GAAP OpEx growth.

d. Macro Commentary from the Call

Miebach also cited more spend fragility and deal-hunting motivation for lower income customer cohorts.

4. Powell Press Conference:

The Fed Funds rate was kept at 5.25%-5.50%. The Fed continues to reduce the pace of quantitative tightening and continues to gain more confidence in a near future rate cut. The employment cost index (ECI) reading this morning added to that confidence even further.  He also spoke on how 2024 disinflation is much healthier than in 2023, as it has now extended to housing and non-housing services. This is no longer just goods disinflation, which is highly positive.

While Powell cannot tell us that a rate cut is coming in September, he hinted at it several times. Inflation was called somewhat elevated vs. elevated previously; the labor market weakening was explicitly cited with a somewhat lower jobs outlook and markets are now pricing in three cuts for 2024 (100% chance in September; 75% chance in November for a second cut; 74% change in December for a 3rd cut). That can change on a dime amid new data releases.

The risks to its dual mandate are now in good balance and it sees the economy as gradually slowing, yet healthy. All of this points to Powell seeing a soft landing as the most likely outcome of this rate hike cycle.

I realize it’s quite popular to pedal macro doom on social media. I happen to think Powell has done a great job in steering monetary policy, as well as expectations through this cycle. I see a soft landing or a mild recession as the only two likely outcomes at this point. And? Easier monetary policy with a still reasonably healthy economy is a good setup for stocks.