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News of the Week (August 12 - 16)
Global-E; Adyen; Applied Materials; Datadog; Walmart; On Running; PayPal; Lululemon; CrowdStrike; Market Headlines; Macro
Brad Freeman
August 17, 2024 • Estimated Reading Time: 16 minutes
Table of Contents
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.
1. Earnings Round-Up – Global-E, Adyen, Applied Materials
a. Global-E (GLBE)
Results:
Beat revenue estimates by 1.2% & beat its guidance by 1.5%.
Beat gross merchandise value (GMV) guidance by 3.3%.
Beat EBITDA estimates & beat its identical guidance by 18.1% each.
Beat -$27.5M GAAP EBIT estimates by nearly $5M.
Balance Sheet:
$340 million in cash & equivalents.
No debt.
Diluted and basic share counts rose by 1.7% Y/Y.
Guidance & Valuation:
Slightly cut its annual GMV guidance.
Cut annual revenue guidance by 3.1%, which missed by 2.4%.
Raised annual EBITDA guide by 2.3%, which beat by 3.2%.
Global-E trades for 45x 2024 EPS. EPS is expected to grow by 30% Y/Y in each of the next two years.
b. Adyen (ADYEY)
Results:
Beat revenue estimates by 0.5%.
Beat EBITDA estimates by 2.3%.
Balance Sheet:
€8.3B in cash & equivalents.
No debt.
Share count is flat Y/Y.
Guidance & Valuation:
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.
c. Applied Materials (AMAT)
Results:
Beat revenue estimate by 1.6% and beat guidance by 2.0%.
Beat $2.05 EPS estimate by $0.07 and beat guidance by $0.11.
Balance Sheet:
$9.1 billion in cash & equivalents.
$5.6 billion in inventory (roughly flat year-to-date).
$6.3 billion in total debt ($100 million is current).
Diluted share count fell by 1.2% Y/Y; basic share count fell by 1.4% Y/Y.
Dividends rose by 23.5% Y/Y.
Guidance & Valuation:
Revenue guidance roughly met estimates.
$2.18 EPS guidance beat estimates by $0.04.
AMAT trades for 25x forward EPS. EPS is expected to grow by 5% this year and by 15% next year.
2. Datadog (DDOG) – CFO Interview
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:
Vendor Consolidation:
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.
Macro:
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.
Stable Usage Growth:
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:
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.”
3. Walmart (WMT) – Earnings Review
a. Demand
Beat revenue estimates by 0.8%.
Walmart U.S. and Sam’s Club were both ahead by about 1%. Walmart International missed by 1% due to FX headwinds.
U.S. Comp sales excluding fuel rose by 4.2% Y/Y vs. 3.5% Y/Y growth expectations. Both Walmart and Sam’s Club comp sales were ahead of expectations.
Global e-commerce and advertising revenue rose by 21% & 26%, respectively.
E-commerce growth was led by 50% growth in store-fulfilled delivery. It’s highly efficient to use existing brick-and-mortar capacity for this added source of revenue.
Walmart Marketplace ad revenue rose by 32% Y/Y.
b. Profits & Margins
Beat 24.0% GAAP GPM estimates by 40 basis points (bps; 1 basis point = 0.01%).
Beat GAAP EBIT estimates by 2.2%. Beat 4.6% GAAP EBIT margin estimates by 10 bps.
Beat $0.65 EPS estimates by $0.67.
Year-to-date free cash flow (FCF) of $5.9 billion vs. $9.0 billion Y/Y. CapEx rose by $1.3 billion Y/Y to support expansion plans.
c. Balance Sheet
$8.8 billion in cash & equivalents.
Overall inventory fell 2% Y/Y and is in “healthy” shape.
$47 billion in total debt.
Dividend payments rose 9% Y/Y.
Diluted and basic share counts both slightly fell Y/Y.
d. Guidance & Valuation
Q3 guidance:
3.75% consolidated FXN revenue growth slightly missed 3.9% growth estimates.
3.75% consolidated FXN missed 8.5% growth estimates.
$0.52 adjusted EPS guidance missed $0.55 estimates.
Annual guidance:
Now sees 4.25% consolidated FXN revenue growth vs. 3.50% when it originally guided and 4.0% last quarter. This missed 4.4% growth estimates.
Now sees 7.25% consolidated FXN EBIT growth vs. 5.0% when it originally guided and 6.0% last quarter. This missed 8.5% growth estimates.
Roughly reiterated $2.39 EPS guidance, which missed $2.44 estimates by $0.05.
Walmart trades for 30x forward earnings. EPS is expected to grow by 10% in each of the next two years.
e. Call & Release
Walmart U.S. Performance:
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.
Inventory fell 2.6% Y/Y.
Grocery inflation cooled from 80 bps in Q1 to 60 bps in Q2.
Private brand penetration rose 60 bps Y/Y.
Health & wellness growth led all categories due to pharmacy growth.
General merchandise was flat Y/Y due to sector-level weakness. It continued to gain market share.
Walmart International:
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.
Sam’s Club USA:
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.
E-commerce sales rose 22% Y/Y. This was driven by order online and pick-up in-store.
The Consumer:
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.”
Automation:
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.
f. Take
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.
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