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- Remaining News of the Week (October 21-25, 2024)
Remaining News of the Week (October 21-25, 2024)
Brad Freeman
October 26, 2024 • Estimated Reading Time: 13 minutes
Table of Contents
In case you missed it, here’s what I published recently:
So much more is coming soon. Earnings mania starts next week. I’ll send out detailed earnings reviews on Meta, Amazon, PayPal, Microsoft, AMD, Uber, SoFi, Alphabet and Apple. I’ll also send coverage of Visa, Mastercard, Intel, Coinbase, Robinhood and Chipotle earnings.
Coupang (CPNG) will also be the topic of my next deep dive. Tons of other coverage to get to while I make time for that.
1. Earnings Snapshots – Enphase (ENPH); IBM; Lam Research (LRCX); Deckers Outdoor (DECK)
a. Enphase
Enphase exists in an extremely cyclical solar energy cycle. Higher rates recently made its installations more expensive for consumers and enterprises. Rate cuts take time to flow through to its sector (especially on the consumer side) to support demand. Bulls will say that easy monetary policy will be like wildfire for this business and that times are about to get much more fun. Bears point to company-specific production issues, tightening California solar energy re-selling regulation, and hefty Chinese competition/Europe struggles as the causes of this firm’s recent decline. While there do seem to be micro-level headwinds, I find it extremely probable that part of this weakness is macro-related. We will see which factors have the strongest impact in the coming quarters.
“While every country in Europe has its nuances, the overall business environment in the region is challenging. Power prices have declined from the early 2023 highs, the economic growth is slow, and the consumer confidence is limited.”
Results:
Missed revenue estimates by 3.3% & missed guidance by 2.3%.
Beat 46.5% GAAP gross profit margin (GPM) GPM guidance by 30 basis points (bps; 1 basis point = 0.01%).
Met GPM estimate.
GPM ex-regulatory credits was 38.9% vs. 41% Q/Q and 45.8% Y/Y.
Beat $46 million GAAP EBIT estimates by $4 million & beat GAAP EBIT guidance by $9M.
Slightly missed EBIT guidance.
Missed $0.78 EPS estimates by $0.13. EPS fell 36% Y/Y.
Beat free cash flow (FCF) estimate by 47%. Inventory is down 26% year-to-date, with liquidations helping generate more FCF.
Q4 Guidance & Valuation:
Missed Q4 revenue estimates by 12.7%.
Missed 49% Q4 GAAP GPM estimate by 50 bps.
Missed $76 million Q4 GAAP EBIT estimate by $29 million or 38%.
ENPH trades for 24x forward earnings. EPS is expected to fall by 51% this year and grow by 82% next year (2-year CAGR of -10%).
Balance Sheet:
$1.77 billion in cash & equivalents.
$1.3 billion in debt.
Diluted share count fell 2.8% Y/Y.
b. IBM
Results:
Missed revenue estimate by 0.7%.
Beat EBT estimate by 1%. Q3 2024 & Q3 2022 GAAP EBT margins include large pension charges.
Beat $2.23 EPS estimate by $0.07. EPS rose 6% Y/Y.
Met GPM estimate.
Guidance & Valuation:
IBM reiterated its annual $12 billion+ FCF guidance. This compares to $12.2 billion estimates. It also guided to stable growth rates in Q4 vs. Q3, which essentially met estimates.
IBM trades for 21x forward earnings. EPS is expected to compound at about a 5% clip over the coming years.
Balance Sheet:
$13.7B in cash & equivalents.
$56.6B in total debt.
Stock comp rose 15% Y/Y. Share count was flat Y/Y.
Dividends rose 1.7% Y/Y.
c. Lam Research
Results:
Beat revenue estimates by 2.7% & beat guidance by 3.0%.
Beat 46.9% GAAP GPM guidance by 110 bps.
Beat EBIT estimate by 6.3% & beat guidance by 8.1%.
Beat $8.00 GAAP EPS estimate by $0.56 & beat guidance by $0.59. GAAP EPS rose 22% Y/Y.
FY Q2 2025 Guidance & Valuation:
Q4 revenue guidance beat by 1%.
Q4 EBIT guidance beat by 1.5%.
Q4 $8.70 EPS guidance beat by $0.30.
LRCX trades for 22x forward earnings. Earnings are expected to grow by 17% this year and by 19% next year.
Balance Sheet:
$6.07 billion in cash & equivalents.
$4.21 billion inventory vs. $4.75 billion Y/Y.
About $5 billion in total debt ($504 million is current).
Dividends rose 15% Y/Y to $2.30 per share.
Diluted share count fell by 2% Y/Y.
d. Deckers Outdoor (DECK)
Deckers owns Hoka, Teva, Ugg and other shoe brands.
Results:
Beat revenue estimates by 9%. All major segments beat comfortably, including a 10% Hoka beat and a 9% Ugg beat. Wholesale beat by 11%; direct-to-consumer (DTC) beat by 5%.
Beat 52.1% GPM estimates by 380 bps. Really good.
Beat EBIT estimates by 33%.
Beat $1.24 EPS estimates by $0.35 for a 29% net income beat. EPS rose 51% Y/Y.
Annual Guidance & Valuation:
Raised annual revenue guidance by 2.1%, slightly missing estimates.
The size of the Q2 revenue beat was slightly larger than the annual guidance raise, implying a slightly worse 2nd half forecast than last quarter. At the same time, Deckers is a king of under-promise and over-deliver.
Raised annual GAAP GPM guidance from 54.0% to 55.3%, which beat 54.5% estimates.
Raised $926 million GAAP EBIT guidance by 5.3%, which missed by 1.6%.
Raised $5.00 GAAP EPS guidance by $0.20 to $5.20, which missed by $0.14.
Deckers trades for 21x forward earnings. EPS is expected to compound at a 13% clip for the next two years.
Balance Sheet:
$1.23 billion in cash & equivalents.
Inventory rose 7% Y/Y to $778 million.
No debt.
Diluted share count fell by 2.7% Y/Y.
2. CrowdStrike (CRWD) – Carahsoft
Carahsoft provides information technology (IT) solutions for the public sector. It resells products created by companies such as SAP, Microsoft, ServiceNow and also CrowdStrike. Last month, the FBI raided its Virginia headquarters due to rumored contract price fixing and false claims. This week, Bloomberg published an article about a $32 million purchase Carahsoft made in 2023 from CrowdStrike for its Identity Threat Protection to deliver to the IRS. The IRS never bought the software, but CrowdStrike has been receiving regular payments for the “non-cancellable order,” with the last payment due in a few weeks.
This merely builds on the negative sentiment surrounding post-outage CrowdStrike, but I think this is noise to hopefully take advantage of if Mr. Market cooperates. Why? CrowdStrike vetted this contract “extensively,” with company representatives calling all of this “inaccurate speculation” and “misleading.” It was not creating a fictitious purchase on its own; it was providing software (that, again, it was paid for) to a federal client through a legitimate distributor. It is not CrowdStrike’s fault that this distributor is being investigated for other issues.
Ask yourself: Do you really think this leadership team would risk their entire company to try to trick investors with a hollow contract to beat a single quarter’s earnings estimates? Do you think they’d risk their sterling reputation, world-class business model and unmatched financials for this? I think the answer is glaringly obvious “no.” Just go look at how admirably this team handled the historically bad July 19th blunder. This contract represents less than 0.4% of current ARR considering payments to CrowdStrike were spread over two years.
I find it nearly impossible that these funds will be clawed back by Carashoft, especially as their own company told Bloomberg that it “stands by the transaction” this week. I look forward to CrowdStrike leadership dispelling all of these concerns whenever it publicly speaks next. That is what I fully expect… An anonymous source saying they wish the company would have waited another week to announce the deal does not change my thoughts on this company in the slightest.
Also consider this: ServiceNow’s relationship with Carahsoft is more material than CrowdStrike. And? On ServiceNow’s last call, it called this drama a complete, immaterial nothing burger and told concerned sell-siders to relax.
Those are my thoughts on CrowdStrike, the company. CrowdStrike the stock has raced back to pre-outage multiples and is back to “extremely expensive” territory. And? It’s there with materially more execution risk looking ahead. I am selfishly rooting for noise like this to drag down the stock in the near-term so that I can buy more shares.
3. Spotify (SPOT) and The Trade Desk (TTD) – Spotify Ad Exchange
Spotify is building a supply side platform (SSP) for its advertising business called the Spotify Ad Exchange (SAX). The product easily plugs agencies and buyers into its universe of impressions for open bidding. Notably, The Trade Desk was named as the first demand side platform (DSP) for this project. The two started testing last week. As part of the arrangement, Spotify will also use TTD’s OpenPath. OpenPath blazes a more direct trail between publishers and advertisers and allows capable sell side players to directly practice their own yield management – rather than using another vendor like Magnite to do so. Spotify will also adopt unified ID 2.0, which is TTD’s open internet identifier. With this, TTD can tell buyers exactly which eyeballs they want to target, what they’re worth and where to find them. Powerful stuff… and Spotify agrees.
For the audio giant, this matters a lot. Most of its advertising business has been built from direct sales, rather than real-time, programmatic auctions. These auctions are by far the best tool to ensure optimal price discovery for the seller (Spotify). They’re also fully equipped with all of TTD’s targeting algorithms and data to ensure buyers get maximum return on ad spend (ROAS). This added precision and context used in each decision creates a compelling win-win. Buyers will pay more for impressions because they lead to more revenue and profit. And? Spotify is happy to collect higher premiums.
For The Trade Desk, Spotify is an ideal partner to grow its programmatic audio business. This partnership is starting with podcast impressions, but will soon expand to audio. The podcast industry continues to rapidly grow and is well behind video streaming in proportion of ad impressions that are fully biddable. The Trade Desk can help it rapidly catch up… can make all stakeholders more successful… and can turn audio into a third powerful growth vector to join connected TV and retail media.
I love it when best-in-breed, complementary companies partner.
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