Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

After a surge in January, markets are showing signs of cooling as earnings season continues, with mixed results for companies and new economic data continuing to weigh on investor sentiment. The S&P 500 closed 28 basis points lower, finishing its second week of the year in the red after declining 50 bps last week. Money markets have fully digested the economic data and now price a peak Fed funds rate of 5.3% in July. Just two weeks ago, markets were betting on rates peaking only at 5.02% in June. The 10-year and 2-year U.S. Treasury bonds hit levels not seen since November.

On Thursday, the headline Producer Price Index came in above expectations, following the CPI readout on Tuesday that showed year-on-year prices of 6.4% were also higher than expected. Headline PPI month-over-month was +0.7% versus the +0.37% expected, while the year-over-year figure showed prices increased +6.0% versus 5.38% expected.

Continued strength in the jobs market, strong retail sales, and inflation surprised the upside lending markets to believe that the Federal Reserve will keep rates higher for longer.

Company specific updates:

Deere (DE) — The stock gained 8.1% after Deere reported revenue and earnings-per-share above analysts expectations

Roku (ROKU) — The stock gained 30.4% on the week after posting a significant beat on revenue and providing positive guidance regarding its market leadership and expense management for 2023.

Moderna (MRNA) — Shares of the biotech company fell 5.1% after its influenza vaccine candidate posted mixed results in clinical trials.

Other notable earnings this week include Shopify (SHOP), PayPal (PYPL) Roblox (RBLX), Airbnb (ABNB), and Pool Corp (POOL) which we have detailed reviews of in this week’s newsletter addition.

Economic data next week

New and existing home sales data

Core PCE deflator

U. Michigan Sentiment

Fed minutes

Friday’s Close (Weekly Performance)

Dow 33,826.99 -0.13%

S&P 500 4,079.09 -0.28%

Nasdaq 11,787.27 +0.59%

Thank you Blue Room Analysts IAN CARTER and NICK PEART

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FY 2023 Guidance

Adjusted EPS: $4.87 at the mid-point of guidance; below expectations of $4.79

Revenue: did not provide guidance, citing macroeconomic uncertainty; expectations were $29.89 B

Q1 2023 Guidance

Adjusted EPS: $1.08 to $1.10; above expectations of $1.06

Revenue: spot increase of 7.5% ($6,969 B); expectations were +7.89%

Earnings Summary

PayPal reported 4Q TPV and revenues that missed expectations but beat adjusted EPS estimates. The company returned $4.2 billion of capital to shareholders in the form of share repurchases (80% of free cash flow) in 2022. It is expanding margins through cost savings initiatives, including a recently-announced plan to lay of about 7% of its workforce. CEO Dan Schulman plans to step down at the end of 2023.

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OVERVIEW

On Thursday, February 16, 2023, the Producer Price Index rose above expectations (both headline and core) and was led primarily by an increase in final demand goods. Goods inflation was mostly attributable to a +5.0% increase in final demand energy, however, the index for goods less food and energy also increased 0.6%.

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Final demand services also moved up 0.4% in January (matching the December increase), led primarily by prices excluding trade, transportation and warehousing, which rose 0.6%.

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Beginning in January of 2022, the index for final demand services has increased every month.

Final demand services less transportation and warehousing, have increased every month since May of 2022.

Since the start of 2023, aggregate economic data has suggested a strong labor market and elevated price levels, implying that future Federal Reserve monetary policy will likely be more restrictive than even the most recent FOMC press conference indicated.

FOMC Member Commentary This Week:

“At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time,” said Fed President of Cleveland, Loretta Mester on Thursday.

“My overall judgment is it will be a long battle against inflation, and we’ll probably have to continue to show inflation fighting resolve as we go through 2023,” commented Fed President of St. Louis, James Bullard.

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January 2023 Key Metrics

Revenue: $213 million — $216 million, up 22% - 24% year-over-year
Bookings: $267 million — $271 million, up 19% - 21% year-over-year
Average DAUs: 65.0 million, up 19% year-over-year
Hours engaged: 5.0 billion, up 19% year-over-year
ABPDAU: $4.11 — $4.17, up 0% - 2% year-over-year

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BLUE ROOM Earnings Analysis

Agricultural demand continues to outpace the rate of production given supply chain and labor constraints, farmer income for 2023 is projected to be supportive of continued demand, John Deere’s order books are filled into Q4 2023, price realization is projected to be up 14% in 2023 given strong demand and will support margins, and the Construction & Forestry segment looks positioned to perform even better than 2022 — due to higher shipment volumes, 9 percentage points of anticipated price realization, and continued strength in earth-moving and compact construction demand. These factors combined lead to a very positive outlook for Deere & Company’s fiscal year 2023, and the continued strength surprised markets enough for DE stock to trade up to $433.31 (+7.5%) following the earnings release and conference call.

The USDA’s 2023 Farm Sector Income Forecast, released on February 7, 2023, points to some increased pressures on farm budgets in the coming year compared to 2022 — but farmer incomes and crop cash receipts remain at historically high levels and support ongoing agricultural machinery demand. U.S. Producer Price Index reading out above expectations for January also supports Deere management’s commentary on the earnings call. As the general market sentiment has shifted towards stronger-than-expected economic strength and potentially stickier-than-expected inflation, both suggest Deere’s fundamentals should remain strong throughout the upcoming year.

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Q4 2022 Quarterly Highlights:

While the earnings backdrop for POOL looks very good from a yearly perspective, Q4 saw year-over-year declines across most key metrics. Notably, management mentioned the decline in inflationary price advantages they had due to “inflationary product cost increases.” One unforeseen cost to the company is a $13 million dollar increase in the cost of goods sold due to tariffs on imported chemicals.

Their loss in pricing power is reflected in the following commentary: “Net sales increased 6% to $1.1 billion in the fourth quarter of 2022 compared to $1.0 billion in the fourth quarter of 2021. Base business net sales increased by 1%. However, net sales benefited approximately 8% from inflationary product cost increases versus 10% last year.” Additionally, inventory levels increased 19.0% y/y for a value of $1.6 billion, and management made commentary regarding a slowdown in new pool starts, which is tied directly to home construction. Management made it clear that their ability to deliver consistent returns is predicated on their stronghold over non-discretionary maintenance products despite “current uncertainty presented by short-term market concerns.”

See the full outlook statement below key metrics.

2023 Outlook Commentary:

"Thinking about the year ahead, we believe that increasing demand for non-discretionary maintenance products, expansion of the installed base of pools, and continued renovation activity, combined with our extensive sales center network, will enable us to deliver solid results even if new pool construction levels are challenged against the higher comparison we saw over the last two years. Consumer preferences for smart pool products and our expanded ability to efficiently serve the DIY market will be a focus as we expect inflation to moderate in 2023. We are well-positioned and confident in our ability to continue our long-term trends of consistent growth and exceptional shareholder return despite the current uncertainty presented by short-term market concerns. We expect earnings for 2023 will be in the range of $16.03 to $17.03 per diluted share, including an estimated $0.03 favorable impact from ASU 2016-09," added Arvan.

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The driving force behind asset markets in 2023 will be Jerome Powell and the Federal Reserve. As Federal Reserve officials debate over how high to take the federal funds rate (and how long to hold it there), markets will be watching intently, pouncing on any signal that can be interpreted as dovish. To this end, equity markets have had a spectacular start to the year as Jerome Powell acknowledged that the disinflationary process has begun in some key areas, notably goods and housing. Furthermore, Powell reinforced the Federal Reserve’s commitment to data-dependence when he stated that the Federal Reserve “will continue to make [its] decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation” at the February FOMC Press Conference. This commitment to economic data makes inflation the primary economic indicator with respect to market outlook.

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Key Fourth Quarter Financial Highlights

Revenue of $2.101 billion, up +14.0% y/y.
Gross margin of 29.6% and adjusted gross margin 30.1%.
Net income of $668 million and adjusted net income of $368 million.
Adjusted EBITDA of $821 million.
Cash, cash equivalents and marketable securities of $3,346 million.

Key Full Year 2022 Financial Highlights

Revenue of $8.108 billion, up +23.0% y/y.
Gross margin of 27.6% and adjusted gross margin 28.4%.
Net income of $1.448 billion, net income margin of 17.8% and adjusted EBITA margin of 38.1%.

“Our revenue in 2022 grew 23% year-over-year, and we delivered record gross margin and net income, making significant progress toward our long-term financial model,” said CEO Dr. Thomas Caulfield. “In the fourth quarter, the GF team continued to execute on its commitments to customers and shareholders, despite the well-publicized inventor correction. As we look into 2023, we will continue to deepen our engagements with our customers in bringing specialty and differentiated solutions to market.”

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Summary

Airbnb beat estimates across key earnings metrics to finish off a strong 2022 which became the first profitable year on a GAAP basis while also achieving a free cash flow margin of 40%.

The company will look to continue its growth in the new year, with Q1 2023 Nights and Experiences Booked year-over-year growth to be nearly as strong as Q4 2022 and a strong backlog for Q1 with longer lead times for bookings in Q4 2022 compared to a year ago. Q1 should also have an easier year-over-year comp with Q1 2022 travel significantly impacted by the Omicron strain of COVID-19 in January and to a lesser extent the war in Ukraine during February.

With the rebound in urban and international travel, average daily rental rates are expected to face increasing downward pressure from mix shift, as well as new and improved pricing and discounting tools the company is rolling out to drive greater affordability and value for guests, and support bookings growth for Hosts. The company’s take rate overall should be similar to 2022, with variance in seasonality quarter to quarter. Since announcing layoffs early in the pandemic, the company has been more lean and productive, which has led to significant operating efficiencies. Airbnb’s headcount is still 5% below its 2019 numbers, and as a result, the company looks to maintain the strong Adjusted EBITDA margin delivered in 2022, offsetting the headwinds with incremental variable cost efficiencies and fixed cost discipline.

Airbnb has maintained its advantage in innovation with feature rollouts such as Airbnb Setup, AirCover, and Total Pricing Display and Tools providing additional benefits for both Host support and Guest user experience. The positive impact has led to growth in its supply, with 6.6 million listings, many of them unique to Airbnb’s platform. The company will continue to add more functions and features that add value to the platform, with the next upgrades coming in its summer release. Following success in its core products, Airbnb will look to expand other product offerings such as Experiences and its recently launched Airbnb-Friendly Apartments. Through partnerships with large real estate developers like Greystar, Airbnb-Friendly Apartments has the potential to unlock a large amount of inventory in multi-family homes in urban areas, starting with 175 buildings in Houston, Phoenix, and Jacksonville.

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BLUE ROOM Earnings Analysis

Majorly exposed to the broader economy through consumer spending trends, Shopify’s disappointing Q1 2023 guidance was the story of their fourth quarter results. Shopify shares traded to $44.88 (-15.9%) following the Q4 earnings results and conference call as the first quarter guidance implies significant pressure on Gross Merchandise Volume (GMV) and revenue throughout 2023. Since the Q3 2022 earnings call, SHOP shares had traded up 56.6% on better-than-expected consumer trends and increasing optimism about growth in the scenario of a soft landing of the economy, but optimistic projections ran counter to the potential risks to growth in the coming year.

Aside from a $426 million reported other income loss driven by a large equity position in Affirm (AFRM stock -49% in Q4 2022), Shopify’s Q4 financial results exceeded estimates due to strong consumer spending during Black Friday/Cyber Monday and the holiday season. Shopify’s market share continues to grow, standing at 10% penetration of the U.S. e-commerce market, and a host of new and improved offerings continues to drive new merchants — especially small businesses — to Shopify’s platform.

The risk to Shopify’s FY 2023 GMV could be 10% below what consensus estimates stood at before the Q4 2022 earnings call. That could set Shopify up for a 4th consecutive year of decelerating revenue growth, and in a hard landing scenario, downside risk to consumer spending would extend into 2024.

Markets had been hoping to see a further reduction in operating expenses and an increased focus on profitability given the challenging macroeconomic environment, but Shopify management’s commentary suggests those hopes could be misplaced as the company continues to invest in the long term. Despite operating at a profit for both 2020 and 2021 during the pandemic e-commerce boom, the $3.5 billion loss in 2022 and expense trajectory implies it will be multiple years before Shopify returns to profitability.

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Summary

Roku beat consensus estimates for nearly all key metrics while providing Q1’23 revenue guidance above analyst expectations, demonstrating its leading position in the AVOD industry despite macroeconomic headwinds affecting the advertising space. Operating expenses came in higher than expected, but the leadership team made it clear that expense growth will significantly decline over the course of 2023.

Devices

Roku’s player sales benefitted from better-than-expected TV unit sales in the US and internationally, with unit sales of Roku TV models in the U.S. outperforming the overall TV market. Roku TV’s market share grew to 38% of units sold in Q4 in the US — more than the next two largest TV operating systems, Samsung and LG, combined. The Roku OS was also the No. 1 selling smart TV OS in Canada and in Mexico, which grew to 30% share of units sold.

The company will be rolling out its Roku-branded TVs in the spring, which will allow it to have greater control over the design process and innovate more quickly.

Streaming and Engagement

Roku was the No. 1 TV streaming platform by hours streamed in the U.S., Canada, and Mexico.

Streaming Hours per Active Account per day of 3.8 hours in Q4, up from 3.6 hours in Q4 2021.

The Roku Channel was a top 5 channel by both active account reach and streaming hour engagement on the Roku platform in the U.S. as streaming hours on TRC grew 85% Y/Y. The Roku Channel’s FAST offering was also the #1 FAST service by reach and engagement on the Roku platform in the U.S. In Q4, Roku added a Sports tab to its home screen to aggregate sporting events in a centralized location and enhance search capabilities which led to streaming hours originating from the Home Screen Menu to double from the previous quarter. As a result of strong scale and engagement, the company has also begun to monetize in Mexico.

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On Thursday, February 16, Moderna announced mixed results from its Phase 3 study for mRNA-1010, its investigative therapeutic designed to protect against influenza. In the trial of over 6,000 adults 18 years of age and older in the Southern Hemisphere, the flu shot produced an immune response against influenza A, the most common type of the virus, that was at least as good as an existing flu vaccine. However, against influenza B, Moderna’s vaccine failed to prove it was equivalent to the existing vaccine.

Although both influenza A and B cause seasonal epidemics, influenza A viruses lead to a majority (>95%) of influenza-related hospitalizations in adults. The influenza A/H3N2 subtype, in particular, is a significant cause of illness in older adults and is responsible for most of the recent influenza outbreaks and excess morbidity caused by the virus, according to Moderna’s management.

Moderna’s vaccine candidate, mRNA-1010, encodes for hemagglutinin (HA) glycoproteins of the four influenza strains recommended by the World Health Organization to prevent influenza, including influenza A/H1N1, A/H3N2, and influenza B/Yamagata- and B/Victoria-lineages. The Phase 3 results indicated that mRNA-1010 achieved superiority on seroconversion rates for A/H3N2 and A/H1N1, as well as superiority on geometric mean titer rations for A/H3N2 and non-inferiority on geometric mean titer ratios for A/H1N1. Non-inferiority was not met for either endpoints for the influenza B/Victoria- and B/Yamagata-lineage strains.

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+ BULLPEN+

Tuesday
Valentine's Day
February 14, 2023
9:30 AM
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Topics
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Super Bowl LVII:
Did you watch the game? What did you think of the penalty call?U.S. Consumer Price Inflation:
Data came in above survey with Core CPI +5.6% vs. +5.5% expected. How does this impact our thinking for the year?
Led by Omar Guzman
Time Stamp: 06:45

National Federation of Independent Business
Small Business Optimism
Led by Nick Peart
Time Stamp: 15:33

Analyst Jared Fenley
Time Stamps:
+ Schrodinger (SDGR): 36:45
+ Shopify (SHOP): 38:22

Analyst Nick Peart
Time Stamps:
+ ROKU: 48:05

BLUE ROOM
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For more information about us and our general disclosures contact us directly.

Weekend Update #114

U.S. ++ VIETNAM

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Weekend Update #114

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Weekend Update #115

Weekend Update #113

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