Weekend Update #141
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.
Fed Chair Jerome Powell’s Jackson Hole summit commentary was one of the most anticipated events of this week as investors parsed through his wording in an attempt to gain insights into the future interest rate trajectory and economic outlook. Overall, Powell’s speech reflected a balanced reaction function of implementing additional rate hikes if upside risks to inflation play out and attempting not to inflict unnecessary harm on the economy if current interest rates are already high enough to return inflation to the target 2%. The Fed’s data-dependent approach will further emphasize the importance of trends within economic indicators as it relates to any stock market reactions. Jerome Powell’s closing analogy of the Federal Reserve “navigating by the stars under cloudy skies” didn’t inspire confidence in any certainty around the economic trajectory, but this and the rest of Powell’s commentary suggest that the FOMC committee remains attentive to all risks.
Nvidia’s Q2 2024 earnings on Wednesday were closely watched following shares’ 230% year-to-date returns and skyrocketing performance expectations among investors. Although the company blew earnings estimates out of the water again in the current quarter and with next quarter guidance, NVDA shares fell 2.3% throughout Thursday and Friday following the earnings release. Investors are clearly struggling to reconcile Nvidia’s exponential growth trajectory driven by AI and data center strength with some rekindled economic concerns given the historic first half performance of the stock market.
A slew of earnings reports this week signaled a weakening consumer and gloomier sales outlook from companies including Macy’s, Foot Locker, Peloton, Dick’s Sporting Goods, Dollar Tree, and Burlington. As consumers work through the last of their excess savings accumulated during the pandemic due to government stimulus and lockdowns, it seems that spending behaviors are beginning to shift and some companies are starting to feel the impact. University of Michigan’s final August Consumer Sentiment report also showed uncertainty around the economic outlook building among consumers given upside risks to inflation and further risk of slowdown in a rising interest rate environment.
Friday’s Close (Weekly Performance)
S&P 500 4,405.71 (+0.82%)
Nasdaq 13,590.65 (+2.26%)
Dow Jones 34,346.90 (-0.45%)
Thank you Blue Room Analyst JARED FENLEY
Monetary Policy
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The 2023 Jackson Hole Economic Policy Symposium
sponsored by the Federal Reserve Bank of Kansas City
August 24—26, 2023
Jackson, Wyoming
Federal Reserve Chairman Jerome Powell
Good morning. At last year's Jackson Hole symposium, I delivered a brief, direct message. My remarks this year will be a bit longer, but the message is the same : It is the Fed's job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate , and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective .
Today I will review our progress so far and discuss the outlook and the uncertainties we face as we pursue our dual mandate goals. I will conclude with a summary of what this means for policy. Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.
The Decline in Inflation So Far
The ongoing episode of high inflation initially emerged from a collision between very strong demand and pandemic-constrained supply. By the time the Federal Open Market Committee raised the policy rate in March 2022, it was clear that bringing down inflation would depend on both the unwinding of the unprecedented pandemic-related demand and supply distortions and on our tightening of monetary policy, which would slow the growth of aggregate demand, allowing supply time to catch up. While these two forces are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.
ANALYST TAKEAWAYS
Although we understood the demand for Nvidia’s accelerated compute platform to be extremely high, the third quarter outlook further advances our assumptions for demand up and out through FY2025:
The significant demand for Nvidia’s GPU solutions has been primarily driven by Cloud Service providers, who make up the bulk of current demand, followed closely by consumer internet companies, then by enterprise level customers and topped off by high performance compute customers. We are estimating the ramp of Nvidia AI Enterprise services and DGX virtual cloud will take several quarters, meaning that demand will continue to be led by CSPs. Over time, we envision that generative AI applications and accelerated computing will extend to the edge where enterprise level customers will consume the largest portion of total demand.
Factors that contribute to our revisions in revenue estimates include:
Nvidia’s supply visibility extends through the entirety of next year:
Management publicly announcing that their demand visibility has been extended to next year conveys extreme confidence in business fundamentals and leads us to believe that Nvidia has secured even more sales agreements than they had in 1Q. (last earnings call the company mentioned visibility only through this fiscal year)
2. Nvidia is working with suppliers to ensure enough product to meet demand:
Nvidia will have incrementally more capacity, sequentially, for the next several quarters moving forward, with the company’s supply partners ramping additional capacity to support volume shipments of DGX, HGX and H100 systems. This applies specifically to CoWos packaging, which CFO Colette Kress specifically highlighted as that had been a primary investor concern going into the call.
3. HGX systems are leading the purchasing, which implies a majority of customers are CSPs. The next wave of DC investment to come from Enterprise level customers for which Nvidia is launching the L40S GPU solution:
L40S is the Enterprise solution for workload-specific training and inference on small-to-medium sized language models
Competition in the industry:
Nvidia’s primary competitor for the accelerated data center compute market is AMD, who is scheduled to begin shipping their Mi300 chip in the fourth quarter of this calendar year, but won’t begin materially competing with Nvidia’s H100 until sometime in 1H2024 . Intel has invested in their inference platform with Core Xeon processors and “Habana Gaudi” AI processors, but according to channel read-throughs, adoption of Intel’s data center GPU solutions is still in the assessment phase.
After rising sharply for the past several months, consumer sentiment moved sideways in August to 71.6 with a small decline that is not statistically different from July. Sentiment reached its second highest reading in 21 months and is now about 39% above the all-time historic low reached in June of 2022.
While buying conditions for durables and expectations over living conditions both improved, the long-run economic outlook fell back about 12% this month but remains higher than just two months ago.
Consumers weighed a combination of positive and negative factors in the economy, which led to differing offsetting trends across demographic groups. Consumers perceive that the rapid improvements in the economy from the past three months have moderated, particularly with inflation, and they are tentative about the outlook ahead.
Median One-Year and Long-Term Inflation Expectation Rates
The median expectation for one-year inflation (blue line) increased to 3.4%.
The median expectation for long-term inflation (green line) remained at to 3.0%.
Year-ahead inflation expectations edged up from 3.4% last month to 3.5% this month. The current reading remains above the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations came in at 3.0% for the third consecutive month, staying within the narrow 2.9-3.1% range for 24 of the last 25 months. These expectations are elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.
Tien Tzuo — Founder and CEO
Thank you, Carolyn. Thank you, everyone, for joining us today, and welcome. Welcome to Zuora's second quarter fiscal 2024 earnings call. I'd like to start off by congratulating our Head of Investor Relations, Luana Wolk, on the birth of her second son. And thank you, Carolyn, for stepping in while Luana is out on parental leave, although I suspect that she might be listening in right now. Q2 was another solid quarter where we delivered on our guidance, progressing our topline and coming in ahead of our bottom line.
In the second quarter, subscription revenue was $95.5 million, growing 16% in constant currency and 14% as reported. ARR grew 14% as reported and we came in at 9% non-GAAP operating margin for the quarter. This is up from 6% last quarter and up 900 basis points from Q2 of last year. We are now halfway through our fiscal '24 and it's a good time to recap our larger mission and strategy and the progress we have made towards building a durable profitable business. The core thesis of the company is to be the leading beneficiary of a broad long-term secular shift in business models. Our mission is to offer differentiated hard-to-replicate technology that helps companies thrive with these new business models.
Updated FY 2023 Guidance:
Net Income: $9.75-10.00 billion (increased from prior $9.25-9.50 billion guidance, compared to $9.41 billion consensus estimate)
Production & Precision Ag:
Net Sales: +20% (unchanged from prior guidance)
Currency Translation: 0% (unchanged from prior guidance)
Price Realization: +15% (unchanged from prior guidance)
Small Ag & Turf:
Net Sales: +5% (unchanged from prior guidance)
Currency Translation: -1% (unchanged from prior guidance)
Price Realization: +15% (increased from prior +9% guidance)
Construction & Forestry:
Net Sales: +15-20% (increased from prior +15% guidance)
Currency Translation: 0% (unchanged from prior guidance)
Price Realization: +11% (increased from prior +10% guidance)
Financial Services:
Net Income: $630 million (unchanged from prior guidance)
Earnings Call Notes:
Deere has a full order book through 2023 and they are seeing early positive signals on demand for 2024 support the earnings guidance raise for the full year
Strong price realization (up to 15% in some segments) aided Q3 results and going into 2024/25, Deere is targeting ~4% price increases on top of general inflation due to technological improvements and autonomy
All segments are seeing lower production cost inflation and those trends are expected to further improve
Brazil and South America are starting to show some signs of weakness to end the year due to low grain prices and strengthening of Brazilian Real against the USD
European countries bordering Ukraine will see pressure on crop prices due to the geographic oversupply and lack of export power
Infrastructure spending is starting to support the construction & forestry segment but will mainly come in 2024 and ‘25
Management expects price realization in construction to continue to strengthen over the next ~5 years
Deere seeing continued progress in take rates on autonomous technology (60% for ExactEmerge and 70% for ExactApply) and positive mix toward large planters
This week saw a flurry of earnings reports from retail companies that all seemed to emphasize that consumers are growing weaker. For instance, Macy’s reported declining sales in the June quarter due as volume decreases. Further, the company noted that delinquencies – which are a proxy for consumer health – were on the rise for its credit card holders at a pace that was “faster than expected.” Macy’s Chief Executive Jeff Ganette commented that the company expects “the pressures consumers are under to continue through the balance of the year.” He added “consumers still have good savings, but they are being more judicious in how they spend…more of their money is going to services and experiences.” Dick’s Sporting Goods echoed the negative sentiment, slashing profit targets for the year due to sales that slowed faster than expected, leaving the company saddled with excess inventory. Foot Locker and Williams-Sonoma similarly disappointed with respect to sales revenue. Abercrombie & Fitch was the exception, and actually raised its net sales guidance for the year after a blowout quarter. Taken all together, the anecdotal evidence suggests that the consumer is growing more and more cautious with respect to discretionary spending. Spending may not necessarily be grinding to a halt, but people are rethinking whether they need that new Smeg Jousting Paladins Dolce and Gabbana refrigerator from Williams-Sonoma. To this end, the key question is whether the earnings reported by these companies are indicative of consumption as a whole suffering in the coming months or are indicative of a more conscious consumer, who will still spend but will do so with more frugality.
— FRESH FROM THE FARM —
Back at HQ, an elated Naia Morse shows the India Jammu harvest to Omar Guzman.
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