Weekend Update #163
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Earnings season went into full swing this week, and it brought with it a slew of economic data that gave further proof inflation continues to cool amid a strong economy. On Thursday, the S&P reached a new high 4,894.16 while the Nasdaq reached a new high of 15,455.36 and the Dow reached a high on Friday of 38,103.43.
On the equities front, Meta surpassed the $1 trillion market cap threshold for the first time again since September 2021. United Airlines forecast a Q1 loss due to the grounding of Boeing 737 Max 9 planes. Netflix shares soared after reporting better-than-expected subscriber growth. Tesla shares tanked after the company guided to lower-than-expected vehicle volume growth in 2024. Intel shares also dropped after providing a downbeat Q1 forecast. American Airlines shares popped after providing a 2024 earnings forecast that exceeded expectations.
The economy appears to be strong overall, with fourth quarter GDP of 3.3% exceeding economists’ expectations of 2.0%. Meanwhile the Fed’s preferred inflation gauge—core PCE— came in at 2.9% in December, below the consensus estimate of 3.0%. Some observers pointed out that on a six-month annualized basis, core PCE came in at 1.9% in December, below the Fed’s 2.0% inflation target, which fueled the debate on whether the Fed would cut rates in March. We’ll get a better idea of how the Fed is interpreting the latest economic data after the FOMC convenes next week.
Also next week we get earnings from several big names, including Pfizer, Microsoft and Google on Tuesday, Boeing on Wednesday, Apple and Amazon on Thursday, and Exxon Mobil on Friday.
Weekly Performance
S&P 500 4,890.97 +0.84%
Dow Jones 38,109.43 +0.28%
Nasdaq 15,455.36 +0.52%
Key Economic Readings Next Week
Monday, January 29 — Dallas Fed Manufacturing Index
Tuesday, January 30 — JOLTS Job Openings; Conference Board Consumer Confidence
Wednesday, January 31 — FOMC Rate Decision; ADP Employment Change
Thursday, February 1 — ISM Manufacturing
Friday, February 2 — Change in Nonfarm Payrolls; Unemployment Rate, U. Mich Sentiment
Thank you Team Leader OMAR GUZMAN
Earnings Summary
Procter and Gamble reported a mixed Q2 for their 2024 fiscal year. Despite missing on revenues—$21.4 billion versus the Street’s estimate $21.6 billion and GAAP earnings per share of $1.40 versus Street estimates of $1.68, investors were mainly focused on guidance, which was overall positive, especially with regards to the company’s “Core” EPS range of $6.37 to $6.43 for FY2024, which represents 8% to 9% year-over-year growth, an improvement from the previous guidance of 6% to 9%. The company also reiterated its net sales growth guidance for the year of 2% to 4%, and organic sales growth of 4% to 5%.
The company stated the fiscal year is benefiting from a commodities tailwind of $800 million as well as productivity savings in cost of goods of $1.5 billion, while it expects a $1.0 billion headwind from foreign exchange.
Procter & Gamble experienced a moderation in sales growth due to the company annualizing price increases which is being partially offset by volume growth. Currently the former is having a bigger impact than the latter, but the company remains confident that as consumers essentially get used to the new price levels—which it doesn’t anticipate to raise in the near- to mid-term—volumes will naturally increase. The company’s stronger business segments include Grooming and Fabric & Home Care, both generating 5% revenue growth year-over-year, while its weakest segment was Beauty, which managed only 1% growth. The company noted that its SK-II product—a Japanese luxury skincare brand—was especially hurt in the quarter, falling over a third, owing to anti-Japanese sentiment that arose following the release of water from the infamous Fukushima plant last summer. Management was quick to note that they had just arrived from a week-long trip in China where they reported seeing green shoots of a recovery, adding that in every instance in the past where something similar has happened, the brand in question always recovered to “new heights.”
The company stated it was confident it would achieve the higher-end of its Core EPS guidance range, benefited by the aforementioned tailwinds and continued strength in its revenue trends predicated on a recovery in volume growth. It remains to be seen whether this dynamic indeed materializes.
Executive Summary
Intel delivered on top and bottom lines in the current quarter and the company got some benefits from reserved inventory selling through, but the dismal guidance provided for the next quarter is causing extreme levels of doubt for the company.
In terms of in-quarter core businesses, sequential growth was positive in CCG and DC&IA:
Client Compute Group: $8.8 billion (+33% Y/Y and +12% Q/Q) and for Data Center & AI: $4.0 billion (-10% Y/Y but +4.0% Q/Q). The trends align with what we’ve heard through channel checking; during late 3Q and through 4Q ‘23 there was a surge in interest in general purpose servers picking back up after a huge investment cycle in GPUs, while the Client compute side (PCs and Notebooks) did much better than initially forecast.
Unfortunately for Intel, the outlook downside absolutely discredited the company’s recent performance and instilled in the market a high level of doubt in the company’s to hit lofty ambitious goals. Revenue of $12.7 billion for the upcoming quarter compares to the consensus estimate of $14.2 billion, or roughly 11.0% below expectations. This forecast suggests sales down nearly 18.0% sequentially, and well "below seasonality". Over the past four quarters, Intel has seemingly trailed its Data Center accelerator peers, while also battling AMD on the client and server compute market. Although it held share, and may have crept up a few basis points, against AMD in the client end market in 2023, the outlook is an extremely difficult start to the year, especially as it appears the segment should return to growth in 2024.
The company noted that at least $1 billion of the miss (against typical seasonality) is attributable to non-core businesses, but in our base case model we struggle to draw a scenario where CCG and DCAI (~83% of Intel’s 2023 business) are not jointly down 13.0% Q/Q. As a reminder the two business segments were down 14% Q/Q in 1Q23. Shares fell -11.9% in the day after the earnings call.
Executive Summary
Tesla disappointed on revenue and gross margins as Automotive revenues came roughly in-line with estimates at $25.6 billion, while Energy and Services both came up short with $1.44 billion (vs. $1.78B expected) and $2.17 billion (vs. $2.35 billion expected). Despite the miss on revenue, the automotive gross margins improved Q/Q which was a positive surprise. Adjusted EPS was $0.71 per share, slightly missing analysts estimates of $0.73. Executives declined to provide full-year guidance, stating that the company is in between growth waves in its automotive business as it prepares the launch of its next-generation vehicle platforms in 2025.
Despite the focus on Tesla’s next-gen platform, there are many catalysts to drive continued growth in 2024, with the launch of the Cybertruck, which is currently ramping up production, as well as launches of refreshed versions of the Model 3 and Y. The Energy segment is also poised for strong growth, as the company plans to double its production capacity this year. TSLA shares are likely to remain range bound until there is more clarity on the timeline of its next-gen vehicle platform.
Valuation
2024 Adj. EPS: 55.7x $3.31 consensus (vs. Blue Room est. $3.32)
2025 Adj. EPS: 41.7x $4.42 consensus (vs. Blue Room est. $5.02)
2024 Adj. EBITDA: 33.0x $17.8 billion consensus (vs. Blue Room est. $19.5 billion)
2025 Adj. EBITDA: 23.7x $24.8 billion consensus (vs. Blue Room est. $29.0 billion)
Details
Despite lower blended ASP, Automotive gross margins (excluding regulatory credits) increased Q/Q to 17.2% in Q4, an 86 bps improvement, suggesting that margins may have finally bottomed. COGS per unit decreased 318 bps sequentially to $36,295.
Energy is expected to be Tesla’s fastest growing segment in 2024, with a second production line being installed at its Lathrop facility, along with construction completion of its Shanghai Megafactory.
The company increased its 2024 capital expenditures outlook from $8-9 billion to $10 billion. It also expects its corporate tax rate to rise to 20%, from roughly 10% in 2023.
Marc Casper — Chairman, President & Chief Executive Officer
Nice to see everybody here in San Francisco. Great to be back at the J.P. Morgan conference.
So, the time goes quickly. A year ago, I'm reflecting back on being in front of this group, right here in this ballroom, and thinking about the year ahead for 2023. And I think the industry, and certainly ourselves as well, expected that our industry would see moderating growth in 2023 after several years of extraordinary growth in terms of the role that the pandemic had called upon our industry to play, in Thermo Fisher specifically as well.
The year wound up turning out to be more challenging even in the moderation of growth that we had reflected upon at that point in time. The pandemic unwind actually played out roughly as, I think, we expected and probably others expected, but the combination of more difficult macro environment and a resulting caution in customer spend, as well as a deterioration in the Chinese economy affected the results, right? And before one declares a victory lap on a year, I think one puts it in the context that we navigated a very different environment than we were expecting to navigate. So I'll talk about our performance in that context. And I'm very proud of how the team operated last year and what we delivered. But of course, we didn't achieve the original financial goals that we set out to, and we'll look forward to getting back to that track record in 2024.
So, when I look at the safe harbor statement and the non-GAAP measures, they're up here on the screen, and you can find the reconciliation of any numbers to the relevant numbers in the Investor section of our website, so take note of that.
Executive Summary
From a high level, the earnings report was incrementally negative relative to the expectation going into the call. TXN missed on revenue, coming in at $4.077 billion versus $4.127 billion (consensus) and $4.102 billion (BLUE ROOM). Gross margin was in line with the outline provided in last quarter’s guidance at 59.63% versus BLUE ROOM expectations for 59.0% even. The Q/Q and Y/Y decline in bps were -200 and -600, respectively. Primary drivers of the decline were lower revenue, higher underutilization charges, and higher CAPEX Y/Y leading to increased depreciation. OPEX management was better than expected and led to EPS of $1.49 coming in slightly above consensus estimates of $1.47 and BLUE ROOM estimates of $1.48.
The main driver of negative stock reaction was the below-expectations outlook for the first quarter of 2024, which indicates continued inventory management in TXN’s end markets. This continues a five quarter sequence of declining Y/Y revenue metrics, extending the declines during a period where it appears the semiconductor industry overall is rebounding, and marking the worst stretch of sales performance since 1Q2019 ( a period marked by cyclicality and COVID-19 headwinds at the tail end). All segments are weaker, including the two areas of primary R&D investment; industrial and automotive. Due to the outlook and the context provided during the earnings call, we will be pushing the TXN-specific revenue recovery back 1.5 quarters.
Valuation
FY2024 EPS: 21.5x on $7.90 consensus (24.2x on $7.02 BLUE ROOM expected)
FY2025 EPS: 16.4x on $10.34 consensus (18.8x on $9.02 BLUE ROOM expected)
Details
(I) Due to the negative 1Q outlook, it suggests that at the very least, some impact of continued cancellations will impact the second quarter. In the base case this means that we will probably push out a recovery by 1.5 quarters due to what we're hearing on the call right now.
(II) TXN expected a recovery in China, most likely through 2H23, but that hasn't materialized. We continue to see issues with investment in that region so it likely will continue to be a pain point through 1Q24. On the positive, China fell by 700 bps as a percentage of overall revenue, but as it still comprises 42% of direct sales, the weakness there will have continued impacts.
Executive Summary
Netflix beat all major metrics, generating $8.8 billion in revenue compared to $8.7 billion consensus, while earning $1.5 billion in operating income compared to $1.2 billion consensus. The company met expectations for diluted EPS with $2.11. The streaming platform beat subscriber estimates by nearly 50% with over 13 million net adds in the quarter as the company’s initiatives on password sharing and advertising start to pay off. Heading into 2024, the company is continuing to get more comfortable with live events, signing its first deal of the year with WWE’s Raw which will stream weekly in the US and internationally.
Valuation
2024 Adj. EPS: 33.0x $17.12 consensus
2025 Adj. EPS: 26.6x $21.05 consensus
2024 EV/EBITDA: 25.5x $9.7 billion consensus
2025 EV/EBITDA: 21.1x $11.9 billion consensus
Details
Netflix Inc. signed up 13.1 million customers in the quarter, its best quarter of growth since 2020 when customers were stuck at home during the pandemic.
Ads membership increased by nearly 70% Q/Q. Ads plans now account for 40% of all Netflix sign-ups in markets with an ad-tier, and the company will begin phasing out its Basic plan for new and rejoining members.
The company repurchased 5.5 million shares for $2.5B in Q4, with $8.4B remaining under the current buyback authorization. Netflix has $400M in senior notes maturing in Q1 and the company plans to pay that down with cash.
Thursday
January 25, 2024
12 PM
BLUE ROOM
MEETING NUMBER 140
Agenda
I. Blue Room Updates
II. Blue Room Investing Update
-- sales and marketing update from Johnny and Eli
III. Blue Room Ag
IV. Blue Room Housing
V. Blue Room Art
Icebreaker Question:
Have you had a close call in your life? What was it, and how did it resolve?
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