Weekend Update #166
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The S&P 500 briefly hit a new all-time high on Monday as investor exuberance about economic strength and earnings performances supported the index above 5,000, but the S&P 500 fell for the full week after valuations struggled to recover from the hot January 2024 CPI report. Breadth widened slightly after Tuesday’s hot inflation reading, in a signal that investors may be turning to more overlooked parts of the market given premium valuations boasted by the consolidated group of 2023’s biggest winners.
Key earnings this week included: MDAY, CDNS, SHOP, ABNB, HOOD, LYFT, CART COIN, and AMAT. More than 80% of S&P 500 companies have beat earnings estimates for the best quarterly performance of 2023. AI investment themes continue to outperform as infrastructure buildout and software innovation continue, but given tech’s outperformance coming into 2024, there is also a high bar to meet to sustain those valuations.
Economic data for the week was mixed, providing hints of supporting each of the various economic outlooks: soft landing, no landing, risk of recession, and further inflation pressures.
Tuesday’s January CPI report came in above economists’ expectations at 0.3% month-over-month and 3.1% year-over-year. On a core basis, January CPI accelerated on a month-over-month basis at 3.1% and, staying steady at 3.9% year-over-year, is still far from the Federal Reserve’s 2.0% target. A measure of Supercore CPI YoY also increased to 4.28% — its highest level since May 2023. The sticky inflation was a signal to which markets responded sharply negatively on the day with the S&P 500’s worst post-CPI performance since September 2022.
PPI for January also surprised to the upside with a 0.3% month-over-month increase vs. the consensus 0.1%, and 0.5% month-over-month excluding food and energy vs. 0.1% consensus.
Retail Sales for January fell more than economists had expected, decreasing 0.8% month-over-month and falling 0.5% month-over-month excluding automobiles and gas.
New Home Construction in January also posted its biggest decline since April 2020 at -14.8% month-over-month.
Initial Jobless Claims for the week ended February 15 rose by 212,000, less than the mean economist estimate of 220,000, while Continuing Claims increased to 1.895 million, more than the consensus estimate of 1.865 million. Directionally, workers who have recently been laid off are having an easier time finding new employment opportunities, while there is still a growing cohort of Americans without work and struggling to find positions that match their skills.
NFIB’s January report showed Small Business Optimism falling more than expected to 89.9 in January as inflation, a tight labor market, and falling sales continue to heavily weigh on small businesses this year.
University of Michigan Consumer Sentiment held steady in February at its highest level since July 2021 as slight increases in consumers’ inflation projections were offset by a continually strong labor market.
Geopolitical tensions also rose this week as attacks sparked fear that Israel is on the brink of fighting a new front against Hezbollah in Lebanon. Internationally, Japan’s economy fell into recession with its second consecutive quarter of growth contraction as the Bank of Japan is also heading toward its first rate hike since 2007.
Friday’s Close
(Weekly Performance)
S&P 500 5,005.57 (-0.42%)
Nasdaq 15,775.65 (-1.35%)
Dow Jones 38,627.99 (-0.11%)
Thank you Blue Room Analyst JARED FENLEY.
OVERVIEW
United States Producer Price Index YoY and MoM
PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).
Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.
Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.
Executive Summary
Instacart reported better-than-expected profitability during Q4 2023 and guided to a beat on adj. EBITDA profitability for Q1 2024, but sales came in weaker than expected — despite a beat on GTV performance and guidance — as Instacart invests more into customer incentives to boost retention on the platform. To offset these incentive investments, Instacart is enacting a 250-person (7%) headcount reduction in Q1 2024 in order to shift OpEx investment to key growth areas including Caper Carts, retail media, and offsite ads. The net impact means there will not be a corresponding 7% reduction in expenses for Instacart as they will use the additional expenses to reinvest in those areas.
Consumer spending on Instacart in aggregate is clearly increasing as guidance implies GTV growth of 8-10% in Q1 2024, which would be the 5th consecutive quarter of accelerating YoY GTV growth. Instacart is pointing to the 5% YoY increase in total orders and 1% increase YoY on Average Order Value in Q4 2023 as evidence of higher quality growth in spending on the platform.
Offsetting these positives, Transaction Take Rate has decreased by 39 basis points to 7.10% from Q1 to Q4 2023 as Instacart has had to invest in more customer incentives to drive growth. Based on management’s commentary on the call, they expect to hold the Q4 take rate steady as they enter 2024 in order to invest in long-term customer retention objectives. This potentially implies Q1 and Q2 2024 will both have sequential declines in revenue. My H1 2024 revenue projection is now $1.561 billion, which was below the consensus $1.587 billion. Advertising revenue will also lag GTV growth, so advertising revenue is not expected to gain traction until late 2024 or 2025 as brands will need time to build confidence and make decisions based on Instacart’s trailing GTV growth.
At the same time, Instacart is focused on driving profitable growth, and the guidance in combination with earnings call commentary leads to my revised FY 2024 net income projection of $210 million, which is above the consensus $121 million. It will take time for this growth to show, and the FY 2024 outlook is clouded by some near-term uncertainty over revenue growth and take rates — in addition to the IPO share lockup expiration on Thursday, 2/15. The puts and takes led to a trough after-hours trading price for CART shares of $24.50 and a peak rebound of $30.64, a 25% trough-to-peak jump. Currently, shares have settled at $26.75 (-4.0%) following the results. It seems like the more positive outlook wasn’t enough to assuage fears of high-volume selling on Thursday.
Yelp shares are poised to continue flat to negative performance into 2024 following FY2024 revenue and adjusted EBITDA guidance that came in below analyst expectations. Yelp's main source of revenue—advertising from its Services segment—generated flat acceleration of 14% year-over-year in 2023, just like in 2022, while Restaurant, Retail & Other (RR&O) continues to decelerate, falling from 17% growth in 2022 to 10% in 2023. Yelp indicated it was continuing its AI-driven innovations to continue expanding its value proposition to new and existing customers, as well as continue driving operating leverage to expand its margin profile, but at this stage this feels like a "value tech stock" after it announced a recently-authorized share repurchase program of $500 million while just having reported $441 million of cash at year-end.
Executive Summary
Roku surpassed estimates as Platform revenue grew 14% year-over-year to $829 million, ahead of $818 million consensus. The beat was driven primarily by strong account acquisition and growth in user engagement with active accounts now at 80 million, 1.4 million higher than estimates. Streaming hours grew 22% year-over-year despite viewing hours on traditional TV declining 16% year-over-year. The Devices segment also grew ahead of estimates due to Roku-branded TVs outpacing industry sales. Roku also managed to produce an Adj. EBITDA profit of $48 million, compared to the consensus estimate of $17.5 million. The overall advertising industry remains challenged with Q4 ad spend on traditional linear TV and scatter down roughly 10% year-over-year. However, Roku’s platform continues to outperform the overall ad market as the company continues to add new partnerships and tap into new budgets as it integrates third-party demand sources. With an expected influx of ad dollars coming in from the 2024 Summer Olympics and the upcoming political cycle, streaming should continue to attract advertisers, largely benefiting Roku as the leading connected-TV platform. ROKU shares are poised for growth in 2024 as the company maintains itself as an industry leader and improves profitability.
Executive Summary
In a signal that consumer spending continues to be resilient through the first part of 2024, Shopify posted a Q4 2023 beat on revenue and earnings expectations and guided to a “low twenties” YoY revenue growth rate for Q1 2024 — above the consensus estimate for 20% YoY growth. With sky-high expectations with the recent 5-day SHOP share price gain of 9.5% coming into the call, the outlook was not enough to reset the outlook to a structurally higher level, although it was an improvement over consensus.
Negatives that can be seen in the quarter were that the Merchant Solutions Attach Rate fell 0.03% sequentially in Q4 2023 and Total Attach Rate fell 0.20% sequentially. Historically, Q4 attach rate has fallen 0.10% to 0.20% sequentially as the surge in holiday spending that flows through to GMV does not mean merchants are paying a proportionate increase to Shopify in fees during the quarter. Free cash flow margin is also expected to be “high-single-digits” in Q1 2024, which estimates FCF of $120-175 million for Q1 if revenue is lower toward the bottom 20s % YoY growth rate vs. consensus estimates of $258 million (implying a ~14% FCF margin). Management said this is due to some Q1-weighted employee-related expenses and seasonal factors with the expectation that FCF and FCF margins improve every quarter throughout 2024 and continue to grow from 2023 levels. That implies a total FY 2023 FCF outlook very similar to what’s modeled in consensus estimates but more back-end heavy. OpEx dollars are expected to increase “low-teens” sequentially, which is another reflection of the Q1-weighted expense outlook but also implies SHOP is done with the cost-cutting measures in the near term as sales are back to 20%+ YoY growth rates.
Executive Summary
Reported revenue was $1.854 billion, up 0.11% sequentially from $1.852 billion last quarter and down 11.76% from $2.101 billion last year. Consensus expectations were for $1.851 billion. GAAP net income was $278 million, up 12% sequentially from $249 million and down 58% year-over-year from $668 million. This translates to GAAP EPS $0.50, meeting the consensus expectation for $0.50.
The Communications & Data Center segment fell $242 million year-over-year, contributing the majority of the topline annual decline. Home & Industrial IoT, Smart Mobile Devices and Personal Computing also contributed. These declines were partially offset by the $203 million year-on-year growth in the automotive segment.
For 1Q24, the company expects revenue of $1.520 billion at the midpoint (consensus expected $1.763 billion and BLUE ROOM estimated $1.763 billion). Operating profit is expected to be around $95 million on lower revenue (consensus expected $231 million and BLUE ROOM estimated $265 million). The midpoint of EPS guidance is for $0.13 (GAAP), versus the consensus expectation of $0.43 and BLUE ROOM’s estimate of $0.43.
On Smart Mobile Devices (40% of revenue) GFS noted that the recovery seen coming out of 4Q 2023 continues to have high inventory backups, so the shape of recovery in SMD is based on 1) consumer demand rebounding and 2) better inflationary environment to drive rates lower. Management mentioned that this down cycle has been deeper and longer than it had been historically, but was offset in the long-term with LTAs. The company did have a contract termination in SMD despite an LTA, where the customer chose to pay $65 million in termination reconciliation instead of continuing to transact with GFS. This is of particular concern because the company will need capacity offsets for lower Comms./Data Center business into the future. Management did cite that this termination was a function of a deeper cyclical downturn, where the contract wasn’t likely viable for the customer and may not represent future demand on an up-cycle.
There's still some uncertainty about winning new Comms./ Data Center contracts to replace customers moving to single nm FinFET technology with competing foundries, which is an area that GFS doesn’t currently serve. GFS’s solution is to transition capacity at existing Fabs, like they have announced for Fab 8 facility, to their durable markets like mobile, automotive and industrial.
Shaping next year’s revenue trajectory; Smart Mobile Devices may recover in 2H and Automotive will grow throughout the year. In the first quarter, the two are expected to decline less than 18% sequentially and have YoY growth. The other sales segments may be down to flat YoY, and down more than 18% sequentially. Gross margin should grow sequentially each quarter but is dependent on the level and pace of recovery in the SMD segment as well as the rebound in total utilization as customers across the board widdle down inventory.
Consumer sentiment was essentially unchanged from January, rising 0.6 index points to 79.6 this month and solidifying the large gains from the past two months.
The fact that sentiment lost no ground this month suggests that consumers continue to feel more assured about the economy, confirming the considerable improvements in December and January across various aspects of the economy.
Consumers continued to express confidence that the slowdown in inflation and strength in labor markets would continue.
Five-year expectations for business conditions rose 5% to its highest reading since December 2020.
Sentiment is currently about 30% above November 2023 and about 6% below its historical average since monthly data collection began in 1978.
Executive Summary
Coinbase generated $954 million in revenue, beating estimates of $826 million, driven by an 83% sequential increase in Transaction revenue. Services revenue grew 12% quarter-over-quarter as a result of higher crypto prices and new products gaining traction. The company grew adjusted EBITDA to $305 million, ahead of the $251 million estimate, and returned to GAAP profitability with a diluted EPS of $1.04 compared to consensus estimate of ($0.05). The launch of Bitcoin ETFs have potentially ignited a new crypto bull market, and Coinbase is emerging with more products and less competition than in previous cycles. Consensus estimates will likely see significant upward revisions, causing COIN shares to continue pushing higher throughout 2024 as Coinbase grows its international presence and new products take shape.
Executive Summary
Trimble posted a beat on revenue and adjusted earnings in Q4 2023, while the company guided below consensus FY 2024 sales and in line with adjusted earnings estimates. The initial impact to the subdued full year outlook on top of a better FY 2023 base than expected led TRMB shares down to a low of $46.80 (-10.9%) in pre-market trading today. Trimble also guided to a big miss on Q1 2024 sales and earnings estimates, which is where the positive spin on the story came into play. TRMB shares reversed early losses throughout the day and traded up to $54.69 (+4.2%) on the company’s expectation that performance will gain traction throughout each quarter this year, and implying higher year-over-year growth rates on sales in H2 2024 as well as better operating leverage.
The business model shift to sources of recurring revenue is occurring quicker than originally anticipated, as the company expects to reach over 60% of sales coming from recurring revenue sources in H2 2024 — much before the long-term guidance of 2027 previously stated. Evidence of execution on this transformation comes as Trimble doubled their Trimble Construction One pre-packaged bundled offerings in Q4 2023. This is a positive flywheel for Trimble as they can use data collected from customers adopting the new software offerings to better inform efficient go-to-market strategies as well.
The story of Trimble’s quarterly results is that after years of divestment and leaning into building software infrastructure, it seems that 2024 could be the first year these fruits come to bear in the financials. The team is starting 2024 under new segmental focuses, where management hopes to bring better human capital synergies by pairing similar businesses: AECO, Field Systems, and Transportation & Logistics. With the AGCO joint venture, Trimble has also turned its focus to paying down debt and returning shareholder capital with a $100 million buyback in Q4 2023, a further $80 million share repurchase authorization in Q1 2024, and an intention to pay down $1.1 billion of debt in teh near-term. North America, engineering, and construction markets are all bright spots with more resilient activity and will be key drivers of performance in FY 2024. With the consensus expectation for a soft landing in the U.S., federal infrastructure dollars still flowing through to construction, a more stable recurring revenue business, and a management team demonstrating execution through an uncertain macroeconomic backdrop, TRMB shares should stand to gain significantly as the economic outlook becomes increasingly more stable.
Operator
Good day, and thank you for standing by. Welcome to the Tripadvisor Fourth Quarter 2023 Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Angela White, VP of IR.
Angela White
Thank you, Josh. Good morning, everyone, and welcome to Tripadvisor's Fourth Quarter and Full Year 2023 Financial Results Call. Joining me today are Matt Goldberg, President and CEO; and Mike Noonan, CFO.
Last night after market close, we filed and made available our earnings release. In that release, you'll find reconciliations of non-GAAP financial measures to the most comparable GAAP measure discussed on this call.
Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent management's views as of today, February 15, 2024. The Tripadvisor disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to our earnings release as well as our filings with the SEC for information concerning factors that could cause actual results to differ materially from these forward-looking statements. With that, I'll turn the call over to Matt.
Matthew Goldberg
Thanks, Angela, and good morning, everyone. Before I begin, I'd like to address the press release we filed on Monday. We announced that our Board of Directors has formed a special committee to evaluate any proposals resulting from Liberty Tripadvisor Holdings' stated intention to engage in discussions with respect to a potential transaction. We appreciate your understanding that we won't address any questions on this topic today or provide further updates unless we have something definitive to share.
Now I'd like to address our performance. We were pleased to exit the year with results that exceeded our expectations. Q4 revenue was $390 million, reflecting year-over-year growth of 10%. Q4 adjusted EBITDA was $84 million, 22% of revenue, exceeding expectations due to revenue outperformance at brand Tripadvisor and marketing efficiencies at both Brand Tripadvisor and Viator. For the full year, consolidated revenue grew by 20% to an all-time high of $1.8 billion and adjusted EBITDA grew 13% to $334 million.
Last year, we made meaningful progress executing against our strategic priorities. We reinforced our market leadership position at Viator while sharpening our focus on smart user acquisition. Viator also finished the year at break-even profitability, achieving the full year milestone a year earlier than anticipated. At Brand Tripadvisor, we invested in our strategy and delivered promising early proof points while maintaining financial discipline.
Finally, at TheFork, we delivered revenue gains while significantly improving our profit margin through disciplined cost management and exited the year at breakeven for Q4. Our results also reflect how we're building a stronger, more diversified and defensible position in the large and growing global travel and experiences industry. We have a unique and leading position in the high-growth experiences category, given the breadth of Tripadvisor and the depth of Viator.
Executive Summary
Deere & Company posted a Q1 2024 beat on sales and earnings but also downwardly revised guidance for the full year 2024, as recent sales and macro ag data point to greater-than-expected deterioration throughout the remaining three quarters of 2024. The areas of strength being Construction & Forestry and Financial Services were not enough to offset harsh drops in demand for agricultural equipment across geographies and product segments. Farmers are faced with the lowest agricultural commodity pricing environment since 2021, and compounded by economic concerns, poor weather conditions in South America and Asia, and the ongoing war in Ukraine impacting the global grain supply chain, farmer income is sharply falling as they feel macro pressures.
John Deere products specifically are struggling with pushback from farmers on premium pricing — what had been a positive tailwind for Deere’s financial results over the past two years — and with a product demand shift to less premium, lower margin products, Deere’s segment operating margins are also contracting at the same time. Deere’s innovative precision ag product offerings so far are not seeing a significant increase in adoption even though farmers are getting increasingly pressured on their own expenses, as the pricing model is not yet fine-tuned enough and farmers do not yet have confidence in the value proposition of these offerings to better manager their financials through an agricultural downturn.
Deere management emphasizes their caution around inventory levels and are responding quickly to macroeconomic shifts, so for the full year 2024, Deere plans to produce in-line with North American retail demand and produce below retail demand in Europe given the softening seen in the first 6 weeks of the year. There are also some offsetting tailwinds where the U.S. fleet age of tractors and combines is still above the 20-year average, which is supportive of a continued replacement cycle over the next few years.
Aside from the operational changes Deere has made to better manage inventory and create efficiencies in the business leading to higher expected trough cycle margins relative to historical performance, there is not much to be excited about in this quarterly report as deterioration in the company’s results throughout the year is accelerating as signaled by trends over the last quarter.
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