Weekend Update #167
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Despite a shortened trading week due to Presidents’ Day, this week had more than its fair share of market-moving moments in the form of large earnings releases and monetary policy updates. Walmart kicked off the week on Tuesday by reporting strong sales across its stores and online operations in the fourth quarter. The Bentonville, Arkansas-based retailer’s U.S. comparable sales rose 4% in the quarter. Chief Executive Doug McMillon remarked on the conference call that the company continues to expect organic revenue growth in 2024 – albeit at a slower pace – in the face of an opaque macroeconomic environment.
On Wednesday, the Board of Governors released the Minutes of The Federal Open Market Committee that took place January 30 - 31. While the Minutes now seem outdated given the surprisingly hot CPI and PPI numbers that were released in early February, the overarching theme of the release was that Federal Reserve officials remain concerned about cutting rates too soon. While some officials raised concerns about higher interest rates impacting the other side of the Federal Reserve’s dual mandate, the Minutes – coupled with recent macroeconomic data – have helped whip market expectations into shape with interest rate futures now pricing the first cut to take place in June.
The release of the Minutes was overshadowed by Nvidia’s earnings release which was published only hours later. Nvidia – which leads the S&P in returns year-to-date – is seen as the primary beneficiary of the artificial intelligence wave thus far that continues to dominate financial, economic, political, sociological and philosophical discussion. Goldman Sachs went so far as to describe Nvidia as the most important stock on earth – given its outsized role in leading markets and market sentiment. Nvidia’s impressive quarter and blowout forecast was large enough to lift many tides on Thursday, with other semiconductor companies along with perceived AI beneficiaries seeing strong gains. Nvidia finished trading Thursday up 16.40% and added $277 billion in market value in a single day.
In international markets, on Thursday, the Nikkei 225 surpassed the index’s high-water mark that was set on December 29, 1989. The Nikkei 225 has seen a steady recovery since bottoming during the global financial crisis. Japanese stocks have had a strong start to 2024, with the Nikkei up 17% year-to-date.
Finally, in geopolitical news, China announced its plans to restart its “Panda Diplomacy” with the United States and other nations in a new effort towards international cooperation. The first pair of pandas – a male and a female – are expected to arrive at the San Diego Zoo in late summer.
Weekly Performance
S&P 500 5,088 (+1.17%)
Nasdaq 15,996 (+0.57%)
Dow Jones 39,131 (+0.92%)
Thank you Blue Room Analyst SPENCER WOOTTEN
Dear Newsletter Reader:
In the early days of the Internet, Yahoo!, emerged as the leading internet search engine
on the World Wide Web, pulling ahead of competitors Excite, Lycos and HotBot. The nascent
internet advertising market, which consisted predominantly of static banner ads in the world of
dial-up speeds of 384 kbps (0.1%-0.01% of what is available in residential homes today) was
exploding. Yahoo! became a public company in 1996 and an instant growth darling.
Revenue growth was stellar, growing from less than $2 million when it was founded in
1995 by Stanford students Jerry Yang and David Filo, to over $1.1 billion in 2000, a 66767%
increase in five years. At its all time high on January 3, 2000, shares peaked at $237.50 per
share for a market capitalization of $127 billion. From a valuation standpoint, the stock was
trading at 216x the $588 million of revenues generated in the previous year, 1999, and 115x the
$1.1 billion in revenues the company would generate in 2000.
Re-engineering the growth implied by the $127 billion market capitalization, Yahoo! would need to increase revenues by 57x from $1.1 billion to $63 billion (56932%) by compounding growth by 50% over the next 10 years, while increasing the operating profit margin from 35% to 50% and maintaining that level for terminal value (with 78% of the stock price from growth beyond 2010). From a human capital perspective, the company was valued at $64 million per employee (1,992 as of December 31, 1999).
It was the afternoon of July 11, 2000 when Jim Craig, the legendary Portfolio Manager of the Janus Fund, walked into my office and deadpanned in his Alabama drawl how he had woken up in a cold sweat thinking out the Yahoo quarter which had just been reported. Although he did not own shares in his fund, the stock was held broadly across the family of growth-oriented mutual funds. As the Internet bellwether, Yahoo’s outperformance was critical to sustain not only the stock, but also the broader market psychology.
Executive Summary
Shutterstock shares are poised to gradually appreciate in value through 2024 as the company continues to invest internally to put itself on a path to achieving its new Shutterstock 2027 Long-Range Financial Targets, including revenue of $1.2 billion, representing a reacceleration in revenue growth from 8% to 10%, and adjusted EBITDA of $350 million, representing a 13% CAGR. Despite guiding flat on revenue and adjusted EBITDA for 2024, the company expects revenue acceleration in its two new revenue segments—Content and Data, Distribution, and Services to reach 5-7% and a 16.7% CAGR, respectively, while expanding adjusted EBITDA from 27% to 30% due to business mix change to Data, Distribution and Services and 1-2% improvement in operating leverage through reduced SG&A and R&D costs.
Nvidia’s fourth quarter earnings capped a stellar year with its fourth sequential beat and raise report where guidance was at least 10% above consensus. A full year of positive guidance surprises compress the NTM P/E multiple and will continue to push shares higher. Artificial intelligence, and the applications derived from it, are proving to drive customer interest from hyperscale, enterprise, consumer internet, pure-play cloud, and research institutions. New customer channels in sovereign entities allow Nvidia to grow into its $1 trillion market TAM without putting pressure any individual customer category, and the company continues to demonstrate the reality of the global demand with tangible revenue growth (+$34 billion YoY in F2024; +126%) and FCF generation (FY2023a FCF was $3.81 billion while FY24a FCF was $27.02 billion). We revise our PT on Nvidia to $890 as we feel the future of Nvidia’s business will be modestly de-risked by a more diversified customer base that includes cloud providers, enterprises and now sovereign entities.
In the quarter, the company delivered revenue above its guidance midpoint at $22.103 billion, above BLUE ROOM estimates of $21.804 billion and above the consensus expected $20.412 billion. Record revenue for Nvidia was primarily driven by Data Center segment revenue of $18.40 billion, which also beat BLUE ROOM’s forecast of $18.10 billion and the street’s $17.21 billion. Sequential growth in gross margin, as well as an increase of 411 bps in sequential operating margin drove a GAAP EPS beat of $4.93, versus BLUE ROOM’s $4.44 and the street’s $4.24 expected. Nvidia’s 1Q25 revenue guidance of $24.0 billion also came in above BLUE ROOM’s estimate for $23.0 billion and the market’s expectation for $21.9 billion.
Nvidia’s fundamental advantage has always been its hardware/technology and is further supported by its software developer ecosystem. The company’s GPU solutions should be thought of as the most critical component to high intensity compute workloads. For 18 years, Nvidia has been positioning itself to capture the demand for AI, ML and LLMs, and is beginning to see ROI through the likes of ChatGPT, Sora, Copilot and other generative AI applications catapulting the demand for accelerated compute. Nvidia’s GPUs have become the industry-wide solution to the slowing pace of Moore’s Law; CPUs can no longer be incrementally improved by adding more cores to the die. This fundamental roadblock is in spite of global compute demand accelerating which means that companies must accelerate their workloads to drive better performance, TCO and energy efficiency.
Our PT revision is mostly based on improving supply for compute solutions that, based on the sustained level of purchase commitments and inventory in 4Q, will be met with the same level of demand in F2025 as it was in 2H24. CFO Colette Kress mentioned that next-generation products will be supply constrained as demand continues to exceed supply. We expect these next generation products to also come with higher ASPs; B100 ($40,000-$45,000), GH200 ($55,000-$65,000). Moving forward, it is likely that Nvidia’s Data Center hardware growth will be led by Sovereign spending and Enterprise adoption as AI enabled workloads become pervasive across the globe. We currently estimate that (global) government spending could represent 20.0% of Nvidia’s F2025 Data Center revenue (~$21.15 billion).
Executive Summary
Vimeo performed well in the quarter, generating $105.5 million in revenue, beating consensus estimates of $102.5 million by 3%. The company achieved positive GAAP operating income and diluted EPS of $5.6 million and $0.05, respectively, compared to consensus estimates of negative profitability in both metrics. Adjusted EBITDA also came in ahead of estimates, with $13.3 million (12.6% margin), compared to $7.5 million for consensus. Bookings declined 3% year-over-year to $101.2 million, below estimates of $104.1 million, primarily driven by an accelerated decline in the “Other” segment. With an improved profitability outlook, VMEO shares are poised to gain in 2024 as its Enterprise segment continues to accelerate and become a larger contribution to overall revenue, and its Self-Serve business looks to stabilize and return to growth.
Executive Summary
Exact Sciences beat on consensus revenue expectations for the 15th consecutive quarter, beat on GAAP earnings for the 7th quarter in a row, improved to profitable EBITDA for FY 2023, raised EBITDA by $440 million for the year, expanded adj. EBITDA to $219.3 million at an 8.8% adj. EBITDA margin, and turned free cash flow positive at $97.9 million for only the second year in its history. The cumulative quarterly revenue beat above consensus each year has expanded from $78.5 million in 2021 to $109.1 million in 2022 and to $177.7 million in 2023. Importantly none of these trends show signs of slowing down in 2024 or beyond as core growth drivers continue to surpass expectations quarter after quarter. Both Rescreen revenue and Age 45-49 revenue now account for 20% of revenue each, while core new patient tests Aged 50 and above continued to grow at double digits throughout 2023.
Looking to 2024, Exact states 1.6 million patients will be eligible for rescreening with Cologuard in the year. Precision Oncology is also projected to see a positive inflection in growth in FY 2024 as international expansion and new product growth drive ~10% year-over-year growth in segment sales, with 48% year-over-year international growth in Oncotype DX in Q4 2023 following the Japan launch.
Longer-term, the company’s target of $7 billion in Cologuard revenue is getting clarity with 50%+ of those sales coming from rescreens — Exact just stated its long-term ambition is to get success up to 70%. At the end of 2024, Exact Sciences could have a rescreening pipeline of close to 15 million cumulative patients that have been tested by Cologuard. On top of this, the next-generation Cologuard is expected to come to market in 2025 and is expected to raise the ASP while decreasing the false positive rate. Longer term, Exact’s colon blood test and multi-cancer early detection tests are also key pieces of future growth in the pipeline.
Despite the positive performance in Q4 2023, EXAS shares traded down following the earnings results as analysts’ worries about the competitive landscape for Cologuard with upcoming blood-based tests were clear in the Q&A section of the earnings call below. As Exact went through a tough period of its own prior to USPSTF guideline inclusion for Cologuard back in 2017, the industry is experiencing some increased anxiety around future approvals, guideline inclusion, and reimbursement for blood-based CRC screening tests and multi-cancer detection tests, with each decision point playing a key role in future adoption and sales possibilities. Below, Exact CEO Kevin Conroy offers a view into the math of how blood-based tests won’t receive USPSTF first-line guideline inclusion based on current performance metrics, setting up a tough ask for blood-based test to receive a $500 price tag, in line with Cologuard. However, there are multiple blood-based competitors betting the future of their companies that those modeling parameters will be different in the upcoming 2027 USPSTF meeting.
Executive Summary
Moderna shares are poised to drift higher in 2024 after establishing clear and conservative financial guidance along with a plethora of operational milestones throughout 2024. After posting results that were in-line with its guidance released at the JPMorgan Healthcare Conference in January 2024 – but better than analyst expectations – and reiterating its financial targets for 2024 and 2025, Moderna’s theme for the upcoming year is execution. The company has strong momentum on its commercial operations after increasing its US COVID-19 market share from 37% in 2022 to 48% 2023, and aims to keep its pace as it gears up for its commercial launch of its RSV candidate. 2024 Milestones for the company include RSV commercialization, data readouts from its Flu, advanced COVID-19, combination Flu/COVID, and CMV vaccines. Further, management alluded to further announcements of INT indications as well as the enrollment completion of its Phase III melanoma trial along with the opening of its INT manufacturing facility in Massachusetts.
Executive Summary
Pool Corporation produced weaker than expected results for Q4 and FY 2023 that slightly missed consensus, top-line projections. The company saw annual sales decline 10.33% y/y while gross margin contracted 129 bps over the period. Throughout the company's fiscal year, management was able to grow the business to 439 sales centers.
These results are highlighted by unfavorable weather conditions throughout the first half of calendar 2023, continued weakness in demand for discretionary and pool construction-related products, and slower maintenance activity than anticipated. The company noted a $6.7 million tax benefit from Accounting Standards Update (ASU) 2016-09 for the calendar year 2023, contributing $0.17 per diluted share. Excluding the tax benefit, Adjusted Diluted EPS was reported at $13.18 per share, below consensus estimates.
Adjusted EBITDA decreased 25% y/y to $806.9 million, representing 14.6% of net sales versus the 17.5% observed in 2022.
The company provided 2024 EPS Outlook, noting an expected decline y/y to $13.10 - $14.10 per diluted share, and $13.00 - $14.00 per share on an adjusted basis (excluding ASU 2016-09 benefits). At the midpoint, this guidance fell 4.52% below Street Estimates.
CONVENED
FOR A GREAT WEEK
TO ROLL OUT 2024
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LETTUCE WRAPS AT FOUNDER, MINYOUNG SOHN’S HOUSE
TUESDAY, February 20, 2024
6 PM
THE DUKE - MIAMI BASKETBALL GAME
CHOPPERS
WEDNESDAY, February 21, 2024
5 PM
—2024—
THE YEAR OF
AND
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THURSDAY, February 22, 2024
3 PM
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BOWLERO
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Team Lunch at Smokin’ Yards BBQ
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OUR FRIDAY LUNCH TRADITION AT SMOKIN’ YARDS.
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AND.
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