Weekend Update #176
Thank you for your continued support and engagement. 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.
This Monday marked the beginning of an important earnings week for stocks following last week’s brutal selloff that was sparked by increasing geopolitical tensions, inflation and uncertainty around the direction of the Fed policy rate. With bond yields rising to new highs since January, earnings season has been considered the last leg upon which equity markets could stand. This week over 40% of S&P reported with additional pressure on companies to perform coming from the looming release of PCE inflation data this Friday. Due to what investors have deemed “lofty valuations”, the expectation going into this week was that stocks had to outperform in the quarter and guide above expectations for prices to hold.
On Tuesday, the S&P recorded its best back-to-back rally in two months following a month-long rout that took the index more than 5.0% lower. Nvidia led the surge and Goldman Sachs finished the day at a record high. After market close, Tesla reported sales and profit that missed estimates, but surprisingly the stock bounced 12% after Elon announced plans to pull forward the company’s launch of its affordable models. This was a welcomed datapoint as EV demand has been waning in part due to price concerns. After trading hours on Wednesday, Meta reported second quarter sales that narrowly beat analyst expectations, but sold off as much as -16% after hours after guiding below expectations and forecasting a step-up in AI-related spending. On Thursday, Meta’s selloff continued into the open and the S&P shed 50 bps after trading as low as -1.50% intraday. The brief, but intense, equity market selloff was a reaction to GDP data that indicated a steeper-than-expected first quarter slowdown and corresponding price data that was well above expectations. While the data stoked stagflation murmurs, traders were able to shake off the negative sentiment before close. On the final day of trading this week, the Nasdaq closed +2.0%, the S&P 500 finished +1.0% and the DJIA increased by +40 bps. That strong rally made this week of trading the best week in 2024 and was led by outperformance from Alphabet Inc. and Microsoft Corp., who both reported strong Cloud segment sales on the back of AI investments.
Other corporate highlights:
TXN – Reported earnings that beat expectations and gave a second quarter outlook above estimates signaling a rebound in the maker of embedded and analog chips.
AAPL – iPhone sales fell 19% in China during 1Q according to a report by an independent research firm.
SPOT – Reported a notable quarterly profit as the company gained subscribers and added new features.
SNAP – Rose 30% this week after projecting a strong increase in revenue that suggested the company isn’t getting phased out of marketing budgets by larger rival Meta.
Weekly Index Performance
S&P 500 5,099.96 +2.67%
DJIA 38,239.66 +0.67%
Nasdaq 15,927.90 +4.23%
Key Economic Readings Next Week
Tuesday April 30th — Conference Board Consumer Confidence & MNI Chicago PMI
Wednesday May 1st — MBA Mortgage Applications; ADP Employment Change; S&P Global US Manufacturing PMI; & FOMC Policy Decision/SEP
Thursday May 2nd — Trade Balance; Initial Jobless Claims/Continuing Claims; Factory Orders; & Durable Goods Orders
Friday May 3rd — Change in Nonfarm Payrolls & Unemployment Rate
Thank you Blue Room Analyst IAN CARTER
Fund One ended the week on a strong note finishing up 1.8% for the day and up 42 basis points for the week, however the Fund trailed the S&P 500 over the week. Despite economic data showing signs of slower than expected growth with inflation data still remaining high, most of the action in our stocks came from company earnings. This week and next are the two biggest weeks in terms of number of portfolio companies reporting first quarter results. We are pleased and energized that our bottom-up earnings forecasts have been coming in largely inline with actual reports. Where we lost some ground to the index this week has been mostly due to lower than expected forward guidance from some of our holdings.
Specifically, the big winner for the week was Snapchat as the stock was up over 30% for the week. Snap reported revenue, margins and earnings above consensus estimates which is what we were expecting. Our analysis led us to be more optimistic on Snap’s results despite Meta Platforms (Facebook) pointing to a weaker advertising market. Moreover, we feel that Snap is experiencing enough traction with platform improvements, coupled with Snapchat+ subscription strength to finally land on the path towards profitability growth and much needed revenue growth.
Conversely, our short position in Tesla, which finished the week up 14%, was a big performance detractor. As we forecasted, the company reported disappointing results, including a 9% decline in revenue, the largest year over year decline in twelve years. We expected a negative stock reaction to the report but instead, the stock rallied on management’s commitment to accelerate the launch of more affordable models. We are also encouraged by that news but we feel that this will come with more than expected investments and will certainly take time to deliver. Despite the negative move for us this week, our Tesla short remains profitable for the Fund. We are optimistic that the position will continue to pay off over the near to medium term.
We look forward to another important week in earnings next week as a handful of holdings will shed light on the past quarter and provide insight into the next earnings cycle. Overall, we’re feeling good about the current earnings season and our portfolio positioning.
Executive Summary
Intel’s first quarter revenue was $12.7 billion, up +9.0% year over year, meeting prior guidance and consensus expectations. First quarter GAAP earnings (loss) per share attributable to Intel was $(0.09); non-GAAP EPS was $0.18. GAAP EPS beat Intel’s prior guidance, but failed to meet the expectations of the Street which had estimated $(0.02). Non-GAAP EPS of 18c beat consensus estimates for 13c.
Intel is forecasting second quarter 2024 revenue of $12.5 to $13.5 billion and expects second quarter EPS of $(0.05) and non-GAAP of $0.10. Revenue guidance missed analyst estimates (including the high end) of $13.6 billion. GAAP and non-GAAP EPS also miss with consensus expectations of 13c GAAP and 24c non-GAAP.
Intel Foundry revenue was $4.369 billion versus $4.831 billion in the first quarter a year ago, and represented 34.3% of Intel net revenue compared to 41.2% last year. Foundry operating loss in the first quarter was $(2.474) billion versus 1Q23 operating loss of $(2.360). It is clear that the is facing revenue headwinds, while also yielding lower profit year over year, and this will be a pain-point for analysts as a new business shouldn't be decreasing in size, especially given the level of investment the company is committing to and with the support they are receiving from the government. No incremental increase in foundry total lifetime deal value also hurt analyst sentiment, with the figure remaining at $15 billion.
The Client Computing business grew 30% YoY, but was overshadowed by only +4.7% in the DC&AI business. That growth is unimpressive relative to Intel's peers Nvidia and AMD.
Additional Notes:
AI PC units are accelerating and Intel expects them to continue to do so throughout 2024. Units are expected to double QoQ in the second quarter, but there are some supply limitations on the back-end for wafer assembly. Effectively Intel stated that demand is there for AI PCs, but their capacity to package and assemble these units had trailed their original estimates for tools.
Within DC&AI, Intel Gaudi 3 is expected to deliver $500 million in revenue in 2H2024, which is a fraction of the demand that AMD is seeing and seemingly infinitesimal relative to Nvidia’s $20 billion expected data center sales.
Executive Summary
Roku surpassed estimates as Platform revenue grew 19% year-over-year to $755 million, ahead of $722 million consensus. The beat was driven primarily by continued account growth and increased user engagement with active accounts nearing 82 million, while streaming hours grew 23% year-over-year despite viewing hours on traditional TV declining 13% year-over-year. The Devices segment also grew 19%, in-line with analysts’ estimates as the company continues its rollout of Roku-branded TVs. Roku also managed to produce an Adj. EBITDA profit of $41 million, significantly above the consensus estimate of $5.5 million and previous guidance of breakeven. Despite the positive quarter, the executive team reiterated its expectations for tougher comps in the second half of the year which has made investors more cautious. ROKU shares are likely to remain range bound in the near term until investors can gain more confidence in the company’s ability to re-accelerate growth and sustain its profit growth trajectory.
Median One-Year and Long-Term Inflation Expectation Rates
Consumer sentiment continued to plateau and was virtually unchanged for the third month in a row at 77.2. Since January, sentiment has remained remarkably stable within a very narrow 2.5 index point range, well under the 4.8 points necessary for a statistically significant difference in readings.
The long-run business outlook inched up to reach its highest reading since June 2021, while views of personal finances softened.
Different parts of the population exhibited offsetting changes this month. Republicans posted notable declines in sentiment this month, whereas Democrats and Independents did not. Sentiment for younger consumers rose, in contrast to middle-aged and older adults whose sentiment changed little or fell.
Overall, consumers continue to express uncertainty about the future trajectory of the economy pending the outcomes of the upcoming election, but at this time there is no evidence that global geopolitical factors are at the forefront of consumers’ minds.
The median expectation for one-year inflation (blue line) increased to 3.2%.
The median expectation for long-term inflation (green line) increased to 3.0%.
Year-ahead inflation expectations ticked up from 2.9% last month to 3.2% this month. Long-run inflation expectations also edged up, from 2.8% last month to 3.0% this month. They have been within the narrow 2.9-3.1% range for 29 of the last 33 months. Long-run inflation expectations remain elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.
Executive Summary
Pool Corporation delivered Q1 2024 results that fell in-line with consensus estimates across key metrics. For the quarter, net sales fell -7.12% year-over-year to $1.121 billion. The results were driven by continued weakness in new pool construction – with sales of building materials falling -11% year-over-year in the quarter – coupled with fragmentation in renovation spending. On a nominal basis, Gross Margin fell -43 bps year-over-year, meeting expectations. However, Gross Margin for Q1 saw a +110 bps tailwind from a one time, $12.6 million import tax reduction experienced by the company. Analyzing Gross Margin on a core basis thus shows a sequential decline from Q4 2023, breaking yearly cyclical trends.
Pool Corp. grew their total sales center count more than expected during Q1, leading to heightened SG&A expenses that depressed Operating Profit Margin to 9.7% – versus the company's guidance of 13% for the full 2024 fiscal year. Funneling into the bottom line, Pool Corp. generated $79 million in Net Income in Q1, leading to Diluted EPS of $2.05 per share. However, similar to the company's Gross Margin, this result was amplified by the company's $7.4 million tax benefit from ASU 2016-09, which decreased the company's provisional tax rate to 17.3% – off of guidance of 25% – and contributed $0.19 to EPS. Removing this tax benefit, Pool Corp. generated $1.85 per share, missing consensus street expectations. Due to the heightened tax benefit in the quarter, Pool Corp. raised their 2024 EPS guidance to $13.19 - $14.19 per share.
Management outlined that sales of building materials continue to experience significant pressure, falling 11% y/y in the first quarter. The number of new pool additions in the industry continues to decline, with a slow start overall to the construction season. According to CEO Peter Arvan, permit applications are down in all key markets, although some (Arizona, Nevada & Florida) are starting to see some inflection while California and Texas remain muted. A significant timing lag has developed with regards to permit applications, which previously took days/weeks to be approved and now can take multiple months. According to management on the call, we have seen a 15% - 20% decline in new pool construction permit application to start 2024 - in comparison to the flat to -10% new pool construction sales expectation baked into the company's guidance during their Q4 2023 earnings call.
Renovation and remodel activity has shown more support than new construction, as buyers appear more cautious of the full discretionary expense of a new pool rather than the semi-discretionary renovation expense. Builder backlog on R/R appears to be solid with headwinds fading, however, consumers have become far more likely to shop around amongst builders in search of best pricing options. Overall, interest in remodel activity is higher than that for new construction.
Pool Corp's CEO Peter Arvan noted that the macro outlook is the largest factor currently influencing demand in the industry. Mr. Arvan stated his expectation that the Fed will not raise rates in 2024, but will maintain current levels while potentially enacting a rate cut in the last quarter of the year. This expectation was used to frame his view that - dependent on normalized weather - major pool markets would see recovery as the pool season kicks off. With continued depressed consumer sentiment and declining views of household financial wellbeing, such recovery should be called into question.
Many of the headline successes of this quarter feel circumstantially manufactured based off of temporary benefits (ASU tax benefit impacting EPS by 10.8%, Import Tax Benefit increasing Gross Margin by 110 bps). Further, eroding macroeconomic outlook and fading rate-cut expectations will put pressure on the true growth catalysts for the company. A large percentage of Pool Corp's business comes from non-discretionary spending that has been supported by the rapid expansion of the install base seen during Covid. However, the underlying expansion of the market has slowed significantly as new pool construction continues to trend negative.
by Blue Room Director of Engagement
NINA SOHN
I had not previously thought much abut flour. Perhaps at all. I nabbed items marked ‘organic’ at the grocery store, but flour seemed such a basic staple that I never given it any real consideration.
This changed several years ago when I sat down with a Kelly Whitaker, a Michelin star chef, who has a passion for wheat (as evidenced by the tattoo of a wheat stalk adorning his forearm). Kelly explained why heirloom grain was different: the seeds have not been genetically modified and can be selected based on suitability to the environment in which it is grown. When harvested, heirloom wheat is milled slowly at low temperatures, the resulting flour is higher in protein and lower in gluten than flour milled by traditional high heat, rapid milling processes. The nutrition factors are profound, and the taste factor is incomparable.
Kelly founded Dry Storage, a flour and milling company which has since come under the Blue Room umbrella. Dry Storage contracts with local Colorado farmers to plant heirloom wheat seeds. We chose varietals that historically do well in our climate, and work with farmers who grow regeneratively (with a focus on soil health). Farmers are paid a premium such that it is worth using their acreage for heirloom wheat versus a different crop. The wheat is harvested, cleaned and milled in Boulder.
++
Several years ago, a Colorado ballot proposed a ‘Farm to School’ program, which voters approved. The program granted school districts a fiscal allotment for the purpose of purchasing food from local sources. Quality food for public schools + a meaningful investment in Colorado agricultural businesses.
A pilot program has run successfully for the last three years, but the formal program experienced funding vulnerabilities due to the unanticipated broader expense of supplying free meals in Colorado schools. The pilot was recently granted another year of funding, after which, everyone hopes, it will become a more permanent line item in the state budget.
The idea of connecting farms to schools resonated with me as both a fledging grain nerd and as someone who has spent time in a classroom as a teacher. We had hosted several school chefs at our mill in Boulder, and through a series of conversations, I was connected to Deb Yirku, the head chef for the Calhan school district. Given the nature of their agricultural community and the fact that the school had a scratch kitchen, Calhan emerged as a logical place to launch our own 'mini pilot' with Dry Storage flour.
Which is how I found myself, several weeks ago, with a fifty pound sample bag of Dry Storage flour, en route to Calhan, to meet with their kitchen staff.
Calhan is a small community (population of 736 as of the 2020 census). The school has 420 students, ranging from pre-school through high school.
The drive to Calhan from Denver is beautiful. South on I25 followed by a series 90 degree turns on long, rolling roads that cut through both wooded patches and flat fields studded with small farms, horses and cattle. There were also a suprpisring number of massive homes scattered throughout certain sections of the drive. It was later explained to me that famers often sell their land to big developers, netting a higher payout than selling it as farmland.
The Calhan kitchen bears witness to on organized choreography that yields nearly 900 meals daily: breakfast and lunch for a school that houses preschoolers through high school seniors, under the capable and experienced leadership of Deb. Deb has been in charge of the kitchen for 30 years. I had the fortune of meeting her just months before her retirement, an event she looks forward to (more time with her grandchildren) and laments deeply. She is attached to the generations of children who have started as preschoolers and gone onto graduate from Calhan, a journey she has witnessed repeatedly during her tenure. The community is tightly knit: during Covid, the kitchen crew at Calhan showed up daily, masks donned, to make meals for all the students, which were delivered to drop off spots by via school bus. They even colored eggs for Easter. “The kids transitioned to remote learning so smoothly because they all had tablets”. Deb explained that maintaining the food program was part of that continuity.
I quickly discovered that the most powerful piece of the Dry Storage story - the relationship with farmers - was the most compelling component to this school kitchen crew. They each have a personal connection to agriculture: they are ranchers and farmers themselves, going back generations. Each of them had livestock (I was almost embarrassed to admit to having only one small designer poodle mix), and a more sophisticated understanding of regenerative farming than I do. Using a product that supports the livelihood of small famers resonates deeply with them.
Not inclined to be a bystander in this very busy little kitchen, I jumped into the sandwich making queue. Several hundred sandwiches later, I told Deb to change my contact in her phone to “Sandwich Maker Extraordinaire”. I was teasing, but found out a few days later that she did, in fact, edit my contact info.
The bag of flour I brought found its way into a huge vat of zucchini bread (the school teachers had contributed the zucchini, which had been shredded and frozen, from their own gardens). I really gained acceptance when I was caught swiping my finger on the batter bowl for a quick taste before it was brought to the dishwasher.
I left Calhan that day with a container of zuccini bread, new friends and a mind full of reflection. The trip galvanized the commitment to the potential impact Dry Storage can make by working to get locally grown and milled flour into schools state wide. It will take ingenuity, given the fragility of the funding, and the support and enthusiasm of people like Deb.
Two weeks after my first visit to Calhan, I returned, this time with a 200 pounds of flour that Deb had officially ordered for use through the remainder of the school year. I told her she needed to add ‘Flour Sherpa’ in addition to ’sandwich maker’ onto my contact card.
And I reassured her, I would make that delivery drive any time.
Executive Summary
Quarterly revenue slightly beats consensus estimates; actual: $239 million; est.: $231 million; BLUE ROOM expected $229 million. Net income (non-GAAP) of $(55) million misses the $(51) million consensus estimate, translating to $(0.70) in EPS versus $(0.60) consensus expected.
Overall the quarter was in line with current expectations after a major reset on the growth outlook was guided to by management. In early January the company telegraphed expectations for 1Q24 revenue to be down 50% Q/Q, experience negative operating margin, and higher operating expenses Q/Q. These outcomes did manifest, but did come in slightly better than expected, which is constructive. The timeline for recovery remains intact with inventory digestion at major customers likely to be completed during the second quarter. Company management speculated that approximately 70% to 75% of excess inventory was burned through during 1Q. The company expects second quarter EyeQ volumes to be around 7.4 million units in 2Q (down 11% YoY), with SuperVision units to be approximately 31,000 (+72% YoY).
In addition to the quarter coming in line with expectations and prior guidance, Mobileye continues to add design engagements with OEMs for future sales of their SoCs. Notably, the company added 3 OEM design wins to their eyes-on-hands-free catalog, increasing to 14 from 11 last quarter. This was a positive surprise as our channel checks indicated that OEMs were generally not looking to expand their ADAS product portfolios due to lack of end demand for certain features. The company explained that Tesla’s pursuit of FSD and driverless taxis is putting pressure on vendors of all drive trains (EV/ICE) to keep up.
Executive Summary
Enphase’s Q4 revenue fell to $263 million, declining 13% sequentially and 64% Y/Y, missing analysts estimates of $278 million. Adjusted EPS also missed analysts’ expectations of $0.42, coming in at $0.35. The company also provided guidance of $290-330 million for 2Q24, which implies an increase from Q1, but misses consensus estimates of $350 million as channel inventory remains highly elevated. Management reiterated its guidance of a stronger rebound in the second half of 2024 despite the seemingly low level of visibility of demand in a higher-for-longer interest rate environment. ENPH shares should remain pressured for the remainder of 2024 as the trajectory for interest rate cuts keeps getting pushed out. Additionally, the company remains at risk of pricing pressure and margin compression as increasingly competitive products pose a risk to the company’s leading market share.
Summary
Microsoft reported a strong third quarter fiscal 2024, beating expectations on key estimates. Revenue grew 17% to $61.9 billion, operating income was $27.6, up 23%, representing a margin of 44.6%, diluted EPS was $2.94, up 20%. Microsoft Cloud surpassed $35 billion in revenue, up 23%.
More than 65% of the Fortune 500 now use Azure OpenAI Service, and Azure Arc now has 33,000 customers, up over 2x year-over-year.
Fabric now has over 11,000 paid customers, including leaders in every industry. Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights, now has over 350,000 paid customers.
GitHub Copilot now has 1.8 million paid subscribers, up 35% quarter-over-quarter, and its revenue accelerated over 45% year-over-year. Over 330,000 organizations—including over 50% of the Fortune 100—have used AI-powered capabilities in Power Platform.
Teams once again saw year-over-year usage growth. Teams Phone continues to be the market leader in cloud calling, now with over 20 million PSTN users, up nearly 30% year-over-year.
Coming in Q4 fiscal 2024, revenue is expected to grow 13% - 14.5% to $63.5 - $64.5 billion. Capital expenditures are expected to increase materially on a sequential basis driven by cloud and AI infrastructure investments.
For the fiscal 2025 outlook, the company expects double-digit revenue and operating income growth, capital expenditures to be higher than fiscal 2024, and operating margins to be down about 1 point year-over-year.
Executive Summary
Snap Inc. delivered strong Q1 2024 results all around, beating consensus estimates on every key metric, and was able to raise the low end of its Q2 2024 guidance range above consensus estimates on both revenue and adjusted EBITDA. Direct response advertising revenue grew 17% year-over-year and brand advertising revenue grew 12% year-over-year, which were both positive demand signals as Snap progressed through 2024. The main contributors highlighted by management were 7/0 pixel purchase optimization driving a 75% year-over-year increase in purchase-related conversions and ROAS improvements broadly for advertisers. User engagement metrics remain strong with time spent watching Spotlight growing 125% year-over-year, total time spent watching Snap Star Stories up 55% year-over-year in North America, Snapchat+ subscription revenue up 200% year-over-year, and DAUs continuing to grow at 420 million DAUS and 10% growth year-over-year in Q1 2024.
Some focus on the Q&A portion of the earnings call was around the number of SMB advertisers on Snap up 85% year-over-year and the potential spend propensity relative to other advertisers. With management’s response, they gave color that the advertising base is broadening out and these initial tests among advertisers are seeing positive results — Those should continue to see improvement and therefore higher spend levels going forward. Snap saw broad-based acceleration across advertising verticals in Q1 2024, with CPG, e-commerce, restaurants, travel, and SMBs called out specifically.
Snap is also continuing to focus on AI model investment to improve ranking and recommendations in order to keep up with larger players, such as TikTok, Instagram, and Facebook, to the tune of a steady $100 million per quarter. These improvements on the user side are clearly paying off with increased engagement on surfaces with recommended content on Snapchat, so that alleviates some fear of Snapchat being left behind by younger generations in favor of content from bigger players. Snap continues to reinforce their longer-term investments in augmented reality specifically as providing good ROI today and opening the door to improved engagement opportunities going forward. The next wave of ad innovation will be driven by new 7/0 optimized products including app installs and app purchases, with management reporting promising early results. This bodes well to regain share in the mobile app advertising space that had been heavily detrimental by iOS privacy changes in since 2021.
Executive Summary
Tesla disappointed on revenue and gross margins as Automotive revenues came up short with $17.4 billion (vs. $19.6 billion expected) which represented a 19% decrease Q/Q and 13% decrease Y/Y. Energy, although reaching a quarterly record of $1.6 billion, missed analyst estimates of $1.9 billion. Despite the miss on revenue, the automotive gross margins excluding regulatory credits surprised to the upside with 16.4%, a 50 basis point beat over the street. Adjusted EPS was $0.45 per share, missing analysts estimates of $0.59. Executives reiterated full-year guidance of “notably lower” growth in its automotive business as the EV industry continues to face macro headwinds.
Despite the dismal quarter, the company shifted focus to its developments on AI and the next-gen platform, which is now set to start production by early 2025, an acceleration of 6 to 12 months. Although there seems to be increased long-term optimism, TSLA shares are likely to remain pressured as deliveries for 2024 are trending negative Y/Y despite the company’s guidance for positive growth and excitement around the next-gen launch.
10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
WE CAN ACCOMPLISH ANYTHING TOGETHER.
These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor.
This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.
For more information about us and our general disclosures contact us directly.