Weekend Update #181
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.
The week began on the heels of Nvidia’s stronger-than-expected earnings release which beat expectations for a sixth consecutive quarter as well as the previous Friday’s news of an improving consumer outlook on inflation..
Traders are now pricing in only one rate cut in 2024—a significant decline from the six they had anticipated earlier in the year. Yields on US government debt rose following weak 5- and 2-year Treasury auctions and hit a four-week high, surpassing the 4.6% threshold at one point. Regarding economic strength, the Bureau of Economic Analysis published data on Thursday that showed GDP rose 1.3% annualized in the first three months of the year, below expectations of 1.6%, while personal spending grew 2.0% versus the 2.5% estimate, hinting that the economy may indeed be slowing down.
On the earnings front, CAVA reported results that beat expectations and raised its guidance on several key metrics, including new restaurant openings, restaurant-level margin and adjusted EBITDA. Salesforce shares cratered 16% after missing on revenue and providing a weak Q2 forecast due to weak client spending on cloud and enterprise. HP, on the other hand, beat on the top and bottom lines thanks to a recovery in its PC business. Shares of Dell declined over 20% after growth in its AI server business was less-than-expected. MongoDB, a document database provider, fell 24% due to lower-than-expected Q2 and FY guidance due to low client demand.
Overall there appears to be a bifurcation of in terms of consumer demand—on one hand you have companies like Kohl’s falling 23% after missing on revenue and profitability, yet other retailers like GAP, Foot Locker and Abercrombie & Fitch outperformed. The consumer has become picky on discretionary spending and has embraced its staples, as seen in Costco’s results, which beat on revenue and EPS. It remains to be seen which companies will continue their strength and which will begin to show signals of weakness as the economy begins to cool.
Weekly Performance
S&P 500 5,277.51 (0.52%)
Dow Jones 38,686.32 (0.33%)
Nasdaq 16,735.02 (1.75%)
Key Economic Readings Next Week
Monday, June 3 — S&P Global Manufacturing PMI; ISM Manufacturing and Prices Paid
Tuesday, June 4 — JOLTS Job Openings
Wednesday, June 5 — ADP Employment Change
Thursday, June 6 — Trade Balance
Friday, June 7 — Change in Nonfarm Payrolls; Unemployment Rate
Thank you Blue Room Team Leader OMAR GUZMAN
As we entered the home stretch for quarterly earnings reports, the S&P 500 finished the short holiday week in negative territory and Fund One followed suit. Information Technology stocks dragged down the broader market and our Fund was not immune from the sell off. Specifically, a handful of enterprise software firms like Salesforce and Fund holding MongoDB reported lackluster earnings and followed with disappointing guidance for the near term. Some of the stocks have been enjoying a lift from the Artificial Intelligence revolution but the market is demanding near term results from companies that may actually take years to fully benefit from the shift to AI. Core holding Moderna also gave some back this week on no significant news but is still up 43% year-to-date.
The standout performer for the week was vision chip-maker Ambarella. We were patient as the company experienced declining revenue earlier in the year. Our fundamental research showed that Ambarella’s revenue trajectory would return to growth as the demand for its AI vision processors, used in automotive camera systems for instance, was accelerating. Our forecast proved correct this week as Ambarella reported revenue above consensus estimates and more importantly, raised their guidance for the remainder of the year. Despite some of the weakness in AI related enterprise software stocks, we’re thrilled that we have picked winners in AI like Nvidia and Ambarella.
Thank you Blue Room Investing President JOHN FENLEY
Executive Summary
Advance Auto Parts shares are poised to hold steady through the second quarter of 2024 and have the potential to rise through 2H 2024 on any evidence that the company’s ongoing turnaround is working. Advance has had significant turnover in the C-Suite over the past few quarters, having added a new CEO, Shane O’Kelley in August of last year, a new CFO, Ryan Grimsland, in November, and a new CAO, Elizabeth Dreyer in January of this year. The new management team has been taking steps to improve the business, and while these steps are still underway, they appear to be the right ones and may begin to bear fruit as early as the back-half of this year.
EXECUTIVE SUMMARY
Ambarella reported a topline beat in the quarter with a very strong 2Q guide, but the focus of this quarter’s earnings was the announcement of CV3-AD’s first passenger vehicle design win (with a Top-5 Chinese BEV OEM by unit volume).
This win is important to investors for two main reasons. The first reason is that it turns a portion of Ambarella’s probability weighted design-win SAM into tangible revenues (to the degree of $100m+). The design win was not described in much detail, but we know that it will carry an average ASP around the midpoint of CV3’s range ($225), be built into multiple new SKUs, power between 7 to 10 cameras and a radar system, and have the potential to be built into all future SKUs from this OEM. The NP date is late ‘25 to early ‘26. The second reason is that it opens up a potential flood gate for other AV OEMs to follow suit now that CV3 has a proof-of-concept design win. It will likely take until after the NP date for this to manifest in a tidal wave of new wins, but we imagine that there will eventually be a domino effect of OEMs that were in the design win funnel, but simply didn’t want to be the first to commit.
In our model (with a $300+ PT), we estimate 290,000 CV3 units shipping to various end markets by 4Q26. With this new design win we can reasonably expect at least a quarter of these units to be filled by this OEM alone. This estimate is derived from the current monthly/quarterly production numbers from the top five Chinese BEV OEM’s. (Li Auto is expected to ship ~75,000 units in its 1Q24). In other words, our growth trajectory has become incrementally more likely with this design win, and will only become increasingly more so as other OEMs follow suit.
Ambarella reported topline results that were the second largest revenue beat since the 3Q22, and above BR estimates. Reported revenue was $54.5 million versus BR $54.2 million and the Street’s $54.0 million. Ambarella’s 2Q25 guidance of $62.0 million also beat BR expectations for $58.8 million and consensus estimates of $59.4 million. For the full year, we estimate $250 million in sales, which Fermi has deemed achievable.
Analyst — Jefferies
So to get started, I was just wondering what excited you about Vimeo when you joined, what brought you to the company?
Gillian Munson — Chief Financial Officer
Sure. I joined Vimeo about two years ago. And when I joined, what I was excited about the company is the huge brand name it has. It's very hard to go anywhere without finding someone who's used Vimeo and knows Vimeo and actually really likes it.
So unlike some larger technology brands, this is a very beloved brand and product. And I thought that was really interesting.
I knew that the company was coming off the back side of COVID, that it had a huge run up in COVID. I think it spun the company out. It had a lot of cash in its books, I kind of liked that given the previous company I’d been at was a startup. And I felt like there were a lot of raw materials from which to go, do something very interesting. And that still today is the case with Vimeo.
I think the back side of COVID has been longer and harder than the company expected, than we all expected. But we're working our way through it. We'd made terrific progress over the last two years in terms of getting the fundamentals of the business in the right place. And now, the next step is to turn to getting the company back to similar growth.
Analyst — Jefferies
Okay. So Philip recently joined as the CEO. I just wanted to know how has working with him been and what have been his key priorities since joining?
Gillian Munson — Chief Financial Officer
Sure. So Philip joined a couple of weeks ago really if you think about it. And he is our third CEO in two years. So a lot of it is about making sure he knows where the office is and how to get there. But he is terribly excited about the business, which makes me very happy to have a partner in the business that is that excited about what we're doing. And what he's really been spending his time on is getting to know this business, understanding why customers buy, why they don't buy, why they cancel, why they upgrade, why they do whatever they do. He's a very date driven guy. And he's very, very focused on the fundamentals of the business. And he has spent a lot of time with the team as well really trying to put together the raw materials to formulate where he wants to go from here with the business.
So his priority right now is truly getting to know the business. That's why you have me, not him. I've been trying to keep him doing any investor stuff at our office as opposed to getting him on the road and all that kind of stuff.
So that's one of the focuses. We expect to give some more insight to how he's thinking about the business on our next earnings call, which likely will be in early August. I cannot remember the exact date. But that makes sense to me. And that will be sort of the culmination of much of the work he's done. Certainly, it's still early days in a lot of ways. There's a lot more to learn. But I think we'll hear a lot more from him then.
Analyst — Jefferies
Okay. Makes sense. You recently mentioned that Vimeo for enterprise is a key growth driver going forward. And what are you seeing in the enterprise?
Gillian Munson — Chief Financial Officer
Sure. Vimeo since about 2019 has been growing an enterprise business quite rapidly actually. That business is increasingly looking like it can easily be a 100-million-dollar business or greater inside the company. Just as backdrop, our company's revenue is roughly around the 400-million-dollar range. So it's a pretty big ramp up in a product.
And what we were seeing at Vimeo -- I wasn't at the company at the time -- but what they were seeing inside the data was that the fastest growth of Vimeo, the best retention, the best ARPUs were in businesses. And that probably indicated that desire from businesses to have better video platforms inside. And so between '19 and now, we'd been building a business to really support that trend.
And we continue to see really good growth there. We have a really terrific product that answers a lot of the questions enterprises have. We're really just getting started. Our ARPU is $20,000 in the enterprise, which means we're still not even really getting the attention of the CIO.
We probably have the attention of the CISO because what we are finding is that SSO, HIPAA, all these were security oriented items, are really a value to the company, isn't it? It's true of our company too. Even for like a $2,000 piece of software, our CISO is on top of that. So that's like a really important piece of how you get some credibility in the enterprise. And our team just continues to build that out.
It is still a ramping business. We are growing that business faster than anyone else that is independent in enterprise video. And we're really proud of it. And I think it has a -- in my view, we are the fastest growing business for years to come. And we'll lead the growth of Vimeo over time.
Still a lot to do from here. It's still not a maturity of our revenue. We got a lot of work to do to ramp it up. But it has a lot of momentum. And we're really very excited about it.
Doug Anmuth — J.P. Morgan
All right. You joined in January. Curious what attracted you to Instacart and how you'll leverage your background and skill set to strengthen the company going forward?
Emily Reuter — Chief Financial Officer
Sure. So, starting with what attracted me to Instacart, the company is the clear leader in the online grocery space and it's a massive market opportunity. You obviously know that it is relatively under penetrated as you look at other categories, and I think there's just a tremendous amount that the company can do to continue to penetrate the online grocery market and maintain its leadership position.
Additionally, the company has a really strong vision for continuing to innovate and drive technology adoption within the grocery industry at large. And so, I think the runway ahead and the ability to sort of continue to innovate and transform grocery is just enormous.
In terms of what I think I can bring to the table at Instacart, leveraging my experience at Uber over the past 10 years is, first and foremost, I have a lot of experience operating in a multi-sided marketplace, experience really balancing growth and profitability, during my time as a CFO of the Mobility business and in corporate finance, finding ways to continue to invest in growth at the same time as delivering consistently improving economics year after year after year. So, we did that while investing in and developing a broad portfolio of products that help serve a broad set of user use cases and needs. And so, I think that I can bring that all, that new lens to Instacart.
And the last thing I'll say there is, also just bringing that experience of having helped take Instacart — sorry, take Uber public, becoming a newly public company, getting into sort of that operating cadence of being a public company. And so, Instacart is well ahead of many companies at this point in its journey in terms of profitability and financial rigor, but can definitely help bring my experience to bear in that regard.
Doug Anmuth — J.P. Morgan
Okay. Great. So, maybe you can talk about where you've focused most of your time over the past four or five months. Have there been any surprises to you so far? And is there anything that you've identified that maybe you do differently?
Emily Reuter — Chief Financial Officer
Sure. So, maybe I'll start with surprises. I think the thing that surprised me most was just how great the company is at operating and executing and making decisions very quickly, cross-functionally. It's a large organization at this point in time, but it still operates incredibly nimbly. I think I was — from the outside one of the things that drew me to Instacart was the fact that it is, entirely focused on the grocery industry, so all of its technology really purpose built for grocery. But coming inside, really just understanding the depth of the competitive advantage that the company has in the space across a whole host of areas that we can get into as we move forward. But it's just been really nice to see.
What was the other part of your question? Sorry.
Doug Anmuth — J.P. Morgan
Anything you would potentially do differently and where you've focused your time most?
Emily Reuter — Chief Financial Officer
Great. Yes. So, I've spent a lot of my time focused on understanding the trade-offs that we are making and will continue to make between growth and profitability. That's something the company's obviously been doing through its history and continues to do. But I'm really trying to take my own lens to the business and understand where are we spending, when, why, how, and are there opportunities to continue to evolve that.
Maintaining leadership position as a clear category leader is a core priority of ours. And so, we are looking across the spectrum, whether that's what we've been talking about the last couple quarters, leaning in some cases into investment opportunities like incentives, where we are able to be more targeted and sophisticated and personalized, but also in terms of thinking about how we're developing our product portfolio. And so, I think there's just a lot more that I'll be doing in the coming months in terms of spending my time, ensuring that we're both continuing to invest in robust growth, but also delivering improvement and profitability.
Executive Summary
MongoDB Shares fell sharply after reporting weaker-than-expected second quarter and full year guidance. In the first quarter of fiscal year 2025, MongoDB provided topline and bottomline results that outperformed the top of its guidance and beat analyst estimates. However, due to “macro” headwinds, MongoDB posted soft guidance for the remainder of the year as consumption growth was less than expected and workloads acquired in fiscal year 2024 were not as accretive as anticipated. While MongoDB remains a leader in the database-as-a-solution industry and is well-positioned to see a step-change in revenue growth from the widespread integration of AI, the company continues to push-out when that revenue growth will arrive, with management highlighting that they don’t see many AI applications in production.
Executive Summary
CAVA shares may rise gradually through 1H 2024 but then may plateau and experience a decline as key performance indicators show signs of a slowdown across the business. The company performed well overall in Q1 2024, generating 27.5% of year-over-year revenue growth, a healthy restaurant-level margin of 25.2% while adding 14 restaurants to reach a total of 323 restaurants. In addition, the company raised its year-end guidance for restaurant openings, same-restaurant sales, restaurant-level profit margin and adjusted EBITDA, all of which had the effect of boosting investor confidence and rewarding CAVA shares with a 19.3% return in the prior 5-day period.
Executive Summary
Nvidia reported another record quarter for total revenue and data center sales. Data Center revenue was led by continued demand for its Hopper architecture GPUs, which continues to remain supply constrained.
The momentum is clearly still with the company as this is the 5th straight beat and raise quarter. Relative to street expectations, Nvidia has beat by a minimum of $1.3 billion on topline sales in the past four quarters.
The outlook was also stronger than consensus estimates. For the second quarter of F25, Nvidia expects $28.0 billion in total revenue, which compares to Blue Room’s estimate for $33.33 billion and the consensus estimate of $26.82 billion. Assuming that Data Center represents ~86.0% of total revenue, Nvidia guides to $24.1 billion in revenue, while Blue Room forecasts $29.52 billion, and the street estimates $22.89 billion.
Global accelerated compute demand continues to appear durable for the foreseeable future, with management expecting to be supply constrained on next-generation platforms, “well into next year”. Additionally, Nvidia’s core cloud customers still represent more than 40% of data center revenue, supporting the long term outlook for sustained growth in the category. Further demand growth has come from large enterprises and sovereigns; Nvidia highlighted Tesla, Meta Platforms, Japan, Italy, France, and Singapore as customers.
Surprisingly, automotive AV is expected to be the largest enterprise vertical within Data Center this year, and was highlighted by Tesla’s expansion of their AI GPU stockpile by 35,000 H100 GPUs in the quarter. (roughly $900m in revenue from this investment alone and about 30% of Tesla’s MRQ reported CAPEX).
From Sovereigns, Nvidia estimates “high-single-digit” billions in revenue this year. (BR is currently modeling $11.0 billion).
In Q1, Nvidia sold to more than a hundred customers building AI factories ranging in size from hundreds to tens of thousands of GPUs with some reaching 100,000 GPUs. Conversations through channel checks highlighted Nvidia’s ability to sell to all customer sizes as a positive.
Doug Creutz — TD Cowen
Great. I am Doug Creutz, Senior Media Entertainment Analyst at TD Cowen. Thank you, all for being here. I'm very happy to have with us here today Strauss Zelnick, Chairman and CEO of Take-Two. Strauss, thanks for being here.
Strauss Zelnick — Chief Executive Officer
Thanks for having us.
Doug Creutz — TD Cowen
Of course. I thought I'd start by framing a question. Sony had a presentation on their games business last night and they pointed out that over 50% of their PlayStation Store revenue comes from a relatively small number of franchises, which included in their deck GTA and NBA 2K. So I thought maybe in that context you could talk about the health of your big franchises, how they perform in the most recent quarter and so forth.
Strauss Zelnick — Chief Executive Officer
Well we had a very good quarter and fourth quarter. NBA 2K, in particular, which had been off to a slow start, really picked up the pace in the fourth quarter and recurrent consumer spending actually was better than expected.
And, of course GTA 5 is now sold in about 200 million units and Grand Theft Auto Online and GTA 5 have seen massive increases in engagement over the prior year. So the big titles continue to perform. And, look, the history of the entertainment businesses, the big and better always get bigger and better.
And the mediocre go away and the stuff in the middle either has to get really, really good or it also goes away. And we're seeing that. It's not something we were unmindful of because I and we have been around the block a few times.
And our strategy has been tailored to that. Our strategy has and remains to try to be the most creative, the most innovative and the most efficient company in the entertainment business. Of course we fall short regularly, but that is our strategy and those are our goals.
Speaking about bigger and better, obviously you guys recently announced that GTA 6 will be launching in fall 2025, which has a lot of people very excited. If you look at the history of the franchise, you go back to the late 90s with the first two GTA games, they were I think pretty modest successes. Then GTA 3 comes out in, I think 2001.
And for the next several iterations, I think those games were more or less $1 billion in iteration and revenue for the company. Then GTA 5 comes out in 2013 and we've estimated that that franchise, that game, life to date has done close to $10 billion in bookings and you can confirm that or not.
Doug Creutz — TD Cowen
When you think about GTA 6 and what you've seen, what they're working on, are you confident that this franchise can take another kind of leap forward in terms of its revenue and its reach and all those things?
Strauss Zelnick — Chief Executive Officer
That is like, you're lucky we're not in a court of law, is the definition of a leading question. So it's -- tempting as it is to just lean into that. As you know, I try not to be promotional. It is in my nature. I do think the world's a different place than it was when we launched GTA 5. As you point out, what came before at that point was for, we had some downloadable add-on content, there was no online version.
It was sort of neck-and-neck with Call of Duty at that point as the biggest franchise in the business. Here we are now with 5, 10, 11 years later, having done what it's done, we're a real outlier now. We are the number one entertainment property of all time across all forms of entertainment.
And when Rockstar put out a trailer, the announcement of the trailer basically broke the internet. Then the trailer had 93 million views on YouTube in 24 hours, which was a record. And that was just the trailer. So the anticipation is huge. One can't deny that. But the question is, okay that's great. That's a wonderful data point. And yet we still have to deliver an amazing, perfect video game. And unless and until we do that, these are all just words.
But if we do do that, and certainly that's what Rockstar and Take-Two want to do, the opportunity is huge. Really huge. And again I think the backdrop is definitely different than it was when we launched 5.
Executive Summary
ULTA shares drifted marginally higher following the release of its earnings as investors think the worst could be over for the beauty retailer. Ulta performed better than feared in the first quarter following comments made at an investor event in which management highlighted an unforeseen slowdown in revenue. Ulta lowered its revenue outlook for the year as the trends it has seen spilled over into the second quarter, and adjusted its operating margin and diluted EPS forecasts as it reconciled with decreased leverage. During the earnings call, management appeared upbeat looking to the second half of the year, especially as comparisons grow easier in the third and fourth quarters, though management’s hesitancy with respect to the second quarter gives some analysts pause. ULTA stock traded up as much as 11% after hours following the earnings call, yet gave up nearly all of those gains the following trading day as investors had more time to digest the comments made by management.
EXECUTIVE SUMMARY
In brief, Target’s first quarter of F24 did better than Blue Room and consensus expectations, with higher sales, better margins and stronger EPS (see graphic 1). Complications for the stock came after the second quarter guidance failed to meet consensus expectations on both top and bottom lines. Additionally, with Target failing to raise the full year outlook on sales despite a 1Q revenue beat, it suggests that the business may be losing slight market share to Walmart as consumers continue to seek value in a higher inflationary environment.
In the quarter, comp. sales of -3.7% was better than our estimate for -4.0%, but slightly worse than Wall Street’s average -3.68% estimate. The sales decline in the quarter was primarily due to a decline in discretionary categories, but was partially offset by continued strong demand within the Beauty category.
Operating income margin was 5.28% versus the BR forecast of 4.90%, primarily due to gross margin leverage of 140 bps YoY (+219 QoQ). That was a beat for us relative to the expectations of +74 bps of GM leverage on a year over year basis. Gross margin leverage was offset by higher OPEX to the tune of $122 million, or +50 bps relative to our expectations. In addition to lower sales, compensation and higher marketing expenses related to the launch of Target Circle specifically drove SG&A deleverage in the quarter.
This results in a change in our outlook for the remainder of the year. Leaving sales relatively unchanged, we increase our gross profit margin estimates: 2Q24 increases by 110 bps; 3Q24 increases by 75 bps; 4Q24 increases by 50 bps; FY24 improves by 81 bps, while also increasing our operating expenses estimates, reflecting higher wage inflation and marketing expenses than expected: 2Q24 decreases by 100 bps; 3Q24 decreases by 90 bps; 4Q24 decreases by 87 bps; FY24 decreases by 82 bps, effectively offsetting the merchandise leverage and freight benefits.
Looking at the second quarter outlook, S.S.S. are forecast to grow 1.0% at the midpoint, which falls below consensus expectations for +1.82% YoY, while also implying further market share loss QoQ when we compare that growth to Walmart’s forecast for +4.0% comparable sales growth YoY. Guidance for $2.15 also fails to beat consensus expectations for $2.18, but did satisfy our expectations for $2.14.
On a relative basis, Target’s full year guidance was weak compared to Walmart’s most recent quarter, which increased its full year outlook based on first quarter outperformance. Additionally, Walmart grew in frequency categories during the quarter while Target noted that their frequency categories continue to post negative comps YoY. We do see further market share attrition for Target. Walmart also posted a 3.8% increase in transactions and a flat year-over-year change in average ticket, while Target posted a -1.9% decline in traffic and a -1.9% decline in average ticket.
We update our model to reflect gross margin leverage gains peaking in the second quarter, according to the company itself, and leveling off as the comps become tougher. That leverage appears to be fully offset by OPEX deleverage, lowering or FY EPS to $8.96 from $9.02.
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