👉 Week in Review: 01/29/23
"All four banks took reserving action that indicated something worse ahead.”
To all of you football lovers, Happy Championship Sunday.
To all of you economy and market lovers, we’ve got a good one for you today.
Last week, we mentioned the success of the Conference Board’s Leading Economic Indicators (LEI) in anticipating recessions — and the recent release painted an ugly picture.
Above is the same data showed on different timeframes.
The first graph comes directly from The Conference Board’s release of Leading Economic Indicators (LEI). The second shows an interpretation of the date from The Macro Compass.
Why should you care? The Conference Board has been killer at anticipating recessions and they had some grim words to share:
“The US LEI fell sharply again in December — continuing to signal recession for the US economy in the near term…
There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead.
Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust.
Nonetheless, industrial production — also a component of the CEI — fell for the third straight month.
Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.” — Ataman Ozyildirim, Senior Director of Economics at The Conference Board.
You can read the full report here.
Quick Update — I’m almost done composing a deep-dive piece that analyzes the economy, the stock market, and shares a few stock ideas that might be poised for growth in 2023.
Expect that to be released on Tuesday (1/31)!
Portfolio Updates:
Our Dividend Growth Strategy continues to attract new investors!
We’re now up to 126 folks who have decided to invest alongside me on my passive income journey. Total assets under management inside of the strategy itself is now hovering ~$135K, with ~$350K total invested across all Quantbase strategies.
I’m thrilled that you all are joining me on this journey, as well as finding other strategies that suit your interests.
The Dividend Growth Strategy is up nearly +3% YTD — with Everest RE Group (RE), Packaging Corp of America (PKG), Principal Financial Group (PFG), KeyCorp (KEY), Fifth Third Bancorp (FITB), and U.S. Bancorp (USB) carrying the team!
You’ll read more updates below re: continual accumulation of shares of certain stocks — but re: new positions, I’m really beginning to consider adding (DVY) to the mix. More to come!
Week in Review — Too Long, Didn’t Read:
Microsoft guided to softer-than-expected growth in their Cloud business, Tesla experienced their best year ever, ASML continues to print free cash flow for their shareholders, war continues, temp-workers are getting the boot, Goldman’s CFO warns of credit default risk, American’s aren’t saving money, GDP results give reason for cautious optimism, the S&P Global Composite PMI shows the cumulative changes to the Manufacturing and Services sectors, and U.S. Consumer Spending follows the Fed’s wishes.
Key Earnings Announcements:
Microsoft guided to softer-than-expected growth in their Cloud business, Tesla experienced their best year ever, and ASML continues to print free cash flow for their shareholders.
Microsoft (MSFT)
Key Metrics
Revenue: $52.7 billion, an increase of +2% YoY
Operating Income: $20.4 billion, compared to $22.2 billion last year
Profits: $16.4 billion, compared to $18.8 billion last year
Earnings Release Callout
“Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend. Also, organizations are exercising caution given the macroeconomic uncertainty.”
My Takeaway
There’s a lot to reflect upon here – with the first being the volatility in stock price that took place after earnings were announced.
After folks saw Microsoft’s cloud business experience +38% growth, their stock popped +5% after-hours. However, once Microsoft’s executive team took the stage during their conference call and explained the macro-environment is causing them to lower growth expectations in 2023 to only +30% (+35% expected) — their stock fell dramatically.
Our next reflection — their Azure cloud business. During their earnings call last quarter, their executive team was alluding to below-expectation — some analysts were expecting only +33% growth for Q4. During this earnings call, Microsoft’s CFO painted a bleak picture for investors —
“We are seeing customers exercise caution in this environment and we saw results weaken through December. We saw moderating consumption growth in Azure and lower-than-expected growth in new business across the standalone Office 365, EMS and Windows commercial products that are sold outside the Microsoft 365 suite.
From a geographic perspective, we saw strong execution in many regions around the world. However, performance in the U.S. was weaker than expected.
As I noted earlier, we exited Q2 with Azure growth in the mid-30s in constant currency. And from that, we expect Q3 growth to decelerate roughly 4 to 5 points in constant currency.”
And just to put all of this in perspective — 70% of Microsoft’s annual revenue is derived from their Commercial business segment. 70% of their Commercial business segment revenue derives from Microsoft Cloud.
That means ~50% of the company’s revenue is Microsoft Cloud — so when their CFO alludes to slowing Cloud growth.. it’s not good.
I own Microsoft as part of the “Long Technology” section of my Dividend Growth Portfolio — and for good reason. Their 15-year average dividend growth rate is +13% compounded annually. I believe Microsoft’s cloud market share will continue to expand throughout the decade and this near-term lack of demand is transitory. Fast forward 18-months and things will be back to normal.
Because Microsoft’s stock is down -30% from recent all-time highs, will generate tens of billions in free cash flow this year despite the recession, and their dividend payout ratio is only 25% — leaving ample room for them to continue to grow their dividend — I’ll continue accumulating shares.
Tesla (TSLA)
Key Metrics
Revenue: $24.3 billion, an increase of +37% YoY
Operating Income: $3.9 billion, an increase of +49% YoY
Profits: $3.7 billion, an increase of +59% YoY
Earnings Release Callout
“Q4-2022 was another record-breaking quarter and 2022 was another recordbreaking year. In the last quarter, we achieved the highest-ever quarterly revenue, operating income and net income in our history.
In the near term we are accelerating our cost reduction roadmap and driving towards higher production rates, while staying focused on executing against the next phase of our roadmap.
Our relentless cost control and cost innovation is why we believe that no other OEM is better equipped to navigate through 2023, and ultimately succeed in the long run, than we are.”
My Takeaway
As you all know, Tesla’s stock price has been through the wringer over the last three months. Having traded down to “only” $100 / share in early-January, now up nearly +70% in three weeks because “results weren’t as bad as investors feared.”
Instead of giving you a whole breakdown of a company I’m sure everyone is already very familiar with — I’ll share with you why I’ll continue to accumulate shares of the EV company at these levels as well as throughout the rest of 2023.
First, their vehicle product capacity is trending up and to the right. Tesla delivering 2M cars during 2023 is possible — especially after Elon’s remarks re: record-high customer demand.
“Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production.
We think demand will be good despite probably a contraction in the automotive market as a whole. So, basically, price really matters. I think there's just a vast number of people that wanted to buy a Tesla car, but can't afford it. And so these price changes really make a difference for the average consumer.”
Next, their focus on cost reduction throughout the next 18-24 months. Their CFO reaffirmed the company’s intention to double-down on rapidly increasing manufacturing volume in 2023 — improving overhead efficiency.
In 2021, their all-in cost to produce their average vehicle was $36K — that number has jumped up to $42K as of late, but their cost reduction initiatives should help that number drop back below $40K.
Finally, I like Elon Musk. I think he’s a rockstar leader, a vast majority of his net worth is directly related to Tesla’s stock performance, and his comments during last quarter’s earnings call re: Tesla’s market capitalization to eclipse Apple and Saudi Aramco combined is really exciting.
I’ll continue to accumulate shares at these levels.
ASML Holding (ASML)
Key Metrics — reported in euros unless stated otherwise
Revenue: $6.4 billion, an increase of +29% YoY
Operating Income: $2.1 billion, an increase of +5% YoY
Profits: $1.8 billion, an increase of +2% YoY
Earnings Release Callout
“We continue to see uncertainty in the market caused by inflation, rising interest rates, risk of recession and geopolitical developments related to export controls. However, our customers indicate that they expect the market to rebound in the second half of the year.
Considering our order lead times and the strategic nature of lithography investments, demand for our systems therefore remains strong.
For 2023, ASML expects continued strong growth with a net sales increase of more than +25% and a slight improvement in gross margin, relative to 2022.”
My Takeaway
Wow! This company really ended up pulling through — as you all might remember from their last earnings report coverage shared here, I was intrigued by their near-term catalysts — specifically record bookings and a lack of order cancellations heading into 2023.
Well, since sharing that post their stock price is up a massive +41% – sheesh!
However, that’s not a fair “start date” as I didn’t disclose my position in the company until this post — of which the stock is up only +13%. Regardless, ASML is doing exactly what we wanted — raking in the high-margin revenue and translating that revenue growth into a growing dividend payment to shareholders.
They just announced a +5.5% hike to their annual dividend payment, something I’m very happy about.
Just so we’re all on the same page as to what ASML sells — they build the machines that build semiconductors. They sit at the very bottom of the supply chain — a good thing considering their customers are the ones who are negatively hit by the chip demand, not ASML.
It takes a while for ASML to build the machines, so their customers (MU, NVDA, TSM, etc.) have to place orders several months in advance — giving investors much needed visibility into the future.
ASML reported a strong Q4 to round off the year — sales grew +11.2% sequentially, lithography system sales were up +19% sequentially, and the company guided for +25% revenue growth in 2023.
I’ll continue accumulating shares.
Investor Events / Global Affairs:
War continues, temp-workers are getting the boot, Goldman’s CFO warns of credit default risk, and Americans aren’t saving money.