Wow. What a week in the markets.
In case you haven’t seen — the 2nd largest crypto exchange declared bankruptcy this week after being ousted as a Ponzi scheme. Essentially, FTX lent their hedge fund Alameda Research $10B of customer deposits to speculate on the markets and generate returns for themselves.
Crypto has been in a bear market for the last several months, causing Alameda Research to completely blow up their trading account. People caught whiff of their insolvency last week, which catalyzed a “bank run” worth $5B against FTX. They didn’t have the money, and now we’re here.
If you’re interested in more “behind the scenes” information about the company, below is a wonderful Twitter thread.
FTX customers (both retail and institutional) aren’t the only ones negatively impacted by their Ponzi scheme. Unfortunately, some of the most well-regarded VCs were also caught with their due diligence pants down. Below is a chart that shows at what valuation specific investors hopped on the FTX cap table — only to lose every penny that was ever invested.
Week in Review — Too Long, Didn’t Read:
Builder’s FirstSource is foreshadowing what might be a tough 2023 for the housing market, Disney continued to see momentum for their Disney+ streaming business, Dutch Bros is adding +150 new stores in 2023, Palantir saw a +66% jump in total customer count, we explain how the recent election results might impact specific sectors of the stock market, Carl Icahn is bearish, Zoom raised their long-term profit margin target range, health insurance might have been the driver for the recent inflation beat, the Credit Bubble grows larger, and small businesses are still seeing supply chain disruptions.
Key Earnings Announcements:
Builder’s FirstSource saw a -35% drop in order rates from public homebuilders, Disney’s results aren’t as bad as the headlines make them out to be, Dutch Bros is slated to open +150 new stores in 2023, and Palantir added +33 new customers.
Builder’s FirstSource (BLDR)
Key Metrics
Revenue: $5.8 billion, an increase of +5% YoY
Operating Income: $1.0 billion, an increase of +20% YoY
Profits: $738.0 million, an increase of +20% YoY
Earnings Release Callout
“While we have begun to experience increasing macro headwinds, our leading position in the market, focus on innovation and prudent capital allocation have positioned us to succeed in any environment. I am confident that we will continue to deliver on our strategic pillars given the skill and dedication of our team members.”
My Takeaway
As I’m sure you all remember, I had BLDR as one of my largest positions heading into 2022 — however, I trimmed that position down to ~1% weighting after realizing just how quickly the Fed was going to hike rates (negatively impacting real estate).
The company reported awesome third quarter results — here are a few reasons to be excited / fearful:
Excited — the company beat their revenue expectations by a wide margin, primarily driven by a +6.9% increase in organic sales. Commodity prices are also beginning to trend back toward historical norms, which could catalyze margin expansion. Finally, during their earnings call their management team reiterated their ability to maintain low double-digit EBITDA margins — even during a “housing correction.”
Fearful — their commentary suggested a -35% decline in order rates on average from public homebuilders. By Q1 of 2023, BLDR would likely have burnt through the bulk of their order backlog.
The verdict is this — we’re always looking for exposure to companies that are already / have the near-term ability to generate substantial amounts of free cash flow. BLDR seems to be doing that just fine. They reported $1.4B in FCF during Q3, and are actively buying back shares of their stock. They’re on track to generate $3.4B in FCF in 2022 ($2.8B previously) — so I’m a happy shareholder. However, I’m not adding to my position given the long road back to interest rate normality ahead.
The Walt Disney Company (DIS)
Key Metrics
Revenue: $20.2 billion, an increase of +9% YoY
Operating Income: $1.6 billion, flat YoY
Profits: $162.0 million, flat YoY
Earnings Release Callout
“The rapid growth of Disney+ in just three years since launch is a direct result of our strategic decision to invest heavily in creating incredible content and rolling out the service internationally, and we expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024. We believe we will be on the path to achieve a profitable streaming business that will drive continued growth and generate shareholder value long into the future.”
My Takeaway
The company’s quarterly results were largely underwhelming — as both their revenue and operating income came in below expectations. Even worse, Disney provided 2023 revenue and operating income guidance that reflected only high single digit growth. This was a big reason why their stock price plummeted.
It seems like the reason they’re forecasting this low of growth is because of the choppy advertiser environment expected in 2023. Below is an awesome visual breakdown of the company’s earnings results courtesy of App Economy Insights.
All in all, Disney’s quarter and outlook were disappointing. However, the underlying demand for their Parks seems healthy, re: Linear Networks they’re experiencing many of the same headwinds as their competitors (industry headwinds vs. Disney-specific) and the one-time cost incurred from launching their cruise ship shouldn’t weigh on their operating income in the future.
With all of that being said, we’re now trading at levels we haven’t seen since late–2014. This potentially presents a wonderful buying opportunity assuming you believe their DTC business segment won’t cannibalize their Linear Networks and Park demand continues to rebound.
Dutch Bros Coffee (BROS)