Week in Review: 11/7/21
Everything worth commentating on regarding this last week in the markets.
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Quick Note on Peloton:
Let’s start with the facts - Peloton reported revenue of $805 million, an increase of +6% year over year. Remember, this time last year we were in the heart of the pandemic with Peloton seeing incredible tailwinds from that.
Connected fitness subscriptions increased +87% to 2.49 million
Paid digital subscriptions increased +74% to 887 thousand
Looking ahead, Peloton is guiding to full-year revenue of about $4.6 billion, compared to the $5.4 billion Wall Street expected, on average. This softer than expected guidance was attributed to supply chain constraints and commodity cost pressures.
If you didn’t see, these results caused their stock to crater -35% the next trading day to around $57 / share.
I think there’s some misconception around Peloton, just like there was for Tesla back in the day. People were valuing Tesla as if they were a car company optimizing for profits - something they weren’t able to do until recently. I think people right now are looking at Peloton like they’re some sort of fitness equipment company optimizing for profits - and “they had a lot of revenue during COVID, that should result in more profits!”
When in actuality, by simply looking at the company’s CEO John Foley, we get a better glimpse into exactly how he’s running this company and what he’s optimizing for in the long term.
It’s not profits - it’s connected fitness subscribers.
“We remain convinced that the growth opportunity for Peloton is substantial and this informs our decision to prioritize accessibility and household acquisition over near-term profitability, particularly as our industry-leading net promoter scores and retention rates support a very strong consumer LTV (lifetime value) and unit economics.”
It’s important as shareholders that this specific metric is what we use to gauge the success of the company quarter over quarter and year over year. Because when you pair a growing list of connected fitness subscribers with an industry leading net promoter score and strong retention rates - over a long period of time, you hit an inflection point, similar to Tesla, driving profits higher exponentially.
By going along this single metric - connected fitness subscribers - we can see that Peloton is doing just fine. It’s absurd to me to think this stock, now at $57 / share, is being valued on an EV / TTM Revenue multiple lower than it was before the pandemic.
Before the exponential sales, before the millions of new subscribers, before the Precor acquisition, and before the partnerships with multiple music artists.
Sure - if you look up above you can see the avg. number of monthly workouts have declined per user, but I’d argue that’s driven from re-opening momentum. I agree, it’ll probably bump around a little bit during the coming quarters.
But let’s not forget this company’s dedicated userbase - their insanely low churn rate, and incredibly high lifetime value as a customer to this company.
Against the thoughts of what other people have said about Peloton, I’m going to buy this dip. I still think Peloton deserves a modest 1-3% weighting in my portfolio. I’m by no means betting the farm on this one - but I think John Foley is going to turn this into a company worth hundreds of billions one day, one way or another (metaverse?) and I want to be along for the ride.
Week in Review - Too Long; Didn’t Read:
There are now 3 Shopify-built companies trading on the stock market, Arhaus analysis coming soon, Realty Income Corporation continues to print cash, Qualcomm doubled down on the controllables - mobile, Roku’s ARPU has almost doubled since the pandemic, MercadoLibre is growing like a weed, Uber is inching toward profitability, Airbnb had their best quarter ever, and the unemployment rate is now at a new pandemic-low.
A few household names went public this week - let’s discuss.
A company I was relatively neutral on made their public debut this week and the market loved it - pushing their stock up from $21.21 / share to as high as $32 / share before coming back down to Earth, closing the week off around $26 / share.
This values Allbirds around $4.0 billion, or about ~16X their trailing twelve months of revenue. The company will likely do around $250 million in revenue this year, on about 55% gross profit margins.
Again, it’s hard for me to get excited about a company with so many competitors and even Amazon knocking off their product at scale.
Regardless, it’s very cool to see companies built on Shopify (SHOP) now making their own public debuts.
The company I was personally excited about made their public debut this week - opening lower than originally anticipated at only $12.68 / share and closing the week off at $12.21 / share.
This is a very interesting stock to Chris Sommers and I as we believe this company has a “growth story” to be told. It’s easy to compare them to the widely successful Restoration Hardware (RH) - a similar company with similar financials.
What’s interesting about this comparison is that Arhaus has roughly the same amount of stores around the country (80 vs. 110), but Restoration Hardware is making 3X more revenue per store than Arhaus.
Why? How? What’s going on here?
Well, we’re not sure. But, the bull case scenario for Arhaus is that over the coming quarters (and potentially years) they’ll be able to optimize their business in such a way to increase their sell through to begin approaching Restoration Hardware’s. If they do that, their stock price will surely see some upside.
Chris and I are doing more research and we should have some final numbers, ideas, and scenarios to share next week. We’re going to record a 7-8 minute long YouTube video on this one as well. Stay tuned!
Key Earnings Announcements:
Earnings were all over the board this week, with several of them being companies in our coverage universe. Let’s talk through their key metrics, quoted call outs, and my thoughts - as always.
Realty Income Corporation (O):
You all likely know this company as the REIT that pays monthly dividends - one of my favorites.
Funds from Operations per share: $0.89, an increase of +8.5%
Investments: $1.61 billion in 308 properties, including $532 million in Europe
Press Release Callout
“Our position as a global consolidator continues to build as we invested a record $3.78 billion year to date across three countries, including our debut transaction in Continental Europe. In addition, we are proud to announce today's closing of our merger with VEREIT, further establishing ourselves as a leading net lease REIT and we look forward to integrating the capabilities of many talented colleagues into our 'One Team'.”
This is a company that’s doing everything right. If building an income generating portfolio is your desire, look no further than Realty Income Corporation. Their dividend yield is 4%, it pays out every month, and they’re continually producing more cash flow year over year for their investors. Their stock price is up +15% YTD which is generally in line with the overall market - making this an investment paying you cash while also increasing in value.
Earnings: $2.55 per share vs. $2.21 per share expected
Revenue: $9.34 billion, an increase of +44% YoY
Q4 Guidance: $10.4 billion in revenue vs. $9.7 billion expected
Press Release Callout
“We are well positioned to continue to lead in mobile and enable the digital transformation of industries with our broad portfolio of relevant technologies. Our results across RF front-end, Automotive and IoT attest to the success of our technology roadmap and revenue diversification strategy.”
Qualcomm crushed this quarter - specifically because they controlled the controllables. While other chip companies were worrying about making specific chips for cars or computers, Qualcomm doubled down on their mobile-focused business segment, allowing them to continue to grow revenue in a challenging environment (supply chain constraints). Then, as mentioned in my favorite stock ideas post, their guidance going forward seems to suggest a more positive supply chain landscape in Q4 - which would positively impact their business as well as others. Finally, Goldman Sachs gave their thumbs up on the stock citing “high end Android momentum as well as broader based positive expectations in other business lines,” before sharing a $194 / share PT.
Qualcomm seems to be positioned to do well throughout the coming quarters.
Earnings: -$0.06 per share vs. the -$0.07 expected
Revenue: $27.7 million, an increase of +10% YoY
Total Subscribers: 439K, an increase of +116% YoY
Paid Subscribers: 53K, an increase of +35% YoY
Annual Recurring Revenue: $63 million
Press Release Callout
“We are pleased to report another strong quarter, more than doubling our subscriber count to 439,000 subscribers, and increasing our Spaces Under Management by 62% to 6.2 million Spaces.
We made significant advances in all of our objectives, including strategic product launches, key industry partnerships, expanded service offerings, and the scaling of our global workforce to address the huge opportunity ahead. We have also been navigating the dynamics of the global supply chain and labor markets to minimize the impact on our hardware and services business.
Our recent launch of Matterport for Android is very timely, and dramatically expands our reach for digitizing spaces using just the phone in your pocket, while giving us an important advantage to our global growth plans for Asia Pacific, Europe, the Middle East and Africa.”
So that last part there is the important call out that sent their stock up almost +10% on Monday. Before, the company was only offering their app through the App Store - but now, through the Google Play store, homeowners, builders, and real estate agents in over 175 countries will be able to access Matterport’s 3D capture technology to map rooms and other spaces.
To me, this company seems like a no brainer - but seems to be too early to the game. There will come a day (we’re already doing this) where people will look at homes through a 3D tour on Zillow or Redfin before making an in-person visit. If you, as an agent, can prove these homes sell faster than those without 3D tours - you’ll be offering it for every home.
Doing so would positively impacts Matterport’s business for years to come. I think the company has a unique growth story for the coming years as they begin to more meaningfully monetize their exponentially growing subscribers in this massive total addressable market - real estate.
Earnings: $0.48 per share vs. $0.07 expected
Revenue: $680 million, an increase of +50% YoY
Platform Revenue: $583 million, an increase of +82% YoY
Gross Profit: $364 million, an increase of +69% YoY
Active Accounts: 56.4 million, an increase of +1.3 million
Average Revenue per User: $40.10, an increase of +49% YoY
Press Release Callout
“In the third quarter, ARPU surpassed the milestone of $40 (trailing 12-month basis) and grew nearly 50% year-over-year. As the global shift to TV streaming continues, our performance demonstrates the strength of our business fundamentals and the momentum of our platform monetization. We are making significant progress with traditional TV advertisers, while also expanding our total addressable market to digital-first advertisers. Despite the ongoing headwinds created by the global supply chain disruptions, Roku remains well positioned as a result of our scale, brand, technology, and relentless focus on the TV streaming experience.”
Wow! What a complete misunderstanding by the market. Roku’s stock traded down nearly -9% this week because of these results - which to me was primarily driven by their lower than expected Q4 revenue guidance ($900M vs. $940M expected). Think about it like this - Roku spent the last 18 months onboarding millions of people onto their platform as fast as possible, with complete disregard for monetization. They just wanted people and for those people to be sticky.
Well, turns out they did a great job. Now, they’re monetizing against those users like crazy - growing average revenue per user from $24.35 Q1 2020 to now over $40 per user Q3 2021. Not only did they add nearly +20 million more users, but they nearly doubled the revenue each user brings them.
Gross profits outpaced revenue this quarter - which means they’re increasing their revenue while cutting costs. I’m buying the dip.
Earnings: $0.37 per share, which was in-line with expectations
Revenue: $3.84 billion, an increase of +27% YoY
Revenue Excluding Bitcoin: $2.0 billion
Gross Payment Volume: $45.4 billion, an increase of +43% YoY
Press Release Callout
“We delivered strong growth at scale during the third quarter of 2021. Gross profit grew 43% year over year to $1.13 billion, which was 51% on a two-year compound annual growth rate (CAGR) basis.
In our Seller ecosystem, gross profit was $606 million, up 48% year over year and 29% on a two-year CAGR basis. Our Cash App ecosystem delivered gross profit of $512 million, an increase of 33% year over year and 104% on a two-year CAGR basis.
In August, we entered into an agreement to acquire Afterpay, a global buy now, pay later platform with more than 16 million consumers and approximately 100,000 merchants as of June 2021. Through this transaction, we plan to unite two complementary businesses with a shared focus on economic empowerment and financial inclusion.
We believe the combination will more deeply connect our Seller and Cash App ecosystems, accelerate our strategic priorities, and allow us to deliver even more compelling products and services for consumers and merchants.”
Square is an inevitable winner, it just comes down to where your average cost per share is. This company’s stock is incredibly volatile, but, over the last few years we’ve seen it trend in the right direction - while simultaneously experiencing peaks and valleys. We’ve seen this stock trade down -60% from recent all time highs at times, but is trading up +30-70% YoY (January to January).
They’re doing everything right and have built an ecosystem of Consumers and Sellers that will continue to flourish - especially as their Afterpay acquisition comes to life.
Earnings: $1.92 per share vs. $1.29 expected
Revenue: $1.86 billion, an increase of +62% YoY
Gross Merchandise Volume: $7.3 billion, an increase of +30% YoY
Mobile GMV: 74.1% of total GMV (above)
Total Payment Transactions: 865.7 million, an increase of +55% YoY
Total Payment Volume via Mercado Pago: $20.9 billion, an increase of +59% YoY
Press Release Callout
“We have once again reached new records in gross merchandise volume, payment volumes and credit portfolio size; which demonstrates resilience and strength across all parts of our ecosystem. Moreover, we see our engagement and satisfaction improving sequentially for both commerce and fintech services, which is particularly encouraging given the user base expansion that we have driven over the last year.”
I, as well as the market, loved these results. Everything is moving in the right direction - causing the company’s stock to trade +10% higher this week. Revenue continued to climb and EBIT margins were 8.6% vs. 6.0% expected. This was due to first party inventory assortment and the expansion of the managed logistics network. Remember, this company is “the Amazon of Latin America,” which, in case you forgot, is the #1 fastest growing geography is relation to eCommerce adoption.
I remember about 12 months ago I couldn’t wrap my head around this company - until a subscriber who lived in Latin America hopped on a video call with me and described just how incredible MELI is and how it’s the #1 trusted way of purchasing goods online in his geography. My friend Mario also did an incredible analysis of their company - here. Wall Street is looking for $2,200 / share - representing at +35% upside from current prices.
Well, I was really excited about this company - thinking they were going to knock our socks off. Turns out I had the wrong ride-sharing company, as Lyft’s stock traded up +17% this week after reporting their earnings. Nonetheless, Uber still traded up +8%.
Earnings: -$1.28 per share vs. -$0.30 expected
Revenue: $4.85 billion, an increase of +73% YoY
Gross Bookings: $23.1 billion, an increase of +57% YoY - an all time high
Trips: 1.64 billion, an increase of +39%
Press Release Callout
“While we recognize it’s just a step, reaching total-company Adjusted EBITDA profitability is an important milestone for Uber. Not only did our Mobility business recover to pre-COVID margins this quarter, our core restaurant delivery business was profitable on an Adjusted EBITDA basis for the first time as well, bringing the full Delivery segment close to breakeven.”
Uber’s flywheel is beginning to accelerate - as their scaled existing services (mobility and restaurant delivery) are expanding into new categories, attracting more customer, increasing engagement and driving Uber Pass sign-ups.
1/3 of new drivers sign up to drive both people and food, while 1/4 of new eaters are coming from the Rides business. The company is showing clear success in their ability to cross-sell. Mix higher engagement with cross-selling and new business segments and you have a recipe for success. Also, seeing this company inch toward profitability was great. Wall Street is looking for $80 / share, representing a +78% upside.
Well, it finally happened - Airbnb reported the insane financials we were hoping they would months ago. Watch this YouTube video for more context - you’ll hear my friend Chris call me out halfway through.
Earnings: $1.22 per share vs. $0.70 expected
Revenue: $2.24 billion, an increase of +67% YoY
Gross Booking Value: $11.9 billion, an increase of +48% YoY
Nights and Experiences Booked: 79.7 million, an increase of +29% YoY
Profits: $834 million, an increase of +280% YoY
Press Release Callout
“The travel rebound that began earlier this year accelerated in Q3, resulting in Airbnb’s strongest quarter ever. Revenue and net income were our highest ever. Adjusted EBITDA exceeded $1 billion, also our highest ever. This summer, we reached a major milestone of 1 billion cumulative guest arrivals as more people got vaccinated and travel restrictions were relaxed. Host earnings reached a record $12.8 billion in the quarter, and active listings continued to grow.
But something bigger than a travel rebound is happening. The world is undergoing a revolution in how we live and work. Technologies like Zoom make it possible to work from home. Airbnb makes it possible to work from any home. This newfound flexibility is bringing about a revolution in how we travel. Millions of people can now take more frequent trips, take longer trips, travel to more locations, and even live anywhere on Airbnb.”
Well, we were right. A bit early, but right nonetheless. If you’ve been rocking with me since Patreon, you might remember these analyses (one and two) that I published on Airbnb - stating just how bullish I was on the stock. Then again at $150 / share here in this update.
After the release several banks on Wall Street boosted their price targets on the stock - now as high as $230 / share. Airbnb is an absolute machine, and I think it’s going to be riding re-opening tailwinds for a few more quarters. It’s interesting to see that domestic travel decreased in relation to cross-border travel - I wonder how this will continue to shape up as more vaccines are rolled out and accepted as a “green light” for reopening in countries around the world, like Australia.
Satya Nadella, Microsoft’s Executive Chairman and CEO, made several key announcements about the direction of the world's most valuable company. These include innovations throughout the worlds of artificial intelligence (AI), enterprise development, security, and of course - the metaverse.
Microsoft Ignite 2021 Conference
Microsoft Cloud: the company believes that in the coming years digital capabilities surrounding sustainability will be as critical for businesses as CRM is for sales and as ERP is for finances today.
In response, Microsoft revealed that they will be launching a tool to help companies measure the carbon footprint of their operations and identify ways to reduce negative environmental impacts.
Microsoft introduced more than 90 new services and updates (sheesh!) in Microsoft Teams, Microsoft 365 and other applications. “Just like Microsoft Teams has transformed collaboration and productivity, Microsoft Loop is the next big breakthrough in Microsoft 365,” said Nadella.
Loop is a new application in a communication and AI-first world. It’s expected to be similar to Google Wave, a real-time collaboration platform that was launched in 2009 and shutdown in 2010.
“We are composing people’s content, comments, chats, reactions, and live business process data even together into a new collaborative canvas. And we are reimagining how anyone can contribute directly in the flow of their work, whether it is from a chat, email meeting or a document,” said Nadella.
Microsoft Azure and AI: the company is extremely confident in its ability to take AI breakthroughs and translate them into platforms for customers to build upon. Just last month, Nvidia (NVDA) - in partnership with Microsoft – launched the Megatron-Turing Natural Language Generation (MT-NLG) model with 530 billion parameters. Nadella said this offers unmatched accuracy across a wide set of natural language tasks, and spotlighted it as a valuable use case.
The new Microsoft Azure OpenAI Service will give customers access to OpenAI’s powerful GPT-3 models, along with security, compliance, reliability, data privacy, and other enterprise-grade capabilities that are built into Microsoft Azure.
“We are moving from a mobile and cloud era to an era of ubiquitous computing and ambient intelligence – an era which will experience more digitisation over the next ten years than the last 40,” said Nadella.
Metaverse: Microsoft plans to build a version of the metaverse for both individuals and enterprises, with a roadmap to integrate with Azure, IoT, Azure Digital Twins to Connected Spaces and Microsoft Mesh.
“When we talk about the ‘Metaverse,’ we are describing both a ‘new platform’ and a ‘new application’ type. Similar to how we talked about the websites in the early 90s,” said Nadella.
If you want to learn more specifics surrounding the conference, I suggest checking out this link.
It is now obvious as to why Microsoft is the most valuable company in the world - sitting at a market capitalization of $2.5 trillion. Wall Street was happy with the conference - with some analysts now calling for $360 / share, representing a modest +5% upside.
Major Economic Updates:
PMI results are heavily impacted from supply chain issues, Jerome Powell makes big statements regarding the Fed’s view on the economy, and Non-Farm Payroll results display positive momentum in an ever-changing labor market.
US Manufacturing PMI for October
The Manufacturing Purchasing Managers’ Index (PMI) measures the activity level of purchasing managers in the manufacturing sector. A reading above 50 indicates expansion in the sector, below 50 indicates contraction.
The PMI was revised lower to 58.4 in October 2021, down from September’s 60.7. The pace of expansion for the US manufacturing industry reached its lowest point in ten months due to the smallest increase in production levels since July 2020.
All of this can be directly linked to capacity constraints, including material shortages, and transportation delays.
Federal Reserve Press Conference Highlights
Chairman Jerome Powell announced that the Federal Reserve will begin tapering (incrementally reducing) asset purchases, but will not be raising the federal funds (interest) rate.
“Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate,” said Powell.
The meeting also focused on supply chain concerns, with Powell reasserting his view that its very difficult to gauge when the crisis will subside and constraints will resolve themselves. He said that the Fed will use its tools to fight inflation if price pressures stay higher in the long-term.
“If we were to see signs of the path of inflation, or longer-term inflation expectations, was moving materially and persistently beyond levels constant with our goals, we will use our tools to preserve price stability,” Powell said.
The market seemed to shrug at these comments - with a rally this week of about +2% taking place. I don’t think we’ll see a material impact from tapering in the short-term.
US Non-Farm Payrolls for October
According to the Bureau of Labor Statistics - the US economy added +531K jobs in October of 2021, the most in 3 months. This was above market forecasts of 450K as Covid-19 cases dropped and employers offered higher wages and more flexible hours.
The biggest job gains occurred in leisure and hospitality (+164K), in professional and business services (+100K), in manufacturing (+60K), and in transportation and warehousing (+54K) while employment in public education declined (-65K).
The unemployment rate is now at 4.6%, a new pandemic low. Seeing these numbers certainly fueled the market’s +2% rally this week - as I’m sure a lot of people let out a sigh of relief. I expect this momentum to increase as the colder weather keeps people inside, potentially slowing the spread of COVID-19 cases in the US.
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.