I hope that each of you have enjoyed your weekend!
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Beyond gaining access to my personal portfolio, our Week in Review posts succinctly summarize every market-moving event that occurred this week - while providing actionable commentary.
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Considering we’ve had about ~300 folks join Rate of Return since Monday, I’m unlocking this normally-paid-for Week in Review post so everyone can read it.
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If you missed any of this week’s posts, here’s some quick links for your convenience:
Finding & Predicting Value in the Stock Market - explaining how companies are valued from a free cash flow per share perspective
Social Media Spotlight - touching on crypto, Web 3.0, self-employment, market volatility, economic updates, and foreign affairs
My Favorite Stocks - highlighting the companies I’m most focused on right now
Let’s breakdown what took place during the Earth’s last 7 rotations.
Week in Review - Too Long; Didn’t Read:
Nubank is going to completely disrupt traditional banking in Brazil, GitLab appointed Snowflake’s (SNOW) Chief Data Officer to their board, Stitch Fix was hammered with downgrades from Wall Street, GameStop continues to leave shareholders guessing, Costco continues to grow, and Lululemon’s Mirror acquisition seems to be a flop thus far.
Southwest takes immense pride in their ‘clean’ balance sheet, trade balance hit a 6-month low, job openings now hover around 11 million, and inflation is running at +6.8% annually.
Warren Buffet’s $500 million investment paid off - Nubank is fundamentally disrupting Brazilian banks at scale.
Nu Holdings (NU):
The Brazilian fintech raised about $2.6 billion after trimming their initial public offering price from the $11 range to only $8-9 / share. The stock ended its first week of trading just shy of $12 / share, putting a ~$55 billion price tag on the company - one of the largest IPOs we’ve seen this year.
Digging deeper here - Brazil is Latin America’s largest economy. It’s also home to one of the most profitable banking industries - given exploitation of interest rates, fees for services, and other profit pumping maneuvers.
Nubank flips traditional banks on their heads by being virtual (smartphone apps vs. physical bank branches) as well as offering much more competitive interest rates on loans.
Revenue has more than doubled from 2018 - 2020, ~85% of their customer acquisition was completely organic (+110% customer CAGR w/ a 90+ net promoter score), and some very respected investors (Warren Buffet, Tiger Global, Tencent) hold several-hundred million dollar positions in this company.
Assuming you live in the USA like myself, it’s incredibly hard to wrap your mind around what opening a bank account is like in Brazil. I encourage all of you to read the letter from their founders in the F-1.
I really like this company and what they’re doing. Now it comes down to diving deeper into their growth story - stay tuned.
The company was aiming to offer ~15M shares to the public at about $70 / share, but demand was so high they were able to offer them at $80 / share instead - finishing their first week of trading at $85.70 / share, or a price tag of $15 billion.
The company is on pace to do $300 million in revenue in 2021, or year-over-year growth of about +50%. While their path to profitability is still obscure to me, I think this company has some legs. Their total addressable markets (cloud infrastructure, legacy and emerging security, legacy and emerging networking, applications and workload orchestration) are on track to be worth a collective ~$70 billion by the end of 2026 - giving HashiCorp a clear runway for growth.
Will they be able to execute on that growth? Only time will tell. I’m going to sit on the sidelines for now and carefully observe.
Key Earnings Announcements:
There was a boatload of earnings announcements this week, which are really making me earn my holiday break. Let’s cut the chit-chat and jump right in.
Revenue: $66.8 million, an increase of +58% YoY
Dollar-Based Net Retention Rate: 130%
Customers w/ $5K+ ARR: 4,057, an increase of +66% YoY
Customers w/ $100K+ ARR: 427, an increase of +73% YoY
Operating Loss: -$32.5 million, an increased loss of -$8.0 million
Press Release Callout
“We performed well during the quarter and believe our business is set up for continued strength. We are pleased with our Dollar-Based Net Retention of over 130% and the positive business outcomes we continue to drive for our customers across all verticals around the world.
The market for DevOps platforms is underpenetrated, and as a pioneer of The DevOps Platform, GitLab is well positioned to make the most of the substantial market opportunity before us.”
GitLab’s stock traded down -15% on the results, likely because of their +30% revenue guidance for the coming quarter - a bit slower than expected. Wall Street is modeling a +35% increase in revenue for 2022, pegging their stock at ~33X forward revenue.. expensive to say the least.
I really like the odds of this company becoming a free cash flow printing machine by the turn of the decade. 90% gross margins, continued customer growth, and a newly appointed member to their board (Sunny Bedi, Snowflake’s Chief Data Officer).
Wall Street’s average price target is $125 / share, or about +67% higher than current levels.
Revenue: $65.0 million, an increase of +79% YoY
Global Active Ports: 163,000 w/ 45,000 in Europe
Total Ports Accessible to ChargePoint Customers: 290,000
Net Loss: -$47.3 million, compared to -$32.5 million a year ago
Press Release Callout
“ChargePoint has delivered another strong quarter, as we have continued to scale our commercial, fleet and residential verticals across two continents. The investments we have made over many years have enabled us to capture charging demand from customers preparing for an electric future. This quarter we added more customers at an accelerated rate, while also successfully closing two acquisitions.”
For EVs to succeed, we’ll need charge ports to be as readily available as gas stations are today. Is ChargePoint going to be the company to enable that? Who knows. I think “long term” this company has legs - but I’m not well versed enough in the EV space to give them a thumbs up (or down).
Stitch Fix (SFIX):
Revenue: $581.2 million, an increase of +19% YoY
Active Clients: 4.2 million, an increase of +11% YoY
Net Revenue per Active Client: $524, an increase of +12% YoY
Net Loss: -$1.8 million
Press Release Callout
“Our revenue per active client topped $500 for the second quarter in a row, reaching a record $524 across our nearly 4.2 million clients. With the launch of Stitch Fix Freestyle we are expanding and broadening our offering, and we are excited to continue to enhance the experience for clients through the introduction of new product features and expanded merchandise selections, increasing the number of purchase occasions we serve.
Overall, we are pleased with the important progress we are making towards our vision of becoming the global destination for personal shopping.”
What a nightmare this stock has become for shareholders - having lost -70% of its value during the last 6 months alone. If the company is “growing” so well, why did the stock continue to fall after earnings you ask? They guided to +0-3% revenue growth for the next 3 months with only single digit growth in the first 6 months of 2022.
This caused a lot of analysts to lower their price targets to anywhere between $22 and $25 per share - down from the mid-$40s. I still believe this line of business is commoditized.
Revenue: $220.8 million, an increase of +50% YoY
Net new ARR: +$91.9 million, an increase of +42% YoY
ARR: $818.4 million, an increase of +58% YoY
Customers w/ $100K+ ARR: 1,363, an increase of +52%
Customers w/ $1M+ ARR: 135, an increase of +82% YoY
Customer Count: 9,630
Press Release Callout
“Automation is essential to digital transformation and UiPath is leading the way with our vision to deliver the fully automated enterprise™ where companies use automation to unlock creativity and the full potential of every worker.”
It’s sort of jaw dropping to see UiPath’s stock perform so poorly during a nationwide (and potentially global) labor shortage. This company’s entire existence stems from their ability to automate tasks away from humans - something I’d imagine every company is trying to do right now.
Wall Street doesn’t exactly see things changing for UiPath either, with the average price target hovering $60 / share.
Revenue: 1.3 billion, an increase of +29% YoY
Inventory on Hand: $1.1 billion, an increase of +32%
Press Release Callout
“Inventory was $1.141 billion at the close of the quarter, compared to $861 million at the close of the prior year’s third quarter, reflecting the Company’s focus on front-loading investments in inventory to meet increased customer demand and mitigate supply chain issues.”
I wish I had more information to share about the company’s quarter, but from a bird’s eye view this is it. They don’t include a cool quote from their management team in their press release, they don’t take questions from analysts during the conference call, and they don’t offer guidance for the coming quarters / year.
Sure, you can dig further into their 10-Q to find more financial metrics like their SG&A expense as a percent of revenue - but I remain baffled that GameStop, the OG meme stock, doesn’t lean heavier into their retail investor community by disclosing as much as possible to shareholders.
Not a shareholder, don’t plan to be anytime soon.
Revenue: $129.6 million, an increase of +9% YoY
Consumer Revenue: $79.2 million, a decrease of -13% YoY
Business Revenue: $50.4 million, an increase of +84% YoY
Business ARR: $207.4 million, an increase of +80% YoY
Business Customers: 9,592, an increase of +42% YoY
Press Release Callout
“We are very pleased with the results in the quarter, particularly with the strong performance of Udemy Business, where more than 9,500 businesses and their employees turned to Udemy to help them upskill and reskill.
Our overall revenue was up 9% year over year, despite our consumer business facing an extraordinary year-over-year comparison given accelerated growth during the early waves of the pandemic last year. We are excited about the future as we continue to execute against our huge global market opportunity.”
This is incredibly interesting to me. Maybe you all knew this and I’m just late to the party, but since when has Udemy been doubling down on business upskill and reskilling? I love it.
Go to the people who have the money to spend - and who will happily spend it, knowing they’re reinvesting into their employees. According to the company, they added Mitsubishi, Carvana, Michelin, and MercadoLibre to their roster of rockstar businesses paying them for courses.
Deceleration in consumer revenue was simply because of tough COVID comps, nothing more in my opinion.
The company is growing around +25% annually, enabling them to hit the big $1 billion in annual revenue mark in 2024. They’re currently trading around ~4.5X forward revenue with their 55% gross profit margins. Assuming the same multiple in 2024, Udemy is now a ~$4.5 billion company with a stock price of ~$35 / share.
I think they’ll be able to expand their gross margins north of 60%, perhaps boosting that to a ~5X forward revenue multiple bringing their stock closer to $40 / share by EOY 2024. 100% return in 3 years? Could be a compelling investment.
Earnings: $1.21 per share, an increase of +14% YoY
Revenue: $10.4 billion, an increase of +6% YoY
Total Cloud Revenue: $2.7 billion, an increase of +22%
TTM Operating Cash Flow: $10.3 billion
Press Release Callout
“These strong results are being driven by the 22% growth of our infrastructure and applications cloud businesses which are approaching $11 billion in annualized revenue. We now have 8,500 Fusion ERP customers with revenue growing 35%, 28,400 NetSuite ERP customers with revenue growing 29%, and our Gen2 infrastructure businesses are growing even faster—and accelerating.
Oracle's Autonomous Database and new MySQL Database with HeatWave are the world's two highest-performance databases. Because of their extreme high-performance, both products present huge growth opportunities for our cloud infrastructure business.
Amazon Aurora customers are discovering that moving to MySQL with HeatWave can increase their performance by more than ten-times—with a corresponding reduction in cost. These two databases will sustain Oracle's database market and technology leadership for years to come.”
What an incredible quarter by a company whose turnaround story has been years in the making. The company’s stock traded sideway for 4 years, before picking up steam early 2021 - now up +60% YTD given their cloud revenue growth, accelerating free cash flow, cloud bookings, and strategic back office investments.
At this time, some of the most bullish analysts on the company are beginning to migrate to the sidelines as the stock now trades at a premium to their peers.
Earnings: $2.98 per share, compared to $2.62 per share last year (+14%)
Net Sales: $49.4 billion, an increase of +16.6% YoY
Operating Income: $1.7 billion, an increase of +18.4% YoY
Same-store Sales in USA: +15%
Same-store Sales in Canada: +17%
Same-store Sales Internationally: +13%
Earnings Call Callout
“The largest areas of increase coming from international spending for new warehouse expansion and increased investment in our logistics and e-comm fulfillment operations. In terms of e-commerce sales in the quarter, ex FX increased 13.3% year-over-year, and that's, of course, on top of an 86% plus increase a year ago in the first quarter.
In terms of an update on Costco Logistics, it continues to drive our big and bulky sales. For the quarter, Costco Logistics deliveries were up over 50% and now represent about 70% of our U.S. e-comm big and bulky shipments.”
Costco continues to do what Costco does best - succeed. For another quarter, the company exceeded expectations and shares continued to climb. Interestingly enough, Charlie Munger is predicting that Costco will eventually become a huge internet player (ecommerce sales) given their customer’s enormous purchasing power and loyalty to the brand.
Costco will be a major position in my 2022 portfolio
Revenue: 7.4 billion, an increase of +15% YoY
Earnings: $2.0 billion, an increase of +50% YoY
Free Cash Flow: $3.5 billion, an increase of +6% YoY
Press Release Callout
“Broadcom concluded the year with record fourth quarter results driven by a rebound in enterprise, and continued strength from cloud and service provider demand. Our infrastructure software growth continues to be steady with our focus on strategic customers. In fiscal 2021, we achieved record adjusted EBITDA margin of 60%, generating $13.3 billion of free cash flow, or 49% of revenue.
As many other semiconductor companies in 2021, Broadcom has thrived. Given their semi and and software businesses, they’ll continue to do well throughout the decade - leading to more free cash flow. I like their growth story.
Lululemon Athletica (LULU):
Revenue: $1.5 billion, an increase of +30%
Total Comparable Sales: +28% in the USA, and +40% internationally
Gross Profits: $829.4 million, an increase of +32% YoY
Store Count: 552, an increase of +18 net new stores
Press Release Callout
“Our third quarter results demonstrate the ongoing strength of lululemon and the tremendous growth potential of the business in both the near- and long-term. We are pleased with our early holiday season performance and how the lululemon brand continues to resonate in markets around the world. We are energized by the exciting opportunities ahead, and I'm proud of our teams across the globe for their passion and agility – I want to thank everyone for delivering a strong quarter.”
Revenue growth, margin expansion, and men’s apparel sales increasing +44% YoY (as predicted here) - Lululemon is doing just fine. Their holiday season seems to be off to a stellar start, as ecommerce delivered record-breaking days through Thanksgiving week. Demand continues to outpace supply, however.
Growth story at this time for LULU remains their men’s apparel, international expansion, and footwear launch. Long LULU.
Calling out notable quotes from the week’s two primary investor conferences, as well as brief highlights of Southwest Airline’s 2021 Investor Day.
Raymond James 2021 Technology Investors Conference:
Matt Baker - Dell (DELL) SVP of Corporate Strategy:
“Dell is incredibly good at supporting tens or hundreds or thousands of things in millions of locations. Right? And this decentralization phenomenon is pushing the market back in our direction not to say it wasn't in our direction, the public cloud because many of the public cloud players are excellent customers of Dell, but this decentralized phenomenon is really pushing computing back towards our core competency, which is the ability to deliver service and deliver product and capability, support it manage it all throughout the globe and be there if there's a problem within two hours, that's our core competency.”
Liz Centoni - Cisco (CSCO) Chief Strategy Officer
“I would say, two things [about Cisco]. One is around how many people think about us as a top 10 software company? We are, [yet] we still hear words like ‘legacy’ and ‘hardware’ thrown around as well…The second one is around innovation. There's a ton of innovation - organic innovation - that's happening in our businesses today. And those are the two things that I'd love for everyone to think when they think Cisco…the word cloud - it's cloud, it's software, it's innovation.”
Southwest Airlines (LUV) 2021 Investor Day:
While I’m personally not a fan of investing into airline stocks, I understand why some investors choose to do so - considering the kings of the industry will likely be around for decades to come. Southwest Airlines is in an interesting position as not being a legacy airline company, but proving its merit as a true industry competitor.
Southwest takes pride in its balance sheet - doing a solid job of having advantaged access to liquidity, while remaining out of significant debt.
Southwest’s expedited ‘point-to-point network’ has allowed the company to soar in total passengers carried per year - giving it a rising presence in key travel areas such as California, Florida, Texas, and Washington DC.
Deutsche Bank Virtual AutoTech Conference:
Ali Kani - Nvidia (NVDA) VP & GM of Automotive Business
Comments on the infrastructure needed for entirely smart vehicles:
“…the secret sauce is in having a software development flow that is safe and secure, which is needed for automotive safety standards. There's no one in the world that does that. Like how do you build AI code that needs to be safe and secure with every drop? You can't release buggy code in an OTA in self-driving vehicles.
Well, how do you build code that is AI-heavy in a safe and secure way? It's that software development flow that's end-to-end in the infrastructure. And essentially, being able to do that is really, really hard. No one has figured it out. And that's where I think NVIDIA is most differentiated, putting the development of a vehicle and -- in a virtual vehicle together so that you have really high-quality and efficient software development. So I think that's the core differentiator.”
Major Economic Updates:
Quickly touching on our country’s trade balance, jobs report, and you guessed it - new inflation data.
US Balance of Trade for October:
According to the Bureau of Economic Analysis (BEA), the US trade deficit narrowed to $67.1 billion October. Strangely, this is the lowest mark in 6 months - just one month after hitting a record high in September.
In October, exports rose +8.1% to $223.6 billion, with imports coming in at +0.9% to $290.7 billion. Leading economists suggest that the strong rebound in exports is evidence that the global supply chain crisis is slowly beginning to subside.
The extremely sensitive deficit with China (the largest with any country) fell by -14% in October to $31.4 billion. This is great news and I’m hoping that the trade imbalances across the board can continue to be slimmed down. Remember - the deficit with China for the first 10 months of the year is still running at nearly +14% higher than the year before.
US Job Openings for October:
According to the Bureau of Labor Statistics, the number of job openings in the US increased by +431,000 from a month earlier to 11.033 million. This heavily exceeded market expectations of 10.369 million.
The largest increases were seen in accommodation & food services (+254,000), nondurable goods manufacturing (+45,000), and educational services (+42,000).
US job openings continue to significantly outpace the number of available workers, with a crippling five million more open positions than people seeking to work. With individuals quitting their jobs at a record pace and more positions becoming available by the week, there’s essentially two unemployed workers per three job openings.
“That’s the lowest ratio of unemployed people to job openings we’ve ever seen and that is contributing to unprecedented tightness in the labor market,” noted Julia Pollak, chief economist for ZipRecruiter.
US Consumer Price Index (CPI) for November:
According to the Bureau of Labor Statistics, the US CPI increased from 276.72 points in October to 278.88 points in November. With the CPI increasing by +0.8% (higher than expected by analysts), inflation in the US is up +6.8% from a year before. This marks the fastest pace of inflation acceleration since 1982.
It’s unbelievable to see our Congressional leadership so clearly stoke the flames of inflation, and now have very limited accountability of the issue. Of course some money-printing needed to take place, but we are now facing the consequences of unchecked, uneducated decisions regarding US money supply circulation. That’s why we’re here though - to beat inflation and position ourselves for the long-term.
One final callout I want to bring to your attention - an outrageous move by the Bureau of Labor Statistics to change how the CPI is calculated. If this doesn’t show that inflation is, in fact, much worse than even the currents statistics suggest - frankly I don’t know what else will.
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.