Happy Sunday.
Before we jump in, I wanted to quickly mention that things are beginning to feel very “slow” for the residential real estate market. I’m not saying the bottom is in — but I live in Nashville, TN and everything seems to have taken a complete 180 from where they were two years ago.
Food for thought if you’re a residential real estate investor.
You heard our friend Genevieve here… the markets have been going crazy.
Be sure to give Genevieve and GRIT Capital a follow / free email signup. They’re great friends of the Rate of Return team!
Oh and by the way… we told you about the following on October 30th. Congrats to all those that have let us know that they took part in the TLT play:
Personally, we wish we took advantage of this trade with more capital — but hindsight is 20/20. More importantly, we don’t believe this trade is over by any means. Robert & Austin actually sat down with Troy Cates, Managing Partner at NEOS Funds, to discuss bonds in detail — especially their (BNDI) ETF.
Portfolio Updates:
Everything is largely the same — stay tuned for a “Year in Review” post in the coming week or so.
Additionally, I wanted to give a major shoutout to Katie Stockton. She’s an absolute technical analysis wizard, and because of her analysis I felt very comfortable doubling down on Broadcom (AVGO) stock back in October.
As you all know by now, that trade has done exceptionally well for me.
If you’re not yet a subscriber to her Substack (linked here) I highly recommend doing so. Her technical analysis service is a wonderful complement to mine — and it only costs $9 / month.
Week in Review — Too Long, Didn’t Read:
Costco announces a special dividend, Adobe delivered $7.3B in operating cash flow, Oracle is a puzzle I don’t care to solve, Macy’s has a big decision to make, Tesla moves quickly to update software on most of their cars in America, and your Fed pivot breakdown.
Key Earnings Announcements:
Costco announces a special dividend, Adobe delivered $7.3B in operating cash flow, and Oracle is a puzzle I don’t care to solve.
Costco (COST)
Key Metrics
Revenue: $56.7 billion, an increase of +6% YoY
Operating Income: $2.0 billion, an increase of +13% YoY
Profits: $1.6 billion, an increase of +16% YoY
Earnings Release Callout
“The Company also announced that the Board of Directors has declared a special cash dividend on Costco common stock of $15 per share, payable January 12, 2024, to shareholders of record as of the close of business on December 28, 2023. The aggregate amount of the payment will be approximately $6.7 billion.”
My Takeaway
Two years ago, someone asked me “If you could only own one stock for the rest of your life — what would it be?” My answer was Costco.
Why? 1) People always need to shop for groceries and other goods, and they love a good discount, 2) Customer loyalty is incredible — people literally pay to shop there, and 3) They’re international — which means the sky is the limit.
As you all know, I’m up about +50% on my Costco position. I opened this position both because of the reasons shared above, but also their dividend. I’m a dividend growth investor because I believe the most powerful wealth building strategy is getting paid more and more by your investments every year.
Costco not only delivered incredible earnings this quarter (we’ll dive deeper in a bit) — but they also announced paying a $15 per share “special dividend” to their shareholders. This proves my original investment thesis surrounding their dividend.
The earnings were great — beating both top and bottom line expectations, inflation was lower than expected, e-commerce sales expanded, in-store trends remained healthy — a great quarter.
Why I remain an excited shareholder:
Gross margin has expanded now for the 4th consecutive quarter, e-commerce sales increased +6% YoY, in-store traffic was up +5%, membership renewals were 92.8%, and the company has introduced dozens of new stores in 2023.
Can’t wait to own this one for years to come.
Adobe (ADBE)
Key Metrics
Revenue: $5.0 billion, an increase of +12% YoY
Operating Income: $1.7 billion, an increase of +16% YoY
Profits: $1.5 billion, an increase of +26% YoY
Earnings Release Callout
“Adobe’s remarkable performance in FY23 drove world-class margins and operating cash flows of $7.30 billion. Adobe’s strategy, scale, speed of execution and profitability position the company for years of sustained success.”
My Takeaway
You read that right — $7.3 billion in operating cash flow in fiscal year 2023. Remarkable! You all know this, but I feel the need to reiterate it every chance I get — if you want to try and predict stock prices, you need to be able to predict cash flow. Adobe is making that very easy right now.
The quarterly results weren’t that bad — with the biggest let down being their $1.9B in annual recurring revenue guidance for 2024 compared to the $2.0B Wall Street was expecting. However, Adobe has a history of guiding conservatively then knocking it out of the park (by the tune of hundreds of millions of dollars).
A few things I liked:
Their Digital Media business segment added +$569M in net new annual recurring revenue, exiting the quarter with $15.2B in ARR. Creative ARR grew to $12.4B, while Document Cloud grew to $2.8B.
The company’s operating margin expanded by +80bps to 45.9%, and the company repurchased $1.2B worth of stock during the quarter — ending the year having repurchased $4.6B ($2.2B still available for use in 2024).
Looking forward, there are a ton of reasons to be excited about Adobe — including price increases, the launch of Express mobile app, their generative AI product for Document Cloud, as well as ramping Firefly for enterprise adoption.
I’ll remain a happy shareholder.
Oracle (ORCL)
Key Metrics
Revenue: $9.7 billion, an increase of +12% YoY
Operating Income: $3.6 billion, an increase of +18% YoY
Profits: $2.5 billion, an increase of +44% YoY
Earnings Release Callout
“Demand for our Cloud Infrastructure and Generative AI services is increasing at an astronomical rate. As a measure of that demand, Oracle’s total Remaining Performance Obligations (RPO) climbed to over $65 billion—exceeding annual revenue.
Oracle is in the process of expanding 66 of our existing cloud datacenters—and building 100 new cloud datacenters—to meet growing demand.”
My Takeaway
Oracle reported another disappointing quarter with a top-line revenue miss driven by weaker-than-expected Oracle Cloud Infrastructure revenue. While management (as shown above) noted large deals in the pipeline — but after reading their earnings call I now have more questions than answers.
For example, the demand environment is improving dramatically for their competitors — but Oracle isn’t seeing it? While other companies in the space beat their revenue and profit expectations, Oracle hasn’t now for two quarters in a row. This leads me to believe the problem isn’t the product, but instead the lack of execution by management.