👉 Week in Review: 5/7/23
Uber & Shopify's new focus on FCF..
Happy Sunday, everyone.
Before we dive in, here’s an interesting interview with legendary investor Stan Druckenmiller. Over a 30 year period of managing client funds, he averaged around +30% annual returns and never had a losing year:
I’ve been doing this for 45 years. I’ve studied a lot of economic history, but I’ve never had a situation where you had free money for 11 years, a very broad asset bubble, followed by jacking up rates +500 basis points in 12 months.
So for someone like me who likes to look at history and come up with potential scenarios — this is a particularly difficult period.
I’d say the one area where I feel reasonably comfortable in is I’m short the United States dollar. Currency trends tend to run at least two or three years. We had a long one here — over $10 trillion, something like $13 trillion came into the U.S. dollar over the previous decade…
I said something that the press ran with 8 months ago — that I wouldn’t be surprised if the stock market was not higher in ten years.
I still believe that, but I do think like the 1968-1982 period — there will be some big swings.
I think the way to make money in the next two years in the equity space is to be patient because I do think we have possibly some rough roads ahead, and I do think the Central Bank will respond in some crazy way that will give you a period like ‘70-’72 where you can make money or ‘76'-’78 where you could’ve made a lot of money…
This is a movie I’ve never seen anything like it, so I’m going to be very careful not to dig myself in a hole when I don’t have a strong belief to come out because I think the opportunities are going to be amazing as this movie unfolds in the next year in macro and equities.
This is presented without commentary — simply an interesting perspective for you to reflect upon.
Before diving in — we also wanted to share our deepest condolences for the victims of the shooting in Allen, Texas over the weekend. Just a couple weeks ago, there was also a mass shooting at a Sweet 16 birthday party in Dadesville, Alabama.
Week in Review — Too Long, Didn’t Read:
Apple announces $90B in share repurchases, Shopify divests their fulfillment business segment and affirm positive FCF in 2023, Uber’s $5B in adj. EBITDA is looking more and more achievable, AMD faces multiple headwinds, Berkshire Hathaway’s annual meeting, Chegg is getting smacked by A.I., Tesla’s fluctuating pricing model, BlackRock & Goldman Sachs encourage some hesitancy on rate hike expectations, Moscow drone strike breeds doubts, Robinhood accidentally said AMC was going bankrupt to users, potentially the last Fed rate hike (in the near-term), the Unemployment Rate drops again, the Services sector is in much better shape than the Manufacturing sector, and Consumer Credit sees its largest increase of the year.
Key Earnings Announcements:
Apple announces $90B in share repurchases, Shopify divests their fulfillment business segment and affirm positive FCF in 2023, Uber’s $5B in adj. EBITDA is looking more and more achievable, and AMD faces multiple headwinds.
Revenue: $94.8 billion, compared to $97.3 billion last year
Operating Income: $28.3 billion, compared to $30.0 billion last year
Profits: $24.2 billion, compared to $25.0 billion last year
Earnings Release Callout
“Our year-over-year business performance improved compared to the December quarter, and we generated strong operating cash flow of $28.6 billion while returning over $23 billion to shareholders during the quarter.
Given our confidence in Apple’s future and the value we see in our stock, our Board has authorized an additional $90 billion for share repurchases. We are also raising our quarterly dividend for the eleventh year in a row.”
I was listening to an episode of the All In Podcast a few weeks ago and those fellas hit the nail on the head — companies like Microsoft, Apple, and other $1T+ market cap giants are stuck between a rock and a hard place.
Given their size, their revenue growth has slowed to single digits and they’re unable to acquire competitors / smaller innovative companies because of antitrust — but they somehow still have to increase profits every year for shareholders.
Apple just showed us (statement quoted above) how they’ll be able to achieve this: stock buybacks and dividend hikes.
With that being said, “boring” single digit revenue growth and continued stock buybacks to supplement EPS is just fine with me assuming it’ll keep driving that stock price higher over time.
Apple delivered another record-breaking quarter for the iPhone and Service revenue sides of the business — catalyzing their total sales to come in just below $95B, +$2B higher than Wall Street’s expectations.
Product sales in key emerging markets continue to show strong momentum, with sales in India, Indonesia, and Turkey doubling year-over-year.
I’m not sure if you all remember us mentioning Tim Cook’s visit to India a few weeks ago, but as the company saturates all of the developed countries — it’s increasingly more important for Apple to begin penetrating the emerging markets of Mexico, Indonesia, Saudi Arabia, India, and Turkey. Total revenue of the APAC geography grew +15% YoY.
My long-term conviction in the massive and boring company remains. I’ll continue to dollar cost average into my position.
Revenue: $1.5 billion, an increase of +25% YoY
Operating Loss: -$193.0 million, compared to -$98.0 million last year
Profits: $68.0 million, compared to a -$1.5 billion loss last year
Earnings Release Callout
“Shopify’s strong first quarter results demonstrate once again that we’re the go-to solution powering businesses of all sizes, on every surface where they sell.
The changes we’re announcing today will ensure we keep pace with the high velocity of change before us, delivering the cutting-edge solutions our customers have come to expect from Shopify.”
Shopify has been a position in my portfolio for about 6 months now because 1) I’m a big believer in the value-add their technology and platform provides to small businesses and 2) the stock had sold off like crazy since their meteoric run since the pandemic.
The stock is now up +75% YTD, and was recently just pushed +25% higher because of their Q1 earnings results + divestiture announcement.
The company announced a second-round of layoffs for the year — saving them $500M / year in operating expenses. They also announced the divestiture of their fulfillment business (similar to what Amazon does with sellers) to Flexport. Finally, the company guided to Q2 revenue growth in the mid-20% range, but more importantly, affirmed investors their intention to generate positive free cash flow every quarter for the remainder of 2023.
I’m honestly skeptical. Their fulfillment business segment had a total addressable market of $100B — and now that’s off the table. However, I’m not going to argue with near-term free cash flow, especially given the macroeconomic environment.
Their path to improving unit economics remains unclear — however, now that their CapEx heavy fulfillment business segment isn’t a part of the equation anymore this company has an opportunity to double down on generating FCF over the coming 3 years (potentially sending their stock price higher).
Here’s the deal — there are two ways to generate more profit / free cash flow: increase topline revenue and let unit economics do their thing, or cut expenses as much as you can.
Shopify, rightfully, chose to do the latter. Okay.. you’re FCF positive and you’ve now bought yourself some time, but that doesn’t solve the slowing topline growth problem.
I’m debating taking my profits and rolling them into a better opportunity (perhaps UBER or somewhere else with more near-term certainty). I’ll keep you all posted on what I do.
Revenue: $8.8 billion, an increase of +29% YoY
Operating Loss: -$262.0 million, compared to -$482.0 million last year
Net Loss: -$157.0 million, compared to -$5.9 billion last year
Earnings Release Callout
“We delivered record profitability and free cash flow in Q1, and we are poised to expand profitability again in Q2. We continued to actively manage our balance sheet, exiting our equity position in Yandex. Taxi and refinancing our term loans, and remain focused on disciplined capital allocation over the coming years."
In summary, Uber is now snowballing into profitability and free cash flow — and their stock price should soon begin to reflect that (over the next 18-24 months).
During the quarter, Uber reported both a sizable increase in their topline revenue and adj. EBITDA — as well as having guided toward $825M in adj. EBITDA during Q2. This $825M guide was +9% higher than Wall Street’s expectations.
Free cash flow came in at nearly $550M, compared to -$47M last year.
More importantly, the company should exit 2023 having generated $3.5B in adj. EBITDA, which translates to $2.5B in FCF. This sets the company up very well to achieve their long-standing 2024 adj. EBITDA guidance of $5B, and FCF of $4.6B.
Assuming this $5B in adj. EBITDA is achieved, the stock is currently trading ~15X adj. EBITDA and ~16X FCF – all very fair valuations in my opinion.
I’m going to exit / trim a few profitable positions and roll that money over into Uber this week — then bump up the sizing to be the same as some of my favorite cybersecurity companies in the portfolio.
Very excited about this one.
Advanced Micro Devices (AMD)