I/O Fund is keeping tabs on cloud security company Zscaler because of its surging sales and strong growth over multiple quarters. Zscaler's success is evident in the most recent earnings results.
Sales History
Zscaler's growth is impressive, because sales have grown over 50%+ for five consecutive quarters.
In fact, as you can see in the chart below, Zscaler has grown 40%+ or more in every quarter, except one, as a public company.
Growth Factors
Zscaler's notably high growth is due to a few secular tailwinds propelling the company forward:
Rise of the cloud environment
Obsolescence of firewalls used to secure networks in the cloud
Network effects, as Zscaler collects massive amounts of data, over 300 trillion signals everyday
Upward Trending Sales and Persistent Demand
Market demand for Zscaler's products and solutions is demonstrated in customers' willingness to pay for multi-year contracts upfront, allowing for a constant stream of revenue and capital to go back into Zscaler's operations.
Current cashflow trends are indicative of Zscaler's ability to deliver high quality results.
We can see upfront cash payments by looking at deferred revenue, which increased 74% YoY. It is also worth pointing out that long-term deferred revenue (DR) increased 99% YoY to $63 million. Deferred revenue turns into sales in the future and an outsized growth in DR highlights that there is ample balance sheet support for future sales.
Deferred revenue actually represented 281% of Q1 sales, the highest seasonal value in the firm's history.
Thoughts from Zscaler's Management
Management has raised its sales guide, and expects FY2022 sales to grow 50% YoY to $1 billion. Management also expects billings to increase 40% YoY to $1.3 billion, which further underscores recent topline growth.
I/O Fund's Potential Position on Zscaler
I/O Fund is watching Zscaler closely but we do have reservations about the company’s elevated valuation. Zscaler trades at over 50x fwd sales which is a premium multiple in the cloud category.
We will be tracking cloud earnings to better understand whether Zscaler is positioned to continue to grow strongly going forward.
But there's more to Zscaler and this analysis –
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DLocal reported Q3 earnings recently and I/O Fund analyst Bradley Cipriano discusses what these earnings mean for the burgeoning company. DLocal offers alternative payment methods to emerging market consumers who may not have access to debit or credit and are more likely to own a smartphone. DLocal's business model has enabled the company to see rapid growth.
Emerging markets, their global relevance, and lively consumers in those areas aren't going away any time soon. Watch the video below to see why DLocal's sales should continue to grow rapidly.
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As earnings season winds down, we review earnings reports for popular growth tech stocks Etsy, Square, and Palantir.
Regarding Etsy, e-commerce valuations have come down as a result of the correction in growth tech, and when compared with other e-commerce stocks that are facing tougher comps, Etsy is showing slowing projected growth of 32% this year.
We also discuss Square, a fintech stock whose topline beat was driven by a surge in Bitcoin revenue. Excluding Bitcoin revenue, the company still reports decent growth of 44%. We look at Square from both perspectives below.
Palantir is guiding for Q2 revenue growth of 43%, but to prove product-market fit, the company needs to show higher growth in commercial revenue. Beth Kindig previously wrote about this in Forbes when she analyzed the product at its IPO.
Etsy:
Like many beneficiaries of Covid-19, e-commerce benefitted from the economic shutdown through an acceleration in revenue. In 2020, consumers spent approximately $861B online with U.S. retailers, up 44% YoY, nearly three times the growth in 2019 at 15.1%, according to estimates from Digital Commerce 360.
E-commerce valuations peaked for the industry in early 2021 as investors worried about more difficult comps. As you can see from the chart below, Etsy’s valuation peaked at 15x forward revenues, based on data from YCharts. As of May 25, Etsy was trading at 9x forward revenues.
Etsy is projected to show slower revenue growth of 32% this year than popular e-commerce stocks like Sea Limited, 89%, Mercado Libre, 89%, and Shopify, 51%. Etsy is facing noticeable deceleration from its 111% YoY revenue growth in 2020.
Revenue growth for Etsy is on par with BigCommerce, which is valued at 16x revenue versus 9x revenue for Etsy. Meanwhile, Etsy is already profitable with 74% gross margins and projected EPS growth in 2021 of 12%. The company also beat on its top and bottom lines with 141% YoY revenue and EPS of $1.
GMS represents total sales and is an important metric for e-commerce stocks. In Q1, consolidated gross merchandise sales (GMS) for Etsy was up 132.3% YoY to $3.1B, while Etsy marketplace GMS was up 144.1% YoY to $2.9B. Etsy estimates that stimulus payments drove approximately 8% of GMS growth in Q1. In its guidance for Q2, Etsy is estimating consolidated GMS growth of 5% to 15% YoY.
In Q1, the Etsy marketplace reported the highest growth rates for active buyers, repeat buyers, and habitual buyers since becoming a public company, acquiring 16.3M new and reactivated buyers. Active buyers grew 91% YoY; repeat buyers who made two or more purchases in the last year grew 114%; while habitual buyers, the company’s most loyal consumers, grew more than 205%.
Conclusion
Like many e-commerce stocks, in 2020 Etsy benefited from Covid-19 through an acceleration in revenue. The company is now facing tougher comps and is guiding for decelerating growth. E-commerce valuations have contracted, and Etsy is not the cheapest e-commerce growth stock we analyzed above.
As of May 25, Etsy was trading at 9x forward revenue versus 6.36x for Farfetch and 7.78x for Poshmark, which we previously covered. Unlike other popular e-commerce stocks, Etsy is profitable with a gross margin of 74%, and projected revenue and EPS growth in 2021 of 32% and 12% respectively.
Square:
Covid-19 accelerated the trend towards digital payments, with more than 70 million transactions being processed globally in 2020, representing growth of 41% YoY, according to a recent report from ACI Worldwide and GlobalData.
The value of those transactions rose 32.8% YoY to $69T, while the share of digital transactions was 9.8%, up from 7.6% in 2019.
Digital payments are nascent with plenty of room for growth, according to the report.
Digital transactions have a projected CAGR of 12% by 2025, with the fastest growth of digital payments from 2020 to 2025 in Croatia, 374.4%, Columbia, 112.7%, Malaysia 83.9%, Peru, 74.4%, and Finland 71.4%.
North America is expected to be the fastest growing region, with a CAGR from 2020 to 2025 of 36.5%.
Square, a popular fintech stock, allows users to trade Bitcoin via its mobile application. Square’s Cash App has outpaced PayPal’s Venmo in quarterly downloads every quarter since launching Bitcoin trading in Q4 2017, based on data from Sensor Tower.
Square reported Q1 earnings May 6, beating on the top and bottom lines, driven by a surge in Bitcoin revenue. Revenue of $5.06B, up 266% YoY, beat by $1.73B. Excluding bitcoin, total net revenue was up 44% YoY to $1.55B.
Cash App revenue was $4.04B, up over 650% YoY, with gross profit of $495M, up 171% YoY. Cash App generated Bitcoin revenue of $3.51B with gross profit of $75 million. Excluding Bitcoin, Cash App generated revenue of $529M, up 139% YoY.
Gross profit grew 79% YoY to $964M. Seller generated revenue of $1.02 billion, up 19% YoY, and $468 million of gross profit, up 32% YoY.
To bring in new customers, last March, Square began offering Cash App users the ability to send Bitcoin for free. During the quarter, Square also integrated Square Loyalty into Cash App, which it says is “a flywheel for seller and buyer discovery, engagement, and retention.”
Square officially launched its industrial bank, Square Financial Services, last March. It is expected to launch business checking and savings accounts, according to a recent report.
Excluding Bitcoin revenue, Square trades at a premium compared to peers PayPal, Fiserv, and Shift4. However, for 2021, Square is projected to grow revenue 115% YoY and EPS 80% YoY, which is higher than other fintech stocks. Gross margins for Square are lower than its competitors, as Bitcoin boosts revenue but reduces gross margins.
Conclusion
Moving forward, Square faces increasingly difficult comps and trades at nearly 16x forward revenue, which is a premium compared to peers and related to its higher revenue growth.
Palantir:
Total commercial revenue grew 19% YoY to $133M, while US commercial revenue grew 72% YoY. Commercial growth was more muted due to the ongoing impacts of Covid-19, including in Europe, according to the report.
Palantir is continuing to make progress on commercial customer growth, according to the report. CEO Shyam Sankar struck a bullish tone, reporting a substantial increase in new leads:
“We see strength and forward looking indicators and customer interest,” he said. “Since the beginning of February, qualified commercial opportunities in the US and the UK are up 2.5 times. Active commercial pilots across the business have more than doubled and opportunities across the US and UK government continue to develop at pace.”
Right now, the closest competitor to Palantir is Semantic AI, a private company headquartered in San Diego, but more competitors are likely being developed in the startup ecosystem. We cover this and more in a previous write-up by Beth Kindig here.
Last April, Palantir demonstrated Apollo for Edge AI. The product is now live and takes a “pioneering approach” to AI using micro models, Sankar said:
“Apollo for Edge AI is the next evolution to transform AI into alpha, enabling customers to train, manage and deploy multiple independently versioned chained models to the Edge with ease,” he said.
Below we compare Palantir with other high growth tech stocks. While Palantir has healthy gross margins of 78%, projected 2021 revenue growth is lower than growth tech stocks like DDOG, SHOP, and ZS, which also trade at valuations under 30x.
Conclusion
Although Palantir is guiding for revenue growth of 30% or more through 2025, we believe the company will needs to do a lot to execute in the Commercial market against the thriving AI startup ecosystem. However, it may take a few years before AI startups can effectively compete against Palantir. The number to watch will be commercial revenue growth, which was low at 19% this past quarter. Without more growth here, the product may not show signs of product-market fit in the commercial sector.
Disclaimer: The author, Jessica Ablamsky, owns shares of Etsy and Square. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.
In my latest Forbes article, I cover the 2020 Q4 earnings for Shopify, Roku, Fiverr and Palantir. More importantly, we explain why tech stocks have been selling off recently despite some healthy earnings reports.
We discuss key points in the earnings reports from leading e-commerce software company Shopify (NYSE:SHOP), a company that’s not sitting stagnant by any means. We review Shopify’s product road map and how the company continually innovates to maintain its lead. The company grew revenue 94% YoY to $978M, topping consensus estimates by $64M (7%). Adjusted EPS of $1.58 beat estimates by $0.37.
We also discuss Roku (NASDAQ:ROKU) and why CEO Anthony Wood does not believe his industry has seen a pull forward from COVID-19 but rather a structural shift that benefits AVOD and programmatic CTV ads long term. In my previous analysis on Forbes, I had pointed out that Roku’s true market is pay-TV advertisers (rather than cord cutters). This was echoed on the recent call (nearly verbatim). Management also explained why Peacock and HBO are not truly competitors but rather increase the pool of customers for Roku.
Moreover, driven by strong advertiser demand, Roku beat on revenue and earnings when it announced Q4 results Feb. 18 with 58% growth year-over-year and guided for 51% growth for Q1 2021.
Fiverr (NYSE:FVRR) is a stock that has seen phenomenal gains of more than 800%. We review this company’s growth potential as a gig economy leader with the recent launch of its subscription service. The online freelance marketplace platform beat on revenue and earnings as it closed out a breakthrough quarter in the company’s history.
Lastly, we talk about Palantir (NYSE:PLTR). The company is guiding for 30% growth over the next five years which didn’t match its valuation going into earnings. Under the hood, the commercial accounts growth was a paltry 4% although perhaps the recent partnership with IBM (NYSE:IBM) will help strengthen the commercial customer base.
Palantir also announced Q4 results Feb. 16. Revenue grew 40% YoY to $322M, beating consensus estimates by $21.02M. Net loss of ($0.08) per share missed estimates of ($0.02), according to Bloomberg, despite the net loss improving from ($0.29) per share for the same period last year.
In the 3rd part of my Q3 earnings analysis, I review reports from Zoom Video, Okta, Snowflake, Crowdstrike, ZScaler and Elastic.
Zoom Video
Zoom Video provided a nearly flawless earnings report for the first full quarter that followed initial work-from-home orders. The blend of Zoom Video having virality across consumers from its freemium model combined with enterprise is the company’s strength strategically as the competitors do not have the virality component. In Q3, customers with more than 10 employees represented 62% of revenue with net dollar expansion rate of 130%. Globally, Zoom exhibits strong growth, as well, with revenue from APAC and EMEA growing 629% year-over-year.
However, gross margins were a weakness in the report at 68.2% compared to 82.9% last year and 72.3% last quarter. The company is providing the service for free to many users including K-12 schools during the pandemic. From my perspective, the temporary margin hit in exchange for virality and establishing consumer behavior is a good trade-off.
Okta
According to most standards, Okta’s earnings report was solid and resulted in an uptick in the stock price. However, the growth has been flat for most of this year.
Revenue rose 42% to $217.4 million ahead of estimates for $202.7 million. Bookings (remaining performance obligations) are growing faster than revenue at 53% to $1.58 billion. Calculated billings were up 44% year-over-year. This was a re-acceleration of calculated billings from the previous quarters in FY2021 where the pandemic weighed on budgets.
The company is profitable on an adjusted basis with EPS of $0.04 and free cash flow of $41.6 million, up from $9 million a year ago. Highlights include a growing number of customers in the financial services sector and government.
Snowflake
Snowflake grew 119% year-over-year to $159.6 million with remaining performance obligations of $927.9 million, or 240% year-over-year growth. Product revenue grew 115% year-over-year. The net revenue retention rate of 162% is impressive although other companies have exceeded this in their 6th year (Snowflake was founded in 2012 but was in stealth mode until 2014 when it began to work with customers).
Gross margins are between 58% to 63%, which it’s normal for a cloud company to be lower than a SaaS company on margins. However, operating margins were negative (30%) with FCF margins of negative (23%). Probably the biggest issue that Snowflake faces are the sales and marketing costs. In the previous two quarters, they were near or exceeded total revenue and in this quarter they were about 90% of revenue at $134 million compared to the $159 million in revenue.
CrowdStrike
CrowdStrike beat consensus estimates on both the top and bottom lines and raised Q4 guidance. Revenue grew 86% YoY, representing an 8% beat above Wall Street estimates. Subscription revenue increased 87% YoY while annual recurring revenue advanced 81% compared to a year ago. The company also achieved its most impressive quarter ever in terms of profitability, earning $0.08 per share on the bottom line. This was CrowdStrike’s third consecutive quarter of positive EPS and its highest total yet. Free-cash-flow margin increased to 33% and gross margin improved to 76%.
In the quarter, CrowdStrike added 1,186 net new subscription customers, representing growth of 85% YoY. CrowdStrike also continues to drive new module adoption in existing customers, as 44% of the company’s subscription customers have adopted five or more modules versus 39% in the previous quarter.
Zscaler
ZScaler announced Fiscal Q1 2021 results that easily cleared analysts’ expectations. Revenue growth accelerated to 52% YoY, which represents the company’s third consecutive quarter of growth acceleration.
Adjusted billings growth increased 64% YoY, far surpassing the consensus expectation calling for 39% growth. This beat was driven in part by a record quarter of seven-figure deals. The company’s net retention rate of 122% advanced from 120% last quarter and 119% the quarter before. Non-GAAP EPS of $0.14 was 8 cents better than expectations while the company also announced an impressive 30% FCF margin. Non-GAAP operating margin of 14% far exceeds the consensus of 2.9%.
Elastic
Elastic announced strong FQ2 earnings on 12/2. Total revenue increased 43% YoY, representing an 11% beat above consensus. Total billings grew 42% YoY while SaaS revenue increased 81% versus the same period a year ago. The company’s losses also improved significantly, with non-GAAP EPS of -$0.03 coming in 17 cents better than expected. Non-GAAP operating loss improved to -$1.9 million, representing a -1% operating margin versus -10% projected. Gross margins also came in better than expected with 77% versus a consensus of 75%. FCF margin was -13% for the quarter.
Subscription revenue totaled 93% of Elastic’s total revenue in the quarter, with 45% of total revenue coming from outside the US. Management views this geographical distribution as a strength in the company’s business model. Elastic’s net retention rate ticked down several points from last quarter but still remained modestly above 130%. Elastic now has a total of 12,900 subscription customers with 650 of those (5%) having annual contract values exceeding $100K.
In the second part of my Q3 2020 tech earnings review series, I covered Roku, Square, The Trade Desk, Datadog and JFrog.
Roku
Roku reported Q3 earnings on November 5th. The 73% year-over-year revenue growth the company announced was 23% above consensus expectations. Gross profit rose 81% YoY while gross margin rose 216 basis points in total to 47.6%.
Roku added 2.9M active accounts in the quarter (+43% YoY). Total streaming hours increased by 0.2 billion hours over the last quarter to 14.8B (+54% YoY), while ARPU grew 20% YoY to $27.
Roku was a beneficiary of the rebound in ad spend, as the company saw Q3 monetized video ad impressions grow 90% YoY vs. 50% YoY growth last quarter. Roku is anticipating that Q4 revenue growth will likely be in the mid-40% range, similar to the growth rate seen in the last few holiday seasons. Per the earnings call, the company is being cautious about holiday spending with this forecasted guidance.
Square
Square announced blowout Q3 results with huge beats on both the top and bottom lines. Non-GAAP EPS of $0.34 beat consensus expectations by $0.18. The company saw revenue grow 140% YoY to $3.03B, beating the consensus estimate by $950M or 46%.
Gross payment volume of $31.7B was 6% above expectations. In total, Square saw gross profit rise 59% YoY, while Cash App gross profit soared 212% YoY.
In the quarter, the number of average daily transacting Cash App customers nearly doubled from the same period last year. Square did not provide guidance for Q4, but noted in its shareholder letter that the trends they observed in Q3 remained strong through October.
Square’s Seller Ecosystem revenue grew 5% YoY as regions began to reopen. More impressive was the growth of Square’s Cash App Ecosystem, which saw an increase of 23% in daily active users and 574% YoY growth in revenue.
The Trade Desk
The Trade Desk announced Q3 results that easily cleared analysts’ expectations. Revenue grew 32% YoY, beating consensus estimates by 19%. Non-GAAP EPS of $1.27 was a big beat on the consensus bottom-line expectation of $0.45. The company noted that it saw Connected TV grow over 100%, Mobile video spend grow 70% and Audio spend grow 70%.
Management issued an upbeat outlook for Q4, expecting $289M in revenue at the midpoint vs. expectations of $255.1M. At the midpoint of this estimate, The Trade Desk is expecting roughly 34% YoY revenue growth in Q4. TTD shares traded over $700 for the first time immediately following the announcement of these results.
Datadog
In Q3, Datadog recorded its 13th consecutive quarter with a dollar-based net retention rate exceeding 130%. Operating margin improved to 9% in the quarter versus expectations of 0.6%, while gross margin improved 3% to 79%.
Q4 guidance was issued for $163M in revenue at the midpoint (+43% YoY) which was 5% above the consensus outlook. Datadog shares initially sold off as much as 14% on these results, but the stock pared its losses to close trade on Wednesday. The stock rebounded Thursday and is now up over 11% off Wednesday’s lows.
In its Q3 earnings call, Datadog’s CEO Olivier Pomel commented on the recovery in usage trends the company observed after a weak Q2. “Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2…the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels.”
JFrog
JFrog announced earnings for Q3 in its first quarter as a public company. The company grew revenue 40% YoY, beating consensus expectations by 3%. JFrog also announced Non-GAAP EPS of $0.05, beating expectations by 5 cents.
Gross margins came in at an impressive 83% while FCF margin improved to 25% in Q3. For Q4, JFrog expects $41.4M in revenue at the midpoint vs. consensus of $40.52M. The stock has initially sold off up to 10% on the results, as the 40% revenue growth represents a deceleration from the 46% growth recorded last quarter. Even after today’s sell-off, FROG still trades at approximately 30x 2021 revenue, which remains among the highest valuations in the software industry.
This article was originally published on Forbes on Oct 29, 2020,11:49pm EDT
Before breaking out the earnings reports from the high-growth universe, here are the results from Big Tech earnings today. Each company beat on both the top and bottom lines. Other than Alphabet, they are all trading down after-hours following these results as the market digests the magnitude of the beats, and in Apple's case, the lack of guidance.
BETH.TECHNOLOGY
Snap:
Snap reported Q3 results on October 20th, beating both the top and bottom lines. The ongoing recovery of advertising budgets helped to boost Snap's revenue growth to 52% YoY in Q3, which now sits just below the 58% pre-COVID growth rate the company recorded during Q1.
Notably, the reacceleration that Snapchat reported is the highest Q3 growth rates since 2017. According to management, some of the user growth highlights from this quarter include Lens Studio, which saw creative applications to use AR as a way to try-on products from brands including Sally Hansen for nail polish and Champs for sneakers.
Other product features released contributing to this quarter's beat include Brand Profiles, Minis, Places on the Map, Dynamic Ads, Bidded AR Lenses, Dynamic Lenses, Camera Kit, Snap ML Lenses including the Anime Lense.
The company also attributes the growth to linear TV and sports being featured on the social media platform at a time when content is seeing a surge.
Here is what the company said about Dynamic Ads and AR Ads on the earnings call:
For example, last quarter we launched Dynamic Ads globally, which combine product catalogs with our optimization capabilities to reward advertisers who invest in our platform with ROI at scale, and we are already seeing strong adoption rates from Retail, CPG, Restaurant, and Gaming verticals, among others.
While Dynamic Ads recommend items to Snapchatters based on their interests, AR try-on takes this a step further and allows Snapchatters to visualize the item in real life. For example, Clearly, an eyewear retailer, leveraged our sponsored AR Lenses to enable our community to try on different pairs of glasses, which resulted in 33 seconds of average playtime and a 5.3% share rate. Clearly was able to drive a full-funnel impact for their brand, achieving a 7-point lift in brand awareness and a 5-point lift in brand consideration while also driving a 46% lift in unique page viewers on their site and a 3.3% lift in purchases.
Daily active users rose 18% to 249M, topping the consensus of 243M. For user base demographics, Snapchat reaches over 90% of Gen Z and 75% of Gen Z and Millennials in the United States, the UK and France. This is one reason the company believes its augmented reality platform is seeing early success with brands as this demographic is more likely to engage with AR advertisements. Snapchat also has a gaming platform with new releases every quarter.
The majority of Snap’s growth came from the Rest of World category, at 43% growth. North America grew 7% and Europe by 10%. Meanwhile, North America and Europe carried the majority of the revenue growth at 56% year-over-year and 49% year-over-year, respectively.
Snap also recorded its most successful quarter ever in terms of monetizing its user base with a global ARPU of $2.73, coming in well ahead of the $2.23 consensus estimate.
Even though the company did not offer guidance for Q4 due to COVID uncertainties, SNAP stock surged over 20% following the results. Kids being schooled virtually, especially college-aged, is likely contributing to the company’s record Q3 usage and monetization.
Pinterest:
Pinterest rose with Snap following Q3 results as investors anticipated a similar recovery in ad spend for the social media company. The company delivered outstanding Q3 results that easily cleared consensus expectations.
Total revenue rose 58% YoY in Q3 with 49% growth in the US and 145% growth internationally. Monthly active users jumped 37% overall to 442M and ARPU rose 15% (US +31% and international +66%) to $1.03.
Perhaps most impressive was management’s 60% YoY growth guidance for Q4:
Additionally, we expect our business to maintain its momentum in Q4, with revenue growing around 60% year-over-year.
And then finally, this brand safety concept, especially post-July and the boycotts that we saw, I would imagine that we're seeing a sustained benefit just due to the election season. But I think it's a secular trend where advertisers want to be around positivity as they build their brands, and that that's contributing to our growth as well. That's what we're hearing.
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Management did state there is a level of uncertainty with this guidance due to Covid and tailwinds the company saw from being “brand safe” during the election (i.e. attracting ad spend typically given to Facebook).
Here is what the company said when asked if the beat came from factors inherent to the product or due to the macro conditions of ad spend being thin in Q2.
Yes, I mean, Ross, it's really hard to parse. I mean, I would love to be able to disaggregate that and say, we're getting X amounts from the technology investments we've made. We're getting Y amounts on demand returning from a macro perspective, or insights give us a certain amount and the brand safety equates to the remainder, in reality, it's the combination of all the above. Ads are working. I think we went through this a little bit on Brian's question, but making it easier for especially medium-sized advertisers to on-board and automate spending their budgets effectively against their desired online conversion and sales objectives has been a big driver for us …. [some parts omitted here for brevity]
So it's a mix of product and technology, macro recovery, the insights that we're able to deliver, and the brand safety and positivity that Pinterest uniquely brings and the world of social media.
Twilio:
Twilio pre-announced Q3 revenue would come in ahead of previously issued guidance from the company of $401 million to $406 million, with analyst consensus at $404M. Expectations were already high going into the earnings report and Twilio went on to beat revenue estimates by 10% for revenue of $448 million and growth of 52% year-over-year. This was the largest beat by dollar in Twilio’s history, as referenced by analyst Khozema on the earnings call.
Twilio also handily beat on earnings at $0.04 EPS compared to analyst consensus of -$0.03 EPS.
For Q4, Twilio expects revenue of $450M-$455M (37% YoY growth) vs. consensus of $432.1M. The net retention rate came in at 137% for TWLO in Q3. The guidance the company provided for earnings next quarter did not match expectations with an operating loss ranging between $10 to $15 million.
Twilio is on an expansion streak fueled by acquisitions. The company completed the acquisition of SendGrid in early 2019, launched the Flex platform, and has now acquired Segment to “enable developers and companies to unify customer data from every touchpoint.” The guidance provided does not include Segment which is expected to close in the current quarter and will modestly impact the top and bottom line.
On the earnings call, the company highlighted the importance of health care with Twilio’s products:
In healthcare, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis, provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy, and magnitude of that need.
Most importantly, CEO Jeff Lawson and the management does not see these trends slowing down with a vaccine or return-to-normal and specifically addressed this:
The other thing I would just point out, though, is that some of the acceleration that we've seen, for example, in healthcare and education, e-commerce, but we also think that those use cases are going to be pretty resilient. I don't think they're going to be ephemeral at all. In fact, I think we see a lot more opportunity in some of those industries. And so I think that's going to provide ongoing tailwind over the medium-term as well.
You can access the Investors Day presentation here where the company guided for 30% growth over the next 4 years.
Shopify:
Shopify announced outstanding Q3 results, with revenue growth of 96% year-over-year and Gross Merchandise Volume growth of 109%. The revenue number came in 18% above consensus estimates while GMV was 13% above forecasts.
The company announced subscription revenue grew 48% during the quarter, merchant revenue rose 132%, and monthly recurring revenue grew 47%. Non-GAAP EPS of $1.13 came in well ahead of estimates calling for $0.50, and operating margin increased to 17.6% vs. an 8.7% consensus. This compares to an adjusted loss of $0.29 EPS.
EMARKETER
Shopify gave away a 90-day free trial with this cohort transitioning from a free trial to paid merchants in Q3, which had a “double cohort effect” on merchant revenue growth of 132%. The company does not expect the Q4 demand for subscriptions on a year-over-year MRR growth rate to match Q3. This note was addressed by Amy Shapero, CFO, in the earnings call:
So, I want to just highlight that we did have a record quarter in Q3 for merchant growth due to the double cohort effect that I talked about in my opening remarks. But I think it's really important to emphasize that even excluding the 90-day free trial as who converted in Q3, we still would have seen an acceleration in our merchant growth over pre-COVID levels, which tells you that more merchants are coming to the platform with this shift to online commerce and COVID.
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The free trial was addressed again here as to how the key metrics compare to the 14-day trial with lower conversions but higher retention:
So, the new store creations in Q2 were the new stores coming on the platform associated with the 90-day free trial. So, we were not able to count them as merchants in Q2. We saw many of them convert to paying merchants in Q3. The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.
Notably, Shopify incredible B2B brand power with philanthropic efforts to support Black entrepreneurship with $130 million dedicated to supporting businesses with diverse ownership. The company also launched a Tiktok channel that allows merchants to market their products using TikTok for Business. The collaboration allows for in-feed video ads to expand their paid and organic reach.
Microsoft announced FQ1 2021 results on October 27th, outperforming on headline metrics led by strong Commercial Cloud and Azure growth. EPS of $1.82 came in ahead of estimates of $1.54 EPS while 12.4% YoY revenue growth represents a 4% beat above consensus.
Intelligent Cloud revenue of $12.99B was well ahead of the $12.73B consensus, while the 48% YoY growth in Azure was better than the expected 44% growth. Management issued a somewhat tepid outlook for FQ2, expecting weaker Consumer PC growth and intelligent cloud revenue in line with forecasts, along with stronger Processes and Business Productivity revenue.
The reason for the lower-than-expected guidance is due to softer business demand that will cut into Windows licensing revenue. We also saw commercial PCs crater 22% after support for Windows 7 ended and the coronavirus pandemic forced more people to work from home.
However, these are not the segments that would cause an investor to choose Microsoft as a portfolio holding. For the most part, the bull thesis centers around Azure and the line of horizontal products under the Azure infrastructure and PaaS umbrella: Azure Arc, Azure Synapse, Azure SQL Edge, Azure Machine Learning, Azure Space and Microsoft Cloud for Healthcare. Azure saw a slight acceleration of 1% this quarter. Gross margins on Commercial Cloud are an impressive 71% when including an accounting change on server equipment from two to four years.
Notably, when asked about the effects a decline in on-premise and transactional revenue could have on Microsoft, CEO Satya Nadella answered that the strategy for Microsoft is distributed computing with the public cloud and edge (and presumably these will make up for any decline seen from transitioning on-premise).
One is, the approach we have always taken is that distributed computing will remain distributed. So, the cloud and the edge is what will be the distributor fabric for applications. So, if you look at where our growth is coming from for the all-up number in Intelligent Cloud, it's coming from the infrastructure layer, the flexibility that we have around hybrid deployment, things like Azure Arc, a very differentiated. The same thing with data, that's one of the big future innovations, even in the last quarter was the ability to deploy, for example, Azure data in any cloud, including the edge.
The more interesting note came at the end of the earnings call by Brent Bracelin of Piper Sandler, who pointed out Azure had grown to 17% of revenue — larger than Windows – and up from 45% just three years ago, according to his model.
I wanted to follow up on Azure. This is a segment that’s grown now to 17% of revenue. I think, that’s up from 4% just three years ago. You talked about the number of petabyte-scale applications doubling. And from a size standpoint, it looks like in my model, Azure is bigger than the Windows business for the first time ever. My question really is around where are we at in the journey around Azure? How important is this to the Microsoft model? And ultimately, how big could it be looking out over the next three to five years?
This provided an important glimpse into Azure’s ongoing importance and the evolution of Microsoft.
This is the inaugural momentum list report written by David Marlin. We will release this report on a monthly basis.
Process Overview:
Identifying stocks that have superior momentum is a proven way to outperform the market. The key is evaluating which stocks show the fundamental and technical trends to sustain the type of momentum that will outperform the broader market.
In this report, I use a combination of fundamental, technical, and industry analysis to determine the top momentum stocks in the tech space. Please note, we’ve included one featured stock in this report: Sea Limited.
For evaluating the strength of a stock’s performance, I use a few time frames: YTD performance, performance from key market lows (in our case, the March lows), and short-term momentum.
For short term, I often look at stocks on a quarterly basis as it is very common to see a stock post big gains after earnings and continue that momentum for the rest of the quarter. With the current sell off in the market, I am also closely looking at how stocks have performed during the market decline as technical strength is best revealed during pullbacks.
On a technical basis, I like to use a few moving averages to help determine trends – the 8ema & 21ema for short terms trends, the 50 MA for medium term, and the 200 MA for long term. In the current market environment, many previous leaders are now trading under their 50-day moving averages. This is a key indicator that there has been a momentum change in these stocks and their previous uptrend has slowed considerably. Many stock trading legends, including William O’Neil, recommend avoiding stocks trading under their 50-day MA’s all together.
The strongest stocks tend to be in the strongest industries. Identifying growing and evolving industries is a key to finding big gainers. Companies with large addressable markets that are ideally positioned to capitalize on emerging trends are the focus of this list.
High growth stocks obviously trade at a premium valuation, so this is not the most important factor in the creation of this list. However, valuation cannot not be ignored, even for high growth stocks. For this list, I analyzed historical valuations and valuation in comparison to peers.
The criteria in the creation and maintenance of this portfolio moving forward is outlined below. Note that I only focus on stocks in the tech space with large addressable markets and market caps exceeding $3B.
Summary: Sea Limited is one of the top growth stocks to own based off its strong growth and leadership position in a rapidly growing market that remains underpenetrated. See the attached PDF for the full report on Sea Limited.
Summary: CrowdStrike continues to prove it is a secular winner in the cybersecurity industry, displacing the existing participants and gaining significant market share. The fundamental performance in Q2 confirms this company is a best-in-class business worth owning as security software continues to be the top priority for organizations around the world.
Summary: Fiverr has seen a surge in consumer demand related to COVID, and the company has now seen 4 consecutive quarter of accelerating YoY revenue growth. I believe Fiverr is ideally positioned to become a sustained beneficiary of the digital transformation long after the economy reopens and see a tremendous runway for growth ahead of them. At a roughly $4B valuation, Fiverr is in the early innings of its lifecycle, as management estimates that its TAM is north of $100B.
Summary: Square has built a platform around digital payments and commerce, positioning itself to benefit from the transition to a cashless society. Square is ideally situated for sustained growth with the ongoing shift towards digital payments, both on the B2C and P2P side with its Seller and Cash App ecosystems.
Summary: Fastly has proven itself as a disruptive and innovative company focused on creating cutting-edge technology for developers and DevOps teams. Fastly is one of the main beneficiaries of the digital transformation, as the subsequent increased internet usage in its clientele has led to accelerating revenue growth and net retention rates for the company.
Summary: MercadoLibre is the leader in the Latin American e-commerce market, and is poised to continue to benefit from the increasing shift to online shopping in those underdeveloped nations. The company received a massive boost from COVID across all its businesses, including tremendous growth in MercadoPago, the company’s digital payments segment. MercadoLibre has a long runway for growth ahead of it as the top e-commerce and fintech company in a developing region.
Summary: Pinterest stock soared after its Q2 earnings report, as management predicted a return to +30% YoY growth levels. Pinterest has a golden opportunity to accelerate its growth by increasing monetization per-user, particularly internationally. As advertisers around the globe gradually ramp up their spending again, Pinterest is positioned to be one of the main beneficiaries.
Summary: A list of the top momentum stocks would not be complete without Tesla. Tesla is a company with massive potential for growth ahead of it as it attempts to revolutionize the future of the transportation industry. The top auto companies in the world are all chasing Tesla to catch up to its EV leadership status and the company continues to widen its lead with its proprietary innovation.
Summary: Penn Gaming has a tremendous opportunity to become a dominant player in the rapidly growing sports betting industry. Newly acquired Barstool Sports will be the main driver of this growth, as the company’s social media following allows Penn to digitally reach millions of potential customers. In its launch last Friday (9/18), the Barstool Sportsbook app was the most downloaded sports app in the US, even as the app is only available for use in 1 state (PA). I expect Penn will continue to leverage the Barstool brand to acquire a dominant position in the industry, making it significantly undervalued in comparison to its peers.
Outside Looking In: ETSY, NET, ZS, SNAP
We are starting out with 9 stocks to include in this portfolio, a number that may change based off conviction and new opportunities. There will be a new tab for monitoring the Momentum Portfolio next to the Active Portfolio moving forward.
I will be covering the list of the top momentum stocks in depth and releasing an updated report each month. Businesses and industries are always changing and new opportunities emerge — my goal is to identify them and bring these to your attention.
The portfolio may change at any time due to a change in fundamentals, technical strength, new opportunities for inclusion on the list, etc. In the coming weeks, I will be releasing in depth reports on each stock included in the momentum portfolio.
Knox and I will also be working together to provide entries/exits in the names included. Please find me on the forum for any questions or comments on this report.
Featured Stock: Sea Limited
By Knox Ridley and David Marlin
This week, we initiated a position in Sea Limited at $150.10. We believe Sea is positioned for significant future growth because of its leadership status in e-commerce and gaming in Southeast Asia. This region is among the fastest growing in terms of internet usage in the world. With Sea establishing itself as the region’s dominant internet company and extending its lead over competition, we have been looking for a proper entry in the stock.
Since the March 23rd lows, SE has been a leader among tech stocks. After climbing over 350% over the last trailing 1-year period, SE is currently down just 10% from its 52-week high, while the NASDAQ is down about 13%. Also, it’s worth noting that SE has, so far, bottomed on Sept. 8, making a series of higher highs and higher lows since. This is compared to the NASDAQ, which found its lowest level of Sept. 22, and is still in a downtrend posture. This is notable strength that we look for during pullbacks.
With a deeper look into the chart, we can see that SE appears to be setting up for a move higher. Note the base that the stock has built, which is outlined in blue, with the breakout spot being around $50.50 – $51. This is accompanied by decreasing volume, with more green bars than red. This is signaling that the sellers appear to be drying up.
Usually I wait for confirmation of a breakout before I move; however, the internals had me anticipate one instead. For one, we are seeing the 50-line hold in the RSI during this selloff, meaning that the momentum is still positive to flat, while the NASDAQ is clearly losing momentum. Recently, the RSI is starting to trend up.
This is coupled with positive divergence in the CCI and the MACD in a classic coiling pattern. Furthermore, the Accumulation/Distribution line is indicating that smart money is buying into this dip. When this indicator makes a new high before price, it’s a good sign that price will soon follow.
There is additional risk within the broad market right now; however, we like the setup forming in SE. We placed a stop about 10% below our entry, which is just below the base SE built. If this stop is hit, we will exit and regroup for the next move up. With momentum, the key is to have hard stops and exit when the momentum is still up.
Quick note: Of the best five performing tech stocks during the pandemic, three of them were featured on this site with a low cost basis: $ZM, $INSG and $SHOP.
I’m publishing a premium report on Micron tomorrow. This is a stock forecast to have a nice sized cyclical comeback.
You’ll get a May spreadsheet and convictions update blog early next week. By now, you know the bear thesis. We will now continually work towards a bull thesis as a backup option. This will look like our 2019 strategy with good trade set-ups and reasonable stops.
With that said, I still believe we will see many of the buy and hold targets we set out on the spreadsheet but this will take patience. In case we are wrong, you will now see an ongoing effort to spell out an alternative scenario with Knox primarily focusing on bull trades.
You can read my thoughts on a few stocks we cover in Forbes including Slack (bullish), Roku (bullish despite ad-tech headwinds) and The Trade Desk (short-term bearish Q2-Q4).
From this week’s earnings reports, I’m still quite keen on Datadog and Dynatrace. You can access the PDFs published previously on Datadog here and Dynatrace here. They remain favorite products due to the migration to hybrid cloud. Microsoft’s impressive earnings report this week should help these two companies. This is what I said in my April convictions overview:
“Cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the crosshairs of anti-trust and are susceptible to consumer spending changes.”
I’m also interested to see what Alibaba reports with the re-opening of the Chinese economy while being positioned in the middle of major trends, like Amazon.
AMD’s earnings report was strong, in my opinion. I detail this below.
I wish I could be as bullish as the market is on ad-tech but unfortunately the delta between Jan/Feb and March could not have been expressed more clearly. As stated in my convictions update: “To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with.”
To be clear, I would never suggest anyone sell a winner but I think it’s important for me to make forecasts at current pricing and point out the story is changing this year for ad-tech.
Earnings Overview:
Microsoft:
Microsoft had the best earnings report of any tech company, thus far. The company beat pre-coronavirus expectations. This matches my thesis that the data center would be a safe haven this year as spelled out in this blog post. This is not only due to work-from-home trends, which were well reported, but also the microtrend of hybrid cloud slated to do well this year.
Perhaps the more important question to ask is what companies are downstream from hybrid cloud and the data center segments. As stated, I’m favoring Datadog and Dynatrace this year as cloud infrastructure counterparts.
MIcrosoft earnings came in at $1.40 EPS compared to expectations of $1.27 EPS. Revenue of $35 billion beat expectations of $33.76 billion.
“We’ve seen two years’ worth of digital transformation in two months,” Satya Nadella said.
Google:
Google especially focused on direct response having “substantial year-on-year growth throughout the entire quarter.” The other positives to Google’s report is the traffic, which peaked “at four-times maximum activity during the Super Bowl.”
Android app downloads were another plus with a rise of 30% from February to March.
Sundar Pichai noted that search is expected to recover quickly due to a clear sense of ROI. He referenced the quick recovery in 2008.
Note: eMarketer published an analysis of search ad spend with the conclusion it will drop about 20% in Q2. published an analysis of search ad spend with the conclusion it will drop about 20% in Q2.
Perhaps the more ironic part is that while Google is giving an upbeat earnings report on advertising, they themselves are cutting marketing and reducing their ad budget (even while being in one of the more insulated non-consumer industries with a huge cash pile).
This was based off the following memo: “Just like the 2008 financial crisis, the entire global economy is hurting, and Google and Alphabet are not immune to the effects of this global pandemic. We exist in an ecosystem of partnerships and interconnected businesses, many of whom are feeling significant pain.”
Google had the following to say about the dichotomy of: Jan/Feb and then March … “Q1 was in many ways the tale of 2 quarters. For our advertising business, the first 2 months of the quarter were strong. In March, we experienced a significant and sudden slowdown in ad revenues. The timing of the slowdown correlated to the locations and sectors impacted by the virus and related shutdown orders.”
Ruth Porat, the CFO, reiterated there was “an abrupt decline in March.” She also offered the following: “In March, revenues began to decline and entered the month at a mid-teens percentage decline in year-on-year revenues, although, users’ search activity increased, their interest shifted to less commercial topics. In addition, there was also reduced spending by our advertisers.”
Regarding YouTube, Porat stated, “As a result by the end of March, total YouTube ads revenue growth had decelerated to a year-on-year growth rate in the high-single-digit.”
Porat stated similar for network revenues – that revenue growth had decelerated in the high-single-digit by the end of March.
The company also focused on the strength of Google Cloud as a means of diversification to advertising.
Facebook:
Similar to it’s ad-tech counterparts, Facebook discussed “facing a period of unprecedented uncertainty’ as of March, yet Wall Street viewed the earnings report as favorable for a surge in price.
The company beat on revenue but missed on earnings. Q1 numbers came in at $17.74 billion and $1.71 EPS compared to analyst estimates of $17.33 billion with $1.74 EPS.
Similar to Google, Facebook’s CFO, Dave Wehner, stated, “we have a really cautious outlook on how things are going to develop” due to a broad-based pullback. The market rallied on the CFO’s comment, “Ad revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020.” The April revenue accounts for a 39% increase in ad impressions.
Perhaps one of the most important comments across all of the ad-tech earnings calls was when the CFO pointed out that ads follow GDP growth, “We are understandably cautious given that most economists are forecasting a global GDP contraction in Q2, which if history were a guide, would suggest that the potential for an even more severe advertising industry contraction.”
Sheryl Sandberg stated, “Our total ad revenue for Q1 was $17.4 billion, which is a 17% year-over-year increase. After a strong start to the quarter, we saw a significant impact on our business as a consequence of the pandemic from the second week of March onwards.”
AMD:
AMD had a decent earnings report IMO yet the market did not respond accordingly. The company was one of a few that provided forward guidance at all, let alone forward guidance that is close to pre-coronavirus levels.
The forward guidance provided was 20% to 30%, or 25% at the midpoint, down from 29% at the midpoint. Meanwhile, the company maintained its forecast for adjusted gross margin of 45%.
AMD was in-line with reported revenue of $1.79 billion and EPS of $0.18 while analysts expected revenue of $1.78 billion on EPS of $0.18. This represents a 40% increase from last year with AMD’s highest gross margin in eight years.
Positives in the report included a 73% increase in computing and graphics chips to $1.44 billion, up from an expected 58% growth.
In the earnings call, Lisa Su noted a “very nice acceleration of the cloud business as [AMD] went through the quarter.”
“In terms of where we believe demand will be versus 90 days ago, it’s pretty similar. And the way I would say it is, we see cloud being strong. What we see is not just putting on more capacity, but really the ramping of new platforms and so we view that as a positive. We have strong enterprise adoption as well. When we look at our pipeline in enterprise, it’s continued to grow, and continue to grow in the first quarter and continue to grow in sort of the first month here of the second quarter.” -Lisa Su
AMD reported a 21% decline in enterprise embedded and semi-custom chips which AMD said was due to a drop in gaming console sales. Sony and Microsoft have plans to release next-gen consoles in Q4 of this year and this segment will regain ground when this occurs.
The forecast for Q2 is set at 21% growth year-over-year to $1.85 billion with a 4% increase sequentially. Ryzen contributes to YoY growth while Epyc processors will drive quarterly growth.
AMD did mention a potential slowdown in infrastructure spending. This matches Google’s decision to slow down Capex this year.
This is an especially important earnings season as we hear from executives for the first time since the pandemic. I’ve provided a summary of the earnings reports from this week and my takeaways.
In this update, I cover Texas Instruments, SAP, Lam Research, and Xilinx and the insights they provide on the data center. I also cover Snap’s earnings report and Netflix. I’ll cover Intel’s report on the forum tomorrow evening.
Main Takeaways:
Data center is coming in strong as we forecasted. There are many instances that confirm this below.
Despite Snap’s breakout, I don’t see anything that invalidates what I’ve published about ads being weak post-covid. In fact, Snap saw significant drop off between Jan/Feb ad revenue and April. I detail this below.
Pay attention to SAP’s guidance around software. I had mentioned that instead of guessing on the various software players that it may be stronger to go to the infrastructure level and SAP could be the beginning of a few reports in weakening software.
I cover Netflix below. Roku will see solid user growth while revenue in Q2 for Roku could go either way.
Texas Instruments:
Per the earnings call, Texas Instruments believes there is a “significant chance for a recession” and is modeling their forward guidance on the 2008 recession. In summary, the 2008 recession snapped back in two quarters time.
TI plans to run factories in Q2 2020 and Q3 2020 in the same way the company ran in Q1 2020 with the expectation they will be sitting on inventory when the demand returns in an effort to maximize optionality for customers who may not be able to forecast at this time.
Q1 revenue was $3.3 billion, down 7% from a year ago, with EPS of $1.24 per share. Texas Instruments guided for Q2 revenue in the range of $2.61 billion to $3.19 billion and earnings per share to be in the range of $0.64 to $1.04.
Although the company did not provide much insight into how Covid-19 affected various revenue segments, TI did confirm that “enterprise systems increased double digits based on strong data center demand.” The company also stated that Industrial and PCs increased while Automotive and Mobile decreased. Communications equipment declined 50% year-over-year but there was an increase quarter-over-quarter.
SAP:
SAP missed on revenue by about $10 million with Q1 revenue at 6.52 billion Euro. The company stated that cloud revenue is expected to continue with rapid growth in 2020 backed by a 25% expansion in the current cloud backlog.
Regarding Covid-19, the company stated that a “significant amount” of new business is being postponed and with software licenses revenue most impacted and falling 31% year-over-year. As of now, the company is guiding for revenue in 2020 to be in the range of 27.8 to 28.5 billion Euros down from 29.2 billion to 29.7 billion Euros.
Netflix added 15.7 million new subscribers compared to expected 8.2 million. The company reported mixed results, however, with EPS of $1.57 and $5.77 billion in revenue compared to expected EPS of $1.65 and sales of $5.76 billion. Earnings rose 107% and sales rose 28%. Netflix is guiding for new subscribers of 7.5 million compared to estimates of 4.1 million. The second half of the year is expected to be light on subscriber growth.
Some of Netflix’s strength is the company’s arsenal of content, which interesting enough, the debt load to create this content is what has fueled criticism of Netflix for the past few years. Free cash flow will improve from negative $2.5 billion to negative $1 billion.
I’ve covered Netflix’s additional strengths in previous editorials.
Snap:
Snap is up 35% on strong Q1 subscriber growth and a revenue beat. The company reported $462 million in revenue compared to analyst estimates of $428.8 million. Average revenue per user was at $2.02 versus $1.68 per user in the year-ago quarter. Daily active users are up 11 million users to 229 million total. In the past, Snap reported relatively flat DAU growth so the 11 million stands out despite being quite low compared to other social sites from Covid-19 usage. For comparison purposes, Pinterest is expected to add 30 million users from 335 at end of Q4 to 365 million users in Q1.
In the earnings call, management discussed the lower levels of ad demand in more detail. Revenue growth was very strong in January and February at 58% year-over-year before falling to 25% year-over-year in March – essentially slashing revenue in half.
In April, the decline continued at 3-4% per week to 15% year-over-year growth through April 19th and 11% year-over-year growth in the current week. This means revenue growth was slashed by 80%.
If the decline continues, this will put Snap at negative YoY revenue by May.
“Like everyone, we’re hearing from advertisers that the global outbreak has dramatically shifted the way that they’re thinking about marketing. Some have paused while they’re rethinking their messaging and others are cutting funding to save jobs.” -Jeremi Gorman, Co-founder and Chief Business Officer, Snap
Meanwhile, Twitter guided for negative revenue in March so it makes sense Snap would join Twitter on this trajectory.
Despite the weak forecast for Snap based on April growth, the stock surged 35%. Knox will be updating the forum on the chart and status of the short position. We may have been early on this one but I don’t see anything in the earnings report that invalidates the thesis.
Lam Research
Previously, Lam withdrew fiscal Q3 guidance in March stating it may not reach previously announced targets. Some of this was due to factories in Malaysia being shut due to government directives to shut businesses. Lam missed slightly on revenue at $2.5 billion compared to $2.58 billion expected from the December quarter. EPS of $3.98 was in-line with the revised consensus. The company has $5.6 billion in cash after drawing $1.25 billion from its revolving credit facility.
Most importantly, Lam Research confirmed that cloud and enterprise-demand remains strong while consumer markets are weak.
“The need for equipment and capacity to support work from home initiatives is causing cloud service providers to increase CapEx, creating the potential for a surge in server demand. Third-party estimates suggest that cloud capacity would need to increase 10-fold to service the peak workloads seen as shelter-in-place rules went into effect. Although these heightened workloads are likely a short-term phenomenon, this event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the daily economy and our dependence on technology continues to expand over time.” -Tim Archer, CEO
The company is exiting March with record backlog as the demand environment is strong yet the supply is constrained.
“And we haven’t seen those plans change and that demand remains kind of at the same level it was in January. And which means that we have a full order book, and we’re – really, our challenge is how to get these tools to customers. And I would say 100% of my conversation with customers right now are about how to get the tools they need to them. And I think that will continue for some period of time. And as Doug said, we will reassess after that period to see how demand is being affected.” -Tim Archer, CEO
Lam is forecasting for June revenues in fiscal Q4 to be higher than March with current operational performance. With that said, Lam is not providing exact financial guidance due to covid uncertainties.
Xilinx
Xilinx beat earnings but issued soft guidance. Revenue came in at $833 million and EPS of $0.94 cents compared to expectations of $827 million and $0.92 cents EPS. Revenue growth was 12% year-over-year and EPS growth of 8%.
Xilinx guided for revenue of $660 million to $720 million in the current quarter, down 19% year-over-year and down 9% QoQ. This is due to weakening demand for communications products and “macro-related weakness.” Xilinx did note there was strong overall growth in the data center. The company is guiding for full year revenue of $3.21 billion to $3.28 billion compared to previous full-year sales of $3.4 billion.
Xilinx is seeing issues with demand. We should know more with Intel’s report if this is a trend across semis or unique to Xilinx. Areas of weakness for Xilinx include Automotive, Broadcast and Consumer. Areas of strength included data center and wired/wireless group.
“The Data Center Group performed as expected with strong sequential growth primarily due to contributions from compute acceleration, driven by a mix of both cloud and high performance compute customers. We saw notable strengths from a hyperscaler deployment of a FPGA-based SmartNIC and our DCG opportunity pipeline continues to grow at double digits, particularly in video, HPC, database and fintech applications.” -Victor Peng, CEO
