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Category: Earnings

Rapid Fire Earnings

Rapid Fire Earnings

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Lots of Freedom Portfolio positions have reported earnings over the past two weeks, a time period which has coincided with a pretty sharp drop in many of those same companies (despite some pretty incredible earnings). Let’s go quickly through some:

Earnings Quick Hits

  • Shopify (SHOP): Firing on all cylinders. A simply incredible quarter on all fronts. The only concern going forward is if this rate of growth can continue when the economy opens back up. I think it can.
    • Share of U.S. Retail eCommerce Sales in 2020: 8.6% (2nd only to Amazon and higher than Walmart)
    • Revenue growth: 94% year over year
    • Gross Merchandise Volume growth: 99% year over year
    • Gross Profit growth: 89% year over year
  • Square (SQ): Mixed results, but Cash App is a bright spot. A continued rise in the price of bitcoin and re-opening of small and mid-sized businesses should provide some tailwinds going forward.
    • Gross Profit growth: 54% year over year (but only 1% quarter over quarter)
    • Cash App Gross Profit growth: 162% year over year (but down quarter over quarter)
    • Cash App Customer Acquisition Cost of less than $5
    • Gross Profit per monthly transacting active Cash App customer reached $41, up 70% year over year
  • Roku (ROKU): Strong growth benefitting from what appears to be an accelerating trend towards online streaming.
    • Gross Profit growth: 89% year over year
    • Active accounts growth: 39% year over year
    • Streaming hours growth: 55% year over year
    • Average revenue per user up 24% year over year
    • In 2020, 38% of all smart TVs sold in the U.S. were Roku TV models
  • Fiverr (FVRR): Continued strong growth with expectations for it to continue into 2021. Network effects should help the company grow and (continue to?) establish a moat going forward.
    • Revenue growth: 89% year over year
    • Active buyer growth: 45% year over year
    • Spend per buyer growth: 20% year over year
    • Outlook for FY 2021: 46-50% year over year growth
  • Redfin (RDFN): Seasonality and pandemic related swings make comparisons difficult, but Redfin seems primed to ride this real estate boom. Would’ve liked to have seen slightly stronger numbers considering what we saw from Zillow, but still like the long term story.
    • Website visitor growth: 44% year over year
    • Market share grew from 0.94% to 1.04% year over year
  • Teladoc (TDOC): Early innings of integrating Livongo, but strong results regardless. Looking forward to seeing where this company is a couple of quarters from now (and a year removed from the Livongo acquisition).
    • Revenue growth: 145% year over year
    • Total visit growth: 139% year over year
  • Novocure (NVCR): Long term thesis intact with many clinical milestones upcoming over the next few years. Still early innings
    • Net revenue growth: 45% year over year
    • Active patient growth: 17% year over year
  • Etsy (ETSY): Riding the same tailwinds as Shopify and creating their own network effects. This is the type of growth that should continue to compound in the coming quarters.
    • Gross Merchandise Sale growth: 118% year over year
    • Revenue growth: 129% year over year
    • Net Income growth: 375% year over year
    • Active seller growth: 62% year over year
    • Active buyer growth: 77% year over year
  • Axon Enterprise (AXON): Not quite the same levels of growth as Etsy and Shopify, but really solid nonetheless. The nature of the business means that these gains should be fairly sticky going forward, too.
    • Revenue of $226 million grew 32% year over year
    • Gross margin of 62.5% improved 860 basis points year over year

Transactions

Sold Tesla (TSLA): Nothing new here. Tesla has been a huge winner for me and I’ve been pretty open about how, while still being bullish on the company, I’ve gotten a little concerned over the valuation getting a bit out of hand. I trimmed a bit more to bring the position size more in-line with my conviction. It remains an Enterprise level position.

Started positions in Butterfly Network (BFLY) and TransMedics Group (TMDX): Two companies that had been on my radar for a bit. Finally decided to open up some small, speculative positions in both. If they show they can execute, I will consider adding more.

Started position in Snowflake (SNOW): I’ve been wanting to own some Snowflake since before their IPO, but the insane run-up in price during the IPO dampened my enthusiasm. After seeing it drop from the high 300s to the mid 200s, I decided it was time to start a small position. I’m interested in seeing where it goes after the lock-up expires in March. Might add more then.

End of an Era at Amazon

End of an Era at Amazon

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I spent way too long trying to come up with some clever way of discussing this topic (Jeff Bezos has less in common with Wonder Woman than you might think), which is why this is so late. Honestly, I think part of it is also coming to grips with the news that Jeff Bezos is stepping down as CEO of Amazon (AMZN) (although he is sticking around still as Executive Chairman). It shouldn’t have been surprising, but it still shocked me to hear. Amazon and Bezos have always been nearly inseparable in my mind.

A little over two years ago, I wrote about why Amazon was my largest holding. It’s no coincidence that the first “Pro” was about the leadership of Jeff Bezos and the first “Con” was the risk of him stepping down. Here is what I wrote then:

Just as Bezos’ leadership is a big benefit for Amazon, it’s only fair to also count the possibility of him someday leaving as a potential risk as well. Bezos is only 54 years old, which is relatively young (especially compared to 88 year old Warren Buffett), and he has shown no indications that he is thinking of stepping down anytime soon. However, Bill Gates stepped down as CEO of Microsoft at the age of 45, so being young is no guarantee against leaving a business. Bezos also notably has other interests, such as space flight company Blue Origin, the Washington Post, and now also his Day One Fund. I don’t see Bezos leaving Amazon anytime soon, but at the same time, it wouldn’t completely shock me to see him step down to a smaller role in the next 5 years. Will Amazon continue to be as relentlessly innovative when that happens? Hard to imagine it will.

Why Amazon is my Largest Holding

Looks like my quasi-prediction of him stepping down to a smaller role came true.

Its worth noting that Bezos stepping down actually overshadowed some pretty incredible results from Amazon for the quarter:

  • Earnings per Share (EPS) was $14.09, blowing away analyst estimates of a $7.26 and representing a 118% year-over-year increase.
  • Revenue was $125.6 billion, which was an increase of 44% year-over-year. For a company the size of Amazon to be able to increase revenue 44% year-over-year is simply amazing.

What a note to go out on as CEO.

I understand Bezos will be sticking around and will still be involved with Amazon and that Andy Jassy is really well thought of, but it’s hard for me not to see this as a hit to Amazon’s prospects going forward. Bezos would be my pick for the most successfully innovative entrepreneur of my lifetime (although Elon Musk is giving him a run for his money). That’s not something easily replaceable, even if we’ve seen some great results from CEOs like Tim Cook (replacing an innovative force that was the face of a company) and Satya Nadella (former head of cloud taking over for a large tech company).

Speaking of Musk, he has a lot in common with Bezos, including a bunch of side projects (one of which is space exploration). I wonder if this compels Musk to step down in the near future?

But I digress. On to some tweaks to the Freedom Portfolio:

Sells

Sold part of Amazon (AMZN): A part of this is absolutely in deference to Jeff Bezos. I don’t care what anybody else says, him stepping down as CEO makes it seem like it is no longer Day 1 at Amazon. But another part of it is an acknowledgement of just how big Amazon has gotten and how the law of large numbers would imply that continuing to grow at the pace it has been will be difficult going forward. The company has performed incredibly well in the past and the stock has almost doubled, and yet it is actually in the lower quartile of performers in the Freedom Portfolio during that time period. Since I created the Freedom Portfolio, it has gone from my undisputed top holding to a Serenity-level holding.

I still think there’s a lot of growth ahead of the company in cloud, advertising, and internationally, but my expectations are for growth to be slowing somewhat in the coming years. That’s why I am cutting my position roughly in half.

Thanks for the returns, Amazon. You’ve been an amazing contributor to the Freedom Portfolio over the years.

Sold part of Roku (ROKU): Nothing fancy here. I wanted to free up some capital for some other purchases (including another CTV play) and Roku stood out as something that had run up a ton lately and had overshot my levels of conviction a bit. I trimmed the position in order to add to some of the below.

Buys

Started position in Magnite (MGNI): The CTV play mentioned above. I spend a lot of time patting myself on the back for my successes. Here, I want to talk about a major mistake. You may not realize it, but actually owned Magnite previously back when the company was known as The Rubicon Project. The idea was that they were setting out to become the sell-side counterpart to the Trade Desk’s (TTD) demand-side platform in the CTV space. About 7 months ago, I got spooked when some executives left and made me worried about the company’s commitment to the CTV space and sold at $7.27 a share.

I just started a new position at $51.41 a share.

Obviously it hurts to have missed out on those big gains, but I didn’t want that to prevent me from rectifying my mistake. I’m dipping my toe back in.

Started position in DermTech (DMTK): Started a small, speculative position in a company that aims to be able to test for melanoma by using a painless sticker instead of having to cut into a person’s skin using a scalpel. If they can do what they claim to be able to do, this feels like it could be a big winner.

Added to Etsy (ETSY) and Fiverr (FVRR): Both of these companies are riding the same trends of entrepreneurship and side hustles and ecommerce and remote work. The more I read about them, the more excited I get about their future. It feels fitting to redeploy some of the capital I raised from Amazon to these two companies.

Volatile earnings; Trimming Tesla to add to Teladoc

Volatile earnings; Trimming Tesla to add to Teladoc

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The past week has been a bit hectic (and the coming week looks to be even more so), so I haven’t been able to cover earnings season as much as I would have liked, but I wanted to get something quick out even if it was entirely too short and inadequate.

A number of Freedom Portfolio companies reported earnings this past week and while there were a few blemishes (looking at you, Fastly (FSLY)), I was ultimately very pleased with what I saw at of those companies. I was particularly encouraged by the incredible results from the eCommerce plays: Shopify (SHOP), Amazon (AMZN), and Etsy (ETSY). I’m really looking forward to seeing what these companies can do over the coming holiday season.

So why did nearly all of the companies which reported great results drop on earnings and fall a ton on Friday? It’s always hard for me to predict short term market movements, but some of it is undoubtedly due to pessimism surrounding the increase in Coronavirus cases around the world and the new lockdown measures being enacted. I believe some perspective is also in order:

  • Shopify (SHOP) is up roughly 140% YTD
  • Novocure (NVCR) is up roughly 40% YTD
  • Teladoc (TDOC) is up roughly 140% YTD
  • Livongo Health (LVGO) is up roughly 350% YTD
  • Fastly (FSLY) is up roughly 200% YTD
  • Etsy (ETSY) is up roughly 170% YTD
  • Amazon (AMZN) is up roughly 60% YTD

That is incredible performance across the board for under a year. It is not at all surprising to see some profit taking after even the best of earnings reports after run-ups like that. Contrary to popular belief, stocks don’t always go up and I am absolutely not concerned to see some of these stocks pull back a bit after the amazing run they have had. Not only is the long term thesis still intact, but I think these earnings reports have largely confirmed them.

Between Coronavirus, the US Presidential election, and the holiday season, I expect a lot of volatility in stocks over the coming months. My plan is to be laser focused on what the companies I have invested in are doing and to do my best to tune out the noise. I do not plan on doing any buying or selling based on who wins the election or weekly Coronavirus numbers or other macro conditions. If something happens that fundamentally changes my investment thesis in one of my companies, then I will act.

With that being said, I do have one tiny allocation change to report on. I am trimming my position in Tesla slightly (it remains a Babylon 5 level position) in order to add slightly to my Teladoc position (keeping it at a Serenity level position, although with the merger with Livongo going through, the joint company will be an Enterprise level position). It is a small tweak, with the change in allocation representing roughly 1% of the portfolio. My thinking was largely based around valuation. I love the optionality and runway for Tesla, but the valuation is somewhat crazy right now and it seems to already be priced for total domination of the car market. I still think it will be a market beater going forward, but wouldn’t be surprised if the growth was a little more muted in the coming years.

Originally, I hated the Teladoc / Livongo merger, but I have done a complete 180 after being convinced by some very smart people on Twitter who had some great insight into how the companies can complement each other going forward. Despite the growth that both companies had already seen in 2020, I think much of that momentum can and will continue over the coming years. As such, I wanted to slightly increase my position. I’m not thrilled over a lot of Livongo management leaving the newly combined company, but I also don’t think it is a deal breaker and I do trust Teladoc management to be able to integrate the new acquisition. Really interested in seeing what kind of growth numbers the newly combined company can put up in the coming quarters.

Netflix: A company in transition

Netflix: A company in transition

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Netflix (NFLX) released their 2020 Q3 earnings last week. Here are some of the high level numbers:

  • Revenue of $6.44B (up 22.7% year over year)
  • Net subscriber additions of 2.2 million vs. forecast of 2.5 million
  • Q4 guidance of 201.15 million global streaming paid memberships (an increase of 20.4% year over year)

The market apparently wasn’t very impressed by the miss on subscriber additions, as the stock is down around 8% since earnings came out. I honestly thought it was a pretty solid quarter, considering they had warned us about all of the subscribers that had ben pulled forward due to Coronavirus. Taken as a whole, this year has been a pretty stellar one for subscriber growth. However, I do believe this most recent quarter might be showing us that Netflix is a company in transition.

Previously, when I was judging how Netflix was performing as a company, it was almost solely on their ability to grow and gain new subscribers. A common criticism of the company was that it was spending too much money but I was willing to excuse that as long as the subscriber count kept growing at a brisk pace, and it did. And while subscriber growth was still pretty great this year thanks to international markets and the pandemic, I believe we’re starting to see signs that the days of stellar growth are beginning to come to an end.

Netflix breaks their numbers down by 4 regions. Here is the subscriber growth over the past 4 quarters by region:

  • UCAN (United States and Canada) – Up 8% y/y
  • EMEA (Europe, Middle-East and Africa) – Up 31% y/y
  • LATAM (Latin America) – Up 24% y/y
  • APAC (Asia-Pacific) – Up 62% y/y

As you can see, subscriber growth in its most mature markets (United States and Canada) was pretty slow. And while growth in the EMEA and LATAM regions was strong, the real superstar was APAC. In fact, the APAC region was responsible for 45% of new subs in the most recent quarter. With the United States pretty much saturated and Europe/Africa/Latin America unlikely to see growth acceleration, it is looking like the Asia-Pacific region is going to be relied on for much of Netflix’s future growth. With 60% of the world’s population, that doesn’t seem like a terrible place to be.

However, I do wonder if the Asian market might be the toughest fight for Netflix yet. They don’t have the streaming video market to itself anymore, and the competition is either already established or charging hard. China has a number of incumbents like former Freedom Portfolio holding iQiyi (IQ) and Netflix has never been able to really make inroads there. India is promising, but Disney (DIS) already has somewhat of a head start by virtue of their ownership of Hotstar and its 300 million active users. Netflix has had to introduce cheaper, mobile-only plans in India in order to gain traction there, which is part of the reason why their average revenue per user (ARPU) is lower in Asia than it is in other markets.

That brings up another concern: pricing power. For awhile, Netflix enjoyed tremendous pricing power as the only game in town and many people talked about how much of a deal it was (especially compared to traditional cable bundles). That’s no longer the case. Cable cutting is accelerating, which lessens the impact of that comparison. Netflix has started to lose some of its most popular programming like The Office and Friends. Disney has launched their competing offering at a much lower price point to gin up interest. There are even fairly compelling free competitors like Peacock. It’s hard to envision Netflix being able to significantly raise its prices anytime in the near future in the face of such competition.

It’s absolutely not all doom and gloom, however. As I mentioned earlier, Netflix is a company in transition. So if it is transitioning away from growth, what is it transitioning to?

Positive free cash flow!

Partially due to production of new content being shut down, the company has actually reported three consecutive quarters of not just positive free cash flow, but increasing positive free cash flow. Netflix is beginning to show its critics who were concerned over its spending and debt that it can make money once it decides to slow down on spending. And with over $8 billion in cash on the balance sheet, they don’t even expect to have to raise any capital this year.

I don’t expect the increasing free cash flow to continue as production that has been shut down due to Coronavirus starts back up, but it is encouraging to see what Netflix’s second act might look like once it has fully transitioned away from subscriber growth at all costs.

All of that is a long-winded way of saying… I’m trimming my Netflix position some, and using the proceeds to add to my Etsy (ETSY) and Crowdstrike (CRWD) positions. I still think Netflix is a wonderful company with a lot of growth ahead of it, and I am still holding the majority of my shares (keeping it at a Serenity level position), but I just think its growth prospects have dimmed a tiny bit.

I haven’t really done much with P.A.U.L. scores lately, but I thought it was worth revisiting what I wrote about Netflix when I scored it back in October of 2018. Back then I gave them a 4 for “Long Runway”, which I would probably bump down to a 3 now, but the biggest drop might be the “Alternatives” score of 5 that I had previously given them. Netflix started off as a DVD by mail company which then disrupted itself by transitioning to online streaming and finally reinventing themselves again by moving from licensing content to developing their own. Now that they are in the midst of conquering international markets… what is their next step? Previously, I was confident there would be one. Now, I am not so sure. There might not be a next chapter for Netflix, and founder and CEO Reed Hastings stepping back somewhat into a co-CEO role with Ted Sarandos might be a symbolic way of showing that the company has reached maturity.

Netflix is probably the company that I have the longest history with, having originally bought shares all the way back in 2004. And every time in the past that I have sold my shares of Netflix, I have regretted it. As I’ve mentioned more times than I can remember, the initial bunch of shares that I bought almost two decades ago would have been worth roughly $2 million now if I had just held onto them. That’s an eye opening lesson. It’s not just shares bought a long time ago either. Most recently, I sold some shares of Netflix last July at around $328 a share. All it has done in a little over a year since is go up 50%. I think there is a very, very good chance that I will end up regretting this sale as well. If that happens, it won’t be the worst thing in the world as I will still have the majority of my position.

I want to be very clear that even though I am trimming my position some, I still think Netflix has a ton of growth in front of it and I’m still a big believer in it being an outperformer over the next 5+ years. I’m just not quite convinced it has the same levels of upside that it did before. Time will tell.

Impressive earnings from Novocure and the best is yet to come

Impressive earnings from Novocure and the best is yet to come

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Novocure (NVCR) is one of only two companies in the Freedom Portfolio that are down for the year. The other is Disney (DIS). Disney had to deal with a world-wide pandemic which has robbed it of virtually all of its major cash generating businesses (amusement parks, movies, cruises, live sports) so it’s completely understandable that it has struggled in our current environment. Novocure doesn’t quite have the same excuse.

It’s not 100% clear to me why Novocure has had such a (relatively) tough year, but my best guess is that Coronavirus has made it difficult for them to make progress on some of the trials that they were hoping would show the efficacy of tumor treating fields on other types of cancer.

Novocure reported their second quarter results a few weeks ago. Here are the main takeaways:

  • Net revenue up 34% year over year
  • Gross profit up 38% year over year
  • Active patients up 20% year over year

Those are some pretty nice numbers, but the real exciting part was later in the earnings report when they discussed the anticipated clinical milestones for their trials:

  • Data from phase 2 pilot HEPANOVA trial in advanced liver cancer (2021)
  • Data from phase 2 pilot EF-31 trial in gastric cancer (2021)
  • Interim analysis of phase 3 pivotal LUNAR trial in non-small cell lung cancer (2021)
  • Interim analysis of phase 3 pivotal PANOVA-3 trial in locally advanced pancreatic cancer (2021)
  • Interim analysis of phase 3 pivotal INNOVATE-3 trial in recurrent ovarian cancer (2021)
  • Data from phase 3 pivotal METIS trial in brain metastases (2022)
  • Data from phase 2 pilot EF-33 trial with high-intensity arrays in recurrent glioblastoma (2022)
  • Final data from phase 3 pivotal LUNAR trial in non-small cell lung cancer (2023)
  • Final data from phase 3 pivotal PANOVA-3 trial in locally advanced pancreatic cancer (2023)
  • Final data from phase 3 pivotal INNOVATE-3 trial in recurrent ovarian cancer (2023)

That’s a long list of cancers where tumor treating fields might prove to be an effective procedure. Even better: it’s a procedure that can be used in addition to other treatments, so there’s less risk of it getting replaced by something else.

I remain extremely excited to see what the next 3 years brings for Novocure.

Redfin: A mixed quarter

Redfin: A mixed quarter

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Redfin (RDFN) announced second quarter earnings last week, and those earnings really drove home just how crazy the past few months have been in the real estate market. As CEO Glenn Kelman said: “Within the span of a single quarter, year-over-year changes in demand went from -41% to +40%”.

As result, I’m wary of reading too much into Redfin’s results this past quarter seeing as the company basically went from preparing for a cataclysmic collapse of the real estate market (check out Kelman’s excellent blog posts about what it was like to run Redfin through the pandemic) to scrambling to handle a spike in demand when it unexpectedly rebounded. Here are some of the key numbers anyway:

  • Revenue increased 8% year-over-year
  • Gross profit decreased 5% year-over-year
  • Reached market share of 0.93% of U.S. existing home sales by value

That last bullet point is the most concerning to me. Redfin’s market share has always been a little erratic, but the general trend was clearly up. That hasn’t quite been the case lately. Take a look:

  • Q3 2019: 0.96%
  • Q4 2019: 0.94%
  • Q1 2020: 0.93%
  • Q2 2020: 0.93%

Not only is that not generally trending up, but if anything, it is trending down. I had assumed that Redfin’s strength with things like virtual tours would’ve helped it to gain more market share during this socially distant period, but that appears to not be the case. I’m trying not to make a big deal out of a single metric like this, and I wouldn’t go so far as to say that I’m worried, but I am a little more cautious after seeing those market share gains stall out.

On the positive side, management sounded very optimistic on the call, and I do trust Redfin management a lot. They don’t sound overly concerned about the market share numbers and they also seem pretty optimistic about the direction of the housing market. I still believe Redfin has inherent advantages over its competitors and that those advantages are even greater during times of social distancing, so I remain bullish on Redfin over the next 3+ years despite what is admittedly a mixed report this time around.

Amazon: A $1.5 trillion company growing revenue 40%

Amazon: A $1.5 trillion company growing revenue 40%

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Amazon (AMZN) announced 2020 Q2 earnings last week and they were incredibly impressive for any company, let alone a company the size of Amazon.

  • Revenue rose 40% year over year (40%!)
  • Amazon Web Services revenue rose 29% (a deceleration)
  • “Other” revenue (mostly ad sales) grew 41% (another deceleration)

The 40% rise in revenue is obvious amazing, although a lot of that can probably be attributed to COVID. Web Services and Advertising continues to grow, although at a slower pace. One interesting thing to note is that international e-commerce turned a profit this quarter. If Amazon can start turning those overseas investments into sources of profit, that could be huge for their continue growth.

One other possible avenue for growth in the future? Internet satellites.

To wrap things up, I want to leave you with a statement that Jeff Bezos recently made to Congress. As you may have heard, the CEOs of some of the largest tech companies were recently summoned before Congress to testify on a number of issues. As part of that testimony, Jeff Bezos released a statement that I consider to be one of the best defenses of the company as a force for good and an inspirational defense of America and capitalism in general. I highly suggest checking it out. You can read it here.

Expectations for Shopify were extremely high… they still blew them away

Expectations for Shopify were extremely high… they still blew them away

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I’ve written a lot about Shopify (SHOP) lately. It’s hard not to when it is one of the largest positions in the Freedom Portfolio and has had such an amazing run (up 30x over the past 5 years and up over 150% this year alone). Shopify was facing some pretty incredible expectations going into their earnings report, and I was bracing myself for disappointment because how could they possibly live up to those expectations? Not only did they not disappoint, but they soundly smashed them:

  • Non-GAAP EPS of $1.05 (beat expectations by $1.03)
  • GAAP EPS of $0.29 (beat expectations by $0.87)
  • Revenue of $714.34M beat expectations by $202.78M and was up 97.3% year over year
  • Gross merchandise volume +119% to $30.1B vs. consensus of $19.90B

Every one of those bullet points shows an incredible amount of growth which just re-affirms that COVID-19 has caused a huge shift of commerce to move online…. and Shopify is helping to lead that shift.

One interesting piece of news that came out the day before the earnings announcement was that Shopify filed for a pretty massive $7.5 billion capital raise. There’s lots of theories running wild that Shopify might be preparing for a large acquisition. I won’t bother weighing in on any of the speculation until there is more definitive information, but even if they don’t end up buying anything, I like that they have the flexibility that this money provides.

As I mentioned before, I’ve already written a lot about Shopify lately, so I’ll just conclude with this: Shopify has grown to be a fairly significant percentage of my overall portfolio. There’s been plenty of times when I have wondered if I was letting it get to be irresponsibly large. After this quarter, though, I have never been more confident in my investment in this company. I love how they’re working on empowering entrepreneurs and how their incentives are aligned with the customers they work with. Management seems absolutely willing to swing for the fences and appears to be executing brilliantly. There are a number of powerful tailwinds at their back and a huge total addressable market in front of them.

Yes, the stock has been on a crazy run and the valuation is incredibly rich, but I’m hanging on to every one of my shares right now and am very excited to see where this company goes over the next 3+ years.

Netflix 2020 Q2 Earnings

Netflix 2020 Q2 Earnings

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Netflix reported Q2 earnings last week that apparently disappointed Wall Street, as the stock dropped around 8% in the aftermath. Here are some of the high level takeaways:

  • Revenue growth of 25% year over year
  • Subscriber growth of 27% year over year
  • 10 million net subscriber addition for Q2, but only 2.5 million net additions forecasted for Q3
  • Ted Sarandos promoted to co-CEO

That last bullet point makes me ever-so-slightly uneasy. Co-CEO arrangements seem incredibly hard to manage and despite Reed Hastings’ comments, this feels like the first step towards him eventually stepping down into a different role. It’s not a huge deal, but something has my eyebrow raised and which I will be keeping an eye on in the future.

Subscriber growth for Q2 was pretty impressive (10 million additions), but it sounds like investors were disappointed by the conservative guidance for Q3 (2.5 million additions, a significant slowdown). The low forecast doesn’t bother me much because of just how many subscribers have probably gotten pulled forward during the past two quarters. If you haven’t signed up for Netflix during a global pandemic that involves significant quarantining and social distancing measures, you probably either never will or just can’t right now due to personal finances or insufficient internet access.

Some people were interested in getting some insight into Netflix’s potential profitability this quarter considering they were expected to spend less on content costs due to COVID shutting down a lot of production. I’m less interested in that because I still see Netflix as a company in its growth phase. I am more focused on them growing that subscriber number and won’t be worried about that those earnings for years down the line.

Netflix breaks their numbers down by the following regions (year over year subscriber growth in parenthesis):

  • UCAN: U.S. and Canada (10%)
  • EMEA: Europe, Middle East, and Africa (39%)
  • LATAM: Latin America (29%)
  • APAC: Asia-Pacific (74%)

As you can see, growth in the United States and Canada is the slowest of the four regions. Netflix currently has around 1 paid subscription for every 6 people in the United States and Canada. If we assume that UCAN represents a mature and fully saturated market, then it looks like Netflix still has a lot of room to run in the other regions. Here are my estimates on their current ratio of subscriptions to total population:

  • UCAN: 1:6
  • EMEA: 1:33 (1:12 if you exclude Africa)
  • LATAM: 1:14
  • APAC: 1:150 (excluding China)

Obviously this is an overly simplistic way of looking at things considering many parts of the world don’t have the infrastructure or disposable income for a video streaming service like Netflix. Still, there’s a lot of room for growth for Netflix globally and I’m happy to see those growth rates remain high in those under-penetrated areas.

One last note: The average revenue per user (ARPU) is lower outside the UCAN region due to a number of factors, including some cheaper mobile only plans in some countries. It’ll be interesting to see if Netflix has the pricing power to increase that over time.

Overall, I remain fully confident in Netflix’s ability to beat the market over the next 3+ years. The short term might be a bit choppy with some subscribers pulled forward because of the pandemic, but Netflix is one of very few entertainment companies that can legitimately claim to have a global brand, and I expect them to only strengthen that brand going forward.

Earnings Recap – Week of 5/3/2020: Part 2

Earnings Recap – Week of 5/3/2020: Part 2

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The crazy week for earnings continues. Here’s my take on the second batch of companies that have reported this week. Looking for part 1? Click here.

Square (SQ)

  • Total net revenue up 44% year over year
  • Gross profit up 36% year over year
  • Cash App gross profit up 115% year over year
  • View Earnings Report Here
  • My thoughts: A large percentage of Square’s clients are the small and mid-sized businesses that are getting hit hard by Coronavirus, so some bad numbers on that front are expected over the next few earnings reports. The key thing I am looking at is their Cash App metrics, which should benefit from Square recently acquiring their banking license, being able to request stimulus checks for users, and presumably the accelerated movement away from cash. The numbers look pretty good on that front, so I’m still excited for the future of Square (especially after we get past Coronavirus).

Livongo Health (LVGO)

  • Revenue up 115% year-over-year
  • Enrolled Livongo for Diabetes Members up 100% year-over-year
  • Livongo Clients up approximately 44% quarter-over-quarter
  • View Earnings Report Here
  • My thoughts: I love seeing these triple digit growth rates and there’s still a long runway ahead of them. Livongo reported 328,000 enrolled diabetes members, but there are an estimated 34 million Americans with diabetes. That means that even if they don’t expand much beyond diabetes, this is a company that has a lot of room to continue growing. Even though Livongo has about doubled in the last 5 months alone, I’m still really excited about this company. In fact, I’m looking to “add to my winners” and possibly add to my position if I can find something to sell in order to raise some cash.

Redfin (RDFN)

  • Revenue increased 73% year-over-year
  • Reached market share of 0.93% of U.S. existing home sales by value, an increase of 0.10 percentage points year over year
  • Announced plans to have RedfinNow resume making offers on homes in select markets in May
  • View Earnings Report Here
  • My thoughts: Similar to Square’s earnings report, I’m hesitant to read too much into Redfin’s earnings report this quarter because of how much social distancing has affected their business and how lumpy some of their results look due to the ramping up (and subsequent shutting down) of their iBuying through RedfinNow. As a result, I’m not overly focused on the revenue growth and instead am encouraged that they are opening back up RedfinNow. On the surface, the market share gain looks good, but it was also down quarter over quarter. Oddly enough, though, for the past few years their market share metric seems to follow the same pattern of being generally flat for three quarters and then jumping between Q1 and Q2. Here’s hoping that pattern persists for next quarter. I’m still very much holding onto my shares and am excited for where the stock goes once home buying is back to normal.