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Biggest Q2 Earnings Takeaways
A few of my biggest takeaways from recently published Q2 earnings reports.
As it begins to die down and we have more time to reflect — it’s clear that this earnings season needs some further breaking down. Before we begin, thanks so much for your continued patience with our posting schedule. We do our best to get you valuable content as much as possible.
Despite only being a two-man team, our #1 goal remains publishing valuable Investing Week Ahead and the Week in Review posts every Monday and Sunday for you.
Our #2 goal is continually sharing deep-dive analysis into the most important and time sensitive topics. If you’re new around here, below are a few our of favorite recent pieces.
Let’s Talk Earnings
As you all have seen from our weekly recaps, there are countless intricacies being mentioned in earnings calls across various industries.
The purpose of this post is to clearly identify and explain the biggest “themes” I’m seeing, while sharing their respective takeaways as we head into the remainder of 2022.
1️⃣ Theme — Macroeconomic Uncertainty
Sprinkled in nearly every earnings call were mentions of “macroeconomic uncertainty.”
Takeaways: as long as there is uncertainty, trading multiples will continue to compress — investors prefer certainty and predictability. We’re seeing companies across all sectors recognize the existence of “macroeconomic uncertainty.” Both companies who sell to businesses and consumers are seeing this reality (below).
📌 Pinterest, a very ad-driven / B2B business.
“I'll now turn to revenue guidance. Given the dynamic nature of the economy today and how quickly conditions can improve or worsen, we thought it would be prudent to provide a fairly broad range rather than providing a point estimate like last quarter.
We're growing slightly faster quarter-to-date, but many of our advertising partners, especially larger retailers are experiencing supply chain issues, inflation and weakening consumer demand. These conditions are weighing on advertisers' ability to spend and our best signals of future performance suggests a slowdown from the growth rate we saw in July.
This anticipated slowdown will likely land us toward the lower end of our guidance range. Moreover, if economic conditions continue to deteriorate, we could end up with revenue growth at the bottom end of the range or below in the low single digits.”
📱 Apple, a very consumer-driven / DTC business.
“Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter.”
2️⃣ Theme — Continued Consumer Demand
Takeaways: despite this macroeconomic uncertainty, several companies mentioned continued consumer demand — from the small ticket items like coffee, to big ticket items like iPhones. According to the chart at the bottom of this post, it is my humble opinion that this demand is fueled by debt, and not cash-in-the-bank. This means that we could just be a few more interest rate hikes away from “this debt doesn’t make sense anymore, I’m going to stop spending as frivolously.”
☕️ Small tickets items, like coffee (Starbucks)
“While we are sensitive to the impact inflation and economic uncertainty are having on consumers, it's critically important that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down, reflecting the strength of the Starbucks brand, deep customer engagement and loyalty, pricing power and the premium nature of our beverage and food offerings.”
📱 Big ticket items, like iPhones (Apple)
“When you look at the product categories, on iPhone, there was no obvious evidence of macroeconomic impact during the June quarter. I'm not saying that there's not one. I'm saying that the data doesn't show it where we can clearly see that in the Wearables, Home and Accessories area.”
3️⃣ Heightened Travel Demand
Takeaways: people have been, and will continue to travel. The slow down in the economy and higher gas prices aren’t stopping people from getting out — either by car or plane. This demand for travel is also expected to continue throughout the rest of the year, with companies like Airbnb and Uber guiding to record quarters in Q3 / Q4.
🏠 In Q2, Airbnb saw their largest quarterly number of nights and experiences booked, ever. I think it’s also important to mention Airbnb experienced their most profitable Q2 ever — which from my POV means Airbnb was able to jack up their servicing prices and still rake in record demand.
“Our Q2 results demonstrate that Airbnb has achieved growth and profitability at scale. From a growth perspective, we exceeded 103 million Nights and Experiences Booked — this was our largest quarterly number ever. Revenue was $2.1 billion, up 58% from last year or 64%, excluding foreign exchange. Gross booking value was $17 billion, up 27% from last year or 34% if you exclude foreign exchange. Now both revenue and GBV were 73% higher than Q2 2019, significantly outperforming the travel industry.
Now from a profitability perspective, we had our most profitable Q2 ever. Net income of $379 million was a nearly $700 million improvement from Q2 2019. Adjusted EBITDA was $711 million. Now this represents a 34% adjusted EBITDA margin, which is significantly up from the 16% margin in Q2 2021, a negative 4% in Q2 2019. Finally, we generated $795 million of free cash flow.”
🚗 Uber, a wonderful gauge on the demand for travel, delivered not only balanced bookings growth of +36% this quarter — but also their first cash flow positive quarter, ever.
“Uber delivered another strong quarter with gross bookings and an annualized run rate of $116 billion, an all-time high; EBITDA of $364 million, another all-time high and well above our guidance range; and positive free cash flow for the first time ever of $382 million. Despite the uncertain global economic environment and considerable foreign exchange headwinds, we've issued Q3 EBITDA guidance that shows strong incremental progression, and we remain confident in our ability to deliver healthy top and bottom line growth, strong margin improvement and yes, free cash flow.”
4️⃣ Margin Compression Related to Inflation
Takeaways: inflation has impacted nearly every commodity-driven business — and it’s not going away anytime soon. Sure, the Federal Reserve is going to continue to raise interest rates in effort to curb inflation by destroying consumer demand — but that does nothing about the raw price of goods increasing, causing consumers to pay more on the backend.
🧴 Johnson & Johnson shared how inflation is eating away at their margins across all business segments.
“MedTech margins declined from 28.6% to 26.5%, driven by inflation.. Consumer Health margins declined from 28.6% to 25.9% due to commodity inflation.
As previously discussed, we did build in a healthy assumption to account for inflation in our January guidance, planning for increased costs in labor, energy and transportation. We noted in April, and are doing so again today, that these pressures will continue to impact margins in the third and fourth quarters and into 2023. As such, we continue to pursue mitigation efforts, including cost improvement initiatives, strategic price increases and contract negotiations with external supply partners.”
🍔 McDonald’s shared with us that inflation is not just pressuring their gross profit margins, but also operating margins as wages increase.
“Our G&A costs increased 10% in constant currencies for the quarter. Company-operated margins were hampered by significant commodity and wage inflation as well as rising energy costs. Given macroeconomic conditions, we expect these inflationary pressures will continue to impact margins for the remainder of the year.”
5️⃣ Beaten Down Tech
As you all remember from this post in late-June, speculative tech stocks had been selling off like crazy — however, I mentioned my thoughts as to why we might have begun to see a bottom for some of them.
Now that we’ve seen this sort of turn into reality, let’s walk through a few reasons why we saw ARKK, the Nasdaq, and other tech-focused indices trade up +25-40%…
— Federal Reserve Pivot
As you all are well aware, interest rates have a direct impact on stock valuations. Sure, there are a ton of things that drive valuation multiples up and down, but for speculative tech the lion’s share is derived from interest rates.
If we rewind to Q1, we knew damn well the Federal Reserve was planning on hiking rates — in turn crushing valuation multiples. But now that we’re “confirmed” to be in a recession, the certainty of large future interest rake hikes have disappeared and is instead dependent on data.
Remember, the stock market is a forward-looking mechanism. The 6-week rally we saw in speculative tech were investors “pricing in” a slow down in rate hikes, and therefore a theoretical “bump” in valuation multiples.
— Software is “Safer” than Feared
It’s one thing to hear the CFO of a Fortune 100 company back into why their operating margins are down because of inflation or why their adj. EBITDA margins are deteriorating because of supply chain issues — but for software.. we’re not exactly seeing that.
For example, Confluent shared their expectations of a $5M headwind to revenue derived from “macroeconomic uncertainty,” which is less than 1% of their FY2022 revenue .. not exactly something to be afraid of.
So, where is speculative tech right now?
It’s hard to say, and unfortunately there are so many factors that continually change that are impacting the answer here. However, it’s still my humble opinion that where we were in late-June might be the base of a bottom forming — and even if shit (continues to) hit the fan, I’m not sure how much lower speculative tech would go.
With all of that being said, there’s a lot of information to digest. Stay tuned for a more elaborate portfolio update soon, as I’m beginning to lean toward taking chips off the table for a few of my largest positions. As always, you all will know what my plans are before I put them into action.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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