Week in Review: 11/7/21

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Quick Note on Peloton:

Let’s start with the facts - Peloton reported revenue of $805 million, an increase of +6% year over year. Remember, this time last year we were in the heart of the pandemic with Peloton seeing incredible tailwinds from that.

• Connected fitness subscriptions increased +87% to 2.49 million

• Paid digital subscriptions increased +74% to 887 thousand

Looking ahead, Peloton is guiding to full-year revenue of about $4.6 billion, compared to the $5.4 billion Wall Street expected, on average. This softer than expected guidance was attributed to supply chain constraints and commodity cost pressures.

If you didn’t see, these results caused their stock to crater -35% the next trading day to around $57 / share.

I think there’s some misconception around Peloton, just like there was for Tesla back in the day. People were valuing Tesla as if they were a car company optimizing for profits - something they weren’t able to do until recently. I think people right now are looking at Peloton like they’re some sort of fitness equipment company optimizing for profits - and “they had a lot of revenue during COVID, that should result in more profits!”

When in actuality, by simply looking at the company’s CEO John Foley, we get a better glimpse into exactly how he’s running this company and what he’s optimizing for in the long term.

It’s not profits - it’s connected fitness subscribers. 

It’s important as shareholders that this specific metric is what we use to gauge the success of the company quarter over quarter and year over year. Because when you pair a growing list of connected fitness subscribers with an industry leading net promoter score and strong retention rates - over a long period of time, you hit an inflection point, similar to Tesla, driving profits higher exponentially.

By going along this single metric - connected fitness subscribers - we can see that Peloton is doing just fine. It’s absurd to me to think this stock, now at $57 / share, is being valued on an EV / TTM Revenue multiple lower than it was before the pandemic.

Before the exponential sales, before the millions of new subscribers, before the Precor acquisition, and before the partnerships with multiple music artists.

Sure - if you look up above you can see the avg. number of monthly workouts have declined per user, but I’d argue that’s driven from re-opening momentum. I agree, it’ll probably bump around a little bit during the coming quarters.

But let’s not forget this company’s dedicated userbase - their insanely low churn rate, and incredibly high lifetime value as a customer to this company.

Against the thoughts of what other people have said about Peloton, I’m going to buy this dip. I still think Peloton deserves a modest 1-3% weighting in my portfolio. I’m by no means betting the farm on this one - but I think John Foley is going to turn this into a company worth hundreds of billions one day, one way or another (metaverse?) and I want to be along for the ride.

Week in Review - Too Long; Didn’t Read:

There are now 3 Shopify-built companies trading on the stock market, Arhaus analysis coming soon, Realty Income Corporation continues to print cash, Qualcomm doubled down on the controllables - mobile, Roku’s ARPU has almost doubled since the pandemic, MercadoLibre is growing like a weed, Uber is inching toward profitability, Airbnb had their best quarter ever, and the unemployment rate is now at a new pandemic-low.

IPO Updates:

A few household names went public this week - let’s discuss. 

• Allbirds (BIRD):

A company I was relatively neutral on made their public debut this week and the market loved it - pushing their stock up from $21.21 / share to as high as $32 / share before coming back down to Earth, closing the week off around $26 / share.

This values Allbirds around $4.0 billion, or about ~16X their trailing twelve months of revenue. The company will likely do around $250 million in revenue this year, on about 55% gross profit margins.

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• Arhaus (ARHS):

The company I was personally excited about made their public debut this week - opening lower than originally anticipated at only $12.68 / share and closing the week off at $12.21 / share.

This is a very interesting stock to Chris Sommers and I as we believe this company has a “growth story” to be told. It’s easy to compare them to the widely successful Restoration Hardware (RH) - a similar company with similar financials.

What’s interesting about this comparison is that Arhaus has roughly the same amount of stores around the country (80 vs. 110), but Restoration Hardware is making 3X more revenue per store than Arhaus.

Why? How? What’s going on here?

Key Earnings Announcements:

Earnings were all over the board this week, with several of them being companies in our coverage universe. Let’s talk through their key metrics, quoted call outs, and my thoughts - as always. 

• Realty Income Corporation (O):

You all likely know this company as the REIT that pays monthly dividends - one of my favorites.

Key Metrics

Funds from Operations per share: $0.89, an increase of +8.5%

Investments: $1.61 billion in 308 properties, including $532 million in Europe

Press Release Callout

“Our position as a global consolidator continues to build as we invested a record $3.78 billion year to date across three countries, including our debut transaction in Continental Europe. In addition, we are proud to announce today's closing of our merger with VEREIT, further establishing ourselves as a leading net lease REIT and we look forward to integrating the capabilities of many talented colleagues into our 'One Team'.”

My Takeaway

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• Qualcomm (QCOM):

Key Metrics

Earnings: $2.55 per share vs. $2.21 per share expected

Revenue: $9.34 billion, an increase of +44% YoY

Q4 Guidance: $10.4 billion in revenue vs. $9.7 billion expected

Press Release Callout

“We are well positioned to continue to lead in mobile and enable the digital transformation of industries with our broad portfolio of relevant technologies. Our results across RF front-end, Automotive and IoT attest to the success of our technology roadmap and revenue diversification strategy.”

My Takeaway

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• Matterport (MTTR):

Key Metrics

Earnings: -$0.06 per share vs. the -$0.07 expected

Revenue: $27.7 million, an increase of +10% YoY

Total Subscribers: 439K, an increase of +116% YoY

Paid Subscribers: 53K, an increase of +35% YoY

Annual Recurring Revenue: $63 million

Press Release Callout

“We are pleased to report another strong quarter, more than doubling our subscriber count to 439,000 subscribers, and increasing our Spaces Under Management by 62% to 6.2 million Spaces.

We made significant advances in all of our objectives, including strategic product launches, key industry partnerships, expanded service offerings, and the scaling of our global workforce to address the huge opportunity ahead. We have also been navigating the dynamics of the global supply chain and labor markets to minimize the impact on our hardware and services business.

Our recent launch of Matterport for Android is very timely, and dramatically expands our reach for digitizing spaces using just the phone in your pocket, while giving us an important advantage to our global growth plans for Asia Pacific, Europe, the Middle East and Africa.”

My Takeaway

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• Roku (ROKU):

Key Metrics

Earnings: $0.48 per share vs. $0.07 expected

Revenue: $680 million, an increase of +50% YoY

Platform Revenue: $583 million, an increase of +82% YoY

Gross Profit: $364 million, an increase of +69% YoY

Active Accounts: 56.4 million, an increase of +1.3 million

Average Revenue per User: $40.10, an increase of +49% YoY

Press Release Callout

“In the third quarter, ARPU surpassed the milestone of $40 (trailing 12-month basis) and grew nearly 50% year-over-year. As the global shift to TV streaming continues, our performance demonstrates the strength of our business fundamentals and the momentum of our platform monetization. We are making significant progress with traditional TV advertisers, while also expanding our total addressable market to digital-first advertisers. Despite the ongoing headwinds created by the global supply chain disruptions, Roku remains well positioned as a result of our scale, brand, technology, and relentless focus on the TV streaming experience.”

My Takeaway

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• Square (SQ):

Key Metrics

Earnings: $0.37 per share, which was in-line with expectations

Revenue: $3.84 billion, an increase of +27% YoY

Revenue Excluding Bitcoin: $2.0 billion

Gross Payment Volume: $45.4 billion, an increase of +43% YoY

Press Release Callout

“We delivered strong growth at scale during the third quarter of 2021. Gross profit grew 43% year over year to $1.13 billion, which was 51% on a two-year compound annual growth rate (CAGR) basis.

In our Seller ecosystem, gross profit was $606 million, up 48% year over year and 29% on a two-year CAGR basis. Our Cash App ecosystem delivered gross profit of $512 million, an increase of 33% year over year and 104% on a two-year CAGR basis.

In August, we entered into an agreement to acquire Afterpay, a global buy now, pay later platform with more than 16 million consumers and approximately 100,000 merchants as of June 2021. Through this transaction, we plan to unite two complementary businesses with a shared focus on economic empowerment and financial inclusion.

We believe the combination will more deeply connect our Seller and Cash App ecosystems, accelerate our strategic priorities, and allow us to deliver even more compelling products and services for consumers and merchants.”

My Takeaway

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• MercadoLibre (MELI):

Key Metrics

Earnings: $1.92 per share vs. $1.29 expected

Revenue: $1.86 billion, an increase of +62% YoY

Gross Merchandise Volume: $7.3 billion, an increase of +30% YoY

Mobile GMV: 74.1% of total GMV (above)

Total Payment Transactions: 865.7 million, an increase of +55% YoY

Total Payment Volume via Mercado Pago: $20.9 billion, an increase of +59% YoY

Press Release Callout

“We have once again reached new records in gross merchandise volume, payment volumes and credit portfolio size; which demonstrates resilience and strength across all parts of our ecosystem. Moreover, we see our engagement and satisfaction improving sequentially for both commerce and fintech services, which is particularly encouraging given the user base expansion that we have driven over the last year.”

My Takeaway

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• Uber (UBER):

Well, I was really excited about this company - thinking they were going to knock our socks off. Turns out I had the wrong ride-sharing company, as Lyft’s stock traded up +17% this week after reporting their earnings. Nonetheless, Uber still traded up +8%.

Key Metrics

Earnings: -$1.28 per share vs. -$0.30 expected

Revenue: $4.85 billion, an increase of +73% YoY

Gross Bookings: $23.1 billion, an increase of +57% YoY - an all time high

Trips: 1.64 billion, an increase of +39%

Press Release Callout

“While we recognize it’s just a step, reaching total-company Adjusted EBITDA profitability is an important milestone for Uber. Not only did our Mobility business recover to pre-COVID margins this quarter, our core restaurant delivery business was profitable on an Adjusted EBITDA basis for the first time as well, bringing the full Delivery segment close to breakeven.”

My Takeaway

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• Airbnb (ABNB):

Well, it finally happened - Airbnb reported the insane financials we were hoping they would months ago. Watch this YouTube video for more context - you’ll hear my friend Chris call me out halfway through.

Key Metrics

Earnings: $1.22 per share vs. $0.70 expected

Revenue: $2.24 billion, an increase of +67% YoY

Gross Booking Value: $11.9 billion, an increase of +48% YoY

Nights and Experiences Booked: 79.7 million, an increase of +29% YoY

Profits: $834 million, an increase of +280% YoY

Press Release Callout

“The travel rebound that began earlier this year accelerated in Q3, resulting in Airbnb’s strongest quarter ever. Revenue and net income were our highest ever. Adjusted EBITDA exceeded $1 billion, also our highest ever. This summer, we reached a major milestone of 1 billion cumulative guest arrivals as more people got vaccinated and travel restrictions were relaxed. Host earnings reached a record $12.8 billion in the quarter, and active listings continued to grow.

But something bigger than a travel rebound is happening. The world is undergoing a revolution in how we live and work. Technologies like Zoom make it possible to work from home. Airbnb makes it possible to work from any home. This newfound flexibility is bringing about a revolution in how we travel. Millions of people can now take more frequent trips, take longer trips, travel to more locations, and even live anywhere on Airbnb.”

My Takeaway

Investor Events:

Satya Nadella, Microsoft’s Executive Chairman and CEO, made several key announcements about the direction of the world's most valuable company. These include innovations throughout the worlds of artificial intelligence (AI), enterprise development, security, and of course - the metaverse.

• Microsoft Ignite 2021 Conference

Microsoft Cloud: the company believes that in the coming years digital capabilities surrounding sustainability will be as critical for businesses as CRM is for sales and as ERP is for finances today.

In response, Microsoft revealed that they will be launching a tool to help companies measure the carbon footprint of their operations and identify ways to reduce negative environmental impacts.

Microsoft introduced more than 90 new services and updates (sheesh!) in Microsoft Teams, Microsoft 365 and other applications. “Just like Microsoft Teams has transformed collaboration and productivity, Microsoft Loop is the next big breakthrough in Microsoft 365,” said Nadella. 

Loop is a new application in a communication and AI-first world. It’s expected to be similar to Google Wave, a real-time collaboration platform that was launched in 2009 and shutdown in 2010.

 “We are composing people’s content, comments, chats, reactions, and live business process data even together into a new collaborative canvas. And we are reimagining how anyone can contribute directly in the flow of their work, whether it is from a chat, email meeting or a document,” said Nadella. 

Microsoft Azure and AI: the company is extremely confident in its ability to take AI breakthroughs and translate them into platforms for customers to build upon. Just last month, Nvidia (NVDA) - in partnership with Microsoft – launched the Megatron-Turing Natural Language Generation (MT-NLG) model with 530 billion parameters. Nadella said this offers unmatched accuracy across a wide set of natural language tasks, and spotlighted it as a valuable use case.

The new Microsoft Azure OpenAI Service will give customers access to OpenAI’s powerful GPT-3 models, along with security, compliance, reliability, data privacy, and other enterprise-grade capabilities that are built into Microsoft Azure. 

“We are moving from a mobile and cloud era to an era of ubiquitous computing and ambient intelligence – an era which will experience more digitisation over the next ten years than the last 40,” said Nadella.

Metaverse: Microsoft plans to build a version of the metaverse for both individuals and enterprises, with a roadmap to integrate with Azure, IoT, Azure Digital Twins to Connected Spaces and Microsoft Mesh.

“When we talk about the ‘Metaverse,’ we are describing both a ‘new platform’ and a ‘new application’ type. Similar to how we talked about the websites in the early 90s,” said Nadella.

If you want to learn more specifics surrounding the conference, I suggest checking out this link.

Major Economic Updates:

PMI results are heavily impacted from supply chain issues, Jerome Powell makes big statements regarding the Fed’s view on the economy, and Non-Farm Payroll results display positive momentum in an ever-changing labor market.

• US Manufacturing PMI for October

The Manufacturing Purchasing Managers’ Index (PMI) measures the activity level of purchasing managers in the manufacturing sector. A reading above 50 indicates expansion in the sector, below 50 indicates contraction.

The PMI was revised lower to 58.4 in October 2021, down from September’s 60.7. The pace of expansion for the US manufacturing industry reached its lowest point in ten months due to the smallest increase in production levels since July 2020.

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• Federal Reserve Press Conference Highlights

Chairman Jerome Powell announced that the Federal Reserve will begin tapering (incrementally reducing) asset purchases, but will not be raising the federal funds (interest) rate. 

“Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate,” said Powell.

The meeting also focused on supply chain concerns, with Powell reasserting his view that its very difficult to gauge when the crisis will subside and constraints will resolve themselves. He said that the Fed will use its tools to fight inflation if price pressures stay higher in the long-term.

“If we were to see signs of the path of inflation, or longer-term inflation expectations, was moving materially and persistently beyond levels constant with our goals, we will use our tools to preserve price stability,” Powell said.

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• US Non-Farm Payrolls for October 

According to the Bureau of Labor Statistics - the US economy added +531K jobs in October of 2021, the most in 3 months. This was above market forecasts of 450K as Covid-19 cases dropped and employers offered higher wages and more flexible hours. 

The biggest job gains occurred in leisure and hospitality (+164K), in professional and business services (+100K), in manufacturing (+60K), and in transportation and warehousing (+54K) while employment in public education declined (-65K).

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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.