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  • Week in Review: 3/20/22

Week in Review: 3/20/22

Everything worth commentating on from the past week in the markets.

20 Mar

Between March Madness and St. Paddy’s Day… odds are you missed some key market moves this week.

The good news? These Week in Review posts serve as your all-encompassing highlight reel of the last 5 trading days!

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Expected Read Time: 7 minutes

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

Some familiar names like GitLab, Shift Technologies, & Warby Parker had incredible weeks, Starbucks’ legendary leader returns for a $1 salary, Adobe Summit 2022 showed that the company is doubling down on content creation from start to finish, The Chinese markets ripped after the CCP pledged to be accommodative, and details on the first interest rate hike since 2018.

Key Earnings Announcements:

Accenture reported a strong beat & raise, SentinelOne acquired Attivo Networks for $617M, elevated transportation costs are eating into FedEx’s 2022 margins, and Dollar General’s private transportation fleet is carrying the team.

  • Accenture (ACN)

Key Metrics

Net Bookings: $19.6 billion, an increase of +22% YoY

Total Revenue: $15.0 billion, an increase of +28% YoY

Technology Revenue: $3.2 billion, an increase of +32% YoY

Financial Services Revenue: $2.9 billion, an increase of +25% YoY

Health & Public Service Revenue: $2.7 billion, an increase of +21% YoY

Products Revenue: $4.3 billion, an increase of +34% YoY

Resources Revenue: $2.0 billion, an increase of +25% YoY

Earnings Release Callout

“Very strong, broad-based demand, with record new bookings and revenue growth, and outstanding EPS growth.”

My Takeaway

The market seems to be more focused on Accenture’s growth (or lack thereof) for the coming 12 months — re-rating the stock’s valuation multiples until visibility improves. Their revised guidance implies a +24% bump in growth, management “felt very good” about their pipeline despite another record bookings quarter, and consulting bookings growth is accelerating as cloud migration and digital transformation move throughout the global economy.

Management also went out of their way to reiterate that only ~30% of enterprise workloads have migrated to the cloud, and that the digital transformation they profit from so heavily is in very early stages.

I’m adding Accenture to my watchlist at these prices.

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  • SentinelOne (S)

Key Metrics

Total Revenue: $65.6 million, an increase of +120% YoY

Annualized Recurring Revenue (ARR): $292.3 million, an increase of +123% YoY

Total Customer Count: 6,700, an increase of +70% YoY

Customers Paying >$100K or More: 520, an increase of +137% YoY

Net Retention Rate: 129%, up from 117% a year ago

Earnings Release Callout

“Fiscal 2022 was a groundbreaking year for SentinelOne. We sustained a triple-digit revenue and ARR growth rate throughout the year, delivering ARR growth of 123% and rapidly approaching $300 million in ARR.

Our results demonstrate the exceptional execution of Sentinels around the world and the strength of our AI-driven, autonomous XDR platform. We remained relentlessly focused on innovation and execution. With our best-in-class Singularity XDR platform, we are protecting more enterprises today than ever before at faster speed, greater scale, higher accuracy, and more automation.”

My Takeaway

Strong execution with key metrics all trending in the right direction — their quarterly results beat expectations on all fronts driven by both legacy displacements and increasing go-to-market scale. This company is still in the early innings, so it’s understandable to see their valuation multiple move around so violently — however, I’m seeing countless underlying growth drivers which will continue to push their revenue higher.

First, the company continues to displace legacy vendors. This is obvious as their >$100K ARR customers grew by +137% YoY. Cross-sell and up-sell is another strong driver, with 33% of new customers purchasing their “DataSet” product, up from only 20% a year ago. This is shown in their NRR growth. Finally, acquisitions — SentinelOne announced their acquisition of Attivo Networks for $617M, adding identity security solutions to their offerings — unlocking a $4B total addressable market for S.

The market loved these results as the stock traded up +30% last week after reporting. However, they’re still richly priced at more than 25X forward revenue. I’m bullish, but not a buyer yet — especially in a bear market.

—

  • FedEx (FDX)

Key Metrics

Revenue: $23.6 billion, an increase of +10% YoY

Operating Income: $1.3 billion, an increase of +32% YoY

Profits: $1.1 billion, an increase of +23% YoY

Earnings Release Callout

“We successfully executed during the holiday peak season, resulting in record December operating income. Our strong quarterly operating income increase was dampened by the surge of the Omicron variant which caused disruptions to our networks and diminished customer demand in January and into February.

We remain focused on revenue quality and operational efficiency initiatives to mitigate inflationary pressures and drive earnings improvement.”

My Takeaway

In my opinion, FedEx remains a “show me” story that will largely be driven by an improvement in its incredibly important Ground business segment. Ground margins will remain the most critical factor for this company — for context, this business segment enjoyed mid-teen margins for years as fuel costs were steady. Now, fuel is nearly twice as expensive.

FedEx will have a tough year proving to their investors they’ll be able to navigate lingering labor costs, heightened fuel costs, and operational disruption from COVID.

Not on my watchlist, but it does make me nervous about my Amazon position.

—

  • Dollar General (DG)

Key Metrics

Revenue: $8.7 billion, an increase of +3% YoY

Operating Income: $797.0 million, down -9% YoY

Profits: $643.0 million, down -7% YoY

Earnings Release Callout

“Despite a more challenging than expected operating environment, our teams remained focused on executing our operating priorities and advancing our strategic initiatives, which we believe position us well for solid sales and profit growth in 2022 and beyond.”

My Takeaway

To me, Dollar General is one of those “slow and steady wins the race” type companies. They have several long-term growth drivers they’re continually executing against while operating on razor thin margins. Their real estate growth strategy, for example, is one of them. As inflation continues to rear its ugly head, it’s sort of a no brainer to think these value-retail stores are seeing the worst of it. However, Dollar General’s private fleet is -20% cheaper than using a third party (something most value-retailers do) and accounts for 40% of their goods sold. Clear differentiation for the company in the eyes of investors.

An interesting call out to keep in mind as fuel prices rise ($4 / gallon while typing this) is that 75% of the US population live within 5 miles of a Dollar General store. Perhaps folks will opt to shop “closer to home” in efforts to save on gas?

Dollar General has done a great job holding their own throughout this bear market, down only -2.5% YTD compared to the SPY’s -7.0% YTD. I’m going to consider taking profits out of Costco and pushing them into DG, as Costco now trades at its highest-ever valuation from a price to earnings perspective.

Other Abbreviated Earnings Results:

The first week in months where numerous names saw significant gains. This is to be expected during a bear market — dead cat bounce / extremely oversold stocks see some relief. Affirm (AFRM) is a perfect example of this, up +40% last week for no reason.

  • GameStop (GME): Narrowly beat top line & completely missed bottom line expectations, GameStop lost -$1.94 per share during the quarter (analysts expected +$0.85 per share), plans to launch an NFT marketplace by the end of Q2 — Shares rose +3.2% last week — Current Price: $91 / share — WS 12M Price Target: $56 / share

  • Coupa Software (COUP): Beat top & bottom line expectations, but provided underwhelming guidance — Shares dropped -8.2% last week — Current Price: $91 / share — WS 12M Price Target: $91 / share

  • GitLab (GTLB): Beat top & bottom line expectations, delivered strong growth metrics & optimistic sales forecasts — Shares ROCKETED +89.7% last week — Current Price: $63 / share — WS 12M Price Target: $73 / share

  • Shift Technologies (SFT): Crushed top line & missed bottom line expectations, announced expansion into new service markets & remarkable guidance — Shares soared +64.0% last week — Current Price: $2.64 / share — WS 12M Price Target: $7.55 / share

  • Williams Sonoma (WSM): Missed on top line & crushed bottom line expectations, provided guidance that the company can continue to increase profitability and limit expenses — Shares climbed +14.9% last week — Current Price: $164 / share — WS 12M Price Target: $179 / share

  • Xometry (XMTR): Narrowly beat top line & missed bottom line expectations, active sellers increased +43% YoY, guided toward rapid expansion — Shares rose +5.1% last week — Current Price: $40 / share — WS 12M Price Target: $68 / share

  • Warby Parker (WRBY): Met top line & completely missed bottom line expectations, expects stores to get back to 100% productivity this year — Shares surged +28.1% last week — Current Price: $31 / share — WS 12M Price Target: $58 / share

  • On Holding (ONON): Beat top line & missed bottom line expectations, expects return to “hyper-growth” during 2H22 — Shares rose +33.5% last week — Current Price: $28 / share — WS 12M Price Target: $40 / share

Investor Events:

Starbucks’ CEO switch-up and takeaways from the highly-watched Adobe Summit.

  • Starbucks Annual Meeting

Howard Schultz is back (for now) and confirmed plans to scale to 55K stores.

The biggest announcement to come from Starbucks’ annual meeting was the resignation of President & CEO Kevin Johnson. He’s retiring after 13 years with the company, five of them as CEO.

Interestingly, his interim replacement will be Howard Schultz — who led Starbucks for three decades and built it from 11 stores to 28,000 stores worldwide. He’s pledged to take on the position as a volunteer, with a compensation of just $1.

Other Highlights:

  • Shared People Positive aspiration to enhance the well-being of one billion people, globally, by 2030

  • Deepened commitment to sustainability through new partnerships, technologies and global reusability efforts

  • Confirmed plans to expand to 55,000 stores in over 100 markets by 2030

  • With over $25B returned to shareholders over the last four years, Starbucks recommitted to returning another $20B by 2025

—

  • Adobe Summit 2022

As has been the case for years, the Adobe Summit is among the most star-studded company conferences of the year.

Main highlights:

  • Keynote on ‘Making the Digital Economy Personal’ was delivered by Adobe executives, Walgreens CEO Rosalind Brewer, Nike CEO John Donahoe, and American Red Cross CEO Gail J. McGovern

  • Actor and Philanthropist Ryan Reynolds led a discussion on Marketing and Advertising

  • Tennis legend Serena Williams helped introduce the Adobe Journey Optimizer, tailor-made for marketers to manage the customer journey from end-to-end

  • CEO Shantanu Narayen revealed Adobe’s role as a leading platform for the metaverse

  • Placed an emphasize on scaling the ability to create content of all kinds using the Adobe Creative Cloud

We use Adobe products for a variety of different tasks and it was pretty special seeing that so much of the Adobe Summit was not just about enhancing the digital economy as a whole, but also the ever-growing niche of the creator economy.

Of course, single-company conferences of this nature can be mostly about ‘tooting your own horn’ and keeping employees happy. However, it was very impressive to see a company worth over 200 BILLION admit that it’s focusing on being the all-in-one solution for creators, managers, marketers, and business professionals.

Major Economic Updates:

China’s market surge and takeaways from the FOMC Meeting.

  • China Market Update

How does this get posted one day:

…and then this on the next?

President Xi Jinping and the governor of the People’s Bank of China pledged to help keep the country’s equity markets strong going forward.

By some metrics, the global confidence in Chinese financial markets was at its weakest levels since the financial crisis of 2008. Changes include completing their crackdown on Big Tech “as soon as possible,” ending some tax increase initiatives, and actively introducing market-benefitting policies to the Communist Party congress.

Were there many specifics laid out? No, but when your market has looked like this over the last 10+ years — you need to act:

As I’ve said many times before, I rarely hold Chinese stocks because I simply have no gauge of going on over there. It’s not some massive anti-China sentiment, I just never know what’s to come next with the CCP.

However, maybe this will change for a stock or two. Shark Tank’s Mr. Wonderful believes that the Chinese economy will be the largest in the world before we know it. He noted the following after taking criticism for buying the dip in China:

“China stocks are volatile. I get it, but where else can you get 30%-50% growth rates and exposure to the worlds fastest growing economy?”

If interested in learning more about the Chinese economy, here’s a great thread.

—

  • FOMC Takeaways

The Federal Open Market Committee (FOMC) is increasing the federal funds rate for the first time since 2018. The increase will be relatively light at +25 basis points, or 0.25%.

Of the nine voting members present at the meeting, eight voted in favor of the +25 bp rate increase, including Fed Chair Jerome Powell and Vice Chair Nominee Lael Brainard. The only dissenting vote was cast by James Bullard, who favored a rate hike of 50 bp.

The current consensus is that there will be a 25 bp rate hike in each of the next six meetings as well, and potentially 3-5 in 2023.

"The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

"The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals [i.e., maximum employment and inflation at 2% over the longer run]. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."

In simple terms: Every member agrees that rate hikes are overdue, but the geopolitical and supply chain issues could lead to temporary suspensions of rate hikes — only if necessary.

Why does this matter? In simple terms again, higher interest rates slow down the economy and generally make stocks look less attractive. Higher rates mean increased borrowing costs for both companies and consumers. It’s sadly a price worth paying for the runaway inflation we’re currently experiencing.

Enjoy the rest of your weekend!

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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