Podcast Summary
Economic landscape cools off, Starbucks reports strong earnings: The economic slowdown and Starbucks' strong earnings led to a market rally and a significant increase in Starbucks' stock price
The economic landscape showed signs of cooling off this week with a weaker than expected jobs report and moderating wage inflation, potentially indicating the Fed's efforts to lower inflation are working. This news caused a significant drop in treasury yields and a subsequent market rally. One of the companies that benefited from this market shift was Starbucks, whose shares surged over 10% after reporting earnings and revenue ahead of expectations. The coffee giant's success was not solely due to price increases but also from increased transactions, making it an attractive investment for shareholders. Despite previous concerns about leadership uncertainty and growth stagnation, particularly in China, Starbucks' solid Q4 results have made it feel good to be a shareholder once again.
Starbucks' Strong Finish and New Strategy: Starbucks had a robust fiscal 2023 ending, projecting 5-7% comps growth, 10-12% revenue growth, and 15-20% earnings growth for 2024. The company's focus on brand elevation, digital presence, global expansion, and operational efficiencies is outlined in its 'Triple Shot Reinvention' strategy.
Starbucks had a strong fiscal 2023 finish with impressive sales and earnings growth, exceeding consensus expectations. The company's operating margin also saw a significant increase. Starbucks' new long-term strategy, named the "Triple Shot Reinvention," focuses on brand elevation, digital presence, global expansion, and operational efficiencies. For fiscal 2024, Starbucks projects comps growth between 5-7%, revenue growth between 10-12%, and earnings growth of 15-20%. Despite these optimistic projections, some investors may be concerned about the coffee metaphor used by the CEO. Meanwhile, Apple, another tech giant, faced challenges in its latest earnings report, with disappointing sales and guidance, particularly in the Mac, iPad, and China markets. Despite stronger-than-expected earnings, these areas of weakness may concern investors.
Apple's earnings growth and Shopify's impressive report: Apple's earnings per share grew by 13%, but its valuation looks expensive. Shopify reported a 22% increase in gross merchandise volume, a 29% rise in subscription solutions revenue, and a significant improvement in profitability.
Apple's earnings per share grew by 13% despite a decrease in shares outstanding. The company continues to generate strong cash flows and has a large cash reserve. However, with a forward P/E ratio of 27 times, the stock's valuation is starting to look expensive, even for a tech giant like Apple. On the other hand, Shopify reported impressive earnings with a 22% increase in gross merchandise volume and a 29% rise in subscription solutions revenue. The company's profitability has also improved significantly due to the sale of its logistics business, leading to a free cash flow margin of 16%. Despite the high level of stock-based compensation, investors are excited about Shopify's growth and profitability. Shopify's president, Harley Finkelstein, recently confirmed the company's strong performance on CNBC.
DoorDash reports record-breaking orders and strong financials: DoorDash's stock price surged 20% due to record orders and financials, despite not being profitable yet.
DoorDash, a leading food delivery company, reported record-breaking orders and strong financials, leading to a nearly 20% increase in their stock price. With a market cap of $35 billion, the company is not yet profitable but is producing free cash flow. The trend of convenience, as consumers continue to prefer staying at home, could help DoorDash grow into its current valuation. However, it remains to be seen if they can do so in a timely manner. Another company that had a rough week was Match Group, the online dating company, which saw a 10% decrease in its stock price after reporting user growth concerns, particularly with their flagship app Tinder.
Trends in Subscription Businesses: Revenue Growth vs. Subscriber Numbers: Match Group's revenue growth from price hikes comes at the cost of declining subscriber numbers, limiting upside potential. Roku's earnings report shows signs of advertising rebound and cost cutting, but faces uncertain macroeconomic conditions.
The pandemic-driven boom in subscriptions for companies like Match Group, which owns popular dating apps like Tinder, may have reached a turning point. While the company has seen revenue growth from price hikes, it has come at the cost of declining subscriber numbers. This trend, which is indicative of a network effects business, has hit the stock hard and may limit its upside potential unless subscriber growth can be revived. Meanwhile, Roku, a streaming and ad company, saw a 40% increase in its stock following a strong earnings report, which included signs of an advertising rebound and cost cutting measures. Despite some positive signs, both companies face uncertain macroeconomic conditions and uneven market recoveries. It's possible that we may be seeing some bottoming out of big growth tech stocks, but they will need to continue to put up strong numbers to maintain investor support in the current interest rate environment.
UAW Secures Major Wins in Auto Negotiations: UAW eliminated multi-tiered wage system, secured coverage for new battery plants, and achieved substantial wage increases through strategic strikes at profitable plants.
The United Auto Workers Union (UAW) negotiations with Ford, GM, and Stellantis resulted in significant wins for the union, including the elimination of the multi-tiered wage system, coverage of new battery plants, and substantial wage increases. The UAW demonstrated its bargaining power by striking the most profitable plants, leading to companies agreeing to bring these new facilities under the national contract at assembly plant wages. However, despite these major advances, union ratification remains a concern. The deals came together after the companies went through their escalation strategy, which involved striking their most profitable plants and waiting for the union to demonstrate their strength to their members. The UAW secured major wage increases, eliminated the multi-tiered wage system, and covered new battery plants, resulting in a strategic defeat for the Detroit automakers. These negotiations could potentially influence the companies' long-term battery strategies.
UAW Strikes Result in Billion Dollar Labor Cost Increases: The UAW's new aggressive approach led to significant labor cost increases for Detroit 3 automakers, inspiring other labor groups to adopt similar tactics.
The recent UAW strikes against the Detroit 3 automakers resulted in significant labor cost increases for the companies, estimated to be over $2 billion per year, or up to 40% more than before. The UAW's new and aggressive approach, led by union president Rory Gamble and his team of young advisors, contributed to the successful negotiations. Unconventional tactics, such as striking multiple plants at once, led to more confrontation and concessions from the automakers. This new approach could inspire other labor groups and industries to adopt similar strategies in the future. However, the hard feelings and financial impact on the automakers may have long-term consequences for how they approach union negotiations.
Labor deals at Detroit 3 companies need ratification: Despite recent labor agreements, their ratification remains uncertain due to past rejections and potential chaos if failed. Union leaders pushing for finality, but companies' financial disclosures may be posturing.
While the recent record-breaking labor deals in the automotive industry between the unions and the Detroit 3 companies are impressive, they still need to be ratified by the union members. Union members at Mack Trucks recently rejected a proposed agreement, and there is a history of failed ratifications. The unions' leaders, like Terry Dittes at UAW, are trying to create a sense of finality by ratifying and calling workers back to work before ratification. However, there's a risk that a failed ratification at any of the three companies could lead to chaos. Additionally, the companies' financial disclosures about the cost of the strikes could be political posturing, as they may be able to make up for the lost production with overtime. Overall, the labor disputes' resolution remains uncertain, and investors should keep an eye on the situation.
Kellogg's declining sales and Quest Diagnostics' resilience: Kellogg, a cereal giant, struggles with declining sales due to competition from healthier options, while Quest Diagnostics, a diagnostics leader, shows resilience in non-COVID testing and has a strong cash flow position
While WK Kellogg (KLG) is a leading seller of ready-to-eat cereals with popular brands like Frosted Flakes, Rice Krispies, and Froot Loops, the company faces declining sales due to competition from healthier food options. The stock has underperformed since its spin-off from its parent company, Kelanova, and has a small market cap. However, if Kellogg can meet its EBITDA targets, it could be an intriguing investment opportunity. On the other hand, Quest Diagnostics (DGX), a leading diagnostics and blood testing company, has shown resilience in its non-COVID testing business, which has helped offset the decline in COVID-19 testing revenue. The company's strong cash flow position and competitive position make it an attractive investment, despite the below-market multiple it trades at.
Beware of Overpromising Marketing Tactics: When evaluating potential investments, focus on the fundamentals of the business and not just the marketing tactics used by companies.
While researching potential investment opportunities, it's important to be aware of the marketing tactics used by companies, even if they seem aspirational or overpromising. For instance, during the discussion on this week's Motley Fool Money Radio Show, the image of a healthy woman multitasking while doing a plank on a company's website raised questions about whether the company was delivering on its promises. However, it's also important to remember that these companies are often lifestyle brands, and the images they use are meant to inspire and motivate consumers. So, while considering potential investments, it's crucial to look beyond the marketing and focus on the fundamentals of the business. In the end, Matt and Ron brought two stocks to the table, and while the discussion around them was engaging, the real lesson was about the importance of conducting thorough research before making investment decisions.
