- Jay Smith
Q3 2018 - The Big Earnings Week Review
AMD $AMD Lisa Su opened the Q3 earnings call with yet another strong performance, highlighting Epyc and high-end Ryzen as the major growth contributors. However there was some bad news. I’ve previously mentioned AMD’s weakness in the GPU market, especially desktop. With fading revenue from a now very old console generation, and no real competition for gamers with the cards offered by nVidia AMD has found itself with a large excess of inventory. This, above all else was the focus for questions during the call.
One question that was interesting to me was, “Can you help us quantify how much of a headwind was that excess graphics inventory in Q3 and Q4?”. Lisa responded “So, the best thing I can say is when we look at the CG segment as a segment, we’re down about $150 million here in the 3rd quarter. We had expected the segment to be down, but we probably expected it to be down about $50 million or so. As we go into the 4th quarter, we do expect graphics to be up, and that’s primarily on the strength of the datacenter GPU business.” This gives us an idea of the scale of the under-estimation for GPU demand by AMD, out by 66%. For me this is not all that surprising, AMD’s cards are simply not competitive, even in the server market they struggle to compete with nVidia.
One caller from Bernstein Research asked Lisa to clarify where the GPU market was going over the next 12 months for AMD. “Could we see year over year revenue down by 20%?” Lisa responded “I would not expect that type of decline on a year on year basis. I think what you will see is some funky seasonality, the first half of the year was very strong for graphics, I think the first half of 19 will not be very strong, but we have a lot of product launches coming up, and we are pretty excited about some of those launches. We need to work off some of this channel inventory that’s in place and then go back to a more typical seasonality, that would see the second half stronger than the first.”
When asked again about clearing the inventory backlog Lisa said, “The weakness in the GPU channel, we might see it in the next quarter or two, but gamers are still buying GPU’s, and so this is really a matter of absorbing some of the first half over-supply.”. For me the take-away from this is how much the company over-estimated demand for their GPU’s, and how far they need to progress to even remain competitive in this sector. Importantly though, these numbers are not that bad. Lisa commented elsewhere during the call that she was excited about future console projects, implying that AMD perhaps already has agreements with Microsoft, Sony or both for the next gen consoles. For me, this, the laptop market, and the server market are opportunities for AMD to keep the dream alive in the sector. AMD does not need to be competitive across the board, just enough to keep the server GPU offering competitive. The opportunity to take server market share with their GPU’s by tying it in with deals for Epyc, which is now approaching it’s 2nd generation is where the long-term profits for this sector are likely located. Everything else, including the console, and desktop gaming markets are a bonus. The really good news is that the product roadmap for AMD is very strong. 7nm GPU’s before the end of the year, 2nd gen Epyc CPU’s probably in the first half of 2019, and then for the desktop CPU market. CPU is where AMD has a real chance to dominate, and unlike Intel or Nvidia, they can use this to upsell their GPU’s, as long as they are competitive. I wrote in a post during pre-market for the 26th that AMD had dropped far further than it should have given their Q4 guidance, and throughout the day we saw the price rally back towards 20 dollars during volatile market conditions. AMD is a long-term investment for me, and I plan to increase exposure and hold it at an average of 1.5x leverage.
Twitter $TWTR Jack opened the Twitter earnings call by discussing the health of the platform, by which he means fake accounts and spam. Interestingly, he stated that most of the scripted and automated accounts are coming from the web, as opposed to mobile or the API. Twitter saw a 20% reduction in these accounts after implementing some new technology, which I can only imagine involves AI’s sifting through the content given that the scripts are clearly running client side, rather than interacting directly with Twitter via the API. This is not an easy problem to solve, so it is encouraging to see the level of effort Twitter has put into this, and should help ease the concerns of governments who have recently displayed their frustrations over the manipulation of social media for fake news and scamming. On the user side of things, Twitter’s daily active users are increasingly coming from mobile, as opposed to the web. This for me is a good sign, Twitter has no problem bringing businesses onto the platform, it is now commonly used for customer service, announcements, PR and marketing. These users typically have staff managing the accounts from web or API based interfaces from offices. The general public however are still moving towards mobile as their primary method of interacting online. With regards to the key metrics, daily usage grew 9% year over year and revenue grew 29% year over year. Ad engagements were up 50% year over year. All encouraging stuff, although I suspect the major events of the year such as the World Cup could have dramatically impacted that ad engagement number, and as a result revenue.
The Q&A was focused on advertising, spam, or “health” as they keep referring to it, and events. Broadly speaking there was nothing new or interesting discussed as far as I’m concerned. I have reduced exposure to Twitter slightly, more as a response to ongoing market-wide volatility rather than turning bearish on Twitter.
There is never a dull moment with Tesla, it felt like the funding secured moment was a distant memory as Tesla announced their epic earnings beat for Q3 2018. Some of the interesting discussion points in the Tesla call were the almost 10 minutes dedicated to employee safety and the easy wins that can be made to increase production with minimal investment. On the safety side, Elon passed the call over to Laurie Shelby who fired information at analysts about Tesla’s improving safety within the workplace. Shelby explained that Tesla has been working hard towards a target of reporting every incident, be it a near miss or an injury. Only a few minutes after she started speaking Elon interrupted, again leaking his frustration about the rumours and bad news often propagated by the short sellers. “We have had some quite unfair accusations, one of them for example is that we are under-reporting injuries. It is worth noting that OSHA completed their investigation and concluded that we have not been doing anything of the sort. After resuming, Shelby explained that Tesla has an early symptom intervention program, with “industrial athletes” out on the production lines helping employees work out any aches and strengthen muscles. Around 80-85% of injuries are sprains. Tesla, in fact, hired 3 full time doctors/nurses on-site to look after the health of staff, even if staff are injured or sick outside the workplace.
Moving back to the company, the subject of batteries came up a few times. Tesla admitted to having had a few days worth of supply issues with batteries, but reassured investors that Panasonic’s supply is expanding, as are their other production lines. Tesla uses around 60% of all Lithium Ion batteries used in cars in Q3. When asked about where batteries would be sourced for the China expansion, they confirmed that the long-term goal would be for self-supply within China.
Speaking of expansion, Elon re-iterated the Q1 2019 date given for Model 3’s reaching European customers.
I genuinely believe that Tesla has now overcome almost every major obstacle that they needed to. Even the debts which will begin being paid back by Tesla in a meaningful way starting with Q1 no longer feel like a threat. Elon said that the goal is to remain cash flow positive and profitable for every quarter from now on, specifically calling out Q1 as “we might be flat”. If that’s the worst we can expect then I think Tesla is in for a good year.
Snapchat reported earnings mid-week which initially saw the stock price jump a few percentage points. After a couple of days digesting the report investors rapidly switched sides as snapchat fell by over 15%. Listening to the earnings call it was clear that despite some growth on the revenue side, investors were wary of the still slowing user growth, now at just 5% year over year. When defending the planned growth, Snapchat suggested that targeting and slightly broader age demographic alongside the long awaited Android rebuild would help. The usage numbers for Snapchat do not look great though, one caller from Deutsche Bank asked. “Last 3 Quarters users created 3.5 billion snaps per day, but last quarter and now this quarter you’re saying users create 3 billion snaps per day and the community is growing 5% year over year, are users not creating content, just consuming content?”. Snapchat again pointed the finger at the current Android design and that the new design for iOS has made them much happier, and they are excited to bring those changes across to Android. He also said “There are lots opportunities around shows and other content products” something I am yet to be convinced of myself.
Another caller asked specifically why Snapchat expect a decline in DAU’s for Q4, the company refused to even comment on this question.
For me these signs are increasingly worrying, especially given the apparent shift towards a bear market globally in equities. I will continue to heavily short Snap into 2019, I believe it is a safe short even in a bull market.
Satya Nadella was someone that I was unsure of when he first took over the role of CEO from Steve Ballmer a few years ago, but as he opened the Microsoft call for this quarter with great story after great story I realised that although he slimmed down the fields in which Microsoft compete, they are now market leaders, or close competitors in many of those different areas. During his opening remarks he touched on the continued growth in Cloud and AI, the dominance of the surface product line as we approach the holiday season, and the strength of core products such as Office 365 and Windows 10. LinkedIn, he said, saw session growth of 34% year over year.
Microsoft yet again beat their best ever Q1, with strong growth across every sector. The underlying themes here appeared to me to be both security and trust. When asked about the acquisition of Github Nadella re-iterated his previous statements that Microsoft will not be changing the product nor using it to push their other products onto consumers. Instead he said that the products must speak for themselves, and that Github is not a means to an end, it is just an end in itself. By building secure, powerful products and maintaining Github as a stand-alone product, Microsoft is building trust with those users, and subtly reminding them of the rest of Microsoft’s ecosystem of products. In fact Sataya even referenced reading HackerNews and seeing good feedback from that community about how Azure stacks up with Amazon’s AWS. For me this is a sensible approach, and has reinvigorated my belief in Microsoft’s long-term goals and growth, especially in Azure.
Shopify had another strong quarter. Year over year revenue was up 58%, gross profit grew 50%, and the company has revised their forecasts for 2018 upwards, expecting 2019 revenue of 1.05bn. One of the subjects discussed early on in both the press release, and the earnings call was Shopify’s new physical retail space for entrepreneurs. In September this trial location was opened, enabling shopify users and potential new customers to meet face-to-face with staff who can assist them in using the products and services on offer. On top of this, there are workshops and tutorials on offer to the community, with the goal of assisting their users to grow their businesses further. One analyst pressed for more information, asking why LA was chosen and which areas were next in the pipeline. Shopify suggested that for now LA is acting as a trial to better understand if the store is effective at onboarding new users, and helping the current users to grow. LA was chosen because of the density of Shopify users within that area. One interesting comment shopify made was that entrepreneurship is often lonely, and they are excited by the ability to perhaps grow a community of entrepreneurs who can bounce ideas off each other as they are better able to relate to the various issues they may face. Another interesting topic discussed was the adoption of Shopify as a home for the cannabis industry. It was clear from the excitement in Tobias’s voice that they were proud of this achievement. They cited the flexibility of their service as the primary draw for the industry, alongside their nimble approach to regulatory changes. Tobias suggested that they are now in a strong position moving forward as other countries begin exploring this industry.
I remain confident in Shopify’s ability to grow into 2019 and do not have any major changes planned for my stance on the company.