Watching Q2 Earnings Season
Paying attention to Tesla and Disney, among others, this quarter. By Benjamin Tan
In recent quarters, market narratives were dominated by recessionary concerns, runaway inflation, and rising interest rates. Shaky macros, in turn, cast a dark shadow over multiple growth companies dependent on consumer and shareholder bullishness to take market share and raise more capital. Responding to changing tides, many prominent names announced and undertook dramatic transformations to their prior growth-at-all-cost strategies. From Salesforce (CRM 0.00%↑) reining in on costs and refocusing on profitability to the incredulous return of Bob Iger to Disney (DIS 0.00%↑), there were too many corporate reinventions to count.
Nevertheless, in recent months, markets have been on an uptrend, with both S&P 500 and Nasdaq 100 indices at or around their 52-week highs:
Does this mean that we are in the clear? Unlikely. Even with market sentiment turning quickly, fundamental concerns still linger. After all, structural challenges do not dissolve in tandem with stock indices, and strategic pivots - if successful - can still take multiple quarters to produce results.
Below are some of the consumer and tech companies that I will be watching as the new reporting season transpires:
Tesla: Gross Margins and Demand
What a turnaround in share price! At the beginning of this year, I wrote an article on Tesla (TSLA 0.00%↑) titled “Already Toast, or Still the Toast of Automotive Future?” to acknowledge the challenges that Tesla faced and to reiterate my belief in the company at the same time. Since then, a combination of price cuts, relentless production drive, and subsidence of concerns over Elon Musk selling more Tesla stock (to support Twitter) have renewed market confidence in the company. This is especially evident in the last few months when competitors - one by one - started caving to Tesla’s charging standards, corroborating the long-term thesis that Tesla is farther ahead of the game than any of its peers.
Still, car financing costs remain high, and Tesla cars are pricey purchases. I will continue to pay attention to the company’s outlook on global demand, progression of Cybertruck deliveries, ramping at Austin/Berlin giga factories, and of course, gross margin performance as management straddles between competitive price wars and economies of scale.
Disney: Where has the Magic Kingdom Gone?
Despite all the hype generated by Bob Iger’s “second coming” (announced in November 2022) and the broader market bullishness in recent months, Disney (DIS 0.00%↑) stock still trades at Covid-lows. There is no love for the House of Mouse, especially when its summer tentpole movies (Elemental, The Little Mermaid, and Indiana Jones) underperformed at the box office.
Adding more pressure, unions representing actors and screenwriters have gone on strike. The below podcast episode from The Town features an interview with the Chief Negotiator of SAG-AFTRA, Duncan Crabtree-Ireland. It is a wide-ranging discussion of the complicated issues surrounding actors’ compensation in the age of streaming and artificial intelligence:
Streaming was supposed to rejuvenate growth and deliver shareholder value, but losses are attracting more attention and dragging down the stock. The long-term viability of Disney’s DTC pivot is increasingly called into question even after exceeding all expectations of subscriber count.
When Disney+ was launched, markets were exceedingly positive about how DTC fit into Disney’s content-rich business model. Since then, opinions have changed. As a sign of times, Warren Buffett recently chimed in to express his skepticism on the fundamental economics of the streaming industry. At the same time, other stakeholders like actors and screenwriters are demanding a greater share of subscription revenue from all the streamers as traditional residuals and box office receipts diminish in the digital era, except for the biggest names in the business.
Where will Iger and Walt Disney go from here? Extensive cost-cutting measures have already been announced and implemented. Can Disney’s DTC business balance scale with a path to sustainable and handsome profits, like Netflix? Or will the entire streaming landscape shift under Iger’s feet as the whole ecosystem adapts to different revenue splits, further diluting profitability and handicapping Iger’s plan to turn Disney+, Hulu, and ESPN+ around?
As venerable as Walt Disney may be as a corporation and as a Dow-30 constituent, challenges continue to mount.
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Amazon, Salesforce, Netflix, Meta, and More
Companies like Alphabet, Meta, and Amazon are bellwethers for the larger subsectors. Google and Facebook still take the lion’s share of advertising budgets, while Amazon is the leader in cloud computing and e-commerce. An awareness of their performance and outlook can help one better assess the shape of the economy and set short-term expectations for smaller peers.
Stay tuned in the coming weeks as we wade deeper into 2023!
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(Author is long Tesla, Disney, and Amazon)
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