Earnings Season Issue 5, We need to talk about Nvidia.
Earnings Season 5/30/23
Opportunities and insights
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In this issue:
Lockheed Martin -Advanced Gunnery Training Systems, Agis combat systems, Black Hawk Helicopters. It’s not talked about all the tie, but the publicly traded defense industry is huge. Let’s see how one of the stalwarts is doing.
强生公司 — $423 Billion in Baby Powder... Checks math... Ok not just baby powder but medical equipment and so much more.
高盛 —$114B Rolling Stone once called this company a “vampire squid wrapped around the face of humanity.” In reality, they are a money- printing machine that is working hard to evolve.
IBM - $114B? I’ll never forget when our family picked up our first PC; it was an IBM. We had 2 CDs, an encyclopedia and my all-time favorite game, The Curse of Monkey Island. Now IBM is doing so much more than playing my old games.
英伟达 - $944 B. There is the old gold rush analogy of you can go hunting for gold or you can sell the shovels and picks. Nvidia’s hardware is the picks and shovels for AI and ML.
沃尔玛 : $394B While they are 1/3 the size of Nvidia… Walmart is the basis of consumerism for a massive portion of the US population.
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In every issue:
●? Whats happened
●? What's coming up
●? Government Data Release calendar
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The highlights:
Lockheed Martin: $122B market cap beat earnings by 35 Cents.
Why we care: Did you sell over 80 fighter jets last quarter? Well if you’re Lockheed Martin, you did. They sold $15.1 billion in equipment led by 16% year-over-year growth at space. Now a lot of their revenue comes from one entity—The United States of America, the department of defense specifically. The DOD is looking to spend $842 billion this year across all its expenses. Now while it is awesome to have a large customer like the Feds, it also puts LM in a pickle. The US government has to approve a lot of its OTHER customers. Lucky for them, the US government approved a recent sale to Australia.
While Lockheed gets a massive customer, they operate on a fixed cost basis on many contracts. So if they do everything right, they profit 13-13.5% on some products. That is nowhere near the margins of other large businesses.
One thing that came up with Lockheed is their growing space business. When you think of space these days, you think SpaceX. After all, they just launched the largest rocket in world history. So what is a company to do when they have one major competitor?? They can compete or shift markets. You can tell by this quote from CFO Jay Malave which direction they are heading:
“We're very excited about the the Australian military satellite communication program, it's a multi-billion dollar opportunity. And that really expanded the international footprint of our space business, which has historically been predominantly a domestic US-based business. So these opportunities continue to present themselves. There is a lot more opportunity in front of us and that is absolutely a growth driver for us over the next five years.”
To me, that implies they are not trying to compete directly with SpaceX in the US but instead attempting to pursue other opportunities internationally. Which makes sense as SpaceX is focused on the US market... For now.
Johnson and Johnson: $423B market cap, beat by 17 cents.
Why we care: What looks like one big company is really 250 businesses across 3 segments: Consumer, Pharmaceutical and Medical Device. The easiest way to think about this is:
Consumer— over the counter, you can get these items at Walmart, CVS etc.
Pharma— You need a prescription.
Medical Device— You’re in a hospital.
One thing that continues to interest me about the medical industry is how well they are able to forecast drug consumption. J&J is forecasting $54-$57 BILLION in pharmaceutical sales. Joseph Wolk, CFO said:
“We feel very good about our pipeline. We continue to work towards some really good data that came out this quarter around multiple myeloma MARIPOSA, which we'll talk about in a minute. We continue to see some uptake of some of our newer products.”
One thing that is particularly interesting is their knee business, with a growth rate of 12%. While it has grown, it has not grown everywhere. There has been a softening in the Chinese market. One can wonder if there is a decrease in major medical spending in China, what that means for their overall economy. While on one side of the coin, people don’t like to wait for life saving procedures. A knee surgery…that might be worth waiting on.
So how would I use this information? If I’m selling to someone that has major inroads into China… I can’t think of a CEO that wouldn’t find the softening in elective surgeries interesting as a leading view on the Chinese economy.
Goldman Sachs: $114B market cap, beat by 65 cents.
Why we care: Nothing says money and power like Goldman Sachs. Well maybe the Federal Reserve or Nancy Pelosi’s stock portfolio, but, Goldman Sachs screams money and power. The deals they do and the money they make comes from the most influential transactions in the global economy.
To put it bluntly, the markets that Goldman participates in have been volatile. Goldman CFO Dennis Coleman said:
“To give you a sense of the magnitude, there have been just four days in the past 25 years that have seen two year yields moved by 50 basis points or more intraday. One was in September, 2008 and three of them occurred in mid-March this year, Monday, March 13 was the biggest one day move in U.S. Treasury two-year yield in over 35 years.”
So what does this all mean? One major type of bond is called a Treasury bond, and the government pays people back their money plus extra after a certain amount of time they purchase this bond. But sometimes, the amount of extra money the government pays can change really quickly, depending on what's happening in the economy. Usually when the Federal reserve raises interest rates, the goal is to slow down spending, which can be fueled by debt. When Goldman talks about how much the rates are changing, it can show us how healthy or not healthy the economy is. Recently, the rate of a Treasury bond changed a ton in just one day, which is pretty unusual and can mean there's something big happening in the economy.
People may spend less when they are uncertain about the economy. While Mitt Romney famously said “companies are people too,” they act similarly when they are faced with uncertainty. One major source of growth for companies is Mergers and Acquisitions, when companies buy other businesses. As you would suspect, if people are more cautious, businesses would be too. Coleman said:
“confidence affects the ability for people to move forward and be active in the M&A market. And certainly, what's going on over the course of the last four weeks. It has -- it has slowed down some of the dialogs. But when you think about big strategic activity, I think most big companies continue to operate from a position, where they're trying to make sure they have the scale and strength competitively to advance their strategies.”
GS is divesting two of their major consumer units—Green Sky and Marcus. They are attempting to get back to their core business. While they say they are not the best owners of these assets, one has to wonder if they see something else.
Perhaps they see the strength in the economy going forward is in B2B and large companies and not in selling to people. They could be telegraphing their economic view here.
IBM International Business Machines: $114B market cap, beat by 9 cents.
Why we care: Honestly I didn’t know why to care when I started writing this. IBM is OLD. Seriously, they are seemingly never in the conversation when it comes to big tech. BUT did you know that AI is forecasted to be $16 TRILLION dollar space by 2030. IBM is focused on productivity gains from AI for the time being.
Arvind Krishna said
“Productivity gains will come from enterprises turning their workflows into simpler automated processes with AI. To achieve this, we are collaborating with companies like Citi to enhance their internal audit and compliance processes through AI. J.B. Hunt Transport use our Turbonomic AI-powered resourcing and automation engine to optimize their cloud environment. This helped reduce infrastructure refresh costs by 75%”
So while there is a focus on AI, It is also important to note IBM is really focused where you think they would be—on blue chip customers, not start ups. When asked about the impact of the recent banking mini-crisis, here is what their CEO had to say:
“Now let me acknowledge they (silicone valley bank clients) are clients, though, of other larger companies who are our clients, but it gets muted as in the impact on us. When we're looking at our large banking clients, whether you think of the top five or 10 in the United States, you think of the top 20 in Europe, we are seeing pretty consistent demand right now because that is largely driven by payments, by retail accounts, by capital markets.”
How could you use this? Well if you’re up against them in anything but blue chip fortune 500, simply point out that they’re not really focused. If they were, they would have had exposure to a significant amount of companies with Silicon Valley Bank. They’re not “part of the culture” as the kids would say.
Nvidia- $944B market cap, beat by 17 cents.
Nvidia is the shoves and pics of the AI world. Personally I was impressed enough with Nvidia’s growth from gaming and crypto. Now, they are on the verge of becoming a trillion dollar company!
Their revenue was up 19% quarter over quarter but actually down 13% year over year.
The big news, though, was this quote from Colette Kress EVP and CFO.
“Generative AI drove significant upside in-demand for our products, creating opportunities and broad-based global growth across our markets. Let me give you some color, across our three major customer categories, cloud service providers or CSPs consumer Internet companies and enterprises. First CSPs around the world are racing to deploy our flagship Hopper and Ampere architecture GPUs to meet the surge in interest from both enterprise and consumer AI applications for training and inference. Multiple CSPs announced the availability of H100 on their platforms, including private previews and Microsoft Azure, Google Cloud and Oracle Cloud Infrastructure. Upcoming offerings at AWS and general availability at emerging GPU specialized cloud providers like CoreWeave and Lamda.
In addition to enterprise AI adoption these CSPs are setting strong demand for our H100 from Generative AI pioneers.”
Jensen Huang, CEO and Founder pointed out the importance of the shift in the equipment of data centers.
“you're seeing the beginning of call it a 10-year transition to basically recycled or reclaimed the world's data centers and build it out as accelerated computing. You'll have -- you'll have a pretty dramatic shift and the spend of the datacenter from traditional computing to accelerated computing with smart NICs, smart switches, of course, GPUs and and the workload is going to be predominantly Generative AI.”
And that is not all Jensen highlighted that the computer industry is going through two simultaneous transitions. One is accelerated computing and the other is generative AI. With 1 trillion in infrastructure currently installed in data centers, its going to be an interesting decade as all of this gets upgraded.
Walmart: $394B market cap, beat by 15 cents.
We all know of Walmarts stores. Concrete floors, high shelves, strong fluorescent lighting, and a slight sense of chaos. But how often do you go to walmart.com for shopping?
Well Doug Mcmillon, CEO, highlighted 26% growth in their ecommerce sales, so a lot more people are shopping there than ever before. And Walmart is not just a US business…International sales grew 12.9% and profits grew 41%
So where is all this coming from?
John Furners said: “in the last few quarters, we have kind of seen new shoppers as John David mentioned, many are higher income and younger and those shoppers are coming to us looking for value. I think what's important for us as we look forward is price is really important to the Walmart shopper.
We are pleased with the price gaps that we see in the market. Those are consistent with where they have been the last few quarters. Certainly, some shifting that you heard about earlier from brands to private brands. And then most important right now is the flexibility that we offer consumers all across the country. We've seen quite a few customers shift to pick up in delivery. Our transaction count has been strong. And as far as our plan, the rest of the year, of course, we have built into the planned room for adjustments should the consumer change or the macro environment change.”?
With Walmart being a global business, we can learn some interesting lessons. One of the stories came from their recent experience with Chinese new year…
Judith Mckenna said:
“Just to give you an idea of the scale of what happened there and the response of our teams, we had all of our product positioned for a Chinese New Year event based in the cities where most people were. What happened is actually everybody went home into the more rural areas. And our team had to pivot completely within a 10-day window and reallocate all of the inventory that we had around the country.”
?Lastly, you can’t help but be impressed by their strategy—how they work to get into the minds of their consumers and take care of their needs. John Rainey highlighted:
“But I think the big story here is that -- that's around how our value proposition for convenience is resonating. We've always been known for price, but I think the steps we've taken in the last three to five years to expand our e-commerce capabilities, to expand online pickup and delivery, you see that resonate with customers. And it doesn't matter what your monthly income is, everybody values convenience the same. So that's the big takeaway here. And I think it's an important point as you think about the future of Walmart as we have these new shoppers coming to us, as we have higher income shoppers coming to shop for not only grocery but general merchandise, we want to retain those. We want to retain them with better experiences, better product offerings, and we're seeing that in the actions that we're taking today.”
What's coming up:
SalesForce: SAAS is all it seems Linkedin talks about talks about—the multiples, the profits, the glory. The first and arguably most important SAAS business is Salesforce. They have so many products that make money, save money, and increase efficiency, that we can learn about a whole slew of business angles from this one business.?
Lululemon: I'll admit it. I like my fair share of lulu... what tech dad doesn't. But their business is nearing a crossroads. Will they stay in their lane... or diverge into different ones.
Broadcom: Nvidia made massive news talking about the 1 trillion dollar datacenter turnover that will take place in the next decade. Lets see how one of the biggest datacenter players views the market.
Academy Sports and Outdoors: The "Walmart" of the sports recreation market shares their insights into the economy. Are they seeing a shift in customers, or are discretionary dollars not shifting?
Data Releases.
Why we care: While alternative data is on the road to taking over, nothing moves the market like government and stalwart financial data. Understanding this data can help craft your messaging and deals.
May 30: Consumer Confidence
May 31: Mortgage Market Index
June 1: ADP National Employment
June 1: Initial and Continuous Jobless Claims
June 1: Construction Spending
June 2:Private, Government, Non- Farm Payrolls.
Examples of ways to use this info:
●? Set up a 5 min call with your clients and prospects. "Susan—can we chat for 4-6 minutes? I read about the how Nvidia is forecasting a 1 trillion dollar 10 year data center turn over and thought it might be of interest to you”
●? Cold email: Subject: "Who is going to be impacted more mid market or enterprise?"? Body— John, Last week both Sales Force and Workday reported earnings. One thing that was interesting was their leaders talked about how they are focusing on enterprise customers more than any other market. This could lead to some interesting opportunities for businesses like yours. Can we chat for 4-6 minutes to see who this might be valuable to?
●? Meeting with your boss: a lot of big tech is focused on multi-lining their customers and heading up market, how can we use this to our advantage?
●? Call with a client: "Kenny- did you see the unemployment rate this week? They came in at X. Are you seeing that in your market?"
●? Linkedin Posts: 3 ways Ulta is crushing Saas. Put in some new lipstick, it’s time to pucker up for investors.
●? Forward them the newsletter!
Thanks for reading!
If you have a tip or feedback, I’d love to hear it.
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