Welcome back everyone. Today on the Joseph Carlson
Show, we're getting into earnings week.
This is the Q2 earnings of 2024, a time where we get to see how
things are going. We get to check in on our
companies, get a bit of a report card of what happened over the
past three months, learn how much money they made, learn how
the business is developing, take a look at the key performance
indicators. We also get to get input from
our management. Are they doing a good job and
what is their expectations of the future?
How do they see things developing over the next three
months? Earnings season is a time where
we can learn a lot about our companies and it can help inform
us on how to position our portfolio.
Now this week, we have a couple important companies.
I've highlighted the ones that I think are the most relevant, the
most interesting. In red tomorrow morning, we have
ASML. ASML is a high quality
compounding machine. It's a new holding in Dev
Cantosario's portfolio. It's a company that makes highly
specialized and incredibly complex machinery.
These are machines that are are enormous.
They cost hundreds of millions of dollars and they play a small
but pivotal role in the creation of semis, in the creation of
chips. We also have a lot of financial
companies reporting earnings. I'm not going to go over every
bank and explain their book value and their valuation.
I don't think that's so interesting.
But I do want to comment on banks overall and talk about
Ally Financial. This is kind of a bank and
fintech company and consumer company.
So we'll be going over Ally Financial's earnings moving on
from Wednesday. We get into Thursday where we
have TSMC, the juggernaut in chip making, very important
company that has a pivotal role in that entire supply chain.
We also have Domino's Pizza. This company is a franchise
restaurant company with extremely high margins, not much
tangible assets. It's considered a long term
compounding machine and it's one of the pivotal companies that
helped Terry Smith make his name by the compounded returns from
this one. Then moving on to Thursday after
market close, we have Netflix, which is always an exciting
earnings report because Netflix is one of the few real tech
companies, a Fang company used to be kind of big tech that's
reporting earnings by itself. There's no other companies to
kind of in the blow. There's not Google and Microsoft
reporting the same day. All the focus and attention
Thursday after market close will be on Netflix and nothing else.
So Netflix gets nearly 100% of the attention.
That makes it very volatile. I'm a big Netflix investor.
I'm a fan of the company and the product.
So I'll be sharing some thoughts on that one.
And then Friday before market open, we have American Express.
This is one that's similar to Visa, MasterCard, we'll be going
over this one as well. So we have a full week to get
into many exciting companies to cover.
And I'll be trying to give some context and insight into what to
expect with these upcoming earnings.
We'll start things off with Wednesday morning before market
open. We have ASML, which is a very
high quality company, one that I have had on my watch list for
quite some time. This is a company that even Dev
Kantasaria, who only has a a small amount of companies, just
a few of them, he even has a a little bit of ASML in his
portfolio, which he filters out anything that's not excellent.
So ASML is a company that's making it into the portfolios of
very high quality investors. Now, what does ASML do?
It's a company that makes a very complex machine.
These machines use lithography. They're using light to print
tiny patterns on silicon. And this is the fundamental step
in mass producing microchips. Now, this isn't the only thing
they do. They do a couple other things,
but this is like the main thing they do.
And this may be just one small part of the total chip making
process, but this is a critical portion.
It's a portion that you can't skip.
In order to make the chips, you have to have the lithography
machines. If you don't have them, your
production's basically shut down.
Now, in order to make these machines, it's much easier said
than done, and I can't possibly explain all the complexities
that go behind this, but there are literally hundreds of
thousands of parts to each of these.
They cost in excess of $500 million per machine.
So if you even think about an NVIDIA chip, an NVIDIA server,
that cost somewhere around $30,000, maybe up to $300,000.
These machines from ASML cost $500 million plus, and the price
is going up. So they are orders of magnitude
more complex than almost any other physical machine on earth.
They're literally some of the most complex feats of
engineering on planet Earth. So what they've accomplished is
remarkable and they have basically a monopoly on this
market. So right now, ASML faces very
limited competition. There's no other company on
earth that can replace what they're doing because of their
technological advantage, because of the complexity of these
devices, they also have very few customers.
They have a high customer concentration of sales into the
big chip makers like TSMC, and they want to keep these
customers happy by always fulfilling their orders on time
and keeping their demand. So ASML doesn't want to
overprice things. They don't want to make their
customers have a big incentive to move over to a competitor.
But as we look at this stock, knowing that it's a high quality
company, there's a price to pay for every company.
And that's my biggest issue with ASML.
When I look at this stock, it's undoubtedly been one of the best
performing. It's really just been
phenomenal. Look at it year to date, it's up
47.9%. So it's been doing incredibly
well this year. We go back one year, up 40%.
We go back five years, five years, it's up 417%.
Obviously, there's not a lot of stocks that perform this well.
And this is really what you get when you have a company that is
a monopolistic part of the overall development cycle of
chips and semiconductors. When chips and semiconductors
are doing so well because of the lack of competition, they have
ample pricing power. They've fulfilled on the demand
of their customers and have kept them happy, and they've profited
greatly from it. So this has been a massive
compounding machine, a company that's on a spectacular role,
but it's also at one of the most expensive prices it's traded at
in recent history. We look at the PE ratio, it's
trading at a 44 Ford PE price to sales is 14, enterprise value to
EBITDA of 38. We have a free cash flow yield
of half a percent. They don't do much stock based
comp, so it's basically just a half percent free cash flow
yield. But even with no stock based
comp, that's still a very, very low free cash flow yield.
The idea of buying a company with a half percent free cash
flow yield in an environment where treasury rates are 5% is
very difficult to get behind. It's just so difficult.
It doesn't matter how much of A monopoly it is or how great the
company is, how spectacular the growth is.
When you have a company that's trading at half a percent free
cash flow yield when treasury rate is 5% and it's guaranteed,
that just makes the calculation and the discounted cash flows in
the future projections so difficult to get behind.
So that's the basic problem I have with ASML right now.
When we look at the business overall, I also think it's doing
fantastic. We look at the revenue growth.
It's been explosive revenue growth, but I still have the
same opinion that I think it may be slowing down a little bit in
the future. I don't think it's going to go
down or it's going to collapse or that this is the top, but I
think the rate of growth may slow down in the future.
We have the net bookings of the company.
The net bookings reached a peak in 2021.
They went down in 2023 even though the stock price race
stopped. Now they're trying to get these
bookings back up. So we'll see them go up over
time, but if we look at this on an annual basis, this will paint
the picture more clearly. The net bookings have been down
from 2022 to 2023. So right now it looks a little
soft with the net bookings, but overall the business is still
doing well. They still expect increased
demand over the coming years. ASML is a great company with a
great future. And if you're just a super long
term investor and you have it in your portfolio as a compounding
machine, I think you can safely put on the blinders.
Ignore this next earnings report.
Don't worry about it, whether or not it drops or goes up and just
hold on to it for the next 10 years and you'll probably do
really well. But in terms of this upcoming
earnings, I have my concerns, the mixture of the valuation,
you know, the, the semi market slowing down a little bit.
I think there's a combination of things that makes me a little
bit more concerned about this earnings than their most recent
ones. So it's difficult to say.
I don't know what direction it's going to trade at, but I do know
that there's higher expectations for this company than there has
been over the past year. Now let's go ahead and move on
to Ally Financial. Ally Financial is a bank and a
financial service company. I think it's a good product.
They have a good interface, they have good services.
They have around the clock customer service through chat
and phone. But one of the notable things
about this bank is that they don't have any physical
branches, or at least they have very limited.
If they do, it's an online bank. There's more banks following
this model, and then there's the older fashion banks that are
still doing the older model and they're making that work like JP
Morgan. But Ally Financial tries to keep
their margins higher, tries to keep a higher level of
profitability by having the online only model.
And overall, I think it's a good business.
But I've avoided Ally Financial for the same reasons I've
avoided basically every bank. I don't find them attractive
investments overall. The more you learn about banks,
the more you avoid them as investments.
They make money by lending it out to people and then you own
whatever they're lending out. So if they're lending out car
loans or used car loans, then that's what you own.
You own the the car loans that they're lending out.
In this case, that's exactly what Ally Financial does.
Now, if we look at the stock performance over the past five
years, the stock chart really resembles the used car market.
If you remember, the used car market went up dramatically in
2020. So did Ally Financial stock
because they are making a lot of money extending out new loans.
They had an increased demand and what they specialized in.
So they were, they're doing great.
Business is booming and then the used car market starts to go
down. Prices start to go down.
Ally Financial is doing repossessions, which they lose
little money on. It's true that they're lending
out something that they have collateral, but getting the cars
back, reselling them, they can lose money in the process of
that. So the stock price starts to
fall similar to the used car market.
Again, when you're investing in banks, you have to look at what
they're lending out their book because that's what you're
investing in. In the case of Ally Financial,
the reason I did not find this company attractive at the time
is because I did not find the used car market attractive.
Now we see a bottoming out phase right here in 2023.
That's where it got to the very bottom and then we see the stock
start to go up a little bit after that.
Overall, if we look at Ally Financial, I don't think it's
such a bad buy right now. I really don't it's come down
South much. While the company has been good,
they've managed their book well over the past couple of years
and they're at a very low valuation even for a company
like this, very low valuation of less than a priced a book of
one. So there's not much baked into
the price here. Expectations aren't very high.
If I'm looking at Ally Financial, this is a stock that
I would feel fine going into earnings.
Now moving on to Thursday before market open, we get into one of
the mega companies here, the large semiconductor company
itself, TSMC. The performance of it has just
been incredible. There's no other way to say it.
Anything in this realm has done well recently.
But TSM being in the center of it all, being the funnel in
which all of this goes through, has done particularly well.
This year, it's up 82 percent, 82% so far this year.
The past year it's up 76%, in the past five years up 343%.
So it's tripled the market, quadrupled it.
Either way, it's just clobbered the markets returns and that's
again because this is the area to be and semiconductors and
chips. This is the era of hardware.
Now I do have concerns about TSMC.
It's a company that I think is amazing and I think it's a great
long term hold. I actually like the positioning
of TSM more than a company like NVIDIA, because TSM I think has
more predictable demand over the next 10 or 20 years.
They have so many customers and they're kind of a winner no
matter what. What happens in all
eventualities in the future, I see TSM winning unless there's
some crazy event, like a geopolitical event happening
with China. Outside of some crazy event like
that, I really think TSM is positioned as a company that's
central to everything. They're the bottleneck that
every other winner has to go through to make their chips.
So this is one that I feel fine. Any investor buying into it for
the next 10 years, holding onto it, putting on the blinders and
ignoring the earnings reports quarter by quarter and just
holding this company. But when we look at this
quarter, there is a lot of people rotating into these
stocks, a lot of funds driving more and more money into these
semiconductor companies, into these chip makers.
TSM is a big supplier of chips to NVIDIA and Apple, and they
are advancing Wednesday after the world's largest third party
chip manufacturer reported a surge in sales.
Taiwan Semiconductor dominates the high end chip manufacturing
market, including the three nanometer and two nanometer
chip, and are expected to power the next generation of
smartphones. So again, this is a company that
it's not just counting on NVIDIA, it's not just counting
on Apple. It doesn't really matter.
Whatever company happens to be advancing the most powerful
chips, TSM is going to make them.
So This is why I see this one as a more safe bet or a more
predictable company than many other companies in the chip
manufacturing process. Most of the best chips in the
world get funneled down through TSM.
The movement looks like a rotation back into technology
hardware stocks after the outperformance of software
stocks in June. So we see all of these people
moving their money back into chip stocks.
They went back into the AI game. They've seen this game before.
What's happened in the recent past is chip stocks go up, AI
stocks go up. Anything associated with that
part of the market is where the money's AT, and we've seen this
before. Investors and funds want to be
wherever the magic's happening. Right now, the magic is
happening in chip making, so a lot of investors are pushing
into that market. In many cases, the valuations
are getting more and more stretched, which I believe,
again, puts this into a more dangerous category.
We have analysts here pointing out that they believe the
market's now getting to a point where it's becoming FOMO and
momentum driven. Quote, what I'm learning about
about investor sentiment and investing in 2024 with AI is, is
that it's FOMO, fear of missing out driven market.
So when you see anything beat slash sound better due to AI
related CapEx spend the stock re rates in a flash as money rushes
to get long. This feels like a bit of a panic
rotation and I agree with that analyst to some extent.
What I see investors in big money doing right now is trying
to position themselves for they're not getting left behind
by staying in the software companies.
Software companies have done OK, but it's the hardware, the
hardware company, the AI company, TSM and NVIDIA that's
really made the riches over the past year.
So a lot of big money's moving into it now, pushing up the
valuations. And as far as I'm concerned, I'm
sticking to my software companies.
I know they haven't done as well like in the past year as NVIDIA
and some hardware companies. But when I look through history,
software has that resilient business model, the SAS business
model, the more predictable earnings and it's done
incredibly well over the past five years.
So in terms of TSMC, just to summarize my thoughts on this
company overall, a long term bet that I think is a predictable
winner, a funnel of all the manufacturing of chips that
happens in the high end in the world.
So I'm not at all bearish on this company.
In fact, I'm incredibly bullish on it over the long term.
But when we're looking at this earnings report, it's another
stock that I'm a little bit concerned about.
It has very high expectations. Maybe it will meet those
expectations, but if it has any disappointment, I could see it
trading down. So it's one that I am a little
cautious on this earnings report, but if you're a long
term investor, I don't believe you have to worry about it.
Now moving on, we get to Domino's at the same time
Thursday morning reporting their earnings.
Domino's is a great company. It's one that I've actually had
for a short time in My Portfolio, but I got out of it
because of the valuation. That turned out to be a good
move at the time. It did trade down for a minute.
It went down after 2021, but it since recovered nicely.
Domino's is on a nice growth track like I expected they
would. It's a great company overall.
It's a franchise business model and it's a company that's a bit
of a recession resistant company because they offer such good
value proposition that many people use them as kind of a low
cost place to get a good meal that feeds a lot of people.
So Domino's overall is fantastic company.
At one point it was a a really important part of Terry Smith's
growth. Microsoft and Domino's were two
of his most outperforming companies during his rise and
prominence. So I like Domino's overall and I
also like it going into this quarter.
Now, you know by now if you've been following this channel,
I've been one of the biggest advocate of restaurant companies
over the past couple of years. I've made them a big part of My
Portfolio as well. I made a large investment in
Texas Roadhouse. This is one of the most
profitable investments I've made in My Portfolio.
It rose from a smaller holding to one of the top holdings in My
Portfolio by over doubling in value over the past couple of
years. When you combine dividends in
the mix, it's just been a massive winner.
Texas Roadhouse is the best sit down restaurant company in the
world. If you measure them by their
execution, their management and their processes, their
profitability and their expansion efforts, it is bar
none of the best. And then you have Chipotle
company that I've continually talked about is having
incredible execution and global scale.
The digital assets it has is also very valuable.
And people are addicted to burritos, so it's not something
I'd bet against. It may seem silly, it's just
burritos, but burritos are well loved by basically everyone
across the world. But now it's gotten to a point
where I've seen a few signs that people are pushing back on
restaurants. They're pushing back a little
bit and we can see that with McDonald's and Starbucks, two
companies that are very good quality, compounding machines
that have both run into huge roadblocks.
Starbucks customers are saying that they're not buying it,
they're done buying Starbucks. They're pushing back on the high
prices and Starbucks is having to earn back customers with
freebies and giveaways in their apps and lowering prices.
McDonald's had massive price push back on the prices of their
meals. A lot of people were were upset.
They are furious at McDonald's for once being the cheap option
but now being almost unaffordable.
So McDonald's is now coming out with $5 value meals.
They're going back to their old self and I see this push back
maybe having a waterfall effect on different food companies.
We can look at an article here. This is from MarketWatch.
It says that these restaurant stocks could still thrive
despite spending pressure. They highlight the problem
that's going on in the restaurant industry.
Restaurant patrons have been more cautious when dining,
buying fewer items, laying back on alcohol, and prioritizing
value menu items rather than the premium items.
UBS has noticed that consumers are prioritizing grocery
shopping overspending money on quick service restaurants
because people have less money to spend on food.
One of my central thesis is on investing in restaurants is that
people are prioritizing restaurants over grocery
shopping because it's quicker and it's cheaper in many cases
than buying a lot of groceries and preparing a meal for a large
group of people. It's easier to just go to a
restaurant and pay for yourself. But you can see the reverse
happening. People are switching back over
to grocery shopping because restaurants, quick service
restaurants, fast food has become so expensive, it's
unaffordable. In some cases, they stay.
With consumers being less likely to splurge eating out, there are
looming pressures for quick service restaurants to still
perform well. Brands are likely to implement
more practices like promotional offers to stimulate growth and
draw in more guests and lower incomes.
So brands are going to have to give discounts, which is
basically declining prices on their food, whether it's through
a free item or a promotion. They're lowering prices.
And that puts downward pressure on the pricing power of
companies like Domino's, Chipotle and Texas Roadhouse.
But they do mention, out of all the companies in the restaurant
industry that they still believe offers the best value
proposition, it is Domino's, Chipotle Mexican Grill and Texas
Roadhouse. Those are the three that they
named. I didn't write this article.
This is the analyst from UBS. They say that these are the few
restaurant stocks that UBS predicts will still outperform
next year. I think Domino's will do fine
this quarter, but I would not be surprised to see a bit of
softness in their projections to say that demand is slowing down
a little bit. They're having to keep prices
lower, not implement price increases.
And they may be forced to give out more promos, more goodies to
entice customers to continue buying.
Now, moving on, we get to Thursday after market close.
All eyes are going to be on Netflix.
It is the only really big, exciting company reporting
earnings. It's going to be highlighted on
CNBC, the countdown of when they report earnings.
Then you're going to get hit with the news.
What was their earnings? What was their subscribers?
And I have to preface this and warn you ahead of time, Netflix
is typically a highly volatile stock.
On earnings day, it moves up above 10% or down below 10%.
Never really stays the same. Some cases it has, but in many
cases, in fact, frequently almost every earnings, it's a
volatile one that will move. So don't be shocked if it goes
up 10%. Don't be really sad or
disappointed if it goes down 10%.
That's the stock. That's what it does every single
earnings report without fail. And after a while, if you've
invested in a company like that for a number of years, you're
just used to the volatility. It's like no big deal.
So whether or not Netflix goes up or down, I'm not going to be
sweating it if it goes down. I won't be emphatically excited
if it goes up. It's just business as usual with
Netflix. That's what I expect out of this
company. I follow their revenue, the
growth of their subscribers, the growth of their pricing per
region over time, which has a chart like this.
It's far more stable and predictable and gradual than
their earnings or their stock price would imply.
But this is what I'm anchored to.
So mentally, what I'm anchored to is this, and that's the
reason that it's easy to hold a stock that's very volatile.
If you're anchored to the fundamentals, that volatility is
not as meaningful. So I just wanted to mention that
because I know we get all excited about how the stock is
trading, but I am going to be focused on the fundamentals of
the business and how things are developing.
Now. I did put together some Netflix
stats of what to expect this quarter and how the stock may
react and trade. Here's some stats associated
with it. They're expected to report
earnings per share growth of around 40%.
So that's the bar They have to beat 40% growth, and the odds
are that they do it. Netflix beats their earnings per
share growth around 85% of the time.
So if you're looking at this statistically, there's an 85%
chance they'll beat their earnings per share growth.
But remember, with a company like Netflix, investors don't
really pay attention to the earnings per share growth as the
primary KPI. The primary KPI has been
subscriber growth. So even though they beat their
earnings per share growth the huge majority of the time, they
still have some volatility because of the subscriber growth
and the other metrics. If we look at another stat here,
out of the last five earnings reports, they've traded down
three of them. So the majority of their
earnings reports, the most recent ones they've traded down
after earnings. So based on the stats here,
statistically, they have a higher likelihood of trading
down after this upcoming earnings than up.
So don't be shocked if they trade down after these earnings.
And keep in mind, they trade down frequently on earnings day
only to recover in stock price the following week.
They've also done that routinely.
I remember 1 earnings report from Netflix, it went down 10%
on earnings day and within one week, it was right back up to
where it was. So there's a lot of options, a
lot of trading that creates volatility that makes the stock
go down in many cases, and then it will recover over time as
people realize the business is OK.
So we have three major stats there.
Now, I added in one thing, and this is technically not a stat.
This is just personal opinion, so it shouldn't be in this list
of stats, but I wanted to add in some personal opinion here.
When I look at the content slate over the past three months from
Netflix, I think it's been pretty weak.
They've had a couple decent movies, but they haven't had any
groundbreaking series. I don't think they've had any
super viral documentaries. And you've had competitors like
Max have House of Dragon and some other bigger shows.
So by comparison, I think that the content slate has been weak
this quarter, which makes me believe it may be a weak quarter
and maybe didn't gain as many subscribers as investors are
expecting now. It's very difficult to say.
Opinions differ, but that's just my opinion.
I think we've had a weak slate the past three months.
The expectations are very high for Netflix right now.
I think there's a higher likelihood the stock drops after
earnings. When I'm looking at the
business, though I'm assessing it on a long term basis, I still
think business is good. Netflix is growing its revenue
in every region. They're growing in subscribers
right now. It's one of the most free cash
flow generative companies in the S&P 500, creating $7 billion of
free cash flow last year and expected to do around that much
this year. So in terms of the overall
business, I still think it's well on track.
I'm not selling a single share, but I would not be surprised if
going into this week it trades down after earnings.
Now moving on to this Friday before market open, we have
American Express reporting their earnings.
This is one that I'm asked about frequently because I own
MasterCard, but I don't own Visa, I don't own Discovery, I
don't own American Express. So why do I not own American
Express, but I own MasterCard? The reasoning was simple.
I think all of these companies in this basket are great
companies. American Express is a
compounding machine. I think even Discovery's good.
I think Visa's amazing. I think it's very, very good
company. And then there's MasterCard, the
one that I own a huge amount of. The reason that I selected
MasterCard above all of these other great options is
MasterCard had a little bit faster international growth,
just growing across the world a little bit faster.
They've executed really well and MasterCard has a dominant market
share. Only next to Visa are they the
biggest player. So Visa's slightly bigger,
especially in the US, but MasterCard is massive
internationally. So the combination of a dominant
market share and fast growth made me go into MasterCard.
That was the basic reasoning there.
But having said that, American Express is a great company and
I've never been bearish on this company.
In fact, I think American Express is really good.
One of the key differences with a company like American Express
than Visa MasterCard is American Express is a more fully fledged
service company. It's not just a network.
MasterCard, if you're looking at this one, or Visa.
These are financial network companies that network together,
banks, customers and merchants. They network all of these
parties together with their digital network and they offer
services on top of that. They also offer a lot of other
financial services and even just like technology services, things
like knowing your customer fraud detection.
They offer all of their data as subscription services as well.
So they are a service company. They're not in the business of
being a bank or lending out money.
When we go to American Express here, this is a company that's
in the business of lending out money.
And since I don't invest in banks, I'm not investing in
American Express. It's not a business that I
understand that well. It's not one that I want to jump
into. So it is a great company.
I'm not bearish on it. Again, I think this one's going
to continue to do well, but I have other reasons why I prefer
Visa, MasterCard over American Express.
Now looking at this one, it's actually performed really well.
This year. It's up 29%.
So investors have done great in it.
If we look over the past five years, it's up 90%.
Again, it's it's just done incredible.
And when I look at American Express, my thoughts are pretty
simple. I think the company will
continue to do well. The customer they have is
typically more stable, higher income, more resilient to
downturns. So I think they'll do well even
if there is concerns about a recession.
And overall, when I look at this one, I can't find any reason to
be really bearish on it or to be down on this company.
So if I was a shareholder of American Express, I personally
can't find any reason to be concerned about it.
Now, there's a quick look at this week's earnings report.
Now keep in mind we have a bigger week next week.
We have a lot of the big key companies reporting earnings.
So if you want to see my thoughts on those companies as
well, make sure you're subscribed to the channel.
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