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The earnings season is in full swing, and the usual revenue and profit misses and beats come with it. But companies make all sorts of announcements during the earnings reports, and not all are revenue and profit related. Three companies made surprise announcements that are worth paying attention to, especially if you plan to invest in them or are an investor already: Palantir, PayPal, and PubMatic. Let's talk about their surprises. I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I also started sharing interesting investing-related stories. The first one was on what happens when the U.S. hit its 2% inflation target. More interesting stories are in the works. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. Palantir's Earnings SurprisePalantir stock price is down by ~ 22% in the first 10 days of August, despite reporting a solid quarterly earnings report. Revenue was up, profits remained in the green, and the company announced the launch of its generative AI product, among other positive news. The surprise came when the company announced a $1B share buyback program. Typically, a share buyback program is quite investor friendly. It reduces the share count and creates more value for current shareholders. Companies buy their own shares for two primary reasons:
Even after the recent price drop, the stock is priced 18 times its sales, so Palantir has to grow its revenue by ~30% per year in the next 10 years to grow into such a valuation. That seems unrealistic when the company just grew 13% year-over-year in the latest quarter. Investors must be worried that the company is "wasting" its cash resource on buying shares at an overpriced level. So why is Palantir's leadership spending $1B in buying its shares? There can be two reasons:
Based on my observations of Palantir's focus on storytelling and riding the wave of the market's momentum and sentiment, I believe the decision is a part of the company's story. PayPal's Earnings SurpriseThe company released its earnings, and the stock price dropped ~6% after. There were lots of good news in the earnings, including 11% Y/Y payment volume growth and 12% transaction per active account growth. Also, the company is quite solid, fundamentally looking at the balance sheet and free cash flow. So what drove the price down? Investors are concerned about the drop in the company's transaction margin. PayPal's business isn't just the branded payment we are all familiar with. It operates Venmo and Braintree. Venmo is so popular that it has become a verb. I just parked my car in a parking lot, and the attendant told me to "Venmo" him the parking fee. It's so popular it's a verb. Braintree is a technology company that enables companies to process credit cards and other forms of payment on their website. And that business is the reason behind the lower transaction margin. For a mature company such as PayPal, profitability and maintaining or expanding is the most important metric investors look for. However, according to the management, several projects and initiatives in the works can improve transaction margin, including the growth of PayPal's unbranded check-out functionality and other value-add payment services that companies such as META and TikTok are adopting. Despite the transaction margin worries, the surprise is in the company's valuation. PayPal generates $5B in free cash flow and shared a positive earnings report and forecast for the year, but the stock is priced 17 times its earnings and 13 times in forward earnings. In contrast, S&P 500's average P/E ratio is above 20 times. Even more surprising is the company's PEG ratio. The PEG ratio takes the P/E ratio and divides it by the earnings growth rate. If the PEG ratio is above one, it means the stock valuation is higher than the speed of its earnings growth, and if lower, it shows a lower valuation than what the company deserves based on its earnings growth rate. PayPal's PEG ratio is 0.7, indicating an undervalued stock despite a fundamentally solid business. This surprising undervaluation made me add PayPal to our Beaten Down portfolio, which is a portfolio of stocks getting punished by the market due to short-term miscalculations. The portfolio's picks, on average, have overperformed the market by more than 80%. Here's the link to this portfolio in the show notes if you'd like to follow the portfolio and get notified of the new additions when we find new beaten-down stocks to add. PubMatic's Earnings' Reaction SurpriseAnd finally, the last earnings surprise comes from PubMatic (PUBM). The surprise isn't in what the company announced but in how the market reacted to the earnings report, dragging the stock price by more than 30% on the earnings day. The report wasn't stellar and came with flat revenue growth and negative GAAP net income due to a few one-time hits to the bottom line, followed by a few analysts cutting their price target for the stock. However, the report also had several early indicators of future growth. PubMatic invested and launched new products, especially in the video ad and ad supply optimization capabilities. It's already seen great traction with those new launches. It has also invested in its infrastructure to create incremental capacity without an impact on the margin. The flat revenue wasn't due to low engagement and activity but rather due to lower CPM. That means that due to overall economic concerns, advertisers spend less on ads or bid less fiercely than they used to, bringing the ad prices down and PubMatic's revenue down with it. Using common valuations metrics such as the Price to Sales or Price to Earnings ratio, the stock isn't cheap. For example, PubMatic is priced 7 times its sales. To reach 7 times sales growth, it requires 20% revenue growth per year in the next ten years. This revenue growth was once quite normal for PubMatic, but it feels quite out of reach compared to the last few quarters. Ultimately, it is still feasible if the advertising spending goes back to growth, and the company's new product launches should help. Also, high profit and the company's focus on strong free cash flow would help it grow into its current valuation. All in all, the 33% drop in the price seems to be an overreaction. Even the analysts cutting down their price target still price it 30% higher than the stock's current price. I still own PubMatic and plan to hold it, although I would want to closely watch and see the revenue and profitability grow as the digital ad market recovers in the next few quarters. See you next time!
$BABA jumped ~5% on the day of its earnings report and then lost 5% the day after.
The stock is up ~9% in the last three months but far from the all-time high of $300+ per share. It's been a roller coaster investment as the company has gone through political challenges and economic recession in China. Now, we hear the country is dealing with deflation. Can Alibaba survive and generate significant value for its long-time holders? Let's find out! Interesting Stuff From BABA's Earnings Report
Alibaba released its large language model, which got millions of users.
As a part of the recent reorganization, Alibaba Cloud is moving toward an IPO, and it managed to show a significant 100%+ jump in profitability despite small 4% revenue growth. Alibaba's Revenue
But Alibaba Cloud was up only 4%, putting even a bigger distance between Alibaba and Amazon comparison. It doesn't seem Alibaba has managed to establish an AWS-like business yet. Score: Fair to Good -- as the Chinese economy recovers, Alibaba will benefit from higher demand. Something to watch as word has it that China's economy is going through deflation now. Alibaba's Profitability
The net income adjustments are due to fluctuations in the value of its equity investments in Ant Group and other public companies. Score: Good -- profitability is a focus; the latest results show it. Alibaba's Balance Sheet
~ $81B+ cash & cash equivalent
vs. No significant debt Score: Good Alibaba's Free Cash Flow
~$5.4B in free cash flow
The company has spent $3.1B in share repurchases. This speaks to the free cash flow generation power of the businesses but also indicates BABA is not focused on drastic improvements of its business. Per announced plans, BABA is focused on splitting its business into six separate individual companies. Score: Good -- Free cash flow is a priority. Alibaba's Valuation
P/E of 25X
Forward P/E of 11X PEG ratio of 1 P/S of 2.1X The stock is undervalued compared to its American counterparts, and considering this highly profitable and free cash flow generating operation. But concerns around China's overall economy and China-US. 4elationship, investors aren't willing to pour money into this stock. Score: Good Is Alibaba (BABA) A Buy Now?
Solid fundamentals
Great valuation Need lots of patience to get value. It isn't a straightforward investment as it will gradually split itself into six separate businesses. I own shares. Hold until I need the capital for other priorities. Do your research: https://stockcard.io/BABA
$PUBM dropped ~33% after its earnings report on Wednesday.
What could bring a free cash flow generating company in a slowly recouping advertising market down by more than 30%? Raymond James and Macquarie Analysts cut their price targets to $18 and $16, respectively, still above the current $12.5 price. Is the price drop a chance to buy, or is the company failing its shareholders? Let's find out! Unexpected Stuff In PubMatic's Earnings
One of the company's clients filed for Chapter 11 bankruptcy and owed PubMatic $5.7M. $PUBM had to deduct this amount as a bad debt from its earnings, resulting in a negative 9% GAAP net income margin.
Brand advertisements have started to slow down in June and July, after good March and April. -- overall impression is that the ad market is recovering, but apparently not. PubMatic's Top line
$PUBM uses software to find the best advertising slots and match them with advertisers online, on mobile devices, and connected TV programs.
This Q, revenue was $63M and flat Y/Y. However, there are a few leading indicators of future revenue growth:
Score: Fair -- the leading indicators paint a positive outlook despite flat revenue. PubMatic's Profitability
Score: Fair -- one-time expenses are dragging down profitability this Q, and higher margins are expected due to higher efficiencies created by investment in the infrastructure. Something to watch for! PubMatic's Balance Sheet
~ $100M+ cash & cash equivalent
vs. No significant debt Score: Good PubMatic's Free Cash Flow
Free cash flow, a true indicator of a company's ability to make money, almost doubled compared to Q2 2022.
Score: Good -- Free cash flow is a primary priority for the company, and it shows. PubMatic's Valuation
P/S of 7X!
To reach 7 times sales growth, PUBM requires 20% revenue growth per year in the next ten years. This is feasible if the advertising spend goes back to growth and the company's new product launches should help. Using P/E, the company is quite overpriced, at 60X PE and 100+X Forward P/E. Score: Bad -- watch for revenue growth and the impact of new product launches to justify the valuation. Rule of 200
The last time I looked at the company, it scored well above 200, partially thanks to do solid gross margin and excellent retention rate.
This time, The company didn't share the retention rate! Questionable! Revenue growth + Gross margin + Operating margin + Net retention rate 0% + 60% - 9% + ? Score: Bad -- in the penalty box to see evidence of retention and margin expansion. Is PubMatic (PUBM) A Buy Now?
The company's fundamentals are alright, despite the market's softness and excluding one-time expenses.
The stock price isn't cheap, but the valuation can be justified if 1) the market goes back to growth and 2) new products launched start delivering revenue. I own shares and plan to hold them. But the stock is in the penalty box to monitor for significant improvement. Do your own research here: https://stockcard.io/PUBM
$PLTR dropped ~5%+ the day after its earnings call on Monday.
15 analysts updated their price target in the last 6 months, Avg. price target is 34% lower than the current price, Avg. recommendation is HOLD, Short interest is ~7% (as of 7/25) Is the price drop a chance to buy, or is the meme hype subsiding, and expectations adjust to reality? Let's find out! Unexpected Stuff In PLTR Earnings
Announced a $1B share repurchase program.
Just launched its LLM product, Artificial Intelligence Platform (AIP). More to come about this product at the September conference. One of the best storytellers in the market. Always trend-forward, relevant, and exciting. Subtle jab at AMD, mentioning PLTR teaches people how to use LLMs instead of writing neat poetry. ;) PLTR's Top Line
Revenue was up 13% Y/Y to $533M.
Commercial revenue up 10% Y/Y. Government revenue up 15% Y/Y. Investors want to see that commercial segment grow rapidly. This Q, the growth rate was the opposite. Score: Good -- Solid Q/Q revenue growth since Q1 2019 PLTR's Profitability
Score: Fair -- small, but good to see the focus and persistence. PLTR's Balance Sheet
~ $3.2B+ cash & cash equivalent
vs. No significant debt Score: Good PLTR's Free Cash Flow
Positive Free Cash Flow, thanks to positive operating cash flow, which in turn is the result of smaller operating loss.
Score: Fair -- Good direction and monitoring for expansion PLTR's Valuation Feasibility
P/S of 19X
Forward P/E of 82X The # of shares going up (diluting customers) justifies buying $1B shares. To reach 19X sales, it requires 34% annual revenue growth in the next ten years. That's not realistic, judging from its revenue growth history. So to justify the current valuation, it has to keep that profit margin or FCF growing by quarter. Score: Bad -- watch for profit margin expansion or free cash flow growth faster than it has been. Notable Investors
Regardless of the valuation, ARKK ETF picked up more shares of PLTR after the earnings, indicating their models expect much faster revenue growth in coming years due to generative AI and AI demand.
IS Palantir (PLTR) A Buy Now?
The company's fundamentals are getting stronger.
The stock price isn't cheap. If you invest now, expect volatility. I don't own PLTR directly but I'm invested in ARKK which means I'm indirectly a PLTR shareholder. Make sure to do your own research: https://stockcard.io/PLTR
$FSLY jumped ~21%+ after its earnings call on Wednesday after hours.
The stock has been a poor investment, down ~4% compared to its IPO price. But there is a reverse in the direction with a 45% jump in the last three months. Is the stock on its way to the all-time high of $100+ or beyond? Let's find out! Unexpected Stuff From Earnings Report
Based on Coatue's Rule 200, FSLY still needs to be in better shape.
Revenue growth + Gross margin + Operating margin + 12M Retention > 20% + 52.3% - 40% + 116% = 148% -- > Negative operating margin is a drag, while revenue growth is not as fast as it used to be: Note: Coatue uses Rule 200 for fintech. I use it for all SaaS/Subscription stocks. The company added several new executives. We need to see how they perform in the upcoming quarters. Fastly's Topline
Leading Indicators:
Score: Fair to Good -- need to see faster growth for such as small company (only $123M in quarterly revenue). Fastly's Bottom Line
Score: Fair -- directionally moving toward profitability. Fastly's Balance Sheet
~ $400M+ cash & cash equivalent
vs. ~$470M+ in total debt Some debt concerns. But there is good news: FSLY uses cash to buy its long-term debt at a discount to par value and saves on overall expenses. Score: Fair -- watch for debt reduction. Fastly's Free Cash Flow
Turned positive Free Cash Flow, thanks to positive operating cash flow, which in turn is the result of smaller operating loss.
Score: Fair -- Good direction and monitoring for expansion. Fastly's Valuation Feasibility
P/S of 4.5X, much smaller than peers.
To grow sales by 4.5X:
Score: Fair to Good -- watch for earnings and rev growth. Is Fastly (FSLY) A Buy Now?
The company's fundamentals are getting stronger.
The stock price could be a fair buying opportunity. I own it and plan to hold it. Do your research: https://stockcard.io/FSLY |
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