Author: James Brumley

AMC – AMC's “Better” Isn't the Same Thing as “Good”

The good news is movie theater chain AMC Entertainment Holdings (NYSE:AMC) topped last quarter’s revenue and earnings estimates. The bad news is it’s still deep in the red, and only selling a fraction of the number of tickets it was selling before the pandemic took hold.

None of this is terribly shocking, of course. A year earlier, the world was largely shut down due to COVID-19. Though the contagion is still with us, consumers and businesses alike are coping. Theaters in the U.S. were mostly reopened by March — before AMC’s second quarter began — and studios were at least willing to give theaters a try. Universal’s Fast and Furious series entry F9 debuted in June, catching the tail end of the quarter in question. A Quiet Place, Part II, and Hitman’s Wife’s Bodyguard were also released in May and June, respectively. Godzilla vs. Kong was in theaters back in April. They weren’t necessarily must-sees, but for newly vaccinated movie-goers ready to get out and do something close to normal again, they were something.

As it turns out, though, they were still very little. AMC has miles to go before nearing the sort of business it was doing before the coronavirus rattled the world.

Investor sitting at a desk, looking at a smartphone.

Image source: Getty Images.

A still-ugly picture

The image below speaks volumes, plotting the number of movie tickets AMC sold every quarter through the quarter ending in June. Also plotted are the company’s historical quarterly revenue, adjusted EBITDA, and operating profit (or loss), which is a function of those ticket sales. As the saying goes, read ’em and weep.

AMC's business is still about a third of what it was before the COVID-19 pandemic struck.

Data source: AMC Entertainment Holdings. Chart by author. Fiscal data is in millions. Ticket data is in thousands.

Last quarter’s 22.1 million tickets sold is around a fourth of the company’s usual quarterly ticket sales, around 90 million. Q2’s revenue of $444.7 million is roughly a third of the normal figure of $1.3 billion. The most recent results are clearly better than the non-existent numbers being produced a year ago, but still, we’re miles away from the pre-pandemic norm. The company’s also still deep in the red, reporting an operating loss of $296.6 million and negative adjusted EBITDA of $150.8 million.

Neither the numbers nor the trend should be surprising, even if analysts and investors alike could only make broad guesses given that the turnaround remains a work in progress. Any revenue and earnings estimate that’s even close to the actual reported figure is impressive in light of the circumstances.

The earnings beat itself, however, has largely obscured more important matters and left important questions unanswered. Chief among these questions is, how much longer will it take the entire movie industry to crawl all the way out of the hole it’s still clearly in?

From sizzle to fizzle

The release of F9 in June drew patrons back to theaters, to be sure. Box Office Mojo reports domestic ticket sales of nearly $99 million for that late-June weekend, which was the best weekend the business had seen since February of last year. Walt Disney‘s (NYSE:DIS) Black Widow led an even better weekend in early July, leading to $117 million worth of ticket sales in the U.S.

The movie industry's post-coronavirus rebound is already fading.

Data source: Box Office Mojo. Chart by author.

Things have clearly cooled off in the meantime, however, despite reasonably splashy titles like Jungle Cruise, Space Jam: A New Legacy, and The Suicide Squad being in theaters. Hitman’s Wife’s Bodyguard and A Quiet Place, Part II are also still in theaters, offering at least something theatrical to a wide audience. Consumers just aren’t as stoked about going to the movies as they were a month ago.

Can AMC explain these gloomy trends with the resurgence of COVID-19 via the delta variant? Sure, that’s a headwind that can’t be ignored. Something else that can’t be ignored, however, is the fact that Jungle Cruise, The Suicide Squad, Space Jam: A New Legacy, Black Widow, and F9 can all be streamed at home.

Bottom line

This isn’t a forecast for a complete collapse of AMC. One way or another, the theater chain will carry on. It may require some sort of reorganization or debt restructuring, but the name will survive.

The return to normalcy (or profitability) is at least several quarters away, though, and that could be a few rough quarters. In the meantime, this company has to justify an $18.5 billion market cap, never having produced more than a billion dollars’ worth of EBITDA in any four-quarter stretch and never having turned an annualized operating profit of more than $265 million in any four-quarter span — even in its 2018 heyday.

At the very least, AMC investors should exercise caution. These investors should also start asking exactly how AMC is going to convince a bunch of consumers to fall out of love with streaming new releases at home. There might not be a good answer to that question.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

TASK – Why TaskUs Is Up 17% Wednesday

What happened

Shares of online customer service outfit TaskUs (NASDAQ:TASK) are up 17.5% at midday today following the release of the company’s second-quarter results. Revenue improved 57% year over year, driving even bigger growth in operating EBITDA.

So what

For the three-month stretch ending in June — its first quarter as a publicly traded entity — TaskUs turned $180.0 million worth of sales into adjusted EBITDA of $44.1 million, up from the year-ago comps of $144.4 million and $26.4 million, respectively.

Rising bar chart, with arrowed trend line.

Image source: Getty Images.

The current quarter should be similarly impressive. The company is guiding for a top line of between $182.0 million and $186.0 million, which would translate into around 50% year-over-year growth. It expects its EBITDA margin rate to contract just a little before recovering during the final quarter of the year.

Now what

Unusually for a recently IPO’d company, not only are shares of TaskUs trading above their initial public offering price of $23.00 per share, but the current price (near $37.00) pushes the stock above its post-IPO surge to a high of $32.94 and also its late-June peak of $35.62. The unlikely bullishness is almost intoxicating.

And that’s the rub for this relatively unfollowed, unknown, and thinly traded name. There’s plenty of profit-taking potential that’s yet to play out, particularly in light of the stock’s opening gap on Wednesday. Would-be buyers may want to let the dust settle on this still-volatile name before venturing in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

GE – Why GE Power Is Charging Up Again

General Electric (NYSE:GE) was once a power-production powerhouse. Electricity-producing turbines, in fact, were the company’s single biggest business as recently as 2017. And then it all unraveled.

A (now-fixed) turbine design flaw prompted would-be power producers to pause their purchase plans. And then clean-burning natural gas power started falling out of favor as more solar power alternatives became readily available. GE’s power turbine revenue is now down to about half its peak levels. This sales contraction has taken an even bigger bite out of the company’s bottom line.

Investors would be wise to take note of an undercurrent of change going on. It could be an indicator that GE’s once-great power business is on the mend.

Fossil fuel turbine generating electricity.

Image source: Getty Images.

From retreat to regroup

It’s admittedly difficult to distinguish between organic growth driven by rising demand and growth that’s merely the mathematical result of last year’s COVID-19-prompted shutdowns. For most companies, it’s probably a mix of both.

For General Electric’s power turbines business, however, it’s likely to be much more related to organic growth. Utility companies plan million-dollar investments years in advance and then service the turbines they purchase for 20 years or more. A headwind spurred by temporary shutdowns meant to keep consumers at home isn’t a major hiccup for the power-production industry.

Knowing this helps put the graphic below in the proper perspective. Last year’s tepid orders and revenue for GE’s power division aren’t the result of the coronavirus contagion. Rather, the business began contracting in 2018 when a handful of turbine blade failures knocked too many GE-made gas turbines out of use for too long. General Electric was quick to start the response, but its institutional customers remained reluctant until it was clear the company’s turbines weren’t going to be out of commission for long periods.

General Electric's Power division is starting to push its way out of a two-year contraction.

Data source: General Electric. Chart by author. All figures are in millions.

It’s also naive to ignore that alternative energies enjoyed a major revolution around the same time GE’s turbine fan blades began to fail, steering capital investments away from older technologies and toward cleaner and greener ones. Numbers from IHS Markit indicate the pace of annual installations of photovoltaic panels more than doubled between 2015 and 2019, more than doubling the world’s solar power production capacity as a result during that stretch, according to data from the International Energy Agency. It would have been surprising if General Electric’s power business hadn’t run into a headwind.

But take a longer, closer look at the chart above. Namely, take note of the fact that at the very least, power’s revenue and orders were stabilizing in 2020 — despite the turbulence — through the recently ended quarter. Equipment orders have also improved dramatically in two of the past three quarters. It’s a subtle hint that the tide is turning for the better, even if most investors aren’t yet seeing it.

Not contracting, just changing

Not losing ground any longer isn’t necessarily the same thing as growing, of course, and to be fair, it could be years before GE’s power unit comes anywhere close to reliving its glory days when $8 billion worth of revenue and a few hundred million dollars’ worth of quarterly profit were the norm.

Don’t be too quick to dismiss the potential of this piece of the company’s repertoire, however, for a couple of reasons.

Chief among them is that as reliable as solar power is, it still faces the problem of not generating electricity at night. This challenge has been reasonably well addressed by battery-based energy storage. The solution, however, still lacks the “instant on” option most power producers need, particularly in the extreme heat of summer and the bitter cold of winter. A multipronged electricity production portfolio that relies on all available options seems to be the most plausible future.

A close-second reason to count on natural gas turbine demand for the foreseeable future is that the world just isn’t ready to make this leap. In a long-term market outlook published just last year, the U.S. Energy Information Administration predicts that by 2050, 36% of the country’s electricity will be produced by natural gas, down just 1 percentage point from 37% right now. That’s despite renewables likely doubling their current portion of the nation’s electricity production from 19% to 38% over the same 30-year span.

And to the extent that more clean-energy pressure is applied, GE’s natural gas turbines can be made to run on hydrogen, which can be produced with a minimal environmental impact and — eventually — be produced cost-effectively. The company believes all of its turbines could be powered with clean hydrogen within a matter of years, which would make the question of natural gas’s environmental impact moot.

The thing is, all of this undertow is evident in the numbers quietly disclosed by the company. As of the end of June, GE’s power equipment and service backlog stood at $71.8 billion worth of business. That’s more than four years’ worth of business already lined up, not counting any new contracts signed in the meantime.

Bottom line

Investors looking for GE’s power business to explode overnight are going to be disappointed. The company’s customers aren’t fast-moving consumers. Rather, they’re corporations that can take months to decide to shell out millions on new equipment.

For long-term investors, though, power offers underappreciated upside that’s on par with those of GE’s renewables and aviation businesses. That bolsters the bullish case that already exists, based on continued cash flow growth even if the company is a bit riskier than the average blue chip here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – One Bright Spot From Netflix's Lackluster Q2 Report

Netflix (NASDAQ:NFLX) investors mostly saw the streaming giant’s second-quarter glass as half empty rather than half full, given Wednesday’s post-earnings stock price pullback of a little more than 3%. Share prices were down again (albeit slightly) on Thursday on lingering worries that the company’s high-growth days are now completely in the past. The company only added 1.54 million paying subscribers during the three-month stretch ending in June, and its customer-growth forecast of 3.5 million for the quarter currently underway was equally concerning to the stock sellers.

There is at least one aspect of the company’s second-quarter earnings report, however, worth celebrating. That is, Netflix has been able to impose price increases that outpace its rising costs, leading to widening per-user profitability.

a person sitting at a table holds a coffee cup while viewing a video on a tablet computer resting on the table in what appears to be a coffee house

Image source: Netflix.

The math on Netflix subscription pricing works

It’s the stuff of ongoing debate. Some investors fear higher prices will make Netflix’s service less marketable. Others believe consumers still see plenty of value in Netflix’s offerings even at a higher price. It’s likely there’s at least a little truth to both ideas.

By and large, though, thus far the company has proven it’s got more than enough pricing power to keep raising its monthly rates.

The graphic below puts things in perspective, plotting the average monthly revenue collected from subscribers in each major market sector. The company’s customer head-count growth is assuredly slowing down, but it’s still growing despite ongoing — or even relatively new — rate increases everywhere except for Latin America.

The monthly price of Netflix service has been steadily rising for years.

Data source: Netflix. Chart by author.

But that’s not the whole story. Far more compelling is the fact the company’s weighted-average revenue per user is significantly outpacing the average per-user cost of offering its streaming service.

Take a look. As of the end of the second quarter, Netflix is collecting an average of $35.01 per quarter per customer, led by U.S. consumers in terms of the total number of customers and the amount paid per month. However, the company only spent $26.36 per quarter per user — a figure that’s been falling since 2019. Simply put, scale is starting to make a measurable difference in Netflix’s profit margins.

Netflix's per-user operating costs have been shrinking even as ARPU has been on the rise.

Data source: Netflix. Chart by author.

There are a couple of noteworthy footnotes to add to the discussion. One of them is the fact that Netflix has spent less on marketing since COVID-19 took hold, perhaps believing bored consumers would find them while shut in at home. Second, the relative growth of the company’s cost of revenue has also been slowed, at least partially due to production shutdowns stemming from the pandemic. Only time will tell to what extent this spending is restored to pre-COVID levels.

Take another, closer look at the chart above, though. Operational spending per user was leveling off as far back as 2018, already widening per-user margins before the coronavirus contagion took shape. This was always the bigger plan.

Not all change is bad

Don’t misread the message. Netflix has plenty of questions to answer for investors. Chief among them is whether or not last quarter’s and this quarter’s tepid subscriber growth figures are the new norm or just a blip born from the extraordinary circumstances of the pandemic. Given the advent of rival streaming services like AT&T‘s HBO Max and Disney+ from Walt Disney, it’s a question well worth asking.

Current and prospective Netflix shareholders, however, can at least take some solace in the fact that the math of this particular business model works. The company is generating decent income on the revenue it’s able to drive, turning a top line of a little more than $7.3 billion last quarter into net income of $1.35 million — figures similar to Q1’s. Even if it shifts from being a pure high-growth name to something more along the lines of a recurring revenue/cash cow sort of play, the bullish argument still holds water. It just holds it in a different way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

DIS – If Disney+ Is the Reason You Own Walt Disney, You Better Read This

The rationale seemingly holds water well enough. The streaming, on-demand video market was on firm footing before COVID-19 took hold of the world, but it truly took off during the pandemic. Walt Disney‘s (NYSE:DIS) prioritization of streaming platforms over other means of monetizing its shows and films last year made perfect sense. Forecasts for as many as 260 million Disney+ subscriptions by 2024 didn’t seem out of line.

Now that growth outlook, however, may be way too bold.

An investor studying an investment report under a magnifying glass.

Image source: Getty Images.

That’s the message of recent reporting from technology industry source The Information. Based on internal Disney data reportedly seen by The Information contributors Wayne Ma and Jessica Toonkel, the pair wrote, “U.S. subscriber growth at Disney’s Disney+ streaming service slowed sharply in the past few months […] with most of the growth in the service this year coming from India and Latin America.”

Take that reporting with a grain of salt. Not all the critical details are available, and Walt Disney itself disputes the broad idea. Indeed, the media giant has directly addressed the article in question, reportedly saying it contained “factual inaccuracies and does not reflect the performance of the service.”

Given what we do know about Disney+ though — and the streaming environment in general — shareholders can’t afford to dismiss the prospect that the service is already running into a stiff headwind.

By the numbers

As of the three-month stretch ended April 3, 2021, Disney+ boasted 103.6 million paying subscribers when including India’s Disney+ Hotstar service. That’s still very impressive, all things considered. The service only launched in Nov. 2019, and Hotstar only debuted in April 2020. While the pandemic helped grow this customer base quickly, plenty of other competition emerged in the meantime.

It’s naive, however, to ignore the fact last quarter’s sequential subscriber growth of only 8.7 million is the weakest quarterly growth rate since the platform’s second quarter of existence. And bear in mind that particular quarter was competing with an impressive pace of signups upon its inaugural launch.

The subscriber growth for Disney+ has suspiciously slowed. 

Data source: Walt Disney. Chart by author.

Diehard Walt Disney shareholders will be quick to point out that Disney+ is not yet available all over the world, and besides, the service’s price increase that went into effect in March was likely to have some sort of adverse impact on subscriber growth. And to be fair, there’s something to those arguments.

There are still red flags no Disney investor can afford to ignore, however.

One of them is the fact that streaming rival Netflix is also peaking in terms of subscriber growth, here and abroad. Last quarter’s total quarter-on-quarter addition of just under four million paying customers was not only below expectations for six million but the second-worst showing since the company’s subscriber growth surged at the start of the pandemic in early 2020. North American subscriber growth was particularly poor at just 450,000 members, yet no region thrived. Netflix’s customer base in Europe, Africa, and the Middle East produced the biggest growth, but even then only improved by 1.8 million despite the enormous opportunity to further penetrate these nascent markets.

So what’s this got to do with Walt Disney? It’s an indirect sign that foreign consumers aren’t embracing any particular streaming service faster than U.S. consumers are anymore.

And the launch of other platforms like AT&T‘s HBO Max and ViacomCBS‘ Paramount+ in overseas markets in the future will only make those markets increasingly challenging for Disney to compete in. In fact, while U.S. consumers may eventually end up using eight different streaming services, according to data from Ampere Analysis, the same outlook suggests overseas households will only pay for between three and five such services. This only further raises the bar for Disney+.

As for the impact of the price increase, any price hike is generally going to work against a service’s near-term marketability. In this case, though, the proverbial sticker price isn’t the price Disney+ customers are paying. The service continues to become effectively cheaper thanks to discounts resulting from bundling and Hotstar’s lower cost with last quarter’s monthly average monthly revenue per paid subscriber coming in at $3.99. That’s down from $5.63 a year ago (and down from the previous quarter’s figure of $4.03). Indeed, the actual, true cost of Disney+ was steadily sliding before and after the launch of Hotstar in India, and then in Indonesia in September.

The effective monthly cost of subscribing to Disney+ is steadily falling, but that's not driving subscriber growth.

Data source: Walt Disney. Chart by author.

The subscriber growth headwind can’t entirely be chalked up to rising prices, or even mostly chalked up to the price hike.

The bottom line

Never say never, of course. Disney might find a way to reignite growth for its premier streaming service if (as The Information suggests) it’s truly slowing. Also, bear in mind all streaming platforms are making year-over-year comparisons with results generated during the pandemic’s earliest days. That’s a big hurdle.

As the old adage goes, where there’s smoke, there’s fire. There’s probably something to the suggestion that Disney+ isn’t growing as quickly as it once was. The same goes for Hulu and ESPN+. Whatever headwind is blowing, it could jeopardize the company’s goal of hitting 230 million to 260 million total Disney+ subscriptions by 2024. Indeed, that goal may be out of reach even if you count all three of Disney’s streaming services together.

Walt Disney's plan to service between 230 million and 260 million total streaming subscriptions by 2024 is bumping into a serious headwind.

Data source: Walt Disney. Chart by author.

If the one of the main reasons you own Disney is the belief the media giant can penetrate and then lead the streaming market based on management’s aggressive growth targets, you’ve certainly got a lot to think about.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

IOVA – Why Iovance Biotherapeutics Soared 40% In June

What happened

Shares of Iovance Biotherapeutics (NASDAQ:IOVA) gained 40.1% last month, according to numbers from S&P Global Market Intelligence. The move, largely driven by an update on a key clinical trial, reverses a downtrend that had been underway since February.

So what

Iovance Biotherapeutics may be one of the most promising names in the field of immuno-oncology, but that didn’t prevent the stock from losing 70% of its value between February’s high and May’s low.

A concerning fourth-quarter update kicked off the cascade of selling that ended (ironically enough) in May, when Iovance’s CEO Maria Fardis resigned following word that the prospective approval of its tumor-fighting candidate Lifileucel had been delayed…again. In this particular case, however, the stock’s plunge in response to the news also flushed out the last of the prospective sellers, priming shares for a rebound.

A person in a business suit plots a rising chart of range bars on a digital screen.

Image source: Getty Images.

That much-needed rebound catalyst materialized on June 4, when the company posted updated efficacy data for the beleaguered drug as a treatment for a targeted segment of melanoma patients. Specifically, for advanced melanoma patients who are immune checkpoint inhibitor (ICI)-naive, the combination of Lifileucel and pembrolizumab demonstrates an overall response rate of 86%, and a complete response rate of 43%.

In simpler terms, delayed or not, the drug holds promise that the market seems to have lost sight of earlier in the year.

Now what

Biotech stocks are already difficult enough to trade. Pre-revenue biotech names like Iovance Biotherapeutics are even trickier to handle. Drama like unexpected CEO exits and approval delays makes such matters even more complicated.

Eventually, though, the risk-adjusted value of a company’s pipeline — its complete pipeline — is reflected in the stock’s price. That’s what’s starting to happen now for Iovance shares.

The stock soared for the better part of 2020, but perhaps sensing something wasn’t quite right early this year, traders sold shares for most of 2021 to date; Fardis’ resignation served as something of a capitulation. Now the actual potential of Lifileucel as a melanoma treatment is coming back into focus, along with the company’s eight other trials and five other therapies in development. The market likes what it sees.

Better still, with shares well below February’s high (near $53 per share) as well as under the consensus target of $40.31, there’s lots of room for the stock to continue making bullish progress directly from its current price of around $25 per share.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

REGN – Here's Why Regeneron Gained 11% Last Month

What happened

Biopharma name Regeneron Pharmaceuticals (NASDAQ:REGN) rallied 11.2% in June, according to data from S&P Global Market Intelligence. A series of encouraging drug-development updates kept the recovery rally going.

So what

A multi-month pullback from Regeneron that finally ended in May was put further into the rearview mirror last month. All told, from March’s low to Wednesday’s close — the best close since November of last year when the stock was losing ground — the stock’s up an incredible 31%.

Several headlines spurred the advance, starting with the early June news that the FDA (Food and Drug Administration) had approved a lower dosage of the company’s REGEN-COV (casirivimab and imdevimab) as a treatment for COVID-19. This decision introduced the potential for wider usage of the therapy. Just a few days later that door was opened even further when it was revealed that REGEN-COV improves the survival rate of COVID-19 in individuals that may not produce their own immune response.

Researcher in a biotechnology laboratory.

Image source: Getty Images.

Perhaps the heaviest-hitting catalysts, however, came late in the month when Libtayo was approved in Europe as a first-line treatment for certain advanced basal cell carcinoma patients as well as certain non-small cell lung cancer patients, followed by the announcement that its genome-editing collaboration with Intellia Therapeutics (NASDAQ:NTLA) was already showing encouraging results in phase 1 trials. In the simplest terms, the testing of the companies’ in vivo CRISPR (clustered regularly interspaced short palindromic repeats) gene-repair technology is producing an 87% reduction in misfolded transthyretin protein typically found in patients suffering from the liver disease known as transthyretin (ATTR) amyloidosis.

Since then, Regeneron Pharmaceuticals has identified gene mutations that help prevent obesity. This knowledge has not yet been turned into a drug-development program, but the prospect is on the table.

All of these developments and advances have the potential to add revenue, if not directly, at least indirectly.

Now what

While the prospect of more COVID-related revenue is the more timely headline, it’s also not a reason to step into a new position in Regeneron. Although not a polished or consistent effort, the pandemic is (mostly) being abated.

Regeneron Pharmaceuticals’ progress on the CRISPR front, however, is a significant step not just for certain liver ailments, but for all sorts of illnesses. As Intellia CEO John Leonard noted of the news, “These are the first-ever clinical data suggesting that we can precisely edit target cells within the body to treat genetic disease within a single intravenous infusion of CRISPR.” 

Shares of this biotech name are technically overextended and ripe for some profit-taking here. Already priced below last July’s coronavirus-prompted peak though, any decent pullback is an entry opportunity … even without yet knowing exactly how big the CRISPR-based approach to medicine could become.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

IBM – Here's Why IBM Fell Nearly 5% Today

What happened

Shares of International Business Machines (NYSE:IBM) were down 4.7% as of late Friday, largely in response to reports that president Jim Whitehurst will be stepping down from that role in the near future. Whitehurst is the former CEO of Red Hat — which IBM acquired in 2019 — and was leading the company’s hybrid cloud efforts made possible by the Red Hat deal.

So what

Although no specific reason for the move was offered, the decision appears to be an amicable one. Whitehurst will continue to serve as an advisor to IBM’s CEO Arvind Krishna and other executives. He’s also going to remain at the post until further notice, presumably until a replacement is found.

Still, investors are understandably rattled.

Letter of resignation.

Image source: Getty Images.

At the time of the Red Hat acquisition, then-CEO Ginni Rometty touted that the deal would make IBM the world’s biggest hybrid cloud service provider, and Krishna has kept it as a priority. In his preface to the company’s 2020 annual report he plainly explained, “we have made decisive moves to help our clients thrive by tapping into the immense power of hybrid cloud and [artificial intelligence].”

Sales of the hybrid cloud platform are also known to drive even greater related software and service revenue.

Now what

It remains to be seen just how critical Whitehurst is to IBM’s hybrid cloud computing success. But given he led Red Hat as it became the big name in the business to beat, his absence will certainly be noticed.

His impending exit, however, isn’t necessarily a reason to bail out of the stock. A company is bigger than any single person working for it, and anyone can be replaced. In fact, Whitehurst’s eventual replacement may be even better suited to lead IBM’s hybrid cloud business now that Red Hat is integrated with its parent.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

COST – Maybe Costco Was Right to Not Sweat Curbside Grocery Pickup

Over the course of the past few months, I’ve criticized Costco (NASDAQ:COST) for failing to take curbside pickup seriously. I understood the club-based retailer’s thinking — in-store shoppers spend more, and besides, most Costco stores just don’t have the space needed to make the service work. Nevertheless, rivals Walmart (NYSE:WMT) and Target were crushing it with curbside pickup service that looked destined to become the new norm. Ignoring the opportunity to win (or just keep) market share was simply short-sighted.

Apparently, I was wrong.

OK, there are degrees of wrongness. Walmart did gain market share by expanding its curbside pickup service during the pandemic. Costco’s sales typically soared once consumers figured out how to live with the coronavirus overhang, but it’s naive to suggest revenue wouldn’t have grown even more had Costco made curbside pickup service available.

Person leaning back in a chair, relaxed, with hands behind their head.

Image source: Getty Images.

A survey performed by McKinsey late last year indicated roughly three-fourths of the country’s consumers tried a new way to shop during the pandemic, adding that almost half of these newcomers planned to keep using curbside even after COVID-19 was in the rearview mirror. Nearly 70% of all U.S. consumers said at the time they’d be using buy-online/pickup-in-store (BOPIS) more often going forward, according to Shopkick.

But now that the contagion’s dust is settling, curbside pickup isn’t the game-changing differentiator it was supposed to be just a few months back.

Curbside grocery pickup by the numbers

Data gathered by market research outfits BrickMeetsClick and Mercatus last month spells out the surprising truth. In May, online grocery sales in the United States fell 16% year over year, from $8.3 billion in 2020 to only $7.0 billion this time around. The curbside pickup portion of that tally fell from $6.6 billion then to $5.3 billion now; ship-to-home grocery sales held steady at $1.7 billion.

If your memory is good, you’ll recall the wave of pantry stocking that was underway in May of last year. Some consumers (concerned that the coronavirus might further disrupt supply lines) bought months’ worth of food and staples. Last month’s comparison to May 2020’s figure isn’t necessarily meaningful.

Some of BrickMeetsClick’s ancillary data, however, sheds some alarming light on last month’s demand. Namely, the average number of monthly orders these online shoppers placed fell 4%, from 2.91 to 2.80, and the average order size fell 7%. But, the crux of the contraction reflects the 12% year-over-year decline in the total number of Americans that placed any online grocery order. That figure fell to 66.8 million households in May, from nearly 75 million a year earlier.

A bunch of consumers who said they were forever on board with curbside pickup aren’t quite as on board as they suggested they would be just a few months ago.

Up-ended plans

It’s telling, and perhaps a bit troubling … particularly to players like Walmart, and smaller grocery rival Albertsons Companies (NYSE:ACI).

Albertson’s was just reaching its full stride on the online ordering and pickup front, recently unveiling a delivery deal with DoorDash after reporting online sales growth of 282% during the quarter ending in February.

As for Walmart, CFO Brett Biggs recently commented at an investor conference, “I think online grocery is a trend that will continue. I think people learn to love that online grocery service and we’re right in the perfect place to serve that customer.” Biggs adds, “I think the customer interactions, the personal interactions with customers, I think that the culture of the company and how we’re able to personally interact with customers, that’s really different [than our competitors]. Online grocery helps with that. Grocery delivery helps with that … We do have an advantage there, and we want to continue to grow that advantage, but it is a big advantage for us.”

Online grocery is only a business-building advantage, however, if more consumers continue making it their norm.

Bottom line

It’s too soon to say curbside grocery pickup’s greatest growth is now in the past. We’re still in a strange environment. Consumers may have visited a store last month just to reclaim a sense of normalcy as much to buy food. Perhaps last year’s pantry-stocking surge was even more powerful than we appreciate.

There’s another curious nuance buried in the numbers though. The monthly Brick Meets Click/Mercatus data also indicates that online grocery shopping leveled off in the latter half of last year, and on a sequential basis has fallen three times in the past four months. That’s despite the fact that consumers and merchants alike are both better equipped for online shopping now than they’ve ever been in the past. If it’s not happening now, in this environment, what’s it going to take?

Given the backdrop, Costco’s recent decision to not expand its small curbside pickup experiment underway in New Mexico — CFO Richard Galanti said, “utilization has not set the world on fire” — makes sense. There just doesn’t seem to be nearly as much growth on this front as previously presumed.

This, of course, is good news for Costco shareholders, as the company has mastered the art of getting in-store shoppers to buy more than online shoppers typically do.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – Netflix Doubled Profits, but It Can't Keep Paying This Price

If you follow Netflix (NASDAQ:NFLX) you likely already know the company missed expected subscriber growth projections when it reported its latest earnings. Specifically, the streaming giant’s net addition of a little less than 4 million paying customers fell short of forecasts for 6.25 million new members. Some see this news as a sign that the pandemic-prompted swell of streaming sign-ups is all but over.

Largely lost in the noise of a membership shortfall, however, is that Netflix more than doubled its year-over-year profits. The first quarter’s bottom line of $1.7 billion is a 140% improvement on net income of $700 million earned during the first quarter of 2020.

So what’s the problem? The reason profits grew so dramatically appears to be the same reason subscriber growth was so poor. If this dynamic represents the new normal, it’s a hint that Netflix may have to choose strong profits or strong customer growth because it can’t have both.

Rising and falling arrowed  charts crossing one another while confused businessman looks on.

Image source: Getty Images.

Customers don’t just show up

For the majority of its existence, Netflix has faced no serious competition. Walt Disney (NYSE:DIS) only launched Disney+ in late 2019, and HBO Max from AT&T (NYSE:T) wasn’t available until the middle of last year. Disney’s Hulu and Fox Corp.‘s ad-supported platform Tubi have been around longer, but have only become contenders within the past couple of years. And that’s just a sampling of new (or newly budding) streaming names.

Netflix hasn’t responded in earnest, however, opting to play more defense against the pandemic than it’s played offense against streaming newcomers. Namely, marketing spending has dwindled — a lot — since early 2020 rather than growing in step with revenue. Last quarter’s marketing outlay of $512 million was barely better than the year-ago figure of $504 million, and that $504 million was the second-lowest amount Netflix had spent on marketing in any quarter since the final quarter of 2017.

Netflix has dramatically slowed its marketing spending.

Data source: Netflix. Chart by author. All dollar figures are in thousands.

One can’t say with certainty the cause-and-effect relationship in play here is an absolute one. The company’s subscriber additions are being held up to tough comps, after all. In the first quarter of last year, Netflix picked up nearly 16 million new subscribers, and it added another 10 million in the second quarter of 2020. It’s arguable that anyone who wanted to subscribe to Netflix is already on board.

But there’s growing evidence that consumers are simply more responsive to other on-demand options despite Netflix’s dominance of the market.

Research outfit Kantar delivered the latest salvo in this argument, estimating HBO Max picked up more of last quarter’s new U.S. streaming business than any other platform: 14.4% of new customers. Prime, from Amazon, won second place in terms of streaming subscriber additions. ViacomCBS‘s Paramount+ (formerly known as CBS All-Access) came in third with its 11.8% share last quarter, followed by Disney’s Disney+ and then its Hulu. Netflix was sixth-best in terms of new U.S. customer growth, winning only 8.5% of the nation’s new on-demand business.

In a similar vein, Ampere Analysis suggests Netflix’s share of the U.S. market fell from 29% to 20%.

This doesn’t necessarily point to subscriber losses. It does, however, make it clear that at least some new streaming customers are choosing a rival’s platform over Netflix.

Content spending was way down too

It’s not just cost-cutting on marketing that may ultimately be undermining Netflix’s dominance, either. The company spent relatively less on content, too, during Q1. The first quarter’s $3.9 billion cost of revenue (what it spent on content) is only 7% more than the year-ago figure even though revenue grew by an incredible 24%. The graphic below puts things in perspective. 

Netflix cut its content spending, as measured by cost of revenue, in a big way during Q1 of 2021.

Data source: Netflix. Chart by author. All dollar figures are in thousands.

On the surface, it may seem irrelevant. The streaming giant still has a huge library of stuff to watch, after all.

It’s not that simple though. Not only does Netflix need more kinds of content to keep its now-bigger audience entertained, it needs more new content to do so. CFO Spence Neumann explained during a post-earnings conference call, “We also have a near-global shutdown in production which we’ve been ramping safely and at scale through much of last year and into this year, but it did push some key title launches into the back — kind of the back end of — of this year,” which he conceded “does create some noise” in terms of subscriber growth.

To this end, the company’s already assured investors it’s going to ramp content spending back up to $17 billion this year, a jump from 2019’s budget of $15 billion and on par with 2020’s pre-pandemic content budget of $17 billion.

In so doing though, last quarter’s gross margin of 46% is apt to be whittled back to a historical norm closer to 38%. This will dial back Q1’s operating income rate of near 27% of revenue to the company’s historical net operating profit margin in the high teens. In terms of dollars, these more normalized margin rates would have meant net operating income closer to $1.2 billion last quarter (or less) rather than the $1.7 billion worth of net operating income Netflix actually posted.

The bottom line

It’s possible that the first quarter’s weak subscriber growth is just the result of bad timing.

Possible, but unlikely. Other streaming services are adding more paying members with what appear to be more aggressive ad campaigns and — in some cases — more aggressive spending on content. For instance, AT&T’s WarnerMedia was willing to undermine box office ticket sales of its new $155 million flick Godzilla vs. Kong by offering it at no additional cost via HBO Max. Kantar says it picked up more new streaming subscribers in Q1 as a result.

Rather, Netflix may mostly be struggling with subscriber growth simply because it’s spending too little on the effort.

If that is indeed the case, don’t look for last quarter’s (or even last year’s) profit growth and profit-versus-expense profile to become the new norm. It’s the exception to the norm. Netflix has already told us it’s going to be spending more on content, but don’t be surprised if the company again ramps up marketing spending. That’s certainly what it should do anyway, given how competitive the streaming market has become in just the past year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.