Research Notes: Intriguing Earnings
Five interesting earnings reports at a pivotal point for the market
We update TSLA again on the back of Q3 earnings.
We also question the post-earnings rally in Harley Davidson.
CDLX looks intriguing yet tough to own after a 53% post-earnings plunge.
The short case for CAR looks airtight — but maybe a little too easy.
We’ve given a disproportionate amount of coverage to Tesla TSLA 0.00 lately. But with Elon Musk’s acquisition of Twitter finally closed, we’ll add a couple more points before letting our modestly profitable trade (+6% as of this writing) run in peace.
As far as Q3 earnings go, there doesn’t seem much in the way of news. Given the massive chasm between bulls and bears, Q3 probably didn’t change any minds.
The quarter did (at least on Twitter) lead to a resurgence of accounting fraud claims:
But as I wrote in a Twitter thread, the quarter actually provides further evidence against those claims. The supposedly impossible SG&A growth (actually a 3% decline per the 10-Q) is entirely attributable to the massive equity award given to Musk back in 2018. Exclude the accounting for that award and cash SG&A rose high teens year-over-year — reasonable in the context of what spend actually goes into that bucket.
What’s more important is Musk’s behavior in the week since the Twitter deal closed. Over at Seeking Alpha, Montana Skeptic, an eloquent and long-time Tesla critic, summarized the problem quite well. Musk’s antics at Twitter run the clear risk of alienating key constituencies required to drive Tesla’s growth.
It’s important to put those antics in the context of the mid-term outlook. TSLA bulls and bears agree on little, but they do agree on one thing: Tesla cannot be just a car company. It’s why Wall Street analysts have to apply material present value to businesses that don’t yet exist (e.g. robotics), and why bears snicker at those models.
In other words, Tesla is a confidence game, and not necessarily in a negative way. To own TSLA stock, investors have to believe in a multi-year outlook that includes Tesla becoming, if not the most valuable, at least the third-most valuable, company on U.S. markets.1 That outlook requires material profit centers beyond the automotive business.
We talked in October about Musk eroding that confidence, but in a week he’s done even further damage. The sh—show that has played out should destroy confidence that Musk (in his spare time) can guide Tesla into being more than what it currently is. (We’d add it also casts serious doubt on the idea that Musk is capable of directing a massive, complex accounting fraud or leading the creation of “gamma squeeze” via the options market.)
Heck, Musk himself made our point on Thursday:
Whether simultaneous attacks are a good sign for Twitter is up for debate. But those attacks are absolutely not a good sign for Tesla.
In mid-September, we argued that Harley-Davidson was set for a cyclical swing down. The company seemed like a classic pandemic winner. Its profitable financing arm was headed for lower profits amid higher interest rates and (presumably) rising loss provisions. And the SPAC merger of electric manufacturer LiveWire Group LVWR 0.00 seemed highly likely to decline post-close.
The case played out quickly. Amid a market swoon, HOG dropped 12% in a little over a month. Over 90% of investors in the LiveWire SPAC redeemed their shares. LVWR is down 20%-plus from the $10 merger price.
Harley’s Q3 report last week reversed the slide. Shipments rose 19%, and operating margins in the motorcycle business increased 950 basis points year-over-year. HOG rallied sharply and touched a 52-week high this week. Our short recommendation is now (as of this writing) about 8% underwater.
And yet…it’s difficult to see what has really changed. The quarter was strong. But Harley also benefited from an improving supply chain. That normalization allowed the company to boost production and replenish dealer inventories. And with the U.S. consumer still spending (as bank earnings for Q3 showed) higher production led to better results.
But Q3 also didn’t surprise. Indeed, Harley reiterated full-year guidance. Nor does it change the short thesis for HOG, which remains a mid- to long-term argument.
The mid-term short case is that earnings are going to fall sharply at some point. Harley certainly looks like it was a pandemic winner. The financial services business is already in decline. LiveWire isn’t coming to the rescue. Longer-term, demographics are simply not in Harley’s favor. This is a boomer brand whose core customers age out each year.
There’s nothing that (to our admittedly biased eye) changes the trajectory of this business. Harley is still facing a good number of challenges, and HOG still looks like an attractive short at this year’s highs.
On a few occasions this year, we’ve taken a close look at Cardlytics CDLX 0.00, a marketing firm that powers offers on financial institution websites. We fortunately passed each time: the stock is down 92% (!) year-to-date following a 53% (!!) decline on Wednesday.
The catalyst was a disappointing third quarter report, with particularly dispiriting guidance for the fourth quarter. Cardlytics is guiding for a year-over-year decline in billings and adjusted contribution (essentially adjusted gross profit). That’s a huge problem for a stock that is guiding for full-year Adjusted EBITDA margins of ~-15% excluding stock-based comp, which should run at another ~15% of revenue.
CDLX did see a nice bounce on Thursday (+25%), but fundamentally there are still huge questions. The stock is simply not as cheap as it looks. With a market cap of ~$190M at the current price and net debt of ~$87M, for an enterprise value of ~$277M. The disastrous acquisition2 of Bridg still requires earnout payments of ~$68M in cash and ~$127M in stock.
Pro forma for the earnout, EV gets to ~$470M. Based on guidance, that’s 1.4x 2022 revenue and more than 3x adjusted contribution. Neither multiple seems all that attractive. Again, this is a business that is guiding for a y/y decline in the current quarter and posting EBITDA margins of -30% or so when accounting for stock-based comp.
But taking the long view, there is a reason to at least be intrigued, and some logic to the market’s bottom-fishing on Thursday. Cardlytics does have major partners among banks. It’s moving customers onto a self-serve ad platform, a move that should be done by next year. That will add features to an experience that, at the moment, is quite bland:
source: author from personal Bank of America account
A new CEO, Karim Temsamani, comes from Google and Stripe. He follows the company’s co-founders, under whom execution does not appear to have been on point (the Bridg deal just one example). The stock has had some ardent bulls, and though those bulls are way underwater, we’d point to Richard Chu’s Substack for a interesting and detailed qualitative bull case.
Chu’s quantitative assumptions were clearly overly optimistic, but below $6 that’s far less important. The reason we passed on CDLX at $50 and $30 was that, even down big from 2021 highs, the stock simply didn’t look cheap.
It still doesn’t. But the stock is cheap enough to be a bet on the business working at all. Maybe that’s through operational improvements, better leadership, and cost savings that should aid 2023 results. Maybe it’s through an expansion into more local offers, or an acquisition (Cardlytics’ rival Figg was purchased by Chase in July).
It’s so difficult to step into a stock like this in a market like this. But it’s understandable why some investors took the plunge on Thursday. And for a lower-risk play on Cardlytics, it’s worth noting the company’s busted (I mean, really busted3) 2025 converts have a yield-to-maturity of 31%.
The short case for Avis Budget CAR 0.00 seems absolutely airtight. Between a still-strong economy, low unemployment, and two years of pent-up demand, consumer demand for travel is at a multi-year high. Given remote work and the continued growth of ridesharing, corporate demand may be headed for a secular decline.
The same spike in used car prices that rescued rival Hertz HTZ 0.00 from bankruptcy has benefited Avis. The same supply chain constraints that created that spike kept the company (and its rival) from needing to upgrade its fleet.
In that context, the fact Avis absolutely crushed estimates in its third quarter release doesn’t matter. If anything, it only further highlights the short case. In Q3, adjusted net income increased 120% year-over-year. Adjusted EPS more than tripled because Avis has bought back a stunning amount of stock. As of Oct. 29, the basic share count had been reduced by more than one-fourth in a year.
What matters is that some semblance of normalcy is going to return. And it is absolutely staggering how detached current results are from pre-pandemic levels.
In Q3 2019, Avis posted Adjusted EBITDA of $471 million, down 1% year-over-year. In Q3 2022, the figure was $1,460 million.
To some extent, the market is pricing in the current abnormal environment: CAR is trading at about 3.4x trailing twelve-month Adjusted EBITDA. From another perspective it isn’t. The stock is still trading at 18x 2019 Adjusted EBITDA.
The concern, however, is that this case isn’t exactly hidden. The market has spent the last year sniffing out pandemic winners and selling them off accordingly. Yet while CAR is down 30% from its highs, it’s still +11% YTD:
Avis does seem to have improved its operations. It’s repurchased a ton of stock. Competition is more rational (for now).
After this bounce, the short case seems to make sense. But it’s a case that the market is keenly aware of. Investors are buying CAR anyway, and that seems to mean something.
As of this writing, Vince Martin is short Harley-Davidson and Tesla.
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At the moment, Apple is worth three times as much, and Microsoft a bit over two times. (We’re excluding Saudi Aramco here.) Give those companies roughly market-matching returns and TSLA can provide reasonably significant alpha over, say, a ten-year horizon if it doesn’t catch either tech titan.
Cardlytics already paid $350M in cash for Bridg; again, its current EV is $267M.
The conversion price, incredibly, is $85.14 per share.