Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Snap’s explosive growth and a Tesla surprise
Peter Garnry
Chief Investment Strategist
Summary: Snap surprised everyone yesterday with explosive revenue growth lifting all the major online advertising companies such as Google, Facebook, Twitter and Pinterest. Snap's results highlight strong advertising demand underscoring confidence among businesses and a recovery that is still on track. Tesla had very high expectations to meet and extraordinarily enough the company surpassed expectations and delivered stunningly 39% y/y growth on revenue and a significant improvement in operating cash flow generation.
US earnings continue to surprise to the upside with S&P 500 Q3 earnings so far up 17% q/q although still behind consensus estimate for the entire season, but next week’s technology earnings (an earnings preview is out tomorrow) will most likely push Q3 earnings closer or even above estimates. The earnings season has so far bolstered the growth vs value trade with growth companies generally delivering better results against expectations relative to value companies.
Smaller online advertising platforms are gaining
The big mover yesterday was Snap which saw its shares up 28% to a new all-time high. The results lifted social media stocks such as Facebook, Google, Twitter, and Pinterest. Analysts covering the online advertising industry were out saying that especially smaller advertising platforms have got a boost during the Covid-19 pandemic and that advertising demand in general is strengthening. This more evidence that the economy continues to recovery despite the ongoing turbulence from a renewed acceleration in Covid-19 cases in both the US and Europe.
Snap grew revenue to $679mn in Q3 up 52% y/y driven by strong growth in the US and Europe, while operating margins also improved drastically indicating that Snap has reached its inflection point for profitability. The last 12 months the operation cash flow has been negative $181mn but we expect this number to turn positive by Q1 2021.
Hats off to Tesla
Tesla was the anticipation yesterday reporting Q3 earnings after the close. Despite high expectations Tesla surprised positively on both revenue and earnings. Q3 revenue was $8.77bn up 39% y/y which is an outstanding achievement given backdrop in Q2 with lockdowns and the economy on shaking ground. EBITDA improved to $1.39bn translating into an EBITDA margin of 15.9% compared to 11.3% for Volkswagen in Q2. Shares were up 3% in extended trading which was bit muted reaction given the delivery in Q3. On the earnings call Elon Musk said it was possible to deliver 850,000 in 2021 when asked and generally the tone was upbeat and the previous erratic behaviour of Elon Musk seems to have faded providing investors with confidence in the leadership.
The operating metrics continue to improve for Tesla despite profitability is not a primary target. Deliveries are up 4x since early 2018 which for any company of that size is an extraordinary achievement. Scaling a large company at high growth rate is a difficult thing to do. 12-month trailing cash flow from operations was $4.3bn and free cash flow reached $1.9bn. This puts Tesla on a 0.5% free cash flow yield which is still aggressive, but for now the market seems to think that this is a fair market value given the growth opportunities globally. We would add that the energy segment is one of the biggest potential unknowns that could suddenly surprise investors. The energy & storage segment revenue was up 44% y/y and we believe that Tesla will be able to maintain higher growth rates in this segment than its automotive for longer than most expect.
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