Short Update About Me

 

My last article came out on June 30th. I wasn’t able to update my blog due to a personal project and summer travel. I have also designed a series of 7 coaching sessions for anyone looking to get a head start on their personal finances, what accounts to open, how to pay down debt fast and which debt to pay first and how to get the max out of retirement plans. I teach these classes on Tuesday and Wednesday nights. If you are interested in these classes, please reach out to me at support@helpmestartinvesting.com

Going forward, I plan to write two articles per month.

Earnings Reports

July marks the beginning of the third quarter, which means that most of the companies will be reporting their 2nd quarter earnings. This week, I am summarizing the Q2 results of two of my smaller holdings.

Netflix (NFLX): I wrote about Netflix Q1 earnings after they released their Q1 2021 report. Netflix management had guided that they will add 1 million subscribers in Q2. They added 1.54 million subscribers so they handily beat that number. They are guiding for an addition of 3.5 million subscribers in Q3 2021. I will be especially paying attention to their actual numbers in Q3 because they missed their guided numbers in Q1 2021. I track their estimates and actual numbers every year and it has been less than 5 times that the management has missed their estimates in the last decade. 

Revenue growth in Q2 came at 19% YoY growth to $7.3 B. Operating Margin came in 25% compared to 22% in Q2 20. Net Income almost doubled from $720m to $1,353m. EPS came in $2.97 per share compared to $1.59 per share. Over the last five years, Netflix stock price has followed the trajectory of growth in their subscriber numbers. However, I suspect that in the next couple years, the valuation of Netflix stock will start tracking the income and EPS numbers. The management mentioned on the call that they will stop borrowing money to fund their growth from this year onwards and start buying back their shares. They already started doing this in Q2. This means that the cash flow that they generated from their internal operations is enough to fund their growth. That is great news and it means that Netflix is maturing as a growth company. I still believe that there is plenty of growth left and it’s just that they are going to fund that growth from dollars generated internally rather than borrowing like they have done in the past. If you look at the subscriber growth in the three most recent quarters (8.51m, 3.98m and 1.54m), you might think that the growth of subscribers is on the decline. However, if you zoom out for two years, you will notice that they have added 54 million subscribers in the last two years which is consistent with their long-term goal of adding 25-30 million subscribers every year. COVID resulted in choppiness in their growth numbers and pulled forward that growth to 2020.

One thing that gives me pause is their slowing revenue growth. I generally look for companies growing their revenues by a minimum of 20% or ideally even more. This quarter, their revenue grew by only 19%. I will be watching this number going forward and will be looking to sell if this number continues to decline.

Pinterest (PINS): I wrote about PINS Q1 earnings on earlier this year. Pinterest reported their Q2 earnings on July 29th and the stock fell hard after their earnings. Let’s look at the results

First the Q2 2021 results

  • Revenue for the quarter was $613 million up 125% from Q2 2020. This number easily beat the guidance set by the management. They were guiding for 105% growth. 
  • Monthly Active Users (MAUs) 454 million up 9% from Q2 2020.
  • Net Income of $69 million vs a loss of $100 million in Q2 2020. This is fantastic. This company is starting to become GAAP profitable.
  • Management provided guidance for Q3 2021 that they are looking to grow their revenues in Q3 2021 in the low 40% range from Q3 2020. Let’s look at their revenue growth over the last few quarters.

 

Year Q1 (YoY%) Q2 (YoY%) Q3 (YoY%) Q4 (YoY%) Total (YoY%)
2019 $202m (54%) $261m (62%) $280m (47%) $400m (46%) $1.14B (51%)
2020 $272m (35%) $272m (4%) $443m (58%) $706m (76%) $1.69B (48%)
2021 $485m (78%) $613m (125%)

Expected

~$620m (40%)

 

  • One reason for the fall in stock price is that the management is guiding for a low-40% growth in revenues in Q3. So that would translate into revenues of about $620m in Q3 which is pretty much the same as their revenues in Q2 2021. This means that management is expecting very little sequential growth in their revenues. Look up the revenue growth in the previous 10 quarters and this has happened only once in Q2 2020 (that was the COVID quarter). So, this has got the market spooked a little bit.
  • Second reason for the fall in stock price and this is more prominent is that they are experiencing a decline in their monthly active users (MAUs). This is how their growth in MAUs has looked in the previous ten quarters.

 

Year Q1 (QoQ%) Q2 (QoQ%) Q3 (QoQ%) Q4 (QoQ%)
2019 291m 300m (3%) 322m (7%) 335m (4%)
2020 367m (10%) 416m (13%) 442m (6%) 459m (4%)
2021 478m (4%) 454m (-5%)

 

You can see in this chart that this is the first quarter that their MAUs declined as compared to the previous quarter. However, if you go into detail into management comments, you will find out that the users that dropped off were desktop users who were anyways less engaged. In fact, the millennial users and the mobile users who are more engaged experienced growth compared to the previous quarter. So, I am not worried about this decline. Moreover, the management had warned about this in their previous quarterly report. 

I am more excited about the new idea pins that management announced and those pins are driving more engagement. Moreover, this management has a history of guiding conservatively. For example, they had guided a 105%  revenue growth in Q2 2021 and came in at 125%. So if they are guiding low 40% revenue growth for Q3 2021, my guess is that they will come around 50% growth. 

With Pinterest, it is also useful to look at their Average Revenue Per User (ARPU) growth and this is a meaningful metric. As you can see below, it is heading in the right direction.

US ARPU Growth

 

Year Q1(YoY%) Q2(YoY%) Q3(YoY%) Q4(YoY%)
2018 $1.59 $1.98 $2.33 $3.16
2019 $2.25 (42%) $2.80 (41%) $2.93 (26%) $4.00 (27%)
2020 $2.66 (18%) $2.50 (-11%) $3.85 (31%) $5.94 (49%)
2021 $3.99 (50%) $5.08 (103%)

 

International ARPU Growth

 

Year Q1 Q2 Q3 Q4
2018 $0.05 $0.05 $0.06 $0.09
2019 $0.08 (60%) $0.11 (120%) $0.13 (117%) $0.21 (133%)
2020 $0.13 (63%) $0.14 (27%) $0.21 (62%) $0.35 (67%)
2021 $0.26 (100%) $0.36 (157%)

The story of both of these companies (Netflix and Pinterest) is similar. Both of these companies experienced a pull forward of their growth during COVID times and now the market is in a wait and watch mode to see if any of that growth sticks and if these companies will be able to capitalize on that growth. For patient, long-term investors, I see this as an opportunity to slowly build your position into these high-quality companies.

What do you think? Would you sell any of these companies and move on? Let me know by commenting below.