Making sense of the markets this week: May 12, 2024
Buffett is comfortable with Canada, Disney and Shopify disappoint in Q1 and Reddit has a great first earnings call.
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Buffett is comfortable with Canada, Disney and Shopify disappoint in Q1 and Reddit has a great first earnings call.
Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, shares financial headlines and offers context for Canadian investors.
When countries look to attract the attention of big financial funds, they often attempt to brand themselves in a manner that will bring much-needed foreign investment to their shores. For example, you might see buzzwords such as:
But given Canada’s stagnating economy, I think it’s appropriate to get excited about this Warren Buffett quote:
“We do not feel uncomfortable in any shape or form putting our money into Canada.”
When Buffett takes the stage at his annual “Woodstock for capitalists” in Omaha each year, the investing world sits up to take notice. So, it was noteworthy to hear his lukewarm notes about Canada, including:
“There are a lot of countries we don’t understand at all. So, Canada, it’s terrific when you’ve got a major economy, not the size of the U.S., but a major economy that you feel confident about operating there. … Obviously, there aren’t as many big companies up there as there are in the United States. There are things we actually can do fairly well that Canada could benefit from Berkshire’s participation.”
He went on to reveal his company’s possible Canadian strategy, saying, “In fact, we’re actually looking at one thing now.” While most other investors are cool on Canadian stocks, it’s interesting to see Buffett warm (again).
Buffett’s last major foray into Canada generated a massive 70% gain in a single year back in 2017 when he invested in Home Capital Group, so he may know a thing or two about making money in the Great White North.
Other highlights from the annual general meeting included (all figures in U.S. dollars):
Buffett wrapped up the annual meeting by saying humbly, “I not only hope you come next year, [but] I hope I come next year.” He later added, “I know a little about actuarial tables,” in reference to his insurance expertise.
This insight was made particularly relevant given the absence of long-time friend and partner Charlie Munger at this year’s event. Munger passed away at age 99 in November 2023.
Investors appear to see value in Buffett’s patience to wait for the right pitch, as Berkshire shares are up 11.5% so far in 2024.
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Despite a small earnings beat on Monday, shares of The Walt Disney Company were down more than 10% after the earnings report was released. Disney reports earnings in USD.
The company responsible for the Happiest Place on Earth released the following:
Disney CEO Bob Iger was quick to point out the progress the company had made in making its streaming service profitable. However, investors weren’t buying the bigger picture as future revenues appear “soft” based on updated guidance.
Here’s how Disney’s various entertainment verticals fared during Q1:
The bottom line: While Disney is still very profitable, high expectations are baked into the share price. The company is in the midst of a major cost-cutting strategy to turn its massive bet on streaming into a source of profit instead of a net loser each quarter.
Iger admitted that Disney was in transition. He tried to manage investors’ expectations, stating “We’ve said all along that our path to profitability will not be linear.”
Betting against Disney and Iger in the past has not been a good idea.
That said, the current price-to-earnings ratio of 65x indicates just how high expectations remain, even after the rough earnings day.
It was another interesting earnings week in the world of U.S. tech, as Reddit released its first-ever earnings report as a publicly traded company.
All earnings below are in U.S. dollars.
Reddit shares were up more than 15% in after-hours trading after announcing a surprising rise in revenues on Tuesday. While Reddit did have a quarterly loss of $575 million (mostly due to one-time costs around its initial public offering), revenues of $243 million represented a 48% increase on the fourth quarter of 2023. User numbers also surprised to the upside, with a 37% increase versus last quarter.
CEO Steve Huffman stated:
“We are happy with our progress this quarter. Our management target is to grow revenue twice as fast as total adjusted costs, but this quarter we grew revenue five times faster.”
Notably, Reddit’s potential to benefit from artificial intelligence has been much speculated upon, due to OpenAI’s Sam Altman’s owning $800 million worth of Reddit shares. “By leveraging its trove of user-generated content to train AI models on conversational language, Reddit has unlocked a lucrative revenue stream,” senior director of briefings Jeremy Goldman stated. (Read: “Is AI stealing my job?”)
In the ride-sharing battle of Uber versus Lyft, Uber maintained its market-share advantage, but had an otherwise disappointing earnings day.
After reporting a larger-than-expected loss Uber shares were down 5.72% on Wednesday. While Uber’s revenues grew 15% year over year, the company is still having trouble controlling costs.
Uber CEO Dara Khosrowshahi explained the loss by referring to non-operating investment losses:
“We did have to mark down those equity stakes that resulted in a loss. We don’t expect that to keep happening going forward.”
The Uber app is more popular than ever with 2.6 billion trips completed in the first quarter of 2024, up 21% from last year.
Lyft, by contrast, outperformed profit forecasts and shares were up 7.11% on Wednesday.
Lyft has slashed costs by 13% since 2023, and shares are up nearly 30% this year.
Shopify Inc. started Wednesday as the second most valuable company in Canada and fell to the fourth largest by sundown. Shopify shares were down 18% in one day despite an earnings beat.
These companies are listed on both the Toronto and New York stock exchanges. All figures in U.S. dollars.
The rationale for the sudden panic in the markets appears to stem from decreased profit guidance going forward. With Shopify forecasting slower sales growth and a decline in profit margins in the next few quarters, clearly investors are questioning the current trajectory of the company and reevaluating the previous premium valuation.
Executives justified the cautious forward guidance. Jeff Hoffmeister, Shopify’s CFO, said: “We have factored in headwinds related to [foreign exchange] from the strong U.S. dollar and some softness in European consumer spending in our Q2 outlook.”
Two of the Brookfield family of companies also reported this week, with Brookfield Renewables losing slightly more money than predicted, and Brookfield Asset Management posting a small earnings beat.
For more on my thoughts on Shopify, please read my article on the best tech stocks in Canada at MillionDollarJourney.com.
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