Earnings Recap -- PTC, Big Tech, Housing, and Chips
The biggest week of earnings season is in the books! How did it go?
What a week! Not only did we have the highly-anticipated FOMC meeting on Wednesday and the first jobs report of 2023 today, but it was also the biggest week for earnings in terms of S&P 500 companies. In total, over 100 companies in the index reported, most of which on Tuesday and Thursday.
This week, I want to once again go over semiconductors and housing earnings, as both continue to raise red flags about the overall economy in 2023. I’ll also review some of the big tech earnings from yesterday, namely Apple, Amazon, and Google.
Once again, there’s a major common theme that runs through all of these companies. Margins are falling, and 2023 sales and profits estimates continue to move down. Personally, I think the data we get straight from the leading companies in these industries is even more valuable than most macro data.
In general, sales and profits for most companies went up rapidly in 2021 and even 2022, and we’re now facing a year where expectations still call for growth based on a strong second half of the year. However, I believe that’s highly unlikely based on the data we’re seeing from cyclical companies that can serve as leading indicators.
First, we’ll go over housing. Last week, we went over DR Horton, Lennar, and KB Homes. Today, we have three more big homebuilders in Pulte Group, NVR, and Meritage Homes.
Going with the same format as last week, we’ll look at the growth of backlog, new orders, and cancellation rate for 2022:
Backlog:
Pulte Group: decreased by 32.4%
NVR: decreased by 28%
Meritage Homes: decreased by 41.3%
New orders:
Pulte Group: decreased by 41.4%
NVR: decreased by 26.9%
Meritage Homes: decreased by 46.3%
Cancellation rate – the % of new home orders which are cancelled:
Pulte Group: 32%
NVR: 18.4%
Meritage Homes: 39%
Just like the ones we looked at last week, 2023 looks like a disaster in the making for these companies. You wouldn’t know that by looking at their stocks, though! ITB, the housing ETF, is up 18% so far for the year. That remains one of the most perplexing trends in the market to me right now.
Next, we have a couple huge chip companies that reported: AMD and Qualcomm.
AMD:
All things considered, AMD had a very solid 2022. Compared to 2021, sales went up 43.6% and EPS was up 26%. However, as the year went on, margins started to slide lower, which is especially bad for a company in a highly cyclical industry like semiconductors.
Now, 2023 is shaping up to be a whole different story.
Over the past 4 months, AMD’s EPS estimates for the year have gone down from $4.89 to $3.04, which would be a 14.1% drop from 2022. And their sales estimates for the year have gone down from $30b to $23.6b, which would be flat YoY.
There’s a case to be made that AMD’s data center creates a bullish investment opportunity in the company as it grew 42% in Q4 and accounted for 30% of their sales. However, its operating margin fell from 32% to 27% YoY.
Qualcomm:
Qualcomm also had a decent 2022, with sales increasing 19% and EPS up 22%. However, like AMD, things are looking to turn south this year, and Q4 was a major foreshadowing of that.
For Q4, revenue was down 12% and EPS down 27% YoY. Meanwhile, operating expenses shot up by 16.4%, which is extremely unhealthy with a 12% drop in sales.
As you can imagine, margins were pretty awful. Qualcomm’s gross margin avoided most of the hit, moving down to 57.3% from 59.8% YoY. But their operating margin crashed to 26% from 36.1% over the past year.
Qualcomm’s 2023 outlook isn’t pretty either.
Over the past 3 months, their EPS estimates have dropped from $12.74 to $9.29, which would be a 26% drop from 2022. And forecasts for their sales have fallen from $46.6b to $38.3b, which would be down 13% from last year. That also forecasts a further drop in margins, as their EPS is projected to fall by more than their sales.
Next, we’ll look at big tech. Similar to semiconductors, the margins here have been deteriorating as have the 2023 forecasts. Here are some stats from Amazon, Google, and Apple.
Amazon:
For Q4, Amazon actually posted a revenue increase of 8%, but that was as far as the good news went. EPS, on the other hand, almost dipped into negative territory and came in 98% lower than Q4 2021.
Their expenses also outpaced their sales, and as a result operating margin slid from 2.52% to 1.83% YoY.
For the full 2022 year, Amazon was also unprofitable, marking their first unprofitable year since 2014.
Amazon’s 2023 forecasts also keep moving down.
Over the past 4 months, their 2023 EPS estimate has dropped from $2.32 to $1.51, which would be lower than 2020 and 2021 EPS. Sales forecasts have also fallen from $601.1b to $558.3b in past 4 months, which would actually be a gain of 9% over 2022.
Google:
Q4 sealed up a rough year for Google, with their revenue up 1% and EPS down 31.4% YoY. Sticking to the trend, their operating expenses were up significantly more than their revenue, to a tune of 10.2% over Q4 2021.
As such, their operating margin fell all the way from 29.1% to 23.9% in 2022. However, forecasts expect some improvement this year, although they’re still on their way down.
Over the past 4 months, Google’s 2023 EPS estimate is down from $5.76 to $5.08, which would be growth of 13% over 2022. For revenue, the forecast is $300b, down from $324b but still would represent growth of 6% from 2022.
Apple:
Despite the stock’s recent move, everything is trending down for Apple. In Q4, sales were down 5.5% and EPS was down 10.5% YoY. EPS was down more than sales, which means we have another case of margin contraction. In fact, despite the sliding sales, operating expenses managed to move up by 12.2%.
More specifically, their gross margin moved down from 43.8% to 42.9% and their operating margin fell from 33.5% to 30.7% over the past year.
Looking ahead, Apple is continued to see negative sales and EPS growth in 2023.
Over the past 4 months, their 2023 EPS estimate has fallen from $6.46 to in $6.04, which would be a drop of 1.2% YoY. Sales-wise, expectations for 2023 have dropped from $412b to $388.4b, which would be 1.5% lower than 2022’s numbers.
The drop in sales estimates for these 3 companies might not stand out in terms of percentage, but the dollar figures are pretty amazing. In the span of just 4 months, forecasts for their combined 2023 revenue have fallen by over $90 billion. As these companies are heavily reliant on consumer strength, to me it’s a signal that consumer weakness is becoming more and more prevalent, which is being outright ignored by the broader market. These estimates most likely are not done moving down, which I’ll get to at the end of the article.
PTC earnings:
On a positive note, I also want to rehash here what I posted on twitter in terms of PTC’s Q4 (fiscal Q1) earnings report:
Overall, I found the report pretty impressive. Here’s a summary of what happened:
First, because of the way their product subscriptions work, they focus on ARR (annual run rate) rather than revenue, and operating efficiency rather than operating margin
Growth:
ARR $1.66b, up by 11% (15% in constant currency – only 45% of revenue is USD)
Free cash flow $172m, up 28% YoY
Fiscal 2023 FCF expected to grow 38% to $575m
Fiscal 2023 operating efficiency expected to grow 4.5% – expanding margins
Strong customers:
PTC’s Windchill and Creo services bring in 70% of ARR, but only saw 3% churn from those customers despite macro picture – shows PTC’s advantage over competition
Big customers like Siemens, SAP, Dassault seeing low/negative growth, but PTC staying very strong
Some slowing in new orders, but customer retention is making up for i
ServiceMax Acquisition:
ServiceMax manages service processes for high-cost, long-life products (MRI machine, pumping equipment at a refinery, machine tool in a factory)
Huge synergies with a lot of PTC products:
Lots of excitement from mutual customers
Expected to add 11% to ARR (22-25% growth expected for fiscal 2023)
Increased debt by $500m and revolving credit facility by $250m
Finally, I want to give a few quick data points for earnings season so far for S&P 500 companies – about half have reported so far.
Overall, earnings expectations continue to deteriorate.
In January, estimates for the total EPS of the S&P 500 for Q1 moved down 3.3%.
Consumer discretionary is surprisingly strong, with automaker revenues up 25% and hotels/restaurants/leisure sales up 22% presumably due to the holiday season – worth watching out for 2nd wave of auto inflation if this continues.
Profit margin for Q4 so far is 11.3%, which is actually below the 5-year average and down from 12.4% in Q4 2021.
Profit margin estimates for 2023 are still above this, but they’ve been coming down steadily from the mid-high 13%’s over the past few months.
So far, 43 companies in the S&P 500 have issued Q1 EPS guidance – 37 of them were negative and only 6 were positive, this trend is led by tech and industrials.
Overall, analysts are still expecting growth in sales (2.5%) and EPS (3%) for 2023. EPS growth is expected to be higher than sales growth, which implies that margins overall would be expanding.
You may be wondering why I keep talking about analyst estimates when I’ve said many times that they’re unreliable. The reason I say they’re unreliable is because they’re a lagging indicator; when things are good, analysts project things to continue to be good at around the same rate for the foreseeable future.
It takes a long time for longer-term forecasts to change, and now we’re at the inflection point where this is happening faster. Since we’re coming off a huge jump in sales and earnings growth across the board in 2021 and at least part of 2022 depending on the company, there’s still a lot that hasn’t been priced in, and I think analyst estimates will continue to fall throughout the year.
Eventually, analyst estimates will get to the point where they’re obviously too low, just like they were obviously too high beginning in early 2022. They stayed way too high for a while, and started really coming down in Q4.
Since we’re now seeing that initial acceleration in the reversal of the estimates, and it’s backed up by major companies’ deteriorating results, it tells me that the market action so far this year is solely focused on the Fed decreasing rates, and just about nothing else. You also have to wonder how much their policy will be changed by the jobs report today; whether or not you consider that data to be valid, it seems like the Federal Reserve does, and they might come out saying they need to raise more in March if it stays strong. I won’t go any farther into macro stuff today, but definitely take a look at Wednesday’s article for my thoughts on that.
So again, where does this leave growth stocks? I’m still looking at the same criteria I have been this whole time. I believe that despite any noise in the short term, the growth stocks that will outperform into the next bull market are the ones that have qualities such as:
They hold (and more importantly, show that they’re able to retain) a large market share in their respective industry and have increasing margins. If their margins are getting worse, management needs to have a solid plan for fixing it.
If they’re not profitable, they need to either be consistently cash flow positive and have a very good balance sheet (lots of cash, low debt, low intangible assets, etc.) or on a very fast track to becoming cash flow positive. If they’re not cash flow positive, it’s even more urgent that they have a ton of cash as runway.
They’re producing consistently high sales growth than their competitors and growing their customer base as well if applicable. It’s also good if they have a relatively small segment in their business that’s growing way faster than their overall top line.
There’s no doubt that we’re seeing weakness in certain important sectors of the economy. However, it’s entirely possible that growth investors will begin to shift out of these stocks and into the ones that are still growing at a fast rate, which applies to just about all of my 21 Disruptors. So far, only 2 out of the 19 stocks in the list (excluding BTC and ETH) have reported their Q4 earnings, and I’m very excited to watch the rest report over the coming weeks. It’ll be a lot at once, but I’ll send out consistent updates on what I think of their reports.
Would love to see your top picks Ian!