Earnings season is back in full force, and it’s been a wild ride already! As I noted last week, I expect that analyst forecasts are far too bright for 2023, and some key sectors I’m watching are semiconductors, housing, and tech. Of course, I’ll also be covering each earnings report of our 21 Disruptors Index (which is only 19 reports excluding BTC and ETH). The only Disruptor that reported this week was Tesla.
Today, I’m going to go through earnings of some housing and semiconductor companies, as well as go through Tesla’s earnings report. I usually give a macro overview each week as well, but I plan on sending out an update on macro news next Tuesday since there’s so much to go over with earnings.
As I’ve mentioned over the past several quarters, cyclical stocks should be at the forefront of everyone’s radar to get a gauge of where we are in the economic cycle. Demand for housing and chips are great economic indicators, so I think there’s a lot that we can get out of their earnings reports and forecasts.
Housing Earnings:
First, we’ll go over housing. We all know this has been a weak area of the market for a while, and the last thing to fall in the housing market is always actual home prices. That trend is set by homebuilders, and then existing home prices follow new home prices.
Home prices have yet to fall meaningfully, but it looks like that trend will accelerate more as we move through 2023.
We can see this in the recent data reported by 3 housing companies: Lennar, DR Horton, and KB Homes.
There are 3 key metrics to look at here: backlog, new orders, and cancellation rates.
We’re going to go through each of these three metrics for the three companies I listed above to see how they changed in 2022:
Backlog:
DR Horton: decreased by 46.3%
Lennar: decreased by 20.6%
KB Homes: decreased by 27.3%
New orders:
DR Horton: decreased by 37.8%
Lennar: decreased by 15.1%
KB Homes: decreased by 80.4%
Cancellation rate – the % of new home orders which are cancelled:
DR Horton: increased from 15% to 27%
Lennar: increased from 12% to 26%
KB Homes: increased from 13% to 68%
All of these numbers are bad, but KBH stands out as being the worst in new orders and cancellation rate by far.
However, these numbers haven’t shown up as much in the headline data yet. In fact, KBH’s sales and EPS were up 15.8% and 29.3% in 2022! But in 2023, there’s a very good chance we’re going to see big drops in these numbers.
Surprisingly, homebuilder stocks have held up very well, with ITB up 34% since October 21st. However, I still hold the opinion that housing stocks are bound to fall a lot more this year as earnings outlooks continue to worsen.
Chip Earnings:
Next, we’ll go through some of the big-name semiconductor companies that have reported their Q4 earnings.
Chip Testers:
ASML, Lam Research, Kla Corporation, and Teradyne are some of the biggest semiconductor testing equipment companies in the world. The companies that make the test equipment are usually less turbulent and generally have higher margins, but even some of these are seeing big downward revisions in estimates.
For the most part, the margins I reference are still higher than they were pre-covid, but lots of data is falling back to earth now and I believe earnings will be no exception.
ASML:
ASML looks to be the healthiest of this group by far, but margins are still sliding
Overall, revenue grew 21% YoY in Q4, and it’s expected to grow another 25% in 2023
However, gross margin fell from 54.17% to 51.49%, and operating margin fell from 36.45% to 33.03%, meaning they’re going to have to look at ways to cut costs
Lam Research:
Over the past year, gross margin has fallen from 46.8% to 45.03%
2023 estimates continue to get worse
Over the past 5 months, analysts’ expectations for 2023 EPS have dropped from $34.95 to $24.35, and revenue estimates have dropped from $18.63b to $14.34b
They also announced that they’re laying off 1,300 employees, which is the first relatively big layoff I’ve seen in the semiconductor industry
Teradyne:
Bad Q4 numbers – sales dropped by 17.3% YoY, gross margin dropped from 59.55% to 57.45% and operating margin dropped from 29.12% to 22.44%
Q1 revenue estimates from Teradyne are $590m, which is lower than the analysts’ estimate of $622m
Analyst expectations for 2023 EPS have fallen from $3.92 to $3.39 in the past 6 weeks
KLA Corporation:
Revenue jumped by 28% in 2022, but gross margin fell from 61.4% to 59.5%, and operating margin fell from 41.06% to 40.19%
Analyst estimates for 2023 forecast revenue to drop 16% and EPS to drop 27%
Chip Makers:
In addition to the semiconductor testers, there’s also the companies that actually make the chips. These are more cyclical, meaning they tend to have way more volatile swings in revenue and EPS growth, as well as margins. Here, we’ll go over 3 chip giants that have reported their Q4 earnings – Taiwan Semiconductor, Texas Instruments, and Intel.
ASML management noted in their earnings call that demand from their customers has weakened, and they expect this to continue through the first half of 2023. This is a big signal, as ASML is the 30th largest publicly traded company in the world and valued twice as high as any other chip testing company. We’re seeing this play out in some of the major chipmakers this earnings season, and it likely will continue to be a trend in 2023.
Taiwan Semiconductor:
Taiwan Semiconductor had a great 2022; their sales were up 29% and EPS were up 60%
2023 looks like a different story – over the past 6 weeks, analyst estimates for the first half of 2023 have fallen steadily
Estimates for EPS have dropped from $2.63 to $2.33 (21% drop from 1H 2022), and sales estimates for the first half have dropped from $36.7b to $34.1b (1.8% drop from 1H 2022)
Given that sales are only expected to drop 1.8% but profits are expected to drop by 21%, margins are expected to get considerably worse over the next 6 months
Texas Instruments:
For Q4, revenue was down 3% and EPS was down 6% YoY
Over the past year, gross margin fell from 69.33% to 66.1% and operating margin fell from 51.55% to 47.62%
Q4 is usually their strongest quarter, but this time, revenue fell 11% from Q3 as demand plummeted in December – they expect that demand to stay low in Q1
For 2023, EPS is expected to fall 21%
Management said they expect that weakness to continue into Q1 as a lot of their customers are trying to decrease their inventory levels, which is a big hint that deflation will continue in this area
Intel:
In 2022, gross margin went from 55.4% to 42.6% and operating margin went from 24.6% to 3.7%
Intel’s Q1 2023 revenue forecast was $11b, which was 18.3% below analyst estimates and down 46% from Q1 2022
Analysts’ 2023 estimates for Intel have plunged over the past 4 months, their EPS forecast has dropped from $1.94 to -$0.68, and revenue expectations have dropped from $68.7b to $50.8b.
Overall, semiconductor companies are seeing tightening margins and 2023 outlooks look pretty bleak even for the largest and best companies out there. Considering the growth we’ve seen out of a lot of chip companies over the past few years, coupled with massive inventory increases in 2022, this shouldn’t come as too much of a surprise. Overall I expect it’ll be deflationary and that EPS will trend down for the foreseeable future. Chip stocks have been on a big rally recently, with SMH up 22% since December 28th. But considering that these prices are extremely sensitive to margins, which look to contract bigtime in 2023, I don’t expect that rally to last too much longer.
Tesla:
I put out a thread on Twitter on this, but in case you haven’t seen that, I wanted to go over it again here. To put it plainly, Tesla had an amazing 2022, and 2023 should be an exciting year as they continue to roll out new products and scale their new gigafactories in Berlin and Austin.
To keep things simple, I’ll put it in outline form and split the report up into 4 sections: sales/production, margins, other, and concerns.
Sales/production:
So far in January, orders are twice the rate of production and the strongest in company’s history
Sales - $21.3m, up 33% YoY
Cars produced – 439,701, up 44% YoY
Cars delivered – 405,278, up 31% YoY
Energy storage deployed – 2,462 MWh, up 152% YoY
Margins:
Overall mixed – gross margin down due to lithium price increase and initial costs of ramping production in Austin/Berlin gigafactories
Operating margin up as overall scaling continues to drive costs down
Gross margin – 23.8%, down from 27.4% YoY
Operating margin – 16%, up from 14.7% YoY
Margins still way better than any other automaker
Other:
Expect 1.8m autos produced in 2023, ~38% increase YoY
Plan to start Cybertruck production in mid-2023, won’t be significant until next year
Insurance now at $300m annual run rate, growing 20%/quarter, 17% of Tesla customers are using it in available states
Dojo supercomputer expected to be competitive with Nvidia’s H1 by end of 2023, goal is to improve energy efficiency
Balance sheet generally strong - $22.2b in cash/equivalents (up 25% YoY) vs total liabilities of $36.4b
Concerns:
Days of inventory unsold – 13, up 225% YoY – if demand is so strong, this should correct itself, but something to watch
Gross margin probably will stay lower for a while due to lithium prices and gigafactory efficiency ramps
Inventory - $12.84b, up 123% YoY – outpacing production
If you noticed, the subtitle to this article was “The Good, The Bad, and The Ugly.”
The Good = Tesla
The Bad = Semiconductors
The Ugly = Housing
That’s all for this week! Next week will be just as crazy with the Fed meeting on Wednesday and big tech earnings on Tuesday and Thursday.
Because of everything going on, keep an eye out for 2 articles. On Wednesday, I’ll go over some recent macro data, and I’ll provide another earnings recap on Friday.