Episode Summary: In this week's episode, we cover CEOs not seeing a downturn as imminent from their data, the challenging ad environment for Snapchat, and look at the week ahead in tech earnings.
The episode is based on yesterday's newsletter which is available on Substack.
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Show Notes
00:00:00 Introduction
00:00:15 CEOs not seeing a recession
00:02:40 Not as bad as expected
00:04:26 Tech earnings ahead
00:07:14 Conclusion
Episode Transcript
CEOs not seeing a recession
[00:00:00] Scott: Welcome everyone to a new episode of The Transcript podcast. You've got me, Scott Krisiloff, I'm editor of The Transcript, along with Erick Mokaya who's our lead author. We sent out a new issue of The Transcript yesterday and last week was the first really big part of earnings season.
CEOs not seeing a recession
And what we saw was really positive commentary, pretty much across the board from companies saying that they don't see any signs of recession out there. So when they're looking at what's going on with their customers, with the consumer, spending seems to be strong. People seem to be confident. People are concerned about a recession. They say I've seen this quote probably half a dozen times now that everybody's reading the same headlines and people are concerned about recession, but when you look at what's going on at our company we're not seeing it. So that is probably the biggest story of the week. What do you think, Erick?
“We’re not seeing the stress. And when we talk to our customers, they’re not seeing the stress in their business models yet” - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
"We're acquiring spending and we see future travel bookings [strong] so I don't see it [a recession] in my numbers at all. It's really hard for me to get my head around that in quarter three or quarter four we're going to have a big slowdown." - American Express (AXP 0.00%↑) CEO Stephen Squeri
[00:00:51] Mokaya: The standout quote was the American Express, who were saying that they're acquiring spending and seeing future travel bookings. They're seeing them as very strong currently. I think in the last part of the quote, he says it's really hard for me to get my head around that in Q3 or Q4, we are going to have a big slow down. It's in the same vein as a Citigroup CEO the previous week who said something like in the data currently, at least they're not seeing the signs of a recession. So the Fed is meeting this week. So I'm not so sure if they're also seeing the same data. Spending is still strong, everything seems to be doing well. So it feels like… it gives the Fed a little bit more leeway to raise rates again. What do you expect going into this week looking at the data that you've been seeing at The Transcript so far?
"If you look at our customer base, the consumer is posing the greatest benefit to the fed and the greatest trouble in that they're employed, they're earning money, spending money, have lots borrowing capability and they have more money in their accounts at the end of June than they had at the end of May, multiples of what they had pre-pandemic. So that makes the Fed's job tough because they're trying to slow down this wonderful thing we have called the American consumer, whose spending helps drive our economy and it's going strong right now. up double digits for the month of June and frankly double-digits for the first few weeks of July over last year's July” - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
[00:01:37] Scott: Yeah, I mean. We've talked about this for the last few weeks on the podcast, that the data that we're seeing that companies are seeing or is really coincidental data. And yes, the economy is strong right now. This was Jamie Damon’s thought really that even though the economy is strong right now, and there are leading indicators that suggest that a recession may be coming. I've tended to agree with that sort of thinking. Most specifically, because the Fed has been tightening and has signaled that it's continuing to tighten. This week I started to think maybe this isn't really as much of a coincidental indicator as the market not really seeing the picture fully that the economy really is strong. And that that may be able to persist rather than turn into a recession.I don't know. I'm still not fully resolved on this, but this week was really a striking consistency of quotes and clear message that was being sent by the companies, which I usually try not to ignore.
Not as bad as expected
[00:02:40] Mokaya: Yeah. I mean. Across the board, you see a lot of companies saying that they're doing well. And one of the surprising one I think for me this week was Blackstone, which is also in the middle of fundraising and it's raising money at a really incredible pace. And they say that from what they're seeing, there's a lot of dry powder even in venture and the PE world, so to speak. We may be wishing a recession on ourselves at the end of the day. From what you read in the transcripts so far, it feels like most companies are doing well. Unless you are a company like Snap or Netflix that is losing consumers. Maybe a quick one on ad spending and the Netflixes of this world, they reported last week. And I think the theme was that they lost fewer subscribers than expected. They were supposed to lose, I think, 2 million and they lost a million and that was better. And the stock price rallied on that results. So I kind of feel like for some of these companies, this quarter is - - if it's not as bad as we expected, then the market's going to be really happy for you. So any thoughts on that, Netflix, Snapchat, especially that reported last week?
"...we're talking about losing 1 million instead of losing 2 million. So, our excitement is tempered by the less bad results. But looking forward, streaming is working everywhere. Everyone is pouring in. It's definitely the end of linear TV over the next five, 10 years, so very bullish on streaming…So, tough in some ways, losing 1 million and calling a success. But really, we're set up very well for the next year." - Netflix (NFLX 0.00%↑) Co-CEO Reed Hastings
[00:03:41] Scott: Yeah, I think that that's a really good point that we're seeing in earnings season here is that even if companies are reporting pretty negative numbers, the pessimism has been baked in for many companies, especially in tech. And so for Netflix to report a million lost subscribers, but have the stock still rally is a pretty strong signal about where we are with respect to the decline in prices. That said, Snap obviously was down 35% or more with its earnings released on slowing advertising and growth. So it'll be interesting. You know, Facebook is really the bellwether to me here. And so watching what happens with that stock this week also, I'll be watching Apple very closely.
Tech earnings ahead
Obviously, we've been seeing signs of decline in PC and smartphone sales. We've seen many indicators of that. And so whether or not that's appreciated by the market right now is another place I'm watching closely this week actually.
"Within the legacy market, revenue was $489 million, down 24% sequentially and 43% year-over-year. The decline was most pronounced in the client PC end market, which now represents a mid-single-digit percentage of our overall revenue. Consumer demand also deteriorated more than anticipated, reflecting the sharp rise in inflation impacting consumer discretionary spending" - Seagate Technology (STX 0.00%↑) CFO Gianluca Romano
[00:04:42] Mokaya: Yeah, it's a pretty big week in tech earnings this week. Of course, what we've been seeing the past few weeks is that obviously, the PC market is slowing down. I saw a headline on Bloomberg that said it's something like Apple may be thinking of having discounts on some of their devices in China. That ties into what we've been seeing lately, in terms of slowing down demand for PCs and smartphones. That may actually combine to make up a tough quarter. They're trying to tap into discounts and that's something that you rarely, if eve,r hear Apple talk about. What's your feeling going into this tech week?
“The 4 megacap companies reporting this week [Google, Facebook, Microsoft and Amazon) comprise 20% of the SP 500’s market cap as of July 22, ’22, and probably close to 13% – 14% of the benchmark’s earnings weight, so the coming reports this week are a big deal” - Fundamentalis
[00:05:21] Scott: Yeah. I mean, there's a lot of data points that are not super positive data points that we've been picking up around this one of which again, on Snap, the advertising spending is slowing. I think this has been a long time in the making that we've seen for social media platforms having a harder time targeting customers or targeting users for advertising with the changes that Apple made to its platform. There's a lot of headwinds that they're still working through. So we'll see how it goes this week. But then the flip side of that is there's a lot of pessimism that's already baked into some of these stocks. So Facebook, you know, is like 12 times earnings or something like that right now. So they're cheap relative to historical earnings. There are also pretty high operating leverage businesses. So if there is a decline in advertising spending, for instance, based on it being a macroeconomic cycle, which advertising is cyclical you would expect earnings to fall for a company like Facebook, for instance.
"I think it's probably a good opportunity to step back and discuss how the overall demand environment is materializing. As you noted, we have seen a pretty good deceleration over the last 90 days. And as we noted in the shareholder letter, we've seen that across our DR and brand businesses as well as a number of sectors. But over a longer trajectory here, we've observed a fairly steady deceleration in demand over the last year." - Snap (SNAP 0.00%↑) CFO Derek Anders
[00:06:20] Mokaya: So then again, the same thing will continue then. If you're not as bad as we expect, we'll be happy. If you are worse than we expect, definitely the market is ready to beat you down.
[00:06:33] Scott: Yeah. And I mean, again, I think that's been the striking thing for me this quarter is that even though earnings have been pretty negative the market has reacted somewhat positively to the news. And so we certainly reached the spot of extremely heightened pessimism sometime about three weeks ago now, probably maybe even four. And we are either maybe just rallying off of that pessimism and still planning, you know, and still potentially falling back down or, you know, this could be a longer-term bottom. I think a lot of that will depend on Fed policy again and whether or not the Fed is really moved from being a put to a call as we've talked about in the past as well.
Conclusion
[00:07:14] Mokaya: So interesting week ahead with tech earnings and the Fed. So be right here at The Transcript to have a look at it. We should end there for this week. See you again next week as we continue with the earnings season. Bye from us.
[00:07:25]Scott: Thank you. Bye.
Tech Earnings Week