Welcome to Episode 29 of The Transcript Podcast. This is a special episode as it is a recording of a Twitter Spaces conversation we held on Friday, 13th August with two special guests Sam Ro and Alex Morris.
Look out for more such episodes where we bring in special guests to help us explore specific themes.
The Podcast is available on Apple Podcasts, Google Podcasts, and Spotify among other platforms and channels.
Episode Summary:
In this episode, we discuss the key themes that we took note of in Q2 2021. The episode is brought to you in partnership with Quartr and Koyfin.
The episode accompanies yesterdays’ newsletter which is available on Substack. A transcript of this podcast, with relevant images and quotes, is available, for subscribers only, after the show notes below.
Show Notes:
00:00:00 Introduction
00:00:54 Q2 in review
00:07:35 Inflation and increased consumer uptake of prices
00:11:13 Excess savings and higher consumer spending
00:16:19 Tight supply chains to continue into next year
00:18:00 COVID, the Delta variant, and vaccinations
00:21:35 Digitization and the unfolding future
00:27:09 Key surprises from Q2 results
00:34:15 Q3 outlook
00:37:25 Why we read earnings transcripts
00:41:49 Closing remarks
Episode Transcript:
Introduction
[00:00:00] Mokaya: Welcome to this Q2 earnings review. My name is Erick Mokaya. I'm based in Sweden and then we have speakers here today. I'll ask Scott to introduce himself and what he's been up to in The Transcript for these many years.
[00:00:13] Scott: Hi everybody. Thanks for joining us on this Twitter Spaces. I founded The Transcript before it was Avondale earnings call notes probably about seven, eight years ago now. And Erick Mokaya and I have been working on this together for about 75% of that time. And we rebranded as The Transcript. I've been distributing it, and I think a lot of you probably read it. So thank you to everyone who reads it and listened to our podcast and everything. I'm excited to be doing this today.
[00:00:42] Sam: Hi, I'm Sam Ro. I'm the writer of the Axios markets newsletter. And like Eric and Scott, I listen to a lot of these earnings calls. So there'll be lots of fun stuff to talk about.
Q2 in Review
[00:00:54] Mokaya: All right. So maybe Scott you can give us a bit of a rundown of just the quick things that you picked up in the Q2 earnings calls.
[00:01:00] Scott: Yeah, I think as probably a lot of listeners or readers know, we break down each week on The Transcript in sections. So we have a macro section that leads it off and then we've got a bunch of industry sections below. So I think that may be the best way to go through this too, is start off with the macro and the big trends of the second quarter which we saw throughout earnings calls.
Erick and I on our podcast have been talking about this as earnings as an economic euphoria that we've had for the last quarter. Ever since people have been getting vaccinated and moving back out into the world and enjoying travel and restaurants and friends and family there's been a huge amount of economic activity. And a lot of people have pent-up savings from stimulus and things like that. And that pent-up demand getting unleashed on the supply chain, causing shortages in the supply chain and inflationary pressures. That's been the story of the last quarter.
"Ever since people have been getting vaccinated and moving back out into the world and enjoying travel and restaurants and friends and family there's been a huge amount of economic activity. And a lot of people have pent-up savings from stimulus and things like that. And that pent-up demand getting unleashed on the supply chain, causing shortages in the supply chain and inflationary pressures. That's been the story of the last quarter" - Scott Krisiloff
[00:01:54] Sam: Yeah. I think something that's been really interesting is, like you said, lots and lots of mentions about inflation, cost inflation, rising wage costs. And then at the other side of this, you have all these companies that are reporting record profit margins. You know, I think some of the analysis will tell you, well, they're actually, there is a little bit of a lag between these companies complaining about rising costs and so maybe the profit margin pressure starts to show up in Q3 or Q4. But clearly based off of the earnings surprises relative to analysts’ expectations I think to some degree, people were surprised by how little these rising costs actually ended up affecting these companies. And I think something a little bit kind of interesting more recently, and maybe this is going to be coming up in your next newsletter make sure you guys subscribe to The Transcript, that's really good. But something that we've been looking at paying really close attention to especially in the last week is, anything companies have been saying about how the spike in COVID infections is affecting business in any kind of way. And I don't know what you guys have been reading, but based off of the handful of earnings transcripts and earnings calls that I've been paying attention to this week, for the most part, businesses seem to not be that affected. Like a lot of what you're hearing about late July and even like the last couple of weeks is consumers are still out there shopping. They're still going to retail stores. I don't know if you guys saw this the other day. The Bumble CEO came on and said activity is actually increasing on their dating app. There were a couple of other earnings calls this week.
Yeah. There were two companies, Aramark and Cisco. You guys will recognize these as the brands that are on the side of trucks and stuff that supply food to college cafeterias and ballpark stadiums and stuff. They were talking about the last couple of weeks. There's no slow down in activity when it comes to entertainment venues and sporting arenas or universities. Everyone seems to still be on track to either reopen or stay open. For the most part, everyone seems to be operating business as usual, even with the spike in the Delta variant infections.
"we are seeing some customers differ their reopening dates by 30 to 60 days and we're seeing that in the B&I sector. But I think people are still taking a wait and see attitude based on the timing of the Delta variant and what impact it might have on their businesses" - Aramark CEO John Zillmer
[00:04:31] Alex: I'll hop in real quick. My name's Alex Morris, I run the TSOH Investment Research Service on Substack. You can find it on my Twitter page. I'd say, yeah, my takeaways so far have really been along those same lines, you know, for me this quarter really started out with some of the banks. And something that stood out from Bank of America and Wells, they effectively said that their credit card and debit card spend among their customers, meaning tens of millions of people was up more than 20% comp to the first half of ‘19 against obviously, you know, a normal period.
So that was a number that, that stood out to me really early. And we've seen a bunch of retail results that kind of paint the same picture. You know, DG, Walmart companies that sell a lot of basics, a lot of food, things that people have to buy all the time to your stacks in the mid-teens, which is, I mean, just a crazy number. Five below home Depot, kind of less essential stuff, but even better comps on two-year stacks. So that's, that's been really interesting and I would say Comcast theme park commentary and Disney theme park commentary was kind of along the same lines. The other key thing that's standing out to me is this idea of digitization and the world kind of changing and it's accelerated as a result of COVID. And I think Satya Nadella, Microsoft, has his comment that digital adoption curves aren't slowing down. In fact, they're accelerating. I mean, I think you see it in the results when you look at a company like Microsoft, a company like Amazon, Facebook, Google, et cetera. So it's really interesting.
"In a secular basis...I always go back to that number, which is 5% of the world GDP is tech spend, it’s projected to double. I think that doubling will happen in a more accelerated pace. And we feel well-positioned because of the innovation across the stack. Because if you think about it, what’s going to happen is every business, whether you’re a retailer or a manufacturer, in the service sector, public sector or private sector, digital adoption is the way you’re going to be both, resilient as well as transform the core business processes" - Microsoft CEO Satya Nadella
[00:06:03] Mokaya: Something I can add to Sam, I think the same thing that we saw in some of the companies, especially in The Transcripts that we had last week, we also noticed that consumer spending is actually still holding up. I think they gave us some statistics for July and June and with post Q2, it seems like especially things to do with travel, they are kind of holding up steadily. But then moving on, I think the worry is mostly about schools reopen this month and next month. So as unemployment benefits come to an end, I think they're watching very closely how things develop, and especially the data comes in going into August and September. So I think that's a key thing to watch out for as we go into the next quarter.
[00:06:48] Scott: Yeah, I mean, I think I agree with everything that everybody's saying. One of the key things that Mokaya just hit on that we've been thinking about is how things change after labor day. And we've had this interesting confluence of events here in the US economy, especially where everybody basically got vaccinated in the spring. And so you had this surge and ability to go places, not only the weather getting nicer and people, you know, partaking in more social activities during the summer than they do in other parts of the year anyways. It'll be interesting to see as we get past labor day kids potentially going back to school if people basically take an opportunity to take a breather from the type of activity they've been they've been partaking in.
Inflation and increased consumer uptake of prices
But at the same time, there's a lot of money in the system. Asset prices are up, people's wages are up and people are feeling more flush. Until you have feelings of inflation to the extent that they actually impact people's feeling of their purchasing power, I would expect consumption to continue.
[00:07:56] Mokaya: Yeah. On the aspect of inflation, something else that we saw, and I think we've been talking about this a lot with Scott, is that several companies are saying that inflation is actually higher. I think they’re experiencing more price increases and a lot of them actually planning to increase prices, even up to January next year. There is a bit of a disconnect between what the companies say they're seeing and then also when you read about the Fed and then I'm sure Sam Ro writes a lot about this, so maybe he can comment a bit more about it.
"We’re seeing what seems like inflation across the board. Four months ago, no one was talking inflation when we had our call. Now everybody is talking about it. And you are hearing even the retailer is talking about taking price. If we continue to be an inflationary environment in 2022, there’s probably more price increases" - B&G Foods CEO Casey Keller
[00:08:24] Sam: Yeah. So we know, we know about cost inflation, and we know a lot of them are saying that they're raising prices. But the other thing that a lot of these executives are really proud to talk about on their calls is that their customers are taking the prices. There's a high uptake of these prices. It'll be interesting to see exactly how this shows up and things like the aggregate inflation data. It's going to be interesting to see how this stuff translates into the aggregate data. I wasn't really keeping that much track of like what the different industries were, who were talking about increasing prices, but you know, the other day you see this big jump and the producer price index wall that that's like very disconnected from what the consumer price index looks like. I dunno, do you guys think this is a function of like manufacturers and companies who are actually absorbing costs instead of passing it onto like the consumer or, you know, what, what do you think is going on there?
“I would lastly just say, the pricing that we’ve taken this year, roughly around 6% or so I think in the U.S., that is about in line, maybe a little bit ahead of where the overall inflation is when you add in the labor inflation with food inflation” - McDonald’s Corporation CEO Chris Kempczinski
[00:09:30] Scott: Yeah, Sam actually, as you were talking, the quote that stood out in my mind that I read last quarter was from McDonald's where they were talking about taking price on their food items by 6%. But they were only seeing cost inflation themselves of like 2%. So their margins were expanding to a point. And I thought when I read that, I thought of it as McDonald's having so much pricing power against their suppliers, that they were able to hold back and push inflation back onto their suppliers. And so I think it's natural. We're reading all of these large multi-billion dollar companies talking about inflation. They're going to have the most pricing power over like small and medium business suppliers or fragmented consumers. I think in the story of earnings calls, you're just not hearing about the people who are really eating inflation at the end of the day. And I think we did have a really good quote on that in one of the transcripts too, about who ends up eating the inflation. I can't remember which company that was from. Maybe Eric you remember.
"We know what happens in an inflationary environment that way, somebody pays for it. It’s usually the consumer, which means, right, that price increases get passed along all the way to the end to the consumer until the consumer says ouch, I am not going to buy anymore" - United Parcel Service CEO Carol Tomé
[00:10:32] Mokaya: I don't remember specifically, but what I’ve seen in earnings calls are mostly maybe CEO saying that the consumer is okay to take some of the price increases because they understand the situation that is arising in terms of the supply chains be very tight and that they have to kind of pass on these costs to them. So that surprised me because I mean, you don't get to hear directly from the consumer, but at least the CEO is saying the consumer is taking it well, and they're okay with the price increases so far, and they’re understanding of the lags in the supply chains. And they're okay with receiving products a bit later than they expected. So I think that was surprising to me. I don't know what Alex has to say about that.
Excess savings and higher consumer spending
[00:11:13] Alex: No, I think the willingness and propensity to spend apparently is there, I mean, I'm thinking of Disney's call yesterday. Last quarter they said that per cap spending at the domestic parks was up double digits from the 2019 comp. This quarter, their wording suggested the per cap for even stronger. So the people who show up to the parks are just spending significantly more money than the people who were there in that same position two years ago. And, you know, it just aligns with everything I've seen in terms of retail data. It just seems that for whatever reason, people have a lot of money to spend right now, I don't totally understand all that stuff. I don't track it all very closely, but it's definitely happening.
[00:11:59] Sam: That's actually something we've been following for a little bit. So, you have this concept of excess savings, right? So, a couple of different economists will track this kind of differently, but it's this idea it's, it's basically based off of this principle of the degree to which income was outpacing spending. And the more income outpaces spending or the more spending pulls back more so than income, that gap represents the personal saving rate or the household saving rate, whatever you want to call it. And so, that amount of saving was something that was actually increasing very significantly during the pandemic. And you know, it makes sense if you think about it, right. If you're on lockdown, you have limited options to spend. You're certainly not going to Disney World in April 2020 or May 2020, right? So, a lot of this money, and let's also not forget about stimulus checks and unemployment benefits and all these other forms of income through transfer payments and stuff.
But the bottom line being that since March of 2020 consumers have accumulated something in the order of $2.4 trillion in excess savings. So what does this mean? Well, it means that consumers just have a lot more flexibility to spend, and just from a straight psychological standpoint, if you had to cancel your Disney World plans last year, and you didn't take a vacation, when you do go this year, you'll probably spend a shitload more. Instead of bringing sandwiches and eating in the parking lot, you might actually go inside and order from the Disney restaurant and eat the $25 cheeseburger or whatever it is. But yeah, consumers, I mean, listen, this is not universal. Like there are a lot of people who are out of work and suffering and struggling, but at the aggregate level it looks like, it seems to be the case that people just have a little bit more money than they did before the pandemic.
[00:14:07] Alex: I just think it's the sustainability of a lot of these numbers that's just really surprising to me. And just to pick a specific example, Dollar General reported 16% comps last year for the fiscal year. They just reported Q1 a couple of months ago, but their guide for fiscal 21, which still has eight, nine months to go, their guide is basically a low single-digit decline. So on a 2-year stack basis, it just seems like this is pretty sustainable. And again, think about the type of businesses, think about the type of customers that they see every day. It's just really surprising. But apparently, it's gonna happen.
[00:14:46] Scott: The numbers certainly do seem unbelievable in magnitude for a lot of, not just the retail comps, but like house prices running at a 25% increase year over year. Are people's incomes going up by this much? Like, are people really making that much more money or it's the segment of society that owns asset prices clearly that there's a lot more purchasing power?
[00:15:13] Sam: I think it's a little bit of both, right? I mean, cause here's the other thing that, and I'm sure we're going to speak a lot more about this, but don't forget that there are shortages for everything out there. Shortages for houses, shortages for cars, shortages for literally everything. So what we're looking at is probably distortions based on the fact that demand is just far outpacing supply. So there's plenty of people who are certainly getting priced out of the market and they complain about it on stuff like the University of Michigan sentiment survey, where the historic numbers of people who are outraged by how expensive stuff like cars and houses have gotten. But on the other side of the data, we're also seeing prices go up because there's still a healthy amount of demand. So I think some of this, a lot of these prices is a reflection of the imbalance in supply and demand. But that said, yeah, it does seem to be the case that people collectively have a little bit more money.
Source: Axios
Tight supply chains to continue into next year
[00:16:19] Scott: Sam brought up a good segue into the supply chains and things that we're seeing there. And, you know, that's something we've documented throughout the quarter, too. I think for at least the last month and a half, Eric and I have been looking for signs that the supply chain is healing and I still don't have good consensus from any of the earnings calls that I'm reading that there's green shoots. So it seems like the consensus is more that the supply chain is going to be tight through the end of the year, into next year, not only in semiconductors but all the other things that we're watching right now. I'm curious if you guys are seeing the same thing.
[00:16:56] Mokaya: I agree on that. It's especially expected auto companies to have.. they had guided that Q2 would be the trough, but what we have seen in most of the calls is that Q3 may actually be tougher in terms of they're not getting what they want to produce the products that they need to. So I think we haven't seen any companies and maybe one or two here and there that say maybe it's easing up, but generally the consensus is that going into Q3 and Q4, the demand will still greatly outpace the supply.
"As for semiconductors, the situation does remain fluid, and the supply chain continues to be impacted by events like what is happening right now with the COVID spike in Malaysia." - General Motors CEO Mary Barra“we expect our capacity will remain tight throughout this year and extend at least into 2022 ”- Taiwan Semiconductor CEO C. C. Wei
[00:17:24] Sam: Yeah. Two reports that are worth following the ISM surveys and then the market PMI surveys where they actually have that sub-index of supplier delivery times. And that's sort of a pretty good proxy for.. like a one-measure proxy for supply chain issues. And the amount of time it's taking to get raw materials and goods to stores and manufacturers and all this stuff at least through July has continued to increase.
COVID, the Delta variant, and vaccination
One of the calls this week actually that I thought was really interesting was Callaway golf. I actually don't remember if that's actually the name of the company, but whoever does Callaway golf, they had an interesting call because they were being asked specifically about if they are being affected at all regarding the Delta variant and the spike in COVID cases in recent weeks. And you know, I think that call probably best captures the state of the world right now because the CEO comes out and says they are seeing no change in demand for their golf clubs and golf balls and all that stuff that they saw. And they also said that foot traffic to the retail outlets that sell their equipment has seen no noticeable negative change. If anything the demand is increasing despite the spike in COVID cases. But one thing that he did mention, and I think this was in the press release too, was that they see an increase in issues in their supply chains because of the Delta variant because they do supply out of places like Southeast Asia where the spike in cases is affecting things like manufacturing.
So I forgot exactly what they said. I think it was like 20 million in lost revenue opportunity in the second half of the year because of supply chain issues that are occurring overseas. So I think that's sort of where you make that connection between how the Delta variant is going to, I mean, I'm assuming most of this audience is like a US-based US-company type of audience, but in areas where consumer demand and stuff like that is holding up, where you are going to see that disruption is when people go to shop and the shelves are empty because of supply chain issues in regions where the Delta variant is actually disrupting the manufacturing process.
[00:20:10] Mokaya: I should say I'm based in Sweden. And then what you see is a bit of.. kind of a disconnect between the US and these international companies. You find that vaccination rates in Europe have been lagging a lot to the US for a while. So I think by the time the US was opening up in the summer, you know, it was a bit behind. There's a difference between the international trajectory of the virus and the trajectory of the opening everywhere as compared to the US so I think the US is way ahead in terms of that. So I’d expect as maybe more cases get to come up in certain regions of Asia, then that actually would cause a little bit of worry to US companies that have exposure to those parts of the world. Generally in Sweden, it didn't close down. So I think the economy still has been open as it was before the pandemic kind of. So there's nothing much that you could not here.
[00:20:59] Alex: Yeah. I haven't heard too many specific examples, but along that line of thinking, Spotify is a company that I follow closely. They talked about some impact in the quarter from countries like India and research in COVID cases. And I think Disney as well, you know, domestic parks have been something of a bright spot, at least as they start to return to something that resembles normalcy, but internationally, my sense, at least from really what they haven't said more than anything else is that the line to recovery there is much less clear and much less advanced than what it looks like in The States.
Digitization and the unfolding future
[00:21:35] Scott: Alex, you mentioned that trend towards digitization when you were first starting off. Curious to get more of your thoughts on that.
[00:21:42] Mokaya: And the metaverse.
[00:21:45] Alex: Well, I'm about as far from an expert as you can be on the metaverse. As a Facebook shareholder, I just find it really interesting how aggressively the company's investing behind this vision of where they think the world's going, and by aggressively, I mean, it sounds like they're probably spending a couple of billion dollars a year run rate at this point in time when something admittedly that's obviously at least a few years away from realizing that vision.
Another good example is probably Disney where they have a movie coming out here and in early September where they kind of have to set dates to release things obviously quite a bit before they actually do release them. And I think some of the commentary on the call suggested that they're kind of skeptical that it's going to do well. And I think that reticence to go back into the theaters even as vaccination rates and things like that are picking up, I think it probably reflects some of that development. It's this idea that the world is changing and in some way, consumer preferences are also changing as well. And some of that is not pandemic-related. It's probably going to be a permanent change. So I think you see that a lot of other areas obviously as well, like food delivery and things along those lines. So I think it's interesting to see how we might live quite a different world on the other side even if the vaccines and such address the issue.
[00:23:08] Scott: Yeah. It's interesting. A lot of you may know I'm an economic historian on top of this earnings call stuff that I've done. So, this period there's a lot of resonance to me in the period that was the post-World War II period where there was a reorientation of the economy, or there was all of this industrial capacity that was created in World War II from investment by the US government, obviously in producing tanks and planes and things like that to go fight the war. But then you came out on the other side and society had completely changed in terms of its industrial capacity.
And all of that went into consumer goods. And the similar analogy here is that in this pandemic, all of us had to spend even more time on the internet. The digitization trend was accelerated. And on the other side, we're probably going to keep working from home, keep ordering our food online to your point, Alex. And the world has kind of fundamentally changed here potentially.
[00:24:04] Sam: I mean it's interesting that the thing about movie theaters…I was talking to an economist a couple of weeks ago about jobs and how the jobs landscape is changing. She's not convinced that we're going to get back to pre-pandemic employment levels any time soon because of exactly what you're saying. That we've undergone a major economic transformation. I mean you just look at some…You take a step back and look at some of the data and some of the economic numbers and, I mean, considering the fact that we're back to a pre-pandemic run rate for GDP yet employment is still 6 million workers below where they were in February of 2020. So where the economy is producing at a rate it was, but with 6 million fewer workers. This same economist was telling me that during this period, because they couldn't go to the movie theater and because they had all these, a lot of these places were just allowing people to screen these things when they came out, she doesn't have to put her two kids into the car, they don't have to get dressed, they don't have to like tie in traffic. They don't have to find parking. They're not buying the $18 popcorn. And of course, they're not buying five movie tickets that's going to cost like $80. It's you stay at home, you microwave the $3 popcorn, you're in your pajamas, you have you can probably invest...Most people can probably, well, not most people, I don't know what the number is, but many people increasing numbers of people can buy gigantic TVs with great sound systems and you just turn the curtains down and suddenly you have a theater experience or something that's marginally less than your theater experience, but at a fraction of the cost. So this is not health, safety concerns, but maybe the pandemic has sort of fast-forwarded some of these behavioral changes that were probably inevitable.
[00:26:19] Alex: Yeah, I think along those lines too, this is more of a long-term trend, but I think not to mention Disney endlessly, but the way they talked about their parks business on this call was a clear indication of how they see their ability to use technology and data to make the experience at the parks better, but also to use it to segment the experience based on how much people are willing to pay if we're being honest. And I think you'll see that trend become more common as data truly becomes something that companies can use in an effective way. Another prominent example is Vail, the skiing and snowboarding mountain operators. They think about it very similarly. And I think that's a trend that as we continue down this path of digitization and everybody having phones in their pocket, you're going to see more and more of that unfold.
Key surprises from Q2 results
[00:27:09] Mokaya: Other than what you've covered so far, are there any other, like thoughts maybe you've had or key things that may have surprised you from the Q2 results and maybe I'll start with Sam.
[00:27:17] Sam: I think one of the most surprising things continues to be the expansion of profit margins. I think from the perspective of all the cost-cutting that happened last year and being able to pass on higher costs through price increases and stuff like that, I think everyone sort of expects that to a certain degree, but to have so many companies beat expectations by such a wide margin. And I understand that that's also a function of the analyst's ability to forecast this stuff. But the degree to which these companies were able to beat expectations while stock, while the market, while the stock market was at an all-time high, right? This was one of those conversations that everyone was having, going into earnings season, that all those expectations were already priced then. Cause we were at a record high before the earnings season even started. It blew away all those expectations on everyone's raising guidance for forward earnings now. So I think from that perspective, the stock market and the companies underlying the market have done a pretty incredible job of beating everybody's elevated expectations.
[00:28:31] Alex: I would tag onto those same comments, but I narrow it down to a single group, which I would just say as big tech, or FAANG. I think about Microsoft they reported Q4 FY21. Their FY21 revenues were up 18%. It was their best result in more than a decade. You know, as I tweeted the other day, Facebook's revenues in 21 will probably be about $60 billion higher than they were three years ago. But I think the incremental revenues in three years for this business are higher than Unilever's annual revenues, their total revenues. Amazon during the pandemic added more than a hundred billion dollars of incremental revenues in a year. And my sense from the Google results I haven't dug in, but my sense was that on a two-year stack basis where you try to X out the impact of COVID and get a clean comp, Facebook was up 70% year over year. And my sense from what others were saying was that Google was even stronger. So it's just amazing how big and dominant these businesses already were. And I know that the FAANG name has been going around for a long time, but the sustainability of these massively out-sized results is… it's kind of mind-blowing.
[00:29:40] Scott: Yeah. It is always surprising how money can seem to come out of areas that you don't expect to happen. Like the numbers don't always end up adding up with respect to like that TAM. I think again, going back to that post-World War II environment, something that always stuck out to me is that American GDP was like $100 billion dollars a year before World War II, shot up to $300 billion a year, all based on spending and borrowing from the US government over that time. And so the analysts at the time would say, okay, now that we're done with World War II, there's not going to be borrowing. GDP is obviously going to go back down to $100 billion dollars a year and just like through a confluence of inflation and also that greater, real industrial capacity, nominal GDP…I don't think, I mean, it felt like 10% or something like that, but we were well at like this new level. And that was just an example that always stood out to me of, you can do all the numbers as they are today, but then somehow new numbers come in, new spending comes in and I think that's the same dynamic that's going on here. When we're looking at 20% comps, 25% comps for companies just the old numbers don't really are not sensible anymore. They don't make any sense.
[00:30:57] Mokaya: Yeah. So if I were to add something, maybe that surprised me myself, it's something in the industrial section from the auto company. So, I think, something that Elon Musk said that electric vehicles especially are at an inflection point and that it has become consensus now that electric vehicles are the only way forward. You see these in a lot of the earnings calls, like the companies themselves shifting a lot to EV. And if they're not there, they are on their way there. When something becomes that consensus it's sometimes it's a little, it's a point at which you need to ask yourself a question, whether it's really true, that that's the way it's going to be. But then again, you see a lot of comments from companies. They also say that there's a lot of runway to go before all autos shift towards being EV-based and until then, oil is still going to be the main source of energy. Scott. You picked up on that yourself.
[00:31:52] Scott: Yeah, that, and actually one of my favorite catalysts of the quarter that I saw was in the Google quarter talking about commercializing the Waymo business in Phoenix, which I haven't really seen anywhere else, anybody talking about that, but that seems like a really big deal to me. Which is crazy. This is a huge catalyst. This is self-driving cars being commercialized.
“Waymo continues to build and commercialize the Waymo driver and grow the team. People love the fully autonomous ride-hailing service in Phoenix. Since first launching its services to the public in October 2020, Waymo safely served tens of thousands of rights without a human driver in the vehicle, and we look forward to many more” - Alphabet CEO Sundar Pichai
[00:32:15] Sam: I saw a TikTok from the Olympics showing people in a car, I guess they pulled over to help someone who needed medical attention, and then the self-driving car actually left without them. But I can't confirm if it was true and listen, I'm not a conspiracy theorist or whatever, but I think a lot of us would love to see a lot more tests before jumping in. But yeah, it's definitely made a lot of progress. Everything you see in terms of self-driving cars and AI and all the machine learning technology and all that stuff behind it has made tremendous amounts of progress. There's no question about that.
[00:33:01] Scott: On the automobile and the AI conversation, the electric vehicle comments to me this quarter felt like in 2010, the way we used to talk about digital distribution of movies, that it was like in five years, it'll be here and everybody will be doing yet. And lo and behold, I mean it's 10 years later, but we have a full digital distribution of movies that we didn't have when we were mailing away for DVDs. And it feels like 10 years from now, we'll look forward and look back and all of us will be driving electric vehicles. No more gasoline, really on the road to speak of.
"It also seems that public sentiment towards EVs is at an inflection point.And at this point, I think almost everyone agrees that electric vehicles are the only way forward" - Tesla CEO Elon Musk
[00:33:38] Alex: An interesting one from Disney today, as a lot of these companies are getting into new businesses, just a general comment, you know, speaking about their D to C opportunity, they essentially said we don't really know what the seasonality is like in this business. So as for guiding quarters, maybe that's not a great idea until we get our arms around it. It's just, for me, it was just a funny comment in terms of, we all obviously live quarter to quarter because that's just how time goes. But as you're, as you're focused on the long term, you're going to see a lot of bumps along the way as we move into what feels like a new world as you move into new business models. And you know, I just think it's interesting.
Source: Disney
Q3 outlook
[00:34:15] Mokaya: I guess then that's in terms of thoughts for Q2. So what are you paying attention to as you move into Q3 then?
[00:34:22] Sam: For anyone who followed the consumer sentiment report this morning, a historic drop in consumer sentiment based off of responses to this University of Michigan sentiment survey. Obviously, this is soft data. People say whatever they want and they'll go do the exact opposite in real life. But to what degree is our concerns about COVID and economic prospects and future inflation and all this stuff actually affecting consumer behavior? You know, this might not even be a thing that we need to wait for Q3 earnings season. We have retailers who are going to start announcing earnings in the next couple of weeks. But the degree to which concerns about things like inflation and the Delta variant is actually translating into a slowdown in economic activity.
[00:35:21] Scott: Yeah. I think to echo Sam, watching really closely for the impact of the Delta variant going forward here and that'll start to show in the next couple of weeks probably. And then also comps getting tougher in the back half of the year. And the back to school period at the end of summer, people going back to a more normal, normalized life, potentially.
[00:35:45] Alex: Yeah. I would say pretty similar as well. I'm curious to see if..where I live, we were back to masks mandated everywhere, and it's not an if you're vaccinated or not kind of thing, it's just everybody to wear masks. And we'll see what the response is by people. If this becomes it's a very serious issue or an even more serious issue than it already is, I’m curious to see how people's ability to spend can manage to stay near the levels that it's at currently. I guess we'll see with retailers in this coming quarter, Q2, you know, the quarter that they're about to report, I would assume it's doing pretty good based on the stuff we've already seen. I'd be curious if we see any changes in terms of guidance, how they look to the back half of the year.
[00:36:30] Mokaya: I think we’ll also be paying attention to supply chains. I think Scott and I are very keen and reading, especially industrials, and trying to look for any signs that there will be changes in the supply chains maybe a balancing out of demand and supply. So I think that's the one thing that we’ll be paying very keen attention to. Something else, of course, a key statistic that’s noted from Q2 from Bank of America was that 65% of the money that was flowing to client accounts from the unemployment benefits were actually being saved and only 30% was being spent. So, that’s a substantial amount, so you'd want to see also how those trends are going going into Q3 and maybe some States in the US also stopped the unemployment benefits and how that impacts spending. So I think apart from the Delta variant, we also want to keep track of the booster vaccines that have also been approved this week, how that's going to impact.
Why we read earnings transcripts?
Before we close up one thing I wanted to ask all of us since you spend a lot of time on earnings transcripts, maybe why you read earnings' calls transcripts and why you spend a lot of time with them, and what you’ve gained from them.
[00:37:38] Sam: Yeah. I probably was reading a lot more transcripts before I started subscribing to your newsletter, which by the way is great. So everyone should make sure it's subscribed to The Transcript and I'm not collecting any fees or anything from that. It's just great. So if you haven't make sure you sign up for that. But yeah, what I like is, you know, sure it's all being taped and they have their handlers all around them, but this is one where executives will go off-script. And you know, it's not like..no one wants to like see people stumble over their words and accidentally say something that's inaccurate or whatever, but you get a lot of information and a lot of color that you do not get in a press release or a 10K or something that is..that has to go through legal compliance departments and stuff like that. You know, getting color on stuff like what happened in the first three weeks of Q3, This is stuff that you don't get any kind of response or companies don't often actively give that kind of color in an AK or an earnings release. So yeah, it's hearing executives answer questions that they would have rather avoided, I think, is really the big benefit of going through these transcripts and listen to these earnings.
“So yeah, it's hearing executives answer questions that they would have rather avoided, I think, is really the big benefit of going through these transcripts and listen to these earnings” - Sam Ro
[00:39:04] Alex: Yeah, for me it's, you know, everything I do in terms of being an investor is trying to find companies and management teams that I want to partner with for the long term. So a huge part of conference calls for me is getting a better feel for the people that I'm entrusted with my capital. Particularly when things are not going well. And obviously, anybody will make mistakes, but I want a clear sense that they're focused on the things I care about, which is the long-term economics competitive position of the business. And I also want to be sure that when those tough times come along, they're being honest with me and transparent with me on the things that I need to know. So that's the primary reason that I listen to conference calls.
"So a huge part of conference calls for me is getting a better feel for the people that I'm entrusted with my capital particularly when things are not going well"- Alex Morris
[00:39:47] Scott: Yeah. I echo everything that Sam and Alex just said in terms of the breadth of information you can get from earnings calls. And also the depth of being able to really get to know the way that management teams are thinking about their companies, especially when you follow them over the length of time that we've been doing. You know, there's some, some CEOs that we've been listening to for a decade already talk about the way that they're thinking about their companies and you get to watch their strategies evolve and the way that they react and their track record, and really get a sense for their track record. I think one thing to add as well is that there's elements of investing that are really about information arbitrage. And I think the interesting thing about conference calls is that every company is trying to tell their story, but not everybody is listening to the full story. And so when you really dig into the conference calls, there's lots of times that there's information in there that the market is not fully appreciating. And there are catalysts to be found that we publish in our newsletter all the time. The Waymo commercialization in Phoenix is a great one. That is a major economic dislocation potentially that it doesn't sound like many people are paying attention to. So those are the reasons that I listen to conference calls. Mokaya, what about you?
"...the interesting thing about conference calls is that every company is trying to tell their story, but not everybody is listening to the full story. And so when you really dig into the conference calls, there's lots of times that there's information in there that the market is not fully appreciating. And there are catalysts to be found that we publish in our newsletter all the time" - Scott Krisiloff
[00:41:05] Mokaya: I think there's a lot of wealth of information. I read it mostly because it gives me a better glimpse of how the economy's doing. Because sometimes, as Sam said, you'd make them the CEOs and the management teams go off script a little bit and they tell you, look, this is what is really happening on the ground. Or sometimes, maybe the question was very irritating and they use practical examples from the field to actually show you what exactly is happening. So I like those kinds of earnings calls where the management has a grip on what's happening and they are actually hands-on and they can give you some statistics and stories and show the impact of the products or the customers and how they're feeling. Maybe they talked to people on the ground and that's something that they can’t really hide.
"I like those kinds of earnings calls where the management has a grip on what's happening and they are actually hands-on and they can give you some statistics and stories and show the impact of the products or the customers and how they're feeling” - Erick Mokaya
Closing remarks
As we close, I wanted to say that the Spaces today we brought in partnership with Koyfin. Koyfin also helps us also to get access to some of the transcripts. We still get good data from them. Also, we partnered with Quartr. It's an app that you can find on Android and iOS where you can also listen to earnings calls. They’ve really revolutionized that. So I think that's been good partners that we’ve had on The Transcript and also along the way. So I would say closing words then maybe we can start with Alex and then Sam, and then Scott, and then you can finally wind up. You can also tell people where they can find you.
[00:42:32] Alex: Yeah, I think as you've heard here the first half of the year or the first half of 2021 is generally done, very strong, both relative to the first half of 2020, obviously, but for most companies that I look at, also relative to the first half of 2019. So it's nice to be in an economic environment that feels a lot different than where we were at 18 months ago. And hopefully, companies continue to do things to keep moving forward and investing for the future. So you can find me on Twitter, as, you know, if you go to my homepage, I guess you'd call it, you can find my Substack. You can sign up for. There's a free version where you'll see previews of the things that I write or a paid version if you want complete access to everything that I do. So I appreciate you guys having me on and hope to do it again in the future.
[00:43:18] Sam: Yeah, I mean, you know, there's..it seems like there's a lot of things to be optimistic about. Of course, there's a lot of things to be uncertain about, but, you know, uncertainty is just the name of the game when it comes to investing in stocks and all that kind of stuff. There will always be a number one topic of uncertainty and in future Twitter Spaces, we'll be probably talking about something else at some point or another. But yeah, it's really encouraging to see not just revenue and earnings for these big companies coming back, but seeing stuff like GDP and household spending and a lot of these other metrics return to pre-pandemic levels, and this is all occurring as there are still 10 million job openings out there. And supplier times are suggesting that there are still supply constraints, which means that there's still a lot of demand in the pipeline. Again, there's still $2 trillion in excess savings for consumers. So there's a lot of things that still need to get processed through the economy and all the companies that are involved in it. So lots of interesting things watch as the economy continues to unfold. But yeah, follow me at @SamRo. On my profile page, you can also see links to how to sign up for the Axios markets newsletter. And you can also click on any of those links and you'll also find my email address. Don't hesitate to email me any questions or anything, or if you want to follow up on something or if you need me to look into something and write about it in future newsletters.
[00:45:00] Scott: Yeah, I think echoing things that have already been said, this has really been a great time for society. I think for people to be vaccinated and have this release of energy from a pretty dim period during the depths of the pandemic. And so we're not totally out of the woods yet. Obviously, Sam mentioned there's still a lot of unemployed and we have the Delta variant and stuff, but I think hopefully this has been a really positive summer for everybody. And, you know, times like this happen infrequently and in society’s life or a person's life span. So I hope everybody was able to enjoy it. Beyond that, just want to say thank you, especially to Alex and Sam for joining us today. Really nice to have you guys here. And hopefully, people will sign up to your guys' newsletters as well. And then Koyfin and Quartr who were also our sponsors today. Thank you. And thank you to everybody who tuned in.
[00:45:50] Mokaya: Thank you so much for joining us today. I'll do this again every quarter or every so often. And so keep an eye on our timelines and also subscribe to our newsletter thetranscript.substack.com. And also listen to our podcasts. And you can also get our email there. You can just drop us an email. Thank you Quartr for helping us and also Koyfin. Thank you and see you next time.
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