Tom Lee On Earnings Week: The Market Will Keep Going Up

Key Concepts

• Earnings Reports: Scheduled announcements by public companies detailing their financial performance.
• Valuation: The process of determining the current worth of an asset or company.
• Price-to-Sales (P/S) Ratio: A valuation metric that compares a company's stock price to its revenue per share.
• Price-to-Earnings (P/E) Ratio: A valuation metric that compares a company's stock price to its earnings per share.
• Free Cash Flow (FCF): The cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
• Revenue Growth: The increase in a company's sales over a specific period.
• Customer Count Growth: The increase in the number of customers a company has.
• AI (Artificial Intelligence): The simulation of human intelligence processes by machines, especially computer systems.
• Autonomous Vehicles (AVs): Vehicles capable of sensing their environment and operating without human involvement.
• Network Effects: A phenomenon whereby a product or service gains additional value as more people use it.
• Churn Rate: The rate at which customers stop doing business with a company.
• Subscription Revenue: Revenue generated from recurring payments for a service or product.
• Daily Active Users (DAU) / Monthly Active Users (MAU): Metrics used to measure user engagement with an app or service.
• Bull Market: A period when stock prices are generally rising.
• Bear Market: A period when stock prices are generally falling.
• Sentiment: The general attitude of investors towards a particular security or the market as a whole.
• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
• Profit Margins: The percentage of revenue that remains after all expenses have been deducted.
• AWS (Amazon Web Services): Amazon's cloud computing platform.
• OpenAI: An artificial intelligence research and deployment company.
• Fail of the Week: A segment highlighting a notable mistake or poor decision.

Earnings Calendar and Company Analysis

This week features a significant number of earnings reports from major companies, alongside important market news and analysis. The focus is on understanding the fundamentals, valuations, and future prospects of these companies.

Palantir (PLTR)

• Main Topics: Palantir's dual narrative of exceptional growth and extreme valuation.
• Key Points:
  • Fundamentals: Palantir exhibits "insane" revenue growth, with strong acceleration over the past year, making it the fastest-growing company in the S&P 500 by revenue size. Customer count in the US has grown significantly (161 to 485), and each customer generates substantial revenue. Free cash flow has surged from less than $200 million in 2022 to $1.7 billion TTM. Earnings per share (EPS) have also grown rapidly (6 cents to 30 cents). Margins are increasing, positioning Palantir as a "world-class AI company."
  • Valuation: The valuation is described as unprecedented, with a market cap over $400 billion. The price-to-sales (P/S) ratio is 134x, and on a forward basis, it's around 90x. This is attributed to a combination of strong fundamentals and significant momentum.
  • Argument/Perspective: The speaker finds Palantir in a "difficult spot" due to its extreme reliance on continued rapid growth. Any deceleration could lead to significant trouble. While acknowledging the possibility of it becoming a trillion-dollar company, the speaker prefers more conservative investments that don't price in as much future expectation.
  • Conclusion: Despite phenomenal fundamentals, the current valuation makes it unattractive for the speaker to invest in at this time.

Shopify (SHOP)

• Main Topics: Shopify's evolution beyond an e-commerce host to a comprehensive commerce platform.
• Key Points:
  • Business Model: Shopify is no longer just for small online retail businesses; it now hosts sales for large companies and is the go-to platform for "do-it-yourself" businesses not selling on Amazon or Walmart.
  • Growth Drivers:
    • International Expansion: Strong momentum in global growth, including Europe.
    • AI-Powered Commerce: Integration of AI tools like Universal Cart, Checkout Kit, and Sidekick.
    • Upmarket Strategy: Focus on attracting larger enterprise merchants and diversifying into B2B and non-traditional retail.
  • Merchant Solutions: Excitement around the growth of payment solutions and Shop Pay, operating under Shopify Capital, positioning it as a competitor to PayPal.
  • Prediction: A 70% chance of beating revenue and earnings expectations.

Uber (UBER)

• Main Topics: Uber's continued growth, its evolving autonomous vehicle strategy, and competitive landscape.
• Key Points:
  • Positive Outlook: The speaker has a consistently positive view of Uber, giving it a 90% chance of being a good investment, with only a 10% chance of being overshadowed by robo-taxi competitors.
  • Autonomous Vehicle (AV) Strategy:
    • Partnerships: Uber is actively partnering with AV companies like Waymo, Nuro, Lucid, and BYU.
    • CEO's Narrative: The CEO is bullish on AVs, presenting Uber as the central hub for AV companies.
    • Speaker's Perspective: The speaker views many of these partnerships as "on paper" and believes Waymo is the only company currently offering meaningful, paid robo-taxi rides without employees. Tesla's potential to offer rides without Uber is a concern.
    • Focus for Earnings: Scaling AV deployments and evaluating their impact on rides, utilization, and efficiency.
  • Competitive Concerns: The growing presence of Waymo and the potential for Tesla to offer its own robo-taxi service without Uber are noted as potential hurdles. The strong user reception of the Waymo app is also highlighted.
  • Investment Stance: The speaker likes Uber but has been waiting for a dip to enter a position, as the stock has not been "dipping."
  • Comparison: Despite liking Uber, the speaker prefers Google's positioning with Waymo.
  • Positive Factors: Share buybacks and the CEO's strong narrative are seen as positive.
  • Prediction: Expected to beat expectations and remain a profitable investment.

Spotify (SPOT)

• Main Topics: Spotify's user growth, competitive advantages, and expansion into new areas.
• Key Points:
  • User Growth: Expected to continue growing monthly active users (MAUs) towards 700 million and potentially over a billion within a few years.
  • Competitive Advantage: Despite competition from YouTube Music and Apple Music, Spotify's free product, refined user interface, and network effects give it an advantage. Users gravitate to the "slightly best" product when prices are similar or free.
  • Expansion:
    • AI Ads: Leaning into digital AI ads, similar to Meta's playbook.
    • Video Content: Embracing video, positioning it as a competitor to YouTube.
    • Monetization: Increased monetization through AI tools like AIDJ and podcasts.
  • Valuation: Currently trading at a "premium valuation," preventing the speaker from entering a position.

AMD (Advanced Micro Devices)

• Main Topics: AMD's resurgence as an AI competitor and its high valuation.
• Key Points:
  • Performance: Up 112% year-to-date.
  • AI Race: Now considered a serious competitor in the AI race due to deals with OpenAI.
  • Valuation: Trades at a high valuation with a 46x forward P/E and a free cash flow yield below 1% (below 7% when factoring in stock-based compensation). This indicates significant future bullishness is priced in.
  • Earnings History: Consistently beats EPS expectations (except for one quarter in the past four years) and revenue.
  • Catalysts: Numerous bullish catalysts are expected for the upcoming earnings.
  • Prediction: Unlikely to see a significant sell-off; expected to beat earnings and revenue.

FICO

• Main Topics: FICO's fundamental strength versus investor sentiment.
• Key Points:
  • Fundamentals: Expected to perform well fundamentally, with continued growth and pricing power. Competes effectively against Equifax and other credit bureaus.
  • Investor Sentiment: The market has not been rewarding companies in the "credit bureau" category, despite strong fundamentals. This is attributed to market trends and momentum factors.
  • Recommendation: For FICO investors, holding the stock is advised, as cash flows and earnings are expected to eventually drive the stock price up.

Duolingo (DUOL)

• Main Topics: Duolingo's user engagement, business model, and long-term potential as a digital learning platform.
• Key Points:
  • Popularity and Opinions: A highly popular app that elicits strong opinions from investors.
  • Speaker's Position: Owns a small, intentionally sized position due to volatility and risk. The holding is currently at a loss ($5,400 in the red on an $18,500 position).
  • Addressing Bear Cases:
    • "Just an App": The speaker argues that many valuable companies (e.g., OpenAI, Instagram) are primarily accessed via apps, and this doesn't diminish their value.
    • High Churn/Overpriced: While acknowledging churn is inherent in subscription models, Duolingo's model of bringing users in with a free tier and converting them to paid tiers drives strong revenue growth (40% overall, 47% subscription revenue growth).
  • User Engagement Metrics:
    • Daily Active Users (DAU): Grew 40% to 47.7 million, placing it in the top tier of social media companies.
    • Paid Users: Over 10.9 million.
  • Long-Term Vision: Duolingo aims to be the dominant digital learning app with the largest network effects, offering a streamlined, easy-to-use product for various learning categories (language, chess, math, music, and potentially science).
  • Earnings Prediction:
    • Monthly Active Users (MAU): Expected to be a weak spot, potentially below expectations due to the shift from hearts to energy, causing some churn among free users.
    • Daily Active Users (DAU) & Paid Subscribers: Expected to continue growing, with paid subscribers potentially exceeding expectations due to higher conversion rates.
  • Volatility: The stock is highly volatile, with potential for significant swings.
  • Investment Thesis: Based on long-term revenue growth, paid subscribers, and future profitability.

Texas Roadhouse (TXRH)

• Main Topics: Texas Roadhouse's consistent performance and the inherent risks of restaurant investments.
• Key Points:
  • Speaker's Position: A significant holding in the speaker's passive income portfolio ($42,000 position with $38,000 in gains). Half of the position has been sold.
  • Company Strength: Considered a "top-tier restaurant" and a "genuine compounding machine" that has outperformed many tech companies over 20 years.
  • Prudency in Restaurant Holdings: The speaker prefers not to have a small restaurant as a top-three position due to the inherent risks.
  • Chipotle Example: The speaker sold Chipotle at around $52, and the stock has since dropped significantly, illustrating the volatility of restaurant stocks.
  • Risks in Restaurants: Low margins make them more susceptible to changes in revenue trajectory and input costs (e.g., avocado, beef prices).
  • Earnings Expectation: "Business as usual" with no massive expectations.
  • Valuation: Fairly valued, not too cheap or expensive.
  • Performance: Doing better than peers with a good value proposition.
  • Recommendation: Continue holding through earnings.

Market Outlook and Major News

Tom Lee's Bullish Market Outlook

• Main Topics: Tom Lee's reiterated bullish stance on the market and his supporting arguments.
• Key Arguments/Perspectives:
  • Historical Precedence: The market has been up for six consecutive months, a rare occurrence (only six times since 1928). This suggests a strong end to the year.
  • Negative Sentiment: Despite market gains, investor sentiment remains bearish (average sentiment of -11.5%). This is seen as a bullish indicator, suggesting a "performance chase" as fund managers who have missed benchmarks rush to invest.
  • Falling Inflation: Inflation is rapidly falling, potentially faster than expected, supported by bond market indicators and data like Trueflation showing sub-2% inflation.
  • Record Profitability: Corporate margins are increasing, suggesting a productivity boom, even amidst tariffs.
  • Potential for Rate Cuts: With inflation in a good place and jobs not strengthening significantly, rate cuts are anticipated, which would be bullish.
• Conclusion: Tom Lee remains bullish, believing the market will continue to go higher throughout the year.

Amazon (AMZN) and OpenAI Deal

• Main Topics: Amazon's new partnership with OpenAI.
• Key Points:
  • Deal Details: A $38 billion multi-year partnership for OpenAI to run and scale its AI workloads on Amazon Web Services (AWS).
  • Investor Reaction: Viewed as a major win for AWS in the AI compute race.
  • AWS Backlog: This deal was not included in AWS's previously reported backlog of $200 billion, indicating further significant deals.
  • Speaker's Stance: Highly bullish on Amazon, Google, and Microsoft, considering them "solid bets."

Fail of the Week: Sam Altman and OpenAI

• Main Topics: Sam Altman's defensive and aggressive reaction to a critical question from an investor.
• Key Arguments/Perspectives:
  • Brad Gersonner's Question: A simple, reasonable question from an OpenAI investor (Brad Gersonner) about how OpenAI can fulfill $1.4 trillion in spend commitments with reportedly $12 billion in revenue.
  • Sam Altman's Reaction:
    • Indignant and defensive.
    • Claimed OpenAI makes "way more than that" in revenue.
    • Challenged Gersonner to sell his shares, offering to find buyers.
    • Expressed a desire for OpenAI to be public so he could tell critics to "short the stock."
  • Speaker's Critique:
    • Altman's response was "weakest" and "ridiculously weak."
    • Challenging investors to short the stock discredits valid criticisms and questions.
    • This reaction is a defense mechanism and a reflection of Altman's own insecurities about the criticism.
    • Altman could have responded kindly, explaining potential financial misunderstandings or the company's path to profitability.
    • The aggressive response reveals that the articles about OpenAI's obligations "get to him."
  • Conclusion: Sam Altman's reaction is deemed the "Fail of the Week" for his unprofessional and defensive handling of a legitimate investor question.

Synthesis/Conclusion

This week's earnings calendar is packed with significant companies, each presenting a unique investment thesis. Palantir stands out for its exceptional growth but also its unprecedented valuation, making it a high-risk, high-reward proposition. Shopify is evolving into a comprehensive commerce platform, while Uber navigates the competitive landscape of ride-sharing and autonomous vehicles. Spotify continues its user growth trajectory, and AMD has solidified its position in the AI race, albeit at a premium valuation. Duolingo, despite its volatility, is positioned as a potential leader in the digital learning space. Texas Roadhouse represents a more traditional, compounding business with inherent sector risks.

Market sentiment, as analyzed by Tom Lee, remains bullish, supported by historical trends, negative sentiment, falling inflation, and strong corporate profitability. Amazon's new deal with OpenAI further solidifies the dominance of hyperscalers in the AI compute race. However, the week is marked by the "Fail of the Week" incident involving Sam Altman, whose defensive reaction to investor concerns highlights a potential weakness in OpenAI's leadership's communication strategy. Overall, the market appears poised for continued upward momentum, but individual company performance will hinge on their ability to meet high expectations and navigate their respective competitive environments.