To The Moon

• Tesla reported a solid quarter with strong growth, but the continual price cuts for market share are a potential margin headwind for the company.
• McDonald’s Corporation reported a blowout quarter justifying its premium valuation.
• Keurig Dr. Pepper Inc. reported a subdued quarter, and the stock remains in a holding pattern.
• Amazon reported a solid quarter despite all the headwinds the company has been facing, along with a slowing cloud.
• Starbucks beat on earnings and revenue as Laxman Narasimhan takes over the reins.

Tesla Inc. (TSLA)

Tesla reported $23.3 billion in revenue in Q1 2023, a 24% increase from Q1 2022 but slightly below analysts’ expectations of $23.36 billion. The Auto segment had revenue growth of 18%, while the Services & Energy Storage segments are growing faster but from a smaller revenue base. Tesla achieved a net income of $2.5 billion, or $0.85 per share, meeting analysts’ expectations, but a 24% decrease from Q1 2022. Tesla’s headline numbers were lackluster compared to what we expected the company to report, but the model price cuts to defend its market share hampered the numbers. Based on the secular growth tailwinds of the transition to EV, we estimated Tesla to earn $0.95/share on revenue of $23.9 billion.

Tesla maintained a high gross margin of 19.3% on its automotive business, despite lowering prices on some models and facing higher costs for raw materials, logistics, and warranty. The company expanded its operating margin from 11.4% to 9.9%, showing that the gigafactory and its supply chain are helping its economies of scale. Tesla delivered a record 240,000 vehicles in Q1 2023, up 36% from Q1 2022, driven by solid demand for Model Y and Model 3 in China and Europe. Tesla increased its production capacity by ramping up Gigafactory Shanghai and Gigafactory Berlin, which started producing Model Y and Model 3 in Q1 2023. In addition, Tesla made progress on its self-driving technology, launching the FSD Beta version 10.0 to select customers in March 2023 and announcing plans to conduct a coast-to-coast autonomous drive by the end of 2023.

The company’s had a significant cash burn during the quarter as free cash flow declined 80% from $2.23 billion to $441 million to reflect the high capex. Tesla updated its outlook for 2023, stating that it expects to grow vehicle deliveries by more than 50% year-over-year, achieve an operating margin above the industry average, and invest $8-$10 billion in capital expenditures. The stock declined because management is willing to do more price cuts to increase or defend its market share. The stock has had quite a run in 2023, and we did not add to our position on the sell-off as we think we will have an opportunity to add at a lower price.

McDonald’s Corporation (MCD)

McDonald’s Corporation reported solid results for the first quarter of 2023, beating analysts’ expectations on earnings and revenue. The company reported $2.63/share (beat WallStreet estimates by $0.29) on revenue of $5.9 billion (beat WallStreet estimates by $320 million). The company’s global comparable sales increased 12.6%, reflecting positive growth across all segments and markets. The company’s digital systemwide sales in its top six markets were nearly $7.5 billion for the quarter, representing almost 40% of its systemwide sales. In addition, the company’s U.S. segment benefited from strategic menu price increases, positive traffic growth, effective marketing campaigns, and operational excellence.

The company’s International Operated Markets segment performed well, led by strong comparable sales across the Big Five (France, Germany, the UK, Canada, and Australia). The company’s International Developmental Licensed Markets segment also showed comparable solid sales growth, led by Japan and other geographic regions. The company’s operating income increased 10% to $2.4 billion, while its operating margin improved to 40.9% from 39.6% a year ago. The company returned $2.1 billion to shareholders through dividends and share repurchases during the quarter. McDonald’s added 191 net new restaurants during the quarter. The stock did not react much to the earnings news as investors had priced a lot of good news into the stock. We will continue to hold the stock because we like how it diversifies our portfolio but trades at a premium valuation for a quick-service restaurant.

Keurig Dr. Pepper Inc. (KDP)

Keurig Dr. Pepper Inc. (KDP), a leading beverage company in North America and the world, reported its Q1 2023 results on April 27, 2023, reaffirming its guidance for the year. The company’s EPS increased 3.0% to $0.34 (beat WallStreet estimates by $0.01) and delivered strong net sales growth of 8.9% to $3.35 billion (beat WallStreet estimates by $10 million). Given how JAB is similar to 3G Capital regarding cost-cut measures and synergies, we expected the company to have a higher EPS number. As a result, our fund expected Keurig Dr. Pepper to earn $0.48/share on revenue of $3.33 billion.

The company’s net sales are driven by a favorable net price realization of 9.9% and modest brand elasticities across most categories. In addition, the company’s net sales growth was consistent on a constant currency basis, reflecting the minimal impact of foreign exchange rates in the quarter. The company’s performance was led by the U.S. Refreshment Beverages and International segments, which posted net sales growth of 14.4% and 13.7% in Q1 2023. The U.S. Coffee segment had a slower start to the year, with net sales declining 2.6%, due to mobility-related changes in the at-home coffee category as consumers returned to more normal routines amid the easing of pandemic restrictions.

The company’s in-market performance in the U.S. Liquid Refreshment Beverages category was strong, with retail dollar consumption advancing 13.6% and market share growth in categories representing 88% of its cold beverage retail sales base. The company’s single-serve pod segment continued to gain volume share of the U.S. coffee category, with KDP Manufactured share at approximately 81%. The company’s retail dollar consumption of KDP Manufactured pods decreased slightly by 0.5% in Q1 2023, reflecting the comparison to the elevated demand for at-home coffee consumption in Q1 2022 due to the pandemic lockdowns.

The company’s chairman and CEO, Bob Gamgort, expressed confidence in the company’s 2023 outlook, despite the persistent inflationary pressures impacting the entire industry. The free cash flow was $16 million reflecting the high capital expenditures and lower operating cash flow. The stock slipped on the news as investors were not too pleased by the volumes, and management did not give good visibility. We will continue to hold the stock and not look to add to our position.

Amazon.com, Inc. (AMZN)

Amazon.com reported its first quarter results for 2023 on April 27, 2023. The company achieved net sales of $127.4 billion (beat WallStreet consensus estimates by $2.85 billion), an increase of 9% compared to the same period in 2022. The company also posted a net income of $3.2 billion, or $0.31 per diluted share (beat WallStreet estimates by $0.11), compared to a net loss of $3.8 billion, or $0.38 per diluted share, in the first quarter of 2022. The net income includes a $500 million pretax loss in Amazon’s stake in Rivian Automotive. Compared to our fund estimates, we estimated Amazon to earn $0.27/share on revenue of $125.8 billion, so the headline numbers from the company were impressive.

The company’s North American segment sales increased 11% year-over-year to $76.9 billion, while its International segment sales increased 1% year-over-year to $29.1 billion. The company’s international segment reported a sluggish number due to the COVID-19 shutdowns and supply chain disruptions, which are vital in transporting goods. The company’s AWS segment sales increased 16% year-over-year to $21.4 billion. The company’s operating income increased to $4.8 billion, compared to $3.7 billion in the first quarter of 2022. The company’s operating margin expanded by 60 basis points which showed solid execution from management. The company’s operational cash flow increased 38% to $54.3 billion for the trailing twelve months, compared to $39.3 billion for the twelve months ending March 31, 2022.

The company’s free cash flow improved to an outflow of $3.3 billion for the trailing twelve months, compared to an outflow of $18.6 billion for the trailing twelve months ended March 31, 2022. Although the free cash flow improved, the company is still burning cash, which CEO Andy Jassy will have to improve by slowing down on the capex spend. The company’s CEO, Andy Jassy, said: “There’s a lot to like about how our teams deliver for customers, particularly amidst an uncertain economy.” The stock reacted well to the news popping 10%, and ended the day up only 4% as traders took profits off the table. We still like the stock and are looking to add more to our position, but there are a lot of cost efficiencies to ring out in the company. We also like the company’s push into healthcare with its One Medical acquisition.

Starbucks Corporation (SBUX)

Starbucks Corporation reported its second quarter fiscal 2023 results on May 2, 2023. The company achieved consolidated net revenues of $8.7 billion (beat WallStreet estimates by $289 million), up 14% year-over-year, despite a 2% unfavorable impact from foreign currency translation. The company saw global comparable store sales growth of 11%, driven by a 6% increase in transactions and a 4% increase in average tickets. The company reported non-GAAP earnings per share of $0.74 (beat WallStreet estimates by $0.09), reflecting strong performance across all segments. The company opened 464 net new stores in Q2, ending the period with 36,634 stores globally, of which 51% were company-operated, and 49% were licensed.

The company’s active U.S. Starbucks Rewards membership reached 30.8 million, up 15% year-over-year. In addition, the company’s segments reported the following results for Q2:

• North America: Net revenues of $6.4 billion, up 17% year-over-year; operating income of $1.2 billion, up 38% year-over-year; operating margin of 18.9%, up from 16.0% in the prior year.
• International: Net revenues of $1.7 billion, up 5% year-over-year; operating income of $378 million, up 13% year-over-year; operating margin of 22.4%, up from 20.5% in the prior year.
• Channel Development: Net revenues of $519 million, down 4% year-over-year; operating income of $195 million, down 9% year-over-year; operating margin of 37.6%, down from 39.7% in the prior year.

Starbucks generated a YTD-free cash flow of $2.11 billion, up from $1.97 billion. The company ended with $3.07 billion in cash on the balance sheet. Management reported lowered guidance due to the slow reopening of China, but we also think they are being prudent to underpromise for them over-deliver in the second half of 2023. Howard Schultz hands over the CEO reigns to Laxman Narasimhan, who has excellent international experience and understands how to sell products at a high volume. The stock fell on the cautious guidance, and it is getting to a level where we want to add to our position. As for now, the stock is a hold, and we are buyers around $90/share.

Disclosure: Cresco Investments is long Tesla Inc. (TSLA), McDonald’s Corporation (MCD), Keurig Dr. Pepper Inc. (KDP), Amazon (AMZN), and Starbucks Corporation (SBUX).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and consult with their financial advisor(s).