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Early Opportunities
Get in Before the Crowd

November 4, 2022


We’ve had a few earnings reports lately that have been delivered under the cloud of the FOMC meeting and press conference (Wednesday). During that event, Fed Chair Powell opened the door to a slower pace of interest rate hikes starting in December but suggested the terminal rate (how high the Fed goes during this cycle) may be higher than previously expected and last for longer than previously expected.

While acknowledging the Fed needs to remain open to the possibility that things could change depending on incoming data, the bottom line is that the Fed remains more hawkish than expected (and desired), and that’s continuing to put pressure on higher-growth stocks as well as the broad market.

Additionally, there appears to be considerable weakness today (Friday) among SaaS stocks. While this group has been weak in the wake of the FOMC meeting the extent of the move (many stocks -10% or more) suggests there could be something else going on. Maybe a fund is taking heat and dumping positions or something along those lines. I won’t be remotely surprised if we hear about something next week.

In any event, we’ll heed the FOMC and today’s action by letting go of our weakest position, GitLab (GTLB).

Additionally, here are a few quick notes on recent earnings reports:

Airbnb (ABNB) surpassed Q3 expectations and delivered $2.88 billion in Q3 revenue (+29%) and EPS of $1.79 (+47%). The stock fell after the report, not because of how the company did but because management isn’t overcommitting to anything in 2023. The concern is that bookings may well fall apart if/as the economy weakens (thanks Fed) and, as a marketplace for hospitality, Airbnb is exposed to a weakening consumer. The flip side of this is that people are still prioritizing travel and Airbnb may see a higher supply of accommodations on the platform if/as people feel the bite of a weaker economy and open their homes for rentals. Subsequent reports from Expedia (EXPE) and Booking Holdings (BKNG) were less dreary in 2023. Bottom line here is that investors tend to split into two groups with ABNB: the believers and the non-believers. I’m in the first group and will give ABNB some more rope (but not likely enough to make a new low). That said, heeding the state of the current market, I’m moving to hold. HOLD

We jumped on a half-sized position in Pinterest (PINS) in September and will stick with that now. The company had a decent Q3 in a pretty awful environment where many social media stocks were destroyed. Revenue of $685 million was up 8% and beat consensus of $666 million while EBITDA (a measure of profits) of $77 million beat by $42 million. The business was helped by large U.S. retailers. Monthly average users (MAU) of 445 million (+12%) surprised to the upside. Management talked about a 3X increase in video content on the platform (the kids love the short-form vids). PINS is anything but a sure bet, but we have (I think) a nice entry point that allows us to be patient with a stock that has real potential to race higher once the Fed lays off. Sticking with BUY HALF.

Axonics (AXNX) beat Q3 expectations with revenue of $70.4 million (+50%) surpassing consensus of $63 million and EPS of -$0.34 beating by $0.13. Full-year guidance got a $9 million boost to $262 million. Initial 2023 guidance remains around consensus of $319 million (+23%) and should afford some wiggle room. Management talked about trying to own the sacral neuromodulation (SNM) market and get to 50% market share, helped by a direct-to-consumer (DTC) marketing effort. The stock was fine after the report but has been sliding for a couple of days now, most likely as a result of broader market volatility. Sticking with HOLD THREE QUARTERS. (BILL) is a stock we’ve had for a while, and we continue to hold just one-quarter of the position, thinking it will emerge as a leader (or be an acquisition target) in a stronger market (this spring’s rally supports this thesis). As of right now, it’s not looking great (down 10% today) despite a massive beat in Q3. Revenue of $230 million (+94%) beat by $19 million and EPS of $0.14 (first quarterly profit) beat by $0.08. The company added a record number of net new customers (14,200) and announced the acquisition of a cloud-based financial planning tool for start-ups and small businesses called Finmark. Finally, management raised their 2023 revenue guide from $974 - $996 million to $994 – 1,007 million and EPS from $0.23 - $0.38 to $0.48 - $0.59. Trying to be patient here as the big-picture thesis remains intact and the rising and positive bottom-line results are impressive. HOLD ONE QUARTER

Last but not least, GitLab (GTLB) is taking it on the chin today with the rest of the software space. We are cutting it loose as it is now our weakest position. SELL

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.