Bear's Q3 earnings thoughts: Vol2

All the way back on Monday I offered some reflections on last week’s earnings reports:…

Now I’d like to follow up and present my thoughts on this week’s action.

Yesterday after the bell, a company I owned (not going to bury the lead here), Mulesoft (MULE), reported earnings. On the surface, very impressive. Revenue was up 57%. Net expansion rate held tough at 116%. They touted many key customers in the CC, and beamed about several deals that produced $1M+ of revenue in the quarter (!) alone. So why did I sell my shares? They added exactly 47 new customers. Not only that, but expenses were up more than 15% sequentially – they increased more than sales. Avg spend per customer was up to $175,000 from $164,000, which is great, but I just don’t think it should cost you that much money to sell to your current customers. I don’t see how they can keep selling more and more and more unless they add more customers. Last year they on average 78 customers per quarter, while spending a lot less to do it. In my opinion, adding 47 customers at this level of spending just doesn’t cut it. Lucky for me, shares were up about 10% after hours, which I gladly accepted and exited my position. They’re back down to roughly even with yesterday’s close as I type, so I feel like maybe I did the right thing. Either way, I have a lot of other places to put the funds.

Yesterday afternoon a couple tech giants reported:

Amazon (AMZN) reported a big beat and seems to have won the doubters over again – they’re up more than 13% today.

Alphabet (GOOG) likewise reported a beat and have been up 5 or 6%.

The results for these two (I assume) have buyed Facebook (FB), which I own, but they don’t report until Wednesday. I very much expect a great quarter and some more appreciation then.

Chipotle (CMG) reported Tuesday. I’ve made noise before about CMG on this board and others. Unfortunately for Chipotle shareholders, my bearish thesis is playing out instead of the bull thesis. They reported Tuesday, and it was fairly awful, starting with revenue up only about 8 or 9% from what should have been a very easy comp, especially since they’ve opened many new stores. Margins didn’t expand either, which based on my conversations on the boards, most shareholders were counting on. Rather, Chipotle took a big step backward from their seeming improvement the two previous quarters. To all current CMG shareholders, I’m sorry the quarter was a disappointment. I highlight this not to pour salt in your wounds, but as a perfect cautionary tale. This is one of those investments that was a dandy pick from something like 10 years ago…but in football terms, sometimes it’s hard to win a won game. Chipotle made it to about a $20B valuation. They had opened so many stores, and their margins were so fantastic, there was basically no chance things could continue to improve at that pace. They had reached the summit. That would have been a great time to sell. The restaurant business is hard, and it was unreasonable to think they would never stumble from price/cost pressures, competition, or who knows what. But they were priced as if the party would go on forever. When they fell, they didn’t just fall to half of their former selves. EPS fell from ~$15/share to ~$1/share. But the stock didn’t fall 90% or more. Everyone seemed to think they would bounce right back – to me, that’s optimism, not a downtrodden stock that’s “cheap.” Math is hard…but it’s important. Chipotle remains expensive, for what you get when you buy the shares: a turnaround play.

Next week almost all of my companies report earnings. I know many of you own the same ones. Hope it’s a great week for us all! I’ll be back with a recap – but there will be a lot! So bear with me if it takes a while.

Everyone have a great weekend.



Chipotle’s price at the peak was assuming perfection in the future. I’d suspect the second food safety scare as the catalyst for the most recent round of trouble.

Despite setbacks, Chipotle is still a good long term play especially from here. In the shorter term, no one could know where it is headed. Some did hope that it would turn around faster but it did not. It will turn around nonetheless.


1 Like