There were two major earnings releases after yesterday’s close. Both beat on earnings and revenues, both missed on cash flows. One is down about 5%, the other up about 10%. I will assert that this type of reaction tells us as much about each company’s analysts and investor bases as it does about the companies themselves. Tesla (TSLA) investors buy the sizzle; IBM investors demand a steak.
TSLA’s earnings per share (EPS) were a record $1.19, handily beating the $1.12 consensus estimate. Revenues were $24.3 billion, also a record, and just above the $24.2B expected. Free cash flow was $1.42B, well below the $3.13B estimate. Net profit margin was 15.3%, unchanged from the prior quarter. Meanwhile, IBM’s EPS was $3.60, a bit above the $3.58 estimate, and revenues of $16.7B beat the $16.4B estimate. Free cash flow was $5.2B, below the $5.8B expectation, and its net profit margin is 16.2%. On the surface, those don’t look all that different, though TSLA’s cash flow miss was far bigger than IBM’s. Yet there are several news stories attributing some of IBM’s decline to its disappointing cash flows while there is little media mention and even less concern about TSLA’s cash flows.
Perception has much to do with the different responses. Their investor bases are wildly different. IBM is considered a somewhat stodgy provider of business services, even though its products and services are rooted in technology – including cutting-edge supercomputers. TSLA is considered a high-tech disruptor, which is true, though its basic business involves manufacturing products that were invented over 100 years ago.
Unlike many other providers of computers and technology solutions, IBM is considered a value stock. It deserves this classification. IBM’s annual EPS are about 60% of where they were five years ago. Yesterday’s layoff announcement did nothing to indicate robust near-term growth. Its Price/Earnings (P/E) ratio is about 16, (which doesn’t necessarily signify a great value, by the way) and it sports a dividend yield of just under 5%. This company’s investor base is willing to put up with relatively stagnant growth as long as it can return sizable funds to shareholders. A series of cash flow misses could threaten that important dividend. It’s not what their investors want to hear.
TSLA investors are all about growth, to the point where its most fervent investors are dedicated futurists. They don’t receive a dividend, nor do they expect or even want one in the foreseeable future. These investors want available cash to be plowed into a rapidly growing business. They seek returns from the sort of stock appreciation that high growth can offer. Yesterday’s conference call highlighted how newly opened factories could enable TSLA to sell 40% more cars in 2023 than it did last year. As long as the company can generate enough cash to finance that growth, it matters little to investors that management spent much more of its cash last quarter.
Neither perception is necessarily right or wrong. It’s largely a matter of risk tolerance and personal preference. As a very rough rubric, younger investors can and should seek growth, while older investors might be willing to forego growth for stability and cash flow. Much of course has to do with risk tolerance, which can only be gauged on an individual basis. This difference of opinion explains how two sets of similar results can be viewed through very different lenses and yield very different responses. In a steakhouse, sizzling platters offer the promise of what is to come. The sizzle abates when the plate hits the table and the diner digs in.
A little bit of history may be in order, by the way. Although IBM is now perceived as a stodgy business services provider, for decades it was THE high-tech stock. In the 1960’s and ‘70s, long before many of TSLA’s most fervent admirers were born, IBM was both the bluest of blue-chips and a key “Nifty 50”[i] and “one decision” stock. Those stocks, which also included tech leaders like Xerox, Kodak and Polaroid, sported peak P/Es of 100 or more because their earnings power and inventiveness would ensure spectacular profit growth for decades to come. In other words, IBM was the TSLA of its day. Just saying…
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The author holds stock and options positions in TSLA
[i] NIFTY 50 is now a popular index in India, sharing a name but nothing else in common with the former US terminology.
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