Earnings Roundup: TSLA, NEE, IBM, CMCSA, NOW

By Brian Nelson, CFA

Tesla (TSLA) Misses Fourth-Quarter Expectations as Continued Uncertainty Looms

Image: The Model Y was the best-selling vehicle globally in 2023. Image Source: Tesla

Tesla missed fourth-quarter expectations on January 24, and the market continues to shy away from the electric-vehicle maker surrounding continued controversy over CEO Elon Musk’s request to have greater voting control over the company. We think Tesla may be past its prime heyday years, and while the firm hauled in a nice chunk of free cash flow during 2023 ($4.4 billion) as it retains a net cash position ($29.1 billion), the company will likely never find its way into the newsletter portfolios, which house our favorite ideas for consideration. In the quarter, Tesla’s revenue nudged higher only 3.5%, as total gross profit fell 23% and income from operations dropped 47%. During 2023, the company delivered over 1.2 million Model Ys, which made the model the best-selling vehicle out there, but the firm is experiencing pricing pressure at a time of near-peak skepticism by investors. We love Tesla’s net cash position on the books and free cash flow generation, but profitability trends in the business are slowing as we await how the new CyberTruck will impact its overall financials after cautious comments from Elon Musk back in October. We’re steering clear for now.

NextEra Energy (NEE) Offers Strong Earnings Outlook for the Next Few Years

NextEra Energy remains one of our favorite utilities, but mostly because of its renewables energy exposure as it relates to ESG considerations. When it comes to utilities (XLU), more generally, however, we tend to take a pass on almost all of them given the capital intensity involved in their operations and their interest-rate sensitivity, especially now in an environment where interest rates are returning to “normal” levels in the mid-single-digits. NextEra Energy operates two principal businesses, FPL, which is the biggest electric utility in Florida, and NEER, which is the world’s largest generator of wind and solar power and a global player in battery storage. NextEra reported decent fourth-quarter results on January 25 and issued a sanguine outlook for the next couple years. For this year, NextEra Energy expects adjusted earnings per share in the range of $3.23-$3.43, and it expects earnings to grow 6%-8% in 2025 and 2026 off that base. Though there is greater downside risk to its dividend growth potential given recent news with NextEra Energy Partners (NEP), the firm continues to “expect to grow its dividends per share at a roughly 10% rate per year through at least 2024 off a 2022 base.” Shares yield ~3.3% at the time of this writing.

IBM (IBM) Looking to Capitalize on Demand for watsonx and Generative AI

IBM’s shares are up nearly 40% during the past 52 weeks, and the company reported better-than-expected fourth-quarter results January 24. In the fourth quarter, revenue advanced 4% (3% in constant currency), as software revenue nudged higher 3% (2% in constant currency), consulting revenue leapt 6% (5% in constant currency), and infrastructure revenue increased 3% (2% in constant currency). The company’s gross profit margin increased 1.4 percentage points, while its pre-tax income margin increased 1.1 percentage points. For the full year, free cash flow came in at $11.2 billion, up $1.9 billion from last year. Though the 2023 results were solid, what has the market excited about IBM is management’s commentary about the momentum in its business in the press release, particularly with respect to AI: “Client demand for AI is accelerating and our book of business for watsonx and generative AI roughly doubled from the third to the fourth quarter.” For 2024, revenue is expected to advance at a mid-single-digit annual pace, while IBM expects to haul in ~$12 billion in free cash flow, slightly better than what it achieved in 2023. We like IBM’s potential in AI, but we prefer Microsoft (MSFT) and Alphabet (GOOG) in this area.

Comcast (CMCSA) Has a Lot of Things Going for It; Raises Dividend for 16th Consecutive Year

Comcast reported fourth-quarter results January 25, and the highlights were noteworthy. The firm has now put up three consecutive years in which it has generated record revenue, adjusted EBITDA and adjusted EPS. Management also noted that its adjusted EBITDA was a record for a fourth quarter in its Theme Parks division, took the top position in the worldwide box office during 2023 thanks to the success of Super Mario Bros. Movie, Oppenheimer and Fast X, while its streaming service Peacock continues to grow at a breakneck pace thanks in part to the company’s exclusive stream of the NFL’s AFC Wild Card game between the Kansas City Chiefs and Miami Dolphins. In the fourth quarter, revenue advanced 2.3%, while adjusted earnings per share nudged higher 2.4%. Free cash flow in the fourth quarter increased 28.5%, to ~$1.71 billion, giving the company confidence to raise its dividend for the 16th consecutive year, as it approved a new Class A share buyback program to the tune of $15 billion. Comcast has a huge net debt position, but the firm’s free cash flows cover its cash dividends paid by a very healthy margin (3.4x in 2023), suggesting strong potential for continued robust annual payout expansion. We’re not ruling this idea out for dividend-oriented investors. Shares yield ~2.7% at the time of this writing.

ServiceNow (NOW) Continues to Grow at a Breakneck Pace

ServiceNow’s Now Platform “optimize(s) processes, connect(s) data and silos, and accelerate(s) innovation at scale using the power of generative AI to create new value on a single, unifying platform built for digital transformation.” The company’s solutions help to accelerate a company’s digital initiatives, drive employee efficiency, while improving the overall customer experience. Over 8,100 global customers and roughly 85% of the Fortune 500 use its Now Platform, and the firm continues to drive continued growth with renewal rates in the 98%-99% range. ServiceNow generated 26% year-over-year subscription revenue growth in fiscal 2023, with a 28% non-GAAP operating margin and 30% non-GAAP free cash flow margin. Things are expected to improve in 2024, too, with ServiceNow targeting a 21.5%-22% increase in subscription revenue and for both its non-GAAP operating margin and non-GAAP free cash flow margin to improve a percentage point, respectively. Driving this expected expansion is what management describes as traction with its GenAI products, which are helping to pull forward its pipeline. We like ServiceNow quite a bit, but the company doesn’t quite make the cut for inclusion in the Best Ideas Newsletter portfolio as we continue to prefer larger big cap tech giants that are performing wonderfully.