It’s another busy week for earnings reports, with many businesses providing updates for a period that encompassed the worst of the COVID-19 lockdown and accompanying economic downturn.
It’s now abundantly clear that many companies were woefully underprepared. Some were completely behind the digital curve, while others were laden with debt and slim on cash.
But three recent report cards stand out from the crowd: Arista Networks (NYSE:ANET), Twilio (NYSE:TWLO), and Disney (NYSE:DIS). Here’s why all three are benefiting from long-term technology trends reinforced during the pandemic.
1. Arista Networks: Dot-com era networking infrastructure needs to go
Riding over a decade of rapid growth in cloud computing from giants in the industry like Amazon and Microsoft, Arista Networks’ prospects have taken a negative turn in recent years. The infrastructure needs of cloud titans are starting to slow. Arista’s revenue has consequently also ebbed, even starting to contract late in 2019. An expected slowdown in spending from many of its customers during the pandemic didn’t help matters. Shares have been languishing in volatile sideways action for over two years now.
But Arista’s second-quarter report came as a small but positive surprise. While revenue declined 11% from a year ago to $541 million, it represented a sequential increase of 3% over the first quarter and beat management’s own guidance. Amid the broad adoption of work-from-home policies and a renewed shift toward the cloud for enterprise use, the company reported a rebound in demand during the period.
Prospects for more cloud and networking infrastructure upgrades loom in the coming years, especially for smaller organizations. Some organizations are still using ancient dot-com era equipment stuffed in coat closets. Arista’s Cognitive Campus service, which is geared toward replacing legacy on-premises business networks with new cloud-based operations, did $100 million in sales in its first year. Management is optimistic that figure will double within another five years or so.
Also on the way is 400G networking hardware, which will begin shipping late this year and into next and could prompt an eventual upgrade cycle in existing data centers. Even in lean times, Arista remains highly profitable, generating an adjusted income profit margin of 27% in Q2. With $2.78 billion in cash and equivalents, zero debt, and traffic across the web and cloud not abating anytime soon, the long-term potential for Arista remains intact.
2. Twilio: The call center of yesteryear doesn’t cut it anymore
Next up is customer experience software firm Twilio. I’ve been critical of Twilio in the past, like after it took over email management outfit SendGrid in early 2019 for $3 billion. But I changed my tune toward the end of last year as the company digested its expensive takeover and demonstrated strong growth in the nascent cloud-based communications and customer experience industry.
That thesis has been borne out in grand fashion in recent months. COVID-19 has shoved the world down the digital path, and many organizations have had to accelerate their adoption of new ways to stay in touch with their customers — from chats and video conferences to new tech-enabled call centers. As a result, Twilio’s revenue is up 51% through the first half of 2020.
To be sure, this is an expensive stock after the Q2 report. Shares are currently trading for 20 times one-year forward revenue, a price tag that assumes double-digit expansion will continue for the foreseeable future (with profitability being a concern much later). But Twilio is well-positioned to capitalize on its opportunity, having $1.9 billion in cash and equivalents and $471 million in convertible debt on the books at the end of June. After the last report, Twilio announced it will raise an additional $1.25 billion in cash via issuance of new stock. With a current market cap of $38 billion, the fresh infusion of liquidity could go a long way toward Twilio’s expansion without diluting existing shareholders too much.
Cloud and customer experience spending is expected to grow near an 18% per year rate through most of the next decade. As communications continue to move online, Twilio’s upside could be far from over.
3. Disney: No theme parks, no theaters, no insurmountable problem
To say Disney had a great spring 2020 would be incorrect. But considering the current state of affairs for the travel and entertainment industry, things could have been a lot worse. In fact, while sales were down 42% from 2019 to $11.8 billion, Disney is still sporting a top-line gain of 0.3% through the first three quarters of its current fiscal year. While operating income is down 34% on the year after the latest report, Disney is still shockingly profitable, with $7.5 billion in operating income.
With the worst of the crisis hopefully in the rearview mirror, it’s time to start thinking seriously about Disney’s long-term growth again. With its parks operating on a limited basis and movie theaters shuttered, this mouse has quickly adjusted to a world of web-based entertainment. TV subscriptions totaled 101.5 million at the end of June, with 57.5 million of those subs for Disney+.
Speaking of Disney+, the company will test the waters with a premium direct-to-consumer offering of the live-action Mulan blockbuster hopeful. Starting Sept. 4, subscribers can view the film for $29.99, with the movie going to theaters in markets where the streaming service isn’t yet available and where cinemas are open.
It will be fascinating to test consumers’ willingness to forgo the silver screen and instead watch feature films from their couches. Given the pre-pandemic cost of taking a family of four to the movies, I’m optimistic that Disney and its fans will embrace this new era of entertainment.
Add in the resumption of live sports (basketball, and, for the moment, baseball), and it’s looking like Mickey may have endured another crisis and will begin rebuilding from here on out. The company is laden with $64.4 billion in debt, but has ample liquidity, with cash and equivalents of $23.1 billion. Already starting to turn the corner on the bottom line, Disney is in much better shape than I expected after the last quarterly update. It remains one of my core holdings.
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