Good Morning!

I hope everyone has had a great February to this point! Before jumping into things, I would love to hear your thoughts on helping me and my friends settle a polarizing debate:

Which Apple feature is better? The one tap Wi-Fi sharing feature or the one time passcode auto fill feature via text? I have my answer (and I don’t think it’s close!) but would love to hear yours!

Also, I know I sent an edition a couple weeks ago, but there is just too much going on in the market for me to keep my mouth shut. In today’s edition, I look forward to sharing some thoughts on PayPal, Disney, and Meta’s earnings as well as turning back the clock to the 1997 Berkshire Annual Meeting!

Showtime!

Three quick housekeeping announcements/reminders before we get started:

1. All opinions in The Crossover are 100% my own.

2. No Artificial Intelligence/ChatGPT is used in writing The Crossover. (Who needs AI when you have AL!)

3. The Crossover is not investment advice and is for education and entertainment purposes solely.

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THE BIG THREE

1. Is PayPal on the Prowl?

Last Wednesday, PayPal announced their Q4 earnings which included beats on both the top and bottom line.

• Revenue: $8.03 (actual) vs. $7.87 (expected)

• Earnings per share: $1.48 (actual) vs. $1.36 (expected)

However, the Company did have a meaningful miss on their Q1 EPS forecast for ‘24 projecting $5.10 a share while analysts projected $5.48 a share — a ~7% miss.

On the earnings call, CEO Alex Chriss had this to say as part of his opening remarks:

“As promised, we're doing a lot of things to drive change internally and externally. However, nothing happens overnight. It will take time for some of our initiatives to scale and move the needle, but the initial customer reaction and merchant demand for our new innovations has been encouraging. 2024 is going to be a transition year, focused on execution to position the business for long-term success. Our clear goal is to reshape the company to accelerate profitable growth and margin expansion in the years ahead.”

Alan’s Angle: Over the past several weeks, I have been a buyer of $PYPL stock. After earnings saw the stock go down 10%, I have continued to buy more bringing my cost basis to a little under $59 a share.

While PayPal is facing stiff competition from the likes of Apple Pay, Google Pay, among others, I do think that the new management team led by CEO Alex Chriss has arrived just in time to rescue the company and stock that is down ~80% from all time highs.

When I think about my PayPal thesis, at the highest level, I just feel the company has much more long-term upside than downside. The company is expected to do $5B in FCF in 2024 and with a market cap of $60B, that means they are trading at ~12x FCF. If the new management team can continue to maintain, or even grow, that cash flow, I think this investment will be a winner.

PayPal also shared that they expect to do ~$5B in share buybacks this year which represents ~8% of the market cap. The company also has a strong balance sheet with $17B in cash and $10B in debt.

Two more quick things that stand out to me:

1. I am excited about the future product roadmap that was highlighted a few weeks back. While it did not “shock the world” like Chriss had projected, PayPal Fast Lane & the developments around Venmo look legit.

2. I really like the overall angle that management is taking from a messaging and disclosure perspective. Whether it is the “prove it” mentality they are emphasizing (versus celebrating a good Q4 and sharing aggressive guidance for the year) or their transparency around stock-based compensation, this is the mentality that I like to see.

Links: Earnings Release x Earnings Presentation x Call Transcript

2. Disney’s Epic Investment

Last Wednesday, Disney announced their Q1 earnings. Here were the results:

• Revenue: $23.55B (actual) vs. $23.64B (expected)

• EPS: $1.22 (actual) vs. $0.99 (expected)

While there was a slight miss on the top line, the big bottom line beat made Wall Street very happy as Iger’s cost-cutting measures are starting to pay dividends leading to the stock taking off 10% the next trading day.

Additionally, Disney had a plethora of announcements on the call:

1. Disney is making a $1.5B investment in Epic Games (Fortnite owner)

2. ESPN launching direct to consumer service 2025

3. Beginning a $3B share buyback program

4. Increasing cash dividend by 50%

5. Securing Taylor Swift’s Eras Tour movie rights for Disney+

There were several other notable announcements as well, including details on the sports streaming joint venture with Fox and Warner Bros. Discovery, a sequel of Moana in 2025, and Nick Saban joining ESPN this fall.

Alan’s Angle: Simply put, Bob Iger had a vintage performance.

At a time when Disney is under serious criticism and facing pressure from activist investor Nelson Peltz, Iger delivered with strong execution and impressive strategic and creative wins.

There are two key points that I want to double-click on from above:

1. I think the Epic Games investment is brilliant from multiple perspectives. Epic’s crown jewel, Fortnite, has over 200M monthly players globally, a majority of which are younger males who have continued to gravitate towards video games versus prior generations who connected more with Pixar, Marval, or a Lucas Films. Not only will Disney be able to bring an Ironman consistently into Fortnite, but this will also put fuel into the fire for their parks as Disney will look to create a Fortnite themed “world,” serving as yet another massive pull to the most magical place on earth.

2. I also think that the securing the Taylor Swift movie (for a reported $75M) was a brilliant move. As Disney+ tries to become a service that is much more than just a Marvel or Lucas Film platform. Getting the millions (and millions) of Swifties behind it can help usher in the next chapter. With the Company projecting streaming profitability at the end of the year, even more so this is something they can afford — especially when you think about the opportunity cost of a Netflix receiving the rights.

I don’t know about you, but I hope Iger continues to push off retirement! This is entertaining!

Links: Earnings Release x Earnings Presentation x Call Transcript x Epic Investment

3. Meta is on the Mark!

On February 1st, Meta kicked off the month with a bang with strong earnings:

• Revenue: $40.1 billion (actual) vs. $39.18 billion (expected)

• Earnings per share: $5.33 (actual) vs. $4.96 (expected)

• Daily active users (DAUs): 2.11 billion (actual) vs. 2.08 billion (expected)

With $META’s cash balance growing to ~$65B (vs. ~$41B in the year prior) the company announced a $50B share buyback and a quarterly $0.50 dividend.

Alan’s Angle:

Honestly. I do not really have anything to add to this. I just really wanted to make the “Meta is on the Mark” pun. 😉 

Also, as $META continues to skyrocket, this means that the stock is up over 400% since Cramer emotionally apologized on CNBC for his bullishness on $META.

I really like Cramer and hope he is not too hard on himself. It happens — especially when you need to talk about stocks everyday!

THE BERKSHIRE BUFFET

1997 Chairman’s Letter & Annual Meeting

I recently watched some of the 1997 Berkshire Hathaway Annual Meeting and read the 1997 Chairman’s Letter. As you might have guessed, I really enjoyed it!

Specifically, the first 10 minutes of the meeting were focused on the formalities of an annual meeting, and I still thought they were incredible. There is just a theater and romance to everything that Berkshire has always done.

When looking at the Chairman’s Letter, one component that jumped out to me was when Buffett discussed the passing of long-time Coca Cola CEO Roberto Goizueta.

Here is a small excerpt from the section on Goizueta.

“After his death, I read every one of the more than 100 letters and notes he had written me during the past nine years. Those messages could well serve as a guidebook for success in both business and life… I will miss him enormously.”

If Buffett were to speak this highly of someone, I thought this would be someone well worth my time someone to look into. I have just begun this process, but it has been very interesting so far and look forward to continuing to do so:

Here is one quote from Goizueta that jumped out to me that I wanted to share:

“If you think you are going to be successful running your business in the next ten years the way you did in the last ten years, you’re out of your mind. To succeed, you have to disturb the present."

Links: 1997 Chairman’s Letter x 1997 Meeting x Goizueta Quotes

KEY CHART

Free Cash Flow & Burritos

Not only has Chipotle filled the stomachs of patrons, but they have also filled the wallets of shareholders! The stock is up over 5,500% since IPO and one of the main reasons why is the explosion of cash flow that the Company has seen.

The chart above highlights just that showing the correlation between the appreciation in the stock price relative to Chipotle’s FCF per Share.

Free Cash Flow is the name of the game!

Links: Chipotle S1 (2006) x Chipotle 10K (2023)

GOLDEN NUGGETS

1. Work Ethic: The Lost Art

2. Speed Skating Strategy

3. NFL & a Long Term Perspective

SOMETHING (EVEN MORE) FUN

The Historic Rivalry: Calculator vs. Alarm Clock

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.