First-quarter profits for General Motors (GM +1.71%) set the stage for a strong fiscal year. Shares of Editas Medicine (EDIT +7.84%) rise despite a mixed first quarter. The Call of Duty franchise highlights Activision Blizzard's (ATVI +0.00%) Q1. In this episode of MarketFoolery, Motley Fool analyst Ron Gross analyzes those stories and weighs in on Match Group's (MTCH +0.00%) hope for a "summer of love" in 2021.
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This video was recorded on May 5, 2021.
Chris Hill: It's Wednesday, May 5th. Happy Cinco de Mayo, welcome to MarketFoolery. I'm Chris Hill. With me today, the one and only, Ron Gross. Thanks for being here.
Ron Gross: Hey, Chris, good to be here always.
Hill: We have earnings from the following industries: video games, gene editing, and dating, [laughs] which is quite a buffet.
Gross: Where does the thread go?
Hill: The thread is earnings. That's the only thread.
Gross: There you go. Okay.
Hill: We're actually going to start with automotive because General Motors' first-quarter profits came in much higher than expected. There are a lot of different ways we can go here, Ron, but here's the thing I'm most curious about. Because one of the things Mary Barra, the CEO of GM, talked about was the impact of the chip shortage. We've talked on this show before about how many different industries are affected by the chip shortage, and automotive is certainly on that list. She said the impact for General Motors is going to be somewhere in the neighborhood of $1.5 to $2 billion this year. Yet, GM is maintaining their profit guidance for the full fiscal year. How are they pulling that off?
Gross: Not only maintaining it, but they're coming in at the high end, which is really impressive. Part of it is really tight cost controls. So they're bringing more money to the bottom line, even though revenue is a little bit down fractionally from last year. Also, the focus on the higher-margin pickup trucks and SUVs are helping bring money to the bottom line. You've got really strong demand. You've got prices for cars are high, used and new, and inventory is light. It's a really interesting economic case study that they should teach in college. Part of the reason inventory is light is because of this chip shortage, and they're going to have to work through that. As Mary Barra said, the second half of the year she thinks will be strong, but the second quarter, which we're in right now, could be actually worse. That's where you see the $1.5 billion to $2.5 billion potential bite out of profits. But they're doing a really wonderful job at controlling those costs. Therefore, they are able to continue to generate profits and continue to guide profits at the high-end of the range.
They're spending a ton of money as well. Capital spending this year is expected to be $9billion-$10 billion. About $7 billion of that is focused on electric and autonomous vehicle development, which I think you've quite frankly have to do in this environment, in this new age. I quote her, she said, "We will continue to convert assembly plants to build EVs and expand our battery cell capacity as we make progress on our goal of EV market share leadership in North America." Market share leadership remains to be seen. We'll see. Their battery technology gets very high reviews, very high marks. The company is doing a really, really nice job. Back in the day, back in our day, Chris, there was a saying, and it was really a misquoted saying, but it caught on, it says, "As goes GM, so goes the nation." Because it was really thought of as a bellwether back in the day. Maybe there are other bellwethers that have taken its place nowadays, but it just was nice to see this quarter. Despite the lack of chips that they were able to produce solid results, guide solidly. I think Mary Barra is an exceptional CEO, and I thought it was a very nice report. We'll see how bad the second quarter is as a result of chips, but I think the year is going to be strong.
Hill: As you said, the cost controls, and in particular Mary Barra and her team's ability to control those costs, is fascinating to see here. I don't want to jinx them. But if Q2 turns out to be not as bad as expected, it really sets them up for a strong second half of the year.
Gross: I think that's right, and I think that's probably what we'll end up seeing, barring any unforeseen shock to the supply chain or any other shock. These stocks, automotive in general, are not expensive companies and they typically are never expensive. Trading 10 times, 9 times, 11 times, depending on what you're looking at, Honda, Toyota, BMW. Even though GM is up I think somewhere like 175% of the stock over the last year, at $57, you're still only trading at around 10 times earnings. If this can continue, if autonomous vehicles, if electric vehicles, if the batteries, if this can all come into place as expected, the stock, after this run-up, still isn't expensive.
Hill: It was a strong first quarter for Match Group. The parent company of Tinder, match.com and others had profits and revenue that were higher than expected. They're expecting an increase in dating demand as the pandemic subsides. If Match Group was doing well during the pandemic, what are their results going to look like six months from now?
Gross: They again are guiding above expectations as the dating apps gain steam. As you said, as the pandemic eases, at least that's what they think they're going to see. There's also this whole new thing going on, which is called the social discovery space, which lets folks, users, discover and connect with people, but it's not exclusively for dating. It could be for friendship, for other things, and that's a new area that they're moving into partially. They are trying to spur that on by an acquisition of a company called Hyperconnect. That'll be another avenue for them to draw on. But even without that, just looking at this quarter, very, very strong report. As you say, revenue up 23%. That's driven by an 18% revenue rise at Tinder, average subscriber growth of 15%. There are other brands, Hinge and what have you, saw revenue increase of 30%. Avenue revenue per user, ARPU, rose 9%, total subscribers up 12%. These are very strong results. Operating margins widened. They, too, had put some leverage with respect to expenses, operating expenses in particular. That led to an operating income increase of 38%. Very strong.
As we said, revenue guidance is above expectations. Second-quarter revenue is expected to be 22%-24% higher than last year. It's funny, they're looking for a quote, summer of love this summer. Now that things are easing, I won't make a comment about whether they're right about that or not, and they do rightly. Mentioned that a big part of the world still remains at risk: Brazil, India, Japan. Certain European markets are actually worsening, and we can't forget that, it's not over yet, and that will impact their business negatively. But overall, I think they're seeing some really bright spots and they are looking forward to the pandemic easing even further and business growing as a result.
Hill: Shares of Match Group up about 5% this morning. It's down from its high earlier in the year, but I'm assuming this is not a General Motors type valuation.
Gross: Well, that depends, Chris. How does 40 times EBITDA or 55 times forward earnings hit you? The stock is up 100% over the last year. I don't know, the results are great. Is it changing the world in a sense? I guess it's changing how we meet each other. In that sense, sure. 40 times cash flow is a little rich for me. I'm happy to just keep an eye on it, watch it, report back to our listeners, but it's not one for me.
Hill: Mixed first-quarter results for Editas Medicine revenue for the gene-editing company look good, but they've missed on the bottom line. Still, though, shares of Editas are up a little bit this morning.
Gross: This is one I talk about a lot. I talk about the whole gene space a lot, the gene-editing space a lot, and its main competitors, Intellia and CRISPR as well. I just have a few brief comments here. When it comes to these early-stage developmental biotech companies, I just really don't pay attention to quarterly results. They just don't mean much from a typical revenue and earnings perspective. Those are not meaningful metrics. It's more about the progress of their technology or of their drug pipeline and the health of the balance sheet. That's a metric I definitely would focus on here because these companies will not be profitable and probably not profitable for some time to have the balance sheet, the war chest to get them through to the next phase where revenue kicks in at a higher level, free cash flow kicks in, if it ever will. This report in particular looks good to me from a technology progress perspective. I know Editas' stock has gotten smacked over the last year. It probably was artificially high at one point in the $90s, now we're back into the $30s. They took advantage in the $60s and did a follow-on offering, raised $250 million to shore up that balance sheet, which was very smart of them. But I think the report looks good to me from a technology perspective.
Investment remains highly speculative, but the balance sheet is strong with $720 million of cash. They added a Chief Scientific Officer, which they needed to do, which I like that as well. I like this report, I'm glad the stock is reacting favorably, but it's just one day. This is a multiyear long investment in this and the entire space, and they always continue to advocate a basket approach.
Hill: The Chief Scientific Officer, is that replacing someone or is that a new position?
Gross: Someone had left and there was a bit of a shake-up at the top, even with the CEO. So it's good that they are starting to get strong people back in there.
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Shares of Activision Blizzard up this morning after first-quarter profits and revenue came in higher than expected. Activision Blizzard also raised full-year guidance. Safe to assume that the Call of Duty franchise is continuing to get it done?
Gross: Call of Duty is very impressive. Their monthly active users increased sequentially, grew over 40%, partially due to the introduction of Free Play. That's something new that they introduced but their in-game net bookings once you're in the game on console and PC grew more than 60%. So yes, Call of Duty, very very strong led to a 27% increase in revenue and net booking increase of 36%. In-game bookings we talked about up 40%. They now have 435 million monthly active users, MAUs. Not just Call of Duty, the World of Warcraft continues to get it done, Candy Crush, which I just always giggle about a little bit. [laughs] When they made that acquisition, it was just mind-boggling to me but Candy Crush continues to put up strong numbers as well. They really have strong franchises that are continuing to generate really strong growth numbers. Adjusted earnings up 29%. That's a really strong quarter. They've raised full-year guidance.
I think it's going to be interesting to watch what happens with these types of companies, gaming, streaming, companies that benefited from us sitting on our couches being home all the time during the pandemic. When we start to go out more, is it just the way it works? Is growth going to slow? I think it probably has to. It's just a matter of how much but it's not necessarily a bad thing because they did get all this growth over the last year. It's better than not having all the growth. We just have to realize that doesn't always continue when you have a systemic change or some hit to the system, the economic system or the health system would create a one-year one-time occurrence if you will. We just have to factor that into our analysis.
Hill: It also seems like video game companies don't have the same level of risk when it comes to franchise fatigue that movie studios do, whereas movie studios are just like, " God. Another Transformers movie, really?" Whereas with Call of Duty, you just don't see that same level of fatigue as long as whatever is the next iteration is good, people tend to be happy with it.
Gross: The next iterations have been good, which is key but also what you can do once you're in the game where you can keep generating revenue for Activision, whether it's purchasing something or upgrading something. That's pretty exciting too. You can continue to play the same game but grow with that game and that generates revenue for Activision. That's a pretty powerful model as well.
Hill: Ron Gross, I always appreciate talking to you and especially on your birthday, my friend. Happy birthday. Thanks for being here.
Gross: Thank you very much Chris. It's always a pleasure. Thanks a lot.
Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery, the show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
