Earnings season is here. The next few weeks will likely feature a slew of dramatic stock price swings. However, a better way to view this period is through the lens of a company's long-term investment thesis and whether management's short- and long-term strategies are helping or hurting the company's success.
In the case of Deere & Company (DE -0.18%), its long-term investment thesis is centered around the ability to sell more equipment. There are a lot of traditional factors at play, from new product features, competition, commodity prices, capital spending from Deere's customers, dealer inventories, and more. And we'll get updates on a lot about these factors, as well as Deere's numbers on the upcoming earnings call.
But what I'm really looking forward to hearing is Deere's progress on integrating artificial intelligence (AI) into more products. Here's why Deere is a must-watch AI stock this earnings season, and what to look for when Deere reports earnings on Aug. 18.
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AI investments and customer reception
Since unveiling its autonomous tractor in January 2022, Deere's AI commentary has been relatively muted, especially on its earnings calls. And although it has discussed its technological innovations during investor presentations, these updates have mainly been ultra-long-term ideas that won't impact the business in the next few years.
Given the recent surge in AI discussion we've seen in the last couple of months, I'd expect Deere to give a meaningful update on its AI solutions and provide a more defined timeline with short- and long-term targets instead of just big-picture plans.
Deere can invest time and money into AI. But ultimately, its customers and the industries it serves will need to buy into this technology. Investors will want to know if customers are the ones leading the conversation, or if Deere is just investing in AI and hoping it works.
Deere is in a bit of a tricky position. It's not a big tech company. And many of its customers may be more fearful than hopeful about the impact AI can have on their businesses -- especially smaller farmers that may be worried AI will lead to further consolidation and put more power in the hands of the major operators.
Although Deere has been investing in AI and robotics for quite some time, the major competitive advantages of these investments and their payoff haven't been felt yet. Rather, Deere's extraordinary results over the last few years seem to be in response to the more traditional factors such as higher commodity prices, strong spending from its end customers, and a general uptick in the cycle.
The opportunity
Deere has experienced the best three-year period in company history. All-time-high revenue and net income are impressive achievements. The question now is whether Deere can sustain this performance, or if growth will slow and Deere will enter a natural contraction.
Another key theme to watch for Deere this quarter and in the years to come is if AI can reduce the cyclicality of the company's performance. If there is sustained industrywide adoption of new technologies, and Deere strengthens itself with a solid lead over its competitors with autonomous solutions, then it could help Deere either extend this growth cycle or limit the damage during a downturn.
For example, Apple's strong brand and integrated ecosystem mitigate the effects of slowdowns in consumer discretionary spending, laptop and new smartphone demand, and other factors. Perhaps the best example is Tesla. The company's industry-leading operating margin, paired with the ongoing shift toward electric vehicles, allows the company to combat industry challenges better than its peers.
In sum, if Deere proves that its solutions can boost crop yield, reduce downtime, and help its customers use fewer materials like fertilizer and water to cut down expenses, then it has a real chance of reducing its correlation with the broader agriculture, construction, and forestry industries.
Is Deere stock a buy?
Deere stock is hovering around an all-time high. Virtually everything has gone well for the business lately. And when times are this good, it's easy to be pessimistic and expect fortunes to turn.
Deere's numbers are so good that growth can stall or even be a little negative and the stock would still be a great value. Over the last three years, Deere stock has gained 147%, and its price-to-earnings ratio has fallen 27% and now sits at just under 15. Usually when a stock stages an epic rally like that, its P/E ratio would be far higher. But this goes to show that Deere's profit growth rate has actually exceeded the growth rate in its stock price.
More important than this quarter's numbers or really Deere's numbers over the next couple of years is the company's ability to convert research and development expenses into real results. Deere has done a phenomenal job reinvesting profits back into its business. Its focus has been on growth over its dividend, which looks to have been the smart move for Deere.
However, investing in growth has its risks. Deere's operating expenses have surged in lockstep with its net income growth, making the company bigger and bulkier, and more vulnerable if profits fall.
Deere needs to prove that its AI investments are paying off by quantifying the impact of its solutions in the same way that Apple began separating its services results from its product results. Or how Amazon separates Amazon Web Services' performance from its retail business. Until then, it's going to be hard for investors to determine what kind of premium Deere stock deserves as a direct result of AI.
