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Media Talk

4Q24 Earnings Updates: Part Two – GOOG, DIS, SONY, WMT, VICI, HD, and NXST

Alphabet (GOOG/GOOGL): GOOG reported mixed results and guidance for 4Q24 and 1Q25 relative to Wall Street and expectations.  The shares dipped about 7% in response but remain up about 1% this year after gaining 14% in 4Q24 and 35% last year.  4Q results were strong and exceeded expectations in the advertising-supported business at Search and YouTube.  Cloud grew 30%, but that was below expectations and a deceleration from 35% in 3Q24.  Guidance indicated that slower growth lies ahead in the first half of 2025 due to strength in the dollar and tough comparisons at Search and YouTube and capacity constraints at Cloud.  Given the intense scrutiny faced by GOOG and secular concerns about the impact of AI on Search and the debate over the return on massive investment in AI infrastructure, GOOG shares are likely to take time to recover and resume upward.  However, that is what we expect and despite the new controversy, we think there were many items in the earnings report that support sustained and superior secular growth for GOOG.

First, management offered detail on the impact of Gemini AI search summaries accompanying the usual search queries.  Engagement is improved and, importantly, there appears to be strong monetization of Gemini summaries with no discounting.  AI summaries are also opening up more ad opportunities, particularly in shopping queries.  The secular bear case for GOOG is that AI will undercut the company’s dominant and highly profitable search business.

Second, the Cloud shortfall raises questions about growth and the eventual return on the massive capital spending on AI infrastructure.  Even after big capex guidance increases from Meta Platforms and Microsoft, GOOG’s announcement that 2025 capex would rise to $70-75 billion (vs. expectations for low $60s) was a big surprise.  Management stated that the Cloud shortfall was due to a lack of capacity.  Their argument was supported by the fact that Cloud operating profit margins rose even though revenue was below budget.  Furthermore, the more AI intense areas of the Cloud business saw the fastest growth with more mundane cloud services lagging.  Capacity constraints and high margins strongly suggest that increased investment is warranted.

Finally, YouTube had another great quarter and there is little to complain about.  Recent third-party studies show YouTube has the largest share of video viewing and is extending its lead.  Only Netflix is keeping up with YouTube’s usage growth.

Disney (DIS): DIS shares initially rose following better-than-expected 1Q25 results.  EPS came in well ahead of estimates with segment level profits ahead of estimates in each division.  Revenue matched expectations at the corporate and segment level.  Management reiterated its recently issued full-year guidance that was part of a well-received three-year outlook given just three months ago.  Investors found fault with the lack of guidance increase given the big beat, worrying it implies below target growth for the rest of FY25 and lower confidence in the three-year outlook.  The shares subsequently retreated and now sit down a little from pre-earnings release levels.  This seems overly pessimistic to us since management was asked about the lack of a 2025 guidance increase and noted that it was just too early in the new fiscal year and too soon since the guidance was established to increase the outlook.  Management also admitted the current guidance could be conservative.  A few estimates were raised above current guidance, an unusual occurrence for brokerage-employed analysts.  Supporting the view that management is just being conservative is positive bookings for the Orlando theme park even as Universal’s Epic theme park in Orlando is opening a major expansion in May.  Theme Parks represent over half of Disney’s profits and have endured slower profit growth recently on the combination of hurricane impacts, expenses for new cruise ships, and a modest softening of demand.  Trends in other divisions also look solid with the run to profits in streaming appearing stronger than expected, ESPN growing steadily, and the linear TV networks business weak but no longer worsening.  Northlake maintains high confidence in DIS shares and thinks the stock could be a big performer later this year as earnings estimates rise.  At less than 20 times earnings for one of America’s most beloved brands, the shares look very attractive.

SONY (SONY): SONY is finally rewarding our patience with the shares up 40% from late October and trading at new all-time highs.  Recently reported 3Q24 earnings provided a positive surprise and increased guidance for the second consecutive quarter.  3Q24 growth was driven by the company’s video games and music businesses, two of the three largest segments.  Video games saw better than expected sales of the latest PlayStation console and the newest software titles.  Hardware is sold at a modest margin so the fact that segment operating profits exceeded expectations indicates broad strength.  Console margins should improve now that sales of the PlayStation 5 are running ahead of management projections.  Music contributed its run of impressive growth with top selling artists in new releases and catalogue.  The company’s semiconductor business that supplies chips for high end smartphones showed improvement despite investor concerns about smartphone demand globally.  Management added confidence to the segment outlook by projecting an 11% top-line gain for the upcoming fiscal year.  Given the better-than-expected results in the company’s three largest divisions, management raised guidance for the fiscal year ending this coming March 31st.  A little before the earnings report SONY announced management changes including promotion of the company’s highly respected CFO to CEO and several new division heads.  The new CEO has an impressive track record improving results as an operating manager at several SONY divisions.  As CFO, he has also led the shift to a more Wall Street and shareholder friendly culture.  A favorable shift in the corporate culture has been a core part of our SONY investment thesis.  In another sign of positive change, the new CEO is the first ever woman to hold the position.  SONY is exiting a multiyear investment period that is expected to pay off with a growth acceleration led by video games, music, imaging sensors for autos, and the company’s dominance in anime.  We were early but the payoff has begun.

Walmart (WMT): WMT shares reacted negatively to the company’s 4Q25 earnings report and guidance update, dropping about 6% on the day of the report and reaching a decline of nearly 10% before its first meaningful rebound.  The 4Q25 report was ahead of Wall Street expectations although the magnitude of the upside was not as large as in previous quarters.  Guidance fell below expectations as well, although we find it conservative and better than perceived.  Northlake sees the problem as one of expectations rather than any change in the superior performance and growth and profitability acceleration the company has been enjoying the last couple of years.  WMT shares doubled from the end of 2023 until just prior to the earnings release.  During this time, the stocks P-E multiple moved to an all-time high 35X, matching that of high growth retailers like Amazon and Costco and leading technology companies.  The massive move in the shares had raised expectations to the point that anything short of another big “beat and raise” was going to be sold in the short-term.  Northlake sees little to be concerned about regarding our long-term thesis for WMT.  Guidance appears conservative and it is notable that after a couple of years of issuing 4-6% growth guidance that the company felt confident raising guidance of 5-7%.  Even if traders looked for more that is not a sign of management being concerned.  Management noted continued progress in what Wall Street is calling the company second profit and loss statement: ecommerce, advertising, and fulfillment.  All three look good for the current year and ecommerce is projected to reach profitability.  One risk to monitor for the core business is tariffs as WMT sources many products from abroad, especially China.  However, the company is much better positioned to handle tariffs than competitors given its scale.  If inflation ticks higher or the economy weakens, WMT is likely to continue to gain market share among low- and high-income shoppers.  We think the share pullback will be a pause that refreshes thanks to effective execution the shareholder friendly win-win strategy of playing offense and defense.

VICI Properties (VICI): VICI reported the company’s usual in-line results.  As an owner of real estate, revenue is contractually obligated rent, which makes financial results highly predictable.  For all of 2024, VICI reported growth in Adjusted Funds From Operation of 4%.  When combined with the dividend that averaged about 5%, this growth sets up a 10% total return, assuming investors keep the multiple of AFFO stable.  Beyond 4Q24 earnings, there were two pieces of news that are bullish for the shares.  First, the company guided to better-than-expected AFFO growth in 2025 of 3%.  Importantly, this does not include anything for current pending or yet to be announced deals.  Second, the company announced a significant deal to finance an experiential living development in Beverly Hills.  The deal looks typical for VICI as the company has expanded beyond casino ownership to experiential real estate. We expect additional deals to be announced over the course of 2025 that should push growth to the mid-single-digits. Third, management noted that Las Vegas looks stable.  Las Vegas represents the company’s largest concentration of real estate ownership. As VICI diversifies and continues to build its track record, we think the multiple of AFFO can expand to levels consistent with other triple net lease REITs.  With 2025 looking like a volatile year for markets and news flow, the setup is good for multiple expansion this year when investors may seek out more conservative investments.

Home Depot (HD): HD shares fell for six consecutive days ahead of the company’s 4Q24 earnings report.  Prior to that stretch, the stock performed well, reaching its highest point since the beginning of 2022, which was when it became apparent that the big gains in sales and profits during the pandemic represented a pull forward of home improvement demand.  More recently, consensus had begun forming that homeowners had grown accustomed to higher borrowing rates and the secular growth in home improvement spending was set to resume.  4Q24 earnings did in fact reveal that comparable stores sales grew for the first time in nearly three years and management provided a forecast for modest comp store sales growth in 2025.  Improved sales growth dominated the narrative exiting the quarter and HD shares rallied sharply.  The stock acted well despite management providing an earnings outlook that was below consensus expectations for 2025.  We suspect that both the sales and earnings forecast will prove conservative if current economic growth is sustained.  Risks to our view are recent declines in consumer in confidence and always present weather volatility. Recent acquisitions and continuing investment in the business are helping to reset and ultimately improve sales and earnings growth.  Pent-up demand definitely exists after three sluggish years, especially among larger projects that are more sensitive to interest rates.  Given many uncertainties in the outlook due to dramatic changes coming from Washington, it may take a couple more quarters for HD’s growth to improve and investors to view guidance as conservative.  We think it will be worth the wait.  Recent investments in the business that have widened the company’s growth opportunities will accelerate earnings growth while the shares trade at only small premium to the market.  HD fits perfectly in Northlake’s search for high-quality growth stocks trading at moderate valuation compared to the average stock.

Nexstar Media Group (NXST): NXST reported a positive surprise for 4Q24 with revenues, EBITDA, and free cash flow ahead of expectations.  Guidance provided for 2025 was reassuring especially after several peers indicated 1Q25 would have weakness in local advertising.  NXST has more national advertising due to owning stations in most larger cities and having the CW broadcast network.  The CW was an especially bright point in 4Q24 and on the conference call.  A long-promised shift from losses due to investments to reorient the network has arrived.  The company is also making good progress with its national cable news network, NewsNation.  These two assets are providing growth in 2025 to offset modestly weak local news advertising and flattish year for retransmission fees before about 60% of subscribers renew late this year.  Expense control was also a highlight with further reductions anticipated in 2025.  Management spoke confidently about the company’s outlook and noted that recent trends in linear television favor broadcast networks.  CEO Perry Sook, the most influential broadcasting executive in the country, feels that the industry is due for significant deregulation under the Trump FCC that could present opportunities for NXST to get back to its fantastic track record of growth from acquisitions. Importantly, management promised that the hurdle rate on acquisition is high compared to their view of the stock being 30-40% undervalued.  With a strong balance sheet and exceptional free cash flow, NXST is in a good position to enhance shareholder value via continued share repurchases and dividend increases or M&A.  If broadcast deregulation comes through in 2025, investor sentiment toward broadcasters like NXST should improve leading to higher valuation for the industry leader. With 2025 guidance providing a healthy floor, we think NXST has the potential to recover toward 2024 highs of $190 or higher.  The rebound is off to a good start with the shares up 12% to $163 in response to the earnings and guidance. While we wait for further increases, NXST stock sports a dividend yield of 5%,

GOOG/GOOGL, DIS, SONY, WMT, VICI, HD, and NXST are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.

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