The battle of Nikola has started; earnings to watch next week

Aside from the short seller report and whether it is correct or not, Nikola has caught attention of its lofty promises to manufacture the world’s best electric truck. The facts are still that the company is valued at $14.2bn with analysts covering the company not expecting more than $283mn in revenue by FY2022. Even in today’s frothy equity market this is an aggressive valuation based on a strong vision and little execution so far.

Adobe is next week’s most interesting earnings release

Earnings releases are running low outside the normal quarterly calendar and only companies not following the regular calendar quarters are reporting. Next week there are four earnings releases worth watching with Adobe being the most interesting.

Adobe reports FY20 Q3 (ending 31 August) on Tuesday after the US market close. Analysts expect revenue of $3.16bn up 11% y/y and EPS of $2.41 up 50% y/y as the business continues to scale with little need for higher fixed operating costs and capex. We have recently talked about the three key indicators of a great company: 1) high ROIC-WACC spread (the return on capital minus cost of capital), 2) earnings predictability (measure of the business’ robustness), and 3) growth in invested capital and revenue. Adobe is a company that scores high on all three indicators. ROIC to WACC ratio is 3.4x with a ROIC of 26% and an earnings predictability of 98% meaning that the company offers few surprises thanks to its new subscription-based business model introduced six years ago. The total invested capital has grown by 9.5% annualized the past 10 years indicating a huge opportunity set for Adobe.

Three other interesting earnings releases besides Adobe are those from Lennar (Monday), FedEx (Tuesday) and Inditex (Wednesday). Lennar is a US homebuilder and will provide a glimpse and outlook for the US housing market. Lower mortgage rates and the gradual rebound in economic activity has pushed US housing starts almost back to where they were before the US lockdown. FedEx being one of the world’s largest logistics companies is worth watching for clues on global trade and how the economic rebound is progressing. Inditex with its main brand Zara has also been weak on e-commerce and integrating it well into its physical stores. This weakness has been put to full display during the COVID-19 lockdowns and the company is one the worst hit European retailers within fashion.