Market Insights

Earnings season is off to a bullish start as companies like Snap, Chipotle Mexican Grill and Coca-Cola blitz past estimates.

That variety of companies — social media, casual dining and hospitals — highlights the breadth of the stock market’s earning power. It shows how many potentially positive forces are at work, making it possible to surpass even the most bullish forecasts in over a decade.

One major trend is growth in online advertising and social media. Snap (SNAP) not only had 2.4 million more daily average users than expected. It also generated 15 percent more revenue per user than estimated. The results continued to validate a big platform overhaul, demonstrating how disruptive technology stocks keep evolving with their customers.

Next, it showed that the surge in online advertising continues. Twitter (TWTR) also highlighted that trend, shooting past estimates despite user growth lagging consensus. Analysts viewed both reports as positive signs for the Alphabet (GOOGL) and Facebook (FB), the trillion-dollar communication giants announcing next week.

Chipotle’s Pricing Power

Chipotle Mexican Grill (CMG) and Domino’s Pizza (DPZ) spiked to new all-time highs after crushing numbers across the board. The burrito chain benefited from two different positive trends:

1. Same-store sales increased by 31.2 percent, ahead of the 29.8 percent forecast. Remember that CMG’s digital business helped it to grow during the pandemic. This week’s numbers suggest it’s maintaining and growing with those new customers.
2. Pricing power helped margins increase by more than 12 percentage points. This shows how corporate America is taking advantage of rising inflation expectations to boost prices on cash-rich consumers.

DPZ had similar results. U.S. same-store sales increased by 3.5 percent, ahead of the expected 1.4 percent decline. Management also spoke of “modest” price increases. But an even bigger story was the 14 percent surge of comparable sales in global markets.

Coca-Cola (KO) also grew its margins by changing its product mix. That fueled better-than-expected earnings and revenue. CEO James Quincey also said he expects higher prices to boost results in coming quarters.

Skechers and Crocs

Footwear companies Skechers USA (SKX) and Croc (CROX) also spiked to new highs after beating estimates. Both had strong margins, following the precedent set by Nike (NKE) last month.

SKX had record margins thanks to higher prices and fewer discounts. Earnings and revenue set new records. Guidance was also increased. CROX said almost exactly the same thing:

"Our average selling price during Q2 increased 8 percent ... [ thanks to ] ... less promotional activity and higher pricing.... price realignments we took on certain products in select markets globally have been successfully adopted as evidenced by our growth and have not hindered demand." - CROX CEO Andrew Rees. (Emphasis added.)

HCA’s Healthy Numbers

Hospital chain HCA Healthcare (HCA) was another big gainer this week. The lifting of pandemic rules has triggered a flood of admissions. Revenue surpassed estimates by almost 6 percent and earnings beat by 38 percent. Management hiked guidance and price increases helped widen margins.

Intuitive Surgical (ISRG) also beat estimates patients returned for procedures deferred by last year’s lockdowns. Shipments of its da Vinci systems increased by 84 percent.

Netflix Drops

The main disappointment this week was Netflix (NFLX), which forecast adding just 3.5 million subscribers this quarter. The Street was looking for growth of 5.9 million. The outlook raises the same question that’s plagued the streaming-video giant for the last year: Did the pandemic surge truly add new customers, or simply cannibalize its future growth prospects?

Harley Davidson (HOG) was another big decliner. The motorcycle company may have beaten estimates, but management predicted weak margins going forward. That contrasts sharply with the strong profit trends at most other companies this week.

In conclusion, earnings season began with strong growth expectations. Companies have mostly exceeded those hopes, thanks to pricing power and wider margins. The trend of strong online advertising also continued, which could bode well for major Nasdaq-100 stocks next week.