Cloudflare (NET -17%) plunges today after warning that a turbulent macroeconomic backdrop is clouding its near-term view, forcing it to maintain a heightened level of caution. The cybersecurity firm's comments were largely unchanged from last quarter, operating its business prudently despite encouraging underlying trends, such as additional large customer wins and improving average deal sizes.

So why are shares sinking today?

• NET spent more time discussing short-term uncertainty in Q1, making it the overarching theme of the quarter. CEO Matthew Prince stated that numerous signals are pointing to heightened near-term uncertainty, from increasing tensions in the Middle East to "no end in sight" surrounding the war in Ukraine and instability brewing in Asia. While Mr. Prince remarked that there are no clear indicators that these situations will worsen, he acknowledged that recent history says macroeconomic factors can materially hurt short-term sales trends.
• Making matters worse were disappointing Q1 results from peer Fortinet (FTNT). While headline numbers were decent, investors were alarmed by a slowdown in total billings in the quarter, falling 6% yr/yr compared to an +8% jump in the previous quarter. Even though FTNT kept its FY24 billings number unchanged, by ending Q1 toward the low end of its previous forecast, investors are fearful that billings may not recover as quickly as the company expects.
• Additionally, the market expressed excitement over the prospect of relatively soft demand within the cybersecurity space -- IT departments continuing to scrutinize their budgets -- reaching a bottom following upbeat results last quarter. Shares of NET spiked at the time, reaching one-year highs; FTNT also gapped higher. However, Q1 results from NET and FTNT signaled that a bottom could be extended.

NET is still amid promising underlying developments. The company sustained its upward momentum with large customers, with total revenue contribution from this cohort ticking 5 pts higher yr/yr to 57%. This helped push NET above its revenue forecast in Q1, delivering 30.5% growth yr/yr to $378.6 mln. Meanwhile, NET demonstrated one of its key competitive advantages in margin efficiency, keeping its gross margins above its long-term target of 75-77% and expanding operating margins by 450 bps yr/yr to 11.2%. As a result, NET registered adjusted EPS of $0.16, nicely higher than its $0.13 forecast. Furthermore, NET kept its FY24 revenue outlook unchanged at $1.648-1.652 bln while pushing its adjusted EPS outlook two pennies higher to $0.60-0.61.

However, given the level of enthusiasm after NET's Q4 results in February, its concerning comments in Q1 were more than enough to shake investors today, causing its shares to sink to 2024 lows. The company remains in a sturdy position to reignite growth, evidenced by its ability to sign massive deals despite a volatile economic landscape. Nevertheless, without more confidence from management that near-term variables will not be as potentially harmful as conveyed today, shares could get stuck trading sideways.

• Following an increase of 31% in Q4, Cash App revenue grew by 23% yr/yr to $4.17 bln as total inflows increased by 17% to $71 bln. Cash App, which offers person-to-person payments like PayPay's (PYPL) Venmo, has added products and tools to its platform over the years, bolstering its growth.
• For instance, in 2017, the company launched the Cash App Card, a customizable debit card that's connected to a customer's Cash App balance. It's been a very successful product for SQ, as illustrated by the 16% yr/yr growth in monthly actives to 24.0 mln in Q1. Furthermore, in Q1, Cash App Card transaction fees exceeded instant deposit as Cash App's largest contributor to gross profit, which grew by 25% yr/yr to $1.26 bln.
• Now, SQ is working on integrating its BNPL business, Afterpay, into the Cash App Card. Over the past few months, the company has tested an Afterpay installment product using Cash App Card, allowing customers to convert purchases into short term loans. By bundling these products together, the revenue opportunity is enhanced as customers increase their usage of SQ's offerings.
• When SQ completed its $29 bln acquisition of Afterpay in February 2022, there was plenty of skepticism over that transaction due to the lofty price tag. However, given Afterpay's strong growth and positive financial contributions, it's hard to argue that the acquisition was a mistake. In Q1, Afterpay's GMV grew by 25% to nearly $7.0 bln with strong acquisition activity across customers and merchants.
• For Square, growth was modest again as weather-related impacts and pockets of same-store-growth weakness in the retail vertical weighed. Total GPV was up 9% yr/yr to $50.46 bln, representing a slight slowdown from Q4's growth of 10% and Q3's growth of 11%.
• Keeping a tight lid on expenses and workforce numbers are helping to mitigate the relative weakness in the Square business. The company remained under its 12,000-employee cap in Q1 and its operating expenses on a non-GAAP basis were up by just 3% yr/yr to $1.8 bln. SQ's cost containment efforts enabled it to generate gross profit growth of 22% to $2.09 bln and adjusted operating income of $364 mln, each of which surpassed expectations.

The main takeaway is that SQ's formula of growing its Cash App and Afterpay businesses, while keeping costs down, is generating strong profit growth which it expects to continue throughout FY24.

Apple (AAPL +6%) is trading nicely higher after reporting Q2 (Mar) results last night. The headline numbers were roughly as expected with modest EPS and revenue upside. Investors also liked Apple's decision to increase its share buyback authorization by $110 bln and a slight increase to its dividend. However, we think the biggest catalyst for today's move is excitement about AI. Apple will flesh out its AI plans at WWDC on June 10. Apple also has what is describes as an exciting product announcement next week.

Investors may have been surprised to see total revenue decline yr/yr, by 4.3% to $90.75 bln. However, keep in mind that last year's MarQ benefitted from Apple's ability to replenish iPhone channel inventory and fulfill significant pent-up demand from DecQ COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Macs. This added close to $5 bln to MarQ last year. Otherwise, revenue would have this year would have grown.

• iPhone performed well with revenue being roughly in-line with expectations. Revenue fell 10.5% yr/yr to $45.96 bln, again see above to explain the decline. Adjusting for this one-time impact, iPhone revenue would have been roughly flat. Also, Apple still saw growth in some markets, including Mainland China, and an industry report said the two best-selling smartphones in urban China were the iPhone 15 and iPhone 15 Pro Max.
• Mac sales rose 3.9% yr/yr to $7.45 bln, driven by the strength of its new MacBook Air powered by the M3 chip. Apple says it had an amazing launch in early March with a new 13 and 15-inch MacBook Air. Apple says the world's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M3 chip and it's even more powerful neural engine.
• iPad revenue fell 17% yr/yr at $5.56 bln. However, it was lapping a difficult compare last year following the launch of M2, iPad Pro and the tenth generation iPad.
• Wearables revenue was down 9.6% yr/yr at $7.91 bln due to a difficult launch compare while Services revenue jumped 14% yr/yr to an all-time record $23.87 bln. Paid subscriptions showed strong double-digit growth. Apple noted it has well over $1 bln in paid subscriptions across its services, more than double the number from only four years ago.
• In terms of Q3 (Jun) guidance, Apple expects revs to be up low single digits yr/yr, which is in-line or slightly above analyst expectations. Apple would not break out by category, but does expect Services and iPad to grow double digits.

Quickly on AI, unlike other big tech names which have provided more specifics on their AI plans and AI spend, Apple has frustrated investors by being more quiet. Apple did say on last night's call that it continues to feel very bullish about its generative AI opportunity and it's making significant investments. We will finally get some more details on Apple's AI plans at WWDC next month. That seems to be boosting the stock today.

Overall, this was a solid but not spectacular quarter. That was partly due to lapping tough comparisons last year. We think shares are being propelled more because investors are focusing on the AI WWDC event on June 10. The buyback news is also helping. Apple did raise its dividend, but its 0.5% yield is still small so maybe a non-event. Also, the stock has pulled back quite a bit from its December highs and there is a new product announcement next week. The combination of these factors seems to be pushing the stock higher today.

Booking Holding (BKNG +5%) is on the move today, reclaiming some lost ground from last month after clearing analysts' earnings and sales estimates in Q1 on healthy bookings growth. The travel accommodations platform, competing closely with Expedia Group (EXPE) and Airbnb (ABNB), continued to observe resilient travel demand during the quarter, an unwavering trend for several quarters running. While BKNG did warn of a slowdown in the near future, it was not as alarming as EXPE's lowered FY24 guidance last night, a sign BKNG continues to outperform EXPE considerably, seizing opportunities created by EXPE's internal strife and leading in additional market share capture.

• BKNG's headline figures highlight its competitive advantages over EXPE, delivering a 76% improvement in adjusted EPS yr/yr to $20.39 in Q1 on 17% revenue growth to $4.42 bln. Gross bookings edged 10% higher while room nights booked increased 9%. All figures outside EPS were roughly double the pace of EXPE's.
• What is crippling EXPE? Vrbo, the company's alternative accommodations platform, remains a drag. This is primarily due to Vrbo's migration onto the Expedia platform, which encountered technical issues. During the time, EXPE chose not to market Vrbo as aggressively as it had, hindering revenue growth. Even though the migration is over, EXPE is enduring a slower-than-expected ramp-up. Management conceded that as a result, Vrbo is losing share to ABNB and BKNG, particularly in city-centric accommodations, where EXPE chooses to have less exposure.
• EXPE's woes are BKNG's fortunes. The company enjoyed a solid 11% bump yr/yr in its global alternative accommodation listings during Q1. Additionally, the global mix of alternative accommodation room nights was up 3 pts yr/yr and sequentially to 36%.
• Alongside this upbeat trend were lighter-than-expected headwinds BKNG touched on last quarter, including geopolitical strife in the Middle East and softness in Europe. Meanwhile, airline tickets booked zoomed 33% higher yr/yr, underpinning fewer issues than EXPE, which noted it endured continued pressure in its air and car rental businesses. Geographically, growth was broad-based. Asia grew by a mid-teens percentage, Europe and the Rest of the World were up high-single-digits, and the U.S. trailed, climbing by a low single-digit percentage.
  • On a side note, while ABNB is gapping higher today as EXPE's report pointed to increasing market share for the alternative accommodations giant, the lingering softness in the U.S. could weigh on the company's Q1 results, which are scheduled for May 8.
• Looking ahead, BKNG expects a slowdown in Q2, projecting gross bookings growth of +3-5% and revenue growth of +4-6%. FX impacts are the root cause, clipping 3 pts off BKNG's bookings forecast. Geopolitical issues are also expected to intensify during Q2. However, like last quarter, BKNG's geopolitical warnings are likely a conservative measure, given how quickly the situation in the region can shift. For FY24, BKNG has not changed its previous commentary, anticipating another strong year.

Bottom line, BKNG's Q1 results underscored sustained travel demand and further market share capture from one of its key competitors. While economic uncertainties can create some near-term volatility, we continue to like BKNG's position in the travel industry.