Market Outlook for the Week of May 12, 2024

Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, summarizes recent financial headlines and provides context for Canadian investors.

Buffett not “uncomfortable” with Canada

When countries compete for large-scale foreign investment, they often promote themselves with buzzwords like “innovative,” “efficient,” “attractive,” and “shareholder-friendly.” Given Canada’s recent economic stagnation, Warren Buffett’s comments about the country are noteworthy.

“We do not feel uncomfortable in any shape or form putting our money into Canada.”

Buffett’s remarks at his annual Berkshire Hathaway shareholders meeting in Omaha drew attention because investors closely watch his view on where capital should flow. He acknowledged Canada’s smaller market size compared with the U.S. but emphasized confidence in operating there and suggested there are opportunities where Berkshire’s participation could add value.

“There are a lot of countries we don’t understand at all. So, Canada, it’s terrific when you’ve got a major economy, not the size of the U.S., but a major economy that you feel confident about operating there. … Obviously, there aren’t as many big companies up there as there are in the United States. There are things we actually can do fairly well that Canada could benefit from Berkshire’s participation.”

Buffett hinted that Berkshire is actively looking at at least one opportunity in Canada. His past success in the country—most notably a large gain after investing in Home Capital Group in 2017—adds credibility to his renewed interest. Berkshire Hathaway’s recent financial position also explains Buffett’s restraint and selectivity: the company held a substantial cash reserve and continues to buy back shares when viable opportunities aren’t available.

• Berkshire Hathaway sat on a large cash balance and benefited from higher interest rates.
• The firm trimmed some Apple holdings but remained one of Apple’s largest shareholders.
• Share buybacks continued as a way to return value to shareholders when no attractive acquisitions appeared.
• Operating profits and insurance underwriting results showed strong year-over-year gains.
• Buffett was candid about mistakes, including losses on certain media investments, and emphasized patience in deploying capital.

Buffett’s measured approach—waiting for the right “pitch”—resonates with many long-term investors. Even in a challenging market, his comments signal that Canada can still attract prudent capital, which is relevant for Canadian investors evaluating domestic opportunities.

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Disney gets dumped

The Walt Disney Company reported earnings that slightly beat expectations but still sent the stock lower by more than 10% after investors focused on softer forward guidance. Although Disney reported profitable progress in streaming, concerns about future revenue growth and content timing weighed on sentiment.

Disney CEO Bob Iger emphasized that streaming had reached profitability for Disney+ and Hulu combined, a milestone after years of heavy content investment. Including ESPN+ in the streaming mix still left a modest net streaming loss, but a massive improvement from the prior year. Traditional TV revenue declined, content licensing fell in the absence of a blockbuster release, and parks performed well domestically and internationally.

• Streaming progress: Disney+ and Hulu profitable together for the first time.
• Streaming net loss (including ESPN+): greatly reduced from the prior year.
• Television revenue: declined; operating profit fell in that division.
• Parks and experiences: U.S. parks rose, international parks showed strong growth.
• Content sales and licensing: down significantly due to timing of releases.

The takeaway: Disney remains a profitable company undergoing a major strategic shift to turn streaming into a durable profit center. With a high price-to-earnings ratio reflecting lofty expectations, the market reacted strongly to any sign that future growth may slow or margins will compress.

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Reddit makes auspicious debut—Lyft shareholders get a free ride

Reddit published its first earnings as a public company and pleasantly surprised investors with revenue growth that pushed the stock higher in after-hours trading. The company still reported a net loss driven by IPO-related and one-time costs, but quarterly revenue and user growth were strong indications of momentum.

Reddit’s management highlighted a focus on revenue growing faster than adjusted costs, pointing to improved unit economics and potential monetization paths, including AI-related opportunities tied to its unique corpus of user-generated content. Uber’s quarter showed robust trip growth but larger-than-expected losses driven by markdowns in non-operating investments. Lyft posted better-than-expected profits thanks to sustained cost reductions and improving margins.

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Shopify’s slide stuns shareholders

Shopify shares plunged sharply after the company issued cautious profit guidance for upcoming quarters despite reporting a modest earnings beat. The market reacted to the company’s forecasted slowdown in sales growth and margin pressure, which prompted a rapid reassessment of Shopify’s high valuation.

Shopify’s management cited headwinds including foreign exchange effects from a strong U.S. dollar and softer consumer spending in Europe. As a result, the market’s confidence in continued rapid expansion softened, and many investors reappraised the company’s premium multiples. Other Canadian names from the Brookfield group reported mixed results, highlighting how sector-specific factors can drive investor reactions.

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Read more about investing:

• Shopify shares sink as company posts Q1 loss
• How much is capital gains tax and other questions answered
• A closer look at “Sell in May and go away”
• Influencer Joyee Yang on making the smart money moves early