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The motto of this earnings season has been “Better than Feared” as tech stocks had been firmly placed into the doghouse.
The NASDAQ 100 was down ~20% going into the earnings mega week and since had a solid rally, only to get faded on Friday after Apple and Amazon disappointed.
Is it over? Are we there yet? When is the bottom?
All crucial questions.
We had a bit of a mixed bag as Netflix has exited the building from the high-growth acronym that everyone is using. While watching mad money Kramer is a great contrary indicator (Just like Prof. Galloway), he is good at naming things.
FAANG (Facebook, Amazon, Apple, Netflix Google) is no more, and courtesy of a few company name changes we now have MAMAA (Microsoft, Alphabet, Meta, Amazon, Apple).
Earnings were highly anticipated as you need these companies to perform well for the sake of the overall indices.
Lots of puts and takes here, so let’s jump in.
This week, in <5 minutes, we’ll cover tech earnings:
Microsoft 👉 Head in the clouds
Alphabet 👉 Now entering deep value territory
Meta 👉 Highjump over a very low bar
Amazon 👉 Spain without the “S”
Apple 👉 Can’t hide from supply chain troubles
Let’s get started!
1. Microsoft 👉 Head in the clouds
Microsoft is at the forefront of digital transformation and has unrightfully been left out when it comes to buzzy tech titan acronyms.
Think of the Office 365 suite as a perpetual annuity on productivity in the work environment. The only worry here is usually saturation, yet it still manages to grow at a steady clip. In a market where labour markets are extremely tight (inflationary), software by its very nature is deflationary by increasing the productivity of the average person. That is a very powerful concept.
There were a lot of moving parts in the quarter, including baking it the Nuance acquisition, F/X headwinds, and cloud growth.
Total revenue up 21% to $49.36B in the quarter vs. est of +18% to $48.94B
Operating income grew 23% YoY while operating margins came in at 41% vs estimates of 40.8%
Non-GAAP EPS came in at $2.22, up 18% YOY vs est of $2.19
Free cash flow came in at $20B, above consensus of $17.73B
You read that right. A company that does $49.4B in revenue drops $20B of that to Free cash flow. Absolute monster.
The standout part of the quarter to me was cloud growth. Azure grew 49% YoY and the number of $100M Azure deals DOUBLED YoY. The company also put out a solid guide when it comes to cloud, guiding +47% vs. estimates of 42%.
Monster quarter. Excellent Company. Buy more of it. Long and strong
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2. Alphabet 👉 Now entering deep value territory
GOOGL is now trading at 5x EV/Rev, 11x EV/EBITDA vs. Coca-cola at 7.5x and 22.8x respectively.
Let that sink in…
I get that internet advertising is one of the most hated categories within all of technology right now, but give me a break. Google’s absolute dominance in search is extremely valuable, and the cloud business (GCP) seems to be humming along well. However, the quarter was pretty soft…
Gross Revenue of $66B, in line with estimates, up 23% YoY, down 10% QoQ.
Search revenue was $39.6B, in line with estimates, up 24% YoY
YouTube revenue was $6.9B, growing only 14% YoY, missing estimates by 9%
GAAP operating income was $20.1B for the quarter.
Management blamed the softness at YouTube on the suspension of commercial activity in Russia, brand spending in Europe related to the war, iOS ATT, FX, & engagement mix-shift to shorts which is only just testing monetization.
GOOGL failed to talk about the impact of TikTok and how the incumbent is stealing advertising market share from the big guys that are involved in video. I think this is a theme we need to keep our eye on.
Cloud growth at GCP was solid, up 44% YoY coming in behind MSFT but still impressive growth from an impressive base.
All-in, for a company that is growing revenue at a steady clip above 20% and is insanely profitable, the valuation it is at today is an absolute steal.
Not a “Back up the truck”, but stay long and strong.
Before we continue, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Meta 👉 Highjump over a very low bar
We all remember how Meta got smoked last quarter. But this quarter was kind of like when you sandbagged everyone in your first job out of school. Underpromise and overdeliver. Except this was more like underpromise, then just barely deliver enough.
I think a lot of the aftermarket reaction in Meta’s rip +18% higher was short covering, but it had one helluva day and took the NASDAQ up significantly with it.
Meta is now in a similar camp to GOOGL where it is significantly undervalued, and could arguably even be called a value stock now, trading at 13x P/E.
FB Revenue grew only 10% YoY to $27.9B, in line with estimates
But adjust for the Covid Comps, and it’s a very different story – two-year stacked Revenue Growth of 54% matched that of the prior two quarters and that of Q4:19
Operating income margin of 30.5% was in line with the street
EPS of $2.72 was 7% ahead of estimates
Despite all the buzz on the T -Risk (i.e. TikTok), Reels has been growing nicely now reaching over 20% of time spent on IG.
I think everyone is now well aware of the macro headwinds ahead for Ad spending and with that baked in, the stock looks like a reasonable buy here.
No table pounder. I sold all my Meta last quarter.
4. Amazon 👉 Spain without the “S”
Amazon tanked on the trading day after earnings, down over 13%.
You couldn’t open up a single report on Amazon without some sort of comment on how AWS should be stripped out. The product marketplace numbers were very weak, but AWS continues to shine through as the crown jewel:
GS on $AMZN: as an interesting framework for its after-hours valuation, its EV (when applied to our 2023 AWS rev and OI forecasts) would be a 13x AWS revenue on 25% ’23 YoY growth and ~43x AWS GAAP OI on 20% ’23 YoY growth – this would value the non-AWS Amazon businesses at zero.
— 1 Main Capital (@1MainCapital)
Apr 29, 2022
Revenue in line with street at $116B, up 9% YoY, and up 25% on a 3-yr CAGR
Q1 Operating income was very disappointing at $3.67B which was 31% below street estimates, with 5% YoY OI contraction
Q2 OI guide of ($1B) – $3B was also significantly below street estimate of $6.8B
The Q2 OI guide includes $4B of incremental costs (higher inflationary pressures, fixed cost deleverage persisting, and lower productivity)
AWS revenue was up 37% in Q1 vs. GOOGL up 44% YoY
AWS backlog of $88.9B during Q1 was up 68% YoY
Amazon is not safe from recessionary and inflationary pressures and it looks like its product marketplace is just a tag-along to the behemoth that is the AWS business.
Stay long, ok to hold here.
5. Apple 👉 Can’t hide from supply chain troubles
There are so many different components in one Apple device that you knew this one was going to be a doozy.
Revenue for the quarter was $97.3B vs. estimates of $94B
EPS came in at $1.52 vs. estimates of $1.42
AAPL reported iPhone sales of $50.6B (+5.5% y/y), which was modestly above consensus of $48.4B
AAPL reported Services sales of $19.8bn (+17.3% y/y and +1.6% q/q) – an all-time revenue record. Gross margin came in at 72.6% (+254bps y/y).
AAPL reported iPad sales of $7.6bn (-2.1% y/y and +5.5% q/q). Mac sales in the quarter were $10.4bn (+14.6% y/y and – 3.8% q/q). Apple called out a notable impact to iPad and Mac due to limited supply
Right at the intersection of semiconductor shortages and supply chain constraints is Apple. Sprinkle on top fears of a recession where consumer disposable income decreases, and you can rationally think that there are more headwinds than tailwinds.
Can still sum this quarter up as “Better than feared” as they were slightly ahead of the street, but printed on a tough overall trading day that took the market as a whole down.
OK to hold – service revenue encouraging sign of strength.
In a market where the mantra goes, “as goes tech, so goes the market” you have to pay attention and comb through these earnings. They are at the intersection of everything going on. Amazon is getting squeezed by inflation, a slowdown in GDP is affecting Meta’s advertising revenue as companies pull back on spend, and Microsoft powers forward as a tight labour market increases the need for productivity software.
This is the most hated the tech leadership has been in the last decade+, so it might be time to sharpen your pencils and pick some winners…
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S. Have you subscribed to our *NEW* CRYPTO NEWSLETTER?
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