Google & Microsoft – Technology does it again

Alphabet Q3 2021 – Very little Apple effect.

• Alphabet reported excellent results but weakness at YouTube, Google Cloud, and a muted share price response continue to imply that the shares are fully valued leaving me pretty unexcited.
• Q3 2021 revenues ex-TAC / EPS were $53.6bn / $27.99 compared to estimates of $52.6bn / $23.50 as most of the business was unaffected by any of the troubles that have plagued Facebook or Snap.
• Revenues at YouTube were most affected by Apple’s policy changes and came in at $7.2bn compared to forecasts of $7.5bn while Google Cloud was also light at $4.99bn compared to forecasts of $5.04bn.
• Search was the engine that drove the numbers and I think that the outlook for Q4 2021 remains quite good.
• This is because advertisers seem to be cutting their budgets on the smaller platforms like Snap and are viewing Google and Facebook as essential spending.
• Hence, these two are likely to be more resilient going into Q4 2021 where the overall pick-up in terms of seasonal advertising spending is likely to be less than usual.
• Alphabet’s share price performance is continuing to outstrip its growth meaning that its earnings are becoming more and more expensive to buy.
• I continue to think that this has more to do with negative real interest rates and a consequent lack of investor interest in the bond market than anything that Google is specifically doing.
• Hence, while relaxed monetary policy continues, I think that Google will continue to grind upwards.
• There is no harm in taking some profit here but there is also no sign of an end to its upwards momentum on the horizon.

Microsoft FQ1 2022 – All about the cloud.

• Microsoft also produced excellent results as the digitisation of the enterprise is still ongoing underpinning Satya Nadella’s strategy to pivot Microsoft almost exclusively towards the enterprise.
• FQ1 2022 revenues / EPS were $45.3bn / $2.27 nicely beating estimates of $43.9bn / $2.07.
• This was driven predominantly by Azure which grew by 50% YoY creating a stark contrast to Google Cloud which missed expectations.
• This is expected to continue into calendar Q4 2021 (FQ2 2022) causing estimates for the company to rise, but the shares were only up slightly in after-hours trading once again implying that expectations are already pretty high.
• Overall, I think that the competitive threat from Google Cloud is weaker than some may expect, leaving Azure as the only real main rival to AWS.
• Hence, I think that Azure can continue to close the gap on Amazon and will remain largely untroubled by Google Cloud nipping at its heels.
• At the same time, the valuation continues to slowly expand increasing the height of the hurdles that the fundamentals have to jump through to keep the rally going.
• My view on Microsoft is similar to Alphabet where the outlook remains pretty good but where there is also no harm in taking some money off the table.

AMD, Twitter and Take Home Message

• AMD and Twitter also produced good results but for very different reasons.
• AMD is capitalising on Intel’s missteps with advanced manufacturing and is producing processors that are outperforming Intel’s.
• This resulted in good results and guidance in contrast to Intel where faith in the Pat Gelsinger turnaround is beginning to erode.
• This can be seen in the recent share price performance of Intel which has continued to sell-off since the numbers on larger than average volume of shares traded.
• This combined with short-term estimate cuts at Intel is why I think the shares can trade lower and why I am waiting to have serious look at Intel from the perspective of taking a position.
• Twitter has also managed to avoid the “Apple effect” but I see this being largely due to its social graph (what people follow) which is very effective at helping advertisers target their ads.
• The net result is that my overall position on the FAANG and Microsoft names remains unchanged.
• They are expensive but could easily remain so as there is no sign of increases in interest rates that will trigger money to decamp from the sector and return to the bond market in search of better yield.
• There is no clear indication when that will occur meaning that the risk-return on these names remains tilted more to the downside as opposed to the upside.
• This is why I don’t own any of them except Alibaba which is currently trading at a quarter of the valuation of Amazon, is widely despised, and now under-owned thanks to many institutions selling out in response to Chinese technology regulation.
• Hence, I think it is more attractive than ever as its regulatory pains are over and its core market of Chinese e-commerce still has plenty of growth left in it.
• Alibaba is also a very cheap way to invest in the growth of cloud computing although the exposure is very much limited to China.