Alphabet & Microsoft– Different shares

Good results but different reactions imply that valuation in big-cap tech is starting to matter again.

Alphabet Q1 2021 – Approaching the range.

• Google reported good Q1 2021 results as it is still catching up from the dip that it suffered in H1 2020 as a result of the pandemic.
• Q1 2021 Revenues Ex-TAC / EPS were $45.6bn / $26.29 substantially ahead of consensus at $42.5bn / $15.65.
• Google Search was the big surprise and was boosted by consumers beginning to patronize restaurants and shops once again and often using Google before they do so.
• I suspect that an element of this is due to the current uncertainty that persists with regards to opening times, restrictions, and so forth but it is also certainly due to the improving economic outlook.
• However, Google is also uncertain just how durable this bounce will be and consequently is seeking authorisation to buy back $50bn of the company’s shares to keep everyone happy.
• This represents just 3.3% of the outstanding share count meaning that the 4% rally in after-hours trading has pretty much priced this in already.
• This of course assumes that the shares that re-purchased are canceled and not simply doled out to employees as many technology companies are wont to do.
• The rally is also due to the fact that Google has been trading at a discount to peers such as Amazon and Microsoft meaning that there is some headroom in its valuation before it hits parity.
• Once parity is hit, it is likely to then become range-bound while improving fundamentals unwind the over-stretched valuations that the stay-at-home pandemic trend and the over-zealous Federal Reserve pumped into the shares of big tech.

Microsoft FQ3 2021 – Bumbling along the top.

• Microsoft reported another excellent quarter but it was not enough to satisfy the already punchy valuation and the shares closed down about 2.5% in after-hours trading.
• FQ3 2021 revenues / EPS were $41.7bn / $2.04 ahead of forecasts of $41.1bn / $1.78.
• Overall revenues which grew at 19% YoY were mostly underpinned by Azure once again which has held onto its 50% growth rate despite its larger size and the waning of the stay-at-home trend.
• All the indicators are pointing in the right direction but there is uncertainty as to whether growth will slow when the economy re-opens.
• This is because Microsoft experienced a big bump during the pandemic which may have been spending pulled forward into earlier periods in order to meet the immediate demand of students and workforces being at home.
• Hence, as the economy recovers, growth could slow markedly while corporate spending readjusts to the normalising work environment.
• This was a good set of results and Microsoft is firing on all cylinders, but the valuation is just too high.
• Microsoft is trading on a 2021 PER of 35.4x and a 2021 EV / Sales of 11.9x a very far cry from 5 years ago when this could be considered a value stock.
• Stellar results and a dip in the share price are a strong indication that, like Amazon, Microsoft will now trade sideways while its fundamentals grow into the valuation.
• I advocated taking some profits on this a while ago and now is probably the time to take the rest.