APPL/GOOG/MSFT – Look elsewhere

Great numbers are already reflected in valuations.

Alphabet Q2 2021 – No adpocalypse

• Alphabet reported excellent Q2 2021 results, and it looks as if Apple’s adpocalyspe is not going to have a significant effect in Q3 2021 leaving a valuation that is fair but not exciting.
• Q2 2021 revenue ex-TAC / EPS were $51bn / $27.26 compared to consensus at $46.1bn / $19.35.
• YouTube was particularly strong with revenues growing 84% YoY driven by direct response advertising which is something that both Twitter and Snap have benefitted from this quarter.
• There are two parts to the strength that Google has seen which are: the economies of the world coming back to life and the impact of the pandemic which has pushed more advertising into the digital realm where it is not impacted by the adpocalypse.
• This is in stark contrast to data from Branch Metrics and Tenjin Inc. which have shown a reallocation of spending away from iOS only a portion of which has been reallocated to Android (see here).
• I can only assume that the spending has been reallocated to areas where tracking is not an issue.
• For example, this would be properties like Google Search or YouTube where the data that Google gathers is not impacted by Apple’s restrictions.
• Google has been quiet on the adpocalypse issue, but Facebook has made a big fuss which can only mean that Facebook stands to lose the most.
• Hence, Facebook’s Q3 2021 outlook will be the place to look to see if this tracking issue is going to have a big impact or not.
• After such a strong quarter, it is not surprising that growth is going to slow down a bit and I think that this is already priced into Alphabet’s valuation which is high but not excessive.
• I remain ambivalent to the shares.

Apple FQ3 2021 – Risk imbalance

• The share price reaction to Apple’s stellar results is yet another sign of just how much good news is priced into this company and that upside vs downside risk remains way out of balance.
• Apple FQ3 2021 revenues / EPS were $81.4bn / $1.30 compared to consensus at $73.5 / $1.01.
• Revenues were strong across all product categories and regions, but iPhone was the standout with $39.6bn in revenues up 50% YoY compared to the $34.6bn consensus forecast.
• I suspect that the Verizon iPhone “give away” that offers strong incentives to upgrade to the 5G iPhone has played a part in Apple’s excellent numbers.
• Guidance was muted with growth expected to slow although it will remain in double digits.
• This is almost entirely due to the chip shortage which is impacting iPad and Mac product lines particularly.
• This makes sense as Apple has less visibility on these product lines, and they are smaller, meaning that pre-orders and commitments are more likely to be adrift of demand and Apple’s priority on those lines with suppliers will be less.
• Despite the stellar numbers, the shares sold off 2% in after-hours trading highlighting just how much expectations are built into the shares.
• The valuation is full, and I think upside is a lot less than it is for other opportunities.
• I am staying away.

Microsoft FQ4 2021 – Azure is an execution powerhouse.

• Another cracking set of numbers from Microsoft but Azure growth may slow which inevitably leads to people questioning the valuation.
• FQ4 2021 revenues / EPS were $46.2bn / $2.17 compared to forecasts at $44.3bn / $1.92.
• Azure once again led the numbers with 51% growth YoY which when adjusted for US$ weakness is reduces to 46%.
• Mid-forties is where the growth rate has been for some time and Microsoft expects it to stay there for a while.
• To me, this is fantastic performance as maintaining that level of growth over a larger revenue base in previous periods becomes harder and harder as time goes by.
• Hence, I see this as stellar performance and think that fickle investors have absolutely nothing to moan about.
• With every quarter that goes by, Microsoft closes the gap incrementally on Amazon but it will be many years (if ever) before it can catch AWS.
• Complaining about excellent execution is a sign of just how high the expectations are for this company and what it has to do just to hang onto its valuation.
• This is why I am indifferent to the shares having been a bull on the stock for so many years.
• The shares may continue to go up moderately, but the transformation and the valuation story that has driven the shares to this level is well and truly over.
• I continue to look elsewhere for performance but admit that I sold too early.