Google and Samsung Q1 2020 – Blind in the storm

Google and Samsung have no idea what the future holds.

Google battens down the hatches

• Alphabet reported good Q1 2020 results but while it noted that there was no real impact until late March, it admitted that it has no real idea how bad things are going to get which has led to it taking a very conservative position on its investments going forward.
• Q1 2020 revenues-ex TAC / EPS were $33.7bn / $9.87 which was ahead of revenue forecasts of $32.6bn but behind EPS forecasts of $10.35.
• Google split the quarter into two pieces: January and February which were relatively normal and March where the pandemic effect began to impact its revenues.
• The effects are twofold:
  • First, advertising: Usage has increased substantially but advertising spending by marketers has fallen meaningfully.
  • At the beginning, the searches and views were almost entirely related to COVID-19 for which the traffic was not very monetisable.
  • This has shifted as the exponential growth of the virus has settled down and there are currently better advertising opportunities to be had than there were in March.
  • However, things are still not good and by the end of March, the run rate was for a YoY decline of somewhere around 15% in advertising revenues.
  • Second, Google Cloud: This was also progressing normally and then activity and revenue took off sharply in March.
  • YoY revenue growth for Q1 was 52% YoY which is about the same as it was for Q4 2019 but obviously a stronger March has compensated for the usually weaker January and February.
  • Hence, I expect that in Q2 2020, the YoY growth will be materially higher which bodes very well for both Amazon and Microsoft who have yet to report.
  • Google saw strength right the way across the board including G suite and its other online collaboration tools.
• The net result is that Google is likely to post YoY revenues in Q2 2020 of $27.7bn (down 12% YoY) which is somewhat worse than consensus which is at $29.8bn (6% YoY decline).
• Hence, I think that earnings are likely to come down further as the quarter progresses but what impact that will have on valuation is unknown as the Fed is currently supporting the market with infinite quantitative easing.
• Despite its optimistic commentary, Google is clearly battening down the hatches as, just like everyone else, it has no idea where 2020 is going.
• This is why there is a hiring freeze, a stop on real estate and facilities construction as well as a cut in capex even in the data centre.
• Instead, Google is focusing on data centre optimisation and efficiency.
• These are the prudent actions of a company, that has no real idea where the next 12 months are going, meaning that a v-shaped bounce is very unlikely.
• There are better and cheaper, and therefore less risky places to be than in Alphabet shares.

Samsung confirms and extends the trend

• Samsung added detail to its preliminary results statement where business exposed to the work at home and cloud trends look like they will have a good 2020 with consumer looking at declines extending into H2 2020.
  • Mobile communications: had a tough quarter falling 4% YoY as it was impacted both by China at the beginning of the quarter and the rest of the world starting in March.
  • However, profitability remained quite good at EBIT margin of 10.6% as Samsung cut marketing and managed to improve the product mix.
  • Samsung is expecting a sharp drop in demand in Q2 2020 (read 10%+) but has very little visibility beyond that.
  • This means that smartphone demand will be determined by the macroeconomic recovery, or lack of it, in H2 2020 leading to very little visibility for H2 2020.
  • Semiconductors: is faring considerably better while demand from the enterprise, PC and the data centre is more than offsetting the uncertainty from the consumer.
  • The overall outlook still remains very uncertain but Samsung is still reasonably optimistic as the trend of accelerated digitisation triggered by the virus looks here to stay.
  • Hence, the outlook for semiconductors is pretty good for H2 2020 and this is likely to be the foundation of profit and cash flow for this segment for the full year 2020.
• Samsung’s diversified presence across the different segments and its dominance of those segments ensures that it is in reasonable shape to weather this crisis.
• Its superb execution in dealing with the Note 7 disaster also gives me confidence that Samsung is capable of dealing with adversity.
• Its valuation at 12.5x 2020 PER also makes it quite defensive but against Intel, I would still prefer Intel.
• This is because a larger proportion of Intel’s revenues are exposed to sectors that are doing well in the pandemic and its valuation is somewhat cheaper than Samsung’s.
• However, if one is looking for the safer end of the technology sector, this would certainly qualify.