Google, SoftBank & Huawei – Smorgasbord.

Google Q3 19, Another Softbank write-down, Huawei’s UK respite.

Google Q3 19 – Core drives. The rest lags.

• Alphabet reported good Q3 19 results that were poorly received as cost pressure from Google Cloud roll-out and the strong US$ dented profitability.
• Q3 19A revenues / EPS were $40.5bn / $10.12 compared to consensus at $40.1bn / $12.46 with further profitability softness to come in Q4 19 as Google continues to try and catch up with Amazon and Microsoft.
• Google’s top-line growth remained excellent at 20% YoY which is a testament to the global dominance in Mobile Search and YouTube which continue to go from strength to strength.
• Elsewhere, and particularly in hardware, the picture is less rosy.
• Senior management is clearly far less bullish on the outlook than was portrayed at the recent launch event with seasonality in hardware being lower than normal this year and barely a mention in the “Google other revenues” commentary.
• To be fair the seasonality is being impacted by the launch of the pixel 3a, but if these launches are as great as they would have us believe, seasonality should be very strong as everyone rushes to buy the new products.
• Acquiring Fitbit is not going to fix this problem which stems fundamentally from the fact that Google does not understand hardware.
• I still believe that it would be far better off doing an exclusive deal with someone who does (see here) and abandoning hardware altogether.
• I continue to be pretty ambivalent to Alphabet shares.

Softbank – Another pretty penny.

• Yet another one of Softbank’s investments appears to be going wrong which will cost investors in the Vision Fund another pretty penny.
• This time it is Wag Labs Inc. which is a Los Angeles based pet care start-up that offers walking, sitting, boarding and daycare for pets.
• Softbank invested $300m in January 2018 at a $650m valuation but now the company is looking to sell itself for $300m or less.
• Wag Labs is a marketplace where sellers of pet services can transact with pet owners with Wag Labs Inc. taking a small commission.
• As I have written many times (see here), marketplaces like these are subject to brutal competition where one company emerges dominant and makes all the money.
• It then buys up all of the others or they just simply fade away.
• Following the investment, the new CEO cut back on the crazy spending that was fuelling the revenue growth which obviously then promptly collapsed.
• The problem is that Wag Labs has a much bigger and much stronger competitor called Rover which is still growing revenues even as Wag Labs stalls.
• This sounds an awful lot like what I expect to happen to WeWork (see here) once new management takes over.
• The net result is that there are more write-downs coming for the Vision Fund which will cast further doubts over other existing investments as well as the viability of Vision Fund II.
• I would stay away.

Huawei – Some relief.

• The UK has granted Huawei some respite from its current woes as Arm and the UK government look very likely to resume doing business with Huawei.
• Arm has determined that the IP for the Armv8-A architecture as well as future generations of it are of UK origin.
• This means that Arm will be able to supply this IP to Huawei despite the company remaining on the entity list.
• Hence, one of the biggest risks to Huawei losing its smartphone business in China has now been removed as all Chinese smartphones are based on Arm processors.
• The UK government looks set to allow Huawei to supply non-contentious parts of its 5G networks.
• In practice, this is likely to mean the radio access network but not the core.
• The radio access network is the bulk of the spending on a new network.
• This follows closely a statement made by BT in terms of its intentions for Huawei earlier this year.
• The UK government is claiming that it is allowing Huawei into its network due to there being a lack of alternatives.
• This is clearly not the case as both Ericsson and Nokia have perfectly viable 5G offerings, but these will both be more expensive than Huawei.
• Consequently, I think this decision is all about cost, which is exactly how Huawei competes against the technology leader, Ericsson.
• Given that traffic remains encrypted at least until it reaches the core network, I do not see that allowing Huawei to supply the radio access network as a big problem.
• This provides a much-needed boost for Huawei but it will not solve its problems caused by an inability to source Google software and I continue to expect its market share in smartphones outside of China to trend towards 0%.
• The outlook remains pretty bleak.