MSFT & AMD – Pandemic plays.

The pandemic is in the driving seat.

• The pandemic trade is back with homeworking and homeschooling driving the results of both Microsoft and AMD, but this may grind to a halt in calendar Q2 as the summer banishes the virus for 6 months or so.

Microsoft FQ2 2021 – Perfect storm.

• Microsoft has been the best exposed of all the pandemic plays and did not disappoint with results and guidance that comfortably beat expectations.
• FQ2 2021 revenues / EPS were $43.1bn / $2.03 nicely ahead of forecasts of $40.2bn / $1.64 as the winter surge of Sars-Cov2 has sent countries running for cover with longer and tougher lockdowns.
• This time the cloud companies were better prepared and this showed in Azure’s 50% YoY revenue growth as well as very robust demand for Office365 subscriptions and Windows operating systems.
• Gaming was also very strong with 51% YoY growth, but this is an incredibly lumpy business weighted towards calendar Q4 and Microsoft has also just launched a new console.
• However, this was still above expectations as gaming consoles are being used to keep the locked-up population from going crazy during the long days spent at home.
• The pandemic has been a perfect storm for Microsoft and this showed in the FQ3 guidance where $40.35bn – $41.25bn in revenues are expected against consensus of $38.74bn which makes complete sense as this is the calendar quarter where the pandemic is going to be at its worst.

AMD Q4 2020 – Making hay.

• AMD benefitted from both pandemic-related demand and Intel’s floundering when it reported excellent results and guided strongly for the coming quarter.
• AMD’s leading chips are currently being made at 7nm giving performance and efficiency advantages over Intel’s 14nm which is being translated into market share gains.
• Q4 2020 revenues / adj-EPS were $3.24bn / $0.52 compared to forecasts of $3.00bn / $0.48.
• AMD is clearly not expecting Intel to show any tangible progress on returning to cutting edge manufacturing in 2021 as it is forecasting revenue growth of 37% YoY for the full year.
• With the acquisition of Xilinx, AMD is turning into a mini-Intel but I think that expectations on this name have gotten ahead of themselves.
• AMD’s edge over Intel has been created by superlative execution by Lisa Su and her team but it has only worked this well thanks to the door that Intel left wide open when it fell off the manufacturing wagon.
• If Intel returns to manufacturing at the cutting edge it should be able to win the advantage back from AMD no matter what Lisa Su does.
• This is where the issue with AMD’s valuation lies as the risks that it is running are not within its control.
• The valuation of this company is reflecting none of these risks as it is trading on 53.1x 2021 PER which is a 358% premium to Intel which is on just 11.6x 2021 PER.
• I am expecting Pat Gelsinger to kitchen sink expectations when he formally takes over and so in the immediate term, I think Intel goes lower.
• However, should Intel go back to $44, the risk-reward on this will be very favourable.

Take-Home Message

• The pandemic has benefitted Microsoft and AMD greatly, but I am starting to look for the time when the market turns to think of the recovery that will eventually happen.
• The nature coronaviruses is that they naturally all but disappear in temperate climates when the weather warms up and I am hopeful that things will begin to normalise in April and May this year.
• This is the time when the pandemic trade will start to wane and the market will begin to think about recovery meaning a boost to the valuations of airlines, hospitality, live entertainment, transport and the sharing economy.
• Hence, with potentially worse to come, I am not looking yet but would consider taking a position on the recovery sometime in March.