Tech Newsround – MSFT FQ2 / Arm & Nvidia / Meta

Microsoft FQ2 2022 – skittish investors.

• Microsoft’s results demonstrated just how edgy the market is with the numbers causing the shares to fall 5% followed by reassuring comments on the call which cause them to bounce back to where they started.
• FQ2 2022 revenues / EPS were $51.7bn (up 20% YoY) / $2.48 compared to estimates at $50.9bn / $2.32.
• This was all well and good but a slowdown in Azure growth from 50% YoY to 45% YoY spooked investors who sold the shares down.
• During the conference call, Microsoft reassured the market that the slowdown was temporary and that growth is expected to return to previous levels which sent the shares back up.
• For me, this is another reason why one should at least consider taking some money off the table when it comes to a holding in Microsoft.
• The valuation of this company is far from the compelling value stock that it was when Satya Nadella took over, and now I think it looks stretched.
• This is evident in how the market reacted to these numbers because unless a very high level of growth is maintained, the market is going to discount the shares.
• The shares are trading at 37.2x 2022 PER and 33.0x 2023 PER with 16.4% growth expected over the next three years.
• By contrast, Qualcomm even after its blistering rally is trading on 17.6x 2022 PER and 16.3x 2023 PER with only moderately lower growth of 14.6%.
• The outlook remains good but not good enough to allow this valuation to hold up in the current environment of rising interest rates.
• I would own Qualcomm over Microsoft in this environment.

Arm / Nvidia – The unthinkable pt. XII

• The chances of an Arm IPO appear to be rising as Nvidia is reportedly (see here) warning its partners to prepare for the eventuality that the transaction fails to close.
• This is undoubtedly due to the regulatory resistance that has been encountered in the UK, EU, China and most recently in the USA.
• The FTC filed a lawsuit some time ago (see here) to block the deal which raised arguably the greatest hurdle so far to the transaction closing.
• This is another sign that the endgame of this transaction may be to return Arm back to public ownership which I have long argued is the simplest solution.
• Softbank’s share price has risen at the prospect of a resolution to the uncertainty but in reality, it should be falling.
• The meteoric rise in Nvidia’s share price since the deal was announced has meant that Softbank would be getting more than $60bn for Arm despite agreeing to an initial price of around half that.
• The problem here is that I think it is very unlikely that Softbank will be able to list Arm at $60bn because while it is one of the most important semiconductor companies in the world, it is currently in investment phase.
• This means that profitability is now far below where it was when SoftBank bought the company which will stretch the profitability valuation multiples to outlandish heights.
• Hence, while one could argue that this is a better outcome for the industry, it is much worse for Softbank which may have to accept a far lower return on investment by being forced down this route.

Meta Libra – Well populated graveyard pt. III.

• Meta’s ill-fated adventure into cryptocurrencies may be coming to an end as the Diem Association (as it is now known) is weighing the sale of its intellectual property and other assets.
• This has undoubtedly been the result of brutal regulatory pressure as the vested interests in the financial system fought to preserve the current status quo in the banking system.
• A cryptocurrency with a potential 3bn users represented a massive threat to both the legacy, slow-moving and inefficient banks and the central bank-controlled fiat currency system.
• This is because had it been allowed to proceed as originally designed, then users would have had an easy-to-use and much cheaper way to effect financial transactions outside of the current centrally controlled system.
• There is no doubt that without adequate controls in place, this could have been an ideal way to launder and transact the proceeds of crime, but the reaction to the initial proposals clearly indicate that there was far more to this than dirty money.
• Instead, this and Meta’s grubby reputation for the usage of the personal data were trotted out as excuses to put Libra or Diem as it became known out of business once and for all.
• The sale of assets indicate that Meta has given up on cryptocurrencies although it will need to do something in this area for its Metaverse offering.
• This is because digital currencies and NFTs are likely to be an integral part of the Metaverse economy meaning that Meta will be incomplete without something.
• The walls are closing in on Crypto in general given the threats to the financial system that it poses meaning that the outlook for a rapid take-off is dimming all the time.
• I am pretty sure that Crypto has a big part to play in disrupting the banking system, but it is a very long-term trend.