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Even as tech companies lay off workers, the cloud is still experiencing impressive growth. Nothing in the latest numbers suggests that investors misjudged its long-term potential.
Valentin Turea/Dreamstime.com
microsoft
Last week we delivered a truck full of lemons to the stock market. Investors chose to look at tankers filled with lemonade. That’s a positive sign heading into the most important week for tech revenue in Q4.
we have come a long way. Tech stocks crashed in 2022 as the Federal Reserve aggressively raised interest rates. He’s a month into 2023 and the Fed looks closer to the end of its tightening cycle than it started, but we see demand for tech goods starting to slow down with these rate hikes. was only recently. As a result, corporate earnings could deteriorate in the coming quarters. If 2022 was all about declining price/earnings ratios as interest rates rise, then 2023 will be all about declining ‘E’ as demand shrinks.
This week, we bring you earnings reports from many of technology’s most important players.
meta platform
(Ticker: META),
apple
(AAPL),
alphabet
(GOOGL), and
Amazon.co.jp
(AMZN). The results should shed new light on advertising market and consumer spending trends. It also provides new insights into one of the most important trends in enterprise technology, cloud computing.
But as earnings continue to skyrocket, investors must distinguish between companies suffering from cyclical volatility and those facing structural changes that could affect their business over the long term. . Investors logically concluded last week that the problems facing Microsoft (MSFT) are temporary in nature. I think they got it right.
While Microsoft has a diverse portfolio of software and services, Street’s focus was entirely on the Azure cloud business heading into the quarter. As it happens, Azure grew 38% on a currency-adjusted basis in his December quarter, beating expectations by about a percentage point.
However, on a quarterly conference call with Microsoft investors, Chief Financial Officer Amy Hood said growth slowed to the mid-30s in December, with a further 4-4 percent drop in the March quarter. We expected a 5 point slowdown. That represents a 30% growth rate, up from her 50% range just a few quarters ago.
Investors should watch closely, but the problem is not as bad as it seems.
Microsoft works with customers to optimize cloud spending. In some cases, this means moving to traditional long-term contracts and moving away from the usual cloud-based consumption model. It also means that customers sticking to a consumption-based model have slowed their usage growth as their business slows down.
But they are cyclical problems. There’s nothing to suggest investors have misjudged the potential of cloud computing, but the business may be more cyclical than Wall Street expected.Franklin Technologies co-manages his fund Jonathan Curtis believes he has a trillion dollar opportunity here.
Curtis said that in the next 90 to 120 days, all enterprise technology vendors will be speaking to customers about their outlook and quotes will be lowered. However, assuming multiples have reset to reasonable levels, the Fed has nearly finished raising rates, and earnings forecast risk has been removed, “now is a good time to resume picking stocks.” He says he has to. “
Curtis remains bullish on the “digital transformation” trend, especially the cloud computing movement. The fund has long been available not only to Microsoft, but also to his two other major cloud vendors, Amazon Web Services and Google Cloud’s parent companies Amazon and Alphabet.
Given Microsoft’s comments about Azure, AWS could come under more scrutiny than usual when Amazon reports its findings on Thursday. “People will see the pace slowing down,” Curtis says.
But whatever the numbers, Curtis believes Amazon’s stock looks cheap here, and investors are getting the company’s massive advertising and e-commerce business virtually for free. Here’s the allegation I made in my cover story on Amazon last July. So far, the stock hasn’t performed as expected, but I think it’s compelling nonetheless.
My story relied in part on AWS analysis by Redburn analyst Alex Haissl. He recently reviewed his own thinking and became convinced that the market still undervalues his AWS. In his recent memo, Haissl argues that growth has picked up again and that most of the recent slowdown reflects “temporary and cyclical” changes.
When he started covering Amazon last summer, Haissl claimed AWS was worth $3 trillion. He admits, “A lot has happened since then, including worsening growth rates and margins… Investors have increasingly questioned the structural growth of the business.” But he wrote that investors were wrong to see the problem as a “structural slowdown.” And he still thinks AWS is worth $3 trillion in the long run.
Franklin’s Curtis has extended its bet on the cloud. His fund also owns shares in his cloud-based database provider.
MongoDB
(MDB), Cloud Infrastructure Provider
cloudflare
(NET), an analytics and AI software provider
snowflake
(SNOW), and data streaming platforms
Confluent
(CFLT).
I think the easiest approach would be to buy and retain Microsoft and Amazon and the startups in this space.
Oracle
(ORCL). They are bets on non-stop creation of data. If anything is certain, it is it.
write destination Eric J. Savitz eric.savitz@barrons.com
