Quick Thoughts: What Happened and What Do We Expect?

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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February 3, 2020

Quick Thoughts: What Happened and What Do We Expect?

  • The last week of January was a busy one for TMT investors, with AAPL, MSFT, AMZN, FB, XLNX, NOW and several other companies reporting. This week is hardly a let-up, with GOOGL, DIS, QCOM, TWTR, ZEN and TMUS set to print.
  • AAPL, MSFT, NOW and AMZN beat and raised last week, with NOW and AMZN jumping better than 8% on their reports. NOW’s strong growth has read across for other SaaS names, like ZEN which reports this week. The response to AAPL was a bit muted relative to the beat, as investors are appropriately worried for the impact of the Coronavirus outbreak on China sales and the supply chain.
  • XLNX missed on very weak 5G numbers and guided down for the next quarter. Part of this is the ban on Huawei sales, but slowdowns in deployments with other customers is worrying, not just for infrastructure but for 5G device adoption as well.
  • FB’s sales were fine – the digital ad market is roaring – but expenses were up much more than revenues as the company grapples with managing “fake news” and privacy. This is likely to be a significant overhang for the stock for the foreseeable future.
  • Monday: GOOGL will report and investors will be looking to see if it can hold the line on expenses where FB couldn’t. We are optimistic and also expect a positive call out on Cloud progress.
  • Tuesday: There will be a lot of moving parts in this DIS report. Analysts want more than 20M Disney+ subs, stability in the linear TV biz, and reassurances that coronavirus will not scuttle 2QFY20. We see significant risk of soft guidance.
  • Wednesday: AAPL’s beat aside, news on smartphone volumes has been discouraging, with weak upgrade #s from US carriers, signs of slowing 5G deployment, and the obvious impact of coronavirus in China. This is all bad for QCOM, which is counting on 200M+ 5G devices in 2020. We think it’s a year too early.
  • Thursday: TMUS already told us about its strong net adds for the quarter. The stock is not likely to move much until we get clarity on its pending merger with S. TWTR ought to be getting a lot of action in this crazy campaign season – we look for upside on subs and sales. The big NOW beat is a big hint that ZEN will follow suit. Consensus is expecting a significant topline deceleration for 2020 – we think they’re wrong.

Everyone thought Apple would beat consensus and everyone was right. The unsurprising surprise moved the stock a little bit, but the joy was tempered by concerns that the viral epidemic slamming China would dampen 2QFY20 sales there and potentially, disturb Apple’s precise supply chain. Moreover, Xilinx’s comments that 5G network deployments all over the globe had slowed has to be incremental bad news for the upgrade “supercycle” that many analysts are calling for later this year. We’d err on the cautious side here. Meanwhile, fellow trillion-dollar club member Microsoft absolutely killed it in its 4Q20 report. A few years back, we predicted that Azure would surpass AWS by 2023 – this quarter’s 62% growth suggests that things are still on track. This ride isn’t over yet (Exhibit 1).

Exh 1: Summary of key TMT earnings reported for the past week

Meanwhile, we were a bit nervous on Amazon given investments in 1-day delivery and grocery, but we needn’t have been. Bezos decided to show a little leg and blew out earnings in 4Q19. Big numbers from 3rd party sales portend more of the same going forward even if AWS is losing share. Service Now was another big beat. Analysts can’t grok the idea that the top SaaS names can stay on their growth trajectory. Consensus has been calling for a sharp deceleration for more than two years now – WRONG! We see a lot more runway left, and another beat next quarter.

On the negative side, we were blindsided by Xilinx. As expected, datacenter sales were just fine, but 5G revenues were terrible, down 19% YoY. Some of that was expected, as shipments to erstwhile big customer Huawei are banned by US trade policy (N.B. the year ago compare likely includes extra shipments as Huawei stocked up ahead), but the problems went beyond that. Management reported that its non-Chinese wireless equipment customers also scaled back orders as carriers around the world slowed down their network deployments. Why is this happening? A bit is the US market, where T-Mobile is waiting for its merger with Sprint to be approved and the market leading duopoly is in no hurry to accelerate capex until they have to. A bit is a few western markets, where governments are still deciding whether to follow the US lead and ban deployment of Huawei gear. A lot of it seems to be carriers fretting about whether or not they will be able to make return on their 5G investment. We see it as a “prisoner’s dilemma” – once one carrier goes all in in a market, the others will have no choice – but for the time being, caution reigns. This is bad for Xilinx, but it is also bad for the entire 5G ecosystem, including smartphones. We are still big believers in 5G, but maybe not in 2020.

Exh 2: Estimated Disney+ subs at end of each year, 2020E -2024E – investors will expect DIS to surprise with progress

Exh 3: Historical Quarterly Sales Growth and Consensus Estimates for ZEN

Facebook beat consensus expectations, but by a LOT less than it usually does. Notably, the topline was better than the bottom line, where disappointing margins pointed to the costs of the company’s attempt to step up to vetting the deliberately misleading content that infuriates politicians as it spreads virally across Facebook’s vast user base. Add in the potential for a slap down from the European Competition Committee, and 2020 could be tough for Mark Zuckerberg and company despite a roaring digital ad market. We’ve been out and we’re inclined to stay out.

Looking ahead to next week, Alphabet is first up, reporting Monday after the close. Google’s business model is a bit less exposed and more diverse than Facebook, so we’re not expecting a similar margin disappointment. Rather, we’re looking for good news, particularly from the revitalized Google Cloud Platform. This may be the quarter that management gives a little more detail on progress – expect 60%+ annual growth if they report it. Overall, we’re expecting a beat and a confident conference call.

Disney’s big year stalled out a bit in December, after it dawned on investors that once the Disney+ streaming service had launched, the work of getting subs to pay for it would begin. It’s probably good that half of the service’s viewers are still on free trial, since the content at launch was still pretty thin. Meanwhile, management still needs to navigate the inevitable decline of its linear TV networks, which still bring the lion’s share of the company’s profits. To turn a profit, streaming will have to grow a LOT, so investors will be keen to see subs above the 20M mark (Exhibit 2). We think they’ll hit that benchmark but have concerns that 4Q earnings will be a bit meh and that coronavirus questions will cast a downbeat pall over the conference call. Qualcomm reports on Wednesday, and while we are enthusiastically optimistic for the company’s position for 2025, 2020 is another story. Global smartphone sales weakness. Trade wars and coronavirus. 5G network deployment delays. Hard to be too cautious on this one.

Thursday will bring T-Mobile. We know subscriber numbers were great, since they already reported them. Strong sales and earnings will likely follow, but the only really important thing for investors is the status of the company’s planned merger with Sprint. We don’t expect much further clarity on Thursday, although we note that we believe investors are underappreciating the strength of T-Mobile’s case in the antitrust lawsuit brought by 13 states and currently under consideration in federal court. Also, on Thursday? Twitter. We haven’t commented on the stock in a while, but the company’s vetting of bots and other fake accounts has to be slowing, so the all-important monetizable user count may show some upside vs. expectations, as the 2020 election season picks up steam. Finally, we expect Zendesk to follow in Service Now’s footsteps and post a big beat. Analysts are projecting a slowdown to 32% YoY growth for the quarter, coming off 36% in 3Q. That is just a bit too conservative given a stable historical sales growth trajectory and a consistent history of upside surprise (Exhibit 3, 4).

Exh 4: Summary of expectations for upcoming earnings this week

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