Quick Thoughts: 4Q21 Earnings Week 3 – See, it’s Not So Bad After All

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

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January 31, 2022

Quick Thoughts: 4Q21 Earnings Week 3 – See, it’s Not So Bad After All

  • Week 2 of the 4Q21 earnings season was a welcome relief to the relentless downdraft for growth tech. Enterprise IT spending is alive and well – IBM, MSFT, NOW, and TEAM all posted upside surprises and confident guidance, boosting these stocks and the subsector as a whole. AAPL’s strong beat quieted concerns of chip shortages, containership backlogs, and an end to the pandemic smartphone upgrade cycle. We also note that ed tech player LRN jumped nearly 30% for the week on its beat and raise.
  • On the downside, INTC saw its shares tumble after a beat (against soft expectations) on concerns that weak sales in PC CPUs was the start of a sharp downturn in the overall PC market. TXN’s beat and raise confirmed that demand still outstrips supply, at least in industrial and automotive, but also showed capacity additions coming online. We believe the cycle peak will coincide with a turn in the smartphone market.
  • This week’s big earnings start on Tuesday with GOOGL. There is no sign that the digital ad boom that was so apparent in GOOGL’s monster 3Q21 beat is over. Still, consensus is betting on a sharp topline deceleration from 41% YoY growth last quarter to 27%. We’d bet the other way. Then there’s PYPL, which continues to gain share in payments but could be tripped up by its exposure to crypto. Its report will be a big read across for SQ.
  • Wednesday brings FB. Expect big talk about Oculus Quest holiday sales – we have heard 5M+ units – and the glorious future of the metaverse. While we are not metaverse true believers (Metaverse Archipelago: Quest for the Holy Grail) and we see longer term disappointment for virtual reality, the strong digital ad market should deliver a nice upside in 4Q21.
  • Expectations for QCOM, which reports same day, are sky high after a big September quarter beat and raise. Still, AAPL’s iPhone surprise is a strong hint that there is still further upside to the smartphone story.
  • Finally, Thursday is AMZN, TMUS, and SNAP. AMZN is off 16% since missing estimates and guiding down last quarter. In this case, the shipping bottleneck that caused the problem is mostly done. We suspect better news this time.
  • TMUS already released its meh new sub numbers, so analysts will mostly be concerned with 2022 guidance. We will also be keen to see the progress on signing 5G fixed broadband customers. SNAP posted a horrible quarter as the only ad platform really unprepared for AAPL’s IDFA policy change. We expect a hangover for 4Q21. Pass.

Last week saw enterprise IT spending and smartphone sales breathe life back into the tech sector. IBM of all companies got things started with a nice beat on solid YoY growth. Microsoft followed on Tuesday night with its own solid beat, with strength in every line of business. It is extraordinary that a company this big can grow sales 20%+ organically (Exhibit 1). Someday, expectations will catch up with performance, but not yet. Behind these two, Atlassian and Service Now also posted beats, naysaying worrywarts concerned that SaaS was just a pandemic thing (Exhibit 2). We are buyers of all of these stocks and see a nice read across for software names yet to report, such as Salesforce, Adobe, and others.

As for smartphones, Apple posted bang up iPhone sales in the face of its own cautions over supply chain obstacles. It would seem that the chip supply hold ups apparently restricting automakers and PCs do not apply to Apple. Smartphone chip suppliers Qualcomm and Skyworks report this week and expectations are running high in the wake of those big Apple numbers. We see room for upside against published consensus, but whisper numbers may blunt the reaction to beats. We missed the great pandemic smartphone replacement cycle entirely and it is likely too late to get in now before it peaks.

Chips are in the spotlight after Intel posted a nice beat (against soft expectations) and raised revenue guidance but tanked anyway after lowering ’22 EPS guidance. Texas Instrument posted its own beat on pent up demand from automotive and industrial customers, jumping nicely at first but giving it all back by the end of the week. To us, this cautious trading suggests some investors may be expecting the first major semiconductor cycle turn in over a decade.

For our model portfolio – 15 recommended stocks that we track as we would a portfolio – the big story last week was Stride Inc. Ed tech has been a rough bet over the years and investors are treating the sector as a temporary beneficiary of remote education and betting that everything will return to 2019 once we get a

Exh 1: Azure continues to grow at exceptional rates, stealing share from AWS

Exh 2: Major SaaS and enterprise software names to report so far in 4Q have displayed excellent growth momentum and upside surprises

better handle on COVID. We are on the other side of this perspective, particularly with Stride. Its 4Q21 numbers were a sharp upside surprise, and the stock boomed nearly 30% as short sellers raced to cover.

This surprise was largely driven by big demand for online professional training and credentialling – we don’t believe that enterprises are likely to return to face-to-face training programs, even if workers are back at their desk. Moreover, we believe that the current educational controversies – parents frustrated by school closures, by controversial curriculum choices, and by threats to end advanced instruction – will be a significant stimulus for organized home schooling and tutoring. Trading at less than 1 times sales, growing in the high single digits, and nicely profitable, Stride could be a multi-bagger from here.

Now looking forward. Alphabet will report on Tuesday night. Alphabet posted a huge beat in 3Q21 on strong digital ad sales driving 40% sales growth. Analysts expect that growth to drop off to just 27% in 4Q21 and we see another big beat coming. Meanwhile, Amazon, which reports two days after, missed numbers in 3Q21 and offered below consensus guidance for 4Q21, fully blaming supply chain constraints for the soft numbers. The stock is down 15% since then and consensus is down within the range of guidance. In our experience, this pattern is usually prelude to a beat.

Meta Platforms is likely to center its report on its newly separated Meta Reality Labs unit, which contains its newly rebranded Meta Quest VR headsets (formerly Oculus Quest). Market reports suggest that Meta may have sold 5 million or more VR devices during the holiday quarter, and we expect CEO Mark Zuckerberg to use that solid sales number to justify the eyepopping $10 billion investment his company plans to make in the unit during 2022. We believe that all of this “metaverse” talk is WAY too early, particularly for immersive interfaces like VR and AR, and that there is considerable risk that the Meta Reality Labs investment will prove to be a considerable disappointment. Still, the rest of the former Facebook should post banner numbers amidst a very strong digital ads market. We think it’s a good trade ahead of earnings but have our concerns longer term. Fellow digital ads platform Snap was the one company that took a hit from Apple’s elimination of advertising identifiers for iPhone accounts – everyone else seems to have worked out alternative tracking mechanisms. Expectations are lower now, and Snap has had 3 months to develop a work-around. Could be worth a look after its report on Thursday.

PayPal will be the first of the fintech names to report. Generally, we are bullish on their prospects in merchant financial services and as a consumer digital wallet, particularly with the possibility that the US and/or EU take action to open the smartphone arena to competitive mobile wallets. Still, we are concerned that PayPal’s position in facilitating consumer cryptocurrency transactions could be a significant downdraft for 4Q21. Rival Block (nee Square) has even more exposure to crypto and any weakness in PayPal related to this market would be a huge red flag.

Finally, T-Mobile will report Thursday. It already reported its new subscriber additions for the quarter, coming in 2nd behind AT&T for the second quarter in a row. As such, the actual earnings may be a bit anticlimactic. Investors will be more interested in the guidance for 2022. We are expecting a big pick up in CAPEX as the company looks to exploit its substantial spectrum advantages for 5G. We are bullish on T-Mobile’s prospects in 5G fixed mobile access for residential broadband. We’d be buyers on any dip.

Exh 3: Snapshot of Key Earnings coming up this week

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