Carmignac: Tech earnings continue outperforming

David Older, senior fund manager specialized in Media, Communication and IT at Carmignac, comments on the latest tech earnings.

This week’s results continued the trend of large cap tech outperformance, with Apple, Facebook, Google and Amazon all exceeding expectations and trading higher.

AAPL rallied on slightly better than consensus numbers after significant cuts over the past three months. We continue to see Fiscal 2017 numbers as too high (with all of the growth coming from buybacks) as the upcoming iteration of the iPhone in September is not likely to lead to a demand surge. However, we do anticipate better demand trends into the new form factor iPhone in September of 2017, a benefit to Fiscal 2018 earnings.

Facebook and Alphabet/Google both posted very strong results, and it is becoming increasingly clear that the digital advertising world is essentially a duopoly between FB and GOOG, who are capturing the vast majority of global growth.

Facebook’s results were highlighted by advertising revenue growth of 63%, or over $2bn in incremental revenues. Threats to platform engagement from youth-oriented applications like Snapchat seem to have had little effect on Facebook to date, with daily active users growing 15% year on year, though this will be an ongoing focus of investors.

Management believes that with three applications with more than 1Bn users (Facebook, Messenger, WhatsApp) Facebook can continue to capture varying ways that users want to interact socially.

We see Facebook a steady earnings growth compounder but believe that it is unlikely to see multiple expansion beyond 25x forward earnings due to investor fears that engagement levels could wane at some point.

Google rebounded from a 1Q EPS miss and intra-quarter concerns about slowing growth rates to post accelerating revenue growth (to 24% year-on-year) in the key websites segment. Mobile search was the primary driver and Google demonstrated good operating leverage with lower capital intensity leading to its highest quarterly Free Cash Flow ever at $7bn.

We see the likelihood of multiple expansion for Google as somewhat limited due to its mega-cap size (over $500bn).

AMZN also had very impressive results with retail growth accelerating globally and the cloud infrastructure “AWS” business retaining its torrid revenue growth (+58% year-on-year) and operating margins (expanded to 30%).

The moat around Amazon’s two business lines continues to get wider – the Company is simply innovating faster and at greater scale than anyone else in either retail or technology infrastructure, and can continue to invest aggressively while delivering material profits.

The only slight disappointment was the guidance for 3Q operating profit due to investment in fulfilment in front of the holidays, video content for the Prime offer, and the high opportunity Indian market. We believe that with Amazon’s track record of a very high returns, investors will stomach the higher spend when it is paired with accelerating revenue growth.

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