David Older, senior fund manager at Carmignac, gave a hint at Q2 tech earnings season.
He said that so far, many large cap stocks in the tech sector exceed expectations, referring to Qualcomm, SAP, Microsoft and IBM. But another major one, Netflix, brought disappointment.
“While the sector remains a core component of Carmignac’s strategy, investors should always beware how soon the benefits of growth will generate the multiples they desire,” Older said.
Carmignac’s manager quoted Microsoft as a strong example with results back on track after Q1 earnings’ disappointment.
“The company is going through a transition to a cloud based model which puts pressure on revenues and margins in the short term but should lead to more predictable, sustainable growth in the long term. The stock has been held back by margins and earnings being consistently reset lower over the past year, but this quarter’s results and the guide for fiscal 2017 seemed to indicate we are reaching a trough.
“Importantly, Microsoft’s cloud based Azure division grew over 100% again this quarter and the company guided to a material improvement in Azure margins in the coming fiscal year. We expect positive effects from the cloud growth in cash flow and EPS over the next 12 months, which should please investors,” he commented.
Older also sees IBM as an inexpensive stock and warns of further challenges to any revenue inflection that would lead to an attractive multiple expansion for the company.
Regarding Netflix, the fund manager said it was a “disappointment in terms of subscriber growth as churn ticked up slightly across its 80m subscriber base due to the beginning of price inflation across the base.”
“This calls into question the pricing power that most investors assumed Netflix enjoyed at the reasonable price point of $8-10 per month. We still see a huge opportunity for the platform of over 550 million global broadband users, and believe subscriber trends will improve into 2017 post-price increases and with better programming (Disney films in the US, 2nd season of Narcos).
“However, we are cautious on the current valuation as investors will have to look out to 2020 for a reasonable multiple,” Older argued.
Older will closely look at Apple, Facebook and Amazon’s earnings reports expected to be published this week.
Will form new Phaeacian Partners