Navigating Tech Earnings Through Covid-19

8 min readApr 20, 2020

Earnings season is upon us and it’s going to be a train wreck.

We know the first quarter took a hit and the second quarter is effectively a zero. For the balance of the year, it’s not that we still don’t have confidence in assessing when the country will reopen, but rather things will not go back to the way they were.

So with that backdrop, how do we assess the winners and losers?

During times like these, it is critical to think in terms of a secular strategy. For our part, that can be summed up through a barbell approach. On the one side is essential infrastructure; we dub these companies as Internet Staples. And on the other side you have the companies that can best leverage that infrastructure.

We segment the group per below:

Internet Staples: Google, Facebook, Microsoft, Apple, Amazon
Leverages: Netflix, Square, Uber, Slack, Zoom

(Note: This is a dynamic list we will be adding to over the coming weeks and months, particularly the leveragers. This report is intended to kick things off).

Let’s get into it.

Internet Staples

Google — Report 4/28

35k foot view: Google is a black box and the segment breakdown from last quarter left much to be desired. Like Facebook, the company is subject to the gap down in discretionary spend, but still well positioned to increase market share as return-based performance ads are prioritized over brand spend. YouTube is somewhat of a hedge, while the cloud business should see growing utilization. All told, Google is increasingly essential as both infrastructure and platform. The good news is that executive compensation is finally tied to share performance, so more diligent spend across other bets is likely. We’ve already seen that in self-driving efforts.
Guidance vs expectations: Estimates haven’t come down enough so disappointing commentary is likely on revenue and the margin, but demand should increase from here in tandem with Facebook.
Valuation: Fair, until greater transparency is provided.
Trading behavior: Likely lower as financial expectations are reset, but the valuation should provide some relative support.
Post Covid-19 position: Cyclically weaker, secularly stronger.

Facebook — Report 4/29

35k foot view: Facebook is significantly exposed to pullbacks in discretionary spend, but conversely engagement is climbing materially higher. With only about 15% market share of global ad spend, even a 50% haircut to the aggregate industry number still leaves Facebook with room to grow. Coming out of this period, targeting and return-based metrics will be more important than ever; thus, essential. A revitalization of Facebook proper as a destination and security investments should help reinforce demand. Moreover, the optionality value is increasing across emergent products such as VR.
Guidance vs expectations: Estimates likely haven’t moved down enough for revenue and even more so on the margin. Disappointment on the P&L is probable, but relative to traditional media should be significantly better. Look for focus on engagement to outshine near-term headwinds.
Valuation: Marginally low.
Trading behavior: Some downside possible, but shares have underperformed the broader big tech peer group during the recent rally supplying relative valuation support.
Post Covid-19 position: Cyclically weaker, secularly stronger.

Microsoft — Report 4/29

35k foot view: Microsoft is firing on all cylinders, whether the Office suite, gaming, or the cloud. Productivity boosting assets like Teams should also see growing demand as the principles of business across all industries are reassessed. The company is both a provider and leverager of the essential infrastructure they have built.
Guidance vs expectations: Estimates haven’t moved much in recent weeks, hence delivering some upside is possible. Focus will be on Azure and extrapolation of that growth into future quarters. The shift toward distributed workforces should bolster demand.
Valuation: High.
Trading behavior: Shares should see some gains, but multiple expansion opportunities remain quite limited relative to the peer group.
Post Covid-19 position. Stronger.

Apple — Report 4/30

35k foot view: Between the iPhone, wearables, and services, Apple is both essential infrastructure and a company that can further leverage its own assets into new areas of growth. These include the cloud, content, and productivity enhancing capabilities across varying industry verticals.
Guidance vs expectations. Focus will be on the supply chain in China and overall demand for the iPhone. Estimates likely haven’t calibrated enough, however, continued strength in services should eclipse concerns over near-term product sales.
Valuation: Low.
Trading behavior: Shares could pare recent gains, but multi-quarter outlook is still strong.
Post Covid-19 position: Stronger.

Amazon — Report 4/30

35k foot view: Amazon is the biggest beneficiary of Covid-19, hands down. This is not only from an e-commerce standpoint, but through two additional knock-on effects. First, it enabled consumer behavior to shift to daily use via utilization of Prime Now. Frequency of touch points is critical. Second, the door is wide open for adoption of checkout-free experiences with “Just Walk Out”. Amazon is best positioned as essential infrastructure for both third-parties and themselves.
Guidance vs expectations: Focus will be on the degree of revenue upside and to a lesser extent on the margin. Estimates haven’t really moved much so positive surprise is in the cards.
Valuation: Too low.
Trading behavior: Shares should continue to appreciate higher.
Post Covid-19 position: Stronger.

Internet Leveragers

Netflix — Report 4/21

35k foot view: Netflix understands what traditional media companies don’t: asset turnover. With content creation sources and destinations exploding higher, it’s imperative to employ a studio model adaptable to this trend. That’s why Tiger King delivers better returns than Marvel blockbusters. Debt is clearly an issue, but the company is sufficiently early in the secular trends to deliver growth outpacing service requirements. Netflix is a prime example of leveraging the established internet infrastructure, in this case being the cloud.
Guidance vs expectations. As a global entity without barriers (i.e. required deals) for distribution, Netflix should deliver positively on the top-line. Concerns over margins and content spend may surface, but likely be overshadowed by gains across key user and monetization metrics.
Valuation: Fair.
Trading behavior: Shares should see upside, particularly advantaged by premiums afforded to the work-from-home (WFH) economy. However, WFH is short-sided in this case. It has more to do with asset turnover of content investments than anything else.
Post Covid-19 position: Stronger.

Square — Report 5/6

35k foot view: Square has exposure to many favorable trends, including cashless checkout, shift to data-driven payments and software for businesses, peer-to-peer payments, and exposure to cryptocurrencies. Further, getting FDIC approval is a big deal to serve as a capital base. Reliance on small businesses, however, will be expectedly painful near-term.
Guidance vs expectations: We don’t know how many small businesses are going under and it could be upwards of 30%. However, Cash App is somewhat of a hedge. Ultimately, performance is likely to disappoint as estimates haven’t moved sufficiently lower to capture macro factors.
Valuation: Too low.
Trading behavior: Following the recent rally and likely estimate reset, shares may move lower despite the valuation support. Nevertheless, this will be a period of peak uncertainty as it relates to the financial outlook and can serve as an opportunity to take advantage of any pullback.
Post Covid-19 position: Cyclically weaker, secularly stronger.

Uber — Report 5/7

35k foot view: Uber is in an interesting position to capitalize on the secular headwinds to the automotive industry and also establish touch points with customers beyond ride sharing. What may not be priced in at this point is that the capital costs of running the business — which are shifted off balance sheet to the drivers — may pose risks to longer-term unit economics. For now, the trends are their friend while supply density helps maintain a leg-up versus Lyft.
Guidance vs expectations: The good news is that the bad news is essentially out already. However, the bad news is that estimates haven’t calibrated lower enough and still assume a 2H20 recovery. It may come, but likely be marginal at best.
Valuation: Fair.
Trading behavior: Lower as financial expectations reset.
Post Covid-19 position: Neutral.

Slack — Jan FY (Report ~June)

35k foot view: Slack is often pegged as a WFH name, but the company is redefining communications both inside and outside the office. Its integrated approach and developer friendly platform should augment demand and utilization for every new business created in the market. To be sure, it will be a two-horse race with Microsoft, but that’s ok as the latter captures the enterprise channel. Slack’s ability to win customers like Uber, however, shows it can play upmarket as well. Email is over.
Guidance vs expectations: Too early to report, but Slack is a key internet infrastructure leverager and should be on the watch list. The trends are in their favor, while the opportunity is far greater than any WFH angle.
Valuation: Marginally low.
Trading behavior: Shares should continue to appreciate as customer metrics manifest growing utility and adoption of the platform.
Post Covid-19 position: Stronger.

Zoom — Jan FY (Report ~June)

35k foot view: Zoom is the poster child for WFH. What they’ve done is what countless other companies have done and continue to do, but Zoom just does it better. Ease of use and a superior interface goes a long way. On the flip side, the company’s disastrous handling of security is very telling of where the priorities have been. It’s perplexing to think it wasn’t a top priority in this day in age. If the government of Taiwan doesn’t trust Zoom, that says a lot. Will they get through it? Yes, probably. But it does leave a window for competition to make sure they are simply another player and not the default.
Guidance vs expectations: Too early to report, but Zoom is a key internet infrastructure leverager and should be on the watch list. That said, the possibility of upside surprise is very high. Focus on security will likely be secondary over the near-term.
Valuation: Too high.
Trading behavior: Without valuation support, shares should trade strictly as a function of estimate revisions. It’s trading for perfection and perpetual logarithmic growth at this point.
Post Covid-19 position: Stronger.

Clockwise Capital is an asset management firm with a private equity approach to the public markets. We focus on the meaning of time and the role it plays in people’s lives. We believe the essence of a great investment resides in the ability of a company to either save their customers time, or improve its quality. We understand how technology evolves to drive these two factors, which we believe define human progress. As a result, we search for securities with cyclically depressed valuations whose companies save time, thus using secularly advantaged industries to build a concentrated portfolio. With each series of investments our goal is to optimize edge, maximize return, while also minimizing correlation. This allows our portfolio to maintain a liquid, low duration fixed income balance, ready to capitalize on market volatility, while still generating market beating performance.