Tech Stock Thoughts #8: Apple, Facebook, Tech Earnings, GameStop/Robinhood

Apple’s Earnings: Pretty Much Across-the-Board Strength

iPads, Services and major Asian markets did especially well.

Sources: Apple (earnings release), Unhedged (CC transcript)

• Strong double-digit growth was recorded across all five of Apple’s product segments during its seasonally biggest quarter. iPhone sales rose 17% Y/Y and beat consensus by ~$6B in spite of a relatively late iPhone 12 launch and Pro/Pro Max supply constraints. iPads were up 41%; Macs were up 21%; Wearables, Home and Accessories were up 30% thanks to the Apple Watch and AirPods; and Services were up 24%. The total Apple device active installed base was said to be up by 150M Y/Y to more than 1.65B, with the iPhone base rising by 100M to more than 1B.

Apple’s December quarter and year-ago sales numbers (figures are in the millions). Think they speak for themselves.

• Maybe one could’ve hoped for a little stronger Mac growth given the notebook market’s strength and the launch of M1-powered Macs, but it’s hard to complain about anything else here. Services growth, it’s worth noting, accelerated sharply from the September quarter’s 16%, with paid accounts rising double-digits in all geographic segments.
• Also, CFO Luca Maestri suggested Apple’s 2019 and 2020 services launches (TV+, Arcade, Apple Card, Apple One bundles, etc.) provided a lift to Services revenue. And with the Services line item also covering Google’s large search ad revenue-sharing payments to Apple, there could be some positive read-through here for Google ahead of its Feb. 2 Q4 report.
• The iPhone growth, meanwhile, contrasts sharply with the 11% revenue decline Samsung reported for its Q4 mobile device sales. That in turn provides some additional context for Samsung’s recent decision to charge $200 less for Galaxy S21 models than it did for comparable Galaxy S20 models — even as Apple kept iPhone 12 Pro/Pro Max pricing unchanged relative to their predecessors and actually charged more for the standard iPhone 12 than the standard iPhone 11.
• Geographically, it’s worth noting that while Apple did register solid growth in Western countries dealing with COVID lockdowns, major Asian markets with less stringent or nonexistent lockdowns were the biggest standouts. “Greater China” revenue rose 57%, Japan revenue rose 33% and India revenue was said to have doubled off a relatively small base.
• Maestri said on the call that Apple expects Y/Y growth to accelerate in the March quarter from the December quarter’s 21%, albeit while seeing “typical seasonality on a sequential basis.” That led Apple’s shares, which were up more than 80% over the prior 12 months going into earnings, to sell off a bit. Nonetheless, Apple’s March quarter revenue consensus rose by more than $2B following its report and now implies 30% growth.
• One other thing of note: Tim Cook twice dropped hints — amid reports that Apple is working on an AR/VR headset, AR glasses and an electric car — about his company’s work on new products. No specifics were given of course, but Cook did suggest Apple expects the new products to address large markets, be meaningful revenue contributors and be ones for which “there’s a requirement for hardware, software and services to come together.”
• As is the case for many other consumer hardware firms, it’s possible that Apple sees demand cool some if/when broader vaccine availability drives a shift in consumer spending towards travel and hospitality. And with the stock still trading for 30x Apple’s fiscal 2021 EPS consensus, I’d prefer to wait for a better entry point. But between its iPhone share gains, inflecting iPad and Mac demand, and accelerating Services and installed base growth, Apple has clearly strengthened its hand in a number of ways over the last 12 months.

Facebook’s Earnings: iOS-Related Headwinds Might Not Be as Bad as Feared

Facebook and cautious forward commentary go hand-in-hand.

Source: Facebook (earnings report, earnings slides, CC transcript, follow-up call transcript)

• Facebook’s Q4 numbers were (in light of what was known about online as spend ahead of Facebook’s report) unsurprisingly strong, with ad revenue growth accelerating to 31% from Q3’s 22% and topping consensus by more than $1B. Also, thanks to soaring Oculus headset sales, non-ad revenue rose 156% and now accounts for more than 3% of total revenue.
• Moreover, Facebook’s forecast for revenue growth “to remain stable or modestly accelerate” in Q1 and Q2 relative to Q4’s 33% puts guidance above consensus estimates for 26% Q1 growth and 32% Q2 growth. And it’s worth keeping in mind that Facebook has historically been quite conservative with its guidance.

Facebook’s global ARPU cracked $10 for the first time in Q4. U.S./Canada ARPU topped $50 for the first time.

• Of course, more than the Q4 numbers or Q1/Q2 guidance, Facebook’s commentary about the potential impact of Apple’s pending privacy changes — changes that require iOS users to opt into any activity tracking done by a developer on apps and websites it doesn’t own — that have been in the spotlight post-earnings, particularly with Facebook indicating revenue growth will slow in 2H21. My thoughts on the Apple impact are as follows:

1. For Facebook, the lion’s share of the damage caused by the changes will fall on the Facebook Audience Network (FAN), its ad network for third-party mobile apps. From all indications, FAN accounted for a small percentage of the $86B in revenue Facebook generated in 2020. Facebook previously disclosed that FAN paid out more than $1.5B to publishers/developers in 2018; that might put Facebook’s own 2018 FAN revenue below $1B, and likely puts Facebook’s 2020 FAN revenue below $2B.
2. The changes will also do a bit of damage to the ad targeting and measurement abilities of Facebook’s own apps — partly by depriving Facebook of data about user activity within third-party iOS apps using FAN, and partly by lowering its visibility into when ad clicks on iOS devices lead to purchases or app installs (Apple’s new SKAdNetwork API will let advertisers know how often an ad campaign results in app installs, but only on an aggregate, anonymized basis). But Facebook’s apps can still leverage the tons of data the company has that’s tied to Facebook/Instagram IDs rather than cookies or Apple’s IDFA identifier.
3. Given the PR fight it’s waging with Apple (not to mention the antitrust suit it’s reportedly mulling), it’s in Facebook’s interests right now to talk up the potential impact of Apple’s moves — both on itself and on the advertisers and developers relying on FAN.
4. There are probably some steps that Facebook and third-party developers can take to reduce the impact of the changes. For example, developers using FAN could ask users to log in via Facebook to obtain virtual currency or unlock game/app features, or they could occasionally ask survey questions to build up a user profile. Also, Facebook noted on its call that its Shops platform and click-to-Messenger/WhatsApp ads will help with tracking conversions.
5. If advertisers decide to significantly reduce their spending on FAN and other mobile ad networks due to the impact of the changes on targeting, a lot of that money could and probably will flow to ad platforms that can still effectively target thanks to their first-party user data. Facebook and Google’s apps and mobile websites are bound to be share-gainers in such an outcome.

• Overall, the changes look like a moderate 2021 headwind for Facebook, rather than a cataclysmic event. Unity Software, which also runs a large mobile ad network and unlike Facebook has been bid up to sky-high multiples, might be more vulnerable here.
• Though they got less media attention, Facebook’s comments about ad sales potentially getting hurt later this year by consumer spending shifting from goods to services due to reopenings might’ve also weighed on its stock post-earnings. Some of this was probably the usual Facebook caution, but it is a risk to keep an eye on — and one that naturally matters to many, many, other tech companies besides Facebook.
• Also generally getting overlooked: Facebook announced a $25B buyback (good for repurchasing a little over 3% of shares at current levels). With tech giants flush with cash and dealing with antitrust scrutiny that’s curtailing their M&A appetites, I wouldn’t be surprised if some other big-cap tech names also announced large buybacks in the coming months (see 2021 tech prediction #20).
• Overall, this looks like a decent report for a company that respectively trades for 24x and 20x its 2021 and 2022 GAAP EPS consensus estimates, tends to err on the side of caution with its forward commentary, and arguably has a lot of optionality related to several platforms (Messenger, WhatsApp, Oculus and Shops).

Disclosure: Long Facebook.

Earnings Notes: Samsung, Western Digital, Skyworks, STMicro, Juniper, Lam Research, Teradyne, SAP, ServiceNow, Atlassian

Numbers and earnings call commentary that I found of interest during a pretty big tech earnings week.

Samsung — They’re forecasting a 1H21 DRAM market turnaround, along with better-than-seasonal NAND demand, thanks to a slew of demand drivers (strength in smartphones, PCs, graphics cards and game consoles, as well as the end of inventory digestion among hyperscalers and pending Intel/AMD server CPU launches). They also suggested their capex would rise this year, albeit without sharing a figure. Micron investors took the DRAM commentary pretty well.

Western Digital — They continue seeing strong PC and game console-related SSD demand, and forecast that their SSD and hard drive sales to cloud giants (down in the December quarter due to capex digestion) would start rebounding. More importantly, they suggested NAND pricing trends were improving — contract prices are still dropping, but at a slower pace, while pricing in “more transactional markets” has begun improving. And though Micron suggested in early January that NAND industry supply growth could top demand growth in 2021, Western forecast demand growth would be a little above supply growth.

Skyworks — They topped their December quarter revenue guidance by more than 40% and issued March quarter sales guidance that was ~25% above consensus. 5G RF chip sales to Apple, Samsung and Chinese OEMs are clearly the biggest growth driver — both due to higher-than-expected volumes and the huge RF front-end content needs of 5G phones. But Skyworks also saw 35% growth in its “broad markets” (non-smartphone) business, aided by design win ramps for everything from Wi-Fi routers and gaming headsets to cars and 5G base stations. It’s a safe bet that Qualcomm and Qorvo will post strong numbers when they report on Wednesday, though I think markets are assuming as much at this point.

STMicroelectronics — Q4 sales were already known thanks to an early-January preannouncement, but they did issue Q1 sales guidance that was well above consensus, thanks in part to massive auto chip orders. Notably, they also guided for capex to rise to $1.8B-$2B in 2021 from 2020’s $1.28B — a reminder that chip equipment makers aren’t just benefiting from big orders related to leading-edge processes, but also capex spikes for mature and specialty processes. Also, their silicon carbide chip sales (driven in large part by EVs) are expected to total $450M-$550M this year, after ending 2020 on a ~$300M run rate. Count on peers such as NXP, ON Semi and Microchip to issue strong guidance as well (though as with Qualcomm/Qorvo, this feels expected to a large degree).

Juniper Networks — They slightly beat Q4 estimates and guided Q1 a little above consensus at the midpoint, but revenue was still just up 1% Y/Y in Q4 and markets clearly wanted more. Of note for investors in other wireline telecom equipment firms and their chip/component suppliers: Juniper reported seeing weak spending among major tier-1 carriers. Management suggested this was particularly the case in North America, due to AT&T and Verizon’s massive spectrum purchases diverting funds away from equipment spend. On the bright side, Juniper did report seeing good router demand from hyperscalers, as well as some strength with smaller cloud providers, cable firms and international carriers.

Lam Research — Along with posting a beat-and-raise quarter, they forecast 2021 wafer fab equipment (WFE) spend would be in the high-$60B to $70B range, up from estimated high-$50B 2020 spend (good for many chip equipment makers, of course). They suggested foundry/logic spending (driven in large part by TSMC) would lead the way, while also forecasting DRAM capex would grow. They offered more restrained comments about NAND capex, suggesting growth would be driven more by process upgrades than wafer capacity additions. Separately, they argued EUV lithography adoption by foundry/logic and DRAM clients would help drive share gains, particularly for their dry photoresist offerings.

Teradyne — They beat Q4 estimates, but guided Q1 below consensus. Also, their 2021 commentary was somewhat mixed: Rising 5G phone sales and auto chip demand will be tailwinds for Teradyne’s SoC test business, but the Chinese SoC test market is expected to be down due to trade sanctions. Industrial automation (factory robot) sales are set to grow, while storage and memory test are expected to be roughly flat following strong 2020 growth. One notable comment: Teradyne suggested the arrival of new entrants in the server CPU and AI accelerator markets will be a growth driver for its budding compute SoC test business.

SAP — They provided more evidence (following IBM’s downbeat Q4 report) that demand for many types of on-prem software is pretty soft right now as cloud adoption accelerates. Though SAP is guiding for 2021 cloud revenue to be up 13%-18% in constant currency, total cloud and software revenue is expected to be just flat to up 2% in CC, while being 2-to-4 points worse than that in euros. SAP also said its outlook “assumes the COVID-19 crisis will begin to recede as vaccine programs roll out globally, leading to a gradually improving demand environment in the second half of 2021.”

ServiceNow — Their numbers contrast quite a bit with SAP’s and (like Microsoft’s report) provide more evidence of accelerating cloud migrations. Revenue growth came in at 29%, while billings growth (benefiting some from early customer payments) accelerated to 38% from Q3’s 23%. They also guided for 28% 2021 subscription revenue growth and 25% subscription billings growth, while forecasting a 2021 acceleration in net new annual contract value (ACV). One point of emphasis on the call: The large number of big Q4 deals inked that featured ServiceNow’s IT operations management (ITOM) and/or customer service management (CSM) offerings, rather than just its bread-and-butter IT service management (ITSM) software. They did caution headwinds will persist in 2021 in COVID-impacted industries, but insisted customer retention within those industries remains strong.

Atlassian — They posted a pretty solid report, with revenue up 23% in the December quarter and forecast to rise 17%-18% in the March quarter in spite of some near-term headwinds related to Atlassian ending on-prem server license sales on Feb. 2 (it aims to move all server license customers to subscription offerings by 2024, when license support ends). Net new customer adds rose by 3K Q/Q to 11,617. That figure is a by-product of both improved churn and strong traction with SMBs — a demographic that Atlassian previously reported seeing some COVID-related headwinds within. The company also reported seeing some enterprise wins for its new Jira Service Management ITSM offering. As with ServiceNow and many other high-growth SaaS names, a lot is already priced in at current multiples.

Disclosure: Long Western Digital

A Few Quick Thoughts on the GameStop/Robinhood/Wallstreetbets Mayhem

• I wrote a few days ago that the short/gamma-squeezes happening in GameStop and other names would eventually spark an institutional response. We’ve now gotten one such response, courtesy of clearinghouses significantly upping deposit requirements in those names. This in turn has led Robinhood to restrict trading in 50 stocks — including some names that haven’t been part of the frenzy, such as Starbucks and AMD — and add $1.5B to its balance sheet through a credit line and an emergency capital infusion. And I suspect this won’t be the last shoe to drop, particularly given the SEC’s Friday comments.
• Thankfully, we’re now seeing some pushback to the narrative that this is a Manichean fight between plucky millennial Redditors and well-connected moneybags hedge fund managers. To this debate, I’d add:

1. Retail investors short stocks and buy puts, too (consider, for example, how many were part of the $TSLAQ brigade). And I have no doubt that many hedge funds and institutional trading desks recently went long some of the proverbial meme stocks as they saw the frenzy gain steam. Indeed, there’s some evidence that retail investors were net sellers of GameStop from Tuesday to Thursday.
2. Investors in hedge funds and funds of funds include not just wealthy individuals, but also the likes of pension funds and college endowments. When such investors lose money because a fund has been blown up due to short/gamma-squeezes, there can be consequences for people of modest means.
3. If an institutional investor is blown out of a short position in a stock bid far above its fair value, it’ll quite possibly liquidate positions in other names to help cover its losses (and if the fund is wound down, then everything is liquidated). If such liquidations happen on a large scale, they’ll weigh on the shares of many blue-chip and growth names that weren’t part of the frenzy but which retail investors also have a lot of exposure to — whether directly via long positions, or indirectly via mutual funds, ETFs and 401k plans. We may have already seen a bit of this over the last week.

• If a surefire sign that a bubble is peaking is that the public in general has become consumed by the speculative frenzy, then it’s hard to top what happened over the last week, as GameStop and other meme stocks achieved a level of attention on both traditional and social media, as well as in everyday conversations, that’s typically reserved for major political events. My own anecdotal experiences: I’ve had several friends and relatives ask me about me about GameStop out of the blue, and (I kid you not) I overheard someone say he bought a share of GameStop at $300 not because he expects to make money on the trade, but because he “wanted to be a part of it.”
• Many retail and institutional investors alike are jittery right now about how financial markets are functioning, as the meme-stock phenomenon causes liquidity pressures both for select brokerages and select asset managers. And quite a few investors of all stripes are currently sitting on massive paper profits, often in names that now have stretched multiples. As a result, it wouldn’t surprise me if we saw additional selling pressure in the coming days, even as certain names potentially keep getting squeezed higher for now. And if that happens, some quality companies that have just gotten a little expensive (rather than bid up to nosebleed valuations) might be worth a look.