The Cloud Acceleration (Deceleration) Debate
$MSFT "should" blow out Sept expectations!?!
Do you remember the May 24, 2023 Nvidia earnings report? They produced revenues of $7.19 billion, about $600 million above the Street and guided the next quarter to $11 billion in revenues! It turns out the July quarter came in at $13.5 billion and they guided to grow to $16 billion in October. The stock closed on May 25th at $380 after the first $4 billion guide higher and reached $500 before falling last week to $416 on Friday, up a mere 9.5% if you bought the first shock of the AI boom. Heck, Caterpillar’s stock ($CAT) is up almost 30% since May of 2023 and on a $2 bump in EPS estimates to $19.75 for a very cyclical stock. Not exactly a ringing endorsement for the Efficient Market Hypothesis (EMH), is it?
EMH: The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.
Nvidia is now trading at 25x 2024 estimates which I think most investors would deem low both absolute and historically given their market leadership, growth and cash flow generation. Sure, the market boogeyman is worried about Coreweave, worried about a pull-in of AI consumption, a stalling, even a drop in demand that will send EPS lower. Is the market correct? As usual, probably not. The challenge as investors is the stock price is always, quite obviously, the last sale and the incremental news determines the next move. If I told you today that Nvidia will hit their and Wall Street’s expectations on the nose, no upside or downside the next 4-6 quarters, is it a buy at 25x during the current market softness? Answer please! At the moment, the stock seems to be discounting downside, right? If the stock drops another $50 before their November 11th EPS date, inline might cause a major rally as investor sentiment could become the “belief in the cycle” not being boom/bust with a commensurate re-rating the multiple higher again. Heck, this company named Tesla (pronounced by Musk as Tezzzla) is trading at 73x and 51x 2023 and 2024 estimates. I know, I know FSD is a game changer and pure profit machine, some day.
All that said, the EMH is silly and pure fancy. Stocks reflect investor euphoria and pessimism to the extreme in most every cycle. The sky is either falling or blue skies ahead. A company seeing accelerating growth is a buy at any price while a deceleration in trends means it’s a sale the same way. At market and individual stock extremes, the last buyer has bought the good news or the last seller has sold the fear of bad. This is why we love some of the price exhaustion tools such as TD Trend and TD MA2 to identify extremes. In the middle you ask? Not euphoria or extreme pessimism? That period is likened to a rugby scrummage with buyers and sellers chopping each other into bits, a fair description of the current market environment!
Well, today, I am going to tell you how wrong the EMH might be on Microsoft between now and year end. The market is currently worrying that cloud services growth at AWS and Azure might be “soft” or certainly still in deceleration mode (and surely not an acceleration quite yet). Amy Hood, the CFO at Microsoft, has been known as a terrific “guider” to the Street each quarter. Her historic accuracy and directional tone has been as strong as any management team I can remember. Amy gave some hints about the impact of AI moving forward that are worth noting:
June quarter conf call:
“Azure and other cloud services revenue grew 26% and 27% in constant currency, including roughly 1 point from AI services, as expected.”
“In Azure, we expect revenue growth to be 25% to 26% in constant currency, including roughly 2 points from Azure AI services.”
For free(loader) subs: Really, you are going to save $10 per month not subscribing? The analysis below has to be worth 10 years of subscribing if you call yourself an investor! Give it a shot, you get the write ups, the WhatsApp daily texts and the proceeds go to charity!