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Non-iPhone hardware strength was core to F2Q, coming against inline iPhone revenues and a modest disappointment on Services. Wearables provided the biggest beat vs. our model in F3Q. We take a second look (exhibit 1) at the business and see that it is now at a scale to more than offset iPhone cycle valleys. On iPhone, we’re modelling another down 10% growth figure in F4Q and we see F20 setting up for units down 2%.
John Treadway has worked with large enterprises considering both private and public cloud implementations, first at Cloud Technology Partners, which was acquired by HPE, and now at Symphony Solutions, where he is CEO. Although hyperscaler revenue growth is moderating, he argues it is mostly due to tough comparisons as cloud approaches $70bn of revenue. He says AWS’s Andy Jassy might be right that only 3% of workloads are in the cloud by dollars.
In addition to tracking the five major tech sectors—Hardware, Semis, Software, Internet, and Services—we have added 2-3 subsectors for each for greater granularity. We show their performance in our weekly Wolfebytes.
Yesterday (07/30/19) after the close, Apple printed a solid report—albeit against low expectations—trading up 4% in the aftermarket. Outperformance of non-iPhone hardware drove much of the 4% beat vs. consensus and F4Q guidance delivered upside to numbers. As for the iPhone, an inline performance helped to cement that 2Q was the trough for units growth. We also read positively the sequential improvement in China as well as commentary around iPhone sales starting to grow in June through the online & retail channels.
AWS gains decelerated from 41% in 1Q to 37% in 2Q and Microsoft from 73% to 64%, still solid results that suggest workloads continue to move to public clouds and capex should improve in the second half. Google Cloud’s stated $2bn includes G Suite. We don’t have history from the company, but our estimates suggest a doubling YoY as Thomas Kurian begins to triple its salesforce. Full-year growth for the top four should be about 40%. We are hosting cloud consultant John Treadway Tues at 2pm.
Tech was strong last week during the first wave of earnings. The Wolfe Tech Universe rose 2.9%, outpacing the S&P 500’s 1.7%. Despite trade issues and weakening auto/industrial demand, Semi stocks jumped 5.4% and passed Software in three-month performance (Exhibit 1). Top stocks this week included Snap (+28%), AMS AG (+27%), Teradyne (+23%), Flex (+15%), and Twitter (+13%). Laggards were PTC (-17%), Computershare (-7%), LG Display (-6%), Citrix (-6%), and Atos (-5%).
With baseball season in full swing, let’s use the national pastime to discuss portfolio performance. The geeks not only own Silicon Valley but have taken over baseball. Sabermetrics, the application of statistical analysis to baseball, has contributed to the dominance of walks/strikeouts/home runs that plagues baseball today. The takeaway from Moneyball (especially the movie) was that on-base percentage is more important than batting average since a walk is almost as good as a single. More important, though, is slugging percentage, which gives more credit for a home run than a double or a walk. Batting average is quantity; slugging percentage is quality. All hits were not created equal.
A solid F2Q print and a general lack of negative data points since has helped the stock track in line with the market while the rest of hardware has traded down. We see potential upside to street numbers in F2H on iPhone units and ASP (our CIRP survey shows XR share gains & steady XS & XS Max share) outperformance, especially in 4Q. We see positive and negatives for gross margins in 3Q, but see Services operating leverage potentially providing a lift in F2H and beyond.
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