Due to realignment of analyst coverage, we are withdrawing coverage of the following equities: AAPL, ANET, CSCO, DELL, FLEX, HPE, HPQ, IBM, JBL, JNPR, NTAP, NTNX, and PSTG. Our final ratings, price targets, and estimates should no longer be relied upon.
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FLEX reported inline F2Q20 results yesterday after the close. The stock reacted positively—currently up 8% intraday today—on the second consecutive quarter of executing on its F20 replatforming goal of substituting margin (EBIT now 3.7% & expanding) for growth. FLEX provided incremental evidence for the broader narrative around industry discipline, while layering in pockets of profitable growth, especially in IEI. The announcement of its F4Q investor day helps as a near term catalyst, but we expect low optionality for meaningful new material customers wins over the near term given full effort behind current plan.
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.
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%).
Our sense is that investors most want to see higher and consistent margins from Flex and Jabil. Consequently, the light top-line is not a major concern given de-emphasis of more volatile and lower margin deals. The operating margin is moving up and should hit 3.7% in the Sep quarter. New CEO Revathi Advaithi is staying close to home strategically—no new industries where Flex doesn’t have expertise—and finetuning execution—reducing factory variances to provide consistency.
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.
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