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We paired up with Tech Strategist Steve Milunovich to host a conference call with networking expert Alan Weckel of the 650 group. Alan’s preliminary 3Q switching estimates are 2% YoY growth, with data center up 3% and enterprise/campus up 2% (exhibit 1).
ANET reported a 12% 3Q EPS beat yesterday after close, but 4Q revenue guide 21% below our est. on reprisal of cloud volatility narrative—this time longer & larger revenue impact—sent the stock down 24% in the aftermarket. Facebook’s decision to delay server/storage upgrades at least a year was vast majority of $130mn forward revenue miss; tier 2 cloud and service provider represented the balance. At current levels we see limited downside, but see upside from improving ex-cloud end demand as likely not material. Further, formerly nearer-term catalysts—400G ramp in 2H20—have been pushed out. As such, we remain peer perform rated.
Last Thursday (8/1/19) after the close ANET reported 2Q earnings of $2.44, posting a beat vs. the street ($2.31) and our estimates ($2.18). But expectations embedded a reacceleration of cloud growth if the cloud Titan that put 2Q orders on hold reversed course. Orders did in fact rebound, but forward guidance and commentary implies flat sequential growth, sending the stock down 10% in Friday’s trading.
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%).
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