On October 26th, Amazon (AMZN) and Alphabet (GOOG) (GOOGL) reported especially impressive upside September quarter results and Intel (INTC) and Microsoft (MSFT) reported better than anticipated results as well.
All but Intel broke to new all-time highs with their gains of 13.2% for Amazon, 4.3% for Alphabet and 6.4% for Microsoft. Intel gained 7.4% but was still 40% below.
We suggest it is a good time to position your portfolios aggressively with high weightings in shares of technology companies that have seen their shares break the most strongly higher on positive earnings reports and other news, driven by the combination of:
- The number of well better than expected reports
- That we are now in the seasonally strongest part of the year
- The number of breaks to new share price highs
Here are our comments on companies with especially surprising positive news. If the market does correct before year-end, having the recent highly positive news should at least partially protect the shares of these companies from correcting as much as they would otherwise. But where their stock prices have surged strongly they surly could correct some back toward technical support.
Nvidia (NVDA): Nintendo raised its 2017 sales estimate for its hot selling Switch video gaming machine from 10 million to 14 million units. The 10 million unit guidance has been unchanged since July 26, when cumulative sales to that point were 4.7 million units, 2.7 million in the launch month of March and 2.0 million units in the June quarter. If an additional 2-3 million units were sold in the September quarter it would take 6.3-7.3 million units sold in the December quarter to reach 14 million for the year. And we will not be surprised if that total is meaningfully exceeded.
The Switch is powered by a high-efficiency custom Nvidia Tegra processor that includes an Nvidia GPU based on the same architecture as Nvidia’s top-performing gaming graphics cards for PCs.
In addition to providing single and multiplayer gaming at home, the Switch enables gamers to play the same games wherever, whenever and with whomever they desire by taking the mobile parts of the Switch on the go. This combination of performance and portability is unmatched by other devices.
The Nvidia technologies provide great graphics and incredible performance. All this fun comes as a result of some serious engineering, taking some 500 man-years of work to create all-new algorithms, computer architecture, system design and system software. And much of this was co-designed between Nintendo and Nvidia engineers.
Nvidia’s Tegra sales into the Switch have been driving much of its strong gaming sector revenue growth that in Nvidia’s July FQ2 was up 15% sequentially and up 52% YTY to $1.19 billion or 53% of total revenues. The strong selling Ge-Force GTX 1080ti PC graphics card that sells for up to $900 also was an important growth driver for Nvidia’s gaming sector sales.
Even more strongly growing have been sales into the data center sector which increased 175% YTY to $416 million in Nvidia’s July FQ2. Especially as many apps run on cloud services data centers, Nvidia chips, architecture and software provides superior performance. And this trend towards AI-enablement has just barely begun.
This Switch sales guidance increase suggests it will have been helping to keep Nvidia’s gaming sector sales strong in the current October FQ3 which is scheduled to be reported a week from Thursday, November 9.
Management’s FQ3 revenue guidance on their FQ2 earnings call was $2.35 billion and Street estimates stood at $2.36 billion as of last Friday. We will not be surprised if these revenues reach $2.5-2.6 billion which would represent growth of 12-16% sequentially - and 25-30% YTY instead of the 17.5% represented by the guided $2.35 billion.
It also will not be surprising if Nvidia management’s January FQ3 revenue guidance in significantly above current expectations for $2.43 billion.
Q3 earnings were $0.52, far above expectations for just $0.03 in this seasonally low quarter.
AWS operating margins surged 28% sequentially on a 12% sequential revenue increase. YTY, AWS revenues increased the same 42% YTY as in Q2. The rapidly growing number of third-party tools and features from other technology leaders to run on and with AWS is key to this strong growth.
Whole Foods generated 3% of Amazon’s sales in Q3 over the month of September following its late-August acquisition closing. Excluding WFM, Amazon’s revenues increased 31% YTY, impressively better than the 22-25% growth of the prior three quarters. We are very positive on the opportunities for Amazon’s Alexa voice-driven services combined with the physical stores of WFM, which will no doubt see many additional products and services added.
In the core marketplaces business:
North American revenues were $25.4 billion, up 35% YTY, better than 27% YTY growth in Q2 and 26% YTY growth in Q3 2016.
International revenues were $13.7 billion, up 29% YTY, better than the 17% growth YTY in Q2.
For Q4, Amazon management has guided revenues to $56.0-60.5 billion. This has caused average Street expectations to be raised from $58.9 billion to $59.7 billion. With the strong momentum across its business, we expect actual Q4 sales will reach the $62 billion-plus, about the same 4.4% higher than expectations that were seen in Q3.
Amazon is one of the most creative and driven companies of our time. Again, this is evidenced by the Alexa voice-driven service, Whole Foods physical store locations and pushes into many more product sectors and geographies like India currently.
We strongly suggest making Amazon shares a cornerstone of your growth portfolios and buying this break to new highs in the price if you are less than fully weighted in the shares.
Last Thursday, Alphabet reported $9.57 in earnings compared to $8.33 expectations, up an impressive 32% YTY for such a large company and higher than the 28% and 27% of the prior two quarters in that order. $0.21 of the upside was from a lower tax rate.
This strong YTY earnings growth acceleration was joined by several other impressively surprising improvements in Q3, including:
Search: 6% sequential growth in paid clicks was joined by positive CPC or “cost” per click” (which is Google’s revenues per click) of 1% for the first time in years - despite the ongoing rising proportion of clicks coming on mobile devices where they generate lower revenues per click because they less often lead directly to purchases of goods or services.
YouTube revenues are running at a $2 billion rate and 1 billion hours have been watched from living rooms.
1.5 billion YouTube users are watching an average of 60 minutes daily.
Google is increasingly investing in original content for YouTube. Mobile ARR reached $1.0 billion and display revenues were $2.5 billion. These numbers have not been provided before so there is little context for them but Google management said they were very proud of the strength of display, YouTube and mobile and suggested that is under-appreciated by investors.
Other positive but less surprising trends revealed by the Q3 earnings report included:
Google site revenues increased 23% YTY to $19.7 billion in Q3.
Google network revenues increased 14% YTY to $4.34 billion.
Other Google revenues increased 40% YTY to $3.41 billion
Other Bets revenues increased 53% YTY to $302 million.
These numbers reflect well-balanced growth and the strongest growth where is to be expected. And better than what the Q2 numbers reflect, like a 6% decline in CPCs and a decline in Google site revenue growth from 21% in Q1 to 20% in Q2.
Lending Tree (TREE):
Q3 results were $172 million and $1.17, well above expectations for $158 million and $0.97. These revenues were up 81% YTY compared to up 29%, 40% and 62% the prior three quarters in that order, partially due to acquisitions.
Non-mortgage revenues were up 20% sequentially and up 138% YTY to $97.7 million or 57% of total revenues. Within this:
- Home equity line revenues increased 76%
- Credit card revenues increased 43%
- Personal loan revenues increased 44%
Mortgage revenues were up 38% YTY to $73.8 million.
Lending Tree is very well managed in our opinion and is progressively succeeding at matching borrowers end lenders, hence the strong and well-balance growth. Not 2% of lending is handled by the company and its competitors, so there is a long growth path ahead so long as the continue to execute well. The shares are one of our two FinTech recommendations, together with PYPL.
Recent news that has most greatly powered GrubHub shares recently higher include 43-49% revenue growth to $197-205 million in Q4, up impressively from 32% YTY sales growth in both Q2 and Q3.
These Q4 revenues would also be up a strong 21-26% sequentially.
Small acquisitions and partnerships are helping growth and a new partnership with Yelp (YELP) that closed on August 3 promises to do much more of that.
Recall, GrubHub reported Q3 results of $163 million and $0.28, above expectations for $160 million and $0.24.
Q3 operating metrics:
- Gross food sales increased 18% YTY to $867 million compared to 20% YTY growth to $880 million in the seasonally stronger Q2.
- Active diners increased 28% to 9.81 million, better than the 25% YTY growth to 9.18 million in Q2.
- Daily active Grubs increased 14% YTY to 304,500 compared to 16% YTY growth to 313,900 in Q2
- EBITDA per order increased 4% sequentially from $1.48 to $1.54.
GrubHub management is positioning the company to be the clear leader in food delivery which is part of the major trend toward eating and living in and home delivery of everything. They are showing us that they are becoming the leading edge of this trend and should be highly successful even as Amazon enters the market.
We suggest there is plenty of room for Amazon and an industry leading GrubHub in the food delivery market, especially with GrubHub adding new restaurants at a rapid pace.
At a valuation of just 5.5x 2018 revenue expectations of $922 million that are likely conservative, GrubHub shares are reasonably valued near the lower end of the 5-10x revenues valuation typically afforded fast growing disruptive leaders in a sector like food delivery.
Adobe Systems (ADBE):
Adobe management at the investor meeting on October 20 provided guidance of $8.7 billion and $5.50, above prior expectations for $8.63 billion and $5.15.
Management addressed concerns from the prior two earnings reports that closings of their new Experience Cloud were progressing slowly by suggesting they should be able to catch up some of these slower closings of larger deals in the current November FQ4 and then have closing of them accelerate in FY 2018.
Experience cloud is Adobe’s new Digital Marketing Cloud and includes its Marketing Cloud, Advertising Cloud and Analytics Cloud. Adobe management sizes this combined market at a TAM of $30 billion. It is currently at a $2 billion run rate so has substantial upside potential.
Adobe is a unique, high-margin leader that is well managed that carries a reasonable P/E of 30 for 30%-plus earnings growth. It should be able to maintain that P/E so that the share price rises at that annual rate, and perhaps significantly more rapidly if anything like the 42-47% earnings growth of the last four quarters is continued.
Disclosure: I am/we are long AAPL, AMZN, NVDA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article focuses on suggesting that the technology leader shares that have moved to new highs on specific unexpected positive news should perform strongly through year-end and beyond