- Microsoft Corp. reported a subdued and mixed quarter as the stock whipsawed after the earnings release.
- Avnet Inc. continues to be the fund’s favorite small-cap stock in the market as they reported a blowout quarter.
- Apple Inc. reported its worst quarter in 7 years as management had to navigate supply chain disruptions and shutdowns in China.
- Uber Technologies Inc. delivered a solid quarter despite another negative free cash flow quarter.
Microsoft Corporation (MSFT): The technology software giant beat on earnings but missed on revenue as management looks to temper expectations in 2023. The company reported earnings of $2.32/share (beat WallStreet estimates by $0.01) on revenue of $52.7 billion (missed WallStreet estimates by $450 million). Microsoft missed the top and bottom line in comparison to our fund estimates of $2.37/share on revenue of $53.2 billion. The company reported revenue growth of 2% which showed significant slowing and 5% was eroded by the strong U.S. dollar. The cloud is still generating solid growth up 18% at $21.5 billion (vs our fund estimate of $21.3 billion).
Looking at other segments, Productivity & Business Processes is up 7% as Enterprise spending continues to spend on various subscriptions and licenses. The Personal Computing segment was down 19% as the demand for PCs and Laptops is starting to wane along with gaming consoles. Gross Margins came in at 66.8% compared to 67.2% from the prior year. In comparison to our fund estimates, gross margins came in lower than our estimate of 68.5%. Operating margins contracted from 43% to 38.7% as general admin expenses were up 69% while the company’s R&D spend was up 19%. Net margins came in at 31.1% down from 36.3% as a result of less other income and a higher income tax provision.
Microsoft generated $4.9 billion down from $8.6 billion while the company had a net cash decrease of $7.2 billion. The company spent $11.6 billion on investments including a $10 billion investment in OpenAI. Microsoft ended the quarter with $15.6 billion in cash on the balance sheet. The stock reacted well to the earnings up 4% in the after-hours market but the outlook during the company conference call was subdued which prompted the stock to end flat. Overall, Microsoft had a mixed quarter as margins seem to be contracting but the Azure cloud growth seems to be holding up well. We like the company’s investment in OpenAI and we continue to hold the stock.
Avnet Inc. (AVT): The electronic components distributor provides its products to the semiconductor, industrial, and various end markets. Avnet reported earnings per share of $2 (beat WallStreet estimates by $0.14) on revenue of $6.72 billion (beat WallStreet estimates by $183 million). In comparison to our fund estimates, Avnet blew away our expectations of earnings per share of $1.92 on revenue of $6.63 billion. The company posted revenue growth of 15% primarily driven by the Electronics segment up 16.3% while the Farrell segment had a revenue decline of 7.3% but its small revenue base. There was strong geographical revenue growth from Emerging Markets and the Americas.
The company reported margin expansion as management continues to execute well in this tough inflationary that is also plagued with supply chain disruptions. Operating margins expanded to 4.5% from 3.6% as a result of General & Administrative cost discipline and lower cost of goods sold. While net margins were up by 110 basis points to end the quarter at 3.6%, thanks to a legal settlement gain of $61 million. The only concerning thing from the report was the free cash flow numbers. Avnet had a cash burn of $1.1 billion compared to the $285.3 million generated in the same period last year. The cash burn is a result of management capex spending to improve its supply chain. The company ended the quarter with $324.8 million in cash on the balance sheet.
Overall, this was a strong quarter for Avnet Inc. despite the supply chain disruptions and inflation the company still managed to execute in FY2022. The stock reacted by trading higher after earnings were released. We continue to hold the stock and we would welcome any sell-off to add to our stock position.
Apple Inc. (AAPL): The most valuable public company in the world reported its first earnings miss since 2016. Apple faced a challenging quarter full of headwinds from COVID-19 shutdowns in China to weaker demand. The company reported earnings per share of $1.88 (missed WallStreet estimates by $0.07) on revenue of $117.2 billion (missed WallStreet estimates by $4.5 billion). Apple’s headline numbers came in well below our fund estimates of $1.97/share in earnings on revenue of $122.7 billion. We assumed that China would cool on the COVID-19 shutdowns but this was far from being the actual case. The company reported a revenue decline of 5.5% with the services segment being the only bright spot for the company.
Apple’s Services revenue came in at $20.8 billion (a new record) but it came in short of fund estimates by $50 million. iPhone sales were down 8% with $65.8 billion compared to our fund estimate of $61.4 billion. We thought with the China shutdown iPhone sales would suffer but it was not as bad as expected. The technology giant suffered some margin contraction in the quarter as gross margins declined by 80 basis points to 43% and net margins declined to 25.6% from 28%. Looking at free cash flow numbers, Apple generated $30.2 billion down from $44.2 billion in the same period last year. The company has been spending money on its supply chain as it looks to maneuver some of its supply chains into other parts of Asia (India and Vietnam). The company finished the quarter with $20.5 billion in cash on the balance sheet down from $23.6 billion last year.
Management maintained its dividend at $0.23/share and will look to get more to shareholders through share buybacks. Overall, this was a bad quarter for Apple but it seems like investors are looking through the noise because a lot of this was priced into the stock. Apple is one of our fund core holdings and we would like to add more to our position and any sort of market selloff.
Uber Technologies Inc (UBER): The mobility platform company beat on the top and bottom lines as they capitalized on the strong travel trends from the consumer. Uber reported earnings per share of $0.29 (beat WallStreet estimates by $0.45) on a revenue base of $8.6 billion (beat WallStreet consensus by $90 million). In comparison to our fund estimates, the headline revenue number is a bit of a miss as we estimated it would come in at $8.65 billion given the strong travel numbers, and earn $0.27/share. Uber reported revenue growth of 49% a clear sign of the strong rebound of travel along with loosened government restrictions as COVID-19 becomes more endemic.
Gross Bookings came in at $30.8 billion below our fund estimates of $32.5 billion which is showing that Uber is making more per ride than expected. Uber’s Freight segment produced solid growth of 43% as they continue to benefit from the Transplace acquisition. Uber’s operating loss was reduced from $550 million to $142 million as management implements strong cost discipline. The company’s overall net income came in at $595 million compared to $892 million in the same period last year. This is because Uber’s investment gains were less than the previous year. The company’s increased cash burn continues to be a sore point for investors as the company had $(303) million in free cash flow up from $(187) million.
Management gave a good FY2023 outlook as they see gross bookings growth between 20–24%. Uber’s shares slipped after the earnings and it's understandable given how the stock has run up into the report creating high expectations. We will not be adding to our position and will only look to add in a significant market selloff.
Disclosure: Cresco Investments is long Microsoft Corporation (MSFT), Avnet Inc. (AVT), Apple Inc. (AAPL), and Uber Technologies Inc (UBER).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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