10/24 Daily Market Note: MSFT and GOOG will demonstrate whether Cloud and Advertising have resilience heading into 2024
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Folks -
This evening after the close, we will witness Microsoft and Google report earnings to better understand the health of the cloud enterprise spending along with the advertising sector. Together, they represent about 8-9% of the S&P 500 and about 13-14% of the Nasdaq-100 (QQQ) in terms of weight. So, their outcomes will drive a directional move in the coming sessions (hopefully positive of course).
Wall Street expects Google to see $75.8 billion and Microsoft to see $54.55 billion in quarterly revenue. Between the two mega cap titans, the Sell Side analysts have been raising estimates into this print for Google with a 26 (upgrades):1 (downgrades) ratio whereas MSFT has seen estimates being raised at a 19:4 ratio. The Street is more bullish on an advertising recovery, and I personally think that Google and Meta are the best positioned to ride an advertising recovery.
That said, I work closely with my Brand Manager on Youtube who has first line visibility into the budgets of brands, and the primary message that I am hearing is that visibility into 2024 is very thin. In other words, she’s suggesting to me that brands will turn back on the advertising switch very quickly upon clarity of the end market (consumers) healing. But they will continue to lean on the cautious side until there is clarity with the macro climate. Based on what I understand about the advertising sector and Youtube, I like the long-term outlook (looking out 2-3 years) but the next couple quarters will depend on broad sentiment recovering.
In earnings outcomes surrounding China-related themes, tonight also has Texas Instruments (TXN) reporting earnings. Texas Instruments receives nearly 50% of its geographic revenues from China, so this evening is going to tell us a couple things:
How well is TXN competing in China given that China is determined to subsidize their domestic fabrication plants
Overall demand from their end market (electronic designers and global manufacturers).
Can they defend their gross margins? Expect a relief rally, if they can.
Because of TXN’s business model in the marketplace, a strong print from them will be helpful for peer companies such as Analog Devices, Qualcomm, Micron, and to a lesser extent AMD.
My personal view on Texas Instruments is that at today’s level, there is about 10-12% upside potential vs. 5-7% downside potential from a 3-6 month standpoint looking out to Q1 2024. I’ve sold Puts on this name to wait for better cost basis, and am heavily considering swapping them for 145 Strike Calls expiring Jan 2024 as I believe even an in-line print from them could cause a technical bounce to retarget 150. Willing to have up to a 30% Stop Loss on calls for risk management purposes. The name has revisited October 2022 bear market lows amid pessimism in the end market. The pessimism is fundamentally justified as forward EBITDA estimates continue to come down due to higher inventory levels that is left unsold with booking trends softening. Any bounce from this quarter’s earnings would be strictly a relief bounce and not necessarily the beginning of a durable bottom.
In today’s pre-market on Whatsapp, I highlighted that I liked IBKR, AMZN, and ORCL with specific parameters on upside targets and stop-losses. The longer the duration on these names, the higher the probability of seeing a positive outcome. These are 3 good companies at reasonable valuations which can see a 2-4% decent bump upon any sign of stability.
Top ideas discussed with everyone from a long-term investment standpoint PDD, TCOM, EDU are epitome examples of China names that bounce back the fastest upon a whiff of recovering sentiment. China has been broadly weak, but the sector cannot be judged by just Alibaba. Investors who expand their search to look for opportunity beyond the most popular names like BABA or Tencent put themselves in the greatest possible chance to survive in this sector.
Be back with more tomorrow. Good luck this evening with Microsoft and Google.
Forward-looking Conclusions of this note:
Macro: I believe Traders are front-running potentially favorable outcomes from MSFT/GOOG.
Stock-Specific: Ahead of earnings tonight, GOOG’s technical setup is stronger than MSFT. I’m waiting for a pullback in these 2 names before re-entering.
Bonds: The more we consolidate at these levels for TLT, the more durable the recovery move in the future. Sharp sudden impulse moves are not price action characteristics I fully trust. Re-adding what I sold in my taxable account into my 401K for TLT. I’ve achieved my purpose for TLT in my taxable accounts.
China: Texas Instruments reports tonight. This name has about 50% revenue exposure from China, and will be a first indirect test of whether China Tech ADRs is entering a swing bottoming phase. Closely watching the Hang Seng to see if there is opportunity to re-enter.
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