Big Tech is back to outperforming expectations! Kind of… until Amazon mentioned AWS growth is continuing to slow in the current quarter… As ever, watching the cloud platform results come through early in the earnings season from Microsoft, Alphabet et al can act as a useful read-through for some of the smaller-fry SaaS names:

Cloud YoY growth - Q3 ‘22 (%) YoY growth - Q4 ‘22 (%) YoY growth - Q1 ‘23
Amazon Web Services (AWS) 27 20 16
Microsoft Azure (constant currency) 42 38 31
Google Cloud Platform (GCP) - includes Google Workspace 38 32 28

For the second quarter running, the keyword was ‘optimization’:

Microsoft:

In Azure, customers continue to exercise some caution as optimization and new workload trends from the prior quarter continued as expected. - Amy Hood, CFO

Amazon:

As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter. And we are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1. - Brian Olsavsky, CFO

Alphabet:

That being said, in Q1, we continued to see slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop which remains uncertain. - Ruth Porat, CFO

The AWS April comments could be read as concerning for Datadog and Snowflake’s future growth given their close partnership with the platform. We’ll have to see how they frame things when they report on the 4th May and the 25th respectively.

One of Stephen Clapham’s recent posts, ‘Read this and beat the market’ makes the case that reading 10-K’s and other publicly available company material provides the ‘world’s simplest investing edge’:

Now there is only one thing here that the average investor can copy and that is reviewing the publicly available materials such as the 10-K. And it’s my assertion that the majority of investors don’t bother to read the 10-K, and that can actually confer an information advantage.

Regardless of whether he’s right or not, I think there’s another (perhaps even simpler) source of edge for the average investor: the rise of the equity analyst-turned-blogger. The success of Substack (where Clapham himself posts) over the past couple of years, and in particular the normalisation of paid subscriptions has made stock-recommendation services a viable pursuit for those that have the domain knowledge and self-marketing nous to forge their own path. 

There are 2 services run by trained analysts I’ve come across that particularly stand out in quality:

  • MBI Deep Dives (generalist)
  • Fabricated Knowledge (specialises in semiconductors but also runs a second, general service)

The obvious advantage of these services is access to a level of quality analysis that wasn’t previously available to the individual investor at a relatively affordable price.

Business Updates

Cloudflare

In competition with Upstart’s Q1 ‘22 report for attempting to fit as many red flags into one earnings update as possible, this was far from Cloudflare’s finest quarter. On first glance, the numbers don’t seem too bad. Sure, revenue growth slowed to 37% over Q1 last year, and disappointingly, DBNRR ticked downwards for the 4th quarter running to 117% but gross margins stayed strong at 78% and operating margins continued their slow climb (and remain positive at 7% for Q1).

[NET Q1 23 Op Margins.png] Not so bad, right?

Unfortunately, all of that pales in insignificance to the dual headline that on top of (just) missing their own revenue guide for this quarter, the full-year 2023 guidance - set for the first time only last quarter - was too optimistic and has now been revised downwards. Way to shatter investor confidence!

Instead of then taking the blame for this avoidable mishap (regardless of the level of his actual involvement in the guidance process), the CEO decided to focus the narrative on a group of 100+ employees in sales:

Digging in with Marc, we’ve identified more than 100 people on our sales team who have consistently missed expectations. Simply put, a significant percentage of our sales force has been repeatedly underperforming based on measurable performance targets and critical KPIs. That’s obviously a problem. - Matthew Prince, CEO

Prince again, from the Q&A:

When things were cruising along in 2021, again, you didn’t have to be a really disciplined seller in order to be successful at Cloudflare. And I think that, that, combined with some of the – what happened during COVID, combined with our hesitancy in terms of what the opportunity costs were in terms of replacing people when the tech employment market was overheating, all combined to have us get to a place where we just had a number of people on our team who weren’t performing.

Taken at face value, at best this suggests weakness in Cloudflare’s hiring process. At worst, it looks like a convenient scapegoat for the real issue: poor setting of guidance (related?). Regardless, in my view the decision to attack his own employees in this way took a bad quarter and made it worse. With the stock priced as it is, that’s a costly misstep.

Amazon

Aside from the AWS deceleration mentioned earlier, Amazon turned in a pretty solid quarter with operating margins making ground once again along with a welcome $1B year-over-year increase in operating income.

[Amazon Op Margin - Q1 23.png] Operating margin, excluding AWS. Source: MBI Deep Dives

This also marks the first quarter where Amazon have fully engaged with the AI/LLM narrative:

we just released our second versions of both Trainium and Inferentia. And the combination of price and performance that you can get from those chips is pretty differentiated and very significant. So we think that a lot of that machine learning training and inference will run on AWS. - CEO, Andy Jassy

Jassy on Bedrock, announced mid-April:

It’s a managed foundational model service where people can run foundational models from Amazon, which we’re exposing ourselves, which we call Titan. Or they can run it from leading large language model providers like AI 21 and Anthropic and Stability AI. And they can run those models, take the baseline, customize them for their own purposes and then be able to run it with the same security and privacy and all the features they use for the rest of their applications in AWS. That’s very compelling for customers.

He also confirmed the existence of a larger LLM being built for Alexa device. I’m looking forward to doing more than just turning my lights on and off with a voice assistant!

Further details of Amazon’s quarter (along with the rest of big tech) are well covered by MBI.

Alphawave

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years - Warren Buffett

How about 2 weeks? That’s about how long Alphawave investors will have to hold shares without being able to buy/sell after the following unwelcome news accompanied Alphawave’s otherwise upbeat FY 2022 and Q1 2023 trading update:

Although the audit procedures are substantially complete, and the Company does not expect any changes to the preliminary results, the Company’s external auditor has requested more time to complete its internal oversight and assurance processes before issuing its formal audit opinion. The principal reason for this is because of the additional procedures required in connection with the first time audit of the Company as an enlarged group following three transformational acquisitions over the past year. These transactions included both whole business acquisitions, carve-outs, debt financing, and a 366% increase in headcount.

Publication of the audited results is now anticipated to be on or before 12 May 2023, which falls outside the deadline required by the Financial Conduct Authority’s Disclosure and Transparency Rules for the publication of audited financial statements. As a result, the Company will request for the listing of its shares to be suspended from trading for a brief period from 7.30am on 2 May 2023 until the publication of its audited FY 2022 results.

After investing $439M in acquisitions over the course of 2022 to expand into designing custom connectivity chips, the balance sheet is still in a strong position with $186.2M in cash and net debt of $24.0M.

Alphawave Semi now has more than half of the top twenty semiconductor device companies as customers, a reflection of its continued strength in the data infrastructure markets that require the World’s most advanced connectivity technology. - Q1 trading update

[Alphawave FY22 Results.png] Alphawave FY22 results Source: IR Presentation

The full year revenue outlook remains unchanged at $340-$360M along with approximately $87M of expected (adjusted) EBITDA. First quarter results are also promising, with $103.1M in new bookings for the three months ended 31st March. Overall, a good update… if not for the suspension of shares.

I think the market reaction to the delayed audited results is overdone though and is a hangover from investor mistrust stirred up by the FT article discussed in last month’s update, which has since been addressed by management. By comparison, a FTSE-250 listed company, Card Factory, issued an almost identical delayed-audit update last week without a knock to its share price (though notably, not also including a suspension of shares). Assuming Alphawave’s audited results are largely unchanged, I wouldn’t be surprised to see a fair amount of volatility in share price in response. I took the opportunity to add slightly to my position following the earnings release. Let’s see what 12th May (or sooner) brings.

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
15.64% 16.81% 8.59% 4.19%

Portfolio

Holding Ticker(s) Weighting (%)
Nasdaq 100 Tracker XNAQ 32.0
Alphawave AWE 16.3
Crowdstrike CRWD 5.1
Snowflake SNOW 5.0
Adobe ADBE 4.0
Cloudflare NET 3.3
Datadog DDOG 3.2
Twilio TWLO 2.8
AMD AMD 2.8
Amazon AMZN 1.5
Cash - 24.0

Adjustments

Although I only made a couple of purchases/sales throughout April they’ve had an outsized impact on the portfolio composition: Alphawave, which I’ve now built into a full position (adding a little following earnings, as mentioned above) and Cloudflare, whose abysmal quarter, plus a correction to my portfolio-tracking spreadsheet (whoops…) means it’s now a far smaller position and one that I’m considering selling out of. I’m also yet to buy back my previous allocation of Amazon and Datadog shares, sold last month for tax purposes.

Closing Remarks

The planned AI post is in the works but I’m still working out how broad (or not) to make it. Stay tuned! Next month’s post is likely to be fairly wedged with earnings updates as AMD, Datadog, Twilio, and Snowflake all report.

Until next time!