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Earnings take on Salesforce and Pure Storage; Tesla’s growing risks

Equities 4 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  While Salesforce and Snowflake guidance yesterday bolstered investor sentiment, Pure Storage provided a worse than expected fiscal Q4 outlook on revenue and operating income. Overall, companies in our AI theme basket are seeing a turnaround in revenue growth in Q3 which is a positive sign that corporate technology spending remains robust. We also revisit the investment case in Tesla and highlights three risks are growing for the EV maker.

Salesforce guidance is stronger than expected

Salesforce, the world’s second-largest software application maker (after Microsoft), reported better than expected operating margin in Q3 and thus Q3 EPS of $2.11 up from $1.40 a year ago, and its Q4 earnings guidance was above consensus. The company’s new focus on profitable growth is paying off and meanwhile revenue growth is stabilising at around 12% y/y in constant currencies. This growth rate is quite impressive given the economic slowdown and cost-cutting in corporate technology spending. As Salesforce’s earnings slide (see below) shows the data related business is where growth has picked up. Analysts’ price target is at $266 vs yesterday’s close of $230.

Source: Salesforce

Pure Storage guidance disappoints, AI related growth is picking up

Pure Storage, a manufacturer of all-flash data storage hardware, disappointed investors yesterday with its Q4 guidance on revenue at $782mn vs est. $924mn indicating that estimates were too optimistic on the back of AI sentiment. Operating income guidance in Q4 was $150mn vs est. $197mn. Pure Storage is part of our AI theme basket. Another company in our AI theme basket that reported last night was Snowflake and unlike Pure Storage it guided Q4 revenue above expectations and the operating margin guidance was 200 bps above consensus.

Out of the 20 stocks in our AI theme basket, Marvell Technology and UiPath that are missing on earnings results, but both companies actually reporting earnings tonight. But if look at the revenue growth figures for the remaining 18 companies in our AI basket then revenue growth (excluding Nvidia) has actually rebounded in Q3 signalling spending is turning around.

The three risks confronting Tesla

Tesla shares touched $250 yesterday before closing around $244 staging an impressive rebound this month up 21.6%. While sentiment remains bullish on Tesla there are growing risks that shareholders should think about.

  • The ‘Morocco risk’ – competition is heating up in every market, but the production of EVs is simpler that ICEs and as a result even a country such as Morocco now has its own local EV manufacturer. This opens up the competitive landscape to a whole new dimension and in the potential new age of nationalism is could lower Tesla’s long-term market share trajectory.
  • The ‘Unionization risk’ – the recent strikes in Sweden and looing unionization among its German workers are indicative that Tesla has reached a size now where society and its workers will demand different things from Tesla. Long-term that could be a headwind for operating margin. European labour markets are very different from China’s labour market that has so far been producing most of the EVs for the European market. But even in the US, the UAW union is targeting 12 carmakers including Tesla for unionization.
  • The ‘Musk risk’ – the CEO is both the company’s biggest strength but also its biggest risk. Musk’s comments and actions have become more volatile over the years and the question is whether at one point these actions could begin harming Tesla’s brand. His latest comments to an antisemitic post on X have yet again showed the risks his personality brings to the Tesla brand.
Next key event for Tesla is the November delivery figures and ultimately Q4 delivery figures vs those of Chinese based BYD which is poised to take over as the largest EV maker in the world (measured on deliveries of battery EVs). It is also worth nothing that analysts are no longer categorical positive on the stock with ratings becoming more diverged with the current rating being neutral and a price target around $240.
Tesla share price | Source: Saxo

Previous equity notes:

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