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, 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.
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.
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.
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