Latest / ausbiz a.m / 29.10.26 Huw Davies Grey Street Partners
Transcript
- nadine: Well, good morning to you. It is the 29th of October. I'm Nadine Blaney from Ozbiz, just filling in for Andrew Gagan this morning, and what a morning it is. What a time to be alive. We had a lot of key data coming overnight in terms of central bank action. and then we had markets kind of hanging out for the big tech results, Microsoft. Alphabet. I'm not going to get too far into those because we've got a guest joining us who can, really give us the rundown on what those results mean. But safe to say we've had some pretty interesting aftermarket reactions to those tech results. But let me get you across what happened in terms of markets. We saw the NASDAQ up by about a quarter of a percent, but again, that predated some of those after-the-close results. We had the S P 500 putting on about 20%. A quarter of a percent or 21 points. So a mildly positive session in the US. And what it was all about was the Fed, of course. The Fed surprised by being a bit dovish. That sent global bond yields plunging. eight basis point drop in US two-year treasury yields. So yeah, the Fed chair Kevin Warsh suggested that inflation medicine is taking effect. also casting a bit of doubt on a December hike, held rates as expected, but also talked about cutting down the amount of Fed meetings from next year. So Fed funds rate on hold as expected. CBA for one coming out this morning saying that they still expect the Fed to increase rates by 25 basis points in December and March. But we will see. we won't know the outcome of that, but it'll be interesting to see Australian markets react to that. But also the very, very important earnings that came after the bell from Alphabet and Microsoft. The headline is Microsoft beat estimates. The headline for Alphabet is that the cash burn is increasing as they continue to spend on cloud. But cloud revenue more than doubled to 30.7 billion. US dollars, but you don't need to hear more about that from me. Let's welcome in our guest, Hugh Davies from Gray Street Partners. Hugh, welcome. What a busy night. Huw Thomas Davies: Yeah, certainly certainly a bit going on last night. yeah, a bit of I woke up v pretty early this morning as I often do and markets were a little bit was a little bit little bit discerning when I when I woke up but that they sort of turned around post Fed meeting and and also some other bits and pieces that happened through the day. nadine: Yeah, so you can I just get your thoughts on the Fed? I mean, I'm chomping at the bit to talk tech with you, obviously, but no big surprise for the hold. Does this improve the outlook for US equities? Huw Thomas Davies: I I s I think it probably it probably does. you know, we're we've we've talked quite a lot in various investment committee meetings that we have over here and general consensus seems to be that while here in Australia we've we've got our challenges, it it does seem to be that in the US there's the US economy is pretty good and you know things are things are trundling along quite nicely over there. you know, putting in putting in the hold is it's always nice for equities. you know, if you move from a hiking cycle transition to a hold and then hopefully into a cutting cycle, that can usually spell pretty good signs for equities. Now we don't know yeah, we we've with Kevin Walsh we've got a slightly different Fed chair than what we had with with with Powell. He was pretty adamant around broadcasting and And really letting people know and letting the market know what their intent was. Whereas Walsh has largely he he's a little bit more a bit less inclined to to really broadcast where they're at. inflation is still obviously a an issue that is popping up globally and and the US is you know not not immune to that. But you know, the the economy's showing that it's still fairly strong, if it's still fairly resilient. nadine: Okay. Yeah. All right. let's leave that there. Can we get to the earnings? So we've just had Microsoft out. I believe shares are rising in after hours trade. Obviously this podcast will date, so I won't go too far into that. But yeah, talk to us about what what you're seeing in that result. Huw Thomas Davies: Yeah, so Microsoft reported it's so it's actually it's it's Q one. so they they kind of report out of sync to to a few different businesses. But their their earnings were you know a breat a beat across the across the top and bottom lines. after hours I think you as you said it it changes pretty quick, but it was up around five percent after hours initially. It it you know may trade off a little bit later on. you know, their EPS was around four dollars eighty nine versus a an expected four seventy three. So that that's a that's a great result. And that's the adjusted earnings, which excludes the impact of investments in the likes of of OpenAI and Anthropics. So as those businesses deliver then you know there's there's further earnings upside there as well. Their revenue was a beat as well, they're up by about 20% year on year, but consensus which was around ninety point six to ninety point seven billion they actually delivered a ninety two point two eight billion. so again, really a a great beat there. And free cash flow. while they're they've still got about 18.6 billion in free cash flow, but it would there was a decline around 27%. But this quarter, one of the things that they've done this quarter is for the first time is they've disclosed the revenue from their from it to Zoo cloud in dollars. Previously they they would just provide a a percentage percentage number, but this is the first time they've broken it down and It beat estimates considerably. yeah, it delivered a forty-eight percent growth versus their guide of forty-four to forty-five. The street was around sort of mid forties for that. but the dollar value is thirty-three point one seven billion versus estimates of about thirty-two and change. So that's delivering fantastic growth within Azure and and cloud growth was also up by thirty percent at around sixty-three point nine. So Yeah, that that cloud growth is is often the number that does move the stock, but further transparency and granularity into Azure is is really welcome by the market. I guess the the big debate is what does their capex look like? And you know, we we keep hearing about conversations on capex AI CapEx versus return on investment. so one of the the items in their capex, so previously in their last update, they guided to around fifty billion dollars of CapEx for the quarter. That came in a little bit lighter at around forty five billion. so it's still up thirty percent, but but a bit lighter on the guide. And that seems to, you know, for for the market it seems to have just been reasonably well received. yeah, a big concern for a lot of investors is how much these you know hyperscalers are are spending in in that capex. nadine: Mm-hmm. Huw Thomas Davies: So seeing that that a little bit a little bit lighter is is nice that is nice to see. but you know there there's still the demand is exceeding its capacity. You know, the r remaining performance obligations for the quarter, yeah, that was up seventy three percent to six hundred and seventy seven billion. if we compare that to the last quarter, that was six hundred and seventy eight billion, which had grown eighty four percent year on year. So that so that demand is is still there and and is It's not going away anywhere quickly. nadine: Uh-huh. So how does that compare to what we saw from Alphabet now? Huw Thomas Davies: Well, Alphabet yeah, Alphabet's a it's certainly behaving quite differently. It it when I last looked after ours it was off around nine percent. nadine: Mm-hmm. Huw Thomas Davies: and it's had yeah, really it it its earnings per share was two dollars twelve versus about a three dollar estimate. So that that's a pretty pretty decent miss there. the revenue number as well came in a little bit light. You it was 127.5 billion versus a hundred and twenty-eight. the growth was still around twenty five percent, but yeah, it it is a it is a slight miss. operating income, you know, that grew by thirty percent. but I I guess where where a real issue comes out here is was in the the capex and ki f and cash flow. So Google's free cash flow fell to about nine billion and estimates were Closer to 2.7 billion. So that's a really big miss there. So, they're obviously spending a hell of a lot of money in their CapEx. it's really, really is eating into their cash flow. but across the the business silos and and and so forth, you know, Google Cloud that had a clear beat. It was generated about 30 billion, 30.1 billion in in revenue, it was up 103%. And estimates were around 29 billion. So that's that's fantastic. The last quarter was about 24 billion. So and margins are solid there. you know, the street was sort of looking around and 90% growth within that space. We're seeing more and more sales in their TPU chips, which is largely up against the likes of an Nvidia. So that nadine: Mm-hmm. Huw Thomas Davies: is yeah, that's a positive for in in that Google Cloud business. If we look at search and advertising, so search so so search and advertising was up about twelve percent and around eighty and and advertising was about eighty two billion. Well search revenue fell short at about it its revenue was around sixty three billion. So it fell short first. but it's still growing nadine: So here. Huw Thomas Davies: around ten, eleven percent. nadine: Yeah. Th does does what we've seen, and I know that it takes a while, you know, to go through all the results, so I really appreciate you having all those at your fingertips, and to I guess make sense of them and to, you know, give thought to them, but does it change your view? Like I don't know if you hold Microsoft or Alphabet, but does it change your view on fundamentally what those companies are worth or where they sit in the AI race? Huw Thomas Davies: We own both of them, and they're they would be larger weights within our portfolios. We've owned them for a long time. So from a I guess if I if I talk about Google initially, you know, when we look at their like if if we just if we start at a a very simple price to earnings ratio, yeah, it's we're looking at nearly ten year lows on current and you know, if we look forward to the next twelve months, yeah, it's you know coming it it's come off quite a bit. They've still forecasted growth is still fantastic. Yeah, they're revenue and sales, so revenue estimates around mid twenties. EPS also, yeah, we look at FY twenty seven, FY twenty-eight, twenty-seven, and twenty-two percent. So for us we look at so what we've seen fundamentally the story for us doesn't and the thesis doesn't change so much. We'll look we'll do some work into into Google and we'll we'll make a call whether or not there's an additional buying opportunity out of this. you know, a nine percent move in a name like Google is a in one day is is usually a it's a a fairly significant significant move. So for us and how we'll often look at stocks like this is that can create you know a bit of inefficiency and and some buying opportunities. So we'll look at that. We may and we'll we'll probably look at managing that weight maybe maybe taking an opportunity to to to buy a bit more but we'll we'll sort of see how that plays out with Microsoft. We've we've been buyers of Microsoft for a little while. We as I said we own it. again the the there's such a the the Azure growth the Azure business is is so pivotal the ingrained and entrenched customer base they have it it's a there's there's not a lot of negatives about Microsoft. The Obviously that CapEx spend we've got to keep a pretty close eye on that. yeah, they'll continue to do it, but whether it the worry is that they it gets out of control. so we we'll monitor that pretty closely. It is starting to move up into sort of all time high territory nadine: Mm-hmm. Huw Thomas Davies: share price. So for us, we're we'll monitor that position. and yeah, we may we may take a little bit, may take a little bit out just because of the the the weighting that it has in the portfolio nadine: Mm-hmm. Huw Thomas Davies: and and where it sits. but yeah we f again the spend and the thesis behind that, yeah, the CapEx spend, the adoption of AI, the growth of AI, despite everything we hear about data centers not, getting blocked and all and all that sort of thing, it for us it often comes back to the one question, are we using more or less AI? I think we all know the answer to that. And What do you need for more AI is you need more compute power, you need more chips, you need more cloud, you need more data centers, you need more, more, more, more speed, more efficiency. So that leans into these types of scales further. nadine: Yeah. look here. Only in the interest of time, and I know you've got a lot of work to do, we'll leave it there. But thank you so much with that instant analysis of Alphabet and Microsoft. Now, off the top I said central banks. I haven't even had a chance to mention that the Bank of Canada hiked twenty five basis points on inflation. That comes after New Zealand. The Bank of New Zealand yesterday decided to hold. So there's some there's some differing views on inflation coming from the central banks. We had the UK budget, we have the ECB tonight, we've got US third quarter GDP, which I'm sure he would agree. It'll be interesting to see how much of that GDP growth is being pushed by the CapEx spend. no big data here locally today. I do believe that we get a couple of sort of out-of-cycle reports or company updates, AGMs no doubt will continue. Look, we've got plenty to hang our hats on as investors this morning. Hugh Davies from Gray Street Partners, thank you so much for joining us on the podcast this morning. Huw Thomas Davies: Thank you. nadine: Thank you, and thank you for listening. We look forward to, yes, speaking with you tomorrow.