Microsoft Q3 FY23: Strong earnings report

Posted on April 27, 2023June 30, 2026 by io-fund

Microsoft’s Q3 FY23 revenue grew 7% YoY and 10% in constant currency to $52.9 billion. EPS came at $2.45 and was up 10% YoY and 14% in constant currency. The company beat revenue estimates by 3.6% and EPS estimates by 9.6%.

Azure grew by 31% YoY in constant currency and came at the higher end of the management guidance of 30% to 31%.

The management guidance for Q4 FY23 is $54.85 billion to $55.85 billion, representing a YoY growth of 6.7% at the mid-point. It was better than the consensus analyst's YoY growth estimate of 5.9%.

Financials

The company’s revenue in the recent quarter was better than the management guidance across all three segments. Revenue grew by 7% YoY and 10% in constant currency to $52.9 billion. The management guidance was between $50.5 billion to $51.5 billion.

Gross profit grew by 8.8% YoY to $36.73 billion. The gross margin was 69.5% compared to 68.4% in the same period last year. It was also higher than the management guidance of 69.1%. The management guidance for the next quarter is 69.5%. Amy Hood, CFO of the company, said in the earnings call, “Microsoft Cloud gross margin percentage increased roughly 2 points year-over-year to 72%, a point ahead of expectations driven by cloud engineering efficiencies. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased slightly, driven by lower Azure margin.”a point ahead of expectations driven by cloud engineering efficiencies. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased slightly, driven by lower Azure margin.”

Operating income grew by 9.8% YoY to $22.35 billion. The operating margin was 42.3% compared to 41.3% in the same period last year. It was higher than the management guidance of 40.2%. The management guidance for the next quarter is 42.1%.

Net income grew by 9.4% YoY to $18.3 billion. The net profit margin was 34.6% compared to 33.9% in the same period last year. EPS was $2.45 compared to $2.22 in the same period last year and beat estimates by 9.6%.

The operating cash flow came at $24.44 billion, with an operating cash flow margin of 46.2% compared to 51.4% in the same period last year. The operating cash flow included the TCJA R&D tax payment of $1.15 billion and the operating cash flow margin, excluding the tax payment is 48.42%. The free cash flow was $17.83 billion with a free cash flow margin of 33.7% and adjusted excluding the tax payment is 35.9% compared to 40.6% in the same period last year. The company has a stable balance sheet with cash and investments of $104.43 billion and a debt of $48.2 billion.

The commercial remaining performance obligation increased by 26% YoY to $196 billion. Roughly 45% is expected to be recognized in revenue in the next 12 months, up 18% YoY and the remaining portion that will be recognized beyond 12 months grew by 34%. The commercial remaining performance obligation increased by 29% YoY to $189 billion in Q2 FY23.

Segments:

The Productivity and Business Processes segment grew by 11% YoY to $17.5 billion and was better than the mid-point of the management guidance of 8%. The guidance for the next quarter is between $17.9B to $18.2B, up 8.7% YoY at the mid-point.

The Intelligent Cloud segment grew by 16% YoY to $22.1 billion and better than the mid-point of the management guidance of 14.7%. Guidance for the next quarter is $23.6B to $23.9B, up 13.6% at mid-point. Microsoft Azure grew by 31% YoY in constant currency and came at the higher end of the management guidance of 30% to 31%. Azure grew by 38% in CC in Q2 FY23 and 49% in the same quarter last year. The management guidance for the next quarter is 26% to 27% in constant currency, which includes roughly 1% from AI services.

Satya Nadella also highlighted Azure gaining market share and the opportunities in AI. He said in the earnings call, “Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure and it’s being used by our partner, OpenAI, as well as NVIDIA and leading AI start-ups like Adept and Inflection to train large models.”“Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure and it’s being used by our partner, OpenAI, as well as NVIDIA and leading AI start-ups like Adept and Inflection to train large models.”

Amy Hood, the CFO of the company, also highlighted the strong growth in AI. She said in the earnings call, “In our largest quarter of the year, we expect customer demand for our differentiated solutions, including our AI platform and consistent execution across the Microsoft Cloud to drive another quarter of healthy revenue growth. Last year, we had our largest commercial bookings quarter ever with a material volume of large multiyear commitments.”

“On that comparable, we expect growth to be relatively flat. We expect consistent execution across our core annuity sales motions with strong renewals and continued commitment to our platform as we focus on meeting customers' changing contract needs, which include shorter term, quick time to value contracts in this dynamic environment. Our key focus remains on delivering customer value.”

More Personal Computing declined by (9%) YoY to $13.3 billion and was better than the mid-point of the management guidance for a decline of (16.7%). The PC segment revenue witnessed better than expected results in all businesses. The guidance for the next quarter represents a YoY decline of (5.6%).

Amy Hood said in the earnings call, “Windows OEM revenue decreased 28% year-over-year and Devices revenue decreased 30% and 26% in constant currency, both ahead of expectations. We saw better-than-expected PC demand, as noted earlier, particularly in the commercial segment, which has higher revenue per license, although results continue to be negatively impacted by elevated channel inventory levels.”We saw better-than-expected PC demand, as noted earlier, particularly in the commercial segment, which has higher revenue per license, although results continue to be negatively impacted by elevated channel inventory levels.”

“Windows commercial products and cloud services revenue increased 14% and 18% in constant currency, significantly ahead of expectations, primarily due to the strong renewal execution with higher in-period revenue recognition noted earlier. Search and news advertising revenue ex TAC increased 10% and 13% in constant currency, including 2 points from the Xandr acquisition. Results were driven by higher search volume with share gains again this quarter for our Edge browser globally and Bing in the U.S.”

“And in Gaming, revenue declined 4% and 1% in constant currency, ahead of expectations. Xbox hardware revenue declined 30% and 28% in constant currency on a high prior year comparable that benefited from increased console supply. Xbox content and services revenue increased 3% and 5% in constant currency, driven by better-than-expected monetization in third-party and first-party content and growth in Xbox Game Pass.”

Source: Company IR

Other notable comments from the earnings call:

Amy Hood said, “We will continue to invest in our cloud infrastructure, particularly AI-related spend as we scale with the growing demand, driven by customer transformation. And we expect the resulting revenue to grow over time. As always, we remain committed to aligning cost and revenue growth to deliver disciplined profitability. Therefore, while the scaled CapEx investments will impact COGS growth, we expect FY '24 operating expense growth to remain low.”And we expect the resulting revenue to grow over time. As always, we remain committed to aligning cost and revenue growth to deliver disciplined profitability. Therefore, while the scaled CapEx investments will impact COGS growth, we expect FY '24 operating expense growth to remain low.”

Satya Nadella put more thoughts on optimization and new workloads into an analyst question. “Thanks, Mark for the question. Maybe I'll make three comments. And it's also important, I think to distinguish between what I'd say, macro or absolute performance and relative performance because I think that's perhaps a good way to think about how we manage our business.”

“First is optimizations do continue. In fact, we are focused on it. We incent our people to help our customers with optimization because we believe in the long run that the best way to secure the loyalty and long-term contracts with customers when they know that they can count on a cloud provider like us to help them continuously optimize their workload. That's sort of the fundamental benefit of public cloud, and we are taking every opportunity to prove that out with customers in real time.”help our customers with optimization because we believe in the long run that the best way to secure the loyalty and long-term contracts with customers when they know that they can count on a cloud provider like us to help them continuously optimize their workload. That's sort of the fundamental benefit of public cloud, and we are taking every opportunity to prove that out with customers in real time.”

“The second thing I'd say is, we do have new workloads started because if you think about it, during the pandemic, it was all about new workloads and scaling workloads. But pre pandemic, there was a balance between optimizations and new workloads. So what we're seeing now is the new workloads start in addition to highly intense optimization driven that we have.”“The second thing I'd say is, we do have new workloads started because if you think about it, during the pandemic, it was all about new workloads and scaling workloads. But pre pandemic, there was a balance between optimizations and new workloads. So what we're seeing now is the new workloads start in addition to highly intense optimization driven that we have.”

“The third is perhaps more of a relative statement because of some of the work we've done in AI even in the last couple of quarters, we are now seeing conversations we never had, whether it's coming through you and just OpenAI's API, right? If you think about the consumer tech companies that are all spinning essentially Azure meters, because they have gone to open AI and are using their API. These were not customers of Azure at all.”These were not customers of Azure at all.”

“Second, even Azure OpenAI API customers are all new, and the workload conversations, whether it's B2C conversations in financial services or drug discovery on another side, these are all new workloads that we really were not in the game in the past, whereas we now are. So those are the three comments that I'd make, both in terms of absolute macro, but more importantly, I think, what is our relative market position and how it's being changed.”“Second, even Azure OpenAI API customers are all new, and the workload conversations, whether it's B2C conversations in financial services or drug discovery on another side, these are all new workloads that we really were not in the game in the past, whereas we now are. So those are the three comments that I'd make, both in terms of absolute macro, but more importantly, I think, what is our relative market position and how it's being changed.”

Amy Hood also added, “Mark, maybe the one thing I would add to those comments is, we've been through almost a year where that pivot that Satya talked about from we're starting tons of new workloads, and we'll call that the pandemic time, to this transition post, and we're coming to really the anniversary of that starting. And so to talk to your point, we're continuing to set optimization. But at some point, workloads just can't be optimized much further. And when you start to anniversary that, you do see that it gets a little bit easier in terms of the comps year-over-year. And so you even see that in a little bit of our guidance, some of that impact from a year-over-year basis.”we're continuing to set optimization. But at some point, workloads just can't be optimized much further. And when you start to anniversary that, you do see that it gets a little bit easier in terms of the comps year-over-year. And so you even see that in a little bit of our guidance, some of that impact from a year-over-year basis.”

Wall Street Analysts Notes:

Wedbush Securities analyst Dan Ives said in a research note. "It's clear that in Redmond's enterprise backyard the company is gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft,"gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft," He further said, "Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."

BMO analyst Keith Bachman upgraded Microsoft (MSFT) shares to outperform. He stated that he now has "higher conviction" that any headwinds to Azure are likely to moderate by the end of the year, while opportunities in artificial intelligence can help the longer-term. "While the stock is not inexpensive, we think the durable growth opportunities warrant a premium valuation."

RBC Capital analyst Rishi Jaluria raised the firm's price target on Microsoft to $350 from $285 and keeps an Outperform rating on the shares. The company's "surprisingly clean" beat-and-raise quarter should help ease some concerns across software, including the narratives around cloud saturation, as AI is set to be the next frontier. Microsoft's commercial business showed more resiliency than expected, headlined by Azure growth hitting the high-end of guidance and Office 365 showing continued resiliency.

UBS analyst Karl Keirstead raised the firm's price target on Microsoft to $300 from $275 and keeps a Neutral rating on the shares. Microsoft's Q3 print was "surprisingly positive," with total constant currency revenue growth of 10% and a material EPS beat. The firm thinks the only concern might be the outlook for FY24 to be an AI investment year and what that means for gross margins and EPS growth.

Conclusion:

The company’s leadership position in the cloud and its perfect customer base of Fortune 500 companies have paid off. Even though Azure is decelerating what is important is that the company is gaining market share. Also, the opportunities in AI are the main highlights in the report, along with the company’s resilience in the Personal Computing Segment.

Recommended Readings:

https://io-fund.com/premium/microsoft-pre-er-will-we-see-evidence-of-a-bottom

https://io-fund.com/premium/google-faces-biggest-lawsuit-in-company-history-what-companies-could-benefit

https://io-fund.com/premium/microsoft-fyq2-guidance-weaker-than-expected

https://io-fund.com/premium/cloud-earnings-review-digging-deeper-on-best-of-breed

Enphase – Post Q123 takeaways

Posted on April 26, 2023June 30, 2026 by io-fund

Enphase reported Q123 earnings on 4/25/23 after the market close. Enphase reported better than expected sales, gross margins and normalized eps.

· Q1 sales came in at $726m, above consensus of $720m and flat sequentially

· Non-gaap gross margins improved to 45.7%, compared to 43.8% in Q4

· Non-gaap eps was $1.37 vs $1.22 consensus

· Generated $224m in fcf and ended Q1 with $1.78b in cash and cash equivalents

For Q223, Enphase guided to the following

· Sales of between $700-750 million vs consensus of $760 million; taking the midpoint this is flat sequentially and lower than consensus

· Non-gaap gross margin 43.5%, down sequentially

The lower sequential guide, driven mainly by weaker conditions in states outside of California, has been the main driver in the price reaction. However, the price seems to have overextended to the downside.

We will review the key points we outlined in our preview.

1. Outlook for the European business

Europe continues to experience healthy growth in their core markets of Netherlands, France, Germany, Belgium, Spain, Portugal and the UK. Europe was up 21% sequentially. Non-gaap gross margins are greater than 45%. Their sell through at the end of Q1 was at an all-time high. Enphase expects Q2 to be better than Q1 and their business is growing much faster than expected. Channel inventories are also healthy. The plan to expand into new counties is on track. Their non-US business currently comprises 30% of revenue and has helped offset weakness in the US.

2. Orders US residential installer level

As we outlined in our preview, this is an important driver of the stock price for 2023. The market was looking for signs of stabilization in the US. California accounts for 20% of total revenues. Although down 9% sequentially, CA was in-line with seasonal trends supported by NEM 2.0 and installers are building 3 to 4 months backlog.

It was in the states outside of California, down 25% sequentially, that was weaker than expected. This is how Enphase described it.

“As I said earlier on this call, our sell-through of microinverters in the US was 21% lesser in Q1 compared to Q4. Our sell-through in California was only 9% lesser than Q4. There was some impact due to the weather in early Q1, but the NEM 2.0 rush in Q1 more than compensated for it.

California installers took advantage of the NEM 2.0 rush and have built up a solar backlog for the next three to four months. We believe when the stockholders aren't expanding their crews to accelerate installation, they're laser focused on their cash flow due to the high interest rate environment and are looking clarity — for clarity on the NEM 3.0 demand.

Sell-through of our batteries in California was 23% lesser in Q1 compared to Q4, as installers focused mainly on solar. We expect this trend to continue for the next three to four months. After that, we see NEM 3.0 as a net positive for California and expect strong demand to resume for solar plus storage.

Let's cover the rest of the US. The sell-through of microinverters in non-California states was 25% lesser in Q1 compared to Q4. We observed that the sell-through was even lower in states with low utility rates such as Texas, Florida and Arizona. In these states, the economics of loan financing has worsened due to rising interest rates.”

This is how Enphase described the environment installers are facing.

“Our installers, in general, are navigating three key challenges: first, the rapid increase in interest rates over last year; second is switch from selling low APR with high dealer fees, the selling market rate loans with low dealer fees; and third, the delayed payment from the loan originators or as the industry calls it, reduction of M1 payments.

Let's discuss about the second and third challenges. We see the move to high APR and low dealer fee loans as a positive for the industry. The demand for market rate loans remained strong. New capital providers who were not able to buy below market rate loans are now offering solar financing. Installers are adjusting their sales practices for a higher interest rate environment.

We are also seeing new lease providers entering the market with focus on servicing the long tail. We think capital will be available for both long-tail — for long-tail installers regardless of the mix of loan and lease.

On the reduced M1 payments, loan originators are providing less cash to installers at the time of contract signing and a greater percentage after installation. This creates a working capital challenge for the installers and is forcing them to become more efficient.

As the installers adjust to this new reality, we expect the sell-through of microinverters and batteries to incrementally improve in Q2 compared to Q1. Q2 is seasonally stronger and should help the situation even more.”

Enphase expects these conditions to improve in Q2.

“So I think it's going to be interesting to watch the situation in the next few quarters. But I think this is a resilient industry. And I believe things are only going to get better from here. Q1, as I indicated, is usually the worst quarter of the year due to seasonality. And so that — Q2 is usually a good quarter in terms of seasonality and with the adjustments installers are making in running their business, we expect things to be incrementally better.”

In terms of revenue California is the biggest at 20%. But what these comments highlight is that in aggregate other states are just as important and have their own different macro drivers both at the installer and consumer level.

On the positive side, Enphase expects pricing to remain firm.

“Question: First one's on pricing as a follow-up to a prior question. Our check suggest pricing through the US resi ecosystem is coming down rapidly. So US resi solar module pricing is down 15% to 30-plus percent. Powerwall pricing is down. Meaningfully some of your inverter peers have lowered inverter pricing. We've heard that you guys have — you may have lowered pricing as well for specific larger customers on a one-off basis. I think, Badri, you just mentioned that you don't see any drop in pricing, but can you talk — can you give us some more color on how you expect to maintain price, especially in this more difficult environment? And can you talk about price specifically in Q3 and Q4, if you expect it to hold, how does it hold? And if there is some risk, maybe talk about that risk? Thanks.

Answer: We don't see any drop in pricing. In fact, we see our gross margin sequentially up a couple of percent from Q4 to Q1. And also, I broke out the gross margins in Europe because some of you had been asking me. The gross margins in Europe are incredibly healthy. They're over 45%. The gross margin in the US is incredibly healthy.

Pricing is stable for us. Gross margin means both price as well as cost. And so we do value-based pricing, which is basically price products based upon the value they bring compared to the next best alternative like alkaline batteries, it may be increased power, increased safety. In microinverters, it may be increased quality, increased service. So that's on the pricing side.”

3. Status of US based manufacturing operations

Enphase is on track to partner with 3 different manufacturers to add inverter capacity in the US. Upon completion, the US will be almost 50% of total global capacity.

“Let's come to US manufacturing. As we discussed last quarter, the IRA, Inflation Reduction Act, will help bring back high-tech manufacturing to the US and stimulate economy through creation of new jobs. We are opening manufacturing lines with three different manufacturing partners, adding a capacity of 4.5 million microinverters per quarter, bringing our overall global capacity to 10 million microinverters per quarter as we exit 2023. We expect to begin US manufacturing with one partner in Q2 and with the remaining two in Q3.”

4. Potential earnings benefit from Inflation Reduction Act corporate tax credits

Enphase confirmed they will also deduct the IRATC from costs of sales.

“Now I'd like to discuss how the advanced manufacturing production credits from the IRA will be reported in our earnings while waiting on the implementation guidelines from the US Treasury. Based on the current guidelines, the production credit can be claimed as direct pay or in the form of tax credit. Under direct pay, the production credit will be accounted for as a reduction in cost of goods sold. And in tax credit, you will be reported in the tax expense line.”

“Incrementally we will provide us the same dollar impact to our earnings per share as the production credit is nontaxable. We expect the production credit net of any incremental costs for domestic manufacturing to be in the range of $20 to $30 per microinverter sold to customers. We expect to ship 50,000 net in USA microinverters to customers this quarter. We plan to have our US contract manufacturing facilities to be fully operational by the end of 2023. We estimate shipments to reach our US capacity of 4.5 million microinverters per quarter by the end of 2024, assuming robust demand.”

We outlined in our preview the base case for potential gross margin improvement from the IRATC. Given the timing on manufacturing capacity, we likely won’t see a gross margin uplift until the end of 2023 into 2024.

Conclusion

For Enphase, Q1 was a tale of two regions. The core markets in Europe are strong and entry into new markets is on track. On the other hand, the US is starting to feel the impact of higher interest rates as installers adjust to the changing financing economics.

Until there are signs that the US has bottomed out and is improving, this will be a headwind. Meanwhile, any hoped for uplift from the IRATC won’t be seen until the medium-term.

First Solar – What to look for in Q1

Posted on April 25, 2023June 30, 2026 by io-fund

We recently did a deep dive into the Inflation Reduction Act (IRA) and its key provisions here. We identified First Solar (FSLR) as a key beneficiary of the bill and analyzed how it would impact its profitability. First Solar has been one of the few companies that have provided clear guidance on how Section 45x of the Inflation Reduction Act and the related Corporate Tax Credits (IRATC) would impact its 2023 earnings.

First Solar is due to report their q123 earnings on 4/27/23 (amc). This is an important quarter because it is the first where the market will be able to assess the impact of the IRATC. There are several key factors that investors will be looking for.

1. Any revisions to the treatment, timing or total amount of the 2023 IRATC?

2. On track to meet production targets and update on contracted backlog?

3. Update on capex plans and related financing

4. Outlook on ASP per watt?

5. Any improvement in logistics costs that was a significant drag on 2022 earnings?

6. 2023 earnings expectations

We will cover each point in more detail below.

1. Update on IRATC

In its Q422 earnings call, First Solar stated that it had consulted with various regulatory bodies and was advised to treat the IRATC as a reduction in the cost of sales. This accounting treatment has a direct impact by increasing gross margins.

“Following consultation review with outside advisers, our auditors and the SEC, we expect to recognize these credits as a reduction to cost of sales in the period such modules and the integrated eligible components are sold to customers”

“I’ll now cover the full year 2023 guidance ranges. Our net sales guidance is between $3.4 billion and $3.6 billion; gross margin is expected to be between $1.2 billion and $1.3 billion, which includes $660 million to $710 million of advanced manufacturing production tax credits under Section 45X of the IRA This results in a full year 2023 earnings per diluted share guidance range of $7 to $8.”

Taking the mid-point of the 2023 IRATC and sales guidance, this would result in gross margins of 36% compared to 16% without the IRATC.

We will look to see if management provides any updates to the guidance above. Management indicated that the IRATC will begin to make a more meaningful contribution after Q1. Indicating that the gross margin uplift will be more visible after Q1.

“Section 45X credits, recognized, will increase after Q1, driven by both the timing of volumes sold as well as the inventory lag, whereby products sold in the early part of 2023 may have been manufactured in 2022.”

2. On track to meet production targets and update on contracted backlog?

First Solar ended 2022 by manufacturing 9.1 GW of capacity. For 2023, they have guided for 11.5 to 12.2 GW. Meanwhile, their contracted backlog stands at 61.4 GW. This is about 5x their estimated 2023 production capacity.

First Solar is currently expanding its capacity in Ohio and Alabama. By 2024, they estimate that about 50% of their total production capacity will be US based.

We will look for updates on these targets for any meaningful changes. For example, if their US capacity is ahead of plan, how this may impact the amount and timing of the IRATC.

3. Update on capex plans and related financing

In the Q4 call, First Solar indicated they did not require external financing.

“Operationally, in 2023, we’re expecting to produce 11.5 to 12.2 gigawatts of modules, and after taking into account reductions in inventory, fell 11.8 to 12.3 gigawatts. From a capital structure perspective, our strong balance sheet has been and remains a strategic differentiator, enabling us both to weather periods of volatility as well as providing flexibility to pursue growth opportunities including self-funding our Series 6 and Series 7 transitions.”

We ended 2022 in a strong liquidity position. And coupled with strong forecasted operating cash flows, modular advance payments and our existing India credit facility, we expect to be able to finance our current capital programs without acquiring external financing. We are evaluating putting in place our revolving credit facility to support jurisdictional cash management as well as to provide short-term optionality and expect to address more details on our capital structure and liquidity outlook at our Analyst Day.”

4. Outlook on ASP per watt?

In Q4, First Solar stated:

“We had a total contracted backlog of 61.4 gigawatts with expected future revenue of $17.7 billion for a portfolio average base ASP of $0.288 per watt, before the application of potential adjusters”

The potential adjusters apply to their domestic production and are impacted by the IRATC. These adjusters are an important source of potential upside to domestic ASP and earnings.

First Solar has also guided to an IRATC of $0.17 per watt, which is effectively an addition to the ASP per watt ($0.288 + $0.17). Any indication that either or both will increase is a positive.

We will look for updates on these pricing dynamics for 2023.

5. Any improvement in logistics costs that was a significant drag on 2022 earnings?

2022 was a difficult year for First Solar. Gross margins were 2.2% vs 25% in 2021. A main factor was higher than average logistic related costs due to the pandemic that other solar companies faced. Demurrage costs – financial penalties incurred for leaving goods on the port beyond the agreed time – were particularly a heavy burden.

Management indicated that they expect a return to normalized levels over the course of 2023. Other solar companies that reported Q4 after First Solar had begun to see significant improvement in logistics related costs. This could be an additional source of margin improvement for First Solar sooner than expected.

It’s important to point out that between the 2023 IRATC and the one-time nature of the 2022 demurrage costs, a year over year comparison of earnings between 2022 and 2023 is not necessarily an apple to apples comparison.

The IRATC has fundamentally changed the earnings profile of First Solar starting in 2023.

6. 2023 earnings expectations

Given the new post-IRATC investing world, consensus expects Q1 sales to be $720m, an increase of 96% y/y. And earnings to improve from a loss of $0.41 to a gain of $0.94. FY 2023 earnings are 2nd half weighted.

Given the accounting treatment of the IRATC, the primary focus should be on earnings per share.

Quarterly

Yearly

How to position ahead of Q123?

Year to date First Solar is up about 45%, reflecting the optimism post their 2023 IRATC guidance in their Q4 call. Consensus revisions have also been increasing as a result, mainly 2nd half weighted.

Suffice to say, positive expectations have been building up going into the report. Given First Solar’s prior comments that “Section 45X credits, recognized, will increase after Q1”, this timing effect may provide a better entry point.

First Solar has guided for 2023 EPS of between $7-8 and total 2023 IRATC of between $660-710m. Any upward revisions to this guidance will be viewed positively. Additionally, if they provide any insight into beyond 2023, that will also be positive although it’s probably too early to expect that.

Fundamentally, we believe that the IRA is a significant piece of legislation and First Solar has positioned themselves as a National Champion in its implementation.

Enphase: Beneficiary of the Inflation Reduction Act

Posted on April 25, 2023June 30, 2026 by io-fund

In 2022, Enphase rewarded investors with a 44% return vs the Nasdaq’s decline of 33%. During this time, Enphase surpassed consensus expectations each quarter through a combination of higher sales and margin expansion. Q422 ended on a solid note. For Q123, the market is expecting $1.22 eps, an increase of 54% from 2022. For 2023 ytd, Enphase is down about 15%. We believe this is primarily due to lack of visibility into the short-term outlook for US residential solar installations that was exacerbated by the SIVB failure which we wrote about for premium readers.

With that in mind, Enphase is due to report Q123 earnings on 4/25/23. These are the key factors we will be monitoring in the earnings release.

1. Update on the European business

2. Order visibility at US residential installer level

3. Status of US based manufacturing operations

4. Potential benefit from Inflation Reduction Act

European Business

Currently, Enphase’s revenue breakdown is 71% US and 29% International. The main international markets are Netherlands, France, Germany, Belgium, Spain, Portugal and the UK. Q4 revenue was up 21% sequentially and 130% year on year. Enphase is on track to introduce the IQ8 inverter into new countries shortly. Meanwhile, q4 ended with a record sell-through and low inverter inventories at the channel level, reflecting continued healthy demand.

US Residential Installer Activity

The market is waiting to see if there’s any SIVB fallout at the installer level and consumer level. Module/Inverter manufacturers typically sell to the installers who then sell to the consumer. Installers typically provide financing to the consumer. So there is a concern how the SIVB fallout may impact the installers' ability to finance. Generally speaking, those that didn't rely on US banks for financing were viewed as being better positioned to weather the storm.

Status of US based manufacturing operations

We will look for an update on the status of the US based manufacturing capabilities. The timing of which will be a critical driver from an earnings perspective.

Potential benefit from Inflation Reduction Act

We wrote about in the key provisions in the Inflation Reduction Act for our premium readers. Briefly, those companies that can claim the corporate tax credit will see a direct impact on their earnings per share. The amount that can be claimed depends on several factors and will vary for each company. For example, how much is actually manufactured in the US and when needed how much content is procured from countries which the US has free trade agreements with.

The intent of the IRA legislation is to spur domestic based manufacturing of clean energy. For our premium readers we identified First Solar as benefiting the most compared to other solar module manufacturers.

We expect Enphase to benefit as well. However, given that their manufacturing is done by electronic contract manufacturers. They will to not be able to claim the full tax credit. The potential impact is still meaningful. We outlined the direct impact to Enphase’s gross margin in our recent earnings preview for premium readers.

Members of the I/O research team contributed to this article

Microsoft Pre-ER: Will We See Evidence of a Bottom?

Posted on April 24, 2023June 30, 2026 by io-fund

Microsoft will report its Q3 FY23 results on April 25th. The company is one of the most anticipated earnings reports in determining cloud trends. The company’s overall revenue in Q2 was in line except for the personal computing miss (which was substantial, but is also well-known).

Azure posted slightly-better-than-expected growth of 38% compared to guidance of 37%. However, the Azure guidance for Q3 is for 30%-31% growth, which marks a sharp deceleration. The CFO also pulled fiscal year guidance, which is unusual for Microsoft. One key metric that could make or break Microsoft’s report will be if Azure has bottomed or if there is further decline.

What we are watching:

Revenue guidance for March quarter missed slightly by about $1.5 billion for a guide of $51 billion at the midpoint. This represents 3.3% growth compared to 6.7% growth expected. The guidance for the next quarter will be in focus.

Consumers are weaker than expected. Not only did More Personal Computing miss in Q2 but this segment is causing enough uncertainty that the CFO did not provide a fiscal year guide. Any insights in the earnings call are to be watched.

Azure guidance is at 30% to 31% growth for the March quarter down from 38% this quarter and down from 49% on CC basis in the year ago March quarter. We are keenly watching if Azure will bottom by not reporting sequential deceleration.

Customers exercised caution in the commercial cloud business. The company’s CFO Amy Hood said in the last earnings call. “In our commercial business, we delivered strong growth in line with our expectations. However, as you heard from Satya, we are seeing customers exercise caution in this environment and we saw results weaken through December. We saw moderated consumption growth in Azure and lower-than-expected growth in new business across the standalone Office 365, EMS and Windows commercial products that are sold outside the Microsoft 365 suite.”

Management comments in the commercial business are to be watched. The management in the previous earnings call provided guidance for the commercial business to grow 20% in the FY 23. They did not give a guidance in Q2 and instead said that revenue grew 20% in H1 and management expects it to further decelerate in H2.

Financials

Estimated Revenue:

Below, you can see that Microsoft is expected to bottom on growth. We talked about the H2 rebound in our most recent webinar. To some extent, the market is front running this rebound as anything can happen in the upcoming earnings reports. Regardless, Microsoft is a safer bet than others that revenue will rebound given its cloud suite drives down costs for enterprises.

· Q3 FY 23E (Mar 23): 3.41%

· Q4 FY23E (Jun 23): 5.82%

· Q1 FY24E (Sept 23): 9.09%

· Q2 FY24E (Dec 23): 10.44%

On a FY basis, Microsoft is expected to report the following – again, we are seeing evidence the next two quarters *should* be the bottom for Microsoft. We will want confirmation of this in the upcoming ER.

· FY June 2022 Actuals: 17.96%

· FY June 2023E: 5.37%

· FY June 2024E: 11.52%

· FY June 2025E: 13%

Microsoft has some of the strongest margins across the FAAMG stocks. For EPS, Microsoft is expected to report:

· Q2 FY 23 (Dec 22A): $2.20

· Q3 FY 23 (Mar 23E): $2.24

· Q4 FY23 (Jun 23E): $2.47

· Q1 FY24 (Sept 23E): $2.57

· Q2 FY24 (Dec 23E): $2.66

Cash Flow:

Cash flow was affected by the TCJA R&D tax payment of $2.355 billion. There is a new tax law that changes how R&D expenses are taxed, which you can read about here referred to as “Tax Cuts and Jobs Act” or “TCJA.”

Operating cash flow was $11.2B down (23%) year-over-year. Excluding the tax payment of $2.355 billion, Op Cash Flow was down (7%). Free cash flow of $4.9 billion was down (43%) YoY. Excluding the tax payment of $2.355 billion, FCF was down (16%).

Operating cash flow margin was 21.18% and adjusted excluding the tax payment was 25.65% compared to 28% in the same quarter last year. Free cash flow margin was 9.29% and adjusted excluding the tax payment was 13.75% compared to 16.65% in the same period last year.

For next quarter, the company expects to make a TCJA R&D tax payment of $1.2 billion.

The company returned $9.7 billion to shareholders with $4.6 billion in share repurchases and $5.1 billion in dividends. The company had cash and investments of $99.51 billion and debt of $48.12 billion at the end of the December quarter.

Noteworthy:

The management had highlighted in the last earnings call that the company is well positioned to capture the opportunity in AI. Satya Nadella said, “We have the most powerful AI supercomputing infrastructure in the cloud. It’s being used by customers and partners like OpenAI to train state-of-the-art models and services, including ChatGPT.”

We had written about the company’s dominance in AI before Chat-GPT3 was released and the market was buzzing about AI. We had said in our premium article in October last year, “Microsoft is a sleeping AI/ML giant. Google gets a lot of attention here yet I think they are equally prepared to serve this market. Maybe Microsoft even more so because of its penetration in the Fortune 500, which are the companies most likely to invest in AI/ML for the practical reason it requires a certain size budget.”

“To help Microsoft rival Google and DeepMind, the company has been investing in OpenAI, which is a large R&D operation that is breaking ground with AI algorithms that help computers to create images from text, reduce the amount of code that developers need to write, and to also help robotics think and act like humans, among other things. GPT-3 is the language generation model that has gotten quite a bit of attention for its ability to build websites and games using a language like English rather than a programming language. As of now, GPT-3 is known as the advanced text autocomplete program.”

Margins:

The Q2 one-time charge related to layoffs negatively impacted gross margin by $152 million, operating income by $1.2 billion, and earnings per share by $0.12. We would like to see consistency in the margins.

· Gross margin of 67% which was in line and flat YoY. The management guidance for the next quarter is 69%.

· GAAP operating margin of 38.8% and adjusted operating margin of 41% compared to GAAP OM of 43% in the year ago quarter. The management guidance for the next quarter is 40%.

Microsoft is looking to maintain the bottom line despite the weakness in consumer. The company’s CFO said in the last earnings call, “As a result, when excluding the Q2 charge and favorable impact from the change in accounting estimate, we expect full year operating margins to be down roughly 1 point in constant currency and roughly 2 points in USD, even with the headwinds from materially lower OEM revenue and higher energy costs.”

According to the preliminary results by IDC, there was a YoY decline of (29%) in the shipments of traditional PCs in Q1 2023 due to weaker demand and excess inventory. IDC expects growth after 2023. So, we expect that the Personal Computing Segment will be weak in the March quarter. Below is the management guidance for the various segments in the next quarter:

· Productivity and Business Processes is 8% YoY at the mid-point. (11% to 13% YoY in CC).

· Intelligent Cloud is 14.7% YoY at the mid-point. (17% to 19% YoY in CC).

· More Personal Computing a YoY decline of (16.7%) at the mid-point.

· Microsoft Azure is 30% to 31% YoY growth in CC.

We believe that there are chances for Microsoft to bottom first in Cloud before AWS or Google Cloud since Microsoft aggregate cloud services help to drive down costs. This is especially attractive for the Fortune 500 whereas startups, SMBs and mid-sized enterprises are likely to seek out and manage a larger portfolio of cloud services from various vendors. We can easily evidence this by Microsoft’s Fortune 500 penetration with 95% using Azure, which was achieved through hybrid computing where Microsoft was first-to-market on serving a mix of on-premise, private and public clouds for their large enterprise customers. Microsoft is a hybrid cloud leader which attracts large enterprises and its ability to reduce costs with its tech stack.

Recent Headlines and updates:

The company announced last month that the new AI-powered Bing and Edge has a good response. The company crossed 100 million daily active users of Bing. “Of the millions of active users of the new Bing preview, it’s great to see that roughly one third are new to Bing. We see this appeal of the new Bing as a validation of our view that search is due for a reinvention and of the unique value proposition of combining Search + Answers + Chat + Creation in one experience.”that roughly one third are new to Bing. We see this appeal of the new Bing as a validation of our view that search is due for a reinvention and of the unique value proposition of combining Search + Answers + Chat + Creation in one experience.”

The company introduced Microsoft 365 Copilot last month. It is the productivity tool that combines large language models (LLMs) with the data in Microsoft Graph and Microsoft 365 apps. The use cases of Copilot in Word include giving the users the first draft while saving the time on sourcing, writing, and editing the content. Similarly, Copilot in PowerPoint will help to create presentations based on the previous content. Copilot in Excel can analyze trends from the data, create charts, and helps to make informative decisions.

The company announced in February that is has previewed two AI-powered services that are designed to manage telecom networks. Jason Zander, executive vice president of strategic missions and technologies at Microsoft said, “What we’re doing is taking our native cloud work and making it specific to this telecom operator network space. I think a really great example of that is all the AI ops work that we are introducing into the system."

The company showed a demo to ad agencies on how the company plans to monetise the new Bing search. One of the ad executive noted, “The company said it is taking traditional search ads, in which brands pay to have their websites or products appear on search results for keywords related to their business, and inserting them into responses generated by the Bing chatbot.”

The UK’s Competition and Markets Authority after receiving feedback from industry participants have dropped some of the key concerns in the Microsoft and Activision deal. The CMA is expected to make a final decision on April 26.

What Analysts are Saying/Channel Checks:

Wedbush analyst Daniel Ives raised the firm's price target on Microsoft to $315 from $290 and keeps an Outperform rating on the shares. The firm's recent checks have been positive around overall cloud deal flow and momentum for Microsoft in the quarter and thinks the company should see at least low 30% Azure growth. He also believes that Microsoft could be in a position to take market share from Amazon AWS over the next 12 to 18 months. “There have been spots of softness, particularly in the financial space, but federal deals look to be strengthening, as Amazon (AMZN), Google (GOOG) (GOOGL), Oracle (ORCL) and IBM (IBM) have also seen a surge of Beltway cloud deal activity this year as the federal government enacts a major shift to the cloud.” Wedbush believes ChatGPT will be the next gear of growth for Microsoft over the coming years. The analyst further said, "We continue to believe the first step for MSFT was Azure/Office 365 with the next step ChatGPT/AI monetization on both the consumer and enterprise fronts combined adding $20 per share to MSFT's sum-of-the parts valuation as this execution story plays out,"

UBS analyst Karl Keirstead lowered the firm's growth estimates for Microsoft's Azure cloud segment, saying that recent trends have continued into Q1. The analyst, who made no change to the firm's Neutral rating or $275 price target, feels the Street's estimates for Azure are too high and concludes that customer efforts to optimize/trim their cloud spend will be deeper and last longer than most think based on calls with AWS/Azure customers and partners. UBS contends that the potential for a worse-than-Street-consensus Azure growth outlook creates some downside risk into the print.

Morgan Stanley says the firm's most recent CIO survey points to stable IT spending and suggests "favorable Microsoft-specific fundamentals." The firm sees several forward looking indicators in the CIO survey that support Microsoft's "strong relative positioning" if 2023 budgets come under further pressure, noting that Microsoft widened its substantial lead in expected IT wallet share gains. The firm, which calls Microsoft "increasingly well positioned" based on its survey work, has an Overweight rating and $307 price target on the shares.

Oppenheimer analyst Timothy Horan raised the firm's price target on Microsoft to $310 from $280 and keeps an Outperform rating on the shares. With the company now having introduced AI Co-Pilot betas across all Office, Cloud, and PC segments, the firm's initial estimate is approximately 3-5 points of incremental annual revenue growth ramping in 2025. This estimate balances the transformative nature of GPTAI, Microsoft's relationship with OpenAI, and large synergy opportunities as Microsoft has purposely understated pricing to spur early adoption.

Enphase – what to look for in Q1

Posted on April 21, 2023June 30, 2026 by io-fund

Q422 ended on a solid note which we wrote about here. For 2023 ytd, Enphase is down about 15%. We believe this is primarily due to lack of visibility into the short-term outlook for US residential solar installations that was exacerbated by the SIVB failure which we wrote about here.

With that in mind, Enphase is due to report Q123 earnings on 4/25/23. These are the key factors we will be monitoring in the earnings release.

1. Continued positive momentum in the European business

2. Order visibility at US residential installer level

3. Status of US based manufacturing operations

4. Potential earnings benefit from Inflation Reduction Act corporate tax credits

We will discuss each and what we’ll be looking for in the earnings call.

1. European Business

Enphase ended 2022 with a quarterly production capacity of 5 million units. They are due to begin manufacturing in Romania which will manufacture an additional 1 million units.

We will look for continued positive momentum in Europe and entry into new countries.

2. Installer activity

Despite a strong q422 report and solid q123 guidance Enphase has underperformed this year. We believe it is due to these Q4 comments.

“Let’s now cover the U.S. We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment. We are seeing that our distributor and installer partners are a little more cautious in booking orders. We normally have a 6-month order visibility and that has been somewhat reduced as our partners watch their spending closely. On the sell-through of our microinverters, while December was quite strong for us we saw a more pronounced seasonality in January than normal.”

This “more pronounced seasonality in January than normal” took some air out of an otherwise solid earnings report. In addition, negative sentiment has also played a role. For example, there were concerns over the impact that technology sector layoffs may have on demand. Meanwhile, the rainy winter in CA – where Enphase derives 20% of revenues – was another factor that raised concerns that installations may be delayed.

SIVB’s subsequent collapse presented another potential headwind. The market is waiting to see if there’s any SIVB fallout at the installer level and consumer level. Module/Inverter manufacturers typically sell to the installers who then sell to the consumer. Installers typically provide financing to the consumer. So there is a concern how the SIVB fallout may impact the installers' ability to finance. This has been the biggest driver in the divergence in solar stock prices. After SIVB’s collapse the market punished those companies that relied more on US banks. Generally speaking, those that didn't rely on US banks for financing were viewed as being better positioned to weather the storm.

For example, CSIQ has held up better because it relies on Chinese banks. On the other hand. RUN had received loans from SIVB in the past and had an active relationship. NOVA disclosed that it was in talks with the DOE to indirectly guarantee $3b in loans it is seeking from a US bank. So far, Enphase has not given any indications that financing is a problem. Starting last week, banks have begun to announce Q1 earnings and so far indications are that the SIVB impact has been limited.

We will look for comments from Enphase on activity levels at the installer lever and order visibility.

3. Status of US based manufacturing capacity

The commencement of Enphase’s US based manufacturing is a key catalyst from an operational and earnings perspective. We will discuss the operational importance here.

Currently, Enphase outsources all of its manufacturing to electronic contract manufacturers (ECM) mainly based in Asia. Currently, these ECM’s have the capacity to manufacture 5 million units a quarter. Enphase has plans to use a US based ECM to manufacture inverters in the US. Once that is finalized, Enphase will manufacture an additional 5 million units per quarter in the US that will commence in the 2nd half of 2023. They are targeting to produce a total of 10 million units by the end of 2023.

We will look for an update on the status of the US based ECM manufacturing. The timing of which will be a critical driver from an earnings perspective which we will cover next.

4. Potential earnings benefit from Inflation Reduction Act corporate tax credits

We have recently written about the key provisions in the Inflation Reduction Act.

Briefly, those companies that can claim the corporate tax credit (IRATC) are able to deduct the amount from the cost of goods sold which has a direct impact on gross margins and earnings per share.

The amount that can be claimed depends on several factors and will vary for each company. For example, how much is actually manufactured in the US and when needed how much content is procured from countries which the US has free trade agreements with.

Given Enphase’s reliance on ECMs in the manufacturing process, Enphase will not be able to claim the full IRATC. Once Enphase starts using an ECM with US based manufacturing, it will have to “give away” a portion of the IRATC to the ECM.

However, Enphase can still potentially benefit from the IRATC portion that they keep. In the q4 call, they indicated a net $20 to 30 IRATC benefit to them once their US based ECM begins to manufacture units. Enphase has targeted 5m units by the end of 2023. The timing of which is important. The sooner it is online, the sooner they can realize the IRATC in their earnings.

Using the same IRATC earnings framework in our previous IRA piece. We’ve put together a scenario analysis with three assumptions:

· Scenario 1 – 100% of the planned US production is eligible for the IRATC and the impact on gross margins if they receive, $20, 25 or 30 per inverter

· Scenario 2 – 50% of the planned US production is eligible for the IRATC and the impact on gross margins if they receive, $20, 25 or 30 per inverter

· Scenario 3 – 25% of the planned US production is eligible for the IRATC and the impact on gross margins if they receive, $20, 25 or 30 per inverter

We’ve used scenario 2 as our base case. As can be seen in the blue highlight, at $25 per inverter, the impact on gross margins is potentially 47% compared to 42% ending in 2022.

This is currently not yet reflected in consensus expectations.

After the earnings release, we will look for further details on the timing and impact of the IRATC.

Analysts’ comments going into Q123

Despite the negative sentiment impacting the sector, analysts expect Enphase to report solid Q123 earnings.

Enphase Energy named short-term buy idea at Deutsche Bank. Analyst Corinne Blanchard placed a "Catalyst Call: Buy" on shares of Enphase Energy as a short-term investment idea. Enphase has been a material underperformer year-to-date, with the stock down 24% versus a 20% gain for its direct peer group, driven by a cautious tone from management in early January on U.S. residential demand and origination trends in the California market, the analyst tells investors in a research note. This has opened the opportunity for an attractive valuation level, says the firm. It believes the stock is well positioned in the short term and expects a "strong" Q1 earnings beat.
Piper Sandler analyst Kashy Harrison upgraded Enphase Energy to Overweight from Neutral with an unchanged price target of $255. The analyst says Q1 U.S residential solar originations and sales were more favorable than feared, suggesting the U.S. is more likely to decelerate than decline during 2023. Decelerating U.S. coupled with significantly more international momentum than anticipated earlier this year may drive 40% sales growth for Enphase in 2023, the analyst tells investors in a research note. The firm views the company's Q1 earnings as a "critical update capable of validating" its view that Enphase can deliver attractive earnings growth within the current environment.
KeyBanc lowered the firm's price target on Enphase Energy (ENPH) to $311 from $363 and keeps an Overweight rating on the shares. The firm expects residential solar levered names to have a light Q1, as poor weather in key markets such as CA impacts deployments negatively. Nonetheless, KeyBanc also believes that Enphase is likely to deliver a solid quarter toward the top end of its Q1 guidance and produce above-consensus guidance for Q2. The firm is seeing indications of the company taking some market share from SolarEdge (SEDG).

Consensus is forecasting solid year over year EPS and Revenue growth.

Stock attributes

These are Enphase’s stock attributes that we continue to like.

FCF generation, FCF yield currently 2%

Valuation at lower end of historical range

Where the I/O Fund Holds Cash When Banks Keeps Failing

Posted on April 20, 2023June 30, 2026 by io-fund

Amidst the growing skepticism in our banking sector, we thought it would be helpful to introduce an alternative way to both protect and diversify one’s assets. The information below discusses a method the I/O Fund uses to hold its cash, which is safer than banks, and yields 4.5% or higher.

The I/O Fund is an actively managed portfolio. We are not financial advisors, rather we discuss openly and in great detail what we are doing with our money through weekly webinars and real-time trade alerts. This has led to 174% better returns compared to Ark and results that are double the Nasdaq in the same time period.

Banks failing presents a new problem for investors, which is where to hold cash. We shared our thoughts on Treasury Direct accounts with our premium members last month, where we explained that opening a TreasuryDirect account allows anyone to directly purchase savings bonds and Treasuries (Notes, Bonds, Bills, TIPS, and FRNs) directly from the U.S. government.

This offers an option that is outside of the banking system, offers a decent yield, and is very liquid. This article is offered as a guide that will walk you through the process of opening a TreasuryDirect account and how it can potentially help secure your cash in these uncertain times.

Below is a brief video clip from our premium webinar. For more detailed information, please reference the article below.

More Concern in the Financial Sector & Why Having a Plan for Cash is Important

The current news cycle and media narrative suggests that it’s just regional banks that are facing challenges due to interest rate risk and depositors withdrawing funds to go to larger "too big to fail" banks. However, taking a closer look at the charts reveals that the situation may be more complex and not limited to just U.S. regional banks.

This is what appears to going on in Financial Sector in the US (XLF), which is comprised of the largest and most recognizable financial institutions in the US.

After breaking down from a bear pennant, we have a clean 5 wave drop from the February high. Until XLF can reclaim the $36 region, which is about 8.5% from current prices, then risk remains high.

International banks like the Royal Bank of Canada ($RY) also are exhibiting similar ugly trends. In fact, warnings are present in most major banks around the world. Here are some quick bullet points:

Japanese banks Mitsubishi UFJ Sumitomo and Mitsui Financial are down 15%-17% since March 9th.
The Commonwealth Bank of Australia is down ~12% since March 14th, and HSBC in England is down ~14% since late February.
Itaú Unibanco, Brazil's top bank, is down ~18% since last November.
Deutsche Bank is down another 21% from it January high, while the largest bank in France, BNP Paribas, is down 14% from its February high.

It appears that the risk doesn’t stop at the regional bank level but is international as well. Global banks are facing significant challenges, and it is unlikely the banking problems are over.

The Royal Bank of Canada ($RY) looks a lot like some of the bigger banks in the US.

An Alternative Solution to Uncertainty: A TreasuryDirect Account for an Extra Layer of Security

To tackle potential issues in the banking sector, we are taking a proactive approach with some of our cash. We are purchasing T-Bills directly from the U.S. government through a TreasuryDirect account, eliminating counter-party risks with banks. If the banking situation deteriorates or becomes systemic, funds in these accounts remain safe and secure.

The Appeal for T-bills vs. Bonds

Investing in four-week T-bills might be the prudent choice in this situation, as they carry no default risk compared to bonds and do not tie up your cash for a long period of time. As an example of what to expect, the four-week Treasury bill rate is around 4.5%, compared to 0.15% last year. This is much higher than the long-term average of 1.22%.

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereSign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick here

It is true that the U.S. government has never defaulted on its federal debt, which includes the umbrella of Treasury bonds, bills, and notes. However, it is also true that countries around the world default on their debt obligations, either partially or entirely, all of the time. We saw Iceland default on their external debt in 2008, and even recently Argentina defaulted on their sovereign debt in 2020 smack dab in the middle of the pandemic. In the event that the U.S. defaults on its debt, it’s speculated that T-bills are safer then bonds because of their shorter-maturity periods, lower interest rate risk, higher liquidity, and general overall market perception.

Opening a TreasuryDirect Account: A Step-by-Step Guide

Here is a link to a video that we gave to our premium subscribers, where I go throguh step-by-step on how to open a TresuryDirect Account.

1. Visit the TreasuryDirect website: Navigate to the official TreasuryDirect website (www.treasurydirect.gov) and click on "Open An Account."

2. Choose account type: Select the appropriate account type (individual, entity, or minor) and fill out the online application form: this essentially like a brokerage account with the government, so you will need your Social Security Number (SSN), email address, and bank account details.

3. Create a password and security questions: Choose a strong password and security questions to ensure the security of your account… this account will hold your cash and security should be prioritized just like your bank account ect.

4. Simply review and submit: Double-check the information you filled-out and submit the account application.

5. Check your email for a confirmation message from TreasuryDirect and follow the instructions to verify your account and email address.

6. Access your account: Use your account number, password, and the one-time passcode sent to your email to log in to your TreasuryDirect account.

7. Purchase bonds and T-bills: Once logged in, navigate to the "BuyDirect" tab and select the desired security type (T-bills, notes, bonds, etc.). Follow the on-screen instructions to complete your purchase.

Lessons from the 2008 Crisis: “History never repeats itself, but it does often rhyme.”

The 2008 financial crisis exposed the banking system's fragile backend to the public in a fast and violent sweep, catching many people unprepared. Most people had no idea what fractional banking was, nor how complex their banks had become. These banks have only grown in size and complexity since.

We rely on banks to store money, but it does come with some risks. When a bank fails, individuals can depend on government-backed insurance (FDIC) to recover their deposits and restore stability in our banking system. However, this process can be lengthy and challenging. As we saw in 2008, no one wants to wait on a Gov’t backed insurance timeline to get money back that they thought was being safely stored in a bank account.

Conclusion:

Considering the current risks within the banking sector, going through the process of opening a TreasuryDirect account offers a safe alternative for people to store their cash in. This guide was written to help you navigate the process of buying Treasury marketable securities and really to show just how simple it is to get started securing your cash with bonds and T-bills. It is important to stay informed and protect what you have worked hard for, we wanted to shine light on something we felt hasn’t gotten enough spotlight in the investment world.

What’s Next:

This Thursday at 4:30 pm Eastern, I will be holding a webinar for premium Tech Insider Network members to discuss how I plan to navigate the broad market, as well as various tech entries including Tesla. We offer trade alerts plus an automated hedging signal. In addition, we are an audited portfolio with 174% better returns than Ark and are results are double the Nasdaq in the same time period.

We identified a strong buy signal in Bitcoin in December, and we also identified Nvidia's (NVDA) bottom in October. Bitcoin is a leading asset YTD in the market, and Nvidia is the leading stock in the S&P 500. We take gains often and we discuss this in our weekly webinars and on our premium site, one of which is scheduled for next Thursday, April 27th.

TSM Q1 23 Earnings Review

Posted on April 20, 2023June 30, 2026 by io-fund

Taiwan Semiconductor Manufacturing Company’s Q1 2023 revenue declined by (4.8%) YoY to $16.72 billion. The revenue came at the lower end of the management guidance of $16.7 billion and $17.5 billion. It missed analyst revenue estimates by 1.6%.

EPADR (Earnings per American Depository Receipt) came at $1.31 and beat estimates by $0.12 (9.7% beat). The Q2 revenue guidance was lower. However, there is scope for a better bottom line than expected in H2 due to the better utilization rate and cost controls.

TSM will be able to better withstand the macro challenges and the company’s long-term growth opportunities are still strong due to the leadership position in the advanced nodes. The recent generative AI trend is another tailwind for the company.

Financials:

Revenue declined by (4.8%) YoY to $16.72 billion and missed estimates by 1.6%. The company released its monthly revenue figures earlier this month. The softness in the revenue was expected and we have covered in our pre-ER here.

The guidance for the next quarter is $15.2 billion to $16 billion based on the exchange rate of $1= NT$30.4. This represents a YoY decline (14.1%) at the mid-point of the guidance. It missed estimates by 4% as the inventory adjustments are expected to continue due to the challenging macro environment and slowing end-market demand.

Wendell Huang, VP and CFO of TSMC, said, “Our first quarter business was impacted by weakening macroeconomic conditions and softening end market demand, which led customers to adjust their demand accordingly.” He further added, “Moving into second quarter 2023, we expect our business to continue to be impacted by customers’ further inventory adjustment.”

Gross profit declined by (3.6%) YoY to $9.42 billion. The gross margin was 56.3% compared to 55.6% in the same period last year. The gross margin was expected to be lower due to lower capacity utilization. The gross margin was higher than the management guidance of 53.5% to 55.5%. The management guidance for Q2 is 52% to 54%. The next quarter’s gross margin will be negatively impacted by lower capacity utilization and higher electricity costs in Taiwan. The higher electricity costs will negatively impact the gross margins by 0.60% in Q2 and by about 0.50% for the full year 2023.

The operating income declined by (5%) YoY to $7.6 billion. The operating margin was 45.5% compared to 45.6% in the same period last year. The operating margin was also higher than the management guidance of 41.5% to 43.5%. The company’s cost control efforts led to a reduction in operating expenses and improvement in the margins. Wendell Huang, CFO of the company, said in the earnings call, “Total operating expenses accounted for 10.8% of net revenue, which is lower than the 12% implied in our first quarter guidance mainly due to stringent expense control and lower employee profit sharing.mainly due to stringent expense control and lower employee profit sharing. The management guidance for Q2 is 39.5% to 41.5%.

We had also highlighted in our pre-ER about the margins, “So, we understand that the margins will be lower due to higher R&D expenses along with lower utilization due to inventory adjustments, ramp-up, overseas fab expansion, and inflationary pressures.”

The net profit declined by (6.3%) YoY to $6.8 billion. The net profit margin was 40.7% compared to 41.3% in the same period last year. The GAAP EPADR (Earnings per American Depository Receipt) came at $1.31 and beat estimates by $0.12. Return on Equity was 27.5% compared to 36.2% in the same period last year.

The free cash flow was $2.72 billion compared to $3.94 billion in the same period last year. The free cash flow margin was 16% compared to 22% in the same period last year. The company has a stable balance sheet. The company had cash and marketable securities of $52.24 billion and debt of $28.16 billion at the end of the March quarter.

Capex increased by 6.1% YoY to $9.94 billion. The management has reiterated the full year Capex guidance of $32 billion to $36 billion.

Smartphone declined (27%) QoQ and accounted for 34% of revenue. HPC declined (14%) QoQ and accounted for 44% of revenue. IoT declined (19%) QoQ and accounted for 9% of revenue. Automotive increased 5% QoQ and accounted for 7% of revenue. Digital Consumer Electronics decreased (5%) QoQ and accounted for 2%. Others decreased by (18%) QoQ and accounted for 4% of revenue.

Other important earnings call updates:

The management had mentioned in the previous earnings call that 2023 will be a slight growth year for the company. However, the recovery is taking longer than expected due to inventory adjustments expected to continue due to the challenging macro environment and slowing end-market demand. So, the company expects 2023 revenue to decline low to mid-single digit in U.S. dollar terms. Revenue in the 1H is expected to decline by 10% YoY and the H2 revenue is expected to be better than the 1H. The key takeaway is that the company will perform better than the industry.

C.C. Wei, CEO of the company, said in the earnings call. “3 months ago, we said we expect fabless semiconductor inventory to start gradually reducing 4Q 2022 and we forecast a sharper reduction throughout the first half of 2023. However, due to weakening macroeconomic conditions and softening end market demand fabless semiconductor inventory continued to increase in the fourth quarter and exited 2022 at a much higher level than we expected. In addition, the recovery in end market demand from channels reopening is also lower than our expectation. Therefore, the fabless semiconductor inventory adjustment in first half '23 is taking longer than our prior expectation. It may extend into third quarter this year before rebalancing to a healthier level.”fabless semiconductor inventory adjustment in first half '23 is taking longer than our prior expectation. It may extend into third quarter this year before rebalancing to a healthier level.”

“For the full year of 2023, we do our forecast for the semiconductor market, excluding memory, to decline mid-single-digit percent while foundry industry is forecast to decline high single-digit percent. We now expect our full year 2023 revenue to decline low to mid-single-digit percent in U.S. dollar terms and our business to do better than both semiconductor ex memory and foundry industries, supported by our strong technology leadership and differentiation.”We now expect our full year 2023 revenue to decline low to mid-single-digit percent in U.S. dollar terms and our business to do better than both semiconductor ex memory and foundry industries, supported by our strong technology leadership and differentiation.”

Management comments on N7 recovery. “It will be recovered but slowly. As I said, most of the N6 and N7's technology loading still in HPC and smartphone. However, looking into the future, some of the specialties such as RF, connectivity, WiFi, all those kind of things will start to build up the loading their demand. And we expect in the long term, 7-nanometers loading will become more healthier.”

The demand for N3 chips are strong. C.C. Wei said in the earnings call, “Our 3-nanometer technology is the first in the semiconductor industry to high-volume production with good yield. As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023 supported by both HPC and smartphone applications. Sizable N3 revenue contribution is expected to start in third quarter and N3 will contribute mid-single-digit percentage of our total wafer revenue in 2023.”Our 3-nanometer technology is the first in the semiconductor industry to high-volume production with good yield. As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023 supported by both HPC and smartphone applications. Sizable N3 revenue contribution is expected to start in third quarter and N3 will contribute mid-single-digit percentage of our total wafer revenue in 2023.”

Analyst Notes:

Susquehanna upgraded TSMC to Positive from Neutral with a $126 price target. The analyst says a "worst-case earnings scenario" is now reflected in investor expectations. The ramp of new products is helping with modest revenue improvement for TSMC in the second half of 2023 following a severe wafer shipment decline in the first half of the year, the analyst tells investors in a research note. With the utilization rate rebounding in fiscal Q3, the company's earnings should rebound at a faster pace than revenue, a trend that should gain momentum in 2024 as new product ramp.

Conclusion

TSM’s results are good taking into consideration the tough macro environment. The revenue guidance is lower. However, the bottom-line beat was the main highlight of the report. The company’s cost control efforts helped to improve the margins. Even though the recovery has been delayed, the company’s long-term growth outlook is still positive due to its leadership position in producing advanced chips that will be used in HPC and smartphones.

Recommended Reading:

https://io-fund.com/premium/taiwan-semiconductor-manufacturing-tsm-deep-dive

https://io-fund.com/premium/tsm-q4-earnings-review

Tesla – Post Q1 23 takeaways

Posted on April 20, 2023June 30, 2026 by io-fund

The market’s primary focus going into Tesla’s Q1 23 earnings report were signs of stabilization and improvement in automotive gross margins that management guided for in the Q422 earnings call. Although the normalized $0.85 eps was in-line with consensus, Tesla did not meet their margin targets. In doing so, Tesla indicated that they have changed their 2023 strategy to increasing volumes at the expense of margins.

As a result, visibility into margins for the foreseeable future have been reduced and management credibility has been dented.

We are going to review the key points we outlined in our preview note.

Pricing + Margins

An important part of our previous analysis was based on Tesla’s Q4 comments on ASP and automotive gross margins, excluding leases and rent credits, after significant January price reductions. This is what Tesla said after those reductions.

Zachary Kirkhorn, CFO

So there is certainly a lot of uncertainty about how the year will unfold, but I'll share what's in our current forecast for a moment. So based upon these metrics here, we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.

In Q123, Tesla automotive gross margin less credits was 19% vs consensus of 20.7%.

Meanwhile, reported automotive gross margin, which include regulatory credits and leasing, was 21.1% and operating margin was 11.4% compared to 25.9% and 16.0% in Q422, respectively.

The main drivers were lower prices and factory related ramp up costs. Higher expenses related to warranty adjustments on older Model S and X were also a factor but were described as one-off.

Critically, the market would likely have given Tesla a pass if they gave indications that its margin targets were still intact. Rather than that, Tesla stated that the margin declines were reflection of Tesla’s change in business strategy to lower prices to increase volumes at the expense of margins.

This is how Elon Musk described the business focus for 2023.

“I want to reiterate the philosophy by which we're operating the business this year. Our approach is to grow volumes as quickly as possible in both our vehicle and energy businesses.”

“We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy.

So we do believe we're like laying the groundwork here, and then it's better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy. This is an extremely important point.”

Tesla’s rationale is that once a car is purchased, this allows them to collect higher margin revenue in the future such as software. It’s somewhat akin to if Apple cut prices on their latest iPhones to get new users and says they’ll make much over the course of the phone’s lifetime via apps and services.

This strategy shift raised questions on pricing and future margins. In contrast to Q422, they would not provide any specifics.

Question: What is the process to make auto pricing adjustments? What variables do you consider? How frequently do you review pricing?

Elon Musk

Yeah, I think this is not something that we can really talk about. It's just — we do our best to evaluate the production output, macroeconomic conditions, and we make a decision. But it's — and unless there's something you'd like to add, Zach.

Zachary Kirkhorn

I think that's right. I mean, as a team, we review where we stand globally on a weekly basis and certainly, I can't get into the details of the reasons why certain decisions are made. But it is something that's very actively managed by a subset of the leadership team.

Question: what do you anticipate 2023 automotive gross margins ex-credits will be at the company's current pricing levels?

Zachary Kirkhorn

Yes, I can start off on this one. This is a difficult environment to make a projection like this. There's a lot of macro uncertainty. There's also headwinds and tailwinds. And this is basically a question I think that's asking about viewpoint and where costs will go. And within costs, there's a set of costs in which we do control the set of costs in which we're kind of subject to what's going on in the macro world.

Question: Back on the automotive gross margins. So, I think, I guess, a few months ago, even after major price cuts, you felt pretty strongly that 20% automotive gross margin was still probably a reasonable floor. Obviously, the macro has gone worse and additional price cuts have happened. Is there anything else that has changed in terms of the outlook? Is it just the macro deteriorating? Is it the competitive landscape? Anything else that's sort of like makes you think differently around the full year? And is there a way, therefore, to frame a floor?

Zachary Kirkhorn

“Yeah. About half of the miss against that previous conversation last quarter is attributed to adjustments we made in pricing in the second half of the quarter. I mean, I guess you could argue that that lowers the floor in a sense. We've also made pricing adjustments so far this quarter. So that brings it down further.

About the other half of the miss in Q1 was attributed to things that are nonrecurring. So I mentioned these in my opening remarks. It's a warranty adjustment for cars that were previously produced but not part of the pedigree of cars we're building now and some autopilot-related deferrals as we make some technology changes here that this deferral should get recognized once some of the software catches up. So those two things are not repeating. So hopefully, that helps answer your question.”

Elon Musk

“Yeah. I mean there's really two macro factors that are tricky. The biggest being the interest rate. So if there's a very high Fed rate or interest rates are very high, that is — every time the Fed raise the interest rates that's equivalent to increasing the price of a car. It makes the cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis. So that's — so it's just almost directly equivalent to a price increase, is there any kind of interest rate increase.

Then the other factor is whenever there is uncertainty in the economy, people will generally postpone new — big, new capital purchases like a new car. This is a natural human reaction. So if people are reading about layoffs and whatnot in the press, they're like, well, they might be worried about — they might be laid off. So then there'll be naturally a little more hesitant than they would otherwise be to buy a new car. Now this is just the nature of the auto industry. But there is — there will be a trans amount of pent-up demand for new cars. So it goes through cycles.”

Question: I just wanted to first just follow-up on your comments in your letter about leveraging your cost position as others struggle with unit economics and also taking into account the lifetime revenue, actually in a way that most other automakers will never see just given your service network and supercharging and other attributes. Can you just maybe give us a sense of how far you'd be willing to take this? Are there brackets around the range of initial margin that you'd be comfortable with? And again, any color that you might provide on the updated range of margins that you'd expect in the auto business?

Elon Musk

I think we may have answered this question or tried to ask this question a few times. But it's difficult to say what the margin will be. It depends on what the macroeconomic environment is like. So for example, if the Fed were to lower the rates, that would be super helpful for demand. If they raise them, that just raises the interest costs that buyers have to pay for to buy a car. So it reduces affordability and therefore, reduces demand. So it's — but if — like if we look past, say, this year or like go sometime next year, middle of next year, so I think things are looking really — I think, like I said, albeit if there's some major geopolitical wildcard that turns up. But in the absence of that, I think I would be very optimistic about middle of next year, end of next year.

Zachary Kirkhorn

“Just to add to Elon's comments, just two other points. What's really important for us this year in addition to just managing the day-to-day of the business but is also investing in, as Elon mentioned, what 2024 and 2025 will look like. And so using the cash generated from the sale of products today and reinvesting that, this is very important for us. And I think that what happens to margins over the next couple of quarters that only matters in the context of what that means for our ability to reinvest into 2024 and 2025.”

“And we have a lot of space before that becomes something that we have to revisit our investment plans. And so we're planning to keep the business healthy. But I just want to caution folks about reading too much into what happens over the near-term here because we're very focused as a company on making sure that when we exit this macroeconomic situation, this company is positioned in the best possible way.”

Key takeaways from the above comments

· Kirkhorn’s last statement is important. He seems to be indicating that there could be continued margin pressure in the short-term as part of their pricing strategy

· Musk’s comments indicate the consumer is feeling the pressure from higher interest rates and weaker macro and Tesla has needed to respond by cutting prices

Raw materials

On the positive side, Tesla will begin to see the benefit of lower lithium prices in the 2nd half of the year. They also are beginning to contract lithium forward at attractive prices.

Elon Musk

Lithium has dropped a lot. It's worth mentioning that the price of lithium has dropped significantly.

Zachary Kirkhorn

Yes. And that's the piece that we expect to see more impact on in Q2. And, generally, as a company, we do expect commodity prices to come down and have a more meaningful impact in the second half of the year.

Elon Musk

Yes.

Karn Budhiraj

We are seeing, as Elon mentioned, quite a bit of softening in the lithium carbonate market. This was — six months ago, we were trading at like $85,000 a ton, and today's spot price is about 26%. So there's been a dramatic decrease in that.

Of course, we were able to take advantage of low lithium pricing earlier on with fixed price contracts. And we find that this is going to be another opportunity — opportune moment to basically extend that into the later half of the decade. But we — at the quantities we're procuring, we're not as impacted by the spot market because we have those contracts in place, and we're just going to be going and doing more of that.

Production, Inventory and Free Cash Flow

Tesla has maintained their 1.8 million unit production guidance.

Inventory days increased slightly from 13 to 15 days leading to a decline in fcf of $0.4B vs $1.4B in Q4. Tesla stated they are trying to balance their regional mix of production and deliveries that is impacting quarter-end cash free cash flow.

Conclusion

Based on Tesla’s prior comments, we entered Q123 with very clear catalysts in mind that did not materialize. We did not expect this sudden shift in their business strategy nor has Tesla provided any tangible insights into their new pricing strategy.

They did make it a point to say that their margins were still industry leading. However, at 11% group operating margins, they are now lower than the Germans and just above the US, Korean and Japanese manufacturers. Tesla suggested that margins may go lower in the future.

This strategy shift is an important change in our investment thesis for Tesla.

We expect there to be continued margin uncertainty for at least the next couple of quarters and earnings estimates to be revised down. The I/O team believes that these factors will present headwinds for Tesla stock until there is more clarity.

Q2 Webinar Highlights

Posted on April 20, 2023June 30, 2026 by io-fund

Below is an excerpt from the I/O Fund team on what to expect for the upcoming earnings season. We hold quarterly webinars before the earnings season kicks off to discuss our positions and what we are looking for from earnings results. In the webinar, we also identify trends/catalysts that we are eyeing to fill our new idea pipeline.

The webinars are not an earnings call or prediction, as anything can happen during an earnings season. It’s an opportunity for us to go over our fundamental research with our members.

Below are two clips from the Portfolio Manager, Knox Ridley, and Lead Tech Analyst, Beth Kindig, where we share highlights with our Essentials Members. For the full webinar including the IOF portfolio, consider upgrading to the Pro or Advanced tiers. Information can be found here.

Clip One: Broad Market and Themes

Portfolio Manager Knox Ridley provides an overview of the broad market. He says that following the bond market is the best way to understand how the economy is performing. The shorter the duration of the yield curve, the more is determined by the FED policy. The 3-month yield went to new highs and it suggests that the FED will raise interest rates in May. The 2-year yield did not follow, meaning that after this hike, most likely the FED will pause. The FED always follows the bond market. Looking into the financial sector, not just the regional banks, even global banks charts are concerning.

Bitcoin is an important them to watch, and the IOF had held exposure here since 2019. We do this with technical analysis and have been able to carefully add at bottoms while taking gains near the top.

Most people think that Bitcoin is correlated to high beta tech. However, this is not always true. When the recent bank failures happened, Bitcoin started to rally. Knox points out that Bitcoin was created in 2009 for the inherent faults in centralized money. If banks fail and Bitcoin continues to rise, we are going to invest in this trend.

Knox also discusses that energy futures appear to be breaking out. If Gas gets above $3, then the setup to new highs will be triggered. Gasoline prices were the sole cause for a lower-than-expected CPI. He has a buy plan for this.

Clip Two: Our Strategy and Trends We Are Watching

Lead Tech Analyst Beth Kindig believes that we are still in a “needle in a haystack” environment for tech stocks, which means there are few high-quality tech stocks in the new macro. What has helped our portfolio is to be focused on those that meet strict criteria, which has helped us hold higher allocations, and has resulted in better returns.

Fundamentally, on a revenue and earnings basis coming out of Q4, Beth firmly states we have not bottomed, rather the market is front running the bottom. It’s true the market is forward-looking yet Q1 will determine if the market is correct (and there will be a H2 rebound) or if the market is too early, and the rebound is further out for the tech industry.

Semiconductors are an exception in this regard because semiconductors have a lot of visibility. You can more easily track that supply is coming back online, and that demand is filling a backlog. For other verticals, we will approach the earnings season with an open mind while waiting for evidence that cloud or ad-tech, for example, are bottoming in terms of revenue growth and/or bottom line growth.

Trends we are watching:

The Inflation Reduction Act is a trend we are closely following. We want to drill down and ensure that the companies that are participating in this trend are expanding their margins.
Our thesis on Bitcoin is that when there was economic uncertainty in the past in Japan or Venezuela, those countries flocked to the safe haven of Bitcoin. Our initial report on Bitcoin said that providing safe haven for people’s financial security should be worth much as an iPhone, any e-commerce platform or a search engine. The addressable market for Bitcoin is quite large, like any other tech company. Our more recent write-up on Bitcoin can be found here.
Google Antitrust lawsuit is the second biggest lawsuit and there are a lot of small-cap and mid-cap companies that are going to benefit from the breakup of the monopoly. We share more stock picks on this trend with our Advanced and Pro Members.
AI/ML is another trend that we are closely watching.

Conclusion:

We are pleasantly surprised to see our defensible portfolio perform so well during the rally while reducing risk should the market turn. Nvidia and Bitcoin were the two top performers across the tech industry in Q1 and we held this stock and asset at a high allocation. There were many others that returned 30% or more this past quarter.

In addition, we use an automated hedge so we can hold quality positions at high allocations more comfortably during any downward swings.

Biggest takeaway is the H2 rebound needs to be confirmed in the upcoming earnings, and our Essentials Members should keep in mind there are very few strong tech stocks right now. What we mean by this is that earnings results for Q4 almost-across the board showed a deceleration on the top line and a worsening bottom line. Our strategy is to invest in those that are outliers in this regard, that are able to report with real evidence an improvement in the top line, bottom line or both. We will be patient and wait on any that are not able to show a reversal on the deceleration.

Last quarter, our webinar clips pointed toward the semi rebound being investable and Knox had provided an Essentials report that clearly stated the semis were most likely to lead the next bull market. Although we are not convinced the Q1 bull market will sustain, this analysis we provided for our Essentials Members could not have been more spot-on in terms of helping our readers prepare for the next leg up. We hope to continue to bring you top-notch information that silences the noise for more focused, and beneficial investment decisions.

Please note, we are very different compared to other research services since we run a top-performing audited portfolio (this has led to 174% better returns compared to Ark and results that are double the Nasdaq in the same time period). We do not publish a flurry of stock tips or information to our Members as we feel this works against an investor to chase new information rather than to remain focused on a couple of high quality positions. We are here to make money as investors, not to be entertainers or marketers.

Instead, what we offer is active management – where are we adding?, when are we taking gains?, and why?. We manage roughly 10-15 positions for Pro/Advanced in the same manner and we strongly feel being focused is what will make a choppy 2023 successful.

In addition, we provide broad market information, which cannot be underestimated in terms of its importance. In fact, we place this information above our stock tips as broad market is truly in the driver’s seat right now. We want the broad market aligned with our portfolio decisions. This helped us buy at the October bottom and it has helped us remain in a wait-and-see mode going into Q1. Notably, we notified you that we took gains in NVDA and AMD as “bird in hand is worth two in the bush” when it comes to a tech rally. These are high conviction positions for us and you’ll know when we start to buy again.

Thank you for your Membership and we look forward to keeping you updated on how we are managing key positions and the broad market for 2023. We know you have a choice in services, and we sincerely appreciate you being part of the IOF Community.

Beth, Knox and Royston