Website update: Check out the beta version of our forum for discussion with other members. We’ve got some great discussion going on there on Snap, MongoDB and more. our forum for discussion with other members. We’ve got some great discussion going on there on Snap, MongoDB and more.
Last week, Google had a strong earnings report with 19% growth from $32.6 billion in Q2 2018 to $38.9 billion in Q2 2019. Net income also rose from $12.6 billion to $16.6 billion compared to the year-ago quarter. The leading drivers, according to the earnings call, were mobile search and YouTube, followed by desktop search. Google Cloud Platform has an annual run rate of $8 billion.
As of now, the thesis published in “Google: 2019 Analysis” has not changed. From an industry perspective, Google is between the rock of privacy and the hard place of anti-trust. For Google to have uninterrupted returns, the ad environment will have to remain tilted in its favor. The headlines around these issues are causing fatigue – not to mention complacency (that is warranted) as Google continues to remain a strong stock in the face of these risks.
My next update on these companies will come in early October after I spend a week with advertising professionals at AdvertisingWeek in NYC – one of the biggest ad industry events of the year with a lot of industry intel. I’ll get the scoop on Apple’s ITP 2.2 and update you on anything else I come across.
Apple Earnings:
At risk of being overly contrarian, I am also not excited about Apple as a long-term buy and hold in 2019 and 2020. Mobile saturation is a risk, and secondly, the trade war could potentially compound the cycle of hardware saturation. I don’t see the United States officially lifting a Huawei ban and I wrote about this both before and after the G20 Summit.
On a separate note, watch your Huawei suppliers carefully (QCOM, AVGO, SWKS, XLNX, etc).
Smartphone Saturation:
The smartphone market contracted in 2017 to 1.462 billion units and in 2018 to 1.42 billion units, and is expected to return to minimal yet positive growth percentages at a CAGR of 2.5%. While 1.5 billion smartphones per year is substantial, the law of saturation is likely to drive prices down, with Android owning 85% of the market today, and we see decreasing iPhone penetration in China where lower-priced competitors gain market share.
IDC estimated Apple will sell 242 million smartphones by 2022 up from 221 million in 2018. The issue with these estimates is that IDC does not break down the percentage of potential decline between 2018 to 2022. The most up to date number available from IDC is an anticipated decline of 0.8% in worldwide smartphone sales in 2019, published on March 6th.
We saw China decline 10% last year in global shipments of smartphones. Taiwanese company, TSMC, is the sole supplier of iPhone core processor chips and told Nikkei Asian Review that the company is cautious about demand for high-end smart phones, which is a nod toward Apple from a main supplier. Samsung Electronic’s Vice President Lee Myung-jin told investors in late January that “demand for memory chips has declined in the fourth quarter as external circumstances worsened and customers adjusted their orders” and he believes the decline “will continue in the first quarter, as key customers keep adjusting their orders.” This was before Samsung’s operating profit fell off a 60% cliff.
Conclusions: I do not believe Apple’s operating profit will fall off a cliff like Samsung but I wouldn’t be surprised if we see the stock trading sub-190 this year. With that said, the cash pile and buybacks keep a lot of investors in the stock.
Status: Hold with potential of downside risk over next two quarters.