After a pretty torrent start to the year, we’re starting to see the markets give a bit back. Most indexes fell on the week as big tech results came in a little lower than expected.
As long-term investors, we should welcome volatility to the downside like this, as it does help us accumulate shares of high-quality companies at lower prices. It’s also important to realize that despite the rocky finish to the week, the markets are still doing exceptionally well over the last couple of years.
In this week’s newsletter, I’m going to go over companies featured here that have reported earnings. At this point, it is mostly US companies reporting that are featured here. However, there are a few Canadian companies I’ll speak on, and there will be more Canadian companies that report as we move through earnings season.
First, let’s get to my portfolio moves, or in this case, my anticipated portfolio moves.
My portfolio moves
I have been out of the office for most of the week, so I haven’t had the time to make any individual moves for my portfolio. However, I do have a 10%~ cash balance that I will be looking to deploy some of that in a couple of companies next week.
The first one would be Lockheed Martin. This was my recent Value Call here at Stocktrades Premium, and it is a company I have bought and trimmed a few times over the years. However, I believe the headwinds impacting it right now are short-term and primarily driven by headlines, not company results.
I won’t go too in-depth regarding my logic in the addition of Lockheed. Instead, I’ll just link to my writeup on it as a Value Call. You can read that here.
The second addition I’ll be looking to make is to Alphabet (GOOG). Alphabet reported what I viewed as a strong quarter, but the market sold the company off on weaker-than-expected Cloud earnings. The interesting thing is that the company missed Cloud revenue estimates by just 1.8%, yet the stock sold off 8% on earnings.
I’ll discuss Alphabet more in the earnings section below, and you’ll probably get a better idea as to why I plan to add to my position next week.I have been out of the office for most of the week, so I haven’t had the time to make any individual moves for my portfolio. However, I do have a 10%~ cash balance that I will be looking to deploy some of that in a couple of companies next week.
The first one would be Lockheed Martin. This was my recent Value Call here at Stocktrades Premium, and it is a company I have bought and trimmed a few times over the years. However, I believe the headwinds impacting it right now are short-term and primarily driven by headlines, not company results.
I won’t go too in-depth regarding my logic in the addition of Lockheed. Instead, I’ll just link to my writeup on it as a Value Call. You can read that here.
The second addition I’ll be looking to make is to Alphabet (GOOG). Alphabet reported what I viewed as a strong quarter, but the market sold the company off on weaker-than-expected Cloud earnings. The interesting thing is that the company missed Cloud revenue estimates by just 1.8%, yet the stock sold off 8% on earnings.
I’ll discuss Alphabet more in the earnings section below, and you’ll probably get a better idea as to why I plan to add to my position next week.
Earnings
Alphabet (GOOG)
Alphabet reported a mixed quarter in terms of analyst estimates. Revenue of $96.5B missed expectations for $96.6B, but earnings per share of $2.15 topped expectations of $2.12. The company’s cloud revenue came in just shy of estimates as well, likely causing the aftermarket selloff post-earnings.
Make no mistake about it, however, this is still a company firing on all cylinders, and I believe the underlying results outside of small misses were exceptional.
When we look to total revenue growth, it came in at 12% year-over-year, while earnings per share increased by 31%. The large increase in earnings per share was a combination of buybacks and strong growth in operating margins, which increased by 5% to sit at 32%.
Although the company’s cloud revenue missed analyst expectations by a mere 1.8%, this segment of the business is still Alphabet’s primary avenue for growth, as year-over-year revenue increased by 30%, and has been growing at a compound annual growth rate of 35% since 2019 (see chart below).
I believe the combination of DeepSeek fears and Donald Trump’s tariffs are leading investors, whether retail or institutional, to have any excuse to sell a stock.
YouTube revenue increased by 13.8%, Google Search by 12.5%, and Google subscriptions and devices by 7.7%. As mentioned, the Cloud segment increased by 30%, and every element of the business is performing well. The company’s annual revenue run rate from YouTube and its Cloud segment alone account for $110B.
The company generated just shy of $25B in free cash flow on the quarter and plans to roll out $75B in capital expenditures in 2025 in an effort to continue developing AI infrastructure.
As a long-term investor, the small misses on revenue don’t really bother me all that much. Do I believe a small 1%~ miss on revenue expectations, primarily from their Cloud platform, is a cause for concern? Absolutely not.
In fact, I see it as an opportunity to add a stellar company at a relatively attractive price. The markets are fairly skittish right now, and I do believe any sort of upset in terms of overall results is going to cause a selloff.
This reminds me a lot of mid-2024 when the company sold off on some subpar results. Those who accumulated shares during that drawdown saw a 35%~ return on its subsequent runup.
The company’s Cloud platform is still one of the faster growing out of the big technology companies, and the business’s moat in terms of search revenue, whether that be Google Search or YouTube, is one of the primary reasons I invest in the company today. If weakness persists over the next while, I will continue to accumulate shares at lower prices.
Amazon (AMZN)
Amazon reported a strong quarter to close out Fiscal 2024. I believe the company’s guidance for its upcoming quarter caused a bit of a dip in stock price, but nothing concerning.
The company reported revenue of $187.7B, right in line with estimates, and earnings per share of $1.86 beat expectations of $1.48 in a big way.
When we look to the full year 2024, sales increased by 10%, and earnings per share increased by 90%. Operating cash flow increased by 36%. This was a combination of increased operational results and a large expansion in operating margin.
From a margin standpoint, the company reported operating margins of 11.3%. If we segment it out per business, retail operating margins came in at 6.7% compared to 4.2% in the fourth quarter of 2023. On the Amazon web services end, operating margins increased by over 12%, coming in at 36.9%.
North American sales grew by 9.8%, International by 8.9%, and Amazon Web Services by 18.5%. Its Advertising segment grew revenue by 17.5%. As you can see by the chart below, the company’s AWS segment has a compound annual growth rate on revenue of 38% since 2013, and its advertising segment is growing at a similar pace, with a CAGR of 35%~.
The company’s faster growth in AWS and its advertising segment, combined with these being the much higher margin segments of the business, is fueling a lot of the growth in earnings and operating income.
Free cash flow came in around $36B in 2024, which is up around $1B from 2023. After scaling back capital expenditures over the last few years, the company is ramping up capital spending again, much like the other big tech players, the bulk of it being geared towards artificial intelligence and its Amazon Web Services segment.
Where the company saw some pressure in terms of share price was the guidance it issued for next quarter. The company expects revenue to come between $151B and $155.5B. Most analysts had expectations for $158.56B. Operating income is expected to come in between $14B-$18B.
In the first quarter of 2024, the company reported operating income of $15.3B. So, the market probably doesn’t like the fact they’re projecting that lower operating income is a possibility.
On the capital expenditure front, the company expects to spend around $100B next year, with the bulk of it going to artificial intelligence and Amazon Web Services spending. This is more than most of the major big tech companies, and if you look to the chart below, is around $17B more than it spent this year.
Overall, the company is executing well. With the markets being near all-time highs and valuations being higher than average, any sort of miss on guidance or light results overall is going to cause a sell-off.
I still view Amazon as one of the most attractively priced Magnificent 7 stocks on the market, and my thesis of the company being a blue-chip retail company with some fast-growing tech segments underneath the surface is still well intact.
The moaty retail end of the business is performing well, with expanding margins and continually growing sales. Meanwhile, its faster-growing verticals like Amazon Web Services and Advertising are continuing to post double-digit growth, all while having significantly higher margins. I’m not overly concerned with the short-term guidance issued by the company, as I am a long-term shareholder.
TMX Group (TSE:X)
TMX is one of the companies featured here at Premium that I do have regrets for not pulling the trigger on. The company continues to execute exceptionally well, nearly quadrupling the returns of the TSX Index over the last 3 years.
The company continues to report strong earnings. Revenue of $393M and earnings per share of $0.48 both topped analyst expectations, and the company ended up returning more than 8% post-earnings.
The company’s results were primarily driven by foreign exchange gains plus strong organic growth within its segments due to the increased activity in the equity markets. The company is proving time and time again that it can make successful acquisitions, merge them into the fold, and grow them organically.
If we look to the chart below, we can see the company’s insights and analytics revenue is growing at a very solid pace. This is where most of the company’s acquisitions have been. However, you can also see the surge in every other segment, including capital formation, which would include things like listing fees for new companies.
Equities and derivatives revenue remains strong as well, which is pretty typical considering the popularity of the stock market at this point in time.
When we look to revenue and operating income, they increased by 30% and 41% year-over-year, respectively. In terms of earnings per share, they increased by 30% over the same timeframe.
Trayport, a commodity-based platform the company acquired pre-pandemic, reported a 25% increase in overall licenses and a 20% increase in trading volumes.
When we look to overall activity in the equity markets, trading volumes grew by 19% year-over-year. The company has also been able to increase the cost of contracts when it comes to derivatives trading and clearing, which is ultimately a profitable portion of the business.
It is difficult to say whether this market activity will continue for TMX Group. We are teetering on the edge of substantial uncertainty when it comes to Donald Trump and his tariff attempts, a weakening Canadian economy, and a cost of living crisis in Canada. However, at this point, there is no doubt that TMX Group is executing well. At the time of writing this report, the company continues to make new all-time highs on a relatively consistent basis.
As mentioned above in the dividend section, the company made a 5% increase to the dividend, a raise that is becoming part of a pattern to make smaller boosts to the dividend several times in a calendar year over single, larger raises.
Overall, there wasn’t much to pick apart in terms of negatives on the quarter. It was an outstanding one.
