We’re right in the thick of earnings season, with many companies highlighted here at Premium reported. We had some exceptional results from big tech highlights like Alphabet and Amazon, and US Foundational Stock Berkshire Hathaway gave us a pretty strong indicator of how Warren Buffett feels about the current valuations of the market.
I’ll waste no time and dig right into my portfolio moves this week and then get into earnings.
My moves this week
I added to my Alphabet (GOOG) position this week. This has been a relatively steady add for me, and as you will see when I go over the company’s earnings later on in this newsletter, it is posting strong results, but valuations are being held down by the DoJ investigation about potentially splitting up the company’s business due to its monopoly over search.
Despite the company’s run-up post-earnings, I still do believe it is undervalued, and it will continue to be an aggressive buy from me over the next while with my weekly USD contributions.
I also added to my BRP Inc (TSE:DOO) position. This is a normal dollar-cost average buy I make for BRP routinely. However, many will likely see that the stock is down significantly over the last while. I believe this is still a high-quality company that is currently in a cyclical downtrend due to the slowing economy. My long-term view hasn’t changed on BRP, and I do believe we will see strong momentum eventually when rates continue to decline. I will continue to add on weakness.
As always, my full portfolio, transactions, and returns are available on the website. It was another strong month for me, returning 1.1%, just outpacing the 1%~ returns of the S&P 500.
Earnings
Berkshire Hathaway (BRK.B)
Berkshire reported a strong third quarter. Revenue of $93B topped expectations for $83B and earnings per share of $12.18 came in well ahead of expectations for $5.33. On a year-over-year basis, revenue is relatively flat, while earnings growth is strong.
The company is still realizing strong results from the insurance segment of the business, benefitting from the higher price of policy rates in the United States. The company’s insurance investing income came in at $3.66B, which is a near 50% increase from the third quarter of 2023 and is one of the main things fuelling earnings at this point.
First, the company continued to trim out its Apple position. The company sold off an additional 25% of its position and has now liquidated over 2/3 of its Apple position since it started selling. Initially, the company had mentioned it was selling some of its Apple shares due to tax reasons, but it is apparent now that Berkshire believes Apple is overvalued and is selling it off due to the position becoming too large inside of the portfolio. The company also sold a chunk of its Bank of America holdings.
Finally, the company has significantly reduced the overall number of shares it has bought back over the last months, practically screeching to a halt in this most recent quarter. Buffett has been a consistent buyer of Berkshire shares when prices remain attractive. However, they have a hard and fast rule that they only buy back shares when they believe Berkshire stock is trading below the intrinsic value of the company.
The company’s cash pile now sits at over $325B, and although Berkshire doesn’t have an abnormal amount of cash on the balance sheet relative to its assets, it is starting to creep up above historical averages. It is clear the company believes the market is overvalued and is opting to hold cash at higher rates of interest rather than invest it in the equity markets.
Overall, it was a solid quarter from the company. Its insurance segment continues to be a highlight, and its utility and railroad segments are providing strong results despite some harsh economic conditions. It will be interesting to see when and where the company deploys some of its sizeable cash position. However, with the ability to earn large returns on cash positions in the United States, I don’t think they’ll be in any rush.
Alphabet (GOOG)
Alphabet reported strong third-quarter results, topping expectations on both fronts. Revenue of $88.2B topped expectations of $86.2B, and earnings per share of $2.12 came in well ahead of estimates for $1.84.
Despite owning a 90%+ market share in search, it continues to post strong double-digit growth in that area, with revenue increasing to $49.3B versus $44B last year.
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YouTube is also gaining strong momentum, with advertising revenue growing by 12%. One of the more substantial aspects of the business, however, and one that grew much more than expected, was its Cloud Platform.
Google Cloud reported 35% year-over-year revenue growth and is now the company’s second-largest revenue driver by a wide margin.
Operating margins increased by 4.5% on a year-over-year basis to sit at 32%, which is one of the primary drivers of the large earnings beat. The higher margins will likely be attributed to cloud growth, as that area of the company is typically a much higher-margin business.
As its Cloud segment continues to grow, we can expect operating margins to grow with it, which should ultimately fuel double-digit earnings growth into the future.
There has been a lot of criticism of Google’s search algorithm changes over the last year or so, suggesting the quality of search is declining. However, considering the fact it is posting double-digit growth in its search segment, clearly, what they’re doing is working, at least in the short term.
The company generated over $17.6B in free cash flow on the quarter. This is lower than the $22.6B it generated in the third quarter of 2023. However, many major technology companies are undergoing significant expansion on the artificial intelligence front, highlighted by capital expenditures increasing from $8B last year to over $13B this quarter.
With returns on invested capital of nearly 30%, I have full confidence that advancements in AI and improvements made to Google and YouTube search will continue to drive strong earnings growth.
The company continued with its quarterly dividend, opting out of raising it. It is difficult to know at what level Google will decide to raise the dividend moving forward, as the company just started paying one a couple of quarters ago.
Overall, it was a great quarter from what I believe to be one of the cheapest Magnificent 7 stocks you can buy today.
Amazon (AMZN)
Amazon reported yet another strong quarter. Revenue of $158.9B topped expectations for $157.2B, and earnings per share of $1.43 came in well ahead of estimates for $1.14.
The company’s North American sales grew by 9%, International sales by 12%, and its Amazon Web Services segment, the fastest-growing one out of the bunch, grew by 19%. Its Advertising segment, which I am particularly bullish on, grew 19% year over year. I’ve added a chart of the two segment’s revenue growth below, and you can see how explosive the AWS segment is in particular.
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From an earnings standpoint, the company grew by 52% on a year-over-year basis, and as mentioned, third-quarter earnings were well ahead of expectations.
Despite a relatively rough economy, Amazon continues to highlight its dominance in the retail space, gaining market share in the face of some tough perceived competition. It is clear its heavy capital expenditures during the COVID-19 pandemic on infrastructure are amplifying results at this point in time. Many were critical of Amazon’s heavy spending over the last few years, but it is certainly paying off, with free cash flows coming in at $47.7B.
It is difficult, if not impossible, to find an online retail chain that can have items at your door faster than Amazon, and the bulk of that comes from the company’s strategic investments made to expand its network in terms of warehouses, delivery methods, etc. In the age of convenience, this is going to be a large driver of success moving forward.
My thesis remains well intact when it comes to Amazon. This is a company with a gigantic moat around the retail end of its business, one that is relatively slow-growing and low margin.
However, underneath the retail end of the business are two segments that are growing at an exceptional pace, namely its Ad segment and its AWS segment. It has been argued for a few years now that AWS could be a publicly traded company on its own, and I tend to agree.
I believe the retail end of the business does drag down the valuations of its AWS and Advertising segments, and it is a bit frustrating that the company has mentioned they have no intentions of spinning AWS off.
However, I’m also happy to be able to accumulate shares at what I feel are still attractive price points despite the company being one of the best-performing Magnificent 7 stocks since the market bottom in 2022.
Guidance was relatively in line with expectations, and if these last few quarters have been any indication of the company’s expected results next quarter, I wouldn’t doubt if it comes in ahead of that guidance.
Visa (V)
Visa closed out Fiscal 2024 on a strong note, topping expectations on all fronts. Revenue of $9.6B came in ahead of expectations for $9.4B, and earnings per share of $2.71 came above estimates for $2.55.
Revenue is up 12% year over year, and earnings per share increased by 16% over the same time period. Payment volume increased by 8% and processed transactions by 10%.
Despite a pretty rough economic backdrop when it comes to consumer spending, the company’s extensive payment network is resulting in double-digit increases to transaction fees (see the chart below).
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It leaves me fairly bullish on the idea that once consumer discretionary spending does improve, Visa will have added tailwinds to the business.
The company generated over $6.3B in free cash flow on the quarter. It allocated $5.7B to share buybacks and $1B to dividends.
The company has been aggressively buying back shares over the last year or so, spending $16.6B of its $18.6B in free cash flow on share buybacks. Management is clearly bullish on the future outlook of the company and wants to capitalize on a relatively flat share price year-to-date. As you can tell by the chart below, buybacks are extensive over the last while.
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The company released its fiscal 2025 outlook in which it expects high single-digit to low double-digit revenue and operating expense growth. In terms of earnings per share, it expects low double digit growth.
This leads me to believe that Visa is likely going to continue buying back shares over the next year as well in order to boost EPS through more than revenue. Either that, or it has plans to improve its already rock-solid margin profile even further.
There have been some fears regarding the Department of Justice cracking down on the company amidst some accusations that it is using its monopolistic payment network to pretty much force businesses to use the network.
However, at this point in time, there has been no ruling as to what will happen, and I will not be making any decisions based on pure speculation.
