Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Earnings preview: Nvidia, Salesforce, and Snowflake
Peter Garnry
Chief Investment Strategist
Summary: Nvidia, Salesforce, and Snowflake report earnings tomorrow providing more clarity on technology spending and the outlook for the overall technology sector. Nvidia is expected to report a big drop in its growth rate due to weakening demand in gaming and more importantly crypto mining. Salesforce is expected to show solid growth and here investors will focus on the Slack integration and what it means for growth ahead. Snowflake's growth rate is coming down and thus investors will demand improvements in the operating income.
Nvidia: turbulence to continue
Earlier this month Nvidia cut its outlook, which we covered in an equity update, driving by excess inventory of GPUs leading to price pressures in GPUs. Lower demand for GPUs, which we believe is mainly driven by less favourable dynamics for crypto mining, is forcing Nvidia to lower its sales outlook, cutting prices, and writing down its existing inventory. Nvidia has gone to great length explaining off the weakness as due to a slowdown in gaming, but the companies in gaming are not showing the decline in demand consistent with the slowdown Nvidia is experiencing.
Because Nvidia does not know very well the end-use cases of their GPUs it is difficult for them to segment revenue, but in our view the economics of crypto mining tied to the Bitcoin price is the best explanation for the historical variance in revenue. Nvidia’s slowdown is tied to cryptocurrencies and thus higher interest rates is not only a key risk to Nvidia’s equity valuation, but it is also a risk to their demand as higher interest rates could lower cryptocurrency prices substantially from current levels.
Nvidia is expected on Wednesday to report only 3% y/y revenue growth in FY23 Q2 (ending 31 July) down from 46% y/y in FY23 Q1 (ending 1 May) which is an abrupt slowdown in growth. It also highlights Nvidia’s biggest business risk. The chipmaker does not fully understand its demand function which can lead to a mismatch in supply and demand. The key question for investors is to what extent Nvidia expects growth to come back but more importantly whether they will change their outlook for operating margins.
Salesforce: can Slack sustain the growth?
Salesforce is reporting FY23 Q2 (ending 31 July) results on Wednesday with analysts estimating revenue growth of 21% y/y which is in line with the long-term growth rate the company has enjoyed for 10 years. The Slack acquisition which has now been fully integrated is one of the key drivers for future growth and an acquisition that has expanded the company’s addressable market and market position in cloud business application software. Salesforce is competing against Microsoft, Oracle, and SAP, and has shown over the years that it gain market share plowing back a lot of its profits back into growth. With rising interest rates the pressure is on Salesforce to lift its operating margin and investors are likely demanding a surprise on operating margin rather than revenue in tomorrow’s earnings release.
Snowflake: consumption model vs economic uncertainty
It is rare for Berkshire Hathaway to engage in technology companies let alone IPOs, but that is exactly what the investment firm did with Snowflake back in 2020. The company sits in the data analytics and cloud intersection providing a novel approach to data warehousing on the cloud at a low costs. The company has grown revenue from $97mn in 2018 to around $1.2bn in 2021 and revenue growth is expected at 72% y/y in FY23 Q2 (ending 31 July) but down from 104% y/y a year ago, but this should be expected as all high growth companies always see their growth rate coming down. The question is to what degree the growth rate is decaying over time. The company has recently disappointed analysts and there might be a downside risk to Snowflake’s results as the business model is centered around consumption which means that if technology spending is slowing down then it will hit Snowflake’s growth rate immediately. Secondly, the company’s high equity valuation relative to revenue means that investors will want to see a big improvement in operating income.
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