Cloud AI – Fountainheadinvesting

I had recommended Alphabet (GOOG) as a great long-term buy between $150 and $170 on several occasions.

Last evening, Google knocked it out of the park with really stellar results. I bought more shares this morning, and am reiterating a Buy.

I believe analysts’ consensus earnings are a bit conservative and Google will continue to beat estimates with better growth and operating margins.

Google’s earnings quality is better than several tech giants for the following reasons.

It has a near monopoly in Search
Market leadership in media with YouTube.
A strong first-mover advantage with Waymo.
A fast-growing Google Cloud business, third only to and catching up with Azure and AWS.

Its earnings and growth are sustainable, thus it deserves a better valuation and multiple.

Let’s take a closer look at Q3 earnings.

Q3 GAAP EPS came in at $2.12 per share, beating expectations of $1.85 per share $0.27, or 14% – This was a substantial beat.

Revenue of $88.3Bn (+14.9% Y/Y) beat by $2.05B or 3%.

Consolidated Alphabet revenues in Q3 2024 increased 15%, or 16% in constant currency, YoY to $88.3Bn reflecting strong momentum across the business.

Google Services revenues increased 13% to $76.5 billion, led by strength across Google Search & other, Google subscriptions, platforms, and YouTube ads.

Total operating income increased 34% and operating margin percent jumped a huge 4.5% to 32%.

Google Cloud revenues grew a whopping 35% to $11.4Bn led by accelerated growth in Google Cloud Platform (GCP) across AI Infrastructure, Generative AI Solutions, and core GCP products, with record operating margins of 17% as the cost per AI query decreased by 90% over the past 18 months.

Cloud titans Amazon (AWS) and Microsoft (Azure) have commanded huge valuations for their cloud computing businesses; with Google Cloud growing at 35%, it should continue to narrow the gap over the next 5 years. Also importantly, AWS and Azure have operating margins over 30%, and should Google continue to scale and leverage their existing fixed costs, they can reach the same margins. I also believe as they get better at AI, they should be able to charge more.

Based on consensus analysts’ estimates Alphabet’s EPS should grow to $11.60 in 2027 from $5.80 in 2023 – that’s an annual growth rate of 18%. Comparatively, Apple‘s estimated EPS growth through FY2027 is slower at 14%, and it sports a P/E of 33 compared to Google’s 22. Alphabet’s P/E is closer to the S&P 500’s P/E of 21!

I believe this is too low, and there is a lot of potential for its stock to appreciate just on the lower valuation.

Besides the strong EPS, a lot of Google’s expenses are noncash depreciation and amortization and their cash flow margins are strong. They generated operating cash of $31Bn on $88Bn last quarter, or a 35% cash flow margin.

The antitrust regulation will remain a possible negative on Alphabet, but the final decision is still years away as Alphabet vigorously appeals the decision.

I recommend Alphabet as a buy at $176

Apple started its Developers Conference with its long awaited, long overdue AI development announcements yesterday.

These were the key points

Emphasis on privacy – Majority usage of AI on device but cloud available as well for more computing power, they would be using their own cloud service instead of Google or Microsoft. Apple will be hosting its own Cloud AI services on its own Apple Silicon servers to counter Microsoft’s cloud AI.

Strategy was integration and not an add on – To show AI integrated into the apps and products you already use—rather than powering a tacked-on perk or stand-alone chatbot.

Partnering with Sam Altman’s OpenAI – Not developing their own artificial intelligence from scratch, instead partnering with Sam Altman’s AI, but crucially it will be integrated. Using a third party for AI could be a smarter move (cheaper, less Capex, fewer failures) – or simply they were too far behind.

Integration Apple’s strongest differentiation was and remains integrated hardware and software product, “System on chip” – basically Apple created and designed silicon with its own operating system and hardware, it’ll be interesting to see how well it is integrated.

The adoption is companywide and includes iOS 18, iPadOS 18 and MacOS Sequoia, Siri,

Some new features, and a lot of catching up – – several features are in Google and Samsung.

Playing Catch Up – Writing tools, Voice transcription, Image generation and Notifications, these all exist, and are now available from Apple Intelligence.

Differentiators

The key differentiator here is that Apple Intelligence will also make it easier to search through our existing data – for example, What’s exciting here is the blending of AI with the photos we’ve already taken, and prioritize our notifications. Like other chatbots, you can now text with Siri. But unlike other chatbots, Siri has access to all your Apple stuff. When all the promised updates arrive, it will be able to see what’s on your screen and work across apps. “Add this address to his contact card.” “Text yesterday’s picnic photos to my mom.” Things like this make total sense to a human but up until now have been out of Siri’s reach. The thing that really elevates Siri is its new friend, ChatGPT. When you ask Siri to do some things it doesn’t know how to—say, come up with dinner ideas based on your recent grocery haul—it asks your permission to check with an integrated version of OpenAI’s bot. However, If Apple can pull off what it showed and convince people that Siri is no longer painfully stupid, it might be a tech miracle. That’s a big if. The company has a decade long history of underwhelming Siri improvements.

If you get a chance watch Joanna Stern’s video in the Wall Street Journal.

https://www.wsj.com/tech/personal-tech/apple-intelligence-ios-18-macos-sequoia-ai-b08bb299?mod=hp_lead_pos7

Apple AI analysis: Impact on the company’s business and stock.

Much needed, frankly regardless of much this helps Apple, if they hadn’t done this it would have hurt them really badly.

Apple’s widest moat has been its integration unlike its competitors, for example you have Windows operating, Intel Silicon and Dell hardware – the Wintel systems for the mass market competing on price. Or the Samsung phones with the Android operating system. Apple’s was always designed to be one seamless product from scratch and that’s how they got their premium pricing and loyal customers.

They continue to emphasize integration and privacy with AI, a big plus.

I think overall, this will help and Apple is going add on features with each new iPhone or Mac version and increase sales, which were stalling for the past three years.

For a lot of people, yes may be underwhelming and just catching up for the regular Apple user, it would be a convincing argument to at least stay with Apple and possibly upgrade.

A core holding: I’ve bought and held Apple for several years now, and usually buy on declines, the last buy call I had made was around $170, and will add if there are unusual or large dips, this will remain a core holding for at least another 5 years. Apple is not a big mover but I’m very, very confident of at least 10-12% a year, plus it works well as a defensive stock too in bad times.