TMTB Morning Wrap Part 2 - NOW/TSLA/IBM

QQQs +51bps. We sent out Part 1 discussing META/MSFT earlier this morning. We’ll cover NOW/TSLA/IBM below…Out with Part 3 in a bit…

NOW -10%: Disappointing Q was Q4/Q1 cRPO miss

Misses on all the important KPIs with cRPO and sub guide missing, not a good look for a stock that was priced for perfection (45x EV/CY26 FCF) and used to a cadence of beats:

Q4 cRPO:+22% cc vs bogeys closer to 23%
Q1 cRPO guide 20.5% guide vs street at 20.5% and bogeys 21%
Q1 Sub guide revs 19.5% -20% vs street at 21% and bogeys of 21.5%
Fy25 sub guide of 19.5% -20% cc vs 21.5% and street at 21%

Likely hits most of sw agentic space today - TEAM becomes even more important tonight.

Reasons for the weaker guide - mgmt said 1) they are modeling a more 2H weighted US fed biz due to administration changes in Jan, but remains confident in pipeline and 2) new variables including rolling out its new Workflow Data Fabric product w a hyprid pricing struction & evolving GTM engagements to incorporate Agentic AI & consumption meters.

Bulls will say that the guide looks overly conservative (22% cRPO cc exit rate leaves room for upside to 20% sub guide) and point to GenAI momentum (new deals +150% q/q). Bulls will also take Bill at face value that their newly announced subscription + consumption hybrid pricing model is additive. This change means NOW assist and NOW Agentic AI will continue to be included as part of the Pro Plus and Enteprises Plus SKUs — and now Pro Plus SKU will give the customer access to AI Agents — the consumption “meter” will be turned on quickly and NOW will capture value through additional “usage packs.” Bulls will say business metrics seem fine, this isn’t a demand issue, GenAI products are ramping and adoption should increase going forward.

Bears will say: look you have a co. trading at 45x FCF that just missed and is pulling disclosure on Pro+ KPIs while reasoning for Federal issues didn’t seem convincing. cRPO missed on a 3ppt easier comp and comps begin to get harder in Q2. How can we believe guide is conservative if NOW just missed?

Stock generally being defended by sell-side this morning.

Our take: Stock should be down given miss and valuation and guidance reset. However, guide does seem like a low enough bar where NOW can beat and business seems ok despite some headwinds that seem confined to Federal. Still — tougher cRPO comps beginning in Q2, pulling of disclosures and early pricing model changes mean stock likely needs to digest a bit.

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TSLA +4%: GM miss overshadowed by Elon’s bullishness on the call

GM miss 13.6% ex credits vs bogeys of 15% and street 16.2%
Res missed at $25.71B vs street at $27.21B

But bulls taking it as a clearing event - now that bad numbers are out, we can go back to focusing on what’s more fun: FSD, Optimus, new model launches, etc…

Key headline is TSLA said it plans an unsupervised AV roll out for Texas later this year, significantly ahead of expectations: “Teslas will be in the wild with no one in them in June in Austin.” UBER/LYFT - 2%

Elon, as usual, sounded bullish on the call and I’ll let the quotes speak for themselves. He came out swinging - here’s his first two few sentences on the call that will get your Thematic Tech Heart fluttering:

I was going to say doubling down on autonomy, but really, it's like -- autonomy is like 10x-ing things, frankly. Doubling is not even enough. We made many critical investments in 2024 in manufacturing AI and robotics that will bear immense fruit in the future, immense. Like it's -- in fact, to such a scale that it is difficult to comprehend

I see a path to Tesla being the most valuable company in the world by far. Not even close. Like not -- maybe several times more than -- I mean, there is a path where Tesla is worth more than the next top five companies combined. There's a path to that. I mean, I think it's like an incredibly, just like a difficult path, but it is an achievable path.

So -- and that is overwhelmingly due to autonomous vehicles and autonomous humanoid robots. So our focus is actually building towards that. And then that's what we're laying the groundwork -- we're laying the groundwork for that in 2024, we'll continue to lay the groundwork for that in 2025, but more than lay the groundwork actually, so we'd be building the structure, we're building the manufacturing lines, and yes. I'd like -- setting up for what I think will be an epic 2026 and a ridiculous '27 and '28, ridiculously good

On FSD:

As yet, very few people understand the value of full self-driving and our ability to monetize the fleet. Some of these things I've said for quite a long time, and I know people have said, well, Elon is the boy who cried wolf like several times, but I'm telling you, there's a damn wolf at this time, and you can drive it. In fact, it can drive you. It's a self-driving wolf.

And it's difficult to -- for people to understand this because human intuition is linear as opposed to what we're seeing is exponential progress

That same asset -- the thing that -- these things that already exist with no incremental cost change, just a software update, now have 5x or more the utility than they currently have. I think this will be the largest asset value increase in human history.

Optimus:

The normal internal plan calls for roughly 10,000 Optimus robots to be built this year. Will we succeed in building 10,000 exactly by the end of December this year? Probably not. But will we succeed in making several thousand? Yes, I think we will. Will those several thousand Optimus robots be doing useful things by the end of the year? Yes, I'm confident they will do useful things.

So the training needs for Optimus or Optimus humanoid robot are probably at least ultimately 10x what's needed for the car, at least to get to the full range of useful roles.

So -- but it is -- like, it is one of those things where I think long-term Optimus will be -- Optimus has the potential to be north of $10 trillion in revenue. Like, it's really bananas. So you can obviously afford a lot of training compute in that situation. In fact, even $500 billion training compute in that situation would be quite a good deal.

And our goal is to ramp up Optimus production faster than maybe anything has ever been ramped. Meaning like, aspirationally, an order of magnitude ramp per year. Now if we aspire to an order of magnitude ramp per year, perhaps we only end up with a half order of magnitude per year. But that's the kind of growth that we're talking about. It doesn't take very many years before we're making a 100 million of these things a year. If you go up by, let's say, a factor by 5x per year.

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IBM +10%: Software acceleration drives beat with strong GenAI

Dec-qtr with REV/EPS coming in at $17.6B/3.92 vs street at $17.6/3.78

Sw accelerated for the 4th straight q to 11% y/y and IBM’s Gen AI book also accelerated, +67% q/q to $5B since inception, up $2B q/q with a big increase to sw Gen Ai bookings. Software strength driven by RHT accelerating to 16% vs 14% last Q.

Cy25 guide was +ve with rev growth expected to accel to >5% cc vs 3% in CY24. 2ppts of fx headwind implies >7% y/y rev growth, well above street at 4.6%. Sw guided grow near dd y/y and consulting +LSD. On the Consulting side, despite flattish trends in Q4, IBM expects the segment to improve in CY25 driven by an improvement in the broader IT spending environment and conversion of the $5.0B of AI signings to revenues.
FCF guide of $13.5B also better than expected.

On M&A, IBM’s CEO said :

if you look at our free cash flow and you look at what we are setting out for the year, that could leave as much as $7 billion or a bit more than that during the year after accounting for the dividend. We always look at a three-year flexibility. I think that's the best way of looking at it…So if you look at a three-year flexibility, you can kind of borrow ahead, but we do kind of want to live within sort of what we can afford. And if we find targets that meet our criteria, we are going to lean in and get things done.

IBM RESULTS: Q4
- Revenue $17.55B, +1% y/y, EST $17.54B
- Software revenue $7.92B, +10% y/y, EST $7.95B
- Consulting segment revenue $5.18B, -2% y/y, EST $5.27B
- Infrastructure revenue $4.26B, -7.6% y/y, EST $4.13B
- Financing revenue $170M, -2.9% y/y, EST $174.9M
- Other revenue $29M, -79% y/y
- ADJ gross margin 60.6% vs. 60.1% y/y, EST 60.5%
- Operating EPS $3.92 vs. $3.87 y/y, EST $3.74
- Free cash flow $6.16B, +1.2% y/y, EST $5.63B
F/Y GUIDANCE
- Guides revenue at constant currency at least +5%, EST +4.81%
- Guides free cash flow about $13.5B, EST $12.92B