TMTB Morning wrap: Part 1
QQQs +45bps. Getting some thoughts out on MSFT and META early and will continue to jam on everything else and send out Part 2 a bit later…
In terms of impact on semis, investors should leave MSFT/META feeling a bit more positive on spend (at least for a day, ha!). We also got news of Softbank investing as much as $25B into OpenAI. Also helping semis for the day: NOW’s miss - while doesn’t seem demand drive - will potentially help shift some flows back to semis vs. software for the day + CLS also had a pretty nice beat.
MSFT guided Q3 and Q4 capex to remain at similar levels from Q2 ($22.6B or >$90B run rate) and expects FY26 capex to grow, albeit at a slower pace than FY25 (~55%). Nadella described the shift in capex from infra to more “short-lived assets more correlated to revenue growth” which reads good for semis like NVDA as that likely means GPUs and servers. Nadella didn’t seem concerned around AI scaling law constraints saying MSFT has been seeing >10x improvements in every model generation and mgmt feels training & inference cost efficiencies are a net positive that will accelerate # of new AI apps written & queries consumer and drive exponentially more demand.
As expected, Zuck sounded bullish on the call saying they will continue to invest “hundreds of billions of dollars” over the long-term (Good for ASICS - MRVL/AVGO +4% early…side note: one thing favoriting ASICs vs NVDA NT is that the White House Export controls affect NVDA much more given ASICs mainly selling to big hyperscalers). On Deepseek, Zuck reiterated the benefits of open source LLMs, noted that costs can be driven down while acknowledging that Deepseek has made a number of advancements in tech and META was still digesting them to see how to implement them into LLama. He talked up 2025 as a pivotal year for them and expects Llama 4 to become most advanced and most used model this year.
On AMZN, Azure issues seem MSFT specific, but the AWS print becomes even more important now. A beat there would go a long way to help cement the burgeoning narrative that AMZN is becoming an AI leader with AWS and flip the narrative that prevailed over the first couple years of AI that they’ve been behind Azure (bogeys sit at 19%+).
MSFT -4%: Azure miss and guide below blamed on “execution issues” as mgmt backed off 2H acceleration commentary
Azure Dec Q 31% vs street at 31.8% and bogeys of 32.5% and guide of 31-32% cc
Azure March Q guide for 31-32% was below bogeys of 33%+
Mgmt cited “execution issues” as partners “balance how to do AI workloads while continuing to work on migrations.” In other words, AI strength was offset by the weaker than expected non-AI workloads due to GTM execution challenges, namely in balancing AI+Classic workload engagements w channel partners.
Core Azure Growth rates:
Q2'24: 22%
Q3'24: 24%
Q4'24: 22%
Q1'25: 21%
Q2'25: 18%
Q3'25: 18-19% (guide)
$13B in annualized AI revs
Azure missed, but bookings looked solid, which will comfort some bulls, driven by large commitments by OpenAI:
Outside of Azure, Office commercial growth 15%, better than ~13-14% expects. GM of 68.7% beat by 30bps while OPM of 45.5% beat by 130bps
Implied Q3 guide is 11-13% vs street at 13% with 2ppts of fx hit. Implied op margin is 44% above street at 43.9% and mgmt now expects margin expansion in the year given strong GM execution and cost controls.
Overall: Disappointing print, but expectations weren’t high going in given MSFT has significantly lagged the rest of software since July. The margin guide and Azure bookings will comfort bulls somewhat, but we think stock will remain a funding short until we get either 1) signs of Azure acceleration or 2) Greater co-pilot traction as we think both of those are required to change the narrative/sentiment around and help get investors comfortable that multiple expansion is possible, especially with stock still trading at 29x FY26.
META +2%: Solid beat; Q1 rev guide good enough; opex guide on the high side
Q4 beat street by 3%, on the high end of their typical beat
Q1 guided to 18% y/y fxn at the high end
Opex guide $114B to $119B vs bogeys of $112B - $116B. Ex Dep change of life, that would have been closer to $117 - $122B.
Overall solid enough print to keep bull case chugging as this remains one of the cleanest ways to play AI as the stock had already come away from this past weekend’s Deepseek saga looking like a winner.
Bulls will say:
Q4 rev beat was on the high end of their typical beat and largest beat in 6 quarters and accelerated to 21% on a 2 ppt tougher comp. The guide at the high-end is for 18% y/y fxn with a 3% fx headwind on another 2ppt tougher comp — why wouldn’t there be another acceleration? After that, comps begin to get easier with a 5ppts easier comp in June and a 2 ppts easier comp in Sept. That gives us line of sight to 20% rev growth. This all jives with this quote from the PR: “While we are not providing a full year 2025 revenue outlook, we expect the investments we are making in our core business this year will give us an opportunity to continue delivering strong revenue growth throughout 2025.”
Opex was high, but likely comes down from here and in ‘26 we can begin to get cost savings from AI engineers/coders
Zuck sounded bullish on the call and continues to be a CEO you want at the helm
Potential upside from any disruption at Tiktok
If META can’t go down on buyside #s coming down, then what happens as #s begin to go up…
Bulls will say 20%+ fxn growth is close to 17%+ reported and close to ~$27+ in FY’25 EPS and $31+ in FY ‘26 and we are just at the beginning of META being helped by recent AI investments. For an AI winner, $31 x 28x = still close to 30% upside from here
On the other hand, bears will be more muted on believing forward revenue growth (Q1 midpt was below bogeys) and say buyside eps comes down low single digits and point to an opex guide that was $5B higher ex dep change and also nitpick the no buyback. Bears will say ‘26 EPS closer to $29-30 and give it 20-22x, which is 10% downside.
Despite the main nitpick of higher opex guide, we side with the bulls as the risk/reward — 30% up, < 10% down — still strikes us as very attractive here for one of the best narratives and one of the best mgmt teams in Tech. META remains one of our favorite compounders.
