Tesla and Microsoft Q2 2020 – The money tree

Tesla Q2 2020 – Cash flow is king.

• Tesla reported good Q2 results as the sale of carbon credits helped it to report another profit while it managed to almost completely buck the general automotive trend of declining vehicle sales.
• Q2 revenues / EPS were $6.04bn / $2.18 compared to forecasts of $5.4bn / $1.45.
• China was the bright spot for Tesla where it shipped 50,000 model 3s during H1 2020 (ZoZo Go) meaning that it has gained a lot of share.
• In total Tesla shipped 90,650 vehicles against forecasts of 74,130 representing a YoY decline of just 5% compared to most of its competitors who are suffering declines of 25%.
• Net income was $108m boosted by a $428m gain from selling zero-emission credits to other carmakers which when stripped out would have seen Tesla lose money.
• Crucially, cash flow was also strong with $964m inflow from operations continuing the trend of the last 12 months which has seen Tesla sustainably generate cash.
• When it comes to digital services, Tesla remains the gold standard in the automotive industry but its robotaxi expectations (see here) upon which much of the valuation has to be based, remain unrealistic.
• This is why I struggle with its $300bn valuation and think that now would be a good time to take some or all of the money off the table.

Microsoft FQ4 2020 – The realm of forecast error.

• Microsoft reported good results, but the shares fell slightly as the growth in cloud services was not enough to support the nosebleed expectations of investors who are paying nearly 35x 2021 PER to own the shares.
• FQ4 2020 revenues / EPS were $38.0bn / $1.46 ahead of expectations of $36.6bn / $1.35.
• While Azure did not grow as fast as demanded, managing 47% YoY compared to expectations of 49% YoY, the games business was a standout.
• This drove the More Personal Computing segment to beat revenue expectations by 13% coming in at $12.9bn as gaming demand has remained very strong.
• The reaction to these results is an indication that Microsoft is no longer the value play that it was when Nadella took over as CEO.
• Azure’s deviation from expectations is well within the realm of forecast error but still, the shares got hit in an indication that the valuation of this company is getting very stretched.
• Microsoft, along with Amazon, benefits from the pandemic in multiple ways as it is uniquely exposed to the work from home and stay at home trends.
• This is why Microsoft has been one my favoured ways to play the pandemic but there are others (like Intel and WDC) which are much more fairly valued and are also benefitting from the pandemic.
• I think that the trends to which Microsoft is exposed are going to keep its revenues elevated for a few more quarters while a vaccine is being developed, but the valuation looks vulnerable.
• Hence, I would be looking to spread my risk across more of the pandemic players at the lower end of the valuation spectrum if I was seeking to play the pandemic through equities.
• I am not in this category and continue to prefer gold as a hedge against currency debasement from the central bank money printing that is going on in most major economies.