GP Bullhound's weekly review of the latest news in public markets.

This week's GP Bullhound Tech Thoughts Newsletter, brought to you by Inge Heydorn and Nejla-Selma Salkovic, highlights Applied Materials' bright future, Cisco's inventory correction extending one more quarter, and Google's enhancement of search with AI.

Market: The market is in a wait-and-see mode ahead of the US CPI numbers. The inline numbers clearly reduced anxiety in the market, weakening the USD and pushing NASDAQ upwards. The next focus is Nvidia's results next week, and the market is highly dependent on these results being positive.

Portfolio: We have not made any major changes in the portfolios this week, although we have traded somewhat within our holdings.

Weekly Conclusion: There is hardly a single earnings call now without companies discussing their AI positioning across all industries.

Quote of the Week: Gary Dickerson, CEO of Applied Materials: “In terms of impact and scale, I believe AI will be the biggest technology inflection of our lifetimes.”

Results:

Alibaba (not owned): Alibaba reported a 7% Y/Y sales growth driven by improved fundamentals across their major business areas. Adjusted EBITDA decreased by 5% Y/Y. Alibaba stated in their report that AI-related revenue accelerated strongly during the quarter, recording triple-digit growth Y/Y. The company has seen a rapid increase in customer AI demand since the beginning of the year, which has also driven demand for traditional cloud computing. Consequently, Alibaba has increased its investment in cloud computing infrastructure, especially in AI solutions.

Cisco (not owned): Cisco Systems announced its Q3 2024 earnings. Initially, the stock rose 5% after-hours but fell 2% the following morning. Revenue fell 13% Y/Y to $12.7 billion, slightly exceeding expectations by $70 million. Excluding Splunk, the decline was 16%. Despite this, Cisco maintained a strong gross margin of 68.3%.

We believe the product side of the business continues to face challenges. A better supply environment last year helped Cisco fulfill orders, but these are now largely being digested. Based on cloud activations, we observe that the products customers have on hand are being steadily deployed. This aligns with our expectations from the last quarter, and we anticipate customers will complete most of their inventory installations by the end of our fiscal year in July.

The strategic shift towards software is supported by Cisco's timely acquisition of Splunk, which is ahead of schedule. Although Cisco's business still heavily relies on product turnover and orders, it is immediately impacted by changes in customer ordering patterns. This sensitivity, combined with a weaker macroeconomic environment and a normalization in networking spending, has significantly impacted Cisco more than initially expected.

Applied Materials (owned): Applied Materials reported a slight Y/Y increase in sales totaling USD 6.65bn with an EPS growth of 4.5% to USD 2.09. The gross margin grew by 70 basis points to 47.5%. The topline was a small beat while the beat on the bottom line was larger. Strength in the quarter was driven by DRAM in China, advanced packaging, and mature edge also driven by China. The services business continued to impress with growth driven by long-term contracts and better utilization at foundries.

The guidance for the coming 3Q is sales totaling USD 6.65bn ± 400m with an EPS midpoint of USD 2.01, both slightly above expectations. DRAM demand in China is expected to slow down, while leading-edge is expected to pick up again after several weak quarters. Looking forward into 2025, leading-edge is expected to further grow driven by gate-all-around technology, doubling from USD 2.5bn this year to around USD 5bn next year for Applied Materials as it ramps towards high-volume production. DRAM is also expected to help growth next year driven by AI memory HBM demand.

Our view: Applied Materials is well-positioned for a number of strong years ahead, driven by technology trends around leading-edge and AI. We believe the top line will be strong, with some uncertainty in our models regarding the leverage they will enjoy given the increased demand.

Walmart (not owned): Walmart's advertising business grew 24% Y/Y in Q1. Both Amazon and Walmart are rapidly growing their advertising businesses.

Our view: Amazon and Walmart are clearly gaining ground in the internet advertising market.

Foxconn Technology (not owned): Foxconn's 1Q sales were previously released, and earnings came in slightly below expectations. AI server sales tripled Y/Y and grew double-digit from Q4. AI servers now account for 40% of their total server revenue, which is 28% of total company sales (up from 22% last year). The company expects AI server sales to grow Q/Q every quarter in 2024, with further growth in 2025.

Our view: The company has a strong relationship with Nvidia and benefits from that demand. Growth in 2024 will depend on Nvidia Blackwell's timetable.

AI:

Alphabet (owned) hosted its Google I/O developers event, showcasing many new AI releases. The company highlighted new search functionalities using Gemini (overviews, planning tools, multi-step reasoning, visual search). Alphabet added new software tools on Workspace and introduced a new AI chip called Trillium, which should be nearly five times faster than its earlier version.

Our view: Adding AI to search is clearly a winning move for Google, as the effectiveness of AI tools depends on the underlying data. In search, no one matches Google's data volume or quality. The chip data sounds promising, but limited information was provided.

For enquiries, please contact: Inge Heydorn, Partner, at inge.heydorn@gpbullhound.com and Nejla-Selma Salkovic, Associate, at nejla-selma.salkovic@gpbullhound.com

About GP Bullhound: GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to the world’s best entrepreneurs and founders. Founded in 1999 in London and Menlo Park, the firm today has 12 offices spanning Europe, the US and Asia. For more information, visit www.gpbullhound.com