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Earnings Season round up

Portfolio businesses revenue growth

Whilst it is impossible to analyse every company in the market, the subset of the market that we analyse, which is high quality companies (companies with higher sustainable profits than the average business), are demonstrating good earnings growth.

Notably, Microsoft with 20% year on year revenue growth is driving the pack. This impressive revenue growth continues to be powered by their cloud computing Azure division and LinkedIn.

Adobe, which we added to our portfolio in the first quarter of the year, continues to grow solidly at 16% per annum.

Alphabet surprised the market with continued growth in their advertising revenue to power their 13% year over year growth. YouTube was notably weaker than previous results. The hardware products of Alphabet, which include Pixel, Chromecast and Nest, have so far received little fanfare as advertising revenues continue to dominate the results, however the current offerings are improving and catching up to the beautiful products offered by Apple. It now appears that the race for the home speaker platform is narrowing to a two horse race between Alphabet (Google Home) and Amazon (Alexa). As is now entrenched in mobile, once a platform attracts the apps, there is no third place for a platform attempting to catch up. Microsoft proved this with their attempt 18 months behind the leaders with no success. The duopoly in mobile between Apple and Android (Alphabet) will likely remain in place for decades to come. The ever-growing home security and automation market could lead to a duopoly between Alexa and Google Home.

One of the fastest growing megacap companies in the world, Taiwan Semiconductor (TSMC) announced revenue growth of 49.9% year over year in the previous month. Chip stocks have been hampered by a myriad of worries including supply chain disruptions and rising material costs, but in our opinion, the talk of a slowdown in semiconductors is likely confined to the lower end of the market and TSMC is a class of its own with its more advanced node technologies and manufacturing processes ahead of its rivals. We think that comparing Taiwan Semiconductor to some of its peers is like comparing a Ferrari to a Kia.

The weakest earnings result in the quarter versus our expectations was Meta. Meta had lower than expected revenue growth whilst increasing costs. Also, their competitive advantage is being eroded by Apple privacy changes and TikTok taking market share. With less cash, there are less buybacks which can improve performance coming out of this market bottom. Management are working to improve this situation via reducing headcount and other management costs whilst increasing advertising effectiveness through artificial intelligence (AI) technology which will enable improved ROI for advertisers. They are still the largest social platform in the world with billions of regular users, growing quarterly, and advertisers are still seeing a return on the advertising dollar. On balance we have reduced our valuation but Meta still has strong potential upside and we remain confident in the management team led by Mark Zuckerberg.

Fiducian posted excellent revenue growth of 18% per annum and combined with their 4% dividend yield, it should provide over 20% returns to shareholders. This annual result highlights how their model of serial acquisition can drive growth despite difficult market conditions seen in the last six months. They appear to have slowed their acquisition pace, which may temper near term growth, however we expect significant growth for many more years to come. They will likely build up cash until another significant acquisition comes along.


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