March-April 2022 Newsletter
The market has had the opportunity to check its forecasts in the last week and some of our businesses have been repriced up.
Taiwan Semi Results
Taiwan Semiconductor had outstanding results. Earnings per share grew by an astonishing 45.1%. This was mainly due to revenue growth, however aided by continued profit margin expansion with gross margins now reaching 55.6% and net margins 41.3%.
The shares of Taiwan Semiconductor are yet to reflect these excellent results. At a mid- teens multiple of next year’s earnings and growth likely to remain near the 20% mark for a number of years, the shares are quite undervalued.
It is possible the market is reacting to the fear of China invading Taiwan after Russia invaded the Ukraine. Taiwan Semiconductor is predominantly based in Taiwan. What is interesting is that the fear has yet to translate to the companies that wholly rely on Taiwan Semiconductor for their chip manufacturing including Apple, Nvidia and AMD. We have limited our position size due to this risk, however we consider the risk to Taiwan Semiconductor operations low. Over time Taiwan Semiconductor will diversify their operations further from the Taiwanese base. They have a factory being built in Arizona and there are discussions of a $10 billion government incentive to build a factory in Bangalore India.
The first quarter results reflect a strong and growing business.
Alphabet Results
Alphabet released its first quarter results with a muted reaction from markets. The initial market reaction was to send the shares down aftermarket. It appears the market reacted to the YouTube growth being slower than expected at only 14%. This slower growth was attributed to growing short form content and weaker European advertising. YouTube revenue is around 10% of the total revenue generated from all businesses.
Total Alphabet revenue grew by 23%. To put this in perspective, the 10 year revenue growth of Alphabet was 21.12%. To grow faster than the 10 year revenue growth rate after such high growth rates during covid is extraordinary.
The growth came from Google Search growing at 24% and Google Cloud growing at 44%. The operating cash flows grew from $19 billion to $25 billion.
Over time the market is usually right. In the short term it can be horribly wrong. We think the market’s initial reaction is wrong and will correct over time. The results were more than acceptable.
Microsoft Results
Microsoft had better than expected results. We continue to be impressed with Satya Nadella’s repainting of this masterpiece of a company. The turnaround of Microsoft since Satya took the reins is impressive.
Revenue increased 20% and continued margin expansion led to operating income increasing 24%. To put this in perspective, the 10 year growth rate for Microsoft before we purchased was only 8.63%.
Here is another business that is accelerating as it becomes larger. The laws of large numbers are being defied.
Cloud growth led the results with Azure growing at 46%. LinkedIn has continued to shine with 37% growth.
Markel Results
Markel reported solid results in both their insurance segment and their Markel Ventures segment. Insurance sales grew 17.5%. They had an excellent combined operating ratio of 89%. A combined operating ratio of less than 100% is essentially a loan for the float (insurance monies yet to be paid) to be invested at a negative interest rate.
Markel is taking this negative interest rate loan and investing it into Markel Ventures, stocks and bonds. Markel Ventures, which is a diversified group of unlisted businesses ranging from home builders to large construction crane rentals, is growing at 34.5% per annum. We view Markel Ventures as the core growth engine of Markel and is the main reason we own the business. Over time we expect Markel ventures to make up the majority of the profits.
Safran
Whilst Safran is yet to report its results, we were given a preview into the CFM (CFM56 series of turbofan aircraft engines) segment growth. LEAP sales for GE (50% ownership of CFM in partnership with Safran) grew solidly in the quarter suggesting that Safran results should show continued growth.
Meta
Meta’s earnings were acceptable which meant that the market reacted to the announcement. The stock was up 19% after hours following the result as there were excessively bearish forecasts for the business.
User growth resumed which assured investors that the business is still a solid business with a strong network. The results show that whilst Meta is investing in its long term vision of the metaverse, it has not lost sight of its current businesses and is taking action to address obstacles such as Apple’s ‘opt out’ and the growing short video trend. The monthly active people count increased 50 million in the quarter and over 190 million for the 12 months until the end of March.
Meta is growing and the revenues reflected that by growing at 7%.
With a more muted spend on developing the Metaverse, the cash flow for the company should provide more opportunity to continue buying back stock at the enormously discounted valuation.
Amazon
Amazon had weaker than expected earnings. Like other businesses, Amazon has been impacted by the war in the Ukraine and the pandemic. However, Amazon is getting on top of those impacts as indicated by the staffing levels starting to return to normal and delivery speeds are returning to pre-pandemic levels.
In addition, Amazon’s ad revenue grew 23% year over year, faster than others in the segment.
We are pleased with the continued growth of 37% per annum of Amazon Web Server. The AWS business is where we see the lion's share of profits coming over the next decade with the growth of data likely to be very strong for a number of years.
Final comment
The world has a lot going on at the moment and those events will impact our businesses. However, we have strong growing businesses that earn their revenue from a range of sources and most with wide moats that provide comfort that those revenues are not easily eroded. We see the impact of the recent world events as short term and our businesses will continue to grow during and after these events.
We invest for the long haul and are prepared for the journey. There may be some bumps but they are small in the big scheme of things.