The second-quarter earnings season is picking up steam this week, with more than 9% of the S&P 500 companies releasing their quarterly results so far. This includes two heavyweights – Microsoft Corp. (MSFT) and Tesla (TSLA) – both of which released their results yesterday after the market close. With that in mind, let’s get straight to the numbers.
For its fourth quarter in fiscal year 2020, Microsoft achieved double-digit revenue growth and single-digit earnings growth. The company noted that it saw an increase in cloud demand and usage, as more folks have been working remotely throughout the pandemic.
In fact, its commercial cloud broke $50 billion in annual revenue. Its Intelligent Cloud business soared 17% year-over-year to $13.4 billion. This was also above estimates for $13.1 billion. Its Azure cloud business increased 47%. Microsoft’s gaming business also saw a nice boost, with its Xbox content and services rising 65%.
Microsoft’s Teams app, which creates a platform for employees to chat and host video calls, also gave the company’s operating expenses a big push – up 10% to $407 million. This growth has clearly made Slack (WORK), which views MSFT as its biggest competitor, a little nervous. Slack management filed an antitrust complaint with the European Union (EU), as they believe Microsoft is violating competition laws by bundling Teams into its Microsoft Office platform. Time will tell where this lawsuit goes, but I’m not concerned right now.
Overall, fourth-quarter revenue rose 13% year-over-year to $38.03 billion, which topped analysts’ estimates for $36.5 billion. Fourth-quarter earnings increased 6.6% year-over-year to $1.46 per share, up from $1.37 per share in the same quarter a year ago. Analysts were expecting earnings of $1.37 per share, so Microsoft posted a 6.6% earnings surprise.
For fiscal year 2020, Microsoft reported earnings of $5.76 per share and revenue of $143.02 billion. That compares to earnings of $4.75 per share and revenue of $125.84 billion in fiscal year 2019. The analyst community was expecting full-year earnings of $5.68 per share on $141.5 billion in revenue.
Clearly, Microsoft has proven itself perfectly capable to roll with the coronavirus pandemic’s punches.
Tesla’s Strong Second Quarter
As for Tesla? The company reported an exceptionally strong second quarter. Adjusted earnings per share of $2.18 per share smashed analysts’ expectations for a loss of $0.16. So, the company posted a stunning 1,460% earnings surprise. Revenue was also solid, coming in at $6.04 billion, versus estimates for $5.37 billion.
The positive earnings marks Tesla’s fourth-consecutive profitable quarter, making it eligible for the S&P 500. This would be a huge boon for the stock, as it would receive more exposure to investors and be added to ETFs (exchange-traded funds) that track the S&P 500 index. Given the company’s nearly $300 billion market cap, it would be more heavily weighted in these indexes. As institutional investors adjust their weightings, they would have to add more Tesla shares to their portfolios.
Interestingly, despite climbing more than 6% in after-hours trading yesterday, the company’s blowout quarter didn’t move the stock’s needle since then. In fact, TSLA shares were down 5% today!
The truth of the matter is that when you dig deeper into the numbers the story isn’t as pretty. For one, auto sales fell 4% year-over-year to $5.18 billion compared to sales of $5.38 billion in the second quarter of 2019. And this decline comes despite the rollout of its Model Y and opening of a new Shanghai plant.
In addition, revenue from regulatory credits was a record $428 million and Tesla had $418 million in positive cash flow. Keep in mind, Tesla’s net income was $104 million (GAAP). Without the $428 million, net income would’ve been down $324 million. This means that the company is not making money on the cars, it’s making money on the credits. GLK Research analyst Gordon Johnson went so far as to say:
“In its efforts to eke out a fourth consecutive quarter of profit in 2Q20, we believe TSLA resorted to somewhat-deceptive accounting practices, primarily aimed at S&P 500 inclusion. And, brazenly, based on commentary provided by TSLA on last night’s call, we believe the company has plans on reversing these tactics as soon as 3Q20.”
Not all analysts agree, though. In fact, according to Factset, 14 out of 32 analysts raised their price targets. We’ll know next quarter if Tesla is still firing on all cylinders.
Regardless, there’s a lot of competition from Volkswagen coming Tesla’s way. Specifically, the company is losing market share in Europe, which is the biggest electric vehicle (EV) market. Personally, I’m staying away from Tesla. As I’ve discussed in previous Market360 articles, I believe Tesla is a bubble stock that needs to be pricked. Instead, I remain focused on fundamentally superior stocks – the companies with strong forecasted earnings and sales with positive earnings guidance. It’s why I’d pick Microsoft over Tesla any day of the week.
The reality is that in the upcoming weeks, it will be every stock for itself. The market is going to get very thin, very fast, which is why it’s critical to stay invested in the crème de la crème. These are the companies that will emerge as the leaders and benefit from a more narrow market.
Earnings season will really heat up for my Growth Investor stocks next week, with about 20 companies expected to report their most-recent earnings. So far, seven of my Growth Investor companies (including Microsoft) have released results, and all seven have posted earnings beats.
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