The World Economic Forum’s recent report “The Future of Jobs 2018” estimate machines and algorithms in the workplace will create 133 million new roles, but cause 75 million jobs to be displaced by 2022. This means that the growth of artificial intelligence could create 58 million net new jobs in the next few years.
According to the global employers surveyed for this report, four specific technological advances - ubiquitous high-speed mobile internet; artificial intelligence; widespread adoption of big data analytics; and cloud technology - are set to dominate the 2018–2022 period as drivers positively affecting business growth.
In this article Macrovue’s investment committee looks at six global companies poised to benefit from the growth of this important sector.
NICE Ltd (NASDAQ: NICE)
NICE Ltd reported 1Q 2019 earnings on May 16, 2019. NICE Systems Q1 Non-GAAP EPS of $1.18 beat by $0.07; Revenue of $377.03M (+12.4% Y/Y) beat by $1.85M. The company’s forward guidance was positive. The company sees 2Q adjusted EPS $1.16 to $1.26 versus cons. estimate of $1.18.; 2Q adjusted revenue $373 million to $383 million vs analysts estimate of $377.6 million; FY adjusted EPS $5.11 to $5.31, above consensus estimate of $5.18. Sees FY adjusted revenue $1.56 billion to $1.58 billion vs. cons. estimate of $1.57 billion.
In summary, the company posted solid growth; revenue was up 12% y/y, cloud increased 30%, operating margins expanded 230bp Y/Y to 25.7% and 22% Pro Forma EPS growth of 22% reflects solid operating leverage. Cloud-plus-recurring revenues reached 71% of total revenue, yielding excellent visibility.
Splunk (NASDAQ: SPLK)
Splunk reported 1Q 2019 earnings on May 23, 2019. The company reported better-than-expected earnings and revenue for the fiscal first quarter and raised its full-year revenue guidance. Splunk’s Q1 Non-GAAP EPS of $0.02 beat by $0.16; Revenue of $424.85M (+36.3% Y/Y) was ahead by $28.93M. SPLK’s guidance has revenue at about $485M versus the $479.49M consensus.
SPLK also raised its FY20 outlook to about $2.25B in revenue (was: $2.2B) compared to the $2.22B estimate. Q1 License revenue was $202.9M (estimate: $171.2M) and Services came in at $222M (estimate: $224.4M). Non-GAAP operating margin was -1.8% compared to the -7.6% estimate. Overall a solid report.
Amazon (NASDAQ: AMZN)
Amazon reported solid 1Q 2019 results on April 25, 2019. Total Revenues grew 17% (vs. 22% in Q4 and 23% in Q3 ex-Whole Foods), Gross Profit grew 27% Y/Y, Core North American Retail Sales grew 19% Y/Y (vs. 21% in Q4 and 25% in Q3), and AWS grew 42% FXN (vs. 46% in Q4). Operating Margins were strong in all segments. AWS Operating Margin of 28.9% was up 316bps Y/Y. North America revenue growth continued to decelerate to 16.6% (vs. 18.3% last qtr) while operating margin has improved to 6.4% vs. 5.1% in 4Q18; Int’l Retail revenue grew 16% FXN vs. 19% in 4Q18, while Int’l Retail operating loss narrowed to -0.6% (best in recent quarters); High-end of 2Q rev guidance of $63.5bn is nicely above consensus of $62.4bn.
Amazon also announced plans to evolve its Prime free 2-day shipping program into 1-day shipping, with AMZN ramping its 1-day selection and zip code coverage over the course of the year which should further pressure the competition.
Tencent Holdings Ltd (HKG: 0700)
Tencent reported Q1 Non-GAAP EPS of RMB2.19 and revenue of RMB85.46B (+16% Y/Y). Tencent’s net profits were up just 17% Y/Y to RMB27B as the company is recovering from a brutal year of Chinese regulators cracking down on smartphone games. While revenue was only up 16% Y/Y (the slowest growth rate since the 2004 listing) its new revenue category - Fintech and Business Services was up 44% to RMB21.8B.
Smartphone revenue dropped 2% to RMB21.2B on fewer game releases. Online ad revenue grew 25% to RMB13.4B. WeChat MAUs totalled 1.1B (+7% Y/Y), and mobile QQ had 700.4M users at quarter's end. Although total revenues missed consensus by 3.7% (due to slower-than-expected growth in online ad and digital content), there was sequential improvement in gross margins and operating margins due to proactive cost controls.
With online games cash grossing +10% Y/Y and deferred revs +12.6% Q/Q, together with commercialization of the Peacekeeper Elite game, it is likely that the uncertainty of a soft 1Q19 has been put to rest. Near term, ad revs are likely to remain affected by soft macro but Tencent has a strong games pipeline going into the rest of 2019. New game launches include several mid to hard core games from action, PRG, SLG and tactical tournament genres. In addition, the company will continue the testing of Season Passes for domestic titles, especially CF Mobile, HoK, QQ Speed Mobile. Finally, following the success of PUBG Mobile, Tencent will identify new games that are fit for publishing in international markets.
In particular, Tencent released Peacekeeper Elite on May 8, 2019. The game achieved initial success by ranking as #2 by iOS grossing as of May 15, 2019, according to App Annie. Currently, the company will prioritize user acquisition, retention and user experience rather than monetization. Tencent has had a nice bounce YTD and is up 23.26% (to 01/05).
Baidu Inc (NASDAQ: BIDU)
Baidu’s most recent earnings report on the other hand is still reflecting the pressures that the company has been undergoing for some months now. Baidu’s Q1 Non-GAAP EPS of $0.41 missed by $0.16; however, revenue of $3.59B (+7.8% Y/Y) was in-line. Revenues rose 15% to 24.12B yuan; ex revenues from divested businesses, they rose 21%. Operating costs rose 53%, and the company swung to an operating loss of 4.6M yuan on a GAAP basis. Net income fell 80% to 967,000 yuan from 4.82M yuan. Nevertheless, user metrics remain positive.
Daily active users of the Baidu app rose 28% to 174M. DAUs for Haokan rose 768% from last year and 16% from last quarter, to 22M. The installed base for the company's voice assistant DuerOS rose 279% Y/Y to 275M, with monthly voice queries rising 817% to 2.37B. Baidu guided 2Q19 net revs to be between Rmb25.1-26.6bn (-3% to +2% y/y) or +1-6% y/y excl. revs from disposed business. The disappointing 2Q19 revenue guidance from both Baidu (and iQiyi its streaming business) indicates a broad-based weakness in online ads, including both brand ads and performance ads.
The company did authorize a new $1B share repurchase program, effective until July 1, 2020 which may support the stock. Baidu also announced its launch of a new CRM offering in 2H19 to its marketing customers that will enhance user targeting, customer engagement and sales force management. Baidu's CRM app will consolidate marketing services placement systems including search, feed and Baidu Union for easier campaign targeting and management, leveraging Baidu's user insight, sales for management experience as well as tech and AI capabilities. Given Baidu’s depressed valuation (8X core 2019 EBIT), potential in further integrating AI into its systems and businesses, and the possibility of meaningful ongoing cost discipline, we believe the outlook for Baidu is positive.
NVIDIA (NASDAQ: NVDA)
Over the past 12 months, NVIDIA has had a few mixed quarters in which earnings were pressured by a fall off in the crypto business and some softness in gaming and datacentre markets hence the negative 1-year return. However, in its most recent earnings report some improvement in those segments can be clearly seen. NVDA had solid F1Q20 (Apr-Q) results with EPS ahead of guidance and a strong gaming recovery.
NVIDIA reported F1Q20 revenues of $2.22B, up 1% Q/Q (down 31% Y/Y) in-line with consensus. Gaming revenues of $1.1B (up 11% Q/Q, down 39% Y/Y) were well-above consensus ($934M), while datacenter revenues of $634M (down 7% Q/Q and down 10% Y/Y) were below consensus of $664M. The GPU business increased 2% Q/Q (down 27% Y/Y) on strength in gaming, pro visualization and autos partially offset by continued datacenter digestion. Non-GAAP Gross Margin increased by 300 bps to 59.0%, in-line with consensus. Non-GAAP EPS of $0.88 was well above consensus of $0.81/$0.82 aided by higher revenues, lower opex and share count.
Given that cloud/hyperscale IT capex is expected to grow 13-15% this year, this implies a strong 2H inflection for the company and NVIDIA’s datacenter revenue growth is supported by growth in AI training, inferencing, data analytics, and enterprise rendering. While NVIDIA is no longer providing full-year guidance, most analysts expect a significantly stronger second half 2019 vs. first half, led by secular drivers in Gaming, Datacenter and Auto.
You can invest in these companies directly through Macrovue's Artificial Intelligence share portfolio.
This portfolio has returned 20.87% over the last 12 months (to 1 May 2019).
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Past performance is not a reliable indicator of future performance.