Your portfolios in brief
Microsoft is the stock selected this week by our president and portfolio manager, Philippe Pratte, as its quarterly results were highly anticipated. Microsoft is an important position in our portfolio as the diversity of its revenues across its many products and services makes it a company capable of reacting well to any market cycle. The company’s revenue increased by 11% year-over-year to $50.1 billion as the software maker’s sales rose 16%. Despite these strong results, numbers from its Microsoft Intelligent Cloud business segment, which includes public cloud Azure, disappointed analysts. This sector generated $20.33 billion in quarterly revenue, an increase of 20%, but slightly less than the consensus of $20.36 billion among analysts polled by StreetAccount.
“Despite a more difficult economic environment, we believe that the company is well positioned within its existing customer base as the company’s management aims for revenues and profits which should ensure a good performance for the next quarters” said our president and portfolio manager Philippe Pratte.
CEO Satya Nadella said Microsoft will strive to become more efficient in helping businesses meet their cost-cutting imperatives. “In this environment, we are focused on helping our clients do more with less, while investing in secular growth areas and managing our cost structure in a disciplined manner,” Nadella said.
The Microsoft stock we hold in the Pratte North American equity fund has fallen around 25% so far this year and we believe the recent pullback is becoming an attractive long-term buying opportunity.
Market Brief
It was a busy week for investors as they eagerly awaited quarterly results from major US corporations. All three major indexes managed to stay positive on Monday and Tuesday, posting solid gains. Companies such as Coca-Cola, General Motors and UPS all filed better than expected results.
However, the publication of quarterly results from Microsoft and Alphabet, published on Wednesday, worried investors. Both companies are among the largest capitalization in the stock market and their fall dragged the NASDAQ lower on Wednesday, ending down 2.04%. Alphabet plunged 9.63% while Microsoft fell 7.7%.
Still, Microsoft filed better-than-expected results, but cloud revenue fell short of expectations, as did the company’s quarterly guidance. For its part, Alphabet saw its revenue growth decline to its lowest since 2013 as YouTube advertising revenue fell 2% to $7 billion, figures below expectations. YouTube’s platform has also been affected by the rise in popularity of Tik-Tok among young and old.
The problem for big tech companies right now is lower ad revenue than before the pandemic. For the past few months, companies have reduced their advertising spending while many have made budget cuts due to inflation and rising interest rates. Indeed, Philipp Schindler, Chief Commercial Officer of Google, said the company has seen a drop in search ad spend in certain areas such as insurance, loans, mortgages, and cryptocurrencies.
The same scenario for Meta (Facebook) who posted disappointing results on Wednesday at the end of the session. The digital platform saw its net profit melt to $4.4 billion in the third quarter (-52% year-on-year), while its turnover fell by 4%, to $27.7 billion. Meta also announced a lower forecast for the next quarter, hit by the growing loss of advertising revenue. “We are facing an unstable macroeconomic environment, increased competition, advertising targeting issues and increased costs for our long-term investments, but I must say that our products seem to be doing better than some comments suggested it,” tried to temper Mark Zuckerberg on Wednesday during the analyst conference.
Meta Platforms Inc. shareholders are paying dearly for its spending on the metaverse: Facebook’s market value has shrunk by $676 billion this year, knocking it out of the title of the world’s 20 largest companies, once in sixth position. Its 25% drop on Thursday dragged the NASDAQ in its wake, down 3%. For its part, the Dow finished higher for a fifth session in a row.
Apple filed strong quarterly results on Tuesday, boosting the tech sector battered this week by the earnings release.
“A colourful week once again. A string of big-earning players, a steady gross domestic product (GDP) in the United States, a consistently positive quarterly season as we enter the second half of this season next week. Then, the announcement by the Bank of Canada, which announced a lower increase in its rates, offered a wind of optimism to investors, as this initiative could lead the Fed to slow down its interest rate hikes. The markets have been very volatile once again this week and should maintain this uncertainty over the next few sessions as investors continue to monitor corporate results,” says our president and Portfolio Manager Philippe Pratte.
Here is the average for the week of the three main indexes at 1 p.m. Friday.
And here's the average for the week for the TSX in Canada.
Bank of Canada
The Bank of Canada announced on Wednesday an increase in its key rate by 50 basis points, to 3.75%. A surprise for many as an increase of 75 basis points was expected. Indeed, other central banks may decide to follow the trend as most institutions are trying to determine how vigorously they should continue to tighten monetary policy.
According to the central bank, the Canadian economy is still overheating. “The Canadian economy continues to show considerable excess demand. Companies are facing widespread labour shortages and persistent tensions in labour markets,” she explains.
"Businesses are moderating their investment and hiring intentions. Mortgage rate increases have led to a sharp decline in housing activity. Households are reducing their spending on goods and, as interest rate increases are felt in the economy, they should also moderate their spending on services."
Global markets were especially enthusiastic after comments from Bank Governor Tiff Macklen, who said they were nearing the end of the monetary tightening cycle.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
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