Rudi's View | Oct 31 2024
By Rudi Filapek-Vandyck, Editor
Momentum has stalled for equities in October. One obvious conclusion to draw is quarterly corporate results are no longer eliciting additional enthusiasm from investors to buy more shares, which seems true, but isn't there also an all-important election looming next week?
From what we can gather at FNArena, admittedly from a limited sample in research that catches our attention, it still seems like there remains plenty of positive momentum on display inside the US corporate results season.
One eye-catching positive read-through for companies on the local bourse remains the ongoing robust demand for cloud services, in addition to firm capex intentions at Big Tech companies in the USA.
As also pointed out by Citi analysts on Thursday morning, megatech giant Google reported an acceleration in cloud revenues to 35% growth in the September quarter versus 29% growth in the three months prior. By comparison, Microsoft's Azure business grew revenues by 34% over the quarter.
Here comes the psychology of today's investor: strictly taken Google's performance was better, but also: Azure's revenues had grown by 35% in the previous quarter. You can all see where this is going, right?
In Microsoft's defence, capacity constraints are keeping a lid on growth with management anticipating the division's pace of growth will be higher in 2025. In more encouraging news, 70% of Fortune 500 companies are now using Microsoft 360 Copilot and customers are adopting the latest AI tool at a faster rate than any new Microsoft 365 suite in the past.
As Evans and Partners released their inaugural deep dive on Gen.Ai this week, the conclusion is this is not a bubble. Investors better make sure they start looking in the right direction and get their head around what this fresh new megatrend entails.
Google management is directing investors towards ongoing sizeable investments to be made in 2025, albeit the rate of growth in capex is expected to slow. Google's capex grew by 60% in FY24 and is forecast to grow by 15% in FY25, so that slowing in pace should not come as a big surprise.
Meta's capex spending fell short of projections in the September quarter, but here too management continues to forecast significantly more capex in 2025.
As per Citi's commentary, capex by Amazon, Google, Meta and Microsoft is expected to grow to US$240bn in FY26 (current market consensus), with strong increases for each of FY24 and FY25 in the meantime.
The direct read-through for investors in Australia is that companies including Goodman Group ((GMG)), NextDC ((NXT)), Macquarie Technology ((MAQ)), and others should continue to reap the benefits from what still appears to be a megatrend in relative infancy.
Citi also refers to Megaport ((MP1)) as one company that should benefit from all of the above, albeit with a soft warning. As more and more data centres are being build, the global cloud density increases and this, ultimately, could make the services provided by a company such as Megaport less attractive.
But that's nothing that should show up in the immediate term.
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