Avoid *THESE* Stocks in 2023.

we're getting a sort of a reversal on a

lot of the um excitement yesterday in

Cloud uh yesterday when I covered

Microsoft's earnings one of the big

things I uh talked about was this idea

that

I'm nervous about Cloud I was I was

initially optimistic by the Microsoft

results prior to them providing their

forecasts right their forecasters were

tanked uh the market but I was initially

concerned about Microsoft uh well the

software sector thinking that I would

prefer to be in the chip sector mostly

because you have higher free cash flows

and in my opinion you have higher

pricing power longer term uh just given

the the uh the capex requirements in uh

in essentially manufacturing and Chip

design then uh than in compared to

software I believe software is

substantially more competitive and I

think this is very simply exemplified by

Taiwan semiconductors which has a 92

percent uh a grasp on the advanced

microchip Market that is massive this is

a massive grasp that they have now of

course uh the software sector is is also

getting a lot of negative attention not

just now because of the negativity

coming out of the earnings call from

Microsoft which apparently was also

suffering technical difficulties which

doesn't help but also there there are

substantial downgrades that we're seeing

from Wall Street for example prior this

is prior and then I want to cover what

happened with Microsoft prior to the

Microsoft report application we we had

uh Wall Street reports suggesting that

application software companies likely

face Revenue downgrades ahead of Q4

earnings calls several percentage points

of growth expectations may be shaved off

going into 2023 analysts think that

average revenue growth rates could come

in below 15 while the current consensus

for software is 17 to 18 now I want you

to keep that in mind that the consensus

is 17 to 18 software growth because

we're about to go through the Microsoft

earnings report and uh well we're going

to go through the earnings call and

while Azure Microsoft Azure actually

beating expectations uh for the last

quarter their forecast was not not so

great in fact spoiler alert their

forecasts were for Azure was flat for

the next quarter and forecasts from Wall

Street were that future Cloud growth

would be somewhere between 17 to 18 in

aggregate

you've got uh consensus estimates here

uh that I'll go ahead and show up on

screen now these are consensus estimates

here and you can see Revenue growth

consensus estimates calendar period here

bill.com expecting to have grown double

in 2022 but only growing by about 36 to

30 percent in 23 24. now that's not like

actually terrible that's actually still

pretty dang good into it expected to

only grow about eight percent in 2023

followed by 13 uh we've got ADP over

here seven and seven paycom 2322 GoDaddy

six nine Shopify coming down to 2022

Squarespace 11 and 14 Wix 9 14

average consensus here 17 to 18 percent

uh just based on on sort of this uh this

group here we do notice obviously that

uh Microsoft is is not in this uh

this list here but uh uh you know coming

in with essentially flat expectations

for growth on Azure not great and that

comes despite uh expectations that the

server industry will actually do well

downgrades uh coming due to obviously uh

slower commercial seat adoptions uh or

expectations for that slower consumer

growth limited pricing leverage that's

actually interesting because you're

going to see that in the Microsoft

earnings call in just a moment you're

going to see limited pricing leverage

which I like to call PP so you're going

to see limited PP why are you going to

see limited PP well because you're going

to see Microsoft Executives talk about

optimizing growth uh and that's not them

optimizing growth it's their customers

optimizing and they think we're actually

going to go through about a one-year

period of optimization now they believe

that once you optimize and after you

optimize then you will be able to get

back to doing more work however they

think we're going to go through a a

one-year period of optimization

lengthier sales cycles and slower

approval time frames are potentially

likely to stall user expansion and limit

pricing a power suggests a Bloomberg the

net percentage of business owners

expecting the economy to improve is

close to all-time lows at negative 51

percent and this is likely to weigh on

discretionary tax spending keep in mind

yesterday we were looking at Mike

Wilson's Morgan Stanley report

uh or Mike Wilson's uh flood report I

should say from Morgan Stanley uh and uh

we we talked about uh exactly business

confidence and how potentially low that

business confidence is right now and how

I actually think when business

confidence is low it's one of the best

times to potentially cannibalize your

competition work harder and do your best

to keep growing and not Contracting very

important uh okay so let's go jump into

that Microsoft earnings call so

Microsoft earnings call right here

so let's take a look I'm just going to

read the in my opinion the most Salient

pieces that doesn't mean I hate

everything here just doing my best here

uh so we've got the CEO here suggesting

as I meet with customers and partners a

few things are increasingly clear just

as we saw customers accelerate their

digital spend during the pandemic we are

now seeing them optimize that spend

that's a red flag right optimizing spend

is basically a euphemism for uh people

ain't spending as much money with

Microsoft step Pro

we saw new highs for game pass on gaming

with game streaming hours and monthly

active devices at records surpassing 200

or 120 million devices during the

quarter that's fantastic

and thanks to lower energy costs they uh

they were actually able to uh increase

their uh margins on Microsoft cloud

better than expected by two percentage

points a year over year however

excluding the impact of an accounting

estimate for useful lives whoopsies

Microsoft Cloud

hold on one second here Microsoft cloud

gross margin percentage decrease roughly

one percentage Point driven primarily by

a sales mix to Azure so apparently a

little bit of a lower pricing structure

there if you introduce a lower mix you

end up with a lower

a lower margin uh keep that in mind I

think a lot of folks get confused by

that I'll just explain that really

quickly so let's say that you run a

dollar store and I love this Dollar

Store example I think it's the easiest

to understand you're the owner of a

dollar store when you sell the little

water guns squirt guns for a buck it

only costs you 10 cents per squirt gun

to buy so you're looking at 90 cents of

gross profits a dollar Revenue cost of

goods sold 10 cents 90 cents a gross

profit right that's on little squirt

guns at the dollar store let's say but

now let's say it's a recession and

people are coming in going sorry Charlie

yeah bite your finger we're not buying

you a squirt gun this time instead said

we have to spend the dollar that we have

on toothpaste and the toothpaste margins

are a lot worse because when you go

shopping for toothpaste you actually

have to spend 80 cents to acquire that

toothpaste well now your growth profit

gross profit is a buck minus 80 cents or

20 cents substantially less and so

that's an example where somebody could

still spend a dollar on your goods and

services on your gas so to speak uh

that's an accounting phrase uh but your

your margin went to crap instead of

having 80 cents a gross profit you only

have 20 cents a gross profit terrible to

your margins got destroyed because

people shifted to a product that has

lower margins for you unfortunately it

sounds like compared to Microsoft cloud

Azure uh provides a lower margin

it's quite interesting okay uh however

they are excited about Azure with

constant currency growth in the mid 30

percent that's Looking Backward just

wait for the forecast all right ready

for that here we go

so Microsoft tells us in our Commercial

Business we expect business trends that

we saw at the end of December to

continue into January February and March

while customers are more cautious in

their spend we also have the opportunity

to improve our execution given our

strong position in global growth markets

in commercial bookings with a declining

expiration base or expiring base and a

strong prior year of comparable

sales essentially for Azure contracts we

expect growth to be womp womp womp

relatively flat year over year we expect

consistent execution across our core

annuity sales motions blah blah blah

basically hey we think the company is

still going to do great and we're super

excited about our company but

unfortunately the Slowdown we saw in

December is going to continue in January

and uh and then everybody else is at

fault we're still performing and firing

on all cylinders but everybody's just

spending less money and unfortunately

that means instead of being excited

about 30 growth for Microsoft Azure

we're actually going to be flat and

given that Bloomberg is pricing in 18 to

20 percent uh or Wall Street potentially

is pricing in 18 to 20ish percent maybe

it was 17 to 18 anyway growth for cloud

and we're going to be growing at a grand

total of zero maybe we'll even be

negative things just ain't that great

right now okay that's like my like super

basic explanation of what Microsoft said

and so if you're wondering why uh in the

pre-market you are seeing software

companies sell down c3ai down about 2.75

you've actually got trade desk down 2.5

percent crowd strike down 2.5 Microsoft

down 2.4 uh I mean almost the entire

software as a Services business has has

rotated down on these Microsoft earnings

this is why although most of the market

is red here in pre-market including the

solar companies uh such as uh and phase

uh sun power and Sunrun all down about

four to four and a half percent solar

Edge only down about three percent I do

expect that to continue so if you are

exposed to solar stocks I do expect that

sort of pain to continue however I

expect there to be some opportunities to

really increase your share of ownership

in solar companies once we get to more

pain in the real estate sector

in Azure our per user business should

continue to benefit from the Microsoft

365 sweet momentum though we expect

continued moderation in the growth rate

given the size of our installed base in

other words thank you law of large

numbers law of large numbers means once

you have so many people on your platform

it's really hard to continue growing and

ultimately you just hope to keep things

stable oh no but what do we have here as

I noted earlier we exited the last

quarter of 2022 with Azure growth in the

mid 30s

we expect Q3 growth to potentially

decelerate four to five points in

constant currency

so that is uh you know to be reiterated

by over here about this potential uh

growth that is flat year over year so in

other words uh

uh this is actually a little bit

confusing and constantly I don't know

expect Q3 growth to say this I wonder if

this is this could be overall uh I

wonder if this right here must be

overall growth or sweet growth since

they did say Azure they expect to be

somewhere flat but either way I mean you

could see the information here and try

to make your own deduction

um in our on-premise server business we

expect Revenue to decline in the low

signal digits uh that is a revenue

decline I said that correctly Revenue

decline low single digits that's a

decline of again maybe three four

percent as demand for our hybrid

Solutions will be more than offset by

the unfavorable Foreign Exchange impact

search and advertising excluding total

acquisition costs should be in the high

single digits roughly seven points

faster now this is actually good right

we like to hear that advertising spend

is up and you are seeing companies like

Carnival Cruise Lines for example boost

their spending substantially just to try

to fill up ships that's what they're

really trying to fill up right now is

they're trying to make sure that if they

are sailing which they are they are

sailing with the highest amount of

potential paying customers

Tech has a percentage of GDP is likely

to be higher going forward however this

is uh this is a this is a subtle way of

saying hey look you know even if we go

into a recession uh we think people are

going to spend less money on other

things relative to Tech in other words

if the rest of the world Falls I'm just

going to make an extreme example here 10

and spend Tech might only fall five

percent and spend just as an example

right that's roughly what they're making

an argument there of

and one of the things we're looking back

to or some savings uh for workloads and

that's okay this is the optimization

cycle that I was talking about where at

first you optimize you take about a year

to optimize and then you can start

thinking about new projects this is

really the CEO of trying to this is

really the CEO trying to paint this

Vision that hey look man in life we

optimize and and sometimes you go

through about a year of optimizing and

then you're back at making money again

so don't worry the future is bright for

Microsoft I don't think it's going to

take two years I think it'll take one

year of pain so in other words a little

bit of um you know trying to

exemplify what's going on uh Microsoft

is doing so uh however still painting

the picture of pain so if you're

wondering why we're having some software

issues this could potentially be why now

I I want you to also think logically for

a moment about software okay so let's

let's understand this for a moment

let me give you an example let's say you

have a team of interns and you want

everyone to make uh I don't know to add

to edit tick tocks okay and what you're

going to do is you're going to buy

everyone uh an Adobe Cloud subscription

so that they that way they could use

Premiere right you want everyone on

Premiere editing your your tick tocks

right let's just say as an example and

then let's say you go into a recession

and you're a normal company with I don't

know a thousand interns right

well in boom time you're like everybody

gets an Adobe Cloud subscription let's

go a thousand Cloud seeds well in a

recession most businesses say okay well

we're actually not going to hire uh new

people we're actually going to lay off

and we're going to be stuck with uh

let's just say 900 people instead of a

thousand well immediately what you've

done for Adobe is you've actually not

provided Cloud growth you actually just

provided Cloud contraction because by by

laying off people in a recessionary time

what happens well you just cut 10 of

your Workforce well you just took away

10 seats from Adobe but not only that

you might also say hey do we really need

900 seats or how about like

300 of y'all just borrow the other

dude's login or computer when you need

it since 300 of y'all are focused on I

don't know playing basketball more

instead or basically doing something

else at the company let's just in

addition to laying off people let's also

optimize how many people we're paying

for cloud seats for so now all of a

sudden we're going to take that down to

600. so all of a sudden you have a 40

drop in in seats that are being offered

to Cloud uh subscription services and so

what do you have well you have a

disaster all right so so this this is a

situation where

it's basically if you're growing at zero

so basically if if you're a cloud

provider and you could keep like Revenue

stable during a recession you're

actually doing good so as much as

Microsoft is sort of this this negative

Canary in the coal mine for software

services companies zero percent growth

in a recessionary environment is

actually good when it comes to Cloud

especially in an environment where we're

seeing as many Tech layoffs as we are

seeing so that's something pretty

important to pay attention to uh my take

now uh how could this affect the chips

Market it's actually a great question

Shane Huff here in our chat asked that

question how will Microsoft affect chips

like Taiwan semiconductors and AMD yeah

so first it's worth noting them open AI

uses uh Microsoft uh cloud services and

most of the cloud services provided by

Microsoft use hard Hardware like

Nvidia chips mostly in video chips but

also AMD chips and obviously a reduction

in the expansion in cloud makes us

Wonder like hey isn't it possible if if

Cloud spend is going to go down that

chip spent could go down absolutely and

I think a lot of that we have already

seen we've already seen a lot of that

pain uh now there were some pieces which

I thought was actually very interesting

there were some pieces that I was

reading about yesterday let me see if I

can find it here there were some pieces

about how we could potentially actually

see an acceleration uh in uh Microsoft

or sorry in chip spent as the demand

for

a higher quality servers accelerates the

refresh cycle for chip spend so keep

that in mind as as these Cloud companies

want to get back to growth they have to

figure out okay well how do we

potentially

uh differentiate ourselves from our

competitors well unfortunately the way

you differentiate yourself from your

competitors is you try to prove that

your product is a better product or a

faster product or a more capable product

and unfortunately you do that by

refreshing the chipsets that you have in

your server industry or your server

division so uh well obviously we expect

the chip sector to slow down there is at

least some enthusiasm that as Cloud

slows down

companies that suffer from those Cloud

slowdowns are going to be very

incentivized to try to get back to

growth as quickly as possible

potentially double down on their

investments into chips to make that a

potential reality

that's just an idea uh you know I think

ultimately everything slows down when we

go into a recession Hardware uh

certainly being one of those sectors

that that is expected to slow down uh

and a lot of that fortunately seems to

have been priced in already obviously no

guarantees on that but

um that's uh that's quite interesting in

fact I have a piece here let me see I'll

read this out because I think the

question is very good this isn't exactly

the one that I was looking for but this

one could be interesting talks about

Taiwan semiconductors and Samsung sales

Taiwan semiconductors and Samsung and

other foundries could expect revenue of

their Advanced packing business key to

producing chiplet based semiconductors

to double by 2025 and become a major

growth structure chiplets structures are

likely to become increasingly popular in

laptops following the introduction of

amd's

first

shiplet-based laptop semiconductor

that's quite interesting I think this

has to do with the

five nanometer chipsets I'm actually not

super familiar with chip chiplets and I

can't find that piece right now but I'm

gonna try to Google it really quick uh

server chips uh shorter shorter refresh

cycle that's what you kind of want to

look for is that potential

server refresh cycle

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I will do one more hike uh look here but

uh I'm generally a big fan of being the

pickaxe seller versus uh investing in

the gold

now uh that can come with risks

obviously as well because it does still

rely on the gold performing very well