Alphabet and Microsoft's solid cloud results are good news for 3 of our chip stocks

Published Wed, Jul 27 20223:05 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

During quarterly earnings season, we scour the entire stock market for results from companies that can inform our broader investment outlook. We call them readthroughs, and they don't only come from holdings in Jim Cramer's Charitable Trust, the stock portfolio we use for the Club. But they can help us just the same. Take American Express (AXP) and Visa (V), for example. In recent days, both companies released numbers in recent days that suggest the travel boom is alive and well . That was helpful to know as we try to make sense of economic slowdown concerns. Club holding Walmart (WMT), on the other hand, slashed its profit outlook as inflation pressures the budgets of some lower income consumers. Taken all together, it seems reasonable to conclude that more affluent people who can afford to travel are not as worried about higher prices as the folks pulling back and only spending on necessities. When tech giants Alphabet (GOOGL) and Microsoft (MSFT), both Club holdings, reported better-than-feared quarters after the closing bell Tuesday, we also found information in those reports that bode well for other stocks in our portfolio. In particular, their results and commentary on cloud growth are positive for three of our semiconductor stocks: Advanced Micro Devices (AMD), Marvell Technology (MRVL) and Nvidia (NVDA). Bottom line It's no secret 2022 has not been kind to semiconductor stocks, but a key part of our long-term thesis in companies like AMD, Marvell and Nvidia is the large opportunity in data center as more computing moves to cloud. It's a multiyear story that's remained intact, even as concerns about a cyclical downturn in the semiconductor industry weighed heavily on these companies' share prices. This explains why we've been willing to stay invested, while trimming our positions strategically in the spring when the Federal Reserve began to signal more aggressive monetary tightening was ahead. What we heard late Tuesday from Alphabet and Microsoft confirms the secular trendline is still pointing up in the face of recession fears and an associated pullback in enterprise spending. That's good news for AMD, Marvell and Nvidia, which we believe still have bright long-term futures because their chips enable this technological transformation. Cloud growth at Microsoft and Alphabet is, ultimately, favorable to our chipmakers who make processors that are used in data center servers. As more enterprises turn to Microsoft and Alphabet — and, of course, Amazon Web Services — to shift their computing workloads to the cloud, that means more server capacity has to be added. Marvell, AMD and Nvidia all make chips that fulfill various critical functions inside the data centers. The more data center capacity needed, the more of these companies' chips that must be ordered. Club holding Amazon (AMZN) reports earnings after the bell Thursday — and as usual, we'll be looking at those AWS cloud numbers carefully. Alphabet's Google Cloud is generally third in the cloud computing market, with AWS occupying the largest chunk followed by Microsoft's Azure. Microsoft When considering where sentiment on the Street appears to have been, Microsoft had positive things to say about its important hybrid cloud segment. Revenue for Azure and other cloud services grew 46% year over in constant currency in its fiscal fourth quarter 2022, compared with analyst estimates of 46.8%, according to StreetAccount. Yes, it was a slight miss in its just-completed quarter — and foreign-exchange adjusted results were a bit further below Wall Street's expectations — but it's still a healthy growth rate considering the operating environment. Guidance for Azure and other cloud services in its fiscal first-quarter 2023, or current quarter, looks pretty good, too, coming in at roughly 43% year-over-year growth in constant currency. Commentary from CEO Satya Nadella also pleased investors. "Organizations in every industry continue to choose our cloud to align their IT investments with demand. We are seeing larger and longer-term commitments and won a record number of $100 million plus and $1 billion plus deals this quarter," Nadella said on the conference call. "We have more data center regions than any other provider and we will launch 10 regions over the next year." That outlook is both good for us as Microsoft shareholders and as shareholders of AMD, Marvell and Nvidia. It speaks to the resiliency of the cloud transformation, even as the economy is slowing overall and sales of consumer electronics like personal computers and smartphones— which also need chips — come back to earth following turbocharged growth during the first two years of the pandemic. Alphabet We're particularly encouraged by Alphabet's indications Tuesday evening that the tech giant continues to see momentum in Google Cloud, despite macro uncertainty, and is investing accordingly in the business even if it means profitability arrives further down the road. In the second quarter, Google Cloud revenue rose 35.6% year over year to $6.28 billion, a solid number although it slightly missed Wall Street estimates of $6.4 billion, according to StreetAccount. "Our view continues to be that this is an extraordinary opportunity. It's a long-term opportunity, and enterprise customers are still early in their move to the cloud," Alphabet CFO Ruth Porat said on the conference call. She acknowledged the push-and-pull between investing to aid growth and profitability, but defended the company's current approach. Google Cloud's wider-than-expected operating loss in the second quarter was $858 million; a year earlier, the division lost $591 million. "What we're focused on is ensuring that we're investing to support the long-term growth and given the upside that we see," Porat said. (Jim Cramer's Charitable Trust is long GOOGL, MSFT, AMD, NVDA, MRVL and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Thomas Kurian, chief executive officer of cloud services at Google LLC, speaks during the Google Cloud Next event in San Francisco on April 9, 2019.

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