GP Bullhound's weekly review of the latest news in public markets.

This week's GTF Weekly Letter, brought to you by Inge Heydorn and Ofelia Aspemyr, highlights the significant market volatility driven by major sector movements. Additionally, we explore our strategic acquisition of AMD shares amid Nvidia's supply constraints, and provide insights into the financial performances and future outlooks for Salesforce, Marvell, Veeva Systems, and Dell.

Market: The volatility around results has been very high this week, driving strong sector and subsector movements. The guidance downgrade by Workday at the end of last week initiated a rotation out of software in tech, which was further amplified by Salesforce this week.

Portfolio: We have been buying some AMD this week as we believe the company is benefiting from Nvidia being sold out. AMD is currently the only real alternative to Nvidia. The shares were also under some pressure due to rumors about order cuts, which we believe are untrue.

Weekly Conclusion: The volatility around results has been very high this week. We see it as a sign that the market is worried about the record levels it is trading at currently.

Results

Salesforce (owned) reported sales of USD 9.13 billion, up 10.7% year-over-year (Y/Y), with subscription revenue up 12% Y/Y, slightly below expectations. EPS beat expectations driven once again by margin expansion. The operating margin reached 32.1%. Contracted Remaining Performance Obligations (CRPO) totaled USD 26.4 billion, up 10% Y/Y. Cash flow grew 39% Y/Y, though this included some one-time tax effects.

The company is guiding 2Q sales to reach USD 9.2-9.25 billion, slightly below the consensus of USD 9.34 billion, while FY25 revenue guidance was kept at USD 37.7-38 billion, up 8-9% Y/Y. Subscription and support revenue guidance was slightly lowered to just below 10% from the earlier 10%. The GAAP margin was lowered somewhat, while the non-GAAP margin target of 32.5% and the cash flow target were maintained.

The company states that scrutiny around deals increased again after easing up a little in 4Q and that they are reorganizing the sales force for better alignment going forward, both having a slight negative effect in the short run. A lot of focus on the call from management was on their progress in AI, customer interest, and the fact that they are clearly leading in the space in terms of data and the breadth of AI offerings.

Our view: The shares were hit hard after the results. We see this as a buying opportunity; the valuation is not overly aggressive, and we view Salesforce as one of the winners in AI. The question remains, however, when this will start to be reflected in the P&L.

Marvell (owned) reported sales of USD 1.16 billion with an EPS of USD 0.24, both in line with expectations. The company is guiding 2Q sales of USD 1.25 billion ±5%, with an adjusted gross margin of 62% and an EPS of USD 0.29 ±0.05. The guidance implies 8% Q/Q growth driven by a ramp in AI.

Data center revenue for the period rose 87% Y/Y and 7% Q/Q to USD 816.4 million, while consumer revenue tumbled 70% Y/Y to USD 42 million. Carrier infrastructure revenue also plunged from the year-ago period to USD 71.8 million, down 75%. Enterprise networking revenue came in at USD 153.1 million, down 58% Y/Y, while automotive and industrial revenue fell 13% to USD 77.6 million.

The company expects AI solutions to ramp during 2H24, while the rest of their business stabilizes after undergoing a major inventory correction. The first shipments of custom AI compute started in the quarter (Amazon).

Our view: The Marvell story is all about the ramp of AI in the second half of this year, with real volume increases expected in 2025.

Veeva Systems (not owned) reported sales of USD 650 million and an EPS of USD 1.50, both slightly above expectations. Subscription revenue grew 29% Y/Y. The sales guidance for 2Q and the fiscal year was, however, a few million USD below expectations. The company states that several R&D subscription deals have been pushed out but not lost.

Our view: We have already heard that companies are scrutinizing and delaying some deals from HubSpot, Workday, Salesforce, and now Veeva Systems. We believe there are two reasons behind this: firstly, uncertainty around economic development, and secondly, how AI will affect the company going forward and what setup will be needed in the future.

Dell (not owned) reported sales of USD 22.2 billion, up 6.2% Y/Y and a clear beat, while EPS of USD 1.27 was a slight miss. The gross margin fell 250 basis points driven by competitive pricing and a higher AI server mix.

Infrastructure Solutions Group (ISG) sales grew 22% Y/Y, reaching USD 9.2 billion, with server and networking sales growing 42% Y/Y to a total of USD 5.5 billion. Client Solutions Group (CSG) was flat Y/Y, reaching USD 12 billion, with commercial PC sales growing somewhat.

ISG AI server orders increased to USD 2.6 billion, with shipments up more than 100% sequentially to USD 1.7 billion. The AI server backlog is now USD 3.8 billion, growing sequentially by approximately USD 900 million. The AI server pipeline grew quarter-over-quarter again and remains a multiple of the backlog. Traditional server sales were also strong in Q1, growing for the second consecutive quarter Y/Y and the fourth consecutive quarter sequentially.

CSG, Commercial PC demand has stabilized, and the company saw an improving demand environment through the quarter. CSG revenue was flat Y/Y and is expected to improve further as the year progresses.

Dell is guiding FY25 sales to be around USD 93.5-97.5 billion, or 8% growth Y/Y, with ISG up over 20% driven by AI servers.

Our view: The order backlog for AI servers continues to grow, while traditional servers are also improving. The company states that the main part of the backlog is with Nvidia and that H100 supply is improving, with H200 and B200 expected to be in supply by the end of 2Q.

AI: Bloomberg reported yesterday that the US government is slowing down AI chip sales to the Middle East while conducting a national security review of the region. The review aims to ensure that the chips do not end up in the wrong hands, such as China.

For enquiries, please contact: Inge Heydorn, Partner, at [email protected] and Ofelia Aspemyr, Associate, at [email protected]

About GP Bullhound: GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to the world’s best entrepreneurs and founders. Founded in 1999 in London and Menlo Park, the firm today has 12 offices spanning Europe, the US and Asia. For more information, visit www.gpbullhound.com