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

This week’s GP Bullhound Tech Thoughts Newsletter, brought to you by Inge Heydorn and Ofelia Aspemyr, highlights:

• A busy economic calendar resulted in lower interest rates, a weaker US Dollar, and a rally across the tech sector.
• The trade hardware ahead of software is still valid.
• Will Apple Intelligence significantly enhance customer value?

Market: The all-important US CPI numbers came in slightly cooler than expected, and the FED statements were very much in line with market expectations. This led to lower interest rates, a weaker US Dollar, and a rally across the tech sector.

Portfolio: We have not made any major changes to the portfolio this week.

Weekly Conclusion: Broadcom numbers once again beat forecasts on the AI side, and demand is expected to remain strong. Thus, the trade hardware ahead of software is still valid.

Quote of the Week:

Oreste Donzella, KLA Tencor – Executive Vice President of Electronics, Packaging and Components: “The EUV scanner is a state-of-the-art tool, and the high-NA EUV is definitely going to be the most incredible product that human beings have ever produced. But this is not enough anymore, and it is too expensive.”

Results:

Oracle (not owned)

• Reported sales: $14.29bn (3.3% Y/Y), slightly below expectations.
• Cloud sales: $5.23bn (IaaS and SaaS) (20% Y/Y), also below expectations with strength in IaaS growing 43% Y/Y.
• Cloud services and license support: $10.2bn.
• Adj. operating margin: 47%, a 300bps improvement Y/Y, slightly beating the forecast.

The key number in the report was the RPO reaching $98bn, which increased a whopping $18bn Q/Q or 44% Y/Y. Oracle signed its largest contract ever during the quarter, driven by high demand for training large language models. The large orders are expected to contribute to accelerating growth going forward. A key mention during the earnings call was the win of Open AI and a total of 30 AI contracts during the quarter, totaling $12bn. Oracle cloud infrastructure consumption revenue was up 53% Y/Y and still constrained by the supply of semiconductors. The outlook is that cloud demand will drive double-digit sales growth for FY25, with growth picking up every quarter. To meet the demand, capex is expected to double (vs. $6.4bn in 2024).

Our View: The order book is very impressive and shows that the company is on the right track. We are definitely going to do some more work on Oracle after the results.

Broadcom (owned)

• Reported 2Q sales: $12.5bn (43% Y/Y), excluding VMware up 12%.
• AI sales: up 280% Y/Y to $3.1bn, offsetting continued cyclical weakness in semiconductor revenue from enterprises and telcos.
• EPS: $10.96. Both sales and EPS came in above expectations.

In 2Q, the infrastructure software segment generated sales of $5.3bn (175% Y/Y), including $2.7bn in sales contribution from VMware, up from $2.1bn Q/Q. Broadcom expects VMware sales to accelerate towards a $4bn quarterly run rate going forward with Broadcom's average operating margins. The semiconductor business, Networking’s 2Q sales reached $3.8bn (44% Y/Y), driven by strong demand from hyperscalers for both AI networking and custom accelerators. The company is raising its full-year guidance for Networking, expecting it to grow 40% Y/Y vs. earlier guidance of 35% Y/Y. Wireless sales grew 2% Y/Y and was down 19% Q/Q due to normal seasonality. Server storage connectivity sales were $824m (-27% Y/Y), although the company now expects a modest recovery from this point. Broadband sales fell 39% Y/Y to $730m and are expected to recover first in 2025. The company is raising its outlook for the full year on the back of strong AI demand and expects sales of $51bn and an adj. EBITDA margin of 61%.

Our View: We argue that the company guidance is still too cautious. The guidance implies limited sequential growth for their AI business. The AI accelerator part is lumpy as it is dependent on one client, Google, but the guidance seems very conservative.

General

Apple (owned, small) The WWDC highlight was the release of Apple Intelligence, replicating Copilot. The focus areas on the release were privacy and security. The company will use a dedicated internal server system to ensure privacy and security. Apple Intelligence is a completely closed and exclusive hybrid AI system that will be integrated into iOS, iPadOS, and MacOS. The AI system will send more complicated inquiries to ChatGPT (OpenAI), but more models will be added soon. The services will, however, only be functional on high-end versions of iPhone 15 and future models.

Our View: Is this enough to drive down the replacement cycle next year? We are somewhat skeptical, and it will take time for developers to come up with AI functions that add significant value to clients. We think this is the right move from Apple, but we argue that the market could overestimate the short-term impact. There are still some headwinds for Apple, such as China and memory prices trending upwards, and gross margins trending downwards.

OpenAI’s CEO Sam Altman states that the company is running at a $3.4bn annual run rate. The main part, $3.2bn, comes from subscriptions. This is up from the $2bn run rate he stated in February.

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