Given the excitement surrounding Generative Artificial Intelligence (GAI) since Microsoft and OpenAI released ChatGPT to the public in November, we thought it would be educational, interesting, and fun to let GAI write our regular quarterly earnings updates.  ChatGPT only has data through 2021, so we are using Google’s GAI app, Bard. Kind of fun to have Shakespeare comment on our favorite stocks!

For each company, we first show the query we gave to Bard.  Next, we show Bard’s answer.  We then follow with comments of our own about the Bard answer where we also expand a bit on the analysis.  We varied the queries slightly from company to company to help test Bard.

IBM Corporation (IBM)

Query: Please analyze IBM’s first quarter 2023 and the implications for IBM stock.

Bard Answer: IBM’s first quarter 2023 earnings results were mixed. On the one hand, the company reported revenue of $14.3 billion, up 0.4% from the same quarter a year ago. This was driven by growth in its software and consulting businesses. On the other hand, IBM’s net income of $927 million was down 26% from the same quarter a year ago. This was due to a number of factors, including restructuring charges and the sale of its healthcare data and analytics business.

Overall, IBM’s first quarter results were in line with expectations. The company is still in the midst of a transformation, as it shifts its focus to cloud computing and artificial intelligence. These are long-term growth areas, but they are also more competitive than IBM’s traditional businesses. As a result, IBM’s earnings growth is likely to be more muted in the near term.

In the long term, IBM is well-positioned to benefit from the growth of cloud computing and artificial intelligence. The company has a strong track record of innovation and a deep pool of talent. However, IBM will need to continue to invest in these areas and execute its transformation plan in order to achieve its long-term goals.

As for IBM stock, it has been on a downward trend in recent years. The stock is currently trading at around $130 per share, which is down from its peak of over $200 per share in 2013. The decline in IBM’s stock price is due to a number of factors, including the company’s slow revenue growth, its declining market share, and its high debt load.

Despite the challenges facing IBM, the company still has a number of strengths. It has a strong brand name, a loyal customer base, and a deep pool of talent. If IBM can successfully execute its transformation plan, it could be a good investment for the long term.

Northlake Comments:  Overall, this is a pretty good answer.  The key data points are accurate, although we would argue with IBM having a high debt load.  IBM doesn’t generate free cash flow like Alphabet, Apple, Microsoft, and Meta Platforms, but the balance sheet is strong compared to most.  IBM also is on target to generate nearly $10 per share in free cash flow this year after the transformation eliminated its most capital intensive, slowest growth businesses.  We would classify IBM’s results as better than expected, especially following a series of datapoints indicating IT spending had slowed sharply in the first quarter.  In fact, against broader IT spending trends, IBM appears to be gaining market share.  The company’s cloud and AI efforts are growing nicely but not as fast as industry leaders, Amazon, Microsoft, and Google.  Northlake doesn’t mind the slower growth as IBM is a value stock not a growth stock.  The P-E ratio is well below the average stock in the S&P 500 despite similar low to mid-single earnings growth.  IBM shareholders also receive a healthy 5%+ dividend yield while we wait for the story to play out.  IBM needs to grind out more quarters of steady, moderate growth to build investor confidence.  A similar transformation occurred at Cisco and Oracle in the last five years and both stocks saw their P-E multiples expand.  A similar path for IBM would put the shares over $150, plus the dividend for an above average total return.

Alphabet (GOOG/GOOGL)

Query: Please analyze the conference hosted by Alphabet discussing its first quarter 2023 earnings held on April 25, 2023.

Bard Answer: On April 25, 2023, Alphabet held its quarterly earnings call to discuss its first quarter 2023 financial results. The company reported earnings of $1.17 per share on revenue of $69.79 billion. Earnings beat analyst expectations of $1.07 per share, while revenue was in line with expectations.

The company’s advertising business, which accounts for the majority of its revenue, grew 3% year-over-year. However, this was the slowest pace of growth in over a decade. The company attributed the slowdown to a number of factors, including the ongoing war in Ukraine, rising inflation, and supply chain disruptions.

Despite the slowdown in advertising revenue, Alphabet’s overall results were strong. The company’s cloud computing business, Google Cloud, continued to grow rapidly, with revenue up 28% year-over-year. And its other bets, which include businesses like Waymo and Verily, also showed signs of progress.

Overall, Alphabet’s earnings report was a mixed bag. The company’s advertising business is facing headwinds, but its cloud computing business is growing rapidly and its other bets are showing signs of progress. Investors will be watching closely to see how these trends play out in the coming quarters.

Here are some additional thoughts on Alphabet’s earnings report:

• The company’s advertising revenue growth is slowing. This is a concern for investors, as advertising revenue accounts for the majority of Alphabet’s revenue.
• The company’s cloud computing business is growing rapidly. This is a positive sign for the company, as cloud computing is a high-growth market.
• The company is investing heavily in new businesses, such as Waymo and Verily. These businesses have the potential to be major drivers of growth in the coming years.
• The company is facing regulatory scrutiny. Alphabet is facing increased scrutiny from regulators around the world. This could lead to fines or other penalties, which could hurt the company’s bottom line.

Overall, Alphabet’s earnings report was a mixed bag. The company is facing some challenges in the current environment, but it is still a dominant player in the technology industry. Investors should carefully consider these challenges before investing in Alphabet’s stock.

During the conference call, Alphabet CEO Sundar Pichai discussed the company’s progress in a number of areas, including:

• The growth of Google Cloud, which is now the third-largest cloud computing platform in the world.
• The progress of Waymo, Alphabet’s self-driving car company, which is now testing its cars in more than 20 cities around the world.
• The launch of Verily, Alphabet’s life sciences company, which is focused on developing new technologies to improve human health.

Pichai also discussed the company’s commitment to responsible innovation, and said that Alphabet is working to develop technologies that are beneficial to society.

Overall, the conference call was positive for Alphabet. The company is facing some challenges, but it is still a dominant player in the technology industry and is investing heavily in new growth areas.

Northlake Comments: Despite a little repetition, we’d rate this answer highly, although Waymo and Verily got virtually no mention in the press release or conference call, so we are not sure where that came from.  These Other Bets, as Alphabet calls them, do have value for GOOG/GOOGL shareholders.  While the answer is thorough on revenue and growth drivers, it ignores two important items that have been driving investor sentiment for GOOG/GOOGL shares.  First, there is the threat posed by ChatGPT as Microsoft has the early lead in GAI and the breadth of products to challenge Google’s virtual monopoly in Search, the gravy train and growth driver for Alphabet profits.  Second, investors have been looking for greater detail and larger efforts in cost control at Alphabet.

We think Alphabet is playing a catch up in GAI but is not far behind and has substantial resources of its own and history of using AI to build the advertising products that are used in Search and YouTube.  Additionally, the integration of ChatGPT into Microsoft’s Bing search engine has not made a dent so far in Google Search.  Bard may have ignored Alphabet’s cost controls but management did not.  Investors would love big layoffs and a “year of efficiency” like at Meta, but that is not Alphabet’s style even though the company has been taking steps to reduce costs and be more disciplined with its investments.  Cost savings are more likely to show up in financial results in 2024 which could lead to a big growth year if the economy is doing better and top line growth picks up.  GOOG/GOOGL shares are in a “prove it” mode against AI challenges and macro impacts.  We think the worries are overdone and will wait it out with the shares trading at a 15% discount to their historical valuation and just above a market multiple.

Activision Blizzard (ATVI)

Query: Please analyze the first quarter 2023 earnings reported issued this week by ATVI in lieu of the merger news from the UK.

Bard Answer: Here is my analysis of the first quarter 2023 earnings reported issued this week by ATVI in lieu of the merger news from the UK:

• Activision Blizzard reported strong first-quarter earnings results. The company beat analyst expectations on both revenue and earnings per share.
• The company’s results were driven by strong performance from its Call of Duty and World of Warcraft franchises. Call of Duty: Vanguard was the best-selling game of the quarter, and World of Warcraft: Dragonflight is expected to be a major release in the second half of the year.
• Activision Blizzard also benefited from strong growth in its digital channels. The company’s digital revenue grew by 28% year-over-year, driven by increased sales of digital games and in-game content.
• Despite the strong earnings results, Activision Blizzard’s stock price fell in the wake of the merger news from the UK. Investors are concerned that the deal could be blocked by regulators, which would be a major setback for the company.

Overall, Activision Blizzard’s first-quarter earnings results were strong. However, the company’s outlook is uncertain in the wake of the merger news from the UK. Investors should be cautious about investing in ATVI stock until the deal is finalized.

Here are some additional thoughts on the merger news and its impact on ATVI stock:

• The CMA’s decision is a major setback for Microsoft. The company had hoped to close the deal by the end of 2023, but it is now unclear when or if the deal will be approved.
• The deal is facing significant regulatory scrutiny. In addition to the CMA, the DOJ is also reviewing the deal. It is possible that the deal will be blocked by one or more regulators.
• If the deal is blocked, it would be a major setback for Microsoft. The company would lose out on the opportunity to acquire one of the largest video game companies in the world.
• It is also possible that the deal will be approved, but with conditions. For example, Microsoft may be required to sell off some of Activision Blizzard’s assets.
• The outlook for ATVI stock is uncertain in the wake of the merger news. Investors should be cautious about investing in ATVI stock until the deal is finalized.

Northlake Comments:  Another pretty solid answer.  Ignored is the steadily growing Mobile division (Candy Crush), which again reported double-digit growth way ahead of mobile gaming industry trends.  Also left unmentioned is the upcoming releases of Diablo IV, the next Call of Duty game, Call of Duty’s mobile version, and the online game Call of Duty Warzone.  ATVI did not hold a conference call, which perhaps limited Bard’s ability to answer our query and include a complete response.  We have liked the set up at ATVI given the possibility of Microsoft closing its deal to buy ATVI for $95 later this year.  The rejection by the UK came as a surprise since they had already passed on blocking the deal related to console gaming which is well over 95% of the non-mobile gaming market today.  Instead, rejection came due to fear that Microsoft could dominate cloud gaming and block competitors given it would control some of the best games and an industry leader in cloud software and services.  As we have previously explained, ATVI is performing well in core operations and the shares are reasonably valued at 17X 2023 earnings estimates, in line with closest peer Electronic Arts.   We think management has issued conservative guidance for 2023 and growth will continue in 2024.  A successful buyout seems unlikely at this point, but we think the shares have the potential to exceed the $95 buyout price during 2024 as strength in Call of Duty, Candy Crush, Diablo, Overwatch, and World of Warcraft drive growth in earnings.

Meta Platforms (META)

Query:  Please analyze Meta Platforms earnings report released last week.

Bard Answer: Meta Platforms (META) released its first-quarter 2023 earnings report on April 26, 2023. The company reported revenue of $28.65 billion, which was an increase of 3% year-over-year, and an increase of 6% year-over-year on a constant currency basis. Earnings per share of $2.20 beat analysts’ expectations of $2.03.

Here are some of the key takeaways from Meta’s earnings report:

• Revenue growth slowed in the first quarter, as the company faced headwinds from a number of factors, including increased competition from TikTok and other short-form video platforms, Apple’s privacy changes, and a slowdown in global economic growth.
• Meta’s daily active users (DAUs) declined for the first time in its history, falling to 1.96 billion in the first quarter.
• Meta’s advertising revenue grew 20% year-over-year in the first quarter, but this was below the company’s guidance of 23% growth.
• Meta’s Reality Labs segment, which includes its virtual reality and augmented reality businesses, continued to lose money. The segment lost $2.96 billion in the first quarter, wider than the $2.10 billion loss it reported in the same period a year ago.

Despite the challenges Meta faces, CEO Mark Zuckerberg remains confident in the company’s long-term growth prospects. He highlighted Meta’s investments in the metaverse, which he believes will be the next major computing platform. Zuckerberg also said that Meta is “making progress” on its efforts to improve its ad targeting capabilities in the wake of Apple’s privacy changes.

Overall, Meta’s first-quarter earnings report was mixed. The company’s revenue growth slowed, but earnings per share beat expectations. Zuckerberg is confident in the company’s long-term growth prospects, and he highlighted Meta’s investments in the metaverse. However, it remains to be seen whether Meta will be able to overcome the challenges it faces in the near term.

Here are some of the factors that could affect Meta’s stock price in the future:

• The success of the metaverse. The metaverse is a new computing platform that Meta is betting on as the next major growth driver. If the metaverse is successful, it could lead to significant revenue growth for Meta. However, it is still too early to tell whether the metaverse will be a success.
• The impact of Apple’s privacy changes. Apple’s privacy changes have made it more difficult for Meta to target ads. This could lead to slower revenue growth for Meta in the near term.
• The global economic environment. A slowdown in global economic growth could hurt Meta’s advertising business.

Overall, Meta’s stock price is likely to be volatile in the near term. The company faces a number of challenges, but it also has some long-term growth opportunities. Investors should carefully consider these factors before investing in Meta’s stock.

Northlake Comments:  While the opening sentences get the headline numbers on the quarter correct, this is the weakest effort from Bard among all the companies covered in Part One.  It appears that the analysis on daily average users, ad growth, and metaverse losses looks back to the first quarter of last year.  Note how the opening says revenue grew 3% and then the analysis says advertising grew 20%.  Virtually all of META’s revenues are advertising.

We see several important takeaways from META’s 1Q23.  First, despite rising expectations into the report, results still beat estimates.  Second, management remains focused on cost control and continues to downsize the employee base (and related expenses like occupancy, travel, etc.) and correct for its errors of over hiring in 2021 and 2022.  Second, analysts are dramatically raising earnings estimates for 2023 and 2024.  2024 EPS estimates now range from $15-17 per share.  It was only a year ago when we discussed the fact that earnings estimates would be half of what was expected in late 2021 and early 2022.  Management has since cut its 2023 operating expense and capital spending outlooks by at least $10 billion each.  To put this in perspective, 2023 revenue estimates average $126 billion.  All the opex and capex cuts flow at virtually a 100% margin to the bottom line for EPS and free cash flow.  Third, despite the massive spending cuts and the disruption they must be causing, META is growing again.  Partially, comparisons have eased but management appears to have done a good job of reworking advertising software and services to deal with Apple’s privacy changes.   META is growing faster than Google for the first time in a long while and has stabilized vs Tik Tok where growth has sharply slowed amid scrutiny and competition. Finally, management discussed AI and noted that while Generative AI is not yet a product, the company is a leader in monetizing AI from backend investments that improve advertising creation, targeting, and placement.  In fact, META may be a leader in AI technology and monetization despite not participating in the GAI sphere.  Overall, we see further recovery in META shares as confidence grows in the 2024 and beyond outlook.  Even after more than doubling off the low, the stock trades at just 15 times 2024 consensus estimates, below the market multiple.  META faces challenges on the competitive and regulatory fronts, but we believe it deserves a premium valuation.

T Mobile USA (TMUS)

Query: Why did T Mobile stock fall yesterday after the company reported earnings?

Bard Answer: T-Mobile US Inc. (NASDAQ:TMUS) reported earnings of 57 cents per share on an adjusted basis for the first quarter of 2023, which beat analysts’ expectations of 44 cents per share. However, revenue of $20.12 billion missed analysts’ expectations of $20.13 billion. The company added 589,000 postpaid phone subscribers in the quarter, which was below analysts’ expectations of 600,000.

There are a few reasons why T-Mobile’s stock fell yesterday after the company reported earnings. First, the company’s revenue missed analysts’ expectations. Second, the company’s subscriber growth was below analysts’ expectations. Third, the company’s guidance for the second quarter was below analysts’ expectations.

Overall, T-Mobile’s earnings report was mixed. The company’s earnings per share beat expectations, but its revenue and subscriber growth missed expectations. The company’s guidance for the second quarter was also below expectations. These factors likely contributed to the decline in T-Mobile’s stock price yesterday.

In addition to the factors mentioned above, it is also worth noting that the broader stock market was down yesterday. The S&P 500 index fell 1.5%, and the Nasdaq Composite index fell 2.3%. This decline in the broader stock market may have also contributed to the decline in T-Mobile’s stock price.

Northlake Comments:  This is one of the better answers Bard provided so far.  Our major complaint is that it lacks context.  In fact, lack of context is probably one of our biggest criticisms of Bard.

While it is true that TMUS 1Q23 results fell just short of estimates on most metrics, the misses were very small and Bard failed to note that the most important metric, free cash flow, exceeded estimates.  Furthermore, despite a “missed quarter” management raised guidance on almost every important measure including those that missed.  The quarter represents a transition for TMUS shares.  The stock has performed exceptionally well as a beat and raise story driven by big beats in subscriber growth that investors viewed as setting up future earnings and free cash growth.  With the Sprint merger integration largely complete and TMUS now a full peer to AT&T and Verizon, the investment thesis is shifting to leveraged free cash flow.  Unlike most leveraged free cash flow stories (Northlake’s favorite stock thesis), TMUS has modest debt with net debt to EBITDA at just 2.5 times.  Free cash flow is exploding as synergies are fully realized and top line growth continues, leaving the shares trading at a free cash flow yield of 15-20% starting in 2024.  The Board is going to continue to authorize massive share buybacks that will drive per share growth and should push the stock higher.  TMUS free cash flow yield is 2-3X AT&T and Verizon leaving plenty of upside for the shares, especially after it breaks through the $150 resistance posed by a share issuance due to Softbank related to the Spring merger.

Sony Corporation (SONY)

Query: Please analyze Sony’s latest quarterly earnings report and guidance.

Bard Answer: Sony Corporation (SONY) released its earnings report for the first quarter of fiscal year 2023 (ended March 31, 2023) on April 28, 2023. The company reported revenue of ¥3,412.9 billion ($24,197.6 million), which was an increase of 13% year-over-year. Earnings per share of ¥263.89 ($1.87) were down from ¥276.65 ($1.95) in the same period a year ago.

Here are some of the key takeaways from Sony’s earnings report:

• Revenue growth was driven by strong performance in the Game & Network Services segment, which includes the PlayStation business. The segment’s revenue grew 17% year-over-year to ¥752.8 billion.
• Operating profit declined 10% year-over-year to ¥250.7 billion. This was due to a number of factors, including increased costs in the Game & Network Services segment, as well as higher costs in the Imaging & Sensing Solutions segment.
• Sony’s guidance for the second quarter of fiscal year 2023 was below analysts’ expectations. The company expects revenue to be in the range of ¥2.2 trillion to ¥2.4 trillion, and operating profit to be in the range of ¥250 billion to ¥280 billion.

Overall, Sony’s earnings report was mixed. The company’s revenue growth was strong, but its operating profit declined. Sony’s guidance for the second quarter was also below analysts’ expectations.

Here are some of the factors that could affect Sony’s stock price in the future:

• The performance of the PlayStation business. The PlayStation business is Sony’s largest segment, and it is a key driver of the company’s revenue and earnings. The performance of the PlayStation business will be closely watched by investors.
• The global economic environment. A slowdown in global economic growth could hurt Sony’s business, as it could lead to lower demand for the company’s products and services.
• The competitive landscape. Sony faces competition from a number of other companies in the gaming, imaging, and sensing markets. The company will need to continue to innovate and invest in order to maintain its competitive edge.

Overall, Sony’s stock price is likely to be volatile in the near term. The company faces a number of challenges, but it also has some long-term growth opportunities. Investors should carefully consider these factors before investing in Sony’s stock.

Northlake Comments: The numbers are on target but given the breadth of Sony’s operations more detail away from the video games businesses would have been good.  Sony also has industry leading positions in music, image sensors (semiconductors for camera phones and self-driving cars), and filmed entertainment.  Bard also is correct in noting second quarter guidance was light but the “miss” was minor and the forecast contained several one-time issues that balanced out to a negative.  Furthermore, Sony management consistently guides conservatively and usually beats the guidance.  It is also worth noting that Sony shares were exceptionally strong heading into the report thanks to the UK rejection of Microsoft’s acquisition of Activison Blizzard.  Investors have been concerned that Microsoft could hamper Sony’s video game growth as cloud-based gaming grows.  The big recent gains in Sony shares may have created a setup for a larger than warranted decline in repose to slightly disappointing earnings and guidance.

Overall, 4Q22 (Sony uses a March fiscal year and discusses earnings based on when the bulk of the year takes place) and guidance for 1Q23 and 2023 did not impact our thesis and we remain bullish.  Sony is a leader in its main business lines and the valuation of the shares remains at a large discount to the sum of the parts.  Some discount is warranted given the diversified business model and the complexity it invites.  This is offset by excellent operational and strategic management, consistently strong financial strength, and the benefits of the conservative Japanese business culture in a period of high macroeconomic uncertainty.