IBM (IBM): IBM shares sold off following a mixed report for 3Q24.  The selloff is mostly related to elevated expectations after the stock had doubled since October 2022, with over half of the gain coming since the start of 2024.  Our original purchase of IBM just over five years ago was based on an investment thesis that the company was poised to return to growth.  A new CEO focused on software after the Red Hat acquisition, using strict expense management, combined with a very depressed valuation, provided a good setup.  The dividend yield was around 5% which was paying us to wait for investors to see the new growth profile.  Our thesis was working out across the board and was then boosted by IBM’s exposure to AI.  IBM was an early player in AI with Watson.  The company is positioned well for the current AI boom through its consulting, software, and infrastructure businesses.  Management has noted steady increases in AI bookings, now at over $3B, from virtually nothing a year ago.  The bull case was evident in management’s discussion of the 3Q24 results, the outlook for 4Q24, and preliminary commentary on 2025.  The stock sold off because consulting and infrastructure segments fell slightly short of estimates.  A 3Q24 acceleration in software is more important for the long-term story, but when a stock is up 2X in two years and more than 60% in 2024, there is no room for error.  This is especially the case for IBM, a fallen angel in the tech world where there remains skepticism about the growth turnaround.  The consulting shortfall relates to cautious spending on traditional technology at large enterprises while AI bookings gradually materialize as revenue.  The balance should shift by the second half of 2025.  Infrastructure represents IBM’s mainframe business.  The company announces a new mainframe every few years and the next generation is soon to arrive.  The weakness in 3Q24 is related to clients waiting for the new systems to ship.  Software is the most important growth driver and picked up to mid-teens.  We expect AI bookings to translate to revenue later next year.  This could create a stall in the stock’s upward progress but the return to growth story looks even stronger today.  The dividend still provides an above average 3% yield and the P-E of 19X 2025 estimates is reasonable compared to the market given the AI and software exposure.  Much of our thesis has played out but we think there is one more leg up in the stock through 2025.

T Mobile USA (TMUS): Sometimes a Wall Street analyst gets straight to the point even better than we do.  Summarizing the third quarter, Cowen and Company stated: “TMUS posted solid 3Q24 results, with a beat on most financials including EBITDA, revenue, and FCF, a postpaid phone adds beat on good churn, an ARPU beat, and slightly raised 2024 guidance.”  These results are what we have gotten used to for TMUS since purchasing the stock for clients over two years ago.  The shares are up 5% to a new all-time high in response to the good results.  The shares are also just shy of a double on our initial TMUS purchases.  In our last few quarterly updates on TMUS, we noted that while the company was still gaining market share and far outgrowing AT&T and Verizon, the upside relative to consensus had begun to wane.  The big positive response to 3Q24 is partially due to the return of TMUS to across-the-board beat-and-raise results.  TMUS shares trade at a substantial premium to AT&T and Verizon and cable companies Comcast and Charter.  The premium is well earned thanks to consistently higher growth, a better balance sheet, higher free cash flow, and more share buybacks.  All of this is built on the company having the best wireless network and the most capacity.  Wireless and broadband services are fully penetrated in the US.  TMUS has a couple more years of share gains in wireless in rural and big city suburban markets and large and small businesses.  Fixed wireless and fiber to the home also are share gainers for the foreseeable future.  Eventually, TMUS growth will slow toward the industry averages and the company will face strategic decisions about how to proceed.  Wireless and broadband markets are converging rapidly and TMUS may need to make larger investments in mergers and networks.  However, that is a problem we will worry about in a year or two.  In the meantime, we think the shares can grind higher on continued industry-leading results despite their premium valuation.  Sometimes you pay for growth.  Sometimes you pay for quality.  At TMUS, we pay for both.

Alphabet (GOOG/GOOGL): GOOG/GOOGL reported strong 3Q24 against cautious expectations and concern about regulatory developments.  The company beat expectations on almost every financial metric at the corporate and segment level.  The most significant upside was at Google Cloud which grew revenues 5% with significantly expanding profit margins.  Cloud is now solidly profitable and turning into a material driver of revenue and profit growth for the entire company.  Google Cloud is gaining market share from Microsoft Azure and Amazon AWS but remains a distant third player.  Alphabet’s leading AI technology positions the company well to continue gaining share in a fast-growing market.  The beat at Search was modest but given concerns about market share losses to AI chatbots and retail media, the results came as a relief to investors and analysts.  Management did a credible job on the conference call to note the company’s strong position in all aspects of AI technology.  Management also laid out an interesting argument that the addition of AI output to search queries is increasing engagement and use cases for search.  They seemed to be saying that the search business might be more competitive, but AI will make it grow more rapidly, insulating the company from modest market share loss.  YouTube results were barely ahead of expectations and the business is growing less quickly than digital advertising peers like Meta Platforms.  However, sustaining low to mid-double-digit growth at YouTube with as much potential to accelerate as decelerate is a win for the stock in the near-term.  The shares responded positively to the report, holding gains of 4-5% for most of the post-earnings trading day.  The shares would probably be much higher if the company did not face major changes to its business after losing the trial over monopoly tactics with the DOJ.  In a few weeks, the government will formally present the judge with its favored remedies.  The shares trade at a discount to the S&P 500 and a larger discount to peers like Meta, Apple, Microsoft and Amazon. Alphabet will probably be fine in the long run even with the most drastic remedies but the upside in the shares is likely delayed until their clarity on the remedies and the timing of their being put in place given a lengthy appeals process.  Northlake maintains a bullish long-term outlook for GOOG/GOOGL shares after balancing the superior growth, strong management, leading technology, and financial strength against the legal and regulatory depressed valuation of the shares.

Meta Platforms (META): META reported good 3Q24 results and issued positive guidance for 4Q24 against high expectations.  The company also gave indications that heavy investment in AI would continue in 2025.  META has asserted leadership in AI and appears to have the most current, direct benefit from AI investments on any of the Magnificent 7 besides Nvidia.  META is already using AI to drive increased engagement, more effective advertising, and better conversion of ads for advertisers.  Improved advertising services also opens a greater pool of companies that can use META’s Facebook, Instagram, WhatsApp, and other platforms.  A key strength of META relative to peers is that its revenue comes from a huge tail of smaller companies.  Improving the creative and conversion of advertising at lower cost is important to driving more ad demand at higher margins for META.  The share traded down following the earnings but are holding up better than other internet and AI related stocks that have reported good results so far this quarter.  The primary concern for META and other AI beneficiaries is the massive investment required to power AI.  META implied another huge increase in capital expenditures is coming in 2025, above even the highest estimates on the street.  This capex pressures free cash flow and net income.  Thus far, META has been able to offset these impacts by sustaining double-digit revenue growth and limiting expenses through its AI investments.  We think this continues but there is little margin for error.  The shares trade at the top end of the historical valuation range but this seems deserved given the company’s leadership in AI and better path to monetization of AI investments than peers.  EPS above $30 annually could come into focus over the next twelve months.  If so, the shares offer upside to north of $700 by sustaining the current P-E ratio. We cannot control short-term investor reaction to AI trends, but management has earned the credibility to invest heavily.  It is an investment that we feel will pay off in the long term.

Apple (AAPL): AAPL shares traded slightly lower following the company’s 4Q24 earnings report and guidance update for the December quarter.  3Q24 results exceeded expectations following a series of lowered estimates from analysts and investors.  Concern had mounted that initial sales of the iPhone 16 family was off to a slow start, particularly in relation to expectations that this could be a super cycle driven by Apple Intelligence, the company’s “on phone” addition of AI features.  Most of the concern came from tracking lead times from order to delivery for the new phones.  It turns out that Apple started production of the new phones earlier than usual to avoid shortages.  Shortages drive lead times higher.  Apple CEO Tim Cook often reminds the street not to over interpret unique datapoints since investors do not have the entire picture.  Ultimately, the company exceeded the lowered estimates for the quarter.  However, management offered slightly weaker than expected guidance for the important holiday-driven December quarter that implies very modest growth for iPhones.  Investors now have another reason to reconsider the super cycle and AAPL’s earnings growth outlook.  Northlake believes that the slow rollout of Apple Intelligence, on a feature and geographic basis, will lead to a strong cycle but one that is spread out over the next 18-24 months.  Given questions swirling around use cases for AI, this leaves open the possibility that AAPL shares will remain in a trading range as they have been since August.  Due to its massive size, AAPL is unlikely to sustain organic growth in revenue much above the mid-single digits on a long-term basis.  Shareholder returns can be significantly better since the company has been steadily driving profit margins upward and the business generates enormous free cash flow that is used to buy back shares and pay and raise dividends.  AAPL has reduced its outstanding shares by nearly 40% in the past 10 years, dramatically supporting growth in earnings per share.  We expect this pattern to continue even with modest organic revenue growth.  AAPL shares are expensive, trading at over 30 times earnings, well above historical levels on an absolute and relative basis.  We believe AAPL is worth premium given the company’s consistency, financial strength, and the possibility that there is still “one more thing” left to accelerate growth.

VICI Properties (VICI): VICI reported another typical quarter offering mid-to-high single-digit growth in revenues and earnings.  Combined with the 5% plus dividend, VICI shares offer consistent double-digit annual returns and dividend growth.  As a reminder, VICI is a REIT offering various forms of financing to casinos and other leisure properties   The company typically owns land and buildings and is paid rent by the tenants that operate the businesses on the properties.  Rent has an annual inflation adjustment that can drive earnings and dividend growth.  VICI enhances its growth profile by financing new properties for its current and new tenants.  Given the highly predictable nature of the business model, quarterly earnings do not create much volatility in the shares.  In the conference call following the recently released 3Q24, the primary discussion was the slow pace of new financing deals over the past few months.  Management noted, the pipeline is full of large and small deals but volatility and uncertainty in the macroeconomic and political outlook, and especially interest rates has slowed the closing of transactions.  Ultimately, the pace of transactions will pick up.  In the meantime, inflation escalators and the dividend provide a good, low-risk return profile for investors.  In the long run, we expect VICI to produce compound annual returns in the 10-15% range.  This return profile makes VICI shares an excellent anchor for client equity portfolios.

IBM, TMUS, GOOG/GOOGL, META, AAPL, and VICI are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.