IBM (IBM): IBM reported better than expected 1Q25 results and maintained guidance for 2025.  However, the mix of underlying datapoints disappointed investors and the shares are trading down more than 5%. We think the decline is overdone and partially related to the excellent performance of IBM over the past 12 months.  Expectations were elevated and IBM’s valuation had begun to reflect Northlake’s “return to growth” thesis, leaving little room for controversy, especially in a market consumed by macro fears.  The disappointment in the 1Q25 reported relates to a deceleration in software growth, specifically at Hybrid Cloud. Overall software growth still hit the company’s 9% target, but Hybrid Cloud drives the valuation of IBM shares.  There was also weakness in transactional software revenues.  These are short-cycle revenues that could indicate brewing weakness related to macro pressures.  The issue in guidance relates to the fact that the company flipped its foreign exchange expectation from a 2% headwind to a 2% tailwind.  This suggests that underlying growth has softened.  One positive from the quarter is management quantified the company’s consulting exposure to Federal government contracts, a fear that has arisen due to DOGE cuts.  Exposure is less than anticipated.  IBM shares are now trading at 20 times 2025 estimated earnings, down from 23 times at the all-time high in March.  Current valuation implies that many investors still do not believe the return to growth thesis driven by software and AI.  The pullback following earnings also suggests that investors believe earnings will not hit guidance for mid-single-digit growth in key financial metrics. Even with the deceleration in Hybrid Cloud, it still grew at 13%.  Thus, we see the issues driving share price weakness as primarily macro related.  The long-term “return to growth” thesis remains intact, so we will hold and continue to collect the above average 3% dividend yield.

Alphabet (GOOG/GOOGL): GOOG provided reassurance to investors with its 1Q25 earnings report and guidance commentary.  The shares have been under pressure for a variety of reasons.  Beyond general concerns related to advertising demand if the economy slows, GOOG faces idiosyncratic risks related to the search business from AI and the advertising business from the loss of two antitrust cases brought by the government.  Trends in 1Q remained quite strong for search and digital advertising with commentary about 2Q suggesting no slowdown has yet been seen.  Management also noted that it is now incorporating AI overviews in 75% of all searches with early signs for engagement and monetization positive.  AI overviews could increase the number of searches and clicks, offsetting lower market share as AI chatbots like ChatGPT provide competition.  GOOG makes less of a big deal about expense control than other companies but consistently notes it is durably managing its operating expenses.  This was evident from another quarter of profit margin expansion. Google Cloud growth remains near 30% and the company has less exposure to Federal Government contracts threatened by DOGE than AWS and Azure.  GOOG continues to face investor concern over a multitude of issues but appears to be managing the risks well.  A long stretch of subpar performance for the shares compared to Mag 7 peers leaves the shares trading at a below market P-E of 17 times 2025 estimates. Risks clearly exist and the challenge from AI concerns us, but at current valuation the shares assume most of the outcomes are going to be bad for GOOG in the near term and long term.  We are more optimistic and think the shares represent good value.

T Mobile USA (TMUS): TMUS shares tumbled 11% following the company’s 1Q25 earnings report, rebounding modestly over the next few days.  The report was actually quite solid.  Revenue and EBITDA continue to rise in mid-single digits, well ahead of telco and cable peers.  The shortfall occurred in postpaid phone adds.  Investors have grown accustomed to positive surprises in this metric.  TMUS still gained market share growing subscribers by hundreds of thousands more on an absolute basis than AT&T and Verizon. With recent industry promotions suggesting mobile phone competition is rising, investors did not like TMUS falling short of new phone subs.  We find this issue minor.  The bigger reason for the stock decline goes back to something we have mentioned in recent notes on TMUS.  After a long run of upside surprises, the company is starting to see its growth rate advantage narrow vs. AT&T, Verizon, Comcast, and Charter.  TMUS deservedly trades at premium to those companies – stronger balance sheet, more free cash flow and share buybacks, increasing market share, and faster growth in revenue, EBITDA, and dividends.  However, with greater competition and improved performance, particularly from AT&T and Charter, TMUS advantages are slightly narrowing.  This is enough to compress the valuation premium in the shares.  The 11% decline can be viewed as a reset of the valuation premium.  Northlake still sees TMUS as a solid holding but the transitional period underway could keep a lid on the shares.  If we see the risks increase regarding the company’s growth leadership position, we will reconsider our view.

META Platforms (META): META reported good 1Q25 results against a nervous investor base.  Revenue and EPS exceeded guidance and were well above recently reduced investor expectations.  The guidance range for growth was widened at the low end as the company built in the possibility of macro-driven weakness in digital advertising and accounted for the elimination of the de minimus exemption that allow Chinese websites to sell products tariff free in the US.  These websites were significant advertisers in the past couple of years.  Management held the top end of growth guidance, an indication that thus far, there has not been a slowdown in advertising demand.  Operating expense guidance for 2025 was reduced slightly, supporting EPS estimates and reminding investors that management remains focused on efficiency.  The company even announced layoffs in Reality Labs, where investors see the company wasting money on artificial reality.  One negative for investors was another hike in capital spending.  This reduces free cash flow and sustains the debate about whether AI investments will have a sufficient return.  On this debate, Northlake comes down firmly on the side of management.  META is one of the best positioned companies for AI.  The company is already seeing improved advertiser demand from more effective AI-driven advertising.  Engagement for Facebook, Instagram and Reels is rising thanks to the use of AI to improve content shown to users.  WhatsApp is benefitting by using AI to improve business messaging, driving demand for customer support services.  Finally, META has developed its own AI model, Llama.  The model is competitive with OpenAI, Google’s Gemini, and other leading models.  META’s massive distribution reach means Meta AI is gaining significant market share.  Llama is an open-source model which seems to be attractive to many companies that do not want to be in a closed system offered by competitors.  Llama is not yet monetizing by offering services like Azure and AWS but that seems to be on the way.  META is not immune to economic weakness, but the company is defensive relative to peers due to its massive reach and effective advertising.  Given the company’s long-term positioning and strong management credibility, we think the shares look attractive at 22 times 2025 earnings estimates.  If confidence grows that the company can meet the street’s 15% growth expectation for 2026, the shares can return to all-time highs over $700.

VICI Properties (VICI): VICI reported another solid quarter with moderate growth in key financial metrics and new investments in experiential real estate.  We regularly remind clients that the company operates an extremely predictable business, owning real estate and receiving rent payments that have annual escalators.  This equates to mid-single digit growth in cash flow and a rising dividend yield that together drive a 10% total return profile.  We think the multiple accorded the shares is too low compared to peers, providing a path to additional shareholder return.  So far in 2025, VICI has announced new investments for a development in Beverly Hills and a Native American casino resort.  We find the Native American investment most interesting.  Management has previously explained that it was not in business with Native American casinos because they found the returns too low.  Clearly, this deal must be clearing a high hurdle rate.  Equally important, this development is being done in association with Red Rock Resorts, a major casino operator.  Red Rock is a new relationship for VICI.  Red Rock owns all its real estate, which could set up further opportunities for VICI should Red Rock look to monetize any of its assets.  VICI is a boring stock.  Boring is especially attractive in the current highly volatile market and news environment.  We see a 10%+ annual return profile for many years to come.

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