HUBS, SITM and MSFT
SiTime (SITM)
We took a crack in March with a half position in SITM when it looked like Q1 2023 was going to be the low part of the semiconductor cycle. Unfortunately, yesterday’s earnings report and management’s guidance suggest this downturn will be longer and deeper than expected. They say they now see Q2 as the low, but there’s not enough evidence to support Q3 and Q4 being better. The reality is the market is still flooded with inventory and demand is slowing, so it’s taking longer to work through that inventory. When demand does start to pick up it may be slower than expected, at least initially. There were more specifics on the conference call about how weak China and the EV market are. But after listening to it, the takeaway for me is that there’s not a lot of incentive to stick with the stock and wait for a turnaround. Better to let it go and come back to it when the evidence is more positive. Again, we started with a half-sized position trying to get into a recovery story, but it’s just too early. SELL
HubSpot (HUBS)
The story is much more positive with HubSpot which delivered a beat-and-raise quarter. The thesis that the company is a beneficiary of companies consolidating their spend with the best-of-breed sales and marketing platform is bearing fruit. And analysts are raising price targets on the stock. As compared to some software firms, HubSpot has not turned its back on “the little guy.” It still has tons of free solutions and sees this as a critical way to bring new customers into the fold to monetize later. Turning to the quarter, revenue was up 27% to $501.6 million, beating by almost $26 million. Adjusted EPS of $1.20 rose by 122% and beat by $0.37. Management increased full-year revenue guidance to around $2.085 billion, slightly ahead of consensus of $2.06 billion. EPS guidance of $4.80 to $4.85 is well above consensus of $4.30. Bottom line, it’s still a buy. We started with a half-sized position and will stick with that now, though if you want to add a few shares (preferably on weakness) I’m fine with that. BUY HALF
Microsoft (MSFT)
I added Microsoft to our portfolio in March, saying it was like a diamond hiding in plain sight, in part because of recent AI investments. The recent quarterly report helps confirm the bull case for the stock. Yes, it’s a megacap tech stock and they’re “hot” now. But also, Microsoft is doing better than expected and has such a deep user base and lineup of ubiquitous solutions that it also fits in the desirable “defensive growth stock” category. In the most recent quarter, revenue rose 7% to $52.86 billion and EPS rose 10% to $2.45. There’s too much to get into in terms of all the moving pieces, but at a high level, Office 365 is proving to be more durable than expected (+18% in the quarter) and the use of AI throughout various products appears to be driving new customer growth. For example, AI-powered Teams just launched a couple months ago and thousands of paying customers are already using it. ChatGPT remains the most downloaded app of all time. “AI” was mentioned 50 times on the conference call! It is a stock to own, and averaging in is the best strategy since shares are sure to move around with the broad market. BUY
