Wednesday, February 1, 2023
HomeMarketCloud Spending Is Flat. It Will Rise Again, According to TE Connectivity.

Cloud Spending Is Flat. It Will Rise Again, According to TE Connectivity.

TE Connectivity makes electrical components used in many industries.

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Lukas Barth/REUTERS/Alamy

The macroeconomic outlook is looking shaky amid rising interest rates, and stubbornly high inflation. There are still pockets of growth out there, however.

TE Connectivity
(ticker: TEL), which just reported strong fiscal-frst-quarter earnings, can help investors find them. It makes electrical components for just about everything including cars, planes, renewable-power-generation assets, and cloud computing. Yes, the servers that enable kids to play video games with one another in real time plug into TE sockets.

Wednesday, the company’s fiscal-first-quarter earnings showed the cloud still has some challenges. But the outlook for other end markets remains solid.

For the quarter, TE earned $1.53 per share on sales of $3.8 billion. Wall Street was looking for earnings of $1.51 a share on sales of $3.8 billion.

Car-related sales rose 14% on a comparable basis from a year ago, while industrial sales grew 7%. Communications-related sales, which includes cloud-computing business, dropped 11% year over year.

Overall, numbers met or exceeded expectations, but guidance was weaker. TE expects fiscal-second-quarter earnings of $1.57 per share on sales of $3.9 billion. Wall Street had expected earnings per share of $1.63 on sales of $4 billion. TE, however, has a history of guiding conservatively. It has beaten its own earnings outlook for 26 consecutive quarters.

Management appears pleased with results. “Our Transportation segment outperformed the market due to our global leading position in electric vehicles, and our Industrial segment demonstrated organic growth across all businesses,” said CEO Terrence Curtin in a company news release.

Curtin noted weakness in TE’s communications segment. He tells Barron’s that spending was lower in cloud computing, enterprise IT budgets as well as electronics distributors, and “we see an inventory correction going on there.”

Reduced cloud-related spending shouldn’t be a surprise to investors though. It was a theme of the recent earnings reports at
Microsoft
(MSFT) and
Alphabet
(GOOGL).

Cloud-capital spending doubled to roughly $120 billion a year over just a few years, says the CEO. It should come in around the same level in 2023. That’s not growth, but it’s stable.

“It’s a pause in [cloud] investment level,” says Curtin who sees growth resuming based on the need for faster speeds and the continued migration of business and personal data.

A recovery in growth would be cheered by tech investors. As for the other portions of TE’s business, Curtin sees global automotive production flat with 2022 at about 80 million units, but more vehicles every year will be fully or partially powered by electricity, which will help TE’s business.

Curtin also sees the industrial economy doing better than some might expect. Spending on infrastructure, renewable power generation and commercial aerospace continues to grow relative to recent levels.

Coming into Wednesday trading, TE stock is up about 9% year to date. The
S&P 500
and
Dow Jones Industrial Average
are up about 4% and 1%, respectively.

TE stock is trading at about 17 times next 12 month’s estimate earnings, in line with its average over the past few years.

Write to Al Root at allen.root@dowjones.com

Credit: marketwatch.com

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