Over the last two weeks, several Big Tech firms reported earnings and their stocks rallied even though earnings results were not entirely spectacular (Figure 1). The combined revenue of Microsoft, Amazon, Apple, Alphabet, and Meta (MAAAM) grew just 7% YoY in 2Q22, as compared to the double-digit growth in 2020 and 2021, while earnings-per-share (EPS) saw a -20% YoY decline over the same period.
Figure 1: MAAAM’s revenue and earnings growth has slowed/declined
But instead of falling, their share prices rebounded because the results were not as bad as feared. (Figure 2) Post the earnings results of the companies, the share price of Amazon jumped over 10%, while Netflix, Microsoft, and Google saw gains of roughly 7% each. Here is a summary of their latest results.
Figure 2: Big Tech rally post the recent earnings season
The company missed expectations – revenue was 1% lower than expected, and EPS was 1.9% lower than expected. However, the stock rallied as investors liked that Microsoft saw strong bookings growth and closed the biggest number of large deals. The positive management guidance of double-digit revenue and profit growth for the next twelve months was also a catalyst for the stock.
The company beat revenue expectations, growing 7% YoY. This strength came as a surprise as markets feared that Amazon would be hit by the pullback in spending by consumers. Additionally, the Amazon Web Services division (cloud division) grew 33% YoY beating expectations and also outperforming the other cloud peers in growth. Although management gave confidence in being able to mitigate the macroeconomic environment, the operating income guide of USD 0-3.5 billion for the next quarter was well below expectations.
Google’s revenue was in-line with expectations growing 13% YoY, with the search advertising division growing above the digital advertising industry at 14% YoY, driven by the resurgence of travel. This was the good news that investors liked, but looking at other data points, the outlook does not look that rosy.
Earnings missed expectations declining by -11% YoY, growth at cloud and YouTube slowed, and guidance from management painted a challenging next 6 months as a cocktail of advertising spend pullback, foreign exchange (FX) headwinds, and tough comparables kick-in.
Revenue was in-line with consensus, and EPS beat estimates slightly as supply chain constraints were not as bad as expected. The company originally guided a USD 4-8 billion impact due to supply chain and Covid disruptions, but actual impact was less than USD 4 billion. Results were better than expected, however, going forward the company mentioned macro weakness to weigh on performance.
Meta was the only Big Tech that did not see a rally as the company posted a -1% revenue growth, which is the first in its history. But, if we look deeper into the company’s results, the picture looks not bad.
Firstly, Meta grew advertising revenues QoQ by 4.3% versus Google Search at 2.7% with similar FX headwinds. Secondly, Facebook app users returned to growth at +3% YoY and the Family of apps users grew by +6%, despite having to close the Russia business. Thirdly, Reels is doing well with a 30% increase in time spent on both the Facebook and Instagram apps.
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Downside risks ahead
All in all, the results across the board had both good and bad. Even though earnings results were not spectacular, the stocks rallied. This gives a hint that investors are looking to get back into these stocks.
Another catalyst to the share price rally in the past two weeks was the expectation of the rate hike cycle to peak in 1Q23. After the last FOMC meeting on 28 July, where rates were hiked by 75bps a second time, tech stocks saw a rally. Just yesterday, the lower than expected US July inflation print of 8.5%, also sent stock prices up.
However, given the challenging macroeconomic environment of inflation and rising interest rates, we see further downside risks including slowing consumption, delayed corporate spending, and a pullback in advertising as the economy slows. Moreover, if inflation persists and the Fed continues to hike rates past 1Q23, another round of tech sell-off could occur if markets are disappointed.
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In conclusion, broadly speaking, given the downside risks and till we see positive catalysts, we recommend for investors wait before going back into Tech stocks. Key indicators investors should look out for include the monthly inflation print and earnings resilience of the companies.
Nevertheless, we acknowledge that given the size and moat of Big Tech, these companies should fare better in weathering the storm. Certain segments are also more resilient such as the cloud business, with Microsoft and Amazon as strong contenders.
Stay tuned for our analysis on the Digital Economy, and recommendations for attractive segments and stocks!
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