Big Tech 4Q23 Wrap: The Rally Continues

Over the past two weeks, several Big Tech firms reported earnings and their stocks have rallied even as their share prices near all-time highs. This was largely driven by stellar results and strong guidance, to varying degrees.

Microsoft (NASDAQ: MSFT)

The company beat expectations on both the top and bottom line, growing its revenue at 17.6% year-over-year (YoY) and net income at 33% YoY, with strong performance in its cloud business and artificial intelligence (AI) initiatives. In particular, Azure and other cloud services segment observed a 28% revenue growth on a constant-currency basis for the quarter, surpassing the 27% growth expected by analysts.

Figure 1: Revenue and Earnings Growth for Microsoft

Amazon (NASDAQ: AMZN)

The company beat both revenue and earnings expectations. Its revenue grew at 17% YoY while net income surged to USD 10.6 billion, from USD 278 million a year earlier, with cost cutting measures paying off. Sales at Amazon Web Services, which now represents 14% of Amazon’s total revenue, climbed 13% YoY in the fourth quarter, marking a slight uptick from the previous quarter, when sales expanded 12% YoY. Lastly, its profitable advertising unit continues to grow rapidly, with sales increasing by 27% YoY, accelerating from the 26.3% YoY growth in 3Q23.

Figure 2: Revenue and Earnings Growth for Amazon

Alphabet (NASDAQ: GOOGL)

Alphabet reported its fastest quarter for revenue growth since early 2022, with sales accelerating 13% YoY. Net income surged 52% YoY in 4Q23 on the back of higher operating margins which expanded to 27% from 24% a year earlier. Notably, Google Cloud remains a growth driver, as the segment grew 26% YoY and is now profitable after trying to keep up with Amazon Web Services and Microsoft Azure. Meanwhile, advertising revenue, which makes up the largest segment of revenue, also climbed 11% YoY.

Figure 3: Revenue and Earnings Growth for Alphabet

Meta Platforms (NASDAQ: META)

The company reported blockbuster results, with the announcement of better-than-expected earnings, forward guidance, and new initiatives for shareholder returns. In 4Q23, revenue grew 25% YoY, clocking in the fastest rate of growth since mid-2021, as the online ad market continued to rebound. Meanwhile, net income more than tripled as the company’s cost cutting initiatives to increase profitability have borne fruit. Furthermore, Meta announced its first ever dividend payout and added a USD 50 billion share buyback, as its cash and equivalents swelled.

Figure 4: Revenue and Earnings Growth for Meta

Apple (NASDAQ: AAPL)

The company beat both revenue and earnings estimates, with sales growing 2% YoY and net income growing 16% YoY. Notably, its services revenue grew 11% YoY, reaching a record high as it continues to make up a larger portion of total revenue (from less than 10% in 2015 to more than 19% as of the latest quarter), while the installed base of Apple's active devices surpassed 2.2 billion, reaching an all-time high as well. However, demand in China was weaker than expected, as sales fell 13% YoY, with Apple facing challenges such as reduced consumer spending in China and increased competition from Chinese brands.

Figure 5: Revenue and Earnings Growth for Apple

Conclusion: Big Tech continues to lead growth

With the exception of Apple, which is facing some headwinds in China, we generally see revenue and net income accelerating back into double-digit territory across the board after rebounding from the earnings recession in 2022.

Related article: The earnings recession is over. Big Tech is set to lead the next phase of growth.

The exceptional performance of these Big Tech companies is expected to continue as we enter 2024, despite higher base effects as compared to 2023, driven by artificial intelligence (AI), cloud computing and continued cost cutting efforts to improve operational efficiency.

Although share prices have been surging higher since our last update in November 2023, we continue to find Big Tech companies attractive due to their superior growth outlook and robust operating margins relative to smaller technology peers.

For investors who wish to obtain an exposure in Big Tech companies, they can look at the Invesco NASDAQ Internet ETF (NASDAQ: PNQI) or the Fidelity Global Technology A-ACC-USD Fund. With share prices near all-time highs, we recommend investors apply for a Regular Savings Plan (RSP) to gain exposure to the sector.

Do also look out for our in-depth technology sector outlook with our updated price target, as well as recommendations for attractive segments and stocks in the upcoming weeks as the earnings season comes to an end!

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Alphabet (NASDAQ: GOOGL).