We're in the middle of Q3 earnings season and we've seen a few of the big names out in the last week particularly from the mega cap tech space.
Yes, I know it's Saturday night and I should have much better things to be doing, but the clocks change in the UK tonight so you might say I've been burning the 11pm oil.
(Yes, I've waited 6 months to make that joke).
And I know I don't usually write on equities but I thought it was worth a bit of a dive into the Apple and Amazon earnings since they were the big misses and at least for Apple, a lot of this was down to supply chain issues.
Of course, we also have the big news that in terms of market cap, MSFT is now the king once more, having overtaken Apple following the Apple earnings release.
Source: CNBC
It's been a battle for the ages... but Apple's lost the crown.
Let's start with the good news - Microsoft:
Well when we look at the breakdown, basically every sector of the business has reported double digit revenue growth - LinkedIn and Azure Cloud grew more than 40% YoY. This is absolutely insane growth.
Growth for the entire company came in at a stinking 22% YoY.
- EPS at $2.27, versus $2.07 expected by analysts
- Revenue at $45bn vs $44bn expected.
- Total revenue climbed 22% YoY
- Reported $20.5bn in net income - up 48%.
- Guidance for next quarter at $50-51bn, above estimates for $58bn.
Basically, this was a blowout report. The stock climbed on the news dramatically, and pushed Microsoft to new all-time highs.
In terms of owning the shares, I don't have a position, but these earnings were beautiful and I also find it interesting how successful Azure has been... if this an AMZN killer?
And a little more good news with Alphabet:
Google also smashed its way to another record high with Alphabet shares jumping almost 5% after earnings. Google reported a 43% increase in advertising revenues to $53.1bn.
EPS of $27.99 smashed analyst expectations for $23.48 too. It's no surprise then that the shares surged, and it seems the company wasn't too badly affected by some of the changes to privacy brought in by Apple (unlike another big tech company... Facebook (or do I say Meta now??????).
There was a warning though from Google, who say they now expect growth rates to dramatically slow given most of the Covid impact has now been accounted for. We'll also have to see whether any supply chain issues start to take a toll. What's the point of advertising if you don't have any stock to sell??
Onto the bad news - AMZN:
Ok I'll confess from the outset... I'm a little bit of an AMZN hater. Don't get me wrong... I'm not like a mad Bezos hater, I just don't like the stock. It's expensive, the company struggles to generate actual profits without the juggernaut that is AWS, and I think it will bear a lot of the brunt of regulatory scrutiny in the next decade.
`Source: Refinitiv Datastream
As the chart above shows, the stock took a pretty aggressive hit right after earnings... sure the bullishness of Friday helped it claw a bit back, but still a way from its highs.
What I also find interesting about Amazon this year is the lacklustre YTD performance - the S&P500 is up a cushy 19%, but AMZN is up a mere 3.55%. I'd be pretty disappointed if I was an AMZN investor this year.
- Earnings: $6.12 versus $8.92 expected.
- Revenue: $110.81bn versus $111.6bn expected.
- Two nasty misses there in what has generally been a beating market.
But the real shocker was guidance for the Q4:
- Analysts had expected $140bn+ and AMZN only guided for 130bn-140bn.
The other issues was costs. We all know about supply chain disruptions this year, but the cost increases have been pretty dramatic for Amazon (which obviously uses a lot of delivery drivers who are in short supply, and also ships a lot of goods so is vulnerable to fuel costs... shipping etc), and the CEO said "several billion dollars" of extra costs could be incurred this year. OUCH.
Just in the US, Amazon has had to make massive hiring, at higher wages, with better benefits. Obviously this will increase costs.
I'm more than happy to disclose my position in this stock - it's zero shares. And I think you'd have to be mad to buy for the next year or so. Supply chain issues are just too great.
The other interesting thing from Amazon was that for the first time in its history, Amazon services revenue (AWS) exceeded its goods revenue. This is insane and a massive compliment to the entrenchment of AWS. But what is also interesting is that Amazon would have made a loss without the margin power of AWS in the latest quarter.
Supply chain issues at AAPL:
No-one who has read my blogs / known me for a while will be surprised to hear that, as always, I'm bullish Apple. These issues relating to disruption in my opinion are a hiccup but not a catastrophe for Apple. AAPL is a stock which you should just buy... and hold... ad infinitum.
- Earnings Highlights:
- EPS: $1.24 in-line
- Revenue: $83.4bn versus $84.9bn expected
- iPhone Revenue (note this will not yet properly include 13) $39bn versus $41.5bn
- Services Revenue: $18.3bn versus $17.6bn.
Now for me, the services revenue continues to be critical. Obviously in an era of chip shortages we want to see growing revenues elsewhere, and that is what services continues to deliver. We also know that margins are absolutely massive (possibly around 70% for services as a whole).
The iPhone miss was disappointing, but it's not the end of the world for now.
The question is... if shortages continue and iPhone delivery times get pushed further and further back, does this mean people delay upgrades to iPhone 14?
For me, the answer to this question is no. At least in the initial period. The expectation from Tim Cook is that shortages will cost Apple about USD6bn in revenue total - this is obviously bad, but it's not the end of the world.
The good news is that Cook expects "solid" YoY revenue growth in December despite the issues. This means we could continue to see the massive revenue growth which Apple has delivered in recent quarters.
Basically, I still like AAPL as a stock to own, and it is better positioned than rivals like Samsung to weather chip shortages given its own dominant position in manufacturing its own chips. This means it can dictate order sizes to suppliers and should be first in line for chips when they become available.
Facebook (Meta):
I wouldn't own FB shares in a million years given all the regulatory scrutiny.
But, for completeness... it's here in this review. Basically, EPS was a touch better than expected, revenue misses, and daily active users was in-line with expectations.
We've also obviously had a total rebrand for the company, which is nothing but an attempt to evade regulatory scrutiny and confuse congressional representatives even more.
Given the EPS beat, the stock rose in after-hours, but was absolutely hammered in Tuesday trading.
That came despite a USD50bn share buyback so it was probably the revenue miss which raised eyebrows, as well as circling reports that the company was really struggling to retain interest on the key Facebook platform.
The internet remains undefeated.
NET NET:
In this busy week of tech earnings, the message for me is that those most exposed to supply chain issues should be taken with a pinch of salt - notably AMZN, but also to some degree AAPL. My view at the moment is also that we could continue to see a push higher in US Treasury yields into year-end - particularly around the 10y point of the curve. If this is the case, this could add pressure to tech, and so general caution is warranted.
MSFT though was fantastic, and I'd be looking to add here on any dips.
CONTACT:
If you have anything to add on the earnings story, please do not hesitate to reach me via the link at the top of the page. I'd love to discuss big tech and have a bit of a debate on the future of these given regulatory scrutiny etc.
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