US earnings have overall been strong and resilient so far. But the same cannot be said about Big Tech. And, a lot of attention should be given to Apple, Microsoft, Amazon, and Alphabet, given their combined weight of almost 20% in the S&P 500.
With around 65% of the S&P 500 having reported so far, 72% are beating analyst estimates, and earnings results are beating estimates by a median of 6%. Investors are eagerly dissecting earnings reports of the mega-cap American tech companies Apple, Microsoft, Amazon, and Alphabet. As a group boasting a market cap of more than 6.7 trillion, they make up almost 20% of the S&P500 and 38% of the Nasdaq100.
The rapid tightening of financial conditions has caused many of the Big Tech companies to give up much of their Covid gains. And, besides Apple, they are also increasingly volatile.
Illustration of performances in % of Apple, Microsoft, Amazon, and Alphabet since December 2019.
Apple: Resilient earnings with positive margin tailwind
The iPhone maker is the highlight of the earnings season by far. Unlike its peers, Apple delivered a stronger report than analysts expected. Revenue grew 8% and profit margins benefited from easing supply chain pressures, 0.25% higher than analysts had forecasted.
Apple is also boosted by its strong brand, which helps it pass on higher costs to consumers. For instance, it recently raised prices on both Apple Music and Apple TV+.
However, weakness in the services unit is a worry as services have a higher P/E multiple than hardware. Apple also hinted that growth could decelerate in the first quarter of next year.
Microsoft: Weak PC sales, still hot cloud growth, but slowing overall
The third-largest company in the world delivered a disappointing quarter, which highlights its growth slowing. For instance, it communicated sales guidance of around USD52.8 billion, implying just 2% growth next quarter. Operating margins forecasted by Microsoft are also lower by 2%, at 40%.
Microsoft’s cloud, Azure, remains a bright spot, growing 35% in the quarter, compared to 40% in the previous quarter. The CFO mentioned that higher energy costs are hurting cloud margins. On the bright side, Microsoft said operating expenses will moderate materially during the next quarter as the company focuses on improving employee productivity.
Microsoft’s consumer business is more vulnerable to a slowing economy, while the cloud is more resilient. In addition, while Azure and Amazon’s AWS have so far dominated the cloud infrastructure industry, IBM and Oracle are now intensifying competition with strong cloud offerings of their own.
Amazon: Slowing and vulnerable to the strong dollar
Revenue grew 15% year-over-year, but the company noted a deceleration. The e-commerce, cloud, and advertising giant is slowing and its bottom line is significantly impacted by the strong dollar.
Amazon’s cloud division, AWS (+28% YoY), for which it is the largest player as it controls around a third of the total market, is facing two big headwinds; a more difficult macro environment for start-ups and small businesses that saw cloud budgets being reduced, and the rising number of rivals. The softness in the growth figures of AWS is something to worry about as Amazon’s market cap is essentially dependent on the cloud business, then the advertising unit, and only last, on e-commerce. The growth of AWS will be something to closely monitor in the coming quarters as it is a factor that could lead to a de-rating in the company’s P/E multiple.
Encouragingly, Amazon has responded to slower growth by aggressively cutting costs across numerous divisions. It halted some projects, slashed warehouse space, closed its telehealth service, and froze hiring for corporate roles in its retail unit.
Alphabet: Advertising growth slams the break
The search giant delivered a disappointing quarter overall. Growth fell to just 6%, versus 41% a year ago, in its weakest expansion since 2013, other than during one period during the pandemic. The company is under pressure as online ad spending falls.
The CEO, Sundar Pichai, said Alphabet will focus on moderating operating expense growth and make the company 20% more efficient. In that sense, despite aggressive hiring in Q3, the company has begun terminating projects such as the next generation of its Pixelbook laptop, and digital gaming service Stadia, and it has cut funding to its Area 120 in-house incubator.
The tightening of financial conditions globally is having a significant impact on the growth of tech giants and pressuring their stock prices. Nonetheless, their growth is still positive year-over-year, and they are showing signs of taking measures to lower costs to successfully navigate the economic slowdown. We are clearly seeing Apple demonstrate strong pricing power and ability to preserve profit margins. On the other hand, Amazon and Google are more vulnerable to the strong dollar and shrinking advertising budgets. Encouragingly, tech giants remain well-positioned to benefit from any loosening in financial conditions, once central banks decide it is time to slightly loosen the screws.