We take a look at how the mega-tech stocks reported over earnings season, including the key themes that have sparked their success.
With another round of earnings behind us, the market has navigated through some short-term volatility brought about by the GameStop short squeeze, and is now beginning to reflect on the magnitude of the results handed down.
As at February 8, half way through earnings season, 80% of companies across the S&P 500 have beat earnings estimates. Once again leading the way as you might expect is big tech.
The pandemic has brought with it a host of changes as far as digitisation and working or staying ‘connected’ from home.
The latest results from the likes of the FAANG stocks, and Microsoft to boot, only serve to assure us in our view that many of these changes will be enduring.
What’s more, with subdued sentiment around the time these results were released, the numbers delivered have given us the confidence to add to our holdings in some of these stocks.
Social networking underpins Facebook
Starting with Facebook (FB), the social media giant delivered revenue of US$28.1 billion versus estimates of US$26.4 billion. The company’s advertising segment picked up dramatically, while the average revenue per user hit an all-time high of US$10.14, equivalent to 19% growth year-on-year and 30% growth quarter-on-quarter.
Online commerce has also been a boon for the tech firm, and while the company noted the risk these trends could reverse, in our view we have seen enough evidence to suggest this may well be one of the more prevalent themes into the mid-to-long term. Even the company’s small but rapidly growing consumer hardware division is adding weight, with virtual reality headsets and video-chatting services proving popular such that revenue grew 156% to US$885 million.
5G iPhones drive Apple’s bumper result
Perhaps the standout result from reporting season thus far, expectations were already high for Apple (AAPL), but the company didn’t just meet these expectations, it blew them away.
Apple notched up its largest revenue quarter in its history, raking in US$111.4 billion in sales across the first-quarter of FY21, nearly US$10 billion more than forecast by the market.
That revenue number represented year-on-year growth of 21%, a significant achievement at any time, let alone the midst of the pandemic where things spiralled out of control in the US during this period.
The highlight for us in Apple’s results was how evenly spread the strong performance was across each of the company’s product categories.
There was double-digit growth in each category. Although the new 5G iPhone proved a particular catalyst for the company, it was actually the category with the ‘slowest’ growth at 17% year over year, despite this being one of the best results for the division in some time.
Margins were also higher, and had it not been for extended store closures in some regions, overall earnings would have been even higher. In our view, these results cemented why Apple is the most valuable company in the world, and if consumers are caught in the midst of a ‘supercycle’ of upgrades following the 5G rollout, this could signal much more growth ahead.
Online shopping surge lifts Amazon
Also delivering its largest quarter of revenue ever, Amazon (AMZN) generated US$125.6 billion in sales during the final quarter of last year.
While we had great expectations for the ecommerce giant amid the shift to ecommerce and the postponed Prime Day event falling in this quarter, this result was still far better than we could have anticipated, with earnings per share at US$14.09 nearly double that forecast across the market.
Guidance was also strong, with the next post-holiday-season quarter expected to see revenue again come in above US$100 billion. Jeff Bezos’ retirement was a surprise to us, but we also see this as one company that has all the tailwinds in its favour to keep delivering major earnings growth.
Google’s ecosystem fires on all cylinders
In the final quarter of 2020, Alphabet (GOOGL) put to bed the notion that advertising spend would take a hit amid the pandemic. The company smashed expectations for both revenue and earnings, with total advertising revenue up 9.8% to US$37.1 billion compared with a year prior.
Google hasn’t been the only company to ride this uptrend, with the likes of Snap and Pinterest reporting a similar observation. This suggests to us that advertising expenditure is back in full swing once again.
Beyond that, its YouTube division has benefitted from more individuals consuming media from home, while hardware equipment sales have also surged as consumers seemingly upgrade to the latest devices.
Microsoft’s cloud powers work from home
With the pandemic worsening during the quarter, and businesses across most of the world still pushing remote work, Microsoft was one of the major beneficiaries as the growth of its cloud business accelerated.
Total revenue growth came in at 17% on an annualised basis, which was ahead of the 12% from the quarter prior. The Intelligent Cloud division saw revenue growth of 23% year-on-year, with the Azure segment growing 50%, well ahead of market forecasts suggesting 42% growth. There was also a tailwind for personal computing as gaming took hold.
Not only did revenue and earnings come in significantly above expectations, but the forward guidance provided also gives us confidence. We also see a future where businesses will continue to invest in cloud capabilities and more workers will have flexibility with their working arrangements, both of which can underpin future growth.
Big tech delivers in spades
The results from big tech underscore how significant digitisation has played into their hands. Whether it be: our desire to connect and socialise via virtual mediums in these tough times; the despite to own the latest hardware; the leap to embrace ecommerce; advertising to digital audiences; or remote work spurring continued uptake of the cloud - big tech is flexing its muscles with growth that shows no sign of abating.