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Making Sense of Apple, Amazon and Big Tech Earnings
The market’s contrasting reactions to December-quarter results from the ‘Big 5 Tech Players’ – Apple, Amazon, Alphabet, Meta & Microsoft – provides us with useful clues as to what is most important to investors in these mega-cap players.
It doesn’t seem to be about beating or missing Q4 estimates; Apple missed on both EPS and revenues, but didn’t suffer for it while Amazon beat without getting any credit for it.
Microsoft had a mixed showing on this count, with an EPS beat but revenues coming up short. MSFT stock went on to get a favorable reception. Alphabet beat, but didn’t benefit as a result.
Meta also beat on EPS and revenue, but we all know that the ‘loud cheers’ for its report weren’t a result of the positive EPS and revenue surprises.
What seems to be front and center for the market appears to be expense trends and guidance. The market is well aware of the challenging macro backdrop and expected these results to validate the evolving macroeconomic environment
This came through in the Microsoft report that kick-started the Q4 reporting cycle for the group showing decelerating cloud trends and serious challenges on the PC front. The cloud growth at Amazon and Alphabet reconfirmed the trends established by Microsoft.
By far the biggest differentiator among these mega-cap players appears to be the market’s perception of expense control. This was the market’s biggest worry with Meta and they seem to have done an excellent job of revising the narrative in their favor. Alphabet and Amazon made the right noises on that front, but the market doesn’t seem to be convinced that they are doing all they can to get on top of the issue.
For example, Alphabet has already announced lay-offs and noted on the call that they are slowing the pace of hirings, but they ended up exiting 2022 Q4 with a net addition to payrolls. Apple, on the other hand, seems to have a lot of credibility on this count, with the company’s gross margin outlook for the current period (2023 Q1) confirming that view.
As noted before, it is clear now that none of these players’ profitability is Teflon coated and immune from cyclical forces. Apple may be getting a pass on its quarterly report, with one-off factors like China’s Covid restrictions that have since been lifted and FX headwinds causing most of the shortfalls. But the consumer decision to purchase the company’s pricey phones and other devices will also always remain a discretionary choice and vulnerable to economic forces.
Looking at the ‘Big 5 Tech Players’ as a whole, Q4 earnings in the aggregate are down -28% from the same period last year on +1.4% higher revenues.
Growth is expected to resume next year. For 2023, the group is expected to bring in +3.8% higher earnings on +6% higher revenues.
Estimates for the group have been steadily coming down, with the Q4 results and associated guidance adding to the trend. The aggregate 2023 earnings estimate for the group has come down by -8.5% over the last three months, with the current full-year 2023 earnings growth estimate of +3.8% down from +11.8% over the period.
Market participants see the big challenge for the group to be centered around margin pressures, a function of their still-heavy payrolls, particularly for Amazon, Meta and Alphabet. One could say that if they move into the management mode of other blue chip operators by getting on top of their expenses, they can help strengthen their profitability.
In addition to the group’s margin challenge, there are two key factors that will drive their profitability over the next two years.
The first factor is the unusual impact of Covid on their profitability in the last two years. The question now is whether the +58% jump in 2021 earnings brought forward profits from 2022 and 2023 only, or will the issue be with us in 2024 as well?
The second factor is related to the impact of macroeconomic forces on these companies’ profitability. Microsoft’s business was affected not only by the slump in PC demand, a function of post-Covid adjustment, but also by growth deceleration in the cloud business. We are seeing similar cloud-centric challenges in the Amazon and Alphabet reports as well.
This cloud deceleration is a direct result of companies cutting back on the so-called enterprise spending, on top of digital advertising spending. The market was earlier under the impression that cloud spending was effectively immune from economic forces and will not experience any cuts. The numbers from Microsoft, Amazon and Alphabet show otherwise.
This brings us back to evaluating the seemingly Teflon-coated status of Apple’s gadgets and services.
I am of the opinion that once the Fed’s tighter policy regime produces cracks in the labor market, we will end up discovering that consumers rationally deferred replacing their older devices with newer ones. We are not there yet because the labor market is rock solid, but we could very well reach that stage at either of the coming two quarterly reports.
2022 Q4 Earnings Season Scorecard
As of Friday, February 3rd, we now have Q4 results from 251 S&P 500 members or 50.2% of the index’s total membership. Total earnings for these 251 index members are down -7.5% from the same period last year on +5.5% higher revenues, with 71.3% beating EPS estimates and 68.1% beating revenue estimates.
With 96 index members on deck to report Q4 results this week, we will have seen results from more than 69% of all the index members by the end of the week.
Regular readers of our earnings commentary know that we have been referring to the overall picture emerging from the Q4 earnings season as good enough; not great, but not bad either. With results from more than 28% of S&P 500 members already out, we can confidently say that corporate earnings aren’t headed towards the ‘cliff’ that market bears were warning us of.
The way we see it, the ‘better-than-feared’ view of the Q4 earnings season at this stage may be a bit unfair, given how resilient corporate profitability has turned out to be. But the view isn’t entirely off the mark either.
The Earnings Big Picture
Estimates for 2023 have been steadily coming down, as we have been flagging for some time now.
Please note that the $1.925 trillion in expected aggregate earnings for the index in 2023 approximate to an index ‘EPS’ of $216.60, which compares to $216.45 in 2022.
From their peak in mid-April 2022, S&P 500 earnings estimates have been revised down by -11.6% for the index as a whole and by -13.7% on an ex-Energy basis, with much bigger cuts to estimates for the Construction, Consumer Discretionary, Retail, Tech and Aerospace sectors.
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Amazon, Alphabet, Apple, Meta and Microsoft are part of Zacks Earnings Preview
For Immediate Release
Chicago, IL – February 6, 2023 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Meta (META - Free Report) & Microsoft (MSFT - Free Report) .
Making Sense of Apple, Amazon and Big Tech Earnings
The market’s contrasting reactions to December-quarter results from the ‘Big 5 Tech Players’ – Apple, Amazon, Alphabet, Meta & Microsoft – provides us with useful clues as to what is most important to investors in these mega-cap players.
It doesn’t seem to be about beating or missing Q4 estimates; Apple missed on both EPS and revenues, but didn’t suffer for it while Amazon beat without getting any credit for it.
Microsoft had a mixed showing on this count, with an EPS beat but revenues coming up short. MSFT stock went on to get a favorable reception. Alphabet beat, but didn’t benefit as a result.
Meta also beat on EPS and revenue, but we all know that the ‘loud cheers’ for its report weren’t a result of the positive EPS and revenue surprises.
What seems to be front and center for the market appears to be expense trends and guidance. The market is well aware of the challenging macro backdrop and expected these results to validate the evolving macroeconomic environment
This came through in the Microsoft report that kick-started the Q4 reporting cycle for the group showing decelerating cloud trends and serious challenges on the PC front. The cloud growth at Amazon and Alphabet reconfirmed the trends established by Microsoft.
By far the biggest differentiator among these mega-cap players appears to be the market’s perception of expense control. This was the market’s biggest worry with Meta and they seem to have done an excellent job of revising the narrative in their favor. Alphabet and Amazon made the right noises on that front, but the market doesn’t seem to be convinced that they are doing all they can to get on top of the issue.
For example, Alphabet has already announced lay-offs and noted on the call that they are slowing the pace of hirings, but they ended up exiting 2022 Q4 with a net addition to payrolls. Apple, on the other hand, seems to have a lot of credibility on this count, with the company’s gross margin outlook for the current period (2023 Q1) confirming that view.
As noted before, it is clear now that none of these players’ profitability is Teflon coated and immune from cyclical forces. Apple may be getting a pass on its quarterly report, with one-off factors like China’s Covid restrictions that have since been lifted and FX headwinds causing most of the shortfalls. But the consumer decision to purchase the company’s pricey phones and other devices will also always remain a discretionary choice and vulnerable to economic forces.
Looking at the ‘Big 5 Tech Players’ as a whole, Q4 earnings in the aggregate are down -28% from the same period last year on +1.4% higher revenues.
Growth is expected to resume next year. For 2023, the group is expected to bring in +3.8% higher earnings on +6% higher revenues.
Estimates for the group have been steadily coming down, with the Q4 results and associated guidance adding to the trend. The aggregate 2023 earnings estimate for the group has come down by -8.5% over the last three months, with the current full-year 2023 earnings growth estimate of +3.8% down from +11.8% over the period.
Market participants see the big challenge for the group to be centered around margin pressures, a function of their still-heavy payrolls, particularly for Amazon, Meta and Alphabet. One could say that if they move into the management mode of other blue chip operators by getting on top of their expenses, they can help strengthen their profitability.
In addition to the group’s margin challenge, there are two key factors that will drive their profitability over the next two years.
The first factor is the unusual impact of Covid on their profitability in the last two years. The question now is whether the +58% jump in 2021 earnings brought forward profits from 2022 and 2023 only, or will the issue be with us in 2024 as well?
The second factor is related to the impact of macroeconomic forces on these companies’ profitability. Microsoft’s business was affected not only by the slump in PC demand, a function of post-Covid adjustment, but also by growth deceleration in the cloud business. We are seeing similar cloud-centric challenges in the Amazon and Alphabet reports as well.
This cloud deceleration is a direct result of companies cutting back on the so-called enterprise spending, on top of digital advertising spending. The market was earlier under the impression that cloud spending was effectively immune from economic forces and will not experience any cuts. The numbers from Microsoft, Amazon and Alphabet show otherwise.
This brings us back to evaluating the seemingly Teflon-coated status of Apple’s gadgets and services.
I am of the opinion that once the Fed’s tighter policy regime produces cracks in the labor market, we will end up discovering that consumers rationally deferred replacing their older devices with newer ones. We are not there yet because the labor market is rock solid, but we could very well reach that stage at either of the coming two quarterly reports.
2022 Q4 Earnings Season Scorecard
As of Friday, February 3rd, we now have Q4 results from 251 S&P 500 members or 50.2% of the index’s total membership. Total earnings for these 251 index members are down -7.5% from the same period last year on +5.5% higher revenues, with 71.3% beating EPS estimates and 68.1% beating revenue estimates.
With 96 index members on deck to report Q4 results this week, we will have seen results from more than 69% of all the index members by the end of the week.
Regular readers of our earnings commentary know that we have been referring to the overall picture emerging from the Q4 earnings season as good enough; not great, but not bad either. With results from more than 28% of S&P 500 members already out, we can confidently say that corporate earnings aren’t headed towards the ‘cliff’ that market bears were warning us of.
The way we see it, the ‘better-than-feared’ view of the Q4 earnings season at this stage may be a bit unfair, given how resilient corporate profitability has turned out to be. But the view isn’t entirely off the mark either.
The Earnings Big Picture
Estimates for 2023 have been steadily coming down, as we have been flagging for some time now.
Please note that the $1.925 trillion in expected aggregate earnings for the index in 2023 approximate to an index ‘EPS’ of $216.60, which compares to $216.45 in 2022.
From their peak in mid-April 2022, S&P 500 earnings estimates have been revised down by -11.6% for the index as a whole and by -13.7% on an ex-Energy basis, with much bigger cuts to estimates for the Construction, Consumer Discretionary, Retail, Tech and Aerospace sectors.
For more details about the evolving earnings picture, please check out our weekly Earnings Trends report here >>>> A Steady Earnings Picture, Without a ‘Cliff’ in Sight
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.