US tech firms (mostly) shine in latest quarterly earnings season
The FANGs and other big US tech stocks are being viewed through the lens of record high share prices by investors worried about a US stock market on the point of overheating.
Yet many of the biggest and fastest-growing tech companies are still knocking the ball out of the park when it comes to earnings, based on the latest quarterly updates.
FANG stocks are Facebook, Amazon, Netflix and Google (officially called Alphabet), a well-used grouping of some of the fastest growing big tech stocks in the world.
Quarterly earnings were mixed across the broader spectrum yet the undercurrent is still hugely positive in both growth and stock performance terms, led by better-than-expected earnings from Alphabet and Facebook with knock-out revenue and user growth posted by Twitter, although there was negative market reactions to both Amazon and Netflix.
ROBUST EARNINGS POWER US MARKETS TO NEW RECORDS
The updates helped US stock markets to close at new record highs. The tech heavy Nasdaq Composite closed last week at 8,330.21, and even the more broadly-based S&P 500 continued its run of record-breaking closes above 30,000, ending the session at 30,025.86.
This week’s expected interest rate cut by the Federal Reserve is likely to fuel further performance optimism in the weeks and months ahead.
Alphabet led the way with the stock jumping close on 10% to $1,245 after posting a 34% jump in quarterly earnings, its biggest year-on-year gain in three years. Revenue rose 19% as it staged a remarkable recovery from the previous quarter’s weak internet advertising growth rates that had many investors worried.
To cap things off Alphabet said its cloud computing business is now on an $8bn a year revenue run-rate and it unveiled plans for a $25bn share buyback. The cloud business news is particularly encouraging for investors because it has historically lagged behind rivals Amazon and Microsoft.
This represents a stunning return to favour for the internet advertising and search giant considering that its stock had plumbed depths of $1,038 as recently as 3 June.
FACEBOOK’S $5BN FINE
In the social media space Facebook reported better-than-expected second quarter earnings although that was offset by confirmation of its record-breaking $5bn privacy fine settlement with the Federal Trade Commission for past infringements.
Revenue growth of 26% showed acceleration on the previous quarter and it is worth noting that while the shares eased back modestly to $199.75 following its earnings update, the stock remains an astonishing 47% up year-to-date.
Twitter also jumped 10% to $41.96 after beating revenue and user growth estimates, while Snapchat-owner Snap reported lower than anticipated quarterly losses and strong revenue and user growth. Snap’s shares rocketed to $17.87, its highest in well over a year.
AMAZON’S LONG-TERM FOCUS
More frustrating for long-term investors will be the negative reaction to a modest earnings miss by Amazon. The online shopping and cloud computing giant’s $5.22 per share of earnings fell short of analysts’ $5.57 estimate. Its shares dipped 1.6% to $1,943 in response.
This was largely caused by lavish investment (about $800m) to expand its one-day Prime deliveries designed to seed future growth, a move that many longer-term stock owners would support.
Another negative data point lurking in the update came from its Amazon Web Services cloud computing arm, or AWS as it is typically known.
The unit saw revenue growth dip below 40% for the first time at 37%.
Investors were also concerned with falling subscriber numbers in the US for Netflix while overseas expansion slowed too. Overall subscribers grew by 2.7m to 151.56m but this was well short of the company’s forecast of 4.7m and the 5m net additions that were expected by the market.
The on-demand streaming TV market is getting tougher by the day with Disney and AT&T joining Amazon Prime and a host of others. Which makes it possibly illustrative that Netflix’s subscriber slowdown was more acute in markets where Netflix has been forced to increase prices in order to keep up with its heavy content spending.
MICROSOFT DRIVES AHEAD
There were more impressive fourth quarter 2019 results from Microsoft, showing another strong headline performance. Total revenue growth of 12% to $33.7bn was ahead of market estimates of $32.8bn while adjusted operating profit was up 20% to $12.4bn.
As we flagged in our recent in-depth look at Microsoft, its Azure cloud computing business goes from strength to strength, growing 64%, albeit to an unspecified number.
Microsoft barely moved on the day (adding $0.15 to $136.42) yet it is worth noting the stock was already close to record highs, a mark the shares have subsequently surpassed again.
We recently launched a new series of articles analysing the major overseas-listed stocks and will look at some of the FANGs in more detail in future editions of Shares.