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Results from Alphabet, Amazon, Apple and Microsoft remain robust
Thursday 04 Aug 2022 Author: Steven Frazer

Latest quarterly results from many of the world’s biggest and most influential companies haven’t been knocking any balls out of the park, to use the baseball analogy, but nor have they been a complete flop, which qualifies as success in a damp earnings season.

The big tech giants conquered their respective headwinds, by and large, with constrained consumer spending, slowing advertising revenues and limp PC and gaming sales failing to upset Apple (AAPL:NASDAQ), Amazon (AMZN:NASDAQ), Alphabet (GOOG:NASDAQ) and Microsoft (MSFT:NASDAQ) too much, partly thanks to solid cloud computing sales.

While Alphabet and Microsoft both fell a little short of analysts’ cloud revenue estimates (Amazon beat its own cloud estimates), growth in that highly promising business (33% at Amazon, 36% Alphabet, 40% Microsoft) helped drive share prices higher, evidence that the market was expecting worse.

This is a big deal for the millions of investors that own mega tech names, either directly or through myriad funds. Now, deep into second quarter earnings season, results so far offer another slither of evidence that, for now, companies continue to spend at a consistent clip even as consumers hit the spending brakes harder.

‘We will be exposed to consumer-driven businesses and (small and medium-sized businesses), but at some level, our strength as a company is much stronger in the core commercial,’ said Microsoft CEO Satya Nadella during his company’s earnings call.

Despite some of the doomsday projections for tech earnings, several tech companies that make their money in the enterprise world have produced surprisingly upbeat results from the most recent quarter.

Three of the world’s top chipmakers have brushed off concerns about a semiconductor slowdown, each seeing modest share price rallies on the back of commercial and industrial clients. Texas Instruments (TXN:NASDAQ) blew past earnings and revenue estimates, with company officials touting better-than-expected automotive, enterprise systems, and communications equipment sales.

That report (26 July) came a day after NXP Semiconductors (NXPI:NASDAQ) also beat analyst forecasts and issued a bullish outlook on the current quarter, thanks to strong automotive and industrial chip demand.

Samsung Electronics (005930:KRX), one of the microchip industry’s bigger beasts, had earlier in the month quelled fears of a major downturn, with analysts predicting that the South Korean company’s chip manufacturing business exceeded expectations. Investors are left with analysts’ best guesses because Samsung didn’t release a segment-level breakdown of financial results.

Recent reports also showed steadiness at two companies making an aggressive pivot to a cloud-based business model – tech conglomerate IBM (IBM:NYSE) and German software giant SAP (SAP:ETR). Barron’s reported that SAP officials are ‘seeing little impact on demand from macroeconomic factors,’ with orders consistently flowing in from North America, Latin America, and Asia.

By comparison, companies primarily driven by consumer spending are pumping the brakes. Shopify (SHOP:NYSE) missed earnings and revenue projections (27 Jul), joining retail colossus Walmart (WMT:NYSE) in warning of revenue and profit shortfalls thanks to a prolonged slowdown in consumers’ discretionary spending.

Shopify shares still rose 8% on the day, though the jump followed a broader tech stock rally and a 15% decline the day before the release. Twitter (TWTR:NYSE) and Snap (SNAP:NYSE), which draw virtually all of their revenue from consumer-driven advertising, also fell far short of expectations as companies tighten their marketing budgets. 

View from Europe: shares barely rally on better-than-expected numbers

The latest research from the European equity strategy team at Morgan Stanley provides a fascinating view of how companies have weathered the storm in the second quarter and just as importantly how the stock market has reacted to their results.

In terms of general themes, European companies have outperformed expectations in terms of sales with 56% of companies beating forecasts by 1% or more during the quarter, leading analysts to raise further their full year estimates (which are already trending upward).

However, at the level of earnings per share only 44% of companies beat expectations last quarter with 30% of companies missing estimates, leaving a margin of 14%, the narrowest of any quarter post-pandemic.

This ‘margin erosion’, mainly due to higher costs, has led to analysts cutting their earnings forecasts, which are already trending down, unlike sales.

Unsurprisingly, the ‘healthiest’ sectors last quarter in terms of earnings were energy and consumer staples, although consumer discretionary stocks also beat expectations which is more of a surprise given fears of a slowdown in spending.

Two key areas of weakness were technology and industrial stocks, while small- and mid-cap stocks underperformed large-cap and value stocks, giving a hint as to where the downgrades are likely to come.

The market’s reaction to results has been instructive too. Companies which have missed earnings forecasts have typically lagged the index by 2.3% on the day, while even stocks which have beaten forecasts have struggled to gain ground, losing 0.2% on average.

This is the biggest quarterly ‘negative skew’ so far for one-day price action according to Morgan Stanley, and ‘may suggest that fundamental weakness is not yet fully priced into equities in aggregate, or that the backward looking second quarter beat is as good as it gets’ say the team.

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