Making Sense of Big Tech Revenue After Amazon and Meta Tumble

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Profit bombs from Amazon AMZN and Meta META and subpar releases from Alphabet GOOGL and Microsoft MSFT have forced us all to revisit our long-held assumptions about the sustainability of the earning power of these tech leaders.

Apple AAPL redeemed itself with its quarterly release, cementing its leadership credentials and status as the “Rock of Gibraltar” in the eyes of its legion of supporters.

Aside from Apple’s strong results, the questions seem to be mostly about the outlook for Amazon and Meta, as Alphabet and Microsoft’s results weren’t that bad. Some of that differentiation is also evident in the stock market’s reaction to the results, with Amazon and Meta stocks literally being swept to the stake after the releases.

The one thing that becomes clear after the results of these ‘Big 5 Tech Players’ is that none of these players are teflon coated and immune to cyclic forces. Apple may look invincible today following its quarterly report, but the consumer’s decision to buy the company’s expensive phones and other devices will also always remain a discretionary choice and vulnerable to economic forces.

Q3 revenue for the “Big 5 Tech Players” as a whole was down -15.2% from the same period last year, with revenue up +9.4%, as the shows the graph below.

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Image source: Zacks Investment Research

For the whole of 2022, the group should achieve a -13.2% drop in profits on a +6.1% increase in revenues. But growth is expected to resume next year, as you can see in the graph below which shows the group’s profits and revenues on a yearly basis.

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Zacks Investment Research

Image source: Zacks Investment Research

One possible explanation for this group’s growth challenge is general pressure on margins based on their inflated payrolls, particularly for Amazon, Meta and Alphabet. You could say that if they adopt the management style of other top-notch operators by controlling their expenses, they can help boost their profitability.

Amazon hired a ton of workers during Covid to keep up with growing demand as we all stopped going to stores. The question now is whether they should let some of those workers go, as Covid restrictions are mostly in the rear view mirror now.

In addition to the group’s margin challenge, two key factors will determine its profitability over the next two years.

The first factor is the unusual impact of Covid on their profitability over the past two years. You can see some of that from the 2021 growth numbers in the chart above. The chart below shows the group’s total dollar revenue over the past 6 years and estimates for the next two years.

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Zacks Investment Research

Image source: Zacks Investment Research

We highlighted above the two years that benefited from the Covid effects. The question now is whether the +58% jump in earnings from 2021 only pushed earnings forward from 2022, or did it also include 2023?

The second factor is related to the impact of macroeconomic forces on profitability. Microsoft’s business was impacted not only by falling PC demand, a function of post-Covid adjustments, but also by slowing cloud business growth. We also saw similar cloud-centric challenges in the Amazon and Alphabet reports.

This cloud deceleration is likely a reflection of companies cutting back on so-called business spend, in addition to digital advertising spend. The market was under the impression that cloud spending was effectively immune to economic forces and would not suffer any reduction. Figures from Microsoft, Amazon and Alphabet show the opposite.

That brings us back to assessing the seemingly Teflon-coated status of Apple’s gadgets and services.

My view is that once the Fed’s tighter policy regime produces cracks in the labor market, we will eventually find that consumers rationally put off replacing their old devices with new ones. We’re not there yet because the labor market is rock solid, but we could very well reach that point in either of the next two quarterly reports.

Third Quarter Earnings Season Dashboard

Including all reports up to Friday 28 Octoberewe now have third-quarter results for 263 members of the S&P 500, which together represent 52.6% of the index’s total market capitalization.

We have another very busy reporting package this week, with results from more than 1,100 companies on deck, including results from 163 members of the S&P 500.

For the 263 members of the index who have already published results, total revenues are down -0.6% compared to the same period last year on revenues up by +11.3%, with 71.9% exceeding EPS estimates and 63.1% exceeding revenue estimates.

Here’s how Q3 2022 earnings and revenue growth rates for these 263 companies compare over different time periods.

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Zacks Investment Research

Image source: Zacks Investment Research

Here’s how the Q3 2022 EPS and revenue percentages for these 263 companies compare over different time periods.

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Zacks Investment Research

Image source: Zacks Investment Research

EPS and revenue percentages were particularly low early in the reporting cycle. But as you can see above, they are now within the historical range.

The overview of benefits

To get an idea of ​​what is currently expected, take a look at the chart below which shows the current earnings and revenue growth forecasts for the S&P 500 Index for the third quarter of 2022 and the following three quarters.

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Zacks Investment Research

Image source: Zacks Investment Research

As you can see here, Q3 2022 earnings are expected to be up +1% on revenue up +9.4%.

Keep in mind that it is the strong contribution from the energy sector that is keeping overall third quarter earnings growth in positive territory. Excluding the energy sector, third-quarter earnings for the rest of the S&P 500 would be down -6.4% from the same period last year.

As we have constantly pointed out, the estimates are down, both for the current period (Q4 2022) and for the year 2023.

The charts below show how earnings growth expectations for the fourth quarter of 2022 have evolved over the past few weeks. The left chart shows earnings growth expectations for the S&P 500 as a whole, while the left chart shows the same data on an ex-energy basis.

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Zacks Investment Research

Image source: Zacks Investment Research

The chart below shows the overall earnings estimate for 2023 excluding energy.

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Zacks Investment Research

Image source: Zacks Investment Research

The chart below shows the overall profit picture on a yearly basis.

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Zacks Investment Research

Image source: Zacks Investment Research

For a detailed look at the overall earnings picture, including expectations for future periods, please see our weekly earnings trends report. >>>> The revenue picture is good, but not great

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