The run up in big tech stocks, such as Google’s parent Alphabet [GOOGL], online retailer Amazon [AMZN], iPhone-maker Apple [AAPL], social media company Facebook [FB] and software major Microsoft [MSFT], slowed at the end of July following the release of earnings reports. While each stock has come off lows, shares have remained largely flat.
What triggered the lacklustre response from investors?
Big tech earnings beats fall flat
Alphabet, Apple, Facebook and Microsoft all exceeded analysts’ earnings expectations, but each stock saw share price fall following their respective announcements.
When Alphabet announced its market-beating second-quarter results on 27 July, its share price hit a 52-week high of $2,765.94 during intraday trading the following day before closing 1.6% down. Since the end of the month, the stock has climbed 1.6% (through 9 August), giving it a year-to-date rise of 56.2%.
Apple had also demolished its third-quarter earnings expectations on 27 July, however, that didn’t stop the stock declining by 1.2% the next day. The Apple share price has rebounded 0.3% since the end of July (through 9 August) and is up 10.6% in the year to date.
The trend continued with Microsoft and Facebook both posting earnings beats that still saw each stock’s share price decline by 0.8% on 27 July and 4% on 29 July, respectively. Since the end of July, shares in Microsoft are up 1.2% (through 9 August) and 30.2% in the year-to-date, while Facebook is up 1.5% and 32.4% in the same periods.
Meanwhile, the Amazon share price saw the biggest post-earnings decline out of the five stocks, falling 7.6% on 30 July after missing second-quarter revenue expectations. As of 9 August, the stock has rebounded 0.4% since the end of July and is up just 2.7% in the year to date.
So far this year, the Nasdaq has underperformed the S&P 500, gaining just 15.3% (through 9 August). In comparison, the blue-chip index had gained 18%.
Big tech’s bumper earnings season
Alphabet, Apple, Facebook, Microsoft and Amazon collectively saw revenue increase 36% to $332bn during the most recent earnings reports. However, while the former exceeded analyst expectations for both revenue and earnings per share (EPS), Amazon missed on revenue — despite beating on EPS and reporting sales of more than $100bn for the third quarter in a row.
Amazon’s revenue miss has been largely blamed on decelerating growth rates. During the earnings call, CFO Brian Olsavsky said COVID-19 and lockdowns had skewed year-over-year revenue growth and made comparisons harder.
Revenue for the three months to the end of June was up 27% from the second quarter of 2020 to $113.08bn – analysts polled by Refinitv had been expecting $115.2bn.
Amazon's revenue for Q2 - a 27% YoY rise
The Jeff Bezos (pictured above) company Amazon has issued book sales guidance of $106bn to $112bn for the third quarter of 2021, representing a growth rate of 10% to 16%. This is weaker than Zacks Equity Research analysts’ estimates, which are between $110.20bn and $116bn.
While Facebook reported its best year-over-year revenue growth rate since 2016, it too warned of a slowdown. Sales were driven by robust advertising spending, with a 47% increase in the average price per advert. Total revenue was up 56% year-over-year to $29.08bn versus $27.89bn as expected by analysts.
Facebook’s advertising segment accounted for nearly all its sales but it’s likely to come up against headwinds during the rest of 2021. The company pinpointed regulatory and platform changes, including updates to Apple’s iOS that means apps and advertisers are now banned from collecting data about iPhone users without their explicit consent.
Apple also reported a 36% year-over-year growth in revenue to $81.41bn in the third quarter of 2021 versus $73.30bn expected by analysts. Despite iPhone revenue increasing close to 50% year-over-year to $39.57bn, the company has warned that the ongoing global chip crunch could very well affect the supply of iPhones in the months ahead. Ongoing supply chain constraints will mean the growth rate in the upcoming quarter will be lower sequentially, warned CFO Luca Maestri on the earnings call.
Apple's Q3 revenue - a 36% YoY rise
Digital advertising growth set to boost upcoming earnings
Analysts don’t appear too concerned by the recent sell-off. Jill Carey Hall, an equities strategist at Bank of America, told Bloomberg that the unimpressed investors suggested that “a lot of the good news had been priced in…Companies that beat just aren’t outperforming very much.”
There are also indications that big tech stocks could hit new all-time highs at some point over the next couple of quarters. The global recovery is accelerating demand for digital advertising, which could prove to be a major tailwind for big tech. As reported by CNBC, Wedbush analysts believe the digital ad market is “red hot”.
According to analysts’ ratings compiled by MarketBeat, all five stocks have a consensus ‘buy’ rating. The Amazon share price has a price target of $4,163.79, which represents a 25.6% upside from its 9 August closing price. Meanwhile, Apple’s $156.38 target represents a 7% uptick, Facebook’s $402.76 target represents a 11.4%, Microsoft’s $317.38 represents 10.1%, and Alphabet’s $2,832.27 represents 3.4%.
“While we believe that Apple’s move to eliminate IDFA was done in the spirit of advancing consumer privacy, it may ultimately provide Apple with an advertising platform that is competitively advantaged versus peers [that] don’t have access to Apple’s richer APIs” - Toni Sacconaghi
The likes of Alphabet and Facebook may also have been irked by Apple killing off Identifier for Advertisers (IDFA), the tool used for targeted ads, but Apple isn’t against advertising per se. In fact, Bernstein’s Toni Sacconaghi wrote in a note to clients seen by Barron’s that Apple’s advertising business may be small but it’s quietly building.
“While we believe that Apple’s move to eliminate IDFA was done in the spirit of advancing consumer privacy, it may ultimately provide Apple with an advertising platform that is competitively advantaged versus peers [that] don’t have access to Apple’s richer APIs.”
All-in-all, the recent post-earnings pullback in big tech stocks doesn’t appear to be a long-term problem but could rather be connected to several factors including a slowdown in digital demand since the initial coronavirus pandemic boom, a semiconductor shortage, and ongoing regulatory crackdowns.
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