In just three days over the past week, the five largest tech companies— Microsoft (MSFT), Amazon.com (AMZN), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB) —all reported earnings. They also happen to be the five largest companies in the S&P 500 (.SPX), so the results mattered—a lot. The news was better than feared, though plenty of questions remain.
Here are my five takeaways:
What bear market?
While the S&P 500 was still down 10% year to date through Thursday’s close, the tech-heavy Nasdaq Composite (.IXIC) is basically back to flat. Most of the credit goes to the tech giants. In April, the S&P 500 rallied 12%, and big tech still managed to outperform, led by gains of 23% for Facebook and 27% for Amazon. As I wrote in mid-March, all five of these companies will exit the crisis stronger than they began. They have sterling balance sheets, dominant market positions, and smart management. The crisis is only accelerating their lead.
Apple has 550 million subscribers to various services. Microsoft’s Azure cloud is growing revenue at nearly 60% a year. In just a few weeks, Amazon hired 175,000 people. And Facebook just hit 3 billion users—nearly 40% of the earth’s population. The big are getting bigger.
Better than advertised
Digital advertising was one of the primary worries for the internet sector heading into earnings season. Airlines, hotels, retailers, restaurants, and movie studios—all large online ad buyers—have little reason to promote themselves, while small businesses are focused on conserving cash. The quarter’s biggest surprise was that Google’s parent Alphabet and Facebook both said that advertising demand had stabilized in April.
Pivotal Research analyst Michael Levine, who had been deeply bearish on Facebook, was so shocked that he backed away from his Sell rating, upgrading the stock to Hold. Results, he said were “far better” than anyone had anticipated. He says that weakness in sectors such as travel and small business were offset by strength in direct-to-consumer retail brands, technology, and gaming. Both Facebook and Alphabet warned that risks remain, that the June quarter would be tougher, and that extrapolating from April is risky. But, for now, online advertising is proving more resilient than expected.
In previewing Apple earnings this past week on Barrons.com, I noted that Apple was likely to announce a new buyback plan. One reader sent me a handful of emails doubting that Apple would double down on stock repurchases, noting that they have become a political hot potato. In fact, much of the corporate world has suspended buyback programs. But not big tech.
Alphabet bought back $8.5 billion of stock in the quarter, a record quarterly haul; Microsoft repurchased $6 billion, and Apple bought back $18.6 billion, while raising its dividend 6%. Apple also announced a $50 billion buyback program, on top of its existing $40 billion authorization. Investors want repurchases, and I would defend the companies’ right to make them. They’re still hiring people, they spend freely on research and development, they have ample cash, and they continue to generate lots more. None of them is taking government stimulus dollars. Why shouldn’t they buy back shares?
In search of guidance
At this point, I’m not sure why some companies are still providing guidance. Apple pulled back its forecast in February, and every analyst overcorrected. The company ultimately beat the consensus revenue estimate by almost $4 billion.
Microsoft had also warned that its original forecast for its PC segment would be too high. The warning proved unnecessary. That segment’s revenues were right in line with the original prediction.
For now, there is no winning anyway. Intel (INTC) pulled its full-year guidance and got punished; Advanced Micro Devices (AMD) bravely issued a full-year outlook, but it was below its previous forecast, so its stock was punished, too. This past week, Apple decided not to give guidance for its June quarter. Investors might not have liked it, but the fact is no one knows what’s coming.
It’s good news that big tech did better than expected in the March quarter. But let’s remember that it was mid-March or later before the shutdowns really started. The economic pain didn’t hit full force until the current quarter. Amazon says it could be breakeven or worse in the June quarter, as the company ramps up Covid-19 related spending. Apple says that iPhone sales will be materially worse. The ad recoveries at Facebook and Alphabet are nice, but year-over-year comparisons in June are going to look worse than March’s. Microsoft’s cloud business looks strong, but the company won’t be insulated from a deep recession. No one will be. So it’s fine to breathe a sigh of relief over the first quarter. But keep your mask on; we’re not done yet.
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