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US Big Tech Q3 Earnings: How to Read Into the Numbers?

Editor, TRANSFIN
Oct 31, 2020 11:45 AM 4 min read
Editorial

Go Big or Go Home! 

US Big Tech posted generally strong results beating consensus estimates. 

This marks the second straight financial quarter of solid results (except Alphabet which posted double-digit growth reversing the sharp decline it saw in the previous quarter). The results come right on the heels of the typical quarterly earnings buzz, despite the sublimating economic effects of the coronavirus pandemic.

Amazon, Alphabet, Apple and Facebook all cruised comfortably past expectations in Q3, maintaining their prima donna-hood in the tech world. However, a largely cautious outlook by management drove mixed reactions in the financial markets.

Let's Look At the Numbers

Google's parent company Alphabet Inc. Posted a profit of $11.2bn (59% YoY growth) on $46.2bn (14% YoY growth) in revenues. Ad revenue jumped to $37.1bn, quelling the historical fallout in this category in the last quarter and suggesting an uptick in spending on Search and YouTube ads.

 

This rebound has helped the company gain some significant stock standing(shares up 6.7% in pre-market) and increased its valuation to almost $1.1trn. While US Department of Justice's almost-daily tabs on the company's regulatory conduct might instill modest uncertainty around the company’s outlook, the underlying fundamentals remain solid, epitomising the increased internet usage during the pandemic. 

Amazon maintained its lead as the king of e-commerce with a massive $96.1bn quarterly revenue, up 37% YoY, mostly attributed to rising online sales during the pandemic and growth in the AWS segment (cloud computing). However, a weak fourth quarter operating income outlook (see page 7) impacted by c. $4bn in COVID-related costs was enough to pressure the stock, down 1.6% in pre-market. 

Facebook posted strong underlying metrics and in turn driving a record 22% revenue increase to $21.5bn. As expected with lockdown restrictions relaxing globally, Facebook saw a sequential decline in DAU’s and MAU’s (albeit up on a YoY basis) and indicated the trend to continue in the next quarter, somewhat dampening the quarterly print. Putting administrative concerns regarding alleged censorship, anti-competitive behaviour and user-data misappropriation aside (particularly the transfer of European users' data back to the US), the company registered a net income increase by 29% to $7.85bn. A 2021 outlook of “significant amount of uncertainty” (see page 2) negatively impacted the stock, down 1.2% in pre-market. 

The Cupertino giant Apple Inc., posted the most modest results of the lot with broadly flat  revenues of $64.7bn and marginal 7.4% decline in profitability to $12.7bn. The revenues were meaningfully impacted by scheduling change for the new iPhone. Softer-than-expected iPhone sales and management’s decision to offer no guidance for the holiday quarter dragged the stock down 4.2% in pre-market.

The combined revenue of the Big Four (worth $5.3trn) came in at $220.28bn and totaled $38.08bn in profits.

 

 

How Promising Does This Look?

The earnings were generally impressive. However, there are several overhangs impeding what would otherwise have painted a pretty positive picture.

One, the companies have been openly vocal about restraining their own revenue forecast (Apple didn't even release any!), saying the pandemic may still cast a pall over businesses. Although the work-from-home syndrome and saving on maintenance costs has boosted operating margins, the economic stimulus may soon run out and winter productivity is likely to decline.

Two, Apple's rescheduled iPhone launch impacted sales in a major way. In China, its second-biggest market, sales dipped by 29%. In addition to the pandemic, customers holding off on purchasing the new models during the September quarter (because launch was pushed to October) also played a part in the financials. 

Three, regulatory woes. Top management from the companies (esp. Google and Facebook) have been taking more-often-than-ideal trips to Capitol Hill to testify for their alleged malpractices. All efforts at appeasing authorities (including recent invocation of Section 230 of the Communications Decency Act, to fend off regulatory onslaught) have fallen short of minimising potentially hefty litigation costs so far. 

Both Google and Facebook are also facing antitrust scrutiny (the former paying Apple to make itself the default search engine on its products and the latter paying $5bn to settle government probes into privacy scandals). Matters could get worse if the Federal Trade Commission decides to file lawsuits.

Four, Amazon, the most consistent achiever among all is overplaying the potential surge in personnel requirement and hence increased spending to cater to the upcoming holiday season demand. In fact, the AWS profit machinery is also expected to peg temporarily (Even if it beat growth estimates, its profit margin dropped.)

Five, Facebook saw an unusual decline in user numbers overall, especially in the US and Canada, its most lucrative ad markets. Amidst the "hate speech" curbing ability, disagreement with Apple over making app-tracking mandatory for iPhone users. 

Six, Alphabet, despite its parade of revenue surges this quarter (YouTube revenue increased by 32% YoY; Cloud revenues scaled up by 44%), it's unlikely to get a breather from federal investigation. 

 

Successes, If Not Excesses

Stay-at-home trends have rather cheered things up for Big Tech companies, thanks to their dominant business models and market positions. 

Investors have high hopes for the new 5G-enabled Apple iPhone. The advertising bubble that was witnessed last quarter is subsiding with Google's sprint (also with revenue increases at Snapchat and Pinterest, indicating return to previous screen-time expenditure figures).

Microsoft's cloud business posted a 48% revenue growth. As for AWS, it waits to be seen how far the crown jewel of Amazon can power through to sustain revenue growth.

Regardless, consumer expenditure will determine the resilience of Big Tech in the coming months.

FIN.

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