Tech Earnings Recap: What We Learned

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Tech earnings came in with resounding strength for the second quarter, a period which analysts expected to show miserable growth rates compared to what these companies produce in a normal environment.

Although The NYSE FANG Index roared into earnings, up 15% from June 8 to July 30, these stocks powered higher after the earnings prints once again exemplified the power of big tech.

Here's a look at each FANG that reported earnings Thursday and what we can expect going forward:

Amazon:

Amazon   (AMZN) - Get Report posted revenue of $89 billion against estimates of $81 billion, with the actual results rising 40% year-over-year. Amazon Web Services revenue came in at $10.8 billion, missing estimates of $11 billion, but still growing 28%. The strength was seen in an explosive e-commerce result, which got a boost from the at-home environment.

Some may have been skeptical that this tailwind was one-time and may not be appropriate to be modeled into estimates for multiple years out. But Amazon tempered that fear, issuing guidance for the third quarter that calls for $90 billion in revenue, up 30% year-over-year. That’s just above where revenue had been growing in the past few quarters. Analysts were looking for Q3 revenue of $86 billion.

Amazon also sometimes favors customer acquisition and the ability to meet demand over profitability over the short-term. But against expectations for an operating margin of 1.4%, the company delivered a 6.5% margin and guided for strength in profitability ahead. Without safety-related costs, the margin would have been in the double digits.

Earnings per share for the reported quarter was $10.30 against estimates of $5.70, with the actual result growing 97%.

"COVID-19 has been like injecting Amazon with a growth hormone and is driving sales expansion in ways that even the rollout of one-day Prime shipping was not able to,” wrote D.A. Davidson & Co. analyst Tom Forte in a note.

And a raised price target by 15% came from RBC Capital Markets analyst Mark Mahaney, who lifed his target multiple on 2022 EBITDA (earnings before interest, tax and non-cash expenses).

Up 4% Wednesday, Amazon trades at just under 100 times next year’s earnings, although investors are becoming more willing to pay that multiple as the company’s growth opportunities relentlessly expand.

Apple:

Apple’s  (AAPL) - Get Report revenue was $59 billion against estimates of about $52 billion, with a 19% beat of iPhone expectations. Some iPhone delays are expected for the usually strong September quarter, but the solid reported quarter reflects that demand is strong even during the pandemic and store closures. iPhone revenue grew for the year. iPhone demand and China has rebounded significantly.

And following Qualcomm’s QCOM strong 5G guide this week for the full year, most investors are comfortable trusting the multi-year 5G growth cycle is intact.

Services revenue was just over $13 billion, and grew 15% year-over-year. This was not a resounding result against expectations, which were rising as stay-at-home orders were a positive for app store activity. The gross margin expanded to 67% from 64% in the trailing 12-month period, helping boost the earnings per share figure. Investors had already been well aware of the higher margin services business. Apple may need to prove itself more on services to sustain its current valuation, although the somewhat breath-taking iPhone results did enable analysts to lift their price targets.

Earnings per share was $2.58, above estimates of $2.05, with the actual results up 25%.

Most analysts are lifting 2021 earnings estimates and therefore their price targets. The stock rose 7.5% to $413 a share. It’s now trading at about 27 times 2021 EPS estimates, slightly high for where it has traded for most of this year. With lifted estimates, the multiple will fall back some, but some would say the stock is fully priced. Catalysts to move the stock would be earnings growth for the near future and continued strength in services, wearables and 5G.

Facebook:

Facebook  (FB) - Get Report reported revenue of $18.7 billion against estimates of $17.6 billion, with the actual result growing 10% year-over-year. Advertising revenue headwinds came in the form of lower marketing spend from brands tailoring their ad budgets to lower consumer spend.

Analysts were looking for growth in the low single digits, but higher-than-expected user engagement helped see revenue through. Average revenue per user, a product of more time spent on apps and ad higher pricing, was $7.05 against estimates of $6.76. The company said the shelter-in-place orders boosted engagement.

But that may not be sustainable if reopenings accelerate. Management, which may not have excellent visibility into the reopenings and consumer demand outlook, is guiding for revenue growth in the third quarter of 10%, above analyst estimates of 10%. But the company acknowledged that any macro deterioration could pressure ad spend. The recovery in ad spend for now, looks to be underway, although with some potential challenges.

Meanwhile, Facebook’s cost management was excellent, as the operating margin expanded to 32% from 27% last year, enabling EPS to grow 98% to $1.80 Estimates were for $1.39.

Analysts are very positive: "Before we start into the comparing and contrasting of Alphabet and Facebook’s 2Q 2020 earnings results, the big picture takeaway is quite remarkable,” wrote Moffett Nathanson analyst Michael Nathanson. "During a quarter in which U.S. GDP declined at a historically awful -9.5% year over year rate, Facebook and Alphabet’s U.S. revenues, largely comprised of economically-sensitive advertising, actually grew +14% and +1%, respectively. These results stand in stark contrast to the steep declines (in the high teens to low-30s) for most forms of traditional advertising and speak to the massive escalation in marketing share shift that is underway.”

Facebook shares rose 8% to $253. Facebook, with tons more growth ahead from Instagram and other avenues, now trades at 28 times earnings, roughly in line with its recent valuation. Some analysts are moving estimates higher. Of course near-term headwinds exist, but the stock seems positioned decently, especially considering the average analyst price target of $275, according to FactSet data.

Google:

Before we even dive into the results, Nathanson posed that Google’s  (GOOGL) - Get Report ad revenue was hit harder than Facebook’s potentially because Facebook’s ad products are still in their infancies, as brands are still shifting spend into them from less up-to-date ad-buying platforms.

Google revenue was $38.2 billion, against estimates of just over $37 billion, with the actual result falling 2%.

The revenue was "driven by gradual improvement in our ads business and strong growth in Google Cloud and Other Revenues,” Ruth Porat, CFO of Alphabet said on the earnings print. Google Cloud, which has been flourishing of late, prevented revenue from falling too hard on a account of poor ad spend. Cloud revenue was $3 billion, rising 42% year-over-year. That was not great against expectations, but Google clearly has a growing — albeit still small — cloud business.

Adjusted EPS was $10.13 against estimates of $8.21, with the actual result falling considerably year-over-year.

Google did elude to some lack of visibility on ad revenues for the second half of the year.

The stock, slightly extended from a rally into earnings, fell more than 4% Friday.

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