Tech giants’ earnings season in the US: Meta and Amazon shine, Apple not so much

The S&P 500, the world's most important equity index, has had a good earnings season. Just under 80% of companies have exceeded analysts' expectations, average earnings growth has been around 7% and share price reactions to the results have been snappily positive, according to Bloomberg data. However, of the just under 250 companies that have reported so far, only 60% have experienced an increase in profits. The main constraints on the amount of earnings growth are the banks, whose results published earlier in January missed expectations. Taken as a whole, the turnaround in earnings growth that began in the third quarter continues at the index level.

The tech giants stand out despite a few disappointments such as Tesla. This graph shows the year-on-year change in the S&P 500's net earnings by quarter, and the corresponding changes for the Magnificent Seven and the S&P 500 index excluding these superstars. In practice, Big Tech earnings shot through the roof and lifted the index-level earnings change out of a downward trend in the third quarter. In contrast, the S&P 500 index excluding these mega-techs is now expected to catch up only in the second quarter, later than previously expected.

 
Of course, the excellent results are not limited to the tech giants, with oil giants Chevron and Exxon reporting better-than-expected earnings. But the brightest stars of the season were tech giants Meta (Facebook) and Amazon. Both reported results that far exceeded analyst expectations. 

Although their businesses are very different, with Amazon being a conglomerate focused on e-commerce and cloud computing and Meta being a social media platform giant, both share a similar trajectory. Just a few years ago, both were spending tens of billions of dollars in visionary, but unprofitable long-shot investments. For example, the metaverse with bold graphics envisioned by Meta's main shareholder Zuckerberg failed to convince investors and the stock plummeted 75% from its peak. Now Zuckerberg is advocating a "leaner" Meta, with fewer people focused on more important things. The company will still continue to invest in AI and virtual reality, as those operations made a loss of €16 billion last year. Meta is even starting to pay a dividend, indicating a reluctance to invest more heavily.

Amazon, meanwhile, poured money into logistics, overestimating the duration of the pandemic-era surge in demand for online shopping. Now the company is axing tens of thousands to sharpen its profitability.

Investors rewarded both earnings announcements with a total increase in value of just under $400, a sum well above the market value of Nasdaq Helsinki. The $200 billion increase in Meta's market capitalization on Friday is a new absolute record.

To me, this shows that after years of pandemic frenzy, investors appreciate cost discipline and cost-effective investments. Both companies are also exposed to the AI boom.

Despite the efficiency measures, the long-term growth outlook for the companies is promising. Meta effectively shares with Google the global market for digital advertising. Meta has also been able to reinvent itself. While it's easy to dismiss Facebook itself as a fading boomer platform whose content's online impact on the minds of adults and teens doesn't seem to be a net positive, the company is having a heyday on platforms like Instagram. Whatsapp hasn't even been properly monetized yet.

Similarly, Amazon, which started out as a bookseller, still has a huge runway ahead of it in the global cloud and e-commerce market.

Apple, vying with Microsoft to become the world's most valuable company, was dampened by a 13% drop in sales in China, although the group's total quarterly revenue jumped by a couple of percent to $120 billion. Services, which are valuable in the eyes of investors, grew by 11%.

Apple is the slowest growing Big Tech. The company's revenue jumped to over $350 billion in the COVID-ridden fiscal year of 2021, and analyst consensus expects revenue of over $400 billion in fiscal 2025.

Although the competitive advantages of the adored company are undeniably excellent, the annual sales of over 200 million units of the company’s cash cow - the iPhone - have not increased for years while the cellphone market has been stable. So, the growth has come from price increases. The iPhone accounts for more than half of Apple's revenue.

Given the slow growth, Apple's valuation picture looks interesting. You have to pay 27 times the projected net earnings one year from now. When Warren Buffett bought the company’s shares back in the day, the P/E was as low as ten. Now investors are paying as much for a share as they did in the early years of the iPhone's explosive growth. However, the valuation picture is supported by a staggering return on investment of around 50%, low earnings growth and deep moats around the business. There is no immediate replacement for Apple's iPhone. The company is secretive in its product development, but it has had its finger on the pulse of consumer desires to an excellent degree.



This Apple P/E ratio graph also brings to mind another story. In general, technology stocks traded at reasonable multiples in the years after the financial crisis. That low starting point is part of the reason for their massive overperformance over the past decade. Those who invest in them now do not have the same advantage of cheap valuations that they had in the past.

Bloomberg had an interesting observation about how historically the weight of technology companies in the S&P 500 index and their relative contribution to the performance of the index as a whole have risen largely hand in hand. Now, however, the gap has widened. The weight of technology companies has risen to pandemic bubble levels of almost 30%, while their relative share of earnings has fallen to 20%. In other words, either the results need to be pushed to even higher growth, or else technology companies are once again showing the symptoms of a bubble.

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